| LUMERA CORP ITEM 1A RISK FACTORS We have incurred substantial operating losses since our inception and will continue to incur substantial operating losses for the foreseeable future |
| Since our inception, we have been engaged primarily in the research and development of our polymer materials technologies and potential products |
| As a result of these activities, we incurred net losses of dlra38dtta2 million from inception through December 31, 2004, and dlra10dtta5 million for the twelve months ended December 31, 2005 |
| We anticipate that we will continue to incur operating losses through at least 2006 |
| As of December 31, 2005, we had an accumulated deficit of dlra48dtta7 million |
| We may not be able to generate significant additional revenue either through development contracts from the US government or government subcontractors or through customer contracts for our potential products or technologies |
| We expect to continue to make significant operating and capital expenditures for research and development and to improve and expand production, sales, marketing and administrative systems and processes |
| As a result, we will need to generate significant additional revenue to achieve profitability |
| We are subject to the risks frequently experienced by early stage companies |
| The likelihood of our success must be considered in light of the risks frequently encountered by early stage companies, especially those formed to develop and market new technologies |
| These risks include our potential inability to: • establish product sales and marketing capabilities; • establish and maintain markets for our potential products; -14- _________________________________________________________________ • identify, attract, retain and motivate qualified personnel; • continue to develop and upgrade our technologies to keep pace with changes in technology and the growth of markets using polymer materials; • develop expanded product production facilities and outside contractor relationships; • maintain our reputation and build trust with customers; • improve existing and implement new transaction-processing, operational and financial systems; • scale up from small pilot or prototype quantities to large quantities of product on a consistent basis; • contract for or develop the internal skills needed to master large volume production of our products; and • fund the capital expenditures required to develop volume production due to the limits of our available financial resources |
| We are entering new markets, and if we fail to accurately predict growth in these new markets, we may suffer substantial losses |
| We are devoting significant resources to the development of products and the support of marketing and sales efforts in new markets, such as the disposable biochip and broader proteomics markets |
| We expect to continue to seek to identify and develop products for new markets |
| New markets change rapidly and we cannot assure you that they will grow or that we will be able to accurately forecast market demand, or lack thereof, in time to respond appropriately |
| Our investment of resources to develop products for these markets may either be insufficient to meet actual demand or result in expenses that are excessive in light of actual sales volumes |
| Failure to predict growth and demand accurately in new markets may cause us to suffer substantial losses |
| In addition, as we enter new markets, there is a significant risk that: • the market may not accept the price and/or performance of our products; • there may be issued patents we are not aware of that could block our entry into the market or result in excessive litigation; and • the time required for us to achieve market acceptance of our products may exceed our capital resources, which would require additional investment |
| The establishment and maintenance of original equipment manufacturer and other collaborative relationships is critical to the success of our business |
| We expect to sell many of our products directly to research laboratories and commercial customers or through potential industry partners |
| For example, we expect to offer disposable bio-chips to research labs and customers who will use them in DNA analysis and protein discovery |
| Our ability to generate revenues depends significantly on the extent to which potential customers and other potential industry partners develop, promote and sell systems that incorporate our products |
| Any failure by potential customers and other potential industry partners to successfully develop and market systems that incorporate our products could adversely affect our sales |
| The extent to which potential customers and other industry partners develop, promote and sell systems incorporating our products is based on a number of factors that are largely beyond our ability to control |
| Our future growth will suffer if we do not achieve sufficient market acceptance of our products |
| We do not know when a market for these products will develop, if at all |
| Our success depends, in part, upon our ability to gain market acceptance of our products |
| To be accepted, our products must meet the technical and performance requirements of our potential customers |
| The biochip markets are evolving rapidly and involve many competitors and competing technologies, and the optical communications industry is currently fragmented with many competitors developing different technologies |
| We expect that only a few of these technologies will ultimately gain market acceptance |
| Products based on polymer materials may not be accepted by OEMs and systems integrators of optical communications networks |
| In addition, even if we achieve some degree of market acceptance for our potential products in one industry, we may not achieve market acceptance in other industries for which we are developing products |
| If the markets we are targeting fail to accept polymer-based products or determine that other products are superior, we may not be able to achieve market acceptance of our products |
| -15- _________________________________________________________________ All of our current products are either in the development stage or are being tested by potential customers |
| We cannot assure you that these customer tests will be successful or that they will result in actual material sales of our products |
| Achieving market acceptance for our products will require marketing efforts and the expenditure of financial and other resources to create product awareness and demand by customers |
| We may be unable to offer products that compete effectively due to our limited resources and operating history |
| Also, certain large corporations may be predisposed against doing business with a company of our limited size and operating history |
| Failure to achieve broad acceptance of our products by customers and to compete effectively would harm our operating results |
| Successful commercialization of our current and future products will require us to maintain a high level of technical expertise |
| Technology in our target markets is undergoing rapid change |
| To succeed in our target markets, we will have to establish and maintain a leadership position in the technology supporting those markets |
| Accordingly, our success will depend on our ability to: • accurately predict the needs of our target customers and develop, in a timely manner, the technology required to support those needs; • provide products that are not only technologically sophisticated but are also available at a price acceptable to customers and competitive with comparable products; • establish and effectively defend our intellectual property; and • enter into relationships with other companies that have developed complementary technology into which our products may be integrated |
| We cannot assure you that we will be able to achieve any of these objectives |
| Many of our products will have long sales cycles, which may cause us to expend resources without an acceptable financial return and which makes it difficult to plan our expenses and forecast our revenues |
| Many of our products will have long sales cycles that involve numerous steps, including initial customer contacts, specification writing, engineering design, prototype fabrication, pilot testing, regulatory approvals (if needed), sales and marketing and commercial manufacture |
| During this time, we may expend substantial financial resources and management time and effort without any assurance that product sales will result |
| The anticipated long sales cycle for some of our products makes it difficult to predict the quarter in which sales may occur |
| Delays in sales may cause us to expend resources without an acceptable financial return and make it difficult to plan expenses and forecast revenues |
| We may require additional capital to continue to fund our operations |
| If we do not obtain additional capital, we may be required to substantially limit our operations |
| Our business does not presently generate the cash needed to finance our current and anticipated operations |
| Based on our current operating plan and budgeted cash requirements, we believe that we will be able to fund our operations at least through 2007 |
| We will require additional capital to continue to fund our operations in future periods |
| We expect that we will need to seek additional funding through public or private financings, including equity financings, and through other arrangements, including collaborative arrangements |
| Poor financial results, unanticipated expenses or unanticipated opportunities could require additional financing sooner than we expect |
| Such financing may be unavailable when we need it or may not be available on acceptable terms |
| If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing stockholders may be reduced, and these securities may have rights superior to those of our common stock |
| If adequate funds are not available to satisfy either short-term or long-term capital requirements, or if planned revenues are not generated, we may be required to limit our operations substantially |
| These limitations of operations may include reductions in capital expenditures and reductions in staff and discretionary costs |
| -16- _________________________________________________________________ We currently rely heavily on a small number of development contracts with the US Department of Defense and government contractors |
| The termination or non-renewal of one or more of these contracts could significantly reduce our revenue |
| In 2005, 2004 and 2003, 95prca, 99prca and 99prca, respectively, of our revenue was derived from performance on a limited number of development contracts with various agencies within the US Department of Defense |
| Any significant disruption or deterioration of our relationships with the Department of Defense could significantly reduce our revenues |
| Our government programs must compete with programs managed by other contractors for limited amounts and uncertain levels of funding |
| The total amount and levels of funding are susceptible to significant fluctuations on a year-to-year basis |
| Our competitors frequently engage in efforts to expand their business relationships with the government and are likely to continue these efforts in the future |
| In addition, our development contracts with government agencies are subject to potential profit and cost limitations and standard provisions that allow the US government to terminate such contracts at any time at its convenience |
| Termination of our development contracts, a shift in government spending to other programs in which we are not involved, or a reduction in government spending generally or defense spending specifically could severely harm our business |
| We intend to continue to compete for government contracts and we expect such contracts will be a significant percentage of our revenue for the foreseeable future |
| Our development contracts with various agencies within the US Department of Defense require ongoing compliance with applicable federal procurement regulations |
| Violations of these regulations can result in civil, criminal or administrative proceedings involving fines, compensatory and punitive damages, restitution and forfeitures, as well as suspensions or prohibitions from entering into such development contracts |
| Also, the reporting and appropriateness of costs and expenses under these development contracts are subject to extensive regulation and audit by the Defense Contract Audit Agency, an agency of the US Department of Defense |
| Any failure to comply with applicable government regulations could jeopardize our development contracts and otherwise harm our business |
| Some of our products in development are directed at the telecommunications and networking markets, which continue to be subject to overcapacity and slow growth or decline |
| We intend over the next several years to derive a substantial portion of our revenues from the sale of electro-optic devices to the telecommunications and networking markets |
| We have not yet made material sustainable commercial sales of these products, and developments that adversely affect the telecommunications or networking markets, including delays in traffic growth and changes in US government regulation, could halt our efforts to generate revenue or cause revenue growth to be slower than anticipated from sales of electro-optic modulators and related products |
| Reduced spending and technology investment by telecommunications companies may make it more difficult for our products to gain market acceptance |
| Such companies may be less willing to purchase new technology such as ours or invest in new technology development when they have reduced capital expenditure budgets |
| Our quarter-to-quarter performance may vary substantially, and this variance, as well as general market conditions, may cause our stock price to fluctuate greatly and potentially expose us to litigation |
| Substantially all of our revenues to date have been generated from a limited number of development contracts with the US government and government contractors |
| Our revenues have varied significantly based on when government contracts commence or end and whether they receive funding appropriations |
| Because we intend to expand into commercial sales of our potential products, we are unable to accurately estimate future quarterly revenue and operating expenses based on historical performance |
| Our quarterly operating results may vary significantly based on many factors, including: • reductions or delays in funding of development programs involving new polymer materials technologies by the US government; • additions of new customers; • fluctuating demand for our potential products and technologies; • announcements or implementation by our competitors of technological innovations or new products; • the status of particular development programs and the timing of performance under specific development agreements; • timing and amounts relating to the expansion of our operations; and • costs related to possible future acquisitions of technologies or businesses |
| -17- _________________________________________________________________ Our current and future expense estimates are based, in large part, on estimates of future revenue, which is difficult to predict |
| We expect to continue to make significant operating and capital expenditures in the area of research and development and to invest in and expand production, sales, marketing and administrative systems and processes |
| We may be unable to, or may elect not to, adjust spending quickly enough to offset any unexpected revenue shortfall |
| If our increased expenses are not accompanied by increased revenue in the same quarter, our quarterly operating results would be harmed |
| In one or more future quarters, our results of operations may fall below the expectations of investors and the trading price of our common stock may decline as a consequence |
| We believe that quarter-to-quarter comparisons of our operating results will not be a good indication of our future performance and should not be relied upon to predict the future performance of our stock price |
| In the past, companies that have experienced volatility in the market price of their stock have often been subject to securities class action litigation |
| We may be the target of this type of litigation in the future |
| Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business |
| We cannot predict the pace of marketable products we may generate, and any inability to generate a sufficient number of marketable products would reduce our revenues and harm our business |
| Our future revenues and profitability are dependent upon our ability to create marketable products, whether through our own research and development efforts or through collaborations with customers or industry partners |
| Because of the inherently uncertain nature of research and development activities, we cannot predict the pace of new product introductions |
| We must undertake additional research and development before we are able to develop additional products for commercial sale |
| Product development delays by us or potential product development partners, or the inability to enter into relationships with these potential partners, may delay or prevent us from introducing products for commercial sale |
| In addition, our product candidates may not result in products having the commercial potential we anticipate |
| Any of these factors could reduce our potential commercial sales and lead to inability to generate revenue and attain profitability |
| The failure to compete successfully could harm our business |
| We expect to face competitive pressures from a variety of companies in each of our target markets |
| Some of our present and potential competitors have or may have substantially greater research and product development capabilities, financial, scientific, marketing, manufacturing and human resources, name recognition and experience than we have |
| As a result, these competitors may: • succeed in developing products that are equal to or superior to our potential products or that will achieve greater market acceptance than our potential products; • devote greater resources to developing, marketing or selling their products; • respond more quickly to new or emerging technologies or scientific advances and changes in customer requirements, which could render our technologies or potential products obsolete; • introduce products that make the continued development of our potential products uneconomical; • obtain patents that block or otherwise inhibit our ability to develop and commercialize our potential products; • withstand price competition more successfully than we can; • establish cooperative relationships among themselves or with third parties that enhance their ability to address the needs of our prospective customers; and • take advantage of acquisitions or other opportunities more readily than we can |
| The failure to compete successfully against these existing or future competitors could harm our business |
| -18- _________________________________________________________________ We may be unable to establish sales and marketing capabilities necessary to successfully commercialize our potential products |
| We currently have limited sales and marketing capabilities |
| To date, we have relied on sales and marketing leadership from our Chief Executive Officer, Mr |
| Mino, our Chief Technology Officer, Dr |
| We will need to either hire more sales personnel with expertise in the markets we intend to address or contract with others to provide for sales support |
| Although our potential products are all based on our polymer materials technology, the potential products themselves address different markets and can be offered through multiple sales channels |
| Addressing each market effectively will require sales and marketing resources tailored to the particular market and to the sales channels that we choose to employ |
| In addition, the markets in which we operate are highly complex and technical; we may not have adequate expertise to adequately market our products |
| We may be unable to establish marketing and sales capabilities necessary to commercialize and gain market acceptance for our potential products |
| Co-promotion or other marketing arrangements with others to commercialize products could significantly limit the revenues we derive from these products, and these parties may fail to commercialize such products successfully |
| We may be unable to obtain effective intellectual property protection for our potential products and technology |
| Our intellectual property, or any intellectual property that we have or may acquire, license or develop in the future, may not provide meaningful competitive advantages |
| Our patents and patent applications, including those we license, may be challenged by competitors, and the rights granted under such patents or patent applications may not provide meaningful proprietary protection |
| For example, we are aware of numerous patents held by third parties that relate to polymer materials, biochips and electro-optic devices |
| These patents could be used as a basis to challenge the validity or limit the scope of our patents or patent applications |
| A successful challenge to the validity or limitation of the scope of our patents or patent applications could limit our ability to commercialize our polymer materials technology and, consequently, reduce our revenues |
| Moreover, competitors may infringe our patents or those that we license, or successfully avoid these patents through design innovation |
| To combat infringement or unauthorized use, we may need to resort to litigation, which can be expensive and time-consuming and may not succeed in protecting our proprietary rights |
| In addition, in an infringement proceeding a court may decide that our patents or other intellectual property rights are not valid or are unenforceable, or may refuse to stop the other party from using the intellectual property at issue on the ground that it is non-infringing |
| Policing unauthorized use of our intellectual property is difficult and expensive, and we may not be able to, or have the resources to, prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect these rights as fully as the laws of the United States |
| We also rely on the law of trade secrets to protect unpatented technology and know-how |
| We try to protect this technology and know-how by limiting access to those employees, contractors and strategic partners with a need to know this information and by entering into confidentiality agreements with these parties |
| Any of these parties could breach the agreements and disclose our trade secrets or confidential information to our competitors, or these competitors might learn of the information in other ways |
| Disclosure of any trade secret not protected by a patent could materially harm our business |
| We may be subject to patent infringement claims, which could result in substantial costs and liability and prevent us from commercializing our potential products |
| Third parties may claim that our potential products or related technologies infringe their patents |
| Any patent infringement claims brought against us may cause us to incur significant expenses, divert the attention of our management and key personnel from other business concerns and, if successfully asserted against us, require us to pay substantial damages |
| In addition, as a result of a patent infringement suit, we may be forced to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a patent covering a third party’s intellectual property unless that party grants us rights to use its intellectual property |
| We may be unable to obtain these rights on terms acceptable to us, if at all |
| Even if we are able to obtain rights to a third party’s patented intellectual property, these rights may be non-exclusive, and therefore our competitors may obtain access to the same intellectual property |
| Ultimately, we may be unable to commercialize our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business |
| If our potential products infringe the intellectual property rights of others, we may be required to indemnify customers for any damages they suffer |
| Third parties may assert infringement claims against our current or potential customers |
| These claims may require us to initiate or defend protracted and costly litigation on behalf of customers, regardless of the merits of these claims |
| If any of these claims succeed, we may be forced to pay damages on behalf of these customers or may be required to obtain licenses for the products they use |
| If we cannot obtain all necessary licenses on commercially reasonable terms, we may be unable to continue selling such products |
| The technology we license from various third parties may be subject to government rights and retained rights of the originating research institution |
| We license technology from the University of Washington and various other research institutions or companies |
| Many of our partners and licensors have obligations to government agencies or universities |
| Under their agreements, a government agency or university may obtain certain rights over the technology that we have developed and licensed, including the right to require that a compulsory license be granted to one or more third parties selected by the government agency |
| -19- _________________________________________________________________ In addition, our partners often retain certain rights under their licensing agreement with us, including the right to use the technology for noncommercial academic and research use, to publish general scientific findings from research related to the technology, and to make customary scientific and scholarly disclosures of information relating to the technology |
| It is difficult to monitor whether our partners limit their use of the technology to these uses, and we could incur substantial expenses to enforce our rights to our licensed technology in the event of misuse |
| The loss of our chief executive officer, or any inability to attract and retain additional personnel, could impair our ability to maintain or expand our business |
| Our future success depends to a significant extent on the continued service of our key management personnel, particularly Thomas D Mino, our chief executive officer |
| We do not maintain key person life insurance on any of our executive officers other than Mr |
| Our future success will also depend on our ability to attract, retain and motivate highly skilled personnel |
| In particular, we will need to hire a significant number of technical personnel |
| Competition for highly educated qualified personnel in the polymer as well as bio-tech industries is intense |
| If we fail to hire and retain a sufficient number of qualified engineering, sales and technical personnel, we will not be able to maintain or expand our business |
| If we fail to develop and maintain the quality of our manufacturing processes, our operating results would be harmed |
| The manufacture of our potential products is a multi-stage process that requires the use of high-quality materials and advanced manufacturing technologies |
| Also, polymer-related device development and manufacturing must occur in a highly controlled, clean environment to minimize particles and other yield- and quality-limiting contaminants |
| In spite of stringent quality controls, weaknesses in process control or minute impurities in materials may cause a substantial percentage of a product in a lot to be defective |
| If we are not able to develop and continue to improve on our manufacturing processes or to maintain stringent quality controls, or if contamination problems arise, our operating results would be harmed |
| If we decide to make commercial quantities of products at our facilities, we may be required to make significant capital expenditures to increase capacity or purchase wafers or components from contract manufacturers |
| We lack the internal ability to manufacture products at a level beyond the stage of early commercial introduction |
| To the extent we do not have an outside vendor to manufacture our products, we will have to increase our internal production capacity and we will be required to expand our existing facilities or to lease or construct new facilities or to acquire entities with additional production capacities |
| These activities would require us to make significant capital investments and may require us to seek additional equity or debt financing |
| We cannot assure you that such financing would be available to us when needed on acceptable terms, or at all |
| If we are unable to expand internal production capacity on a timely basis to meet increases in demand, we could lose market opportunities for sales |
| Further, we cannot assure you that any increased demand for our potential products would continue for a sufficient period of time to recoup our capital investments associated with increasing our internal production capacity |
| In addition, we do not have experience manufacturing our potential products in large quantities |
| In the event of significant demand for our potential products, large-scale production might prove more difficult or costly than we anticipate and lead to quality control issues and production delays |
| We may not be able to manufacture products at competitive prices |
| To date, we have produced limited quantities of products for research, development and demonstration purposes |
| The cost per unit for these products currently exceeds the price at which we could expect to profitably sell them |
| If we cannot substantially lower our cost of production as we move into sales of products in commercial quantities, our financial results will be harmed |
| We conduct all of our operations at a single facility, and circumstances beyond our control may result in significant interruptions |
| We conduct all of our research and development, internal manufacturing and management activities at a single facility in Bothell, Washington |
| A disaster such as a fire, flood, earthquake, volcanic eruption or severe storm at or near this facility could prevent us from further developing our technologies or manufacturing our potential products, which would harm our business |
| -20- _________________________________________________________________ We could be exposed to significant product liability claims that could be time-consuming and costly and impair our ability to obtain and maintain insurance coverage |
| We may be subject to product liability claims if any of our potential products are alleged to be defective or harmful |
| Product liability claims or other claims related to our potential products, regardless of their outcome, could require us to spend significant time and money in litigation, divert our management’s time and attention from other business concerns, require us to pay significant damages, harm our reputation or hinder acceptance of our potential products |
| Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the future on commercially reasonable terms |
| Any inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could impair our ability to commercialize our potential products |
| If we fail to effectively manage our growth, our business could suffer |
| To date, substantially all of our activities and resources have been directed at the research and development of our technology and development of potential products |
| The transition from research and development to a vendor of products will require effective planning and management |
| In addition, future expansion will be expensive and will likely strain our management and other resources |
| In order to effectively manage growth, we must: • continue to develop an effective planning and management process to implement our business strategy; • hire, train and integrate new personnel in all areas of our business; and • expand our facilities and increase our capital investments |
| We cannot assure you that we will be able to accomplish these tasks effectively or otherwise effectively manage our growth |
| We are subject to regulatory compliance related to our operations |
| We are subject to various US governmental regulations related to occupational safety and health, labor and business practices |
| Failure to comply with current or future regulations could result in the imposition of substantial fines, suspension of production, alterations of our production processes, cessation of operations, or other actions, which could harm our business |
| We may be unable to export our potential products or technology to other countries, convey information about our technology to citizens of other countries or sell certain products commercially, if the products or technology are subject to United States export or other regulations |
| We are developing certain polymer-based products that we believe the United States government and other governments may be interested in using for military and information gathering or antiterrorism activities |
| United States government export regulations may restrict us from selling or exporting these potential products into other countries, exporting our technology to those countries, conveying information about our technology to citizens of other countries or selling these potential products to commercial customers |
| We may be unable to obtain export licenses for products or technology if necessary |
| We currently cannot assess whether national security concerns would affect our potential products and, if so, what procedures and policies we would have to adopt to comply with applicable existing or future regulations |
| -21- _________________________________________________________________ Our use of the name “Lumera” may result in infringement claims and other legal challenges, which could cause us to incur significant expenses, pay substantial damages and be prevented from using this name |
| Our use of the name “Lumera” may result in infringement claims and other legal challenges, which could cause us to incur significant expenses, pay substantial damages and be prevented from using this name |
| In April 2004 we filed a trademark application with the US Patent and Trademark Office to register the trademark “Lumera |
| ” We are aware of a company that has also applied for a trademark for the name Lumera in connection with PC-based electromechanical controls for use in the control and operation of automation equipment |
| We may not receive approval of our trademark application for the name “Lumera,” and, even if the application is approved, the trademark may be challenged by third parties or invalidated |
| As a result of such infringement claims or challenges, we may incur significant expenses, pay substantial damages and be prevented from using the name “Lumera” unless we enter into royalty or license agreements |
| We may not be able to obtain royalty or license agreements on terms acceptable to us, if at all |
| Use of the name “Lumera” or similar names by third parties may also cause confusion to our clients and confusion in the market, which could decrease the value of our brand and harm our reputation |
| We may incur liability arising from the use of hazardous materials |
| Our business and our facilities are subject to a number of federal, state and local laws and regulations relating to the generation, handling, treatment, storage and disposal of certain toxic or hazardous materials and waste products that we use or generate in our operations |
| Many of these environmental laws and regulations subject current or previous owners or occupiers of land to liability for the costs of investigation, removal or remediation of hazardous materials |
| In addition, these laws and regulations typically impose liability regardless of whether the owner or occupier knew of, or was responsible for, the presence of any hazardous materials and regardless of whether the actions that led to the presence were taken in compliance with the law |
| In our business, we use hazardous materials that are stored on site |
| We use various chemicals in our manufacturing process which may be toxic and covered by various environmental controls |
| The waste created by use of these materials is transported off-site by an unaffiliated waste hauler |
| Many environmental laws and regulations require generators of waste to take remedial actions at an off-site disposal location even if the disposal was conducted lawfully |
| The requirements of these laws and regulations are complex, change frequently and could become more stringent in the future |
| Failure to comply with current or future environmental laws and regulations could result in the imposition of substantial fines, suspension of production, alteration of our production processes, cessation of operations or other actions, which could severely harm our business |
| Acquisitions or investments may be unsuccessful and may divert our management’s attention and consume significant resources |
| We may in the future acquire or make investments in other businesses as well as products and technologies to complement our current business |
| Any future acquisition or investment may require us to use significant amounts of cash, make potentially dilutive issuances of equity securities or incur debt |
| In addition, acquisitions involve numerous risks, any of which could harm our business, including: • difficulties in integrating the operations, technologies and personnel of acquired businesses; • diversion of our management’s attention from other business concerns; • unavailability of favorable financing for future acquisitions; • potential loss of key employees of acquired businesses; • inability to maintain the key business relationships and the reputations of acquired businesses; • responsibility for liabilities of acquired businesses; • inability to maintain our standards, controls, procedures and policies; and • increased fixed costs |
| -22- _________________________________________________________________ Our plan to develop relationships with strategic partners may not be successful |
| As part of our business strategy, we have developed relationships and entered into agreements with strategic partners, such as with Helix BioPharma, the University of Washington and Arizona Microsystems, to conduct research and development of technologies and products |
| We expect to continue to evaluate similar opportunities |
| For these efforts to be successful, we must identify partners whose competencies complement ours |
| We must also successfully enter into agreements with them on terms attractive to us, and integrate and coordinate their resources and capabilities with our own |
| We may be unsuccessful in entering into agreements with acceptable partners or negotiating favorable terms in these agreements |
| Also, we may be unsuccessful in integrating the resources or capabilities of these partners |
| In addition, our strategic partners may prove difficult to work with or less skilled than we originally expected |
| If we are unsuccessful in our collaborative efforts, our ability to develop and market products could be severely limited |
| As our business grows, if we need to establish global operations, we will be subject to various risks |
| Many of the markets that we propose to address are global and may require us to conduct foreign operations, including the establishment of sales, manufacturing and possible research and development facilities in other countries |
| While the specific risks that will apply to these activities would depend on the circumstances, we could become subject to risks relating to foreign currency fluctuations, political and social unrest, local regulatory systems and varying standards for the protection of intellectual property |
| The existence of any of these risks will complicate our business and may lead to unexpected and adverse effects on our business |
| If we are required to conduct significant foreign operations, we will also need expertise in such operations, which we do not presently have |
| Insiders have substantial control over us |
| Our principal stockholders, including Microvision, directors, executive officers and entities affiliated with them beneficially own approximately 18dtta5prca of the outstanding shares of our common stock as of March 1, 2006 |
| As a result, these stockholders, if they were to act together, would be able to significantly influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions |
| The concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock |
| In addition, Richard F Rutkowski, one of our current directors, is also a director of Microvision |
| Our limited operating history makes financial forecasting difficult for us and for others that may publish estimates of our future financial results |
| As a result of our limited operating history, it is difficult to accurately forecast our revenue and results, including product sales and government contract revenue, cost of revenue, research and development expenses, marketing, general and administrative expenses and other financial and operating data |
| We have a limited amount of meaningful historical financial data upon which to base projected revenue or expenses |
| We base our current expense levels and estimates of future expense levels on our operating plans and estimates of future revenue, and our future expenses will be dependent in large part upon our future levels of product sales |
| Sales and results are difficult to forecast because we do not currently have any commercial customers, we are uncertain of the extent of orders for our products and the mix, volume and timing of any such orders, and we are uncertain of the receipt of and extent of performance under government contracts |
| Financial analysts and others that may seek to project our future performance face similar difficulties |
| This inability to accurately forecast our revenue and expenses could cause our financial results to differ materially from any projected financial results and could cause a decline in the trading price of our common stock |