| SPATIALIGHT INC Item 1A Risk Factors We are confronted by serious liquidity concerns |
| As of the date hereof, we have limited financial resources |
| Our operations to date have consumed substantial amounts of cash and will continue to require substantial amounts of capital in the future |
| In order to remain competitive, we must continue to make significant investments essential to our ability to operate profitably, including further investments in research and development, equipment, facilities and production activities |
| Taking into account our current financial condition, we will require significant additional financing to satisfy our increasing working capital requirements in 2006 |
| Our financial condition and liquidity have been strongly assisted through private sales of our common shares (both registered and unregistered), convertible note financing, and the payment of exercise prices on our warrants and options |
| We have no assurance that outstanding stock options and warrants will be exercised in the future |
| Reliance on private equity purchase agreements and public offerings and exercises of derivative securities to finance our future operations entails the additional risks of our inability to sell our common shares or other securities and an insufficient number of warrants being exercised owing to the prevailing market prices of our underlying common shares |
| In the event that we are unable to obtain further financing on satisfactory terms, or at all, or we are unable to generate sales sufficient to offset our costs, or if our costs of development and operations are greater than we anticipate, we may be unable to increase the size of our business at the rate desired or may be required to delay, reduce, or cease certain or all of our operations, any of which could materially harm our business and financial results |
| Certain of the holders of the Senior Secured Convertible Notes issued by us in November 2004 have made claims of default |
| As previously disclosed in our Current Report on Form 8-K, filed December 19, 2005, holders of dlra9cmam000cmam000 principal amount of our Senior Secured Convertible Notes have alleged that we have defaulted in the payment of the installment of interest due November 30, 2005 on these Notes |
| In addition, one of these holders, who holds dlra4cmam500cmam000 principal amount of the Senior Secured Convertible Notes, has alleged that we have defaulted in our failure to maintain the effectiveness of registration statement on Form S-3 pertaining to the Senior Secured Convertible Notes (Registration Nodtta 333-122391) in such manner as to permit such holder to sell its shares pursuant to that registration statement |
| That holder of dlra4cmam500cmam000 principal amount of the Senior Secured Convertible Notes, as previously disclosed in our Current Report on Form 8-K, filed February 14, 2006, has also alleged that we have defaulted under the terms of the Senior Convertible Notes by entering into certain types of debt financing transactions |
| As a consequence of these alleged defaults, these holders have demanded the immediate redemption of the principal amount of their Senior Secured Convertible Notes plus a redemption premium of dlra675cmam000 to each of them |
| We do not believe that we have defaulted in the payment of interest on the Senior Secured Convertible Notes, and we believe that the registration statement has remained effective, that we have not entered into any debt financing transactions that would constitute a breach or failure in any material respect, and that we are otherwise in compliance with the relevant provisions of the Senior Secured Convertible Notes |
| At this date, we cannot predict what actions, if any, will be undertaken by any of the holders of the Senior Secured Convertible Notes, but we will contest any adverse actions as we do not believe that we have committed any defaults under the terms of the Senior Secured Convertible Notes |
| 8 _________________________________________________________________ We are currently manufacturing and shipping our LCoS Sets in limited commercial quantities, but difficulties in manufacturing our products in larger quantities will make it difficult to meet customer demands and our operating results could be significantly harmed by such difficulties |
| We have recently experienced difficulties in manufacturing our LCoS Sets principally due to problems that we have experienced in certain specific portions of our manufacturing process, which, until January 2006, were being carried out in our production facility in California |
| We have relocated these portions of our manufacturing process to our production facility in South Korea, where we have highly qualified personnel and a new facility designed to our specifications |
| See “Status of Business with LG Electronics, Inc |
| ” contained in Item 7 for a more detailed discussion of manufacturing difficulties that we have experienced |
| Furthermore, by having manufacturing take place in one location, we expect to be able to maintain a higher level of quality controls over our LCoS Set production |
| However, because the manufacture of our LCoS Sets involves highly complex processes and technical problems may continue to arise as we manufacture our LCoS Sets, we cannot assure satisfactory manufacturing yields or that we will be able to adequately ramp up volume production of our LCoS Sets |
| Current purchase orders, including our agreement with LG Electronics, and anticipated future purchase orders, which we cannot assure, will require us to produce greater quantities of our LCoS Sets than we have produced in the past |
| If future manufacturing yields do not improve or if we incur unanticipated future problems in production of our LCoS Sets, it will significantly harm our business and operating results because we will have already incurred the costs for the materials used in the LCoS Set manufacturing process as well as the costs of operating our South Korean manufacturing facility |
| Unanticipated further problems in manufacturing our LCoS Sets could also cause production delays that could lead our current and prospective customers to seek other sources, which would negatively impact our operating results |
| In addition, the complexity of our manufacturing processes will increase as the sophistication of our LCoS Sets increases, and such complexities may lend to similar difficulties that could harm our business and operating results |
| Although we believe that we will be able to mass produce our LCoS Sets, other companies, including some with substantially greater resources than us, have found great difficulty or failed to do so |
| We do not have reliable information about why other companies have failed to manufacture similar liquid crystal microdisplays and can therefore make no assurances that we will not encounter similar problems |
| We currently obtain silicon backplanes, a vital component in our microdisplays, from the Far East |
| Some Asian countries are subject to earthquakes, typhoons or political instability |
| Unless we obtain an alternative source, any disruption or termination of our silicon manufacturing sourceapstas operation in Taiwan or air transportation with the Far East could significantly harm our operations |
| Our LCoS Sets are assembled by combining the silicon backplanes with electronic components |
| The design and manufacture of LCoS Sets are highly complex processes that are sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, variations in temperature and humidity, impurities in the materials used, and the performance of personnel and equipment |
| We have built and equipped a manufacturing plant in South Korea where we currently manufacture our LCoS Sets in limited quantities |
| We believe that these current arrangements provide us with strong quality controls and effectively protect our proprietary technology in our products, but the risks discussed above associated with the highly complex processes of manufacturing these liquid crystal microdisplays remain applicable |
| Although we have commenced producing products in our manufacturing facility in South Korea, which serves as our principal facility for manufacturing our microdisplay products, we may encounter difficulties in conducting our manufacturing operations and difficulties in maintaining our quality controls over the manufacturing and production processes, any of which would be likely to cause significant harm to our business |
| Our decision to locate our principal manufacturing operations in South Korea may cause us to encounter one or more potential problems that could harm our business |
| These potential problems could arise in connection with conducting our manufacturing operations at the facility in South Korea |
| As a result of cultural or language differences, problems may arise in the training of, or communications with, our employees, such as misunderstandings or the creation of inefficiencies in our operations |
| The geographic separation between our corporate offices in the United States and our principal manufacturing operation in South Korea could result in managerial or supervisory problems, which could lead to decreased quality controls and a subsequent material harm to our business |
| We are largely dependent on one customer, LG Electronics, for our future revenues, and failure to expand our customer base or receive additional orders from our existing customer base will make us vulnerable to substantial loss of potential revenues |
| In 2005, most of our revenue was derived from LG Electronics |
| Based upon our agreement with LG Electronics, it is likely that a substantial percentage of our anticipated future revenues will be derived from LG Electronics as well |
| If we cannot diversify our customer base or derive increased revenues through additional purchase orders and product deliveries from customers other than LG Electronics, and therefore remain primarily reliant on only one customer for a substantial percentage of our revenues, we will be vulnerable to a substantial decline in anticipated revenues if we lose LG Electronics as a customer for any reason or if LG Electronics were to otherwise reduce, delay or cancel its orders |
| Any such events could cause a material adverse effect on our business, operations and financial condition and the value of our common shares could decline substantially |
| 9 _________________________________________________________________ Our ability to retain and receive additional purchase orders from our current customers and to attract and receive purchase orders from prospective customers may depend upon the acceptance of LG Electronics &apos products in the consumer marketplace |
| If LG Electronics &apos television products incorporating our LCoS technology are not commercially successful, demand for our products from our current and prospective customers may not materialize, which could negatively impact our results of operations and our financial condition |
| We are the subject of an investigation by the staff of the SEC regarding the circumstances surrounding our filing of certain consents of the independent registered accounting firm BDO Seidman, LLP without requisite authorization |
| We have been advised by the Staff of the SEC that it is conducting an investigation into the circumstances surrounding our filing of consents of the independent registered accounting firm BDO Seidman, LLP, without requisite authorization, which consents were filed as Exhibit 23dtta1 to amendments to our registration statements on Form S-3 (Nos |
| The consents would have allowed us to incorporate by reference in each of the prospectuses constituting a part of the above-referenced registration statements our consolidated financial statements for the years ended December 31, 2002 and 2003 |
| Our current independent registered accounting firm, Odenberg, Ullakko, Muranishi & Co |
| LLP (OUM) has since provided us with a new report with respect to each of the three years ended December 31, 2004 and we were not requested to amend or restate the financial statements contained in our annual reports on Form 10-K for any of the three fiscal years ended December 31, 2004 in connection with the issuance of OUMapstas new report |
| We have been cooperating and intend to continue to cooperate with the SEC in connection with this matter |
| In addition, the audit committee of our board of directors has concluded a review and investigation of these matters |
| As of this date, we cannot determine whether we or our management will be adversely affected by this inquiry |
| See “Certain Developments” under Item 7 for further information concerning the factual circumstances underlying the SEC investigation and the audit committee investigation and report with respect to this matter |
| We may be subject to lawsuits relating to our use of a registration statement that did not contain an authorized consent of BDO Seidman LLP As disclosed under “Certain Developments” under Item 7, we filed, as part of amendment numbers 5 and 6 to a registration statement (File Nodtta 333-122391) registering shares for resale by certain selling shareholders (the “Financing Registration Statement”) and as part of amendment numbers 3 and 4 to a “shelf” registration statement (File Nodtta 333-122392), an unauthorized consent of BDO Seidman to incorporate by reference their report on our consolidated financial statements for the fiscal years ended December 31, 2002 and 2003, respectively |
| Although we received the requisite authorized consents from BDO Seidman to the incorporation by reference of their report on the consolidated financial statements into these registration statements when initially filed and subsequent amendments thereto (and BDO Seidman has not withdrawn these subsequent consents), we did not receive the requisite authorization from BDO Seidman to file its consent as an exhibit to the penultimate and final amendments to the registration statement before it was declared effective |
| These amendments were filed with the SEC on July 27, 2005 |
| Subsequently, our current independent registered public accountants, OUM, re-audited our consolidated financial statements for fiscal years 2003 and 2002 |
| OUM has given its consent to incorporate by reference into the registration statement the financial statements for 2002 and 2003 and its report related to those financial statements |
| Following the filing in July 2005 of amendment number 6 to the Financing Registration Statement and amendment number 4 to the “shelf” registration statement, which contained the unauthorized consents referred to above, the Staff of the SEC declared both of the registration statements effective |
| In August 2005, we filed post-effective amendments number 1 to both of these registration statements (those post-effective amendments were subsequently withdrawn and replaced by additional post-effective amendments), which disclosed the filing of the unauthorized consents |
| Because both registration statements were used to sell common shares after the Staff of the SEC declared the registration statements effective, it is conceivable that there may be litigation against us or our officers or directors under Section 11 of the Securities Act |
| Although we do not believe that the filing of an invalid consent constitutes a materially misleading statement or an omission to disclose a material fact within the meaning of Section 11 of the Securities Act, a contrary determination could result in a liability for us |
| At present, we are unable to ascertain the exact amount of damages, if any, to which we could potentially be subject under a Section 11 claim instituted by any persons who directly purchased shares pursuant to those registration statements |
| Furthermore, at this date, we cannot ascertain the amount of damages, if any, for which we could be liable for claims instituted by any subsequent purchasers who could trace the shares purchased by them to those registration statements |
| In August 2005, we sold 500cmam000 common shares to three institutional purchasers for dlra5dtta40 per share pursuant to the “shelf” registration statement referenced herein |
| Each of those investors has since represented to us in writing, in connection with a separate transaction, that they have disposed of all of those shares |
| One of those institutional investors has represented to us that it sold those shares at a sale price at or higher than its purchase price from us |
| We believe, based upon discussions with the other two investors, that they sold their shares at a sale price of not lower than dlra4dtta25 per share |
| Therefore, we believe that our maximum damages pursuant to Section 11 claims from direct purchasers, which we would fully contest, would be dlra385cmam250, or the difference between the two investors’ purchase price and lowest believed resale price, multiplied by the 335cmam000 shares that they purchased and then resold |
| 10 _________________________________________________________________ In addition to any damage claims, which may be material to our financial condition, any lawsuit alleging securities law violations could require us to expend significant financial and managerial resources |
| Any such lawsuit could also result in further volatility in the market price of our common shares |
| Nothing set forth in the foregoing statement constitutes an express or implied admission by us of any liability under Section 11 of the Securities Act or otherwise |
| The obligations arising from our Senior Secured Convertible Notes restrict our future financing alternatives and may result in financial difficulties for us in the future |
| The Senior Secured Convertible Notes issued in November 2004 bear a 10prca rate of interest per annum and are not prepayable, in whole or in part, prior to their maturity on November 30, 2007 |
| Therefore, we do not have the ability to refinance the 2004 Senior Secured Convertible Notes with debt obligations bearing more favorable terms to us or out of the proceeds of an equity financing until their maturity date |
| Although we do have the right to convert the Senior Secured Convertible Notes into our common shares in the event that our common shares trade at or above dlra14dtta58 (150prca of the dlra9dtta72 conversion price of the Senior Secured Convertible Notes) for twenty consecutive trading days |
| The last sale price of our common shares on March 10, 2006, was dlra2dtta28 per share |
| Furthermore, the Senior Secured Convertible Notes are secured by virtually all of our assets, other than those located in South Korea, and it may therefore be difficult for us to obtain future debt financing |
| However, the terms of the Senior Secured Convertible Notes allow us to subordinate these Notes to indebtedness to a bank or other institution where that indebtedness is secured by accounts receivable, contractual rights or inventory or similar financing |
| If we default in meeting our obligations under the Senior Secured Convertible Notes, the indebtedness which they evidence may become immediately due and payable, and the holders of the Senior Secured Convertible Notes may be entitled to foreclose on any of our assets securing the notes |
| As noted earlier, certain of the holders of our Senior Secured Convertible Notes have alleged that we have defaulted in meeting our obligations and have demanded the immediate repayment of principal and liquidated damages |
| In the event these holders pursue their claims, and a court determines that we have defaulted in our obligations, we will have to seek financing from third parties to satisfy the holder’s claims |
| The Senior Secured Convertible Notes are convertible into our common shares and the issuance of such shares (including any shares issued in payment of interest on such notes) may have a dilutive effect on the value of our outstanding common shares |
| We have a history of losses and may incur losses in the future and therefore cannot assure you that we will achieve profitability |
| We have incurred losses to date and have experienced cash shortages |
| For the year ended December 31, 2005, we incurred net losses of approximately dlra14 million |
| In addition, we had an accumulated deficit of approximately dlra82 million as of December 31, 2005 |
| We expect additional losses as we continue spending for commercial scale production and other business activities as well as further research and development of our products |
| As a result, we will need to generate substantial sales to support our costs of doing business before we can begin to recoup our operating losses and accumulated deficit and achieve profitability |
| We are subject to lengthy development periods and product acceptance cycles, which may significantly harm our business |
| Our business model requires us to develop microdisplays that perform better than existing technologies, manufacture our LCoS Sets in bulk, and sell the resulting LCoS Sets to OEMs that will then incorporate them into their products |
| OEMs make the determination during their product development programs whether to incorporate our LCoS Sets and/or display units in their products |
| This requires us to invest significant amounts of time and capital in designing our LCoS Sets before we can be assured that we will generate any significant sales to our customers or even recover our investment |
| If we fail to recover our investment in the LCoS Sets, it could seriously harm our financial condition |
| In addition, the acceptance of new technologies developed by our competitors could limit the time period that our products may be demanded by our customers |
| We incur substantial operational and research and development costs in connection with products and technologies that may not be successful |
| We currently have 9 full-time engineering and 8 full-time manufacturing personnel based in California working on microdisplays |
| We currently have nine full-time engineering and 74 full-time manufacturing personnel based in South Korea |
| This staffing creates significant operational and research and development costs that may not be recouped |
| Even if our current LCoS Sets become accepted and/or successful, we must continue to employ and may increase in number, our engineering and manufacturing personnel to develop future generations of our microdisplays because of the rapid technological changes in our industry |
| As a result, we expect to continue incurring significant operational and research and development costs |
| 11 _________________________________________________________________ Geopolitical conditions or potential military conflicts between allies, the United States and South Korea, and North Korea may negatively impact our business |
| We commenced producing products in our principal manufacturing operations in South Korea during the second quarter of 2005, and our largest customer, LG Electronics, resides in South Korea |
| South Korea and North Korea are technically at war with each other, despite the mutually agreed upon existence of the Demilitarized Zone and the relative absence of physical conflict for several decades |
| Any escalation in the existing conflict between these countries or any commencement, or perceived commencement of a military conflict between the United States and North Korea, may limit our ability to effectively operate our manufacturing facility in South Korea and also may substantially limit our ability to sell products into South Korea because of the negative economic, physical or other destructive impact that such a conflict could have on our most important customer |
| Any such disruptions to our manufacturing operations and/or ability to consummate sales to a substantial customer could adversely affect the development of our business and our financial condition |
| If the high definition television market does not continue to develop and if other potential markets for our products do not materialize, then our business will likely be significantly harmed |
| High definition television programming has only recently become available to consumers, and widespread market acceptance, although anticipated, is uncertain at this time |
| The market demand for high definition televisions is considered contingent upon widespread acceptance of high definition television programming |
| Our current sales and marketing efforts are focused on OEMs of high definition televisions and OEMs of light engines designed for incorporation into high definition televisions |
| Therefore, if the market for high definition televisions does not continue to grow and develop, then we will have significant difficulty selling our products, which will have a material adverse effect on our results of operations |
| Various potential target markets for our products, including projectors, monitors, and portable microdisplays, are uncertain and may be slow to develop |
| In addition, companies in those markets could utilize competing technologies |
| For us to succeed in selling our products into these potential markets we must offer end-product manufacturers higher quality and less expensive microdisplay products than our competitors, and the manufacturers themselves will also have to develop commercially successful products using our products |
| In the event that we attempt to market and sell our products into these potential target markets, if we are not able to succeed in selling our products into these potential markets, then our results of operations and overall business may be negatively affected |
| If our products do not become widely accepted by our customers or the end-users, our business could be significantly harmed |
| Our LCoS Sets may not be accepted by a widespread market |
| Even if we successfully obtain customer orders, our customers may determine not to introduce or may terminate products utilizing the technology for a variety of reasons, including the following: • superior technologies developed by our competitors; • price considerations; and • lack of anticipated or actual market demand for the products |
| We cannot assure you that we will obtain additional purchase orders from our current or prospective customers, or, if we do, that such orders will generate significant revenues |
| Even though in the past we have received purchase orders for our LCoS Sets and/or display units from LG Electronics and from certain Chinese and Taiwanese OEMs and may receive additional purchase orders from prospective customers, sales to manufacturers in the electronics industry are subject to severe competitive pressures, rapid technological change and product obsolescence |
| In addition, purchase orders received from our customers other than LG Electronics are for limited quantities of our products |
| Customers may, at any time, cancel purchase orders or commitments or reduce or delay orders, thereby increasing our inventory and overhead risks |
| Therefore, despite the purchase orders received from current customers and other purchase orders that we may receive from prospective customers, we cannot assure you that these agreements will result in significant revenues to us |
| If our customers &apos products are not successful, our business would be materially harmed |
| We do not currently sell any products to end-users |
| Instead, we design and manufacture various product solutions that our customers (ie, OEMs) may incorporate into their products |
| As a result, our success depends almost entirely upon the widespread market acceptance of our customers &apos products |
| Any significant absence of, or slowdown in the demand for our customers &apos products would materially harm our business |
| 12 _________________________________________________________________ Our dependence on the success of the products of our customers exposes us to a variety of risks, including our need to do the following: • maintain customer satisfaction with our design and manufacturing services; • match our design and manufacturing capacity with customer demand and maintain satisfactory delivery schedules; • anticipate customer order patterns, changes in order mix, and the level and timing of orders that we can meet; and • adjust to the cyclical nature of the industries and markets we serve |
| The high definition television industry is highly competitive, which may result in lost sales or lower gross margins |
| We serve the highly competitive high definition television industry that is characterized by price erosion, rapid technological change and competition from major domestic and international companies |
| This intense competition could result in downward pricing pressures, lower sales, reduced margins and lower market share |
| Companies competing in the LCoS microdisplay market include Sony and JVC, although we presently believe that Sony has developed LCoS microdisplays for its own use and not for sale to other OEMapstas |
| A major competitor of ours in the reflective microdisplay market is Texas Instruments, which, rather than using liquid crystals in the display, is producing a micro-mechanical structure of moving mirrors on a silicon backplane, a technology known as digital light processing, or DLP Texas Instruments has had significant success selling its DLP products to its customers in the business front projector market and the rear projection high definition television market |
| Some of our competitors, including Texas Instruments, Sony, and JVC, have greater market recognition, larger customer bases, and substantially greater financial, technical, marketing, distribution and other resources than we possess |
| As a result, they may be able to introduce new products and respond to customer requirements more quickly and effectively than we can |
| Rapid and significant technological advances have characterized the microdisplay market |
| There can be no assurance that we will be able to effect any significant technological advances or that we will have sufficient funds to invest in new technologies or products or processes |
| Although we believe that our displays have specifications and capabilities, which equal or exceed that of commercially available LCD, cathode ray tube (CRT) and DLP based display products, the manufacturers of these products may develop further improvements of their existing technology that would eliminate or diminish our anticipated advantage |
| The acceptance of our LCoS Sets and/or display units will be dependent upon the pricing, quality, reliability and useful life of these products compared to competing technologies, as to which there can be no assurance |
| Our competitive position also may suffer if one or more of our customers decide to design and manufacture their own microdisplay products, to contract with our competitors, or to use alternative technologies |
| In addition, customers in the television manufacturing industry typically develop a second source |
| Second source suppliers may win an increasing share of our customerapstas product demands |
| Our ability to compete successfully depends on a number of factors, both within and outside our control |
| These factors include the following: · our success in designing and manufacturing new display technologies; · our ability to address the needs of customers; · the quality, performance, reliability, features, ease of use, pricing, and diversity of our display products; · foreign currency fluctuations, which may cause a foreign competitorapstas products to be priced significantly lower than our displays; · the quality of our customer services; · the efficiency of our production sources; and · the rate at which customers incorporate our displays into their own products; and products or technologies introduced by our competitors |
| 13 _________________________________________________________________ Fluctuations in the exchange rate of the United States dollar and foreign currencies could have a material adverse effect on our financial performance and profitability |
| A portion of our costs is denominated in foreign currencies, including the Korean Won and the Euro |
| As a result, changes in the exchange rates of these currencies or any other applicable currencies to the US dollar will affect our costs of good sold and operating margins, and could result in exchange losses |
| We cannot fully predict the impact of future exchange rate fluctuations on our profitability |
| From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations, although we have not engaged in any such hedging activities to date |
| However, we cannot offer assurance that any hedging technique we may implement will be effective |
| If it is not effective, we may experience reduced operating margins |
| Our operating results are subject to significant fluctuations |
| Our results of operations have varied significantly from quarter-to-quarter in the past and are likely to vary significantly in the future, which makes it difficult to predict our future operating results |
| Accordingly, we believe that quarter-to-quarter comparisons of our operating results are not meaningful and should not be relied upon as an indicator of our future performance |
| Some of the factors that cause our operating results to fluctuate include the following: · introductions of displays and market acceptance of new generations of displays; · timing of expenditures in anticipation of future orders; · changes in our cost structure; · availability of labor and components; · pricing and availability of competitive products and services; · the timing of orders; · the volume of orders relative to the capacity we can contract to produce; · evolution in the life cycles of customers &apos products; and · changes or anticipated changes in economic conditions |
| The market price of our common shares is highly volatile |
| The market price of our common shares has been highly volatile, reflecting among other things reported losses, receipts of additional financing and investors &apos perceptions about our business prospects |
| Some research has shown that similar volatility in other companies correlates with class action securities lawsuits although to date we have not been a defendant in any such lawsuit |
| The trading price of our common shares in the future could continue to be subject to wide fluctuations in response to various factors, including the following: · quarterly variations in our operating results; · actual or anticipated announcements of technical innovations or new product developments by us or our competitors; · public announcements regarding our business developments; · changes in analysts &apos estimates of our financial performance; · sales of large numbers of our common shares by our shareholders; · general conditions in the electronics industry; and · worldwide economic and financial conditions |
| In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market prices for many high-technology companies and that often have been unrelated to the operating performance of these companies |
| These broad market fluctuations and other factors may adversely affect the market price of our common shares |
| By further increasing the number of our common shares that may be sold into the market, any future offerings of our common shares, or securities convertible into or exercisable for our common shares, could cause the market price of our common shares to decrease significantly, even if our business operations are performing well |
| 14 _________________________________________________________________ The total number of common shares included in the Post-Effective Amendment Nodtta 6 to Form S-3 Registration Statement that we filed with the SEC on February 14, 2006 (Registration Number 333-122391), principally relating to the November 2004 Financing, the 1cmam500cmam000 common shares included in the Post-Effective Amendment Nodtta 6 to Form S-3 “Shelf” Registration Statement filed by us with the SEC on February 14, 2006 (Registration Number 333-122392) and 800cmam007 common shares included the Form S-3 Registration Statement filed by us with the SEC on February 27, 2006 (Registration Number 333-132048), represents approximately 11dtta01prca of the total number of our common shares that were issued and outstanding as of December 31, 2005 |
| Sales of these shares into the public market, or the perception that future sales of these common shares could occur, might adversely affect the prevailing market price of our common shares in the near future |
| Furthermore, market perceptions regarding the likelihood that we will be required to issue and sell additional common shares in the near future to fund our ongoing operations, thereby diluting the ownership interests of current owners of our common shares, could have a material adverse effect on the market price of our common shares |
| Our common shares may not be liquid |
| Our common shares are currently traded on the NASDAQ SmallCap Market |
| Our shareholders may find that it is more difficult to sell our common shares than shares that are listed on The NASDAQ National Market or New York Stock Exchange |
| The trading volume of our common shares has historically been adversely affected by their limited marketability, but such volume has increased significantly in recent periods |
| Nevertheless, any substantial sales of our common shares may result in a material reduction in their market price, reflecting the volatility of the trading market for our common shares |
| If we lose our key personnel or are unable to attract and retain additional personnel, our ability to compete could be harmed |
| Our development and operations depend substantially on the efforts and abilities of our senior management and qualified technical personnel |
| Our products require sophisticated production, research and development and technical support |
| The competition for qualified management and technical personnel is intense |
| The loss of services of one or more of our key employees or the inability to add key personnel could have a material adverse affect on us; particularly since currently we do not have any insurance policies in place to cover that contingency |
| Our success will depend upon our ability to attract and retain highly qualified scientific, marketing, manufacturing, financial and other key management personnel |
| We face intense competition for the limited number of people available with the necessary technical skills and understanding of our products and technology |
| We cannot assure you that we will be able to attract or retain such personnel or not incur significant costs in order to do so |
| Our future success depends on our ability to protect our proprietary technology and our registered intellectual property |
| We believe that our success depends in part on protecting our proprietary technology |
| We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality and assignment of inventions agreements from our employees, consultants and advisors and other contractual provisions, to establish and protect our intellectual property rights |
| If we are unable to protect our intellectual property from use by third parties, our ability to compete in the industry will be harmed |
| Policing unauthorized use of our products and technology is difficult, however |
| Despite our efforts to protect our proprietary rights, we face the following risks: · pending patent applications may not be issued; · patents issued to us may be challenged, invalidated, or circumvented; · unauthorized parties may obtain and use information that we regard as proprietary despite our efforts to protect our proprietary rights; · others may independently develop similar technology or design around any patents issued to us; · breach of confidentiality agreements; · intellectual property laws may not protect our intellectual property; and · effective protection of intellectual property rights may be limited or unavailable in some foreign countries, such as China, in which we may operate |
| Specifically, although we consider the following unlikely because of the complex technological structure of our products, one or more of our current or prospective Chinese, Korean or Taiwanese customers, or their respective employees or other persons including our competitors, that have or gain access to our products for testing purposes, may seek to misappropriate or improperly convert to their own use our intellectual property and a lack of adequate remedies and impartiality under the Chinese, Korean and other foreign legal systems may adversely impact our ability to protect our intellectual property |
| 15 _________________________________________________________________ There can be no assurance that we will have adequate remedies in the event any of the foregoing materializes |
| Failure to protect our intellectual property would limit our ability to produce and market our products in the future, which would materially adversely affect our revenues generated by the sale of such products |
| In addition, third parties could assert that our products and technology infringe their patents or other intellectual property rights |
| As a result, we may become subject to future patent infringement claims or litigation, the defense of which is costly, time-consuming and diverts the attention of management and other personnel |
| The material weaknesses identified by our management and our independent registered public accounting firm with respect to our material internal control systems, processes and procedures may have a materially negative impact on our business |
| In accordance with the rules prescribed by the SEC and the Sarbanes-Oxley Act of 2002, we must periodically review and test our material internal control systems, processes and procedures to ensure compliance |
| During our preparation of our Form 10-K Annual Report for the year ended December 31, 2005, our management and our independent registered public accounting firm identified several material weaknesses in our internal controls over financial reporting |
| Although these material weaknesses did not result in a misstatement of our financial results, they relate closely to assuring the fulfillment of critical components of the financial reporting functions of our business |
| As of this date, the material weaknesses identified include the fact that our Company does not have a full-time chief financial officer |
| The Company does not currently have a chief financial officer to work with the chief executive officer and chief operating officer in overseeing and monitoring complex and significant transactions in order to provide reasonable assurance that such transactions are reflected accurately and fairly in the financial statements, although we employ a part-time controller to assist in the performance of the foregoing functions |
| Furthermore, our Audit Committee does not have a member who is deemed a "e financial expert "e as defined by the rules promulgated by the SEC, although a member of our Audit Committee has the level of financial sophistication that the NASDAQapstas rules require |
| Additionally, the Company does not have a corporate governance or disclosure committee, has inadequate controls and procedures over inventory, lacks information technology controls and procedures that would likely prevent unauthorized access to accounting and financial systems, does not have effective internal controls over financial reporting at our wholly owned subsidiary in South Korea, does not maintain formal accounting policies and procedures to allow the accounting function to adequately analyze transactions and determine correct accounting under GAAP, and does not have formal procedures to prevent the filing of registration statements with the SEC without the required accountant’s consent |
| We may therefore need to incur significant additional expenses to achieve compliance and we may incur other costs in connection with regulatory enforcement actions, any of which could negatively impact our business |
| Political, economic and regulatory risks associated with international operations may limit our ability to do business abroad |
| A substantial number of our customers, manufacturers and suppliers are located outside of the United States, principally in the Far East |
| Our international operations are subject to political and economic conditions abroad, and protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export or import compliance laws, or other trade policies, any of which could adversely affect our ability to manufacture or sell displays in foreign markets and to purchase materials or equipment from foreign suppliers |
| Certain of our current purchase order agreements with customers are governed by foreign law and therefore are subject to uncertainty with regard to their enforceability |
| We do not pay cash dividends |
| We have never paid any cash dividends on our common shares and do not anticipate that we will pay cash dividends in the near future |
| Moreover, under the terms of the November 2004 Financing, we are prohibited from paying cash dividends while the Senior Secured Convertible Notes issued in the November 2004 Financing remain outstanding |
| Instead, we intend to apply any future earnings to the expansion and development of our business |