| VERTICALNET INC Item 1A Risk Factors We may require additional capital for our operations and obligations |
| Although, based on our most recent projections, we believe our current level of liquid assets and the expected cash flows from contractual revenue arrangements will be sufficient to finance our capital requirements and anticipated operating losses through at least March 31, 2007, any projection of future long-term cash needs and cash flows are inherently subject to uncertainty |
| There is no assurance that our resources will be sufficient for anticipated or unanticipated working capital and capital expenditure requirements during this period |
| We may need, or find it advantageous, to raise additional funds in the future to fund our growth, pursue sales and licensing opportunities, develop new or enhanced products and services, respond to competitive pressures, or acquire complementary businesses, technologies, or services |
| If we are ultimately unable, for any reason, to receive cash payments expected from our customers, our business, financial condition, and results of operations may be materially and adversely affected |
| As of December 31, 2005, our accumulated deficit was approximately dlra1dtta2 billion |
| We may never again generate an operating profit or, even if we do become profitable from operations at some point, we may be unable to sustain that profitability |
| We generate a significant portion of our revenues and accounts receivable from two customers |
| For 2004, these same two customers accounted for dlra11dtta2 million or 48dtta9prca of our total revenues |
| A termination or material reduction of our professional services by either of these customers could have a material adverse effect on our business, operating results, and financial condition |
| As of December 31, 2005, these two customers accounted for dlra1dtta6 million or 30dtta6prca of our accounts receivable balance, of which dlra1dtta4 million of the outstanding receivable has been collected as of March 1, 2006 |
| Although we have had a successful collection history with these customers, and do not foresee any collection issues, there can be no assurance that we will be able to collect outstanding balances and future invoices from them |
| We have contractual obligations to provide consulting services over many periods |
| We maintain a professional services and consulting workforce to fulfill contracts that we enter into with our customers that may extend over multiple periods |
| Our profitability is largely a function of performing against customer contractual arrangements within the estimated costs to perform these obligations |
| If we exceed these estimated costs, our profitability under these contracts may be negatively impacted |
| In addition, if we are not able to obtain sufficient work to keep all of our professionals on revenue generating projects, our business, financial condition, and results of operations may be adversely affected |
| If we fail to meet client expectations in the performance of our services, our business could suffer |
| Our failure to meet client expectations in the performance of our services, including the quality, cost, and timeliness of our services, may adversely affect our ability to attract and retain clients |
| If a client is not satisfied 6 ______________________________________________________________________ [36]Table of Contents with our services, we will generally spend additional human and other resources at our own expense to ensure client satisfaction |
| Such expenditures will typically result in a lower margin on such engagements and could have a material adverse effect on our business, financial condition, and results of operations |
| We may be unable to maintain our listing on the Nasdaq Capital Market, which could cause our stock price to fall and decrease the liquidity of our common stock |
| Our common stock is currently listed on the Nasdaq Capital Market |
| A continued listing on the Nasdaq Capital Market requires us to meet certain qualitative standards, including maintaining a certain number of independent Board members and independent Audit Committee members, and certain quantitative standards, including that we maintain dlra2dtta5 million in shareholders’ equity and that the closing price of our common stock not be less than dlra1dtta00 per share for 30 consecutive trading days |
| Since March 14, 2005, our stock has closed below dlra1dtta00 per share |
| On April 27, 2005, we received written notification from the staff (the “Staff”) of The Nasdaq Stock Market (“Nasdaq”) that the bid price of our common stock for the last 30 consecutive trading days had closed below the minimum dlra1dtta00 per share required for continued listing under Nasdaq Marketplace Rule 4310(c)(4), (the “Rule”) |
| Pursuant to Nasdaq Marketplace Rule 4310(c)(8)(D), we were provided an initial period of 180 calendar days, or until October 24, 2005, to regain compliance |
| On October 26, 2005, we received a second notice from Nasdaq stating that the Staff had determined that we had not regained compliance with the Rule, although we met all of the Nasdaq Capital Market initial listing criteria, except for the bid price requirement |
| Because we met the initial listing criteria, the Staff notified us that we had been granted an additional 180 calendar days compliance period, or until April 24, 2006, to regain compliance with the minimum bid price rule |
| The notice states that the Staff will provide written notification that we have achieved compliance with the Rule if at any time before April 24, 2006, the bid price of our common stock closes at dlra1dtta00 per share or more for a minimum of ten consecutive business days, although the notice also states that the Staff has the discretion to require compliance for a period in excess of ten consecutive business days, but generally no more than 20 consecutive business days, under certain circumstances |
| If we fail to regain compliance by April 24, 2006, the Staff will provide written notice that our securities will be delisted |
| At that time, we may appeal the Staff’s determination to de-list our securities to a Listing Qualifications Panel |
| We expect to regain compliance with Nasdaq’s listing qualifications for continued listing of our stock |
| As of March 30, 2006 we met all qualitative and, except for the minimum bid requirement, all quantitative standards for initial and continuing listing of our stock on the Nasdaq Capital Market |
| On March 24, 2006, we filed a Preliminary Proxy Statement on Schedule 14A with the SEC in connection with our 2006 annual meeting of shareholders (the “Preliminary Proxy Statement”) which is scheduled to be held on May 19, 2006 |
| One of the proposals set forth in the Preliminary Proxy Statement is to obtain approval from our shareholders to authorize our board of directors to affect a reverse split of our outstanding common stock at an exchange ratio of no less than 1-for-3 and no more than 1-for-7 (the “Stock Split”) |
| If we put the Stock Split proposal to a vote of our shareholders, no assurance can be given that our shareholders will approve the proposal or that if approved, our board of directors will affect the Stock Split |
| If the Stock Split is completed, we expect to satisfy the dlra1dtta00 per share minimum bid requirement for continued listing under the Rule |
| However, there can be no assurance that we will be able to meet all qualitative and quantitative listing qualifications in the future |
| In the event we do not meet such listing qualifications, our common stock could be subject to delisting from the Nasdaq Capital Market |
| Please see the Preliminary Proxy Statement for more information on the Stock Split proposal |
| If our stock is delisted from the Nasdaq Capital Market or our share price declines significantly, then our stock may be deemed to be penny stock |
| If our common stock is considered penny stock, it would be subject to rules that impose additional sales practices on broker-dealers who sell our securities |
| Because of these additional obligations, some brokers may be unwilling to effect transactions in our stock |
| This could have an adverse effect on the liquidity of our common 7 ______________________________________________________________________ [37]Table of Contents stock and the ability of investors to sell their common stock |
| For example, broker-dealers must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale |
| Also, a disclosure schedule must be prepared prior to any transaction involving a penny stock and disclosure is required about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities |
| Monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock |
| If our stock is delisted from the Nasdaq Capital Market, we may be unable to license our products and sell our services to prospective or existing customers |
| If our stock is delisted, our prospective and existing customers may lose confidence that we can continue as a viable business to provide support necessary to further develop our solutions and provide ongoing maintenance and consulting services |
| Prospective and existing customers could consider alternative solutions or significantly reduce the value they are willing to pay for our solutions to compensate for the potential added risk to their business |
| If our stock is delisted, our ability to meet our revenue goals could be adversely impacted, resulting in deterioration of the financial condition of our business |
| Our success depends on our ability to retain key management personnel, whom we may not be able to retain |
| We believe that our success depends on the continued employment of our senior management team |
| If one or more members of our senior management team were unable or unwilling to continue in their present positions, our success could be adversely affected |
| We may not be able to hire or retain enough additional personnel to meet our hiring needs |
| Our success also depends on having highly trained professional services and software development personnel |
| If we are unable to retain our personnel, it could limit our ability to service our customers and design and develop products, which could reduce our attractiveness to potential customers, investors, or acquirers |
| We may need to hire additional personnel if our business grows |
| A shortage in the number of trained consultants and developers could limit our ability to implement our software if we are able to license software to new customers or if our present customers ask us to perform more services for them |
| Competition for personnel, particularly for employees with technical expertise, could be strong |
| Our business, financial condition, and operating results will be materially adversely affected if we cannot hire and retain suitable personnel |
| Our cost containment and cost reduction initiatives may yield further unintended consequences, such as reduced employee morale, decreased productivity and disclosures of confidential information about us by employees that seek employment with others in violation of their confidentiality agreements with us |
| Fluctuations in our quarterly operating results may cause our stock price to decline |
| Our quarterly operating results are difficult to forecast and could vary significantly |
| If our operating results in a future quarter or quarters do not meet the expectations of securities analysts or investors, the price of our common stock may fall |
| Our quarterly operating results will be substantially dependent on software licenses and professional services booked and delivered in that quarter |
| Any delay in the recognition of revenue for any of our license transactions or professional services could cause significant variations in our quarterly operating results and could cause our revenues to fall significantly short of anticipated levels |
| Our quarterly operating results could fluctuate significantly due to other factors, many of which are beyond our control, including: • anticipated lengthy sales cycle for our products; • the size and timing of individual license transactions; • intense and increased competition in our target markets; 8 ______________________________________________________________________ [38]Table of Contents • our ability to develop, introduce, and bring to market new products and services, or enhancements to our existing products and services, on a timely basis; and • risks associated with past acquisitions |
| If we are able to grow our business, we may not be able to manage the growth successfully |
| If we are able to grow our business, such growth could place a significant strain on our resources and systems |
| We may seek to acquire another business or raise additional capital, which could dilute the ownership of our existing shareholders |
| In addition, we may seek to raise additional capital |
| We may be required to incur debt or issue equity securities to pay for acquisitions or to raise additional capital, which may be dilutive to our existing shareholders |
| New versions and releases of our products may contain errors or defects |
| Our enterprise software products may contain undetected errors or failures when first introduced or as new versions are released |
| This may result in loss of, or delay in, market acceptance of our products |
| Errors in new releases and new products after their introduction could result in delays in release, lost revenues and customer frustration during the period required to correct these errors |
| We may in the future discover errors and defects in new releases or new products after they are shipped or released |
| We utilize third-party software that we incorporate into and include with our products and solutions, and impaired relations with these third-parties, defects in third-party software, or their inability or failure to enhance their software over time could have a material adverse effect on our operating performance and financial condition |
| We incorporate and include third-party software into and with our products and solutions |
| We are likely to incorporate and include additional third-party software into and with our products and solutions as we expand our product offerings |
| If our relations with any of these third-party software providers become impaired, and if we are unable to obtain or develop a replacement for the software, our business could be harmed |
| Our products may be impacted if errors occur in the third-party software that we utilize |
| It may be more difficult for us to correct any defects in third-party software because the software is not within our control |
| Accordingly, our business could be adversely affected in the event of any errors in this software |
| There can be no assurance that these third-parties will continue to invest the appropriate levels of resources in their products and services to maintain and enhance the capabilities of their software |
| We have shifted a significant portion of our product development operations to India, which poses significant risks |
| Since September 2003, an unrelated third-party has provided us with software development services in Bangalore, India |
| We assumed a second software development agreement with another company in Bangalore in connection with our acquisition of B2eMarkets |
| Since September 2003, we have increased the proportion of our product development work being performed by contractors in India in order to take advantage of cost efficiencies associated with India’s lower wage scale |
| However, we may not achieve the cost savings and other benefits we anticipate from this program and we may not be able to find sufficient numbers of developers with the necessary skill sets in India to meet our needs |
| We have a heightened risk exposure to changes in the economic, security, and political conditions of India |
| Economic and political instability, military actions, and other unforeseen occurrences in India could impair our ability to develop and introduce new software applications and functionality in a timely manner, which could put our products at a competitive disadvantage whereby we lose existing customers and/or fail to attract new customers |
| 9 ______________________________________________________________________ [39]Table of Contents Our target markets are evolving and characterized by rapid technological change, with which we may not be able to keep pace |
| The markets for our products and services are evolving and characterized by rapid technological change, changing customer needs, evolving industry standards, and frequent new product and service announcements |
| The introduction of products employing new technologies and emerging industry standards could render our existing products or services obsolete or unmarketable |
| If we are unable to respond to these developments successfully or do not respond in a cost-effective way, our business, financial condition, and operating results will suffer |
| To be successful, we must continually improve and enhance the responsiveness, services, and features of our enterprise software products and introduce and deliver new product and service offerings and new releases of existing products |
| We may fail to improve or enhance our software products or fail to introduce and deliver new releases or new offerings on a timely and cost-effective basis or at all |
| If we experience delays in the future with respect to our software products, or if our improvements, enhancements, offerings, or releases to these products do not achieve market acceptance, we could experience a delay or loss of revenues and customer dissatisfaction |
| Our success will also depend in part on our ability to acquire or license third-party technologies that are useful in our business, which we may not be able to do |
| We may ultimately be unable to compete in the markets for the products and services we offer |
| The markets for our enterprise software products and services are intensely competitive, which may result in low or negative profit margins and difficulty in achieving market share, either of which could seriously harm our business |
| We expect the intensity of competition to increase |
| Our enterprise software products and services face competition from software companies whose products or services compete with a particular aspect of the solution we provide, as well as several major enterprise software developers and consulting firms |
| Many of our competitors have longer operating histories, greater brand recognition, and greater financial, technical, marketing, and other resources than we do, and may have well-established relationships with our existing and prospective customers |
| This may place us at a disadvantage in responding to our competitors’ pricing strategies, technological advances, advertising campaigns, strategic partnerships, and other initiatives |
| Our competitors may also develop products or services that are superior to or have greater market acceptance than ours |
| If we are unable to compete successfully against our competitors, our business, financial condition, and operating results would be negatively impacted |
| If we do not develop the “Verticalnet” brand in the supply management solution industry, our revenues might not increase |
| We must establish and continuously strengthen the awareness of the “Verticalnet” brand in the supply management solution industry |
| If our brand awareness as a maker of supply management solution software does not develop, or if developed, is not sustained as a respected brand, it could decrease the attractiveness of our products and services to potential customers, which could result in decreased revenues |
| We may not be able to protect our proprietary rights and may infringe the proprietary rights of others |
| Proprietary rights are important to our success and to our competitive position |
| We may be unable to register, maintain, and protect our proprietary rights adequately |
| Although we file copyright registrations for the source code underlying our software, enforcement of our rights might be too difficult and costly for us to pursue effectively |
| We have filed patent applications for the proprietary technology underlying our software, but our ability to fully protect this technology is contingent upon the ultimate issuance of the corresponding patents |
| Effective patent, copyright, and trade secret protection of our software may be unavailable or limited in certain countries |
| In addition, third parties may claim that our current or potential future products infringe their intellectual property rights |
| Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product and service delivery delays or require us to enter into royalty or licensing agreements, which, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business |
| 10 ______________________________________________________________________ [40]Table of Contents Several lawsuits have been brought against us and the outcome of these lawsuits is uncertain |
| Several lawsuits have been brought against us and the underwriters of our stock in our initial public offering |
| These lawsuits allege, among other things, that the underwriters engaged in sales practices that had the effect of inflating our stock price, and that our prospectus for that offering was materially misleading because it did not disclose these sales practices |
| In addition, a lawsuit has been brought against us and several of our former officers and directors alleging, among other things, that we failed to properly register certain Verticalnet stock delivered pursuant to an acquisition in 2000 |
| We intend to vigorously defend ourselves against these lawsuits; however, no assurance can be given as to the outcome of these lawsuits |
| Shares eligible for future sale by our current or future shareholders may cause our stock price to decline |
| If our shareholders, option holders, warrant holders, or holders of convertible notes sell substantial amounts of our common stock in the public market, including shares issued in completed or future acquisitions, upon the exercise of outstanding options and warrants, or upon conversion of convertible notes, then the market price of our common stock could fall |
| We also have filed a shelf registration statement to facilitate our acquisition strategy, as well as registration statements to register shares of common stock under our equity compensation and employee stock purchase plans |
| Shares issued pursuant to existing or future shelf registration statements, upon exercise of stock options and warrants, upon conversion of convertible notes, and in connection with our employee stock purchase plan will be eligible for resale in the public market without restriction |
| Anti-takeover provisions and our right to issue preferred stock could make a third-party acquisition of us difficult |
| Verticalnet is a Pennsylvania corporation |
| Anti-takeover provisions of Pennsylvania law could make it more difficult for a third party to acquire control of us, even if such change in control would be beneficial to our shareholders |
| Our articles of incorporation provide that our Board of Directors may issue preferred stock without shareholder approval |
| In addition, our bylaws provide for a classified board, with each board member serving a staggered three-year term |
| The issuance of preferred stock and the existence of a classified board could make it more difficult for a third party to acquire us |
| Our common stock price is likely to remain highly volatile |
| The market for stocks of technology companies has been highly volatile since our initial public offering in 1999 |
| Throughout this period, the market price of our common stock has reached extreme highs and lows, and our daily trading volume has been, and will likely continue to be, highly volatile |
| Investors may not be able to resell their shares of our common stock following periods of price or trading volume volatility because of the market’s adverse reaction to such volatility |
| Factors that could cause volatility in our stock price and trading volume, in some cases regardless of our operating performance, include, among other things: • general economic conditions, including suppressed demand for technology products and services; • actual or anticipated variations in quarterly operating results; • announcements of technological innovations; • new products or services; • changes in the market valuations of other software or technology companies; • failure to meet analysts’ or investors’ expectations; • announcements by us or our competitors of significant acquisitions, strategic partnerships, or joint ventures; • our cash position and cash commitments; • our prospects for enterprise software sales and new customers; and • additions or departures of key personnel |
| 11 ______________________________________________________________________ [41]Table of Contents Acquisitions may disrupt or otherwise have a negative impact on our business |
| We have made, and plan to continue to make, investments in and acquisitions of complementary companies, technologies, and assets |
| Future and past acquisitions are subject to the following risks: • acquisitions may cause a disruption in our ongoing business, distract our management and other resources, and make it difficult to maintain our standards, controls, and procedures; • we may acquire companies in markets in which we have little experience; • we may not be able to successfully integrate the services, products, and personnel of any acquisition into our operations; • we may be required to incur debt or issue equity securities, which may be dilutive to existing shareholders, to pay for the acquisitions; • we may be exposed to unknown or undisclosed liabilities; and • our acquisitions may not result in any return on our investment and we may lose our entire investment |
| Interruptions or delays in service from our third-party Web hosting facilities could impair the delivery of our service and harm our business |
| We provide our service through computer hardware that is currently located in a third-party web hosting facility in Dulles, Virginia operated by ServerVault, Inc |
| In the near future, we also plan to provide our service through a co-location facility located in Philadelphia, Pennsylvania operated by SunGard, Inc |
| We do not and will not control the operation of these facilities, and they may be subject to damage or interruption from floods, fires, power loss, telecommunications failures, and similar events |
| They may also be subject to break-ins, sabotage, intentional acts of vandalism, and similar misconduct |
| Despite precautions taken at the facilities, the occurrence of a natural disaster, a decision to close a facility without adequate notice, or other unanticipated problems at a facility could result in lengthy interruptions in our service |
| In addition, the failure by a facility to provide our required data communications capacity could result in interruptions in our service |
| While we are not aware of any such interruptions, if an actual or perceived interruption of our applications occurred or if our applications become unstable or unavailable, the perception by existing or potential customers of our applications could be harmed and we could lose sales and customers |
| In addition, we may be subject to service level penalties, which could materially and adversely affect our business, financial condition, and operating results |
| If our security measures are breached and unauthorized access is obtained to a customer’s data, our on-demand applications may be perceived as not being secure and customers may curtail or stop using our service |
| Our on-demand supply management application model involves the storage, analysis, and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss or corruption of this information, litigation, and possible liability |
| If our security measures are breached as a result of third-party action, employee error, malfeasance, or otherwise, and, as a result, an unauthorized party obtains access to one or more of our customers’ data, our reputation could be damaged, our business may suffer, and we could incur significant liability |
| Because techniques used to obtain unauthorized access or to sabotage computer systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures |
| While we are not aware of any such breach, if an actual or perceived breach of our security occurs, the perception by existing or potential customers of the effectiveness of our security measures could be harmed and we could lose sales and customers |
| If our software or the third-party software we use to support and enable our applications is subject to intrusion or corruption by third parties, our applications could become unstable or unavailable to our customers |
| We use third-party software to support or enable our applications which may be subject to intrusion or corruption by third parties, which may render our on-demand applications unstable or unavailable to our customers |
| 12 ______________________________________________________________________ [42]Table of Contents While we are not aware of any such intrusion, if an actual or perceived intrusion or corruption of third-party software which we use to support or enable our applications occurs, and our applications become unstable or unavailable, the perception by existing or potential customers of our applications could be harmed and we could lose sales and customers |
| If our on-demand application model is not widely accepted, our operating results will be harmed |
| We expect to derive an increasing portion of our software revenues from subscriptions to our on-demand applications |
| As a result, widespread acceptance of our on-demand supply management applications is critical to our future success |
| Factors that may affect market acceptance of our on-demand applications include: • potential reluctance by enterprises to migrate to an on-demand application model; • the price and performance of our on-demand applications; • the level of customization we can offer; • the availability, performance, and price of competing products and services; and • potential reluctance by enterprises to trust third parties to store and manage their internal data |
| The inability of our on-demand applications model to achieve widespread market acceptance would harm our business |
| Because we will recognize revenue from our on-demand applications over the term of the agreement, downturns or upturns in sales may not be immediately reflected in our operating results |
| We will recognize revenue from customers with hosted term-based licenses over the term of their agreements, which are typically 12 to 24 months, although terms can range from one to 36 months |
| As a result, a portion of the revenue we report in each quarter will be from agreements entered into during previous quarters |
| Consequently, a decline in new or renewed agreements in any one quarter will not necessarily be fully reflected in the revenue in that quarter and will negatively affect our revenue in future quarters |
| In addition, we may be unable to adjust our cost structure to reflect these reduced revenues |
| Accordingly, the effect of significant downturns in sales and market acceptance of our service may not be fully reflected in our results of operations until future periods |
| Our on-demand application model will also make it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable agreement term |
| We do not have an adequate history with our on-demand application model to predict the rate of customer renewals and the impact these renewals will have on our revenue or operating results |
| Our customers have no obligation to renew their agreements for our service after the expiration of their initial contract period and some customers have elected not to do so |
| In addition, our customers may decide not to renew unless we offer lower prices or agree to reduce the number of users |
| We have limited historical data with respect to rates of customer renewals, so we may not be able to accurately predict customer renewal rates |
| Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their dissatisfaction with our applications or the customers’ ability to continue their operations and spending levels |
| If our customers do not renew their agreements for our on-demand supply management applications, our revenue may decline and our business may suffer |
| Our future success also depends in part on our ability to sell additional features or functions of our applications, additional applications, or additional services to our current customers |
| This may require increasingly sophisticated and costly sales efforts that are targeted at our customers’ senior management |
| 13 ______________________________________________________________________ [43]Table of Contents A failure to adequately expand our direct sales force may impede our growth |
| We expect to be substantially dependent on our direct sales force to obtain new customers, particularly large enterprise customers, and to manage our customer base |
| We believe that there is significant competition for direct sales personnel with the advanced sales skills and technical knowledge we need |
| Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training, and retaining sufficient direct sales personnel |
| New hires require significant training and may, in some cases, take more than a year before they achieve full productivity |
| Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business |
| If we are unable to hire and develop sufficient numbers of productive sales personnel, sales of our products and services may suffer |
| We have also reduced our sales force as part of our cost containment and cost reduction initiatives |
| Changes in the value of the US dollar, in relation to the currencies of foreign countries where we transact business, could harm our operating performance and financial condition |
| International operations represent an increasing portion of our revenues |
| We expect to continue to commit significant resources to our international sales and marketing activities |
| For international sales and expenditures denominated in foreign currencies, we are subject to risks associated with currency fluctuations, particularly as a result of the decline in the value of the US dollar compared to other foreign currencies |
| Although such international revenues are increasing, because such amounts are still relatively immaterial, we have not to date hedged our risks associated with foreign currency transactions in order to minimize the impact of changes in foreign currency exchange rates on earnings |
| In the event we do begin hedging activities, there is no guarantee our hedging strategy will be successful and that currency exchange rate fluctuations will not have a material adverse effect on our operating results |
| Our indebtedness and debt service obligations may adversely affect our cash flow |
| Should we be unable to satisfy our interest and principal payment obligations under our convertible notes through the use of shares of our common stock, we will be required to pay those obligations in cash |
| If we are unable to generate sufficient cash to meet these obligations, we may have to restructure or limit our operations |
| Our indebtedness could have significant additional negative consequences, including, but not limited to: • requiring the dedication of a substantial portion of our expected cash flow from operations to service the indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures; • increasing our vulnerability to general adverse economic and industry conditions; • limiting our ability to obtain additional financing; • limiting our flexibility to plan for, or react to, changes in our business and the industry in which we compete; and • placing us at a possible competitive disadvantage to competitors with less debt obligations and competitors that have better access to capital resources |
| Issuance of shares of common stock upon conversion or repayment of our convertible notes and exercise of warrants will dilute the ownership interest of existing shareholders and could adversely affect the market price of our common stock |
| We may issue shares of common stock (i) upon conversion of some or all of our convertible notes, (ii) in satisfaction of our principal and interest payment obligations under the convertible notes, in lieu of cash payments, and (iii) upon exercise of the associated warrants |
| Any of these issuances will dilute the ownership 14 ______________________________________________________________________ [44]Table of Contents interests of existing shareholders |
| Any sales in the public market of this common stock could adversely affect prevailing market prices of the common stock |
| In addition, the existence of these convertible notes and warrants may encourage short selling by market participants |
| Our convertible notes are secured by substantially all of our assets |
| The investors in our private placement of our convertible notes received a security interest in and a lien on substantially all of our assets, including our existing and future accounts receivable, cash, general intangibles (including intellectual property) and equipment |
| As a result of this security interest and lien, if we fail to meet our payment or other obligations under the convertible notes, the investors would be entitled to foreclose on and liquidate substantially all of our assets |
| Under those circumstances, we may not have sufficient funds to service our day-to-day operational needs |
| Any foreclosure by the investors in the private placement would have a material adverse effect on our financial condition |
| Our convertible notes provide that upon the occurrence of various events of default and change of control transactions, the holders would be entitled to require us to redeem the convertible notes for cash, which could leave us with little or no working capital for operations or capital expenditures |
| Our convertible notes allow the holders thereof to require redemption of the convertible notes upon the occurrence of various events of default, such as the termination of trading of our common stock on the Nasdaq Capital Market, or specified change of control transactions |
| In such a situation, we may be required to redeem all or part of the convertible notes, including any accrued interest and penalties, within five business days after receipt of a demand for such redemption |
| If an event of default or a change of control occurs, we may be unable to pay the full redemption price in cash |
| Even if we were able to pay the redemption price in cash, any such redemption could leave us with little or no working capital for our business |
| We have not established a sinking fund for payment of our obligations under the convertible notes, nor do we anticipate doing so |