| ADVANCED PHOTONIX INC Item 1a Risk Factors Investing in our Class A common stock involves a high degree of risk and uncertainty |
| You should carefully consider the risks and uncertainties described below before investing in our Class A common stock |
| Our business, prospects, financial condition and results of operations could be adversely affected due to any of the following risks |
| In that case, the value of our Class A common stock could decline, and you could lose all or part of your investment |
| RISKS RELATING TO OUR BUSINESS WE ARE DEPENDENT UPON SEVERAL SUPPLIERS FOR A SIGNIFICANT PORTION OF RAW MATERIALS USED IN THE MANUFACTURING OF OUR PRODUCTS The principal raw materials we use in the manufacture of our semiconductor components and sensor assemblies are silicon and III-IV wafers, chemicals and gases used in processing wafers, gold wire, lead frames, and a variety of packages and substrates, including metal, printed circuit board, flex circuits, ceramic and plastic packages |
| From time to time, particularly during periods of increased industry-wide demand, silicon wafers and other materials have been in short supply |
| Any significant interruption in the supply of these raw materials could have a material adverse effect on us |
| CUSTOMER ACCEPTANCE OF OUR PRODUCTS IS DEPENDENT ON OUR ABILITY TO MEET CHANGING REQUIREMENTS Customer acceptance of our products is significantly dependent on our ability to offer products that meet the changing requirements of our customers, including the military, medical institutions, industrial laboratories, government agencies and industrial corporations |
| Any decrease in the level of customer acceptance of our products could have a material adverse effect on us |
| WE ARE SUBJECT TO MARKET RISK THROUGH OUR SALES TO OVERSEAS MARKETS A growing amount of our sales are being derived from overseas markets |
| These international sales are primarily focused in Europe and the Middle East |
| These operations are subject to risks that are inherent in operating in foreign countries, including the following: - foreign countries could change regulations or impose currency restrictions and other restraints; 9 - changes in foreign currency exchange rates and hyperinflation or deflation in the foreign countries in which we operate; - exchange controls; - in some countries, there is a risk that the government may expropriate assets; - some countries impose burdensome tariffs and quotas; - political changes and economic crises may lead to changes in the business environment in which we operate; - international conflict, including terrorist acts, could significantly impact our financial condition and results of operations; and - economic downturns, political instability and war or civil disturbances may disrupt distribution logistics or limit sales in individual markets |
| In addition, we utilize third-party "e Distributors "e to act as our representative for the geographic region that they have been assigned |
| These "e Distributors "e are responsible for maintaining customer account management and in some cases maintaining an inventory of products for those customers within their geographic region |
| Our success is dependent on these "e Distributors "e finding new customers and receiving new orders from existing customers |
| OUR FUTURE PERFORMANCE IS DEPENDENT UPON FINDING NEW CUSTOMERS AND RETAINING OUR EXISTING CUSTOMERS Customers normally purchase our products and incorporate them into products that they in turn sell in their own markets on an ongoing basis |
| As a result, our sales are dependent upon the success of our customers &apos products and our future performance is dependent upon our success in finding new customers and receiving new orders from existing customers |
| In several of our market, quality and/or reliability of our products are a major concern for our customers, not only upon the initial manufacture of the product, but for the life of the product |
| Any failure of the quality and/or reliability of our products could have an adverse affect on us and on our ability to maintain or attract customers |
| CUSTOMER ORDERS ARE SUBJECT TO CANCELLATION OR MODIFICATION AT ANY TIME Our sales are made primarily pursuant to standard purchase orders for delivery of products |
| However, by industry practice, orders may be canceled or modified at any time |
| No assurance can be given that we will receive these amounts after cancellation |
| The current backlog contains only those orders for which we have received a confirmed purchase order and also includes contracts which have scheduled shipping dates beyond the upcoming fiscal year |
| As such, the current backlog represents only a portion of expected annual revenues for fiscal year 2006 |
| 10 THE MARKETS FOR MANY OF OUR PRODUCTS ARE CHARACTERIZED BY CHANGING TECHNOLOGY The markets for many of our products are characterized by changing technology, new product introductions and product enhancements, and evolving industry standards |
| The introduction or enhancement of products embodying new technology or the emergence of new industry standards could render existing products obsolete or result in short product life cycles |
| Accordingly, our ability to compete is in part dependent on our ability to continually offer enhanced and improved products |
| WE ARE DEPENDENT ON KEY IN-HOUSE MANUFACTURING EQUIPMENT OR PROCESSES TO DELIVER A CUSTOM PRODUCT (SOLUTION) WITH THE HIGHEST PERFORMANCE AND SHORT TIME TO MARKET We depend on key in-house manufacturing equipment and assembly processes |
| We believe that these key manufacturing and assembly process give us the flexibility and responsiveness to meet our customer delivery schedule and performance specification with a custom product |
| This value proposition is an important component of our offering to our customers |
| A loss of these capabilities could have an adverse effect on our existing operations and new business growth |
| CHANGES IN THE SPENDING PRIORITIES OF THE FEDERAL GOVERNMENT CAN MATERIALLY ADVERSELY AFFECT OUR BUSINESS In fiscal 2006, approximately 33dtta0 % of our sales were related to products purchased by military contractors |
| Our business depends upon continued federal government expenditures on defense, intelligence, aerospace and other programs that we support |
| In fiscal 2006, our sales to military contractors enjoyed a strong steady growth rate |
| In addition, foreign military sales are affected by US Government regulations, regulations by the purchasing foreign government and political uncertainties in the US and abroad |
| There can be no assurance that the US defense and military budget will continue to grow or that sales of defense related items to foreign governments will continue at present levels |
| In addition, the terms of defense contracts with the US Government generally permit the Government to terminate such contracts, with or without cause, at any time |
| Any unexpected termination of a significant US Government contract with a military contractor that we sell our products to could have a material adverse effect on us |
| OUR INDUSTRY IS HIGHLY COMPETITIVE AND FRAGMENTED We compete with a range of companies for the custom optoelectronic and silicon photodetector requirements of customers in our target markets |
| We believe that our principal competitors for sales of custom devices are small to medium size companies |
| Because we specialize in custom devices requiring a high degree of engineering expertise to meet the requirements of specific applications, we generally do not compete to any significant degree with other large United States, European or Pacific Rim manufacturers of standard "e off the shelf "e optoelectronic components or silicon photodetectors |
| We cannot assure you that we will be able to compete successfully in our markets against these or any future competitors |
| OUR INDUSTRY IS SENSITIVE TO CHANGING ECONOMIC CONDITIONS We believe that many factors affect our industry, including consumer confidence in the economy, interest rates, fuel prices and credit availability |
| The overall economic climate or Gross National Product growth has a direct impact on our customers and the demand for our products |
| We cannot assure you that our business will not be adversely affected as a result of an industry or general economic downturn |
| WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS The photonics industry, as well as the semiconductor industry in general, is subject to governmental regulations for the protection of the environment, including those relating to air and water quality, solid and 11 hazardous waste handling, and the promotion of occupational safety |
| Various federal, state and local laws and regulations require that we maintain certain environmental permits |
| We believe that we have obtained all necessary environmental permits required to conduct our manufacturing processes |
| Changes in the aforementioned laws and regulations or the enactment of new laws, regulations or policies could require increases in operating costs and additional capital expenditures and could possibly entail delays or interruptions of operations |
| IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY, THE VALUE OF OUR PRODUCTS COULD BE DIMINISHED We utilize proprietary design rules and processing steps in the development and fabrication of our PIN photodiodes, avalanche photodiodes and our Terahertz systems and sensors |
| In addition, we have over 100 patents or patents pending utilized in our products |
| There can be no assurance that any issued patents will provide us with significant competitive advantages, or that challenges will not be instituted against the validity or enforceability of any patent utilized by us, or, if instituted, that such challenges will not be successful |
| The cost of litigation to uphold the validity and to prevent the infringement of a patent could be substantial and could have a material adverse effect on our operating results |
| Furthermore, there can be no assurance that our APD technology will not infringe on patents or rights owned by others, licenses to which might not be available to us |
| Based on limited patent searches, contacts with others knowledgeable in the field of APD technology, and a review of the published materials, we believe that our competitors hold no patents, licenses or other rights to the APD technology which would preclude us from pursuing our intended operations |
| In some cases, we may rely on trade secrets to protect our innovations |
| There can be no assurance that trade secrets will be established, that secrecy obligations will be honored or that others will not independently develop similar or superior technology |
| To the extent that consultants, key employees or other third parties apply technological information independently developed by them or by others to our projects, disputes might arise as to the proprietary rights to such information which may not be resolved in our favor |
| WE FACE STRONG COMPETITION FOR SKILLED WORKERS Our success depends in large part on its ability to attract and retain highly qualified scientific, technical, management, and marketing personnel |
| Competition for such personnel is intense and there can be no assurance that we will be able to attract and retain the personnel necessary for the development and operation of our business |
| WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS, WHICH COULD RESULT IN OUR NOT ACHIEVING THE EXPECTED BENEFITS OF THE ACQUISITION, THE DISRUPTION OF OUR BUSINESS AND AN INCREASE IN OUR COSTS Over the past three years, we have acquired 3 businesses and we continually explore opportunities to acquire related businesses, some of which could be material to us |
| Our ability to continue to grow may depend upon identifying and successfully acquiring attractive companies, effectively integrating these companies, achieving cost efficiencies and managing these businesses as part of our company |
| We may not be able to effectively integrate the acquired companies and successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions |
| Our efforts to integrate these businesses could be affected by a number of factors beyond our control, such as regulatory developments, general economic conditions and increased competition |
| In addition, the process of integrating these businesses could cause the interruption of, or loss of momentum in, the activities of our existing business |
| The diversion of managementapstas attention and any delays or difficulties 12 encountered in connection with the integration of these businesses could negatively impact our business and results of operations |
| Further, the benefits that we anticipate from these acquisitions may not develop |
| RISKS RELATING TO OUR CLASS A COMMON STOCK OUR SHARE PRICE HAS BEEN VOLATILE IN THE PAST AND MAY DECLINE IN THE FUTURE Our Class A common stock has experienced significant market price and volume fluctuations in the past and may experience significant market price and volume fluctuations in the future in response to factors such as the following, some of which are beyond our control: - quarterly variations in our operating results; - operating results that vary from the expectations of securities analysts and investors; - changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; - announcements of technological innovations or new products by us or our competitors; - announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; - changes in the status of our intellectual property rights; - announcements by third parties of significant claims or proceedings against us; - additions or departures of key personnel; - future sales of our ordinary shares; and - stock market price and volume fluctuations |
| Stock markets often experience extreme price and volume fluctuations |
| Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events or hostilities in or surrounding the United States, could adversely affect the market price of our Class A common stock |
| In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of its securities |
| We may in the future be the target of similar litigation |
| Securities litigation could result in substantial costs and divert managementapstas attention and resources both of which could have a material adverse effect on our business and results of operations |
| FUTURE SALES OF OUR CLASS A COMMON STOCK IN THE PUBLIC MARKET COULD LOWER OUR STOCK PRICE, AND CONVERSION OF OUR WARRANTS AND ANY ADDITIONAL CAPITAL RAISED BY US MAY DILUTE YOUR OWNERSHIP IN US We may sell additional shares of Class A common stock in subsequent offerings |
| In addition, holders of warrants to purchase our Class A common stock will, most likely, exercise their warrants to purchase shares of our Class A common stock after this registration statement is declared effective |
| We cannot predict the size of future issuances of our Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock will have on the market price of our Class A common stock |
| Sales of substantial amounts of our Class A common stock, including shares issued in connection with the exercise of 13 the warrants, or the perception that such sales could occur, may adversely affect prevailing market prices for our Class A common stock |
| SHARES ELIGIBLE FOR PUBLIC SALE IN THE FUTURE COULD DECREASE THE PRICE OF OUR CLASS A COMMON STOCK AND REDUCE OUR FUTURE ABILITY TO RAISE CAPITAL Sales of substantial amounts of our Class A common stock in the public market could decrease the prevailing market price of our Class A common stock, which would have an adverse affect on our ability to raise equity capital in the future |
| WE DO NOT INTEND TO PAY DIVIDENDS We have never declared or paid any cash dividends on our Class A common stock |
| We currently intend to retain future earnings, if any, to finance operations and expand our business and, therefore, do not expect to pay any dividends in the foreseeable future |