| NANOPHASE TECHNOLOGIES CORPORATION Item 1A Risk factors for additional discussion |
| Forward-Looking Statements Nanophase wants to provide investors with more meaningful and useful information |
| As a result, this Annual Report on Form 10-K (the “Form 10-K”) contains and incorporates by reference certain “forward-looking statements”, as defined in Section 21E of the Securities Exchange Act of 1934, as amended |
| These statements reflect the Company’s current expectations of the future results of its operations, performance and achievements |
| Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 |
| The Company has tried, wherever possible, to identify these statements by using words such as “anticipates”, “believes”, “estimates”, “expects”, “plans”, “intends” and similar expressions |
| These statements reflect management’s current beliefs and are based on information now available to it |
| Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause the Company’s actual results, performance or achievements in 2006 and beyond to differ materially from those expressed in, or implied by, such statements |
| These risks, uncertainties and factors include, without limitation: a decision by a customer to cancel a purchase order or supply agreement in light of the Company’s dependence on a limited number of key customers; uncertain demand for, and acceptance of, the Company’s nanocrystalline materials; the Company’s manufacturing capacity and product mix flexibility in light of customer demand; the Company’s limited marketing experience; changes in development and distribution relationships; the impact of competitive products and technologies; the Company’s dependence on patents and protection of proprietary information; the resolution of litigation in which the Company may become involved; and other risks set forth under the caption “Risk Factors” below |
| Readers of this Annual Report on Form 10-K should not place undue reliance on any forward-looking statements |
| Except as required by federal securities laws, the Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties |
| Investor Information The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act) and, accordingly, files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the SEC) |
| Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330 |
| gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically |
| Financial and other information may also be accessed at the Company’s web site |
| The Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically with, or otherwise furnishing it to, the SEC, and intends to make all such reports and amendments to reports available free of charge on its web site |
| Item 1A Risk Factors The following risks, uncertainties, and other factors could have a material adverse effect on our business, financial condition, operating results and growth prospects |
| 9 ______________________________________________________________________ [10]Table of Contents We have a limited operating history and may not be able to address difficulties encountered by early stage companies in new and rapidly evolving markets |
| We were formed in November 1989 and began our commercial nanocrystalline materials operations in January 1997 |
| We have not yet generated a significant amount of revenue from our nanocrystalline materials operations |
| Because of our limited operating history and the early stage of development of our rapidly evolving market, we have limited insight into trends that may emerge and adversely affect our business and cannot be certain that our business strategy will be successful or that it will successfully address these risks |
| In addition, our efforts to address any of these risks may distract personnel or divert resources from other more important initiatives, such as attracting and retaining customers and responding to competitive market conditions |
| We have a history of losses that may continue in the future |
| We have incurred net losses in each year since our inception with net losses of dlra5dtta83 million in 2003, dlra6dtta45 million in 2004 and dlra5dtta38 million in 2005 |
| As of December 31, 2005, we had an accumulated deficit of approximately dlra57dtta57 million and presently expect to continue to incur losses on an annual basis through at least the end of 2006 |
| We believe that our business depends, among other things, on our ability to significantly increase revenue |
| If revenue fails to grow at anticipated rates or if operating expenses increase without a commensurate increase in revenue, or if we fail to adjust operating expense levels accordingly, then the imbalance between revenue and operating expenses will negatively impact our cash balances and our ability to achieve profitability in future periods |
| We depend on a small number of customers for a high percentage of our sales, and the loss of orders from a significant customer could cause a decline in revenue and/or increases in the level of losses incurred |
| We expect a significant portion of our future sales to remain concentrated within a limited number of strategic customers |
| We may not be able to retain our strategic customers, such customers may cancel or reschedule orders, or in the event of canceled orders, such orders may not be replaced by other sales or by sales that are on as favorable terms |
| In addition, sales to any particular customer may fluctuate significantly from quarter to quarter, which could affect our ability to achieve anticipated revenues on a quarterly basis |
| (formerly known as “Rodel”) and CI Kasei, a division of Itochu Corporation, accounted for approximately 83prca of total revenue for the year ended December 31, 2005, and revenue from the same three customers accounted for approximately 89prca of total revenue in 2004 |
| For the years ended December 31, 2005 and 2004, BASF accounted for 66prca and 70prca of our total revenue, respectively |
| If we were to lose, or receive significantly decreased orders from, any of these three customers, then our results of operations would be materially harmed |
| While our agreements with our two largest customers are long-term agreements, they may be terminated by the customer with reasonable notice and do not provide any guarantees that these customers will continue to buy our products |
| In addition, while our agreements with our two largest customers contain minimum order requirements, the only repercussion under the agreements for missing the minimum order requirement is that we would be freed from the exclusivity obligations under these contracts |
| We have been consistently expanding both our marketing and business development efforts and our production efficiency in order to address the issues of our dependence upon a limited amount of customers, enhancement of gross profit and operating cash flows, and the achievement of profitability |
| We currently have customers that may grow to the point where they generate significant revenues and 10 ______________________________________________________________________ [11]Table of Contents margins as relationships expand |
| Given the special nature of our products, and the fact that markets for them are not yet fully developed, it is difficult to accurately predict when additional large customers will materialize |
| Going forward, the Company’s margins, as a percentage of revenue, will be dependent upon revenue mix, revenue volume and the Company’s ability to continue to cut costs |
| The extent of the growth in revenue volume and the related gross profit that this revenue generates, will be the main drivers in generating positive operating cash flows and, ultimately, net income |
| Any downturn in the markets served by us would harm our business |
| A majority of our products are incorporated into products such as sunscreens, polishing slurries, personal care, and to a lesser extent, medical diagnostics, abrasion-resistant coatings for flooring, and other products |
| These markets have from time to time experienced cyclical, depressed business conditions, often in connection with, or in anticipation of, a decline in general economic conditions |
| These industry downturns have resulted in reduced product demand and declining average selling prices |
| Our business would be harmed by any future downturns in the markets that we serve |
| Our products often have long adoption cycles, which could make it difficult to achieve market acceptance and makes it difficult to forecast revenues |
| Due to their often novel characteristics and the unfamiliarity with them that exists in the marketplace, our nanocrystalline materials often require longer adoption cycles than existing materials technologies |
| Our nanomaterials have to receive appropriate attention within any potential customer’s organization, then they must be tested to prove a performance advantage over existing materials, typically on a systems-cost basis |
| Once we have proven initial commercial viability, pilot scale production runs must be completed by the customer, followed by further testing |
| Once production-level commercial viability is established, then our nanomaterials can be introduced, often to a downstream marketplace that needs to be familiarized with them |
| If we are unable to convince our potential customers of the performance advantages and economic value of our nanocrystalline materials over existing and competing materials and technologies, we will be unable to generate significant sales |
| Our long adoption cycle makes it difficult to predict when sales will occur |
| We depend on collaborative development relationships with our customers and do not have a substantial direct sales force or an established distribution network apart from the distribution networks of our strategic partners |
| If we are unable to initiate or sustain such collaborative relationships or if the terms of these relationships limit the distribution of our products or if our strategic partners are unable to distribute our products efficiently, then we may be unable to independently develop, manufacture or market our current and future nanocrystalline materials or applications |
| We have established, and will continue to pursue, strategic relationships with many of our customers and do not have a substantial direct sales force or an established distribution network (other than distribution arrangements for research samples) |
| Through these relationships, we seek to develop new applications for our nanocrystalline materials and share development and manufacturing resources |
| We also seek to coordinate the development, manufacture and marketing of our nanocrystalline products |
| Future success will depend, in part, on our continued relationships with these customers and our ability to enter into similar strategic relationships with other customers |
| Our customers may not continue in these collaborative development relationships, may not devote sufficient resources to the development or sale of our materials or may enter into strategic development relationships with our competitors |
| These customers may also require a share of control of these collaborative programs |
| Some of our agreements with these customers limit our ability to license our technology to others and/or limit our ability to engage in certain product development or marketing activities |
| These relationships generally can be terminated unilaterally by customers |
| Additionally and except for our research quantities distribution agreement with Alfa Aesar, these 11 ______________________________________________________________________ [12]Table of Contents customers generally require exclusive distribution arrangements within the field of application covered by our agreement with these customers, and the very nature of these strategic relationships limits the distribution of our products to the distribution networks available to our strategic relationship partners |
| In addition, the development agreements with some of our larger customers contain provisions that require us to license our intellectual property to these customers on disadvantaged terms and/or transfer equipment to these customers in the event that we materially breach these agreements or fail to satisfy certain financial covenants |
| For example, see “Risk Factors—We may need to raise additional capital in the future |
| ” If we are unable to initiate or sustain such collaborative relationships or if the terms of these relationships materially limit our access to distribution channels for our products, then we may be unable to independently develop, manufacture or market our current and future nanocrystalline materials or applications |
| If commodity metal prices increased at such a rate that we are unable to recover lost margins on a timely basis or that our products became uncompetitive in their current marketplaces, our financial and liquidity position and results of operations would be substantially harmed |
| Many of our significant raw materials come from commodity metal markets that may be subject to rapid price increases |
| While we generally pass commodity price increases on to our customers, it is possible that, given our limited customer base and the limited control we have over it, commodity metal prices could increase at such a rate that could hinder our ability to recover lost margins from our customers on a timely basis |
| It is also possible that such drastic cost increases could render some of our materials uncompetitive in their current marketplaces when considered relative to other materials on a cost benefit basis |
| If either of these potential results occurred, our financial and liquidity position and results of operations would be substantially harmed |
| If a catastrophe strikes either of our manufacturing facilities or if we were to lose our lease for either facility due to non-renewal or other unforeseen events, we may be unable to manufacture our materials to meet customers’ demands |
| Our manufacturing facilities are located in Romeoville and Burr Ridge, Illinois |
| These facilities and some of our manufacturing and testing equipment would be difficult to replace in a timely manner |
| Therefore, any material disruption at one of our facilities due to a natural or man-made disaster or a loss of lease due to non-renewal or other unforeseen events could have a material adverse effect on our ability to manufacture products to meet customers’ demands |
| While we maintain customary property insurance, this insurance may not adequately compensate us for all losses that we may incur and would not compensate us for any interruption in our business |
| If we are unable to expand our production capabilities to meet unexpected demand, we may be unable to manage our growth and our business would suffer |
| Our success will depend, in part, on our ability to manufacture nanocrystalline materials in significant quantities, with consistent quality and in an efficient and timely manner |
| We expect to continue to expand our current facilities or obtain additional facilities in the future in order to respond to unexpected demand for existing materials or for new materials that we do not currently make in quantity |
| Such unplanned demand, if it resulted in rapid expansion, could create a situation where growth could become difficult to manage, which could cause us to lose potential revenue |
| Protection of our intellectual property is limited and uncertain |
| Our intellectual property is important to our business |
| We seek to protect our intellectual property through patent, trademark, trade secret protection and confidentiality or license agreements with our 12 ______________________________________________________________________ [13]Table of Contents employees, customers, suppliers and others |
| Our means of protecting our intellectual property rights in the United States or abroad may not be adequate and others, including our competitors, may use our proprietary technology without our consent |
| We may not receive the necessary patent protection for any applications pending with the US Patent and Trademark Office (“USPTO”) and any of the patents that we currently own or license may not be sufficient to keep competitors from using our materials or processes |
| In addition, patents that we currently own or license may not be held valid if subsequently challenged by others and others may claim rights in the patents and other proprietary technology that we own or license |
| Additionally, others may have already developed or may subsequently develop similar products or technologies without violating any of our proprietary rights |
| If we fail to obtain patent protection or preserve our trade secrets, we may be unable to effectively compete against others offering similar products and services |
| In addition, if we fail to operate without infringing the proprietary rights of others or lose any license to technology that we currently have or will acquire in the future, we may be unable to continue making the products that we currently make |
| Moreover, at times, attempts may be made to challenge the prior issuance of our patents |
| For example, the USPTO has granted a third-party request for re-examination with respect to one patent relating to one of our nanoparticle manufacturing processes |
| On September 7, 2005, our representatives conducted an interview with the Examiner assigned to the re-examination at the USPTO, resulting in the Examiner preparing an interview summary indicating that the Examiner agreed that all the issued claims were patentable |
| However, prior to the USPTO issuing a formal notice confirming patentability, the same third party filed a second request for re-examination of the patent (which second request, the USPTO has since denied) |
| Nonetheless, a second interview was conducted, resulting in an amendment to all patent claims |
| While we will continue to vigorously defend our patent position, we may not be successful in maintaining the scope of the claims of this patent during re-examination |
| If our patent claims are narrowed substantially by the USPTO, the patent coverage afforded our nanoparticle manufacturing process could be impaired |
| While we would not expect such impairment to affect the value of our manufacturing trade secrets that have not been disclosed in the patent, it could impede the extent of our legal protection of the invention that is subject to this patent and potentially harm our business and operating results |
| Furthermore, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity |
| Such litigation could result in substantial costs and diversion of resources and could harm our business, operating results and financial condition |
| In addition, if others assert that our technology infringes their intellectual property rights, resolving the dispute could divert our management team and financial resources |
| In the future, we may license certain of our intellectual property, such as trademarks or copyrighted material, to third parties |
| While we would attempt to ensure that any licensees maintain the quality and value of our brand, these licenses might diminish this quality and value |
| We may be subject to claims that one or more of the business methods used by us infringe upon patents held by others |
| The defense of any claims of infringement made against us by third parties could involve significant legal costs and require our management to divert time and other resources from our business operations |
| Either of these consequences of an infringement claim could have a material adverse effect on our operating results |
| If we are unsuccessful in defending any claims of infringement, we may be forced to obtain licenses or pay royalties to continue to use our technology |
| We may not be able to obtain any necessary licenses on commercially reasonable terms or at all |
| If we fail to obtain necessary licenses or other rights, or if these licenses are costly, our operating results may suffer either from reductions in revenue through our inability to serve clients or from increases in costs to license third-party technology |
| 13 ______________________________________________________________________ [14]Table of Contents Our industry is experiencing rapid changes in technology |
| Rapid changes have occurred, and are likely to continue to occur, in the development of advanced materials and processes |
| Our success will depend, in large part, upon our ability to keep pace with advanced materials technologies, industry standards and market trends and to develop and introduce new and improved products on a timely basis |
| We expect to commit substantial resources to develop our technologies and product applications and, in the future, to expand our commercial manufacturing capacity as volume grows |
| Our development efforts may be rendered obsolete by the research efforts and technological advances of others and other advanced materials may prove more advantageous than those we produce |
| Our market is highly competitive, and if we are unable to compete effectively, then our business will not grow |
| The advanced materials industry is new, rapidly evolving and intensely competitive, and we expect competition to intensify in the future |
| The market for materials having the characteristics and potential uses of our nanocrystalline materials is the subject of intensive research and development efforts by both governmental entities and private enterprises around the world |
| We believe that the level of competition will increase further as more product applications with significant commercial potential are developed |
| The nanocrystalline product applications that we are developing will compete directly with products incorporating both conventional and advanced materials and technologies |
| While we are not currently aware of the existence of commercially available competitive products with the same attributes as those we offer, other companies may develop and introduce new or competitive products |
| Our competitors may succeed in developing or marketing materials, technologies and better or less expensive products than the ones we offer |
| In addition, many of our potential competitors have substantially greater financial and technical resources, and greater manufacturing and marketing capabilities than we do |
| If we fail to improve our current and potential nanocrystalline product applications at an acceptable price, or otherwise compete with producers of conventional materials, we will lose market share and revenue to our competitors |
| We may need to raise additional capital in the future |
| If we are unable to obtain adequate funds, we may be required to delay, scale-back or eliminate some of our manufacturing and marketing operations or we may need to obtain funds through arrangements on less favorable terms or we may be required to transfer equipment to our largest customer |
| We expect to expend significant resources on research, development and product testing, and in expanding current capacity or capability for new business |
| In addition, we may incur significant costs in preparing, filing, prosecuting, maintaining and enforcing our patents and other proprietary rights |
| If necessary, we may seek funding through public or private financing and through contracts with government or other companies |
| Additional financing may not be available on acceptable terms or at all |
| If we are unable to obtain adequate funds, we may be required to delay, scale-back or eliminate some of our manufacturing and marketing operations or we may need to obtain funds through arrangements on less favorable terms |
| If we obtain funding on unfavorable terms, we may be required to relinquish rights to some of our intellectual property |
| To raise additional funds in the future, we would likely sell our equity or debt securities or enter into loan agreements |
| To the extent that we issue debt securities or enter into loan agreements, we may become subject to financial, operational and other covenants that we must observe |
| In the event that we were to breach any of these covenants, then the amounts due under such loans or debt securities could become immediately payable by us, which could significantly harm us |
| To the extent that we sell additional shares of our equity securities, our stockholders may face economic dilution and dilution of their percentage of ownership |
| 14 ______________________________________________________________________ [15]Table of Contents We currently have a supply agreement with BASF that contains provisions which could potentially result in a mandatory license of technology and sale of production equipment to BASF providing capacity sufficient to meet BASF’s production needs |
| The license and related sale would be “triggered” only in the event that we breach certain of our obligations under the supply agreement or one of the following occurs: • our earnings for a twelve month period ending with our most recently published quarterly financial statements are less than zero and our cash, cash equivalents and investments are less than dlra2cmam000cmam000, or • the acceleration of any debt maturity having a principal amount of more than dlra10cmam000cmam000, or we become insolvent as defined in the supply agreement |
| In the event of a triggering event where we are required to sell to BASF production equipment providing capacity sufficient to meet BASF’s production needs, the equipment would be sold at 115prca of the equipment’s net book value |
| We believe that we have sufficient cash balances to avoid the first triggering event through 2006 |
| If a triggering event were to occur and BASF elected to proceed with the license and related sale mentioned above, we would lose both significant revenue and the ability to generate significant revenue to replace that which was lost in the near term |
| Replacement of necessary equipment that would be purchased and removed by BASF pursuant to this triggering event could take six months to a year |
| Any additional capital outlays required to rebuild capacity would probably be greater than the proceeds from the purchase of the assets pursuant to our agreement with BASF This shortfall might put us in a position where it would be difficult to secure additional funding given what would then be an already tenuous cash position |
| Such an event would also result in the loss of many of our key staff and line employees due to economic realities |
| We believe that our employees are a critical component of our success and would be difficult to quickly replace and train |
| We might elect to effectively reduce our size and staffing to a point where we could remain a going concern in the near term |
| We depend on key personnel, and their unplanned departure could harm our business |
| Our success will depend, in large part, upon our ability to attract and retain highly qualified research and development, management, manufacturing, marketing and sales personnel on favorable terms |
| Due to the specialized nature of our business, we may have difficulty locating, hiring and retaining qualified personnel on favorable terms |
| If we were to lose the services of any of our key executive officers or other key personnel, or if we are unable to attract and retain other skilled and experienced personnel on acceptable terms in the future, or if we are unable to implement a succession plan to prepare qualified individuals to assume key roles upon any loss of our key personnel, then our business, results of operations and financial condition would be materially harmed |
| In addition, we do not currently have “key-man” life insurance policies covering all of our executive officers or key employees, nor do we presently have any plans to purchase such policies |
| We face potential product liability risks which could result in significant costs that exceed our insurance coverage, damage our reputation and harm our business |
| We may be subject to product liability claims in the event that any of our nanocrystalline product applications are alleged to be defective or cause harmful effects to humans or physical environments |
| Because our nanocrystalline materials are used in other companies’ products, to the extent our customers become subject to suits relating to their products, such as cosmetic, skin-care and personal-care products, 15 ______________________________________________________________________ [16]Table of Contents these claims may also be asserted against us |
| We may incur significant costs including payment of significant damages, in defending or settling product liability claims |
| We currently maintain insurance coverage in the amount of dlra10 million for product liability claims, which may prove not to be sufficient |
| Even if a suit is without merit and regardless of the outcome, claims can divert management time and attention, injure our reputation and adversely affect demand for our nanocrystalline materials |
| We are subject to governmental regulations |
| The costs of compliance and liability for noncompliance with governmental regulations could have a material adverse effect on our business, results of operations and financial condition |
| Current and future laws and regulations may require us to make substantial expenditures for preventive or remedial action |
| Our operations, business or assets may be materially and adversely affected by governmental interpretation and enforcement of current or future environmental, health and safety laws and regulations |
| In addition, our coating operations pose a risk of accidental contamination or injury |
| The damages in the event of an accident or the costs to prevent or remediate a related event could exceed both the amount of our liability insurance and our resources or otherwise have a material adverse effect on our business, results of operations and financial condition |
| In addition, both of our facilities and all of our operations are subject to the plant and laboratory safety requirements of various occupational safety and health laws |
| We believe we have complied in all material respects with regard to governmental regulations applicable to us |
| However, we may have to incur significant costs in defending or settling future claims of alleged violations of governmental regulations and these regulations may materially restrict or impede our operations in the future |
| In addition, our efforts to comply with or contest any regulatory actions may distract personnel or divert resources from other more important initiatives |
| The manufacture and use of certain products that contain our nanocrystalline materials are subject to extensive governmental regulation, including regulations promulgated by the US Food and Drug Administration, the US Environmental Protection Agency and the US Occupational Safety and Health Administration |
| As a result, we are required to adhere to the requirements of the regulations of governmental authorities in the United States and other countries |
| These regulations could increase our cost of doing business and may render some potential markets prohibitively expensive |
| We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if an acquisition could be beneficial to our stockholders |
| In October 1998, we entered into a Rights Agreement, commonly referred to as a “poison pill |
| ” The provisions of this agreement and some of the provisions of our certificate of incorporation, our bylaws and Delaware law could, together or separately: • discourage potential acquisition proposals; • delay or prevent a change in control; and • limit the price that investors might be willing to pay in the future for shares of our common stock |
| In particular, our board of directors is authorized to issue up to 24cmam088 shares of preferred stock (less any outstanding shares of preferred stock) with rights and privileges that might be senior to our common stock, without the consent of the holders of the common stock, including up to 2cmam500 shares of Series A Junior Participating Preferred Stock issuable under the 1998 Rights Agreement |
| In addition, Section 203 of the Delaware General Corporations Law relating to business combinations with related stockholders and the terms of our stock option plans relating to changes of control may discourage, delay or prevent a change in control of our company |
| 16 ______________________________________________________________________ [17]Table of Contents Future sales of our common stock by existing stockholders could negatively affect the market price of our stock and make it more difficult for us to sell stock in the future |
| Sales of our common stock in the public market, or the perception that such sales could occur, could result in a decline in the market price of our common stock and make it more difficult for us to complete future equity financings |
| A substantial number of shares of our common stock and shares of common stock subject to outstanding warrants and options may be resold pursuant to currently effective registration statements |
| As of March 1, 2006, there are: • 15cmam828cmam905 shares of common stock that have been issued in registered offerings, upon the exercise of options under our equity incentive plan or in private placements and are freely tradable in the public markets, • 1cmam476cmam606 shares of common stock that may be issued on the exercise of stock options outstanding and exercisable under our equity incentive plan; • 906cmam002 shares of common stock that were issued pursuant to our September 8, 2003 private placement and the related warrant which was exercised on September 2, 2004 |
| The resale of these shares has been registered pursuant to a Registration Statement on Form S-3 which was declared effective by the Securities and Exchange Commission on August 13, 2004; and • 1cmam256cmam281 shares of common stock that were issued pursuant to our March 23, 2004 private placement and may be registered for resale after March 23, 2006 pursuant the terms of the Registration Rights Agreement executed in connection with this private placement |
| We cannot estimate the number of shares of common stock that may actually be resold in the public market because this will depend on the market price for our common stock, the individual circumstances of the sellers, and other factors |
| If stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the market price of our common stock could decline significantly |
| Bradford T Whitmore has significant influence on all matters requiring stockholder approval because he beneficially owns a large percentage of our common stock, and he may vote the common stock in ways with which our other stockholders disagree |
| As of March 1, 2006, Bradford T Whitmore, together with his affiliates, Grace Brothers, Ltd |
| and Grace Investments, Ltd, beneficially owned approximately 19dtta8prca of the outstanding shares of our common stock |
| As a result, he has significant influence on matters submitted to our stockholders for approval, including proposals regarding: • any merger, consolidation or sale of all or substantially all of our assets; • the election of members of our board of directors; and • any amendment to our certificate of incorporation |
| 17 ______________________________________________________________________ [18]Table of Contents The ownership position of Mr |
| Whitmore could delay, deter or prevent a change of control or adversely affect the price that investors might be willing to pay in the future for shares of our common stock |
| Whitmore’s interests may be significantly different from the interests of our other stockholders and he may vote the common stock he beneficially owns in ways with which our other stockholders disagree |
| Investors in the Company should also note that R Janet Whitmore, one of our directors, is the sister of Mr |
| We have been involved in litigation |
| If we are involved in similar litigation in the future, the expense of defending such litigation and the potential costs of judgments against us and the costs of maintaining insurance coverage could have a material adverse effect on our financial performance |
| We have been involved in three securities class action lawsuits, one of which was a consolidation of several related lawsuits |
| While all of these lawsuits have been settled and dismissed with all settlements funded by our directors and officers liability insurance, we may be the target of additional securities lawsuits in the future |
| If we are involved in similar litigation in the future, the expense of defending such litigation, the potential costs of judgments against us, the costs of maintaining insurance coverage and the diversion of management’s attention could have a material adverse effect on our financial performance |
| The stock markets in general, and the stock prices of technology-based companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of any specific public company |
| The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future as well |
| Our future financial performance and stock price may be subject to significant volatility, particularly on a quarterly basis |
| Shortfalls in our revenues in any given period relative to the levels expected by investors could immediately, significantly and adversely affect the trading price of our common stock |
| Dilutive Effect of Private Placements |
| On September 8, 2003 we sold 453cmam001 shares of our common stock to Grace Brothers, Ltd |
| at a purchase price of dlra4dtta415 per share together with a warrant to purchase a like number of shares of common stock during the next twelve months also at a price of dlra4dtta415 per share |
| This warrant was exercised on September 2, 2004 to acquire 453cmam001 newly issued shares of common stock |
| The share price for the common stock was determined based on the fifteen-day market closing average for our stock ending September 5, 2003 |
| On September 8, 2003 and September 2, 2004 the closing sale price of our common stock as reported on NASDAQ, was dlra5dtta50 and dlra5dtta49 respectively, per share |
| On March 23, 2004 we sold 1cmam256cmam281 shares of our common stock to Altana at a purchase price of dlra7dtta96 per share |
| On March 23, 2004 the closing sale price of our common stock, as reported on NASDAQ, was dlra8dtta26 per share |
| Each of these issuances of stock at below the then-current market price had a dilutive effect on existing common stockholders |
| We have never paid dividends |
| We currently intend to retain earnings, if any, to support our growth strategy |
| We do not anticipate paying dividends on our stock in the foreseeable future |