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Important Information Regarding Forward-Looking Statements
We may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts and projections, and the beliefs and assumptions of our management. Words such as we "expect," "anticipate," "target," "project," "believe," "goals," "estimate," "potential," "predict," "may," "might," "could," "intend," variations of these types of words and similar expressions are intended to identify these forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.
Among the important factors that could cause actual results to differ materially from those indicated by our forward-looking statements are those discussed below entitled "Risk Factors." We undertake no obligation to revise or update publicly any forward-looking statement for any reason. Readers should carefully review the risk factors described below, as well as in the documents filed by us with the OTC Markets Group Inc. (the OTC Markets) and specifically, our Annual Report for the year ended December 31, 2010 filed with the OTC Markets on March 31, 2011, as well as our Quarterly Reports and in our other filings, as they may be amended from time to time.
Risk Factors
Our business faces significant risks. The risk factors set forth below may not be the only ones that we face. Additional risks that we are not aware of yet or that currently are not material may adversely affect our business operations.
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We may not be able to increase our revenue or profitability and our operating results are likely to fluctuate, which may cause the trading price of our common stock to decline.
We had positive cash flows from operations in 2010. We incurred negative cash flows from operations in 2009. In 2009, our cash plus investments position decreased by an average of approximately $3 million per quarter. While we had positive cash flows from operations in 2010, we may not be able to increase revenue or generate gross profits or net income on a longer-term basis. Our revenue and operating results have fluctuated over the past several quarters and are likely to continue to do so, causing our stock price to fluctuate. If our revenue or operating results decline, the market price of our common stock could decline substantially.
Factors that may contribute to fluctuations in our revenue and operating results include the risk factors discussed elsewhere in this Annual Report and the following additional factors:
• the timing and volume of sales of our products;
• market demand for, and changes in the average sales prices of, our products and technologies;
• defects in our products, exposing us to product liability claims and product recalls, safety alerts or advisory notices;
• a shortage of critical parts, which may negatively impact our ability to fulfill customer orders;
• fluctuating demand for, and life cycles of, our products;
• changes in our relationship with Dell, our largest customer with which we have an exclusive sales and marketing agreement regarding certain ruggedized computer notebook products;
• inconsistency in forecasts provided to us by Dell, resulting in increased inventory exposure as we build to the current Dell forecast;
• decreases in military spending and the budgets of federal, state and local agencies, impacting sales of our ruggedized products;
• the failure of our ruggedized products to meet the military specification MIL-STD-810, which is the required specification for products to be considered rugged;
• operational risks from our reliance on suppliers, subcontractors and third-party manufacturers for the production of ruggedized products, including, but not limited to, quality issues;
• changes in the level of our operating expenses;
• our ability to develop new products that are successfully qualified and utilized by customers;
• our ability to have manufactured and shipped products within a particular reporting period;
• deferrals or cancellations of customer orders in anticipation of the development and commercialization of new technologies or for other reasons;
• changes in our products and technologies;
• the timing of the introduction by others of competing, replacement or substitute products and technologies;
• risks associated with the manufacture of our products in Juarez, Mexico, given the ongoing violence of drug cartels in the area;
• our ability to enforce our intellectual property rights or to defend claims that we infringe the intellectual property rights of others, as well as our ability to protect our intellectual property, and the significant costs to us of related litigation; and
• general economic conditions that may affect demand for our products.
We are dependent upon an exclusive contract with Dell for revenue generated from the sale of our ruggedized notebook products, which represents substantially all of our revenue, and in the event of any adverse change to our relationship with Dell, our business, financial condition and results of operations could be adversely affected.
Presently, Dell is our only customer for our rugged notebooks. Revenue from Dell represented a substantial percentage of our total revenue in 2009 and 2010. On April 9, 2010, we announced that we extended our contract with Dell until February 2012. If Dell reduces or discontinues its business with us, our business, financial condition and results of operations could be adversely affected.
In addition, we heavily rely on the Dell sales force to sell our ruggedized notebook products and the Dell service organization to provide support to end customers. If we experience issues regarding insufficient training or lack of sales efforts by the Dell sales force, the decline of sales of our ruggedized notebook products could have a material and adverse effect on our operating results.
A substantial percentage of our total revenue depends on the sale of ruggedized notebook products, and as a result, any significant reduction of sales of these products could materially and adversely affect our operating results.
Because our revenue is derived substantially from sales of our ruggedized notebook products, we are highly dependent upon the continued market acceptance of these products. Continued market acceptance of our ruggedized notebook products is critical to our future success. Any significant reduction of sales of these products could materially and adversely affect our business.
We are dependent on a limited number of suppliers for our ruggedized products, and the loss of these suppliers and our inability to procure new suppliers at comparative costs could have a material and adverse effect on our business, financial condition and results of operations.
We purchase notebooks and components from a limited number of suppliers. Dell is the sole supplier of many of the components that are used in our ruggedized laptop computers. While we believe that alternative sources are available, contractual obligations to Dell preclude our ability to secure new suppliers. The loss of our supplier could cause a disruption in the availability of these products. In addition, we have a limited number of suppliers for other components, and a disruption in the supply of these components may also cause a disruption in the availability of these components and a delay in manufacturing, which could have a material adverse effect on our business.
We depend on a third party to manufacture our ruggedized products, subjecting us to certain operational risks.
We currently depend on a third-party manufacturer to manufacture our ruggedized products and ruggedized products under development, and this reliance subjects us to significant operational risks, any of which could impair our ability to deliver products to our customers should they occur. Our reliance involves a number of risks, including:
· reduced management and control of component purchases;
· reduced control over delivery schedule and quality assurance;
· reduced control over manufacturing yields;
· lack of adequate capacity during periods of excess demand;
· limited warranties on products supplied to us;
· potential increases in prices;
· interruption of supplies as a result of fire, natural calamity, strike or other significant events; and
· misappropriation of our intellectual property.
In addition, this manufacturer maintains a facility in Juarez, Mexico, where it manufactures our products. The U.S. Department of State has issued a travel warning to U.S. citizens traveling to and living in Mexico regarding numerous areas, including Juarez. The Department of State has advised that U.S. citizens defer unnecessary travel to Juarez, given the ongoing violence of drug cartels in the area. In recent months, drug traffickers have blocked major highways and prevented the military from responding to criminal activity in some areas. This ongoing violence and the actions of the drug traffickers could result in transportation delays of components used in our products, as well as delivery of our products, in addition to other issues that could have a material and adverse effect on our business, financial condition and results of operations.
We are subject to certain inventory risks.
We rely on sales forecasts provided by Dell on a monthly basis. We build our rugged notebooks to these forecasts as they are provided to us, which may result in increased inventory exposure in the event Dell reduces its forecast after we procure materials. Any such forecast that Dell decreases could have a material and adverse effect on our operating results. Also, our contract with Dell does not allow Dell to cancel purchase orders it has placed with us for products to be delivered 60 or fewer days from the delivery date set forth in the purchase order. However, the contract provides that if Dell does not comply with this contractual provision, it is within Dell’s discretion whether it reimburses us for cancellation expenses we incur, including increased inventory we may have purchased to fill the purchase orders placed. Additionally, the lead time to procure and ship materials may exceed the period covered by forecasts. Finally, we face inventory risks when we purchase material in advance and subsequently decide to terminate production of (end of life) one or more of our products. In those circumstances, we estimate our inventory requirements, but if our estimates are inaccurate, we will bear the cost of holding the inventory or may incur additional costs to acquire additional inventory on an expedited basis.
Our relationship regarding ownership of inventory with a third-party manufacturer presents certain risks to us that could negatively affect our business, results of operations and financial condition.
We have an arrangement with VirTex, a third-party manufacturer, in which VirTex purchases and takes title of certain inventory relating to certain of our products upon shipment from the original manufacturers of such inventory. VirTex recovers the cost of inventory upon the sale of finished goods to us. This program offers us several advantages; however, this arrangement also results in concentrated credit and inventory risk for us. A large percentage of our accounts receivable balance at the end of 2010 and 2009 was with VirTex. In addition, by transferring inventory to VirTex, the financial failure of VirTex could freeze this inventory, preventing us from accessing it and using it for our products. As our sales increase, these amounts will increase.
Budget constraints of the U.S. military, federal, state and local governments could negatively impact sales of our ruggedized products, which could materially and adversely affect our operating results.
We market to the various branches of the U.S. military as potential customers of our ruggedized products, as well as other state and local governments. Any decrease in spending by these agencies or a change in the current political situation or overall market conditions may negatively impact sales of our ruggedized products, which could materially and adversely affect our operating results.
In the event of a failure of our ruggedized products to meet the military specification MIL-STD-810, our business, financial condition and results of operations could be adversely affected.
Our products are ruggedized to meet (and in some cases, exceed) the military specifications MIL-STD-810. Created by the U.S. government, the MIL-STD-810 specifications cover a broad range of tests that measure the durability of equipment used under harsh conditions. A failure to meet this standard would result in our products not qualifying as “rugged” products, which could have a material and adverse effect on our operating results. In addition, this standard could change, third-party components could fail to meet the required specifications, or a third-party manufacturer could fail to produce our products according to the required specifications, each of which could also have a material and adverse effect on our operating results.
Some of our suppliers and subcontractors do not have long operating histories or significant financial strength.
Some of the suppliers and subcontractors with which we engage to provide services to us are small companies without a long operating history or significant financial strength. We have selected these third parties because of their flexibility in dealing with our schedules, their prices and expertise, among other factors, but they may not have the reliability or financial position of larger, more well-established suppliers and subcontractors. As a result, we face increased risks in dealing with these third parties in terms of their financial position, ability to continue operations and meet their commitments and quality control, among other issues, which could materially and adversely affect our operating results.
We depend on key Dell personnel, and in the event of changes to these Dell personnel, our business could be harmed.
We believe our future success will depend in large part upon our relationships with key Dell personnel. If any of these key personnel leave their current positions with Dell, this could jeopardize our future relationship with Dell, as well as delay the development and introduction of, and negatively impact our ability to sell, our ruggedized notebook products.
We partially rely on Dell to purchase products from inventory hubs so that we can receive payment for our products. If Dell does not take possession of these products, we will not be paid, which could materially and adversely affect our business, financial condition and results of operations.
We stock certain of our products in hubs based on a forecast from Dell, from which Dell purchases products and pays us after taking possession. If we stock these hubs but Dell does not purchase our products, this could result in an increase in our inventory levels, as well as an increase in our working capital exposure, since we are required to pay our suppliers prior to receiving payment from Dell. This could materially and adversely affect our business, financial condition and results of operations. In the future, our supply chain with Dell may change, which could impact our inventory levels, our working capital exposure, as well as our cash position.
In the event of product failures, Dell could terminate our relationship and we could be subject to increased warranty costs, as well as additional costs, all of which could have a material adverse effect on our results of operations and financial condition.
We warrant products for periods up to 37 months following the manufacture of our products. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs increase, our warranty costs to support the products in the field could increase, which could have a material and adverse effect on our results of operations and financial condition. In addition, our agreement with Dell requires that we pay for all costs that Dell incurs (whether or not the warranty continues to apply) with respect to defects in the design, manufacturing process or material of a product that constitute an epidemic failure, which term is defined as a specific defect found in 0.5% of a type of product delivered during any one-month period. In the event of an epidemic failure and we are held responsible for all costs that Dell incurs in repairing or replacing the products in question, it could have a material adverse effect on our results of operations and financial condition. Finally, in the event of excessive product failure rates, Dell could terminate its contract with us, which would also have a material and adverse effect on our results of operations and financial condition.
Because we do not have long-term agreements with our customers and generally do not have a significant backlog of unfilled orders, our revenue and operating results in any quarter are difficult to forecast.
With the exception of our exclusive sales and marketing contract between Augmentix and Dell, we do not have long-term purchase agreements with customers. Because our expense levels are based in part on our expectations as to future revenue and to a large extent are fixed in the short term, we likely will be unable to adjust spending on a timely basis to compensate for any unexpected shortfall in revenue. Accordingly, any significant shortfall of revenue in relation to our expectations could hurt our operating results and depress our stock price.
We are subject to risks relating to product concentration and lack of revenue diversification.
Until our acquisition of Augmentix, we derived nearly all of our revenue from sales or licenses of our Stakpak and memory module solutions. We terminated our memory solutions manufacturing business and now are focusing on our rugged technology solutions business, which derives nearly all of its revenue from sales to Dell. We expect these sales to continue to account for a substantial portion of our total revenue in the near term. Continued market acceptance of our products is critical to our future success. As a result, our business, financial condition and results of operations could be adversely affected by:
• any decline in demand for our products;
• failure of our products and technologies to achieve continued market acceptance;
• the introduction of products and technologies that can serve as a substitute for, replacement of or represent an improvement over, our products and technologies;
• technological innovations that we are unable to address with our products and technologies; and
• any inability by us to release new products or enhanced versions of our existing products and technologies on a timely basis or the failure of our products to achieve market acceptance.
If our products include defective parts, we may be subject to product liability or other claims.
If we sell products that are defective or contain defective components, we could be subject to product liability claims and product recalls, safety alerts or advisory notices. While we have product liability insurance coverage, we cannot assume that it will be adequate to satisfy claims made against us in the future or that we will be able to obtain insurance in the future at satisfactory rates or in adequate amounts. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business, financial condition, results of operations and reputation, and on our ability to attract and retain customers.
The viability of our business model could be threatened if we are unable to control costs.
Dell expects us to deliver products and new designs within certain cost parameters, and our ability to pass unexpected design or manufacturing costs on to Dell is limited. We also experience pressure to reduce our margins. Accordingly, if we are unable to design or procure ruggedized notebook products efficiently, our business model could be unprofitable.
If the supply of materials used to manufacture our products is interrupted, our financial condition and results of operations could be adversely affected.
In order to have our ruggedized products manufactured, we require components, such as, but not limited to, main logic boards, memory, base LCDs, power supplies, chassis, thermal systems, optical enhancements, and other rugged elements. We typically procure these materials from limited sources. Shortages in some of these materials may occur from time to time, and have occurred in the past. In addition to shortages, we could experience quality problems with these materials. If our supply of materials is interrupted for any reason, or our manufacturing turnaround times are extended, our financial condition and results of operations could be adversely affected.
We are vulnerable to increases in shipping costs, which could have an adverse impact on our gross profit margin.
Presently, our supply chain configuration requires us to bear the expense of transporting the components of our rugged notebook products a significant distance before our manufacturing process is complete and the products are made available to our primary customer. Historically, we have heavily relied on air transportation to ship our products due to the need to deliver products in a timely manner.
If the cost of transportation increases in the future, or we are unable to decrease our reliance on transportation and decrease the distances we must transport products, we could face a decline in our gross profit margins.
We are a small company with limited resources compared to some of our current and potential competitors, and we may not be able to compete effectively and maintain or increase our market share.
Some of our current and potential competitors have longer operating histories, significantly greater resources and name recognition, and a larger base of customers than we have. Some of these companies are better positioned to influence industry acceptance of a particular industry standard or competing technology than we are. These companies may also be able to devote greater resources to the development, promotion and sale of products, and may be able to deliver competitive products or technologies at a lower price. They also may be able to adopt more aggressive pricing policies than we can adopt.
We expect our competitors to continue to improve the performance of their current products, reduce their prices and introduce new services and technologies that may offer greater performance and improved pricing, any of which could cause a decline in revenue or loss of market acceptance of our products. In addition, our competitors may develop enhancements to, or future generations of, competitive products that may render our products or technologies obsolete or uncompetitive. These and other competitive pressures may prevent us from competing successfully against current or future competitors, and may materially harm our business. Competition could decrease our prices, reduce our revenue, lower our gross profits or decrease our market share.
If we acquire other businesses or technologies in the future, these acquisitions could disrupt our business and harm our business, financial condition and results of operations.
As part of our growth and product diversification strategy, we will evaluate opportunities to acquire other businesses, intellectual property or technologies that would complement our current offerings, expand the breadth of our markets or enhance our technical capabilities. Acquisitions entail a number of risks that could materially and adversely affect our business and operating results, including:
• difficulties in integrating the operations, systems, technologies or products of the acquired companies;
• the risk of diverting management’s time and attention from the normal daily operations of the business;
• insufficient revenue to offset increased expenses associated with acquisitions;
• difficulties in retaining business relationships with suppliers and customers of the acquired companies;
• risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; and
• the potential loss of key employees of the acquired company.
Future acquisitions also could cause us to incur debt or contingent liabilities or cause us to issue equity securities. These actions could negatively impact the ownership percentages of our existing stockholders, our financial condition and results of operations.
We may make acquisitions that are dilutive to existing shareholders, result in unanticipated accounting charges or otherwise adversely affect our results of operations.
We may grow our business through business combinations or other acquisitions of businesses, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. If we make any future acquisitions, we could issue stock that would dilute our earnings and stockholders’ percentage ownership, reduce our cash reserves, incur substantial debt, or assume contingent liabilities.
Furthermore, acquisitions may require material infrequent charges and could result in adverse tax consequences, deferred compensation charges, substantial depreciation, in-process research and development charges, the amortization of amounts related to deferred compensation and identifiable purchased intangible assets or impairment of goodwill, any of which could negatively impact our results of operations.
Our marketing and sales efforts may be unsuccessful.
We have limited sales and marketing resources. As our business evolves, we may have to employ more rigorous sales and marketing efforts, hire more sales and marketing personnel and engage in lengthy negotiations to reach agreement with potential customers. As a result, our operating expenses may increase, and we may incur losses in periods that precede the generation of revenue. If the sales and marketing efforts of our technologies are unsuccessful, then we may not be able to sell or license our technologies.
If we experience credit losses or other collections issues, our business, financial condition and results of operations could suffer.
Although we do not believe that we will incur any material credit losses in the foreseeable future, if we were to do so, our financial condition and results of operations could be harmed.
If we are unable to develop new and enhanced products that achieve market acceptance in a timely manner, our financial condition, results of operations and competitive position could be harmed.
Our future growth and success could be based on our ability to develope new technologies and enhancements that can achieve market acceptance in a timely and cost-effective manner. Successful development and introduction of new technologies on a timely basis require that we:
• identify and adjust to changing requirements of customers;
• identify and adapt to emerging technological trends in our target markets;
• maintain effective marketing strategies;
• timely design and introduce cost-effective, innovative and performance-enhancing features that differentiate our products from those of our competitors; and
• successfully develop our relationships with existing and potential customers.
The failure of any bank in which we deposit our funds could impair our operations.
Our deposits with our banks could be at risk and the FDIC deposit insurance may not be sufficient to cover any potential loss arising from a bank failure. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash, cash equivalents and investments could impair our operations.
Austin Ventures controls us, and will continue to control us, as long as it beneficially owns a majority of our common stock.
Austin Ventures beneficially owns approximately 78% of our outstanding common stock. Because Austin Ventures and its affiliates own more than 50% of our common stock, we are considered a “controlled company.” As long as Austin Ventures beneficially owns a majority of our outstanding common stock, Austin Ventures will continue to be able to elect all members of our board of directors. Purchasers of our common stock will not be able to affect the outcome of any stockholder vote until Austin Ventures beneficially owns less than a majority of our outstanding common stock. As a result, Austin Ventures will control all matters affecting us, including:
· the composition of our board of directors and, through it, any determination with respect to our business direction and policies, including the appointment and removal of officers;
· any determinations with respect to mergers or other business combinations;
· our acquisition or disposition of assets, which we consider from time to time; and
· our corporate finance activities.
In addition, to the extent that Austin Ventures continues to beneficially own a significant portion of our outstanding common stock, although less than a majority, it will continue to have a significant influence over all matters submitted to our stockholders and to exercise significant control over our business policies and affairs. Under our certificate of incorporation, as amended, if Austin Ventures ceases to own at least 30% of our outstanding common stock, the approval of the holders of at least two-thirds of our common stock will be required for stockholders to amend our certificate of incorporation or bylaws, to increase or decrease the authorized number of shares of our capital stock or to remove a director. Furthermore, concentration of voting power could have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders. This significant concentration of share ownership may also adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in a company that is controlled by a small number of stockholders. Austin Ventures is not prohibited from selling a controlling interest in us to any third party, or from selling its shares at any time, which could adversely affect our stock price as long as Austin Ventures complies with Section 203 of the Delaware General Corporation Law.
Austin Ventures and its designees on our board of directors may have interests that conflict with our interests.
Austin Ventures and its designees on our board of directors may have interests that conflict with, or are different from, our own. Conflicts of interest between Austin Ventures and us may arise, and such conflicts of interest may not be resolved in a manner favorable to us, including potential competitive business activities, corporate opportunities, indemnity arrangements, registration rights, sales or distributions by Austin Ventures of our common stock and the exercise by Austin Ventures of its ability to control our management and affairs. Our certificate of incorporation does not contain any provisions designed to facilitate resolution of actual or potential conflicts of interest, or to ensure that potential business opportunities that may become available to both Austin Ventures and us will be reserved for or made available to us. Pertinent provisions of law will govern any such matters if they arise. In addition, Austin Ventures and its director designees could delay or prevent an acquisition or merger even if the transaction would benefit other stockholders.
We depend on a few key personnel to manage our business effectively, and if we lose the services of any of those personnel or are unable to hire additional personnel, our business could be harmed.
Our future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel. We believe that our future success will be dependent on retaining the services of our key personnel, developing their successors, modifying our internal processes to reduce our reliance on specific individuals, and on properly managing the transition of key roles should departures or additions to the management team occur. The loss of any of our key employees, or the inability to attract or retain qualified personnel, including engineers and sales and marketing personnel, could delay the development and introduction of, and negatively impact our ability to sell, our services and technologies.
If we fail to protect our proprietary rights, our customers or our competitors might gain access to our technologies, which could adversely affect our ability to sell our products, to license our memory solutions, to compete successfully in our markets, as well as result in refunds we are required to pay to Dell and other customers and harm our operating results.
We believe that the strength of our intellectual property rights is, and will continue to be, important to our business. If any of our key patents or other intellectual property rights are invalidated or deemed unenforceable, if a court limits the scope of the claims in any of our key patents or other intellectual property rights, if we fail to protect our intellectual property or unknowingly develop products based on the intellectual property of third parties, our business could be adversely affected. We indemnify Dell and other customers for patent infringement, so in the event an infringement claim is made with respect to the notebooks we sell to Dell or other products sold to customers, if we cannot defend against the claim made, we may have to refund to Dell and other customers the purchase price of the products sold, as well as defend against the infringement claim. The results of the factors set forth above could significantly harm our business, financial condition and results of operations.
We rely on a combination of license, development and nondisclosure agreements and other contractual provisions and patent, trademark and trade secret laws, and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality agreements with our employees, consultants and third parties, and control access to and distribution of our documentation and other proprietary information. It is possible that these efforts to protect our intellectual property rights may not:
• prevent challenges to, or the invalidation or circumvention of, our existing patents;
• result in patents that lead to commercially viable products or provide competitive advantages for our products;
• prevent our competitors from independently developing similar products, duplicating our products or designing around the patents owned by us;
• prevent third-party patents from having an adverse effect on our ability to do business;
• provide adequate protection for our intellectual property rights;
• prevent disputes with third parties regarding ownership of our intellectual property rights;
• prevent disclosure of our trade secrets and know-how to third parties or into the public domain; or
• result in valid patents, including international patents, from any of our pending applications.
We may be involved in costly legal proceedings to enforce or protect our intellectual property rights or to defend against claims that we infringe the intellectual property rights of others.
Litigation is inherently uncertain, and an adverse outcome could subject us to significant liability for damages or invalidate our proprietary rights. Legal proceedings we initiate to protect our intellectual property rights could also result in counterclaims or countersuits against us. Any litigation, regardless of its outcome, could be time consuming and expensive to resolve and could divert our management’s time and attention. Any intellectual property litigation also could force us to take specific actions, including:
• cease selling products that are claimed to be infringing a third party’s intellectual property;
• obtain licenses to make, use, sell, offer for sale or import the relevant technologies from the intellectual property’s owner, which licenses may not be available on reasonable terms, or at all;
• redesign those products that are claimed to be infringing a third party’s intellectual property; or
• pursue legal remedies with third parties to enforce our indemnification rights, which may not adequately protect our interests.
We have found it necessary to litigate against others, including our customers, to enforce our intellectual property and contractual and commercial rights, as well as to challenge the validity and scope of the proprietary rights of others and to defend against claims of infringement or invalidity.
In 2008, Samsung claimed that it made errors in certain royalty reports, resulting in an overpayment of royalties to us, and also claimed that we owe Samsung for these errors.
We had a license arrangement with Samsung Electronics Co., Ltd. (Samsung), pursuant to which we licensed certain technologies to Samsung, and Samsung provided to us quarterly reports of its license usage and paid corresponding royalty amounts in accordance with the terms of the agreement. We primarily relied on these reports from Samsung and subsequent cash payment to record revenue from this license agreement.
During the second quarter of 2008, Samsung sent us a letter asserting that it made errors in the royalty reports that it previously delivered to us during the period beginning in the fourth quarter of 2005 and ending in the first quarter of 2008. Samsung stated that it believes that these errors resulted in an overpayment to us of an aggregate of approximately $2.9 million, and Samsung has requested that we refund this amount. Samsung paid to us a total of $14.2 million during this time period.
Because of information provided to us by Samsung regarding excessive yield loss and independent information we have obtained, we do not believe it would be appropriate to make any changes to our financial reports or book allowances related to this refund request, and we believe that our revenue recognition has been appropriate.
Our stock price is volatile.
Our common stock has been publicly traded since February 2004. The market price of our common stock has been subject to significant fluctuations since the date of our initial public offering. The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of technology companies. We have limited liquidity in terms of the number of outstanding shares of our common stock that are publicly traded, which may adversely affect the value of our stock. As a result, the market price of our common stock may materially decline, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts management’s attention and resources.
March 2011
