This prospectus contains, and may incorporate by reference, forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. These forward-looking statements relate to future events or our future performance and include, but are
not limited to, statements concerning our business strategy, future commercial revenues, market growth, capital requirements, new product introductions, expansion plans and the adequacy of our funding. Other statements contained in this prospectus
that are not historical facts are also forward-looking statements. We have tried, wherever possible, to identify forward-looking statements by terminology such as may, will, could, should,
expect, anticipate, intend, plan, believe, seek, estimate and other comparable terminology. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections.
Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any
forward-looking statements presented in this prospectus or the documents incorporated by reference herein or therein, or those that we may make orally or in writing from time to time, are based upon managements beliefs and assumptions and are
made based on information available to us as of the time made and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our
assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material.
Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.
For further discussion of these and other factors see Risk Factors in this prospectus and the sections titled
Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors in the documents incorporated into this prospectus by reference.
RISK FACTORS
Investment in our securities involves a high degree of risk. You should carefully consider the risks described below, as well as those
risks described in the sections titled Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations, each contained in our most recent Annual Report on Form
10-K
for the year ended December 31, 2017, which has been filed with the SEC and is incorporated herein by reference in its entirety, as well as other information in this prospectus or in any other documents
incorporated by reference. Each of the risks described in these sections and documents could adversely affect our business, financial condition, results of operations and prospects, and could result in a complete loss of your investment. This
prospectus and the incorporated documents also contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain
factors, including the risks mentioned above.
Risks Related to Our Business
We have a history of losses and may never become profitable.
In each of our last five years, we have experienced significant net losses and negative cash flows from operations. In 2017, we incurred a net
loss of $9.5 million and had negative cash flows from operations of $7.4 million. In 2016, we incurred a net loss of $11.1 million and had negative cash flows from operations of $8.1 million. Our independent registered public
accounting firm has included in its audit reports an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. If we fail to increase our revenues, we may not achieve and may not maintain profitability, we
may not realize our investment in infrastructure, and may not meet our expectations or the expectations of financial analysts who report on our stock.
We may need to raise additional capital. If we are unable to raise capital our ability to implement our current business plan and ultimately our
viability as a company could be adversely affected.
At December 31, 2017, we had $3.1 million in cash and cash
equivalents. On March 7, 2018, we announced the pricing of a registered offering of common stock (and common stock equivalents) with total gross proceeds of approximately $2 million. The closing of the registered public offering was
completed on March 9, 2018. The net proceeds to us from the registered offering, after deducting the placement agent fees and our estimated offering expenses, was approximately $1.7 million. Our current forecast is that our existing cash
resources will be sufficient to fund our planned operations into the third quarter of 2018. Our cash resources will not be sufficient to fund our business through March 30, 2019. Therefore, unless we can materially grow our revenues from
commercial operations during such period, we will need to raise additional capital during the next
12-months
to continue to implement our current business plan and maintain the viability of the Company.
We believe the key factors to our future liquidity will be our ability to successfully use our expertise and our technology to generate
revenues in various ways, including commercial operations, joint ventures and licenses. Because of the expected timing and uncertainty of these factors, we will need to raise funds to meet our working capital needs.
Additional financing may not be available on acceptable terms or at all. If we issue additional equity securities to raise funds, the
ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock and could also require that we issue warrants in connection with sales
of our stock. If we cannot raise any needed funds to grow our commercial resources, we might be forced to make changes to, or delay aspects of, our business plan which could adversely affect our ability to implement our current business plan and
ultimately our viability as a company.
Our strategic initiative to develop a new wire platform may not prove to be successful and our decision to
focus our research and development efforts on next generation power applications (NGEMs) may not be the most advantageous market opportunity for HTS.
We have spent a considerable amount of resources in developing a new wire platform for power applications. In late 2010, we transitioned our
research and development efforts to adapting our proprietary HTS material deposition techniques to the production of our HTS Conductus
®
wire. In early 2018, we announced the concentration of
our future Conductus
®
wire product development efforts on NGEMs to capitalize on several accelerating energy megatrends. While this refined focus is very synergistic with our program with the
Department of Energy (DOE) award for the development of superconducting wire to enable NGEMs other applications for the use of HTS wire may ultimately prove to have been more advantageous to us had we not focused on NGEMs.
8
Substantial technical and business challenges remain before we can have a commercially successful
product introduction. We may not be able to overcome these challenges in a timely or cost effective manner, if at all. Such a failure could adversely impact our prospects, liquidity, stock price and carrying value of our fixed assets.
There are numerous technological challenges that must be overcome in order for our Conductus wire to become commercially successful and our ability to
address such technological challenges may adversely affect our ability to gain customers.
Our plan is for commercial production of
Conductus wire following completion of qualification orders. We have experienced in the past, and may continue to experience, delays in achieving commercial production of Conductus
®
.
Commercialization can be delayed, among other factors, by technological challenges as we seek to improve our products and processes, delays from customer qualification orders and customer analysis of those orders, and decisions made by our customers
with respect to post-qualification orders. Many of the factors that affect successful commercialization of our products are affected by third party decisions.
Conductus
®
wire is uniquely positioned to address three key technical challenges in
the market: high performance, improved economics and commercial-scale capacity. To date, we, along with existing HTS wire manufacturers, have not overcome these challenges to allow for broad commercialization of HTS wire. Customers cannot purchase
long-length wire with any reasonable confidence or guaranteed volume; and electric utilities lack confidence in product availability which leads to delays in their deployment roadmap. HTS wire performance is currently below what many customers
require. Many power applications require high performance wire with high current carrying capacity, mechanical durability, electrical integrity with low AC losses and minimal splices. Producing high performance HTS wire has proven difficult,
especially at volumes required for large scale deployment. The high demand for high performance wire available in very low volume results in a high wire price that narrows the market and limits commercial viability.
We have made significant progress in these areas, however delays in our Conductus wire development, as a result of technological challenges or
other factors, may result in the introduction or commercial acceptance of our Conductus wire products later than expected.
The commercial uses of
superconducting wire and superconducting wire related products are limited today, and a broad commercial market may not develop.
Even if the technological hurdles are overcome, there is no certainty that a robust commercial market for unproven HTS wire products will come
to fruition. To date, commercial use of HTS wire has been limited to small feasibility demonstrations, and these projects are largely subsidized by government authorities. While customer demand is high and market forecasts project large revenue
opportunity for superconducting wire in power applications, the market may not develop and superconducting wire might never achieve long term, broad commercialization. In such an event, we would not be able to commercialize our Conductus wire
initiative and our business could be adversely impacted.
We have limited experience marketing and selling superconducting wire products, and our
failure to effectively market and sell our superconducting wire solutions would lower our revenue and cash flow.
We have limited
experience marketing and selling our Conductus wire. Once our Conductus wire is ready for commercial use, we will have to hire and develop a marketing and sales team to effectively demonstrate the advantages of our product over both more traditional
products and competing superconducting products or other adjacent technologies. We may not be successful in our efforts to market this new technology.
We expect continued customer pressures to reduce our product pricing which may adversely affect our ability to operate on a commercially viable basis.
We expect to face pressure to reduce prices and accordingly, the average selling price of our Conductus wire. We anticipate
customer pressure on our product pricing will continue for the foreseeable future. HTS wire is currently being sold at $250/kiloampere-meter
(kA-m).
At this price, HTS wire represents more than half the cost
of the end device. A price reduction is required for long term commercialization. Cryogenic systems, including cryocoolers and cryostats, have been developed but will also need to be cost optimized as HTS wire becomes available in volume. We have
plans to further reduce the manufacturing cost of our products, but there is no assurance that our future cost reduction efforts will keep pace with price erosion. We will need to further reduce our manufacturing costs through engineering
improvements and economies of scale in production and purchasing in order to achieve adequate gross margins. We may not be able to achieve the required product cost savings at a rate needed to keep pace with competitive pricing pressure.
Additionally, we may be forced to discount future orders or may never reach commercial viability. If we fail to reach our cost saving objectives or we are required to offer future discounts, our business may be harmed.
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We face competition with respect to various aspects of our technology and product development.
Our current wireless products compete on the basis of performance, functionality, reliability, pricing, quality, and compliance with industry
standards. With respect to our Conductus wire materials, our competition includes American Superconductor (AMSC), SuperPower (Furukawa), SuNam , Bruker, Shanghai Superconductor, BASF, SuperOx, Fujikura, Sumitomo and THEVA. In addition, we currently
supply components and license technology to several companies that may eventually decide to manufacture or design their own HTS components, rather than purchasing or licensing our technology. If we are unable to compete successfully against our
current or future competitors, then our business and results of operations will be adversely affected.
We may not be able to compete effectively
against alternative technologies.
Our products also compete with a number of alternative approaches and technologies. Some of
these alternatives may be more cost effective or offer better performance than our products and we may not succeed in competing against these alternatives.
We currently rely on specific technologies and may not successfully adapt to the rapidly changing market environments.
We must overcome technical challenges to commercialize our Conductus wire. If we are able to do so, we will need to attain customer acceptance
of our Conductus wire, and we cannot ensure that such acceptance will occur. We will have to continue to develop and integrate advances to our core technologies. We will also need to continue to develop and integrate advances in complementary
technologies. We cannot guarantee that our development efforts will not be rendered obsolete by research efforts and technological advances made by others. Our business success depends upon our ability to keep pace with advancing technology,
including materials, processes and industry standards.
We may experience significant fluctuations in sales and operating results from quarter to
quarter.
Our quarterly results may fluctuate due to a number of factors, including:
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the lack of any contractual obligation by our customers to purchase their forecasted demand for our products;
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variations in the timing, cancellation, or rescheduling of customer orders and shipments; and
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high fixed expenses that may disproportionately impact operating expenses, especially during a quarter with a sales shortfall.
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If our customers desire to purchase products in excess of the forecasted amounts or in a different product mix, there may not be enough
inventory or manufacturing capacity to fill their orders.
Due to these and other factors, our past results have limited predictive value
as to our Conductus wire initiative. Future revenues and operating results may not meet the expectations of stock analysts and investors. In either case, the price of our common stock could be materially adversely affected.
Worldwide economic uncertainty may adversely affect our business, operating results and financial condition.
The United States and global economies continue to experience a period of economic and financial uncertainty, which could result in economic
volatility having direct and indirect adverse effects on our business, operating results and financial condition in a number of ways. For example, current or potential customers may delay or decrease spending with us, may delay paying us for
previously purchased products, or may not pay us at all. In addition, this recent downturn has had, and may continue to have, an unprecedented negative impact on the global credit markets. If we are required to obtain financing in the near term to
meet our working capital or other business needs, we may not be able to obtain that financing. Further, even if we are able to obtain the financing we need, it may be on terms that are not favorable to us, with increased financing costs and
restrictive covenants.
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Our reliance on a limited number of suppliers and the long lead time of components for our products could
impair our ability to manufacture and deliver our systems on a timely basis.
A number of components used in our products are
available from a limited number of outside suppliers due to unique designs as well as certain quality and performance requirements. Our reliance on sole or limited source suppliers involves certain risks and uncertainties, many of which are beyond
our control. These include the possibility of a shortage or the discontinuation of certain key components. Any reduced availability of these parts or components when required could impair our ability to manufacture and deliver our systems on a
timely basis and result in the delay or cancellation of orders, which could harm our business.
In addition, the purchase of some of our
key components involves long lead times and, in the event of unanticipated increases in demand for our solutions, we may be unable to obtain these components in sufficient quantities to meet our customers requirements. We do not have
guaranteed supply arrangements with any of these suppliers, do not maintain an extensive inventory of parts or components and customarily purchase sole or limited source parts and components pursuant to purchase orders. Business disruptions, quality
issues, production shortfalls or financial difficulties of a sole or limited source supplier could materially and adversely affect us by increasing product costs, or eliminating or delaying the availability of such parts or components. In such
events, our inability to develop alternative sources of supply quickly and on a cost-effective basis could impair our ability to manufacture and deliver our systems on a timely basis and could harm our business.
Our reliance on a limited number of suppliers exposes us to quality control issues.
Our reliance on certain single-source and limited-source components exposes us to quality control issues if these suppliers experience a
failure in their production process or otherwise fail to meet our quality requirements.
A failure in single-source or limited-source
components or products could force us to repair or replace a product utilizing replacement components. If we cannot obtain comparable replacements or effectively return or redesign our products, we could lose customer orders or incur additional
costs, which could have a material adverse effect on our gross margins and results of operations.
Our ability to protect our patents and other
proprietary rights is uncertain, exposing us to possible losses of competitive advantage.
Our efforts to protect our proprietary
rights may not succeed in preventing infringement by others or ensure that these rights will provide us with a competitive advantage. Pending patent applications may not result in issued patents and the validity of issued patents may be subject to
challenge. Third parties may also be able to design around the patented aspects of the products. Additionally, certain of the issued patents and patent applications are owned jointly with third parties. Because any owner or
co-owner
of a patent can license its rights under jointly-owned patents or applications, inventions made by us jointly with others are not subject to our exclusive control. Any of these possible events could result
in losses of competitive advantage.
We depend on specific patents and licenses to technologies, and we will likely need additional technologies in
the future that we may not be able to obtain.
We utilize technologies under licenses of patents from others for our products.
These patents may be subject to challenge, which may result in significant litigation expense (which may or may not be recoverable against future royalty obligations). Additionally, we continually try to develop new products, and, in the course of
doing so, we may be required to utilize intellectual property rights owned by others and may seek licenses to do so. Such licenses may not be obtainable on commercially reasonable terms, or at all. It is also possible that we may inadvertently
utilize intellectual property rights held by others, which could result in substantial claims.
Intellectual property infringement claims against us
could materially harm results of operations.
Our products incorporate a number of technologies, including high-temperature
superconductor technology, technology related to other materials, and electronics technologies. Our patent positions, and that of other companies using high- temperature superconductor technology, is uncertain and there is significant risk that
others, including our competitors or potential competitors, have obtained or will obtain patents relating to our products or technologies or products or technologies planned to be introduced by us.
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We believe that patents may be or have been issued, or applications may be pending, claiming
various compositions of matter used in our products. We may need to secure one or more licenses of these patents. There can be no assurances that such licenses could be obtained on commercially reasonable terms, or at all. We may be required to
expend significant resources to develop alternatives that would not infringe such patents or to obtain licenses to the related technology. We may not be able to successfully design around these patents or obtain licenses to them and may have to
defend ourselves at substantial cost against allegations of infringement of third party patents or other rights to intellectual property. In those circumstances, we could face significant liabilities and also be forced to cease the use of key
technology.
Other parties may have the right to utilize technology important to our business.
We utilize certain intellectual property rights under
non-exclusive
licenses or have granted to others
the right to utilize certain intellectual property rights licensed from a third party. Because we may not have the exclusive rights to utilize such intellectual property, other parties may be able to compete with us, which may harm our business.
Because competition for target employees is intense, we may be subject to claims of unfair hiring practices, trade secret misappropriation or other
related claims.
Companies in HTS wire industries whose employees accept positions with competitors frequently claim that
competitors have engaged in unfair hiring practices, trade secret misappropriation or other related claims. We may be subject to such claims in the future as we seek to hire qualified personnel, and such claims may result in material litigation. If
this should occur, we could incur substantial costs in defending against these claims, regardless of their merits.
Our success depends on the
attraction and retention of senior management and technical personnel with relevant expertise.
As a competitor in a highly
technical market, we depend heavily upon the efforts of our existing senior management and technical teams. The loss of the services of one or more members of these teams could slow product development and commercialization objectives. Due to the
specialized nature of our products, we also depend upon our ability to attract and retain qualified technical personnel with substantial industry knowledge and expertise. Competition for qualified personnel is intense, and we may not be able to
continue to attract and retain qualified personnel necessary for the development of our business.
Regulatory changes could substantially harm our
business.
Certain regulatory agencies in the United States and other countries set standards for operations within their
territories. HTS wire is subject to a regulatory regime, which may become more strictly regulated if the market grows. Any failure or delay in obtaining necessary approvals could harm our business.
We may acquire or make investments in companies or technologies that could cause loss of value to stockholders and disruption of business.
We may explore opportunities to acquire companies or technologies in the future. Other than the acquisition of Conductus, Inc. in 2002, we have
not made any such acquisitions or investments to date and, therefore, our ability as an organization to make acquisitions or investments is unproven. An acquisition entails many risks, any of which could adversely affect our business, including:
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failure to integrate operations, services and personnel;
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the price paid may exceed the value eventually realized;
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loss of share value to existing stockholders as a result of issuing equity securities to finance an acquisition;
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potential loss of key employees from either our then current business or any acquired business;
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entering into markets in which we have little or no prior experience;
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diversion of financial resources and managements attention from other business concerns;
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assumption of unanticipated liabilities related to the acquired assets; and
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the business or technologies acquired or invested in may have limited operating histories and may be subjected to many of the same risks to which we are exposed.
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In addition, future acquisitions may result in potentially dilutive issuances of equity
securities, or the incurrence of debt, contingent liabilities or amortization expenses or charges related to goodwill or other intangible assets, any of which could harm our business. As a result, if we fail to properly evaluate and execute
acquisitions or investments, our business and prospects may be seriously harmed.
If we are unable to implement appropriate controls and procedures
to manage our potential growth, we may not be able to successfully offer our products and implement our business plan.
Our ability
to successfully offer our products and implement our business plan in a rapidly evolving market requires an effective planning and management process. Growth in future operations would place a significant strain on management systems and resources.
We expect that we would need to improve our financial and managerial controls, reporting systems and procedures, and would need to expand, train and manage our work force worldwide. Furthermore, we expect that we would be required to manage multiple
relationships with various customers and other third parties.
Compliance with environmental regulations could be especially costly due to the
hazardous materials used in the manufacturing process. In addition, we could incur expenditures related to hazardous material accidents.
We are subject to a number of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our business. Current or future laws and regulations could require substantial expenditures for preventative or remedial action, reduction of chemical exposure, waste treatment or disposal. Any
failure to comply with present or future regulations could result in the imposition of fines, suspension of production or interruption of operations. In addition, these regulations could restrict our ability to expand or could require us to acquire
costly equipment or incur other significant expense to comply with environmental regulations or to clean up prior discharges.
In
addition, although we believe that our safety procedures for the handling and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, there is always the risk of accidental contamination or injury from
these materials. To date, we have not incurred substantial expenditures for preventive action with respect to hazardous materials or for remedial action with respect to any hazardous materials accident, but the use and disposal of hazardous
materials involves risk that we could incur substantial expenditures for such preventive or remedial actions. If such an accident were to occur, we could be held liable for resulting damages. The liability in the event of an accident or the costs of
such remedial actions could exceed our resources or otherwise have a material adverse effect on our financial condition, results of operations or cash flows.
The reliability of market data included in our public filings is uncertain.
Since we operate in a rapidly changing market, we have in the past, and may from time to time in the future, include market data from industry
publications and our own internal estimates in some of the documents we file with the Securities and Exchange Commission. The reliability of this data cannot be assured. Industry publications generally state that the information contained in these
publications has been obtained from sources believed to be reliable, but that its accuracy and completeness is not guaranteed. Although we believe that the market data used in our filings with the Securities and Exchange Commission is and will be
reliable, it has not been independently verified. Similarly, internal company estimates, while believed by us to be reliable, have not been verified by any independent sources.
Our international operations expose us to certain risks.
In 2007, we formed a joint venture with BAOLI to manufacture and sell our SuperLink interference elimination solution in China. In addition to
facing many of the risks faced by our domestic business, if that joint venture or any other international operation we may have is to be successful, we (together with any joint venture partner) must recruit the necessary personnel and develop the
facilities needed to manufacture and sell the products involved, learn about the local market (which may be significantly different from our domestic market), build brand awareness among potential customers and compete successfully with local
organizations with greater market knowledge and potentially greater resources than we have. We must also obtain a number of critical governmental approvals from both the United States and the local country governments on a timely basis, including
those related to any transfers of our technology. We must establish sufficient controls on any foreign operations to ensure that those operations are operated in accordance with our interests, that our intellectual property is protected and that our
involvement does not inadvertently create potential competitors. There can be no assurance that these
13
conditions will be met. Even if they are met, the process of building our international operations could divert financial resources and management attention from other business concerns. Finally,
our international operations will also be subject to the general risks of international operations, such as:
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changes in exchange rates;
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international political and economic conditions;
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changes in government regulation in various countries;
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adverse tax consequences; and
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costs associated with expansion into new territories.
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Risks Related to the Offering
Our stock price is volatile.
The
market price of our common stock has been, and is expected to be, subject to significant volatility. The value of our common stock may decline regardless of our operating performance or prospects. Factors affecting our market price include:
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our perceived prospects and liquidity;
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progress or any lack of progress (or perceptions related to progress) in timely overcoming the remaining substantial technical and commercial challenges related to our Conductus wire initiative;
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variations in our operating results and whether we have achieved key business targets;
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changes in, or our failure to meet, earnings estimates;
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changes in securities analysts buy/sell recommendations;
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differences between our reported results and those expected by investors and securities analysts;
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announcements of new contracts by us or our competitors;
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market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors; and
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general economic, political or stock market conditions.
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Recent events have caused stock prices
for many companies, including ours, to fluctuate in ways unrelated or disproportionate to their operating performance. The general economic, political and stock market conditions that may affect the market price of our common stock are beyond our
control. The market price of our common stock at any particular time may not remain the market price in the future.
If we fail to maintain the
listing of our common stock with a U.S. national securities exchange, the liquidity of our common stock could be adversely affected.
Our ability to publicly or privately sell equity securities and the liquidity of our common stock could be adversely affected if we are
delisted from the Nasdaq Capital Market or if we are unable to transfer our listing to another stock market.
Our common stock is listed
for trading on the Nasdaq Capital Market. Nasdaq has adopted a number of continued listing standards that are applicable to our common stock, including a requirement that the bid price of our common stock be at least $1.00 per share. Failure to
maintain the minimum bid price can result in the delisting of our common stock from the Nasdaq Capital Market. We have previously fallen out of compliance with the minimum bid price requirement. On July 18, 2016 we effected a
one-for-fifteen
reverse stock split in connection with regaining compliance with the minimum bid requirement following a notice from the Listing Qualifications Department of
the Nasdaq Stock Market on October 30, 2015 and received a notice of
re-compliance
from the Listing Qualifications Department of the Nasdaq Stock Market on August 2, 2016. We currently have
approximately 11,936,594 publicly held shares as of March 15, 2018. Because of Nasdaqs continued listing standard which requires that we maintain at least 500,000 publicly held shares, our ability to effectuate a reverse split in the
future is limited to a reverse split ratio that would maintain compliance with such publicly held share requirement. This effective limit to a reverse split ratio could prevent us from remediating a minimum bid price violation under circumstances
where our stock price was substantially below $1.00 and a higher ratio was needed to remediate the noncompliance.
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If our common stock is delisted by Nasdaq, our common stock may be eligible to trade on the OTC
Bulletin Board, OTC QB or another
over-the-counter
market. Any such alternative would likely result in it being more difficult for us to raise additional capital through
the public or private sale of equity securities and for investors to dispose of, or obtain accurate quotations as to the market value of, our common stock. In addition, there can be no assurance that our common stock would be eligible for trading on
any such alternative exchange or markets.
We have a significant number of outstanding warrants and options, and future sales of the shares obtained
upon exercise of these options or warrants could adversely affect the market price of our common stock.
As of December 31,
2017, we had outstanding options exercisable for an aggregate of 126,130 shares of common stock at a weighted average exercise price of $37.03 per share and warrants to purchase up to 9,294,161 shares of our common stock at a weighted average
exercise price of $3.12 per share. Of such warrants, an aggregate of 274,492 warrants originally issued in our August 2013 financing include a price adjustment mechanism whereby the exercise price of such warrants will be automatically reduced,
subject to limitations, to the extent we issue shares of our common stock, or equivalents, at a price lower than the then applicable exercise price of such warrants which is currently $1.14. The holders may sell these shares in the public markets
from time to time under a registration statement or under Rule 144, without limitations on the timing, amount or method of sale. As our stock price rises, the holders may exercise their warrants and options and sell a large number of shares. This
could cause the market price of our common stock to decline.
Our corporate governance structure may prevent our acquisition by another company at a
premium over the public trading price of our shares.
It is possible that the acquisition of a majority of our outstanding voting
stock by another company could result in our stockholders receiving a premium over the public trading price for our shares. Provisions of our restated certificate of incorporation and our amended and restated bylaws, each as amended, and of Delaware
corporate law could delay or make more difficult an acquisition of our company by merger, tender offer or proxy contest, even if it would create an immediate benefit to our stockholders. For example, our restated certificate of incorporation does
not permit stockholders to act by written consent, and our bylaws generally require ninety days advance notice of any matters to be brought before the stockholders at an annual or special meeting.
In addition, our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the terms, rights
and preferences of this preferred stock, including voting rights of those shares, without any further vote or action by the stockholders. At March 15, 2018, 1,374,845 shares of preferred stock remained unissued. The rights of the holders of
common stock may be subordinate to, and adversely affected by, the rights of holders of preferred stock that may be issued in the future. The issuance of preferred stock could also make it more difficult for a third party to acquire a majority of
our outstanding voting stock, even at a premium over our public trading price.
Furthermore, our certificate of incorporation also
provides for a classified board of directors with directors divided into three classes serving staggered terms. These provisions may have the effect of delaying or preventing a change in control of us without action by our stockholders and,
therefore, could adversely affect the price of our stock or the possibility of sale of shares to an acquiring person.
We do not anticipate
declaring any cash dividends on our common stock.
We have never declared or paid cash dividends on our common stock and do not
plan to pay any cash dividends in the near future. Our current policy is to retain all funds and earnings for use in the operation and expansion of our business.
Additional Risks Related to our Business, Industry and an Investment in our Common Stock
For a discussion of additional risks associated with our business, our industry and an investment in our common stock, see the section titled
Risk Factors in our most recent Annual Report on Form
10-K,
as filed with the SEC on March 23, 2018, as well as the disclosures contained in documents filed by us thereafter pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, which are incorporated by reference into, and deemed to be a part of, this prospectus.
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Authorized Capitalization
We have 252,000,000 shares of capital stock authorized under our certificate of incorporation, consisting of 250,000,000 shares of common stock
and 2,000,000 shares of preferred stock, of which 706,829 have been designated as Series A Convertible Preferred Stock, par value $0.001 per share, or Series A Preferred Stock, 10,000 have been designated as Series B Convertible Preferred Stock, par
value $0.001 per share, or Series B Preferred Stock, 1,500 have been designated as Series C Convertible Preferred Stock, par value $0.001 per share, or Series C Preferred Stock, and 8,000 have been designated as Series D Convertible
Preferred Stock, par value $0.001 per share, or Series D Preferred Stock. As of December 31, 2017, we had 10,746,594 shares of common stock, 328,925 shares of Series A Preferred Stock, 0 shares of Series B Preferred
Stock, 0 shares of Series C Preferred Stock, and 0 shares of Series D Preferred Stock outstanding. Our authorized shares of common stock and preferred stock are available for issuance without further action by our stockholders,
unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. If the approval of our stockholders is not so required, our board of directors may
determine not to seek stockholder approval.
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On July 18, 2016, we effected a
1-for-15
reverse stock split of our common stock, or the Reverse Stock Split. As a result of the Reverse Stock Split, every fifteen shares of our
pre-Reverse
Stock
Split common stock were combined and reclassified into one share of our common stock. Previously, effective March 11, 2013, we effected a
1-for-12
reverse stock
split of our common stock, or the March 2013 Reverse Stock Split. As a result of the March 2013 Reverse Stock Split, every twelve shares of our
pre-March
2013 Reverse Stock Split common stock were combined and
reclassified into one share of our common stock.
All share and per share data in this prospectus for periods prior to March 11, 2013
have been retroactively adjusted to reflect the
1-12
reverse split of our common stock that was effective on March 11, 2013 and, for periods prior to July 18, 2016, retroactively adjusted to reflect
a
1-for-15
reverse stock split of our common stock that was effective on July 18, 2016.
Common Stock
Holders of our common stock
are entitled to such dividends as may be declared by our board of directors out of funds legally available for such purpose, subject to any preferential dividend rights of any then outstanding preferred stock. The shares of common stock are neither
redeemable nor convertible. Holders of common stock have no preemptive or subscription rights to purchase any of our securities.
Each
holder of our common stock is entitled to one vote for each such share outstanding in the holders name. No holder of common stock is entitled to cumulate votes in voting for directors.
In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive pro rata our assets that
are legally available for distribution, after payments of all debts and other liabilities and subject to the prior rights of any holders of preferred stock then outstanding. All of the outstanding shares of our common stock are fully paid and
non-assessable.
The shares of common stock offered by this prospectus and the shares of common stock underlying the warrants offered by this prospectus will be fully paid and
non-assessable.
Our common stock is listed on the Nasdaq Capital Stock Market under the symbol
SCON. Computershare is the transfer agent and registrar for our common stock. Its address is 250 Royall Street, Canton, MA 02021.
Preferred Stock
Our certificate of
incorporation permits us to issue up to 2,000,000 shares of preferred stock in one or more series and with rights and preferences that may be fixed or designated by our board of directors without any further action by our stockholders. We currently
have 706,829 shares of preferred stock designated as Series A Preferred Stock, 10,000 shares of preferred stock designated as Series B Preferred Stock, 1,500 shares of preferred stock designated as Series C Preferred Stock and 8,000 shares of
preferred stock designated as Series D Preferred Stock, of which, as of December 31, 2017, 328,925 shares of Series A Preferred, 0 shares of Series B Preferred, 0 shares of Series C Preferred, and 0 shares of Series D Preferred were
outstanding, respectively.
Subject to the limitations prescribed in our certificate of incorporation and under Delaware law, our
certificate of incorporation authorizes the board of directors, from time to time by resolution and without further stockholder action, to provide for the issuance of shares of preferred stock, in one or more series, and to fix the designation,
powers, preferences and other rights of the shares and to fix the qualifications, limitations and restrictions thereof. The issuance of preferred stock could adversely affect the rights of holders of our common stock, including with respect to
voting, dividends and liquidation and, by issuing shares of preferred stock with certain voting, conversion and/or redemption rights. Such issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control.
Preferred stock could thus be issued quickly with terms calculated to delay or prevent a change in control of us or to make removal of
management more difficult. Additionally, the issuance of preferred stock may decrease the market price of our common stock. The number of authorized shares of preferred stock may be increased or decreased, but not decreased below the number of
shares then outstanding, by the affirmative vote of the holders of a majority of our common stock without a vote of the holders of preferred stock, or any series of preferred stock, unless a vote of any such holder is required pursuant to the terms
of such series of preferred stock.
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Series A Convertible Preferred Stock
In October 2007, in connection with entering into an amended investment agreement with Hunchun BaoLi Communication Co. Ltd., or BAOLI, our
board of directors authorized the designation and issuance of 706,829 shares of Series A Preferred Stock. The terms of the investment agreement were subsequently amended and, in February 2008, we issued to BAOLI and two related purchasers
(collectively, BAOLI), a total of approximately 17,230 shares of our common stock and 611,523 shares of our Series A Preferred Stock (convertible under certain conditions into approximately 33,974 shares of our common stock).
Subject to the terms and conditions of our Series A Preferred Stock and to customary adjustments to the conversion rate, shares of our Series
A Preferred Stock are convertible into shares of our common stock so long as the number of shares of our common stock beneficially owned by BAOLI following such conversion does not exceed 9.9% of our outstanding common stock. Except for a preference
on liquidation of $0.01 per share, each share of Series A Preferred Stock is the economic equivalent of the ten shares of common stock into which it is convertible. Except as required by law, the Series A Preferred Stock will not have any voting
rights. For a complete description of the terms of the Series A Preferred Stock, please see the certificate of designations, which is incorporated by reference into the registration statement of which this prospectus is a part.
As of December 31, 2017, all of our previously issued Series B, C and D Preferred Stock had been converted into our common stock.
Warrants to Purchase Common Stock
As of
March 15, 2018, we have warrants outstanding representing the right to acquire 9,294,161 shares of our common stock at a weighted average exercise price of $3.12 per share. Of such warrants, an aggregate of 274,492 warrants originally issued in
our August 2013 financing include a price adjustment mechanism whereby the exercise price of such warrants will be automatically reduced, subject to limitations, to the extent we issue shares of our common stock, or equivalents, at a price lower
than the then applicable exercise price of such warrants which is currently $1.14. Accordingly, any offering price of shares of our common stock less than $1.14 will cause the exercise price of the warrants originally issued in our August 2013
financing to be to such price.
As of March 15, 2018, we have
pre-funded
warrants outstanding
representing the right to acquire 391,000 shares of our common stock with an initial exercise price of $0.01 per share. The
pre-funded
warrants may not be exercised by the holder to the extent that the holder,
together with its affiliates, would beneficially own, after such exercise more than 9.99% of the shares of common stock then outstanding (subject to the right of the holder to increase or decrease such beneficial ownership limitation upon not less
than 61 days prior notice provided that such limitation cannot exceed 9.99%).
Anti-Takeover Effects of Certain Provisions of Delaware Law and Our
Charter Documents
The following is a summary of certain provisions of Delaware law, our certificate of incorporation and our bylaws.
This summary does not purport to be complete and is qualified in its entirety by reference to the corporate law of Delaware and our certificate of incorporation and bylaws.
Effect of Delaware Anti-Takeover Statute.
We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover
law. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder,
unless:
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prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;
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upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of shares of voting stock outstanding (but not the voting stock owned by the interested stockholder) those shares owned by persons who are directors and officers and by
excluding employee stock plans in which employee participants do not have the right to determine whether shares held subject to the plan will be tendered in a tender or exchange offer; or
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on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66
2
/
3
% of the outstanding voting stock that is not owned by the interested stockholder.
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Section 203 defines business combination to include the following:
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any merger or consolidation involving the corporation and the interested stockholder;
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any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
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subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;
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any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or
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the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.
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In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding
voting stock of the corporation, or who beneficially owns 15% or more of the outstanding voting stock of the corporation at any time within a three-year period immediately prior to the date of determining whether such person is an interested
stockholder, and any entity or person affiliated with or controlling or controlled by any of these entities or persons.
Our Charter
Documents.
Our charter documents include provisions that may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal
that might result in the payment of a premium over the market price for the shares held by our stockholders. Certain of these provisions are summarized in the following paragraphs.
Classified Board of Directors.
Pursuant to our certificate of incorporation, the number of directors is fixed by our board of
directors. Our directors are divided into three classes, each class to serve a three-year term and to consist as nearly as possible of
one-third
of the total number of directors. Pursuant to our bylaws,
directors elected by stockholders at an annual meeting of stockholders will be elected by a plurality of all votes cast.
No
Stockholder Action by Written Consent
. Our bylaws provide that a special meeting of stockholders may be called only by the chairman of the board, a majority of the entire board of directors or the president. Stockholders are not permitted to
call, or to require that the board of directors call, a special meeting of stockholders. Moreover, the business permitted to be conducted at any special meeting of stockholders is limited to the business brought before the meeting pursuant to the
notice of the meeting given. In addition, our certificate of incorporation provides that any action taken by our stockholders must be effected at an annual or special meeting of stockholders and may not be taken by written consent instead of a
meeting. Our bylaws establish an advance notice procedure for stockholders to nominate candidates for election as directors or to bring other business before meetings of our stockholders.
Change in Control Agreements.
A number of our executives have agreements with us that entitle them to payments in certain circumstances
following a change in control.
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