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ITEM 1.
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LEGAL PROCEEDINGS
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Staktek Group, L.P. v. Kentron Technologies,
Inc. and Chris Karabatsos
We filed an action against Kentron Technologies, Inc. and Chris Karabatsos, an individual, seeking
damages and injunctive relief relating to the defendants’ false and disparaging statements regarding Staktek and our ArctiCore technologies that we are proposing to the JEDEC Solid State Technology Association for
possible adoption as a standard. In particular, we have alleged that the defendants’ actions constitute unfair competition under the Lanham Act, intentional interference with prospective business relations, defamation,
business disparagement and have caused actionable injury to our business reputation. We filed the first action on August 1, 2006 in the U.S. District Court for the Western District of Texas, Austin Division, which was dismissed
on March 7, 2007 for lack of personal jurisdiction. On March 8, 2007, we filed a similar action in the U.S. District Court for the District of Massachusetts, Boston Division. On April 19, 2007, the defendants filed a motion for a
more definitive statement as well as a motion to strike, which motions the judge denied on June 22, 2007. On July 11, 2007, the defendants filed their answer and a counterclaim, in which they made claims of unfair methods of
competition and unfair, deceptive acts by Staktek, in violation of the laws of the Commonwealth of Massachusetts. On July 12, 2007, the defendants filed a motion to dismiss our Lanham Act claims, and we also filed a motion to dismiss
their counterclaims. The judge denied both of these motions. We also filed a motion to compel discovery, which the judge granted on October 24, 2007. No further action has been taken. While we intend to vigorously prosecute these
claims, as well as vigorously defend against the defendants’ counterclaim, there can be no guarantee that we will ultimately prevail or that the court will award the remedies we are seeking.
As of September 30, 2007, we were not involved in any other material legal proceedings.
From time to time, we may be subject to legal proceedings, claims in the ordinary course of business, claims in foreign jurisdictions where we operate,
and non-contractual customer claims or requested concessions we may agree to in the interest of maintaining business relationships.
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.
We may not be able to increase our revenue and our operating results are likely to fluctuate, which may cause the trading price of our common stock
to decline.
We may not be able to increase revenue or generate gross profits or net income. Our revenue and operating results are
likely to fluctuate, causing our stock price to fluctuate. If our revenue or operating results fall below the expectations of market analysts or investors, 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 Quarterly Report on
Form 10-Q and the following additional factors:
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the timing and volume of orders received from our customers;
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market demand for, and changes in the average sales prices of, our services and technologies;
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the rate of qualification and adoption of our services and technologies including, but not limited to, the transition from DDR-1 to DDR-2 technologies, as well as
from DDR-2 to DDR-3 technologies, and from leaded to non-leaded packages;
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a shortage of memory chips, which may negatively impact our ability to fulfill customer orders;
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the impact of the ongoing transition from current-generation products to next-generation products, with each transition resulting in lower unit volumes of memory
products to produce the same amount of memory capacity. This is partially offset by increasing demand for memory capacity with each new generation of systems;
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the increasing adoption of planar and dual-die solutions by OEMs as well as memory suppliers, instead of adopting our solutions;
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fluctuating demand for, and life cycles of, the products and systems that incorporate our solutions;
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changes in OEMs’ memory and DIMM buying processes;
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changes in the level of our operating expenses;
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our ability to develop new products that are successfully qualified and utilized by customers;
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our ability to manufacture and ship products within a particular reporting period;
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deferrals or cancellations of customer orders in anticipation of the development and commercialization of new technologies or for other reasons;
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our ability to enter into new licensing arrangements, and the terms and conditions for payment to us of license fees under those arrangements;
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the timing and compliance with license or service agreements and the terms and conditions for payment to us of license or service fees under these agreements;
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changes in our royalties caused by changes in demand for products incorporating semiconductors that use our licensed technology;
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delays in our introduction of new technologies or market acceptance of these new technologies through new license agreements;
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changes in our services and technologies and revenue mix;
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seasonal purchasing patterns for our products with lower revenue generally occurring in the first and second quarters;
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the timing of the introduction by others of competing, replacement or substitute technologies or manufacturing services;
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our ability, or the ability of our customers, to procure or manufacture memory and other required components or fluctuations in the cost of such components;
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our ability to enforce our intellectual property rights or to defend claims that we infringe the intellectual property rights of others, and the significant costs
to us of related litigation;
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new packaging types that we do not support;
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cyclical fluctuations in semiconductor markets generally; and
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general economic conditions that may affect end-user demand for products that use our technologies.
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Fluctuations in the demand for our solutions occur as the price of next-generation monolithic memory chips declines and as OEMs respond to demand for
their products, which will contribute to volatility in our revenue and operating results and may adversely impact our stock price. The rate at which OEMs adopt our memory products using a particular generation of high-density memory chips, if they
adopt our memory products at all, may affect our revenue and operating results. In the past, it has taken several quarters for new, higher-density memory chips to achieve market acceptance. Once accepted by the market, demand for our memory products
using these chips can accelerate rapidly and then level off such that rapid growth in sales of these products is not indicative of continued future growth. Likewise, demand for legacy memory chips can quickly decline when a new, higher-density
memory chip is introduced and receives market acceptance. Sales of our products and product lines toward the end of a product’s market life may fluctuate significantly, and the precise timing of these fluctuations is difficult, if not
impossible, to predict.
In other cases, revenue may decline as customers anticipate making new product purchases. The need for continued
significant expenditures for capital equipment purchases, research and development and ongoing customer service and support, among other factors, makes it difficult for us to reduce our operating expenses in any particular period if our expectations
for revenue for that period are not met. Due to the various factors mentioned above, the results of any prior quarterly or annual periods should not be relied upon as an indication of our future operating performance.
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 and are substantially dependent upon customer orders received and fulfilled in that quarter.
We do not have long-term purchase agreements with customers. Our customers generally place purchase orders for deliveries no more than three months in advance and sometimes no more than a day in advance. These
purchase orders generally have no cancellation or rescheduling penalty provisions. Therefore, cancellations, reductions or delays of orders from any significant customer could have a material adverse effect on our business, financial condition and
results of operations.
Our business model is one in which there typically is not a backlog of unfilled orders. Rather, a majority of our
revenue and earnings in any quarter depends upon customer orders for our products that we receive and fulfill in that quarter. 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 depend on a limited number of customers for a substantial portion of our revenue, and the loss of,
or a significant reduction in orders from, any key customer could significantly reduce our revenue.
The loss of any of our key
customers, or a significant reduction in sales to any one of them, would significantly reduce our revenue and adversely affect our business. Our five largest customers accounted for 80% of our total revenue during the nine months ended
September 30, 2007, 89% of our total revenue in 2006, and 86% of our total revenue in 2005. In particular, Micron Technology (Micron) and SMART accounted for 39%, and 19%, respectively, of our total revenue in the first nine months of 2007.
Most of the markets for our current services and technologies are dominated by a small number of potential customers. Therefore, our operating results in the foreseeable future will continue to depend on our ability to effect sales to these
customers, as well as the ability of these customers to sell products that incorporate memory utilizing our technologies. In the future, these customers may decide not to specify products that incorporate our technologies for use in their systems,
purchase fewer memory products than they did in the past or alter their purchasing patterns. In addition, we may be more likely to make concessions to these customers regarding potential returns, repairs, or other issues than we would make if they
were not significant customers.
Some of our customers have sought or are seeking to design alternative solutions, either internally or
through third parties, to address their need for greater memory capacity. The success of these efforts could have an adverse effect on the prices we are able to charge our customers and the volume of units that incorporate our solutions, which would
negatively affect our revenue and operating results.
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Consolidation in some of our customers’ industries may result in increased customer concentration
and the potential loss of customers. From time to time, the composition of our major customer base has changed from quarter to quarter as the market demand for our customers’ products has changed, and we expect this variability to continue in
the future. We expect that sales of our products to a limited number of customers will continue to represent a majority of our revenue in the foreseeable future. The loss of, or a significant reduction in purchases by, any of our major customers
could harm our business, financial condition and results of operations.
A natural disaster, epidemic, labor strike, war or political
unrest where our customers’ facilities are located could reduce our sales to such customers. For example, Samsung is based in South Korea. North Korea’s decision to withdraw from the Nuclear Non-Proliferation Treaty, as well as more recent
related geopolitical developments, have created unrest. This unrest could create economic uncertainty or instability, escalate into war or otherwise adversely affect South Korea, including Samsung, which in turn, could have a material and adverse
effect on our business, financial condition and results of operations.
The price of DRAM is volatile, and excess inventory of DRAM,
other components and finished products could adversely affect our gross margin.
Given our acquisition of Southland, we purchase
more DRAM for the products we manufacture than we historically have purchased prior to this acquisition. The price of DRAM is subject to rapid fluctuation and variability. The prices of our products are adjusted periodically based largely
on the market price of DRAM. Once our prices with a customer are negotiated, we are generally unable to revise pricing with that customer until our next regularly scheduled price adjustment. Consequently, we are exposed to the risks
associated with the volatility of the price of DRAM during that period. If the market price for DRAM increases, we generally cannot pass this price increase on to our customer for products purchased under an existing purchase order. As a
result, our cost of sales could increase and our gross margin could decrease. Alternatively, if there is a decline in the price of DRAM, we will need to reduce our selling prices for subsequent purchase orders, which may result in a decline in
our expected net sales.
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 or license our memory solutions or to compete successfully in our markets and harm our operating results.
Our solutions rely on our proprietary rights, and we believe that the strength of our intellectual property rights is, and will continue to be, critical
to the success of our business. If any of our key patents or other intellectual property rights are invalidated or deemed unenforceable, or if a court limits the scope of the claims in any of our key patents or other intellectual property rights,
the likelihood that companies will continue to purchase or license our memory solutions could be significantly reduced. If we fail to obtain patents or if the patents issued to us do not cover all of the claims we asserted in our patent
applications, others could use portions of our intellectual property without the payment of license fees and royalties.
The resulting loss in revenue 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:
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prevent challenges to, or the invalidation or circumvention of, our existing patents;
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result in patents that lead to commercially viable products or provide competitive advantages for our products;
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prevent our competitors from independently developing similar products, duplicating our products or designing around the patents owned by us;
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prevent third-party patents from having an adverse effect on our ability to do business;
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provide adequate protection for our intellectual property rights;
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prevent disputes with third parties regarding ownership of our intellectual property rights;
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prevent disclosure of our trade secrets and know-how to third parties or into the public domain; or
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result in valid patents, including international patents, from any of our pending applications.
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A court invalidation or limitation of our key patents could significantly harm our business, financial condition and results of operations.
Our patent portfolio contains some patents that are particularly significant to our ongoing revenue and business. If any of these
key patents is invalidated, or if a court limits the scope of the claims in any of these key patents, the likelihood that companies will take new licenses and that current licensees will continue to agree to pay under their existing licenses could
be significantly reduced. The resulting loss in license fees and royalties could significantly harm our business, financial condition and results of operations.
Our revenue may suffer if we cannot continue to license or enforce our intellectual property rights or if third parties assert that we violate their intellectual property rights.
We rely upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and agreements with our
employees, customers, suppliers and other parties, to establish and maintain our intellectual property rights in our technology. However, any of our direct or indirect intellectual property rights could be challenged, invalidated or circumvented.
Further, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States. Therefore, in certain jurisdictions we may be unable to protect our technology adequately against unauthorized
third-party use, which could adversely affect our business. Third parties also may claim that we or our customers are infringing upon their intellectual property rights. Even if we believe that the claims are without merit, the claims can be time
consuming and costly to defend and divert management’s attention and resources away from our business. Claims of intellectual property infringement also might require us to enter into costly settlement or license agreements or pay costly damage
awards. Some of our license agreements provide limited indemnities and we may agree to indemnify others in the future. Our indemnification obligations could result in substantial expenses. In addition to the time and expense required for us to
indemnify our licensees, a licensee’s development, marketing and sales of licensed semiconductors could be severely disrupted or shut down as a result of litigation, which in turn could severely hamper our business, financial condition and
results of operations. If we cannot or do not license the infringed technology at all or on reasonable terms or substitute similar technology from another source, our business could suffer.
We are subject to risks relating to product concentration and lack of revenue diversification.
To date, we have derived nearly all of our revenue from sales or licenses of our Stakpak solutions, and we expect these solutions to continue to account
for a large portion of our total revenue in the near term. Continued market acceptance of these solutions is critical to our future success. As a result, our business, financial condition and results of operations could be adversely affected by:
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any decline in demand for our Stakpak solutions;
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failure of our services and technologies to achieve continued market acceptance;
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the introduction of services and technologies that can serve as a substitute for, replacement of or represent an improvement over, our services and technologies
such as planar solutions for small packages or dual-die solutions that do not require stacking;
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technological innovations that we are unable to address with our services and technologies; and
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any inability by us to release new products or enhanced versions of our existing services and technologies on a timely basis or the failure of our products to
achieve market acceptance.
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The average selling prices of our services and technologies could decrease rapidly,
which may negatively impact our revenue and gross margins.
We may experience substantial period-to-period fluctuations in our
future revenue and operating results due to a decline in the average selling prices for our services and technologies. From time to time, we reduce the average unit price of our services and technologies in anticipation of future competitive pricing
pressures, declining memory chip prices, introductions of new services and technologies by us or our memory suppliers and other factors. The high-density memory market is extremely cost sensitive due to potentially high-order volumes combined with
memory buyers’ expectations for aggressive price reductions over time. As a consequence, the average selling prices of monolithic memory chips historically have declined as new product generations are commercialized. We expect that these
factors will continue to create downward pressure on our average selling prices, which may, in turn, negatively impact our revenue and gross margins, particularly if we are unable to offset reductions in average selling prices by increasing our unit
volumes or reducing our manufacturing costs. To maintain our gross margins, we will need to develop and introduce new services and technologies on a timely basis and continually reduce our costs. Our failure to do so could cause our revenue and
gross margins to decline.
We are a relatively 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. In addition, some of our current and potential competitors have established relationships with the decision makers at our current or potential customers. These
competitors may be able to leverage their existing relationships to discourage their customers from purchasing products from us or persuade them to replace our products with their products.
In addition, some of our significant customers are competitors of ours, and may have the ability to manufacture competitive products at lower costs. Our
current or potential competitors may also offer bundled arrangements offering a more complete or cost-effective product, despite the technical merits or advantages of our services or technologies. We also face competition from current and
prospective customers that continually evaluate our capabilities against the merits of manufacturing products internally. Competition may also arise due to the development of cooperative relationships among our current and potential competitors or
third parties to increase the ability of their products to address the needs of our prospective customers. In addition, we expect to face competition from existing competitors and new and emerging companies that may enter our existing or future
markets with similar or alternative products, which may be less costly or provide additional features. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share.
We have many competitors who have developed competing technologies. For example, planar solutions allow additional memory devices to be
directly attached on the printed circuit board without the need for stacking. Some of the major OEMs and memory suppliers currently are using planar solutions and we expect them to continue to utilize planar solutions in the near future in legacy
DDR technologies, as well as in next-generation DDR-2 and DDR-3 technologies with the migration to smaller footprint packages.
In
addition, memory packages have been developed that place multiple memory chips into a single package that allows these memory chips to fit in the same area as a single Stakpak. Other competitors utilize competing technologies that stack standard
memory chips. We also could face competition from many new technologies, such as 3D memory cells, stacked wafers, stacked die and module innovations or module stacking. These and other new technologies could change the demand for or performance
requirements of memory products, and could provide the market with cost-effective memory solutions that outperform our Stakpak solutions.
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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 services 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 our services and technologies are used in defective products or include defective parts, we may be subject to product liability or other claims.
If we manufacture memory products that are defective, used in defective or malfunctioning products 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 licensees and customers.
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. For example, we acquired Southland Micro Systems, Inc., a provider of memory products and services for leading OEMs,
on August 31, 2007. Acquisitions entail a number of risks that could materially and adversely affect our business and operating results, including:
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difficulties in integrating the operations, technologies or products of the acquired companies;
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the risk of diverting management’s time and attention from the normal daily operations of the business;
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insufficient revenue to offset increased expenses associated with acquisitions;
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difficulties in retaining business relationships with suppliers and customers of the acquired companies;
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risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
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the potential loss of key employees of the acquired company; and
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the potential need to amortize intangible assets.
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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.
Our limited experience in acquiring other businesses, product lines and technologies
may make it difficult for us to overcome problems we may encounter in connection with any acquisitions we undertake.
We
continually evaluate and explore strategic opportunities as they arise, including business combinations, strategic relationships, capital investments and the purchase, licensing or sale of assets. Our experience in acquiring other businesses,
product lines and technologies is very limited. The attention of our small management team may be diverted from our core business if we undertake future acquisitions. Future acquisitions may also require us to incur debt or issue equity securities
that may result in dilution of existing stockholders. Potential future acquisitions also involve numerous risks, including, among others:
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problems and delays in successfully assimilating and integrating the purchased operations, personnel, technologies, products and information systems;
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unanticipated costs and expenditures associated with the acquisition, including any need to infuse significant capital into the acquired operations;
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adverse effects on existing business relationships with suppliers, customers and strategic partners;
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risks associated with entering markets and foreign countries in which we have no or limited prior experience;
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contractual, intellectual property or employment issues;
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potential loss of key employees of purchased organizations; and
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potential litigation arising from the acquired company’s operations before the acquisition.
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We may make acquisitions that are dilutive to existing shareholders, result in unanticipated accounting charges or otherwise adversely affect our
results of operations.
We intend to 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.
We expect a material portion of our future revenue to be derived from license royalties, which is inherently risky.
Because we expect a material portion of our future revenue to be derived from license royalties, our future success depends on:
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our ability to secure broad patent coverage for our new technologies and enter into license agreements with potential licensees; and
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the ability of our licensees to develop and commercialize successful products that incorporate our technologies.
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Although we have engaged in discussions with potential licensees for our Stakpak technologies, we historically have not devoted significant resources to
licensing our technologies and currently have only five license arrangements. We face risks inherent in a royalty-based business model, many of which are outside of our control, such as the following:
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the rate of adoption of our technologies by, and the incorporation of our technologies into products of, semiconductor manufacturers and OEMs;
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the extent to which large equipment vendors and materials providers develop and supply tools and materials to enable manufacturing using our technologies on a
cost-effective basis and in quantities sufficient to enable volume manufacturing;
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the willingness of our licensees and others to make investments in the manufacturing process that supports our licensed technologies, and the amount and timing of
those investments;
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our licensees’ ability to design and assemble memory modules and other system parts that utilize our technologies in components qualified for use by OEMs;
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any failure by our licensees to abide by compliance and quality control guidelines with respect to our proprietary rights;
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actions by our licensees that could severely harm our ability to use our proprietary rights;
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the pricing and demand for products incorporating memory modules and other system parts that utilize our licensed technologies;
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our ability to structure, negotiate and enforce agreements for the determination and payment of royalties;
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the cyclicality of supply and demand for products using our licensed technologies; and
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competition we may face with respect to our licensees competing with our services business.
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It is difficult to predict when we will enter into additional license agreements, if at all. The time it takes to establish a new licensing arrangement
can be lengthy. We may also incur delays or deferrals in the execution of license agreements as we develop new technologies. The timing of our receipt of royalty payments and the timing of how we recognize license revenue under license agreements
may fluctuate and significantly impact our quarterly or annual operating results. Because we may recognize a significant portion of license fee revenue in the quarter that the license is signed, the timing of signing license agreements may
significantly impact our quarterly or annual operating results. Under our typical license agreements, we also receive ongoing royalty payments, and these may fluctuate significantly from period to period based on sales of products incorporating our
licensed technologies.
It is difficult for us to verify royalty amounts owed to us under our license agreements, and this may cause
us to lose revenue.
The standard terms of our license agreements require our licensees to document the manufacture and sale of
products that incorporate our technologies and report this data to us on a periodic basis. Although our standard license terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time
consuming and potentially detrimental to our ongoing business relationship with our licensees. As a result, to date, we have primarily relied on the accuracy of the reports themselves without independently verifying the information in them. Our
failure to audit our licensees’ books and records may result in us receiving less royalty revenue than we are entitled to under the terms of our license agreements.
Because our licensing cycle is lengthy and costly, it is difficult to predict future revenue, which may cause us to miss analysts’ estimates and may result in our stock price declining.
Pursuing and entering into new license agreements generally requires significant marketing and sales efforts. The length of time it takes to establish
a new licensing relationship can range from six to 12 months or longer. Because our licensing cycle is a lengthy process, the accurate prediction of future revenue from new licenses is difficult.
In addition, engineering services are dependent upon the varying level of assistance desired by licensees and, therefore, revenue from these services is
also difficult to predict as it is recognized in the period in which we render service. There can be no assurance that we can accurately estimate the amount of resources required to complete projects, or that we will have, or be able to expend,
sufficient resources required to complete a project. Furthermore, there can be no assurance that the product development schedule for these projects will not be changed or delayed. All of these factors make it difficult to predict future licensing
revenue that may result in us missing analysts’ estimates and may cause our stock price to decline.
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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.
Our reliance on
our memory manufacturer customers for the memory chips used in products that incorporate our technologies subjects us to the risk of a shortage of these chips, adversely impacting our ability to fulfill orders from other customers, risks of natural
disasters and other factors that could cause disruptions in the supply of memory chips.
Our ability to fulfill customer orders is
dependent on a sufficient supply of memory chips to which we apply our manufacturing services. Historically, our customers have shipped on consignment their memory chips to be stacked, which we stack and then return to them. We have no memory supply
contracts under which we are currently operating. In acquiring memory chips, supply options are very limited because of the small number of memory manufacturers. Our dependence on our customers’ provision of memory chips to us on a just-in-time
consignment basis, rather than through guaranteed supply contracts, subjects our business to risks associated with unforeseen disruptions in the industry availability of memory chips. In the past, there have been shortages of DRAM chips available in
the market. These shortages negatively impacted our ability to fulfill customer orders, which resulted in a decrease in shipments in these quarters. Any future shortage could result in a similar decrease in shipments, which would adversely impact
our financial condition and results of operations.
In addition, natural disasters or other factors could cause delays or reductions in
product shipments that could negatively affect our revenue, financial condition and results of operations. Moreover, since the majority of memory chips are manufactured in the Pacific Rim region, we believe that the risk of exposure of memory
suppliers to earthquakes, typhoons, political unrest, terrorist activity, infectious diseases or other similar events is of particular concern. Any unexpected interruption in the manufacture of other key electronic components used in association
with products that incorporate our technologies could disrupt production of devices that use our services and technologies, thereby adversely affecting either our ability to deliver products to our customers or the customers’ demand for our
services and technologies.
We have an indefinite-lived intangible asset and other intangible assets that may become impaired, which
could significantly affect our results of operations in the period recognized.
In accordance with generally accepted accounting
principles, we evaluate the recoverability of our indefinite-lived intangible asset (goodwill) on an annual basis and periodically evaluate the recoverability of all of our intangible assets when indicators of impairment
exist. The following factors may result in an impairment of goodwill or other intangible assets: significant negative industry or economic trends; disruptions to our business; declines in revenue or market capitalization; or other
factors may result in an impairment of goodwill or other intangible assets. Future impairment charges could significantly affect our results of operations in the periods recognized.
If we are unable to manufacture our products efficiently or we experience credit losses or other collections issues, our business, financial
condition and results of operations could suffer.
We are continuously modifying our manufacturing processes in an effort to
maintain satisfactory manufacturing yields and product performance, lower our costs and reduce the time it takes to design products based on our technologies. In addition, new manufacturing processes are required as we ramp high-volume production of
new technologies. We face increased risks with these new processes and we incur significant start-up costs associated with implementing new manufacturing technologies, methods and processes and purchasing new equipment, which could impact our
gross margins. We expect to experience manufacturing delays and inefficiencies as we develop or refine new manufacturing technologies and methods, implement them in volume production and qualify them with customers, which could cause our operating
results to decline. As we manufacture more complex products, such as our High Performance Stakpak, ArctiCore and future products, the risk of encountering delays or difficulties increases.
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In addition, if demand for our products increases significantly, we will need to expand our operations to
manufacture sufficient quantities of products without increasing our production times or our unit costs. As a result of such expansion, we could be required to purchase new equipment, upgrade existing equipment, develop and implement new
manufacturing processes and hire additional personnel. Further, new or expanded manufacturing facilities could be subject to qualification by our customers. We cannot be certain that we will be able to add required manufacturing capacity or that we
will be able to maintain control over product quality, delivery schedules, manufacturing yields and costs as we increase our output. Any difficulties in expanding our manufacturing operations could cause product delivery delays and lost sales.
If demand for our products decreases, we could have excess manufacturing capacity. The fixed costs associated with excess manufacturing
capacity could cause our operating results to decline. If we are unable to achieve further manufacturing efficiencies and cost reductions, particularly if we are experiencing pricing pressures in the marketplace, our financial condition and results
of operations could suffer.
We have not historically recorded a bad debt allowance or established reserves for our accounts receivable
because we have not had significant credit losses or other collections issues during the periods for which financial information is presented. 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. Furthermore, should we face any collections issues in the future, it could become necessary to begin recording a bad debt allowance, which could negatively impact our
results of operations.
If we are unable to develop new and enhanced solutions that achieve market acceptance in a timely manner, our
financial condition, results of operations and competitive position could be harmed.
Our future success will be based in large
part on our ability to reduce our dependence on our current Performance Stakpak solution for the majority of our revenue by increasing revenue associated with our other solutions, such as High Performance Stakpak, ArctiCore and other memory modules,
and by developing other 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:
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identify and adjust to changing requirements of customers within the memory and semiconductor markets generally;
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identify and adapt to emerging technological trends in our target markets;
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maintain effective marketing strategies;
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timely design and introduce cost-effective, innovative and performance-enhancing features that differentiate our services and technologies from those of our
competitors;
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timely qualify and certify our technologies for use in our customers’ products; and
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successfully develop our relationships with existing and potential customers, OEMs and supplier and channel partners.
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Our research and development efforts are focused primarily on furthering the technologies related to our non-leaded solutions, ArctiCore and other new
product initiatives. If the development of these technologies is delayed or abandoned, or if these new technologies fail to achieve market acceptance, our growth prospects, financial condition, results of operations and competitive position could be
adversely affected. Furthermore, if markets for these new technologies develop later than we anticipate, or do not develop at all, demand for our solutions that are currently in development would suffer, resulting in lower sales of these products
than we currently anticipate.
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If we do not create and implement new designs to expand our licensable technology portfolio, our
competitive position could be harmed or our financial condition and results of operations adversely affected.
We expect in the
future to derive a significant portion of our revenue from licenses and royalties from a relatively small number of key technologies. To remain competitive, we must introduce new technologies or designs in a timely manner and the market must adopt
them. Developments in these key technologies are inherently complex, and require long development cycles and a substantial investment before we can determine their commercial viability. We may not be able to develop and market new technologies in a
timely or commercially acceptable fashion. Moreover, our currently issued U.S. patents expire at various times from 2010 through 2022. We need to develop and patent successful innovations before our current patents expire.
We also may attempt to expand our licensable technology portfolio and technical expertise by acquiring technologies or developing strategic relationships
with others. These strategic relationships may include the right for us to sublicense technologies to others. However, we may not be able to acquire or obtain rights to licensable technologies in a timely manner or upon commercially reasonable
terms. Moreover, our research and development efforts, and acquisitions and strategic relationships, may be futile if we do not accurately predict the future packaging needs of the semiconductor and consumer electronics industries. Our failure to
develop or acquire new technologies could significantly harm our business, financial condition, and results of operations.
Failure
by our licensees to introduce products using our technologies, as well as our licensees’ pricing policies, could limit our royalty revenue growth.
Because we expect a significant portion of our future revenue to be derived from royalties on memory products that use our licensed technology, our future success depends upon our licensees developing and introducing
commercially successful products, as well as charging competitive prices for these products. Any of the following factors could limit our royalty revenue growth:
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the willingness and ability of materials and equipment suppliers to produce materials and equipment that support our licensed technologies, in a quantity sufficient
to enable volume manufacturing;
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the ability of our licensees to purchase such materials and equipment on a cost-effective and timely basis;
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the willingness of our licensees and others to make investments in the manufacturing processes that support our licensed technologies, and the amount and timing of
those investments;
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our licensees’ ability to design and assemble packages incorporating our technologies that are acceptable to their customers; and
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the willingness of our licensees to set competitive prices so that products using our intellectual properties sell in significant volume.
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Products that incorporate our technologies generally have long sales and implementation periods, and our customers
require that our technologies undergo a lengthy and expensive qualification process without any assurance of revenue.
Products
that incorporate our technologies are complex and are typically intended for use in applications that may be critical to the systems being developed by our customers. Prospective customers generally must make a significant commitment of resources to
test and evaluate our technologies and to integrate memory modules and other system parts into larger systems. As a result, our sales process is often subject to delays associated with lengthy approval processes that typically accompany the design,
testing and adoption of new, technologically complex products. This may delay the time in which we recognize revenue and result in our investing significant resources well in advance of orders for our products.
Prior to incorporating memory products utilizing our technologies, our customers require our processes and technologies to undergo an extensive
qualification process, which involves testing products utilizing our technologies, as well as rigorous reliability testing. This qualification process may continue for six months or
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longer. However, qualification by a customer does not ensure any sales to that customer. Even after successful qualification and sales to a customer of
products incorporating our technologies, changes in our technologies may require a new qualification process, which may result in additional delays. After our products are qualified, it can take an additional six months or more before the customer
commences production of components or devices that incorporate our products. Despite these uncertainties, we devote substantial resources, including design, engineering, sales, marketing and management efforts, toward qualifying our products with
customers in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, such failure or delay would preclude or delay sales of such products to the customer, which may impede our growth and cause our
business to suffer.
If the supply of materials used to manufacture our products is interrupted, or our manufacturing turnaround
times are extended, our financial condition and results of operations could be adversely affected.
In order to manufacture our
solutions, we require raw materials and components such as but not limited to DRAM, flex circuits, printed circuit boards, aluminum cores, resistors, capacitors, advanced memory buffers, epoxy adhesive, solder, nitrogen, ink marking supplies and
tape and reel supplies. We typically procure these materials from limited sources to take advantage of volume pricing discounts. Shortages in these materials may occur from time to time. In addition to shortages, we could experience quality problems
with these materials, which could result in returning them to our suppliers. These shortages and returns could extend the turnaround times of our manufacturing services. 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.
A significant portion
of our manufacturing operations is located in Reynosa, Mexico; our failure to continue to manage these operations, as well as issues associated with the location of this facility, could materially and adversely affect our business.
We began manufacturing operations in our Mexico facility in the first quarter of 2003, and currently manufacture virtually all of
our Stakpak units in Mexico. The relocation of our operations has placed, and any future growth of our operations may place, a significant strain on our management personnel, systems and resources. We may need to implement a variety of new and
upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. We also expect that we will need to continue to expand, train, manage and motivate our workforce.
All of these endeavors will require substantial management time and attention, and we anticipate that we will require additional management personnel and internal processes to manage these efforts. If we are unable to effectively manage our
expanding operations, our business could be materially and adversely affected.
In addition, this facility is exposed to certain risks as a
result of its location, including:
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changes in international trade laws, such as the North American Free Trade Agreement, or other governmental regulations or tariffs affecting our import and export
activities;
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changes in labor laws and regulations affecting our ability to hire and retain employees;
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fluctuations of foreign currency and exchange controls;
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increases in Mexican tax rates;
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security measures at the United States-Mexico border;
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potential political instability and changes in the Mexican government;
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relations between the governments of the United States and Mexico;
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potential kidnappings of employees;
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natural disasters, such as flooding and other acts of nature;
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strikes by our union employees;
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issues relating to drug-trafficking activities in Mexico; and
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general economic conditions in Mexico.
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Any of these risks could interfere with the operation of this facility or restrict or delay our ability to move components, finished products or manufacturing equipment across the United States–Mexico border and result in reduced
production, increased costs, or both. In the event that this facility’s production is reduced or we encounter disruptions or delays in moving products across the border, we could fail to ship products on schedule and could face a reduction in
future orders from dissatisfied customers. If our costs to operate this facility increase, our gross margins would decrease. Reduced shipments and margins would have an adverse effect on our business, financial condition and results of operations.
We operate our manufacturing facility in Mexico as a Maquiladora and any loss of this status or change in the laws affecting
Maquiladoras, or disputes with the labor union in Mexico, could materially harm our business, financial condition and results of operations.
We currently manufacture virtually all of our Stakpak products at our manufacturing facility in Reynosa, Mexico. This facility is authorized to operate as a Maquiladora by the Ministry of Economy of Mexico. Mexico has
enacted this legislation to promote the use of such manufacturing operations by foreign companies, and continuation of these operations depends upon, among other factors, compliance with applicable laws and regulations of the United States and
Mexico. Maquiladora status allows us to import items into Mexico duty-free, provided that such items, after processing, are re-exported from Mexico within 18 months. Maquiladora status is subject to various restrictions and requirements, including:
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compliance with the terms of the Maquiladora authorization program;
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proper utilization of imported materials;
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hiring and training of Mexican personnel;
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compliance with tax, labor, exchange control and notice provisions and regulations, both in the United States and in Mexico; and
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compliance with local and national constraints.
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Because assembly operations in Mexico continue to be less expensive than comparable operations in the United States, in recent years many companies have established Maquiladora operations in the Reynosa area to take
advantage of lower labor costs. Increasing demand for labor, particularly skilled labor and professionals, from new and existing Maquiladora operations could in the future result in increased labor costs. The loss of our Maquiladora status, changes
in the Maquiladora program, the inability to recruit, hire and retain qualified employees, a significant increase in labor costs, unfavorable exchange rates or interruptions in the trade relations between the United States and Mexico could have a
material adverse effect on our business, financial condition and results of operation.
While we are not party to any collective bargaining
agreements with any of our employees in the United States, as of September 30, 2007, 234, or 75%, of our employees in Mexico were represented by a labor organization that has entered into a labor contract with us. As a result, our Reynosa
operations are subject to union activities, including organized strikes or other work stoppages, and cost factors arising from our negotiations of employment terms with the representatives of this union. To date, we have not experienced any
organized strikes or other work stoppages at our facility in Reynosa.
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We derive a portion of our revenue from our license agreement with Samsung. Royalties paid to us by
Samsung generally have been decreasing over time and they may continue to decline as a result of Samsung not utilizing as much of our stacking technology as it utilized in the past, which could materially harm our business, financial condition and
results of operations.
We receive a portion of our license revenue from our license agreement with Samsung. This agreement
requires that Samsung pay us royalties based on the number of stacked memory products Samsung sells or bundles within its own products. Royalties paid to us by Samsung generally have been decreasing over time and they will continue to decline as a
result of Samsung not utilizing as much of our stacking technology as it has utilized in the past.
As of September 30, 2007, the
remaining residual value of the customer relationship intangible asset associated with this contract was $1.2 million. The value was initially recorded based upon the projected discounted net cash flows attributable to this relationship.
We may have to record an impairment charge for some or all of the value of this asset, depending upon the amount of royalties Samsung pays to us, since unanticipated reductions in the future cash flow from this contract may cause an
impairment. As of September 30, 2007, no impairment had been recorded.
The consumer electronics market is a highly
competitive and volatile market and if we are not successful in this or other new markets, our business, financial condition and results of operations could be adversely affected.
One of our areas of focus is the consumer electronics market, particularly the consumer Flash market. We believe our package-stacking
technologies and manufacturing processes are directly applicable to Flash memory market, but we are a recent entrant to this market, and many of the memory suppliers and memory module makers are increasingly focusing on the consumer Flash
memory market. Further, the consumer market is highly competitive and is characterized by aggressive pricing practices, downward pressure on gross margins, frequent introduction of new products, short product life cycles, evolving industry
standards, continual improvement in product price/performance characteristics, rapid adoption of technological and product advancements by competitors, price sensitivity on the part of consumers, dynamic customer demand patterns, seasonal revenue
trends and a large number of competitors. In addition, the consumer market can be much more volatile than other segments of the memory market place. To be successful, we will need to continually introduce new products and technologies, enhance
existing products in order to remain competitive, and effectively stimulate customer demand for new products and upgraded versions of our existing products. The success of new product introductions is dependent on a number of factors, including
market acceptance; our ability to manage the risks associated with product transitions and production ramp issues; the availability of products in appropriate quantities to meet anticipated demand; and the risk that new products may have quality or
other defects in the early stages of introduction. The gross margins in the consumer business are also lower than the other markets on which we are focused, which may adversely affect our financial performance and could lead to a decreased valuation
of the Company. As a result, we cannot determine in advance the ultimate effect that new products will have on our sales, licensing or results of operations, and, as a result, if we are not successful in this or other new markets, our business,
financial condition and results of operations could be adversely affected.
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” under NASD Marketplace Rule 4350(c)(5), and we are exempt from NASD rules that would
otherwise require that our board of directors consist of a majority of independent directors. As a “controlled company,” we also are exempt from NASD rules that require the compensation of officers and the nomination of company directors
be determined by a committee of independent directors or a majority of independent directors. Our board of directors currently consists of seven directors, of which three qualify as independent directors under NASD rules. 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:
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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;
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any determinations with respect to mergers or other business combinations;
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our acquisition or disposition of assets; and
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our corporate finance activities.
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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.
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.
Our operations could be disrupted by power outages,
political unrest, natural disasters or other disasters.
We operate manufacturing facilities in Irvine, California and Reynosa,
Mexico. These areas are subject to earthquakes, fires, flooding and other natural disasters. Our facility in Reynosa is also subject to an epidemic, political unrest, war, labor strikes or work stoppages. Interruptions in supply or
utilities at these locations would likely result in the disruption of our manufacturing services, cause significant delays in shipments of our products and materially and adversely affect our operating results.
In addition, our disaster recovery plans may not be adequate or effective. We do not carry earthquake insurance. Other insurance that we carry
is limited in the risks covered and the amount of coverage. Our insurance would not be adequate to cover all of our resulting costs, business interruption and lost profits if a natural disaster were to occur. A natural disaster rendering
one of our manufacturing facilities totally or partially unusable, whether or not covered by insurance, would materially and adversely affect our business and financial condition.
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We intend to expand our research and development activities and other operations, and this
expansion may strain our resources and increase our operating expenses.
We intend to increase our research and development
activities and other operations, both in the United States and in Mexico, as we grow our business and expand our technology offerings. We may do so through both internal growth and acquisitions. We expect that this expansion could strain our systems
and operational and financial controls.
Products that incorporate our technologies must conform to industry standards in order to be
widely accepted by OEMs for use in their products.
Our services and technologies are used to create products that comprise only a
part of a larger system. Typically, the components of these systems comply with industry standards in order to operate efficiently together. We depend on companies that provide other components of systems and devices to support prevailing industry
standards. Many of these companies are significantly larger and more influential in affecting industry standards than we are. Some industry standards may not be widely adopted or implemented consistently, and competing standards may emerge that may
be preferred by our customers or end users. If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected, which would harm our business.
Industry standards are continually evolving, and our ability to compete in the future will depend on our ability to identify and ensure
compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by other suppliers. As a result, we could be required to invest significant time and effort and
to incur significant expense to implement new services and technologies to ensure compliance with relevant standards. If our products or those of our customers are not in compliance with prevailing industry standards for a significant period of
time, we may not be able to sell our services and technologies and our financial condition and results of operations would suffer. In addition, if we do not correctly anticipate new technologies and standards, or if the products that we develop
based on these new technologies and standards fail to achieve market acceptance, our competitors may be better able to address market demand than we would and our business, financial condition and results of operations would be adversely affected.
We have been in the process of obtaining adoption of our ArctiCore technologies as a standard in the electronics industry by the JEDEC
Solid State Technology Association (JEDEC). JEDEC policies and procedures require that member companies disclose any intellectual property they own and of which they are aware that may infringe a proposed standard. Kentron Technologies,
Inc. (Kentron) and Chris Karabatsos, a principal of Kentron, have stated that they believe our ArctiCore technologies infringe on a pending patent application they have filed with the United Stated Patent and Trademark Office, which has not been
publicly disclosed, but they have refused to disclose a complete copy of this patent application to either JEDEC or to us. Their allegations cannot be evaluated without disclosure of their pending patent application. Certain members of
JEDEC have expressed concern regarding these allegations, which has resulted in a delay of the standardization of our ArctiCore technologies by JEDEC. In response to their actions, we initiated legal action against Kentron and the
principal, which is more fully described in Part II, Item 1—Legal Proceedings.
We may not be able to adequately address the
issues raised by Kentron and its principal in a timely fashion, we may not succeed in our litigation, and we may be required to obtain a license from Kentron, if a license is available to us on reasonable terms. In addition, there can be no
assurance that we will be able to sell or license any of our ArctiCore technologies even if JEDEC standardizes some or all of them as a standard.
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.
We believe 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.
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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:
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cease selling products that are claimed to be infringing a third party’s intellectual property;
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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;
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redesign those products that are claimed to be infringing a third party’s intellectual property; or
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pursue legal remedies with third parties to enforce our indemnification rights, which may not adequately protect our interests.
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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.
We may be involved in costly legal proceedings involving our contracts, which could include our licensees, potential licenses or strategic partners.
We may become involved in a dispute relating to our contracts, which could include or be with a licensee, potential licensee or strategic partner. Any
such dispute could cause the licensee or strategic partner to cease making royalty or other payments to us and could substantially damage our relationship with the company on both business and technical levels. Any litigation stemming from such a
dispute could be very expensive. Litigation could also severely disrupt or shut down the business operations of our licensees or strategic partners, which in turn would significantly harm our ongoing relations with them and cause us to lose
royalties. Any such litigation could also harm our relationships with other licensees or our ability to gain new customers, which may postpone licensing decisions pending the outcome of the litigation.
Our failure to comply with environmental laws and regulations could subject us to significant fines and liabilities, and new laws and regulations
or changes in regulatory interpretation or enforcement could make compliance more difficult and costly.
We are subject to various
and frequently changing federal, state and local, and foreign governmental laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal
of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. We could incur substantial costs, including clean-up costs, civil or criminal fines or sanctions and third-party claims for property
damage or personal injury, as a result of violations of or liabilities under environmental laws and regulations or non-compliance with the environmental permits required for our facilities. These laws, regulations and permits also could require the
installation of costly pollution control equipment or operational changes to limit pollutant emissions or decrease the likelihood of accidental releases of hazardous substances.
In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination at our
sites or the imposition of new clean-up requirements could require us to curtail our operations, restrict our future expansion, subject us to liability and cause us to incur future costs that would have a negative effect on our financial condition
and results of operations.
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Economic, political and other risks associated with international sales and operations could
adversely affect our revenue.
Since we sell our services and technologies worldwide, our business is subject to risks associated
with doing business internationally. Our revenue originating outside the United States, including license revenue from Samsung and others and services revenue from our United States and Mexico manufacturing facilities derived from foreign customers,
as a percentage of our total revenue, was 17% during the first nine months of 2007, 22% in 2006, and 37% in 2005. International turmoil, exacerbated by the war in Iraq, the escalating tensions in North Korea and violence in the Middle East, have
contributed to an uncertain political and economic climate, both in the United States and globally, which may affect our ability to generate revenue on a predictable basis. In addition, terrorist attacks and the threat of future terrorist attacks
both domestically and internationally have negatively impacted the worldwide economy. As we ship memory units both in the United States and internationally, the threat of future terrorist attacks may adversely affect our business. These conditions
make it difficult for us and for our customers to accurately forecast and plan future business activities and could have a material adverse effect on our business, financial condition and results of operations.
A portion of our revenue is derived from customers based in Asia. The economies of Asia have been highly volatile and recessionary in the past, resulting
in significant fluctuations in local currencies and other instabilities. Some countries in Asia have recently been affected by infectious diseases. These instabilities continue and may occur again in the future. Our exposure to the business risks
presented by the economies of Asia will increase to the extent that we continue to expand our customer base and activities in that region. An outbreak of an infectious disease could result in reduced demand for products incorporating our
technologies, extend the qualification periods for our technologies or otherwise adversely affect our business.
If industry or
securities analysts do not continue to publish reports or research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends on the research and reports that industry and securities analysts publish about us and our business. We do not have any control over these analysts. If one or more of the analysts who cover us
downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our
stock price or trading volume to decline.
Our stock price is likely to be volatile and could drop unexpectedly.
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. In addition, we have an ongoing stock repurchase program, which could further
decrease our liquidity. 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.
If Congress changes the patent laws, we could be adversely impacted.
We rely on the uniform and historically consistent application of United States patent laws and regulations. Congress is currently considering modifying
the U.S. patent laws, and the Patent and Trademark Office is considering modifying certain regulations relating to filing for patent protection. Some of these modifications may not be advantageous for us, and may make it more difficult to obtain
adequate patent protection or to enforce our patents against parties using them without a license or a payment of royalties. These changes could have a negative affect on our licensing program and, therefore, the royalties we would receive.
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Recently enacted and proposed changes in securities laws and regulations have increased our costs.
The Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as new rules and regulations subsequently implemented by the
SEC, have required changes to some of our corporate governance practices. The Sarbanes-Oxley Act also requires the SEC to promulgate additional new rules on a variety of subjects. In addition to final rules and rule proposals already made by the
SEC, the National Association of Securities Dealers has adopted revisions to its requirements for companies, such as us, that propose to have securities listed on the Nasdaq Stock Market. These new rules and regulations have increased our legal and
financial compliance costs, and have made some activities more difficult, time consuming and costly. These new rules and regulations have made it more difficult and more expensive for us to obtain director and officer liability insurance. These new
rules and regulations could also make it more difficult for us to attract and retain qualified members for our board of directors, particularly to serve on our audit committee, as well as qualified executive officers.
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