Back to GetFilings.com
United States
Securities and Exchange Commission
Washington, D.C. 20549
- -------------------------------------------------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities and Exchange
Act of 1934
For the quarterly period ended March 31, 2003
[] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
Commission File Number 000-19828
SpatiaLight, Inc.
(Exact name of registrant as specified in its charter)
New York 16-1363082
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
Five Hamilton Landing, Suite 100, Novato, California 94949
(Address of principal executive offices)
(415) 883-1693
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 26,956,748 shares of common
stock as of May 13, 2003.
SPATIALIGHT, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2003
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets dated
March 31, 2003 and December 31, 2002........................3
Condensed Statements of Operations
for the Three months Ended March 31, 2003 and 2002..........4
Condensed Statements of Stockholders' Deficit
for the Three months Ended March 31, 2003...................5
Condensed Statements of Cash Flows
for the Three months Ended March 31, 2003 and 2002..........6
Notes to Condensed Financial Statements.....................7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............15
Item 3. Quantitative and Qualitative Disclosures About Market Risks.19
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . ..19
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................29
Item 6. Exhibits and Reports on Form 8-K............................30
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
SPATIALIGHT, INC.
BALANCE SHEET
March 31, December 31,
2003 2002
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 10,731 $ 575,663
Inventory 775,829 275,959
Prepaids and other current assets 900,958 565,515
--------------- ------------
Total current assets 1,687,518 1,417,137
Property and equipment, net 445,291 506,968
Other assets 135,893 134,349
--------------- ------------
Total assets $ 2,268,702 $ 2,058,454
=============== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 2,371,168 $ 2,018,230
Short-term convertible notes 400,000 -
Short-term notes 195,000 -
Current portion of convertible notes 4,322,789 -
Accrued expenses and other current liabilities 217,371 206,796
--------------- ------------
Total current liabilities 7,506,328 2,225,026
Noncurrent liabilities
Convertible notes, net of current portion - 4,207,232
--------------- ------------
Total liabilities 7,506,328 6,432,258
--------------- ------------
Commitments
Stockholders' deficit:
Common stock, $.01 par value:
40,000,000 shares authorized;
26,956,786 and 26,018,658 shares issued and
outstanding at March 31, 2003 and
December 31, 2002 269,568 260,187
Additional paid-in capital 46,189,054 45,550,830
Notes and stock subscriptions receivable (1,393,887) (1,426,999)
Accumulated deficit (50,302,361) (48,757,822)
--------------- ------------
Total stockholders' deficit (5,237,626) (4,373,804)
--------------- ------------
Total liabilities and stockholders' deficit $ 2,268,702 $ 2,058,454
=============== ============
See accompanying notes to financial statements.
3
SPATIALIGHT, INC.
STATEMENTS OF OPERATIONS (unaudited)
Three months ended March 31,
2003 2002
------- --------
Selling, general and administrative expenses:
Selling, general and administrative expenses $ 457,662 $ 585,211
Stock-based general and administrative expenses 173,753 265,977
----------- -----------
Total selling, general and administrative expenses 631,415 851,188
-
Research and development expenses 724,597 707,706
Total operating expenses 1,356,012 1,558,894
----------- -----------
Operating loss (1,356,012) (1,558,894)
----------- -----------
Other income (expenses):
Interest expense:
Interest expense (70,950) (63,133)
Stock-based interest expense (136,165) (487,136)
----------- -----------
Total interest expense (207,115) (550,269)
Interest and other income 19,388 7,418
----------- -----------
Total other expenses (187,727) (542,851)
----------- -----------
Loss before income tax expense (1,543,739) (2,101,745)
Income tax expense 800 1,425
----------- -----------
Net loss $ (1,544,539) $ (2,103,170)
============ ===========
Net loss per share - basic and diluted $ (0.06) $ (0.09)
============ ===========
Weighted average shares used in computing
net loss per share- basic and diluted 25,538,382 23,859,321
============ ===========
See accompanying notes to financial statements
4
SPATIALIGHT, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT (unaudited)
THREE MONTHS ENDED MARCH 31, 2003
COMMON STOCK ADDITIONAL
PAID-IN NOTES
SHARES AMOUNT CAPITAL RECEIVABLE
--------- --------- ------------ --------------
Balance, January 1, 2003 26,018,658 $ 260,187 $ 45,550,830 $ (1,426,999)
Exercise of stock options and warrants 2,500 25 3,100
Payments on notes receivable from stockholders 52,500
Accrued interest on notes receivable from stockholders (19,388)
Issuance of stock, stock options, and warrants for services 47,000 470 277,248
Issuance of stock and options to employees and directors 12,285
Conversion of notes and accrued interest 142,360 1,424 353,053
Shares issued on exercise of warrant under installment note 746,268 7,462 (7,462)
Net loss
---------- --------- ------------ --------------
26,956,786 269,568 46,189,054 (1,393,887)
TOTAL
ACCUMULATED STOCKHOLDERS'
(DEFICIT) DEFICIT
-------------- -------------
Balance, January 1, 2003 $ (48,757,822) $ (4,373,804)
Exercise of stock options and warrants 3,125
Payments on notes receivable from stockholders 52,500
Accrued interest on notes receivable from stockholders (19,388)
Issuance of stock, stock options, and warrants for services 277,718
Issuance of stock and options to employees and directors 12,285
Conversion of notes and accrued interest 354,477
Shares issued on exercise of warrant under installment note -
Net loss (1,544,539) (1,544,539)
-------------- -------------
(50,302,361) (5,237,626)
See accompanying notes financial statements
5
SPATIALIGHT, INC.
STATEMENTS OF CASH FLOW (unaudited)
Three months ended March 31,
------------------------------
Cash flows from operating activities: 2003 2002
------------ -------------
Net loss $ (1,544,539) $ (2,103,170)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 68,843 96,106
Stock-based general and administrative expense 173,753 265,977
Stock-based interest expense 136,165 487,136
Changes in operating assets and liabilities:
Inventories (499,870) -
Prepaid and other current assets (51,765) 89,530
Accounts payable 406,938 (212,742)
Accrued expenses and other current liabilities 123,016 (15,226)
Other assets (20,932) (887)
------------ -------------
Net cash used in operating activities (1,208,391) (1,393,276)
------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (7,166) (102,966)
------------ -------------
Net cash used in investing activities (7,166) (102,966)
------------ -------------
Cash flows from financing actitivies:
Payments on capital lease obligations - (1,429)
Proceeds from issuance of short term notes 195,000 -
Proceeds from the issuance of short term convertible notes 400,000 -
Payments on stock subscriptions and notes
receivable from shareholders 52,500 21,875
Proceeds from exercise of warrants and options 3,125 2,590
------------ -------------
Net cash provided by financing activities 650,625 23,036
------------ -------------
Net decrease in cash (564,932) (1,473,206)
Cash and cash equivalents at beginning of period 575,663 2,728,134
------------ -------------
Cash and cash equivalents at end of period $ 10,731 $ 1,254,928
============ =============
Supplemental disclosure of cash flow information:
Income taxes paid during the period $ 800 $ 1,425
------------ -------------
Interest paid during the period $ - $ 180
------------ -------------
Non cash financing activities:
Common stock issued upon conversion of notes $ 354,477 $ 691,400
------------ -------------
Recission of stock purchase agreement $ - $ 2,504,059
------------ -------------
See accompanying notes to financial statements.
6
SPATIALIGHT, INC.
Notes to Condensed Financial Statements (Unaudited)
1. Business Description
SpatiaLight, Inc. (SpatiaLight or the Company) is in the business of
manufacturing high-resolution microdisplays for applications such as computer
monitors, high definition television, video projectors and other applications.
To date, the Company has entered into seven agreements with eight original
equipment manufacturers (OEMs) in China and one agreement with an OEM in the
Republic of South Korea.
On January 29, 2003, the Company announced that it had concluded negotiations
with Skyworth Display Ltd., resulting in a signed agreement for the purchase by
Skyworth of 14,100 display units from SpatiaLight during a one-year delivery
period. In each of the months June, July and August we are scheduled to deliver
200 units. Beginning in September, the Company is scheduled to deliver 1,500
units per month until the order is completed. Pursuant to the terms of the
purchase order, the obligations of Skyworth will be backed by letters of credit
in the Company's favor to be issued monthly, the first of which has already been
issued. The purchase order is cancelable by Skyworth on a quarterly basis and is
subject to pricing contingencies and other customary terms and conditions. The
Company has delivered the requisite number of SpatiaLight imagEngine(TM)
microdisplays to Fuji Photo Optical Co., Ltd. for incorporation into the display
units to be delivered to Skyworth in the first of the twelve monthly deliveries.
2. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q of Item 303 of Regulation
S-K. Accordingly they do not include all of the information and footnotes
necessary for a fair presentation of financial condition, results of operations
and cash flows in conformity with generally accepted accounting principles. In
the opinion of management of SpatiaLight, the interim condensed financial
statements included herewith contain all adjustments (consisting of normal
recurring accruals and adjustments) necessary for their fair presentation. The
unaudited interim condensed financial statements should be read in conjunction
with the Company's Annual Report on Form 10-KSB, which contains the audited
financial statements and notes thereto, together with the Management's
Discussion and Analysis, for the year ended December 31, 2002. The interim
results for the period ended March 31, 2003 are not necessarily indicative of
results for the full fiscal year.
Certain prior year and quarter amounts have been reclassified in order to
conform to current year presentation.
3. Liquidity
The Company's operations are constrained by an insufficient amount of working
capital. As of March 31, 2003 the Company has sustained recurring losses and had
a net capital deficiency of approximately $5,240,000, and a net working capital
deficiency of approximately $5,800,000. These conditions raise substantial doubt
about the ability of the Company to continue as a going concern. We anticipate
that our cash expenditures during 2003 will approximate $400,000 per month, or
approximately $5 million for the year, without regard to any revenues in 2003.
7
We expect to meet our cash needs with our existing cash balances and collections
from stock subscriptions receivable of approximately $1,400,000 and from the
exercise of warrants held by existing investors. In addition, we expect to fund
working capital requirements by drawing on letters of credit issued by customers
in connection with signed purchase orders and by additional equity financing.
The Company's continued existence is dependent upon its ability to generate
revenue by successfully marketing and selling its products, and obtain
additional financing. The Company continues its efforts to locate sources of
additional financing. However, there can be no assurance that the Company's
efforts will be successful, or that additional debt or equity financing will be
available to the Company. For this reason, there is uncertainty whether the
Company can continue as a going concern. Further, the Company's auditors
included a paragraph in their report on the audited financial statements for the
year ended December 31, 2002, indicating that substantial doubt exists as to the
Company's ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company incurred significant operating losses in each of the last five fiscal
years and incurred a net loss of approximately $1,550,000 in the three months
ended March 31, 2003. Of this amount, approximately $310,000 was non-cash
stock-based expenses. Additionally, as of March 31, 2003, the Company's
accumulated deficit totaled approximately $50,300,000. The Company has generated
limited revenues to date and the development, commercialization and marketing of
the Company's products will require substantial expenditures in the foreseeable
future. The successful completion of the Company's development program and
ultimately, the attainment of profitable operations are dependent upon future
events. These events include obtaining adequate financing to fulfill its
development activities, successful launching of the commercial production and
distribution of its products and achieving a level of sales adequate to support
the Company's cost structure. These matters, among others, may indicate that the
Company will be unable to continue as a going concern for a reasonable period of
time.
The condensed financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
4. Per Share Information
Basic loss per common share available to common shareholders excludes dilution
and is computed by dividing loss available to common shareholders by the
weighted-average number of common shares for the period. Excluded from weighted
average shares outstanding for the three months ended March 31, 2003 are
1,346,268 shares of common stock issued but held in escrow in connection with
the private stock purchase agreements and warrant installment notes. Diluted
loss per common share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Excluded from the computation of diluted loss per share for
the three months ended March 31, 2003 and 2002 respectively, are options and
warrants to acquire 4,502,083 and 7,592,697 shares of common stock, and
3,577,584 and 3,425,603 common share equivalents in each period relating to
convertible secured notes, because the effect of their assumed exercise would be
antidilutive. The weighted average exercise price as of March 31, 2003 for the
options and warrants is $2.38 and $2.47, respectively; the weighted average
conversion price for the common share equivalents related to convertible notes
is $1.25.
5. Notes Payable
8
Convertible notes at March 31, 2003 consist of the following:
Argyle Notes:
In 1998, the Company received $1,188,000 in cash in exchange for notes in that
amount to Argyle Capital Management Corporation (Argyle), a company owned and
controlled by Robert A. Olins, Acting Chief Executive Officer, Secretary,
Treasurer, and a Director of the Company. The notes accrue interest at a
contractual rate of 6% per annum, and are secured by substantially all the
assets of the Company. Both principal and interest are convertible into the
Company's common stock at $.50 per share. On May 23, 2001, the due date of the
notes was extended until December 31, 2002. On the extension date, the
beneficial conversion effect representing the excess aggregate value of the
common shares receivable upon conversion of the notes based on the then current
market price of $1.90 per share, over the aggregate conversion price for such
common shares (limited to the original proceeds of $1,188,000), was recorded as
additional paid-in capital. The resulting $1,188,000 discount to the debt
arising from the beneficial conversion feature was being amortized through
December 31, 2002. The effective interest rate for financial statement purposes
due to this discount differs from the actual contractual interest received or
receivable in cash or shares by Argyle. This discount, along with the
contractual 6% interest rate, resulted in a new effective interest rate of 72%
per annum as of the May 23, 2001 extension date when compared to the outstanding
principal balances. The effective rate prior to extension had been the 6% per
annum contractual rate. On September 20, 2002, the due date was extended until
March 31, 2004. Accordingly, the remaining unamortized discount at the extension
date of $198,000 is being amortized through March 31, 2004, resulting in a new
effective interest rate of 17% per annum when compared to the outstanding
principal balances.
On January 3, 2003 the Company issued 142,360 shares of common stock upon the
conversion of prepaid interest of $354,477. Prepaid interest was computed using
the closing price of the common stock on December 31, 2002 of $2.49, and is
being amortized through December 31, 2003. For the three months ended March 31,
2003, additional stock-based interest expense of approximately $70,800 was
recorded due to the beneficial conversion feature of the prepaid interest,
representing the excess value of the common shares received upon conversion of
the prepaid interest. At March 31, 2003, the carrying value of the Argyle notes
totals $1,056,000, which includes the $1,188,000 principal balance net of
unamortized discounts of $132,000. See also Note 6.
Alabama Group Notes:
In December 1999, the Company received $1,437,500 in cash and issued notes in
that amount to a group of investors (the "Alabama Group"), which includes a
trust for the benefit of Steven F. Tripp, a Director of the Company. Mr. Tripp
is not the trustee of this trust and has no power to vote or dispose of the
Common Shares of the Company or any other securities held by that trust. Marcia
K. Tripp, Steven F. Tripp's mother, is the trustee of this trust and directs and
is responsible for all of the investment decisions of this trust. In the opinion
of the Company, no other investor in the Alabama Group is an affiliate of the
Company and Mr. Tripp is not an affiliate of any other investor in the Alabama
Group. The notes accrue interest at a contractual rate of 6% per annum, and are
secured by substantially all the assets of the Company. This portion of the
notes is convertible into shares of the Company's common stock at $3.50 per
share. Upon issuance of the notes, the Company also issued warrants to purchase
821,429 shares of common stock. The warrants were exercised on June 28, 2002
(note 6). The warrants were valued using the Black-Scholes option-pricing model
and the following assumptions: contractual life 2.5 years; volatility 114%;
risk-free interest rate 6%; and dividend yield of $0. The total cash received
from the issuance of this tranche of notes of $1,437,500 was less than the
9
calculated value associated with the warrants. Therefore, the value assigned to
the warrants was limited to the original proceeds of $1,437,500, and has been
recorded as a discount on the notes. The effective interest rate for financial
statement purposes due to this discount differs from the actual contractual
interest received or receivable in cash by the holders of the Alabama Group
Notes. This discount, along with the contractual 6% per annum interest rate,
resulted in an effective interest rate of 70% per annum when compared to the
outstanding principal balances.
The proceeds of the second tranche of notes, also totaling $1,437,500 and
carrying interest at 6% per annum, were originally to be received by the Company
upon the achievement of certain performance targets. The proceeds were received
in November 2000, prior to reaching those targets, in exchange for reducing the
conversion price of the notes to the then-market price of $2.25 per share. No
warrants were issued with the second tranche of notes. The remaining unamortized
discount for the first tranche, along with the contractual interest on both
tranches, resulted in a combined effective interest rate of 87% per annum as of
the issuance date for the second tranche when compared to the outstanding
principal balances.
On June 15, 2001 the due date of both tranches was extended until December 31,
2002. On the extension date, the excess $255,000 aggregate value of the common
shares receivable upon conversion of the notes based on the then current market
price of $2.65 per share, over the aggregate conversion price for the notes
convertible at $2.25 per share, was recorded as additional paid-in capital. The
resulting $255,000 discount to the debt, along with the remaining unamortized
discount for the first tranche, was being amortized through December 31, 2002.
The effective interest rate for financial statement purposes due to these
discounts differs from the actual contractual interest received or receivable by
the holders of the Alabama Group Notes. These discounts, along with the
contractual 6% per annum interest rate, result in a new effective interest rate
upon extension of 25% per annum as of the extension date when compared to the
outstanding principal balances. On September 20, 2002, the due date of both
tranches was extended until March 31, 2004. On the extension date, the excess
$58,000 aggregate value of the common shares receivable upon conversion of the
notes based on the then current market price of $2.34 per share over the
aggregate conversion price for the notes convertible at $2.25 per share, was
recorded as additional pain-in-capital. Accordingly, the remaining unamortized
discount at the extension date of $194,195 including the new discount of $58,000
is being amortized through March 31, 2004, resulting in a new effective interest
rate of 10.5% per annum when compared with to the outstanding principal
balances. At March 31, 2003, the carrying value of the Alabama notes totals
$3,266,789, which includes principal balance plus accrued interest of $521,252,
net of unamortized discounts of $129,463.
Other Short-term Notes
During the first quarter of 2003 the Company received $595,000 under short-term
notes. Of this amount $400,000 were convertible notes, with conversion prices
ranging from $2.25 to $3.16, which approximate the stock price on the date of
issuance. There is no beneficial conversion effect associated with these notes.
All of the notes accrue interest at 6% per annum and have maturity dates ranging
from thirty (30) days to two hundred and seventy (270) days. Notes for an
aggregate of $145,000 were issued to Steven F. Tripp, a director of the Company,
and a note for $65,000 was issued to Marcia Tripp.
Activity in notes payable for the three months ended March 31, 2003 follows:
10
DECEMBER 31, ADDITION OR NEW DISCOUNT CONVERSION TO BALANCE AT
DEBT PRINCIPAL: 2002 DISCOUNT AMORTIZATION EQUITY MARCH 31, 2003
--------------- ------------- --------------- ------------ -------------
Argyle $ 1,188,000 - - - $ 1,188,000
Argyle discount (165,000) - 33,000 - (132,000)
Alabama Group 2,875,000 - - - 2,875,000
Alabama Group Discount (161,829) - 32,366 - (129,463)
Other short term notes (convertible and other) - 595,000 - - 595,000
--------------- -------------- -------------- ------------ -------------
Total 3,736,171 595,000 65,366 - 4,396,537
--------------- -------------- -------------- ------------ -------------
Interest:
Accrued Argyle 6% - 17,820 - (17,820) -
Accrued Alabama 6% 471,061 50,191 - - 521,252
Beneficial interest - 70,799 - (70,799) -
--------------- -------------- -------------- ------------ -------------
Total 471,061 138,810 - (88,619) 521,252
--------------- -------------- -------------- ------------ -------------
TOTAL $ 4,207,232 $ 733,810 $ 65,366 $ (88,619) $ 4,917,789
=============== ============== ============== ============ =============
Stock-based interest expense discussed above is as follows:
Three months ended March 31,
---------------------------
2003 2002
--------------- ------------
Amortization of Alabama group discount $ 32,366 $ 136,193
Amortization of Argyle Capital discount 33,000 198,000
Effect of beneficial conversion priviledges
on accrued interest 70,799 152,943
$ 136,165 $ 487,136
========== ==========
6. Issuance of Securities
Interest Conversion
On January 3, 2003 the Company issued 142,360 shares of common stock upon the
conversion of prepaid interest of $354,477. Prepaid interest was computed using
the closing price of the common stock on December 31, 2002 of $2.49, and is
being amortized through December 31, 2003. For the three months ended March 31,
2003, additional stock-based interest expense of approximately $70,800 was
recorded due to the beneficial conversion feature of the prepaid interest,
representing the excess value of the common shares received upon conversion of
the prepaid interest. At March 31, 2003, the carrying value of the Argyle notes
totals $1,056,000, which includes the $1,188,000 principal balance net of
unamortized discounts of $132,000.
11
EXERCISE OF STOCK OPTIONS, WARRANTS, DURING THE THREE MONTHS ENDED MARCH 31,
2003
During the first three months of 2003, 2,500 shares of common stock were issued
upon the exercise of employee stock options. Total cash received was $3,125.
Payments under notes receivable from shareholder resulting from the exercise of
warrants in 2002 totaled $52,500.
ISSUANCE OF STOCK, STOCK OPTIONS AND WARRANTS IN THE THREE MONTHS ENDED MARCH
31, 2003
In March 2003, the Company issued 47,000 shares of common stock in exchange for
consulting services provided in 2002 totaling $116,250. The expense associated
with these services was recorded in 2002.
On October 14, 2002 the Company issued a fully vested warrant to purchase
250,000 shares of common stock at an exercise price of $3.50 in exchange for
consulting services rendered over a six-month period. A value of $76,068 was
assigned to the warrants for the portion of the services rendered in 2003 using
the Black-Scholes option pricing model and the following assumptions: stock
price $1.84, historical volatility 100%, risk free rate 5%, a dividend yield of
0, and a contractual term of two years. The portion of the value of the warrant
earned, $76,068, in the first quarter of 2003 is reflected in the statement of
operations as stock-based general and administrative expense.
In March 2003, the Company issued a fully vested warrant to purchase 200,000
shares of common stock in exchange for services rendered in the first quarter of
2003. A value of $85,400 was assigned to the warrant using the Black-Scholes
option pricing model and the following assumptions: stock price $2.43,
historical volatility 100%, risk free rate 5%, a dividend yield of 0, and a
contractual term of five months. The value of the warrant is included in
stock-based general and administrative expense.
Other expenses in 2003 related to the valuation of options granted to directors
for additional services totaled $12,285 and are included in stock based general
and administrative.
ISSUANCE OF STOCK DURING THE THREE MONTHS ENDED MARCH 31, 2002
In March 2002, the Company issued 60,000 shares of common stock to its Director
of Corporate Development. The shares were issued in consideration of services
rendered by the employee with respect to assisting the Company in negotiating
the contractual relationships with its existing prospective customers. These
shares were valued at $220,200, the market value of the shares on the date of
grant.
ISSUANCE OF STOCK UNDER INSTALLMENT NOTE
In November 2002, a warrant to purchase 746,268 common shares was exercised at
$2.00 under a warrant installment agreement totaling $1,492,536. Payments of
$200,000 were made in 2002. An additional $52,500 was received in 2003. Interest
accrues at 6% per annum and is due with the final payment. As of March 31, 2003,
approximately $26,000 of accrued interest has been recorded, including interest
of approximately $19,000 in 2003. The shares were issued in 2003, but are held
in escrow by the Company pending receipt of the remaining balance of $1,266,400.
With the acquiescence of the Company, the shareholder has not met the due dates
of two previously scheduled installment payments under the warrant installment
agreement which, as of March 31, 2003 equaled $100,000 and as of April 30, 2003,
equaled an additional $100,000.
12
Stock-based general and administrative expense discussed above is as follows:
Three months ended March 31,
2003 2002
--------- ---------
Stock and options granted to employees and directors $ 12,285 $ 220,000
Common stock and warrants expensed for services 161,468 -
Warrant and other charges - 45,777
--------- ---------
$ 173,753 $ 265,777
========= =========
7. Segment Information
The Company's chief operating decision-maker, the Chief Executive Officer (CEO),
reviews the Company's financial information as a single "operating segment" to
make decisions about the Company's performance and resource allocation.
Therefore the Company has determined that it operates in a single business
segment. There were no sales in the first quarter of 2003.
8. Stock-based Compensation
The Company accounts for its stock-based compensation arrangements for employees
and directors using the intrinsic value method pursuant to Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," As such,
compensation expense is recorded when, on the date of grant, the fair value of
the underlying common stock exceeds the exercise price for stock options or the
purchase price for issuances or sales of common stock. Pursuant to Statement of
Financial Accounting Standard (SFAS) No. 123 "Accounting for Stock-Based
Compensation," the Company discloses the proforma effects of using the fair
value method of accounting for stock-based compensation arrangements and records
compensation expense for the fair value of options granted to non-employees.
If the Company had elected the fair value method of accounting for stock-based
compensation, compensation cost would be accrued at the estimated fair value of
stock option grants over the service period, regardless of later changes in
stock prices and price volatility.
13
he table below shows net income per share for the three months ended March 31,
2003 and 2002 as if the Company had elected the fair value method of accounting
for stock options.
2003 2002
------------- -------------
Net loss as reported $ (1,544,539) $ (2,103,170)
Deduct: total stock-based employee compensation
determined under fair value method for all awards,
net of any applicable related tax effects (364,667) (864,739)
------------- -------------
Proforma net loss, as adjusted $ (1,909,206) $ (2,967,909)
Loss per share:
Basic and diluted, as reported $ (0.06) $ (0.09)
Basic and diluted, as adjusted $ (0.08) $ (0.13)
9. Recent Accounting Pronouncements
In August 2001 Statement of Financial Accounting Standards SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets" was issued,
superseding SFAS No. 121, "Accounting for the Impairment of Long-lived Assets to
be Disposed of." Among other things, SFAS No. 144 provides guidance on how
long-lived assets used as part of a group should be evaluated for impairment,
establishes criteria for when long-lived assets are held for sale, and
prescribes the accounting for long-lived assets that will be disposed of other
than by sale. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company's financial position and results of operations
have not been affected by the adoption of SFAS No. 144 as of January 1, 2003.
In July 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which addresses financial accounting and reporting
for costs associated with exit or disposal activities. SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. This Statement also establishes that
fair value is the objective for initial measurement of the liability. Severance
pay under SFAS No. 146, in many cases, would be recognized over time rather than
up front. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. Adoption of this
Statement did not have a material impact on the Company's financial condition or
results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which provides alternative methods of
transition for a voluntary change to fair value based method of accounting for
stock-based employee compensation as prescribed in SFAS No. 123. Additionally,
SFAS No. 148 requires more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. The provisions of this
Statement are effective for fiscal years ending after December 15, 2002.
Adoption of this Statement did not have a material impact on the Company's
financial condition or results of operation, as we are not currently planning to
make a voluntary change to the fair value method of accounting for stock-based
employee compensation.
14
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45. "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 requires a guarantor to
recognize, at the inception of a qualified guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. FIN No. 45 is
effective on a prospective basis for qualified guarantees issued or modified
after December 31, 2002. Adoption of this Interpretation did not have a material
impact on the Company's financial condition or results of operations.
Note 10. Subsequent Events
Subsequent to March 31, 2003, the Company has agreed to issue approximately 2.72
million common shares for a total of $5,000,000 to several private investors.
The shares to be issued in this transaction consist of previously authorized but
unissued shares of the Company. The shares are priced at $1.84 per share, equal
to 80% of the trailing 30-day average closing price of the shares through May
12, 2003. As part of this stock purchase transaction, the Company will also
issue, for each four shares issued, one five-year warrant to purchase an
additional common share at $2.65 per share, equal to a 15% premium to the
trailing 30-day average closing price of the shares through May 12, 2003. Of the
total $5,000,000 stock purchase, $2,500,000 has been subscribed for personally
by Robert A. Olins, Acting Chief Executive Officer and a Director of the
Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, as amended, which
statements are subject to the Safe Harbor provisions created by that statute. In
this report, the words "anticipates," "believes," "expects," "future,"
"intends," and similar expressions identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including, but not
limited to, those discussed herein, those contained in this Item, 2 and those
discussed in the Company's Annual Report on Form 10-KSB as filed with the
Securities and Exchange Commission on April 14, 2003. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be needed
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The following is a discussion and analysis of the consolidated financial
condition of the Company as of March 31, 2003, and the results of operations for
the Company for the three months ended March 31, 2003 and 2002. The following
should be read in conjunction with the unaudited financial statements and
related notes appearing elsewhere herein.
GENERAL
Our operations are constrained by an insufficient amount of working capital, and
we continue to experience negative cash flows and net operating expenses. Our
operations in recent months have been funded by the exercise of warrants and
options, and the issuance of short-term notes. We are continuing our efforts to
locate sources of additional financing but there can be no assurance that
additional financing will be available. Our auditors have included a paragraph
15
in their report on the audited financial statements as of the year ended
December 31, 2002, indicating that substantial doubt exists as to our ability to
continue as a going concern.
We anticipate that our cash expenditures during 2003 will approximate $400,000
per month, or approximately $5 million for the year, without regard to any
revenues in 2003. We expect to meet our cash needs with our existing cash
balances from collections of stock subscriptions receivable of approximately
$1,400,000 and from the exercise of warrants held by existing investors. In
addition, we expect to fund working capital requirements by drawing on letters
of credit issued by customers in connection with signed purchase orders and by
additional equity financing. However, there can be no assurance that any
significant number of these other warrants will be exercised. If no warrants are
exercised, and the Company does not derive any significant revenues from its
operations during 2003, it is likely that we will need to raise additional debt
or equity financing during 2003. There can be no assurances that such additional
debt or equity funding will be available from our current investors or from any
other source.
Our continued existence is dependent upon our ability to successfully develop,
market and sell our products. In May 2001 we entered into an arrangement with
Fuji Photo Optical Co., Ltd., for the manufacture of light engines. Pursuant to
the arrangement, Fuji Photo Optical Co., Ltd. may scale up their manufacturing
capacity in order to produce a minimum of 10,000 light engines per month
incorporating the SpatiaLight imagEngine(TM) microdisplay. In September 2002 we
accepted delivery of the first pre-production SpatiaLight/Fuji display units.
These pre-production display units, which have been provided to our prospective
customers in China, incorporate mechanical changes and technical enhancements
that we initiated based upon the results of extensive testing of the prototype
display units.
OVERVIEW
We manufacture microdisplays that provide high resolution images suitable for
applications such as rear projection computer monitors, high definition
television and video projectors, and potential applications such as those used
in wireless communication devices, portable games and digital assistants. Our
microdisplays are designed for use in end products of original equipment
manufacturers, and therefore we work closely with customers to incorporate our
microdisplays into their final products. While in the past we have had working
arrangements with several independent liquid crystal display fabricators to
manufacture certain of our prototype products, we are now manufacturing our
microdisplays ourselves in a 500 square foot Class 100 cleanroom and a 1200
square foot Class 1000 cleanroom. We have enhanced quality control and we have
more effective protection of our proprietary technology in our products.
Internal manufacturing is subject to certain risks described under "Business
Risks and Uncertainties." We have patents covering parts of our designs;
however, the key designs of the circuitry in the silicon, drive electronics, and
liquid crystal assembly techniques are proprietary and not covered by patents.
Since late October 2001, we have entered into seven agreements or memoranda of
understanding with eight original equipment manufacturers in China contemplating
the purchase by these prospective customers of our display units and/or
SpatiaLight imagEngine(TM) microdisplays for use in certain of their products.
All of these agreements require that we supply prototypes of our display units
and/or SpatiaLight imagEngine(TM) microdisplays and that they meet technical
criteria satisfactory to each of such prospective customers. In addition, in
January 2003 we entered into an Agreement of Principal Terms with one original
equipment manufacturer (OEM) in the Republic of South Korea contemplating the
purchase of our display units for use in certain of its products. This agreement
requires that we supply a prototype of our display unit and that it meet
technical criteria satisfactory to the prospective customer.
16
In January 2003, we concluded negotiations with Skyworth Display Ltd., resulting
in a signed agreement for the purchase by Skyworth of 14,100 display units from
us during a one-year delivery period. In each of the months June, July and
August we are scheduled to deliver 200 units. Beginning in September, we are
scheduled to deliver 1,500 units per month until the order is completed.
Pursuant to the terms of the purchase order, the obligations of Skyworth will be
backed by letters of credit in our favor to be issued monthly, the first of
which has already been issued. The purchase order is cancelable by Skyworth on a
quarterly basis and is subject to pricing contingencies and other customary
terms and conditions. We have delivered the requisite number of our SpatiaLight
imagEngine(TM) microdisplays to Fuji Photo Optical Co., Ltd. for incorporation
into the display units to be delivered to Skyworth in the first of the twelve
monthly deliveries.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, we had approximately $11,000 in cash and cash equivalents,
a decrease of approximately $565,000 from the December 31, 2002 amount of
$575,000. Our net working capital deficit at March 31, 2003 was approximately
$5,800,000 compared to a net working capital deficit of approximately $800,000
at December 31, 2002. This change is due to the reclassification of the Argyle
and Alabama Group notes to the current liabilities based on their maturity date
of March 31, 2004.
Net cash used in operating activities totaled approximately $1,200,000 and
$1,400,000 for the three months ended March 31, 2003 and 2002, respectively.
Cash was used primarily to fund the operating loss.
Net cash provided by financing activities in the three months ended March 31,
2003 was approximately $650,000 as compared to approximately $23,000 for the
three months ended March 31, 2002. In the first quarter of 2003, cash was
provided primarily from proceeds from the issuance of short-term notes.
As of March 31, 2003, we had an accumulated deficit of approximately
$50,300,000. We have realized significant losses in the past and we expect that
these losses will continue at least through 2003. It is likely that we will have
quarterly and annual losses in 2003 and beyond. We have generated limited
revenues and no profits from operations. The development, commercialization and
marketing of our products will require substantial expenditures for the
foreseeable future. Consequently, we may continue to operate at a loss for the
foreseeable future and there can be no assurance that our business will operate
on a profitable basis or will be able to continue as a going concern.
Subsequent to March 31, 2003, we agreed to issue approximately 2.72 million
Common Shares in exchange for a total of $5,000,000 to several private
investors, including Robert A. Olins, Acting Chief Executive Officer and a
Director of the Company. This transaction is more fully described in Note 10 to
the Condensed Financial Statements in Item 1 of Part I of this Report. We expect
this transaction to significantly enhance our liquid capital resources and
working capital thereby giving us a stronger financial platform to expand our
manufacturing business.
RESULTS OF OPERATIONS
Selling, general and administrative costs. Selling, general and administrative
costs were approximately $460,000 and $585,000 in the three months ended March
31, 2003 and 2002, respectively and include professional services, salaries and
related taxes and benefits, rent, depreciation, travel, insurance and office
expenses. Employment expenses decreased $30,000 due to fees paid in the first
quarter of 2002 related to hiring of employees. Consulting, legal and public
relations fees decreased approximately $110,000 due to a decrease in legal fees
as well as the elimination of certain consultants and public relations firms.
Stock-based general and administrative costs. Stock-based general and
administrative costs were approximately $174,000 in the three months ended March
31, 2003, and approximately $266,000 in the three months ended March 31, 2002.
17
The amounts incurred relate to common stock, stock options, and warrants issued
in exchange for services. The decrease in 2003 relates primarily to expenses
incurred in 2002 associated with stock granted as compensation to an employee
valued at $220,000, which had no comparable expense in 2003, offset by expenses
incurred in 2003 related to the issuance of warrants in exchange for services
totaling $130,000.
Research and development costs. Research and development costs were
approximately $725,000 and $707,000 in the three months ended March 31, 2003 and
2002. Salaries and related benefits increased approximately $76,000 due to
hiring of research and development personnel. Other research and development
expenses decreased approximately $60,000 due to a reduction in consulting
expenses.
Interest income. Interest income for the three months ended March 31, 2003 and
2002 was approximately $19,000 and $7,400, respectively. The increase is due to
accrued interest on a note received from a shareholder in the first quarter of
2003.
Interest expense. Interest expense for the three months ended March 31, 2003
increased approximately $7,000 from the same period in 2002 due to annual
compounding of interest. This is consistent with the unchanged face amounts of
the convertible note balances from 2002 to 2003.
Stock-based interest expense. Stock-based interest expense was approximately
$136,000 and $487,000 for the three months ended March 31, 2003 and 2002,
respectively. Stock-based interest expense relates to the beneficial conversion
feature of interest converted and convertible into equity on the notes payable
to Argyle Capital Management Corporation, a company wholly owned by Robert
Olins, Acting Chief Executive Officer of the Company. The beneficial conversion
interest represents the excess value of the shares received or receivable at
current market prices over the $0.50 per share conversion price. Interest
expense related to the beneficial conversion feature decreased approximately
$80,000 due to the change in the stock price from 2002 to 2003. In addition,
stock-based interest expense relates to amortization of the discounts on notes
payable to Argyle Capital Management Corporation and to the Alabama Group, a
group of investors, which includes a trust for the benefit of Steven F. Tripp, a
director of the Company. In September 2002 the notes were extended 18 months,
thereby reducing the monthly amortization of the discount.
CRITICAL ACCOUNTING POLICIES
Outlined below are accounting policies that we believe are key to a full
understanding of our operations and financial results. All our accounting
policies are in compliance with accounting principles generally accepted in the
United States of America.
Stock-based Compensation - We account for our stock-based compensation
arrangements with employees and directors using the intrinsic value method
pursuant to Accounting Principles Board Opinion (APB) No. 25, as clarified by
Financial Accounting Standards Board (FASB) Interpretation No. 44. As such,
compensation expense is recorded when, on the date of grant, the fair value of
the underlying common stock exceeds the exercise price for stock options or the
purchase price for issuances or sales of common stock. Pursuant to Statement of
Financial Accounting Standard (SFAS) No. 123, we disclose the proforma effects
of using the fair value method of accounting for stock-based compensation
arrangements and records compensation expense for the fair value of options
granted to non-employees.
Research and Development - Research and development costs are charged to expense
when incurred.
18
Inventory valuation - We value inventories at the lower of cost (based on the
first-in, first-out method) or market value. We include materials, labor and
manufacturing overhead in the cost of inventories. In determining inventory
market values, we give substantial consideration to the expected product selling
price based on historical recovery rates. If we assess the market value of our
inventory to be less than costs we write it down to its replacement cost or its
net realizable value. Our estimates may differ from actual results due to the
quantity and quality and mix of products in inventory, consumer and retailer
preferences and economic conditions. At December 31, 2002, inventories
(consisting entirely of raw materials components) were written down by $286,000,
as prices on initial order quantities were higher than those expected in the
future, and would otherwise have resulted in losses on finished goods in 2003.
Income tax assets and liabilities - In establishing our deferred income tax
assets and liabilities, we make judgments and interpretations based on the
enacted tax laws and published tax guidance that are applicable to our
operations. We record deferred tax assets and liabilities and evaluate the need
for valuation allowances to reduce the deferred tax assets to realizable
amounts. The likelihood of a material change in our expected realization of
these assets is dependent on future taxable income, our ability to use foreign
tax credit carryforwards and carrybacks, final U.S. and foreign tax settlements,
and the effectiveness of our tax planning strategies in the various relevant
jurisdictions. Due to our lack of profitable operating history, potential
limitations on usage of operating losses and general uncertainty, we provided
for a 100% valuation allowance against our deferred tax assets. We are also
subject to examination of our income tax returns for multiple years by the
Internal Revenue Service and other tax authorities. We periodically assess the
likelihood of adverse outcomes resulting from these examinations to determine
the adequacy of our provision for income taxes. Changes to our income tax
provision or the valuation of the deferred tax assets and liabilities may affect
our annual effective income tax rate.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
SpatiaLight places all of its excess cash and cash equivalents in a checking
account or money market account with a nationally reputable bank. As of March
31, 2003, the Company's cash and cash equivalents totaled $10,731.
Item 4. Controls and Procedures.
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, we
evaluated the effectiveness of the design and operation of our "disclosure
controls and procedures" (Disclosure Controls), and our "internal controls and
procedures for financial reporting" (Internal Controls). This evaluation (the
Controls Evaluation) was done under the supervision and with the participation
of our principal executive officer, who is also our principal financial officer
(collectively, CEO).
Limitations on the Effectiveness of Controls. Our Chief Executive Officer does
not expect that our Disclosure Controls or our Internal Controls will prevent
all error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. We have not had
any revenue derived from the sale of our microdisplay products in the current
reporting period. While the Controls Evaluation has accounted for such absence
of sales and revenue, new or additional controls may or may not be required once
we begin selling our microdisplay products in volume in the ordinary course of
business. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or honest
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more persons, or by management override of
the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
19
potential future conditions; over time, specific controls may or may not become
inadequate (e.g., when we commence to sell our products in volume in the
ordinary course of business) because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Internal Controls. In accordance with SEC requirements, the CEO notes that,
since the date of the Controls Evaluation to the date of this Quarterly Report,
there have been no significant changes in Internal Controls or in other factors
that could significantly affect Internal Controls. During 2002, we were advised
by our independent public accountants of a "reportable condition" in our system
of internal controls, resulting in large part because we do not have a full
time, qualified on-site Chief Financial Officer or similar accounting officer.
The Company acknowledges this condition, which has been reported to our audit
committee, and is in the process of addressing this need concurrently with the
increase in our operations as a result of the expected ramp-up for sales and
production activity.
Conclusions. Based upon the Controls Evaluation, our CEO has concluded that,
subject to the limitations noted above, our Disclosure Controls are effective to
ensure that material information relating to the Company is made known to the
CEO, particularly during the period when our periodic reports are being
prepared, and that our Internal Controls are effective to provide reasonable
assurance that our financial statements are fairly presented in conformity with
generally accepted accounting principles.
BUSINESS RISKS AND UNCERTAINTIES
WE HAVE A HISTORY OF LOSSES AND MAY INCUR LOSSES IN THE FUTURE AND THEREFORE
CANNOT ASSURE YOU THAT WE WILL ACHIEVE PROFITABILITY.
We have incurred losses over the past five years and have experienced cash
shortages. For the three months ended March 31, 2003 and 2002, we incurred net
losses of approximately $1,550,000 and $2,100,000, respectively. In addition, we
had an accumulated deficit of $50,300,000 as of March 31, 2003. We may incur
additional losses as we continue spending for production and other business
activities. As a result, we will need to generate substantial sales to support
our cost structure before we can begin to recoup our operating losses and
accumulated deficit and achieve profitability.
IF WE ARE UNABLE TO OBTAIN FURTHER FINANCING OR GENERATE REQUIRED WORKING
CAPITAL OUR ABILITY TO OPERATE COULD SUFFER OR CEASE. OUR AUDITORS HAVE ISSUED A
REPORT ON OUR FINANCIAL STATEMENTS WHICH CONTAINS AN EXPLANATORY PARAGRAPH
REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Our operations to date have consumed substantial amounts of cash and will
continue to require substantial amounts of capital in the future. In order to
remain competitive, we must continue to make significant investments essential
to our ability to operate profitably, including investments in further research
and development, equipment, facilities and production activities. Although our
financial condition and liquidity have been assisted through the exercise of
warrants and private purchases of our common shares, we will still require
additional financing to provide for our required capital expenditures. Reliance
for financing upon exercise of warrants and private stock purchase agreements
entails the additional risks of non-exercise of such warrants because of the
prevailing market prices of our underlying shares or default by stock purchasers
under these agreements. In the event that we are unable to obtain further
financing on satisfactory terms or at all, generate sales sufficient to offset
our costs, or the costs of development and operations are greater than we
anticipated, we may be unable to grow our business at the rate desired or may be
required to delay, reduce, or cease certain of our operations, any of which
could materially harm our business and financial results. Our independent
20
auditors have included an explanatory paragraph in their report in our Form
10-KSB on our financial statements for our last fiscal year regarding our
ability to continue as a going concern.
WE ARE SUBJECT TO LENGTHY DEVELOPMENT PERIODS AND PRODUCT ACCEPTANCE CYCLES,
WHICH MAY SIGNIFICANTLY HARM OUR BUSINESS.
Our business model requires us to develop microdisplays that perform better than
existing technologies, contract with one or more third-party manufacturers to
manufacture our display units in bulk, and sell the resulting display units to
original equipment manufacturers that will then incorporate them into their
products. Original equipment manufacturers make the determination during their
product development programs whether or not to incorporate our SpatiaLight
imagEngine(TM) microdisplays and/or display units in their products. This
requires us to invest significant amounts of time and capital in designing our
SpatiaLight imagEngine(TM) microdisplays and/or display units before we can be
assured that we will generate any significant sales to our customers or even
recover our investment. If we fail to recover our investment from the
SpatiaLight imagEngine(TM) microdisplays and/or display units, it could
seriously harm our financial condition. In addition, the length of time our
products may be successfully received by our customers could be limited by the
acceptance of new technologies developed by our customers.
WE INCUR SUBSTANTIAL RESEARCH AND DEVELOPMENT COSTS IN CONNECTION WITH
TECHNOLOGIES THAT MAY NOT BE SUCCESSFUL.
We currently have six full-time engineering and seven full-time manufacturing
personnel based in California working on microdisplays. This staffing creates
significant research and development costs that may not be recouped. Even if our
current microdisplays become accepted or successful, due to the rapid
technological change in our industry, we must continue to use, and may increase
in number, our engineering and manufacturing personnel to develop future
generations of our microdisplays. As a result, we expect to continue incurring
significant research and development costs.
IN RECENT MONTHS WE HAVE COMMENCED MANUFACTURING AND SHIPPING OUR MICRODISPLAYS
IN COMMERCIAL QUANTITIES, BUT DIFFICULTIES IN CONTINUING THE PROCESS OF
MASS-PRODUCING OUR MICRODISPLAYS MAY MAKE IT DIFFICULT TO MEET CUSTOMER DEMANDS
FROM TIME TO TIME AND OUR OPERATING RESULTS COULD BE SIGNIFICANTLY HARMED BY
SUCH DIFFICULTIES.
We need to work closely with our manufacturing sources to assure volume
production of our current display units. Problems in implementing volume
production or lower than expected manufacturing yields could significantly harm
our business because we will have already incurred the costs for the materials
used in the microdisplay manufacturing process. These problems could cause
delays that might lead our potential customers to seek other sources.
We currently obtain silicon backplanes, a vital component in our microdisplays,
from the Far East. Some Asian countries are subject to earthquakes, typhoons and
political instability. Unless we obtain an alternative source, any disruption or
termination of our silicon manufacturing operations in Taiwan or air
transportation with the Far East could significantly harm our operations.
Our microdisplays are assembled by combining the silicon backplanes with
electronic components. The design and manufacture of liquid crystal displays and
display units are highly complex processes that are sensitive to a wide variety
of factors, including the level of contaminants in the manufacturing
environment, impurities in the materials used, and the performance of personnel
and equipment. While in the past we have had working arrangements with several
independent liquid crystal display fabricators to manufacture certain of our
products, we are now manufacturing our microdisplays ourselves. We believe that
the internal manufacture of all such liquid crystal microdisplays will benefit
us by allowing us to enhance quality control over such products as well as
21
protect more effectively our proprietary interest in those products, but the
risks discussed above associated with the highly complex processes of
manufacturing these liquid crystal microdisplays remain applicable.
We continue to have working arrangements with the manufacturer of the light
engines and lamps required in the assembly of our display units. We have entered
into an agreement for the supply of prisms and filters which are also required
for the assembly of such units. Except for that agreement, we do not have
written agreements which are binding upon the manufacturers of the other
components and any such manufacturer is not now bound to furnish us with any
specific quantities of their products at previously specified prices. At this
date, we are not aware that any of those manufacturers have known shortages of
critical material.
Because the manufacture of our SpatiaLight imagEngine(TM) microdisplays involves
highly complex processes and technical problems may arise, we, in our capacity
as internally manufacturing the liquid crystal microdisplays, which are an
integral part of the display units, cannot assure the manufacturing yields of
our products. Problems in mass-production or lower than expected manufacturing
yields could significantly harm our business and operating results. In addition,
the complexity of our manufacturing processes will increase as the
sophistication of our microdisplays and display units increases.
IF A MARKET FOR OUR PRODUCTS DOES NOT DEVELOP, OUR BUSINESS WILL LIKELY BE
SIGNIFICANTLY HARMED.
Various target markets for our microdisplays, including projectors, monitors,
high-definition televisions, and portable microdisplays, are uncertain, may be
slow to develop or could utilize competing technologies. High-definition
television has only recently become available to consumers, and widespread
market acceptance is uncertain. In addition, the commercial success of the
portable microdisplay market is uncertain. The acceptance of our display units
and/or SpatiaLight imagEngine(TM) microdisplays will be dependent upon the
pricing, quality, reliability and useful life of these units compared to
competing technologies, as to which there can be no assurance. In order for us
to succeed, not only must we offer end-product manufacturers better and less
expensive microdisplays than our competitors, but the manufacturers themselves
must also develop products using our microdisplays that are commercially
successful. SpatiaLight's marketing efforts are focused on developing strategic
customer and governmental relationships in China and the Republic of South
Korea. Our failure to sell our microdisplays to such manufacturers or the
failure of the ultimate target markets to develop as we expect will negatively
affect our anticipated growth.
IF OUR MICRODISPLAYS DO NOT BECOME WIDELY ACCEPTED BY OUR CUSTOMERS OR THE
END-USERS, OUR BUSINESS COULD BE SIGNIFICANTLY HARMED.
Our microdisplays may not be accepted by a widespread market. Even if we
successfully mass-produce a display that is used in a product, our customers may
determine not to introduce or may terminate products utilizing the technology
for a variety of reasons, including the following:
o superior technologies developed by our competitors;
o price considerations; and
o lack of anticipated or actual market demand for the products.
We currently have agreements with a limited number of customers. Despite our
reasonable efforts to retain these customers, we may not be successful in this
22
regard. The loss of, or significant reduction in sales attributable to, any one
or more of these customers could materially harm our business and financial
condition.
TO DATE, WE HAVE ONLY RECEIVED ONE FIRM PURCHASE ORDER FROM ONE CUSTOMER AND WE
CANNOT ASSURE YOU THAT WE WILL OBTAIN ADDITIONAL PURCHASE ORDERS FROM THAT
CUSTOMER OR OUR OTHER PROSPECTIVE CUSTOMERS, OR, IF WE DO, THAT THEY WILL
GENERATE SIGNIFICANT REVENUES.
Since late October 2001, we entered into seven agreements with eight original
equipment manufacturers in China and one OEM in the Republic of South Korea
contemplating the purchase of our display units and/or SpatiaLight
imagEngine(TM) microdisplays. The testing of our display units and/or
SpatiaLight imagEngine(TM) microdisplays by certain of these prospective
customers commenced after these agreements were signed.
In January 2003, we concluded negotiations with Skyworth resulting in a signed
agreement for the purchase by Skyworth of 14,100 display units from us over a
one year delivery period. This purchase order agreement is cancelable by
Skyworth on a quarterly basis, however, which could result in us not deriving
all of our anticipated revenues from the purchase order.
The Company has been advised by the other prospective Chinese customers that
they are satisfied with the results of the testing of the prototypes under their
agreements with the Company and we are currently negotiating terms of purchase
orders for our display units and/or SpatiaLight imagEngine(TM) microdisplays
with each of them. There remain open issues that have to be finally negotiated,
including prices and quantities of our products. We cannot assure whether we
will receive purchase orders binding on any of these companies for their
purchase of commercial quantities of our microdisplay products commencing in the
near future.
In addition, even if we receive purchase orders from our current customer or
prospective customers for our display units, we may have problems implementing
volume production of such display units. Furthermore, sales to manufacturers in
the electronics industry are subject to severe competitive pressures, rapid
technological change, and product obsolescence. Manufacturers may, at any time,
cancel purchase orders or commitments or reduce or delay orders, thereby
increasing our inventory and overhead risks. Therefore, even if we obtain
purchase orders from several current or prospective customers, we cannot assure
you that these agreements will result in significant revenues to us.
IF OUR CUSTOMERS' PRODUCTS ARE NOT SUCCESSFUL, OUR BUSINESS WOULD BE MATERIALLY
HARMED.
We do not sell any products to end-users. Instead, we design and manufacture
various product solutions that our customers (i.e., original equipment
manufacturers) may incorporate into their products. As a result, our success
depends almost entirely upon the widespread market acceptance of our customers'
products. Any significant slowdown in the demand for our customers' products
would materially harm our business.
Our dependence on the success of the products of our customers exposes us to a
variety of risks, including our need to do the following:
o maintain customer satisfaction with our design and manufacturing
services;
o match our design and manufacturing capacity with customer demand
and maintain satisfactory delivery schedules;
23
o anticipate customer order patterns, changes in order mix, and the
level and timing of orders that we can meet; and
o adjust to the cyclical nature of the industries and markets we
serve.
Our failure to address these risks may cause us to lose sales or for sales
to decline.
THE ELECTRONICS INDUSTRY IS HIGHLY COMPETITIVE, WHICH MAY RESULT IN LOST SALES
OR LOWER GROSS MARGINS.
We serve highly competitive industries that are characterized by price erosion,
rapid technological change and competition from major domestic and international
companies. This intense competition could result in pricing pressures, lower
sales, reduced margins and lower market share. Some of our competitors have
greater market recognition, larger customer bases, and substantially greater
financial, technical, marketing, distribution and other resources than we
possess. As a result, they may be able to introduce new products and respond to
customer requirements more quickly than we can.
Our competitive position could suffer if one or more of our customers decides to
design and manufacture their own display units, to contract with our
competitors, or to use alternative technologies. In addition, our customers
typically develop a second source. Second source suppliers may win an increasing
share of a program. Our ability to compete successfully depends on a number of
factors, both within and outside our control. These factors include the
following:
o our success in designing and manufacturing new display
technologies;
o our ability to address the needs of customers;
o the quality, performance, reliability, features, ease of use,
pricing, and diversity of our display products;
o foreign currency fluctuations, which may cause a foreign
competitor's products to be priced significantly lower than our
displays;
o the quality of our customer services;
o the efficiency of our production sources;
o the rate at which customers incorporate our displays into their
own products; and
o products or technologies introduced by our competitors.
OUR BUSINESS IS SIGNIFICANTLY AFFECTED BY CONDITIONS OR EVENTS OCCURRING IN THE
ELECTRONICS INDUSTRY GENERALLY.
The electronics industry has experienced significant economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices, and production over-capacity. Since the electronics
industry is cyclical in nature, we may experience substantial period-to-period
fluctuations in future operating results because of general industry conditions
or events occurring in the general economy.
24
OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
Our results of operations have varied significantly from quarter to quarter in
the past and are likely to vary significantly in the future, which makes it
difficult to predict our future operating results. Accordingly, we believe that
quarter-to-quarter comparisons of our operating results are not meaningful and
should not be relied upon as an indicator of our future performance. Some of the
factors which cause our operating results to fluctuate include the following:
o introductions of displays and market acceptance of new
generations of displays;
o timing of expenditures in anticipation of future orders;
o changes in our cost structure;
o availability of labor and components;
o pricing and availability of competitive products and services;
o the timing of orders;
o the volume of orders relative to the capacity we can contract to
produce;
o evolution in the life cycles of customers' products; and
o changes or anticipated changes in economic conditions.
THE MARKET PRICE OF OUR COMMON SHARES IS HIGHLY VOLATILE.
The market price of our common shares has been extremely volatile, reflecting
reported losses, receipt of additional financing and changes of management.
Other companies have found similar volatility correlates with class action
securities lawsuits although to date we have not been a defendant in any such
lawsuit. The trading price of our common shares in the future could continue to
be subject to wide fluctuations in response to various factors, including the
following:
o quarterly variations in our operating results;
o actual or anticipated announcements of technical innovations or
new product developments by us or our competitors;
o public announcements regarding our business developments;
o changes in analysts' estimates of our financial performance;
o sales of large numbers of our common shares by our shareholders;
o general conditions in the electronics industry; and
o worldwide economic and financial conditions.
In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices for many
25
high-technology companies and that often have been unrelated to the operating
performance of these companies. These broad market fluctuations and other
factors may adversely affect the market price of our common shares.
OUR COMMON SHARES MAY NOT BE LIQUID.
Our common shares are currently traded on The Nasdaq SmallCap Market. Our
shareholders may find that it is more difficult to sell our common shares than
shares that are listed on The Nasdaq National Market, American Stock Exchange or
New York Stock Exchange. The trading volume of our common shares may be limited
in part due to the marketability of our shares. Any swing in the price of our
common shares may result in a material reduction in price because relatively few
buyers may be available to purchase our common shares.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, OUR ABILITY TO COMPETE COULD BE HARMED.
Our development and operations depend substantially on the efforts and abilities
of our senior management and qualified technical personnel. Our products require
sophisticated production, research and development and technical support. The
competition for qualified management and technical personnel is intense. The
loss of services of one or more of our key employees or the inability to add key
personnel could have a material adverse affect on us, particularly since
currently we do not have any life insurance policies in place to cover that
contingency. Our success will depend upon our ability to attract and retain
highly qualified scientific, marketing, manufacturing, financial and other key
management personnel. We face intense competition for the limited number of
people available with the necessary technical skills and understanding of our
products and technology. We cannot assure you that we will be able to attract or
retain such personnel or not incur significant costs in order to do so.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY FROM USE BY THIRD PARTIES,
OUR ABILITY TO COMPETE IN THE INDUSTRY WILL BE HARMED.
We believe that our success depends in part on protecting our proprietary
technology. We rely on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality and assignment of inventions agreements
from our employees, consultants and advisors and other contractual provisions to
establish and protect our intellectual property rights. Policing unauthorized
use of our products and technology is difficult, however. Despite our efforts to
protect our proprietary rights, we face the following risks:
o pending patent applications may not be issued;
o patents issued to us may be challenged, invalidated, or
circumvented;
o unauthorized parties may obtain and use information that we
regard as proprietary despite our efforts to protect our
proprietary rights;
o others may independently develop similar technology or design
around any patents issued to us;
o breach of confidentiality agreements;
o intellectual property laws may not protect our intellectual
property; and
26
o effective protection of intellectual property rights may be
limited or unavailable in some foreign countries, such as China,
in which we may operate.
There can be no assurance that we will have adequate remedies in the event any
of the foregoing materializes. Failure to protect our intellectual property
would limit our ability to produce and market our products in the future, which
would materially adversely affect our revenues generated by the sale of such
products. In addition, third parties could assert that our products and
technology infringe their patents or other intellectual property rights. As a
result, we may become subject to future patent infringement claims or
litigation, the defense of which is costly, time-consuming and diverts the
attention of management and other personnel.
POLITICAL, ECONOMIC AND REGULATORY RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS MAY LIMIT OUR ABILITY TO DO BUSINESS ABROAD.
A substantial number of our manufacturers, customers and suppliers are located
outside of the United States, principally in the Far East. Our international
operations are subject to political and economic conditions abroad,
protectionist trade legislation in either the United States or foreign
countries, such as a change in the current tariff structures, export or import
compliance laws, or other trade policies, any of which could adversely affect
our ability to manufacture or sell displays in foreign markets and to purchase
materials or equipment from foreign suppliers. All of our agreements with
customers are governed by foreign law and, therefore, are subject to uncertainty
with regard to their enforceability.
RISKS RELATED TO DOING BUSINESS IN CHINA MAY NEGATIVELY AFFECT OUR BUSINESS.
Our business is subject to significant political and economic uncertainties and
may be adversely affected by political, economic and social developments in
China. Over the past several years, the Chinese government has pursued economic
reform policies including the encouragement of private economic activity and
greater economic decentralization. The Chinese government may not continue to
pursue these policies or may significantly alter them to our detriment from time
to time with little, if any, prior notice.
A lack of adequate remedies and impartiality under the Chinese legal system may
adversely impact our ability to do business in China and to enforce the
agreements or purchase orders to which we are, or may become, a party.
At various times during recent years, the United States and China have had
significant disagreements over political, economic and social issues.
Controversies may arise in the future between these two countries. Any political
or trade controversies between the United States and China, whether or not
directly related to our business, could adversely affect our ability to do
business in China.
THE RECENT OUTBREAK OF SEVERE ACUTE RESPIRATORY SYNDROME ("SARS") MAY ADVERSELY
IMPACT OUR BUSINESS.
The SARS outbreak has been significantly focused on Asia, and specifically in
China where our current customer and many of our prospective customers are
located. The SARS outbreak may have already begun to impact on our ability to
sell our products. The demand in China for high definition televisions, rear
projection monitors and other end products that would incorporate our
microdisplay products is seasonal, with one typically high demand season arising
in early May. However, because of the outbreak of SARS and related market
uncertainties, demand for our customer's and prospective customers' products was
unusually low in May 2003. Should the SARS illness spread to new regions in Asia
or elsewhere or intensify in severity in areas already affected, causing demand
for our customer's and prospective customers' products to remain low, our
operating results could be adversely impacted.
WE DO NOT PAY CASH DIVIDENDS.
We have never paid any cash dividends on our common shares and do not anticipate
that we will pay cash dividends in the near future. Instead, we intend to apply
any future earnings to the expansion and development of our business.
PART II. OTHER INFORMATION
ITEM 2 Changes in Securities and Use of Proceeds
27
On January 3, 2003 the Company issued 142,360 shares of common stock upon the
conversion of prepaid interest of $354,477. Prepaid interest was computed using
the closing price of the common stock on December 31, 2002 of $2.49, and is
being amortized through December 31, 2003. For the three months ended March 31,
2003, additional stock-based interest expense of approximately $70,800 was
recorded due to the beneficial conversion feature of the prepaid interest,
representing the excess value of the common shares received upon conversion of
the prepaid interest. At March 31, 2003, the carrying value of the Argyle notes
totals $1,056,000, which includes the $1,188,000 principal balance net of
unamortized discounts of $132,000.
EXERCISE OF STOCK OPTIONS, WARRANTS, DURING THE THREE MONTHS ENDED MARCH 31,
2003
During the first three months of 2003, 2,500 shares of common stock were issued
upon the exercise of employee stock options. Total cash received was $3,125.
Payments under notes receivable from shareholder resulting from the exercise of
warrants in 2002 totaled $52,500.
ISSUANCE OF STOCK, STOCK OPTIONS AND WARRANTS IN THE THREE MONTHS ENDED MARCH
31, 2003
In March 2003, the Company issued 47,000 shares of common stock in exchange for
consulting services provided in 2002 totaling $116,250. The expense associated
with these services was recorded in 2002.
On October 14, 2002 the Company issued a fully vested warrant to purchase
250,000 shares of common stock at an exercise price of $3.50 in exchange for
consulting services rendered over a six-month period. A value of $76,068 was
assigned to the warrants for the portion of the services rendered in 2003 using
the Black-Scholes option pricing model and the following assumptions: stock
price $1.84, historical volatility 100%, risk free rate 5%, a dividend yield of
0, and a contractual term of two years. The portion of the value of the warrant
earned, $76,068, in the first quarter of 2003 is reflected in the statement of
operations as stock-based general and administrative expense.
In March 2003, the Company issued a fully vested warrant to purchase 200,000
shares of common stock in exchange for services rendered in the first quarter of
2003. A value of $85,400 was assigned to the warrant using the Black-Scholes
option pricing model and the following assumptions: stock price $2.43,
historical volatility 100%, risk free rate 5%, a dividend yield of 0, and a
contractual term of five months. The value of the warrant is included in
stock-based general and administrative expense.
Stock-based general and administrative expense discussed above is as follows:
Three months ended March 31,
2003 2002
--------- ---------
Stock and options granted to employees and directors $ 12,285 $ 220,000
Common stock and warrants expensed for services 161,468 -
Warrant and other charges - 45,777
--------- ---------
$ 173,753 $ 265,777
========= =========
28
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Report on Form 8-K:
None.
29
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused the report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: May 15, 2003
SpatiaLight, Inc.
By: /s/ROBERT A. OLINS
Robert A. Olins
Acting Chief Executive Officer
(Principal Executive, Financial
and Accounting Officer
30
CERTIFICATION
I, Robert A. Olins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SpatiaLight, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us by others within
those entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
- -----------------------
Robert A. Olins
Chief Executive Officer and
Principal Financial Officer