SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 2003.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to
Commission File Number: 000-19828
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SPATIALIGHT, INC.
(Exact name of registrant as specified in its Charter)
NEW YORK 16-1363082
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Five Hamilton Landing, Suite 100, Novato, California 94949
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(Address of principal executive offices)
(415) 883-1693
--------------------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None Securities registered under Section 12(g) of the Exchange Act:
Common Shares, $.01 par value
-----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value for the Issuer's voting Shares held by
non-affiliates of the Issuer, based upon the $ 4.25 per share closing sale price
of the Common Shares on March 26, 2004, as reported on the Nasdaq SmallCap
Market, was approximately $ 127,281,631. Common Shares held by each officer and
director and by each person who owns 5% or more of the outstanding Common Shares
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 29, 2004, Registrant had 34,495,062 Common Shares outstanding.
1
SPATIALIGHT, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
ITEM 1 Description of Business........................................................... 3
ITEM 2 Description of Property........................................................... 8
ITEM 3 Legal Proceedings................................................................. 8
ITEM 4 Submission of Matters to a Vote
Of Security Holders............................................................... 8
PART II
ITEM 5 Market for Common Equity and Related Shareholder Matters.......................... 8
ITEM 6 Selected Consolidated Financial Data.............................................. 11
ITEM 7 Management's Discussion and Analysis of Financial Condition
And Results of Operation.......................................................... 12
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk ....................... 25
ITEM 8 Consolidated Financial Statements and Supplementary Data.......................... 25
ITEM 9 Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure............................................ 53
ITEM 9A Controls and Procedures .......................................................... 53
PART III
ITEM 10 Directors and Executive Officers.................................................. 54
ITEM 11 Executive Compensation............................................................ 56
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters................................................... 59
ITEM 13 Certain Relationships and Related Transactions.................................... 60
ITEM 14 Principal Accountant Fees and Services ........................................... 62
PART IV
ITEM 15 Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K...... 63
2
PART I
This annual report on Form 10-K contains certain forward-looking statements
within the meaning of Section 21E of the Securities and Exchange Act of 1934, as
amended, and is 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 risks and uncertainties, including, but not limited
to, those discussed herein which are specific to the Company's business, and in
particular, those contained in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the caption "Risk Factors,"
that could cause actual results to differ materially from those projected. You
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. We undertake no obligation to publicly
update or revise these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events and thus you should not assume that silence by management
over time means that actual events are bearing out as estimated in such
forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
We manufacture microdisplays that provide high resolution images suitable
for applications including high definition television, rear projection computer
monitors 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 and prospective
customers to incorporate our microdisplays into their final products. We lease
clean room space where we currently manufacture our SpatiaLight imagEngine(TM)
microdisplays. In addition, in January 2004, we leased an additional clean room
at the same location as the existing clean room to address current and
anticipated increased manufacturing demand. We believe these facilities are
suitable to meet our current and immediate future needs. We also believe that
these current arrangements provide us with strong quality controls and
effectively protect our proprietary technology in our products. Internal
manufacturing is subject to certain risks described under "Risk Factors" in Item
7 herein. 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.
Our microdisplays are high-resolution liquid crystal displays. They are
constructed with a silicon chip, a layer of liquid crystals and a glass cover
plate in contrast to the more common construction of liquid crystals sandwiched
between two glass plates. These displays are also known as and commonly referred
to as liquid crystal on silicon (LCoS), liquid crystal displays (LCD), active
matrix liquid crystal displays and spatial light modulators.
The image on a microdisplay can be projected onto a screen or other
surface for individual or group viewing or used in a portable application that
is viewed through a magnifying device similar to a viewfinder. Potential
microdisplay applications include:
o large-screen rear-projection television systems, in both high
definition television format and standard television formats;
o large-screen rear-projection computer monitors in a variety of
resolutions;
o video projectors for applications such as presentations;
o head-mounted displays which are used for virtual reality systems,
defense, aerospace and gaming applications; and
o other potential applications such as point of purchase displays,
optical computing and data storage.
3
Our technology uses liquid crystals and silicon chips. An advantage of
these materials is that processes for working with them are already known and
they may be produced more quickly than competing technologies offering
comparable quality. By using existing manufacturing processes, we believe we
will be able to obtain economies of scale.
From 2001 through 2003, we entered into agreements or memoranda of
understanding with original equipment manufacturers (OEMs) in China and the
Republic of South Korea for testing of our microdisplay products in
contemplation of definitive purchase order agreements. Fuji Photo Optical Co.,
Ltd. (Fuji) is our current manufacturer of light engines being used with our
microdisplay products to be sold to our current and prospective customers.
In late January 2003, we announced that we signed a purchase order
agreement with Skyworth Display, one of the Chinese OEMs with which we had an
agreement to test prototypes of our microdisplay products, for the purchase by
Skyworth of 14,100 SpatiaLight display units during a one year delivery period.
The purchase order originally provided for 200 units to be delivered in February
and an additional 200 units in each of March and April 2003. Skyworth and we
subsequently agreed to delay the first delivery of units. To date, we have
completed shipment of 100 of the 200 units originally scheduled for delivery in
the first month. Skyworth has recently advised us that it has decided to change
the screen size format of the LCoS televisions that it intends to manufacture
using our display units. As a result, Skyworth is making necessary changes to
certain of its internally developed electronics components, which Skyworth has
advised us will occur in the future. We expect to ship the remainder of the
first 200 units after Skyworth completes these changes. Following the initial
delivery provisions of 200 units per month for the first three months, we are
scheduled to deliver 1,500 units per month until the order is completed. The
purchase order is cancelable by Skyworth on a quarterly basis and is subject to
pricing contingencies and other customary terms and conditions.
In September 2003, we announced that we signed a purchase order agreement
with China Electronics Corporation (CEC), another of the Chinese OEMs with which
we had an agreement to test prototypes of our microdisplay products, for the
purchase by CEC of 2,000 display units from us. The agreement provides for an
initial delivery of ten display units, which was completed in September, with a
second delivery of 100 units to follow in the immediate future. Additional
shipments will be made periodically according to a schedule to be determined by
CEC and us. Pursuant to the terms of the purchase order, the current obligations
of CEC are backed by letters of credit in our favor. The purchase order is
cancelable by CEC after delivery of 110 units and is subject to other customary
terms and conditions.
In October 2003, we announced that we had signed a purchase order
agreement with Nanjing Panda Electronics Co. (Panda), a third Chinese OEM with
which we had an agreement to test prototypes of our microdisplay products, for
the purchase of 2610 display units by Panda. The agreement provides for an
initial television box integration phase, which Panda recently completed,
utilizing a prototype SpatiaLight display unit. The agreement then provides for
delivery of ten display units to Panda, which we expect to occur in the
immediate future, with a second delivery of 100 display units to follow.
Subsequent shipments under the purchase order will be made periodically
according to a schedule to be determined by the parties. Pursuant to the terms
of the purchase order, the obligations of Panda will be backed by letters of
credit in our favor. The purchase order is cancelable by Panda after delivery of
ten display units and is subject to other customary terms and conditions.
In December 2003, we signed a purchase order agreement with SCT Optronics
Company Ltd. (SCT), a Chinese OEM, for the purchase of 2,020 display units from
SpatiaLight. The initial shipment of ten display units provided for under the
agreement was completed in December 2003. Future shipments are scheduled to be
made periodically according to a schedule to be finally determined by the
parties. The purchase order is cancelable by SCT after delivery of ten display
units and is subject to other customary terms and conditions.
In December 2003, we signed a purchase order agreement with Shanghai China
Display Co., Ltd. (China Display), another Chinese OEM with which we had an
agreement to test prototypes of our microdisplay products. The agreement
provides for the purchase by China Display of 1,000 sets of three SpatiaLight
imagEngine(TM) microdisplays. Pursuant to the purchase order, we completed an
initial delivery of 100 microdisplay sets to China Display in December 2003. A
second delivery of 300 sets and a third delivery of 600 sets are to follow. The
entire order is scheduled to be completed within a three-month period. We may
mutually agree with China Display to revise the delivery schedule. Pursuant to
the terms of the purchase order, the obligations of China Display will be backed
by three letters of credit, the first of which was issued and paid to us. The
purchase order is not cancelable by China Display, according to the terms of the
purchase order, because the delivered microdisplay sets met China Display's
specifications. The purchase order is subject to other customary terms and
conditions.
4
In December 2003, we signed a purchase order agreement with Global Display
Limited, a Chinese OEM, for the purchase of 2,000 display units from
SpatiaLight. Shipments are scheduled to be made periodically according to a
schedule to be finally determined by the parties. The purchase order is
cancelable by Global Display after the initial delivery of ten display units
provided for under the agreement and is subject to other customary terms and
conditions.
We are also currently negotiating the terms of purchase orders for our
products with certain other prospective customers, primarily in China and South
Korea, some of whom are parties to the agreements or memoranda of understanding
described in this Item 1. There are significant open issues with respect to
these prospective purchase orders that have to be finally negotiated, including
prices and quantities of our products. We cannot assure whether we will receive
any purchase orders binding on any of these companies for their purchase of our
microdisplay products in the near future. Even assuming that we receive purchase
orders that are binding on the prospective customers, these orders and our sales
to these customers are subject to certain contingencies described under "Risk
Factors" in Item 7 herein.
We were incorporated under the laws of the State of New York in 1989. Our
executive offices are located at Five Hamilton Landing, Suite 100, Novato,
California 94949.
TECHNOLOGY AND PRODUCTS UNDER DEVELOPMENT
A typical liquid crystal display, as might be found in a notebook
computer, basically consists (along with other associated materials and
processes) of liquid crystal material sandwiched between two pieces of glass,
polarizers, color filters, a data signal and a light source. As the data signal
is applied across the sandwich of the liquid crystals, the electric field
created by this data signal causes the liquid crystals to tilt. This tilting,
combined with the polarizers, makes each pixel change from opaque to
transparent, thereby controlling either the transmission or reflection of light
from each pixel.
Departing from typical liquid crystal displays utilizing circuitry on two
pieces of glass, we design integrated circuits that control individual
reflective pixels on a silicon substrate. This silicon substrate is manufactured
using a conventional complimentary metal oxide semiconductor (CMOS) process.
This processed silicon substrate, also known as a silicon backplane, then has
the liquid crystal material and a cover glass applied to it. When the data
signal is sent to the circuitry in the silicon, the liquid crystals again tilt
from opaque to transparent states. When polarizers are added and light is
reflected from the pixels on the silicon, images can be viewed directly or,
using standard optical techniques, projected into larger images on a screen.
As is common with all LCDs, the images produced are inherently black and
white. The varying of the electrical signal to each pixel produces gray scaling
(various shades of gray going from black to white). Utilizing this gray scaling,
there are three basic techniques for achieving color displays: (1) optically
combining different colors of light, (2) sequential color systems and (3) color
filters. We believe our displays can be adapted for use in all of these types of
color display processes.
The display industry has undergone and continues to undergo rapid and
significant technological change. We expect display technologies to continue to
develop rapidly, and our success will depend significantly on our ability to
attain and maintain a competitive position. Rapid technological development may
result in actual and proposed displays, products or processes becoming obsolete
before we recoup a significant portion of related research and development,
acquisition and commercialization costs.
5
Our ability to compete will depend in part upon many factors including the
quality of the display, delivery, pricing and technical specifications. In
addition there will be factors within and outside of our control, including
customer support and the success and timing of product introduction and
distribution by our customers. Our competitors may succeed in developing
technologies and products that are equally or more efficient than any which are
being developed by us which will render our technology, displays and other
products obsolete and non-competitive.
Our continued existence is dependent upon our ability to successfully
develop, manufacture, market and sell our products. To date, we have received
purchase orders from seven Chinese OEMs. We are currently offering two types of
products to our customers and prospective customers primarily in China and South
Korea. One product is sets of three of our proprietary SpatiaLight
imagEngine(TM) LCoS microdisplays. Our other product, the display unit, is
comprised of three of our LCoS microdisplays fitted onto a light engine designed
by SpatiaLight and Fuji and manufactured by Fuji. Our current microdisplay sets
and display units each utilize more than 3.6 million pixels and are designed to
be incorporated into High Definition televisions, rear projection monitors, home
theater projection systems, video projectors and other display applications.
MARKETING, SALES AND DISTRIBUTION
Application and Markets
We are currently working with a number of OEMs, primarily in China and
South Korea, to use our microdisplay products in their end product applications.
We do not believe that designing, selling and distributing end products for
these diverse markets is in our own best interests. We are establishing
relationships with OEMs and considering possibilities with respect to jointly
developing end products that could be marketed and sold into those markets. We
are also continuing to establish relationships with OEMs to incorporate our
microdisplays into their end products. In high volume applications, we currently
are and expect to continue custom designing our microdisplay products to fit a
specific manufacturer's need for a specific product. We will also consider
licensing our microdisplay products to large manufacturers who have the ability
and desire to manufacture our displays for use in their final products. Our
SpatiaLight imagEngine(TM) microdisplays can be incorporated into a wide variety
of products such as High Definition televisions, rear-projection computer
monitors, video projectors and head mounted displays.
Our strategy is to focus our abilities on original equipment design (OED)
of LCoS microdisplays and to work closely with OEMs to market end products
utilizing our microdisplays. We are therefore dependent upon these OEMs for the
manufacturing, marketing and selling of end products.
Manufacturing and Supply
We lease clean room space in California where we currently manufacture our
SpatiaLight imagEngine(TM) microdisplays. In addition, in January 2004, we
leased an additional clean room at the same location as the existing clean room
to address current and anticipated increased manufacturing demand. We believe
that these current arrangements provide us with strong quality controls and
effectively protect our proprietary technology in our products. Internal
manufacturing is subject to certain risks described under "Risk Factors." We
perform product testing of our microdisplays, analyze the results and take
actions to refine the manufacturing process and enhance product design. We have
developed statistical quality control procedures for our manufacturing process.
We currently obtain silicon backplanes, a vital component in our
microdisplays, from the Far East. The supply of silicon backplanes from
suppliers does fluctuate and we may be subject to problems of availability.
Since January 2003, we have entered into seven purchase order agreements,
the terms and status of which are more fully described under the heading
"Introduction" in this Item 1 and Note 1 and Note 8 in Item 8. Fuji Photo
Optical Co., Ltd. (Fuji) is our current manufacturer of light engines being used
with our microdisplay products to be sold to our current and prospective
customers.
6
Any termination of a manufacturing or supply contract could have a
material adverse effect on our ability to meet our anticipated commitments to
customers while we identify and qualify replacement manufacturers. We could
become dependent on a manufacturer and any termination or cancellation of our
agreement with the manufacturer could adversely affect our ability to
manufacture our products.
COMPETITION
Microdisplays are a subset of the display market (including television and
video display). This display market subset consists of (1) reflective
microdisplays produced on silicon backplanes, (2) transmissive microdisplays and
(3) emissive microdisplays. Companies competing in the reflective microdisplay
market include Aurora, Brillian, eLCOS, Hitachi, Hughes/JVC, Intel, Philips, and
Sony. These companies are all producing different forms of a liquid crystal
display on a silicon backplane. A competitor in the reflective microdisplay
market, although not using liquid crystals in the display, is Texas Instruments,
which is producing a micro-mechanical structure of moving mirrors on a silicon
backplane.
Rapid and significant technological advances have characterized the
microdisplay market. There can be no assurance that our displays will be
representative of such advances or that we will have sufficient funds to invest
in new technologies or products or processes. Although we believe that our
displays have specifications and capabilities which equal or exceed that of
commercially available LCD and Cathode Ray Tube (CRT) based display products,
the manufacturers of these products may develop further improvements of their
existing technology that would eliminate or diminish our anticipated advantage.
In addition, numerous competitors have substantially greater financial,
technical, marketing, distribution and other resources than we have. We may also
face an aggressive, well-financed competitive response that may include
misappropriation of our intellectual property or predatory pricing.
PATENTS AND INTELLECTUAL PROPERTY
Our ability to compete effectively with other companies will depend, in
part, on our ability to maintain the proprietary nature of our technologies.
SpatiaLight has been awarded six U.S. patents and we have other U.S. and
international patent applications pending. There can be no assurance as to the
degree of protection offered by these patents or as to the likelihood that
pending patents will be issued. Our competitors, in both the United States and
foreign countries, many of which have substantially greater resources and have
made substantial investments in competing technologies, may seek to apply for
and obtain patents that will prevent, limit or interfere with our ability to
make and sell our products or intentionally infringe upon our patents.
The defense and prosecution of patent suits is both costly and
time-consuming, even if the outcome is favorable to us. This can be particularly
true in foreign countries. In addition, there is an inherent unpredictability
regarding obtaining and enforcing patents in foreign countries. An adverse
outcome in the defense of a patent suit could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third
parties, or require us to cease selling our products.
We also rely on unpatented proprietary technology and there can be no
assurance that others may not independently develop the same or similar
technology or otherwise obtain access to our proprietary technology. To protect
our rights in these areas, we require all employees and technology consultants,
advisors and collaborators to enter into confidentiality agreements. However,
these agreements may not provide meaningful protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. To date, we have no experience in enforcing our
confidentiality agreements.
7
RESEARCH AND DEVELOPMENT
We incurred research and development expenses of approximately $2,681,000
million in 2003 and $3,639,000 in 2002. Research and development expenses are
those costs incurred for personnel and experimental materials for the design and
development of new products, including approximately $800,000 in pre-production
tooling costs for test designs in 2002. We believe that the development of new
products will be required to allow us to compete effectively and to achieve
future revenues. We currently have 11 full-time employees whose duties include
research and development and seven full-time employees whose duties include
manufacturing. We intend to continue our product development programs, focusing
on increasing the display specifications including resolution, color and
manufacturing processes. We believe that such developments will be required to
exploit future markets.
EMPLOYEES
As of December 31, 2003, the Company had 28 full-time employees and three
part-time engineering contractors. Full-time employment is divided among three
functional areas with 11 in research and development, seven in manufacturing and
10 in management/finance/administration. In July 2003, we hired a Chief
Financial Officer and an Executive Vice President of Strategic Planning, both of
whom serve as executive officers. Employees are not represented by any
collective bargaining organizations. We consider our relations with our
employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
Our headquarters are located at Five Hamilton Landing, Suite 100, Novato,
California. Our premises, which were designed and built-out to our
specifications, encompass our corporate offices, quality assurance and testing
facilities and optics laboratories. The facility aggregates 14,000 square feet
and the lease continues through August 2009. We also lease clean room space in
California where we currently manufacture our SpatiaLight imagEngine(TM)
microdisplays. In addition, in January 2004, we leased an additional clean room
at the same location as the existing clean room to address current and
anticipated increased manufacturing demand. We believe these facilities are
suitable to meet our current and immediate future needs.
ITEM 3. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings. The
Company is subject to routine claims and lawsuits from time to time in the
ordinary course of business. While the outcome of such ordinary course
proceedings cannot be predicted with certainty, we believe that the resolution
of any future ordinary course matters individually or in the aggregate will not
have a material adverse effect on our business, financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during
the fourth quarter of fiscal 2003.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDERS MATTERS
Trading in our Common Shares has been conducted on the Nasdaq SmallCap
Market since May 24, 2000 under the symbol "HDTV." Because we are traded on the
SmallCap Market, our securities may be less liquid, receive less coverage by
security analysts and news media and generate lower prices than might otherwise
be obtained.
8
The following table sets forth, for the calendar quarters indicated, the
range of high and low quotations for our Common Shares, as reported by Commodity
Systems, Inc.
HDTV COMMON SHARES
Fiscal 2003
High Low
---- ---
First Quarter 3.95 2.03
Second Quarter 3.05 1.89
Third Quarter 5.00 2.40
Fourth Quarter 6.39 4.29
Fiscal 2002
High Low
---- ---
First Quarter 8.15 3.18
Second Quarter 5.24 2.95
Third Quarter 3.95 2.05
Fourth Quarter 4.25 1.79
The quotations listed above reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not represent actual transactions.
As of March 16, 2004, there were approximately 489 holders of record of
our Common Shares and the closing price per share was $4.32 as reported on the
Nasdaq SmallCap Market. The Common Shares represent the only class of securities
outstanding as of this filing.
In June 2003 the shareholders approved an amendment to the Corporation's
Restated Certificate of Incorporation, as amended, to increase the number of
authorized Common Shares, par value $0.01, from 40,000,000 to 50,000,000.
To date, we have not paid a dividend on our Common Shares. The payment of
future dividends is subject to our earnings and financial position and such
other factors, including contractual restrictions, as the Board of Directors may
deem relevant. It is unlikely that dividends will be paid in the foreseeable
future.
Sales of Unregistered Securities
In October 2003, the Company issued 31,250 Common Shares upon the exercise
of a warrant. The purchase price was $3.50 per share and total cash received was
$109,375.
In August 2003, the Company issued 1,212,061 Common Shares and 303,015
fully vested warrants with a strike price of $3.29 for net proceeds of
$2,538,851.
In May 2003, the Company issued 2,796,325 Common Shares at $1.84 per share
and 669,080 fully vested warrants with a purchase price of $2.65. Net proceeds
received were $4,974,935.
On December 31, 2002, the Company issued 50,000 Common Shares upon the
exercise of a warrant. The shares were purchased at $2.42; total cash received
was $121,000.
During 2001, the Company sold 391,036 Common Shares under private stock
purchase agreements. The purchase prices range from $1.75 to $2.40; total cash
received was $785,146.
On October 1, 2001, the Company sold 100,000 Common Shares under a private
stock purchase agreement. The stock was sold at $1.75 per share and was due in
four equal installments. The entire amount was paid on December 31, 2001.
9
On May 15, 2001, the Company sold 600,000 Common Shares under a private
stock purchase agreement. The stock was sold at a price of $1.75 per share. Cash
received was $262,500. The balance of $787,500 was to be paid in three equal
quarterly installments of $262,500. An escrow agent is holding the certificates
for the shares being purchased until all three installments have been paid in
full. At December 31, 2003 the remaining balance is $127,500.
On October 5, 2001, the Company sold 1,346,268 shares of common stock
under a private stock purchase agreement. The stock was sold at a price of $1.75
per share. The balance of $2,517,521 was received in the form of a non-interest
bearing stock subscription receivable, to be paid in four equal quarterly
installments. At December 31, 2001 the remaining balance was $2,504,058. During
the first quarter of 2002, the purchaser defaulted under the second agreement,
resulting in the cancellation of the stock purchase agreement. The 1,346,268
shares have been restored to the status of authorized but unissued shares. The
cancellation had no impact on the Company's results of operations.
None of the above securities transactions involved any underwriters.
All of the purchasers of the Company's securities in the above-described
securities transactions were "Accredited Investors" within the meaning of Rule
501 under Regulation D of the Securities Act of 1933, as amended (the 1933 Act)
and, accordingly, all of these transactions were exempt from registration under
the 1933 Act by reason of Section 4(2) thereof.
We have used proceeds from the above-described securities transactions to
reduce our liabilities, for working capital purposes and for other general
corporate purposes.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2003 regarding
compensation plans (including individual compensation arrangements) under which
equity securities are authorized for issuance.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON EQUITY COMPENSATION PLANS
EXERICSE OF OUTSTANDING WEIGHTED-AVERAGE EXERCISE (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY OPTIONS PRICE OF OUTSTANDING OPTIONS IN COLUMN (A)
- ---------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
--------------------------------------------------------------------------------------------
Equity Compensation Plans
(1999 Stock Option Plan)
Approved by Security Holders 3,252,333 $2.60 415,417
Equity Compensation Plans
(Outside the 1999 Stock
Option Plan) Not Approved
by Security Holders 1,700,000 $4.51 -
* For more information see Note 6 to the Consolidated Financial Statements.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data as of, and for the periods ended, December 31,
2003, 2002, 2001, 2000 and 1999 presented below have been derived from the
audited consolidated financial statements of SpatiaLight. The selected financial
data should be read in conjunction with our consolidated financial statements
and notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein, in order to
fully understand factors that may affect the comparability of the financial data
presented below.
STATEMENT OF OPERATIONS:
Year Ended December 31,
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Sales $ 221,252 $ - $ - $ 65,650 $ 62,000
Cost of Goods Sold (708,320) (286,000) - (16,625) (10,945)
------------ ------------ ------------ ------------ ------------
Gross Margin (deficit) (487,068) (286,000) - 49,025 51,055
Operating expenses 6,322,750 6,001,881 4,907,032 6,130,284 4,039,443
Stock-based general and administrative expenses 1,985,720 713,001 2,938,062 1,162,902 1,935,504
Total operating expenses 8,308,470 6,714,882 7,845,094 7,293,186 5,974,947
------------ ------------ ------------ ------------ ------------
Operating loss (8,795,538) (7,000,882) (7,845,094) (7,244,161) (5,923,892)
------------ ------------ ------------ ------------ ------------
Other income (expenses):
Net interest and other expense (137,167) (245,659) (234,536) (26,762) (94,009)
Stock-based interest expense (583,672) (1,779,147) (1,824,864) (561,346) (1,389,585)
------------ ------------ ------------ ------------ ------------
Total other income (expenses) (720,839) (2,024,806) (2,059,400) (588,108) (1,483,594)
Income tax expense - 2,225 7,233 1,600 3,375
------------ ------------ ------------ ------------ ------------
Net loss $ (9,516,377) $ (9,027,913) $ (9,911,727) $ (7,833,869) $ (7,410,861)
============ ============ ============ ============ ============
Net loss per share - basic and diluted $ (0.34) $ (0.37) $ (0.46) $ (0.41) $ (0.57)
============ ============ ============ ============ ============
Weighted average shares used in computing
net loss per share- basic and diluted 28,173,770 24,578,226 21,469,960 19,178,639 12,964,597
============ ============ ============ ============ ============
BALANCE SHEET DATA: December 31,
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents $ 6,359,969 $ 575,663 $ 2,728,134 $ 1,035,957 $ 1,236,609
Inventory 779,617 275,959 - - 5,036
Working capital (deficit) 6,228,782 (807,891) (868,056) (2,061,234) 319,331
Total assets 8,349,696 2,058,454 3,488,002 1,800,530 1,679,585
Convertible notes 1,155,000 4,207,232 3,137,284 2,782,453 1,216,337
Total stockholders' equity (deficit) 5,813,275 (4,373,806) (213,346) (1,463,178) (562,088)
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the financial
statements and related notes appearing elsewhere in this report. This discussion
and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to, customer's reception of our products,
intensity of competition, quality control during manufacturing and those set
forth under "Risk Factors."
OVERVIEW
We manufacture microdisplays that provide high-resolution images suitable
for applications such as high definition television, rear projection computer
monitors and video projectors, and potential applications such as use in
wireless communication devices, portable games and digital assistants. Our
revenues through December 31, 2003 have been derived from the sales of a limited
quantity of our commercial microdisplay products.
From 2001 through 2003, we entered into agreements or memoranda of
understanding with original equipment manufacturers (OEMs) in China and the
Republic of South Korea 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 generally 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 late January 2003, we announced that we signed a purchase order
agreement with Skyworth Display, one of the Chinese OEMs with which we had an
agreement to test prototypes of our microdisplay products, for the purchase by
Skyworth of 14,100 SpatiaLight display units during a one year delivery period.
The purchase order originally provided for 200 units to be delivered in February
and an additional 200 units in each of March and April 2003. Skyworth and we
subsequently agreed to delay the first delivery of units. To date, we have
completed shipment of 100 of the 200 units originally scheduled for delivery in
the first month. Skyworth has recently advised us that it has decided to change
the screen size format of the LCoS televisions that it intends to manufacture
using our display units. As a result, Skyworth is making necessary changes to
certain of its internally developed electronics components, which Skyworth has
advised us will occur in the immediate future. We expect to ship the remainder
of the first 200 units after Skyworth completes these changes. Following the
initial delivery provisions of 200 units per month for the first three months,
we are scheduled to deliver 1,500 units per month until the order is completed.
The purchase order is cancelable by Skyworth on a quarterly basis and is subject
to pricing contingencies and other customary terms and conditions.
In September 2003, we announced that we signed a purchase order agreement
with China Electronics Corporation (CEC), another of the Chinese OEMs with which
we had an agreement to test prototypes of our microdisplay products, for the
purchase by CEC of 2,000 display units from us. The agreement provides for an
initial delivery of ten display units, which was completed in September, with a
second delivery of 100 units to follow in the future. Additional shipments will
be made periodically according to a schedule to be determined by CEC and us.
Pursuant to the terms of the purchase order, the current obligations of CEC are
backed by letters of credit in our favor. The purchase order is cancelable by
CEC after delivery of 110 units and is subject to other customary terms and
conditions.
In October 2003, we announced that we had signed a purchase order
agreement with Nanjing Panda Electronics Co. (Panda), a third Chinese OEM with
which we had an agreement to test prototypes of our microdisplay products, for
the purchase of 2,610 display units by Panda. The agreement provides for an
initial television box integration phase, which was recently completed. The
agreement then provides for delivery of ten display units to Panda, which we
expect to occur in the immediate future, with a second delivery of 100 display
units to follow. Subsequent shipments under the purchase order will be made
periodically according to a schedule to be determined by the parties. Pursuant
to the terms of the purchase order, the obligations of Panda will be backed by
letters of credit in our favor. The purchase order is cancelable by Panda after
delivery of ten display units and is subject to other customary terms and
conditions.
12
In December 2003, we signed a purchase order agreement with SCT Optronics
Company Ltd. (SCT), a Chinese OEM, for the purchase of 2,020 display units from
SpatiaLight. The initial shipment of ten display units provided for under the
agreement was completed in December 2003. Future shipments are scheduled to be
made periodically according to a schedule to be finally determined by SCT and
us. The purchase order is cancelable by SCT after delivery of ten display units
and is subject to other customary terms and conditions.
In December 2003, we signed a purchase order agreement with Shanghai China
Display Co., Ltd. (China Display), another Chinese OEM with which we had an
agreement to test prototypes of our microdisplay products. The agreement
provides for the purchase by China Display of 1,000 sets of three SpatiaLight
imagEngine(TM) microdisplays. Pursuant to the purchase order, we completed an
initial delivery of 100 microdisplay sets to China Display in December 2003. A
second delivery of 300 sets and a third delivery of 600 sets are to follow. The
entire order is scheduled to be completed within a three-month period. We may
mutually agree with China Display to revise the delivery schedule. Pursuant to
the terms of the purchase order, the obligations of China Display will be backed
by three letters of credit, the first of which was issued and paid to us. The
purchase order is not cancelable by China Display, according to the terms of the
purchase order, because the delivered microdisplay sets met China Display's
specifications. The purchase order is subject to other customary terms and
conditions.
In December 2003, we signed a purchase order agreement with Global Display
Limited, a Chinese OEM, for the purchase of 2000 display units from SpatiaLight.
Shipments are scheduled to be made periodically according to a schedule to be
finally determined by the parties. The purchase order is cancelable by Global
Display after the initial delivery of ten display units provided for under the
agreement and is subject to other customary terms and conditions.
We are also currently negotiating the terms of purchase orders for our
products with certain other prospective customers, primarily in China and South
Korea, some of whom are parties to the agreements or memoranda of understanding
described in this Item 7. One of these parties is a large electronics
manufacturer in South Korea that we signed a development agreement with
contemplating the purchase of sets of SpatiaLight imagEngine(TM) microdisplays.
With respect to prospective purchase orders, there are significant open issues
that have to be finally negotiated, including prices and quantities of our
products. We cannot assure whether we will receive any purchase orders binding
on any of these companies for their purchase of our microdisplay products in the
near future. Even assuming that we receive purchase orders that are binding on
the prospective customers, these orders and our sales to these customers are
subject to certain contingencies described under "Risk Factors" in this Item 7.
We are no longer working with Daewoo Electronics, with which we had an MOU.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 2003, we have sustained recurring net losses from
operations and, at December 31, 2003, we had net equity of approximately
$5,813,000. During 2003, we experienced negative cash flows from operating
activities of approximately $7,563,000 and a net loss of approximately
$9,516,000. Our operations were funded in 2003 by the exercise of warrants and
options of approximately $850,000, from the private placements of $12.5 million
of equity securities, including the sale to certain private purchasers, in late
December 2003, of $5.0 million of equity securities that had been included in a
"Shelf" Registration Statement, and approximately $221,000 of revenues generated
from the commercial sale of a limited quantity of our microdisplay products.
As of December 31, 2003, the Company had approximately $6,360,000 in cash
and cash equivalents, an increase of approximately $5,784,000 from the December
31, 2002 amount of $576,000. Our net working capital at December 31, 2003, was
approximately $6,229,000, compared to a net working capital deficit of
approximately $808,000 at December 31, 2002.
13
Net cash used by operating activities totaled approximately $7,563,000 and
$5,059,000 in 2003 and 2002, respectively. The increase was due to an increase
in inventory for production needs in 2004 and a reduction in accounts payable to
vendors. Net cash provided by financing activities was approximately $13,872,000
and $3,188,000 in 2003 and 2002, respectively, resulting from net proceeds of
$12,500,000 raised in three separate equity private placement transactions in
2003.
As of December 31, 2003, we had an accumulated deficit of approximately
$58,274,000. We have realized significant losses in the past and expect that
these losses will continue until we start to receive significant revenues from
the sale of our products. We generated revenues of $221,000 from operations
during 2003. The ramp up in manufacturing and commercialization of our
microdisplays will require substantial expenditures during 2004. Although we are
expecting to generate revenues from purchase orders in 2004, we may continue to
operate at a loss during 2004. There can be no assurance that our business will
operate on a profitable basis thereafter.
We anticipate that our cash expenditures during 2004 will approximate
$500,000 per month, or $6.0 million for the year, without regard to any revenues
in 2004. We expect to meet our cash needs with our existing cash balances and
collections from stock subscription receivable of approximately $1,097,000 and
from the exercise of warrants held by existing investors. In addition, we expect
to fund working capital requirements by receiving payments from our customers in
connection with signed purchase orders and by considering opportunities to
obtain debt financing. There can be no assurances that we will be able to obtain
such debt financing or that existing investors will exercise their warrants.
OFF BALANCE SHEET ARRANGEMENTS
None.
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
We have long-term contractual obligations and commitments primarily with
regards to payment of debt and lease arrangements.
The following table aggregates our expected contractual obligations and
commitments subsequent to December 31, 2003:
PAYMENTS DUE BY PERIOD
2008 and
Contractual obligations 2004 2005 2006 2007 beyond Total
- ---------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Employment Agreements $ 520,000 $ 180,000 $ - $ - $ - $ 700,000
Long-term convertible debt - 1,188,000 - - - 1,188,000
Operating lease commitments 520,305 458,996 446,853 459,040 792,419 2,677,613
Purchase Commitments 978,450 - - - - 978,450
----------- ----------- ----------- ----------- ----------- -----------
Total contractual cash obligations $ 2,018,755 $ 1,826,996 $ 446,853 $ 459,040 $ 792,419 $ 5,544,063
=========== =========== =========== =========== =========== ===========
RESULTS OF OPERATIONS
Revenues. The Company recognized revenues of $221,000 for the year ended
December 31, 2003. Revenues were related to initial shipments against purchase
orders signed in 2003. No revenues were recognized in 2002 and 2001.
14
Cost of Goods Sold. Cost of goods sold was $708,320, $286,000 and $0 in
2003, 2002 and 2001, respectively. In 2003, cost of goods sold consisted of
product costs of $192,000, lower of cost or market adjustment of $311,000 as our
initial inventory components were at a cost higher than we expect to incur for
future purchase, and an inventory write-down of $205,000 resulting from a
physical count as we moved from preproduction to production. In 2002, cost of
sales consisted of an inventory adjustment to lower of cost of market of
$286,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses were approximately $3,641,000, $2,363,000 and 2,260,000
in 2003, 2002 and 2001, respectively, and include professional services,
salaries and related taxes and benefits, rent, depreciation, travel, insurance,
and office expenses. Salaries and related taxes and benefits increased
approximately $889,000 in 2003 over 2002 as a result of the reassignment of
employees from research and development to general and administrative and the
increase in the number of general and administrative staff, which was due to the
transition toward commercial manufacturing of our microdisplay products. An
additional increase is due to fees of $250,000 reimbursed to Robert A. Olins,
our Acting Chief Executive Officer, for fees incurred in conjunction with the
May 2003 private placement (see Note 2 to the Consolidated Financial Statements
under Item 8 of this Report) and an increase in rent expense of $137,000. The
increase in expenses for 2002 over 2001 are due to an increase of $160,000 in
legal fees pertaining to normal business and an increase in recruiting expenses
related to a Chief Operating Officer search of $70,000. These increases were off
set by a $146,000 decrease in insurance expense resulting from a change in
carrier, a decrease in coverage and an increase in employee contribution for
medical expenses.
Stock-based general and administrative expenses. Stock-based general and
administrative expenses were approximately $1,986,000, $713,000 and $2,938,000
in 2003, 2002 and 2001, respectively. The amounts incurred in 2003, 2002 and
2001 relate to Common Shares, options to purchase Common Shares and warrants
issued in exchange for services. The increase in 2003 when compared to 2002,
relates primarily to stock-based expense of approximately $1,300,000 associated
with the May 2003 private placement. Of this amount, $959,000 related to the
deemed beneficial pricing of shares and warrants purchased by Robert A. Olins,
Acting Chief Executive Officer. The decrease in 2002 when compared to 2001,
relates primarily to expenses incurred in 2001 related to stock options granted
as compensation to directors valued at $1,655,000, as well as the issuance of
200,000 Common Shares granted as employee compensation valued at $740,000, the
market value of the stock at the date of issuance. The 200,000 Common Shares
referred to above in December 2001 were issued to our former Director of
Corporate Development (DCD). In 2002, 60,000 Common Shares were issued as
compensation valued at $220,000, the market value of the stock at the date of
issuance. The shares were issued in consideration of services rendered by the
DCD with respect to assisting the Company in negotiating the contractual
relationships with its existing prospective customers. See Note 2 to the
Consolidated Financial Statements under Item 8 of this Report.
Research and development expenses. Research and development expenses were
approximately $2,681,000 at December 31, 2003, $3,639,000 at December 31, 2002
and $2,647,000 at December 31, 2001. The increase from 2001 when compared to
2002, and subsequent decrease in 2003 is due to costs of approximately $800,000,
expensed in 2002, related to test units and the purchase of prototype engines
for testing purposes. Additional decrease in 2003 over 2002 is due to
reassignment of existing employees to general and administrative, offset by
hiring of new employees.
Interest income. Interest income was approximately $72,000, $16,000, and
$21,000 in 2003, 2002, and 2001, respectively. The increase in interest income
in 2003 was due to interest earned on a stock subscription receivable from a
shareholder. See Note 2 to the Consolidated Financial Statements under Item 8 of
this Report.
Interest expense. Interest expense was approximately $213,000, $261,000,
and $269,000 in 2003, 2002, and 2001, respectively. These amounts are consistent
with the balances in notes payable.
Stock-based interest expense. Stock-based interest expense of $584,000,
$1,779,000 and $1,825,000 in 2003, 2002 and 2001, respectively, relates to the
valuation of 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 A. Olins, Acting Chief Executive
Officer of the Company based on the intrinsic value of the conversion feature.
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. The notes were extended until June 2005 resulting in a lower
monthly amortization of the beneficial conversion in 2003. In addition,
amortization of discounts on the Argyle and Alabama Group notes is included in
stock-based interest expense.
15
Loss before income taxes. Losses before income taxes were $9,516,000,
$9,026,000, and $9,905,000 in 2003, 2002 and 2001, respectively. This increase
from 2002 to 2003 is due primarily to increases of approximately $1,272,000 of
stock-based general and administrative expenses, an increase of $1,278,000 in
general and administrative in 2003 compared to 2002, offset by a decrease of
approximately $958,000 in research and development expenses incurred as a
result of pre-production tooling costs and purchase of prototype engines of
approximately $800,000 and a decrease in stock-based interest expense of
approximately $1,195,000, due to decrease in monthly amortization of
beneficial conversion feature on notes payable. The decrease from 2001 to 2002
is due primarily to a decrease of approximately $2,225,000 of stock-based
general and administrative expenses in 2002 compared to 2001. This decrease was
offset by an increase of approximately $992,000 in research and development
expenses incurred as a result of pre-production tooling costs of approximately
$800,000 and the purchase of prototype light engines for testing purposes.
Income taxes. Income taxes consist primarily of minimum state tax
requirements. See Note 5 to the Consolidated Financial Statements under Item 8
of this Report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our results of operations and
liquidity and capital resources are based on our consolidated financial
statements. To prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America, we
must make estimates and assumptions that affect the amounts reported in the
consolidated financial statements. We regularly evaluate these estimates and
assumptions, particularly in areas we consider to be critical accounting
estimates, where changes in the estimates and assumptions could have a material
impact on our results of operations, financial position and, generally to a
lesser extent, cash flows. Senior management and the Audit Committee of the
Board of Directors have reviewed the disclosures included herein about our
critical accounting estimates, and have reviewed the processes to determine
those estimates.
Revenue Recognition - We enter into commercial transactions to sell our
products. We evaluate revenue recognition for these transactions using the
following criteria (collectively called the Revenue Recognition Criteria):
o Evidence of an arrangement: Before revenue is recognized, we must have
evidence of an agreement with the customer reflecting the terms and
conditions to deliver our products.
o Delivery: For products, delivery is considered to occur when title and
risk of loss have been transferred.
o Fixed or determinable fee: We consider a fee to be fixed or determinable
if the fee is not subject to refund or adjustment. If a portion of the
arrangement fee is not fixed or determinable, we recognize that amount as
revenue when the amount becomes fixed or determinable. We do not consider
a fee to be fixed and determinable if any amount is due more than 180 days
from the delivery date. Payment terms of less than 180 days are evaluated
based upon the country in which the arrangement is entered into to assess
whether the fee is fixed and determinable.
o Collection is deemed reasonably assured: Collection is deemed reasonably
assured if we expect the customer to be able to pay amounts under the
arrangement as those amounts become due. If we determine that collection
is not reasonably assured, we recognize revenue when collection becomes
reasonably assured (generally upon cash collection).
16
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 selling price
of the product 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.
Research and Development - Our research and development costs are charged
to expense when incurred.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards SFAS 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 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 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. The
adoption of this Statement did not have a material impact on the Company's
financial condition or results of operations, but may affect any exit or
disposal activities entered into in the future.
In December 2002, the FASB issued (SFAS) 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 123, "Accounting for
Stock-Based Compensation." Additionally, SFAS 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, with early application permitted in
certain circumstances. 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. We did, however adopt the new
disclosure provisions.
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. We did,
however adopt the new disclosure provisions.
17
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires an investor with a
majority of the variable interests in a variable interest entity to consolidate
the entity and also requires majority and significant variable interest
investors to provide certain disclosures. A variable interest entity is an
entity in which the equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial support
from other parties. The Company does not have any variable interest entities
that must be consolidated.
In May 2003, FASB issued "Accounting For Certain Financial Instruments
with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. The adoption of
SFAS No. 150 in 2003 did not have a material impact on the Company's results of
operation or financial position.
RISK FACTORS
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 to date and have experienced cash shortages. In 2003 and
2002, we incurred net losses of approximately $9,516,000 and $9,028,000,
respectively. In addition, we had an accumulated deficit of $58.3 million as of
December 31, 2003. We expect additional losses as we continue spending for
production and other business activities as well as further research and
development of our products. As a result, we will need to generate substantial
sales to support our costs of doing business 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 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 exercises of
warrants and public and private purchases of our Common Shares, including the
approximately $12.5 million raised by us in 2003 equity financings and $850,000
raised through exercises of stock options and warrants, we may still require
additional financing to satisfy our increasing working capital requirements.
Reliance for financing upon exercise of warrants, private equity purchase
agreements and public offerings entails the additional risks of non-exercise of
such warrants because of the prevailing market prices of our underlying Common
Shares, default by purchasers under these agreements or inability to sell
publicly registered shares. In the event that we are unable to obtain further
financing, if any, on satisfactory terms, or we are unable to generate sales
sufficient to offset our costs, or if our costs of development and operations
are greater than we anticipate, 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.
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 in the SpatiaLight imagEngine(TM) microdisplays and/or display units,
it could seriously harm our financial condition. In addition, the length of time
that our products may be successfully received by our customers could be limited
by the acceptance of new technologies developed by our competitors.
WE INCUR SUBSTANTIAL RESEARCH AND DEVELOPMENT COSTS IN CONNECTION WITH
TECHNOLOGIES THAT MAY NOT BE SUCCESSFUL.
We currently have eleven 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 changes 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.
18
WE ARE CURRENTLY MANUFACTURING AND SHIPPING OUR MICRODISPLAYS, BUT UNANTICIPATED
DIFFICULTIES IN MANUFACTURING 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
production of our current microdisplays. Problems in 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 source's
operation 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. We lease clean room space in California where we currently
manufacture our SpatiaLight imagEngine(TM) microdisplays. In addition, in
January 2004, we leased an additional clean room at the same location as the
existing clean room to address current and anticipated increased manufacturing
demand. We believe that these current arrangements provide us with strong
quality controls and effectively protect our proprietary technology in our
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. We do not have other such written
agreements which are binding upon the manufacturers of the other components and
no such manufacturer is 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 our component 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 manufacturing our liquid crystal microdisplays, which are an
integral part of the display units, cannot assure the manufacturing yields of
our products. Current purchase orders and future purchase orders, as to which we
cannot give any assurance, will require us to produce greater quantities of our
microdisplay products than we have produced in the past. Problems in production,
including problems associated with increasing our production output 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, and such complexities may lend to similar difficulties that could
harm our business and operating results.
IF MARKETS FOR OUR PRODUCTS DO NOT CONTINUE TO DEVELOP, OUR BUSINESS WILL LIKELY
BE SIGNIFICANTLY HARMED.
Various target markets for our microdisplays, including high-definition
televisions, projectors, monitors, and portable microdisplays, are uncertain and
may be slow to develop. In addition, companies in those markets could utilize
competing technologies. High-definition television has only recently become
available to consumers, and widespread market acceptance, although anticipated,
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 commercially
successful products using our microdisplays. 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 effect our anticipated growth.
19
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 obtain customer orders, 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 purchase order agreements with a limited number of
customers. Despite our reasonable efforts to retain these customers, and obtain
new customers we may not be successful in either of these regards. The loss of
any one or more of these customers or a failure to obtain new customers could
materially harm our business and financial condition.
WE CANNOT ASSURE YOU THAT WE WILL OBTAIN ADDITIONAL PURCHASE ORDERS FROM OUR
CURRENT OR PROSPECTIVE CUSTOMERS, OR, IF WE DO, THAT SUCH ORDERS WILL GENERATE
SIGNIFICANT REVENUES.
From 2001 through 2003, we entered into agreements or memoranda of
understanding (MOU) with original equipment manufacturers (OEMs) in China and
the Republic of South Korea for testing of our microdisplay products in
contemplation of definitive purchase order agreements. All of these agreements
generally 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. To date, we have received
purchase orders from seven Chinese OEMs. Certain other prospective customers
have advised us that they are satisfied with the results of the testing of the
prototypes under their agreements or MOUs 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 are significant open
issues with respect to these prospective purchase orders that have to be finally
negotiated, including prices and quantities of our products. We cannot offer
assurance that we will receive, in the future, binding purchase orders from any
of these companies for their purchase of our microdisplay products.
In addition, even if we receive purchase orders from our current or
prospective customers for our microdisplay products, we may have problems
implementing volume production of such microdisplay products. 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 currently sell any products to end-users. Instead, we design and
manufacture various product solutions that our customers (i.e., OEMs) 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.
20
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;
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 and effectively than
we can.
Our competitive position could suffer if one or more of our customers
decide to design and manufacture their own microdisplay products, 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.
21
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 that 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 highly volatile, reflecting
reported losses and receipt of additional financing. 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
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.
22
BY FURTHER INCREASING THE NUMBER OF OUR COMMON SHARES THAT MAY BE SOLD INTO THE
MARKET, ADDITIONAL OFFERINGS OF OUR EQUITY SECURITIES COULD CAUSE THE MARKET
PRICE OF OUR COMMON SHARES TO DECREASE SIGNIFICANTLY, EVEN IF OUR BUSINESS
OPERATIONS ARE PERFORMING WELL.
The total number of our Common Shares and warrants to purchase our Common
Shares, sold in two private financings and one public financing completed in
2003 represents approximately 14.52% of the total number of our Common Shares
that are issued and outstanding as of March 16, 2004. Sales of these shares,
into and within the public market, or the perception that future sales of these
Common Shares could occur, might adversely affect the prevailing market price of
our Common Shares in the near future.
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
adversely affected due to the limited marketability of our Common Shares. Any
substantial sales 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 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
o effective protection of intellectual property rights may be limited or
unavailable in some foreign countries, such as China, in which we may
operate. Specifically, although we consider the following unlikely because
of the complex technological structure of our products, one or more of our
current or prospective Chinese or Korean customers, or their respective
employees or other persons including our competitors, that have or gain
access to our products for testing purposes, may seek to misappropriate or
improperly convert to their own use our intellectual property and a lack
of adequate remedies and impartiality under the Chinese and Korean legal
systems may adversely impact our ability to protect our intellectual
property.
23
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, and 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 current
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.
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.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We place all of our excess cash and cash equivalents in a checking account
or money market account in the United States with a nationally reputable bank.
We do not expect any material losses from the Company's placement of such cash
balances and we believe that our interest rate exposure is modest. As of
December 31, 2003, our cash and cash equivalents totaled $6,359,969.
We do not have any immediate foreign currency exposure as nearly all of
the Company's business is transacted in United States currency.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
SpatiaLight, Inc.
Novato, California
We have audited the accompanying consolidated balance sheets of SpatiaLight,
Inc. as of December 31, 2003 and 2002 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on those financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SpatiaLight, Inc. at
December 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
San Francisco, California
March 5, 2004
25
SPATIALIGHT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 6,359,969 $ 575,663
Accounts receivable 117,530 -
Inventory 779,617 275,959
Prepaids and other current assets 353,087 565,515
------------- -------------
Total current assets 7,610,203 1,417,137
Property and equipment, net 638,430 506,968
Other assets 101,063 134,349
------------- -------------
Total assets $ 8,349,696 $ 2,058,454
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 863,284 $ 2,018,230
Accrued expenses and other current liabilities 518,137 206,798
------------- -------------
Total current liabilities 1,381,421 2,225,028
Noncurrent liabilities
Convertible notes 1,155,000 4,207,232
------------- -------------
Total liabilities 2,536,421 6,432,260
------------- -------------
Commitments
Stockholders' equity (deficit):
Common stock, $.01 par value:
50,000,000 shares authorized; 33,229,191 and 26,018,658
shares issued and outstanding at 2003 and 2002 332,292 260,187
Additional paid-in capital 61,046,425 45,550,830
Notes and stock subscription receivable (1,096,926) (1,426,999)
Common Stock Issuable 3,805,685 -
Accumulated deficit (58,274,201) (48,757,824)
------------- -------------
Total stockholders' equity (deficit) 5,813,275 (4,373,806)
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 8,349,696 $ 2,058,454
============= =============
See accompanying notes to consolidated financial statements.
26
SPATIALIGHT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
2003 2002 2001
------------- ------------- -------------
Sales 221,252 - -
Cost of Goods Sold (708,320) (286,000) -
------------- ------------- -------------
Gross Margin (487,068) (286,000) -
Selling, general and administrative expenses:
Selling, general and administrative expenses 3,641,422 2,362,865 2,259,942
Stock-based general and administrative expenses 1,985,720 713,001 2,938,062
------------- ------------- -------------
Total selling, general and administrative expenses 5,627,142 3,075,866 5,198,004
Research and development expenses 2,681,328 3,639,016 2,647,090
------------- ------------- -------------
Total operating expenses 8,308,470 6,714,882 7,845,094
------------- ------------- -------------
Operating loss (8,795,538) (7,000,882) (7,845,094)
------------- ------------- -------------
Other income (expenses):
Interest expense:
Interest expense (213,362) (261,314) (268,905)
Stock-based interest expense (583,672) (1,779,147) (1,824,864)
------------- ------------- -------------
Total interest expense (797,034) (2,040,461) (2,093,769)
Interest and other income 76,195 15,655 34,369
------------- ------------- -------------
Total other income (expenses) (720,839) (2,024,806) (2,059,400)
------------- ------------- -------------
Loss before income taxes (9,516,377) (9,025,688) (9,904,494)
Income tax expense - 2,225 7,233
------------- ------------- -------------
Net loss $ (9,516,377) $ (9,027,913) $ (9,911,727)
============= ============= =============
Net loss per share - basic and diluted $ (0.34) $ (0.37) $ (0.46)
============= ============= =============
Weighted average shares used in computing
net loss per share- basic and diluted 28,173,770 24,578,226 21,469,960
============= ============= =============
See accompanying notes to consolidated financial statements
27
SPATIALIGHT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
COMMON STOCK ADDITIONAL NOTES
SHARES AMOUNT PAID-IN CAPITAL RECEIVABLE
------------ ------------ ------------ ------------
Balance January 1, 2001 20,273,229 $ 202,732 $ 28,152,273 $ -
Sale of common stock under private stock purchase
agreements 2,437,304 24,374 4,503,292 (3,480,021)
Conversion of notes and accrued interest 275,120 2,751 527,635 -
Discount on notes payable - - 1,443,000 -
Issuance of stock, stock options and
warrants for services 21,889 219 402,508 -
Issuance of stock and options to employees and
directors 200,000 2,000 2,533,335 -
Exercise of stock options and warrants 2,604,244 26,042 4,349,836 (492,708)
Payments on notes receivable - - - 1,319,295
Net loss - - - -
------------ ------------ ------------ ------------
Balance, December 31, 2001 25,811,786 $ 258,118 $ 41,911,879 $ (2,653,434)
Exercise of stock options and warrants, net of
costs of $132,610 1,355,854 13,559 3,619,035 (1,747,347)
Payments on notes receivable - - - 982,443
Reversal of notes receivable (197,005) (1,970) (614,765) 643,416
Repricing of warrants - - 49,283 143,362
Installment note for shares not yet issued, net of
related payments - - 1,492,536 (1,292,536)
Accrued interest on notes receivable from stockholders - - - (6,962)
Issuance of stock, stock options and
warrants for services 92,799 928 396,162 -
Issuance of stock and options to employees and
directors 60,000 600 315,311 -
Conversion of notes and accrued interest 241,492 2,415 813,985 -
Discount on notes payable - - 58,000 -
Rescission of stock purchase agreement (1,346,268) (13,463) (2,490,596) 2,504,059
Net loss
------------ ------------ ------------ ------------
Balance, December 31, 2002 26,018,658 $ 260,187 $ 45,550,830 $ (1,426,999)
Exercise of stock options and warrants 365,624 3,657 541,124 -
Payments on notes receivable from stockholders - - - 402,500
Accrued interest on notes receivable from stockholders - - - (72,427)
Issuance of stock, stock options,
and warrants for services 79,000 790 569,937 -
Issuance of options to employees and directors - - 195,387 -
Conversion of debt and accrued interest 1,580,820 15,807 3,929,439 -
Warrants issued in lieu of interest
on short term borrowings - - 6,647 -
Shares issued on exercise of warrant
under 2002 installment note 746,268 7,463 (7,463) -
May Private placement, net of issuance cost of $175,065 2,796,325 27,963 4,946,972 -
Issuance of shares to third party for finder's
fee in conjunction with May Private placement 130,435 1,304 375,653 -
August Private placement net of issuance cost of $224,648 1,212,061 12,121 2,526,731 -
December private placement,
300,000 issued, 700,000 issuable in January 300,000 3,000 1,452,255 -
Beneficial pricing on stock and warrants acquired in
private placement - - 958,913 -
Net loss -
------------ ------------ ------------ ------------
Balance, December 31, 2003 33,229,191 $ 332,292 $ 61,046,425 $ (1,096,926)
============ ============ ============ ============
See accompanying notes to consolidated financial statements
TOTAL
ACCUMULATED COMMON STOCK STOCKHOLDERS'
DEFICIT ISSUABLE EQUITY (DEFICIT)
------------ ------------ ------------
Balance January 1, 2001 $ (29,818,184) $ - $ (1,463,179)
Sale of common stock under private stock pu