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Annual Report -- Small Business · Form 10-KSB
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10KSB · Annual Report
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| puredepth_10ksb-013108.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
[X] ANNUAL REPORT UNDER SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF
1934
For the
Transition Period from _____ to _____
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Commission
file number: None
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(Exact
Name of Registrant as Specified in Its
Charter)
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Delaware
(State
or other jurisdiction of
incorporation
or organization)
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20-4831825
(I.R.S.
Employer Identification No.)
|
|
(Address
of principal executive offices)
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(Issuer’s
telephone number)
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(Former
name, former address and former fiscal year, if changed since last
report)
|
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: None
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.Yes [X] No
[ ]
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [X]
Indicate
by check mark whether the registrant is a shell company: Yes
[ ] No [X]
Issuer’s
revenues for its most recent fiscal year: $1,024,405.
The
aggregate market value of the voting and non-voting common stock held by
non-affiliates computed by reference to the average bid and asked price of the
Issuer’s common stock as of April 18, 2008 was approximately
$7,036,000. Shares of common stock held by each officer and director
and by each person known by the Issuer to own 5% or more of the outstanding
common stock 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
January 31, 2008, 68,483,979 shares of Issuer’s common stock, $0.001 par value,
were outstanding.
Transitional
small business disclosure format: Yes
[ ] No [X]
PUREDEPTH,
INC.
FORM
10-KSB ANNUAL REPORT
Table
of Contents
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PART I
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4
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Item
1- Description of Business
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4
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Item
2- Description of Property
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21
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Item
3- Legal Proceedings
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21
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Item
4- Submission of Matters to a Vote of Security Holders
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21
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PART
II
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22
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Item
5- Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities
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22
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Item
6- Management's Discussion and Analysis or Plan of
Operation
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24
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Item
7- Financial Statements
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33
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Item
8- Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
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64
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Item
8A(T)- Controls and Procedures
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65
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Item
8B- Other Information
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66
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PART
III
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Item
9- Directors, Executive Officers, Promoters, Control Persons and Corporate
Gvernance; Compliance with Section 16(a) of the Exchange
Act
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67
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Item
10- Executive Compensation
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70
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Item
11- Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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79
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Item
12- Certain Relationships and Related Transactions and Director
Independence
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81
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Item
13- Exhibits
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82
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Item
14- Principal Accountant Fees and Services
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85
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SIGNATURES
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86
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Special
Note Regarding Forward-Looking Information
This Annual Report of PureDepth, Inc.
on Form 10-KSB contains certain “forward-looking statements” All statements in
this Annual Report other than statements of historical fact are “forward-looking
statements” for purposes of these provisions, including any statements of the
plans and objectives for future operations and any statement of assumptions
underlying any of the foregoing. Statements that include the use of terminology
such as “may,” “will,” “expects,” “believes,” “plans,” “estimates,” “potential,”
or “continue,” or the negative thereof or other and similar expressions are
forward-looking statements. Forward-looking statements in this report include,
but are not limited to, statements regarding expanding the use of our
technologies in existing and new markets; demand for and future revenues from
the sale of visual display products incorporating our technologies; growth
opportunities in the visual display market; opportunities to incorporate our
technologies in markets outside the traditional consumer product markets; the
rate of adoption and sales of MLD visual displays; diversification of sources of
licensing revenue; our expected profit margin from our MLD product sales; the
future impact of our critical accounting policies, including those regarding
revenue recognition, allowance for doubtful accounts, accounting for income
taxes, and stock-based compensations; statements regarding the sufficiency of
our cash reserves; and our expected rate of return on investments. Actual
results may differ materially from those discussed in these forward looking
statements due to a number of factors, including: the rate of growth of the
markets for MLD visual displays that include our technologies; the extent to
which our expectations regarding new licensing markets are realized; whether our
competitors are able to develop and sell alternative 3-D or MLD visual display
technologies to our partners; the accuracy of our identification of critical
accounting policies and the accuracy of the assumptions we make in implementing
such policies; the accuracy of our estimates regarding our taxable income and
cash needs for the next twelve months; the accuracy of our calculations of
royalties due to our licensors; and fluctuations in interest rate and foreign
currencies These forward-looking statements involve risks and
uncertainties, and it is important to note that our actual results could differ
materially from those projected or assumed in such forward-looking statements.
Among the factors that could cause actual results to differ materially are the
factors detailed under the heading “Risk Factors” as well as elsewhere in this
Annual Report on Form 10-KSB. All forward-looking statements and risk factors
included in this document are made as of the date hereof, based on information
available to us as of the date hereof, and we assume no obligation to update any
forward-looking statement or risk factor. You should consider the factors
affecting results and risk factors listed from time to time in our filings with
the Securities and Exchange Commission (SEC), including our Annual Report on
Form 10-KSB, our Quarterly Reports on Form 10-QSB, our Current Reports on Form
8-K and amendments to such reports. Such filings are available on our
website, free of charge, at www.puredepth.com,
but the information on our website does not constitute part of this Annual
Report.
Company
and Fiscal Year
As used
herein, unless the context otherwise requires, PureDepth, Inc., together with
its New Zealand subsidiaries PureDepth Limited and PureDepth Incorporated
Limited, are referred to in this Annual Report on Form 10-KSB as the “Company,”
“we,” “us” and “our.” References herein to year ending 2009, and years ended
2008 and 2007 mean the fiscal year ending January 31, 2009, and the fiscal years
ended January 31, 2008 and January 31, 2007, respectively.
PART
I
ITEM
1- DESCRIPTION OF BUSINESS
Overview
We are a
technology and licensing company focused on the visual display
experience. Our business is the development, marketing, licensing and
support of our proprietary Multi-Layer Display (MLD™) technology and related
products and services. Unlike other display-based technologies, our MLD
technology was created and designed based on how humans visualize the
world. Depth is a key component of everyday visualization and
interaction, yet in the world today most of our information is displayed on
technology that can, at best, only provide the visual perception of depth.
Unlike standard two-dimensional (2D) display technologies that utilize only a
single-layer liquid crystal display (LCD), our MLD technology utilizes two or
more LCD panels that are stacked and separated by actual depth. We
believe that when our MLD technology is incorporated into display products, this
actual depth provides for distinct new ways in which to view, monitor and
interact with visual information.
Our
technology has application in industries and markets where flat panel monitors
and displays are utilized. Our goal is to have our MLD technology
become a standard technology for incorporation into these LCD-based products,
which include location-based entertainment devices, computer monitors, flat
panel televisions, mobile devices and other mass market display
devices.
Corporate
Background and Organization
Predecessor
Entities
PureDepth,
Inc. was originally incorporated in California in April 2005 as the
successor-in-interest to a New Zealand corporation, Deep Video Imaging Limited,
founded in 1999, and its wholly owned subsidiaries PureDepth Limited and
PureDepth Incorporated Limited. In this prospectus, we occasionally refer to
PureDepth, Inc. (the California Corporation) and its predecessors-in-interest as
the “PureDepth Group” and to Deep Video Imaging Limited as “DVIL.”
Reverse
Merger
On March
31, 2006, PureDepth, Inc. (the California Corporation) consummated a merger
transaction in which it merged with and into a wholly owned subsidiary of
Diamond One, Inc. (Diamond One), a publicly traded Colorado corporation. As a
result of that merger, the separate legal existence of PureDepth, Inc. (the
California Corporation) ceased. The former stockholders of PureDepth,
Inc. (the California Corporation) received shares of Diamond One stock in
connection with the merger to the extent that they owned approximately 89% of
the voting capital stock of Diamond One immediately after the transaction. For
accounting purposes, the merger was treated as the reverse acquisition whereby
PureDepth, Inc. (the California Corporation) was treated as the acquirer.
Accordingly, the merger is sometimes referred to herein as the “reverse
merger.”
On May 8,
2006, Diamond One changed its name to PureDepth, Inc. On May 30, 2006,
PureDepth, Inc. (f/k/a Diamond One, Inc.) reincorporated in the State of
Delaware by engaging in a short-form merger with a wholly-owned Delaware
subsidiary. After the short-form reincorporation merger, the surviving entity
was and currently is named PureDepth, Inc.
Divestiture
of Former Business
On May 9,
2006, pursuant to the exercise of an Option Agreement dated March 16, 2006 by
and among Diamond One, Robert Chramosta and Troy Fullmer, we
transferred all of the outstanding membership interests (initially held by
Diamond One) in our then wholly-owned subsidiary, Numismatic Capital Group, LLC,
a Colorado limited liability company, to Messrs. Chramosta and Fullmer in
consideration of their transfer to us of 1,000,000 shares of our common stock
then held by them. We subsequently retired and cancelled these
shares. Prior to the reverse merger, Diamond One assigned all of its
assets and liabilities, specifically including the coin and exchange business
owned and operated by Diamond One prior to the merger, to Numismatic Capital
Group. The exercise of the Option Agreement effectively divested the Company of
the coin and exchange business.
PureDepth,
Inc. has a wholly-owned subsidiary named PureDepth Limited, which in turn has a
wholly-owned subsidiary named PureDepth Incorporated Limited. Both
PureDepth Limited and PureDepth Incorporated Limited are New Zealand
corporations. PureDepth Limited owns our intellectual property portfolio, which
is licensed to PureDepth, Inc. pursuant to an exclusive, perpetual license
agreement. PureDepth Incorporated Limited provides operations and other support
for us, including regional finance, administration, research and development,
and intellectual property (including legal) management operations on behalf of
its parent entities. All financial items included in this prospectus are
denominated in US dollars unless specifically identified as New Zealand
dollars.
Principal
Executive Offices
Industry
Background
Display
technology has evolved from cathode ray tubes to LCDs, plasma displays and other
display technologies. LCDs are part of our everyday work and personal lives, as
they are integrated in a wide range of products such as computer monitors,
televisions, mobile phones and car navigation systems. According to
DisplaySearch, a leading market research and consulting firm, in 2006 worldwide
shipments of all LCD forms exceeded 1 billion units.
Visual
display products that utilize only a single LCD layer cannot display the
real depth of three dimensional (3D) content. Various software applications and
techniques designed for standard single LCD layer display products have been
developed to simulate depth. Some of these applications provide an
illusion of three dimensions by the use of shading sections around windows and
dialog boxes on screens. High-end gaming, CAD drawing and industrial design
software packages have been developed which combine realistic surface rendering,
lighting, shading and shadow effects with photo-realistic perspective images in
order to simulate a 3D image which can be manipulated and rolled around on the
screen. Graphical user interfaces have been developed to allow for the stacked
display of multiple windows on which different data or images can be overlapped.
Software techniques such as “alpha blending,” in which operating systems
using transparent layers of graphical user interface windows, such as Apple
Macintosh computers and Microsoft Windows, are used to display multiple layers
of information, attempt to enhance the utility of layered content by allowing
the viewer to see through one stacked window to the window below
it.
An
alternative approach to using software applications and techniques with single
layer displays to simulate depth is stereoscopic technology. This technology
works by directing slightly different images to a viewer’s left and right eye.
The result is that objects appear to float in front of or behind the display
surface. With this technology, however, there is an optimum viewing
position, or “sweet spot,” from which the viewer best achieves the 3D effect.
Accordingly, a significant drawback to this technology is that if the viewer is
not seated in the sweet spot, he or she will not observe a 3D effect.
Additionally, some users may become nauseous or dizzy when using
stereoscopic technology. Further, 3D stereoscopic displays may require
specialized manufacturing processes and dedicated software development, and
sometimes must be used with special glasses or tracking devices.
Our
MLD Technology
We
believe that because our MLD technology utilizes real depth, it provides a
superior method of displaying multiple windows on which different data or images
can be overlapped displaying 3D content and creating unique opportunities for
visual application functionality.
Our MLD
technology utilizes two or more distinct layers of LCD panels that are stacked,
separated by actual depth and share a common light source.
The
stacked arrangement allows the viewer to look through the front LCD display
panel to see images displayed on the LCD display panel behind it. The
appropriate distance between the LCD panels in an MLD-based display device will
depend on the target application. For example, for location based
entertainment display devices, a large separation between the LCD panels will
create a more dramatic 3D effect, whereas for air traffic control, a smaller
distance may be more appropriate to closely relate the information displayed on
each layer.
Traditionally,
because a stacked LCD arrangement uses overlaid pixel patterns, it would give
rise to what is called “Moiré interference.” Moiré interference is a visual
pattern of bright and dark vertical bands which results in distraction for the
viewer and can lead to nausea. In order to address this problem, we have
developed and patented an interstitial optical component that is placed between
the LCD display layers. The primary function of this component is to
eliminate the Moiré interference while minimizing any degradation to the rear
display image quality.
MLD
Technology Benefits and Functionality
We
believe that our MLD technology allows for a more natural 3D viewing experience
than other display technologies for the following reasons:
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▪
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Natural human visual
experience: MLD technology does not attempt to “trick” the brain
into perceiving a 3D image. Instead, it leverages off the
natural human visual system by using real depth to display 3D
images. The result is that viewers are not subject to
headaches, nausea, fatigue and loss of orientation which may occur when
viewing content on alternative display technologies that simulate rather
than utilize real depth.
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▪
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Transparency using real depth:
When software transparency is used in a single layer display to
view two graphical objects at the same time, the viewer receives mixed
visual signals from each of the pixels where the graphical objects
overlap. In this case, the pixels display both graphical images in the
same area by blending the colors of the images which requires cognitive
overhead to “de-code” and separate out the individual graphical
objects. Viewers of MLD-based visual displays do not experience
this type of cognitive overhead as graphical objects on each LCD layer
have pixels that are solely dedicated to their display and
presentation.
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▪
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Natural viewings
angles: MLD-based display devices do not impose any
restrictions on the angle at which a 3D image may be viewed. Typical
stereoscopic displays have a “sweet spot” where the user must position
themselves so that the 3D effect is optimal. As MLD technology uses real
depth, users can view the display from all angles as they would when
viewing a single layered display.
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Un-aided viewing
experience: MLD-based display devices do not require the
viewer to use any ancillary devices such as tracking systems or viewing
glasses.
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In
addition, we believe our technology has the following market
advantages:
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Uses existing
technology: MLD display devices can replace single layer display
devices and enhance off-the-shelf computing hardware and software,
allowing any user to upgrade and differentiate without writing-off current
information and technology investments. As such, MLD technology can be
used with all major operating
systems.
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▪
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Uses existing
components: The components involved in constructing MLD devices are
readily available since MLD technology uses industry standard LCD flat
panels. At present, there is a multi-billion dollar
infrastructure for the LCD market that manufactures displays suitable for
use in MLD-based products.
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We
believe that the visual effect created by our MLD technology has the potential
to enable unique display product features, such as:
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Information
Segregation. An MLD-based visual display product can
help a user find objects in a complicated user interface by separating out
objects naturally with depth For complex user tasks that
require monitoring of many objects in a display, such as those typically
performed in air traffic control applications, we believe that MLD-based
displays will enable better information uptake by the
viewer.
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▪
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Brilliant Alerts. An
MLD-based product can produce “brilliant alerts” in order to bring
time-sensitive information to the immediate attention of the viewer. These
alerts are created by quickly moving information from the back LCD to the
front LCD and back again. The goal of such an alert is to trigger the
viewer’s instinctual fight or flight response and improve reaction times
compared to those of viewers of a single layer display equivalent. This
type of feature would have application in navigation, process control
and command and control
products.
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▪
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Natural Human
Interfaces. By using the front LCD in our MLD technology
as an interface display and the back LCD as a content display, our MLD
technology can be utilized to create artificial 3D human interfaces for
use in product applications ranging from computer graphical user
interfaces to television programming and
recording.
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▪
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Variability. An
MLD-based display can switch between single layer mode and multi-layer
mode, providing multiple uses within one device. For example, the user can
run 3D games in MLD-mode and then switch back to normal single layer mode
for applications that may work best on a single layer display such as word
processing.
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Our
Business Model
Our
business model is to derive revenues primarily from the licensing of our
technology to our product partners and LCD manufacturing partners and, to a
lesser extent, from sales of prototype MLD-enabled display devices and
associated technical services.
Licensing
revenues are primarily royalties paid by licensees for the integration of our
intellectual property into their display-based products. These
revenues are generally calculated on a per-unit sold or shipped
basis. In connection with our licensing arrangements, for an
additional fee we may also provide various support services to help our partners
achieve a successful launch of their MLD-based products. These
services may include the following:
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Engineering
consulting services, including providing reference designs and technical
transfers for rapid product design for mass production of MLD-based
products;
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▪
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Specification
and supply of the interstitial component used in these MLD
devices;
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▪
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Software
development tools and drivers for market-specific
applications. For example, we have developed a software
development tool for software developers to optimize 3D modeling and
content design for software applications. Additionally we are developing
an automated MLD 3D driver for use with 3D gaming products which will
allow all existing 3D games to be played on an MLD-based display device
without any software modification.
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▪
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Software
support and training, which can involve on-site training sessions on best
practices in design and/or training on our software tools and drivers for
market-specific applications.
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Product
revenues are generally derived from sales of our MLD-enabled, display-based
product prototypes. We have developed and manufactured a limited
number of these prototypes for each of our target markets. We market
these prototypes to our existing or potential partners, who generally use them
to evaluate our technology and to develop, test and promote MLD-based display
products.
Our
Strategy
We are
focused on creating mutually beneficial partnerships with the leading providers
in each of our target markets: location-based entertainment devices, computer
monitors, public information display systems, mobile devices, flat-panel
televisions and other mass market display devices. We intend
to capitalize on our technical know-how and innovative culture to continue
developing and delivering compelling visual display experiences utilizing MLD.
Through our partnerships we believe we can create a consumer expectation and
promote expansion for MLD-based visual displays.
We do not currently manufacture, market or sell MLD-based visual display
devices, other than prototypes used in the marketing, evaluation and
demonstration of our technology. Instead, our direct customers are
our product partners and LCD manufacturing partners.
Product
Partners
Companies
that we would categorize as product partners include those that
design, develop, manufacture, and sell finished visual display-based products
such as computer monitors, flat panel televisions and mobile devices. Some of
the leading examples of these types of companies are Samsung, Dell,
and Viewsonic. Generally, these companies utilize external OEMs for the core
technologies integrated into visual display-based products, including LCD
manufacturers that produce LCD modules. They are interested in
defensible technological advantages for their visual display-based products due
to the commodity nature of their target market segments. Our strategy is to
license our MLD technology to companies that become our product
partners. These product partners may also work collaboratively with
our engineers and their OEMs to integrate our MLD technology into their consumer
products. In most cases, we will also provide our product partners with partner
specific software and hardware engineering consultancy services, software tools,
manufacturing know-how and product prototypes. Our current licensees
are all in the product partner category.
LCD
Manufacturing Partners
Companies
that we would categorize as LCD manufacturing partners include those
that design, develop, manufacture and sell LCD modules to be incorporated
into display-based products for various market segments. Some of
the leading examples of these type of companies include Samsung, LG
Philips, Sharp, Epson, AUO, TMD and Chimei. The majority of these
manufacturers are based in Korea, Japan, and Taiwan. They are
interested in unique technologies, such as our MLD technology, which can
enable them to differentiate their offerings to their target customer
group, which includes companies that we would categorize as
product partners. Our strategy is to license our MLD technology to
companies that become our LCD manufacturing partners. In most cases,
we will also provide our LCD manufacturing partners with partner specific
software and hardware engineering consultancy services, software tools,
manufacturing know- how and product prototypes.
Our
Target Markets
In
conjunction with our product and LCD manufacturing partners we are targeting the
following markets:
Location-Based
Entertainment (LBE) Devices
Location-based
entertainment devices include visual display devices that are located in
entertainment establishments, such as casinos, coin-operated amusement centers
and similar facilities. Our strategy is to provide a replacement and/or
enhancement for mechanical gaming devices and enable new and more compelling
content for customers of our partners.
In Japan,
we are a party to an agreement with Sanyo Electric Corporation (Sanyo) for the
licensing of our MLD technology into products for the Pachinko and Pachislot
market. According to the National Police Agency of Japan, this market
is one of the largest gaming markets in the world with unit volume approaching
6,000,000 machines per year. Sanyo is developing an innovative
Pachinko and Pachislot platform integrating MLD technology that they expect to
begin shipping to customers by the end of our year
ending 2009.
Outside
of Japan, we are a party to a licensing agreement with International Game
Technology (IGT) for the licensing of our technology into wager-based gaming
machines. IGT is the largest provider of gaming machines outside of
Japan. The total annual estimated worldwide sales volume of slot machines is
approximately 300,000 units.
Computer
Monitors
DisplaySearch
estimated that there were over 120,000,000 computer monitors sold in
calendar year ended 2007. The leading product vendors selling
monitors include Samsung, Dell, HP, Acer, LGE and Viewsonic. As evidenced by the
significant declines in average selling prices for monitors in recent years,
this market is highly competitive and driven mostly by price. Our
strategy is to provide a highly compelling solution for the high-end gamer and
graphics professional. Gamers and graphics professionals generally
demand the best visual experience, which is typically characterized by high-end
graphics cards, large displays and fast refresh rates. Moreover, graphics
professionals will be able to double their viewing area without compromising
their physical space.
Public
Information Display Systems
According
to Meko research, a market research firm, the market for specialist
displays will continue to grow in the low double-digit range overall but LCD
sales are showing more than 40% year on year growth in 2007 and continued
double-digit increases in 2008 and 2009. The main goal of public
information displays is to capture the attention of the public with compelling
information and entertainment. Because MLD solutions can provide
eye-catching graphics by having images jump from the back LCD to the front LCD,
MLD solutions can be a very effective and unique vehicle for public information
displays where attention-grabbing technologies are a key factor for
success. Our strategy is to work with the leading providers of LCD
monitors, public information display integrators, and
manufacturers.
Mobile
Devices
According
to DisplaySearch, there were over 1,000,000,000 mobile phones and handheld
entertainment devices sold worldwide in 2006. Handheld devices are
expanding rapidly in their capabilities. Multipurpose devices have
become the norm with the functionality of mobile phones blurring with personal
assistants, music players, game machines, high-resolution cameras and GPS
navigation. Using an MLD-based device, users will be able to double
their viewing area without increasing the physical size of the
device. Our strategy is to target the leading providers of mobile
phones and handheld entertainment devices offering: (i) a new platform for
doubling screen size without changing the form factor of the device, and (ii) a
3D interactive gaming platform for small devices.
Flat
Panel Televisions
DisplaySearch
estimated that there were over 60,000,000 LCD flat-panel televisions sold in
calendar year ended 2007. The leading vendors in this market include
Samsung, Sharp, Sony, Philips and LGE. Our strategy is to provide a
platform for seamless integration of computer and television interfaces using
MLD-based display devices. Because MLD technology provides two layers
of LCD panels, enhanced interfaces can be easily displayed across any video
signal that can drive an LCD panel. This allows for such applications
as Tivo-like recording, Apple TV or Microsoft Media Center access to be
displayed on one layer, while separate content is displayed on the other layer
utilizing another video signal. In addition to new interfaces,
MLD-based televisions have the capability of providing highly saturated colors
by using the back LCD as a dynamic color backlight.
Other
Mass Market Devices
We
believe that automotive, defense and other vertical markets like personal
navigation are well aligned to take advantage of our MLD
technology. Our strategy for vertical market penetration is to work
with established leaders and integrators in these markets, including the major
automobile manufacturers and their associated integrators.
Sales
and Marketing
Our sales
and marketing strategy is focused on securing and supporting our
partners.
Sales
Strategy
Because
we are primarily a licensing company, we focus our attention to named
accounts in each of our target product areas. Key areas of focus are
LCD manufacturers in Asia and leading product companies in each of our target
markets.
Marketing
Strategy
Our
marketing strategy is to promote our MLD technology and support our
partners. As is often the case with new technologies, we believe that
mass market consumers, consumer product companies and manufacturers need to be
educated on the benefits of MLD technology. In this aspect, we face
the same market challenge that the display industry faced in the early days of
high definition television. Accordingly, one of our key marketing
objectives is to articulate and promote the benefits of MLD
technology. Our main vehicles of communication are our web site,
press releases, trade shows and speaking opportunities.
Research
and Development
Our
research and development activities fall into four categories: (i) research;
(ii) patent development; (iii) prototype development and (iv) product design
development. Our efforts in research focus on the core technology surrounding
our MLD technology, such as optics, LCD and alternative display
technologies, backlight technology, manufacturing processes, component
technologies, and similar technologies. Patent development focuses on the
authoring of new and supplemental patents to support and continue developing our
core patents, and the protection of our existing patents. Prototype development
is the actual sample implementation of the MLD technology into specific devices
(such as computer monitors, mobile phones, music players, notebook computers,
navigation devices or gaming machines). Finally, product design development is
the adaptation of our MLD technology for use by a specific partner for a
specific market - for example, the amusement market for Sanyo in
Japan.
Total
research and development costs were $2.8 million and $2.3 million for the years
ended 2008 and 2007, respectively.
Customers
and Partners
Currently,
our key customers are our current product partners: Sanyo and IGT in the
location-based entertainment device market, and Samsung Electronics
Corporation (“Samsung”) in the consumer products market, that may include
computer monitors, TVs, and public information displays.. We are working to
expand our customer base by targeting LCD manufacturers, primarily based in
Asia, as potential LCD manufacturing partners.
In the
years ended 2008 and 2007, license revenue from our agreement with IGT accounted
for 100% of our licensing revenues and approximately 73% and 80% of our total
revenues, respectively.
Competition
We
compete in the global visual display consumer products market, principally in
North America, Asia and Europe and primarily the markets for location-based
entertainment devices, computer monitors, flat panel televisions, mobile devices
and other mass market display devices. As an early-stage company with limited
history we do not yet have a significant share in any of these markets. We
categorize our competition for our MLD technology and MLD-based products into
three main categories: (i) standard single layer displays, (ii) software
applications and techniques that are used with single layer displays to simulate
depth, such as software transparency and alpha blending, and (iii) 3D
stereoscopic displays. Major standard single layer display
competitors comprise all consumer product manufactures of LCD displays,
including Samsung, Sharp, LG Philips. Competitors offering software
techniques and applications used with single layer displays to simulate depth
include Apple and Microsoft. Competitors providing 3D stereoscopic
displays include NEC, LGE, Philips, Sharp and Neurok.
Sources
and Availability of Raw Materials
Our
research and development, marketing prototype and production support operations
depend on obtaining adequate supplies of quality raw materials and components on
a timely basis In general, we source most of our raw materials as well as key
components of prototype MLD products from two or three suppliers for each key
component. This is a result of our need to buy small quantities of raw materials
and in many cases with non-standard or customized specifications. The high
volume, lower cost manufacturers of these materials generally will not sell in
small quantities or build non-standard or customized components. We may
experience shortages in the supply of components or raw materials as a result
of, among other things, anticipated capacity expansion in MLD and competitive
industries.
Proprietary
Rights and Licenses
Intellectual
Property and Patents
With 50
patents covering the United States, Europe, Japan, Korea and smaller markets
around the world, we believe that our MLD technologies are well protected for
use in any form factor utilizing multiple LCDs with real depth and an
interstitial component. PureDepth has maintained a rigorous intellectual
property strategy since inception. We believe that this strategy will ensure
that the core technology we have developed is protected and will simultaneously
limit the ability of competitors to operate in our market. Our intellectual
property portfolio includes an extensive range of defensive and offensive
patents, trademarks and designs. The main focus of the portfolio relates to the
MLD technology together with improvements and components. In addition, the
portfolio includes certain software applications we have developed for use with
our MLD technology.
Hardware
Technology Patents
Our
family of patents were filed to protect our core technology and the idea of
providing an image with depth rather than a true 3D image. The base patent
relating to the MLD technology was originally filed as a PCT application in July
1998. Subsequently, the application has entered the national phase in thirteen
territories, notably including the major markets of Europe, United States and
Japan. The patent covers two or more layers arranged such that one can look
through the front most layer(s) and see the images displayed on the layers
behind it and includes the use of an interstitial diffuser to overcome Moiré
interference. The patent has been granted in New Zealand and the
U.S.
Our
patent portfolio is not limited to one method of eliminating Moiré interference.
Additional hardware patents have been granted which offer protection of MLD
technology beyond the original scope of the base patent. Other patent
applications filed address embedded hardware and end-user applications. These
include an MLD PDA and in-car viewing applications. Broader applications address
the use of MLD technology, such as an MLD-enabled display interfaced to a
computing device.
Software
Technology Patents
The
patent applications we have filed relate to software technology we have
developed to address the control or use of MLD technology and the integration of
the technology into existing software programs. This software allows users to
allocate screen objects to specific layers within the optical stack, either on
an object by object basis, a region basis, or as an automated process based on
image analysis and modification. In addition, this software can be used to
enhance the viewing experience by controlling the characteristics of an object,
such as color and brightness, and those spatially adjacent to the object in the
depth axis.
Assignment
of Intellectual Property from the BASS Group
In
December 2001, DVIL entered into an agreement with BASS Group LLC, a Florida
limited liability company, whereby John and Robert Bass assigned the rights and
interest to three patents granted in the U.S. These rights were subsequently
assigned to PureDepth Limited. In consideration of the assignment,
PureDepth Limited is required to pay BASS Group approximately $175,000 per year
through 2010. Currently, we owe BASS Group an aggregate of approximately
$525,000. As of the date of this filing, no amount is currently due, the
next payment due date is December 1, 2008. Pursuant to the
agreement with BASS Group, we may be required to reassign the intellectual
property to BASS Group in the event of certain defaults, including failure to
pay pursuant to the agreement.
Other
Intellectual Property Rights and Protection
We depend
upon the skills, knowledge and experience of our scientific and technical
personnel, as well as those of our advisors, consultants and other contractors,
none of which is patentable. To help protect our proprietary know-how and
inventions for which patents may be difficult to enforce, we currently and will
in the future rely on trade secret protection and confidentiality agreements to
protect our interests. To this end, we, as a matter of general practice, require
our employees, consultants, advisors and other contractors to enter into
confidentiality agreements that prohibit the disclosure of confidential
information and, where applicable, require disclosure and assignment to us of
the ideas, developments, discoveries and inventions that we determine are
important to our business.
Governmental
Regulation/Environmental
Our
business and operations are subject to various forms of government regulation in
the various countries in which we do business, including required
business/investment approvals, export regulations based on national security or
other reasons, and other export/import regulations such as tariffs. Currently,
we design our technology and products to meet rigid governmental requirements.
However, because the final product will generally be produced and manufactured
by our partners, the actual approval process is the responsibility of the
partner for the specific market.
Many of
the products manufactured by our licensees and the prototypes we manufacture are
subject to certain environmental and recycling laws and regulations relating to
the disposal of electronics. These laws are constantly subject to revision and
amendment.
Employees
As of
January 31, 2008 we had 28 full time employees based in the United States and
New Zealand. Our research and development, hardware and software
engineering and intellectual property patenting activities are based in New
Zealand, and our business development activities are based out of our United
States headquarters. The current level of employees is adequate
to run our operations and support our existing customer
agreements. We do not anticipate hiring additional employees in year
ending 2009 until we resolve our funding needs and we may be required to reduce
our worldwide headcount further depending on the amount, type and terms of any
funding we may attain.
RISK
FACTORS
You
should carefully consider the risks described below before making an investment
decision. If any of the following risks actually occur, our business, financial
condition or results of operations could be materially and adversely affected.
In such case, the trading price of our common stock could decline, and you may
lose all or part of your investment.
WE
HAVE OBTAINED FINANCING, AND ARE SEEKING ADDITIONAL FINANCING, THAT WILL DILUTE
SHAREHOLDINGS, AND OUR FAILURE TO OBTAIN ADDITIONAL FINANCING WILL RESTRICT OUR
OPERATIONS AND MAY CAUSE US TO CEASE OPERATIONS ALTOGETHER.
Because
our cash balance and cash flow is not likely to be sufficient to fund our future
long-term operating expenses and the growth of our business, we are undertaking
efforts to obtain additional financing or funding in order to finance our future
losses during the current fiscal year and thereafter. Additional financing
could be sought from a number of sources, including, but not limited to,
additional sales of equity or convertible debt securities, loans from
banks, other financial institutions or our affiliates, or a credit facility; in
addition, additional funding could be sought from new or existing license
partners in the form of royalty advances or other prepayment. In the first
quarter of the year ending 2009, we entered into a Note Purchase Agreement with
K1W1, our majority stockholder, pursuant to which we issued K1W1 notes in the
aggregate principal amount of $3,000,000. The notes will be
convertible at a discount of five percent into the investment instruments we
would issue pursuant to and upon any subsequent qualified
financing. If such qualified financing does not occur, upon maturity
one year from the date of issuance the notes may, at K1W1’s option, convert into
our common stock at a five percent discount from a formula-derived market price,
which will dilute existing shareholders. In addition, pursuant to the
Note Purchase Agreement, K1W1 received a three-year warrant to purchase a number
of the instruments that are issued in the qualified financing equal to 10% of
the aggregate principal under the Notes divided by the discounted price at which
such Notes convert. If this warrant is exercised, the resulting issuance
of instruments would also dilute the existing shareholders, including those
investors which participated in the qualified financing.
We expect that it will be necessary for
us to obtain additional financing or other funding in order to fund our
operations beyond July 2008. We cannot, however, be certain that any
such financing or funding will be available on terms favorable to us, or if such
financing or funding will be available to us at all. If additional funds are
raised by the issuance of our equity securities, such as through the issuance of
stock, convertible securities, or the issuance and exercise of warrants, then
the ownership interest of our existing stockholders would be further diluted. If
additional funds are raised by the issuance of debt or other equity instruments,
we may become subject to certain operational limitations, and such securities
may have liquidation rights senior to those of the then existing holders of
common stock.
Ultimately, if no additional financing
or funding is obtained as and when needed, we may be required
to significantly reduce our level of operations, including by
slowing our growth, delaying hiring, abandoning certain product
development including product development on which we may have already spent
considerable resources and otherwise reducing expenses, or eventually, if
necessary, cease operations altogether. Further, if we do not
enter into a qualified financing resulting in the conversion of the notes issued
to K1W1, or do not satisfy the payment obligations under the notes, K1W1 may
elect to exercise its remedies with respect to its security interest described
below under the heading “We have granted our lender a security interest in our
assets, and a default of our obligations under our outstanding convertible notes
could result in the seizure or forced sale of our assets.”
WE HAVE GRANTED OUR LENDER A SECURITY
INTEREST IN OUR ASSETS, AND A DEFAULT OF OUR OBLIGATIONS UNDER OUR OUTSTANDING
CONVERTIBLE NOTES COULD RESULT IN THE SEIZURE OR FORCED SALE OF OUR
ASSETS.
Our obligations under the Note Purchase
Agreement and Security Agreement, under which the Company raised $3,000,000, are
secured by a first priority security interest in substantially all of our
assets, including patents and intellectual property. If there is an
event of default under the loan and/or security agreements including of the
Company's fault to meet its payment obligations, is liquidated or becomes
insolvent, K1W1 would be entitled to exercise the remedies available to a
secured lender under applicable law and/or pursuant to the applicable loan and
security agreements, including its ability to exercise its rights
associated with the security interests in the Company’s assets. See
the description of the Note Purchase Agreement transaction in "Note 16 --
Subsequent Events."
WE ARE NOT CURRENTLY PROFITABLE AND MAY
NEVER BECOME PROFITABLE.
We have a
history of losses and expect to incur substantial losses and negative operating
cash flow for the foreseeable future. In fact, we expect that our expenses will
increase significantly in absolute dollars in future periods. As a
result, we will need to generate significant revenue in order to achieve and
maintain profitability. Currently, we have limited sources of revenue. Even if
we succeed in developing and commercializing our current and additional
products, we expect that we will continue to incur substantial losses for the
foreseeable future. In sum, we may never achieve or maintain profitability. Our
failure to achieve or maintain profitability will likely negatively impact the
value of our securities.
WE
HAVE A LIMITED OPERATING HISTORY UPON WHICH TO BASE AN INVESTMENT
DECISION.
We are an
early-stage company with a limited operating history upon which to evaluate the
viability of our business and long-term prospects for success. Accordingly,
potential investors should carefully consider the risks, expenses and unforeseen
difficulties generally encountered in the operation and development of an
early-stage business, including the risks and uncertainties frequently
encountered by companies whose business and viability is dependent upon new
technologies.
IF
OUR PARTNERS ARE UNABLE TO INNOVATE, DEVELOP AND MARKET ATTRACTIVE NEW PRODUCTS
INTO WHICH OUR TECHNOLOGY CAN BE INCORPORATED, OUR BUSINESS MAY BE ADVERSELY
AFFECTED.
We do not
manufacture, market or sell visual display consumer products, other than
prototypes, and expect to derive a substantial portion of our future revenues
from the licensing of our MLD technology to our partners for their incorporation
into innovative new products for sale. We expect that these revenues
will generally be based on royalty payments calculated on a per unit sold or
shipped basis. Accordingly, our licensing revenues depend on the
success of our licensees in launching products in volume that incorporate our
technology. We cannot control these manufacturer’s product development or
commercialization efforts or predict their success. The process of
developing and marketing new products is generally complex and uncertain, and
involves a number of risks including, without limitation, the
following:
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our
partners may be unable to obtain adequate funding and resources necessary
for investments in new products and
technologies;
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our
partners’ investments and commitment of significant resources may not
result in successful new products or
technologies;
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our
partners may misunderstand their customers’ product needs and
desires;
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our
partners may not be able to successfully anticipate the new products and
technologies which will gain market acceptance, especially since the
industry in which they operate is characterized by rapid changes,
including technological changes;
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our
partners’ technology may become obsolete earlier than expected due to
rapid advancements in technology and changes in consumer preferences,
and
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delays
in being first to market with new technologies and products may prevent
our partners from successfully competing with their
rivals.
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If our
partners fail to develop and market innovative new products, or if any of the
risks described above materialize, our licensing revenues from our arrangements
with these partners will decline and our business may be negatively and
adversely affected.
OUR
LICENSING ARRANGEMENTS HAVE LENGTHY SALES CYCLES THAT MAKE IT DIFFICULT TO PLAN
OUR EXPENSES AND FORECAST RESULTS.
Our
technology is generally incorporated in our partners’ products at the design
stage. However, their decision to use our technology often requires
significant expenditures by us for engineering, prototype manufacturing and
sales consultation without any assurance of success, and often precedes volume
sales of products incorporating our technology, if any, by a year or
more. If a partner decides at the design stage not to incorporate our
technology into their products, we may not have another opportunity for a design
win with respect to that customer's product for many months or years, if at all.
Our sales cycle can take up to 24 months to complete and because of this
lengthy sales cycle, we may experience a delay between increasing expenses for
research and development and our sales and marketing efforts and the generation
of volume licensing revenues, if any, from these expenditures. Moreover, the
value of any design win will largely depend on the commercial success of our
product and LCD manufacturing partners' products. There can be no assurance that
we will continue to achieve licensing wins or that any licensing win will result
in future revenues.
A
SMALL NUMBER OF PARTNERS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES AND
ACCOUNTS RECEIVABLE IN ANY PERIOD, AND IF ANY ONE OF THEM FAILS TO SHIP PRODUCTS
INCORPORATING OUR TECHNOLOGY OR FAILS TO PAY US, OUR OPERATING RESULTS WILL
SUFFER.
We
currently have licensing arrangements only with IGT, Sanyo, Samsung, and DRS,
and expect to derive a majority of our revenues for the year ended 2008 in the
form of deferred revenue resulting from prepaid royalties under our licensing
agreement with IGT. We are not expecting significant additional
revenue Samsung, Sanyo or DRS, or revenues resulting in cash, during the year
ending 2009 as we cannot control our other partner’s product development or
commercialization efforts. If for any reason our partners do not ship
products incorporating our technology, we will not receive additional licensing
revenues and our operating results will suffer.
At any
given time, the majority of our accounts receivable will be comprised of amounts
due from a small number of these partners. Generally, we do not
require collateral from our partners. If any of our partners do
not pay us, our operating results will be harmed.
EVEN
WITH SIGNIFICANT CAPITAL SPENDING IN THE FUTURE TO KEEP PACE WITH TECHNOLOGICAL
CHANGES, WE MAY NOT BE ABLE TO DEVELOP NEW TECHNOLOGIES THAT ARE ACCEPTED BY THE
MARKET.
Advances
in technology typically lead to a decline in sales volumes for products made
with older technologies and may even lead to those products becoming obsolete.
As a result, we will likely be required to make significant expenditures to
enhance our existing technology or to develop or acquire new technologies to be
incorporated into our partners’ products, including technologies that may cause
our MLD technology to obsolesce. We may not be able to successfully enhance our
technology or develop new technologies that keep pace with technological changes
through our own research and development efforts or through our acquisition of
technology licenses. This may be true even after we have spent significant
amounts of capital. Furthermore, even if we are successful in enhancing,
developing or acquiring any particular technology, we may not be able to
effectively market and license our technology to our partners, or our partners
may not be able to effectively commercialize or market the resulting MLD based
products into which our technology has been incorporated.
THE
AVERAGE SELLING PRICES OF DISPLAYS USING OUR TECHNOLOGY MAY DECLINE OVER TIME
AND NEGATIVELY AFFECT OUR OPERATING RESULTS.
The
average selling prices of displays using
our technology are expected to continually decline over time as a result of,
among other factors, technology advances, cost reductions and increased
competition. Although we may initially be able to take advantage of higher
selling prices that may be associated with the new MLD-based products that our
partners may bring to market, we cannot provide assurance that we will be able
to maintain licensing royalty rates with our partners in the face of market
competition for these products. If we are unable to effectively anticipate and
counter the price erosion that accompanies our partners’ products and may affect
our licensing royalty rates, our profit margins will be negatively
affected.
WE
OPERATE IN A HIGHLY COMPETITIVE ENVIRONMENT AND OUR OPERATING RESULTS MAY BE
ADVERSELY AFFECTED IF WE CANNOT COMPETE EFFECTIVELY.
Our
ability to compete successfully depends on factors both within and outside our
control, including: the end-product pricing of our partners and its impact on
our licensing royalty rates, the performance and reliability of our technology
and the products of our partners which incorporate our technology, our
successful and timely investment in technology development, the success or
failure of our partners in marketing their brands and the products into which
our technology is incorporated, component and raw material supply costs for our
prototypes and our partners’ products, market acceptance of alternative
technologies and general economic and industry conditions. Some prospective
customers for our partners’ products may perceive the quality of certain
products utilizing our competitors’ technologies to be equivalent or superior to
MLD-based products. Our competitors from time to time may have greater
financial, sales and marketing, manufacturing, research and development or
technological resources than us. In particular, competitors with greater
resources may be able to license or manufacture competitive products on a larger
scale or with greater cost efficiencies than us. Alternatively, because
innovation in our industry often creates wide scale change in technologies and
resulting products, our competitors may develop superior technologies and obtain
exclusive rights to those technologies. The number of our competitors may
increase in the future. If any technology that is competing with ours is or
becomes more reliable, higher performing, less expensive or has other advantages
over our technology, then the demand for our technology and related products and
services would decrease. Any of the foregoing factors could harm our
business
OUR
BUSINESS MAY BE ADVERSELY AFFECTED IF ALTERNATIVE VISUAL DISPLAY PANEL
TECHNOLOGIES ERODE FUTURE SALES OF PRODUCTS BASED ON OUR MLD TECHNOLOGY.
The
successful marketing and sale of currently available alternative visual display
panel technologies, or the introduction of new alternative visual display panel
technologies, including those that may be currently under development by our
competitors and us, may erode future sales of MLD technology and may have a
material adverse effect on our business.
GOVERNMENTAL REGULATION MAY LIMIT OUR
ACTIVITIES OR INCREASE OUR COST OF OPERATIONS.
Our
business and operations are subject to various forms of government regulation in
the various countries in which we do business, including required
business/investment approvals, export regulations based on national security or
other reasons, and other export/import regulations such as tariffs. Currently,
we design our technology and products to meet rigid governmental requirements.
However, because the final product will generally be produced and manufactured
by our partners, the actual approval process is the responsibility of the
partner for the specific market. Many of the products manufactured by our
licensees and the prototypes we manufacture are subject to certain environmental
and recycling laws and regulations relating to the disposal of electronics.
These laws are constantly subject to revision and amendment. If we or our
partners cannot comply with these regulations without great cost, our financial
performance may suffer.
GENERAL ECONOMIC CONDITIONS MAY
ADVERSELY AFFECT OUR SALES AND PROFITABILITY.
For the
most part, purchases of the products into which our technology is incorporated
are discretionary. As a result, demand for consumer electronics products, which
we believe will account for a significant proportion of our worldwide operating
revenue will likely be affected by general economic trends in the countries or
regions in which the products into which our technology is incorporated are
sold. Similarly, demand for business use products and for components we may
manufacture that go into products of third parties will also likely be affected
by general economic trends in the various markets in which we sell our products.
In sum, economic downturns and resulting declines of demand in our major markets
and those of our product and LCD manufacturing partners, including North
America, Asia, and Europe, may adversely affect our sales and operating
results.
AS
WE MATERIALLY RELY ON A LIMITED NUMBER OF THIRD-PARTY SUPPLIERS FOR KEY RAW
MATERIALS AND COMPONENTS, AND ANY DISRUPTION IN THEIR SUPPLY WILL NEGATIVELY
AFFECT OUR BUSINESS.
Our
development and sale of MLD prototype products depend in part on obtaining
adequate supplies of quality raw materials and components, which are in many
cases with non-standard or customized specifications, on a timely basis.
Similarly, our third party licensors also depend on adequate supplies of quality
raw materials and components to manufacture MLD products, including without
limitation, polarized and/or laminated film. In general, most of the
raw materials as well as key components of these MLD products are sourced from
two or three suppliers for each key component. The high volume, lower cost
manufacturers of these materials generally will not sell in smaller quantities,
nor will they generally build non-standard or customized materials. We, and our
third-party licensors, may experience shortages in the supply of these and other
components or raw materials as a result of, among other things, anticipated
capacity expansion in the MLD and competitive industries. If we or our
third-party licensors are unable to obtain adequate supplies of high quality raw
materials or components at a reasonable cost or in a timely manner, or are
unable to make alternative arrangements for such supplies, our operating results
could be negatively impacted.
OUR
BUSINESS MATERIALLY RELIES ON PATENT RIGHTS THAT MAY BE NARROWED IN SCOPE OR
FOUND TO BE INVALID OR OTHERWISE UNENFORCEABLE.
Our success will
materially depend on our ability to obtain, defend and enforce our patent rights
worldwide. The coverage claimed in a patent application can be significantly
reduced before a patent is issued. Consequently, our pending or future patent
applications may not result in the issuance of patents. Patents issued to us may
be subjected to further proceedings limiting their scope and may not provide
significant proprietary protection or a competitive advantage. Our patents also
may be challenged, circumvented, invalidated or deemed unenforceable. In
addition, because (i) patent applications in various countries publish at
different times, (ii) it is difficult to monitor patent applications that may be
filed in other countries by third parties, and (iii) the publication of
discoveries in scientific or patent literature often lags behind actual
discoveries, we generally cannot be certain that (i) we were the first creator
of inventions covered by our pending patent applications, (ii) that we or any of
our licensors will be entitled to any rights in purported inventions claimed in
pending or future patent applications, or (iii) that we were the first to file
patent applications on such inventions.
FAILURE
TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD IMPAIR OUR COMPETITIVENESS AND
HARM OUR BUSINESS AND FUTURE PROSPECTS.
We
believe that developing new products and technologies that can be differentiated
from those of our competitors is critical to the success of our business. We
intend to take active measures to obtain international protection of our
intellectual property by obtaining patents and undertaking monitoring activities
in our major markets. Nevertheless, we may not be able to effectively deter
competitors from improper use of our proprietary technologies. For instance, our
competitors may misappropriate our intellectual property, disputes as to
ownership of intellectual property may arise, and our intellectual property may
otherwise become known or independently developed by our competitors. Our
technology may be accessible in markets, such as Asia, where the practical legal
protections for intellectual property may be considerably less than in North
America or Europe. As a result, we may have to litigate to enforce and protect
our intellectual-property rights to determine their scope, validity or
enforceability. Intellectual property litigation is particularly expensive,
could cause a diversion of financial resources and the time and attention of our
management, and may not prove successful. The loss of intellectual property
protection, or the inability to secure or enforce intellectual property
protection, could materially harm our business and ability to
compete.
IF
WE INFRINGE THE RIGHTS OF THIRD PARTIES, WE COULD BE PREVENTED FROM SELLING
PRODUCTS, FORCED TO PAY DAMAGES, OR FORCED TO DEFEND AGAINST LITIGATION, WHICH
WOULD ADVERSELY AFFECT OUR BUSINESS.
If our
products, methods, processes or other technologies infringe the proprietary
rights of other parties, we could incur substantial costs and we may have
to:
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obtain
licenses, which may not be available on commercially reasonable terms, if
at all;
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abandon
an infringing implementation or
product;
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redesign
our products or processes to avoid
infringement;
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stop
using the subject matter claimed in the patents held by
others;
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defend
litigation or administrative proceedings which may be costly whether we
win or lose, and which could result in a substantial diversion of our
valuable management resources.
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WE RELY UPON TRADE SECRETS AND OTHER
UNPATENTED PROPRIETARY KNOW-HOW TO MAINTAIN OUR COMPETITIVE POSITION IN OUR
INDUSTRY, AND ANY LOSS OF OUR RIGHTS TO, OR UNAUTHORIZED DISCLOSURE OF, OUR
TRADE SECRETS OR OTHER UNPATENTED PROPRIETARY KNOW-HOW COULD NEGATIVELY AFFECT
OUR BUSINESS.
We also
rely upon trade secrets, unpatented proprietary know-how and continuing
technological innovation in our business. We typically enter into
confidentiality agreements with each of our employees and consultants upon the
commencement of an employment or consulting relationship, whereby each employee
or consultant agrees to maintain the confidentiality of our trade secrets and
certain other proprietary information on a perpetual basis. However, these
agreements may be breached and in certain circumstances we may not be able to
enforce them. Moreover, even if we can enforce such an agreement, we may not
have an adequate remedy for any such breach. The mere disclosure of our trade
secrets or other know-how as a result of such a breach could adversely and
irreparably affect our business.
OUR
BUSINESS WILL SUBJECT US TO POTENTIAL PRODUCT-LIABILITY CLAIMS THAT COULD
ADVERSELY AFFECT OUR OPERATING RESULTS, FINANCIAL CONDITION AND BUSINESS
REPUTATION.
We
currently manufacture only prototype MLD visual display products for sale to and
use by our partners. We may in the future
manufacture various products or components for incorporation into our partners’
products. We cannot be certain, however, that our prototypes, components we may
manufacture and products incorporating our technology will be defect-free and
will not be recalled at some later date. Furthermore, although we maintain
insurance against product-liability claims, we cannot be certain that such
insurance can adequately satisfy the liabilities that may ultimately be
incurred. In addition, insurance may not continue to be available on terms
acceptable to us. A large-scale product recall or a successful product-liability
claim against us could result in significant costs or have a negative impact on
our reputation, which may in turn lead to a decrease in sales, adversely
affecting our results of operations.
WE
RELY ON KEY ENGINEERS, SENIOR MANAGEMENT AND OTHER PERSONNEL, AND THE LOSS OF
THE SERVICES OF ANY SUCH PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN
SUITABLE REPLACEMENTS MAY NEGATIVELY AFFECT OUR BUSINESS.
Our
success depends to a significant extent upon the continued service of our
research and development and engineering personnel, and on our ability to
continue to attract, retain and motivate qualified researchers and engineers,
especially during periods of rapid growth. The loss of the services of any of
our key research and development and engineering personnel or senior management,
without adequate and timely replacement, could result in delays in product
development, loss of customers, partners and sales, and a diversion of
management resources, each of which could have a material adverse effect on our
business. The current cash position of the Company, and our publicly
identified need for funding, may increase the risk of loss of employees,
including without limitation, loss resulting from employee concerns about their
job security or loss resulting from other companies identifying the employees as
suitable and susceptible hire candidates.
IF
WE ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL, OUR ABILITY TO GROW OUR
BUSINESS MAY BE HARMED.
As we
attempt to grow our business, we will need to hire additional qualified
personnel with expertise in software development, testing, research, technology
development and manufacturing, as well as sales and marketing. We believe that
attracting and retaining qualified personnel will be critical to our success. In
this regard, we compete for qualified individuals with numerous other
enterprises. Competition for individuals with the expertise we require in
Redwood City, California and in Auckland, New Zealand is intense, and we may not
be able to attract and retain qualified personnel.
WE
EXPECT TO HAVE SIGNIFICANT INTERNATIONAL OPERATIONS, WHICH WILL POSE UNIQUE
RISKS TO OUR BUSINESS.
We expect
that a substantial portion of our operational activity and the operational
activity of our partners will be conducted outside of the United States and
particularly in Asia. There are a number of risks inherent for us and our LCD
product and LCD manufacturing partners in doing business in overseas markets,
including the following:
|
|
▪
|
unexpected
legal or regulatory changes;
|
|
|
▪
|
unfavorable
political or economic factors;
|
|
|
▪
|
difficulties
in recruiting and retaining personnel;
|
|
|
|
|
|
|
▪
|
labor
disputes, including strikes;
|
|
|
|
|
|
|
▪
|
less
developed technological infrastructure, which can affect our production or
other activities or result in lower customer acceptance of our products
and services;
|
|
|
▪
|
potentially
adverse tax consequences; or
|
|
|
▪
|
social,
political or economic turmoil due to terrorism, war, or other
factors.
|
Our
failure to adequately address these risks may harm our business.
WE
MAY BE UNABLE TO SUCCESSFULLY MANAGE AND SUSTAIN OUR GROWTH, WHICH COULD HARM
OUR BUSINESS.
Since the
founding of DVIL, we have experienced, and expect to continue to experience,
growth in the scope and complexity of our operations. This growth may strain our
managerial, financial, manufacturing and other resources, impairing our ability
to effectively execute our business plans. The materialization of these risks
could adversely affect our operating results.
OUR
MAJORITY STOCKHOLDER POSSESSES A CONTROLLING PORTION OF THE VOTING POWER OF OUR
COMMON STOCK, WHICH COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
STOCK.
As
of April 18, 2008, K1W1, our majority stockholder, possessed beneficial
ownership of 36,664,355 shares of our common stock, or approximately 53% of our
outstanding common stock, including 884,349 shares of common stock issuable
upon exercise of warrants. This represents a significant and controlling
portion of the outstanding voting power of our securities, and enables K1W1 to
control our management and affairs through the election and removal of our
entire Board of Directors, and all other matters requiring stockholder approval,
including any future merger, consolidation or sale of all or substantially all
of our assets. This concentrated control could discourage others from initiating
any potential merger, takeover or other change-of-control transaction that may
otherwise be beneficial to our stockholders. As a result, the return on an
investment in our common stock through the market price of our common stock or
ultimate sale of our business could be adversely affected.
SINCE
TRANSFER RESTRICTIONS HAVE ELAPSED ON CERTAIN SHARES OF OUR OUTSTANDING COMMON
STOCK, AND AS OUR SECURITY REGISTRATIONS HAVE BECOME EFFECTIVE, THE AVAILABILITY
OF SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
In the year ending
2008, the
number of shares
available for resale on the OTC Bulletin Board has increased and may continue to
increase in the future. Shares of our outstanding common stock
totaling 68,483,979 are now eligible for resale without registration under Rule
144 of the Securities Act, subject to the limitations of that
rule. Additionally, we have registered on Form S-8 22,241,260 shares
of our common stock for issuance upon exercise of options granted under our 2006
Stock Incentive Plan, including most recently 8.5 million shares pursuant to a
Form S-8 filed on September 5, 2007. In connection with our prior
private placements and other arrangements with certain of our security holders,
we have registered on Form SB-2/A, 21,463,423 shares of our outstanding common
stock and 16,406,119 shares underlying outstanding warrants to purchase our
common stock. Any increase in the number of shares available on the
market resulting from the above factors may have an adverse effect on the
trading price of the stock.
TRADING
OF OUR COMMON STOCK ON AN ILLIQUID MARKET MAY RESULT IN LOWER MARKET
PRICES.
Trading
of our common stock is conducted on the OTC Bulletin Board. This has an adverse
effect on the liquidity of our common stock, not only in terms of the number of
shares that can be bought and sold at a given price, but also through delays in
the timing of transactions and reductions in security analysts’ and the media’s
coverage of our operations and our common stock. This may result in lower prices
for our common stock than might otherwise be obtained and could also result in a
larger spread between the bid and asked prices for our common
stock.
THERE
IS CURRENTLY LITTLE TRADING VOLUME IN OUR COMMON STOCK, WHICH WILL MAKE IT
DIFFICULT TO SELL SHARES OF OUR COMMON STOCK.
In general, there has
not been substantial trading activity in shares of our common stock. The small
trading volume will likely make it difficult for our stockholders to sell their
shares as and when they choose. Furthermore, small trading volumes generally
depress market prices. As a result, our stockholders may not always be able to
resell shares of our common stock publicly at times and prices that they feel
are fair or appropriate.
WE
MAY NOT SUCCEED IN EFFORTS TO HAVE OUR COMMON STOCK LISTED ON THE NASDAQ GLOBAL
MARKET OR A SECURITIES EXCHANGE.
We plan
to seek listing of our common stock on a national securities exchange. However,
we cannot assure you that we will be able to meet the initial listing standards
of any stock exchange.
THERE
HAS BEEN ONLY A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK TO DATE.
To date,
there has been only a limited public market for our common stock on the OTC
Bulletin Board. Our common stock is currently not listed on any national
exchange. If an active trading market for our common stock does not develop, the
market price and liquidity of our common stock will be materially and adversely
affected.
BECAUSE
WE BECAME PUBLIC BY MEANS OF A REVERSE MERGER, WE MAY NOT BE ABLE TO ATTRACT THE
ATTENTION OF MAJOR BROKERAGE FIRMS.
Additional
risks may exist as a result of our becoming a public reporting company through a
reverse merger transaction, as opposed to a traditional initial public offering.
Because we did not engage in a more traditional and publicized initial public
offering, security analysts of major brokerage firms may not provide us research
coverage. In addition, there is no incentive to brokerage firms to recommend the
purchase of our common stock. The failure of brokerage firms to provide analyst
coverage will be likely to slow the dissemination of awareness and knowledge of
our business. As a result, the trading price of our common stock may be
adversely affected.
Our
authorized capital consists of 200,000,000 shares, of which 190,000,000 shares
are designated as common stock, par value $0.001 per share, and 10,000,000
shares are designated as preferred stock, par value $0.001 per share. Pursuant
to authority granted by our certificate of incorporation, our Board of
Directors, without any action by the stockholders, may designate and issue
shares in such classes or series (including classes or series of common stock
and/or preferred stock) as it deems appropriate and establish the rights,
preferences, and privileges of such shares, including dividends, liquidation and
voting rights. The rights of holders of classes or series of common stock or
preferred stock that may be issued could be superior to the rights of the common
stock offered hereby. Our Board of Directors’ ability to designate and issue
shares could impede or deter an unsolicited tender offer or takeover proposal.
Further, the issuance of additional shares having preferential rights could
adversely affect other rights appurtenant to the shares of common stock offered
hereby. Any such issuances will dilute the percentage of ownership interest of
our stockholders and may dilute our book value.
WE
ARE SUBJECT TO THE SARBANES-OXLEY ACT AND THE REPORTING REQUIREMENTS OF FEDERAL
SECURITIES LAWS, WHICH CAN BE EXPENSIVE.
As a
public reporting company, we are subject to the Sarbanes-Oxley Act of 2002, as
well as the information and reporting requirements of the Securities Exchange
Act of 1934 and other federal securities laws. The costs of compliance with the
Sarbanes-Oxley Act and of preparing and filing annual, quarterly and current
reports and other information with the SEC, will cause our expenses to be higher
than they would be had we remained privately held. In addition, because we only
recently became subject to these laws and regulations, we cannot accurately
estimate their cost to us from a general and administrative
standpoint.
WE HAVE NEVER PAID DIVIDENDS ON OUR
CAPITAL STOCK AND DO NOT INTEND TO DO SO FOR THE FORESEEABLE
FUTURE.
We have
never paid dividends on our capital stock and we do not anticipate that we will
pay any dividends for the foreseeable future. Accordingly, any return on an
investment in us will be realized, if at all, only when an investor sells shares
of our common stock.
Item
2- Description of Property
In
October 2005 we entered into a lease agreement with First Five Trust for office
and facility space in New Zealand at 24 Morrin Road, Panmure,
Auckland. The premises in New Zealand houses our research and
development activities. The lease covers approximately 5,750 square feet for
approximately $3,950 per month under a three-year lease agreement expiring in
October 2008, subject to certain rights of renewal.
In May
2006, we entered into an office lease agreement with CA-Shorebreeze Limited
Partnership relating to our lease of corporate office space at 255
Shoreline Drive, Suite 610, Redwood City, California 94065. The lease covers
approximately 2,200 square feet for $5,131 per month and expires in May
2008.
In
November 2007, we entered into a new office lease agreement with The Realty
Associates Fund VII L.P. for office space at 3 Twin Dolphin Drive, Suite 350
Redwood City, CA. The new office lease is a 4 year term, commencing
on February 1, 2008 and covers approximately 4,626 square feet at a rate of
$12,952 per month. We subsequently subleased this office space to
Precise Software Solutions (the sublessee) for a 24 month term commencing on
June 1, 2008 at a rate of $13,647 per month.
Item
3- Legal Proceedings
We are not currently involved in any
legal proceedings.
Item
4- Submission of Matters to a Vote of Security Holders
Not
Applicable
PART
II
Item
5- Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities
Market
for Common Stock
Since May
11, 2006, our common stock has traded on the OTC Bulletin Board under the symbol
“PDEP.OB.” From March 31, 2006, the closing date of the reverse merger, to May
10, 2006, our common stock traded on the OTC Bulletin Board under the symbol
“DMDO.” Prior to March 31, 2006, there was no established public
trading market for any class of equity securities of PureDepth, Inc. (the
California entity) or any of its predecessors-in-interest, and the common stock
traded was that of Diamond One, Inc. under the symbol “DMDO.” The
following table lists the high and low bid price for common stock as quoted on
the OTC Bulletin Board during each quarter (or other period, as noted) within
the year ended 2008 and 2007. Although we have provided price
information for Diamond One, Inc. prior to the reverse merger on March 31, 2006,
we believe that the trading of the common stock of Diamond One, Inc. is not
material due to our complete divestiture of the Diamond One business operations
in May 2006.
|
|
|
Price
Range
|
|
|
Quarter
Ended or Other Period as noted
|
|
High
|
|
|
Low
|
|
|
|
|
$ |
1.15 |
|
|
$ |
0.24 |
|
|
|
|
|
1.54 |
|
|
|
0.70 |
|
|
|
|
|
2.13 |
|
|
|
1.30 |
|
|
|
|
|
2.38 |
|
|
|
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.84 |
|
|
|
2.03 |
|
|
|
|
|
3.50 |
|
|
|
1.85 |
|
|
|
|
|
2.35 |
|
|
|
1.45 |
|
|
|
|
|
2.15 |
|
|
|
1.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.11 |
|
|
|
1.30 |
|
The
quotations from the OTC Bulletin Board reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions. Throughout the periods indicated above, trading in our common
stock was sporadic, exemplified by low trading volume.
Record
Holders
As of
January 31, 2008, there were approximately 120 holders of record of our common
stock.
Dividends
We have
not paid or declared any dividends on our common stock and we do not anticipate
paying dividends on our common stock for the foreseeable future.
Equity
Compensation Plan Information
The following table sets forth certain
equity compensation plan information as of January 31, 2008:
|
Equity
Compensation Plan Information
|
|
Plan
Category
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for
future
issuance under equity
compensation
plans
(excluding
securities
reflected
in column (a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans
approved
by security holders
|
13,429,240(1)
|
$0.73
|
7,528,266
(2)
|
|
Equity
compensation plans not
approved
by security holders
|
|
|
|
|
Total
|
13,429,240
|
$0.73
|
7,528,266
|
|
|
(1)
|
Represents
(i) 12,002,429 shares issuable upon exercise of outstanding stock options
granted under our 2006 Stock Incentive Plan with a weighted average
exercise price of $0.74 per share, (ii) 1,082,811 shares issuable upon
exercise of C-warrants issued for professional services with an exercise
price of $0.44 per share and (iii) 344,000 shares issuable upon exercise
of D-warrants issued for professional services with an exercise price of
$1.20 per share.
|
|
|
(2)
|
Represents
shares available for future issuance under our 2006 Stock Incentive
Plan.
|
Recent
Sales of Unregistered Securities.
During
the year ended 2008, we sold the following securities in transactions not
registered under the Securities Act of 1933.
|
|
·
|
In
March 2007, we issued 205,202 shares of common stock pursuant to the
exercise of B-warrants at an exercise price of $0.87 per share for cash
totaling $178,903.
|
|
|
·
|
In
February 2008, we entered into a convertible note purchase agreement
(“Note Purchase Agreement”) with K1W1 providing for the purchase by K1W1
of convertible notes (“Notes”) up to of an aggregate principal amount of
$3,000,000. Under the Note Purchase Agreement, upon the
closing, on February 4, 2008, K1W1 purchased an initial note of $1,000,000
($100,000 of which was previously funded to the Company on January 30,
2008) and on March 14, 2008 K1W1 purchased another note of
$2,000,000. The Notes will be convertible at a discount of five
percent (5%) into investment instruments issued by us pursuant to and upon
a qualified financing. If such qualified financing does not
occur, upon maturity one year from the date of issuance the Notes may, at
K1W1’s option, convert into common stock of the Company at a five percent
(5%) discount from a formula-derived market price. The Notes
will accrue interest at the annual rate of 8%, commencing October 4,
2008. In addition, pursuant to the Note Purchase Agreement,
K1W1 will receive in the form of a warrant the right to participate in
qualified financing, for a period of three years, in an amount equal to
ten percent (10%) of the aggregate principal under the Notes, and at a
discount of five percent (5%) of the purchase price of the investment
instruments issued in such qualified financing. The Notes are
secured by the assets of the Company pursuant to a security
agreement.
|
The sales
of securities identified above were made pursuant to privately negotiated
transactions, which did not involve a public offering of
securities. Each of the investors in these transactions represented
to us in connection with their investment that they were “accredited investors”
(as defined by Rule 501 under the Securities Act) and were acquiring the shares
for investment and not distribution, that they could bear the risks of the
investment and could hold the securities for an indefinite period of time. These
investors received written disclosures that the securities had not been
registered under the Securities Act and that any resale must be made pursuant to
a registration or an available exemption from such
registration. Based upon the foregoing, we believe that the
transactions summarized above were exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) thereof, and/or Rule 506 promulgated
thereunder, and Rule 701 promulgated under Section 3(b). All of the foregoing
securities are deemed restricted securities for purposes of the Securities Act
of 1933, except that the resale of the shares of common stock issued upon
exercise of the B-warrants has been registered by us on Form SB-2.
Item
6- Management’s Discussion and Analysis or Plan of Operation
Management’s
Discussion and Analysis
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and related notes included under Item 7 of this Part II
entitled “Financial Statements” and the above section entitled “Special Note
Regarding Forward-Looking Statements”.
Plan
of Operations
PureDepth,
Inc. is a technology and licensing company focusing on the visual display
experience by delivering award-winning Multi-Layer Display (MLD)
technology. We derive, and expect to continue to derive, revenues
primarily from the licensing of our technology to our product partners and LCD
manufacturing partners and, to a lesser extent, from sales of prototype
MLD-enabled display devices that we manufacture. Licensees are and will be
responsible for the manufacture and sale of display-based products incorporating
our technology and related software. In connection with our licensing
arrangements, we may also derive revenues from the sale of software tools and
drivers for market-specific applications and from various support services,
including engineering consulting services, technical services for implementation
and optimization of our technology and software support and
training.
Our
efforts in the immediate future are primarily focused on fulfilling the
requirements of and supporting existing customer agreements with Sanyo Electric
Corporation (Sanyo), International Game Technology (IGT) and Samsung
Electronics Company, Ltd (Samsung). At the same time, we will
continue to seek to diversify our sources of licensing revenue. We have
identified the following target markets in North America, Asia and Europe that
we believe are appropriate for our MLD technology: location-based entertainment
devices, computer monitors, public information display systems, mobile devices,
flat-panel televisions and other mass market display devices. Our
existing license agreements pertain to products for the location-based
entertainment devices, mass market display devices and mobile
devices. Our goal is to expand our business by working with partner
companies to develop MLD-based products and developing demand and a presence for
such devices in our identified target markets.
Our
primary operating costs relate to compensation for employees, including stock
options and other incentives; ongoing research and development of our
technology; legal services including patent applications and defense of
currently-held patents; and rental of premises in both Redwood City, CA and
Auckland, New Zealand. Other than our research and development expenses no
significant capital equipment purchases are expected during the year ending
2009.
Our
critical research and development activities include: further enhancing our
existing MLD technology and related software; developing, manufacturing and
testing prototype MLD-enabled display devices for our existing licensee partners
and potential licensee partners; designing and customizing features to the
specification of potential licensee partners; and patent defense and application
for our existing and new technology developments. Our goal is to enhance our
existing technology based upon research and development in optics, LCD
technology, backlighting, and component technologies.
We
maintain two facilities, our US headquarters in Redwood City, California and our
research and development center in Auckland, New Zealand. Both
facility leases expire in year ending 2009; May 2008 for Redwood City,
California and October 2008 for Auckland, New Zealand. We expect to
exercise our renewal option for our Auckland, New Zealand
facility. We recently signed a new 4 year lease in new location in
Redwood City, California starting in February 2008. Due to our
reduction in headcount and our need to reduce costs, we subsequently subleased
the new office space to a sublessee for a two year term commencing in June 2008
at terms similar to our obligations. We expect to either renew our
current lease or relocate to a similarly sized location at expiration of our
current lease.
We have
reduced the number of worldwide employees from a high of 46 employees during the
year ending 2008 to a current level of 28 full time employees. Five
of our employees are located at our US headquarters in Redwood City, California
and the remaining 23 employees are located at our research and development
facility in Auckland, New Zealand. We believe the current level of
employees is adequate to run our operations and support our existing customer
agreements. We do not anticipate hiring additional employees in the
year ending 2009 until we resolve our funding needs and we may be required to
reduce our worldwide headcount further depending on the amount, type and terms
of any funding we may attain.
The
report from our independent auditors on our financial statements for the year
ending 2008 includes an explanatory paragraph indicating there is substantial
doubt about our ability to continue as a going concern. Our operations have
incurred operating losses to date and are expected to continue to have operating
losses in year ending 2009. Because our cash balance and cash flow is
not likely to be sufficient to fund our future long term operating expenses and
the growth of our business, we are undertaking efforts to obtain additional
financing in order to finance our future losses during the current fiscal year
and thereafter.
In the
first quarter of year ending 2009, we raised $3.0 million in secured convertible
debt agreements from our majority shareholder. Additional financing could
be sought from a number of sources, including, but not limited to, additional
sales of equity or convertible debt securities, loans from banks,
other financial institutions or our affiliates, or a credit
facility. In January 2008, we executed a cost reduction plan at both
our operating locations. At the same time, we continue to seek
to increase and diversify our sources of licensing revenue.
While we
believe our plans ultimately will resolve the going concern issue, there is no
assurance that the intended results will occur. In the event we are unsuccessful
in our plans to finance operations through the above means, or in amounts
sufficient to maintain current operations, we will be forced to again reduce, or
significantly reduce our level of operations, including slowing growth,
delaying hiring, abandoning certain product development including product
development on which we may have already spent considerable resources and could
eventually be forced, if necessary to cease operations altogether. We
may eventually, if necessary, seek other business opportunities through
strategic alliances, merger or acquisition transactions or other arrangements
that may dilute the interests of existing stockholders or cease
operations altogether. If we are successful in our plans to
finance operations through the above means, these plans ultimately may not
resolve the going concern issue and additional financings may also be
necessary thereafter until we are able to attain and sustain profitable
operations. These uncertainties continue to raise substantial doubt
about our ability to continue as a going concern.
The
accompanying financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of these uncertainties.
Results
of Operations
We
reported net operating losses of $9.4 million in year ended 2008 and $10.2
million in year ended 2007. Our net losses are primarily derived from
total operating expenses and will continue to be so until our licensing revenues
become significant. We expect our net loss to decrease in year ending
2009 as a result of operating expense reductions and increases in licensing
royalties from our customers. Our operations have not generated net
income to date and are not expected to do so in year ending 2009.
Licensing
Revenue and Cost of Licensing
|
|
|
Fiscal
Year Ended
|
|
|
Change
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
$ |
|
|
|
%
|
|
|
Licensing
revenue
|
|
$ |
750 |
|
|
$ |
216 |
|
|
$ |
534 |
|
|
|
247% |
|
|
Cost
of licensing
|
|
|
308 |
|
|
|
148 |
|
|
|
160 |
|
|
|
108% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin - $
|
|
$ |
442 |
|
|
$ |
68 |
|
|
$ |
374 |
|
|
|
|
|
|
Gross
margin - %
|
|
|
59 |
% |
|
|
31 |
% |
|
|
|
|
|
|
|
|
We are a
party to a patent and technology license and technology transfer agreement (the
“IGT Agreement”) with International Game Technology (IGT) that involves the
manufacture and distribution of products by IGT, incorporating MLD technology
for sale in the wagering-based gaming segment of the location-based
entertainment display device market. This agreement grants IGT certain rights of
exclusivity for the development and sale of MLD-based products in the
wagering-based gaming market. We received an advance, non-refundable payment of
license fees of $3.75 million under the terms of the agreement during the year
ended 2007. Our licensing revenue consists entirely of the
amortization of this advance non-refundable payment which began in October
2006. The increase in licensing revenue is the result of a full
year’s recognition of the amortized advance, non-refundable payment in year
ended 2008 versus a partial period in year ended 2007. The balance of
the advance on licensing revenues is recorded as deferred revenue and will
continue to be earned over the remaining term of the
agreement.
Our
patent and technology licensing agreements provide royalties to us when our
customers sell or ship products incorporating our MLD
technology. Except for advanced, non-refundable payments, we do
not recognize licensing revenues until our customer sell or ship their products
incorporating MLD technology. Therefore, a majority of our potential
licensing revenue is dependent upon our customers’ sales and marketing
programs. We expect to recognize licensing revenue from our
customers’ sales in year ending 2009; however, we have no control over the
timing or success of our customer’s sales or marketing programs.
Cost of
licensing is primarily the amortization of capitalized costs related to our
patents. We entered into the IGT Agreement in October 2006 and a
pro-rata portion of the related licensing costs were recognized in relation to
its commencement date. Prior to that commencement date, the
amortization of our patents was reported under operating
expenses. The increase in cost of licensing is the result of a full
year’s amortized patent costs in year ended 2008 as compared to a partial period
in year ended 2007. Cost of licensing is not expected to grow
proportionately with revenues as our costs related to intellectual property
(including legal fees, registration costs and ongoing maintenance costs) are
generally capitalized and amortized on a straight-line basis over the expected
statutory lives of the related patents, of up to 20 years.
Service
Revenue and Cost of Services
|
|
|
Fiscal
Year Ended
|
|
|
Change
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
|
|
|
Service
revenue
|
|
$ |
67 |
|
|
$ |
- |
|
|
$ |
67 |
|
|
|
100% |
|
|
Cost
of services
|
|
|
58 |
|
|
|
- |
|
|
|
58 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin - $
|
|
$ |
9 |
|
|
$ |
- |
|
|
$ |
9 |
|
|
|
|
|
|
Gross
margin - %
|
|
|
13 |
% |
|
|
- |
|
|
|
|
|
|
|
|
|
We had no
service revenue in year ended 2007. Our services revenue consists
entirely of billings for technical and professional services provided to
IGT. We offer professional services to IGT and our other licensee in
order for them to develop, test, and promote MLD applications in their
products. We believe that service revenues will continue as
relationships with new and existing partners evolve, but will continue to
represent a small portion of our total revenues.
Cost of
services represents direct labor and overhead costs of providing the respective
services. We expect cost of services to increase in relation to
service revenues.
Product
Sales Revenue and Cost of Product Sales
|
|
|
Fiscal
Year Ended
|
|
|
Change
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
$ |
|
|
|
%
|
|
|
Product
sales revenue
|
|
$ |
207 |
|
|
$ |
53 |
|
|
$ |
154 |
|
|
|
291% |
|
|
Cost
of product sales
|
|
|
185 |
|
|
|
55 |
|
|
|
130 |
|
|
|
236% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin - $
|
|
$ |
22 |
|
|
$ |
(2 |
) |
|
$ |
24 |
|
|
|
|
|
|
Gross
margin - %
|
|
|
11 |
% |
|
|
(4% |
) |
|
|
|
|
|
|
|
|
Product
sales represent sales of prototype MLD-enabled display devices to existing and
potential licensing customers. We design and manufacture these prototypes
specifically for sale to these customers, who use them to develop, test and
promote MLD applications in their products. Product sales revenues increased in
year ended 2008 because year ended 2007 had only a partial year’s worth of sales
and because our number of existing and potential customers have increased in
year ended 2008. We expect product revenues of our prototype
MLD-enabled display devices will continue to increase as relationships with new
and existing partners evolve, but will continue to represent a small portion of
our overall revenues in year ending 2009.
Cost of
product sales represents material, overhead and labor costs of assembling the
prototypes at our research and development facility in Auckland, New
Zealand. We have minimal margins on our product sales as we acquire
small quantities of materials at higher costs than we would have paid had we
been able to buy in bulk and because the engineering for prototype MLD-enabled
display devices has, to date, required the use of non-standard parts and manual
assembly. As the engineering and material standards for form factors
are finalized, we expect the cost of materials and associated labor to decline.
In addition, we intend to outsource the assembly of many prototypes with the
expectation of further reducing our costs. As a result of these factors, we
expect to see our cost of product sales as a percentage of product revenues
decline in the year ending 2009.
Operating
Expenses
| |
|
Fiscal
Year Ended
|
|
|
|
|
|
|
|
January
31,
|
|
|
January
31
|
|
|
Change
|
|
|
($
in thousands)
|
|
2008
|
|
|
%
of Total
|
|
|
2007
|
|
|
%
of Total
|
|
|
|
$
|
|
|
|
%
|
|
|
Depreciation
and amortization
|
|
$ |
102 |
|
|
|
1% |
|
|
$ |
189 |
|
|
|
2% |
|
|
$ |
(87 |
) |
|
|
(46% |
) |
|
Research
and development
|
|
|
2,769 |
|
|
|
28% |
|
|
|
2,301 |
|
|
|
22% |
|
|
|
468 |
|
|
|
20% |
|
|
Sales
and marketing
|
|
|
1,749 |
|
|
|
18% |
|
|
|
1,843 |
|
|
|
17% |
|
|
|
(94 |
) |
|
|
(5% |
) |
|
General
and administrative
|
|
|
5,251 |
|
|
|
53% |
|
|
|
6,214 |
|
|
|
59% |
|
|
|
(963 |
) |
|
|
(15% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
$ |
9,871 |
|
|
|
100% |
|
|
$ |
10,547 |
|
|
|
100% |
|
|
|
(676 |
) |
|
|
(6% |
) |
Included
in our operating expenses are stock-based compensation costs related to the
granting of warrants to non-employees for services and options to employees and
directors. Stock-based compensation totaled $0.9 million for year
ended 2008 and $3.2 million for year ended 2007. The decrease of $2.3
million is primarily attributed to anti-dilution provisions in options granted
as part of our merger transaction in year ended 2007. We intend to
continue to offer stock options as part of compensation packages to motivate and
retain employees. As a result, stock-based compensation on existing
and new grants will continue to be recognized. In year ended 2008 we
expensed stock-based compensation of $0.2 million in research and development,
$0.1 million in sales and marketing, and $0.6 million in general and
administrative operating expense categories.
Depreciation and
amortization. The decrease in depreciation and amortization is
primarily the result of reporting amortization of intellectual property in our
cost of licensing for the entire year ended 2008. In the
corresponding prior year ended 2007, we reported a pro rata amount of
amortization expense in cost of licensing based on the commencement date of our
IGT licensing agreement. The remainder of amortization expense in
year ended 2007 was reported under operating expenses. In total,
depreciation and amortization expenses are consistent with the prior year.
Depreciation expense is not expected to increase proportionately with
revenue or total operating expenses as it is not necessary for us to
significantly increase our purchases of fixed assets.
Research and
development. Research and development expenses consist
primarily of personnel salary and benefits, travel, materials, consultant fees
and stock based compensation. The increase in research and
development expenses is primarily due to the hiring of a new Chief Technology
Officer and six engineers during the first half of year ended 2008 of $0.5
million and the subsequent severance expense related to a reduction in headcount
for the research and development department of $0.2 million during the same
fiscal period. Additional increases related to increased travel and
project expenses of $0.3 million related to the increased activity with our
existing and potential new customers in Asia and United
States. Offsetting these increases were reductions in consultant fees
of $0.3 million as more projects were administered in-house with newly hired
engineers and reduction in stock based compensation of $0.3 million as the prior
year ended 2007 had higher stock based compensation costs related to an
anti-dilutive feature in options granted as part of our merger
transaction. Other fluctuations in research and development expenses
were consistent between the two years with modest increases to reflect the
increase in activity related to advancing our products and
technology.
We expect
research and development expenses to decrease in year ending 2009 due to the
reductions in headcount and the cost savings measures implemented at the end of
year ended 2008. We are focused on meeting the immediate needs of our
existing customers and maintaining our technology. We expect that our
long term research and development activities beyond these two objectives will
be postponed until adequate funding or a sustainable revenue stream is
realized.
Sales and
marketing. Sales and marketing expenses consist primarily of
personnel salary and benefits, travel, tradeshows, consultant fees and stock
based compensation. During year ended 2008 we had increases in sales
and marketing expenses of $0.4 million from the hiring of 3 new employees, a new
sales consultant in Asia, and severance expenses related to the termination of 4
sales and marketing employees at the end of year ended
2008. Additional increases of $0.2 million related to increased
travel and tradeshow expenses related to the increased activity with marketing
our technology and sales activity with our signed and potential new customers in
Asia and United States. Offsetting these increases in expenses were
reductions in bonus payments of $0.2 million and stock based compensation of
$0.5 million. Bonuses were paid in the prior year ended 2007 related
to the signing of our IGT licensing agreement, while no bonuses were paid in
year ended 2008. Stock based compensation decreased in year ended
2008 as the prior year ended 2007 had higher stock based compensation costs
related to an anti-dilutive feature in options granted as part of our merger
transaction. Other fluctuations in sales and marketing expenses were
consistent between the two years with modest increases to reflect the increase
in activity with our current and potential new customers.
We expect
sale and marketing expenses to decrease in year ending 2009 due to the
reductions in headcount and the cost savings measures implemented at the end of
year ended 2008. Sales and marketing activities will be scaled back
until adequate funding or a sustainable revenue stream is realized.
General and
administrative. General and administrative expenses
consist primarily of personnel salary and benefits, travel, capital raising
costs, merger related expenses, insurance, stock based compensation, and
professional fees related to our public company filing
requirements. During year ended 2008 we had increases in personnel
salary and benefits of $0.5 million from the hiring of 4 new employees and the
increase in base salaries for two executive replacements. We had
increases in director fees and compensation of $0.1 million due to the addition
of two new directors and increases in the number of meetings and management
activities. We also had increases in severance expenses of $0.5
million related to the resignations of two CEOs. Offsetting these
increases in general and administrative expenses were reductions in capital
raising costs and professional fees of $0.5 million related to consultant and
legal fees for our two private placements and our merger transaction in year
ended 2007. In year ended 2008, we had no capital raising or merger
expenses. Also, stock based compensation decreased in year ended 2008
by $1.5 million as the prior year ended 2007 had higher stock based compensation
costs related to an anti-dilutive feature in options granted as part of our
merger transaction. Other fluctuations in general and administrative
expenses were consistent between the two years with modest increases to reflect
the increase in activity for meeting our public filing requirements as well as
our implementation of the Sarbanes-Oxley requirements.
At the
end of year ended 2008 we implemented cost savings measures related to our
general and administrative expenses. As a public company we have
certain unavoidable expenses related to our public filing requirements, legal
obligations, insurance needs, and other necessary expenditures to fulfill our
fiduciary and regulatory requirements. These unavoidable expenses
could increase due to the reduction of inside legal and technical employees and
the reliance of external professionals. We may also experience
increased legal and capital raising cost associated with any capital raising
activities we may undertake in year ending 2009. We anticipate that
the overall cost savings measures introduced during year ended 2008 will help us
maintain or offset increases in our general and administrative expenses in year
ending 2009.
Other
Income and Expense
| |
|
Fiscal
Year Ended
|
|
|
Change
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
Interest
income
|
|
$ |
193 |
|
|
$ |
196 |
|
|
$ |
(3 |
) |
|
|
(2% |
) |
|
Interest
expense
|
|
|
(54 |
) |
|
|
(68 |
) |
|
|
14 |
|
|
|
21% |
|
|
Foreign
exchange gain or (loss)
|
|
|
(106 |
) |
|
|
22 |
|
|
|
(128 |
) |
|
|
(581% |
) |
|
Other
income or (expense)
|
|
|
- |
|
|
|
87 |
|
|
|
(87 |
) |
|
|
(100% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income, net
|
|
$ |
33 |
|
|
$ |
237 |
|
|
$ |
(204 |
) |
|
|
(86% |
) |
Other
income and expense consists of interest income, interest expense, foreign
exchange gain or loss and other miscellaneous items. Interest income
is earned on our cash balances and marketable securities. We expect
interest income to fluctuate in year ending 2009 depending on the amount and
timing of any capital raised, advanced licensing payments received or royalty
payments received and the rate at which we use such funds to pay our ongoing
operating expenses. Interest expense is incurred on our notes
payable. The decrease in interest expense relates to the decrease in
the principal balance of our notes payable. We expect interest
expense to increase in year ending 2009 as a result of the convertible note
purchase agreements entered into at the beginning of year ending 2009 with an 8%
annual interest rate. Our foreign exchange gains and losses result
from transactions with our New Zealand subsidiaries, with our overseas customers
and translation of our New Zealand subsidiaries into US dollars. The
loss in foreign exchange transactions and translation in year ended 2008 is
attributed to the declining value of the US dollar and may continue into year
ending 2009. Other income was immaterial for year ended 2008
and is expected to be immaterial in year ending 2009.
Liquidity
and Capital Resources
We have
funded our operations from inception through January 31, 2008 primarily through
the sale and exercise of common stock and warrants and the use of an advance,
non-refundable payment of licensing fees. In year ended 2008, net
cash used in operating activities was $8.1 million and an additional $0.5
million was used for investment in fixed assets and intellectual
property. Our operating activities and asset purchasing activity was
primarily funded by available cash, cash equivalents and marketable securities
of $8.3 million as well as funds received from the exercise of employee stock
options and warrants of $0.8 million.
In
January 2008, we executed a cost reduction plan including a reduction in
headcount at both our operating locations. In the first quarter of
year ending 2009, we raised $3.0 million in secured convertible debt agreements
and we are undertaking efforts to obtain additional financing. At the
same time, we continue to seek to increase and diversify our sources of
licensing revenue with our existing customer base and potential new
customers.
We expect
the cash balance of $0.5 million and the $3.0 million raised in the first
quarter of year ending 2009 will allow us to fund operations through at least
July 2008. We expect that it will be necessary for us to obtain
additional financing in order to fund our operations beyond July
2008. If additional funds are raised by the issuance of our equity
securities, such as through the issuance of stock, convertible securities, or
the issuance and exercise of warrants, then the ownership interest of our
existing stockholders would be further diluted. If additional funds are raised
by the issuance of debt or other equity instruments, we may become subject to
certain operational limitations, and such securities may have liquidation rights
senior to those of the then existing holders of common stock. Ultimately, if no
additional financing is obtained as and when needed, we may be required
to significantly reduce our level of operations, including by
slowing our growth, delaying hiring, abandoning certain product
development including product development on which we may have already spent
considerable resources and otherwise reducing expenses, or eventually, if
necessary, cease operations altogether. Further, if we do not
enter into a qualified financing resulting in the conversion of the notes issued
to K1W1, K1W1 may elect to exercise its remedies with respect to its security
interest, which could result in the seizure or forced sale of our
assets.
We have
issued options to employees and directors pursuant to our 2006 Stock Incentive
Plan. As of January 31, 2008, we had 12,002,429 options outstanding under our
2006 Stock Incentive Plan with a weighted exercise price of $0.74. We
also have outstanding warrants to purchase 17,290,468 shares of common stock at
a weighted average exercise price of $1.15.
Subject
to approval of our Board of Directors, the 2006 Stock Incentive Plan allows
option holders to exercise options using a “cashless exercise,” whereby vested
shares would be used as payment for the exercise of options. While
the exercise of stock options for cash will generally increase immediate working
capital, the approval of a cashless exercise by our Board of Directors would
impact directly on the extent of this working capital and our ability to use
existing options as a capital resource.
Provision
for State and Federal Income Taxes
From
inception through January 31, 2008, we have incurred net losses for federal and
state tax purposes. We have also incurred foreign net losses in respect of our
predecessor entity and two foreign subsidiaries.
We have
not recorded a tax benefit for domestic tax losses because of the uncertainty of
realization. We adhere to SFAS No. 109 Accounting for Income Taxes
(“SFAS 109”), which requires an asset and liability approach to financial
accounting and reporting for income taxes. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Under paragraph 17e of SFAS 109, deferred tax assets are reduced by a
valuation allowance if the weight of the available positive and negative
evidence suggests that it is more likely than not some portion or all of the
deferred tax asset will not be realized.
We have
generated net losses since our inception, and since our current projections are
based upon predictions that cannot ensure sustained profitability in future
years, we have provided a full valuation allowance against the deferred tax
assets at January 31, 2008 and 2007.
As a
result of the adoption of FIN 48, there was no impact to our consolidated
financial position, results of operations or cash flows for year ended
2008. In accordance with FIN 48, we recognize interest and penalties
related to unrecognized tax benefits as a component of income
taxes. At January 31, 2008 no interest or penalties related to
unrecognized tax benefits had been recorded. There was no change to
our unrecognized tax benefits for the year ended 2008.
We are
subject to taxation in the U.S. and California. Our subsidiaries are subject to
taxation in New Zealand. All of our tax years in the U.S. will be
open to examination by the federal and California tax authorities because the
statute of limitations are open and due to our overall net operating loss
carryforward position. Our subsidiaries are subject to examination by
foreign tax authorities for all tax years.
Obligations
Our
obligations as of January 31, 2008 consisted of operating leases for facilities,
a settlement agreement obligation accounted for as a note payable and an advance
on a convertible note purchase agreement. At January 31, 2008, minimum lease
payments required under the operating leases amounted to $0.7 million and are
payable through 2012. The note payable has a balance, including future interest,
of approximately $0.5 million and is payable in equal annual installments of
$175,000 through 2010. The advance on a convertible note purchase agreement was
applied to our initial note issued on February 4, 2008 under the note purchase
agreements. All notes issued under the note purchase agreement are
convertible at a discount of five percent (5%) into investment instruments
issued by us pursuant to and upon a qualified financing. If such
qualified financing does not occur, upon maturity one year from the date of
issuance the notes may, at the holder’s option, convert into our common stock at
a five percent (5%) discount from a formula-derived market price. The
notes will accrue interest at the annual rate of 8%, commencing October 4,
2008. In addition, pursuant to the note purchase agreement, each note
holder will receive in the form of a warrant the right to participate in
qualified financing, for a period of three years, in an amount equal to ten
percent (10%) of the aggregate principal under the notes, and at a discount of
five percent (5%) of the purchase price of the investment instruments issued in
such qualified financing. The notes are secured by our
assets.
We intend
to fund our obligations from our ongoing operations, existing cash resources,
subleasing agreements, funds from our convertible debt agreements and other
capital raising activities.
We
anticipate that our existing licensing contracts will require limited capital
investment and will be supported by our current staff levels.
Qualitative and Quantitative
Disclosure about Market
Risk
The
primary objectives of our investment activity are to preserve principal, provide
liquidity and maximize income without significantly increasing the risk. Some of
the securities we invest in are subject to market risk. To minimize this risk,
we maintain our portfolio of cash equivalents and short term investments in
money market funds, and certificates of deposit. Since our results of
operations are not dependent on investment performance, we believe that such
risks would not have a significant impact on our results from
operations.
Transactions
with our New Zealand research facility and with suppliers and manufacturers in
Asia are denominated in local currencies and thus, we are subject to foreign
currency exchange fluctuations associated with re-measurement to US dollars.
Such fluctuations have not been significant historically. We are prepared to
hedge against any fluctuations in foreign currencies should such fluctuations
have a material economic impact on us, although we have not engaged in hedging
activities to date.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America, (“U.S. GAAP”). The preparation of these financial statements in
accordance with U.S. GAAP requires us to utilize accounting policies and make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingencies as of the date of the financial
statements and the reported amounts of revenue and expenses during a fiscal
period. We have described our accounting policies in Note 1 to our condensed
consolidated financial statements included in the Form 10-KSB under Item 7 of
this Part II entitled “Financial Statements”. The SEC considers an
accounting policy to be critical if it is both important to a company’s
financial condition and results of operations and it requires significant
judgment and estimates on the part of management in its
application.
We have
discussed the selection and development of the critical accounting policies with
the audit committee of our board of directors, and the audit committee has
reviewed our related disclosures in this Annual Report on Form 10-KSB. Although
we believe that our judgments and estimates are appropriate and correct, actual
results may differ from those estimates. See also the section
entitled “Risk Factors” for certain matters which may affect our future results
of operations.
Revenue
Recognition. We evaluate revenue recognition for transactions
to sell products and services and to license technology, trademarks and know-how
using the criteria set forth by the SEC in Staff Accounting Bulletin 104,
Revenue Recognition (SAB 104). For revenue transactions that involve software or
software-related products, we recognize revenue under the guidance established
by Statement of Position No. 97-2, Software Revenue Recognition (SOP
97-2). Both SAB 104 and SOP 97-2 state that revenue is recognized
when each of the following criteria is met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
seller’s price to the buyer is fixed or determinable, and collectibility is
reasonably assured. If we make different judgments or utilize
different evidence in relation to the revenue recognition criteria, the amount
and timing of our revenue could be materially affected.
Licensing.
Licensing revenue is primarily derived from royalties received from licensees of
our intellectual property rights, including patents, trademarks and know-how.
Royalties are recognized when all revenue recognition criteria have been met.
Judgments are made as to whether collectibility can be reasonably assured based
on the licensee’s recent payment history and credit worthiness.
Deferred revenue related to agreements
involving both an exclusive license for a term and a provision for royalty
payments per units beyond a minimum threshold will be recognized as follows: the
initial payment amount will be either (a) recognized equally over the term or
(b) based upon customer license usage, whichever cumulative figure is
higher.
If we
were to make different judgments or utilize different evidence in relation to
licensing revenue agreements, collectibility and the amount of deferred revenue
related to the agreements and the terms, the amount and timing of our revenue
could be materially affected.
Research
and Development Costs. Research and
development costs are recognized in the period incurred in accordance with SFAS
No. 2 Accounting for Research and Development Costs. Research and development
expenses primarily include prototype development costs, contractor fees, and
administrative expenses directly related to research and development
support. If we make different judgments in relation to the nature of
research and development costs, the amount of research and development costs and
operating expenses could be affected.
Intellectual
Property. Intangible assets (intellectual property) consist of
acquired technology and patents, and internally developed patents and software
costs. All of the acquired technology was transferred to the Company
from its predecessor company and are recorded at the predecessor’s original
cost. Acquired technology is amortized on a straight-line basis over
the life of the original agreement.
The costs
of internally developing intellectual property that are not specifically
identifiable, have indeterminate lives, or are inherent in a continuing business
and related to an entity as a whole have been expensed as incurred pursuant to
the requirements of SFAS No. 142, Goodwill and Other Intangible Assets. Legal
fees, registration costs, and ongoing maintenance costs relating to intellectual
property are capitalized as incurred and are amortized on a straight line basis
over the estimated remaining statutory lives of the patents, ranging from one to
twenty years. We evaluate the recoverability of our intellectual property
periodically and take into account events or circumstances that warrant revised
estimates of useful lives or that indicate that impairment exists. No
impairments of intellectual property have been identified during the periods
presented.
Our
impairment analysis contains judgments, uncertainties and estimates in order to
estimate future cash flows and fair values, if we were to make different
judgments and estimates, the outcome of the impairment analysis could be
materially affected.
Foreign
Operations and Foreign Currency. We have two wholly-owned
subsidiaries incorporated in New Zealand. Our direct subsidiary, PureDepth Ltd.,
is the holding entity for the intellectual property portfolio, which is subject
to an exclusive license with us for its use, exploitation and future
development. Our indirect subsidiary, PureDepth Incorporated Ltd., undertakes
the operations in respect of any future research and development of the
intellectual property portfolio on our behalf. This activity is governed by a
development agreement with us pursuant to which an annual development fee of
cost plus 7.5% is calculated at the end of each quarter. Income and
expenditures relating to the license and future development of the intellectual
property are inter-company transactions and are eliminated on consolidation.
Therefore, these amounts are not shown in the financial statements. We
(including our subsidiaries) use the US dollar as our functional currency. We
determined that the cash flow, sales price, sales market, expense, financing and
intercompany transaction indicators had reached a significant level where under
SFAS 52 each of the entities would be best represented by the US dollar as the
functional currency. Our currency decisions contain judgments and
uncertainties that if we were to make different judgments, the outcome could
have a material affect to our operating results and fiscal period ending
balances.
Accounting
for Income Taxes. In preparing our consolidated financial
statements, we are required to make estimates and judgments that affect our
accounting for income taxes. This process includes estimating actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences, including
differences in the timing of recognition of stock-based compensation expense,
result in deferred tax assets and liabilities, which are included in our
consolidated balance sheets. We also assess the likelihood that our deferred tax
assets will be recovered from future taxable income and, to the extent that we
believe that recovery is not likely, we have established a valuation
allowance.
During
year ended 2008, we adopted the provisions of Financial Accounting Standards
Board (“FASB”) Interpretation No. 48, “Accounting for Uncertain Income Taxes –
An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes” (“FAS 109”) and prescribes a recognition threshold
and measurement attributes for financial statement disclosure of tax positions
taken or expected to be taken on a tax return. There was no impact to
our consolidated financial position, results of operations or cash flows for
year ended 2008.
Significant
judgment is required in determining the provision for income taxes, deferred tax
assets and liabilities and the valuation allowance against our deferred tax
assets. Our financial position and results of operations may be materially
affected if actual results significantly differ from these estimates or the
estimates are adjusted in future periods.
Stock-Based
Compensation. We follow the provisions of Statement of
Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS
123R). SFAS 123R requires measurement of all employee and non-employee
stock-based compensation awards using a fair-value method and recording of such
expense in the consolidated financial statements over the requisite service
period. We estimate our stock-based compensation using the
Black-Scholes option-pricing model. The Black-Scholes option-pricing
model requires judgmental assumptions including expected option life,
volatility, and forfeiture rates. If we make or utilize different
assumptions used in the Black-Scholes option-pricing model, the amount of
stock-based compensation expense could be materially affected.
Item
7- Financial Statements
Documents filed as part of
this annual report on Form 10-KSB:
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
34 |
| |
|
| CONSOLIDATED
BALANCE SHEET |
35 |
| |
|
| CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS |
36 |
| |
|
| CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY |
37 |
| |
|
| CONSOLIDATED
STATEMENTS OF CASH FLOWS |
40 |
| |
|
| NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS |
42 |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
PureDepth,
Inc.
We have
audited the accompanying consolidated balance sheet of PureDepth,
Inc. and subsidiaries (the “Company”) as of January 31, 2008 and the
related consolidated statements of operations and comprehensive loss,
stockholders’ equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to
perform an audit of the Company’s internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides 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 PureDepth, Inc. and
subsidiaries as of January 31, 2008, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1A to
the consolidated financial statements, the Company’s significant operating
losses raise substantial doubt about its ability to continue as a going
concern. Management’s plans concerning this matter are also described in
Note 1A. These consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
Stonefield Josephson, Inc.
San
Francisco, California
(Formerly
Diamond One, Inc.)
CONSOLIDATED
BALANCE SHEET
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Current
Assets
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
429,726 |
|
|
Restricted
cash
|
|
|
78,499 |
|
|
Accounts
receivable, net
|
|
|
12,000 |
|
|
Other current assets
|
|
|
152,276 |
|
|
Total current assets
|
|
|
672,501 |
|
|
|
|
|
|
|
|
Property and
equipment, net
|
|
|
382,300 |
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
Intellectual
property, net
|
|
|
2,564,260 |
|
|
Other
assets
|
|
|
40,000 |
|
|
Total Assets
|
|
$ |
3,659,061 |
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts
payable
|
|
$ |
379,556 |
|
|
Accrued expenses
|
|
|
668,344 |
|
|
Accrued payroll and related expenses
|
|
|
197,297 |
|
|
Accrued interest
|
|
|
7,253 |
|
|
Current portion – deferred revenue
|
|
|
750,000 |
|
|
Current portion - notes payable
|
|
|
135,870 |
|
|
Total current liabilities
|
|
|
2,138,320 |
|
|
|
|
|
|
|
|
Long Term Liabilities
|
|
|
|
|
|
Notes
payable
|
|
|
312,309 |
|
|
Long-term
debt
|
|
|
100,000 |
|
|
Deferred
revenue-non current
|
|
|
2,033,654 |
|
|
Total
Liabilities
|
|
|
4,584,283 |
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
Preferred
Stock, $0.001 par value, 10,000,000 authorized and no
outstanding
shares
|
|
|
- |
|
|
Common stock, $0.001 par value, 190,000,000 shares
|
|
|
|
|
|
authorized,
68,483,979 issued and outstanding
|
|
|
68,484 |
|
|
Additional
paid in capital
|
|
|
34,155,297 |
|
|
Accumulated
other comprehensive loss
|
|
|
(706,421
|
) |
|
Accumulated
deficit
|
|
|
(34,442,582
|
) |
|
Total stockholders' equity
|
|
|
925,222 |
|
|
Total Liabilities and Stockholders' Equity
|
|
$ |
3,659,061 |
|
The
accompanying footnotes are an integral part of these financial
statements.
(Formerly
Diamond One, Inc.)
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
|
Year
ended
|
|
|
Year
ended
|
|
|
Revenue
|
|
|
|
|
|
|
|
Licensing
|
|
$ |
750,000 |
|
|
$ |
216,346 |
|
|
Services
|
|
|
67,088 |
|
|
|
- |
|
|
Product
sales
|
|
|
207,317 |
|
|
|
52,650 |
|
|
Total
revenue
|
|
|
1,024,405 |
|
|
|
268,996 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of licensing
|
|
|
308,147 |
|
|
|
148,290 |
|
|
Cost
of services
|
|
|
57,776 |
|
|
|
- |
|
|
Cost
of product sales
|
|
|
184,565 |
|
|
|
55,178 |
|
|
Total
cost of revenue
|
|
|
550,488 |
|
|
|
203,468 |
|
|
Gross
margin
|
|
|
473,917 |
|
|
|
65,528 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
101,766 |
|
|
|
188,956 |
|
|
Research and development
|
|
|
2,769,356 |
|
|
|
2,300,560 |
|
|
Loss on fixed asset disposal
|
|
|
- |
|
|
|
2,011 |
|
|
Sales and marketing
|
|
|
1,748,669 |
|
|
|
1,843,152 |
|
|
General
and administrative
|
|
|
5,250,848 |
|
|
|
6,212,426 |
|
|
Total operating expenses
|
|
|
9,870,639 |
|
|
|
10,547,105 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,396,722
|
) |
|
|
(10,481,577
|
) |
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
193,370 |
|
|
|
196,170 |
|
|
Interest expense
|
|
|
(53,940
|
) |
|
|
(68,452
|
) |
|
Foreign exchange gain/(loss)
|
|
|
(106,432
|
) |
|
|
22,476 |
|
|
Other income
|
|
|
368 |
|
|
|
86,543 |
|
|
Total other income
|
|
|
33,366 |
|
|
|
236,737 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(9,363,356
|
) |
|
|
(10,244,840
|
) |
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(9,363,356
|
) |
|
|
(10,244,840
|
) |
|
Discontinued
operations, net of income taxes
|
|
|
- |
|
|
|
15,279 |
|
|
Net
loss
|
|
$ |
(9,363,356 |
) |
|
$ |
(10,229,561 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
|
$ |
(0.14 |
) |
|
$ |
(0.17 |
) |
|
Weighted
average shares outstanding
|
|
|
67,231,738 |
|
|
|
59,346,392 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
Net
loss, per statement of operations
|
|
$ |
(9,363,356 |
) |
|
$ |
(10,229,561 |
) |
|
Foreign
exchange gain
|
|
|
4,480 |
|
|
|
33,132 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
net loss
|
|
$ |
(9,358,876 |
) |
|
$ |
(10,196,429 |
) |
The
accompanying footnotes are an integral part of these financial
statements.
PUREDEPTH,
INC. AND SUBSIDIARIES AND PREDECESSOR ENTITIES (Formerly Diamond One,
Inc.)
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Preferred
Series A
|
|
|
Common
Stock
|
|
|
Paid
in
|
|
|
Subscribed
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
- |
|
|
$ |
- |
|
|
|
16,712,769 |
|
|
$ |
15,075,180 |
|
|
$ |
2,007,722 |
|
|
$ |
350,000 |
|
|
$ |
(744,033 |
) |
|
$ |
(14,849,665 |
) |
|
$ |
1,839,204 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares in exchange for related party notes at $1.00 per share with
386,143 A-warrants to purchase an additional share at $2.75 and 386,143
B-warrants to purchase an additional share at $2.00 in February
2006
|
|
|
|
|
|
|
|
|
|
|
772,286 |
|
|
|
774,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
774,330 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares in a private placement offering at $1.00 per share with
2,897,500 A-warrants to purchase an additional share at $2.75 and
2,897,500 B-warrants to purchase an additional share at $2.00, net of
issuance costs of $3,021,299 in March 2006. Included in
the issuance costs are the issuance of 1,082,811 C-warrants (adjusted to
reflect the March 31, 2006 merger transaction) to purchase an additional
share at $0.44, as non cash compensation of $1,840,779 for professional
services during the private placement
|
|
|
|
|
|
|
|
|
|
|
5,795,000 |
|
|
|
4,614,480 |
|
|
|
|
|
|
|
(350,000 |
) |
|
|
|
|
|
|
|
|
|
|
4,264,480 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock options for a former employee at $0.65 per share in March
2006
|
|
|
|
|
|
|
|
|
|
|
31,800 |
|
|
|
20,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,670 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of all outstanding PDI common stock to PDI Series A Preferred Stock, par
value $0.01, at a 1-for-100 conversion ratio in March 2006
|
|
|
233,119 |
|
|
|
2,331 |
|
|
|
(23,311,855 |
) |
|
|
(20,484,660 |
) |
|
|
20,482,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying footnotes are an integral part of these financial
statements
PUREDEPTH,
INC. AND SUBSIDIARIES AND PREDECESSOR ENTITIES (Formerly Diamond One,
Inc.)
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Preferred
Series A
|
|
|
Common
Stock
|
|
|
Paid
in
|
|
|
Subscribed
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Total
|
|
|
Issuance
of common stock in exchange for the remaining outstanding common stock of
Diamond One, Inc.
|
|
|
|
|
|
|
|
|
6,255,400 |
|
|
|
6,255 |
|
|
|
(13,933 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,678 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of all outstanding PDI Series A Preferred Stock, par value $0.01, to PDI
common stock at a 229.021-for-1 conversion ratio in May
2006
|
|
|
(233,119 |
) |
|
|
(2,331 |
) |
|
|
53,389,045 |
|
|
|
53,389 |
|
|
|
(51,058 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of common stock
|
|
|
|
|
|
|
|
|
|
|
(1,000,000 |
) |
|
|
(1,000 |
) |
|
|
(6,601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,601 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares under the terms of the March 2006 private placement offering
with a merger adjusted price of $0.44 per share with 57,255 A-warrants to
purchase an additional share at a merger adjusted price of $1.20 and
57,255 B-warrants to purchase an additional share at a merger adjusted
price of $0.87 in July 2006
|
|
|
|
|
|
|
|
|
|
|
114,510 |
|
|
|
115 |
|
|
|
49,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of B-warrants for common stock at $0.87 per share, net of issuance costs
of $11,630, with the issuance of 6,716,044 D-warrants to purchase an
additional share at $1.20, in July 2006
|
|
|
|
|
|
|
|
|
|
|
6,716,044 |
|
|
|
6,716 |
|
|
|
5,854,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,860,717 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 344,000 D-warrants to purchase an additional share at $1.20, for
professional services in September 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
675,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
675,960 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of B-warrants for common stock at $0.87 per share, net of issuance costs
of $54,118 in January 2007
|
|
|
|
|
|
|
|
|
|
|
166,041 |
|
|
|
166 |
|
|
|
90,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,338 |
|
The
accompanying footnotes are an integral part of these financial
statements
PUREDEPTH,
INC. AND SUBSIDIARIES AND PREDECESSOR ENTITIES (Formerly Diamond One,
Inc.)
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Preferred
Series A
|
|
|
Common
Stock
|
|
|
Paid
in
|
|
|
Subscribed
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Total
|
|
|
Exercise
of common stock options at a weighted average exercise price of $0.28 per
share
|
|
|
|
|
|
|
|
|
516,342 |
|
|
|
516 |
|
|
|
144,852 |
|
|
|
|
|
|
|
|
|
|
|
|
145,368 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock options as stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,214,990 |
|
|
|
|
|
|
|
|
|
|
|
|
3,214,990 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,229,561 |
) |
|
|
(10,229,561 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,132 |
|
|
|
|
|
|
|
33,132 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
$ |
- |
|
|
|
66,157,382 |
|
|
$ |
66,157 |
|
|
$ |
32,448,319 |
|
|
$ |
- |
|
|
$ |
(710,901 |
) |
|
$ |
(25,079,226 |
) |
|
$ |
6,724,349 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of B-warrants for common stock at $0.87 per share in March
2007
|
|
|
|
|
|
|
|
|
|
|
205,202 |
|
|
|
205 |
|
|
|
178,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,903 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock options at a weighted average exercise price of $0.28 per
share
|
|
|
|
|
|
|
|
|
|
|
2,121,395 |
|
|
|
2,122 |
|
|
|
591,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
593,990 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock options as stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
936,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
936,412 |
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,363,356 |
) |
|
|
(9,363,356 |
) |
|
Foreign
exchange translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,480 |
|
|
|
|
|
|
|
4,480 |
|
|
|
|
|
- |
|
|
$ |
- |
|
|
|
68,483,979 |
|
|
$ |
68,484 |
|
|
$ |
34,155,297 |
|
|
$ |
- |
|
|
$ |
(706,421 |
) |
|
$ |
(34,442,582 |
) |
|
$ |
925,222 |
|
The
accompanying footnotes are an integral part of these financial
statements
(Formerly
Diamond One, Inc.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
|
Year ended
|
|
|
Year ended
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(9,363,356 |
) |
|
$ |
(10,229,561 |
) |
|
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
409,914 |
|
|
|
337,235 |
|
|
Loss
on disposal of assets
|
|
|
- |
|
|
|
2,011 |
|
|
Stock-based
compensation expense
|
|
|
936,412 |
|
|
|
3,214,990 |
|
|
Warrants
issued for professional services
|
|
|
- |
|
|
|
675,960 |
|
|
Foreign
exchange (gain) / loss
|
|
|
- |
|
|
|
(22,476
|
) |
|
Unearned
interest discount
|
|
|
(2,822
|
) |
|
|
(26,854
|
) |
|
Marketable
securities
|
|
|
(44,247 |
) |
|
|
- |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,791
|
) |
|
|
62,786 |
|
|
Restricted
cash
|
|
|
(17,677
|
) |
|
|
(60,822
|
) |
|
Prepaid
and other assets
|
|
|
(40,084
|
) |
|
|
(98,708
|
) |
|
Accounts
payable
|
|
|
147,918 |
|
|
|
(60,738
|
) |
|
Deferred
revenue
|
|
|
(750,000
|
) |
|
|
3,533,654 |
|
|
Accrued
expenses
|
|
|
597,321 |
|
|
|
183,550 |
|
|
Accrued
interest
|
|
|
(1,993
|
) |
|
|
4,108 |
|
|
Net
cash used in operating activities
|
|
|
(8,131,405
|
) |
|
|
(2,484,865
|
) |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchases
of securities
|
|
|
(999,631
|
) |
|
|
(2,942,446
|
) |
|
Proceeds
from the maturity of securities
|
|
|
4,016,000 |
|
|
|
- |
|
|
Purchases
of fixed assets
|
|
|
(168,943
|
) |
|
|
(197,409
|
) |
|
Expenditures
for intellectual property
|
|
|
(337,002
|
) |
|
|
(287,565
|
) |
|
Net
cash provided by or (used in) investing activities
|
|
|
2,510,424 |
|
|
|
(3,427,420
|
) |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock (net)
|
|
|
772,896 |
|
|
|
10,431,573 |
|
|
Borrowings
on notes payable
|
|
|
15,074 |
|
|
|
- |
|
|
Proceeds
from financing
|
|
|
100,000 |
|
|
|
- |
|
|
Principal
payments on notes payable
|
|
|
(121,621
|
) |
|
|
(137,737
|
) |
|
Net
cash provided by financing activities
|
|
|
766,349 |
|
|
|
10,293,836 |
|
|
Effect
of exchange rate on cash
|
|
|
4,480 |
|
|
|
40,329 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(4,850,152
|
) |
|
|
4,421,880 |
|
|
Cash
and cash equivalents at beginning of year
|
|
|
5,279,878 |
|
|
|
857,998 |
|
|
Cash
and cash equivalents at end of year
|
|
$ |
429,726 |
|
|
$ |
5,279,878 |
|
The
accompanying footnotes are an integral part of these financial
statements.
(Formerly
Diamond One, Inc.)
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
|
|
Year ended
|
|
|
Year ended
|
|
|
Cash
paid for income taxes
|
|
$ |
- |
|
|
$ |
- |
|
|
Cash
paid for interest
|
|
$ |
56,045 |
|
|
$ |
66,848 |
|
|
|
|
|
|
|
|
|
|
|
|
NON
CASH DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
Warrants
issued for stock issuance costs
|
|
$ |
- |
|
|
$ |
1,840,779 |
|
|
Notes
and accrued interest converted to stock
|
|
$ |
- |
|
|
$ |
774,330 |
|
The
accompanying footnotes are an integral part of these financial
statements.
AND
PREDECESSOR ENTITIES
(Formerly
Diamond One, Inc.)
Notes
to Consolidated Financial Statements
Note
1 - Summary of Significant Accounting Policies and Description of
Business
The
Company- Description of Business
PureDepth,
Inc., (PDI) along with its wholly owned subsidiaries, PureDepth Limited (PDL)
and PureDepth Incorporated Limited (PDIL), and predecessor parent entity, Deep
Video Imaging Limited (DVIL), (collectively, the Company) develops, markets,
licenses, and supports multi-layer display (MLD) technology. The Company also
sells prototype MLD-enabled display devices that it manufactures. The Company’s
technology has application in industries and markets where LCD monitors and
displays are utilized including location based entertainment, computer monitors,
telecommunications, mobile phones and other hand held devices.
Pursuant
to an Agreement and Plan of Merger and Reorganization discussed in Note 2,
PureDepth, Inc. survived as the newly formed and named parent entity of PDI and
PDIL and the name of the predecessor entity, Diamond One, Inc. is no longer
used.
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(U.S. GAAP). The consolidated financial statements include all of the
accounts of PureDepth, Inc., a U.S. corporation based in California, and its
wholly-owned subsidiaries, based in Auckland, New Zealand.
The
Company’s fiscal year ends on January 31. All references to yearly,
year, fiscal year or annual period in the financial results are references to
the results for the relevant fiscal period ending January 31.
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the use of management’s estimates. These estimates are subjective in
nature and involve judgments that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at fiscal year
end, and the reported amounts of revenues and expenses during the fiscal year.
Actual results may differ from these estimates.
Foreign
Currency Translation
The
functional currency of the Company and its subsidiaries is the US Dollar in
accordance with SFAS No. 52, Foreign Currency Translation.
The financial statements of the Company’s foreign subsidiaries are remeasured to
US Dollars using the temporal method. Translation and transaction
gains or losses are credited or charged to income except for translation and
transaction gains or losses from inter-company transactions which are reflected
in the accumulated translation adjustments component of accumulated other
comprehensive income in stockholders’ equity.
AND
PREDECESSOR ENTITIES
(Formerly
Diamond One, Inc.)
Notes to
Consolidated Financial Statements
Revenue
is derived from licensing, services and product sales. Licensing
revenues are primarily royalties paid by licensees related to use of
intellectual property which include technical transfer, implementation and
integration of both hardware and software solutions, post contract support,
training, and consulting. Service revenues are derived primarily from
technical and professional support provided to customers in order for them to
develop, test and promote MLD applications in their products. Product
revenues are derived primarily from the sale of demonstration units and product
samples.
Revenues
are recognized on licensing (royalties) transactions and product sales using the
criteria in Staff Accounting Bulletin 104, Revenue Recognition (SAB
104). For revenue transactions that involve software or software
related products, we recognize revenue under the guidance established by
Statement of Position No. 97-2, Software Revenue Recognition
(SOP 97-2). Both SAB 104 and SOP 97-2 state that revenue must be
recognized when persuasive evidence of an arrangement exists, delivery of the
product or performance of the service has occurred, no significant company
obligations with regard to implementation or integration exist, the fee is fixed
or determinable and collectibility is reasonably
assured. Arrangements for which the fees are not deemed reasonably
assured for collection are recognized upon cash collection.
Royalties
derived from the licensing of intellectual property are recognized when all
revenue recognition criteria have been met. Revenue from products
sales is recognized on a contractual basis when products are delivered to the
customer.
Deferred
revenue represents payments from customers of non-refundable licensing fees that
are ultimately expected to be recognized as revenue, but for which not all
revenue recognition criteria have been met. As the revenue
recognition criteria is met, deferred revenue is amortized in accordance with
the terms of the license agreement on the greater of the straight line basis
over the life of the agreement or the units of production method.
Cost
of Revenue
Cost of
revenue primarily consists of amortization expense on the Company’s intellectual
property for licensing revenue and direct labor and material costs with applied
labor and manufacturing overhead for service and product revenue.
Cash,
Cash Equivalents and Marketable Securities
The
Company considers money market funds and all highly liquid investments purchased
with an original maturity from the date of purchase of three months or less to
be cash equivalents. Investments with an original maturity date from
the date of purchase of more than three months but less than one year are
classified as marketable securities. Investments with a maturity date
of one year or more from the date of purchase are classified as long term
investments. The company had no marketable securities or long term investments
at year ended 2008.
From time
to time the Company maintains amounts on deposit with financial institutions
which exceed federally insured limits. The Company has not experienced any
significant losses in such accounts, nor does management believe it is exposed
to any significant credit risk.
The
Company has cash held at a financial institution in time deposits as collateral
for the use of Company issued credit cards. The Company considers
these amounts to be restricted cash.
AND
PREDECESSOR ENTITIES
(Formerly
Diamond One, Inc.)
Notes to
Consolidated Financial Statements
Fair
Value of Financial Instruments
The
carrying amounts of cash, restricted cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate their respective
fair values because of the short-term maturity of these items.
The
carrying amount of the Company’s notes payable approximates fair value based on
incremental borrowing rates for similar types of borrowing
arrangements.
The
carrying amount of long-term debt at January 31, 2008 is not materially
different from the fair value based on rates available for similar types of
arrangements.
Research
and Development Costs
Research
and development costs are expensed in the period incurred in accordance with
SFAS No. 2 Accounting for
Research and Development Costs. Research and development expenses
primarily include prototype development costs, contractor fees, and
administrative expenses directly related to research and development
support.
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Computer
equipment and software are depreciated generally over 4 years; furniture and
office equipment are depreciated generally over 5 to 12 years, respectively; and
leasehold improvements are amortized over the estimated useful lives, or the
term of the related leases, whichever is shorter. Repair and maintenance costs
are charged to operations as incurred and major improvements are capitalized.
The Company reviews the carrying amount of fixed assets whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable in accordance with SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets.
Intellectual
property consists of acquired patents and capitalized initial patent
registration costs related to internally developed
technology. Capitalized costs related to internally developed
technology are amortized on a straigh
