MICROHELIX, INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT (November 2005)
Exhibit
10.1
MICROHELIX,
INC.
SERIES
B PREFERRED
(November
2005)
This
SERIES B PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement")
is made by and between MICROHELIX, INC., an Oregon corporation (the
"Company"),
and the purchaser of the Company's securities hereunder that has executed
this
Agreement ("Investor").
The date of this Agreement is set forth on the Investor's signature page
hereto.
The
parties hereby agree as follows:
1. Authorization
of Series B Preferred Stock; Purchase and Sale of Series B Preferred
Stock.
1.1 Authorization
of Series B Preferred Stock.
The
Company has adopted and filed with the Secretary of State of the State of
Oregon
the Certificate of Designation, as amended, setting forth the rights, privileges
and preferences of the Series B Preferred Stock (the "Amendment").
The
Company has authorized the issuance and sale of up to 2,750,000 shares of
Series
B Preferred Stock, no par value (the "Series
B Preferred Stock"),
of
which up to 500,000 shares are being offered in this offering (the "Offering").
A
total
of 2,250,000 shares of Series B Preferred Stock were previously issued by
the
Company on April 8, 2005 and remain outstanding.
1.2 Purchase
and Sale of the Series B Preferred Stock.
(a) Subscription.
Subject
to the terms and conditions of this Agreement and on the basis of the
representations and warranties set forth herein, Investor agrees to purchase
from the Company that number of shares of Series B Preferred Stock
(collectively, the "Shares")
set
forth on Investor's signature page hereto at a purchase price of $1.00 per
Share.
(b) Agreement
Non-Binding on the Company Until Accepted.
Investor
understands and agrees that the Company has the right to reject this Agreement,
in whole or in part, and for any reason whatsoever. To the extent this Agreement
is rejected by the Company, the consideration for the rejected Shares shall
be
refunded to Investor without interest.
1.3 Minimum
and Maximum Offering.
There
is no minimum number of shares of Series B Preferred Stock the Company must
sell
in this Offering before it will accept this Agreement. The Company does not
intend to sell more than 500,000 shares of Series B Preferred Stock during
this
Offering. As of November 1, 2005, the Company has sold 310,000 shares of
Series
B Preferred Stock during this Offering.
2. Closing;
Delivery.
2.1 The
closing of the purchase and sale of the Shares (the "Closing")
will
occur at 9:00 a.m., Pacific Time, on the day this Agreement is Accepted by
the
Company, or such later time and date as the Company may advise Investor in
writing; provided, that in no event may the Closing be postponed later than
March 31, 2006 without the consent of Investor. The Closing will take place
at
the offices of Xxxxxx Xxxx LLP, 1600 Pioneer Tower, 000 XX Xxxxx Xxxxxx,
Xxxxxxxx, XX 00000.
1
2.2 At
or
promptly following the Closing, the Company will deliver to Investor a
certificate, registered in Investor's name, representing the number of Shares
acquired by Investor pursuant to this Agreement,
in each case against payment of the purchase price of the Shares by wire
transfer to the following Company account, by certified or cashiers check,
in
immediately available funds, payable to "microHelix,
Inc.", or by conversion of outstanding debt owed to the Investor by the
Company.
West
Coast Bank
Portland
Branch
0000
XX
Xxxxxxxx, Xxxxx 0000
Xxxxxxxx,
XX 00000
ABA
No.:
1232000088
Account
No. 560001281
Account
Name: microHelix, Inc.
3. Representations
and Warranties. In
order
to induce Investor to enter into this Agreement and to purchase the Shares
hereunder, the Company hereby represents and warrants to each
Investor:
3.1 Organization
and Corporate Power. The
Company is a corporation duly organized and validly existing under the laws
of
the State of Oregon. The
Company has all required corporate power and authority to own its property,
to
carry on its business as presently conducted or contemplated to be conducted
and
to carry out the transactions contemplated hereby.
3.2 Authorization. This
Agreement and the Registration Rights Agreement dated as of April 8, 2005
in
substantially the form accompanying this Agreement (together, the "Transaction
Documents")
have
been or will prior to Closing be duly executed and delivered by the Company
and
will be the legal, valid and binding obligations of the Company, enforceable
in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws of general
application affecting enforcement of creditors' rights generally. The execution,
delivery and performance of each of the Transaction Documents has been or
prior
to Closing will be duly authorized by all necessary corporate action of the
Company.
3.3 Capitalization. The
entire authorized capital stock of the Company consists of 20,000,000 shares
of
Common Stock, no par value, of which 2,116,246 shares were issued and
outstanding as of November 1, 2005, and 3,500,000 shares of Preferred Stock,
no
par value, of which 500,000 shares have been designated Series A Preferred
Stock
(no shares of which are issued and outstanding), and of which
2,750,000 shares
are designated Series B Preferred Stock, 2,560,000 shares of which are issued
and outstanding prior to Closing. In
this
Offering the Company will issue up to 500,000 shares of Series B Preferred
Stock. Following this Offering, and assuming that all of the 500,000 shares
of
Series B Preferred Stock offered in the Offering are issued, the Company
will
have substantially the following capitalization:
2
|
Existing
|
Post
Offering
|
||||||||||||
|
Common
Stock
|
2,116,246
|
16.9
|
%
|
2,116,246
|
14.6
|
%
|
|||||||
|
Series
B Preferred Stock*
|
9,000,000
|
71.8
|
%
|
11,000,000
|
75.7
|
%
|
|||||||
|
Outstanding
Public Warrants**
|
812,611
|
6.5
|
%
|
812,611
|
5.6
|
%
|
|||||||
|
Other
Options & Warrants***
|
595,867
|
4.8
|
%
|
595,867
|
4.1
|
%
|
|||||||
|
|
12,524,724 |
14,524,724
|
*
On an
as converted basis (4-to-1).
**
Exercise price is $21.60 per share.
***
Exercise prices range from $0.25 to $27.18 per share.
All
outstanding capital stock is duly authorized, validly issued and fully paid
and
non-assessable. When issued in accordance with the terms of this Agreement,
the
Shares will be duly authorized, validly issued and outstanding, fully paid
and
nonassessable.
3.4 Subsidiaries. Except
for Xxxxx Electronics, Inc., an Oregon corporation wholly owned by the Company,
the Company has no subsidiaries and does not own or control any interest
in any
other corporation, association or business organization.
3.5 Intellectual
Property.
To
the
Company's Knowledge, the Company owns a valid right, title, interest or license
in and to the intellectual property necessary for the operation of its business,
which includes, but is not limited to, all copyrights, common law copyrights,
trade names, trademarks, service marks, trade secrets, technology, know-how,
processes, or any other intangible property rights ("Intellectual
Property")
of the
Company. There are no claims pending or, to the Company's Knowledge, threatened
against the Company regarding any claim or infringement of any Intellectual
Property belonging to any other person, firm or corporation and the Company
has
not received any written notice or other indication of any claim of any such
infringement. The "Company's
Knowledge"
means
the actual knowledge, after reasonable investigation, of Tyram X.
Xxxxxx.
3.6 Licenses
and Permits.
The
Company possesses all material licenses and permits necessary for the present
conduct of its business. Each of such licenses and permits is in full force
and
effect, and there are no pending or, to the Company's Knowledge, threatened
claims or proceedings challenging the validity of, or seeking to revoke or
discontinue, any license or permit of the Company.
3.7 Taxes.
The
Company has (a) timely filed all federal, state, local and foreign franchise,
income, sales, gross receipts and all other tax returns and statements which
are
required to be filed by it and which were due prior to the date hereof
("Tax
Returns and Statements"),
and
(b) paid within the time and in the manner prescribed by law or established
reasonable reserves for the payment of all taxes, levies, assessments, fees,
penalties, interest and other governmental charges accrued or payable for
all
periods ending on or prior to the date hereof. The Tax Returns and Statements
are complete and accurate in all material respects, and no tax assessment
or
deficiency which has not been paid or for which an adequate reserve has not
been
set aside, has been made or proposed against the Company, nor are any of
the Tax
Returns and Statements now being examined or audited nor, to the Company's
Knowledge, is there a threat that any of the Tax Returns and Statements will
be
examined or audited, and no consents waiving or extending any applicable
statues
of limitations for the Tax Returns and Statements, or any taxes required
to be
paid thereunder, have been filed.
3
3.8 Compliance
with Laws.
The
business of the Company has been conducted in material compliance with all
applicable laws, statutes, ordinances, rules, regulations, orders and other
requirements of all national governmental authorities, and of all territories,
states, municipalities and other political subdivisions and agencies thereof,
having jurisdiction over it, except for violations that individually, or
in the
aggregate, would have no material adverse effect on the business, operations
or
financial condition of the Company.
3.9 Reservation
of Underlying Shares.
The
shares of Common Stock issuable on conversion of the Shares have been, or
will
be prior to Closing, duly and validly reserved for issuance and, upon conversion
of the Shares into shares of Common Stock, will be duly and validly issued,
fully paid and nonassessable.
3.10 Litigation.
There
is
no claim, action, lawsuit, proceeding, complaint, charge or investigation
pending or, to the Company's Knowledge, threatened against the Company which
questions the validity of any of the Transaction Documents or the right of
the
Company to enter into them or to consummate the transactions contemplated
hereby
or thereby, or which might result, either individually or in the aggregate,
in
any material adverse change in the business, assets, conditions, operations,
affairs, or prospects of the Company, financial or otherwise, or any change
in
the current equity ownership of the Company, nor to the Company's Knowledge
is
there any basis for the foregoing.
3.11 1934
Act Reports.
The
Company's Common Stock is traded on the Nasdaq OTC Bulletin Board under the
symbol "MHLX.OB." The Company has filed all reports required to be filed
by it
through the date hereof under the Securities Exchange Act of 1934, as amended,
(collectively, the "1934
Act Reports").
The
Company's 1934 Act Reports are available at xxx.xxx.xxx.
3.12 Transaction
Costs.
The
Company does not expect to pay more than eight percent (8%) with respect
to
finders or brokers fees in connection with this Offering.
4. Representations
and Warranties and other Agreements of Investor.
4.1 Representations
and Warranties. Investor
hereby represents and warrants to the Company that:
4
(a) Accredited
Investor.
Investor is an "accredited investor" as defined in Rule 501(a) of
Regulation D promulgated under the Securities Act of 1933, as amended
(the
"Securities
Act")
as
identified on Investor's attached signature page:
(i)
An
individual whose individual net worth, or joint net worth with that person's
spouse, at the time of the purchase exceeds $1,000,000;
(ii)
An
individual who had an individual income in excess of $200,000 in each of
the two
most recent years or joint income with that person's spouse in excess of
$300,000 in each of those years and who reasonably expects to reach the same
income level in the current year;
(iii)
A
corporation or partnership, not formed for the specific purpose of acquiring
the
Shares, with total assets in excess of $5 million;
(iv)
A
trust,
with total assets in excess of $5 million, not formed for the specific purpose
of acquiring the Shares, whose purchase is directed by a sophisticated person
as
described in Regulation D; or
(v)
An
entity
in which all of the equity owners are accredited investors as set forth
above.
As
used
in this paragraph, the term "net worth" means the excess of total assets
over
total liabilities. For the purpose of determining a person's net worth, the
principal residence owned by an individual should be valued at fair market
value, including the cost of improvements,
;net
of
current encumbrances. As used in this paragraph, "income" means actual economic
income, which may differ from adjusted gross income for income tax purposes.
Accordingly, Investor should consider whether it should add any or all of
the
following items to its adjusted gross income for income tax purposes in order
to
reflect more accurately its actual economic income: any amounts attributable
to
tax-exempt income received, losses claimed as a limited partner in any limited
partnership, deductions claimed for depletion, contributions to an XXX or
Xxxxx
retirement plan, and alimony payments.
(b) Authorization;
Residency.
Investor has full power and authority to execute, deliver and perform the
Transaction Documents and to acquire the Shares. The Transaction Documents
constitute the valid and legally binding obligations of Investor, enforceable
against Investor in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization and moratorium laws and
other
laws of general application affecting enforcement of creditors' rights
generally. Investor is a resident of the jurisdiction set forth under its
name
on Investor's signature page hereto.
(c) Purchase
Entirely for Own Account.
The Shares to be purchased by Investor and the Common Stock issuable upon
conversion of the Shares (collectively, the "Securities")
will be acquired for investment for Investor's own account, not as a nominee
or
agent, and not with a view to the resale or distribution of any part thereof,
and Investor has no present intention of selling, granting any participation
in
or otherwise distributing the same. Investor does not have any contract,
undertaking, agreement or arrangement with any person or entity to sell,
transfer or grant participation to such person or to any third party with
respect to any of the Securities.
5
(d) Reliance
Upon Investor's Representations.
Investor understands that the Securities have not been registered under the
Securities Act on the ground that the sale provided for in this Agreement
and
the issuance of securities hereunder is exempt from registration, and that
the
Company's reliance on such exemption is predicated on Investor's representations
set forth herein. Investor realizes that the basis for the exemption may
not be
present if, notwithstanding such representations, Investor has in mind merely
acquiring shares of the Securities for a fixed or determinable period in
the
future, or for a market rise, or for sale if the market does not rise. Investor
has no such intention.
(e) Investment
Experience.
Investor is experienced in evaluating and investing in private placement
transactions of securities of companies in a similar stage of development
as the
Company and acknowledges that Investor is able to fend for itself, can bear
the
economic risk of Investor's investment and has such knowledge and experience
in
financial and business matters that Investor is capable of evaluating the
merits
and risks of the investment in the Securities. If Investor is an entity not
otherwise owned entirely by accredited investors, Investor has not been
organized for the purpose of acquiring the Securities.
(f) Restricted
Securities.
Investor understands that the Securities may not be sold, transferred or
otherwise disposed of without registration under the Securities Act or an
exemption therefrom, and that in the absence of an effective registration
statement covering the Securities or an available exemption from registration
under the Securities Act, the Securities must be held indefinitely. In
particular, Investor is aware that the Securities may not be sold pursuant
to
Rule 144 promulgated under the Securities Act unless all of the conditions
of that Rule are met.
(g) Receipt
of Information.
Investor
has received all the information Investor considers necessary or appropriate
for
deciding whether to purchase the Shares, including without limitation the
Company's 1934 Act Reports. Investor has had an opportunity to ask questions
and
receive answers from the Company regarding the terms and conditions of this
Offering and the business, properties, prospects and financial condition
of the
Company and its subsidiary, and to obtain additional information (to the
extent
the Company possessed such information or could acquire it without unreasonable
effort or expense) necessary to verify the accuracy of any information furnished
to Investor or to which Investor had access.
6
(h) Acknowledgement
of Investment Risk.
Investor
understands that much of the customer, market and competition information
contained in information supplied by the Company is based upon the Company's
knowledge and belief, and may be based on limited independent investigation.
Investor further understands that the future operating financial information
provided by the Company is for illustrative purposes only, and based upon
certain hypothetical assumptions and events over which the Company has only
partial or no control. In addition, the assumptions made by the Company and
used
in its forecasts are inherently arbitrary. The selection of assumptions requires
the exercise of judgment and is subject to uncertainty due to the effects
that
operational, economic, legislative or other changes may have on future events.
The Company considers it highly unlikely that each of these events will occur
in
the manner and at the time anticipated in its financial forecasts. To the
extent
that the occurrence or timing of actual events do not match the Company's
assumptions, the Company's actual operating and financial results will likely
vary substantially from its current financial projections. INVESTOR UNDERSTANDS
THE RISKS AND SPECIAL CONSIDERATIONS RELATING TO AN INVESTMENT IN THE COMPANY,
INCLUDING, WITHOUT LIMITATION, THOSE IDENTIFIED ON ATTACHED EXHIBIT
A.
(i) Finder's
Fees. There
are
no claims for brokerage commissions or finder's fees or similar compensation
in
connection with the transactions contemplated by this Agreement based on
any
arrangement or agreement made by or on behalf of Investor, and Investor agrees
to indemnify and hold the Company and the other investors in this Offering
harmless against any damages incurred as a result of any such
claims.
4.2 Legends.
Investor
understands that certificates evidencing the Shares may bear substantially
the
following legends:
|
(a)
|
"The
shares represented by this certificate have not been registered
under the
Securities Act of 1933, as amended. The shares may not be sold
or offered
for sale in the absence of (a) an effective registration statement
for the
shares under such Act, or (b) satisfactory assurances to the Company
that
registration under such Act is not required with respect to such
sale or
offer."
|
|
(b)
|
Any
legend required by the laws of any other applicable
jurisdiction.
|
5. Conditions
to Investor's Obligations at Closing. The
obligations of Investor to purchase Shares at Closing are subject to the
fulfillment on or before Closing of each of the following conditions unless
waived by such Investor:
5.1 Representations
and Warranties.
The
representations and warranties of the Company contained in Section 2
will be
true and correct in all material respects on and as of the date of
Closing.
5.2 Performance.
Company
will have performed and complied in all material respects with all agreements,
obligations, and conditions contained in this Agreement that are required
to be
performed or complied with by it on or before the Closing.
5.3 Agreements.
The
Transaction Documents will have been accepted and executed by the
Company.
7
6. Use
of Proceeds. Proceeds
from the sale of the Shares to all Investors in this Offering will be used
by
the Company for general working capital.
7. Miscellaneous.
7.1 Incorporation
by Reference.
All
exhibits appended to this Agreement are incorporated by reference and made
a
part of this Agreement.
7.2 Binding
Effect.
All
covenants, agreements, representations, warranties and undertakings in this
Agreement made by and on behalf of any of the parties hereto will bind and
inure
to the benefit of the respective successors and assigns of the parties hereto
and transferees of the Shares.
7.3 Amendments
and Waivers.
Except
as set forth in this Agreement, changes in or additions to this Agreement
may be
made, or compliance with any term, covenant, agreement, condition or provision
set forth herein may be omitted or waived (either generally or in a particular
instance and either retroactively or prospectively), upon the written consent
of
the Company and the Investor.
7.4 Governing
Law; Jurisdiction.
This
Agreement will be deemed a contract made under the laws of the State of Oregon
and, together with the rights and obligations of the parties hereunder, will
be
construed under and governed by the laws of such State, without giving effect
to
principles of conflicts of law. The parties hereto irrevocably submit to
the
jurisdiction of any state or federal court sitting in Multnomah County, Oregon,
in any action or proceeding brought to enforce, or otherwise arising out
of or
relating to, this Agreement, and hereby waive any objection to venue in any
such
court and any claim that such forum is an inconvenient forum.
7.5 Waiver
of Jury Trial; Attorney Fees.
Each
party hereby irrevocably waives any right it may have, and agrees not to
request, a jury trial for the adjudication of any dispute hereunder or in
connection herewith or arising out of this Agreement or any transaction
contemplated hereby. In the event suit or action is brought by any party
under
this Agreement to enforce any of its terms, or in any appeal therefrom, it
is
agreed that the prevailing party or parties will be entitled to reasonable
attorneys fees to be fixed by the arbitrator, trial court, and/or appellate
court.
7.6 Injunctive
Relief.
The
parties agree that a breach or violation of this Agreement will result in
immediate and irreparable harm to the non-breaching party in an amount that
will
be impossible to ascertain at the time of the breach or violation, and that
the
award of monetary damages will not be adequate relief to the non-breaching
party. The non-breaching party will be entitled to seek equitable or injunctive
relief, in addition to other remedies to which it may be entitled at law
or
equity. In any action for equitable relief, the parties agree to waive any
requirement for the posting of a bond or security.
7.7 Notices.
All
notices, requests, consents and demands will be in writing and may be personally
delivered (effective upon receipt), mailed, postage prepaid (effective three
business days after dispatch), sent by facsimile (effective upon receipt
of the
facsimile in complete, readable form), or sent via a reputable overnight
courier
service (effective the following business day), to:
8
|
(a)
|
The
Company at:
|
|
|
microHelix,
Inc.
00000
XX 00xx
Xxxxx
Xxxxxxxx,
XX 00000
FAX
(000) 000-0000
|
||
|
Attn:
Tyram X. Xxxxxx
President
|
||
|
with
a copy to:
|
||
|
Xxxxxx
Xxxx LLP
000
XX Xxxxx Xxxxxx, Xxxxx 0000
Xxxxxxxx,
XX 00000
FAX
(000) 000-0000
Attn:
Xxxx X. Xxxxxx
|
||
|
(b)
|
Investor
at its address set out on its signature page hereto, or such
other address
as may be furnished in writing to the Company.
|
|
|
(c)
|
Any
other holder of Shares or the underlying Common Stock at such
address or
facsimile number shown in the Company's records, or, until any
such holder
so furnishes an address or facsimile number to the Company, then
to and at
the address of the last holder of such Shares or underlying Common
Stock
for which the Company has contact information in its
records.
|
7.8 Entire
Agreement.
This
Agreement and the exhibits hereto constitute the entire agreement among the
Company and Investor with respect to the subject matter hereof. This Agreement
supersedes all prior agreements between the parties with respect to the Shares
purchased hereunder and the subject matter hereof.
7.9 Severability.
Each
provision of this Agreement will be treated as a separate and independent
clause, and the unenforceability of any one clause will in no way impair
the
enforceability of any of the other clauses. Moreover, if one or more of the
provisions contained in this Agreement will, for any reason, be held to be
excessively broad as to scope, activity, or subject so as to be unenforceable
at
law, such provision or provisions will be construed by the appropriate judicial
body by limiting and reducing it or them, so as to be enforceable to the
maximum
extent compatible with the applicable law as it will then appear.
9
7.10 Counterparts.
This
Agreement may be executed in one or more counterparts, each of which when
executed will be deemed to be an original, but all of which taken together
will
constitute one and the same agreement. A facsimile transmission of this signed
Agreement will be legal and binding on all parties hereto.
7.11 Further
Cooperation and Assurances.
Each of
the parties hereto will execute and deliver any and all additional papers,
documents and other assurances, and will do any and all acts and things
reasonably necessary in connection with the performance of their obligations
hereunder and to carry out the intent of the parties hereto.
[Signatures
on Following Pages]
10
Exhibit
10.1
IN
WITNESS WHEREOF, the Company and the Investor have executed this
Agreement.
| MICROHELIX, INC. | ||
| |
|
|
| By: | ||
|
Tyram X. Xxxxxx, President |
||
11
Exhibit
10.1
MICROHELIX,
INC.
Series
B Preferred Stock Investor Signature Page
This
Series B Preferred Stock Investor Signature Page to the Series B Preferred
Stock
Purchase Agreement with microHelix, Inc. (the "Agreement"), is executed and
delivered by the Investor.
The
undersigned is hereby designated as an "Investor" under the Agreement, is
entitled to the rights of an Investor under the Agreement, makes the
representations and warranties set forth in Section 3
of the Agreement to the Company, and agrees to be bound by each and all of
the
terms of the Agreement as they apply to Investors.
Dated
as of _____________________.
Number
of Shares of Series B Preferred Stock: ____________
Price
Per Share: $1.00
Total
Purchase Price: $______________
Accredited
Investor Pursuant to Sect. 4.1 (identify all subsections that
apply):_______________
| PURCHASER (Individual): | PURCHASER (Jointly Held/Spouse): | ||
|
Signature |
Signature |
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|
Print Name |
Print Name |
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| Address: | Address: | ||
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| PURCHASER (Entity): | |||
| Entity Name: | |||
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|||
| By: | |||
|
Signature |
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| Its: | |||
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|||
| Address: | |||
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12
Exhibit
10.1
EXHIBIT
A
Risk
Factors and Special Considerations
An
investment in the Company involves a high degree of risk. In addition to
the
other information contained in this Agreement, you should carefully consider
the
following risks before making an investment decision. You could lose all
or part
of your investment due to our financial condition or any of these risks.
The
risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us, or that we
currently think are immaterial, may also impair our business
operations.
Our
on-going business plan is based on assumptions that could prove to be incorrect,
which could mean that we may be unable to expand as planned and could cause
us
to invest in areas that do not result in new sales.
The
key
element of the Company's on-going business plan involves the expansion of
our
cable assembly capabilities and customer base, in part through our acquisition
in April 2005 of Xxxxx Electronics, Inc.. This effort intends to capitalize
on
what we expect to be new growth in the medical ultrasound equipment market.
The
success of our plan depends on numerous assumptions that we cannot be sure
are
justified. If any of our key assumptions are incorrect, we could be unable
to
expand our business as we currently anticipate and we may make substantial
investments in product development and/or marketing efforts that do not result
in new product sales. Our assumptions include the following:
|
·
|
demand
for sophisticated “next generation” ultrasound imaging and diagnostic
systems will continue to increase;
|
|
|
·
|
our
cable assembly capabilities, including those that that serve
ultrasound
system OEMs, and our replacement ultrasound probes will efficiently
address market needs as they develop;
|
|
|
·
|
OEMs
with whom we have or may develop relationships will be successful
in
developing their technologies and addressing their markets and
will remain
agreeable to outsource some or all of these cable assemblies;
and
|
|
|
·
|
other
companies will not expand their cable assembly capabilities that
offer
technological or economic advantages over
ours.
|
13
The
development of products by our OEM customers is usually subject to review
by the
U.S. Food and Drug Administration and other regulatory agencies, which means
that new cable assemblies provided by us that are designed as part of these
systems may not be sold in commercial quantities for a long time, if
ever.
Our
sales
process involves designing our cable assemblies into both existing and new
OEM
devices. The sale of any new system in commercial quantities is generally
preceded by a pre-production design phase in which we produce various cable
assembly prototypes based on a collaboration with the customer’s engineering and
product design staff. The OEM’s imaging systems are subject to regulation and
licensing, usually by the U.S. Food and Drug Administration ("FDA"), and
sometimes by comparable foreign regulatory bodies, which increases the cost
and
time required for the development, marketing and sale of these systems. We
expect that the sales cycle for most of our cable assemblies will take 3-12
months to develop and validate. We are generally paid for prototypes during
the
design phase but do not expect such payments to contribute significantly
to our
profitability. If either our proposed cable assembly solution or the overall
imaging system is not approved or is not successfully brought to market in
a
timely manner, the failure to do so will have a direct and adverse impact
on our
future sales.
A
large portion of our sales is concentrated with a few customers that could
make
fluctuations in revenue and earnings more severe.
Sales
to
the Company's largest customer, GE Parallel Design, accounted for 69% and
63% of
our total ultrasound sales in 2003 and 2004, respectively. There are a
relatively limited number of OEMs that make ultrasound-imaging systems. Although
we provide cable assemblies and/or other services to industry-leading OEMs
and
to several specialized competitors, the loss of a significant customer could
have a material adverse impact on us. While we expect the overall size of
the
medical ultrasound market to expand, it remains possible that significant
penetration of these markets may depend on large volume sales to a limited
number of potential customers. Concentration in our customer base may make
fluctuations in revenue and earnings more severe and make business planning
more
difficult.
Large
OEM customers can change their demand on short notice, further adding to
the
unpredictability of our quarterly sales and earnings.
Our
quarterly results have in the past and may in the future vary significantly
due
to the lack of dependable long-term demand forecasts from our larger OEM
customers. In addition to this risk, many of our OEM customers have the right
to
change their demand schedule, either up or down, within a relatively short
time
horizon. These changes may result in us incurring additional working capital
costs and causing increased manufacturing expenses due to these short-term
fluctuations. In particular, our quarterly operating results have in the
past
fluctuated as a result of some of the larger OEM customers changing their
orders
within a fiscal quarter. Our expense levels, to a large extent, are based
on
shipment expectations in the quarter. If sales levels fall below these
expectations, operating results are likely to be adversely affected. Although
we
have tried to lessen our dependency on a few large customers, this is the
nature
of the OEM medical ultrasound industry that we serve and we can provide no
assurance that we will be able to materially alter this dependency in the
immediate future, if at all.
14
In
our highly competitive markets, many of our potential competitors have resources
that we lack, which could impair our relationships with actual or potential
customers.
Our
markets are highly competitive. This is particularly true in the area of
cable
assemblies sold to OEM customers. Competition is based on technology,
established relationships, quality of support, location of facilities and
price.
Several of our competitors have a longer history of operations and more
established relationships with actual and potential customers than we have.
In
addition, most of our OEM customers choose to concentrate their cable assembly
business with one or two suppliers and may have certain geographic preferences.
The combination of these factors may have a direct and adverse impact on
our
ability to serve these customers in the future. The Company's principal
competitive advantages are: (a) low cost manufacturing in Nogales, Mexico;
(2)
exceptional quality record; (3) highly responsive to customers with quick
turn
capability; and (4) very competitive pricing. Despite these advantages, many
of
our competitors and potential competitors have technological and financial
resources and established business relationships that may afford them a
competitive advantage.
Intellectual
Property
Although
we may apply for patents for some of our products, the patents may not be
granted or may not provide adequate protection of our intellectual property.
We
intend to rely on copyrights, trademarks, trade secret laws and contractual
obligations with employees and third parties to protect our intellectual
property. Despite efforts to protect our intellectual property, unauthorized
parties may attempt to copy aspects of our products or obtain and use
information that we regard as proprietary. Our efforts to protect our
intellectual property from third-party discovery and infringement may be
insufficient and third parties may independently develop technologies similar
to
ours, duplicate our products or design around any patents we may obtain.
In
addition, third parties may assert that our products and technologies infringe
their intellectual property.
Growth
Management
The
rapid
execution necessary for us to successfully implement our business plan requires
an effective planning and management process. We anticipate significant growth
and will be required to continually improve our financial and management
controls, reporting systems and procedures on a timely basis, and expand,
train
and manage our personnel. There can be no assurance that our systems, procedures
or controls will be adequate to support our operations or that our management
will be able to achieve the rapid execution necessary to successfully implement
our business plan.
Dependence
on Key Personnel
Our
success depends on our ability to identify, attract and retain highly qualified
personnel and the failure to do so could have a material adverse effect on
us.
15
Future
Capital Needs and the Uncertainty of Additional Financing
In
addition to the funding provided by the proceeds of the sale of Series B
Preferred Stock under this Offering, to complete and implement our business
plan
we may need to raise significant additional funds. There can be no assurance
that additional financing, if needed, will be available on terms favorable
to
us, or at all.
Offering
Price and Conversion Ratio
The
price
per share and conversion ration of the Series B Preferred Stock was set by
us.
Although set in good faith, the price and/or conversion ratio may not bear
any
direct relationship to the assets, results of operations or other objective
criteria of value applicable to us.
Illiquid
Investment
The
Securities have not been registered under the Securities Act and are being
offered in reliance upon an exemption from registration under the Securities
Act
and applicable state securities laws. The Securities can only be transferred
or
resold in a transaction under or exempt from the Securities Act and applicable
state securities laws. There is no public market for the offered Series B
Preferred Stock, and there is no guarantee that any public market for these
securities will develop. For these reasons Investors may not be able to
liquidate their investment in the Company in the event of an emergency or
for
any other reason. Consequently, the purchase of Series B Preferred Stock,
and
the acquisition of Common Stock upon the conversion of Series B Preferred
Stock,
should be considered only as a long-term investment.
16
