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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2000
Commission File Number 0-28081
CONSTELLATION 3D, INC.
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(Exact name of registrant as specified in its charter)
Florida 13-4064492
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
230 Park Avenue, Suite 453, New York, NY 10169
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(Address of principal executive offices) (Zip Code)
(212) 983-1107
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 4, 2000, 46,501,609 shares of the registrant's common stock, $.001 par
value per share, (the "Common Stock") were issued and outstanding, including the
5,500,000 shares of Common Stock issued to Constellation 3D Trust LLC, a
Delaware limited liability company wholly owned by the registrant. EXCEPT WHERE
AND AS OTHERWISE STATED TO THE CONTRARY IN THIS QUARTERLY REPORT, ALL SHARE,
WARRANT AND OPTION AMOUNTS, PRICES PER SHARE AND EXERCISE PRICES HAVE BEEN
ADJUSTED TO GIVE RETROACTIVE EFFECT TO THE CHANGE IN THE PRICE PER SHARE OF THE
COMMON STOCK RESULTING FROM THE THREE-FOR-ONE FORWARD SPLIT OF THE COMMON STOCK
THAT TOOK EFFECT ON JANUARY 18, 2000.
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Table of Contents
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements ........................................... 5
Consolidated Balance Sheets at March 31, 2000 and December 31, 1999 ..... 5
Consolidated Statements of Operations and Deficit for the Three Month
Periods Ended March 31, 2000 and March 31, 1999 ............... 6
Consolidated Statements of Cash Flows for the Three Month Periods
Ended March 31, 2000 and March 31, 1999 ....................... 8
Notes to Consolidated Financial Statements ............................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 12
PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ...................... 25
Item 6. Exhibits and Reports on Form 8-K ............................... 25
Signatures .............................................................. 26
Exhibit Index ............................................................ 27
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Except where the context indicates otherwise, references in this document to
"we," "us" and "our" refer to the registrant, Constellation 3D, Inc.
(individually referred to in this Quarterly Report as "C3D" and together with
all of its directly and indirectly owned subsidiaries, collectively referred to
in this Quarterly Report on Form 10-Q (this "Quarterly Report") as the
"Company")).
FORWARD LOOKING STATEMENTS
Some of the information in this Quarterly Report and the documents incorporated
by reference in this Quarterly Report may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. You can identify these statements by the
appearance of words and phrases such as "will likely result," "may," "believes,"
"are expected to," "is anticipated to," "is forecasted to," "is designed to,"
"plans to," "predict," "seek," "estimate," "projected," "intends to" or other
similar words and phrases. Important factors that could cause actual results to
differ materially from expectations include:
o failure to raise sufficient capital to fund business operating plans;
o market conditions and demand for new data storage technology;
o our competitors' ability to successfully develop new technologies to
satisfy demand for data storage;
o difficulties in achieving sales, gross margin and operating expense
targets based on competitive market factors;
o difficulties in competing successfully in the markets for new products
with established and emerging competitors;
o difficulties with single source supplies, product defects or product
delays;
o our status as a going concern;
o difficulties in forming and maintaining successful joint venture
relationships;
o difficulties in negotiating and receiving licensing royalties;
o difficulties in obtaining, maintaining and using intellectual property
protections;
o changes in data storage technological protocols and standards;
o volatility in interest rates and currency exchange rates;
o difficulties in state, federal, foreign and international regulation
and licensing requirements;
o economic and political instability in the foreign countries where we
conduct operations;
o litigation actions by directors, employees, investors and others;
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o limited operation and management history;
o dependence on key personnel;
o other factors discussed in the Quarterly Report.
All of the above factors could cause our actual results to differ
materially from historical results and those presently anticipated. When
considering forward-looking statements, you should keep these factors in mind as
well as the other cautionary statements in this Quarterly Report, including
without limitation, the Risk Factors beginning on page 17 of this Quarterly
Report. This document should be read in conjunction with the amended Form 10-K
filed with the Securities and Exchange Commission on March 31, 2000.
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 (Unaudited) 1999
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ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 3,829,963 $ 2,030,139
Prepaid and other 210,944 150,989
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Total Current Assets 4,040,907 2,181,128
Property, Plant and Equipment, net 272,938 241,100
Deferred Interest, net of amortization of $51,002 3,948,998 -
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Total Assets $ 8,262,843 $ 2,422,228
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Note payable $ 662,529 $ 650,577
Accounts payable and accrued expenses 1,721,730 1,268,404
Due to related parties 355,071 360,711
Due to shareholder 1,349,123 1,316,712
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Total Current Liabilities 4,088,453 3,596,404
Convertible Notes Payable 6,152,099 2,105,480
Other Long Term Liabilities 40,419 39,969
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Total Liabilities 10,280,971 5,741,853
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Stockholders' Deficit
Preferred stock, no par value; 10,000,000 shares authorized, 0 issued and
outstanding - -
Common stock, $.001 par value; 100,000,000 shares authorized, 41,001,609
issued and outstanding 41,001 41,001
Additional paid in capital 15,310,708 7,310,708
Deficit accumulated during the development stage (17,369,837) (10,671,334)
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Total Stockholders' Deficit (2,018,128) (3,319,625)
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Total Liabilities and Stockholders' Deficit $ 8,262,843 $ 2,422,228
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</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(Unaudited)
Three Months Ended March 31,
--------------------------------
2000 1999
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OPERATING EXPENSES
Research and development $ 779,733 $ 323,206
General and administrative 1,121,072 294,259
Marketing 145,965 -
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Total operating expenses 2,046,770 617,465
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OTHER OPERATING EXPENSES
Interest expense (income), net 4,643,212 24,454
Taxes 8,521 7,000
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Net loss $ (6,698,503) $ (648,919)
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Net loss per share - basic and diluted $ (0.16) $ (0.02)
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Weighted average number of shares
of common stock outstanding 41,001,609 29,214,000
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The accompanying notes are an integral part of these consolidated
financial statements.
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CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Additional During the
Shares Amount Paid-in Capital Development Stage Total
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<S> <C> <C> <C> <C> <C>
Constellation 3D, Inc. Activities
(Formerly Constellation 3D Holdings):
Issuance of common stock for cash 600 $ 3 $ - $ - $ 3
Net Loss - - - (2,612,745) (2,612,745)
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Balance, December 31, 1997 600 3 - (2,612,745) (2,612,742)
Issuance of common stock for
cancellation of shareholders
advances, December 27, 1998 3,749,400 39,906 4,848,631 - 4,888,537
Recapitalization, December 27, 1998 25,464,000 (10,695) 10,695 - -
Net Loss - - - (3,191,902) (3,191,902)
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Balance, December 31, 1998 29,214,000 29,214 4,859,326 (5,804,647) (916,107)
Debt settlement through the
issuance of common stock - April
1, 1999 36,000 36 241,454 - 241,490
Common stock issued in connection
with reverse acquisition -
October 1, 1999 11,109,765 11,109 942,096 - 953,205
Conversion of notes payable
($1.67/share) - October 22, 1999 608,835 609 1,014,116 - 1,014,725
Sale of common stock for cash, net
($4.90/share) November 1, 1999 25,509 25 99,974 - 99,999
Issuance of common stock for
services ($3.83/share) November
8, 1999 7,500 8 28,742 - 28,750
Beneficial conversion discount of
convertible debt - November 11,
1999 - - 125,000 - 125,000
Net Loss - - - (4,866,687) (4,866,687)
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Balance, December 31, 1999 41,001,609 $ 41,001 $ 7,310,708 $(10,671,334) $ (3,319,625)
Deferred interest related to issuance
of detachable warrants - March 24,
2000 - - 4,000,000 - 4,000,000
Beneficial conversion discount of
convertible debt - March 24, 2000 - - 4,000,000 - 4,000,000
Net Loss - - - (6,698,503) (6,698,503)
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Balance, March 31, 2000 41,001,609 $ 41,001 $ 15,310,708 $(17,369,837) $ (2,018,128)
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</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Three Months Ended March 31,
----------------------------
2000 1999
- -----------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C> <C>
Net loss $ (6,698,503) $ (648,919)
Adjustments to reconcile net loss to net
cash used in operating activities:
Discount amortization on convertible debt 4,000,000 -
Discount amortization on deferred interest 51,002 -
Depreciation 11,637 12,817
Change in assets and liabilities:
Prepaid and other (59,955) (51,171)
Accounts payable 453,326 53,093
Accrued interest on convertible notes payable 46,619 -
Accrued interest on notes payable 11,952 -
Accrued interest on shareholder loans 32,411 -
- -----------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (2,151,511) (634,180)
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Cash Flows From Investing Activities
Purchase of furniture and equipment (43,475) (12,789)
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Net Cash Used in Investing Activities (43,475) (12,789)
- -----------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from on borrowings on convertible debt 4,000,000 -
Proceeds from shareholders loan - 241,490
Proceeds from notes payable - 239,144
Net changes in other long-term debt 450 13,584
Advances from related party (5,640) 166,517
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Net Cash Provided by Financing Activities 3,994,810 660,735
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Net Increase in Cash and Cash Equivalents 1,799,824 13,766
Cash and Cash Equivalents, beginning of period 2,030,139 123,097
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Cash and Cash Equivalents, end of period $ 3,829,963 $ 136,863
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Non-cash Financing Activity
Increase in deferred interest related to
detachable warrants $ 4,000,000 $ -
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</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS DESCRIPTION
Constellation 3D, Inc., a Florida corporation ("C3D"; together with all of its
subsidiaries, the "Company"), was incorporated on December 27, 1995, under the
name Latin Venture Partners, Inc. The name of the company was changed to C3D
Inc. on March 24, 1999 in anticipation of a proposed transaction with
Constellation 3D Technology Limited, a British Virgin Islands company
("Constellation Tech").
On December 27, 1999, as approved by the requisite number of shares at the
Annual Meeting of Shareholders, C3D Inc. changed its name to Constellation 3D,
Inc. effective December 29, 1999, and amended its Articles of Incorporation to
allow for an increase in the number of shares authorized from 50,000,000 shares
to 100,000,000 shares of Common Stock ($.001 par value). In addition, the
Company is authorized to issue 10,000,000 shares of preferred stock (no par
value). On January 18, 2000, a three-for-one forward split of C3D's Common Stock
took effect for shareholders of record as December 16, 1999.
The Company has developed what it believes to be a state-of-the-art optical,
data storage product that surpasses the physical limits of two-dimensional
memory technology. Research and development work on the Company's technology has
been conducted and is being conducted in the United States, Israel, Russia and
Ukraine.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company are unaudited
and include, in the opinion of management, all normal recurring adjustments
necessary to present fairly the consolidated balance sheets as of March 31,
2000, and the related statements of operations, stockholders' deficit and cash
flows for the period presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and the related notes
thereto included in C3D's amended Form 10-K filed with the Securities and
Exchange Commission on March 31, 2000.
The Company has been in the development stage since its inception. It has had no
operating revenue to date, has accumulated losses of $17,369,837 and will
require additional working capital to complete its business development
activities and generate revenue adequate to cover operating and further
development expenses. Thus, there is no assurance that the Company will be able
to continue as a going concern. As a result of these factors, the Company's
independent certified public accountants modified their opinion with an
explanatory paragraph addressing the Company's ability to continue as a going
concern.
3. INCOME TAXES
The Company records its provision for income taxes using the liability method.
Under this method deferred tax assets and liabilities are recognized based on
the anticipated future tax effects arising from the differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases.
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4. NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted average
number of Common Stock outstanding. Per share information for all prior periods
have been adjusted to reflect the three-for-one forward stock split effective
January 18, 2000. As of March 31, 2000, the Company had issued 3,450,000
warrants and 525,000 options to purchase shares of Common Stock which were not
included in the calculation of loss per share as their effect was anti-dilutive.
5. BUSINESS COMBINATION
The acquisition of Constellation Tech was treated as a reverse acquisition
whereby C3D was acquired by Constellation Tech, with the balance sheets being
combined using each company's historical cost bases. The results of operations
include that of both companies from the date of acquisition forward. The
financial statements for the period prior to the date of acquisition are those
of Constellation Tech. As the transaction was a reverse acquisition with a
public shell, no pro forma information related to this transaction is provided.
The equity section of the balance sheet and the earnings per share of the
Company are retroactively restated to reflect the effect of the exchange ratio
established in the asset purchase agreement.
The consolidated financial statements of the Company include the accounts of its
subsidiaries after elimination of intercompany balances and transactions.
6. SECURITIES ISSUED DURING THE QUARTER
On March 24, 2000, C3D issued a $4,000,000 subordinate convertible debenture to
Sands Brothers Venture Capital Associates LLC, a limited liability company
organized under the laws of New York ("Sands Brothers VC"). The subordinate
convertible debenture can be converted into shares of Common Stock of the
Company at a conversion price of $17.65 and expires on September 24, 2001. The
quoted price for the Company's stock on March 24, 2000 was $46.50, resulting in
a deemed beneficial conversion feature and discount of approximately $4,000,000,
which was recorded as an interest expense and an increase to additional paid-in
capital. C3D granted the subordinate convertible debenture holder certain
registration rights with respect to the underlying Common Stock.
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In conjunction with the issuance of the Sands Brothers VC subordinate
convertible debenture, the Company issued detachable warrants to purchase
3,450,000 shares of Common Stock expiring on December 1, 2004.
7. DETACHABLE STOCK PURCHASE WARRANTS
Upon closing of the $4,000,000 subordinate convertible debenture to Sands
Brothers VC on March 24, 2000, and pursuant to the terms of the Warrant
Agreement, by and between the Company and Sands Brothers & Co. Ltd., a Delaware
corporation ("Sands Brothers"), the Company issued to Sands Brothers detachable
warrants to purchase 1,050,000 shares of Common Stock at an exercise price of
$3.67 per share and warrants to purchase 2,400,000 shares of Common Stock at an
exercise price of $15.13 per share.
Proceeds from the subordinate convertible debenture issued with the detachable
stock purchase warrants are allocated between the debenture and the warrants
based on their relative fair values as per Accounting Principles Board Opinion
No. 14. The value ascribed to the detachable warrants for accounting purposes
was $4,000,000 based on the proceeds of the subordinate convertible debenture to
the Company. The $4,000,000 value was recorded as a deferred interest and will
be amortized as interest expense over the term of the related debt. This amount
is presented as an addition to paid-in capital of stockholders' deficit.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed in these forward-looking statements as a result
of various factors, including risk factors set forth in this Quarterly Report
and in the C3D's amended Form 10-K filed with the Securities and Exchange
Commission on March 31, 2000. The following discussion should be read in
conjunction with the financial statements and notes thereto included elsewhere
in this Quarterly Report.
Overview
Constellation 3D, Inc. ("C3D"), formerly known as C3D Inc., is an
international enterprise headquartered in New York, New York. With operations in
the United States, Israel and Russia and a subcontractor who performs services
for the Company in Ukraine, the Company researches and develops data storage
technology products with flexibility in commercial applications. The Company has
developed what it believes to be a state-of-the-art optical, data storage
product that surpasses the physical limits of two-dimensional memory technology.
Research and development work on the Company's technology has been conducted and
is being conducted in the United States, Israel, Russia and Ukraine.
The Company plans to continue its focus on research and development of
its data storage technology and to develop strategic alliances, joint ventures
and licensing arrangements with established companies in the data storage
industry. The Company expects that its operating expenses will increase
significantly during the foreseeable future as the result of its plans to:
o increase expenditures on marketing and business development by hosting
demonstrations of the Company's technology to potential strategic
partners, continually obtaining information about the market size and
growth parameters to update the market analysis, updating industry
pricing and cost trends, enlarging the team responsible for
establishing partnerships, and monitoring new technological
developments in the industry. The Company expects to increase
expenditures from the current levels of approximately $80,000 per
month to $150,000 per month for the above activities;
o enhance existing capabilities of products by increasing the levels of
research and development expenditures and capital assets from the
current levels of $300,000 per month to $600,000;
o increase expenditures on administration to provide the overall
management of the parent company as well as the subsidiaries from the
current levels of $100,000 per month to $200,000 per month;
o increase monthly expenditures on professional fees for patent
registration, licensing and joint venture agreements from $100,000 per
month to $150,000 per month; and
o establish research and development facilities with initial
manufacturing capabilities in the United States by hiring additional
staff and transferring equipment and personnel. The Company expects
such expenses to be approximately $1,000,000 over the next twelve
months.
On February 8, 2000, C3D formed Constellation 3D Trust LLC, a Delaware
limited liability company. C3D then issued 2,500,000 (Two Million Five Hundred
Thousand) shares of Common Stock to Constellation 3D Trust LLC as a capital
contribution. On March 21, 2000, C3D issued an additional 3,000,000 (Three
Million) shares of Common Stock to Constellation 3D Trust LLC as a capital
contribution. Constellation 3D Trust LLC intends to use the shares to raise debt
or equity capital and contribute the proceeds thereof to C3D, which proceeds
shall be used for general corporate purposes. There is no assurance that the
issuance of the shares will result in the raising of any debt or equity capital.
For the purposes of the Company's consolidated financial statements, the
issuance of the 5,500,000 (Five Million Five Hundred Thousand) shares of Common
Stock are not considered to be issued or outstanding because the Common Stock
has remained under the control of C3D and will be cancelled if no financing
transaction is completed.
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On February 15, 2000, the Company entered into a letter of intent to
acquire Reflekt Technology, Inc., a Massachusetts corporation. There is no
assurance that the transaction will be consummated. It is possible that the
parties to the letter of intent will agree to modify or waive one or more terms
and/or conditions of the letter of intent. If the acquisition is consummated, it
is also possible that, by agreement of the parties, one or more terms and/or
conditions of any legally binding definitive acquisition agreements will differ
materially from the terms and conditions of the letter of intent. On April 7,
2000, the Company formed FMD&E, Inc., a Massachusetts corporation, which the
Company anticipates will be the operating entity upon completion of C3D's
intended acquisition of Reflekt Technology, Inc.
The Company must raise additional funds as a result of the planned
significant increase in its operating expenditures and anticipates that it will
require approximately $15 million in order to fund its operations over the next
twelve months. The Company has sufficient working capital to support its
operations through September 2000 and is in the process of negotiating for
additional capital. The Company does not expect to receive revenues until the
first quarter of the fiscal year 2001 and expects to continue to incur operating
losses until late in the fourth quarter of fiscal year 2001. The Company is
currently exploring additional financing alternatives, including the possibility
of private equity or debt offerings. In March 2000, the Company entered into an
agreement to amend an agreement originally dated December 1, 1999, with Sands
Brothers & Co., Ltd. pursuant to which Sands Brothers & Co., Ltd. is to raise,
on a best efforts basis, a minimum of $4.0 million and a maximum of $120.0
million of financing for the Company through the issuance of the Company's
capital stock. On March 24, 2000, Sands Brothers & Co., Ltd. raised the minimum
$4.0 million by way of a subordinated convertible debenture and was issued
warrants to purchase 1,050,000 and 2,400,00 shares of Common Stock at a price of
$3.67 and $15.13 respectively. Sands Brothers & Co., Ltd. can earn additional
warrants dependent on additional financings. Although the Company's existing
debt securities contain no such restrictions, the signing of future convertible
debt or preferred share agreements could result in restrictions being placed on
dividends, interest and principle payments, or any other covenant restrictions
that could make payments of such debts difficult, create difficulties in
obtaining further financings, limit the flexibility of changes in the business,
and cause substantial liquidity problems. There can be no assurance, however,
that such financing will be available to the Company or, if it is, that it will
be available on terms acceptable to the Company. If the Company is unable to
obtain the financing necessary to support its operations, its may be unable to
continue as a going concern.
The Company has a limited operating history upon which to base an
evaluation of its business. The Company's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets such as data storage. These risks
include, but are not limited to, rapid technological change, inability to manage
growth, competition from more established companies, dependence on suppliers,
internal system problems, risks relating to the Year 2000 issue, inability to
obtain sufficient financing and an unproven business record.
Results of Operations for the Three Months Ended March 31, 2000 Compared to the
Three Months Ended March 31, 1999
Our reported financial condition and earnings for the quarter ended
March 31, 2000, includes all amounts for the parent company, C3D, and our two
wholly owned operating subsidiary companies, C-TriD and Vostok. Our reported
financial condition and earnings for the comparative quarter ended March 31,
1999, include the consolidated amounts of the predecessor company, Constellation
Tech.
Revenue. The Company generated no revenue in the three months ended
March 31, 2000 and 1999.
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Research and Development Expenses. Research and development expenses
consist primarily of expenses incurred for the development of the data storage
technology, including compensation of technical staff and contractors,
professional fees for intellectual property, general and administrative expenses
related to development offices, and travel expenses. The Company incurred
research and development expenses of $779,733 for the three months ended March
31, 2000, compared with $323,206 for the three months ended March 31, 1999. The
significant costs were payroll for staff and contractors which amounted to
$506,825 for the three months ended March 31, 2000, compared with $214,495 for
the three months ended March 31, 1999. Professional fees were $67,810 for patent
preparation and filing for the three months ended March 31, 2000, compared with
$27,210 for the three months ended March 31, 1999. The increase in patent costs
was due to the expanded coverage in scope and geography of the Company's
Fluorescent Memory Technology. General office expenses relating to research and
development amounted to $99,931 for the three months ended March 31, 2000,
compared with $81,501 for the three months ended March 31, 1999. Travel expenses
amounted to $80,449 for the three months ended March 31, 2000, compared with no
travel expenses for the three months ended March 31, 1999. The increase in
travel costs is due to the travel of research and development staff between the
Company's geographical locations.
General and Administrative Expenses. General and administrative
expenses consist of management compensation, rent, professional services,
telephone expense, travel and other general corporate expenses. General and
administrative expenses were $1,121,072 for the three months ended March 31,
2000, compared with $294,259 for the three months ended March 31, 1999. This
increase reflected the hiring of additional management, increased facilities
charges and expansion of operations in the United States. Payroll expenses and
management fees relating to general and administrative expenses were $207,714
for the three months ended March 31, 2000, compared with $150,099 for the three
months ended March 31, 1999. The increase was due to the expansion of the
management team of the Company from a year ago. Office and maintenance charges
consisting of expenditures on rent, general maintenance, and communications were
$229,072 for the three months ended March 31, 2000, compared with $95,761 for
the three months ended March 31, 1999. Travel and accommodation expenses were
$123,359 for the three months ended March 31, 2000, compared with $38,799 for
the three months ended March 31, 1999. Professional fees were $525,267 for the
three months ended March 31, 2000, compared with $9,600 for the three months
ended March 31, 1999, the majority of which were related to legal support for
the Company's financing transactions and the preparation of the previously filed
Registration Statement and Annual Report.
Marketing and Business development: Marketing and business development
expenses consisted of compensation to consultants and travel expenditures for
demonstrations of the Company's technology to potential strategic partners.
Marketing and business development expenses were $145,965 for the three months
ended March 31, 2000, compared to no expenses for the three months ended March
31, 1999, when the company had yet to demonstrate its technology. Payroll
expenses and consulting fees relating to marketing and business development were
$105,000 for the three months ended March 31, 2000, compared with no expenses
for three months ended March 31, 1999. Travel and accommodation expenses were
$36,263 for the three months ended March 31, 2000, compared with no expenses for
the three months ended March 31, 1999
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Interest and other charges. The Company has recorded net interest
expense of $4,643,212 for the three months ended March 31, 2000, compared with
$24,454 for the three months ended March 31, 1999. The interest expense included
$4,000,000 for the beneficial conversion feature on the subordinated convertible
debt issued during the three months ended March 31, 2000, compared to no expense
for the three months ended March 31, 1999. The Company recognized interest
expense of $51,002 for the amortization of the financing cost associated with
the detachable warrants during the three months ended March 31, 2000, compared
to no expense for the three months ended March 31, 1999. The Company also
recorded an interest expense of $500,000 related to the commission charged on
the subordinated convertible debt issued during the three months ended March 31,
2000, compared with no expense for the three months ended March 31, 1999.
Interest expenses relating to bank overdrafts, shareholder loans and
subordinated convertible debt amounted to $104,254 for the three months ended
March 31, 2000, compared to $24,454 for the three months ended March 31, 1999.
Interest revenue was generated through short-term deposits and amounted to
$12,044 during the three months ended March 31, 2000, compared with no revenue
for the three months ended March 31, 1999.
Income Taxes. The Company has generated inter-company taxable income to
date and therefore has paid $8,521 for the three months ended March 31, 2000,
compared with $7,000 for the three months ended March 31, 1999. The taxes were
incurred in the Israeli and Russian subsidiaries, C-TriD and Vostok, due to
their treatment of inter-company advances as taxable revenue. The Company has
not generated any taxable income to date and therefore has not paid any federal
income taxes since its inception. Deferred tax assets created primarily from net
operating loss carry-forwards have been fully reserved as management is unable
to conclude that future realization is more likely than not.
Liquidity and Capital Resources
As of March 31, 2000, the Company's cash position was $3,829,963 and
its working capital deficit was $47,546, compared to a cash position of
$2,030,139 and a working capital deficit of $1,415,276 as at December 31, 1999.
Since inception, the Company has financed its operations from capital
contributions, shareholder loans and subordinated convertible debt. During the
three months ended March 31, 2000, the Company received net proceeds of
$3,345,000 from the sale of subordinated convertible debt. By virtue of the
Company receiving net proceeds of at least $3,000,000 during the quarter, a
shareholder's loan in amount of $300,000 became due and payable on March 24,
2000. The loan has since been extended to May 19, 2000.
Net cash used in operating activities was $2,151,511 for the three
months ended March 31, 2000, including a net loss of $6,698,503 and an increase
in payables of $453,326. Non-cash transactions involved the recording of a
charge of $4,000,000 for the beneficial conversion feature on the subordinated
convertible note issued during the three months ended March 31, 2000. The
Company also issued detachable warrants in conjunction with the subordinated
convertible note during the quarter, resulting in a $4,000,000 deferred interest
asset to be amortized over the term of the debt. The Company amortized $51,002
during the three months ended March 31, 2000. The Company's current operating
expenditures are approximately $700,000 per month and the Company plans to
increase its operating expenditures to $1,100,000 a month in order to expand its
operations. The Company has not generated any revenues to date and does not
anticipate cash flow from operations to be sufficient to fund its cash
requirements until late in 2001.
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The Company incurred net capital expenditures of $43,475 for the three
months ended March 31, 2000, compared with $12,789 for the three months ended
March 31, 1999. These expenditures were primarily for laboratory equipment
associated with the Company's continued research and development.
The Company currently has no commitments for any credit facilities such
as revolving credit agreements or lines of credit that could provide additional
working capital. Based on its existing capital resources, the Company believes
that it will be able to fund operations through September 2000. The Company's
capital requirements depend on several factors, including the success and
progress of research development programs, the resources devoted to developing
products, the extent to which products achieve market acceptance and other
factors. The Company anticipates that it will require substantial additional
financing to fund its working capital requirements. There can be no assurance,
however, that additional funding will be available or, if available, that it
will be available on terms acceptable to the Company. If adequate funds are not
available, it may not be able to continue. There can be no assurance that the
Company will be able to raise additional cash if its cash resources are
exhausted. The Company's ability to arrange such financing in the future will
depend in part upon the prevailing capital market conditions as well as the
Company's business performance.
The Company has been in the development stage since its inception. It
has had no operating revenue to date, has accumulated losses of $17,369,837 and
will require additional working capital to complete its business development
activities and generate revenue adequate to cover operating and further
development expenses. Thus, there is no assurance that the Company will be able
to continue as a going concern. As a result of these factors, the Company's
independent certified public accountants modified their opinion with an
explanatory paragraph addressing the Company's ability to continue as a going
concern.
Market Risk
The Company expects that, like many companies, it may be exposed to
some degree of market risk particularly, for its Ukrainian, Israeli and Russian
operations. The Company cannot provide any assurance that future developments in
each respective country will not generally have an adverse effect on the
financial condition of the Company. The Company does not anticipate that it will
enter into derivative transactions (e.g., foreign currency forward or option
contracts) to hedge against known or forecasted market changes.
The Company believes that it does face political risk based on having
operations in the Ukraine, Israel and Russia. These countries do face political
instability that could have a material adverse effect on the Company's
operations, however, the Company believes that this is unlikely to occur. The
Company does not possess "political risk" or other insurance to protect it
against business interruption losses caused by political acts.
Year 2000 Issue
As of May 9, 2000, the Company's management does not have any actual
knowledge of any Year 2000 computer problem that has had, is having or will have
a material adverse effect on the Company's financial condition.
The Company has completed its assessment of its information technology
systems, as well as its non-information technology systems. The Company
reasonably believes that it will not be materially adversely affected by the
Year 2000.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The Statement establishes
accounting and reporting standards requiring that every derivative instrument
(including some types of derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The Statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS 133, as
amended by SFAS No. 137 defining SFAS No. 133's effective date, is effective for
fiscal years beginning after June 15, 2000, and must be applied to instruments
issued, acquired, or substantively modified after December 31, 1997. Also, SOP
98-5, "Reporting the Costs of Start-up Activities" is effective for the year
ended January 1, 2000. The Company does not expect the adoption of the
accounting pronouncement to have a material effect on its financial position or
results of operations.
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RISK FACTORS
No History of Revenue
As a research and development enterprise, the Company has no revenue
history and therefore has not achieved profitability. The Company expects to
continue to incur operating losses until late in the third or fourth quarter of
2001. The Company incurred a net loss of $6,698,503 for the three months ended
March 31, 2000, $4,866,687 for the year ended December 31, 1999 and $3,191,902
for the year ended December 31, 1998. The Company has never been profitable, and
there can be no assurance that, in the future, the Company will be profitable on
a quarterly or annual basis. In addition, over the next twelve months, the
Company plans to increase its operating expenses from approximately $700,000 per
month to $1,100,000 per month in order to fund research and development and
increase its administration resources. The Company expects to receive revenues
by the first quarter of 2001. Nevertheless, it is possible that the revenue of
the Company may never be sufficient to recognize a profit.
Limited Operating History
The operations of the Company began in January of 1997, when it
continued the performance of research and development of three-dimensional
technology for the storage of digital information on disc that had begun in
1995.
The Company's proposed operations will be subject to the problems,
expenses, difficulties, complications, and delays frequently encountered in
connection with the development, production and marketing of a start-up
operation. Primarily, there is the risk that the Company may not be able to
transform the technology into commercially profitable products. Also, there is
the risk that once introduced into the market place, the Company's products will
not be embraced by the market.
The Company as a Going Concern
Due to its lack of operating revenues, accumulated operating losses of
$17,369,837 and the need for additional working capital, there is no assurance
that the Company will be able to continue as a going concern. The Company's
independent certified public accountants modified their opinion on the Company's
Financial Statements in the Company's amended Form 10-K filed with the
Securities and Exchange Commission on March 31, 2000 to express their
substantial doubt about the Company's ability to continue as a going concern.
Need for Additional Capital
The Company believes that it has sufficient working capital to sustain
its operations through September 2000. However, as a research and development
company in the data storage technology field, the Company continually expends
large amounts of capital over short periods of time. The Company is currently
generating no revenues and does not expect to do so until early in 2001. There
is no assurance that revenues generated in future operations, if any, will be
sufficient to finance the complete cost of the Company's research and
development. Additional funds will be required before the Company achieves
positive cash flow from operations. Future capital requirements and
profitability depend on many factors, including, but not limited to, the timely
success of product development projects and the timeliness and success of joint
venture and corporate alliance strategies and marketing. The Company is actively
in the process of raising additional capital, including the issuance of
convertible debt securities and the potential issuance of preferred shares. The
Company's outstanding convertible debt contains no restrictions on the further
incurrence of indebtedness nor does such debt adversely affect the Company's
liquidity. However, future debt or preferred share offerings could result in
restrictions that could make payments of such debts difficult, create
difficulties in obtaining further financings, limit the flexibility of changes
in the business, and cause substantial liquidity problems. However, there can be
no assurances that financing or additional funds needed will be available when
needed or, if available, on terms acceptable to the Company. Additional equity
or convertible debt financing, if obtained, could result in substantial dilution
to shareholders. The Company is not currently considering acquiring a bank
credit facility.
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Sales of Securities Under Rule 144
Under Rule 144 of the U.S. Securities Act of 1933, as amended ("Rule
144"), certain holders of restricted shares of the Common Stock of C3D might be
able to sell at least some of their shares of such Common Stock beginning one
year after C3D offered or sold those shares of Common Stock to them. Such sales,
if legally permissible, might be subject to certain restrictions and limitations
under Rule 144. Sales of such Common Stock may result in a lower per share price
of C3D's Common Stock and/or volatility in such price. In particular, as of May
4, 2000, those shareholders who were sold and/or offered shares of Common Stock
on May 7, 1999 pursuant to a Regulation S offering under the U.S. Securities
Exchange Act of 1933, as amended, held 1,359,765 shares of Common Stock of C3D,
at least some of which might be salable pursuant and subject to Rule 144. In
addition, Michael Goldberg, Director of Legal Affairs, interim Chief Operating
Officer, Secretary and Member of the Board of Directors of C3D, and Brigadier
General Itzhak Yaakov, Chairman of the Board of Directors of C3D, have held
shares of C3D's Common Stock whose issuance was authorized by C3D's Board of
Directors on March 8, 1999 and which might also be salable pursuant and subject
to Rule 144. However, nothing in this paragraph should be deemed an opinion,
legal or otherwise, regarding the salability of any shares of Common Stock of
C3D referred to in this paragraph or elsewhere.
Foreign Operations
In addition to its activities in the United States, the Company
conducts business operations in Israel and Russia, and it has hired a
subcontractor to perform various activities for the Company in Ukraine. In
recent history, these three nations have experienced significant economic and
political instability. It is possible that present or future economic or
political instability in those nations will have a material adverse impact on
the Company's ability to conduct its business and/or its financial condition.
The rate of inflation in Israel, Russia and Ukraine has not materially adversely
affected the Company's financial condition.
Economic Instability
Economic instability may encompass unstable price level (i.e.
inflation), unstable interest levels or rates (i.e. fluctuation of capital) and
social unrest.
The rate of inflation in Israel, Russia and Ukraine has not materially
adversely affected the Company's financial condition. It is not possible for the
Company to predict whether the rate of inflation in Israel, Russia or Ukraine
will materially adversely affect the Company's financial condition in the
future. However, the Company believes that it is possible that such adverse
effects might result in the future. High rates of inflation have occurred in the
above-mentioned countries on numerous occasions in the past, and they may
reoccur in the future. High rates of inflation may cause insecurity and
uneasiness in the local populace in general, including the Company's employees.
In such situations, there is often concern about the increasing cost of living
(as measured in local currency) and attempts to keep pace with it. This
situation by itself might adversely affect the performance of the Company.
Whenever inflation is not matched proportionately by the currency exchange rate
(as has happened as a matter of governmental policy in countries such as Israel,
Argentina, and Russia), generally there is an increase in the costs to the
Company in U.S. dollars. Such increases in costs might materially adversely
affect the Company's financial condition.
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The Company does not have, at the moment, a hedging policy for
protecting against changes in the dollar costs of the activities.
Changes and fluctuations of interest rates might, in principle, affect
the operations of the Company in each of the aforementioned countries. The
changes in the interest rates might create flows of capital that might affect
the economy of an entire country, and thus also the Company's employees. Since
most of the financing of the non-U.S. operations is provided by the Company, and
since such financing is expected to continue in the future, the Company believes
that local interest rate fluctuations will not have a material adverse impact on
the Company's financial condition.
The economic situation in each of the above-mentioned countries might
eventually develop into extended social unrest. Such social unrest might
materially adversely affect the financial performance of the Company's local
activities and of the Company as a whole.
Political Instability
The Company does not possess "political risk" or other insurance to
protect it against business interruption losses caused by political acts.
Israel's physical security and integrity have been at risk since
Israel's inception as a modern nation. Recently, Israel and Syria have stopped
their peace negotiations. There is no formal peace between Israel and Syria or
Lebanon, and there are conflicts also between Israel and Iraq and between Israel
and Iran. Furthermore, Israel and the Palestinian Authority have been conducting
negotiations with respect to the legal status of the West Bank and Gaza Strip,
and negotiations concerning the legal status of Jerusalem, the current Israeli
capitol, may ensue. In connection with those negotiations and their results,
violent activity has occurred, and may reoccur. Therefore, to the extent that
the Company has operations in Israel, there is risk that the political
instability will have an adverse impact on the Company's ability to conduct its
business. It is highly unlikely, but possible, that Israel's compulsory military
service obligation for its citizens, which lasts until an individual is 50 years
of age, could disrupt the scheduled work of the Company's Israeli research and
development facility, which in turn could delay the commercial launch of the
Company's planned volumetric storage product line and materially adversely
affect the Company's results of operations and financial condition.
Russia's significant political and economic instability could have a
material adverse effect on the results of our operations and the market price of
our stock. Russia has incurred significant debt, which it may fail to adequately
service. Russian currency, the ruble, has encountered foreign exchange
volatility. The Russian government has experienced frequent political
instability and change, including wars inside Russia, acts of terrorism, power
struggles among government officials and among big commercial enterprises, which
included allegations of high levels of corruption, and allegations of organized
or other crime. In the recent years, prime ministers have been replaced
frequently, and parties with radical positions regarding intervention of the
government in the economy, like the Communist Party, have gained in influence.
Although we do not believe that the Company has been materially adversely
affected by these activities to date, in the future, such factors may have a
material adverse effect on our operations. Our ability to conduct operations in
Russia could be adversely affected by difficulties in protecting and enforcing
our rights and by future changes to local laws and regulations.
Other Adversities
Additional strains on our local operations might result from other
factors, such as the delay of Moscow banks in acknowledging wire transfers of
funds into Russia. These delays can be anywhere from a day to a week. Also,
Moscow banks often charge very expensive and somewhat arbitrary fees with
respect to wire transfers.
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The Company's activities in Ukraine are limited to the operations of a
single subcontractor. Economic or political instability in Ukraine might have a
material adverse impact on the Company's ability to conduct its business and/or
its financial condition. It should be noted that, as in Russia, Ukraine has
experienced significant political and economic change. The Ukrainian economy is
less developed than that of Russia. Ukraine is susceptible to most of the same
economic risks as Russia, including sovereign debt defaults and/or
restructurings, foreign exchange volatility and political instability.
Deterioration in the Ukrainian economic or political situation could materially
adversely impact our results of operations.
Need for Additional Technology
The Company believes that it has developed a substantial amount of
technology for developing its products. Nevertheless the Company foresees the
need to recruit more employees with relevant technological knowledge and
capabilities and/or to purchase the right for specific technologies from others.
However, there can be no assurances that the Company will succeed in performing
these acquisitions.
Proprietary Rights Protection
Although the Company intends to rely on trade secret, trademark,
copyright and other intellectual property laws to protect its Fluorescent Memory
Technology, currently the Company relies and expects to rely almost entirely on
patent laws for such protection. While the Company currently intends to
vigorously enforce its intellectual property rights, there can be no assurance
that the steps taken by the Company to protect its Fluorescent Memory Technology
and to enforce its rights will be successful. The Company, through its wholly
owned subsidiary TriDStore IP, L.L.C., individually holds five U.S. patents
relating to its Fluorescent Memory Technology. Through its wholly owned
subsidiary TriDStore IP, L.L.C., the Company holds more than forty U.S. and
foreign regular patent applications relating to its Fluorescent Memory
Technology. However, there can be no assurance that patents will be issued for
those patent applications. As of May 9, 2000, through its wholly owned
subsidiary TriDStore IP, L.L.C., the Company holds thirteen pending provisional
patent applications. There is also no assurance that the Company will timely
exercise its right to convert provisional patent applications into regular or
international patent applications or that patents will be issued for any regular
or international patent applications into which the Company does convert such
provisional patent applications.
The Company expects that it will develop trade secrets. The Company may
seek patent or copyright protection for such trade secrets. There is no
assurance that the Company will develop trade secrets or seek patent or
copyright protection for any or all of them. The Company intends to enter into
confidentiality and non-disclosure agreements to protect one or more trade
secrets which it or its employees or independent contractors may develop, but
there is no assurance that the Company will do so or that the confidentiality
necessary to protect a Company trade secret will be maintained. Such failure to
maintain one or more trade secrets could have a material adverse financial
impact on the Company.
The Company may offer products in the U.S. and in foreign countries
based on its patented Fluorescent Memory Technology. Certain foreign countries
in the Pacific Rim and elsewhere may not offer the same degree of intellectual
property protection that is afforded in the U.S., European Community and Japan,
and the Company may be unable to enforce its patent rights in such
jurisdictions, even if it were able to obtain such rights.
Pending Intellectual Property Applications
The Company has filed intent to use trademark applications with the
U.S. Patent and Trademark Office for the trademarks "CLEARCARD" and
"CONSTELLATION 3D". There is no assurance that these applications will mature
into registrations or that the Company will even use these marks. Furthermore,
the Company has acquired the internet domain names "C-3D.NET," "C-TRID.COM,"
"C-TRID.NET", "CONSTELLATION3D.COM", and "CONSTELLATION3D.NET". Currently, the
Company maintains a web site at http://www.c-3d.net.
There can be no assurance that any patents, copyrights, trade secrets,
trademarks or domain names developed or obtained by the Company will provide
substantial or sufficient value or protection to the Company. Furthermore, there
is no assurance that their validity will not be challenged or that affirmative
defenses to infringement will not be asserted. With respect to trademarks,
affirmative defenses to both infringement or dilution may be asserted. If
another party were to succeed in developing data storage technology comparable
to the Company's Fluorescent Memory Technology without infringing, diluting,
misusing, misappropriating or otherwise violating the Company's intellectual
property rights, the Company's financial condition might suffer a material
adverse effect.
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Possible Intellectual Property Litigation
As is typical in the data storage industry, from time to time, the
Company may in the future be notified of claims that it may be infringing,
diluting, misusing, misappropriating or otherwise violating patents, copyrights,
trademarks, trade secrets and/or other intellectual property rights of third
parties. It is not possible to predict the outcome of such claims, and there can
be no assurance that such claims will be resolved in the Company's favor. If one
or more of such claims is resolved unfavorably, there can be no assurance that
such outcomes will not have a material adverse effect on the Company's business
or financial results. In particular, the data storage industry has been
characterized by significant litigation relating to infringement of patents and
other intellectual property rights. There can be no assurance that future
intellectual property claims will not result in litigation. If infringement,
dilution, misuse, misappropriation or another intellectual property rights
violation were established, the Company and/or its joint ventures (to the extent
that it has any) could be required to pay substantial damages or be enjoined
from developing, marketing, manufacturing and selling the infringing product(s)
in one or more countries, or both. In addition, the costs of engaging in
intellectual property litigation may be substantial regardless of outcome. If
the Company seeks licensure for intellectual property that it cannot otherwise
lawfully use, there can be no assurance that the Company will be able to obtain
such licensure on satisfactory terms.
Intellectual Property Ownership
In the future, a Company employee or contractor, and not the Company,
might be deemed the legal and/or record owner of one or more patents, patent
applications or other intellectual property which is material to protecting the
Company's data storage technology. The Company typically requires that its
employees and contractors assign to the Company all right, title and interest in
and to the intellectual property which they develop for the Company. However,
there can be no assurance that the Company will obtain legal or record ownership
of, or one or more licenses to use, such intellectual property on satisfactory
terms. It is possible that failure to obtain such legal or record ownership, or
one or more licenses to use, such intellectual property will have a material
adverse effect on the Company's business or financial results.
Product Liability Considerations
The Company may face inherent business risk of exposure to product
liability claims in the event that the use or misuse of its future products is
alleged to have resulted in the death or injury of a customer, consumer or user
or to have had some other adverse effect. The Company does not presently have
product liability insurance. Currently, the Company's technology is not mass
manufactured and it is not expected to be mass manufactured in the near future.
Although the Company might obtain product liability insurance and the Company
might protect itself against product liability claims by contractually requiring
its joint ventures (to the extent that it has any): (a) to have continuous
quality control inspections, detailed training and instructions in the
manufacture of its products; (b) to indemnify the Company for damages caused by
the joint venture's own tortuous acts or omissions; and/or (c) to obtain and
maintain adequate product liability insurance, product liability lawsuits may
affect the reputation of the Company's future products and services (to the
extent that it has any) or otherwise diminish the financial resources of the
Company. If product liability suits are brought, there is no assurance that any
existing product liability insurance of the Company or a joint venture or any
existing indemnification by the Company's joint ventures will be adequate to
cover the liability claims. However, there is no assurance that product
liability insurance will continue to be available to the Company or the
Company's joint ventures in sufficient amounts at acceptable costs.
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Supply of Components and Raw Materials
It is not uncommon in the data storage technology manufacturing and
assembly industry that certain components are available only from a few or
sole-source suppliers. However, the Company anticipates that the key components
for its future products (to the extent that it has any) will be available from a
number of source suppliers and that the Company and its joint ventures will not
experience difficulty in obtaining a sufficient supply of key components on a
timely basis. As discussed below, the Company intends to develop relationships
with qualified manufacturers with the goal of securing high-volume manufacturing
capabilities and controlling the cost of current and future models of the
Company's future products (to the extent that it has any).
However, there can be no assurance that the Company will be able to
obtain a sufficient supply of components on a timely basis or on commercially
reasonable terms or realize any future cost savings. Sales may be adversely
affected for these or similar reasons. The inability to obtain sufficient
components and equipment, to obtain or develop alternative sources of supply at
competitive prices and quality or to avoid manufacturing delays could prevent
the Company's joint ventures (to the extent that it has any) from producing
sufficient quantities of the Company's products to satisfy market demand. In
addition, in the case of a component purchased exclusively from one supplier,
the Company's joint ventures (to the extent that it has any) could be prevented
from producing any quantity of the affected product(s) until such component
becomes available from an alternative source. Such adverse events could cause
delays to product shipments, thereby increasing the joint venture's material or
manufacturing costs or causing an imbalance in the inventory levels of certain
components. Moreover, difficulties in obtaining sufficient components may cause
the Company's joint venture(s) to modify the design of the Company's products to
use a more readily available component, and such design modifications may result
in product performance problems. Any or all of these problems could result in
the loss of customers, provide an opportunity for competing products to achieve
market acceptance and otherwise adversely affect the Company's business and
financial results. The Company does not believe that there are any raw materials
on which its products depend whose unavailability is a material risk to the
financial condition of the Company.
Customers
As solely a research and development company, the Company has not yet
had any customers for its products. As discussed above, the Company intends to
establish joint ventures with strategic partners to market and sell the
Company's Fluorescent Memory Technology. In the future, it is possible that the
Company or its joint ventures will have sales to one or more customers which
equal ten percent (10%) or more of the Company's consolidated revenues. However,
the Company does not intend to become financially dependent on a small number
of, or any single, customer.
Directors' and Officers' Involvement in Other Projects
Some of the officers and directors of C3D, notably Leonardo Berezowsky
and Michael Goldberg, serve and are expected to serve as directors, officers
and/or employees of companies other than C3D. See "Directors, Executive Officers
and Certain Significant Employees." While the Company believes that such
officers and directors will be devoting adequate time to effectively manage C3D,
there can be no assurance that such other positions will not negatively impact
an officer's or a director's duties for C3D and that such impact will not have a
material adverse effect on the Company's financial condition. The Company
believes that such other company positions do not raise actual or potential
conflicts of interest that could interfere with the carrying out of the
respective duties of Messrs. Berezowsky and Goldberg at C3D.
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Legal and Regulatory Controls
The Company is not aware of any particular electrical,
telecommunication, environmental, health or safety laws and standards that will
apply to the Company's products. While the Company does not anticipate
regulation of its products, there can be no assurances that the Company will not
have to comply with laws and regulations of domestic, international or foreign
governmental or legal authorities, compliance with which could have a material
adverse affect on the Company. The U.S. Federal Communications Commission (the
"FCC") regulates computer hardware that contains or utilizes magnetic forces to
store information. To the extent the FCC may regulate in the future
fluorescent-based computer storage devices, such as our products, compliance
with those regulations could have a material adverse effect on our financial
condition.
Market Risk
The Company expects that, like many companies, it may be exposed to
some degree of market risk, particularly for its Ukrainian, Israeli and Russian
operations. The Company cannot provide any assurance that future developments in
each respective country will not generally have an adverse effect on the
financial condition of the Company. Therefore, the Company does not anticipate
that it will enter into derivative transactions (e.g., foreign currency forward
or option contracts) to hedge against known or forecasted market changes.
No Dividends
The Company does not intend to pay dividends to the holders of any of
the Company's outstanding stock for the foreseeable future. Therefore, investors
who anticipate the need for immediate or future income by way of dividends from
their investment should refrain from the purchase of the Company's shares.
Year 2000
As of May 9, 2000, the Company's management does not have any actual
knowledge of any Year 2000 computer problem that has had, is having or will have
a material adverse effect on the Company's financial condition.
The Year 2000 issue arises with the change in century and the potential
inability of information systems to correctly "rollover" dates to the new
century. To save on computer storage space, many systems were programmed with a
two-digit century (e.g., December 31, 1999 would appears as 12/31/99) assuming
that all years would be part of the 20th century. On January 1, 2000, systems
with this programming would have defaulted to 01/01/1900 instead of 01/01/2000
and calculations using or reporting the date would not be correct and errors
would arise. To prevent this from occurring, information systems need to be
updated to ensure that they recognize the Year 2000. The Company does not
anticipate any material exposure to the Year 2000 issue. As of the date of this
Annual Report, the Company has not experienced any material adverse effects
resulting from the arrival of January 1, 2000.
The Company has completed its assessment of its information technology
systems, as well as its non-information technology systems. The Company
reasonably believes that it was not materially adversely affected by the Year
2000.
The Company's research records are primarily handwritten. The Company's
computer hardware and software is relatively new and all have been purchased
with Year 2000 computer risks in mind. The Company does not reasonably
anticipate that any of its computer hardware or software will malfunction as a
result of the Year 2000.
23
<PAGE>
The Company expects that its research prototypes will accurately and
unambiguously display, reconfigure, interrupt and process all date codes
designating the Year 2000 and beyond, including leap years. However, the
Company's research prototypes may encounter a Year 2000 problem because of the
interaction of a third party's product with the Company's prototypes.
The Company is primarily relying on Year 2000 Readiness Disclosures in
its assessment of its principal suppliers. After reviewing these Year 2000
Readiness Disclosures, the Company does not foresee that any of its principle
suppliers will suffer Year 2000 issues. The Company has one supplier from which
it purchases the raw materials needed for its research operations. The Company
believes that this suppler will not face Year 2000 problems that would affect
the supplier's ability to provide the materials the Company needs to continue
its research operations. However, in the event the supplier is unable to fill
orders to the Company as a result of a Year 2000 computer failure, the Company
is prepared to utilize other suppliers to fill its orders for raw materials.
Finally, the Company has determined that its operations in Russia,
which account for a material portion of the Company's business, were not
materially adversely affected by the Year 2000 problem. The Company's concerns
stem from the state of readiness of third parties, including the Russian
government, and not from its own level of preparation. The Company reasonably
believes that the Russian government was able to handle the possible problems
that may have arisen from the Year 2000 problem and which could put at material
risk the financial condition of the Company. However, it is possible that some
unexpected problem may arise as a result of a Year 2000 problem and cause a
material adverse impact on the Company's financial condition. The Company has
put contingency plans in place to deal with a possible Year 2000 failure in
Russia. These contingency plans include a complete back-up of all computer
files, as well as the creation of paper copies of all computer files.
Dependence on Key Personnel
The Company's success depends, to a great extent, upon its ability to
attract and retain highly qualified technical and management personnel,
including experts in the field of data storage technology and the sciences
underlying such technology. Such individuals are in high demand and are often
subject to competing offers. The Company faces competition for such personnel
from other companies, research and academic institutions, government entities
and other organizations. There can be no assurances that the Company will be
able to attract and retain other qualified personnel needed for its business.
Furthermore, the Company does not currently maintain "key man" insurance for any
personnel.
Competitors in the Data Storage Technology Industry
The Company estimates that there are approximately 14 enterprises
researching, developing and/or producing data storage technology which the
Company believes to be the Company's material competitors. The data storage
technology industry is fiercely competitive, and a number of the Company's
competitors have already established their names, brands, products and
technologies in the marketplace. Some competitors are expected to have
significant market shares. Mergers, acquisitions and research and development by
the Company's competitors might further increase their market shares.
While the Company believes that its Fluorescent Memory products and
joint venture strategies will result in competitive advantages, there is no
assurance that any such advantages will be obtained or, if obtained, can be
maintained over time, that a competitor will not invent a superior technology,
or that the Company's products and services will be able to penetrate the data
storage market. Many of the Company's current and potential competitors have or
may have advantages over the Company such as greater financial, personnel,
marketing, sales and public relations resources. Existing or future competitors
may develop or offer products that provide significant performance, price,
creative or other advantages over those offered by the Company.
Restricted Securities
Sales of a substantial number of shares of our Common Stock after the
filing of this Quarterly Report could adversely affect the market price of our
Common Stock by introducing a large number of sellers to the market. Given the
potential volatility in the price of our shares, these sales could cause the
market price of our Common Stock to decline.
The majority of our outstanding shares of Common Stock have been issued
in private placements and are restricted securities under the U.S. Securities
Act of 1933, as amended. These restricted securities will be subject to
restrictions on the timing, manner and volume of sales of restricted shares.
We cannot predict if future sales of our Common Stock or the
availability of our Common Stock for sale will adversely affect the market price
for our Common Stock or our ability to raise capital by offering equity
securities.
24
<PAGE>
PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The information below relates to securities of C3D sold by C3D during the period
covered by this Quarterly Report that were not registered under the U.S.
Securities Act of 1933 (the"Securities Act"). THE SHARE AMOUNTS AND PRICES PER
SHARE HAVE BEEN ADJUSTED TO GIVE RETROACTIVE EFFECT TO THE CHANGE IN THE PRICE
PER SHARE OF THE COMMON STOCK RESULTING FROM THE THREE-FOR-ONE FORWARD SPLIT OF
C3D'S COMMON STOCK THAT TOOK EFFECT ON JANUARY 18, 2000.
Section 4(2) Offering to Sands Brothers
On March 24, 2000, C3D issued a 10% Subordinate Convertible Debenture due
September 24, 2001 in principal amount of $4.0 million to Sands Brothers Venture
Capital Associates LLC, a limited liability company organized under the laws of
New York ("Sands Brothers VC"). In connection with such issuance, C3D granted to
Sands Brothers VC certain registration rights with respect to the underlying
Common Stock. The issuance of the convertible debenture, convertible at $17.65
per share as of the issue date, was made as an exempt offering under Section
4(2) of the Securities Act. In connection with such issuance, pursuant to the
terms of the Warrant Agreement dated as of December 1, 1999, by and between the
Company and Sands Brothers & Co. Ltd., a Delaware corporation ("Sands
Brothers"), the Company issued to Sands Brothers warrants to purchase 1,050,000
shares of Common Stock at an exercise price of $3.67 per share and warrants to
purchase 2,400,000 shares of Common Stock at an exercise price of $15.13 per
share. Both warrants expire on December 1, 2004.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are included herein:
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed with the Securities and Exchange
Commission during the three months ended March 31, 2000 except for the
following:
On March 13, 2000, a report on Form 8-K was filed presenting the press release
dated March 1, 2000 for C3D's intended acquisition of all of the outstanding
voting stock of Reflekt Technology, Inc.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSTELLATION 3D, INC.
----------------------
(Registrant)
Date: May 15, 2000 By: /s/ Eugene Levich
-----------------
EUGENE LEVICH
President and
Chief Executive Officer
(Principal Executive Officer
and Director)
Date: May 15, 2000 By: /s/ Leonardo Berezowsky
-----------------------
LEONARDO BEREZOWSKY
Chief Financial Officer and Senior
Vice President of Finance
(Principal Financial and
Accounting Officer)
26
<PAGE>
EXHIBIT INDEX
The following exhibit is filed as part of this Quarterly Report on Form 10-Q:
Exhibit
Number
27 Financial Data Schedule
27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,829,963
<SECURITIES> 0
<RECEIVABLES> 210,944
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,040,907
<PP&E> 335,029
<DEPRECIATION> 62,091
<TOTAL-ASSETS> 8,262,843
<CURRENT-LIABILITIES> 4,088,453
<BONDS> 0
0
0
<COMMON> 41,001
<OTHER-SE> (2,059,129)
<TOTAL-LIABILITY-AND-EQUITY> 8,262,843
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,698,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,698,503)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,698,503)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,698,503)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
