continue to bring such actions. We could incur additional expenses if new regulations
regarding the collection, use or storage of personal information are introduced or if government
agencies investigate our privacy or security practices.
We rely on encryption and authentication technology licensed from third parties to provide the
security and authentication necessary to effect secure transmission of sensitive customer
information such as customer credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments may result in a compromise
or breach of the algorithms that we use to protect customer transaction data. If any such
compromise of security were to occur, it could subject us to liability, damage our reputation and
diminish the value of our brand-name. A party who is able to circumvent the security measures could
misappropriate proprietary information or cause interruptions in operations. We may be required to
expend significant capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches. Our security measures are designed to prevent security
breaches, but our failure to prevent such security breaches could subject us to liability, damage
our reputation and diminish the value of our brand-name.
Moreover, for the convenience of our customers, we provide non-secured channels for customers
to communicate. Despite the increased security risks, customers may use such channels to send
personal information and other sensitive data. In addition, phishing incidents are on the rise.
Phishing involves an online companys customers being tricked into providing their credit card
numbers or account information to someone pretending to be the online companys representative.
Such incidents have recently given rise to litigation against online companies for failing to take
sufficient steps to police against such activities by third parties, and may discourage customers
from using online services.
We may be subject to product liability claims that could be costly and time consuming.
We sell products manufactured and distributed by third parties, some of which may be
defective. If any product that we sell were to cause physical injury or damage to property, the
injured party or parties could bring claims against us as the retailer of the product. Our
insurance coverage may not be adequate to cover every claim that could be asserted. If a successful
claim were brought against us in excess of its insurance coverage, it could expose us to
significant liability. Even unsuccessful claims could result in the expenditure of funds and
management time and could decrease profitability.
If eCOST is unable to generate projected cash flows, it could trigger future impairment charges
related to eCOSTs intangible assets.
The valuation of intangible assets related to eCOST is dependent upon, among other things,
eCOSTs ability to generate projected cash flows for its business. In the event eCOST is unable to
meet such projections, we may be required under current accounting rules to record an impairment
charge in connection with the write-down of such intangibles.
Risks Related to Our eCOST Online Retailer Operating Segments Industry
Additional sales and use taxes could be imposed on past or future sales of our products or other
products sold on our eCOST website, which could adversely affect our revenues and profitability.
In accordance with current industry practice and our interpretation of applicable law, we
collect and remit sales taxes only with respect to physical shipments of goods into states where we
have a physical presence. If any state or other jurisdiction successfully challenges this practice
and imposes sales and use taxes on orders on which we do not collect and remit sales taxes, we
could be exposed to substantial tax liabilities for past sales and could suffer decreased sales in
that state or jurisdiction in the future. In addition, a number of states, as well as the U.S.
Congress, have been considering various legislative initiatives that could result in the imposition
of additional sales and use taxes on Internet sales. If any of these initiatives are enacted, we
could be required to collect sales and use taxes in states where we do not have a physical
presence. Future changes in the operation of our business also could result in the imposition of
additional sales and use tax obligations. The imposition of additional sales and use taxes on past
or future sales could adversely affect our revenues and profitability.
Existing or future government regulation could expose us to liabilities and costly changes in our