P
ART I
General
We are a leading
company in developing and commercializing high temperature superconductor (HTS) materials and related technologies. Superconductivity is the unique ability to conduct various signals or energy (e.g., electrical current or radio frequency
(RF) signals) with little or no resistance when cooled to critical temperatures. HTS materials are a family of elements that demonstrate superconducting properties at temperatures significantly warmer than previous
superconducting materials. Electric currents that flow through conventional conductors encounter resistance that requires power to overcome and generates heat. HTS materials can substantially improve the performance characteristics of electrical
systems, reducing power loss, lowering heat generation, and decreasing electrical noise.
We were established in 1987 shortly
after the discovery of HTS materials, a family of elements that demonstrate superconducting properties at temperatures significantly warmer than previous superconducting materials. Our stated objective was to develop products based on these
materials for the commercial marketplace.
After analyzing the market opportunities available, we decided to pursue a
strategic revenue opportunity developing products for the utility and telecommunications industries.
Our initial product was
completed in 1998 and we began delivery to a number of wireless network providers. In the following 13 years, we continued to refine and improve the platform, with the primary focus on improving reliability, increasing performance and runtime, and
most importantly, removing cost from the manufacturing process of the required subsystems. Our cost reducing efforts led to the invention of our proprietary, high-yield and high throughput HTS material deposition manufacturing process.
In the last several years we have focused our research and development efforts on adapting our successful HTS
materials deposition techniques to the production of our HTS Conductus
®
wire for next generation power
applications. While most of our current commercial product revenues come from the sale of high performance wireless communications infrastructure products, production of our Conductus wire is our principal opportunity to grow our future revenue.
Commercialization
Our development efforts over the last 26 years have yielded an extensive patent portfolio as well as critical trade secrets, unpatented technology and proprietary knowledge. We have commercialized
wireless products and cryogenic coolers using our proprietary technology and are currently focusing our efforts on this technology in superconducting power applications.
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Wireless Communications
. Our current commercial products help maximize the performance of wireless telecommunications networks by improving the
quality of uplink signals from mobile wireless devices. Our products increase capacity utilization, lower dropped and blocked calls, extend coverage, and enable higher wireless data throughput all while reducing capital and operating costs.
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Cryocoolers.
We developed a unique cryocooler that can efficiently and reliably cool HTS circuits to the critical temperature (77 Kelvin), and
as a result, our wireless products are maintenance free and reliable enough to be deployed for many years.
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Electric Power Devices.
As discussed above, we are adapting our unique HTS materials deposition techniques to deliver our energy efficient,
cost-effective and high performance Conductus wire technology for next generation power applications. We have identified several large initial target markets for our Conductus Wire including energy (wind turbines, cables, fault current limiters) and
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industrial (motors, generators) applications. We are partnering with HTS industry leaders to accelerate our development and manufacturing processes for our Conductus wire which we expect to begin
commercial production in 2014.
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Our development efforts (including those described under Our Strategic
Initiatives below) can take a significant number of years to commercialize, and we must overcome significant technical barriers and deal with other significant risks, some of which are set out in our public filings, including in particular the
Risk Factors included in Item 1A of this Report.
Our Wireless Business
Substantially all of our current revenue comes from the design, manufacture, and sale of high performance infrastructure products for
wireless communication applications. We have three current product lines all of which relate to wireless base stations:
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SuperLink
®
, a
highly compact and reliable receiver front-end HTS wireless filter system to eliminate out-of-band interference for wireless base stations, combining filters with a proprietary cryogenic cooler and a cooled low-noise amplifier;
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AmpLink
®
, a
ground-mounted unit for wireless base stations that includes a high-performance amplifier and up to six dual duplexers; and
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SuperPlex, a high-performance multiplexer that provides extremely low insertion loss and excellent cross-band isolation designed to eliminate the need
for additional base station antennas and reduce infrastructure costs.
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We sell most of our current
commercial products to a small number of wireless carriers in the United States, including AT&T and Verizon Wireless. Verizon Wireless and AT&T each accounted for more than 10% of our commercial revenues in each of the last three years.
Demand for wireless communications equipment fluctuates dramatically and unpredictably and recently has been trending downward. As a result of this downward trend, we have managed our inventory to historically low levels, which may result in longer
delivery lead times, which may not be acceptable to our customers. If this downward trend continues, we may be compelled to refocus our manufacturing away from wireless products altogether. We continue to evaluate the various options available for
our wireless business as we transform ourselves into a Conductus wire manufacture. Our commercial operations are subject to a number of significant risks, some of which are set out in our public filings, including in particular the Risk
Factors included in Item 1A of this Report.
Our Strategic Initiatives
We have created several unique capabilities and HTS manufacturing systems related to a new Conductus wire platform, and cryocoolers that
we are seeking to commercially deploy by leveraging our leadership in superconducting technologies, extensive intellectual property, and HTS manufacturing expertise.
HTS Wire Platform
Our Conductus wire product development is focused
on large markets where the advantages of HTS wire are recognized by the industry. Our initial product roadmap targets three important applications: superconducting high power transmission cable, superconducting fault current limiters (SFCL) and
superconducting rotating machines such as motors and generators.
Superconducting High Power Transmission Cable:
Superconducting high power transmission and distribution cable transmit 5 to 10 times the electrical current of
traditional copper or aluminum cables with significantly improved efficiency. HTS power cable systems
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consist of the cable, which is comprised of hundreds of strands of HTS wire wrapped around a copper core, and the cryogenic cooling system to maintain proper operating conditions. HTS power
cables are particularly suited to high load areas such as the dense urban business districts of large cities, where purchases of easements and construction costs for traditional low capacity cables may be cost prohibitive. The primary application
for HTS cables is medium voltage feeds to load pockets in dense urban areas. In these high demand zones the grid is often saturated with aging infrastructure. HTS technology brings a considerable amount of power to new locations where the
construction of additional transmission to distribution substations, with major transformer assets, is not feasible. Another potential use of HTS power cable is to improve grid power transmission by connecting two existing substations. In dense
urban environments many substations often reach capacity limits and require redundant transformer capacity to improve reliability HTS cables can tie these existing stations together, avoiding very costly transformer upgrades and construction costs.
Superconducting Fault Current Limiter (SFCL):
With power demand on the rise and new power generation sources being added, the grid has become overcrowded and vulnerable to catastrophic faults. Faults are abnormal flows of electrical current like a
short circuit. As the grid is stressed, faults and power blackouts increase in frequency and severity. SFCLs act like powerful surge protectors, preventing harmful faults from taking down substation equipment by reducing the fault current to a safer
level (20 50% reduction) so that the existing switchgear can still protect the grid. Currently, electrical-utilities use massive 80kA circuit breakers, oversized transformers and fuses to prevent faults from damaging their equipment and
protecting against surges. However, once a fault has occurred, standard circuit breakers suffer destructive failure and need to be replaced before service can be restored. In addition, Smart Grid and embedded alternative energy generation
enhancements will increase the need for SCFLs. Grid operators face a major challenge in moving power safely and efficiently, from generators to consumers, through several stages of voltage transformation step downs and step ups. At each stage,
valuable energy is lost in the form of waste heat. Moreover, while demands are continually rising, space for transformers and substations especially in dense urban areas is severely limited. Conventional oil-cooled transformers pose a
fire and environmental hazard. Compact, efficient superconducting transformers, by contrast, are cooled by safe, abundant and environmentally benign liquid nitrogen. As an additional benefit, these actively-cooled devices will offer the capability
of operating in overload, to twice the nameplate rating, without any loss of life to meet occasional utility peak load demands.
Superconducting Rotating Machines Motors and Generators:
Superconducting motors, generators, turbines and other rotating machines are expected to generate large future demand for our Conductus
wire. Coils utilizing Conductus wire will enable electric motors and generators to operate at much higher power densities. When compared to a copper wire based electric machine with equivalent output power, future superconducting motors and
generators will enable a significant size reductions for the motors with higher efficiency. One potential application for high-powered superconducting generators is expected to be 10+ megawatt offshore wind turbines. Offshore superconducting wind
turbines promise to capture clean energy at a lower cost than competing renewables, while delivering power directly to growing coastal cities. Superconducting wind turbines are expected to play a unique role offshore since conventional technology
cannot achieve the power per tower requirement.
Superconducting High Field magnets:
There are a variety of applications that utilize superconducting magnets in order to capitalize on their unique ability to create
extremely high magnetic fields. The NMR (Nuclear Magnetic Resonance) and MRI (Magnetic Resonance Imaging) machines of today utilize such superconducting magnets for this very reason. Currently, high-field superconducting magnets are
manufactured using commercially available superconducting wire such as niobium-titanium (NbTi) or niobium-tin (Nb3Sn). NMR and MRI device manufacturers look towards advances in superconducting technologies to improve the overall performance of their
systems by dramatically
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increasing the magnetic fields while reducing size. High demand for a robust, high performance and low cost superconducting wire has spurred rapid development of a next generation alternative. In
the last 10 years, new second generation (2G) Rare Earth, Barium, Copper Oxide (ReBCO) superconducting materials have been proven to drastically increase magnetic field strengths, especially at low temperatures. These advanced ReBCO based
superconductors now provide an excellent alternative to NbTi and Nb3Sn based materials.
Advanced RF Filters for mobile
communications
In February 2012 our newly formed subsidiary, Resonant LLC, entered into an agreement to develop its
innovative Reconfigurable Resonance (RcR) technology in the rapidly growing mobile communications products industry. In July 2012, we contributed 14 patents and patents pending regarding our innovative Reconfigurable Resonance (RcR)
technology, limited use of our Santa Barbara facility, experienced executive leadership and technical expertise as our minority investment in Resonant LLC. Resonant will require financing in order to commence active development, and is currently
exploring financing options and there is no assurance as to whether Resonant will obtain the necessary financing. The contributed patents do not relate to either our current wireless business nor to our Conductus wire initiative.
Other Assets and Investments
From time to time we may pursue joint ventures with other entities to commercialize our technology. As mentioned above, in July 2012, we contributed 14 issued and pending patents regarding our innovative
Reconfigurable Resonance (RcR) technology, limited use of our Santa Barbara facility, experienced executive leadership and technical expertise as our minority investment in Resonant LLC. As of December 31, 2012 and June 18, 2013, our
interest in Resonant was 30%, and the net value of the assets contributed, estimated to approximate fair value, was $423,000 and $185,000, respectively. We had accounted for this investment using the equity method and included it in
Other
assets
for both periods.
At June 18, 2013, we announced via a press release, that we exchanged our equity interest
in Resonant LLC, a wholly owned subsidiary of Resonant Inc., for a $2.4 million subordinated convertible note receivable from Resonant Inc. No gain was recognized for the exchange of our net equity interest on the date of issuance for the note
receivable due to uncertainties in connection with the collectability of this subordinated note receivable. Our note is subordinated to a third party lender and is only convertible in the event Resonant Inc. conducts an initial public offering and
certain other conditions are met. We determined that our net equity interest of $185,000 approximated the fair value of the note receivable at December 31, 2013. Resonant Inc. filed a registration statement with the Securities and Exchange
Commission in January of 2014. Upon conversion of our note, we would own, before any such initial public offering, approximately 18.5% of Resonant Inc. We cannot estimate the value of such interest or predict the outcome of the offering by Resonant
Inc.
In 2007, we formed a joint venture with Hunchun BaoLi Communication Co. Ltd. (BAOLI) to manufacture and sell
our SuperLink interference elimination solution in China. We use the equity method of accounting for our 45 percent joint venture interest. The joint venture agreement called for our joint venture partner to supply the capital and local
expertise, and for us to provide a license of certain technology and supply key parts for manufacturing. Since 2007, we have been conducting lab and field trials in the existing China 2G market using our TD-SCDMA and SuperLink solutions. Although
those activities continue, the parties have not completed their contributions to the joint venture, including most of the funding and our license, within the two year period specified by the agreement and Chinese law. The future of the joint
venture, including any commencement of manufacturing and the transfer of our processes, will depend on product demand in China, completion of funding by our joint venture partner, as well as a number of other conditions, including certain critical
approvals from the Chinese and United States governments. There continues to be no assurance that these conditions will be met and even if these conditions are met and the approvals received, the results from our joint venture will be subject to a
number of significant risks associated with international operations and new ventures, some of which are set forth in our public filings, including in particular the Risk Factors included in Item 1A of this Report.
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Licenses
We grant licenses for our technology to other companies. Specifically, we have granted licenses to, among others, (1) Bruker for Nuclear Magnetic Resonance application, (2) General Dynamics for
government applications and (3) Star Cryoelectronics for Superconducting Quantum Interference Device applications.
Government
Contracts
We did not generate revenues from government contracts in 2013 as we focus on our strategic initiatives going
forward. For 2012 and 2011, government related contracts accounted for 6% and 2%, respectively, of our net revenues.
Manufacturing
Our manufacturing process involves the assembly of numerous individual components and precision tuning by production
technicians. We purchase inventory components and manufacture inventory based on existing customer purchase requests, and to a lesser extent, on sales forecasts. The parts and materials used by us and our contract manufacturers consist primarily of
printed circuit boards, specialized subassemblies, fabricated housing, relays and small electric circuit components, such as integrated circuits, semiconductors, resistors and capacitors. We currently manufacture our SuperLink systems at our
facilities in Santa Barbara, California. Principal components of our AmpLink and SuperPlex products are produced by foreign manufacturers. Our Santa Barbara facilities currently also house our AmpLink assembly and distribution center. In January
2012, we sublet 26,000 square feet of our Santa Barbara facilities due to weak demand for our wireless products and simultaneously took possession of our new advanced manufacturing center of excellence in Austin, TX. Our Texas facility addresses our
growth expectations for our superconducting wire initiative. The opening of this facility coincided with the delivery of our first superconducting wire production equipment in early 2012. We expect to begin commercial Conductus wire production in
2014.
A number of components used in our products are available from only a limited number of outside suppliers due to unique
designs as well as certain quality and performance requirements. There are components that we source from a single vendor due to our current production volume. In addition, key components of our conventional products are manufactured by a sole
foreign manufacturer. We do not have guaranteed supply arrangements with any of these suppliers, do not maintain an extensive inventory of parts or components and customarily purchase sole or limited source parts and components pursuant to purchase
orders. Our reliance on sole or limited source suppliers involves certain risks and uncertainties, many of which are beyond our control, and some of which are set out in our public filings, including in particular the Risk Factors
included in Item 1A of this Report.
Marketing and Sales
Because we have a concentrated customer base, we primarily sell using a direct sales force in the U.S and Europe. We may use a local agent firm to represent us in the Asian market. Our sales and marketing
efforts are complemented by sales applications engineering that manage field trials and initial installations, as well as, provide ongoing pre-sales and post-sales support.
Competition
We face competition in various aspects of our technology and
product development. Our products compete on the basis of performance, functionality, reliability, pricing, quality, and compliance with industry standards. With respect to our Conductus wire, we compete with American Superconductor, SuperPower,
SuNam , Fujikura, and THEVA, among others. Our current and potential competitors with respect to our wireless business include conventional RF filter manufacturers, including Alcatel-Lucent, Powerwave, and RFS and both
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established and newly emerging companies developing similar or competing HTS technologies. In addition, we currently supply components and license technology to several companies that may
eventually decide to manufacture or design their own HTS components, rather than purchasing or licensing our technology.
Research and
Development
Our 2013 research and development activities were focused entirely on developing our Conductus wire product.
Our wireless products and government contracts effort required significantly less of our engineering resources in 2013 and 2012 as our focus on our Conductus wire expanded. We spent a total of $6.1 million for 2013, and $5.2 million and $5.4
million for each of 2012 and 2011 on research and development, of which $6.1 million, $5.0 million and $5.3 million, respectively, was for company-funded research and development. Customer-funded research and development, most of which was
attributable to work under contracts with the U.S. Government, represented zero, 3% and 2% of total research and development costs for each of 2013, 2012 and 2011, respectively.
Our Proprietary Technology
We have an extensive patent portfolio in
addition to critical trade secrets, unpatented technology and proprietary knowledge. Our current patents expire at various dates from 2014 to 2028. We enter into confidentiality and non-disclosure agreements with our employees, suppliers and
consultants to protect our proprietary information.
Environmental Issues
We use certain hazardous materials in our research, development and manufacturing operations. As a result, we are subject to stringent
federal, state and local regulations governing the storage, use and disposal of such materials. Current or future laws and regulations could require substantial expenditures for preventative or remedial action, reduction of chemical exposure, waste
treatment or disposal. Although we believe that our safety procedures for the handling and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, there is always the risk of accidental contamination
or injury from these materials. To date, we have not incurred substantial expenditures for preventive action with respect to hazardous materials or for remedial action with respect to any hazardous materials accident, but the use and disposal of
hazardous materials involves risk that we could incur substantial expenditures for such preventive or remedial actions. If such an accident were to occur, we could be held liable for resulting damages. The liability in the event of an accident or
the costs of such remedial actions could exceed our resources or otherwise have a material adverse effect on our financial condition, results of operations or cash flows.
Corporate Information
Our facilities and executive offices are located at
two locations: 460 Ward Drive, Santa Barbara, California 93111, and 9101 Wall Street, Suite 1300, Austin, Texas 78710. Our principal executive office remains in Santa Barbara. Our telephone number is (805) 690-4500. We were incorporated in
Delaware on May 11, 1987. Additional information about us is available on our website at www.suptech.com. The information on our web site is not incorporated herein by reference.
Employees
As of December 31, 2013, we had a total of 36 employees.
None of our employees are represented by a labor union, and we believe that our employee relations are good.
Backlog
Our commercial backlog consists of accepted product purchase orders with scheduled delivery dates during the next twelve months. We had
commercial backlog of $88,000 at December 31, 2013, compared to $313,000 at December 31, 2012.
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The following section includes some of the material factors that may adversely affect our business and operations. This is not an exhaustive list, and additional factors could adversely affect our
business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact
of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. This discussion of risk factors includes
many forward-looking statements. For cautions about relying on such forward looking statements, please refer to the section entitled Forward Looking Statements at the beginning of this Report immediately prior to Item 1.
Risks Related to Our Business
We
have a history of losses and may never become profitable.
In each of our last five years, we have experienced
significant net losses and negative cash flows from operations. In 2013, we incurred a net loss of $12.2 million and had negative cash flows from operations of $8.3 million. In 2012, we incurred a net loss of $10.9 million and had negative cash
flows from operations of $8.2 million. Our independent registered public accounting firm has included in its audit reports an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. If we fail to increase
our revenues, we may not achieve and maintain profitability and may not meet our expectations or the expectations of financial analysts who report on our stock.
We need to raise additional capital, and if we are unable to raise capital our ability to implement our current business plan and ultimately our viability as a company could be adversely affected
At December 31, 2013, we had $7.5 million in cash and cash equivalents. Our cash resources will not be
sufficient to fund our business for the next twelve months. We believe the key factors to our future liquidity will be our ability to successfully use our expertise and our technology to generate revenues in various ways, including commercial
operations, joint ventures and licenses. Because of the expected timing and uncertainty of these factors, we will need to raise funds to meet our working capital needs.
Additional financing may not be available on acceptable terms or at all. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced.
New investors may demand rights, preferences or privileges senior to those of existing holders of common stock and could also require that we issue warrants in connection with sales of our stock. If we cannot raise any needed funds, we might be
forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company.
Our strategic initiative to develop a new wire platform may not prove to be successful.
We have spent a considerable amount of resources in developing a new wire platform for power applications. Substantial technical and
business challenges remain before we have a commercially successful product introduction. We may not be able to overcome these challenges in a timely or cost effective manner, if at all. Such a failure could adversely impact our prospects,
liquidity, stock price and carrying value of our fixed assets.
There are numerous technological challenges that must be overcome in
order for our Conductus wire to become commercially successful and our ability to address such technological challenges may adversely affect our ability to gain customers.
We expect to begin commercial Conductus wire production in 2014. There are a number of technological and business challenges to overcome
for broad commercialization of HTS wire. First, the current HTS wire
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market is supply constrained. Current producers cannot manufacture sufficient wire to meet demand; customers cannot purchase long-length wire with any reasonable confidence or guaranteed volume;
and electric utilities lack confidence in product availability which leads to delays in their deployment roadmap. Secondly, HTS wire performance is currently below what many customers require. Many power applications require high performance wire
with high current carrying capacity, mechanical durability, electrical integrity with low AC losses and minimal splices. Producing high performance HTS wire has proven difficult, especially at volumes required for large scale deployment. Thirdly,
high demand for premium performance wire available in very low volume results in a high wire price that narrows the market and limits commercial viability. Delays in our Conductus wire development, as a result of technological challenges or other
factors, may result in the introduction or commercial acceptance of our Conductus wire products later than expected.
The commercial
uses of superconducting wire and superconducting wire related products are limited today, and a broad commercial market may not develop.
Even if the technological hurdles are overcome, there is no certainty that a robust commercial market for unproven HTS wire products will come to fruition. To date, commercial use of HTS wire has been
limited to small feasibility demonstrations, and these projects are largely subsidized by government authorities. While customer demand is high and market forecasts project large revenue opportunity for superconducting wire in power applications,
the market may not develop and superconducting wire might never achieve long term, broad commercialization. In such an event, we would not be able to commercialize our Conductus wire initiative and our business could be adversely impacted.
We have limited experience marketing and selling superconducting wire products, and our failure to effectively market and sell our
superconducting wire solutions would lower our revenue and cash flow.
We have little experience marketing and selling
our Conductus wire. Once our Conductus wire is ready for commercial use, we will have to hire and develop a marketing and sales team that will effectively demonstrate the advantages of our product over both more traditional products and competing
superconducting products or other adjacent technologies. We may not be successful in our efforts to market this new technology.
We rely
on a small group of customers for the majority of our commercial wireless revenues, and the loss of any one of these customers could adversely affect our business.
We sell most of our wireless products to a small number of wireless carriers. We derived 96% of our commercial product revenues from Verizon Wireless and AT&T in 2013, down slightly from the 96% these
two customers purchased in each of 2012 and 2011.
Demand for wireless communications equipment fluctuates dramatically and
unpredictably and recently has been trending downward. As a result of this downward trend, we have managed our inventory to historically low levels, which may result in longer delivery lead times, which may not be acceptable to our customers. If
this downward trend continues we may be compelled to refocus our manufacturing away from wireless products altogether
In
addition, the market for HTS wire would also consist of a small number of customers and would face similar challenges to those we face in our wire business.
We expect decreases in average selling prices, requiring us to reduce product costs in order to achieve and maintain profitability.
We face pressure to reduce prices of our wireless products and accordingly, the average selling price of our existing products has
decreased over the years. We anticipate customer pressure on our product pricing will continue for the foreseeable future. In our Conductus wire initiative, wire is currently being sold at
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$250-400/kiloampere-meter
(kA-m). At this price, HTS wire represents more than half the cost of the end device. A price reduction is required for long term
commercialization. Cryogenic systems, including cryocoolers and cryostats, have been developed but will also need to be cost optimized as HTS wire becomes available in volume. We have plans to further reduce the manufacturing cost of our products,
but there is no assurance that our future cost reduction efforts will keep pace with price erosion. We will need to further reduce our manufacturing costs through engineering improvements and economies of scale in production and purchasing in order
to achieve adequate gross margins. We may not be able to achieve the required product cost savings at a rate needed to keep pace with competitive pricing pressure. Additionally, we may be forced to discount future orders or may never reach
commercial viability. If we fail to reach our cost saving objectives or we are required to offer future discounts, our business may be harmed.
We face competition with respect to various aspects of our technology and product development.
Our current wireless products compete on the basis of performance, functionality, reliability, pricing, quality, and compliance with
industry standards. With respect to our Conductus wire materials, we compete with American Superconductor, SuperPower, SuNam, Fujifura,and THEVA, among others. Our current and potential competitors with respect to our wireless business include
conventional RF filter manufacturers, including Alcatel-Lucent, Powerwave, and RFS and both established and newly emerging companies developing similar or competing HTS technologies. In addition, we currently supply components and license technology
to several companies that may eventually decide to manufacture or design their own HTS components, rather than purchasing or licensing our technology. If we are unable to compete successfully against our current or future competitors, then our
business and results of operations will be adversely affected.
We may not be able to compete effectively against alternative
technologies.
Our products also compete with a number of alternative approaches and technologies. Some of these
alternatives may be more cost effective or offer better performance than our products and we may not succeed in competing against these alternatives.
We currently rely on specific technologies and may not successfully adapt to rapidly changing market environments.
We must overcome technical challenges to commercialize our Conductus wire. If we are able to do so, we will need to attain customer acceptance of our Conductus wire, and we cannot ensure that such
acceptance will occur. We will have to continue to develop and integrate advances to our core technologies. We will also need to continue to develop and integrate advances in complementary technologies. We cannot guarantee that our development
efforts will not be rendered obsolete by research efforts and technological advances made by others. Our business success depends upon our ability to keep pace with advancing technology, including materials, processes and industry standards.
We experience significant fluctuations in sales and operating results from quarter to quarter.
Our quarterly results fluctuate due to a number of factors, including:
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the lack of any contractual obligation by our customers to purchase their forecasted demand for our products;
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variations in the timing, cancellation, or rescheduling of customer orders and shipments; and
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high fixed expenses that may disproportionately impact operating expenses, especially during a quarter with a sales shortfall.
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The nature of our business requires that we promptly ship products after we receive orders. This means that
we typically do not have a significant backlog of unfilled orders at the start of each quarter. Our major customers generally have no contractual obligation to purchase forecasted amounts and may cancel orders, change delivery
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schedules or change the mix of products ordered with minimal notice and minimal penalty. As a result of these factors, we may not be able to accurately predict our quarterly sales. Any shortfall
in sales relative to our quarterly expectations or any delay of customer orders would adversely affect our revenues and results of operations.
Order deferrals and cancellations by our customers, declining average sales prices, changes in the mix of products sold, increases in inventory and finished goods, delays in the introduction of new
products and longer than anticipated sales cycles for our products have, in the past, adversely affected our results of operations. Despite these factors, we maintain significant finished goods,
work-in-progress
and raw materials inventory to meet estimated order forecasts. If our customers purchase less than the forecasted amounts or cancel or delay existing purchase orders, there will be higher
levels of inventory that face a greater risk of obsolescence. If our customers desire to purchase products in excess of the forecasted amounts or in a different product mix, there may not be enough inventory or manufacturing capacity to fill their
orders.
Due to these and other factors, our past results may not be reliable indicators of our future performance in our
wireless business, and has no predictive value as to our Conductus wire initiative. Future revenues and operating results may not meet the expectations of stock analysts and investors. In either case, the price of our common stock could be
materially adversely affected.
We depend on the capital spending patterns of our customers, and if capital spending is decreased or
delayed, our business may be harmed.
Any substantial decrease or delay in capital spending patterns from our
customers may harm our business. Demand from customers for our products depends to a significant degree upon the amount and timing of capital spending by these customers for constructing, rebuilding or upgrading their systems. Their capital spending
patterns depend on a variety of factors, including access to financing, the status of federal, local and foreign government regulation and deregulation, overall demand, competitive pressures and general economic conditions. In addition, capital
spending patterns can be subject to some degree of seasonality, with lower levels of spending in the first and third calendar quarters, based on annual budget cycles.
The current worldwide uncertainty may adversely affect our business, operating results and financial condition.
The United States and global economies continue to experience a financial downturn, with some financial and economic analysts predicting that the global economy may be entering into a prolonged economic
downturn characterized by high unemployment, limited availability of credit, increased rates of default and bankruptcy and decreased consumer and business spending. These developments could negatively affect our business, operating results and
financial condition in a number of ways. For example, current or potential customers may delay or decrease spending with us or may not pay us, or may delay paying us for previously purchased products. In addition, this downturn has had, and may
continue to have, an unprecedented negative impact on the global credit markets. Credit has tightened significantly, resulting in financing terms that are less attractive to borrowers, and in many cases, the unavailability of certain types of debt
financing. If this crisis continues or worsens, and if we are required to obtain financing in the near term to meet our working capital or other business needs, we may not be able obtain that financing. Further, even if we are able to obtain the
financing we need, it may be on terms that are not favorable to us, with increased financing costs and restrictive covenants.
Our
reliance on a limited number of suppliers and the long lead time of components for our products could impair our ability to manufacture and deliver our systems on a timely basis.
A number of components used in our products are available from a limited number of outside suppliers due to unique designs as well as
certain quality and performance requirements. There are components that we source from a single vendor due to the present volume. In addition, key components of our conventional products are
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manufactured by a sole foreign manufacturer. Our reliance on sole or limited source suppliers involves certain risks and uncertainties, many of which are beyond our control. These include the
possibility of a shortage or the discontinuation of certain key components. Any reduced availability of these parts or components when required could impair our ability to manufacture and deliver our systems on a timely basis and result in the delay
or cancellation of orders, which could harm our business.
In addition, the purchase of some of our key components involves
long lead times and, in the event of unanticipated increases in demand for our solutions, we may be unable to obtain these components in sufficient quantities to meet our customers requirements. We do not have guaranteed supply arrangements
with any of these suppliers, do not maintain an extensive inventory of parts or components and customarily purchase sole or limited source parts and components pursuant to purchase orders. Business disruptions, quality issues, production shortfalls
or financial difficulties of a sole or limited source supplier could materially and adversely affect us by increasing product costs, or eliminating or delaying the availability of such parts or components. In such events, our inability to develop
alternative sources of supply quickly and on a cost-effective basis could impair our ability to manufacture and deliver our systems on a timely basis and could harm our business.
Our reliance on a limited number of suppliers exposes us to quality control issues.
Our reliance on certain single-source and limited-source components exposes us to quality control issues if these suppliers experience a failure in their production process or otherwise fail to meet our
quality requirements. A failure in single-source or limited-source components or products could force us to repair or replace a product utilizing replacement components. If we cannot obtain comparable replacements or effectively return or redesign
our products, we could lose customer orders or incur additional costs, which could have a material adverse effect on our gross margins and results of operations.
Our ability to protect our patents and other proprietary rights is uncertain, exposing us to possible losses of competitive advantage.
Our efforts to protect our proprietary rights may not succeed in preventing infringement by others or ensure that these rights will
provide us with a competitive advantage. Pending patent applications may not result in issued patents and the validity of issued patents may be subject to challenge. Third parties may also be able to design around the patented aspects of the
products. Additionally, certain of the issued patents and patent applications are owned jointly with third parties. Because any owner or co-owner of a patent can license its rights under jointly-owned patents or applications, inventions made by us
jointly with others are not subject to our exclusive control. Any of these possible events could result in losses of competitive advantage.
We depend on specific patents and licenses to technologies, and we will likely need additional technologies in the future that we may not be able
to obtain.
We utilize technologies under licenses of patents from others for our products. These patents may be
subject to challenge, which may result in significant litigation expense (which may or may not be recoverable against future royalty obligations). Additionally, we continually try to develop new products, and, in the course of doing so, we may be
required to utilize intellectual property rights owned by others and may seek licenses to do so. Such licenses may not be obtainable on commercially reasonable terms, or at all. It is also possible that we may inadvertently utilize intellectual
property rights held by others, which could result in substantial claims.
Intellectual property infringement claims against us could
materially harm results of operations.
Our products incorporate a number of technologies, including high-temperature
superconductor technology, technology related to other materials, and electronics technologies. Our patent positions, and that of other companies using high-temperature superconductor technology, is uncertain and there is significant risk that
others, including our competitors or potential competitors, have obtained or will obtain patents relating to our products or technologies or products or technologies planned to be introduced by us.
12
We believe that patents may be or have been issued, or applications may be pending, claiming
various compositions of matter used in our products. We may need to secure one or more licenses of these patents. There can be no assurances that such licenses could be obtained on commercially reasonable terms, or at all. We may be required to
expend significant resources to develop alternatives that would not infringe such patents or to obtain licenses to the related technology. We may not be able to successfully design around these patents or obtain licenses to them and may have to
defend ourselves at substantial cost against allegations of infringement of third party patents or other rights to intellectual property. In those circumstances, we could face significant liabilities and also be forced to cease the use of key
technology.
Other parties may have the right to utilize technology important to our business.
We utilize certain intellectual property rights under non-exclusive licenses or have granted to others the right to utilize certain
intellectual property rights licensed from a third party. Because we may not have the exclusive rights to utilize such intellectual property, other parties may be able to compete with us, which may harm our business.
Because competition for target employees is intense, we may be subject to claims of unfair hiring practices, trade secret misappropriation or other
related claims.
Companies in the wireless telecommunications and HTS wire industries whose employees accept positions
with competitors frequently claim that competitors have engaged in unfair hiring practices, trade secret misappropriation or other related claims. We may be subject to such claims in the future as we seek to hire qualified personnel, and such claims
may result in material litigation. If this should occur, we could incur substantial costs in defending against these claims, regardless of their merits.
Our success depends on the attraction and retention of senior management and technical personnel with relevant expertise.
As a competitor in a highly technical market, we depend heavily upon the efforts of our existing senior management and technical teams.
The loss of the services of one or more members of these teams could slow product development and commercialization objectives. Due to the specialized nature of our products, we also depend upon our ability to attract and retain qualified technical
personnel with substantial industry knowledge and expertise. Competition for qualified personnel is intense, and we may not be able to continue to attract and retain qualified personnel necessary for the development of our business.
Regulatory changes could substantially harm our business.
Certain regulatory agencies in the United States and other countries set standards for operations within their territories. Equipment marketed for use within their territories must meet specific technical
standards. Our ability to sell our products is impacted by regulatory changes and requirements and depends on the ability of our customers to obtain and retain the necessary approvals and licenses. HTS wire is subject to a regulatory regime, which
may become more strictly regulated if the market grows. Any failure or delay in obtaining necessary approvals could harm our business.
We may acquire or make investments in companies or technologies that could cause loss of value to stockholders and disruption of business.
We may explore opportunities to acquire companies or technologies in the future. Other than the acquisition of
Conductus, Inc. in 2002, we have not made any such acquisitions or investments to date and, therefore, our ability as an organization to make acquisitions or investments is unproven. An acquisition entails many risks, any of which could adversely
affect our business, including:
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failure to integrate operations, services and personnel;
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the price paid may exceed the value eventually realized;
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loss of share value to existing stockholders as a result of issuing equity securities to finance an acquisition;
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potential loss of key employees from either our then current business or any acquired business;
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entering into markets in which we have little or no prior experience;
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diversion of financial resources and managements attention from other business concerns;
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assumption of unanticipated liabilities related to the acquired assets; and
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the business or technologies acquired or invested in may have limited operating histories and may be subjected to many of the same risks to which we
are exposed.
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In addition, future acquisitions may result in potentially dilutive issuances of equity
securities, or the incurrence of debt, contingent liabilities or amortization expenses or charges related to goodwill or other intangible assets, any of which could harm our business. As a result, if we fail to properly evaluate and execute
acquisitions or investments, our business and prospects may be seriously harmed.
If we are unable to implement appropriate controls and
procedures to manage our potential growth, we may not be able to successfully offer our products and implement our business plan.
Our ability to successfully offer our products and implement our business plan in a rapidly evolving market requires an effective planning and management process. Growth in future operations would place a
significant strain on management systems and resources. We expect that we would need to improve our financial and managerial controls, reporting systems and procedures, and would need to expand, train and manage our work force worldwide.
Furthermore, we expect that we would be required to manage multiple relationships with various customers and other third parties.
Compliance with environmental regulations could be especially costly due to the hazardous materials used in the manufacturing process. In addition,
we could incur expenditures related to hazardous material accidents.
We are subject to a number of federal, state and
local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our business. Current or future laws and regulations could require substantial expenditures for
preventative or remedial action, reduction of chemical exposure, waste treatment or disposal. Any failure to comply with present or future regulations could result in fines being imposed, suspension of production or interruption of operations. In
addition, these regulations could restrict our ability to expand or could require us to acquire costly equipment or incur other significant expense to comply with environmental regulations or to clean up prior discharges.
In addition, although we believe that our safety procedures for the handling and disposing of hazardous materials comply with the
standards prescribed by state and federal regulations, there is always the risk of accidental contamination or injury from these materials. To date, we have not incurred substantial expenditures for preventive action with respect to hazardous
materials or for remedial action with respect to any hazardous materials accident, but the use and disposal of hazardous materials involves risk that we could incur substantial expenditures for such preventive or remedial actions. If such an
accident were to occur, we could be held liable for resulting damages. The liability in the event of an accident or the costs of such remedial actions could exceed our resources or otherwise have a material adverse effect on our financial condition,
results of operations or cash flows.
The reliability of market data included in our public filings is uncertain.
Since we operate in a rapidly changing market, we have in the past, and may from time to time in the future, include market data from
industry publications and our own internal estimates in some of the documents we file
14
with the Securities and Exchange Commission. The reliability of this data cannot be assured. Industry publications generally state that the information contained in these publications has been
obtained from sources believed to be reliable, but that its accuracy and completeness is not guaranteed. Although we believe that the market data used in our filings with the Securities and Exchange Commission is and will be reliable, it has not
been independently verified. Similarly, internal company estimates, while believed by us to be reliable, have not been verified by any independent sources.
Our international operations expose us to certain risks.
In 2007,
we formed a joint venture with BAOLI to manufacture and sell our SuperLink interference elimination solution in China. In additional to facing many of the risks faced by our domestic business, if that joint venture or any other international
operation we may have is to be successful, we (together with any joint venture partner) must recruit the necessary personnel and develop the facilities needed to manufacture and sell the products involved, learn about the local market (which may be
significantly different from our domestic market), build brand awareness among potential customers and compete successfully with local organizations with greater market knowledge and potentially greater resources than we have. We must also obtain a
number of critical governmental approvals from both the United States and the local country governments on a timely basis, including those related to any transfers of our technology. We must establish sufficient controls on any foreign operations to
ensure that those operations are operated in accordance with our interests, that our intellectual property is protected and that our involvement does not inadvertently create potential competitors. There can be no assurance that these conditions
will be met. Even if they are met, the process of building our international operations could divert financial resources and management attention from other business concerns. Finally, our international operations will also be subject to the general
risks of international operations, such as:
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changes in exchange rates;
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international political and economic conditions;
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changes in government regulation in various countries;
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adverse tax consequences; and
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costs associated with expansion into new territories.
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Risks Related to Our Common Stock
Our stock price is volatile.
The market price of our common stock has been, and we expect will continue to be, subject to significant volatility. The value of our
common stock may decline regardless of our operating performance or prospects. Factors affecting our market price include:
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our perceived prospects and liquidity;
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progress or any lack of progress (or perceptions related to progress) in timely overcoming the remaining substantial technical and commercial
challenges related to our Conductus wire initiative;
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variations in our operating results and whether we have achieved key business targets;
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changes in, or our failure to meet, earnings estimates;
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changes in securities analysts buy/sell recommendations;
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differences between our reported results and those expected by investors and securities analysts;
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announcements of new contracts by us or our competitors;
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market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors; and
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general economic, political or stock market conditions.
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Recent events have caused stock prices for many companies, including ours, to fluctuate in ways unrelated or disproportionate to their operating performance. The general economic, political and stock
market conditions that may affect the market price of our common stock are beyond our control. The market price of our common stock at any particular time may not remain the market price in the future.
If we fail to maintain the listing of our common stock with a U.S. national securities exchange, the liquidity of our common stock could be
adversely affected.
If our common stock is delisted by NASDAQ, our common stock may be eligible to trade on the OTC
Bulletin Board or another over-the-counter market. Any such alternative would likely result in it being more difficult for us to raise additional capital through the public or private sale of equity securities and for investors to dispose of,
or obtain accurate quotations as to the market value of, our common stock. In addition, there can be no assurance that our common stock would be eligible for trading on any such alternative exchange or markets.
We have a significant number of outstanding warrants and options, and future sales of the shares obtained upon exercise of these options or
warrants could adversely affect the market price of our common stock.
As of December 31, 2013, we had
outstanding options exercisable for an aggregate of 91,738 shares of common stock at a weighted average exercise price of $44.18 per share and warrants to purchase up to 11,088,430 shares of our common stock at a weighted average exercise price of
$3.22 per share. We have registered the issuance of all the shares issuable upon exercise of the options and warrants, and they will be freely tradable by the exercising party upon issuance. The holders may sell these shares in the public markets
from time to time, without limitations on the timing, amount or method of sale. As our stock price rises, the holders may exercise their warrants and options and sell a large number of shares. This could cause the market price of our common stock to
decline.
Our corporate governance structure may prevent our acquisition by another company at a premium over the public trading price
of our shares.
It is possible that the acquisition of a majority of our outstanding voting stock by another company
could result in our stockholders receiving a premium over the public trading price for our shares. Provisions of our restated certificate of incorporation and bylaws and of Delaware corporate law could delay or make more difficult an acquisition of
our company by merger, tender offer or proxy contest, even if it would create an immediate benefit to our stockholders. For example, our restated certificate of incorporation does not permit stockholders to act by written consent, and our bylaws
generally require ninety days advance notice of any matters to be brought before the stockholders at an annual or special meeting.
In addition, our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the terms, rights and preferences of this preferred stock, including voting rights
of those shares, without any further vote or action by the stockholders. At March 14, 2014, 1,388,477 shares of preferred stock remained unissued. The rights of the holders of common stock may be subordinate to, and adversely affected by, the
rights of holders of preferred stock that may be issued in the future. The issuance of preferred stock could also make it more difficult for a third party to acquire a majority of our outstanding voting stock, even at a premium over our public
trading price.
Further, our certificate of incorporation also provides for a classified board of directors with directors
divided into three classes serving staggered terms. These provisions may have the effect of delaying or
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preventing a change in control of us without action by our stockholders and, therefore, could adversely affect the price of our stock or the possibility of sale of shares to an acquiring person.
We do not anticipate declaring any cash dividends on our common stock.
We have never declared or paid cash dividends on our common stock and do not plan to pay any cash dividends in the near future. Our
current policy is to retain all funds and earnings for use in the operation and expansion of our business.
We may record a material
warrant derivative liability, which could impact our ability to remain listed on the NASDAQ Capital Market
The
price-based anti-dilution feature of the warrants (other than the pre-funded warrants) issued in our August 2013 offering create a warrant derivative liability that we would have to record in our financial statements. Similarly, a separate feature
in the warrants (other than the pre-funded warrants) requires that, in connection with certain fundamental transactions (such as a sale of the Company in an all-cash transaction), a warrant holder has the option to require the Company to pay the
holder cash in an amount equal to the value of the warrant determined under the Black-Scholes option pricing model. Accordingly, we recorded a warrant derivative liability. Further, such warrant derivative liability and our net loss would likely
increase and our stockholders equity would decrease if our stock price increases. The continued listing standards of the NASDAQ Capital Market on which our stock is listed require, among other things, that we maintain at least
$2.5 million in stockholders equity. Although the warrant derivative liability is not settled in cash, it will still reduce our stockholders equity for purposes of this continued listing requirement and financial reporting purposes
generally. Any warrant derivative liability, and particularly a large liability, will make it more difficult for us to maintain the minimum equity required for the NASDAQ Capital Market. As we continue to execute our business plan our total assets
are, at least in the near term, likely to decline. Unless we are able to maintain or increase our total assets, the presence of a large warrant derivative liability will reduce our stockholders equity over time. The warrant derivative
liability will be adjusted to fair value at each reporting period (quarterly and annual basis), and could increase or decrease significantly on a periodic basis. However, assuming that the fair value of any warrant derivative liability is and
remains material, then without any offsetting increase to our stockholders equity, we estimate we could be close to, or below, the Nasdaq Capital Market minimum listing standard by the first or second quarter of 2014, and earlier if our stock
price were to increase significantly before that time. Failure to remain listed on the NASDAQ Capital Market could have a material adverse effect on the value and liquidity of our common stock and our warrants.
ITEM 1B.
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UNRESOLV
ED STAFF COMMENTS
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Not applicable.
We lease all of our properties. All of our operations, including our manufacturing facilities, are located in industrial complexes in Santa Barbara, California and Austin, Texas. We occupy approximately
71,000 square feet in Santa Barbara, California under a long-term lease that expires in November 2016. Commencing January 1, 2012 and expiring in November 2016 we sublet 26,000 square feet of our Santa Barbara facility and leased a 35,000
square foot facility in Austin, Texas that expires in April 2017. In August 2012, we amended our Austin lease to include an additional 7,000 square feet. Although we currently have excess capacity, we believe these facilities can be managed in a
flexible and cost effective manner and are adequate to meet current and reasonably anticipated needs for approximately the next two years.
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ITEM 3.
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LEGAL PROCE
EDINGS
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From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. Excluding ordinary, routine litigation incidental to our
business, we are not currently a party to any legal proceedings that we believe would reasonably be expected to have a material adverse effect on our business, financial condition or results of operation or cash flow.
ITEM 4.
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MINE SAFETY DIS
CLOSURES
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Not applicable.
PA
RT III
ITEM 10.
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DI
RECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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Directors and Executive Officers
The following table sets forth certain
information regarding those individuals currently serving as our directors (or nominated to serve as a director) and executive officers as of March 14, 2014:
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Name
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Age
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Position
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Martin A. Kaplan(1)(2)(3)
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76
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Chairman of the Board
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Lynn J. Davis(1)(2)(3)(4)
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67
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Director
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Dan L. Halvorson(1)(2)(3)(5)
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48
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Director
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Jeffrey A. Quiram(4)
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53
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President, Chief Executive Officer and Director
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William J. Buchanan
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65
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Chief Financial Officer (Principal Financial and Accounting Officer)
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Kenneth E. Pfeiffer
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46
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Vice President, Engineering
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Robert L. Johnson
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63
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Senior Vice President, Operations
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Adam L. Shelton
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Vice President, Product Management and Marketing
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(1)
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Member of our Audit Committee
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(2)
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Member of our Compensation Committee.
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(3)
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Member of our Governance and Nominating Committee.
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(4)
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Member of our Stock Option Committee.
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(5)
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Joined our Board on March 3, 2014.
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Each of our directors, including each of our current nominees, was nominated based on the assessment of our Nominating Committee and our Board that he has demonstrated: an ability to make meaningful
contributions to our Board; independence; strong communication and analytical skills; and a reputation for honesty and ethical conduct. Our Board consists of, and seeks to continue to include, persons whose diversity of skills, experience and
background are complementary to those of our other directors.
Martin A. Kaplan
has served on our board since
2002 and was named Chairman of the Board in October 2010. From 2000 through 2012, Mr. Kaplan was Chairman of the Board of JDS Uniphase, Inc., a
30
telecommunications equipment company. He remains a director. He also serves as a director of Actelis Networks, a private telecommunications company. In a career spanning 40 years,
Mr. Kaplan last served as Executive Vice-President of the Pacific Telesis Group, which became a subsidiary of SBC Communications in 1997. Mr. Kaplan has served as a director of a number of other public and private
companies. Mr. Kaplan earned a B.S. in engineering from California Institute of Technology. Our Board has determined that Mr. Kaplan is qualified to serve as a director because he has extensive business leadership and board
experience.
Lynn J. Davis
has served on our Board since 2005. He served as President, Chief Operating Officer
and director of August Technology, a manufacturer of inspection equipment for the semiconductor fabrication industry from 2005 to 2006. From 2002 to 2004, he was a partner at Tate Capital Partners Fund, LLC, a private investment firm he co-founded.
Prior to Tate, Mr. Davis was an employee of ADC Telecommunications for 28 years, serving in 14 management positions, including Corporate President, Group President and Chief Operating Officer. He is also Chairman of the Board of Directors
of Flexsteel Industries Inc., a furniture manufacturer. Mr. Davis holds a B.S. in electrical engineering from Iowa State University and an M.B.A. from the University of Minnesota. Our Board has determined that Mr. Davis is qualified to
serve as a director because he has extensive knowledge in various management roles in the telecommunications industry, including manufacturing, sales and marketing. In addition, as a venture capitalist, Mr. Davis has worked with smaller
companies and brings a valuable entrepreneurial approach to management and compensation issues.
Dan L.
Halvorson
joined our Board in March 2014. Mr. Halvorson is currently the Executive Vice President and Chief Financial Officer for OneRoof Energy, Inc., a technology finance provider for residential solar systems. Mr. Halvorson
previously served as the Executive Vice President and Chief Financial Officer of Mandalay Digital Group, Inc. from September 2012 through December 2012 and Executive Vice President-Operations and Chief Financial Officer for DivX, Inc. from 2007
until its acquisition by Sonic Solutions in October 2010. Prior to joining DivX, he served at Novatel Wireless, Inc., from 2000 to 2007, most recently as its Chief Financial Officer. He was Director of Finance for Dura Pharmaceuticals, Inc. from
1988 to 2000, when the company was acquired by Elan Corporation, and Director of Finance for Alliance Pharmaceutical Corp. from 1996 to 1998. From 1988 to 1994, Mr. Halvorson was with Deloitte & Touche LLC, and subsequently, with
PriceWaterhouseCoopers LLP from 1994 until he joined Alliance Pharmaceutical Corp. in 1996. Mr. Halvorson is a certified public accountant (inactive) and holds a Bachelor of Science in Business Administration and Accounting from San Diego State
University. Our Board has determined that Mr. Halvorson is qualified to serve as a director because of his overall business experience and his extensive knowledge about public and financial accounting matters.
Jeffrey A. Quiram
has served on our Board, and has been our President and Chief Executive Officer, since 2005. From 1991 to
2004, Mr. Quiram served ADC Telecommunications in a variety of management roles, including Vice President of its wireless business unit. Mr. Quiram has a B.S. in Quantitative Methods and Computer Science from College of St. Thomas, and an
M.B.A. from University of Minnesota. Our Board has determined that Mr. Quiram is qualified to serve as a director because he has extensive knowledge about product development, business planning, and complex manufacturing. In addition, he has
extensive knowledge about our corporate operations and market activities from serving as our Chief Executive Officer.
William J. Buchanan
has been our Chief Financial Officer since May 2010. Mr. Buchanan joined us in 1998 and served as
our Controller from 2000 to May 2010. For 16 years prior to joining us, he was a self-employed private investor and investment advisor. For the nine years prior to that, he served in various executive and accounting positions with Applied
Magnetics Corp and Raytheon Co. Mr. Buchanan holds a B.A. in Economics from California State University, Fresno.
Robert L. Johnson
has been our Senior Vice President, Operations since 2004. Mr. Johnson joined us in
2000 as Vice President of Wireless Manufacturing. From 1996 to 2000, Mr. Johnson was the Director and General Manager of Schlumberger ATE. From 1990 to 1996, he served as Vice President and General Manager of Harman International Industries.
Mr. Johnson studied industrial engineering at Arizona State University.
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Adam L. Shelton
has been our Vice President, Product Management and Marketing
since 2006. From 2005 to 2006, Mr. Shelton was the Senior Director of Marketing for Motorola. From 2003 to 2005, he was the Senior Director of Marketing for Advanced Fibre Communications (AFC), now Tellabs. Mr. Shelton also held various
management and executive management positions with Mahi Networks, ATU Communications and Bell Canada. Mr. Shelton graduated with deans honors as a Civil Engineering Technologist from Seneca College in Toronto, Canada.
Kenneth E. Pfeiffer
has been our Vice President, Engineering since 2012. From 2009 to 2011, Mr. Pfeiffer was Vice
President, Engineering at Veeco Instruments Inc. From 2006 to 2009, Mr. Pfeiffer was the Director of Equipment Engineering for HelioVolt Corporation. Prior to that, Mr. Pfeiffer held various engineering and management positions at Active
Power, Inc. and Applied Materials, Inc. Mr. Pfeiffer obtained a B.S. Mechanical Engineering degree from Texas A&M University in 1990 and a M.S. Mechanical Engineering from the University of Texas in 1994. He also holds a Masters in
Business Administration degree from the University of Texas at Austin.
Corporate Governance Policies and Practices
The following is a summary of our corporate governance policies and practices:
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Our Board has determined that all of our directors, other than Mr. Quiram, are independent as defined by the rules of the SEC and The NASDAQ Stock
Market (NASDAQ). Our Audit Committee, Corporate Development Committee, Compensation Committee and Governance and Nominating Committee each consists entirely of independent directors under the rules of the SEC and NASDAQ.
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We have a Code of Business Conduct and Ethics for all of our employees, including our Chief Executive Officer and Chief Financial Officer. If we amend
any provision of our Code of Business Conduct and Ethics that applies to our Chief Executive Officer or Chief Financial Officer (or any persons performing similar functions), or if we grant any waiver (including an implicit waiver) from any
provision of our Code of Business Conduct and Ethics to our Chief Executive Officer or Chief Financial Officer (or any persons performing similar functions), we will disclose those amendments or waivers on our website at
www.suptech.com/Investors/Corporate Governance/Amendments and Waivers to the Code of Conduct
within four business days following the date of the amendment or waiver.
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Our Audit Committee reviews and approves all related-party transactions.
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As part of our Code of Business Conduct and Ethics, we have made a whistleblower hotline available to all employees for anonymous reporting
of financial or other concerns. Our Audit Committee receives directly, without management participation, all hotline activity reports concerning accounting, internal controls or auditing matters.
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Board Leadership Structure and Role in Risk Oversight
Our Boards current policy is to separate the role of Chairman of our Board and Chief Executive Officer. Our Board believes that this structure combines accountability with effective oversight. This
structure also allows us to benefit from the experience and knowledge of our Chairman, who has been on our board since 2002, while reflecting the responsibilities and contributions of our Chief Executive Officer. In addition, we believe that the
independence of our Chairman provides additional oversight over the decisions of our management and places additional control in the hands of our independent directors.
Our Board is actively involved in overseeing our risk management through our Audit Committee. Under its charter, our Audit Committee is responsible for inquiring of management and our independent auditors
about significant areas of risk or exposure and assessing the steps management has taken to minimize such risks. Our Boards role in risk oversight has not affected our Boards determination that the separation of roles of Chairman and
Chief Executive Officer is most appropriate for our company.
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Stockholder Communications with Directors
Stockholders who want to communicate with our Board or with a particular director or committee may send a letter to our Secretary at
Superconductor Technologies Inc., 460 Ward Drive, Santa Barbara, California 93111. The mailing envelope should contain a clear notation indicating that the enclosed letter is a Board Communication or Director
Communication. All such letters should state whether the intended recipients are all members of our Board or just certain specified individual directors or a specified committee. The Secretary will circulate the communications (with the
exception of commercial solicitations) to the appropriate director or directors. Communications marked Confidential will be forwarded unopened.
Attendance at Annual Meetings of Stockholders
We expect that all of our
Board members attend our Annual Meetings of Stockholders in the absence of a showing of good cause for failure to do so. All of the members of our Board attended our 2013 Annual Meeting of Stockholders.
Board Meetings and Committees
During 2013, each of our directors attended at least 75% of the aggregate of (i) the total number of Board meetings and (ii) the total number of meetings of the committees on which the director
served.
Board of Directors
Our Board held a total of seven meetings during 2013. Our Board has three standing committees an Audit Committee established in accordance with section 3(a)(58)(A) of the Securities Exchange
Act of 1934 (our
Audit Committee
), a Compensation Committee (our
Compensation Committee
) and a Governance and Nominating Committee (our
Nominating Committee
). Our Audit Committee,
Compensation Committee and Nominating Committee each have a charter, which is available at the Corporate Governance section under the Investors tab on our website at
www.suptech.com
.
Audit Committee
The principal functions of our Audit Committee are to hire our independent public auditors, to review the scope and results of the year-end audit with management and the independent auditors, to review
our accounting principles and our system of internal accounting controls and to review our annual and quarterly reports before filing them with the SEC. Our Audit Committee met seven times during 2013. The current members of our Audit Committee are
Messrs. Halvorson (Chairman), Kaplan and Davis.
Our Board has determined that all members of our Audit Committee are
independent as defined under the rules of the SEC and the listing standards of NASDAQ. Our Board has determined that Mr. Halvorson is an audit committee financial expert.
Compensation Committee
Our Compensation Committee reviews and approves salaries, bonuses and other benefits payable to the executive officers and administers our management incentive plan. Our Compensation Committee makes all
compensation decisions with respect to our Chief Executive Officer and makes recommendations to our Board regarding non-equity compensation and equity awards to our other named executive officers (set forth below under Executive Compensation
Summary Compensation Table) and all other elected officers. In doing so, with respect to named executive officers other than the Chief Executive Officer, our Compensation Committee generally receives a recommendation from our Chief
Executive Officer and other officers as appropriate. Our Chief Executive Officer also generally recommends the number of options or other equity awards to be granted to executive officers, within a range associated with the individual
executives salary level, and presents this to our Compensation Committee for its review and approval.
33
Our Compensation Committee uses available data to review and compare our compensation levels
to market compensation levels, taking into consideration the other companies size, the industry, and the individual executives level of responsibility, as well as anecdotal data regarding the compensation practices of other employers. We
do not annually benchmark our executive compensation against a defined peer group, since we believe that defining such a group is difficult and would not materially affect our decisions. Our Compensation Committee does not generally hire an outside
consulting firm to assist with compensation, as we believe that the value of doing so is exceeded by the costs. No compensation consultant was engaged to provide advice or recommendations on our executive or director compensation for 2013.
Our Compensation Committee also reviews the compensation of directors and recommends to our Board the amounts and types of
cash to be paid and equity awards to be made to our directors.
Our Compensation Committee met four times during 2013. The
current members of our Compensation Committee are Messrs. Davis (Chairman), Kaplan and Halvorson. Our Board has determined that all members of our Compensation Committee are independent as defined under the rules of the SEC and the
listing standards of NASDAQ. Our Compensation Committee will only delegate its authority to the extent consistent with our certificate of incorporation and bylaws and applicable laws, regulations and listing standards.
Our Compensation Committee created the Stock Option Committee (our
Stock Option Committee
) consisting of two members
our Compensation Committee Chairman and the Chief Executive Officer. The purpose of our Stock Option Committee is to facilitate the timely granting of stock options in connection with hiring, promotions and other special situations, and
therefore our Stock Option Committee meets only periodically as certain events occur. Our Stock Option Committee is empowered to grant options to non-executive employees up to a preset annual aggregate limit (120,000 shares for 2013). The Stock
Option Committee did not meet during 2013. Our Compensation Committee supervises these grants and retains exclusive authority for all executive officer grants and the annual employee grants. The current members of our Stock Option Committee are
Messrs. Davis (Chairman) and Quiram.
Governance and Nominating Committee
Our Nominating Committee is responsible for overseeing and, as appropriate, making recommendations to our Board regarding, membership and
constitution of our Board and its role in overseeing our affairs. Our Nominating Committee is responsible for proposing a slate of directors for election by the stockholders at each annual meeting and for proposing candidates to fill any vacancies.
Our Nominating Committee is also responsible for the corporate governance practices and policies of our Board and its committees. The current members of our Nominating Committee are Messrs. Kaplan (Chairman), Davis, and Halvorson. Our
Nominating Committee met four times in 2013. Our Board has determined that all members of our Nominating Committee are independent as defined under the rules of the SEC and the listing standards of NASDAQ.
Our Nominating Committee manages the process for evaluating current Board members at the time they are considered for re-nomination.
After considering the appropriate skills and characteristics required on our Board, the current makeup of our Board, the results of the evaluations, and the wishes of our Board members to be re-nominated, our Nominating Committee recommends to our
Board whether those individuals should be re-nominated.
Our Nominating Committee periodically reviews with our Board whether
it believes our Board would benefit from adding a new member(s), and if so, the appropriate skills and characteristics required for the new member(s). If our Board determines that a new member would be beneficial, our Nominating Committee solicits
and receives recommendations for candidates and manages the process for evaluating candidates. All potential candidates, regardless of their source (including candidates recommended by security holders), are reviewed under the same process. Our
Nominating Committee (or its chair) screens the available information about the potential candidates. Based on the results of the initial screening, interviews with viable candidates are scheduled
34
with Nominating Committee members, other members of our Board and senior members of management. Upon completion of these interviews and other due diligence, our Nominating Committee may recommend
to our Board the election or nomination of a candidate.
Candidates for independent Board members have typically been found
through recommendations from directors or others associated with us. Our stockholders may also recommend candidates by sending the candidates name and resume to our Nominating Committee under the provisions set forth above for communication
with our Board. No such suggestions from our stockholders were received in time for our Annual Meeting.
Our Nominating
Committee has no predefined minimum criteria for selecting Board nominees, although it believes that (i) all directors should share qualities such as: an ability to make meaningful contributions to our board; independence; strong communication
and analytical skills; and a reputation for honesty and ethical conduct; and (ii) independent directors should share qualities such as: experience at the corporate, rather than divisional level, in multi-national organizations as large as or
larger than us; and relevant, non-competitive experience. Our Nominating Committee does not have a formal policy with respect to diversity. However, our Nominating Committee and our Board believe that it is important that we have Board members whose
diversity of skills, experience and background are complementary to those of our other Board members. In considering candidates for our Board, our Nominating Committee considers the entirety of each candidates credentials. In any given search,
our Nominating Committee may also define particular characteristics for candidates to balance the overall skills and characteristics of our Board and our perceived needs. However, during any search, our Nominating Committee reserves the right to
modify its stated search criteria for exceptional candidates.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and significant
stockholders (defined by statute as stockholders beneficially owning more than 10% of our common stock) to file with the SEC initial reports of beneficial ownership, and reports of changes in beneficial ownership, of our common stock. Directors,
executive officers and significant stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of Forms 3, 4 and 5 (and amendments thereto) filed with the
SEC and submitted to us, and on written representations by certain directors and executive officers received by us, we believe that all of our executive officers, directors and significant stockholders complied with all applicable filing
requirements under Section 16(a) during 2013.
AUDIT COMMITTEE REPORT
The information contained in this Audit Committee Report shall not be deemed incorporated by reference in any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing (except to the extent that we specifically incorporate this
information by reference) and shall not otherwise be deemed soliciting material or filed with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934
(except to the extent that we specifically request that this information be treated as soliciting material or specifically incorporate this information by reference).
Our Audit Committee reviews our financial reporting process on behalf of our Board. Management has the primary responsibility for the financial statements and the reporting process, including the system
of internal controls. Our Audit Committee has reviewed and discussed the audited financial statements with management. In addition, our Audit Committee has discussed with our independent registered public accounting firm the matters required to be
discussed by Public Company Accounting Oversight Board Auditing Standard No. 16
Communications with Audit Committees
.
35
Our Audit Committee has also received the written disclosures and the letter from our
independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding their communications with the audit committee concerning independence, and has discussed with them their
independence, including whether their provision of other non-audit services to us is compatible with maintaining their independence.
Our Audit Committee discussed with our independent registered public accounting firm the overall scope and plans for the audit. Our Audit Committee meets with them, with and without management present to
discuss the results of their examinations, the evaluation of our internal controls and the overall quality of our reporting.
Based upon the review and discussions referred to in the foregoing paragraphs, our Audit Committee recommended to our Board that the
audited financial statements be included in our Annual Report on Form 10-K for 2013 for filing with the Securities and Exchange Commission.
AUDIT COMMITTEE
Dan L. Halvorson
(Chairman)
Martin A. Kaplan
Lynn J. Davis
ITEM 11.
|
EXECUTIVE C
OMPENSATION
|
Summary Compensation Table
The following table sets forth for 2013, 2012
and 2011 the base salary and other compensation of our (i) President and Chief Executive Officer and (ii) our other two most highly compensated officers for 2013 (our named executive officers):
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Name and Principal
Position
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Year
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Salary
($)
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Stock
Awards
($)(1)
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Option
Awards
($)(1)
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Non-equity
Incentive Plan
Compensation
($)
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All Other
Compensation
($)(2)
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Total
($)
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Jeffrey A. Quiram
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2013
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324,450
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23,387
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408,732
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50,830
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807,399
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President, Chief
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2012
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324,450
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66,542
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45,545
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36,351
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472,888
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Executive Officer, Director
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2011
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324,450
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167,058
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123,708
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102,771
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717,987
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Robert L. Johnson
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2013
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242,462
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13,108
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227,148
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14,262
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496,980
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Senior Vice President,
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2012
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242,462
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37,296
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25,527
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12,628
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317,913
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Operations
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2011
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242,462
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93,553
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69,277
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10,331
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415,623
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Adam L. Shelton
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2013
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247,200
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13,364
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227,316
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1,971
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489,851
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Vice President Product
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2012
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247,200
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38,024
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26,025
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107,884
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419,133
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Management and Marketing
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2011
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247,200
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93,553
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69,277
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37,889
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447,919
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(1)
|
The Option Awards and Stock Awards amounts represent the aggregate grant date fair value of the options to purchase common stock or shares of restricted common stock
(as applicable) calculated in accordance with ASC 718, under the assumptions included in Note 5 to our audited financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K.
|
(2)
|
The All Other Compensation amounts shown reflect the value attributable to term life insurance premiums and company 401(k) matching for each named
executive officer as well as other perquisites described below. Each named executive officer is responsible for paying income tax on such amounts. The aggregate dollar amount of perquisites or other personal benefits for Mr. Johnson is less
than $10,000. Pursuant to the
|
36
|
terms of his employment agreement, Mr. Quiram received $45,740, $31,314 and $102,321 in 2013, 2012 and 2011, respectively, for travel expenses from his home in Minnesota, temporary housing
near our Santa Barbara and Austin facilities, the use of an automobile, and special indemnity payments to cover the taxes resulting from the payment or reimbursement of such travel and housing expenses; and Mr. Shelton received $89,585 in 2012
for moving to our Austin facility and $0, $13,605 and $37,589 in 2013, 2012 and 2011, respectively, for travel expenses for travel from his home in California to our headquarters.
|
Narrative Disclosure to Summary Compensation Table
Employment Agreement
We entered into an employment agreement with
Mr. Quiram in 2005, which was amended in 2007. The employment agreement provides for the following:
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Appointment as our President, Chief Executive Officer and a member of our Board;
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A base salary, which was $315,000 per year for 2008-2009 and increased to $324,400 during 2010;
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A bonus of up to 100% of his base salary based upon achievement of annual performance goals to be developed by our Compensation Committee and
Mr. Quiram;
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Accelerated vesting of all his equity grants in the event of an Involuntary Termination or Change of Control (both as defined in his employment
agreement);
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A severance payment equal to one years salary and continued benefits for one year in the event of Involuntary Termination;
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In the event of a Change of Control, whether or not he is terminated, Mr. Quiram is entitled to (i) payment of two times his annual base
salary, (ii) 24 months of benefits coverage, and (iii) accelerated vesting of all of his outstanding equity grants;
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Payment or reimbursement of travel expenses from his present home in Minnesota and the lease of an apartment for Mr. Quiram near our Santa Barbara
headquarters; and a special indemnity payment for any taxes resulting from the payment or reimbursement of such expenses; and
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Lease of an automobile.
|
Change of Control Agreements
We also have a change of control agreement with Mr. Shelton. The change of control agreement generally provide that, if the employees employment is terminated within twenty-four
months of a Change of Control (as defined in the change of control agreements) either (i) by us for any reason other than death, Cause or Disability (as both terms are defined in the change of control
agreements) or (ii) by the employee for Good Reason (as defined in the change of control agreements), then the terminated employee will be entitled to severance benefits salary continuation payments and continuation of health/life
insurance benefits for 18 months and accelerated vesting for all outstanding unvested stock options and other equity securities held by the employee. Any payments or distributions made to or for the benefit of the named employees under these change
of control agreements will be reduced, if necessary, to an amount that would result in no excise taxes being imposed under Internal Revenue Code Section 4999.
Non-Equity Incentive Compensation
We maintain a bonus plan for executive
officers and selected other members of senior management. Under the plan, our Compensation Committee establishes financial and other pertinent objectives for the period and assigns each executive officer an annual target bonus amount based on a
percentage of his or her base salary, which ranges from 20% to 100%. Our Compensation Committee also retains the authority to award discretionary
37
bonuses for performance in other aspects of the business not covered by the established goals. At the beginning of 2012, our Compensation Committee decided, based on then-current economic
conditions, to not establish financial performance targets under this plan for 2013 and to not award cash bonuses based on financial objectives in 2012. Our Compensation Committee did reserve its right to award discretionary bonuses if appropriate;
however no bonuses were awarded for 2013.
Equity Grants
For 2013, we made the following grants of restricted stock awards and options to our named executive officers:
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Name
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Grant Date
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Stock Awards:
Number of
Shares (#)
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Option Awards:
Number of
Shares
underlying
options (#)(1)
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Exercise price
of option
awards
($/Share)
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Grant date
Fair Value of
Stock &
Option
Awards ($)(2)
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Jeffrey A Quiram
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03/07/2013
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9,280
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0.00
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23,386
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03/07/2013
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9,280
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2.52
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15,278
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12/05/2013
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270,000
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2.12
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393,452
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Robert L Johnson
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03/07/2013
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5,202
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0.00
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13,109
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03/07/2013
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5,202
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2.52
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8,565
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12/05/2013
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150,000
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2.12
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218,585
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Adam L Shelton
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03/07/2013
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5,303
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0.00
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13,364
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03/07/2013
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5,303
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2.52
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8,678
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12/05/2013
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150,000
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2.12
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218,585
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(1)
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These stock options were granted as part of our regular performance review process and vest based on the executive continuing to provide services to us through the
applicable vesting dates.
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(2)
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The value of a stock award or stock option award is based on the fair market value as of the grant date of such award determined pursuant to ASC 718. Stock awards
consist of restricted stock awards. The exercise price for all options granted to the named executive officers is 100% of the fair market value of the shares on the grant date.
|
38
Outstanding Equity Awards at Fiscal Year End
The following table sets forth certain information with respect to outstanding options and unvested shares of restricted stock on December 31, 2013:
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Option Awards
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Stock Awards
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Name
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Number of
Securities
Underlying
Unexercised
Options(#)
Exerciseable
(1)
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Number of
Securities
Underlying
Unexercised
Options(#)
Unexerciseable
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Option
Exercise
Price ($)
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Option
Expiration
Date
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Number of
Shares or
Units of
Stock That
Have Not
Vested
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Market
Value of
Shares or
Units of
Stock That
Have
Not
Vested ($)(5)
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Jeffrey A Quiram
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10,000
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82.80
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5/25/2015
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4,167
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61.44
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2/20/2018
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3,061
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61.44
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2/20/2018
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2,752
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31.44
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5/6/2020
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8,811
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18.96
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1/25/2021
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1,899
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1,899(2)
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17.52
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2/9/2022
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9,280(3)
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2.52
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3/7/2023
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270,000(4)
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2.12
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12/5/2023
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949(2)
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2,040
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Robert L Johnson
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1,500
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61.44
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2/20/2018
|
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1,716
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|
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|
|
|
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61.44
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2/20/2018
|
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1,543
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|
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|
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31.44
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5/6/2020
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4,934
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18.96
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1/25/2021
|
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|
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1,064
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|
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1,065(2)
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17.52
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2/9/2022
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5,202(3)
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2.52
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3/7/2023
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150,000(4)
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2.12
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12/5/2023
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532(2)
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1,144
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|
Adam L Shelton
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|
|
4,583
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|
|
|
|
|
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|
48.36
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|
4/24/2016
|
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2,000
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|
|
|
|
|
|
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61.44
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|
|
|
2/20/2018
|
|
|
|
|
|
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|
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1,749
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|
|
|
|
|
|
|
61.44
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|
2/20/2018
|
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1,573
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|
|
|
|
|
|
|
31.44
|
|
|
|
5/6/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
4,934
|
|
|
|
|
|
|
|
18.96
|
|
|
|
1/25/2021
|
|
|
|
|
|
|
|
|
|
|
|
|
1,085
|
|
|
|
1,085(2)
|
|
|
|
17.52
|
|
|
|
2/9/2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,303(3)
|
|
|
|
2.52
|
|
|
|
3/7/2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000(4)
|
|
|
|
2.12
|
|
|
|
12/5/2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
543(2)
|
|
|
|
1,167
|
|
(1)
|
These options are fully vested.
|
(2)
|
These shares vested 50% on February 9, 2013 and the remaining 50% will vested on February 9, 2014.
|
(3)
|
These shares will vest 50% on March 7, 2014 and the remaining 50% vested on March 7, 2015.
|
(4)
|
These shares will vest 50% on December 5, 2014 and the remaining 50% will vest on December 5, 2015.
|
(5)
|
The market value is calculated using the closing share price of our common stock of $2.15 on December 31, 2013.
|
Non-employee Director Compensation
Summary of Compensation
Our directors who are also our employees do not receive additional compensation for their service on our Board. Our Board maintains a
written compensation policy for our non-employee directors. Each director other than our Chairman of the Board receives an annual cash retainer of $20,000, and our Chairman of the Board
39
receives an annual cash retainer of $40,000. The annual cash retainer is paid bi-annually and requires that the director attend at least 75% of our Board meetings. Each director receives a $5,000
annual retainer for service as a member of our four standing committees. In addition, on the date of each annual meeting of stockholders, each director other than our Chairman of the Board receives an equity grant of 10,000 shares of our common
stock, and our Chairman of the Board receives a grant of 15,000 shares. In addition to the foregoing equity grants, new directors receive an initial grant of 25,000 shares of our common stock on the date that they join our Board. Initial equity
grants vest in three equal installments, on each anniversary of the grant date, and annual grants vest in two equal installments, on each anniversary of the grant date. Our Board provides an additional $15,000 annual retainer (which is paid
bi-annually) as compensation for service as chairman of our Audit Committee and an additional $10,000 annual retainer for service as chairman of each of our Corporate Development Committee, Compensation Committee and Nominating Committee.
Non-employee directors do not receive compensation from us other than as a director or as committee member. There are no
family relationships among our directors and executive officers.
The following table summarizes the compensation paid to our non-employee
directors for 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Fees earned or paid
in
cash ($)
|
|
|
Stock Awards
($)
(1)
|
|
|
Total
($)
|
|
Martin A. Kaplan
|
|
|
60,000
|
|
|
|
31,800
|
|
|
|
91,800
|
|
|
|
|
|
Lynn J. Davis
|
|
|
40,000
|
|
|
|
21,200
|
|
|
|
61,200
|
|
|
|
|
|
David W. Vellequette(2)
|
|
|
45,000
|
|
|
|
21,200
|
|
|
|
66,200
|
|
|
|
|
|
Dan L. Halvorson(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The amounts in this column represent the aggregate grant date fair value of the shares of restricted common stock calculated in accordance with Accounting Standards
Codification (
ASC
) 718, under the assumptions included in Note 5 to our audited financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K. As of December 31, 2013:
(i) Mr. Kaplan had 1,917 options to purchase common stock and 16,805 unvested shares of restricted common stock; (ii) Mr. Davis had 1,783 options to purchase common stock and 11,389 unvested shares of restricted common stock;
(iii) Mr. Vellequette had 1,250 options to purchase common stock and 11,389 unvested shares of restricted common stock.
|
(2)
|
On March 3, 2014, director David Vellequette resigned from our Board of Directors and Dan Halvorson joined our Board of Directors. Consistent with past practice,
effective as of his termination of board service, we extended the exercise period of options held by Mr. Vellequette to the term of the options and accelerated the vesting of previously granted restricted stock. As a new director,
Mr. Halvorson received an initial grant of 25,000 shares of our common stock on the date that he joined our Board.
|
40
ITEM 12.
|
SEC
URITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
The following table sets forth the beneficial ownership of our common stock as of March 14, 2014 by (i) each person known by us
to be the beneficial owner of more than 5% of our outstanding common stock, (ii) each of our directors, (iii) each of our executive officers named in the table under Executive Compensation Summary Compensation
Table, and (iv) all of our directors and executive officers as a group. Except as otherwise indicated in the footnotes to the table, (i) the persons and entities named in the table have sole voting and investment power with respect
to all shares beneficially owned, subject to community property laws where applicable, and (ii) the address of each person is c/o Superconductor Technologies Inc., 460 Ward Drive, Santa Barbara, California 93111.
|
|
|
|
|
|
|
|
|
Name
|
|
Number of Shares (1)
|
|
|
Percentage Ownership
|
|
Kopp Investment Advisors, LLC
|
|
|
2,301,356
|
(2)
|
|
|
18.4
|
%
|
7701 France Avenue South, #500
|
|
|
|
|
|
|
|
|
Edina, MN 55435
|
|
|
|
|
|
|
|
|
Jeffrey A. Quiram
|
|
|
75,097
|
|
|
|
|
*
|
William J. Buchanan
|
|
|
28,671
|
|
|
|
|
*
|
Robert L. Johnson
|
|
|
32,638
|
|
|
|
|
*
|
Adam L. Shelton
|
|
|
35,828
|
|
|
|
|
*
|
Kenneth E. Pfeiffer
|
|
|
7,416
|
|
|
|
|
*
|
Lynn J. Davis
|
|
|
15,949
|
|
|
|
|
*
|
Martin A. Kaplan
|
|
|
24,243
|
|
|
|
|
*
|
Dan L. Halvorson
|
|
|
25,000
|
|
|
|
|
*
|
All executive officers and directors as a group (8 persons)
|
|
|
244,842
|
|
|
|
2.0
|
%
|
(1)
|
Includes shares issuable upon the exercise of stock options that are exercisable within 60 days of March 14, 2014 as follows: Mr. Quiram, 37,228 shares;
Mr. Buchanan 13,601 shares; Mr. Johnson 14,420 shares; Mr. Shelton, 19,660 shares; Mr. Davis, 1,783 shares; Mr. Kaplan, 1,917 shares; Mr. Vellequette, 1,250 shares; and all executive officers and directors as a group,
89,651 shares.
|
(2)
|
Based solely on information reported in a Schedule 13F/HR filed with the SEC on January 21, 2014 by Kopp Investment Advisors, LLC (KIA), Kopp Holding
Company, LLC (KHCLLC), and LeRoy C. Kopp (Mr. Kopp). KIA, KHCLLC and Mr. Kopp are the beneficial owners of and have shared voting authority with respect to 2,301,356 shares.
|
ITEM 13.
|
CE
RTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
Mr. Vellequette resigned from our Board of Directors effective March 3, 2014. Consistent with past practice, effective as of his
termination of board service, we extended the exercise period of options he held to the term of the options and accelerated the vesting of previously granted restricted stock.
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Our Audit Committee regularly reviews and determines whether specific non-audit projects or expenditures with our independent registered public accounting firm, Marcum LLP, potentially affects its
independence. Our Audit Committees policy is to pre-approve all audit and permissible non-audit services provided by Marcum LLP. Pre-approval is generally provided by our Audit Committee for up to one year, as detailed as to the particular
service or category of services to be rendered, and is generally subject to a specific budget. Our Audit Committee may also pre-approve additional services of specific engagements on a case-by-case basis.
41
The following table sets forth the aggregate fees billed to us by Marcum LLP for 2013 and
2012, all of which were pre-approved by our Audit Committee:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Audit fees(1)
|
|
$
|
215,247
|
|
|
$
|
215,455
|
|
All other fees(2)
|
|
$
|
72,845
|
|
|
$
|
39,067
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
288,092
|
|
|
$
|
254,522
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes fees for professional services rendered for the audit of our annual consolidated financial statements and review of our annual report on Form 10-K and for
reviews of the condensed consolidated financial statements included in our quarterly reports on Form 10-Q for the first three quarters of 2013 and 2012.
|
(2)
|
These fees related to services rendered for our S-1 and S-3 registration statements.
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 1 The Company
Superconductor Technologies Inc. (together with our subsidiaries, we or us) was incorporated in
Delaware on May 11, 1987. We develop and produce high temperature superconducting (HTS) materials and associated technologies. We have generated more than 100 patents as well as proprietary trade secrets and manufacturing
expertise, providing interference elimination and network enhancement solutions to the commercial wireless industry. We are now leveraging our key enabling technologies, including radio frequency filtering, HTS materials and
cryogenics, to pursue emerging opportunities in the electrical grid and in equipment platforms that utilize electrical circuits. In January 2012 we took possession of a facility in Austin, Texas and have moved our HTS wire processes and our
research and development to Austin. We continue to maintain a presence in Santa Barbara for certain business operations and commercial wireless business.
Our initial superconducting products were completed in 1998, and we began delivery to a number of wireless network providers. In the following 13 years, our cost reducing efforts led to the invention of
our proprietary, high-yield and high throughput HTS material deposition manufacturing process.
In the
last several years we have focused our research and development efforts on adapting our successful HTS materials deposition techniques to the production of our HTS Conductus
®
wire for next generation power applications. While most of our current commercial product revenues come from the sale of high performance wireless communications
infrastructure products, production of our Conductus wire is our principal opportunity to grow our future revenue.
Historically, we used research and development contracts as a source of funds for our commercial technology development. We are not
currently involved as either a contractor or subcontractor on contracts with the U.S. government. Thus for the years ended December 31, 2013, 2012, and 2011, government related contracts accounted for 0%, 6%, and 2%, respectively, of our net
revenues.
Note 2 Summary of Significant Accounting Policies
Basis of Presentation
We have incurred significant net losses since our inception and have an accumulated deficit of $274.1 million. In 2013, we incurred a net loss of $12.2 million and had negative cash flows from
operations of $8.3 million. In 2012, we had an accumulated deficit of $262.0 million, a net loss of $10.9 million and negative cash flows from operations of $8.2 million. At December 31, 2013, we had $7.5 million in cash. Our cash resources
will not be sufficient to fund our business for the next 12 months. From January 1, 2014 through March 21, 2014, we have received more than $3.7 million from the exercise of outstanding warrants. Even with this additional cash, we may need
to raise funds to meet our working capital needs. Additional financing may not be available on acceptable terms or at all. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be
reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise any needed funds, we might be forced to make further substantial reductions in our operating expenses, which
could adversely affect our ability to implement our current business plan and ultimately our viability as a company. These factors raise substantial doubt about our ability to continue as a going concern.
Our plans regarding improving our future liquidity will require us to successfully use our expertise and our technology to generate
revenues in various ways, including commercial operations, joint ventures and licenses. We have invested and will continue to invest significant capital in our Austin, Texas manufacturing facility to enable us to produce our Conductus wire products.
However, delays in the timing of our ability to, including but not limited to, raise additional capital, unexpected production delays, and our ability to sell our Conductus wire products in large scale could substantially impact our estimates used
in the determination of expected future cash flows and/or expected future profitability.
F-6
The accompanying consolidated financial statements do not include any adjustments that may
result from the outcome of the uncertainties set forth above.
On March 11, 2013, we effected a 1-for-12 reverse stock
split of our common stock, or the Reverse Stock Split. As a result of the Reverse Stock Split, every twelve shares of our pre-Reverse Stock Split common stock were combined and reclassified into one share of our common stock. The Reverse Stock Split
did not change the authorized number of shares or the par value of our common stock. Certain of the information contained in the documents incorporated by reference herein and therein present information on our common stock on a
pre-Reverse
Split basis. Share and per share data included herein has been retroactively restated for the effect of the reverse stock split. In addition, we identified certain critical accounting policies which
affect certain of our more significant estimates and assumptions used in preparing our consolidated financial statements in this Annual Report on Form 10-K for 2013. We have not made any material changes to these policies.
We have reviewed recently issued Financial Accounting Standards Board pronouncements and do not believe they will have a material impact
on our consolidated financial statements as of and for the year ended December 31, 2013.
Principles of
Consolidation
The consolidated financial statements include the accounts of Superconductor Technologies Inc. and its
wholly owned subsidiaries. All significant intercompany transactions have been eliminated from the consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of
highly liquid investments with original maturities of three months or less. Cash and cash equivalents are maintained with what management believes to be quality financial institutions and from time to time exceed FDIC limits. Historically, we have
not experienced any losses due to such concentration of credit risk.
Accounts Receivable
We sell predominantly to entities in the wireless communications industry. We grant uncollateralized credit to our customers. We perform
usual and customary credit evaluations of our customers before granting credit. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of
probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience. Past due balances are reviewed for collectability. Account balances are charged off against the allowance when we deem
it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.
Revenue Recognition
Commercial revenues are principally derived
from the sale of our SuperLink, AmpLink and SuperPlex family of products and are recognized once all of the following conditions have been met: a) an authorized purchase order has been received in writing, b) the customers credit worthiness
has been established, c) shipment of the product has occurred, d) title has transferred, and e) if stipulated by the contract, customer acceptance has occurred and all significant vendor obligations, if any, have been satisfied.
We currently have no contract revenues. Historically, contract revenues were principally generated under research and development
contracts. Contract revenues were recognized utilizing the percentage-of-completion method measured by the relationship of costs incurred to total estimated contract costs. If the current contract estimate were to indicate a loss, utilizing the
funded amount of the contract, a provision would be made for the
F-7
total anticipated loss. Revenues from research related activities were derived primarily from contracts with agencies of the U.S. Government. Credit risk related to accounts receivable arising
from such contracts was considered minimal. These contracts included cost-plus, fixed price and cost sharing arrangements and were generally short-term in nature.
All payments to us for work performed on contracts with agencies of the U.S. Government are subject to adjustment upon audit by the Defense Contract Audit Agency. Contract audits through 2003 are closed.
Based on historical experience and review of current projects in process, we believe that any future audits will not have a significant effect on our consolidated financial position, results of operations or cash flows.
Shipping and Handling Fees and Costs
Shipping and handling fees billed to customers are included in net commercial product revenues. Shipping and handling fees associated with freight are generally included in cost of commercial product
revenues.
Warranties
We offer warranties generally ranging from one to five years, depending on the product and negotiated terms of purchase agreements with our customers. Such warranties require us to repair or replace
defective product returned to us during such warranty period at no cost to the customer. Our estimate for warranty related costs is recorded at the time of sale based on our actual historical product return rates and expected repair costs. Such
costs have been within our expectations.
Indemnities
In connection with the sales and manufacturing of our commercial products, we indemnify, without limit or term, our customers and contract
manufacturers against all claims, suits, demands, damages, liabilities, expenses, judgments, settlements and penalties arising from actual or alleged infringement or misappropriation of any intellectual property relating to our products or other
claims arising from our products. We cannot reasonably develop an estimate of the maximum potential amount of payments that might be made under our indemnities because of the uncertainty as to whether a claim might arise and how much it might total.
Historically, we have not incurred any expenses related to these indemnities.
Research and Development Costs
Research and development costs are charged to expense as incurred and include salary, facility, depreciation and
material expenses. Research and development costs are charged to research and development expense. Research and development costs incurred solely in connection with research and development contracts were charged to government and other contract
expense.
Inventories
Inventories are stated at the lower of cost or market, with costs primarily determined using standard costs, which approximate actual costs utilizing the first-in, first-out method. We review inventory
quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory and/or vendor cancellation charges related to purchase commitments. If the results of the review determine that a write-down is
necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory. Such provisions are established based on historical usage,
adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements. Costs associated with idle capacity are charged to operations immediately.
F-8
Property and Equipment
Property and equipment are recorded at cost. Equipment is depreciated using the straight-line method over their estimated useful lives
ranging from three to five years. Leasehold improvements and assets financed under capital leases are amortized over the shorter of their useful lives or the lease term. Furniture and fixtures are depreciated over seven years. Expenditures for
additions and major improvements are capitalized. Expenditures for minor tooling, repairs and maintenance and minor improvements are charged to operations as incurred. When property or equipment is retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the accounts. Gains or losses from retirements and disposals are generally recorded in other income or expense. In 2013 and 2012 there were disposals totaling $9,405,000 and $520,000, respectively, and
gains of $98,000 and $92,000, respectively, from these disposals. In 2013, we also disposed of research and development equipment with a net book value of $337,000 and charged that disposal to research and development expense.
Patents and Licenses
Patents and licenses are recorded at cost and are amortized using the straight-line method over the shorter of their estimated useful lives or approximately seventeen years.
Long-Lived Assets
The realizability of long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover the carrying amount. Long-lived assets that will no longer be used in
the business are written off in the period identified since they will no longer generate any positive cash flows for us. Periodically, long lived assets that will continue to be used by us will need to be evaluated for recoverability. Such
evaluation is based on various analyses, including cash flow and profitability projections. The analyses necessarily involve significant management judgment. In the event the projected undiscounted cash flows are less than net book value of the
assets, the carrying value of the assets will be written down to their estimated fair value. We tested our long lived assets for recoverability in 2012 and did not believe there was any impairment; however, for the year ended December 31, 2013
we charged $93,000 of patents pending to operations.
In July 2012, we contributed 14 issued and pending patents regarding our
innovative Reconfigurable Resonance (RcR) technology, limited use of our Santa Barbara facility, experienced executive leadership and technical expertise as our minority investment in Resonant LLC. As of December 31, 2012 and
June 18, 2013, our interest in Resonant was 30%, and the net value of the assets contributed, estimated to approximate fair value, was $423,000 and $185,000, respectively. We had accounted for this investment using the equity method and
included it in
Other assets
for both periods.
At June 18, 2013, we announced via a press release, that we
exchanged our equity interest in Resonant LLC, a wholly owned subsidiary of Resonant Inc., for a $2.4 million subordinated convertible note receivable from the new Resonant Inc. No gain was recognized for the exchange of our net equity interest on
the date of issuance for the note receivable due to uncertainties in connection with the collectability of this subordinated note receivable. Our note is subordinated to a third party lender and is only convertible in the event Resonant, Inc.
conducts an initial public offering and certain other conditions are met. We determined that our net equity interest of $185,000 approximated the fair value of the note receivable at December 31, 2013.
We have invested and will continue to invest significant capital in our Austin, Texas manufacturing facility to enable us to produce our
Conductus wire products. Delays in the timing of our ability to, including but not limited to, raise additional capital, unexpected production delays, our ability to sell our Conductus wire products in large scale could substantially impact our
estimates used in the determination of expected future cash flows and/or expected profitability. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
F-9
Loss Contingencies
In the normal course of our business, we are subject to claims and litigation, including allegations of patent infringement. Liabilities
relating to these claims are recorded when it is determined that a loss is probable and the amount of the loss can be reasonably estimated. The costs of our defense in such matters are charged to operations as incurred. Insurance proceeds
recoverable are recorded when deemed probable.
Income Taxes
We recognize deferred tax liabilities and assets based on the differences between the consolidated financial statement carrying amounts
and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax
liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
The guidance further clarifies the accounting for uncertainty in income taxes and sets a consistent framework to determine the appropriate level of tax reserve to maintain for uncertain tax positions.
This interpretation uses a two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not to be sustained. The amount of the benefit is then measured to be the highest tax benefit that is greater than 50% likely to be
realized and sets out disclosure requirements to enhance transparency of our tax reserves.
Unrecognized tax positions, if
ever recognized in the consolidated financial statements, are recorded in the consolidated statement of operations as part of the income tax provision. Our policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as
part of the income tax provision.
No liabilities for uncertain tax positions were recognized in 2013. No interest or
penalties on uncertain tax positions have been charged to operations to date. We are not under examination by any taxing authorities. The federal statute of limitations for examination of us is open for 2010 and subsequent filings.
Marketing Costs
All costs related to marketing and advertising our products are charged to operations as incurred or at the time the advertising takes place. Advertising costs were not material in each of the three years
in the period ended December 31, 2013.
Net Loss Per Share
Basic and diluted net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of
common shares outstanding in each year. Net loss available to common stockholders is computed after deducting accumulated dividends on cumulative preferred stock, deemed dividends and accretion of redemption value on redeemable preferred stock for
the period and beneficial conversion features on issuance of convertible preferred stock. Potential common shares are not included in the calculation of diluted loss per share because their effect is anti-dilutive.
Stock-based Compensation Expense
We have in effect several equity incentive plans under which stock options and awards have been granted to employees and non-employee members of the Board of Directors. We are required to estimate the
fair value of share-based awards on the date of grant. The value of the award is principally recognized as expense ratably over the requisite service periods. We have estimated the fair value of stock options as of the date of grant using the
Black-Scholes option pricing model. The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of our stock price. We evaluate the assumptions used to value stock
F-10
options on a quarterly basis. The fair values generated by the Black-Scholes model may not be indicative of the actual fair values of our equity awards, as it does not consider other factors
important to those awards to employees, such as continued employment and periodic vesting.
The following table presents
details of total stock-based compensation expense that is included in each functional line item on our consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Cost of revenue
|
|
$
|
1,000
|
|
|
$
|
9,000
|
|
|
$
|
18,000
|
|
Research and development
|
|
|
169,000
|
|
|
|
277,000
|
|
|
|
477,000
|
|
Selling, general and administrative
|
|
|
322,000
|
|
|
|
568,000
|
|
|
|
1,068,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
492,000
|
|
|
$
|
854,000
|
|
|
$
|
1,563,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impact to the consolidated statements of operations for 2013, 2012 and 2011 on basic and diluted
earnings per share was $0.07, $0.26 and $0.59, respectively. No stock compensation cost was capitalized during the three year period ended December 31, 2013.
Use of Estimates
The preparation of consolidated financial
statements in conformity with generally accepted accounting principles in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The significant estimates in the preparation of the consolidated financial statements relate to the
assessment of the carrying amount of accounts receivable, inventory, fixed assets, intangibles, goodwill, estimated provisions for warranty costs, accruals for restructuring and lease abandonment costs, contract revenues, income taxes and
disclosures related to the litigation. Actual results could differ from those estimates and such differences may be material to the consolidated financial statements.
Fair Value of Financial Instruments
We have estimated the fair
value amounts of our financial instruments using the available market information and valuation methodologies considered appropriate. We determined the book value of our cash and cash equivalents, accounts receivable, inventories, prepaid expenses
and other current assets and other current liabilities as of December 31, 2013 and December 31, 2012 approximate fair value.
The fair value of our warrant derivative liability was estimated using the Binomial Lattice option valuation model.
Fair value for financial reporting purposes is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date, ASC 820, Fair Value Measurement and Disclosures, also establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 quoted prices in active markets for identical assets or liabilities
Level 2 quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
F-11
The fair value of our warrant liabilities was determined based on level 3 inputs. These
derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as Adjustment to Fair Value of Derivatives. See Note 5
Warrants
.
Comprehensive Income
We have no items of other comprehensive income in any period and consequently have not included a Statement of Comprehensive Income.
Segment Information
We operate in a single business segment, the research, development, manufacture and marketing of high performance products used in cellular base stations to maximize the performance of wireless
telecommunications networks by improving the quality of uplink signals from mobile wireless devices. We currently derive net commercial product revenues primarily from the sales of our AmpLink and SuperPlex products. We currently sell most of our
products directly to wireless network operators in the United States, and historically net revenues derived principally from government research and development contracts are presented separately on the consolidated statements of operations for all
periods presented. In the second half of 2014 we expect commercial level sales of our Conductus wire products.
Certain
Risks and Uncertainties
Our long-term prospects are dependent upon the successful commercialization and market
acceptance of our Conductus wire products.
We currently sell most of our products directly to wireless network operators in
the United States and our product sales have historically been concentrated in a small number of customers. In 2013, we had two customers that represented 63% and 33% of total net revenues and 89% of our accounts receivable. In 2012, these two
customers represented 67% and 22% of total net revenues and 38% of our accounts receivable. The loss of or reduction in sales, or the inability to collect outstanding accounts receivable, from any of these customers could have a material adverse
effect on our business, financial condition, results of operations and cash flows.
We currently rely on a limited number of
suppliers for key components of our products. The loss of any of these suppliers could have material adverse effect on our business, financial condition, results of operations and cash flows.
In connection with the sales of our commercial products, we indemnify, without limit or term, our customers against all claims, suits,
demands, damages, liabilities, expenses, judgments, settlements and penalties arising from actual or alleged infringement or misappropriation of any intellectual property relating to our products or other claims arising from our products. We cannot
reasonably develop an estimate of the maximum potential amount of payments that might be made under our indemnities because of the uncertainty as to whether a claim might arise and how much it might total.
For more risks of our business, see Item 1A, Risk Factors in our Annual Report on Form 10-K and other filings with the
Securities and Exchange Commission.
Note 3 Short Term Borrowings
None
F-12
Note 4 Income Taxes
We incurred a net loss in each year of operation since inception resulting in no current or deferred tax expense for
2013, 2012 or 2011.
The benefit for income taxes differs from the amount obtained by applying the federal statutory income
tax rate to loss before benefit for income taxes for 2013, 2012 and 2011 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Tax benefit computed at Federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Increase (decrease) in taxes due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(39.8
|
)
|
|
|
(39.8
|
)
|
|
|
(39.8
|
)
|
State taxes, net of federal benefit
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets (liabilities) at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Loss carryforwards
|
|
$
|
6,910,000
|
|
|
$
|
40,650,000
|
|
Capitalized research and development
|
|
|
|
|
|
|
94,000
|
|
Depreciation
|
|
|
1,853,000
|
|
|
|
2,029,000
|
|
Tax credits
|
|
|
103,500
|
|
|
|
602,000
|
|
Inventory
|
|
|
288,000
|
|
|
|
805,000
|
|
Acquired intellectual property
|
|
|
|
|
|
|
(90,000
|
)
|
Other
|
|
|
394,000
|
|
|
|
517,000
|
|
Less: valuation allowance
|
|
|
(9,548,500
|
)
|
|
|
(44,607,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013, we had net operating loss carryforwards for federal and state income tax
purposes of approximately $313.8 million and $160.6 million
,
respectively, which expire in the years 2014 through 2033. Of these amounts, $77.5 million and $5.1 million, respectively, resulted from the acquisition of Conductus. Under the
Internal Revenue Code change of control limitations, a maximum of $17.4 million and $16.8 million, respectively, will be available for reduction of taxable income. In addition, we had research and development and other tax credits for federal and
state income tax purposes of approximately $69,000 and $52,000, respectively, which expire in the years 2030 through 2033.
Due to the uncertainty surrounding their realization, we have recorded a full valuation allowance against our net deferred tax assets.
Accordingly, no deferred tax asset has been recorded in the accompanying consolidated balance sheets. The valuation allowance decreased by $35,058,500 in 2013 and increased by $4,449,000 in 2012 due to the revaluation of the deferred tax asset from
loss carryforwards under the change in control provisions in the Internal Revenue Code.
Section 382 of the Internal
Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards based on a statutory rate of return (usually the applicable federal funds rate, as defined in the Internal Revenue Code) and the value of
the corporation at the time of a change of ownership as defined by Section 382. We had changes in ownership in August 1999, December 2002, June 2009, and August 2013. In addition, we acquired the right to Conductus
net operating losses, which are also subject to the limitations imposed by Section 382. Conductus underwent five ownership changes, which occurred in February 1999, February 2001, December 2002, June 2009, and August 2013.
Therefore, the ability to utilize Conductus and our net operating loss carryforwards of $77.5 million and $232 million, respectively, which were incurred prior to the 2013 ownership changes, will be subject in future periods to annual
limitations of $655,000. Net
F-13
operating losses incurred by us subsequent to the ownership changes totaled $4.7 million and are not subject to this limitation. An additional $259,000 in losses were released from limitation
during 2013 under Section 382.
Note 5 Stockholders Equity
Preferred Stock
Pursuant to our Certificate of Incorporation, the Board of Directors is authorized to issue up to 2,000,000 shares of preferred stock (par value $.001 per share) in one or more series and to fix the
rights, preferences, privileges, and restrictions, including the dividend rights, conversion rights, voting rights, redemption price or prices, liquidation preferences, and the number of shares constituting any series or the designation of such
series. In February 2008, we issued to Hunchun BaoLi Communication Co. Ltd. (BAOLI) and two related purchasers a total of (a) 3,101,361 shares of our common stock and (b) 611,523 shares of our Series A Preferred Stock
(convertible into 6,115,230 shares of our common stock) in exchange for net proceeds of $14.9 million in cash after offering costs of $89,000, of which $4.0 million was received in 2007. Subject to the terms and conditions of our Series A
Preferred Stock and to customary adjustments to the conversion rate, each share of our Series A Preferred Stock is convertible into ten shares of our common stock so long as the number of shares of our common stock beneficially owned by BAOLI
and affiliates following such conversion does not exceed 9.9% of our outstanding common stock. In 2013, 235,717 of these preferred shares were converted into 196,422 shares of our common stock. There was no conversion of these preferred shares into
common stock in 2012. Except for a preference on liquidation of $.01 per share, each share of Series A Preferred Stock is the economic equivalent of the ten shares of common stock into which it is convertible. There is no beneficial conversion
feature related to the conversion of the preferred shares, as the value of the common shares into which the preferred shares convert does not exceed the recorded amount of the preferred shares at the date of issuance. Except as required by law, the
Series A Preferred Stock does not have any voting rights.
Common Stock
On August 9, 2013, we consummated an underwritten public offering (Registration No. 333-189006) of units of our common stock and
warrants for gross proceeds of $12 million, and net proceeds to us of approximately $10.9 million after deducting underwriting discounts and commissions and offering expenses. In the offering, a total of 5,721,675 shares of common stock were issued,
plus an additional 954,001 shares subject to pre-funded warrants with an exercise price of $0.01 per pre-funded warrant. In addition, a total of 6,675,676 five year warrants and 3,337,838 two year warrants were issued, each with an exercise price of
$2.57. The units consisted of either (at the option of the investors): (i) one share of common stock, one five year warrant and one two year warrant sold at a price to the public of $1.799, or (ii) (for those investors whose acquisition of
our common stock through purchase of new units would cause them to own more than 9.9% of our outstanding common stock), a unit which consisted of one pre-funded warrant (in lieu of the share of common stock), one five year warrant and one two year
warrant. Because the pre-funded warrants had an exercise price of $0.01 per share, the price for a unit having a pre-funded warrant was one penny less, or $1.789 per unit. At September 28, 2013 all of the pre-funded warrants had been exercised.
Additionally, the underwriter of this offering received 117,670 warrants, each with an exercise price of $2.25, and exercisable for a period of three years commencing August 5, 2013. These warrants to our underwriter may not be exercised for a
period of 180 days following August 5, 2013.
In a registered direct offering completed April 26, 2013 we raised
proceeds of $1.95 million, net of offering costs of $236,000, from the sale of 513,827 shares of common stock and an equal number of warrants.
Equity Awards
At December 31, 2013, we had two equity award
option plans, the 2003 Equity Incentive Plan and the 2013 Equity Incentive Plan (collectively, the Stock Option Plans) although we can only grant new options under the 2013 Equity Incentive Plan. Under the Stock Option Plans, stock
awards may be made to our directors, key
F-14
employees, consultants, and non-employee directors and may consist of stock options, stock appreciation rights, restricted stock awards, performance awards, and performance share awards. Stock
options must be granted at prices no less than the market value on the date of grant.
At December 31, 2013, 1,145,000
shares of common stock were available for future grants under the Stock Option Plans.
There were no stock option exercises in
the last three years.
We granted stock options in each of the last three years. The weighted average fair value of options
has been estimated at the date of the grant using the Black-Scholes option-pricing model. The following are the significant weighted average assumptions used for estimating the fair value under our stock option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Per share fair value at grant date
|
|
$
|
1.46
|
|
|
$
|
11.16
|
|
|
$
|
16.08
|
|
Risk free interest rate
|
|
|
1.04
|
%
|
|
|
0.6
|
%
|
|
|
1.5
|
%
|
Expected volatility
|
|
|
99.4
|
%
|
|
|
100
|
%
|
|
|
111
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life in years
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
4.0
|
|
The expected life was based on the contractual term of the options and the expected employee exercise
behavior. Typically, options to our employees and Board Members have a 2 year vesting term and a 10 year contractual term and vest at 50% after one year and 50% after two years. The risk-free interest rate is based on the U. S. Treasury zero-coupon
issues with a remaining term equal to the expected option life assumed at the grant date. The future volatility is based on our 4 year historical volatility. We used an expected dividend yield of 0% because we have never paid a dividend and do not
anticipate paying dividends. We assumed a 10% aggregate forfeiture rate based on historical stock option cancellation rates over the last 4 years.
At December 31, 2013, 1,145,000 shares of common stock were available for future grants and options covering 1,152,074 shares were outstanding but not yet exercised. Option activity during the three
years ended December 31, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2010
|
|
|
90,280
|
|
|
$
|
77.16
|
|
Granted
|
|
|
52,827
|
|
|
|
21.60
|
|
Canceled
|
|
|
(28,398
|
)
|
|
|
70.32
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
114,709
|
|
|
|
53.28
|
|
Granted
|
|
|
18,125
|
|
|
|
16.32
|
|
Canceled
|
|
|
(27,451
|
)
|
|
|
56.73
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
105,383
|
|
|
|
46.08
|
|
Granted
|
|
|
1,053,333
|
|
|
|
2.13
|
|
Canceled
|
|
|
(6,642
|
)
|
|
|
100.84
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
1,152,074
|
|
|
$
|
5.58
|
|
|
|
|
|
|
|
|
|
|
F-15
The following table summarizes information concerning currently outstanding and exercisable
stock options at December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
Range of
Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted Average
Exercise Price
|
|
|
$ 2.12 - $2.12
|
|
|
|
1,020,000
|
|
|
|
9.93
|
|
|
$
|
2.12
|
|
|
|
|
|
|
$
|
|
|
|
2.52 - 2.52
|
|
|
|
33,334
|
|
|
|
9.18
|
|
|
|
2.52
|
|
|
|
|
|
|
|
|
|
|
8.14 - 18.96
|
|
|
|
39,820
|
|
|
|
7.39
|
|
|
|
18.02
|
|
|
|
33,682
|
|
|
|
18.40
|
|
|
19.32 - 61.44
|
|
|
|
45,977
|
|
|
|
4.50
|
|
|
|
49.98
|
|
|
|
45,113
|
|
|
|
50.28
|
|
|
62.40 - 843.60
|
|
|
|
12,943
|
|
|
|
1.34
|
|
|
|
90.14
|
|
|
|
12,943
|
|
|
|
9.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,152,074
|
|
|
|
9.51
|
|
|
$
|
5.58
|
|
|
|
91,738
|
|
|
$
|
44.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our outstanding options expire on various dates through December 2023. The weighted-average contractual
term of outstanding options was 9.5 years and the weighted-average contractual term of currently exercisable stock options was 5 years. At December 31, 2013, 1,020,000 outstanding options, none of which were exercisable, had an exercise price
less than the current market value and had an intrinsic value of $31,000. The number of options exercisable and their weighted average exercise price at December 31, 2012 and 2011 totaled 74,706 and $56.52 and 61,308 and $79.68, respectively.
The grant date fair value of each share of our restricted stock awards is equal to the fair value of our common stock at the
grant date. Shares of restricted stock under awards all have service conditions and vest over one to four years. Some of our grants also have performance conditions. The following is a summary of our restricted stock award transactions for the year
ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Balance nonvested at December 31, 2012
|
|
|
37,190
|
|
|
$
|
18.00
|
|
Granted
|
|
|
64,167
|
|
|
|
2.30
|
|
Vested
|
|
|
(52,225
|
)
|
|
|
10.25
|
|
Forfeited
|
|
|
(5,967
|
)
|
|
|
16.27
|
|
|
|
|
|
|
|
|
|
|
Balance nonvested at December 31, 2013
|
|
|
43,165
|
|
|
$
|
4.28
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of our restricted stock awards, their total fair value and the
fair value of all shares that have vested during each of the past three years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Weight-average grant date fair value
|
|
$
|
2.30
|
|
|
$
|
13.92
|
|
|
|
20.28
|
|
Fair value of restricted stock awards
|
|
$
|
148,000
|
|
|
$
|
358,000
|
|
|
$
|
1,009,000
|
|
Fair value of restricted stock awards vested
|
|
$
|
535,000
|
|
|
$
|
688,000
|
|
|
$
|
669,000
|
|
For the majority of restricted stock awards granted, the number of shares issued on the date the
restricted stock awards vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. For the year ended December 31, 2012 we withheld 99,323 shares to
satisfy $135,000 of employees tax obligations. There was no such withholding for the year ended December 31, 2013.
F-16
No stock compensation cost was capitalized during the periods. At December 31, 2013,
the total compensation cost related to non-vested option awards not yet recognized was $1.3 million and the
weighted-average
period over which the cost is expected to be recognized is 1.5 years. The total
compensation cost related to non-vested stock awards not yet recognized was $100,000, and the weighted-average period over which the cost is expected to be recognized is 8 months.
Warrants
The following is a summary of outstanding warrants at December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
|
|
Total
|
|
|
Currently
Exercisable
|
|
|
Price per
Share
|
|
|
Expiration Date
|
|
(1)
|
|
Warrants related to February 2012 financing
|
|
|
419,451
|
|
|
|
419,451
|
|
|
$
|
16.20
|
|
|
|
February 22, 2017
|
|
(2)
|
|
Warrants related to November 2012 financing
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
4.50
|
|
|
|
November 26, 2015
|
|
(3)
|
|
Warrants related to December 2012 financing
|
|
|
15,625
|
|
|
|
15,625
|
|
|
|
4.50
|
|
|
|
December 18, 2015
|
|
(4)
|
|
Warrants related to April 2013 financing
|
|
|
256,914
|
|
|
|
|
|
|
|
5.45
|
|
|
|
April 26, 2015
|
|
(5)
|
|
Warrants related to April 2013 financing
|
|
|
256,913
|
|
|
|
|
|
|
|
5.45
|
|
|
|
April 26, 2019
|
|
(6)
|
|
Warrants related to August 2013 financing
|
|
|
117,670
|
|
|
|
|
|
|
|
2.25
|
|
|
|
August 5, 2016
|
|
(7)
|
|
Warrants related to August 2013 financing
|
|
|
6,675,676
|
|
|
|
6,675,676
|
|
|
|
2.57
|
|
|
|
August 9, 2018
|
|
(8)
|
|
Warrants related to August 2013 financing
|
|
|
3,337,838
|
|
|
|
3,337,838
|
|
|
|
2.57
|
|
|
|
August 9, 2015
|
|
Warrants (1)-(6) are exercisable by paying cash or, solely in the absence of an effective
registration statement or prospectus, by cashless exercise for unregistered shares of common stock. The exercise price of the warrants is subject to standard antidilutive provision adjustment in the case of stock dividends or other distributions on
shares of common stock or any other equity or equity equivalent securities payable in shares of common stock, stock splits, stock combinations, reclassifications or similar events affecting our common stock, and also, subject to limitations, upon
any distribution of assets, including cash, stock or other property to our stockholders. The exercise price of the warrants is not subject to price-based anti-dilution adjustment. We have determined that these warrants related to
issuance of common stock are subject to equity treatment because the warrant holder has no right to demand cash settlement and there are no unusual anti-dilution rights.
We have determined that warrants (7) and (8) are not considered indexed to our common shares under ASC 815-40, and require separate accounting as derivative instruments with changes in fair
value recognized in earnings each period. The warrants contain a provision whereby the warrant exercise price would be decreased in the event that future common stock issuances are made at a price less than the then exercise price. Due to the
potential variability of their exercise price, these warrants do not qualify for equity treatment, and therefore are recognized as a liability. The warrant liability is adjusted to fair value each reporting period, and any change in value is
recognized in the statement of operations. Their initial August 9, 2013 valuation was determined using the binomial lattice valuation model, including an equal probabilities tree and early exercise factor of 30%, the significant weighted
average assumptions for estimating the fair value of these warrants were, respectively, as follows: expected life of five years and two years; risk free interest rates of 1.36% and 0.32%; expected volatility of 111% and 116% and; dividend yield of
0% and 0%. The initial fair value at August 9, 2013 was estimated to be slightly less than $4.2 million.
Using the
binomial lattice valuation model, including an equal probabilities tree and early exercise factor of 30%, the significant weighted average assumptions for estimating the fair value of these warrants at December 31, 2013 were, respectively, as
follows: expected life of 4.6 years and 1.6 years; risk free interest rates of 1.75% and 0.38%; expected volatility of 97% and 126% and; dividend yield of 0% and 0%., and the December 31, 2013 fair value of these warrants was estimated to be
$5.7 million. The fair value change from August 9, 2013 to December 31, 2013 was $1.6 million.
F-17
Note 6 Employee Savings Plan
In December 1989, the Board of Directors approved a 401(k) savings plan (the 401(k) Plan) for our employees
that became effective in 1990. Eligible employees may elect to make contributions under the terms of the 401(k) Plan; however, contributions by us are made at the discretion of management. We made a contribution of $96,000 to the 401(k) plan in
2013, and $108,000 and $0 in 2012 and 2011, respectively.
Note 7 Commitments and Contingencies
Operating Leases
We lease our offices and production facilities under non-cancelable operating leases in Santa Barbara, CA and Austin, TX that expire in November 2016 and March 2017, respectively. The leases contain
minimum rent escalation clauses that require additional rental amounts after the first year. Rent expense for these leases with minimum annual rent escalation is recognized on a straight line basis over the minimum lease term. These leases also
require us to pay utilities, insurance, taxes and other operating expenses and contain one five-year renewal option. The January 1, 2012 partial sublease of our Santa Barbara facility has offset some of these expenses.
For 2013, 2012 and 2011, rent expense was $868,000, $956,000, and $1,094,000, respectively.
Patents and Licenses
We have entered into various licensing agreements requiring royalty payments ranging from 0.13% to 2.5% of specified product sales. Certain of these agreements contain provisions for the payment of
guaranteed or minimum royalty amounts. In the event that we fail to pay any minimum annual royalties, these licenses may automatically be terminated
.
These royalty obligations terminate in 2014 to 2020. Royalty expenses totaled $25,000 in
each of 2013 and 2012, and $137,000 in 2011. Under the terms of certain royalty agreements, royalty payments made may be subject to audit. There have been no audits to date and we do not expect any possible future audit adjustments to be
significant.
The minimum lease payments under operating leases and license obligations are as follows:
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Licenses
|
|
|
Operating
Leases
|
|
2014
|
|
$
|
30,000
|
|
|
$
|
1,671,000
|
|
2015
|
|
|
45,000
|
|
|
|
1,723,000
|
|
2016
|
|
|
45,000
|
|
|
|
1,654,000
|
|
2017
|
|
|
45,000
|
|
|
|
87,000
|
|
2018
|
|
|
45,000
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
$
|
210,000
|
|
|
$
|
5,135,000
|
|
|
|
|
|
|
|
|
|
|
Note 8 Contractual Guarantees and Indemnities
During our normal course of business, we make certain contractual guarantees and indemnities pursuant to which we may
be required to make future payments under specific circumstances. We have not recorded any liability for these contractual guarantees and indemnities in the accompanying consolidated financial statements.
Warranties
We establish reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with our customers. Our warranty reserves are established at the time of
sale and updated throughout the warranty period based upon numerous factors including historical warranty return rates and expenses over various warranty periods.
F-18
Intellectual Property Indemnities
We indemnify certain customers and our contract manufacturers against liability arising from third-party claims of intellectual property
rights infringement related to our products. These indemnities appear in development and supply agreements with our customers as well as manufacturing service agreements with our contract manufacturers, are not limited in amount or duration and
generally survive the expiration of the contract. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, we are unable to determine the maximum amount of losses
that we could incur related to such indemnifications.
Director and Officer Indemnities and Contractual Guarantees
We have entered into indemnification agreements with our directors and executive officers, which require us to
indemnify such individuals to the fullest extent permitted by Delaware law. Our indemnification obligations under such agreements are not limited in amount or duration. Certain costs incurred in connection with such indemnifications may be recovered
under certain circumstances under various insurance policies. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed against a director or executive officer, we are unable
to determine the maximum amount of losses that we could incur relating to such indemnities. Historically, any amounts payable pursuant to such director and officer indemnities have not had a material negative effect on our business, financial
condition or results of operations.
We have also entered into severance and change in control agreements with certain of our
executives. These agreements provide for the payment of specific compensation benefits to such executives upon the termination of their employment with us.
General Contractual Indemnities/Products Liability
During the
normal course of business, we enter into contracts with customers where we agree to indemnify the other party for personal injury or property damage caused by our products. Our indemnification obligations under such agreements are not generally
limited in amount or duration. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed, we are unable to determine the maximum amount of losses that we could incur relating
to such indemnities. Historically, any amounts payable pursuant to such indemnities have not had a material negative effect our business, financial condition or results of operations. We maintain general and product liability insurance as well as
errors and omissions insurance, which may provide a source of recovery to us in the event of an indemnification claim.
Note 9 Legal Proceedings
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary
course of our business. Excluding ordinary, routine litigation incidental to our business, we are not currently a party to any legal proceedings that we believe would reasonably be expected to have a material adverse effect on our business,
financial position or results of operations or cash flows.
Note 10 Earnings Per Share
Basic earnings (loss) per share is based on the weighted-average number of common shares outstanding and diluted
earnings (loss) per share was based on the weighted-average number of common shares outstanding plus all potentially dilutive common shares outstanding.
F-19
Since their impact would be anti-dilutive, our loss per common share does not include
the effect of the assumed exercise or vesting of any of the following shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Outstanding stock options
|
|
|
1,152,074
|
|
|
|
105,383
|
|
|
|
114,709
|
|
Unvested restricted stock awards
|
|
|
43,165
|
|
|
|
37,190
|
|
|
|
53,484
|
|
Outstanding warrants
|
|
|
11,088,420
|
|
|
|
443,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,283,659
|
|
|
|
585,982
|
|
|
|
168,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Also, the preferred stock convertible into 274,104, 470,535 and 470,535 shares of common stock at
December 31, 2013, 2012 and 2011, respectively, was not included since their impact would be anti-dilutive.
Note 11 Severance Charges
In 2013, as part of our effort to reduce costs, we incurred a severance related operating expense of $14,000. In 2012,
we reduced our workforce and incurred $104,000 in severance costs.
Note 12 Details of Certain Financial Statement Components and Supplemental Disclosures of Cash Flow Information and Non-Cash
Activities
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Accounts receivable-trade
|
|
$
|
7,000
|
|
|
$
|
57,000
|
|
U.S. government accounts receivable-billed
|
|
|
|
|
|
|
67,000
|
|
Less: allowance for doubtful accounts
|
|
|
(1,000
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,000
|
|
|
$
|
122,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
563,000
|
|
|
$
|
1,031,000
|
|
Reserve for raw materials
|
|
|
(542,000
|
)
|
|
|
(1,031,000
|
)
|
Work-in-process
|
|
|
31,000
|
|
|
|
335,000
|
|
Reserve for WIP
|
|
|
(25,000
|
)
|
|
|
(314,000
|
)
|
Finished goods
|
|
|
204,000
|
|
|
|
676,000
|
|
Reserve for finished goods
|
|
|
(155,000
|
)
|
|
|
(646,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76,000
|
|
|
$
|
51,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
9,315,000
|
|
|
$
|
18,625,000
|
|
Leasehold improvements
|
|
|
7,397,000
|
|
|
|
6,675,000
|
|
Furniture and fixtures
|
|
|
387,000
|
|
|
|
387,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,099,000
|
|
|
|
25,687,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(11,626,000
|
)
|
|
|
(19,445,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,473,000
|
|
|
$
|
6,242,000
|
|
|
|
|
|
|
|
|
|
|
F-20
Depreciation expense amounted to $1,205,000, $220,000, and $701,000 in 2013, 2012 and 2011,
respectively. In 2013, 2012 and 2011 we disposed of older, fully depreciated equipment with an acquisition value of $9,405,000, $520,000 and $2,917,000, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Patents, Licenses and Purchased Technology:
|
|
|
|
|
|
|
|
|
Patents pending
|
|
$
|
434,000
|
|
|
$
|
517,000
|
|
Patents issued
|
|
|
1,176,000
|
|
|
|
1,033,000
|
|
Less accumulated amortization
|
|
|
(722,000
|
)
|
|
|
(661,000
|
)
|
|
|
|
|
|
|
|
|
|
Net patents issued
|
|
|
454,000
|
|
|
|
372,000
|
|
|
|
|
|
|
|
|
|
|
Purchased technology
|
|
|
|
|
|
|
1,706,000
|
|
Less accumulated amortization
|
|
|
|
|
|
|
(1,706,000
|
)
|
|
|
|
|
|
|
|
|
|
Net purchased technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
888,000
|
|
|
$
|
889,000
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to these items totaled $65,000, $93,000 and, $104,000 in 2013, 2012, and
2011, respectively. Amortization expenses related to these items are expected to total $71,000 in 2014 and $69,000 in 2015.
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Accrued Expenses and Other Long Term Liabilities:
|
|
|
|
|
|
Salaries payable
|
|
$
|
98,000
|
|
|
$
|
81,000
|
|
Compensated absences
|
|
|
206,000
|
|
|
|
215,000
|
|
Compensation related
|
|
|
25,000
|
|
|
|
47,000
|
|
Warranty reserve
|
|
|
151,000
|
|
|
|
227,000
|
|
Deferred rent
|
|
|
443,000
|
|
|
|
470,000
|
|
Other
|
|
|
200,000
|
|
|
|
94,000
|
|
Fair value of warrant derivatives
|
|
|
5,708,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,831,000
|
|
|
|
1,134,000
|
|
Less current portion
|
|
|
(637,000
|
)
|
|
|
(460,000
|
)
|
|
|
|
|
|
|
|
|
|
Long term portion
|
|
$
|
6,194,000
|
|
|
$
|
674,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Warranty Reserve Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
227,000
|
|
|
$
|
225,000
|
|
|
$
|
289,000
|
|
Additions
|
|
|
19,000
|
|
|
|
74,000
|
|
|
|
26,000
|
|
Deductions
|
|
|
(95,000
|
)
|
|
|
(72,000
|
)
|
|
|
(90,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
151,000
|
|
|
$
|
227,000
|
|
|
$
|
225,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,000
|
|
F-21
Note 13 Subsequent Events
From January 1, 2014 through March 21, 2014, we have received more than $3.7 million from the exercise of
more than 1.4 million outstanding warrants issued in connection with our August 2013 underwritten public offering.
Q
uarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues (1)
|
|
$
|
776,000
|
|
|
$
|
555,000
|
|
|
$
|
229,000
|
|
|
$
|
150,000
|
|
Loss from operations
|
|
|
2,233,000
|
|
|
|
2,380,000
|
|
|
|
3,370,000
|
|
|
|
2,499,000
|
|
Net loss
|
|
|
2,408,000
|
|
|
|
2,436,000
|
|
|
|
3,454,000
|
|
|
|
3,875,000
|
|
Basic and diluted loss per common share
|
|
$
|
(0.58
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(0.34
|
)
|
Weighted average number of shares outstanding
|
|
|
4,152,036
|
|
|
|
4,521,731
|
|
|
|
8,176,262
|
|
|
|
11,527,366
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues (1)
|
|
$
|
399,000
|
|
|
$
|
596,000
|
|
|
$
|
1,331,000
|
|
|
$
|
1,133,000
|
|
Loss from operations (2)
|
|
|
3,006,000
|
|
|
|
3,443,000
|
|
|
|
2,270,000
|
|
|
|
2,307,000
|
|
Net loss
|
|
|
2,988,000
|
|
|
|
3,419,000
|
|
|
|
2,262,000
|
|
|
|
2,259,000
|
|
Basic and diluted loss per common share
|
|
$
|
(1.35
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
(0.69
|
)
|
|
$
|
(0.65
|
)
|
Weighted average number of shares outstanding
|
|
|
2,964,811
|
|
|
|
3,325,383
|
|
|
|
3,292,650
|
|
|
|
3,490,231
|
|
(1)
|
Our revenues vary from quarter to quarter as our customers provide minimal lead-time prior to the release of their purchase orders and have non-binding commitments to
purchase from us.
|
(2)
|
Includes increased reserve for inventory obsolescence of $92,000, $90,000, $88,000 and zero, respectively, in the 2012 quarters.
|
F-22