See accompanying notes to the unaudited interim condensed consolidated financial statements.
See accompanying notes to the unaudited interim condensed consolidated financial statements.
Note – December 31, 2013 balances were derived from the audited consolidated financial statements.
See accompanying notes to the unaudited interim condensed consolidated financial statements.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. 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. 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 electronics industry. 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 production of HTS Conductus
®
wire for next generation power applications. While most our current commercial product revenues come from the sale of high performance wireless infrastructure
products, production of our Conductus HTS wire is our principal opportunity to grow our future revenue.
The unaudited condensed
consolidated financial information furnished herein has been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and reflects all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management, are necessary for a fair statement of the results of operations for the periods presented.
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions
that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.
This quarterly report on Form 10-Q should be read in conjunction with our Form 10-K for 2013. The results of operations for the three months ended March 29, 2014 are not necessarily indicative of the results for all of 2014.
2. Summary of Significant Accounting Policies
Basis of Presentation
We have incurred significant net losses since our inception and had an accumulated deficit of $277.0 million as of March 29, 2014.
For the three months ended March 29, 2014, we incurred a net loss of $2.9 million and negative cash flows from operations of $2.0 million. For all of 2013, we incurred a net loss of $12.2 million and had negative cash flows from operations of
$8.3 million. These factors raise substantial doubt about our ability to continue as a going concern.
At March 29, 2014, we had $7.8
million in cash and cash equivalents, including more than $3.7 million from the exercise of 1,459,398 outstanding warrants during the quarter. Since March 29, 2014, through May 2, 2014, there have been no additional warrant exercises. Our
cash resources will not be sufficient to fund our business for the next twelve months. We may need to additional funds to meet our working capital needs and 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. Our independent registered public
accounting firm has also included in their audit reports for 2013 and 2012 an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
5
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. 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. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of
these uncertainties.
We have reviewed recently issued Financial Accounting Standards Board pronouncements and do not believe they will
have a material impact on our condensed consolidated financial statements.
Principles of Consolidation
The interim condensed consolidated financial statements include the accounts of Superconductor Technologies Inc. and its wholly owned
subsidiaries. All significant intercompany transactions have been eliminated from the condensed 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 we believe 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 collectibility. Accounts 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 customer’s 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.
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. An estimate by us for warranty related costs is recorded by us 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
6
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 and are not
reversed until we sell or dispose of the related 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 expense immediately.
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 seven 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 expense 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 recorded in selling, general and administration expenses. In the first quarter of 2014, there were no retirements or disposals and we realized
gains of $96,000 from the sale of previously retired equipment. In 2013, there were disposals and retirements totaling $9.4 million and gains of $98,000 from disposals.
Patents, Licenses and Purchased Technology
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 must 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 during 2013 and determined there was no impairment.
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 it using the equity method and included it in
Other assets
for both periods.
On 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 and March 29, 2014, respectively. Resonant Inc. filed a registration statement with the Securities and Exchange
Commission in January 2014. Upon conversion of our note, we would own, before any such 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.
7
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.
Other Investments
From time to time we may pursue joint ventures with other entities to commercialize our technology. In 2007, we formed a joint venture with
Hunchun BaoLi Communication Co. Ltd. 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 U.S. 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
.
We incurred no expenses in the quarter ended March 29, 2014 or in the full year 2013 as a result of this joint venture.
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 expensed 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 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. The adoption of this guidance has not had a material impact on our consolidated
financial statements as we concluded our tax positions are highly certain of being settled at 100% of the benefit claimed. Guidance is also provided on the accounting for the related interest and penalties, financial statement and disclosure. We are
currently not under examination by any taxing authority nor have we been notified of an impending examination. The oldest tax year that remains open to possible evaluation and interpretation of our tax position is 2010.
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. However, during 2013, we concluded that under the Internal Revenue Code change of control limitations, a maximum of $17.4 million and $16.8 million,
respectively, would be available for reduction of taxable income and reduced both the deferred tax asset and valuation allowance accordingly. Due to the uncertainty surrounding their realization, we recorded a full valuation allowance against our
net deferred tax assets. Accordingly, no deferred tax asset has been recorded in the accompanying condensed consolidated balance sheets.
Marketing
Costs
All costs related to marketing and advertising our products are charged to expense as incurred or at the time the advertising
takes place. Advertising costs were not material in each of the quarters ended March 29, 2014 and March 30, 2013.
8
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. Potential common shares are not included in the calculation of diluted loss per share because their effect is anti-dilutive.
Stock-based Compensation
We grant both
restricted stock awards and stock options to our key employees, directors and consultants. For the quarters ended March 29, 2014 and March 30, 2013, the weighted average fair value of options was 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
March 29, 2014
|
|
|
March 30, 2013
|
|
|
Expected life in years
|
|
|
4.0
|
|
|
|
4.0
|
|
|
Risk free interest rate
|
|
|
1.1
|
%
|
|
|
0.6
|
%
|
|
Expected volatility
|
|
|
100.2
|
%
|
|
|
93.3
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The stock-based compensation expense for our restricted stock awards is measured at fair value on the date of
grant based on the number of shares expected to vest and the quoted market price of our common stock. The expected life was based on the contractual term of the options and expected employee exercise behavior. Typically, options to our employees
have a 2 to 4 year vesting term and a 10 year contractual term. The risk-free interest rate is based on 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. Our actual 2013 forfeiture rate was 25% and we assumed a 20% forfeiture rate in the
period ending March 29, 2014 based on our historical stock option cancellation rates over the last 4 years.
The following table
presents details of total stock-based compensation expense that is included in each functional line item on our condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
March 29, 2014
|
|
|
March 30, 2013
|
|
|
Research and development
|
|
$
|
48,000
|
|
|
$
|
55,000
|
|
|
Selling, general and administrative
|
|
|
139,000
|
|
|
|
111,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
187,000
|
|
|
$
|
166,000
|
|
|
|
|
|
|
|
|
|
|
|
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP 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 financial statements and the reported amounts of revenues and expenses during the reporting periods. The significant
estimates in the preparation of the financial statements relate to the assessment of the carrying amount of accounts receivable, inventory, fixed assets, intangibles, estimated provisions for warranty costs, fair value of warrant derivatives, income
taxes and disclosures related to litigation. Actual results could differ from those estimates and such differences may be material to the condensed 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 March 29, 2014 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
9
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)
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 Adjustments to fair value of derivatives. See Note 3 — Stockholder’s Equity:
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 SuperLink,
AmpLink and SuperPlex products. We currently sell most of our products directly to wireless network operators in the United States.
Certain Risks and
Uncertainties
Our long-term prospects are dependent upon the successful commercialization and market acceptance or 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. At March 29, 2014, we had two customers that represented 86% and 10% of total net revenues and 99% of accounts receivable. In 2013, these two customers represented 63% and 33% of
total net revenues and 89% of 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
indemnity obligations because of the uncertainty as to whether a claim might arise and how much it might total.
3. Stockholders’ Equity
The following is a summary of stockholders’ equity transactions for the three months ended March 29, 2014:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred Stock
|
|
|
|
|
|
Capital in
Excess of
Par Value
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
328,925
|
|
|
$
|
—
|
|
|
|
11,634,950
|
|
|
$
|
12,000
|
|
|
$
|
281,411,000
|
|
|
$
|
(274,117,000
|
)
|
|
$
|
7,306,000
|
|
|
Issuance of common stock from exercise of outstanding warrants
|
|
|
|
|
|
|
|
|
|
|
1,459,398
|
|
|
|
1,000
|
|
|
|
3,750,000
|
|
|
|
|
|
|
|
3,751,000
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
187,000
|
|
|
|
|
|
|
|
187,000
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,935,000
|
)
|
|
|
(2,935,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 29, 2014
|
|
|
328,925
|
|
|
$
|
—
|
|
|
|
13,119,348
|
|
|
$
|
13,000
|
|
|
$
|
285,348,000
|
|
|
$
|
(277,052,000
|
)
|
|
$
|
8,309,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Stock Options
At March 29, 2014, we had two active equity award option plans, the 2003 Equity Incentive Plan and the 2013 Equity Incentive Plan
(collectively, the “Stock Option Plan”), although we can only grant new options under the 2013 Equity Incentive Plan. Under the Stock Option Plans, stock awards were made to our directors, key employees, consultants, and non-employee
directors and consisted of stock options, stock appreciation rights, restricted stock awards, performance awards, and performance share awards. Stock options were granted at prices no less than the market value on the date of grant. There were no
stock option exercises during the three months ended March 29, 2014 or during the three months ended March 30, 2013.
The impact
to the condensed consolidated statements of operations for the quarter ended March 29, 2014 on net loss was $152,000 and $0.01 on basic and diluted net loss per common share and for the quarter ended March 30, 2013 the impact was $80,000
and $0.02 on basic and diluted net loss per common share. No stock compensation cost was capitalized during either period. The total compensation cost related to nonvested awards not yet recognized was $1.5 million and the weighted-average period
over which the cost is expected to be recognized was 1.9 years at March 29, 2014.
The following is a summary of stock option
transactions under our stock option plans at March 29, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Price Per Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Options
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Balance at December 31, 2013
|
|
|
1,152,074
|
|
|
$
|
2.12 - $ 843.60
|
|
|
$
|
5.58
|
|
|
|
91,738
|
|
|
$
|
44.18
|
|
|
Granted
|
|
|
50,000
|
|
|
|
2.85
|
|
|
|
2.85
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(120
|
)
|
|
|
96.00 - 843.60
|
|
|
|
404.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 29, 2014
|
|
|
1,201,954
|
|
|
$
|
2.12 - $555.00
|
|
|
$
|
5.43
|
|
|
|
114,174
|
|
|
$
|
36.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The outstanding options expire on various dates through the end of December 2023. The weighted-average
contractual term of options outstanding is 9.3 years and the weighted-average contractual term of stock options currently exercisable is 5.6 years. The exercise prices for these options range from $2.52 to $555 per share, for an aggregate exercise
price of approximately $6.5 million. At March 29, 2014, outstanding options covering 1,053,334 shares, with an intrinsic value of $661,000, had an exercise price less than the current market value and 16,668 of these options were exercisable,
with an intrinsic value of $4,000.
Restricted Stock Awards
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 at March 29, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
Balance nonvested at December 31, 2013
|
|
|
43,165
|
|
|
$
|
4.28
|
|
|
Granted
|
|
|
25,000
|
|
|
|
2.76
|
|
|
Vested
|
|
|
(13,932
|
)
|
|
|
7.38
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance nonvested at March 29, 2014
|
|
|
54,233
|
|
|
$
|
3.13
|
|
|
|
|
|
|
|
|
|
|
|
The impact to the condensed consolidated statements of operations for the three months ended March 29,
2014 was $35,000 and less than $0.01 on basic and diluted net loss per common share and for the quarter ended March 30, 2013 the impact was $86,000 and $0.02 on basic and diluted net loss per common share. No stock compensation cost was
capitalized during the period. The total compensation cost related to nonvested awards not yet recognized was $149,000 and the weighted-average period over which the cost is expected to be recognized was 1.2 years.
11
Warrants
The following is a summary of outstanding warrants at March 29, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
117,670
|
|
|
|
2.25
|
|
|
|
August 5, 2016
|
|
|
(7)
|
|
Warrants related to August 2013 financing
|
|
|
6,117,383
|
|
|
|
6,117,383
|
|
|
|
2.57
|
|
|
|
August 9, 2018
|
|
|
(8)
|
|
Warrants related to August 2013 financing
|
|
|
2,436,733
|
|
|
|
2,436,733
|
|
|
|
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.
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.
At March 29, 2014 the
significant weighted average assumptions for estimating the fair value of these warrants were, respectively, as follows: expected life of 4.4 years and 1.4 years; risk free interest rates of 1.49% and 0.25%; expected volatility of 99% and 136% and;
dividend yield of 0% and 0%., and the March 29, 2014 fair value of these warrants was estimated to be $5.9 million. The fair value change from December 31, 2013 to March 29, 2014 was $0.2 million.
From January 1, 2014 through March 29, 2014, we have received more than $3.7 million from the exercise of 1,459,398 outstanding
warrants issued in connection with our August 2013 underwritten public offering. Since March 29, 2014, through May 2, 2014, there have been no additional warrant exercises.
4. Earnings Per Share
Basic and diluted net earnings (loss) per share is based on the weighted-average number of common shares outstanding.
12
Since their impact would be anti-dilutive, our net loss per common share does not include
the effect of the assumed exercise or vesting of the following shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2014
|
|
|
March 30, 2013
|
|
|
Outstanding stock options
|
|
|
1,201,954
|
|
|
|
137,534
|
|
|
Unvested restricted stock awards
|
|
|
54,233
|
|
|
|
45,803
|
|
|
Outstanding warrants
|
|
|
9,629,022
|
|
|
|
443,409
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,885,209
|
|
|
|
626,746
|
|
|
|
|
|
|
|
|
|
|
|
Also, the preferred stock convertible into 274,104 shares of common stock was not included since its impact
would be
anti-dilutive.
5. 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.
In April 2014 documents were signed to amend our Santa Barbara, CA building operating lease and reduced our lease commitment. Instead of
leasing approximately 71,000 square feet and partially subleasing to other tenants, we will now lease approximately 35,000 square feet and our former principal tenant will lease their portion of the building directly from our landlord. Other terms
and conditions of the lease remain the same. Our table of minimum operating lease payments listed below has not yet been updated to reflect this reduced commitment going forward.
For the three months ended March 29, 2014 and March 30, 2013, rent expense was $229,000 and $221,000 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 minimum annual royalties, these licenses may automatically become non-exclusive or be terminated. These royalty obligations terminate at various times from 2014 to 2021. For each of the three months ended March 29, 2014 and March 30,
2013, royalty expense totaled $6,000. 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 future audit adjustments to be significant.
The minimum lease payments under operating leases and license obligations as of March 29, 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years ending December 31,
|
|
Licenses
|
|
|
Operating Leases
|
|
|
Remainder of 2014
|
|
$
|
30,000
|
|
|
$
|
1,253,000
|
|
|
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
|
|
|
$
|
4,717,000
|
|
|
|
|
|
|
|
|
|
|
|
6. 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 condensed consolidated financial statements.
13
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.
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 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 indemnities.
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 indemnities 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.
7. Details of Certain Financial Statement Components and Supplemental Disclosures of Cash Flow Information and Non-Cash Activities
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
|
December 31,
2013
|
|
|
Accounts receivable
:
|
|
|
|
|
|
|
|
|
|
Accounts receivable-trade
|
|
$
|
309,000
|
|
|
$
|
7,000
|
|
|
U.S. government accounts receivable-billed
|
|
|
—
|
|
|
|
—
|
|
|
Less: allowance for doubtful accounts
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
308,000
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
|
December 31,
2013
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
565,000
|
|
|
$
|
563,000
|
|
|
Less: Raw material reserves
|
|
|
(542,000
|
)
|
|
|
(542,000
|
)
|
|
Work-in-process
|
|
|
30,000
|
|
|
|
31,000
|
|
|
Less: Work-in-process reserves
|
|
|
(25,000
|
)
|
|
|
(25,000
|
)
|
|
Finished goods
|
|
|
213,000
|
|
|
|
204,000
|
|
|
Less: Finished goods reserves
|
|
|
(162,000
|
)
|
|
|
(155,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,000
|
|
|
$
|
76,000
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
|
December 31,
2013
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
10,812,000
|
|
|
$
|
9,315,000
|
|
|
Leasehold improvements
|
|
|
7,397,000
|
|
|
|
7,397,000
|
|
|
Furniture and fixtures
|
|
|
387,000
|
|
|
|
387,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,596,000
|
|
|
|
17,099,000
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(11,938,000
|
)
|
|
|
(11,626,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,658,000
|
|
|
$
|
5,473,000
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense amounted to $312,000 and $218,000 for the three month periods ended March 29, 2014
and March 30, 2013, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
|
December 31,
2013
|
|
|
Patents and Licenses:
|
|
|
|
|
|
|
|
|
|
Patents pending
|
|
$
|
454,000
|
|
|
$
|
434,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents issued
|
|
|
1,176,000
|
|
|
|
1,176,000
|
|
|
Less accumulated amortization
|
|
|
(740,000
|
)
|
|
|
(722,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net patents issued
|
|
|
436,000
|
|
|
|
454,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
890,000
|
|
|
$
|
888,000
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to these items totaled $18,000 and $16,000, for the three month periods ended
March 29, 2014 and March 30, 2013, respectively. Amortization expenses are expected to total $59,000 for the remainder of 2014 and $70,000 for 2015 and $69,000 for 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
|
December 31,
2013
|
|
|
Accrued Expenses and Other Long Term Liabilities:
|
|
|
|
|
|
|
|
|
|
Salaries Payable
|
|
$
|
125 000
|
|
|
$
|
98,000
|
|
|
Compensated Absences
|
|
|
217,000
|
|
|
|
206,000
|
|
|
Compensation related
|
|
|
64,000
|
|
|
|
25,000
|
|
|
Warranty reserve
|
|
|
146,000
|
|
|
|
151,000
|
|
|
Deferred rent
|
|
|
431,000
|
|
|
|
443,000
|
|
|
Other
|
|
|
179,000
|
|
|
|
200,000
|
|
|
Fair value of warrant derivatives
|
|
|
5,940,000
|
|
|
|
5,708,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,102,000
|
|
|
|
6,831,000
|
|
|
Less current portion
|
|
|
(709,000
|
)
|
|
|
(637,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long term portion
|
|
$
|
6,393,000
|
|
|
$
|
6,194,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended,
|
|
|
|
|
March 29, 2014
|
|
|
March 30, 2013
|
|
|
Warranty Reserve Activity:
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
151,000
|
|
|
$
|
227,000
|
|
|
Additions
|
|
|
—
|
|
|
|
2,000
|
|
|
Deductions
|
|
|
(5,000
|
)
|
|
|
(18,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
146,000
|
|
|
$
|
211,000
|
|
|
|
|
|
|
|
|
|
|
|
8. Subsequent Events
In April 2014 documents were signed to amend our Santa Barbara, CA building operating lease and reduced our lease
commitment. Instead of leasing approximately 71,000 square feet and partially subleasing to other tenants, we will now lease approximately 35,000 square feet and our former principal tenant will lease their portion of the building directly from our
landlord. Other terms and conditions of the lease remain the same. Our table of minimum operating lease payments listed above has not yet been updated to reflect this reduced commitment going forward.
15