Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
or No
x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act. Yes
¨
or No
x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
x
or No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
x
or No
¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.
¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
¨
or No
x
The aggregate market value of the common stock held by non-affiliates was $15.4 million
as of June 27, 2015 (the last business day of our
most recently completed second fiscal quarter). The closing price of the common stock on that date was $1.05 as reported by the NASDAQ Capital Market. For purposes of this determination, we excluded the shares of common stock held by each
officer and director and by each person who was known to us to own 10% or more of the outstanding common stock as of June 27, 2015. The exclusion of shares owned by the aforementioned individuals and entities from this calculation does not
constitute an admission by any of such individuals or entities that he or it was or is an affiliate of ours.
We had 40,748,218 shares of
common stock outstanding as of the close of business on March 15, 2016.
PART I
ITEM 1.
BUSINESS
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 electricity 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, reduce power loss, and lowering heat generation providing extremely high current carrying
density and zero resistance to direct current.
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 develop 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 late 2010, we transitioned our research and development efforts to adapting our proprietary HTS material deposition techniques to the
production of our HTS Conductus
®
wire for next generation power applications, which is our primary opportunity to grow our future revenues. We continue to generate revenue from our legacy
wireless communications products. This revenue has been declining and we expect this trend to continue until we completely abandon these products.
Our
Proprietary Technology
Our development efforts over the last 28 years have yielded an extensive patent portfolio as well as critical
trade secrets, unpatented technology and proprietary knowledge. 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 2016
to 2031. We enter into confidentiality and non-disclosure agreements with our employees, suppliers and consultants to protect our proprietary information.
Our strategic plan is to utilize our core proprietary technology in superconductivity and leverage our proprietary manufacturing processes to
build Conductus wire for use in electrical power devices. As discussed above, we are adapting our unique HTS material deposition techniques to produce 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 superconducting wire including energy (wind turbines, cables, fault current limiters), medical (NMR (nuclear magnetic resonance and MRI (magnetic
resonance imaging)), science (high performance magnets) and industrial (motors, generators) applications. We are working with leading industry device manufactures to complete qualification and acceptance testing of Conductus wire. We
expect significant commercial production of Conductus wire in the last half of 2016.
Our development efforts (including those described
under Our Future Business 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.
3
Our Future Business
We have created several unique capabilities and HTS manufacturing systems related to our Conductus wire platform that we are seeking to produce
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 high field magnets.
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 consist of the cable, which is comprised of 100s 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 substationsespecially in dense urban areasis 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 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 and MRI 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).
4
NMR and MRI device manufacturers look towards advances in superconducting technologies to improve the overall performance of their systems by dramatically 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.
Other Assets and Investments
In
September 2014, STI and Robinson Research Institute entered a strategic agreement to jointly engage end customers and partners in the building of superconductor products utilizing our
Conductus
®
superconducting wire and Robinson Research Institutes superconducting device technology. The Robinson Research Institute, based at Victoria University of Wellington in New
Zealand, has unique capabilities in the production of HTS Roebel cable used in superconducting machines and magnets, and in the development of HTS MRI and HTS transformers. The Robinson Research Institute has been a valuable ally as we prepare for
the commercial launch of Conductus wire; Robinsons performance characterization expertise and applications knowledge are truly impressive. As we move to full production, we are implementing a comprehensive plan to supply Conductus wire and
support global leaders in the commercialization of superconducting devices. Robinson is an expert in the development of innovative superconducting products. Jointly, we have identified initial projects including applications such as rotating
machines, transformers, scientific magnets and MRI systems. Additionally, Robinson and its partners have a strong focus on Asia and we believe our agreement will help us expand our reach into that fast-growing market. Working alongside many industry
leaders, the Robinson Research Institute and its partners have built superconducting devices for the energy industry, recently completing a transformer for use in the electrical grid. In the healthcare market, Robinson has focused on applications of
MRI systems where HTS wire gives a competitive advantage.
In July 2012, we contributed 14 issued and pending patents regarding our
innovative Reconfigurable Resonance (RcR) technology in exchange for a minority investment in Resonant LLC. As of December 31, 2013 our interest in Resonant and the net value of the assets contributed, estimated to approximate fair value, was
$185,000. In late September 2014 we entered into a private transaction to sell this minority interest to various buyers for gross proceeds to us of $3.6 million, and net proceeds to us of $3.3 million after offering expenses.
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 specified 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, there has been no significant progress to manufacture and sell our SuperLink interference elimination solution in China and the parties have not completed
their contributions to the joint venture within the two year period specified by the agreement and Chinese law. We see our primary opportunity to grow future revenues with the production of our HTS Conductus
®
wire, and do not expect this joint venture to be a significant part of future revenues.
Licenses
We grant licenses for our
technology to other companies. We have granted licenses to, among others, (1) Bruker for Nuclear Magnetic Resonance application, (2) General Dynamics for government applications, (3) Star Cryoelectronics for Superconducting Quantum
Interference Device applications and (4) Theva for network infrastructure wireless electronic devices.
Government Contracts
We did not generate revenues from government contracts in the last three years.
5
Manufacturing
Our manufacturing process involves the operation of sophisticated production equipment and material handling by production technicians. We
purchase inventory components and manufacture inventory based on existing customer purchase requests, and to a lesser extent, on sales forecasts. Our primary facility is our advanced manufacturing center in Austin, Texas. This 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. Sales of our Conductus wire are expected
to increase as we reach production scale in the second half of 2016 and beyond. We currently assemble and test our wireless communications products at our facilities in Santa Barbara, California.
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. 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
We utilize a direct selling model due to the concentrated customer base for superconducting wire.
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. Our primary competitors are American
Superconductor (AMSC), SuperPower (Furukawa), SuNam, Fujikura, Sumitomo and THEVA, among others.
Research and Development
Our 2013 through 2015 research and development activities were focused entirely on developing our Conductus wire product. We spent a total
of $4.1 million for 2015, and $6.0 million and $6.1 million for 2014 and 2013, respectively, on research and development.
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 2016 to 2031. 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. However, the use and disposal of hazardous
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materials involves the 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
principal executive offices are located at 9101 Wall Street, Suite 1300, Austin, Texas 78754. Our telephone number is (512) 334-8900. 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, 2015, we had a total of 25 full time 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 $58,000 at December 31, 2015, compared to $63,000 at December 31, 2014.
7
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 2015, we incurred a
net loss of $8.6 million and had negative cash flows from operations of $8.5 million. In 2014, we incurred a net loss of $8.3 million and had negative cash flows from operations of $10 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 may not maintain profitability, we may not
realize our investment in infrastructure, and may not meet our expectations or the expectations of financial analysts who report on our stock.
We need to raise additional capital. 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, 2015, we had $7.5 million in cash and cash equivalents. Our current
forecast is that our cash resources will be sufficient to fund our planned operations into the fourth quarter of 2016. Our cash resources will not be sufficient to fund our business for the next twelve months. Therefore, unless we can
materially grow our revenues from commercial operations during such period, we will need to raise additional capital during the next 12-months to implement our current business plan and maintain the viability of the Company.
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 to grow our commercial resources, we might be forced to make changes to, or delay aspects of, our business plan 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 can 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.
8
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 2016. Conductus
®
wire is
uniquely positioned to address three key technical challenges in the market: high performance, improved economics and commercial-scale capacity. To date, we, along with existing HTS wire manufacturers, have not overcome these challenges to allow for
broad commercialization of HTS wire. 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.
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. The high demand for high 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 limited 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 to 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 expect continued customer pressures to reduce our product pricing which may adversely affect our ability to
operate on a commercially viable basis.
We expect to face pressure to reduce prices and accordingly, the average selling price of
our Conductus wire. We anticipate customer pressure on our product pricing will continue for the foreseeable future. HTS wire is currently being sold at $250/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.
9
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 (AMSC), SuperPower (Furukawa), SuNam, Fujikura, Sumitomo and THEVA, among others. 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 may experience significant fluctuations in sales and operating results from quarter to quarter.
Our quarterly results may 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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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. 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 have limited 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.
Worldwide economic uncertainty may adversely affect our business, operating results and financial condition.
The United States and global economies continue to experience a period of economic and financial uncertainty, which could result in economic
volatility having direct and indirect adverse effects on our business, operating results and financial condition in a number of ways. For example, current or potential customers may
10
delay or decrease spending with us may delay paying us for previously purchased products, or may not pay us at all. In addition, this recent downturn has had, and may continue to have, an
unprecedented negative impact on the global credit markets. 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 to 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. 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
11
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.
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 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. 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.
12
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 the imposition of fines, 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
13
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 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
addition 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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Risks Related to Our Common Stock
Our stock price is volatile.
The
market price of our common stock has been, and is expected 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.
On October 30, 2015, we received a letter from the Listing Qualifications Department of The Nasdaq Stock Market notifying us that the minimum
bid price per share for our common stock fell below $1.00 for a period of 30 consecutive business days and that therefore we did not meet the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2).
We have been provided 180 calendar days, or until April 27, 2016, to regain compliance with the minimum bid price requirement. In
accordance with Rule 5810(c)(3)(A), we can regain compliance if at any time during the 180-day period the closing bid price of our common stock is at least $1.00 for a minimum of 10 consecutive business days. If by April 27, 2016, we
cannot demonstrate compliance with the Rule 5550(a)(2), we may be eligible for additional time. To qualify for additional time, we will be required to meet the continued listing requirement for market value of publicly held shares and all other
initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of our intention to cure the deficiency during the second compliance period. If we are not eligible for
the second compliance period, then the Nasdaq Staff will provide notice that our securities will be subject to delisting. At such time, we may appeal the delisting determination to a Hearings Panel.
We continue to monitor the closing bid price of our common stock and may, if appropriate, consider implementing available options to regain
compliance with the minimum bid price requirement. If our common stock is delisted by The Nasdaq Stock Market, our common stock may be eligible to trade in an 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, 2015, we had outstanding options exercisable for an aggregate of 1,973,606 shares of common stock at a weighted average
exercise price of $2.54 per share and warrants to purchase up to 57,451,915 shares of our common stock at a weighted average exercise price of $0.55 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.
15
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, as amended our 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 15, 2016, 1,383,727 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.
Furthermore, 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 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.
ITEM 1B.
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UNRESOLVED 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 14,000 square feet in Santa Barbara, California and 94,000 square feet in Austin, Texas under
long-term leases that expire in November 2016 and April 2017, respectively. 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. Both leases contain renewal options.
ITEM 3.
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LEGAL PROCEEDINGS
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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 DISCLOSURES
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Not applicable.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1The 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. We are now leveraging our key enabling technologies in 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, CA for certain business operations and our legacy 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.
Note 2Summary of Significant Accounting Policies
Basis of Presentation
We have incurred significant net losses since our inception and have an accumulated deficit of $291 million. In 2015, we incurred a net loss of
$8.6 million and had negative cash flows from operations of $8.5 million. In 2014, we had an accumulated deficit of $282 million, a net loss of $8.3 million and negative cash flows from operations of $10 million. At December 31, 2015, we had $7.5
million in cash. Our cash resources will not be sufficient to fund our business for the next 12 months. We will need to grow our revenues from commercial operations and/or raise additional funds over the next 12-months 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 changes to, or delay aspects of, our business plan, 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. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of the uncertainties set forth above.
F-6
In 2015, we undertook steps to reduce our ongoing operating costs through headcount reductions
and other cost saving efforts and we raised net cash proceeds of $14.9 million from the sale of our common shares and warrants.
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 2015. 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, 2015.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The
amendments to this update supersede nearly all existing revenue recognition guidance under GAAP. The standard was originally set to become effective in annual periods beginning after December 15, 2016 and for interim and annual reporting
periods thereafter. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers; Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for all entities by one year, thereby delaying the
effective date of the standard to January 1, 2018, with an option that would permit companies to adopt the standard as early as the original effective date. Early adoption prior to the original effective date is not permitted. The core
principle of this Topic is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This Topic defines a five-step
process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the
contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. We have not yet assessed the impact of ASU 2014-09.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial StatementsGoing Concern
(Sub-Topic 205-40)
, which provides guidance in GAAP about managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote
disclosures. This update is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. We have early adopted this guidance.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
, which provides new guidance
regarding the measurement of inventory. The new guidance requires most inventory to be measured at the lower of cost or net realizable value. The standard defines net realizable value as estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal and transportation. The standard applies to companies other than those that measure inventory using last-in, first-out (LIFO) or the retail inventory method. The standard will be
effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. Early application is permitted. We have not yet evaluated the impact of the adoption of this accounting standard
on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases,
which replaces the existing guidance in ASC 840, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a
F-7
ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will
be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the
income statement. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and requires retrospective
application. We will adopt in Fiscal 2019 and are currently evaluating the impact of ASU 2016-02 to our consolidated financial statements.
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 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 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 2006 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.
F-8
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 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 operations 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 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 2015 and 2014 there were
disposals totaling $99,000 and $8 million, respectively, and gains of $1,000 and $96,000, respectively, from these disposals.
F-9
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 be used in operations and 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. Market acceptance and significant revenues from our new Conductus wire is a key assumption in realization of our investment in long-lived assets. 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 each of the last three years 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 June 2013, our interest
in Resonant was 30%, and the net value of the assets contributed, estimated to approximate fair value was $185,000. We had accounted for this investment using the equity method and included it in
Other assets
for both periods. At June 2013 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 was subordinated to a third party lender and was only convertible in the event Resonant, Inc.
conducted an initial public offering and certain other conditions were met. We determined that our net equity interest of $185,000 approximated the fair value of the note receivable at December 31, 2013.
At May 29, 2014, the note receivable was converted into 700,000 common shares of Resonant. These common shares represented 10.2% of
Resonants outstanding shares (including over-allotment) and could not be traded without the consent of the underwriter of the initial public offering for a period of twelve months after the initial public offering date of May 29, 2014. In late
September 2014 we entered into a private transaction to sell this minority interest to various buyers for gross proceeds to us of $3.6 million, and net proceeds to us of $3.3 million after offering expenses.
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, and our ability to realize our investment in these assets. The accompanying consolidated financial statements do not include any adjustments that may
result from the outcome of these uncertainties.
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. Legal fees are recorded as services are provided. The costs of our defense in such matters are charged
to operations as incurred. Insurance proceeds recoverable are recorded when deemed probable.
F-10
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 the current year. 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 California and federal statute of limitations for examination of us is open for 2011 and 2012, respectively, 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, 2015.
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 option pricing 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 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 they do not consider other factors important to
those awards to employees, such as continued employment and periodic vesting.
F-11
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:
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2015
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2014
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2013
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Cost of revenue
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|
$
|
10,000
|
|
|
$
|
|
|
|
$
|
1,000
|
|
Research and development
|
|
|
332,000
|
|
|
|
204,000
|
|
|
|
169,000
|
|
Selling, general and administrative
|
|
|
1,856,000
|
|
|
|
658,000
|
|
|
|
322,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,198,000
|
|
|
$
|
862,000
|
|
|
$
|
492,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impact to the consolidated statements of operations for 2015, 2014 and 2013 on basic and diluted earnings
per share was $0.11, $0.07 and $0.07, respectively. No stock compensation cost was capitalized during the three year period ended December 31, 2015.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted 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, and other current liabilities as of December 31, 2015 and December 31, 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 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 Adjustment to Fair Value of Derivatives. See Note 5
Stockholders Equity - Warrants
.
F-12
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 have historically operated in a single business segment: the research, development, manufacture and marketing of high performance
products used in cellular base stations. We derived net commercial product revenues primarily from the sales of our AmpLink and SuperPlex products which we sold directly to wireless network operators in the United States. Net revenues derived
principally from government contracts are presented separately on the consolidated statements of operations for all periods presented. As discussed in this Report, we are adapting our unique HTS material deposition techniques to produce our energy
efficient, cost-effective and high performance Conductus wire. We expect commercial level sales of our Conductus wire products later this year.
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 2015, we had two customers that represented 70% and 10% of total net revenues and 40% of our accounts receivable. In 2014, these two customers represented 52% and 31% of
total net revenues and 95% 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 this Report and other filings with the Securities and Exchange
Commission.
Note 3Short Term Borrowings
None
Note 4Income Taxes
We incurred a net loss in each year of operation since inception resulting in no current or deferred tax expense for 2015, 2014 or 2013.
F-13
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 2015, 2014 and 2013 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Tax benefit computed at federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Increase (decrease) in taxes due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(30.0
|
)
|
|
|
(39.8
|
)
|
|
|
(39.8
|
)
|
Permanent differences (stock options, warrant fair value, other)
|
|
|
(9.8
|
)
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Loss carryforwards
|
|
$
|
15,208,000
|
|
|
$
|
11,490,000
|
|
Depreciation
|
|
|
1,084,000
|
|
|
|
1,490,000
|
|
Tax credits
|
|
|
574,000
|
|
|
|
388,000
|
|
Inventory
|
|
|
308,000
|
|
|
|
292,000
|
|
Other
|
|
|
101,000
|
|
|
|
280,000
|
|
Less: valuation allowance
|
|
|
(17,275,000
|
)
|
|
|
(13,940,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015, we had net operating loss carryforwards for federal and state income tax purposes of
approximately $334.7 million and $150.5 million
,
respectively, which expire in the years 2018 through 2035. 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 $38.3 million and $37.7 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 $384,000 and $288,000, respectively, which expire in the years 2031 through 2035.
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 balance sheets. The valuation allowance
increased by $3,335,000 and $4,391,500 in 2015 and 2014, respectively.
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 operating losses incurred by us subsequent to the
ownership changes totaled $27.1 million and are not subject to this limitation. An additional $655,000 in losses was released from limitation during the year under Section 382.
Note 5Stockholders 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,
F-14
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 2015 or 2014. At December 31, 2015, the 328,925 preferred shares issued and outstanding could be
converted into 274,104 shares of common stock. 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.
October 2015 Public Offering
In October 2015, in a registered direct offering, we sold 13,531,994 Class A Units (consisting of one share of our common stock, a
six-month Series A warrant to purchase one share of our common stock at an exercise price equal to $0.35 (Series A warrant), and a five-year Series B warrant to purchase 0.75 of a share of our common stock at an exercise price equal
to $0.40 per share (Series B warrant)). The shares of common stock, Series A warrants and Series B warrants which are part of a Class A Unit were immediately separable and were issued separately in this offering.
We also sold to purchasers, whose purchase of Class A Units in this offering would otherwise result in the purchaser, together with its
affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding common stock immediately following the consummation of this offering, 4,750.0005 Class B Units. Each Class B Unit consisted of one share of our Class
B Convertible Preferred Stock, or the Series B Preferred, with a stated value of $1,000 and convertible into 13,571,430 shares of our common stock at $0.35 per share, the public offering price of the Class A Units, together with the equivalent
number of Series A warrants and Series B warrants as would have been issued to such purchaser if they had purchased Class A Units based on the public offering price. The Series B Preferred do not generally have any voting rights but are
convertible into shares of common stock. The shares of Series B Preferred, Series A warrants and Series B warrants part of a Class B Unit were immediately separable and were issued separately in this offering.
At the closing of the October 2015 offering, we raised aggregate net proceeds of $8.6 million.
As of December 31, 2015, 2,802 of the 4,750.0005 Series B Preferred shares had been converted to 8,006,429 shares of our common stock and
1,948.0005 Series B preferred (convertible into 5,565,001 common shares) remained issued and outstanding.
Common Stock
On October 14, 2015 we completed a registered direct offering including shares of our common stock (see
Preferred
Stock
October 2015 Public Offering).
On March 25, 2015, in a registered direct offering, we sold 3,062,790 shares of our
common stock, and 1,531,395 warrants to purchase additional shares over the next 5.5 years, at a price of $1.6325 per share, providing us with aggregate net proceeds of $4.6 million.
F-15
On February 14, 2015, we entered into warrant exercise agreements with certain holders of
our outstanding warrants to purchase an aggregate of 916,858 shares of our common stock. The warrants were originally issued as part of an underwritten public offering that we closed on August 9, 2013. Pursuant to the terms of the agreements,
the exercise price of the warrants being exercised was adjusted, immediately prior to their exercise, to $2.00 per share down from the previously agreed $2.57, providing us with aggregate net proceeds from such exercises of $1.7 million.
At various times during 2014, a total of 1,589,471 of the below mentioned warrants were exercised at $2.57 each, providing us with net
proceeds of $4.1 million.
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, 2015, 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 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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Per share fair value at grant date
|
|
$
|
0.15
|
|
|
$
|
1.97
|
|
|
$
|
1.46
|
|
Risk free interest rate
|
|
|
1.4
|
%
|
|
|
1.1
|
%
|
|
|
1.04
|
%
|
Expected volatility
|
|
|
98.8
|
%
|
|
|
100.2
|
%
|
|
|
99.4
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life in years
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
4.0
|
|
F-16
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 aggregate forfeiture rates of 10% to 20% based on historical stock option cancellation rates over the last 4 years.
At December 31, 2015, 1,442,880 shares of common stock were available for future grants and options covering 1,973,606 shares were outstanding
but not yet exercised. Option activity during the three years ended December 31, 2015 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
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
|
|
Granted
|
|
|
50,000
|
|
|
|
2.85
|
|
Canceled
|
|
|
(1,126
|
)
|
|
|
158.13
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
1,200,948
|
|
|
|
5.32
|
|
Granted
|
|
|
870,000
|
|
|
|
0.22
|
|
Canceled
|
|
|
(97,342
|
)
|
|
|
16.22
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
1,973,606
|
|
|
$
|
2.54
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information concerning currently outstanding and exercisable stock options at
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
Range of
Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
$0.22 - $0.22
|
|
|
|
870,000
|
|
|
|
9.9
|
|
|
$
|
0.22
|
|
|
|
|
|
|
$
|
|
|
|
2.12 - 2.12
|
|
|
|
947,500
|
|
|
|
7.9
|
|
|
|
2.12
|
|
|
|
947,500
|
|
|
|
2.12
|
|
|
2.52 - 2.85
|
|
|
|
81,073
|
|
|
|
7.8
|
|
|
|
2.72
|
|
|
|
47,741
|
|
|
|
2.64
|
|
|
8.14 - 18.96
|
|
|
|
35,816
|
|
|
|
5.4
|
|
|
|
17.93
|
|
|
|
35,816
|
|
|
|
17.93
|
|
|
$19.32 - $62.40
|
|
|
|
39,217
|
|
|
|
2.4
|
|
|
|
49.52
|
|
|
|
39,217
|
|
|
|
49.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,973,606
|
|
|
|
8.6
|
|
|
$
|
2.54
|
|
|
|
1,070,274
|
|
|
$
|
4.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our outstanding options expire on various dates through November 2025. The weighted-average contractual term
of outstanding options was 8.6 years and the weighted-average contractual term of currently exercisable stock options was 7.6 years. There were no exercisable options at December 31, 2015 with a price less than the then market value. At
December 31, 2014, outstanding options covering 1,053,334 shares, with an intrinsic value of $672,000, had an exercise price less than the current market value and 526,667 of these options were exercisable, with an intrinsic value of $336,000. There
were no exercisable options at December 31, 2013 with a price less than the then market value.
F-17
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, 2015:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Balance nonvested at December 31, 2014
|
|
|
1,057,535
|
|
|
$
|
2.80
|
|
Granted
|
|
|
15,000
|
|
|
|
1.08
|
|
Vested
|
|
|
(505,226
|
)
|
|
|
2.81
|
|
Forfeited
|
|
|
(55,000
|
)
|
|
|
2.81
|
|
|
|
|
|
|
|
|
|
|
Balance nonvested at December 31, 2015
|
|
|
512,309
|
|
|
$
|
2.77
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Weighted-average grant date fair value
|
|
$
|
1.08
|
|
|
$
|
2.81
|
|
|
$
|
2.30
|
|
Fair value of restricted stock awards granted
|
|
$
|
16,000
|
|
|
$
|
2,990,000
|
|
|
$
|
148,000
|
|
Fair value of restricted stock awards vested
|
|
$
|
1,420,000
|
|
|
$
|
143,000
|
|
|
$
|
535,000
|
|
For the majority of restricted stock awards granted, the number of shares issued on the date the restricted
stock awards vest may be 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, 2015 we withheld 133,894 shares to satisfy $26,000
of employees tax obligations. There was no such withholding for the years ended December 31, 2014 or December 31, 2013.
No stock
compensation cost was capitalized during the periods. At December 31, 2015, the total compensation cost related to non-vested option awards not yet recognized was $738,000 and the weighted-average period over which the cost is expected to be
recognized is 1.2 years. The total compensation cost related to non-vested stock awards not yet recognized was $0.6 million, and the weighted-average period over which the cost is expected to be recognized is 0.6 years.
Warrants
The
following is a summary of outstanding warrants at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016
|
|
(3)
|
|
Warrants related to December 2012 financing
|
|
|
15,625
|
|
|
|
15,625
|
|
|
|
4.50
|
|
|
|
December 18, 2016
|
|
(4)
|
|
Warrants related to April 2013 financing
|
|
|
256,913
|
|
|
|
256913
|
|
|
|
5.45
|
|
|
|
April 26, 2019
|
|
(5)
|
|
Warrants related to August 2013 financing
|
|
|
117,670
|
|
|
|
117,670
|
|
|
|
2.25
|
|
|
|
August 5, 2016
|
|
(6)
|
|
Warrants related to August 2013 financing
|
|
|
6,117,383
|
|
|
|
6,117,383
|
|
|
|
0.35
|
|
|
|
August 9, 2018
|
|
(7)
|
|
Warrants related to February 2015 agreement
|
|
|
45,843
|
|
|
|
45,843
|
|
|
|
3.00
|
|
|
|
February 13, 2020
|
|
(8)
|
|
Warrants related to March 2015 financing
|
|
|
1,531,395
|
|
|
|
1,531,395
|
|
|
|
1.63
|
|
|
|
September 24, 2020
|
|
(9)
|
|
Warrants related to March 2015 financing
|
|
|
153,140
|
|
|
|
0
|
|
|
|
2.04
|
|
|
|
March 20, 2020
|
|
(10)
|
|
Warrants related to October 2015 financing
|
|
|
27,103,424
|
|
|
|
27,103,424
|
|
|
|
0.35
|
|
|
|
April 14, 2016
|
|
(11)
|
|
Warrants related to October 2015 financing
|
|
|
20,327,567
|
|
|
|
20,327,567
|
|
|
|
0.40
|
|
|
|
October 14, 2020
|
|
(12)
|
|
Warrants related to October 2015 financing
|
|
|
1,355,171
|
|
|
|
0
|
|
|
|
0.4375
|
|
|
|
October 14, 2020
|
|
F-18
On October 14, 2015, in a registered direct offering, we sold 13,531,994 Class A Units
(consisting of one share of our common stock, a six-month Series A warrant to purchase one share of our common stock at an exercise price equal to $0.35, (Series A warrant), and a five-year Series B warrant to purchase 0.75 of a
share of our common stock at an exercise price equal to $0.40 per share, (Series B warrant)). We also sold to purchasers, whose purchase of Class A Units in this offering would otherwise result in the purchaser, together with its
affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding common stock immediately following the consummation of this offering, 4,750.0005 Class B Units. Each Class B Unit consisted of one share of our Class
B Convertible Preferred Stock, or the Series B Preferred, with a stated value of $1,000 and convertible into shares of our common stock at $0.35 per share, the public offering price of the Class A Units, together with the equivalent number of
Series A warrants and Series B warrants as would have been issued to such purchaser if they had purchased Class A Units based on the public offering price. As a result, Series A warrants to purchase 27,103,424 shares of our common stock and
Series B warrants to purchase 20,327,567 shares of our common stock were issued with the sale of these Class A and Class B Units. In addition, we granted the placement agent 1,355,171 five-year warrants to purchase our common shares at $0.4375. The
shares of common stock, Series B Preferred, Series A warrants and Series B warrants were immediately separable and were issued separately in this offering.
On March 25, 2015, in a registered direct offering, we sold 3,062,790 shares of our common stock, and 1,531,395 warrants to purchase
additional shares over the next 5.5 years, at a price of $1.6325 per share. The sale of these shares reset the exercise price of warrants (6) to $1.6325. The placement agent received 153,140 five-year warrants at an exercise price of
$2.0406.
On February 14, 2015, we entered into Warrant Exercise Agreements with certain holders of our outstanding warrants to
purchase an aggregate of 916,858 shares of our common stock. The warrants were originally issued as part of an underwritten public offering that we closed on August 9, 2013. Pursuant to the terms of the Warrant Exercise Agreements, the exercise
price of the warrants being exercised was adjusted, immediately prior to their exercise, to $2.00 per share down from the previously agreed $2.57. In connection with the adjustment to the warrant exercise price, we charged to expense $0.4 million
under the following fair value assumptions: expected life of six months; risk free interest rates of 0.07%; expected volatility of 33.6% and; dividend yield of 0%. In connection with the warrants exercised, we reclassified $669,000 relating to the
fair value of the warrant derivative liability to capital in excess of par. Additionally, the underwriter received a five-year warrant to purchase 45,843 shares at a per share exercise price of $3.003.
Warrants (1)-(5) and (7)-(12) 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 (6) 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
F-19
follows: expected life of five years and two years (these two year warrants expired on August 9, 2015 and are no longer listed in the table of outstanding warrants above); 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 approximately $4.2 million.
Using the binomial lattice valuation model, including an equal probabilities tree and early exercise factor of 30%, the fair value of these
warrant liabilities at December 31, 2013 and December 31, 2014 were, respectively, were $5.7 million and $5.2 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 warrant liabilities at December 31, 2015 as follows: expected life
of 2.6; risk free interest rates of 1.24%; expected volatility of 88% and; dividend yield of 0%. The December 31, 2015 fair value of these warrants was estimated to be $245,000. These warrants were also subject to a price adjustment as the result of
our October 14, 2015, which increased their value by $170,000 in the quarter ended December 31, 2015. The fair value of these warrants was reduced by $966,000 during the quarter ended December 31, 2015 and the fair value was reduced by
$4.8 million from December 31, 2014 to December 31, 2015 principally due to our reduced market stock price and expiration of unvested warrants.
Note
6Employee 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 $85,000 to the
401(k) plan in 2015, and $104,000 and $96,000 in 2014 and 2013, respectively.
Note 7Commitments 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.
For 2015, 2014 and 2013, rent expense was $514,000, $815,000, and $868,000, 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 2016 to 2020. Royalty expenses totaled $45,000 in 2015, $30,000 in 2014 and $25,000 in 2013. 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.
F-20
The minimum lease payments under operating leases and license obligations are as follows:
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Licenses
|
|
|
Operating
Leases
|
|
2016
|
|
$
|
45,000
|
|
|
$
|
1,374,000
|
|
2017
|
|
|
45,000
|
|
|
|
292,000
|
|
2018
|
|
|
45,000
|
|
|
|
41,000
|
|
2019
|
|
|
|
|
|
|
27,000
|
|
2020
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
$
|
135,000
|
|
|
$
|
1,734,000
|
|
|
|
|
|
|
|
|
|
|
Note 8Contractual 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 disclosed the contractual guarantees and indemnities in the accompanying consolidated financial statements as follows:
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 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
F-21
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 9Legal 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. 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 10Earnings 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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Outstanding stock options
|
|
|
1,973,606
|
|
|
|
1,200,948
|
|
|
|
1,152,074
|
|
Unvested restricted stock awards
|
|
|
512,309
|
|
|
|
1,057,535
|
|
|
|
43,195
|
|
Outstanding warrants
|
|
|
57,451,915
|
|
|
|
9,498,949
|
|
|
|
11,088,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
59,937,830
|
|
|
|
11,757,432
|
|
|
|
12,283,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Also, the preferred stock convertible into 5,839,105, 274,104 and 274,104 shares of common stock at December
31, 2015, 2014 and 2013, respectively, was not included since their impact would be anti-dilutive.
F-22
Note 11Details of Certain Financial Statement Components and Supplemental Disclosures of Cash Flow
Information and Non-Cash Activities
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Accounts receivable-trade
|
|
$
|
43,000
|
|
|
$
|
87,000
|
|
Less: allowance for doubtful accounts
|
|
|
(5,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,000
|
|
|
$
|
86,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
651,000
|
|
|
$
|
580,000
|
|
Reserve for raw materials
|
|
|
(578,000
|
)
|
|
|
(540,000
|
)
|
Work-in-process
|
|
|
28,000
|
|
|
|
31,000
|
|
Reserve for work-in-process
|
|
|
(28,000
|
)
|
|
|
(25,000
|
)
|
Finished goods
|
|
|
216,000
|
|
|
|
196,000
|
|
Reserve for finished goods
|
|
|
(168,000
|
)
|
|
|
(168,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
121,000
|
|
|
$
|
74,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
11,571,000
|
|
|
$
|
11,853,000
|
|
Leasehold improvements
|
|
|
1,065,000
|
|
|
|
734,000
|
|
Furniture and fixtures
|
|
|
205,000
|
|
|
|
223,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,841,000
|
|
|
|
12,810,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(7,290,000
|
)
|
|
|
(4,908,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,551,000
|
|
|
$
|
7,902,000
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense amounted to $2,402,000, $1,259,000, and $1,205,000 in 2015, 2014, 2013,
respectively. In 2015, 2014 and 2013 we disposed of older, fully depreciated equipment with an acquisition value of $52,000, $8,000,000 and $9,405,000, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Patents, Licenses and Purchased Technology:
|
|
|
|
|
|
|
|
|
Patents pending
|
|
$
|
555,000
|
|
|
$
|
454,000
|
|
|
|
|
|
|
|
|
|
|
Patents issued
|
|
|
1,252,000
|
|
|
|
1,226,000
|
|
Less accumulated amortization
|
|
|
(869,000
|
)
|
|
|
(794,000
|
)
|
|
|
|
|
|
|
|
|
|
Net patents issued
|
|
|
383,000
|
|
|
|
432,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
938,000
|
|
|
$
|
886,000
|
|
|
|
|
|
|
|
|
|
|
F-23
Amortization expense related to these items totaled $75,000, $73,000 and, $65,000 in 2015, 2014,
and 2013, respectively. Amortization expenses related to these items are expected to total $73,000 in 2016 and $73,000 in 2017.
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Accrued Expenses and Other Long Term Liabilities:
|
|
|
|
|
|
|
|
|
Salaries payable
|
|
$
|
98,000
|
|
|
$
|
130,000
|
|
Compensated absences
|
|
|
197,000
|
|
|
|
231,000
|
|
Compensation related
|
|
|
38,000
|
|
|
|
19,000
|
|
Warranty reserve
|
|
|
23,000
|
|
|
|
38,000
|
|
Deferred rent
|
|
|
132,000
|
|
|
|
368,000
|
|
Other
|
|
|
78,000
|
|
|
|
21,000
|
|
Fair value of warrant derivatives
|
|
|
245,000
|
|
|
|
5,228,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
811,000
|
|
|
|
6,035,000
|
|
Less current portion
|
|
|
(418,000
|
)
|
|
|
(1,401,000
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
393,000
|
|
|
$
|
4,634,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Warranty Reserve Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
38,000
|
|
|
$
|
151,000
|
|
|
$
|
227,000
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
19,000
|
|
Deductions
|
|
|
(15,000
|
)
|
|
|
(113,000
|
)
|
|
|
(95,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
23,000
|
|
|
$
|
38,000
|
|
|
$
|
151,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12Subsequent Event
On March 9, 2016, 399 of our Series B Preferred shares were converted into 1,140,000 shares of common stock.
Quarterly Financial Data (Unaudited)
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First Quarter
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Second Quarter
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Third Quarter
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Fourth Quarter
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2015
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Net revenues (1)
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$
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55,000
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$
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71,000
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$
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91,000
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$
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27,000
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Loss from operations
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3,685,000
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2,953,000
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2,886,000
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3,199,000
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Net loss
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1,418,000
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2,409,000
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2,373,000
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2,402,000
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Basic and diluted loss per common share
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$
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(0.10
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)
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$
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(0.14
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)
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$
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(0.14
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)
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$
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(0.08
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)
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Weighted average number of shares outstanding
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13,712,906
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17,047,082
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17,147,823
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29,388,932
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2014
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Net revenues (1)
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$
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389,000
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$
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75,000
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$
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86,000
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$
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82,000
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Loss from operations
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2,799,000
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3,158,000
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3,116,000
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3,234,000
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Net loss
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2,935,000
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55,000
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2,412,000
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2,849,000
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Basic and diluted loss per common share
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$
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(0.25
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)
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$
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(0.00
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)
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$
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(0.19
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)
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$
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(0.22
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)
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Weighted average number of shares outstanding
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11,880,889
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13,026,636
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12,917,653
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13,158,592
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(1)
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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.
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F-24