NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
We are a leading company in developing and commercializing high temperature superconductor (HTS) materials
and related technologies. Superconductivity is the unique ability to conduct various signals or energy (e.g., electrical current or radio frequency (RF) signals) with little or no resistance when cooled to critical
temperatures. HTS materials are a family of elements that demonstrate superconducting properties at temperatures significantly warmer than previous superconducting materials. Electric currents that flow through conventional conductors encounter
resistance that requires power to overcome and generates heat. HTS materials can substantially improve the performance characteristics of electrical systems, reducing power loss, lowering heat generation, and decreasing electrical noise.
We were established in 1987 shortly after the discovery of HTS materials, a family of elements that demonstrate superconducting
properties at temperatures significantly warmer than previous superconducting materials. Our stated objective was to develop products based on these materials for the commercial marketplace.
After analyzing the market opportunities available, we decided to pursue a strategic revenue opportunity developing products for the
electronics industry.
Our initial product was completed in 1998 and we began delivery to a number of wireless network
providers. In the following 13 years, we continued to refine and improve the platform, with the primary focus on improving reliability, increasing performance and runtime, and most importantly, removing cost from the manufacturing process of the
required subsystems. Our cost reducing efforts led to the invention of our proprietary, high-yield and high throughput HTS material deposition manufacturing process.
In the last several years we have focused our research and development efforts on adapting our successful HTS materials deposition techniques to production of high performance second generation
2G HTS wire for next generation power applications. While all our current commercial product revenues come from the sale of high performance wireless infrastructure products, we now see production of our Conductus® HTS wire as an
excellent strategic 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 contractor or subcontractor on contracts with the U.S. government. For the three months ended March 30, 2013 and March 31, 2012, government
and other contract revenues accounted for 0% and 14%, respectively, of our net revenues.
For the three months ended
March 30, 2013 and March 31, 2012, commercial product revenues accounted for 100% and 86%, respectively, of our net revenues.
The unaudited condensed consolidated financial information furnished herein has been prepared in accordance with generally accepted accounting principles and reflects all adjustments, consisting only of
normal recurring adjustments, which in the opinion of management, are necessary for a fair statement of the results of operations for the periods presented.
The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts
reported in the condensed consolidated financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements. This quarterly report
on Form 10-Q should be read in conjunction with our Form 10-K for 2012. The results of operations for the three months ended March 30, 2013 are not necessarily indicative of the results for all of 2013.
2. Summary of Significant Accounting Policies
Basis of Presentation
We have incurred significant net losses since our inception and had an accumulated deficit of $262.0 million through 2012. For the three months ended March 30, 2013, we incurred a net loss of $2.4
million and negative cash flows from operations of $1.8 million. For all of 2012, we incurred a net loss of $10.9 million and had negative cash flows from operations of $8.2 million.
5
At March 30, 2013, we had $1.7 million in cash and cash equivalents. Our cash resources
will not be sufficient to fund our business for the next 12 months. Because of the 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. If we
cannot raise any needed funds, we might be forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company. These
factors raise substantial doubt about our ability to continue as a going concern.
Our plans regarding improving our future
liquidity will require us to successfully use our expertise and our technology to generate revenues in various ways, including commercial operations, joint ventures and licenses. We have invested and will continue to invest significant capital in
our Austin, Texas manufacturing facility to enable us to produce our HTS 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 HTS 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.
Principles of Consolidation
The interim condensed consolidated financial statements include the accounts of Superconductor Technologies Inc. and its wholly owned subsidiaries. All significant intercompany transactions have been
eliminated from the condensed consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. Cash and cash equivalents
are maintained with what we believe to be quality financial institutions and from time to time exceed FDIC limits. Historically, we have not experienced any losses due to such concentration of credit risk.
Accounts Receivable
We
sell predominantly to entities in the wireless communications industry, and until this year, to entities of the U.S. government. We grant uncollateralized credit to our customers. We perform usual and customary credit evaluations of our customers
before granting credit. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We
determine the allowance based on historical write-off experience. Past due balances are reviewed for collectibility. Accounts balances are charged off against the allowance when we deem it is probable the receivable will not be recovered. We do not
have any off-balance sheet credit exposure related to our customers.
Revenue Recognition
Commercial revenues are principally derived from the sale of our SuperLink, AmpLink and SuperPlex family of products and are recognized
once all of the following conditions have been met: a) an authorized purchase order has been received in writing, b) the 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 2003 are closed. Based on historical experience, we believe that the audits
will not have a significant effect on our financial position, results of operations or cash flows.
6
Shipping and Handling Fees and Costs
Shipping and handling fees billed to customers are included in net commercial product revenues. Shipping and handling fees associated with
freight are generally included in cost of commercial product revenues.
Warranties
We offer warranties generally ranging from one to five years, depending on the product and negotiated terms of purchase agreements with
our customers. Such warranties require us to repair or replace defective product returned to us during such warranty period at no cost to the customer. An estimate by us for warranty related costs is recorded by us at the time of sale based on our
actual historical product return rates and expected repair costs. Such costs have been within our expectations.
Indemnities
In connection with the sales and manufacturing of our commercial products, we indemnify, without limit or term, our
customers and contract manufacturers against all claims, suits, demands, damages, liabilities, expenses, judgments, settlements and penalties arising from actual or alleged infringement or misappropriation of any intellectual property relating to
our products or other claims arising from our products. We cannot reasonably develop an estimate of the maximum potential amount of payments that might be made under our indemnities because of the uncertainty as to whether a claim might arise and
how much it might total. Historically, we have not incurred any expenses related to these indemnities.
Research and Development Costs
Research and development costs are charged to expense as incurred and include salary, facility, depreciation and material
expenses. Research and development costs are charged to research and development expense. Research and development costs incurred solely in connection with research and development contracts were charged to government and other contract expense.
Inventories
Inventories are stated at the lower of cost or market, with costs primarily determined using standard costs, which approximate actual
costs utilizing the first-in, first-out method. We review inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory and/or vendor cancellation charges related to purchase commitments.
If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and
are not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production
requirements. Costs associated with idle capacity are charged to expense immediately.
Property and Equipment
Property and equipment are recorded at cost. Equipment is depreciated using the straight-line method over their estimated useful lives
ranging from three to seven years. Leasehold improvements and assets financed under capital leases are amortized over the shorter of their useful lives or the lease term. Furniture and fixtures are depreciated over seven years. Expenditures for
additions and major improvements are capitalized. Expenditures for minor tooling, repairs and maintenance and minor improvements are charged to expense as incurred. When property or equipment is retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts. Gains or losses from retirements and disposals are recorded in selling, general and administration expenses. In the first quarter of 2013, there were retirements and disposals totaling $6,000
and gains of $6,000 from retirements and disposals. In 2012, there were disposals totaling $520,000 and gains of $92,000 from disposals.
Patents, Licenses and Purchased Technology
Patents and licenses are recorded at cost and are amortized using the straight-line method over the shorter of their estimated useful lives or approximately seventeen years. Purchased technology acquired
through the acquisition of Conductus, Inc. in 2002 was recorded at our estimated fair value and was amortized using the straight-line method over seven years ending in 2009.
Long-Lived Assets
The realizability of long-lived assets is evaluated
periodically as events or circumstances indicate a possible inability to recover the carrying amount. Long-lived assets that will no longer be used in the business are written off in the period identified since they will no longer generate any
positive cash flows for us. Periodically, long lived assets that will continue to be used by
7
us will need to be evaluated for recoverability. Such evaluation is based on various analyses, including cash flow and profitability projections. The analyses necessarily involve significant
management judgment. In the event the projected undiscounted cash flows are less than net book value of the assets, the carrying value of the assets will be written down to their estimated fair value. We tested our long lived assets for
recoverability during 2012 and determined there was no impairment. However, for the period ended March 30, 2013, we expensed $79,000 of patents pending.
In July 2012, we contributed 14 issued and pending patents regarding our innovative Reconfigurable Resonance (RcR) technology, limited use of our Santa Barbara facility, experienced executive
leadership and technical expertise as our minority investment in Resonant LLC. As of December 31, 2012 and March 30, 2013, our interest in Resonant was 30%, and the net value of the assets contributed, estimated to approximate fair
value, was $423,000 and $241,000, respectively. We have included this investment in
Other assets
for both periods, and have accounted for it using the equity method. For the period ending March 30, 2013 we recognized an expense of
$182,000.
We have invested and will continue to invest significant capital in our Austin, Texas manufacturing facility to
enable us to produce our HTS 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 HTS wire products in large scale could substantially
impact our estimates used in the determination of expected future cash flows and/or expected profitability. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
Other Investments
From time to time we may pursue joint ventures with other entities to commercialize our technology. In 2007, we formed a joint venture with Hunchun BaoLi Communication Co. Ltd. to manufacture and sell our
SuperLink interference elimination solution in China. We use the equity method of accounting for our 45 percent joint venture interest. The joint venture agreement called for our joint venture partner to supply the capital and local expertise,
and for us to provide a license of certain technology and supply key parts for manufacturing. Since 2007, we have been conducting lab and field trials in the existing China 2G market using our TD-SCDMA and SuperLink solutions. Although those
activities continue, the parties have not completed their contributions to the joint venture, including most of the funding and our license, within the two year period specified by the agreement and Chinese law. The future of the joint venture,
including any commencement of manufacturing and the transfer of our processes, will depend on product demand in China, completion of funding by our joint venture partner, as well as a number of other conditions, including certain critical approvals
from the Chinese and U.S. governments. There continues to be no assurance that these conditions will be met and even if these conditions are met and the approvals received, the results from our joint venture will be subject to a number of
significant risks associated with international operations and new ventures, some of which are set forth in our public filings, including in particular the Risk Factors included in Item 1A of our Annual Report on Form 10-K for
2012
.
We incurred no expenses in the quarter ended March 30, 2013 or in the full year 2012 as a result of this joint venture.
Loss Contingencies
In
the normal course of our business we are subject to claims and litigation, including allegations of patent infringement. Liabilities relating to these claims are recorded when it is determined that a loss is probable and the amount of the loss can
be reasonably estimated. The costs of our defense in such matters are expensed as incurred. Insurance proceeds recoverable are recorded when deemed probable.
Income Taxes
We recognize deferred tax liabilities and assets based on the
differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the
change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized. The guidance further clarifies the accounting for uncertainty
in income taxes and sets a consistent framework to determine the appropriate level of tax reserve to maintain for uncertain tax positions. This interpretation uses a two-step approach wherein a tax benefit is recognized if a position is
more-likely-than-not to be sustained. The amount of the benefit is then measured to be the highest tax benefit that is greater than 50% likely to be realized and sets out disclosure requirements to enhance transparency of our tax reserves. The
adoption of this guidance has not had a material impact on our consolidated financial statements as we concluded our tax positions are highly certain of being settled at 100% of the benefit claimed. Guidance is also provided on the accounting for
the related interest and penalties, financial statement and disclosure. We are currently not under examination by any taxing authority nor have we been notified of an impending examination. The oldest tax year that remains open to possible
evaluation and interpretation of our tax position is 1996.
As of December 31, 2012, we had net operating loss
carryforwards for federal and state income tax purposes of approximately $311.9 million and $192.1 million
,
respectively, which expire in the years 2013 through 2032. Due to the uncertainty surrounding their realization, we recorded a full
valuation allowance against our net deferred tax assets. Accordingly, no deferred tax asset has been recorded in the accompanying condensed consolidated balance sheets.
8
Marketing Costs
All costs related to marketing and advertising our products are charged to expense as incurred or at the time the advertising takes place. Advertising costs were not material in each of the quarters ended
March 30, 2013 and March 31, 2012.
Net Loss Per Share
Basic and diluted net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of
common shares outstanding in each year. Potential common shares are not included in the calculation of diluted loss per share because their effect is anti-dilutive.
Stock-based Compensation
We grant both restricted stock awards and stock
options to our key employees, directors and consultants. For the quarters ended March 30, 2013 and March 31, 2012, the weighted average fair value of options was estimated at the date of the grant using the Black-Scholes option-pricing
model. The following are the significant weighted average assumptions used for estimating the fair value under our stock option plans:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 30,
2013
|
|
|
March 31,
2012
|
|
|
|
|
Expected life in years
|
|
|
4.0
|
|
|
|
4.0
|
|
Risk free interest rate
|
|
|
0.6
|
%
|
|
|
0.6
|
%
|
Expected volatility
|
|
|
93.3
|
%
|
|
|
100
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The expected life was based on the contractual term of the options and expected employee exercise
behavior. Typically, options to our employees have a 2 to 4 year vesting term and a 10 year contractual term. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected option life assumed at
the grant date. The future volatility is based on our 4 year historical volatility. We used an expected dividend yield of 0% because we have never paid a dividend and do not anticipate paying dividends. We assumed a 10% forfeiture rate through 2012
and a 15% forfeiture rate in the period ending March 30, 2013 based on our historical stock option cancellation rates over the last 4 years.
The stock-based compensation expense for our restricted stock awards is measured at fair value on the date of grant based on the number of shares expected to vest and the quoted market price of our common
stock. We assumed a 10% forfeiture rate through 2012, and a 15% forfeiture rate in the period ending March 30, 2013 based on our historical stock option cancellation rates over the last 4 years.
The following table presents details of total stock-based compensation expense that is included in each functional line item on our
condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 30,
2013
|
|
|
March 31,
2012
|
|
|
|
|
Cost of Revenue
|
|
$
|
|
|
|
$
|
5,000
|
|
Research and development
|
|
|
55,000
|
|
|
|
101,000
|
|
Selling, general and administrative
|
|
|
111,000
|
|
|
|
215,000
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
166,000
|
|
|
$
|
321,000
|
|
|
|
|
|
|
|
|
|
|
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The significant estimates in the
preparation of the financial statements relate to the assessment of the carrying amount of accounts receivable, inventory, fixed assets, intangibles, estimated provisions for warranty costs, contract revenues, income taxes and disclosures related to
litigation. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.
9
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, inventory, prepaid expenses and other current assets and other current liabilities as of March 30, 2013 approximate fair value.
Comprehensive Income
We have no items of other comprehensive income in any period and consequently have not included a Statement of Comprehensive Income.
Segment Information
We operate in a single business segment, the research,
development, manufacture and marketing of high performance products used in cellular base stations to maximize the performance of wireless telecommunications networks by improving the quality of uplink signals from mobile wireless devices. We
currently derive net commercial product revenues primarily from the sales of our SuperLink, AmpLink and SuperPlex products. We currently sell most of our products directly to wireless network operators in the United States. Net revenues derived
principally from government research and development contracts have historically been presented separately on the condensed consolidated statement of operations.
Certain Risks and Uncertainties
Our long-term prospects are dependent upon
the successful commercialization and market acceptance or our 2G HTS products.
We currently sell most of our
products directly to wireless network operators in the United States and our product sales have historically been concentrated in a small number of customers. At March 30, 2013, we had two customers that represented 76% and 21% of total net
revenues and 73% of accounts receivable. In 2012, these two customers represented 67% and 22% of total net revenues and 38% of accounts receivable. The loss of or reduction in sales, or the inability to collect outstanding accounts receivable, from
any of these customers could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We currently rely on a limited number of suppliers for key components of our products. The loss of any of these suppliers could have material adverse effect on our business, financial condition, results
of operations and cash flows.
In connection with the sales of our commercial products, we indemnify, without limit or term,
our customers against all claims, suits, demands, damages, liabilities, expenses, judgments, settlements and penalties arising from actual or alleged infringement or misappropriation of any intellectual property relating to our products or other
claims arising from our products. We cannot reasonably develop an estimate of the maximum potential amount of payments that might be made under our indemnity obligations because of the uncertainty as to whether a claim might arise and how much it
might total.
3. Stockholders Equity
The following is a summary of stockholders equity transactions for the three months ended March 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Excess of
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
564,642
|
|
|
$
|
1,000
|
|
|
|
4,193,690
|
|
|
$
|
4,000
|
|
|
$
|
272,231,000
|
|
|
$
|
(261,944,000
|
)
|
|
$
|
10,292,000
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock
|
|
|
(28,122
|
)
|
|
|
|
|
|
|
23,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash in lieu of shares from reverse stock split
|
|
|
|
|
|
|
|
|
|
|
(2,865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
23,200
|
|
|
|
|
|
|
|
166,000
|
|
|
|
|
|
|
|
166,000
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,408,000
|
)
|
|
|
(2,408,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 30, 2013
|
|
|
536,520
|
|
|
$
|
1,000
|
|
|
|
4,237,457
|
|
|
$
|
4,000
|
|
|
$
|
272,397,000
|
|
|
$
|
(264,352,000
|
)
|
|
$
|
8,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
10
Stock Options
At March 30, 2013, we had no active equity award option plans. Under our last plan, the 2003 Equity Incentive Plan, which expired March 19, 2013, stock awards were made to our directors, key
employees, consultants, and non-employee directors and consisted of stock options, stock appreciation rights, restricted stock awards, performance awards, and performance share awards. Stock options were granted at prices no less than the market
value on the date of grant. There were no stock option exercises during the three months ended March 30, 2013 or during the three months ended March 31, 2012.
The impact to the condensed consolidated statements of operations for the quarter ended March 30, 2013 on net loss was $80,000 and $0.02 on basic and diluted net loss per common share and for the
quarter ended March 31, 2012 the impact was $154,000 and $0.05 on basic and diluted net loss per common share. No stock compensation cost was capitalized during either period. The total compensation cost related to nonvested awards not yet
recognized was $610,000 and the weighted-average period over which the cost is expected to be recognized was 1.2 years at March 30, 2013.
The following is a summary of stock option transactions under our stock option plans at March 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Price Per Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Options
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance at December 31, 2012
|
|
|
105,383
|
|
|
|
$ 8.16 - $ 894.00
|
|
|
$
|
46.08
|
|
|
|
74,706
|
|
|
$
|
56.52
|
|
Granted
|
|
|
33,333
|
|
|
|
2.52
|
|
|
|
2.52
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(1,182
|
)
|
|
|
19.44 - 366.00
|
|
|
|
38.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 30, 2013
|
|
|
137,534
|
|
|
|
$2.52 - $894.00
|
|
|
$
|
35.56
|
|
|
|
91,730
|
|
|
$
|
49.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The outstanding options expire on various dates through the end of March 2023. The weighted-average
contractual term of options outstanding is 7 years and the weighted-average contractual term of stock options currently exercisable is 5.7 years. The exercise prices for these options range from $2.52 to $894 per share, for an aggregate exercise
price of approximately $4.9 million. At March 30, 2013, outstanding options covering 33,333 shares, with an intrinsic value of $1,000, had an exercise price less than the current market value and none were exercisable.
Restricted Stock Awards
The grant date fair value of each share of our restricted stock awards is equal to the fair value of our common stock at the grant date.
Shares of restricted stock under awards all have service conditions and vest over one to four years. Some of our grants also have performance conditions. The following is a summary of our restricted stock award transactions at March 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
|
|
|
Balance nonvested at December 31, 2012
|
|
|
37,190
|
|
|
$
|
18.00
|
|
Granted
|
|
|
29,167
|
|
|
|
2.52
|
|
Vested
|
|
|
(14,587
|
)
|
|
|
18.71
|
|
Forfeited
|
|
|
(5,967
|
)
|
|
|
16.27
|
|
|
|
|
|
|
|
|
|
|
Balance nonvested at March 30, 2013
|
|
|
45,803
|
|
|
$
|
8.24
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2012, we withheld 7,500 shares, to satisfy $129,000 of
employees tax obligations. There was no such withholding in the three months ended March 30, 2013.
The impact to
the condensed consolidated statements of operations for the three months ended March 30, 2013 was $86,000 and $0.02 on basic and diluted net loss per common share and for the quarter ended March 31, 2012 the impact was $168,000 and $0.06
on basic and diluted net loss per common share. No stock compensation cost was capitalized during the period. The total compensation cost related to nonvested awards not yet recognized was $203,000 and the weighted-average period over which the cost
is expected to be recognized was 9 months.
11
Warrants
The following is a summary of outstanding warrants at March 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
Total
|
|
|
Currently
Exercisable
|
|
|
Price per
Share
|
|
|
Expiration Date
|
|
Warrants related to February 2012 financing
|
|
|
419,451
|
|
|
|
419,451
|
|
|
$
|
16.20
|
|
|
|
February 22, 2017
|
*
|
Warrants related to November 2012 financing
|
|
|
8,333
|
|
|
|
|
|
|
|
4.50
|
|
|
|
November 26, 2015
|
* **
|
Warrants related to December 2012 financing
|
|
|
15,625
|
|
|
|
|
|
|
|
4.80
|
|
|
|
December 18, 2015
|
* **
|
*
|
The warrants 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.
|
**
|
These warrants will become exercisable on a cash-only basis on November 26, 2013 and December 18, 2013, respectively, and each have a term of three years.
|
We issued 513,827 warrants convertible into common shares in connection with our April 2013 financing. These
warrants will become exercisable on a cash-only basis in April 2014, at a price of $5.45 per share. One half of the warrants will have a term of one year and the other half will have a term of five years from the 2014 vest date.
4. Earnings Per Share
Basic and diluted net earnings (loss) per share is based on the weighted-average number of common shares outstanding.
Since their impact would be anti-dilutive, our net loss per common share does not include the effect of the assumed
exercise or vesting of the following shares:
|
|
|
|
|
|
|
|
|
|
|
March 30,
2013
|
|
|
March 31,
2012
|
|
|
|
|
Outstanding stock options
|
|
|
137,534
|
|
|
|
127,730
|
|
Unvested restricted stock awards
|
|
|
45,803
|
|
|
|
51,311
|
|
Outstanding warrants
|
|
|
443,409
|
|
|
|
419,451
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
626,746
|
|
|
|
598,492
|
|
|
|
|
|
|
|
|
|
|
Also, the preferred stock convertible into 447,100 shares of common stock was not included since its
impact would be anti-dilutive.
5. Commitments and Contingencies
Operating Leases
We lease our offices and production facilities under non-cancelable operating leases in Santa Barbara, CA and Austin, TX that expire in November 2016 and March 2017, respectively. The leases contain
minimum rent escalation clauses that require additional rental amounts after the first year. Rent expense for these leases with minimum annual rent escalation is recognized on a straight line basis over the minimum lease term. These leases also
require us to pay utilities, insurance, taxes and other operating expenses and contain one five-year renewal option. The January 1, 2012 partial sublease of our Santa Barbara facility has offset some of these expenses.
For the three months ended March 30, 2013 and March 31, 2012, rent expense was $221,000 and $309,000, respectively.
12
Patents and Licenses
We have entered into various licensing agreements requiring royalty payments ranging from 0.13% to 2.5% of specified product sales. Certain of these agreements contain provisions for the payment of
guaranteed or minimum royalty amounts. In the event that we fail to pay minimum annual royalties, these licenses may automatically become non-exclusive or be terminated. These royalty obligations terminate at various times from 2013 to 2020. For
each of the three months ended March 30, 2013 and March 31, 2012, royalty expense totaled $6,000. Under the terms of certain royalty agreements, royalty payments made may be subject to audit. There have been no audits to date and we do not
expect future audit adjustments to be significant.
The minimum lease payments under operating leases and license obligations
are as follows:
|
|
|
|
|
|
|
|
|
Years ending December 31,
|
|
Licenses
|
|
|
Operating
Leases
|
|
|
|
|
Remainder of 2013
|
|
$
|
25,000
|
|
|
$
|
1,234,000
|
|
2014
|
|
|
30,000
|
|
|
|
1,698,000
|
|
2015
|
|
|
45,000
|
|
|
|
1,750,000
|
|
2016
|
|
|
45,000
|
|
|
|
1,680,000
|
|
2017
|
|
|
45,000
|
|
|
|
88,000
|
|
Thereafter
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
$
|
235,000
|
|
|
$
|
6,450,000
|
|
|
|
|
|
|
|
|
|
|
6. Contractual Guarantees and Indemnities
During our normal course of business, we make certain contractual guarantees and indemnities pursuant to which we may
be required to make future payments under specific circumstances. We have not recorded any liability for these contractual guarantees and indemnities in the accompanying condensed consolidated financial statements.
Warranties
We establish
reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with our customers. Our warranty reserves are established at the time of sale and updated throughout the warranty period based upon
numerous factors including historical warranty return rates and expenses over various warranty periods.
Intellectual Property Indemnities
We indemnify certain customers and our contract manufacturers against liability arising from third-party claims of
intellectual property rights infringement related to our products. These indemnities appear in development and supply agreements with our customers as well as manufacturing service agreements with our contract manufacturers, are not limited in
amount or duration and generally survive the expiration of the contract. Given that the amount of potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, we are unable to determine the
maximum amount of losses that we could incur related to such indemnities.
Director and Officer Indemnities and Contractual Guarantees
We have entered into indemnification agreements with our directors and executive officers which require us to indemnify
such individuals to the fullest extent permitted by Delaware law. Our indemnification obligations under such agreements are not limited in amount or duration. Certain costs incurred in connection with such indemnities may be recovered under certain
circumstances under various insurance policies. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed against a director or executive officer, we are unable to determine
the maximum amount of losses that we could incur relating to such indemnities. Historically, any amounts payable pursuant to such director and officer indemnities have not had a material negative effect on our business, financial condition or
results of operations.
We have also entered into severance and change in control agreements with certain of our executives.
These agreements provide for the payment of specific compensation benefits to such executives upon the termination of their employment with us.
General Contractual Indemnities/Products Liability
During the normal course of business, we enter into contracts with customers where we agree to indemnify the other party for personal injury or property damage caused by our products. Our indemnification
obligations under such agreements are not generally limited in amount or duration. Given that the amount of any potential liabilities related to such indemnities
13
cannot be determined until a lawsuit has been filed, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities. Historically, any amounts payable
pursuant to such indemnities have not had a material negative effect our business, financial condition or results of operations. We maintain general and product liability insurance as well as errors and omissions insurance which may provide a source
of recovery to us in the event of an indemnification claim.
7. Details of Certain Financial Statement Components and Supplemental
Disclosures of Cash Flow Information and Non-Cash Activities
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
March 30,
2013
|
|
|
December 31,
2012
|
|
|
|
|
Accounts receivable
:
|
|
|
|
|
|
|
|
|
Accounts receivable-trade
|
|
$
|
278,000
|
|
|
$
|
57,000
|
|
U.S. government accounts receivable-billed
|
|
|
66,000
|
|
|
|
67,000
|
|
Less: allowance for doubtful accounts
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
342,000
|
|
|
$
|
122,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30,
2013
|
|
|
December 31,
2012
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,035,000
|
|
|
$
|
1,031,000
|
|
Less: Raw material reserves
|
|
|
(1,031,000
|
)
|
|
|
(1,031,000
|
)
|
Work-in-process
|
|
|
313,000
|
|
|
|
335,000
|
|
Less: Work-in-process reserves
|
|
|
(313,000
|
)
|
|
|
(314,000
|
)
|
Finished goods
|
|
|
395,000
|
|
|
|
676,000
|
|
Less: Finished goods reserves
|
|
|
(254,000
|
)
|
|
|
(646,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,000
|
|
|
$
|
51,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30,
2013
|
|
|
December 31,
2012
|
|
Property and Equipment
:
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
18,075,000
|
|
|
$
|
18,625,000
|
|
Leasehold improvements
|
|
|
7,397,000
|
|
|
|
6,675,000
|
|
Furniture and fixtures
|
|
|
387,000
|
|
|
|
387,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,859,000
|
|
|
|
25,687,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(19,657,000
|
)
|
|
|
(19,445,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,202,000
|
|
|
$
|
6,242,000
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense amounted to $218,000 and $34,000 for the three month periods ended March 30,
2013 and March 31, 2012, respectively.
|
|
|
|
|
|
|
|
|
|
|
March 30,
2013
|
|
|
December 31,
2012
|
|
Patents and Licenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents pending
|
|
$
|
461,000
|
|
|
$
|
517,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents issued
|
|
|
1,033,000
|
|
|
|
1,033,000
|
|
Less accumulated amortization
|
|
|
(677,000
|
)
|
|
|
(661,000
|
)
|
|
|
|
|
|
|
|
|
|
Net patents issued
|
|
|
356,000
|
|
|
|
372,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase technology
|
|
|
1,706,000
|
|
|
|
1,706,000
|
|
Less accumulated Amortization
|
|
|
(1,706,000
|
)
|
|
|
(1,706,000
|
)
|
|
|
|
|
|
|
|
|
|
Net purchase technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
817,000
|
|
|
$
|
889,000
|
|
|
|
|
|
|
|
|
|
|
14
Amortization expense related to these items totaled $16,000 and $30,000, for the three month
periods ended March 30, 2013 and March 31, 2012, respectively. Amortization expenses are expected to total $48,000 for the remainder of 2013 and $66,000 in of 2014 and $62,000 for 2015.
|
|
|
|
|
|
|
|
|
|
|
March 30,
2013
|
|
|
December 31,
2012
|
|
Accrued Expenses and Other Long Term Liabilities:
|
|
|
|
|
|
|
|
|
Salaries Payable
|
|
$
|
121,000
|
|
|
$
|
81,000
|
|
Compensated Absences
|
|
|
251,000
|
|
|
|
215,000
|
|
Compensation related
|
|
|
45,000
|
|
|
|
47,000
|
|
Warranty reserve
|
|
|
211,000
|
|
|
|
227,000
|
|
Deferred rent
|
|
|
465,000
|
|
|
|
470,000
|
|
Other
|
|
|
179,000
|
|
|
|
94,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,272,000
|
|
|
|
1,134,000
|
|
Less current portion
|
|
|
(609,000
|
)
|
|
|
(460,000
|
)
|
|
|
|
|
|
|
|
|
|
Long term portion
|
|
$
|
663,000
|
|
|
$
|
674,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended,
|
|
|
|
March 30,
2013
|
|
|
March 31,
2012
|
|
Warranty Reserve Activity:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
227,000
|
|
|
$
|
225,000
|
|
Additions
|
|
|
2,000
|
|
|
|
5,000
|
|
Deductions
|
|
|
(18,000
|
)
|
|
|
(53,000
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
211,000
|
|
|
$
|
177,000
|
|
|
|
|
|
|
|
|
|
|
8. Subsequent Events
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.