See accompanying notes to the unaudited interim condensed consolidated financial statements.
See accompanying notes to the unaudited interim condensed consolidated financial statements.
Note December 31, 2015 balances were derived from audited financial statements.
See accompanying notes to the unaudited interim condensed consolidated financial statements.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
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. During the three months ended July 2, 2016 we decided not to renew
our Santa Barbara lease at the end of November 2016 and consolidate all our operations in our Austin, TX facility by the year end.
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 our legacy high performance wireless communications infrastructure products, production of our Conductus wire is our principal opportunity to grow our future revenue.
The unaudited condensed consolidated financial information furnished herein has been prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) and reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are necessary for a fair statement of the results of
operations for the periods presented.
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP
requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Our ability to realize our investment in infrastructure is dependent on market acceptance
and realization of significant revenues from Conductus wire products. Our independent registered public accounting firm has included in its audit reports for 2015 and 2014 an explanatory paragraph expressing substantial doubt about our ability to
continue as a going concern. 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 2015 (See Note 2. Summary of Significant Accounting Policies Basis of Presentation). The results of operations for the nine months ended October 1, 2016 are not necessarily indicative of the results for all of 2016.
2. Summary of Significant Accounting Policies
Basis
of Presentation
We have incurred significant net losses since our inception and have an accumulated deficit of $299.6 million. In
2015, we incurred a net loss of $8.6 million and had negative cash flows from operations of $8.5 million. For the first nine months of 2016, we incurred a net loss of $8.6 million and had negative cash flows from operations of $6.0 million. At
October 1, 2016, we had $3.4 million in cash compared to $7.5 million in cash and cash equivalents as of December 31, 2015. Our cash resources will not be sufficient to fund our business for the next 12 months. On August 2, 2016, we closed a
registered offering of our common stock, Series C preferred stock along with a concurrent private placement of warrants to purchase 0.75 of a share of our common stock that provided gross proceeds of $2.2 million and net proceeds to us, after
deducting fees and our estimated offering expenses, of $1.9 million. 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 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.
5
Our plans regarding improving our future liquidity will require us to successfully use our
expertise and our technology to generate revenues in various ways, including commercial operations, joint ventures and licenses. We have invested and will continue to invest in our Austin, Texas manufacturing facility to enable us to produce our
Conductus wire products. Delays in the timing of our ability to, including but not limited to, raise additional capital, unexpected production delays, and our ability to sell our Conductus wire products in large scale could substantially impact our
estimates used in the determination of expected future cash flows and/or expected future profitability. If we fail to increase our revenues, we may not achieve and may not maintain profitability and we may not realize our investment in
infrastructure. The accompanying condensed consolidated financial statements do not include any adjustments that may result from the outcome of the uncertainties set forth above.
On July 18, 2016, we effected a 1-for-15 reverse stock split of our common stock, or the Reverse Stock Split. As a result of the Reverse Stock
Split, every fifteen 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 our Annual Report on form 10-K for 2015 referenced in this Report 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 condensed consolidated financial statements in
our 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 condensed consolidated financial statements.
Principles of Consolidation
The interim
condensed consolidated financial statements include the accounts of Superconductor Technologies Inc. and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated from the condensed consolidated financial
statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. Cash and cash equivalents are
maintained with what we believe to be quality financial institutions and from time to time exceed FDIC limits. Historically, we have not experienced any losses due to such concentration of credit risk.
Accounts Receivable
We 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. 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
Our revenues have
principally been derived from the sale of our wireless communications products, and to an increasing extent our Conductus wire, 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.
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.
6
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 research and development expense as incurred and include salary, facility, depreciation and
material expenses.
Inventories
Inventories were 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 October 1, 2016, net inventory value was $64,000 compared to a
December 31, 2015 value of $121,000. 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 (minimal sales in the current quarter and year to date, and no backlog of sales orders as of October 1, 2016 related to our wireless business), or the estimated forecast of product demand and production
requirements. Costs associated with idle capacity are charged to expense immediately. During the quarter ended October 1, 2016, we disposed of substantially all our fully reserved remaining wireless filter inventory. There was no income or expense
to the condensed consolidated financial statements as a result of this disposition.
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 nine months of 2016 and 2015, there were no retirements or disposals
and we realized gains of $0 and $1,000, respectively, from sale of previously retired equipment.
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
seventeen years.
Other Assets and Investments
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 during 2015 and determined there was no impairment. We believe there have been no triggering events in the nine months ended
October 1, 2016 that would cause us to retest the recoverability of these long-lived assets.
7
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 condensed
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 California and federal tax years that remain open to possible evaluation and interpretation of our tax
position are 2011 and 2012, respectively.
As of December 31, 2015, we had net operating loss carryforwards for federal and state income
tax purposes of $334.7 million and $150.5 million
,
respectively, which expire in the years 2018 through 2035. However, during 2015, we concluded that under the Internal Revenue Code change of control limitations, a maximum of $38.3 million
and $37.7 million, respectively, would be available for reduction of taxable income and reduced both the deferred tax asset and valuation allowance accordingly. Due to the uncertainty surrounding their realization, we recorded a full valuation
allowance against our net deferred tax assets. Accordingly, no deferred tax asset has been recorded in the accompanying condensed consolidated balance sheets.
Marketing Costs
All costs related to
marketing and advertising our products are charged to expense as incurred or at the time the advertising takes place. Advertising costs were not material in each of the nine months ended October 1, 2016 and September 26, 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. 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 three and nine months ended
October 1, 2016 and September 26, 2015, no options or awards were granted.
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
|
|
|
Nine months ended
|
|
|
|
October 1, 2016
|
|
|
September 26, 2015
|
|
|
October 1, 2016
|
|
|
September 26, 2015
|
|
Cost of revenue
|
|
$
|
2,000
|
|
|
$
|
4,000
|
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
Research and development
|
|
|
36,000
|
|
|
|
78,000
|
|
|
|
110,000
|
|
|
|
247,000
|
|
Selling, general and administrative
|
|
|
219,000
|
|
|
|
452,000
|
|
|
|
661,000
|
|
|
|
1,367,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
257,000
|
|
|
$
|
534,000
|
|
|
$
|
776,000
|
|
|
$
|
1,619,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The significant
estimates in the preparation of the financial statements relate to the assessment of the carrying amount of accounts receivable, fixed assets, intangibles, estimated provisions for warranty costs, fair value of warrant derivatives, stock-based
compensations, income taxes and disclosures related to litigation. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.
Fair Value of Financial Instruments
We
have estimated the fair value amounts of our financial instruments using the available market information and valuation methodologies considered appropriate. We determined the book value of our cash and cash equivalents, accounts receivable, and
other current liabilities as of October 1, 2016 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 Adjustments to fair value of derivatives. There have been no transfers into or out of our category Level 3. See Note 3
Stockholders Equity:
Warrants
.
Comprehensive Income
We have no items of other comprehensive income in any period and consequently have not included a Statement of Comprehensive Income.
Segment Information
We 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. 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 in 2017.
Certain Risks and Uncertainties
Our long-term prospects are dependent upon the successful commercialization and market acceptance of our Conductus wire products. We do not
currently have a customer buying significant amounts of our wire products.
Current sales of our wireless products are to wireless network
operators in the United States and our product sales have historically been concentrated in a small number of customers. For the three and nine months ended October 1, 2016, AT&T and Verizon Wireless represented 33% and 78%, respectively, of
total net revenues. For the three and nine months ended September 26, 2015, these two customers represented 63% and 81%, respectively, of total net revenues. The loss of or reduction in sales, or the inability to collect outstanding accounts
receivable, from any of these customers, or any significant new 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 a
material adverse effect on our business, financial condition, results of operations and cash flows.
9
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 nine months ended October 1, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Excess of
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Deficit
|
|
|
Total
|
|
Balance at December 31, 2015
|
|
|
330,873
|
|
|
$
|
|
|
|
|
2,640,547
|
|
|
$
|
3,000
|
|
|
$
|
304,089,000
|
|
|
$
|
(290,970,000
|
)
|
|
$
|
13,122,000
|
|
Issuance of common stock (net of costs)
|
|
|
|
|
|
|
|
|
|
|
293,604
|
|
|
|
|
|
|
|
1,900,000
|
|
|
|
|
|
|
|
1,900,000
|
|
Conversion of Series B preferred stock to common stock
|
|
|
(1,799
|
)
|
|
|
|
|
|
|
342,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series C preferred stock
|
|
|
1,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of shares from reverse stock split
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
776,000
|
|
|
|
|
|
|
|
776,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,582,000
|
)
|
|
|
(8,582,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2016
|
|
|
330,369
|
|
|
$
|
|
|
|
|
3,276,782
|
|
|
$
|
3,000
|
|
|
$
|
306,765,000
|
|
|
$
|
(299,552,000
|
)
|
|
$
|
7,216,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
At October 1, 2016, we had two active equity award option plans, the 2003 Equity Incentive Plan and the 2013 Equity Incentive Plan
(collectively, the Stock Option Plan), although we can only grant new options under the 2013 Equity Incentive Plan. Under our Stock Option Plan, stock awards were made to our directors, key employees, consultants, and non-employee
directors and consisted of stock options, 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 and nine months ended October 1, 2016 or during the three and nine months ended September 26, 2015.
Our stock option
expense to the condensed consolidated statements of operations for the three and nine months ended October 1, 2016 was $94,000 and $288,000 and $0.03 and $0.10 on basic and diluted net loss per common share, respectively, compared to $93,000 and
$297,000 and $0.08 and $0.28 on basic and diluted net loss per common share for the three and nine months ended September 26, 2015, respectively. No stock compensation cost was capitalized during either period. The total compensation cost
related to nonvested stock options not yet recognized was $0.5 million and the weighted-average period over which the cost is expected to be recognized was 11 months at October 1, 2016.
The following is a summary of stock option transactions under our Stock Option Plan at October 1, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Price Per Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Options
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance at December 31, 2015
|
|
|
131,573
|
|
|
$
|
3.30 - $ 936.00
|
|
|
$
|
38.10
|
|
|
|
71,351
|
|
|
$
|
66.15
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(399
|
)
|
|
|
257.40 936.00
|
|
|
|
680.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2016
|
|
|
131,174
|
|
|
$
|
3.30 - $921.60
|
|
|
$
|
36.08
|
|
|
|
72,046
|
|
|
$
|
62.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The outstanding options expire on various dates through the end of November 2024. The weighted-average
contractual term of options outstanding is 7.9 years and the weighted-average contractual term of stock options currently exercisable is 6.9 years. The exercise prices for these options range from $3.30 to $921.60 per share, for an aggregate
exercise price of $4.7 million. At October 1, 2016, no options had an exercise price less than the current market value.
10
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 October 1, 2016:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Balance nonvested at December 31, 2015
|
|
|
34,153
|
|
|
$
|
41.55
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(555
|
)
|
|
|
41.40
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance nonvested at October 1, 2016
|
|
|
33,598
|
|
|
$
|
41.55
|
|
|
|
|
|
|
|
|
|
|
Our restricted stock awards expense to the condensed consolidated statements of operations was $163,000
and $488,000 and $0.05 and $0.17, respectively, on basic and diluted net loss per common share for the three and nine months ended October 1, 2016, respectively, and $441,000 and $1,321,000 and $0.39 and $1.24 on basic and diluted net loss per
common share for the three and nine months ended September 26, 2015, respectively. No stock compensation cost was capitalized during the period. The total compensation cost related to nonvested awards not yet recognized was $120,000 and the
weighted-average period over which the cost is expected to be recognized was 3 months.
Warrants
The following is a summary of outstanding warrants at October 1, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
|
Total
|
|
|
Currently
Exercisable
|
|
|
Price per
Share
|
|
|
Expiration Date
|
(1)
|
|
Warrants related to February 2012 financing
|
|
|
27,963
|
|
|
|
27,963
|
|
|
$
|
243.00
|
|
|
February 22, 2017
|
(2)
|
|
Warrants related to November 2012 financing
|
|
|
556
|
|
|
|
556
|
|
|
$
|
67.50
|
|
|
November 26, 2016
|
(3)
|
|
Warrants related to December 2012 financing
|
|
|
1,042
|
|
|
|
1,042
|
|
|
$
|
67.50
|
|
|
December 18, 2016
|
(4)
|
|
Warrants related to April 2013 financing
|
|
|
17,127
|
|
|
|
17,127
|
|
|
$
|
81.75
|
|
|
April 26, 2019
|
(5)
|
|
Warrants related to August 2013 financing
|
|
|
407,825
|
|
|
|
407,825
|
|
|
$
|
3.00
|
|
|
August 9, 2018
|
(6)
|
|
Warrants related to February 2015 agreement
|
|
|
3,056
|
|
|
|
3,056
|
|
|
$
|
45.05
|
|
|
February 13, 2020
|
(7)
|
|
Warrants related to March 2015 financing
|
|
|
102,093
|
|
|
|
102,093
|
|
|
$
|
24.49
|
|
|
September 24, 2020
|
(8)
|
|
Warrants related to March 2015 financing
|
|
|
10,209
|
|
|
|
10,209
|
|
|
$
|
30.61
|
|
|
March 20, 2020
|
(9)
|
|
Warrants related to October 2015 financing
|
|
|
1,355,171
|
|
|
|
1,355,171
|
|
|
$
|
6.00
|
|
|
October 14, 2020
|
(10)
|
|
Warrants related to October 2015 financing
|
|
|
90,345
|
|
|
|
90,345
|
|
|
$
|
6.56
|
|
|
October 14, 2020
|
(11)
|
|
Warrants related to August 2016 financing
|
|
|
535,062
|
|
|
|
0
|
|
|
$
|
3.00
|
|
|
February 2, 2022
|
(12)
|
|
Warrants related to August 2016 financing
|
|
|
49,939
|
|
|
|
0
|
|
|
$
|
3.86
|
|
|
August 2, 2021
|
Warrants (1)-(4) and (6)-(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.
On July 27, 2016, we entered into a Securities Purchase Agreement (Purchase Agreement) with certain investors (the
Purchasers), pursuant to which we agreed to issue to the Purchasers, in a registered offering, (i) an aggregate of 293,604 shares of our common stock at a price of $3.08375 per share and (ii) to Purchasers, whose purchase of
our common stock 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, an
aggregate of 1,294.595255 shares of our Series C Convertible Preferred Stock (the Series C Preferred). The Series C Preferred have a stated value of $1,000 and are convertible into
11
shares of our common stock at $3.08375 per share, the public offering price of the shares of our common stock. Subject to certain prohibitions on conversion, the 1,294.595255 shares of
Series C Preferred would be convertible into an aggregate of 419,812 shares of our common stock.
In a concurrent private placement
on July 27, 2016, each Purchaser also received warrants to purchase 0.75 of a share of common stock for each share of common stock (or common stock underlying the Series C Preferred) purchased in the registered offering, or up to an
aggregate of 535,062 warrants. The warrants have an exercise price of $3.00 per share and are exercisable during the period following the nine month anniversary of the date of issuance of the warrants until the five and a half year anniversary of
the date of issuance. The warrants are exercisable for cash or, solely in the absence of an effective registration statement or prospectus, by cashless exercise. The sale of these shares reset the exercise price of warrants (5) to $3.00. In
addition, we granted the placement agent in the registered offering and concurrent private placement, an aggregate of 49,939 five-year warrants to purchase our common shares at $3.855.
On October 14, 2015, in a registered direct offering, we sold 902,132 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 $5.25, (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 $6.00 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 1,806,894 shares of our common
stock and Series B warrants to purchase 1,355,171 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 90,345 five-year warrants to purchase our common
shares at $6.5625. The sale of these shares reset the exercise price of warrants (5) to $5.25. 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 204,186 shares of our common stock, and
102,093 warrants to purchase additional shares over the next 5.5 years, at a price of $24.49 per share. The sale of these shares reset the exercise price of warrants (5) to $24.49. The placement agent received 10,209 five-year warrants at an
exercise price of $30.61.
On February 14, 2015, we entered into Warrant Exercise Agreements with certain holders of our outstanding
warrants to purchase an aggregate of 61,123 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 $30.00 per share down from the previously agreed $38.55. 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 Nine 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 3,056 shares at a per share exercise price of $45.05.
We have determined that warrants (5) are not considered indexed to our common shares under ASC 815-40, and require separate accounting as
derivative instruments with changes in fair value recognized in earnings each period. The warrants contain a provision whereby the warrant exercise price would be decreased in the event that future common stock issuances are made at a price less
than the then exercise price. Due to the potential variability of their exercise price, these warrants do not qualify for equity treatment, and therefore are recognized as a liability. The warrant liability is adjusted to fair value each reporting
period, and any change in value is recognized in the statement of operations. Their initial August 9, 2013 valuation was determined using the binomial lattice valuation model, including an equal probabilities tree and early exercise factor of
30%, the significant weighted average assumptions for estimating the fair value of these warrants were, respectively, as follows: expected life of five years and two years; risk free interest rates of 1.36% and 0.32%; expected volatility of 111% and
116% and; dividend yield of 0% and 0%. The initial fair value at August 9, 2013 was estimated to be approximately $4.2 million.
Using the
binomial lattice valuation model, including an equal probabilities tree and early exercise factor of 30%, the significant weighted average assumptions for estimating the fair value of warrants (5) at December 31, 2015 was as follows: expected
life of 2.6 years; risk free interest rates of 1.24% expected volatility of 88% and; dividend yield of 0% and the December 31, 2015 fair value of these warrants was estimated to be $245,000.
12
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 warrants (5) at October 1, 2016 was as follows: expected life of 1.9 years; risk free interest rates of 0.7% expected volatility of 104% and;
dividend yield of 0% and the October 1, 2016 fair value of these warrants was estimated to be $254,000. The fair value of warrants accounted for as derivative liabilities was decreased by $38,000 from December 31, 2015 to October 1,
2016.
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:
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
September 26, 2015
|
|
Outstanding stock options
|
|
|
131,174
|
|
|
|
73,587
|
|
Unvested restricted stock awards
|
|
|
33,598
|
|
|
|
67,196
|
|
Outstanding warrants
|
|
|
2,600,388
|
|
|
|
577,717
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,765,160
|
|
|
|
718,500
|
|
|
|
|
|
|
|
|
|
|
Also, the Series A, Series B and Series C preferred stock convertible into 466,419 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. We are currently in negotiations to renew our Austin facility lease. During the three months ended July 2, 2016 we decided not to renew our Santa Barbara lease at the end of November 2016 and
consolidate all our operations in our Austin, TX facility by the year end. As a result of this pending consolidation, we accrued $184,000 in the three months ended July 2, 2016 for moving expenses, building restoration expenses and employee
transition expenses.
For the three and nine months ended October 1, 2016, rent expense was $173,000 and $492,000, respectively, and
for the three and nine months ended September 26, 2015, rent expense was $167,000 and $357,000, respectively.
Patents and Licenses
We have entered into various licensing agreements requiring royalty payments ranging from 0.13% to 2.5% of specified product sales. Certain of
these agreements contain provisions for the payment of guaranteed or minimum royalty amounts. In the event that we fail to pay minimum annual royalties, these licenses may automatically become non-exclusive or be terminated. These royalty
obligations terminate at various times from 2016 to 2020. For the three and nine months ended October 1, 2016, royalty expense totaled $11,000 and $34,000, respectively, compared to an expense of $11,000 and $31,000, respectively, for the three and
nine months ended September 26, 2015. Under the terms of certain royalty agreements, royalty payments made may be subject to audit. There have been no audits to date and we do not expect future audit adjustments to be significant.
The minimum lease payments under operating leases and license obligations as of October 1, 2016 are as follows:
|
|
|
|
|
|
|
|
|
Years ending December 31,
|
|
Licenses
|
|
|
Operating Leases
|
|
Remainder of 2016
|
|
$
|
|
|
|
$
|
318,000
|
|
2017
|
|
|
45,000
|
|
|
|
292,000
|
|
2018
|
|
|
45,000
|
|
|
|
40,000
|
|
2019
|
|
|
45,000
|
|
|
|
27,000
|
|
2020
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
$
|
135,000
|
|
|
$
|
677,000
|
|
|
|
|
|
|
|
|
|
|
13
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 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:
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
December 31,
2015
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Accounts receivable-trade
|
|
$
|
10,000
|
|
|
$
|
43,000
|
|
Less: allowance for doubtful accounts
|
|
|
(5,000
|
)
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,000
|
|
|
$
|
38,000
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
December 31,
2015
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
64,000
|
|
|
$
|
651,000
|
|
Less: Raw material reserves
|
|
|
|
|
|
|
(578,000
|
)
|
Work-in-process
|
|
|
|
|
|
|
28,000
|
|
Less: Work-in-process reserves
|
|
|
|
|
|
|
(28,000
|
)
|
Finished goods
|
|
|
|
|
|
|
216,000
|
|
Less: Finished goods reserves
|
|
|
|
|
|
|
(168,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,000
|
|
|
$
|
121,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
December 31,
2015
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
11,571,000
|
|
|
$
|
11,571,000
|
|
Leasehold improvements
|
|
|
1,065,000
|
|
|
|
1,065,000
|
|
Furniture and fixtures
|
|
|
205,000
|
|
|
|
205,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,841,000
|
|
|
|
12,841,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(8,966,000
|
)
|
|
|
(7,290,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,875,000
|
|
|
$
|
5,551,000
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense amounted to $556,000 and $1.7 million, respectively, for the three and nine months ended October 1,
2016 and $629,000 and $1.9 million, respectively, for the three and nine months ended September 26, 2015.
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
December 31,
2015
|
|
Patents and Licenses:
|
|
|
|
|
|
|
|
|
Patents pending
|
|
$
|
566,000
|
|
|
$
|
555,000
|
|
|
|
|
|
|
|
|
|
|
Patents issued
|
|
|
1,372,000
|
|
|
|
1,252,000
|
|
Less: accumulated amortization
|
|
|
(927,000
|
)
|
|
|
(869,000
|
)
|
|
|
|
|
|
|
|
|
|
Net patents issued
|
|
|
445,000
|
|
|
|
383,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,011,000
|
|
|
$
|
938,000
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to these items totaled $20,000 and $58,000, respectively, for the three and nine
months ended October 1, 2016, and $18,000 and $56,000, respectively, for the three and nine months ended September 26, 2015. Amortization expenses are expected to total $19,000 for the remainder of 2016 and $74,000 for each of 2017 and
2018.
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
December 31,
2015
|
|
Accrued Expenses and Other Long Term Liabilities:
|
|
|
|
|
|
|
|
|
Salaries payable
|
|
$
|
55,000
|
|
|
$
|
98,000
|
|
Compensated absences
|
|
|
178,000
|
|
|
|
197,000
|
|
Compensation related
|
|
|
42,000
|
|
|
|
38,000
|
|
Warranty reserve
|
|
|
8,000
|
|
|
|
23,000
|
|
Deferred rent
|
|
|
55,000
|
|
|
|
132,000
|
|
Santa Barbara facility closure
|
|
|
148,000
|
|
|
|
|
|
Other
|
|
|
272,000
|
|
|
|
78,000
|
|
Fair value of warrant derivatives
|
|
|
254,000
|
|
|
|
245,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,012,000
|
|
|
|
811,000
|
|
Less: current portion
|
|
|
(750,000
|
)
|
|
|
(418,000
|
)
|
|
|
|
|
|
|
|
|
|
Long term portion
|
|
$
|
262,000
|
|
|
$
|
393,000
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
For the Nine months ended,
|
|
|
|
October 1, 2016
|
|
|
September 26, 2015
|
|
Warranty Reserve Activity:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
23,000
|
|
|
$
|
38,000
|
|
Additions
|
|
|
|
|
|
|
|
|
Deductions
|
|
|
(15,000
|
)
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
8,000
|
|
|
$
|
28,000
|
|
|
|
|
|
|
|
|
|
|
8. Subsequent Events
On November 4, 2016, we filed a registration statement on Form S-1 with the Securities and Exchange Commission in anticipation of a possible
future equity financing transaction. We cannot make any assurances as to the timing, size or other material terms of such transaction or if we will proceed with or complete such a transaction.