See accompanying notes to the unaudited condensed consolidated financial statements.
See accompanying notes to the unaudited condensed consolidated financial statements.
Note December 31, 2016 balances were derived from audited financial statements.
See accompanying notes to the unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED 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.
Our initial superconducting products were completed in 1998, and we began
delivery to a number of wireless network providers. In the following 14 years, our cost reducing efforts led to the invention of our proprietary, high-yield and high throughput HTS material deposition manufacturing process.
Since 2010, 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. Our current commercial product revenues principally come from our Conductus wire products which we are beginning
to commercialize. Production of our Conductus wire is our principal opportunity to grow our future revenue.
In November 2016, we were
selected as the prime recipient of a $4.5 million program award provided by the U.S. Department of Energy (DOE) and, in June 2017, the related contract was finalized and we have now commenced work under that contract.
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. 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 2016. The results of operations
for the three and nine months ended September 30, 2017 are not necessarily indicative of the results for all of 2017.
2. Summary of Significant
Accounting Policies
Basis of Presentation
We have incurred significant net losses since our inception and have an accumulated deficit of $309.8 million. In 2016, we incurred a net
loss of $11.1 million and had negative cash flows from operations of $8.1 million. At September 30, 2017, we had $4.7 million in cash and cash equivalents compared to $10.5 million in cash and cash equivalents as of
December 31, 2016. We will need to raise additional capital to continue to implement our current business plan and maintain our viability with our current forecast that our existing cash and cash equivalents resources will be sufficient to fund
our planned operations through the first quarter of 2018. 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 within one year after the date the
condensed consolidated financial statements were issued.
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
5
products. However, delays in the timing of our ability to, including but not limited to, raise additional capital, unexpected production delays, and our ability to sell our Conductus wire
products in large scale could substantially impact our estimates used in the determination of expected future cash flows and/or expected future profitability.
The accompanying 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. Share and per share data included herein has been retroactively restated for the effect of the Reverse Stock Split as applicable. 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 the fiscal year ended
December 31, 2016. 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 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. 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
Our revenues have
historically been derived from the sale of our legacy wireless communications products. We are in the process of commercializing our Conductus wire which now comprises part of our revenue. We recognize revenue 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.
Government contract revenues are
principally generated under research and development contracts. These revenues are 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 are derived from contracts with agencies of the U.S. Government. Credit risk related to accounts receivable arising from such contracts is considered minimal. 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. Based on historical experience and review of our current project in process, we believe that adjustments from open audits will not have a significant effect on our
financial position, results of operations or cash flows.
Shipping and Handling Fees and Costs
Shipping and handling fees billed to customers are included in revenues. Shipping and handling fees associated with freight are generally
included in cost of revenues.
6
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 research and development expense as incurred and include salary, facility, depreciation and
material expenses.
Inventories
Inventories were stated at the lower of cost or net realizable value, 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 September 30, 2017 net inventory value was $47,000 compared to a December 31, 2016 value of $68,000. 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, 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 five years. Leasehold improvements 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.
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, as well as alternative uses, such as government contracts or awards. 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 2016 and at September 30, 2017 and did not
believe there was any impairment.
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 2012 and 2013, respectively.
As of December 31, 2016, we had net operating loss carryforwards for federal and state income tax purposes of $344.3 million and
$119.6 million
,
respectively, which expire in the years 2017 through 2036. However, during 2016, we concluded that under the Internal Revenue Code change of control limitations, a maximum of $2.9 million and $2.8 million,
respectively, would be available for reduction of taxable income and reduced both the deferred tax asset and valuation allowance accordingly. Due to the uncertainty surrounding their realization, we recorded a full valuation allowance against our
net deferred tax assets. Accordingly, no deferred tax asset has been recorded in the accompanying condensed consolidated balance sheets.
Marketing
Costs
All costs related to marketing and advertising our products are charged to expense as incurred or at the time the advertising
takes place. Advertising costs were not material in each of the nine months ended September 30, 2017 and October 1, 2016.
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 period. 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 September 30, 2017 and October 1, 2016 no options were granted. We granted 44,334 restricted stock awards during
the nine months ended September 30, 2017. See Note 3 Stockholders Equity:
Restricted Stock Awards
.
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
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
Cost of revenue
|
|
$
|
1,000
|
|
|
$
|
2,000
|
|
|
$
|
1,000
|
|
|
$
|
5,000
|
|
Research and development
|
|
|
13,000
|
|
|
|
36,000
|
|
|
|
41,000
|
|
|
|
110,000
|
|
Selling, general and administrative
|
|
|
85,000
|
|
|
|
219,000
|
|
|
|
258,000
|
|
|
|
661,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
99,000
|
|
|
$
|
257,000
|
|
|
$
|
300,000
|
|
|
$
|
776,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 condensed consolidated 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, 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 September 30, 2017 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 warrant derivatives. 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.
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. With respect to our Conductus wire business, we expect to also have some customer concentration in that business as we continue to commercialize our wire product. The loss of
or reduction in sales, or the inability to collect outstanding accounts receivable, from any significant customer 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.
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.
9
3. Stockholders Equity
The following is a summary of stockholders equity transactions for the nine months ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred Stock
|
|
|
Common Stock
|
|
|
Capital in
Excess of
Par Value
|
|
|
Accumulated
Deficit
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
|
333,767
|
|
|
$
|
|
|
|
|
7,353,714
|
|
|
$
|
7,000
|
|
|
$
|
316,177,000
|
|
|
$
|
(302,086,000
|
)
|
|
$
|
14,098,000
|
|
Conversion of Series B preferred stock to common stock
|
|
|
(4,842
|
)
|
|
|
|
|
|
|
3,227,880
|
|
|
|
3,000
|
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
44,334
|
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
Warrant exercises
|
|
|
|
|
|
|
|
|
|
|
133,333
|
|
|
|
1,000
|
|
|
|
199,000
|
|
|
|
|
|
|
|
200,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,674,000
|
)
|
|
|
(7,674,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
328,925
|
|
|
$
|
|
|
|
|
10,759,261
|
|
|
$
|
11,000
|
|
|
$
|
316,673,000
|
|
|
$
|
(309,760,000
|
)
|
|
$
|
6,924,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
At September 30, 2017, 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. On September 27, 2017, our stockholders approved an amendment to the 2013 Equity Incentive Plan to increase the number of shares authorized to be issued under such plan from 293,333 to 2,293,333 shares and the related sublimit of awards to
any one participant from 20,000 to 300,000 shares. There were no stock option exercises during the three or nine months ended September 30, 2017 or during the three and nine months ended October 1, 2016.
Stock option expense to the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 on net
loss was $96,000 and $290,000 and $0.01 and $0.03 on basic and diluted net loss per common share, respectively, compared to $94,000 and $288,000 and $0.03 and $0.10 on basic and diluted net loss per common share for the three and nine months ended
October 1, 2016. No stock compensation cost was capitalized during either period. The total compensation cost related to nonvested stock options not yet recognized was $128,000 and the weighted-average period over which the cost is expected to
be recognized was 8 months at September 30, 2017.
The following is a summary of stock option transactions under our Stock Option
Plan at September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Price Per Share
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Options
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance at December 31, 2016
|
|
|
131,158
|
|
|
$3.30 - $921.60
|
|
$
|
36.03
|
|
|
|
101,046
|
|
|
$
|
45.35
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(1,361
|
)
|
|
3.30 - 379.80
|
|
|
10.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
129,797
|
|
|
$3.30 - $921.60
|
|
$
|
36.30
|
|
|
|
101,464
|
|
|
$
|
45.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The outstanding options expire on various dates through the end of November 2025. The weighted-average
contractual term of options outstanding is 6.9 years and the weighted-average contractual term of stock options currently exercisable is 6.5 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 September 30, 2017, 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 three years. The following is a summary of our restricted stock award transactions at September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Balance nonvested at December 31, 2016
|
|
|
555
|
|
|
$
|
41.40
|
|
Granted
|
|
|
44,334
|
|
|
|
1.07
|
|
Vested
|
|
|
(555
|
)
|
|
|
41.40
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance nonvested at September 30, 2017
|
|
|
44,334
|
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
|
|
Restricted stock award expense to the condensed consolidated statements of operations was $2,000 and $9,000
and $0.00 and $0.00, respectively, on basic and diluted net loss per common share for the three and nine months ended September 30, 2017, respectively, and $163,000 and $488,000 and $0.05 and $0.17 on basic and diluted net loss per common share
for the three and nine months ended October 1, 2016, respectively. No stock compensation cost was capitalized during the period. The total compensation cost related to nonvested awards not yet recognized was $42,000 and the weighted-average
period over which the cost is expected to be recognized was 13 months.
Warrants
The following is a summary of outstanding warrants at September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
Total
|
|
|
Currently
Exercisable
|
|
|
Price per
Share
|
|
|
Expiration Date
|
|
(1) Warrants related to April 2013 financing
|
|
|
17,127
|
|
|
|
17,127
|
|
|
$
|
81.75
|
|
|
|
April 26, 2019
|
|
(2) Warrants related to August 2013 financing
|
|
|
274,492
|
|
|
|
274,492
|
|
|
$
|
1.50
|
|
|
|
August 9, 2018
|
|
(3) Warrants related to February 2015 agreement
|
|
|
3,056
|
|
|
|
3,056
|
|
|
$
|
45.05
|
|
|
|
February 13, 2020
|
|
(4) Warrants related to March 2015 financing
|
|
|
102,093
|
|
|
|
102,093
|
|
|
$
|
24.49
|
|
|
|
September 24, 2020
|
|
(5) Warrants related to March 2015 financing
|
|
|
10,209
|
|
|
|
10,209
|
|
|
$
|
30.61
|
|
|
|
March 20, 2020
|
|
(6) Warrants related to October 2015 financing
|
|
|
1,355,171
|
|
|
|
1,355,171
|
|
|
$
|
6.00
|
|
|
|
October 14, 2020
|
|
(7) Warrants related to October 2015 financing
|
|
|
90,345
|
|
|
|
90,345
|
|
|
$
|
6.56
|
|
|
|
October 14, 2020
|
|
(8) Warrants related to August 2016 financing
|
|
|
535,062
|
|
|
|
535,062
|
|
|
$
|
3.00
|
|
|
|
February 2, 2022
|
|
(9) Warrants related to August 2016 financing
|
|
|
49,939
|
|
|
|
49,939
|
|
|
$
|
3.86
|
|
|
|
August 2, 2021
|
|
(10) Warrants related to December 2016 financing
|
|
|
6,856,667
|
|
|
|
6,856,667
|
|
|
$
|
2.00
|
|
|
|
December 14, 2021
|
|
Warrants (1) and (3)-(10) are exercisable by paying cash or, solely in the absence of an effective
registration statement or prospectus, by cashless exercise for unregistered shares of common stock. The exercise price of the warrants is subject to standard antidilutive provision adjustment in the case of stock dividends or other distributions on
shares of common stock or any other equity or equity equivalent securities payable in shares of common stock, stock splits, stock combinations, reclassifications or similar events affecting our common stock, and also, subject to limitations, upon
any distribution of assets, including cash, stock or other property to our stockholders. The exercise price of the warrants is not subject to price-based anti-dilution adjustment. We have determined that these warrants related to
issuance of common stock are subject to equity treatment because the warrant holder has no right to demand cash settlement and there are no unusual anti-dilution rights.
We have determined that warrants (2) 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.
11
Using the binomial lattice valuation model, including an equal probabilities tree and early
exercise factor of 30%, the fair value of these warrant liabilities at December 31, 2014 and December 31, 2015, respectively, were $5.2 million and $245,000.
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 (2) at December 31, 2016 was as follows: expected life of 1.6 years; risk free interest rates of 1.15% expected volatility of 147% and; dividend yield of 0% and the
December 31, 2016 fair value of these warrants was estimated to be $127,000.
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 (2) at September 30, 2017 was as follows: expected life of 0.85 years; risk free interest
rates of 1.27%; expected volatility of 151% and; dividend yield of 0% and the September 30, 2017 fair value of these warrants was estimated to be $60,000. The fair value of warrants accounted for as derivative liabilities was decreased by
$67,000 from December 31, 2016 to September 30, 2017. On April 19, 2017, we received $200,000 from the exercise of 133,333 of these outstanding warrants at $1.50 per share.
4. Loss 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:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
Outstanding stock options
|
|
|
129,797
|
|
|
|
131,174
|
|
Unvested restricted stock awards
|
|
|
44,334
|
|
|
|
33,598
|
|
Outstanding warrants
|
|
|
9,294,161
|
|
|
|
2,600,388
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,468,292
|
|
|
|
2,765,160
|
|
|
|
|
|
|
|
|
|
|
Also, the preferred stock convertible into 18,274 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 facility under a
non-cancelable
operating lease in Austin, Texas that expires in April 2020. The lease contains minimum rent escalation clauses that require additional rental amounts after the first
year. Rent expense for these leases is recognized on a straight line basis over the minimum lease term. This lease also requires us to pay utilities, insurance, taxes and other operating expenses and contains one five-year renewal option.
For the three and nine months ended September 30, 2017 rent expense was $106,000 and $305,000, respectively, and for the three and nine
months ended October 1, 2016 rent expense was $173,000 and $492,000, 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 2017 to 2020. For the three and nine months ended September 30, 2017 and October 1, 2016, royalty expense totaled $11,000 and $34,000, respectively. 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.
12
The minimum lease payments under operating leases and license obligations as of
September 30, 2017 are as follows:
|
|
|
|
|
|
|
|
|
Years ending December 31,
|
|
Licenses
|
|
|
Operating Leases
|
|
Remainder of 2017
|
|
$
|
|
|
|
$
|
220,000
|
|
2018
|
|
|
45,000
|
|
|
|
898,000
|
|
2019
|
|
|
|
|
|
|
907,000
|
|
2020
|
|
|
|
|
|
|
223,000
|
|
2021
|
|
|
|
|
|
|
3,000
|
|
Thereafter
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
$
|
45,000
|
|
|
$
|
2,253,000
|
|
|
|
|
|
|
|
|
|
|
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 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.
13
7. Details of Certain Financial Statement Components and Supplemental Disclosures of Cash Flow Information and
Non-Cash
Activities
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Accounts receivable-trade
|
|
$
|
92,000
|
|
|
$
|
13,000
|
|
Less: allowance for doubtful accounts
|
|
|
(5,000
|
)
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,000
|
|
|
$
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
47,000
|
|
|
$
|
68,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47,000
|
|
|
$
|
68,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
11,692,000
|
|
|
$
|
11,571,000
|
|
Leasehold improvements
|
|
|
1,065,000
|
|
|
|
1,065,000
|
|
Furniture and fixtures
|
|
|
205,000
|
|
|
|
205,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,962,000
|
|
|
|
12,841,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(10,800,000
|
)
|
|
|
(9,350,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,162,000
|
|
|
$
|
3,491,000
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense amounted to $437,000 and $1.4 million, respectively, for the
three and nine months ended September 30, 2017 and $556,000 and $1.7 million, respectively, for the three and nine months ended October 1, 2016.
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Patents and Licenses:
|
|
|
|
|
|
|
|
|
Patents pending
|
|
$
|
67,000
|
|
|
$
|
566,000
|
|
|
|
|
|
|
|
|
|
|
Patents issued
|
|
|
1,682,000
|
|
|
|
1,372,000
|
|
Less accumulated amortization
|
|
|
(973,000
|
)
|
|
|
(948,000
|
)
|
|
|
|
|
|
|
|
|
|
Net patents issued
|
|
|
709,000
|
|
|
|
424,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
776,000
|
|
|
$
|
990,000
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to these items totaled $9,000 and
$25,000, respectively, for the three and nine months ended September 30, 2017 and $20,000 and $58,000, respectively, for the three and nine months ended October 1, 2016. Amortization expenses are expected to total $10,000 for the remainder
of 2017 and $40,000 for 2018 and 2019.
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Accrued Expenses and Other Long Term Liabilities:
|
|
|
|
|
|
|
|
|
Salaries Payable
|
|
$
|
52,000
|
|
|
$
|
105,000
|
|
Compensated absences
|
|
|
176,000
|
|
|
|
144,000
|
|
Compensation related
|
|
|
22,000
|
|
|
|
17,000
|
|
Warranty reserve
|
|
|
8,000
|
|
|
|
8,000
|
|
Deferred rent
|
|
|
44,000
|
|
|
|
37,000
|
|
Other
|
|
|
351,000
|
|
|
|
342,000
|
|
Fair value of warrant derivatives
|
|
|
60,000
|
|
|
|
127,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
713,000
|
|
|
|
780,000
|
|
Less current portion
|
|
|
(601,000
|
)
|
|
|
(608,000
|
)
|
|
|
|
|
|
|
|
|
|
Long term portion
|
|
$
|
112,000
|
|
|
$
|
172,000
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended,
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
Warranty Reserve Activity:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
8,000
|
|
|
$
|
23,000
|
|
Additions
|
|
|
|
|
|
|
|
|
Deductions
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
8,000
|
|
|
$
|
8,000
|
|
|
|
|
|
|
|
|
|
|