Clearday, Inc. - Quarter Report: 2010 October (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 2, 2010
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
_____
to
_____
Commission File Number 0-21074
SUPERCONDUCTOR TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
| Delaware | 77-0158076 | |
| (State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification No.) |
460 Ward Drive,
Santa Barbara, California 93111-2356
(Address of principal executive offices & zip code)
Santa Barbara, California 93111-2356
(Address of principal executive offices & zip code)
(805) 690-4500
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
| Large Accelerated Filer o | Accelerated Filer o | Non-accelerated Filer o | Smaller reporting company þ | |||
| (do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o or No þ
The registrant had 27,217,408 shares of common stock outstanding as of the close of business on
November 1, 2010.
SUPERCONDUCTOR TECHNOLOGIES INC.
INDEX TO FORM 10-Q
Quarterly Report Ended October 2, 2010
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| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. We claim the protection of the safe harbor contained in the Private Securities Litigation
Reform Act of 1995 for these forward looking statements. Our forward-looking statements relate to
future events or our future performance and include, but are not limited to, statements concerning
our business strategy, future commercial revenues, market growth, capital requirements, new product
introductions, expansion plans and the adequacy of our funding. Other statements contained in this
Report that are not historical facts are also forward-looking statements. We have tried, wherever
possible, to identify forward-looking statements by terminology such as “may,” “will,” “could,”
“should,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and other
comparable terminology.
We caution investors that any forward-looking statements presented in this Report, or that we
may make orally or in writing from time to time, are based on the beliefs of, assumptions made by,
and information currently available to, us. Such statements are based on assumptions, and the
actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that
are beyond our control or ability to predict. Although we believe that our assumptions are
reasonable, they are not guarantees of future performance and some will inevitably prove to be
incorrect. As a result, our actual future results can be expected to differ from our expectations,
and those differences may be material. Accordingly, investors should use caution in relying on past
forward-looking statements, which are based on known results and trends at the time they are made,
to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or
achievements to differ materially from those expressed or implied by forward-looking statements
include the following:
| • | limited cash and a history of losses; |
| • | limited number of potential customers; |
| • | limited number of suppliers for some of our components; |
| • | no significant backlog from quarter to quarter; |
| • | our market is characterized by rapidly advancing technology; |
| • | fluctuations in product demand from quarter to quarter can be significant; |
| • | the impact of competitive filter products, technologies and pricing; |
| • | manufacturing capacity constraints and difficulties; and |
| • | general economic conditions, such as the current worldwide recession. |
For further discussion of these and other factors see, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and “Risk Factors” in our Annual Report on Form
10-K for 2009.
This Report and all subsequent written and oral forward-looking statements attributable to us
or any person acting on our behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to in this section. We do not undertake any obligation to release
publicly any revisions to our forward-looking statements to reflect events or circumstances after
the date of this Report.
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PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
Item 1. Financial Statements.
SUPERCONDUCTOR TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 2, | September 26, | October 2, | September 26, | |||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Net revenues: |
||||||||||||||||
Net commercial product revenues |
$ | 1,830,000 | $ | 2,985,000 | $ | 5,901,000 | $ | 5,893,000 | ||||||||
Government and other contract revenues |
144,000 | 1,307,000 | 1,857,000 | 2,708,000 | ||||||||||||
Total net revenues |
1,974,000 | 4,292,000 | 7,758,000 | 8,601,000 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of commercial product revenues |
2,110,000 | 2,947,000 | 6,464,000 | 7,186,000 | ||||||||||||
Cost of government and other contract
revenue |
86,000 | 993,000 | 1,095,000 | 2,227,000 | ||||||||||||
Research and development |
1,507,000 | 902,000 | 3,998,000 | 2,984,000 | ||||||||||||
Selling, general and administrative |
1,622,000 | 1,629,000 | 5,338,000 | 5,164,000 | ||||||||||||
Total costs and expenses |
5,325,000 | 6,471,000 | 16,895,000 | 17,561,000 | ||||||||||||
Loss from operations |
(3,351,000 | ) | (2,179,000 | ) | (9,137,000 | ) | (8,960,000 | ) | ||||||||
Other Income and Expense |
||||||||||||||||
Noncontrolling interest in joint venture |
— | (30,000 | ) | — | (117,000 | ) | ||||||||||
Adjustments to fair value of derivatives |
2,000 | 393,000 | 171,000 | (387,000 | ) | |||||||||||
Interest income |
2,000 | 4,000 | 4,000 | 21,000 | ||||||||||||
Interest expense |
(7,000 | ) | (7,000 | ) | (21,000 | ) | (25,000 | ) | ||||||||
Net loss |
$ | ( 3,354,000 | ) | $ | (1,819,000 | ) | $ | (8,983,000 | ) | $ | (9,468,000 | ) | ||||
Basic and diluted loss per common share |
$ | (0.14 | ) | $ | (0.08 | ) | $ | (0.40 | ) | $ | (0.50 | ) | ||||
Weighted average number of common
shares outstanding |
23,335,955 | 21,621,035 | 22,334,644 | 19,116,136 | ||||||||||||
See accompanying notes to the unaudited interim condensed consolidated financial statements.
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SUPERCONDUCTOR TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| October 2, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Unaudited) | (See Note) | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 8,275,000 | $ | 10,365,000 | ||||
Accounts receivable, net |
250,000 | 462,000 | ||||||
Inventory, net |
2,396,000 | 2,644,000 | ||||||
Prepaid expenses and other current assets |
493,000 | 445,000 | ||||||
Total Current Assets |
11,414,000 | 13,916,000 | ||||||
Property and equipment, net of accumulated depreciation of
$21,760,000 and $21,076,000, respectively |
1,457,000 | 1,832,000 | ||||||
Patents, licenses and purchased technology, net of accumulated amortization
of $2,466,000 and $2,384,000, respectively |
2,236,000 | 2,163,000 | ||||||
Other assets |
205,000 | 215,000 | ||||||
Total Assets |
$ | 15,312,000 | $ | 18,126,000 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 817,000 | $ | 467,000 | ||||
Accrued expenses |
1,128,000 | 671,000 | ||||||
Fair value of warrant derivative |
— | 171,000 | ||||||
Current portion of capitalized lease obligations and long term debt |
34,000 | 50,000 | ||||||
Total Current Liabilities |
1,979,000 | 1,359,000 | ||||||
Other long term liabilities |
607,000 | 526,000 | ||||||
Total Liabilities |
2,586,000 | 1,885,000 | ||||||
Commitments and contingencies-Notes 6 and 7 |
||||||||
Stockholders’ Equity: |
||||||||
Preferred stock, $.001 par value, 2,000,000 shares authorized,
611,523 shares issued and outstanding |
1,000 | 1,000 | ||||||
Common stock, $.001 par value, 250,000,000 shares authorized,
26,617,408 and 22,512,033 shares issued and outstanding, respectively |
27,000 | 23,000 | ||||||
Capital in excess of par value |
247,346,000 | 241,882,000 | ||||||
Accumulated deficit |
(234,648,000 | ) | (225,665,000 | ) | ||||
Total Stockholders’ Equity |
12,726,000 | 16,241,000 | ||||||
Total Liabilities and Equity |
$ | 15,312,000 | $ | 18,126,000 | ||||
See accompanying notes to the condensed consolidated financial statements
Note-December 31, 2009 balances were derived from audited financial statements.
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SUPERCONDUCTOR TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | ||||||||
| October 2, | September 26, | |||||||
| 2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (8,983,000 | ) | $ | (9,468,000 | ) | ||
Adjustments to reconcile net loss to net cash used in
operating activities: |
||||||||
Depreciation and amortization |
766,000 | 1,143,000 | ||||||
Stock-based compensation expense |
822,000 | 843,000 | ||||||
Provision for excess and obsolete inventories |
270,000 | 192,000 | ||||||
Noncontrolling interest in joint venture |
— | 117,000 | ||||||
Fair value of derivatives |
(171,000 | ) | 387,000 | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
212,000 | (670,000 | ) | |||||
Inventory, net |
(22,000 | ) | 2,024,000 | |||||
Prepaid expenses and other current assets |
(48,000 | ) | (710,000 | ) | ||||
Patents, licenses and purchased technology |
(154,000 | ) | (123,000 | ) | ||||
Other assets |
8,000 | 309,000 | ||||||
Accounts payable, accrued expenses and other long-term liabilities |
873,000 | 838,000 | ||||||
Net cash used in operating activities |
(6,427,000 | ) | (5,118,000 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Investment in joint venture |
— | (8,000 | ) | |||||
Purchases of property and equipment |
(309,000 | ) | (183,000 | ) | ||||
Net cash used in investing activities |
(309,000 | ) | (191,000 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Repurchase of common shares for withholding obligations |
(573,000 | ) | — | |||||
Net proceeds from the sale of common stock |
5,219,000 | 10,456,000 | ||||||
Net cash provided by financing activities |
4,646,000 | 10,456,000 | ||||||
Net increase (decrease) in cash and cash equivalents |
(2,090,000 | ) | 5,147,000 | |||||
Cash and cash equivalents at beginning of period |
10,365,000 | 7,569,000 | ||||||
Cash and cash equivalents at end of period |
$ | 8,275,000 | $ | 12,716,000 | ||||
See accompanying notes to the unaudited interim condensed consolidated financial statements.
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SUPERCONDUCTOR TECHNOLOGIES INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
Superconductor Technologies Inc. (together with its subsidiaries, “we” or “us”) was
incorporated in Delaware on May 11, 1987, and we maintain our headquarters in Santa Barbara,
California. We are a global leader in high temperature superconductor (“HTS”) materials and related
technologies. We have been awarded more than 100 patents and also relay on significant proprietary
trade secrets and manufacturing expertise. Our current commercial efforts have been focused on the
design, manufacture and sale of high performance infrastructure products for wireless voice and
data applications, including our SuperLink® (high-temperature superconducting filters), AmpLink®
(high performance, ground-mounted amplifiers) and SuperPlex (high performance multiplexers)
products. We are now leveraging our key enabling technologies, including radio frequency filtering,
HTS materials and cryogenics, to pursue emerging opportunities in the electrical grid and in
equipment platforms that utilize electrical circuits, as well as government products and
reconfigurable handset filters.
For the nine months ended October 2, 2010 and September 26, 2009, commercial revenues
accounted for 76% and 69%, respectively, of our net revenues.
We have also generated significant revenues from government contracts. We typically own the
intellectual property developed under these contracts and grant the U.S. government a royalty-free,
non-exclusive and nontransferable license to use it. For the nine months ended October 2, 2010 and
September 26, 2009, government related contracts accounted for 24% and 31%, respectively, of our
net revenues.
The unaudited condensed consolidated financial information furnished herein has been prepared
in accordance with generally accepted accounting principles and reflects all adjustments,
consisting only of normal recurring adjustments that, in our opinion, are necessary for a fair
statement of the results of operations for the periods presented. The preparation of these
condensed consolidated financial statements in conformity with generally accepted accounting
principles requires us to make estimates and assumptions that affect the amounts reported in the
financial statements and the accompanying notes. Actual results could differ from those estimates,
and such differences may be material to the financial statements. This quarterly report on Form
10-Q should be read in conjunction with our Annual Report on Form 10-K for 2009. The results of
operations for the nine months ended October 2, 2010 are not necessarily indicative of the results
for all of 2010.
2. Summary of Significant Accounting Policies
Basis of Presentation
For the nine months ended October 2, 2010, we incurred a net loss of $9.0 million and negative
cash flows from operations of $6.4 million. In 2009, we incurred a net loss of $13.0 million and
had negative cash flows from operations of $7.4 million.
At October 2, 2010, we had $8.3 million in cash and cash equivalents. Our cash resources,
together with our line of credit, should be sufficient to fund our business through the second
quarter of 2011. We believe the key factors to our liquidity will be our ability to successfully
use our expertise and our technology to generate revenues in various ways, including commercial
operations, government contracts, joint ventures and licenses. Because of the uncertainty of these
factors, we may need to raise funds to meet our working capital needs. If we require additional
financing, we cannot assure you that additional financing will be available on acceptable terms or
at all. If we issue additional equity securities to raise funds, the ownership percentage of our
existing stockholders would be reduced. New investors may demand rights, preferences or privileges
senior to those of existing holders of common stock. If we cannot raise any needed funds, we might
be forced to make further substantial reductions in our operating expenses, which could adversely
affect our ability to implement our current business plan and ultimately our viability as a
company.
Our condensed consolidated financial statements have been prepared assuming that we will
continue as a going concern. The factors described above raise substantial doubt about our ability
to continue as a going concern. Our financial statements do not include any adjustments that might
result from this uncertainty.
Principles of Consolidation
The interim condensed consolidated financial statements include the accounts of Superconductor
Technologies Inc. and our wholly owned subsidiaries. All significant intercompany transactions have
been eliminated from the condensed consolidated
financial statements.
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Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of
three months or less. Cash equivalents are maintained with quality financial institutions and from
time to time exceed FDIC limits. Our money market funds are not insured or guaranteed by the FDIC.
Historically we have not experienced any losses due to such concentration of credit risk.
Accounts Receivable
We sell predominantly to entities in the wireless communications industry and to entities of
the United States government. We grant uncollateralized credit to our customers. We perform usual
and customary credit evaluations of our customers before granting credit. Trade accounts
receivable are recorded at the invoiced amount and do not bear interest. We record an allowance
for doubtful accounts that represents our best estimate of the amount of probable credit losses in
our existing accounts receivable based on our historical write-off experience. Past due balances
are reviewed for collectibility. Accounts balances are charged off against the allowance when we
deem it is probable the receivable will not be recovered. We do not have any off balance sheet
credit exposure related to our customers.
Revenue Recognition
Commercial revenues are principally derived from the sale of our SuperLink, AmpLink and
SuperPlex family of products and are recognized once all of the following conditions have been met:
a) an authorized purchase order has been received in writing, b) customer’s credit worthiness has
been established, c) shipment of the product has occurred, d) title has transferred, and e) if
stipulated by the contract, customer acceptance has occurred and all significant vendor
obligations, if any, have been satisfied.
Contract revenues are principally generated under research and development contracts.
Contract 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 primarily from
contracts with agencies of the U.S. Government. Credit risk related to accounts receivable arising
from such contracts is considered minimal. These contracts include cost-plus, fixed price and cost
sharing arrangements and are generally short-term in nature.
All payments to us for work performed on contracts with agencies of the U.S. Government are
subject to adjustment upon audit by the Defense Contract Audit Agency. Contract audits through
2003 are closed. Based on historical experience and review of current projects 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 net commercial product
revenues. Shipping and handling fees associated with freight are generally included in cost of
commercial product revenues.
Warranties
We offer warranties generally ranging from one to five years, depending on the product and
negotiated terms of purchase agreements with our customers. Such warranties require us to repair
or replace defective product returned to us during such warranty period at no cost to the customer.
Our estimate for warranty-related costs is recorded at the time of sale based on our actual
historical product return rates and expected repair costs. Such costs have been within our
expectations.
Guarantees
In connection with the sales and manufacturing of our commercial products, we indemnify,
without stated limit or term, our customers and contract manufacturers against 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 expensed as incurred and include salary, facility,
depreciation and material expenses. Research and development costs are charged to research and
development expense. Research and development costs
incurred solely in connection with contracts are charged to government and other contract expense.
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Inventories
Inventories are stated at the lower of cost or market, with costs primarily determined using
standard costs, which approximate actual costs utilizing the first-in, first-out method. We review
inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess
and obsolete inventory and/or vendor cancellation charges related to purchase commitments. If we
determine that a write-down is necessary, we recognize a loss in the period in which the loss is
identified, whether or not the inventory is retained. Our inventory reserves establish a new cost
basis for inventory and are not reversed until we sell or dispose of the related inventory. Such
provisions are established based on historical usage, adjusted for known changes in demands for
such products, or the estimated forecast of product demand and production requirements. Costs
associated with idle capacity are expensed immediately.
Property and Equipment
Property and equipment are recorded at cost. Equipment is depreciated using the straight-line
method over its estimated useful life ranging from three to five years. Leasehold improvements and
assets financed under capital leases are amortized over the shorter of their useful lives or the
lease term. Furniture and fixtures are depreciated over seven years. Expenditures for additions
and major improvements are capitalized. Expenditures for minor tooling, repairs and maintenance
and minor improvements are charged to 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
administrative 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 approximately seventeen years. Purchased
technology acquired through the acquisition of Conductus, Inc. in 2002 was recorded at its
estimated fair value and has been amortized using the straight-line method over seven years.
Long-Lived Assets
The realizability of long-lived assets is evaluated periodically as events or circumstances
indicate a possible inability to recover the carrying amount. Long-lived assets that will no
longer be used in our business are written off in the period identified since they are no longer
expected to generate any positive cash flows for us. Long-lived assets that continue to be used by
us are periodically evaluated for recoverability. Such evaluation is based on various analyses,
including cash flow and profitability projections. The analyses necessarily involve significant
management judgment. In the event the projected undiscounted cash flows are less than net book
value of the assets, the carrying value of the assets is written down to its estimated fair value.
We tested our long lived assets for recoverability during 2009 and did not believe that there was
any impairment.
While we believe the expected cash flows from our long-lived assets, including intangible
assets, exceed their carrying amounts, materially different assumptions regarding future
performance and discount rates could result in future impairment losses. In particular, if we no
longer believe we will achieve our long-term projected sales or operating expenses, we may
conclude, in future impairment tests, that the estimated fair value of our long-lived assets,
including intangible assets, is less than their book value and recognize an impairment charge. Any
impairment charge would adversely affect our earnings.
Other Investments
From time to time we may pursue joint ventures with other entities to commercialize our
technology. In 2007, we formed a joint venture with Hunchun BaoLi Communication Co. Ltd. to
manufacture and sell our SuperLink interference elimination solution in China. We use the equity
method of accounting for our 45 percent joint venture interest. The joint venture agreement called
for our joint venture partner to supply the capital and local expertise, and for us to provide a
license of certain technology and supply key parts for manufacturing. Since 2007, we have been
conducting lab and field trials in the existing China 2G market using our TD-SCDMA and SuperLink
solutions. Although those activities continue, the parties have not completed their contributions
to the joint venture, including most of the funding and our license, within the two year period
specified by the agreement and Chinese law. The future of the joint venture, including any
commencement of manufacturing and the transfer of our processes, will depend on product demand in
China, completion of funding by our joint venture partner, as well as a number of other conditions,
including certain critical approvals from the Chinese and United States governments. There
continues to be no assurance that these conditions will be met. As a result of this uncertainty, at
December 31, 2009, we fully reserved against our investment in the joint venture of $521,000. Other
expense included $30,000 and $117,000 in the three and nine months ended September 26, 2009,
respectively, from our 45 percent equity ownership. There was no such expense in 2010.
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Restructuring Expenses
Liability for costs associated with an exit or disposal activity are recognized when the
liability is incurred.
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 accounting 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 framework uses a two-step approach under
which 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. Guidance
is also provided on the accounting for the related interest and penalties, financial statement and
disclosure. We are currently not under examination by any taxing authority nor have we been
notified of an impending examination. The oldest tax year that remains open to possible evaluation
and interpretation of our tax position is 1995. As of December 31, 2009, we had net operating loss
carryforwards for federal and state income tax purposes of approximately $298.8 million and $169.9
million, respectively. 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 expensed as incurred or at the
time the advertising takes place. Advertising costs were not material in the three and nine months
ended October 2, 2010 or the three or nine months ended September 26, 2009.
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 2, 2010 and September 26, 2009, the
weighted average fair value of options was estimated at the date of the grant using the
Black-Scholes option-pricing model. The following are the significant weighted average assumptions
used for estimating the fair value under our stock option plans:
| Three months ended | Nine months ended | |||||||||
| October 2, | September 26, | October 2, | September 26, | |||||||
| 2010 | 2009 | 2010 | 2009 | |||||||
Expected life in years |
n/a | n/a | 4.0 | n/a | ||||||
Risk free interest rate |
n/a | n/a | 2.04 | % | n/a | |||||
Expected volatility |
n/a | n/a | 117 | % | n/a | |||||
Dividend yield |
n/a | n/a | 0 | % | n/a | |||||
The expected life was based on the contractual term of the options and expected employee
exercise behavior. Typically, options to our employees have a 3 or 4 year vesting term and a 10
year contractual term. The risk-free interest rate is based on U. S. Treasury zero-coupon issues
with a remaining term equal to the expected option life assumed at the grant date. The future
volatility is based on our 4 year historical volatility. We used an expected dividend yield of 0%
because we have never paid a dividend and do not anticipate paying dividends. We assumed a 10%
forfeiture rate based on our historical stock option cancellation rates over the last 4 years.
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The stock-based compensation expense for our restricted stock awards is measured at fair value
on the date of grant based on the number of shares expected to vest and the quoted market price of
our common stock.
The 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 2, | September 26, | October 2, | September 26, | |||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of revenue |
$ | 5,000 | $ | 8,000 | $ | 16,000 | $ | 23,000 | ||||||||
Research and development |
89,000 | 67,000 | 226,000 | 200,000 | ||||||||||||
Selling, general and administrative |
212,000 | 224,000 | 580,000 | 620,000 | ||||||||||||
Total stock-based compensation expense |
$ | 306,000 | $ | 299,000 | $ | 822,000 | $ | 843,000 | ||||||||
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. The significant estimates in the preparation of the financial statements relate
to the assessment of the carrying amount of accounts receivable, inventory, fixed assets,
intangibles, estimated provisions for warranty costs, accruals for restructuring and lease
abandonment costs, contract revenues, income taxes and disclosures related to litigation. Actual
results could differ from those estimates, and such differences may be material to the condensed
consolidated financial statements.
Fair Value of Financial Instruments
We have estimated the fair value of our financial instruments using the available market
information and valuation methodologies considered to be appropriate and have determined that the
book value of our cash and cash equivalents, accounts receivables, inventories, prepaid expenses
and accrued expenses approximate fair value.
Comprehensive Income (Loss)
We have no items of other comprehensive income (loss) in any period presented and consequently
have not presented a statement of comprehensive income (loss).
Segment Information
We operate in a single business segment, the research, development, manufacture and marketing
of high performance products used in cellular base stations to maximize the performance of wireless
telecommunications networks by improving the quality of uplink signals from mobile wireless
devices. We currently derive net commercial product revenues primarily from the sales of our
SuperLink, AmpLink and SuperPlex products. We currently sell most of our products directly to
wireless network operators in the United States. Net revenues derived principally from government
research and development contracts are presented separately on the unaudited condensed consolidated
statements of operations for all periods presented.
Certain Risks and Uncertainties
Our long-term prospects are dependent upon the continued and increased market acceptance for
our products.
We currently sell most of our products directly to wireless network operators in the United
States, and our product sales have historically been concentrated in a small number of customers.
In the nine months ended October 2, 2010, we had two customers that represented 59% and 12% of
total net revenues and collectively 75% of accounts receivable. In 2009, these two customers
represented 51% and 11% of total net revenues and collectively 38% of accounts receivable. The
loss of or reduction in sales to, or the inability to collect outstanding accounts receivable from,
any of these customers could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
We currently rely on a limited number of suppliers for key components of our products. The
loss of any of these suppliers could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
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In connection with the sales of our commercial products, we indemnify, without stated limit or
term, our customers against 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.
Recent Accounting Pronouncements
In February 2010, the Financial Accounting Standards Board issued updated guidance related to
subsequent events. As a result of this updated guidance, we must still evaluate subsequent events
through the issuance date of our financial statements; however, we are not required to disclose
that date in our financial statement disclosures. This amended guidance became effective upon its
issuance on February 24, 2010. We adopted this updated guidance effective as of that date and all
subsequent event references in our Securities and Exchange Commission filings will reflect these
amended disclosure requirements.
We have considered all other newly issued accounting guidance that is applicable to our
operations and the preparation of our condensed consolidated statements, including guidance that we
have not yet adopted. We do not believe that any such guidance will have a material effect on our
financial position or results of operation.
3. Short Term Borrowings
We have a line of credit with a bank. There was no amount outstanding under this facility at
October 2, 2010 or December 31, 2009. The line of credit was renewed in July 2010 and expires in
July 2011. The loan agreement is structured as a sale of accounts receivable and provides for the
sale of up to $3.0 million of eligible accounts receivable, with advances to us totaling 80% of the
receivables sold. Any advances bear interest at the bank’s prime rate (4.0% at October 2, 2010)
plus 2.50%, subject to a minimum monthly charge. Advances (if any) under the agreement are
collateralized by all our assets. Under the terms of the agreement, we must continue to service the
sold receivables and are subject to recourse provisions.
The agreement contains representations and warranties, affirmative and negative covenants and
events of default customary for financings of this type. The failure to comply with these
provisions, or the occurrence of any one of the events of default, would prevent any further
borrowings and would generally require the repayment of any outstanding borrowings. Such
representations, warranties and events of default include (a) non-payment of debt and interest
thereunder, (b) non-compliance with terms of the agreement covenants, (c) insolvency or bankruptcy,
(d) material adverse change, (e) merger or consolidation where our stockholders do not hold a
majority of the voting rights of the surviving entity, (f) transactions outside the normal course
of business, or (g) payment of dividends.
4. Stockholders’ Equity
The following is a summary of stockholders’ equity transactions for the nine months ended
October 2, 2010:
| Convertible | Capital in | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Excess of | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Par Value | Deficit | Total | ||||||||||||||||||||||
Balance at December 31, 2009 |
611,523 | $ | 1,000 | 22,512,033 | $ | 23,000 | $ | 241,882,000 | $ | (225,665,000 | ) | $ | 16,241,000 | |||||||||||||||
Issuance of common stock |
4,000,000 | 4,000 | 5,217,000 | 5,221,000 | ||||||||||||||||||||||||
Repurchase of common stock
to satisfy withholding
obligations |
(182,520 | ) | (573,000 | ) | (573,000 | ) | ||||||||||||||||||||||
Stock-based compensation |
287,895 | 820,000 | 820,000 | |||||||||||||||||||||||||
Net loss |
(8,983,000 | ) | (8,983,000 | ) | ||||||||||||||||||||||||
Balance at October 2, 2010 |
611,523 | $ | 1,000 | 26,617,408 | $ | 27,000 | $ | 247,346,000 | $ | (234,648,000 | ) | $ | 12,726,000 | |||||||||||||||
Common Stock
In an underwritten offering completed in August 2010 we raised net proceeds of $5.2 million,
net of offering costs of $800,000, from the sale of 4 million shares of common stock at $1.50 per
share.
Stock Options
We have three equity award option plans, the 1998 and 1999 Stock Option Plans and the 2003
Equity Incentive Plan, although we can only grant new awards under the 2003 Equity Incentive Plan.
Under the 2003 Equity Incentive Plan, equity awards may consist of stock options, stock
appreciation rights, restricted stock awards, performance awards, and performance share awards.
Stock options granted under these plans must be 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 2, 2010 or during the three and nine months ended September 26, 2009.
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The option compensation impact was $142,000 and $406,000 on net income and $0.01 and $0.02 on
basic and diluted earnings per share for the three and nine months ended October 2, 2010,
respectively, compared to $130,000 and $391,000 on net income and $0.01 and $0.02 on basic and
diluted earnings per share for the three and nine months ended September 26, 2009, respectively. No
stock compensation cost was capitalized during any period. For the first nine months of 2010 we
issued 187,498 stock options with a weighted-average fair value at the grant date of $2.01 per
share. There were no stock options issued in the first nine months of 2009. The total compensation
cost related to non-vested awards not yet recognized is $985,000, and the weighted-average period
over which the cost is expected to be recognized is 1.1 years.
The following is a summary of stock option transactions under our equity award plans during
the first nine months of 2010:
| Weighted | Weighted | |||||||||||||||||||
| Average | Number of | Average | ||||||||||||||||||
| Number of | Exercise | Options | Exercise | |||||||||||||||||
| Shares | Price Per Share | Price | Exercisable | Price | ||||||||||||||||
Balance at December 31, 2009 |
1,144,876 | $ | 1.43 - $493.75 | $ | 20.16 | 970,703 | $ | 22.96 | ||||||||||||
Granted |
187,498 | 2.62 | 2.62 | |||||||||||||||||
Exercised |
— | — | — | |||||||||||||||||
Canceled |
199,043 | 1.85 - 493.75 | 73.36 | |||||||||||||||||
Balance at October 2, 2010 |
1,133,331 | $ | 1.43 - $216.70 | $ | 7.91 | 900,131 | $ | 9.18 | ||||||||||||
The outstanding options expire on various dates through the end of May 2020. The
weighted-average contractual term of outstanding options is 6.2 years and the weighted-average
contractual term of currently exercisable stock options is 5.4 years. The exercise prices for
options range from $1.43 to $216.70 per share, for an aggregate exercise price of approximately
$9.0 million. At October 2, 2010, outstanding options covering 2,200 shares, with an intrinsic
value of $196, had an exercise price less than the current market value, and all of these options
were exercisable.
Restricted Stock Awards
There were no awards of restricted stock during the three months ended October 2, 2010. In May
2010, we issued 242,498 shares of restricted stock under awards that have performance and service
conditions, and generally vest over three years. The per share grant-date fair value was $2.62. In
February 2010, we issued 75,000 shares of restricted stock under awards that have performance and
service conditions, and generally vest over four years. The per share grant-date fair value was
$3.12. In May 2009, we issued awards covering 55,000 shares of restricted stock, vesting 50% after
one year and 50% after two years. The per share grant-date fair value was $3.24. In January 2009,
we issued awards covering 835,998 shares of restricted stock, vesting 50% after one year and 50%
after two years. The per share grant-date fair value was $1.00. In January 2010, 50%, or 417,999,
of these 835,998 awards vested and because plan participants may surrender vested shares back to us
to satisfy their minimum statutory tax withholding requirements, we repurchased 181,982 shares. The
181,982 repurchased shares had a fair value of $573,000 based on the closing price of our common
stock on the Nasdaq Stock Market of $3.15 on their vesting date. The impact of restricted stock
awards was $164,000 and $416,000 to the condensed consolidated statements of operations and $0.01
and $0.02 on basic and diluted earnings per share for the three and nine months ended October 2,
2010, respectively and $169,000 and $452,000 to the condensed consolidated statements of operations
and $0.01 and $0.02 on basic and diluted earnings per share for the three and nine months ended
September 26, 2009, respectively. No stock compensation cost was capitalized during any period.
As of October 2, 2010 the total compensation cost related to non-vested restricted stock awards not
yet recognized was $672,000, and the weighted-average period over which the cost is expected to be
recognized was one year.
Warrants
The following is a summary of outstanding warrants at October 2, 2010:
| Common Shares | ||||||||||||
| Total and | Price | |||||||||||
| Currently | per | |||||||||||
| Exercisable | Share | Expiration Date | ||||||||||
Warrants related to April 2004 Bridge Loans |
10,000 | 18.50 | April 28, 2011 | * | ||||||||
| * | The terms of these warrants contain net exercise provisions, under which holders can elect to receive common stock equal to the difference between the exercise price and the sale price for common shares on the exercise date or the date immediately preceding the exercise date instead of paying the exercise price in cash. |
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On August 16, 2010, 608,237 warrants related to the issuance of common stock expired. The
exercise price of these warrants had been adjusted under special anti-dilution adjustment
provisions in the warrants relating to the price of other issuances of our common stock.
Accordingly, we determined that these warrants were subject to fair value accounting as a
derivative. We used the Black-Scholes valuation model to estimate the fair value of these warrants.
For the three and nine months ended October 2, 2010 this fair value adjustment was a gain of
$2,000 and $171,000, respectively, compared to a gain of $393,000 and a loss of $387,000,
respectively, in the three and nine months ended September 26, 2009.
5. Earnings Per Share
Basic and diluted loss per share is based on the weighted-average number of common shares
outstanding.
Since their impact would be anti-dilutive, our loss per common share does not include the
effect of the assumed exercise of any of the following options or warrants or the vesting of any of
the following restricted stock awards:
| October 2, | September 26, | |||||||
| 2010 | 2009 | |||||||
Outstanding stock options |
1,133,331 | 1,157,136 | ||||||
Unvested restricted stock awards |
720,730 | 910,998 | ||||||
Outstanding warrants |
10,000 | 618,237 | ||||||
Total |
1,864,061 | 2,686,371 | ||||||
6. Commitments and Contingencies
Operating Leases
We lease our offices and production facilities under a non-cancelable operating lease that
expires in November 2016. This lease contains escalation clauses for increases in annual renewal
options and requires us to pay utilities, insurance, taxes and other operating expenses.
Rent expense was $277,000 and $822,000, respectively, for the three and nine months ended
October 2, 2010 and $282,000, and $845,000, respectively, for the three and nine months ended
September 26, 2009.
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 2010 to 2020. Royalty expense totaled $46,000 and
$137,000 for the three and nine months ended October 2, 2010, respectively, compared to $40,000 and
$115,000 for the three and nine months ended September 26, 2009, respectively. Under the terms of
certain royalty agreements, royalty payments made may be subject to audit. There have been no
audits to date.
The minimum lease payments under operating leases and license obligations are as follows:
| Year ending December 31, | Licenses | Operating Leases | ||||||
Remainder of 2010 |
$ | — | $ | 329,000 | ||||
2011 |
175,000 | 1,338,000 | ||||||
2012 |
175,000 | 1,369,000 | ||||||
2013 |
175,000 | 1,401,000 | ||||||
2014 |
180,000 | 1,442,000 | ||||||
Thereafter |
930,000 | 2,884,000 | ||||||
Total payments |
$ | 1,635,000 | $ | 8,763,000 | ||||
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7. 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
unaudited interim 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 any potential
liabilities related to such indemnities cannot be determined until an infringement claim has been
made, we are unable to determine the maximum amount of losses that we could incur related to such
indemnities.
Director and Officer Indemnities and Contractual Guarantees
We have entered into indemnification agreements with our directors and executive officers that
require us to indemnify such individuals to the fullest extent permitted by Delaware law. Our
indemnification obligations under such agreements are not contractually 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 contractually 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.
Short Term Borrowings
We also have an existing line of credit with a bank, which expires in July 2011. See Note
3—Short Term Borrowings.
8. Severance Expense
During the third quarter of 2010, we reduced our workforce and generated severance charges
totaling $204,000. There were no severance charges for the quarter and nine months ended September
26, 2009.
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9. Details of Certain Financial Statement Components and Supplemental Disclosures of Cash Flow
Information and Non-Cash Activities
Balance Sheet Data:
| October 2, | December 31, | |||||||
| 2010 | 2009 | |||||||
Accounts receivable: |
||||||||
Accounts receivable-trade |
$ | 208,000 | $ | 204,000 | ||||
United States government accounts receivable-billed |
51,000 | 269,000 | ||||||
Less: allowance for doubtful accounts |
(9,000 | ) | (11,000 | ) | ||||
| $ | 250,000 | $ | 462,000 | |||||
| October 2, | December 31, | |||||||
| 2010 | 2009 | |||||||
Inventories: |
||||||||
Raw materials |
$ | 1,518,000 | $ | 2,010,000 | ||||
Work-in-process |
610,000 | 543,000 | ||||||
Finished goods |
1,307,000 | 919,000 | ||||||
Less inventory reserve |
(1,039,000 | ) | (828,000 | ) | ||||
| $ | 2,396,000 | $ | 2,644,000 | |||||
| October 2, | December 31, | |||||||
| 2010 | 2009 | |||||||
Property and Equipment: |
||||||||
Equipment |
$ | 16,037,000 | $ | 15,743,000 | ||||
Leasehold improvements |
6,776,000 | 6,761,000 | ||||||
Furniture and fixtures |
404,000 | 404,000 | ||||||
| 23,217,000 | 22,908,000 | |||||||
Less: accumulated depreciation and amortization |
(21,760,000 | ) | (21,076,000 | ) | ||||
| $ | 1,457,000 | $ | 1,832,000 | |||||
Depreciation expense amounted to $230,000 and $684,000, respectively, for the three and
nine month periods ended October 2, 2010 and $274,000 and $890,000, respectively, for the
three and nine month periods ended September 26, 2009.
| October 2, | December 31, | |||||||
| 2010 | 2009 | |||||||
Patents and Licenses: |
||||||||
Patents pending |
$ | 1,134,000 | $ | 1,118,000 | ||||
Patents issued |
1,285,000 | 1,141,000 | ||||||
Less accumulated amortization |
(533,000 | ) | (477,000 | ) | ||||
Net patents issued |
752,000 | 664,000 | ||||||
Licenses Pending |
12,000 | 18,000 | ||||||
Licenses Issued |
563,000 | 563,000 | ||||||
Less accumulated amortization |
(225,000 | ) | (200,000 | ) | ||||
Net licenses |
338,000 | 363,000 | ||||||
| $ | 2,236,000 | $ | 2,163,000 | |||||
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Amortization expense related to these items totaled $48,000 and
$82,000, respectively, for the three and nine month periods ended
October 2, 2010 and $85,000 and $253,000, respectively, for the three
and nine month periods ended September 26, 2009. Amortization expenses
are expected to total $29,000 for the remainder of 2010 and $116,000 in
each of 2011 and 2012.
| October 2, | December 31, | |||||||
| 2010 | 2009 | |||||||
Accrued Expenses and Other Long Term |
||||||||
Liabilities: |
||||||||
Salaries payable |
$ | 258,000 | $ | 107,000 | ||||
Compensated absences |
367,000 | 397,000 | ||||||
Compensation related |
106,000 | 39,000 | ||||||
Warranty reserve |
313,000 | 255,000 | ||||||
Deferred rent |
406,000 | 384,000 | ||||||
Other |
319,000 | 236,000 | ||||||
| 1,769,000 | 1,418,000 | |||||||
Less current portion |
(1,162,000 | ) | (892,000 | ) | ||||
Long term portion |
$ | 607,000 | $ | 526,000 | ||||
| For the nine months ended, | ||||||||
| October 2, | September 26, | |||||||
| 2010 | 2009 | |||||||
Warranty Reserve Activity: |
||||||||
Beginning balance |
$ | 255,000 | $ | 262,000 | ||||
Additions |
66,000 | 21,000 | ||||||
Deductions |
(8,000 | ) | (6,000 | ) | ||||
Ending balance |
$ | 313,000 | $ | 277,000 | ||||
10. Subsequent Events
Sale of Common Stock
In October 2010 we raised net proceeds of $830,000, net of offering costs of $70,000, from the
sale of 600,000 shares of common stock at $1.50 per share. The sale was the result of the exercise
of the over-allotment option relating to our August 2010 underwritten sale of common stock. See
Note 4.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
General
We are a global leader in high temperature superconductor (HTS) materials and related
technologies. HTS materials have the unique ability to conduct electrical current with little or
no resistance when cooled to very low “critical” temperatures. As a result, HTS materials can
substantially improve the performance of electrical systems by reducing the power loss and
minimizing heat generation caused when electrical currents flow through conventional conductors.
To obtain these benefits on a cost effective basis, we have developed patented and proprietary
technologies relating to matters such as thin film deposition manufacturing, cryogenic cooling and
radio frequency (RF) circuit filter tuning. We have had over $150 million in HTS sales to date,
with over 6,000 of our commercial systems deployed worldwide. We are now pursuing new applications
in HTS wire and tunable handset filters, as well as expanding our existing applications in the next
generation of wireless networks.
Our Proprietary Technology
We focus on research and development to maintain our technological edge in solving the
technical challenges in commercializing HTS technology. Many of our employees hold advanced
degrees in physics, materials science, electrical engineering and other related fields. Our
development efforts have yielded an extensive patent portfolio as well as critical trade secrets,
unpatented technology and proprietary knowledge. We enter into confidentiality and non-disclosure
agreements with our employees, suppliers and consultants to protect our proprietary information.
As of October 2, 2010, we held 60 U.S. patents in the following categories:
| • | 7 patents for technologies directed toward producing thin-film materials and structures, which expire between 2010 and 2025. We have developed a proprietary state-of-the-art manufacturing process for producing HTS thin-films of the highest quality. |
| • | 35 patents for cryogenic and non-microwave circuit designs, which expire between 2012 and 2028. The expertise of our highly qualified team has allowed us to design and fabricate extremely small, high-performance circuits including RF signal filters. |
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| • | 17 patents covering cryogenics, packaging and systems, which expire between 2013 and 2025. Our proprietary and patented cryogenic packaging innovation provides us with a significant competitive advantage in maintaining our HTS materials at their critical temperatures. |
| • | 1 patent covering other superconducting technologies, which expires in 2013. |
As of October 2, 2010, we also had 21 issued foreign patents, 19 U.S. patent applications
pending and 62 foreign patent applications pending.
We are currently focusing our efforts on applications of our proprietary HTS technology in the
following areas:
Superconducting Power Applications
We are adapting our patented HTS material deposition techniques to develop energy efficient,
cost-effective and high performance second generation (2G) HTS wire for existing and emerging power
applications. HTS wire enables greater electrical current carrying capacity than comparable size
copper wires, dramatically reducing the volume and weight of the required wire. To date, the
market for 2G HTS wire has been limited by the inability of the existing suppliers to establish
production processes that are capable of producing wire that meets target specifications and cost
requirements. We plan to utilize our patented and proprietary manufacturing methods to overcome
these challenges and make the HTS wire cost effective in a number of applications.
To accelerate our efforts in the development and manufacturing processes for our 2G HTS wire,
we have established a Cooperative Research and Development Agreement with Los Alamos National
Laboratory and have partnered with other HTS industry leaders. After successfully producing 2G HTS
wire in one meter lengths, we are now completing the design of a wire deposition machine to produce
50 meter lengths, with the goal of producing one kilometer lengths in our production machine.
Assuming we overcome the technical hurdles, we intend to be a supplier of HTS wire to manufacturing
concerns, primarily large businesses, which would incorporate the wire into their products. We
expect to begin delivering samples of our 2G HTS wire before year end for testing by prospective
customers, at which time we can begin to formalize our commercial relationships.
We are initially targeting markets where we believe the advantages of HTS wire are at a
premium, such as:
| • | Wind Turbines: Current wind turbine power generating capacity is limited by the size and weight of the generator. Turbine manufacturers believe that building a generator utilizing HTS wire will reduce its size and weight sufficiently to enable the development of 10 megawatt (MW) and larger wind turbines. According to Emerging Energy Research, 2731 MW of worldwide offshore capacity of wind turbines producing more than 5 MW is expected to be installed in 2016, which will rise to nearly 5377 MW in 2020. Using a current estimated installed offshore cost of $2 million per MW, this translates into an investment for 5 MW capacity or larger wind turbines of approximately $5.5 billion in 2016 and nearly $11 billion in 2020. |
| • | Power Cables: Because they can carry significantly more electrical current with less electrical loss than conventional cables, HTS power cables allow utilities to deliver significantly more electrical current utilizing existing power cable entry facilities in office buildings and other facilities with large and growing power requirements. |
| • | Fault Current Limiters: A fault current limiter is a device in a power transmission network which cuts off electrical flow in the same manner as a ground fault interrupter in the home. By eliminating the superconductor properties of the HTS wire when too much electricity is flowing, the resistance in the fault current limiter can be substantially increased, stopping current flow and preventing damage to the rest of the power distribution network. |
| • | Superconducting Magnetic Energy Storage (SMES): As renewable energy generating systems continue to proliferate, the power grid needs reliable power backup to offset the intermittent nature of those systems. The low power loss from HTS wire could be used to provide an alternative to chemical and other forms of current battery technology for energy storage. |
| • | Magnetic Resonance Imaging (MRI): MRI machines used for medical imaging already use existing low temperature superconducting wire; the improvements targeted for 2G HTS wire may enable the manufacturers of MRI machines to reduce the initial cost and operating expenses of these devices. |
| • | Industrial Motors and Generators: The reduced weight and size required for a generator built with HTS wire could enable motors and generators that can generate two to three times the power as existing generators of the same size. |
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Tunable Filter Products
We have developed and patented several techniques to allow a single HTS or conventional (SAW
or BAW) RF filter to be “tuned” between multiple frequency bands. Current cell phone handsets
generally utilize two or three discrete filters for each frequency band, and thus require ten or
more filters in each handset to enable seamless worldwide coverage with today’s five bands.
However, with the forecasted growth in the future generations of cell phones to ten or more bands,
a discrete filter approach would be both expensive and occupy scarce space in the handset. To
address this challenge, we are pursuing opportunities with existing wireless handset module
providers to incorporate tunable filters into the future generations of smart phones. These
tunable filters will allow significant reduction in size, power, and cost over conventional
discrete filter technologies.
Wireless Networks
Our current commercial products help maximize the performance of wireless telecommunications
networks by improving the quality of uplink signals from mobile wireless devices. Our products
increase capacity utilization, lower dropped and blocked calls, extend coverage, and enable higher
wireless data throughput, while reducing capital and operating costs for the carrier. While we
continue to serve the market for retrofitting existing towers, we are currently pursuing an
opportunity to include our HTS filters in the Long Term Evolution (LTE) data networks now being
deployed by the top U.S. wireless carriers (expected to be over 75,000 base stations in the next
few years). Our HTS filters have been incorporated into one of the two base station solutions
selected by a major carrier for live market trials currently planned for 2010.
Our Business Model
To be successful, we must use our expertise and our technology to generate revenues in various
ways, including government contracts, commercial operations, joint ventures and licenses:
Government Contracts
We have generated significant revenues from government contracts. We typically own the
intellectual property developed under these contracts, and grant the U.S. government a
royalty-free, non-exclusive and nontransferable license to use it. As a result, our government
contracts can not only generate a profit for us, but we can also make additional money through
exploiting of the resulting technology in our commercial operations as well as government products,
or through licenses or joint ventures.
Commercial Applications
We have chosen to manufacture and sell certain commercial products on our own. To date, our
commercial efforts have been focused on the design, manufacture, and sale of high performance
infrastructure products for wireless voice and data applications. We have three current product
lines, all of which relate to wireless base stations:
| • | SuperLink, a highly compact and reliable receiver front-end HTS wireless filter system to eliminate out-of-band interference for wireless base stations, combining filters with a proprietary cryogenic cooler and a cooled low-noise amplifier. |
| • | AmpLink, a ground-mounted unit for wireless base stations that includes a high-performance amplifier and up to nine dual duplexers. |
| • | SuperPlex, a high-performance multiplexer that provides extremely low insertion loss and excellent cross-band isolation designed to eliminate the need for additional base station antennas and reduce infrastructure costs. |
We sell most of our current commercial products to a small number of wireless carriers in the
United States, including AT&T, Sprint Nextel, T-Mobile and Verizon Wireless. Verizon Wireless and
AT&T each accounted for more than 10% of our commercial revenues in the nine months ended October
2, 2010 and for all of 2009. We are seeking to expand our customer base by selling directly to
other wireless network operators and manufacturers of base station equipment, including
internationally. Demand for wireless communications equipment fluctuates dramatically and
unpredictably. The wireless communications infrastructure equipment market is extremely competitive
and is characterized by rapid technological change, new product development, product obsolescence
and evolving industry standards. We expect these trends to continue and may cause significant
fluctuations in our quarterly and annual revenues. Our commercial operations are subject to a
number of significant risks, some of which are set out in our public filings, including in
particular the “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for 2009 (2009
Form 10-K).
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Joint Ventures
From time to time we may pursue joint ventures with other entities to commercialize our
technology. In 2007, we formed a joint venture with Hunchun BaoLi Communication Co. Ltd. (“BAOLI”)
to manufacture and sell our SuperLink interference elimination solution in China. We use the equity
method of accounting for our 45 percent joint venture interest. The joint venture agreement calls
for our joint venture partner to supply the capital and local expertise, and for us to provide a
license of certain technology and supply key parts for manufacturing. Since 2007, we have been
conducting lab and field trials in the existing China 2G market using our TD-SCDMA and SuperLink
solutions. Although those activities continue, the parties have not completed their contributions
to the joint venture, including most of the funding and our license, within the two year period
specified by the agreement and Chinese law. The future of the joint venture, including any
commencement of manufacturing and the transfer of our processes, will depend on product demand in
China, completion of funding by our joint venture partner, as well as a number of other conditions,
including certain critical approvals from the Chinese and United States governments. There
continues to be no assurance that these conditions will be met. As a result of this uncertainty, at
December 31, 2009, we fully reserved against our investment in the joint venture of $521,000. Other
expense included $30,000 and $117,000 in the three and nine months ended September 26, 2009,
respectively, from our 45 percent equity ownership. There was no such expense in 2010.
Licenses
From time to time we grant licenses for our technology to other companies. Specifically, we
have granted licenses to, among others, (1) Bruker for Nuclear Magnetic Resonance application, (2)
General Dynamics for government applications and (3) Star Cryoelectronics for Superconducting
Quantum Interference Device applications.
Backlog
Our commercial backlog consists of accepted product purchase orders with scheduled delivery
dates during the next twelve months. We had commercial backlog of $106,000 at October 2, 2010
compared to $795,000 at December 31, 2009.
Results of Operations
Quarter and nine months ended October 2, 2010 compared to the quarter and nine months ended
September 26, 2009
Total net revenues decreased by $2.3 million or 54%, to $2.0 million in the third quarter of
2010 from $4.3 million in the third quarter of 2009. Total net revenues decreased by $843,000, or
10%, to $7.8 million in the first nine months of 2010 from $8.6 million in the same period of 2009.
Total net revenues consist primarily of commercial product revenues and government contract
revenues.
Net commercial product revenues decreased by $1.2 million or 39%, to $1.8 million in the third
quarter of 2010 from $3.0 million in the third quarter of 2009. The decrease in the quarter was
primarily the result of lower sales volume to our major customer. For the first nine months of
2010 and 2009, net commercial revenues were unchanged at $5.9 million. The average sales prices for
our products were unchanged. Our three largest customers accounted for 97% of our total net
commercial product revenues in the first nine months of 2010 compared to 98% in the first nine
months of 2009. These customers generally purchase products through non-binding commitments with
minimal lead times. Consequently, our commercial product revenues can fluctuate dramatically from
quarter to quarter based on changes in our customers’ capital spending patterns.
Government contract revenues decreased $1.2 million, or 89%, to $144,000 in the third quarter
of 2010 from $1.3 million in the third quarter of 2009. For the first nine months of 2010
government contract revenues decreased to $1.9 million from $2.7 million, a decrease of $851,000,
or 31%. This decrease was principally the result of the completion of our SURF contract. This
reduced level of government contract revenue will continue as we use more of our limited
engineering resources on our commercial projects.
Cost of commercial product revenues includes all direct costs, manufacturing overhead,
provision for excess and obsolete inventories and restructuring and impairment charges relating to
the manufacturing operations. The cost of commercial product revenue decreased $837,000, or 28%,
to $2.1 million for the third quarter of 2010 compared to $2.9 million in the third quarter of
2009. For the first nine months of 2010, the cost of commercial product revenues totaled $6.5
million compared with $7.2 million for the first nine months of 2009, a decrease of $722,000 or
10%. The lower costs resulted primarily from lower production as a result of lower sales in the
second and third quarters.
Our cost of sales includes both variable and fixed cost components. The variable component
consists primarily of materials, assembly and test labor, transportation costs and warranty costs.
The fixed component includes test equipment and facility depreciation, purchasing and procurement
expenses and quality assurance costs. Given the fixed nature of such costs, the absorption of our
production overhead costs into inventory decreases, and the amount of production overhead variances
expensed to cost of sales increases, as production volumes decline since we have fewer units
against which to absorb our overhead costs. Conversely, the absorption of our production overhead
costs into inventory increases, and the amount of
production overhead variances expensed to cost of sales decreases, as production volumes
increase since we have more units against which to absorb our overhead costs. As a result, our
gross profit margins generally decrease as revenue and production volumes decline due to lower
sales volume and higher amounts of production overhead variances expensed to cost of sales; and our
gross profit margins generally increase as our revenue and production volumes increase due to
higher sales volume and lower amounts of production overhead variances expensed to cost of sales.
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The following is an analysis of our commercial product gross profit and margins:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| Dollars in thousands | October 2, 2010 | September 26, 2009 | October 2, 2010 | September 26, 2009 | ||||||||||||||||||||||||||||
Net commercial product sales |
$ | 1,830 | 100 | % | $ | 2,985 | 100 | % | $ | 5,901 | 100 | % | $ | 5,893 | 100 | % | ||||||||||||||||
Cost of commercial product sales |
2,110 | 115 | % | 2,947 | 99 | % | 6,464 | 110 | % | 7,186 | 122 | % | ||||||||||||||||||||
Gross profit (loss) |
$ | (280 | ) | (15 | )% | $ | 38 | 1 | % | $ | (563 | ) | (10 | )% | $ | (1,293 | ) | (22 | )% | |||||||||||||
We had a gross loss from the sale of our commercial products of $280,000 in the third quarter
of 2010 compared to a $38,000 profit in the third quarter of 2009. We experienced a gross loss in
the third quarter of 2010 because the reduced level of commercial sales was insufficient to cover
our fixed manufacturing overhead costs. The gross profit in the third quarter of 2009 resulted from
higher sales that covered our fixed manufacturing overhead costs. We regularly review inventory
quantities on hand and provide an allowance for excess and obsolete inventory based on numerous
factors including sales backlog, historical inventory usage and forecasted product demand and
production requirements for the next twelve months. Our gross margin was also adversely impacted
by charges for excess and obsolete inventory of $90,000 and $270,000 in the third quarter and year
to date in 2010, respectively, compared to $90,000 and $192,000 in the third quarter and year to
date in 2009 respectively. There were no sales of previously written-off inventory in first nine
months of 2010 and 2009.
Cost of government and other contract revenue totaled $86,000 in the third quarter of 2010
compared to $993,000 in the third quarter of 2009 and $1.1 million in the first nine months of 2010
compared to $2.2 million in the first nine months of 2009. This decrease was the result of lower
expenses associated with less revenue from government contracts.
Research and development expenses relate principally to development of new wireless commercial
products and other products related to our expertise. We also incur design expenses associated
with reducing the cost and improving the manufacturability of our existing products. These
expenses totaled $1.5 million and $4.0 million, respectively, in the three and nine months ended
October 2, 2010 compared to $902,000 and $3.0 million in the three and nine months ended September
26, 2009. These expenses increased due to government and other contracts using relatively less of
our limited engineering resources and commercial projects using more of our resources.
Selling, general and administrative expenses totaled $1.6 million and $5.3 million,
respectively, in the three months and nine months ended October 2, 2010 compared to $1.6 million
and $5.2 million in the three and nine months ended September 26, 2009. Our 2010 regulatory
compliance expenses were slightly higher compared to 2009.
Other expense included $30,000 and $117,000 in the three and nine months ended September 26,
2009, respectively, from our 45 percent equity ownership of a joint venture with BAOLI in China.
There was no such expense in 2010. The investment had been fully written off at the end of 2009 and
no further losses were recordable under the equity method of accounting.
The adjustment of the fair value expense in 2010 and 2009 represents the treatment, as a
derivative, of 608,237 warrants that are exercisable for common stock. We used the Black-Scholes
valuation model to determine their fair value. These warrants expired in August 2010.
Interest income in the three and nine months ended October 2, 2010 was $2,000 and $4,000,
respectively, compared to $4,000 and $21,000, respectively, in the three and nine months ended
September 26, 2009. The decreases resulted from lower interest rates and less cash available for
investment.
Interest expense in the three and nine months ended October 2, 2010 was $7,000 and $21,000,
respectively, compared to $7,000 and $25,000, respectively, in the three and nine months ended
September 26, 2009.
We had a net loss of $3.4 million for the quarter ended October 2, 2010 compared to a net loss
of $1.8 million in the same period of 2009. For the nine months ended October 2, 2010, our loss
totaled $9.0 million compared to a net loss of $9.5 million in the same period of 2009.
The net loss available to common stockholders totaled $0.14 per common share in the third
quarter of 2010 compared to a net loss of $0.08 per common share in the same period of 2009. The
net loss available to common stockholders totaled $0.40 per common share in the first nine months
of 2010 compared to $0.50 per common share in the first nine months of 2009.
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Liquidity and Capital Resources
Cash Flow Analysis
As of October 2, 2010, we had working capital of $9.4 million, including $8.3 million in cash
and cash equivalents, compared to working capital of $12.6 million at December 31, 2009, which
included $10.4 million in cash and cash equivalents. We currently invest our excess cash in
short-term, investment-grade, money-market instruments with maturities of three months or less. We
believe that all of our cash investments would be readily available to us should the need arise.
Cash and cash equivalents decreased by $2.1 million from $10.4 million at December 31, 2009 to
$8.3 million at October 2, 2010. Cash was used principally in operations and to a lesser extent for
the purchase of property and equipment. In addition, in the first nine months of 2010, $573,000
was used to repurchase shares from our employees to satisfy withholding taxes due upon the vesting
of their restricted stock awards. We realized a net $5.2 million from the sale of common stock in
the third quarter of 2010.
Net cash used in operations totaled $6.4 million in the first nine months of 2010. We used
$7.3 million to fund the cash portion of our net loss. We also used cash to fund a $224,000
increase in prepaid assets and patents, inventory, and other assets. Operating cash was provided by
a $1.1 million increase in accounts payable and long term liabilities and a decrease in accounts
receivable.
Net cash used in investing activities totaled $309,000 in the first nine months of 2010
compared to $191,000 in the first nine months of 2009. In the first nine months of 2010, all cash
used in investing activities was for purchases of property and equipment.
Financing Activities
We have historically financed our operations through a combination of cash on hand, cash
provided from operations, equipment lease financings, available borrowings under bank lines of
credit and both private and public equity offerings. Net cash provided by financing activities in
the first nine months of 2010 totaled $5.2 million, net of $800,000 expenses, from the sale of 4
million shares of common stock at $1.50 per share in August 2010. In January we repurchased
$573,000 of our common shares from our employees to satisfy withholding taxes due upon the vesting
of their restricted stock awards.
We also have an existing line of credit from a bank. The line of credit was renewed in July
2010 and expires in July 2011. The loan agreement is structured as a sale of our accounts
receivable and provides for the sale of up to $3.0 million of eligible accounts receivable, with
advances to us totaling 80% of the receivables sold. Advances bear interest at the bank’s prime
rate (4% at October 2, 2010) plus 2.50% subject to a minimum monthly charge. There was no amount
outstanding under this facility at October 2, 2010 or December 31, 2009. Advances are
collateralized by a lien on all of our assets. Under the terms of the loan agreement, we would
continue to service the sold receivables and are subject to recourse provisions.
Contractual Obligations and Commercial Commitments
We have not had any material changes outside the ordinary course of business in the
contractual obligations as specified in our 2009 Form 10-K.
Capital Expenditures
We plan to invest approximately $100,000 in fixed assets during the remainder of 2010.
Future Liquidity
For the nine months ended October 2, 2010, we incurred a net loss of $9.0 million and had
negative cash flows from operations of $6.4 million. In 2009, we incurred a net loss of $13.0
million and had negative cash flows from operations of $7.4 million. Our independent registered
public accounting firm has included in its audit reports for 2009 and 2008 an explanatory paragraph
expressing doubt about our ability to continue as a going concern.
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At October 2, 2010, we had $8.3 million in cash and cash equivalents. Subsequent financing
activities in October 2010 totaled $830,000, net of $70,000 expenses, from the sale of 600,000
shares of common stock at $1.50. The sale was the result of the exercise of the over-allotment
option relating to our August 2010 sale of common stock. Our cash resources, together with our line
of credit, should be sufficient to fund our business through the second quarter of 2011. We
believe the key factors to our liquidity will be our ability to successfully use our expertise and
our technology to generate revenues in various ways, including commercial operations, government
contracts, joint ventures and licenses. Because of the uncertainty of these factors, we may need to
raise funds to meet our working capital needs. If we require additional financing, we cannot
assure you that additional financing will 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.
Net Operating Loss Carryforward
As of December 31, 2009, we had net operating loss carryforwards for federal and state income
tax purposes of approximately $298.8 million and $169.9 million, respectively, which expire in the
years 2010 through 2029. Of these amounts, $80.9 million and $23.5 million, respectively, resulted
from the acquisition of Conductus, Inc. Included in the net operating loss carryforwards are
deductions related to stock options of approximately $24.1 million and $13.1 million for federal
and California income tax purposes, respectively. To the extent net operating loss carryforwards
are recognized for accounting purposes, the resulting benefits related to the stock options will be
credited to stockholders’ equity. In addition, we had research and development and other tax
credits for federal and state income tax purposes of approximately $3.1 million and $1.4 million,
respectively, which expire in the years 2010 through 2029. Of these amounts, $549,000 and $581,000,
respectively, resulted from the acquisition of Conductus.
Due to the uncertainty surrounding their realization, we have recorded a full valuation
allowance against our net deferred tax assets. Accordingly, no deferred tax asset has been
recorded in the accompanying balance sheet.
Section 382 of the Internal Revenue Code imposes an annual limitation on the utilization of
net operating loss carryforwards and other tax attributes based on a statutory rate of return
(usually the “applicable federal funds rate”, as defined in the Internal Revenue Code) and the
value of the corporation at the time of a “change of ownership” as defined by Section 382. We had
changes in ownership in August 1999, December 2002 and June 2009. In addition, we acquired the
right to Conductus’ net operating losses, which are also subject to the limitations imposed by
Section 382. Conductus underwent four ownership changes, which occurred in February 1999, February
2001, December 2002 and June 2009. Therefore, the ability to utilize Conductus’ and our net
operating loss carryforwards will be subject to annual limitations upon utilization in future
periods. We are currently studying the impact of these Section 382 limitations on the future
realizability of our various tax attributes.
Critical Accounting Policies and Estimates
Our discussion and analysis of our historical financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial
statements in conformity with those principles requires us to make estimates of certain items and
judgments as to certain future events including for example those related to bad debts,
inventories, recovery of goodwill and long-lived assets (including intangible assets), income
taxes, warranty obligations, and contingencies. These determinations, even though inherently
subjective and subject to change, affect the reported amounts of our assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. While we believe that
our estimates are based on reasonable assumptions and judgments at the time they are made, some of
our assumptions, estimates and judgments will inevitably prove to be incorrect. As a result,
actual outcomes will likely differ from our accruals, and those
differences — positive or
negative — could be material. Some of our accruals are subject to adjustment, as we believe
appropriate, based on revised estimates and reconciliation to the actual results when available.
In addition, we identified certain critical accounting policies that affect certain of our
more significant estimates and assumptions used in preparing our consolidated financial statements
in our 2009 Form 10-K. We have not made any material changes to these policies.
Recent Accounting Pronouncements
In February 2010, the Financial Accounting Standards Board issued updated guidance related to
subsequent events. As a result of this updated guidance, we must still evaluate subsequent events
through the issuance date of our financial statements; however, we are not required to disclose
that date in our financial statement disclosures. This amended guidance became effective upon its
issuance on February 24, 2010. We adopted this updated guidance effective as of that date and all
subsequent event references in our Securities and Exchange Commission filings will reflect these
amended disclosure requirements.
We have considered all other newly issued accounting guidance that is applicable to our
operations and the preparation of our condensed consolidated statements, including guidance that we
have not yet adopted. We do not believe that any such guidance will have a material effect on our
financial position or results of operation.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We do not believe that there was a material change in our exposure to market risk at October
2, 2010 compared with our market risk exposure on December 31, 2009. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Market Risk” in our 2009 Form
10-K.
Item 4. Controls and Procedures.
We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended). As of the end of the period
covered by this report we carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial
Officer), of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 of
the Securities and Exchange Act of 1934, as amended. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this report.
There have been no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) of the Securities Exchange Act of 1934) that occurred during the period covered by
this report that materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
We do not expect that our disclosure controls and procedures or our internal controls will
prevent all error and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected.
PART II
OTHER INFORMATION
OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are party to various lawsuits, claims and other legal proceedings that
arise in the ordinary course of our business. Excluding ordinary, routine litigation incidental to
our business, we are not currently a party to any legal proceedings that we believe would
reasonably be expected to have a material adverse effect on our business, financial condition or
results of operation or cash flow.
Item 1A. Risk Factors.
A description of the risk factors associated with our business is contained in Item 1A, “Risk
Factors,” of our 2009 Form 10-K. We are not aware of any material changes to those risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
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Item 6. Exhibits.
| Number | Description of Document | |||
| 10.1 | Eighth Amendment to Loan and Security Agreement by and between
Registrant and Silicon Valley Bank dated July 28, 2010* |
|||
| 31.1 | Statement of CEO Pursuant to 302 of the Sarbanes-Oxley Act of 2002* |
|||
| 31.2 | Statement of CFO Pursuant to 302 of the Sarbanes-Oxley Act of 2002* |
|||
| 32.1 | Statement of CEO Pursuant to 906 of the Sarbanes-Oxley Act of 2002* |
|||
| 32.2 | Statement of CFO Pursuant to 906 of the Sarbanes-Oxley Act of 2002* |
|||
| * | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SUPERCONDUCTOR TECHNOLOGIES INC. |
||||
| Dated: November 10, 2010 | /s/ William J. Buchanan | |||
| William J. Buchanan | ||||
| Vice President and Chief Financial Officer | ||||
| /s/ Jeffrey A. Quiram | ||||
| Jeffrey A. Quiram | ||||
| President and Chief Executive Officer | ||||
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