Attached files
file | filename |
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EX-32 - EX-32 - ISC8 INC. /DE | a55147exv32.htm |
EX-10.4 - EX-10.4 - ISC8 INC. /DE | a55147exv10w4.htm |
EX-31.1 - EX-31.1 - ISC8 INC. /DE | a55147exv31w1.htm |
EX-31.2 - EX-31.2 - ISC8 INC. /DE | a55147exv31w2.htm |
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 December 27, 2009
OR
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 1-8402
IRVINE SENSORS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 33-0280334 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
3001 Red Hill Avenue,
Costa Mesa, California 92626
Costa Mesa, California 92626
(Address of Principal Executive Offices) (Zip Code)
(714) 549-8211
(Registrants 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, as amended, (the Exchange
Act) 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 the definitions 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 (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of February 5, 2010, there were 13,985,316 shares of common stock outstanding.
IRVINE SENSORS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL PERIOD ENDED DECEMBER 27, 2009
FOR THE FISCAL PERIOD ENDED DECEMBER 27, 2009
TABLE OF CONTENTS
PAGE | ||||||||
3 | ||||||||
21 | ||||||||
35 | ||||||||
35 | ||||||||
37 | ||||||||
37 | ||||||||
49 | ||||||||
49 | ||||||||
49 | ||||||||
49 | ||||||||
50 | ||||||||
Signatures. | 52 | |||||||
EX-10.4 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 |
In this report, the terms Irvine Sensors, Company, we, us and our refer to Irvine Sensors
Corporation (ISC) and its subsidiaries.
Irvine Sensors®, TOWHAWK, iNetworks, Novalog, Personal Miniature Thermal Viewer, PMTV®,
Cam-Noir, Eagle Boards and RedHawk are among the Companys trademarks. Any other trademarks or
trade names mentioned in this report are the property of their respective owners.
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
IRVINE SENSORS CORPORATION
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
December 27, 2009 | ||||||||
(Unaudited) | September 27, 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 122,500 | $ | 125,700 | ||||
Accounts receivable, net of allowance for doubtful accounts of $15,000 and $15,000,
respectively |
1,106,900 | 1,396,300 | ||||||
Unbilled revenues on uncompleted contracts |
675,400 | 885,300 | ||||||
Inventory, net |
387,800 | 441,100 | ||||||
Prepaid expenses and other current assets |
321,000 | 53,200 | ||||||
Total current assets |
2,613,600 | 2,901,600 | ||||||
Property and equipment, net |
2,530,900 | 2,845,200 | ||||||
Intangible assets, net |
56,400 | 67,300 | ||||||
Deposits |
37,400 | 37,500 | ||||||
Total assets |
$ | 5,238,300 | $ | 5,851,600 | ||||
Liabilities and Stockholders Equity (Deficit) |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,895,600 | $ | 3,427,100 | ||||
Accrued expenses |
3,811,200 | 3,730,800 | ||||||
Accrued estimated loss on contracts |
2,800 | | ||||||
Advance billings on uncompleted contracts |
424,100 | 249,600 | ||||||
Advances against accounts receivable |
492,300 | 985,800 | ||||||
Deferred revenue |
18,900 | 180,000 | ||||||
Income taxes payable |
3,200 | | ||||||
Restructured debt, net of discounts |
188,400 | 188,400 | ||||||
Promissory note payable related party |
400,000 | 400,000 | ||||||
Capital lease obligations |
5,300 | 11,200 | ||||||
Total current liabilities |
8,241,800 | 9,172,900 | ||||||
Executive Salary Continuation Plan liability |
996,800 | 1,057,600 | ||||||
Total liabilities |
9,238,600 | 10,230,500 | ||||||
Commitments and contingencies (Note 9) |
||||||||
Stockholders equity (deficit): |
||||||||
Preferred stock, $0.01 par value, 1,000,000 and 1,000,000 shares authorized, respectively; |
1,100 | 1,200 | ||||||
Series A-1 83,200 (unaudited) and 99,900 shares issued and outstanding,
respectively (1);
liquidation preference of $3,172,500 (unaudited) and $3,586,200 respectively; |
||||||||
Series A-2 25,000 (unaudited) and 25,000 shares issued and outstanding,
respectively (1);
liquidation preference of $1,070,100 (unaudited) and $1,043,500 respectively; |
||||||||
Series B-3,500 (unaudited) and 0 shares issued and outstanding, respectively (1);
liquidation preference of $3,490,000 (unaudited) and $0 respectively |
||||||||
Common stock, $0.01 par value, 150,000,000 and 150,000,000 shares authorized,
respectively;
10,944,500 and 9,694,500 shares issued and outstanding, respectively (1) |
109,400 | 96,900 | ||||||
Common stock held by Rabbi Trust |
(1,169,600 | ) | (1,169,600 | ) | ||||
Deferred compensation liability |
1,169,600 | 1,169,600 | ||||||
Paid-in capital |
161,921,100 | 162,497,700 | ||||||
Accumulated deficit |
(166,356,300 | ) | (167,299,100 | ) | ||||
Irvine Sensors Corporation stockholders (deficit) equity |
(4,324,700 | ) | (4,703,300 | ) | ||||
Noncontrolling interest |
324,400 | 324,400 | ||||||
Total stockholders (deficit) equity |
(4,000,300 | ) | (4,378,900 | ) | ||||
Total liabilities and stockholders deficit |
$ | 5,238,300 | $ | 5,851,600 | ||||
(1) | The number of shares of preferred stock and common stock issued and outstanding have been rounded to nearest one hundred (100). |
See Accompanying Condensed Notes to Consolidated Financial Statements.
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Table of Contents
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
13 Weeks Ended | ||||||||
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Revenues: |
||||||||
Contract research and development revenue |
$ | 2,759,400 | $ | 2,443,200 | ||||
Product sales |
447,000 | 290,800 | ||||||
Other revenue |
3,800 | 9,500 | ||||||
Total revenues |
3,210,200 | 2,743,500 | ||||||
Cost and expenses: |
||||||||
Cost of contract research and development revenue |
2,036,200 | 1,937,400 | ||||||
Cost of product sales |
402,800 | 378,000 | ||||||
General and administrative expense |
1,651,400 | 1,860,800 | ||||||
Research and development expense |
755,200 | 350,400 | ||||||
Total costs and expenses |
4,845,600 | 4,526,600 | ||||||
Gain on sale or disposal of assets |
12,500 | | ||||||
Loss from operations |
(1,622,900 | ) | (1,783,100 | ) | ||||
Interest expense |
(114,900 | ) | (409,100 | ) | ||||
Provision for litigation judgment |
(20,200 | ) | | |||||
Change in fair value of derivative instrument |
45,500 | | ||||||
Interest and other income (expense) |
(1,000 | ) | 31,600 | |||||
Loss from continuing operations before
provision for income taxes |
(1,713,500 | ) | (2,160,600 | ) | ||||
Provision for income taxes |
(3,200 | ) | (18,900 | ) | ||||
Loss from continuing operations |
(1,716,700 | ) | (2,179,500 | ) | ||||
Discontinued operations: |
||||||||
Income from discontinued operations |
| 65,300 | ||||||
Net loss |
$ | (1,716,700 | ) | $ | (2,114,200 | ) | ||
Less net loss attributable to noncontrolling interests in subsidiary |
| 100 | ||||||
Net loss attributable to Company |
$ | (1,716,700 | ) | $ | (2,114,100 | ) | ||
Basic and diluted net income (loss) per common share information |
||||||||
From continuing operations attributable to Company |
$ | (0.33 | ) | $ | (0.43 | ) | ||
From discontinued operations attributable to Company |
| 0.01 | ||||||
Basic and diluted net loss attributable to Company per common share |
$ | (0.33 | ) | $ | (0.42 | ) | ||
Weighted average number of common shares outstanding, basic and
diluted |
10,141,400 | 5,298,900 | ||||||
See Accompanying Condensed Notes to Consolidated Financial Statements.
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Table of Contents
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
Irvine Sensors Corporation Stockholders Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||||||||||||
Common | ||||||||||||||||||||||||||||||||||||||||||||||||
Series A-1 and A-2 | Series B | Stock | ||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Common Stock | Warrants | Prepaid | Total | |||||||||||||||||||||||||||||||||||||||||||
Shares Issued (1) | Shares Issued (1) | Shares Issued (1) | Issued (1) | Stock-Based | Accumulated | Noncontrolling | Stockholders | |||||||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | Number | Compensation | Paid-in Capital | Deficit | Interest | Equity (Deficit) | |||||||||||||||||||||||||||||||||||||
Balance at September 28, 2008 |
126,000 | $ | 1,300 | | $ | | 3,557,200 | $ | 35,600 | 717,900 | $ | | $ | 159,717,800 | $ | (168,213,900 | ) | $ | 411,600 | $ | (8,047,600 | ) | ||||||||||||||||||||||||||
Common stock issued to employee retirement plans |
| | | | 1,785,700 | 17,900 | | (750,000 | ) | 732,100 | | | | |||||||||||||||||||||||||||||||||||
Common stock issued to pay operating expenses |
| | | | 339,800 | 3,400 | | | 129,700 | | | 133,100 | ||||||||||||||||||||||||||||||||||||
Common stock issued to investment banking firm |
| | | | 315,000 | 3,100 | | | 122,400 | | | 125,500 | ||||||||||||||||||||||||||||||||||||
Common stock issued to purchasers of debt |
| | | | 575,600 | 5,800 | | | 244,200 | | | 250,000 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation expense vested stock |
| | | | 1,600 | | | | 600 | | | 600 | ||||||||||||||||||||||||||||||||||||
Common stock warrants issued to investment banking firm |
| | | | | | 299,300 | | 92,100 | | | 92,100 | ||||||||||||||||||||||||||||||||||||
Additional common stock warrants
issued under anti-dilution provisions |
| | | | | | 504,000 | | | | | | ||||||||||||||||||||||||||||||||||||
Common stock warrants expired |
| | | | | | (59,900 | ) | | | | | | |||||||||||||||||||||||||||||||||||
Stock-based compensation expense options |
| | | | | | | | 27,900 | | | 27,900 | ||||||||||||||||||||||||||||||||||||
Preferred stock issued to retire debt |
25,000 | 300 | | | | | | | 999,700 | | | 1,000,000 | ||||||||||||||||||||||||||||||||||||
Common stock issued upon conversion of preferred stock |
(26,100 | ) | (400 | ) | | | 1,956,300 | 19,600 | | | (19,200 | ) | | | | |||||||||||||||||||||||||||||||||
Common stock issued to convert debt |
| | | | 1,089,000 | 10,800 | | | 337,600 | | | 348,400 | ||||||||||||||||||||||||||||||||||||
Amortization of deferred stock-based compensation |
| | | | | | | | 113,500 | | | 113,500 | ||||||||||||||||||||||||||||||||||||
Issuance of nonvested stock, net |
| | | | 74,300 | 700 | | | (700 | ) | | | | |||||||||||||||||||||||||||||||||||
Amortization of employee retirement plan contributions |
| | | | | | | 750,000 | | | | 750,000 | ||||||||||||||||||||||||||||||||||||
Optex
minority interest |
| (87,100 | ) | (87,100 | ) | |||||||||||||||||||||||||||||||||||||||||||
Net income |
| | | | | | | | | 914,800 | (100 | ) | 914,700 | |||||||||||||||||||||||||||||||||||
Balance at September 27, 2009 |
124,900 | 1,200 | | | 9,694,500 | 96,900 | 1,461,300 | | 162,497,700 | (167,299,100 | ) | $ | 324,400 | (4,378,900 | ) | |||||||||||||||||||||||||||||||||
Cumulative-effect adjustment of adopting ASC 815-40 |
| | | | | | | | (4,230,000 | ) | 4,130,500 | | (99,500 | ) | ||||||||||||||||||||||||||||||||||
Sale of preferred stock, net of financing costs and
value assigned to warrants issued to investors |
| | 3,500 | | | | | | 1,307,900 | | 1,307,900 | |||||||||||||||||||||||||||||||||||||
Common stock warrants issued to preferred stock investors
|
| | | | | | 2,094,000 | | 424,000 | | | 424,000 | ||||||||||||||||||||||||||||||||||||
Deemed dividend of beneficial conversion feature of
preferred stock issuance
to preferred stock investors |
| | | | | | | | 1,471,000 | (1,471,000 | ) | | | |||||||||||||||||||||||||||||||||||
Common stock issued upon conversion of preferred stock |
(16,700 | ) | (100 | ) | | | 1,250,000 | 12,500 | | | (12,400 | ) | | | | |||||||||||||||||||||||||||||||||
Common stock warrants issued to investment banking firm |
| | | | | | 1,257,400 | | 436,600 | | | 436,600 | ||||||||||||||||||||||||||||||||||||
Additional common stock warrants
issued under anti-dilution provisions |
| | | | | | 715,500 | | | | | | ||||||||||||||||||||||||||||||||||||
Amortization of deferred stock-based compensation |
| | | | | | | | 25,200 | | | 25,200 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation expense
options |
| | | | | | | | 1,100 | | | 1,100 | ||||||||||||||||||||||||||||||||||||
Net loss |
| | | | | | | | | (1,716,700 | ) | | (1,716,700 | ) | ||||||||||||||||||||||||||||||||||
Balance at December 27, 2009
(Unaudited) |
108,200 | $ | 1,100 | 3,500 | $ | | 10,944,500 | $ | 109,400 | 5,528,200 | $ | | $ | 161,921,100 | $ | (166,356,300 | ) | $ | 324,400 | $ | (4,000,300 | ) | ||||||||||||||||||||||||||
(1) | Amounts of preferred stock, common stock and warrants issued have been rounded to nearest one hundred (100). |
See Accompanying Condensed Notes to Consolidated Financial Statements.
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IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
13 Weeks Ended | ||||||||
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (1,716,700 | ) | $ | (2,114,100 | ) | ||
Add back income from discontinued operations |
| (65,300 | ) | |||||
Loss from continuing operations |
(1,716,700 | ) | (2,179,400 | ) | ||||
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities: |
||||||||
Depreciation and amortization |
348,200 | 519,300 | ||||||
Provision for (reduction in) allowance for inventory valuation |
17,500 | (10,000 | ) | |||||
Non-cash interest expense |
| 276,700 | ||||||
Non-cash employee retirement plan contributions |
| 248,000 | ||||||
Gain on sales or disposal of assets |
(12,500 | ) | | |||||
Change in fair value of derivative instrument |
(45,500 | ) | | |||||
Net loss attributable to noncontrolling interests |
| (100 | ) | |||||
Common stock issued to pay operating expenses |
| 120,000 | ||||||
Non-cash stock-based compensation |
26,300 | 25,300 | ||||||
Decrease (increase) in accounts receivable |
289,400 | (90,600 | ) | |||||
Decrease in unbilled revenues on uncompleted contracts |
209,900 | 595,800 | ||||||
Decrease (increase) in inventory |
35,800 | (34,200 | ) | |||||
Increase in prepaid expenses and other current assets |
(148,800 | ) | (92,300 | ) | ||||
Increase in other assets |
100 | 63,500 | ||||||
(Decrease) increase in accounts payable and accrued expenses |
(499,100 | ) | (64,800 | ) | ||||
Decrease in Executive Salary Continuation Plan liability |
(60,800 | ) | (31,100 | ) | ||||
Increase in advance billings on uncompleted contracts |
174,500 | 48,700 | ||||||
(Decrease) increase in deferred revenue |
(161,100 | ) | 10,300 | |||||
Total adjustments |
173,900 | 1,584,500 | ||||||
Net cash used in operating activities |
(1,542,800 | ) | (594,900 | ) | ||||
Cash flows from investing activities: |
||||||||
Property and equipment expenditures |
(3,700 | ) | (6,900 | ) | ||||
Proceeds from sales of fixed assets |
12,500 | | ||||||
Transfer of fixed asset to (from) contract expense |
(19,300 | ) | 19,000 | |||||
Acquisition and costs related to patents |
| (35,500 | ) | |||||
Increase in restricted cash |
| (2,100 | ) | |||||
Net cash used in investing activities |
(10,500 | ) | (25,500 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from sale of preferred stock |
2,049,500 | | ||||||
Proceeds from senior promissory notes |
| 640,000 | ||||||
Debt issuance costs paid |
| (163,200 | ) | |||||
Decrease in advances against accounts receivable |
(493,500 | ) | | |||||
Principal payments of capital leases |
(5,900 | ) | (9,700 | ) | ||||
Net cash provided by financing activities |
1,550,100 | 467,100 | ||||||
Cash flows from discontinued operations: |
||||||||
Net cash used in operating activities |
| (275,000 | ) | |||||
Net decrease in cash and cash equivalents |
(3,200 | ) | (428,300 | ) | ||||
Cash and cash equivalents at beginning of period |
125,700 | 638,600 | ||||||
Cash and cash equivalents at end of period |
$ | 122,500 | $ | 210,300 | ||||
Non-cash investing and financing activities: |
||||||||
Conversion of preferred stock to common stock |
$ | 500,000 | $ | | ||||
Issuance of warrants recorded as deferred financing costs |
$ | 119,000 | $ | | ||||
Supplemental cash flow information: |
||||||||
Cash paid for interest |
$ | 73,700 | $ | 8,800 | ||||
Cash paid for income taxes |
$ | | $ | 3,900 |
See Accompanying Condensed Notes to Consolidated Financial Statements.
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IRVINE SENSORS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 General
The information contained in the following Condensed Notes to Consolidated Financial
Statements is condensed from that which appear in the audited consolidated financial statements for
Irvine Sensors Corporation (ISC) and its subsidiaries (together with ISC, the Company), and the
accompanying unaudited consolidated financial statements do not include certain financial
presentations normally required under accounting principles generally accepted in the United States
of America (GAAP). Accordingly, the unaudited consolidated financial statements included herein
should be read in conjunction with the audited consolidated financial statements and related notes
thereto contained in the Annual Report on Form 10-K of the Company for the fiscal year ended
September 27, 2009 (fiscal 2009). It should be understood that accounting measurements at
interim dates inherently involve greater reliance on estimates than at year-end. The results of
operations for the interim periods presented are not necessarily indicative of the results expected
for the entire year.
The consolidated financial information for the 13-week periods ended December 27, 2009 and
December 28, 2008 included herein is unaudited but includes all normal recurring adjustments which,
in the opinion of management of the Company, are necessary to present fairly the consolidated
financial position of the Company at December 27, 2009, the results of its operations and its cash
flows for the 13-week periods ended December 27, 2009 and December 28, 2008.
On October 14, 2008, substantially all of the assets of Optex Systems, Inc., a Texas
corporation (Optex) and a wholly-owned subsidiary of ISC, were sold pursuant to a UCC public
foreclosure sale (the Optex Asset Sale). The Optex Asset Sale was completed as contemplated by a
binding Memorandum of Understanding for Settlement and Debt Conversion Agreement dated September
19, 2008 (the MOU) between the Company and its senior lenders, Longview Fund, L.P. (Longview)
and Alpha Capital Anstalt (Alpha). Longview and Alpha are sometimes collectively referred to as
the Lenders. As agreed to in the MOU, Optex Systems, Inc., a Delaware corporation controlled by
the Lenders (Optex-Delaware), credit bid $15 million in this UCC public foreclosure sale, and its
offer was the winning bid. As a result, $15 million of the Companys aggregate indebtedness to the
Lenders was extinguished. All of the Companys financial statements and notes and schedules thereto
give effect to this event and report Optex as a discontinued operation for both the current and
prior fiscal periods. Optex filed a voluntary petition for relief under Chapter 7 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the District of California in
September 2009 (the Optex bankruptcy). None of the Companys subsidiaries accounted for more
than 10% of the Companys total assets at December 27, 2009 or had separate employees or facilities
at such date.
The consolidated financial information as of September 27, 2009 included herein has been
derived from the Companys audited consolidated financial statements as of, and for the year ended,
September 27, 2009.
Description of Business
The Company is a vision systems company enabled by technology for three-dimensional packaging
of electronics and manufacturing of electro-optical products. The Company designs, develops,
manufactures and sells vision systems, miniaturized electronic products and higher level systems
incorporating such products for defense, security and commercial applications. The Company also
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Table of Contents
performs customer-funded contract research and development related to these systems and products,
mostly for U.S. government customers or prime contractors. Most of the Companys historical
business relates to application of its technologies for stacking either packaged or unpackaged
semiconductors into more compact three-dimensional forms, which the Company believes offer volume,
power, weight and operational advantages over competing packaging approaches, and which the Company
believes allows it to offer higher level products with unique operational features.
Summary of Significant Accounting Policies
Consolidation. The consolidated financial statements include the accounts of ISC and its
subsidiaries, Optex, Novalog, Inc. (Novalog), MicroSensors, Inc. (MSI), RedHawk Vision Systems,
Inc. (RedHawk) and iNetWorks Corporation (iNetWorks). All significant intercompany transactions
and balances have been eliminated in the consolidation. The accounts for Optex have been
eliminated from the balance sheets from September 27, 2009 forward due to the Optex bankruptcy in
September 2009.
Fiscal Periods. The Companys fiscal year ends on the Sunday nearest September 30. Fiscal
2009 ended on September 27, 2009 and included 52 weeks. The fiscal year ending October 3, 2010
(fiscal 2010) will include 53 weeks. The Companys first quarter of fiscal 2010 was the 13 weeks
ended December 27, 2009.
Subsequent Events. The Company evaluates events that occur subsequent to the balance sheet
date of periodic reports, but before financial statements are issued for periods ending on such
balance sheet dates, for possible adjustment to such financial statements or other disclosure.
This evaluation generally occurs through the date at which the Companys financial statements are
electronically prepared for filing with the Securities and Exchange Commission (SEC). For the
financial statements as of and for the periods ended December 27, 2009, this date was February 10,
2010.
Warrant Valuation and Beneficial Conversion Feature. The Company calculates the fair value of
warrants issued with debt or preferred stock using the Black-Scholes valuation method. The total
proceeds received in the sale of debt or preferred stock and related warrants is allocated among
these financial instruments based on their relative fair values. The discount arising from
assigning a portion of the total proceeds to the warrants issued is recognized as interest expense
for debt from the date of issuance to the earlier of the maturity date of the debt or the
conversion dates using the effective yield method. Additionally, when issuing convertible
instruments (debt or preferred stock), including convertible instruments issued with detachable
warrants, the Company tests for the existence of a beneficial conversion feature. The Company
records the amount of any beneficial conversion feature (BCF), calculated in accordance with the
accounting standards, whenever it issues convertible instruments that have conversion features at
fixed rates that are in-the-money using the effective per share conversion price when issued. The
calculated amount of the BCF is accounted for as a contribution to additional paid-in capital and
as a discount to the convertible instrument. A BCF resulting from issuance of convertible debt is
recognized as interest expense from the date of issuance to the earlier of the maturity date of the
debt or the conversion dates using the effective yield method. A BCF resulting from the issuance of
convertible preferred stock is recognized as a deemed dividend and amortized over the period of the
securitys earliest conversion or redemption date. The maximum amount of BCF that can be
recognized is limited to the amount that will reduce the net carrying amount of the debt or
preferred stock to zero.
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Reclassifications. Certain reclassifications have been made to the consolidated balance sheet
for September 27, 2009 to conform to the current period presentation to reflect the adoption of new
accounting guidance regarding the presentation of minority interests in subsidiaries, as discussed
below.
Recently Issued Accounting Pronouncements. In December 2007, the Financial Accounting
Standards Board (FASB) issued guidance as codified in Accounting Standards Codification (ASC)
810-10, Consolidation Noncontrolling Interests (previously SFAS No. 160, Noncontrolling
Interests in Consolidated Financial StatementsAmendments of ARB No. 51. ASC 810-10 states that
accounting and reporting for minority interests will be recharacterized as noncontrolling interests
and classified as a component of equity. ASC 810-10 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. ASC 810-10 is effective for fiscal years
beginning after December 15, 2008, which for the Company is fiscal 2010. The adoption of ASC 810-10
has resulted in the reclassification on the balance sheet of minority interests from liabilities to
stockholders equity for the periods presented herein.
In June 2008, the FASB ratified guidance issued by the Emerging Issue Task Force (EITF) as
codified in ASC 815-40, Derivatives and Hedging Contracts in Entitys Own Equity (previously
EITF Issue No. 07-05, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an
Entitys Own Stock). ASC 815-10 specifies that a contract that would otherwise meet the definition
of a derivative but is both (a) indexed to the companys own stock and (b) classified in
stockholders equity in the statement of financial position would not be considered a derivative
financial instrument. ASC 815-40 provides a new two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed to an issuers own stock and thus
able to qualify for the ASC 815-10 scope exception. ASC 815-40 is effective for fiscal years
beginning after December 15, 2008, which for the Company is fiscal 2010, and early adoption was not
permitted. Pursuant to ASC 815-40, the Company was required to reclassify certain warrants from
equity to liabilities, which resulted in a cumulative effect adjustment of approximately $4,230,000
to reduce paid in capital for the original allocated value recorded for these affected
warrants, a corresponding reduction in accumulated deficit of $4,230,000 and recording of the fair
market value of the warrant derivative liability of $99,500 effective September 28, 2009, the first
day of fiscal 2010. The fair market value of the warrant derivative liability was remeasured at
December 27, 2009 and adjusted by $45,500 to report the change in fair value. The warrant
derivative liability is included in accrued expenses on the consolidated balance sheet.
Note 2 Going Concern
These consolidated financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and settlement of obligations in the normal course of
business. The Company generated significant net losses in fiscal years prior to fiscal 2009. In
fiscal 2009, the Company generated net income of $914,800, but this was primarily attributable to
the approximately $8.6 million of aggregate non-recurring gains realized by a sale of patent assets
and substantial gains on the elimination of consolidated debt and reduction in pension liability.
In the first quarter of fiscal 2010, the 13-week period ended December 27, 2009, the Company had a
net loss of $1,716,700.
Management believes that the Companys losses in recent years have primarily resulted from a
combination of insufficient contract research and development revenue to support the Companys
skilled and diverse technical staff believed to be necessary to support monetization of the
Companys technologies, amplified by the effects of discretionary investments to productize a
variety of those technologies. The Company has not yet been successful in most of these product
activities, nor has it been able to raise sufficient capital to fund the future development of many
of these technologies.
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Accordingly, the Company has sharply curtailed the breadth of its product investments, and instead
has focused on the potential growth of its chip stacking business, various miniaturized camera
products and a system application incorporating such camera products. In addition, the initial
acquisition of Optex in December 2005 and the ultimate discontinuation of Optexs operations in
October 2008 pursuant to the Optex Asset Sale contributed to increases in the Companys
consolidated net losses, largely due to inadequate gross margins on Optexs products and related
consequential impacts.
As of December 27, 2009, the Company also had negative working capital and stockholders
deficit of approximately $5.6 million and $4.0 million, respectively. The Company is also involved
in on-going litigation related to Optex. (See Note 9). The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
Management is focused on managing costs in line with estimated total revenues for fiscal 2010
and beyond, including contingencies for cost reductions if projected revenues are not fully
realized. However, there can be no assurance that anticipated revenues will be realized or that the
Company will successfully implement its plans. Accordingly, it is likely that the Company will
need to raise additional funds to meet its continuing obligations and may incur additional losses.
The Companys common stock has traded below the $1.00 per share minimum Nasdaq continued
listing criterion for substantial periods of time recently. On September 15, 2009, the Company
received a written notice from Nasdaq of its lack of compliance with this criterion and was given
until March 15, 2010 to regain compliance. There can be no assurance that the Company will be able
to comply with the minimum $1.00 per share trading rule and be able to maintain its listing on the
Nasdaq Capital Market. Delisting from the Nasdaq Capital Market for any present or future
noncompliance with Nasdaqs listing requirements could significantly limit the Companys ability to
raise capital and adversely impact the price of and market for the Companys common stock. If the
Company requires additional financing to meet its working capital needs, there can be no assurance
that suitable financing will be available on acceptable terms, on a timely basis, or at all.
Note 3 Note Payable Related Party
In December 2006, in consideration for amendments to the Stock Purchase Agreement, the Buyer
Option Agreement and the Escrow Agreement with Timothy Looney initially entered into on December
30, 2005 for the acquisition of Optex, the Company issued an unsecured subordinated promissory note
to Mr. Looney in the original principal amount of $400,000, bearing interest at a rate of 11% per
annum. The principal and accrued interest under this note was due and payable in full to Mr. Looney
on December 29, 2007. The Company has recorded the principal and accrued interest amount of this
note in its Consolidated Balance Sheets at December 27, 2009 and September 27, 2009 as a current
liability.
The Company has received notices from Mr. Looney claiming that it is in default under the
$400,000 one-year unsecured subordinated promissory note for the alleged nonpayment of principal
and interest and demanding payment thereof. This note is in dispute as it relates to litigation
between the Company and Mr. Looney. (See Note 9).
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Note 4 Common Stock and Common Stock Warrants, Preferred Stock, Stock Incentive Plans, Employee
Retirement Plan and Deferred Compensation Plans
Non-Cash Common Stock Transactions. During the 13-week period ended December 27, 2009, the
Company exchanged $500,000 of the Companys Series A-1 10% Cumulative Convertible Preferred Stock
(the Series A-1 Stock) for an aggregate of 1,250,000 shares of common stock of the Company in
various transactions.
Common Stock Warrants. In the 13-week period ended December 27, 2009, a five-year warrant to
purchase 907,400 shares of common stock at an exercise price of $0.55 per share was issued to its
investment banking firm as partial consideration for services rendered in the private placement of
a preferred stock unit financing, as discussed below. As an element of that financing, the Company
issued five-year warrants to the investors to purchase an aggregate of 2,094,000 shares of common
stock at an exercise price of $0.55 per share. In the 13-week period ended December 27, 2009, the
Company also issued a five-year warrant to purchase 350,000 shares of the Companys common stock at
an exercise price of $0.44 per share to its investment banking firm for a one-year extension of an
agreement with said firm to assist the Company to raise additional capital and to provide financial
advisory services. The estimated fair value of this warrant, $119,000, will be amortized over the
12-month term of the extension.
In the 13-week period ended December 27, 2009, as a result of the closing of the preferred
stock financing and the warrant issued to the investment banking firm in connection with the
agreement extension discussed above, warrants to purchase 762,000 shares of common stock at $3.18
per share were automatically adjusted to purchase 1,477,500 shares at $1.64 per share, which
warrants expired on December 30, 2009. No warrants to purchase shares of the Companys common
stock expired during the 13-week period ended December 27, 2009.
At December 27, 2009 and September 27, 2009, there were warrants outstanding to purchase
5,528,200 and 1,461,300 shares of the Companys common stock, respectively. As noted above,
subsequent to December 27, 2009, on December 30, 2009, warrants to purchase 1,477,500 shares of
common stock expired.
Preferred Stock. On September 30, 2009, the Company sold and issued an aggregate of 3,490
preferred stock units (the Units) at a purchase price of $700 per Unit. The $2,443,000 aggregate
purchase price for the Units was paid in cash to the Company. Each Unit was comprised of one share
of the Companys newly created Series B Convertible Preferred Stock (the Series B Stock), plus a
five-year warrant to purchase 600 shares of the Companys common stock at $0.55 per share, as
discussed above. Each share of Series B Stock is convertible at any time at the holders option
into 2,000 shares of common stock at an initial conversion price per converted share of common
stock equal to $0.50. As of December 27, 2009, an aggregate of 6,980,000 shares of the Companys
common stock were issuable upon conversion of the Series B Stock at the initial conversion price.
The Series B Stock is non-voting, except to the extent required by law. With respect to
distributions upon a deemed dissolution, liquidation or winding-up of the Company, the Series B
Stock ranks senior to the Common Stock and junior to both the Companys Series A-1 Stock and Series
A-2 10% Cumulative Convertible Preferred Stock (the Series A-2 Stock). The liquidation preference
per share of Series B Stock equals its stated value, $1,000 per share. The Series B Stock is not
entitled to any preferential cash dividends; however, the Series B Stock is entitled to receive,
pari passu with the Companys Common Stock, such dividends on the Common Stock as may be declared
from time to time by the Companys Board of Directors.
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The
Companys aggregate gross proceeds received of $2,443,000 from
the sale of the Series B Stock was allocated to the individual components
comprising the stock units on a relative fair value basis, resulting in approximately $424,000 of
the proceeds allocated to the five-year warrant and approximately $2,019,000 allocated to the
Series B Stock. In addition, because the effective conversion price of the Series B Stock was
below the current trading price of the Companys shares at the date of issuance, the Company
recorded a beneficial conversion feature (BCF) of approximately $1,471,000. Since the preferred
shares contain no set redemption date and they are convertible from inception by the holder, the
entire BCF amount was accreted as a preferred dividend as of the issuance date.
The Company used the Black-Scholes model to value the warrants issued to the investment
banking firm and those issued to the Series B Stock investors discussed above using the following
assumptions; volatility of 93.2%, stock price $0.50 per share, exercise price $0.55 per share,
risk-free interest rate of 2.3% and an expected term of five years.
In the 13-week period ended December 27, 2009, 16,700 shares of the Series A-1 Stock were
converted by Longview into 1,250,000 shares of common stock, as discussed above.
Stock Incentive Plans. In June 2006, the Companys stockholders approved the Companys 2006
Omnibus Incentive Plan (the 2006 Plan), which is designed to serve as a comprehensive equity
incentive program to attract and retain the services of individuals essential to the Companys
long-term growth and financial success. The 2006 Plan permits the granting of stock options
(including both incentive and non-qualified stock options), stock-only stock appreciation rights,
nonvested stock and nonvested stock units, performance awards of cash, stock or property, dividend
equivalents and other stock grants. Upon approval of the 2006 Plan in June 2006, the Companys 2003
Stock Incentive Plan (the 2003 Plan), 2001 Non-Qualified Stock Option Plan (the 2001
Non-Qualified Plan), 2001 Stock Option Plan (the 2001 Plan) and 2000 Non-Qualified Stock Option
Plan (the 2000 Plan) (collectively, the Prior Plans) were terminated, but existing options
issued pursuant to the Prior Plans remain outstanding in accordance with the terms of their
original grants. As of December 27, 2009, options to purchase 4,000 shares of the Companys common
stock at an exercise price of $265.62 per share were outstanding and exercisable under the 2000
Plan, options to purchase 2,500 shares of the Companys common stock at an exercise price of $11.50
per share were outstanding and exercisable under the 2001 Plan, options to purchase 44,900 shares
of the Companys common stock were outstanding and exercisable under the 2001 Non-Qualified Option
Plan, at exercise prices ranging from $8.60 to $13.50 per share, and options to purchase 267,900
shares of the Companys common stock were outstanding under the 2003 Plan at exercise prices
ranging from $10.40 to $36.20 per share, of which options to purchase 267,600 shares were
exercisable at December 27, 2009.
Pursuant to an amendment of the 2006 Plan by stockholders in March 2009, the number of shares
of common stock reserved for issuance under the 2006 Plan shall automatically increase at the
beginning of each subsequent fiscal year by the lesser of 1,250,000 shares or 5% of the common
stock of the Company outstanding on the last day of the preceding fiscal year. As a result of
that provision, the number of shares issuable under the 2006 Plan increased by 484,800 shares in
the 13-week period ended December 27, 2009. The aggregate number of shares of common stock
issuable under all stock-based awards that may be made under the 2006 Plan at December 27, 2009 is
899,700 shares. As of December 27, 2009, there were options to purchase 249,600 shares of the
Companys common stock outstanding under the 2006 Plan, at exercise prices ranging from $0.35 to
$14.10 per share, of which options to purchase 211,400 shares were exercisable at December 27,
2009. In addition, as of December 27, 2009, 89,600 shares of nonvested stock were issued and
outstanding pursuant to the 2006 Plan and 237,200 shares of vested stock were issued and
outstanding pursuant to the 2006 Plan.
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The following table summarizes stock options outstanding as of December 27, 2009 as well as
activity during the 13-week period then ended:
Weighted Average | ||||||||
Shares (1) | Exercise Price | |||||||
Outstanding at September 27, 2009 |
568,900 | $ | 17.78 | |||||
Granted |
| | ||||||
Exercised |
| | ||||||
Forfeited |
| | ||||||
Outstanding at December 27, 2009 |
568,900 | $ | 17.78 | |||||
Exercisable at December 27, 2009 |
530,400 | $ | 18.36 | |||||
(1) | Rounded to nearest one hundred (100). |
Through the first 13 weeks of fiscal 2010, there have been no options granted. At December
27, 2009, the aggregate intrinsic value of unvested options outstanding and options exercisable was
$0 and $0, respectively. There were no options exercised during the 13 weeks ended December 27,
2009 and therefore, the total intrinsic value of options exercised during that period was $0. The
intrinsic value of a stock option is the amount by which the market value of the underlying stock
exceeds the exercise price of the option. At December 27, 2009, the weighted-average remaining
contractual life of options outstanding and exercisable was 5.1 years and 5.0 years, respectively.
The amount of compensation expense related to outstanding stock options not yet recognized at
December 27, 2009 was $4,600 and, assuming the grantees continue to be employed by or remain as
directors of the Company, that amount will be recognized as compensation expense as follows:
FY 2010 (remainder of year) |
$ | 2,800 | ||
FY 2011 |
$ | 1,600 | ||
FY 2012 |
200 | |||
Total |
$ | 4,600 | ||
The following table summarizes nonvested stock grants outstanding as of December 27, 2009 as
well as activity during the 13-week period then ended:
Weighted | ||||||||
Average Grant | ||||||||
Date Fair Value | ||||||||
Nonvested Shares | per Share | |||||||
Outstanding at September 27, 2009 |
90,400 | $ | 2.15 | |||||
Granted |
| | ||||||
Vested |
(300 | ) | 10.30 | |||||
Forfeited |
| | ||||||
Outstanding at December 27, 2009 |
90,100 | $ | 3.34 | |||||
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The amount of compensation expense related to nonvested stock grants not yet recognized at
December 27, 2009 was $51,200 and, assuming the grantees continue to be employed by or remain as
directors of the Company, that amount will be recognized as compensation expense as follows:
FY 2010 (remainder of year) |
$ | 40,400 | ||
FY 2011 |
9,400 | |||
FY 2012 |
1,400 | |||
Total |
$ | 51,200 | ||
Note 5 Loss per Share
Since the Company had losses for the 13-week periods ended December 27, 2009 and December 28,
2008, basic and diluted net loss per common share are the same and are computed based solely on the
weighted average number of shares of common stock outstanding for the respective periods.
Cumulative dividends on the Series A-1 Stock and the Series A-2 Stock for the 13-week period ended
December 27, 2009 and on the Series A-1 Stock for the 13-week period ended December 28, 2008,
although not declared, constitute a preferential claim against future dividends, if any, and are
treated as an incremental expense of continuing operations for purposes of determining basic and
diluted net loss from continuing operations per common share. In like manner, the beneficial
conversion feature associated with the issuance of the Companys Series B Stock in the 13-week
period ended December 27, 2009, although not recorded as an expense, is treated as a deemed
dividend and, therefore, an incremental expense of continuing operations for purposes of
determining basic and diluted net loss from continuing operations per common share.
The following table sets forth the computation of basic and diluted loss per common share:
13 Weeks Ended | ||||||||
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Continuing Operations Numerator: |
||||||||
Loss from continuing operations attributable to Company |
$ | (1,716,700 | ) | $ | (2,179,400 | ) | ||
Undeclared cumulative dividends on Series A-1 and
Series A-2 preferred stock |
(112,900 | ) | (100,900 | ) | ||||
Deemed dividend for beneficial conversion feature
related to Series B preferred stock |
(1,471,000 | ) | | |||||
Adjusted basic and diluted net loss attributable to Company
common stockholders |
$ | (3,300,600 | ) | $ | (2,280,300 | ) | ||
Discontinued Operations Numerator: |
||||||||
Gain from discontinued operations |
$ | | $ | 65,300 | ||||
Continuing and Discontinued Operations Denominator: |
||||||||
Weighted average number of common shares outstanding |
10,141,400 | 5,298,900 | ||||||
Basic and diluted net loss per share information: |
||||||||
From continuing operations attributable to Company |
$ | (0.33 | ) | $ | (0.43 | ) | ||
From discontinued operations attributable to Company |
| 0.01 | ||||||
Basic and diluted net loss attributable to Company per common share |
$ | (0.33 | ) | $ | (0.42 | ) | ||
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Note 6 Inventories, Net
Net inventories at December 27, 2009 and September 27, 2009 are set forth below.
December 27, | September 27, | |||||||
2009 | 2009 | |||||||
Inventory: |
||||||||
Work in process |
$ | 1,091,900 | $ | 1,128,000 | ||||
Raw materials |
356,700 | 326,800 | ||||||
Finished goods |
131,400 | 161,000 | ||||||
1,580,000 | 1,615,800 | |||||||
Less reserve for obsolete inventory |
(1,192,200 | ) | (1,174,700 | ) | ||||
$ | 387,800 | $ | 441,100 | |||||
The Company uses the average cost method for valuation of its product inventory.
Title to all inventories remains with the Company. Inventoried materials and costs relate to:
work orders from customers; the Companys generic module parts and memory stacks; and capitalized
material, labor and overhead costs expected to be recovered from probable new research and
development contracts. Work in process includes amounts that may be sold as products or under
contracts. Such inventoried costs are stated generally at the total of the direct production costs
including overhead. Inventory valuations do not include general and administrative expenses.
Inventories are reviewed quarterly to determine salability and obsolescence.
Note 7 Reportable Segments
The Company manages its operations through two reportable segments, the contract research and
development segment and the product segment.
The Companys contract research and development segment provides services, largely to U.S.
government agencies and government contractors, under contracts to develop prototypes and provide
research, development, design, testing and evaluation of complex detection and control defense
systems. The Companys research and development contracts are usually cost reimbursement plus fixed
fee, which require the Companys good faith performance of a statement of work within overall
budgetary constraints, but with latitude as to resources utilized, or fixed price level of effort,
which require the Company to deliver a specified number of labor hours in the performance of a
statement of work. Occasionally, the Companys research and development contracts are firm fixed
price, which require the delivery of specified work products independent of the resources or means
employed to satisfy the required deliveries.
Currently, the Companys product segment primarily consists of stacked semiconductor chip
assemblies, electronic chips and miniaturized cameras, largely all of which are based on
proprietary designs of the Company.
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The Companys management evaluates financial information to review the performance of the
Companys research and development contract business separately from the Companys product
business, but only to the extent of the revenues and the cost of revenues of the two segments.
Because the various indirect expense operations of the Company, as well as its assets, now support
all of its revenue-generating operations, frequently in circumstances in which a distinction
between research and development contract support and product support is difficult to identify,
segregation of these indirect costs and assets is impracticable. The revenues and gross profit or
loss of the Companys two reportable segments for the 13-week periods ended December 27, 2009 and
December 28, 2008 are shown in the following table.
13 Weeks Ended | ||||||||
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Contract research and development revenue |
$ | 2,759,400 | $ | 2,443,200 | ||||
Cost of contract research and development revenue |
2,036,200 | 1,937,400 | ||||||
Contract research and development segment gross profit |
$ | 723,200 | $ | 505,800 | ||||
Product sales |
$ | 447,000 | $ | 290,800 | ||||
Cost of product sales |
402,800 | 378,000 | ||||||
Product segment gross profit (loss) |
$ | 44,200 | $ | (87,200 | ) | |||
Reconciliations of segment revenues to total revenues are as follows:
13 Weeks Ended | ||||||||
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Contract research and development revenue |
$ | 2,759,400 | $ | 2,443,200 | ||||
Product sales |
447,000 | 290,800 | ||||||
Other revenue |
3,800 | 9,500 | ||||||
Total revenues |
$ | 3,210,200 | $ | 2,743,500 | ||||
Reconciliations of segment gross profit (loss) to loss from continuing operations before
provision for income taxes are as follows:
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13 Weeks Ended | ||||||||
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Contract research and development segment gross profit |
$ | 723,200 | $ | 505,800 | ||||
Product segment gross profit (loss) |
44,200 | (87,200 | ) | |||||
Net segment gross profit |
767,400 | 418,600 | ||||||
Add (deduct): |
||||||||
Other revenue |
3,800 | 9,500 | ||||||
General and administrative expense |
(1,651,400 | ) | (1,860,800 | ) | ||||
Research and development expense |
(755,200 | ) | (350,400 | ) | ||||
Interest expense |
(114,900 | ) | (409,100 | ) | ||||
Provision for litigation judgment |
(20,200 | ) | | |||||
Change in fair value of derivative instrument |
45,500 | | ||||||
Gain on disposal of assets |
12,500 | | ||||||
Interest and other (expense) income |
(1,000 | ) | 31,600 | |||||
Loss from continuing operations before
provision for income taxes |
$ | (1,713,500 | ) | $ | (2,160,600 | ) | ||
Note 8 Concentration of Revenues and Sources of Supply
In the 13-week period ended December 27, 2009, direct contracts with the U.S. government
accounted for 70% of the Companys total revenues, and second-tier government contracts with prime
government contractors accounted for 27% of total revenues. The remaining 3% of the Companys total
revenues were derived from non-government sources. Of the revenues derived directly or indirectly
from U.S. government agencies, the U. S. Army, classified agencies, Alion Science and Technology
Corporation, a defense contractor, and the U.S. Air Force accounted for 30%, 26%, 13% and 12%,
respectively, of total revenues in the 13-week period ended December 27, 2009. Loss of any of
these customers would have a material adverse impact on our business, financial condition and
results of operations. No other single governmental or non-governmental customer accounted for more
than 10% of the Companys total revenues in the 13-week period ended December 27, 2009.
In the 13-week period ended December 28, 2008, direct contracts with the U.S. government
accounted for 60% of the Companys total revenues, and second-tier government contracts with prime
government contractors accounted for 14% of total revenues. The remaining 26% of the Companys
total revenues were derived from non-government sources. Of the revenues derived directly or
indirectly from U.S. government agencies, the U.S. Air Force accounted for 40% of total revenues.
No other single governmental or non-governmental customer accounted for more than 10% of the
Companys total revenues in the 13-week period ended December 28, 2008.
The Company primarily uses contract manufacturers to fabricate and assemble its stacked chip,
microchip and sensor products. At current limited levels of sales, the Company typically uses a
single contract manufacturer for such products and, as a result, is vulnerable to disruptions in
supply. The Company also uses contract manufacturers for production of its visible camera products,
except for final testing, which the Company performs itself. The Company currently assembles,
calibrates and tests its
17
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thermal camera and software products itself, given the relatively low
volumes of these products. The
Company presently relies on a limited number of suppliers of imaging chips that meet the
quality and performance requirements of the Companys thermal imaging products, which makes the
Company vulnerable to potential disruptions in supply of such imaging chips.
Note 9 Commitments and Contingencies
Litigation. In January 2008, Timothy Looney, the former shareholder of Optex, filed a lawsuit
in the Superior Court of California, County of Orange (the Court), against the Company and the
Lenders alleging that the Company had breached its contract to register the shares of its common
stock issued to Mr. Looney to purchase the final 30% of the shares of Optex. Mr. Looney also
alleged that the Companys senior lenders had tortiously and negligently interfered with his
contractual rights with the Company by allegedly requiring the Company to refrain from registering
his securities. In March 2009, the Company received notice that the Lenders had reached a
settlement with Mr. Looney, the terms of which are unknown to the Company. The Lenders have
notified the Company that they believe they are entitled to indemnification by the Company for this
claim under their loan arrangements with the Company, and the Company has paid such indemnification
expense. Pursuant to this lawsuit, Mr. Looney was seeking partial liquidated damages, declarative
and injunctive relief compelling the Company to register his shares and unspecified compensatory
damages.
In June 2008, the Company filed a cross-complaint against Mr. Looney in the Superior Court of
California, County of Orange, in response to the January 2008 action discussed above, alleging that
Mr. Looney fraudulently and negligently misrepresented the financial condition of Optex prior to
its sale to the Company and breached his contractual obligations to the Company subsequent to that
sale. Pursuant to this cross-complaint, the Company sought compensatory and punitive damages and
attorneys fees.
Trial of Mr. Looneys January 2008 lawsuit against the Company and the Companys June 2008
cross-complaint against Mr. Looney was completed in July 2009. A jury verdict was reached awarding
Mr. Looney liquidated damages of $105,000, with the court rejecting Mr. Looneys claim for
additional compensatory damages based on the Companys motion, and the Companys cross-complaint
against Mr. Looney with respect to allegations of fraud was denied. The results of the trial are
potentially subject to appeal by either or both parties, the outcome of which action is uncertain.
In December 2009, the Superior Court of California, County of Orange, entered a judgment in such
jury trial in favor of Mr. Looney. The aggregate amount of the judgment was $959,400, which
included the $105,000 liquidated damages and Mr. Looneys attorneys fees. The Company has recorded
the liability for this judgment in its Consolidated Financial Statements at December 27, 2009.
In December 2008, Mr. Looney filed another lawsuit in the Superior Court of California, County
of Orange alleging breach of contract. Mr. Looney alleges in this lawsuit that the UCC foreclosure
sale of the assets of Optex constituted a change-in-control and claims that the Company is
required to pay him an earnout payment of $3.9 million. The Company believes that it has
meritorious defenses to these claims, but there is no assurance that such defenses will prevail.
The Company has also filed a cross-complaint against Mr. Looney in this proceeding, alleging that
Mr. Looney fraudulently and negligently misrepresented the financial condition of Optex prior to
its sale to the Company and breached his contractual obligations to the Company subsequent to that
sale. Pursuant to this cross-complaint, the Company is seeking compensatory and punitive damages
and its attorneys fees. On July 30, 2009, the Court denied Mr. Looneys motion for summary
adjudication of his claim. This litigation is currently set for trial on April 26, 2010.
Management believes that the range of possible outcomes under this lawsuit
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could range from up to
the $3.9 million sought by Mr. Looney, plus costs and attorneys fees, to recovery
of damages by the Company if the Companys allegations are upheld. Therefore, no accrual for
loss has been recorded.
In September 2008, Mr. Looney filed a lawsuit in the United States District Court, Central
District of California, against John C. Carson, the Companys CEO, and John J. Stuart, Jr., the
Companys CFO, alleging that Messrs. Carson and Stuart negligently misrepresented the Companys
financial information when the Company was negotiating with Mr. Looney regarding the acquisition of
Optex. Messrs. Carson and Stuart strongly deny these allegations. Pursuant to this lawsuit, Mr.
Looney is seeking recovery of damages, interest and costs. Because
the alleged actions of Messrs.
Carson and Stuart were arguably in their capacity as officers of the Company, the Company has
agreed to defend Messrs. Carson and Stuart in this lawsuit, subject to waivers of any conflict of
interests that may arise, and the Company may be required to indemnify Messrs. Carson and Stuart in
this matter. Messrs. Carson and Stuart filed a motion for summary judgment in this matter in
September 2009. In November 2009, the Court granted alternate relief in response to the motion for
summary judgment, allowing Messrs. Carson and Stuart to conduct further discovery into Mr. Looneys
alleged damages, and ordered Mr. Looney to pay the related attorneys fees. This lawsuit is not
currently set for trial. Management believes that the probability of loss under this lawsuit is
remote and, therefore, no accrual for loss has been recorded.
In April 2009, Mr. Looney initiated litigation against the Company for breach of contract for
alleged default under the $400,000 one-year unsecured subordinated promissory note in the State
District Court of Dallas County, Texas. Also in April 2009, TWL Group, LP (TWL), an entity owned
by Mr. Looney, initiated litigation against Optex for breach of contract for alleged default under
a $2 million secured subordinated note. Although a motion for summary judgment brought by TWL in
this latter matter was granted, the action has been stayed as a result of the Optex bankruptcy. As
a result of the Companys filings, the litigation on the $400,000 note has been removed to the
Federal District Court of Northern Texas. The Companys defenses in this matter are related to the
Companys defenses and cross-claims in the California litigation discussed above, defenses that the
Company intends to pursue vigorously, but the outcome of which cannot be assured. That matter is
set for trial on March 1, 2010. Mr. Looney has filed a motion for summary judgment in this matter,
but a hearing date has not been set for this motion.
With the exception of the Looney January 2008 litigation, the outcome of the above litigation
is inherently uncertain, and it is currently not possible to estimate the range of possible loss
that the Company might realize in the event of an adverse outcome from the various litigations with
Mr. Looney. In the event of one or more unfavorable outcomes, there could be a material and adverse
effect on the Companys financial condition. The Company and Mr. Looney preliminarily agreed
in December 2009 to the outline of a potential settlement of all litigation by and between the
parties, including the judgment entered in Mr. Looneys
favor. The Company believes an agreement was subsequently reached
between the parties on the essential settlement terms. However, Mr.
Looney has been unwilling to enter into a definitive settlement
agreement and has terminated negotiations with respect thereto as of
the date of this report. The Company cannot assure that it will be able to enter into an definitive settlement
agreement with Mr. Looney on acceptable terms, on a timely basis or at all. Failure to settle this litigation in the
near future or an adverse ruling in such litigation could have a material adverse effect on the
Companys financial position and business.
In March 2009, FirstMark III, LP, formerly known as Pequot Private Equity Fund III, LP, and
FirstMark III Offshore Partners, LP, formerly known as Pequot Offshore Private Equity Partners III,
LP, filed a lawsuit in the state Supreme Court, State of New York, County of New York, against the
Company. The plaintiffs allege the Company breached a settlement agreement dated December 29, 2006
between them that allegedly required the Company to make certain payments to the plaintiffs that
were
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not made, in the principal amounts of approximately $539,400 and $230,000 plus interest
thereon
allegedly accruing at 18% from March 14, 2007 and May 31, 2007, respectively. At December
27, 2009, the Company has approximately $1,161,900 of expense accrued reflecting these alleged
obligations. The plaintiffs filed a motion for summary judgment in this matter, which was granted
in January 2010, although judgment has not yet been entered as of the date of this Report. The
Company is currently in negotiations with the plaintiffs to settle this matter, but such an outcome
cannot be assured.
The Company has been, and may from time to time, become a party to various other legal
proceedings arising in the ordinary course of its business. The Company does not presently know of
any such other matters, the disposition of which would be likely to have a material effect on the
Companys consolidated financial position, results of operations or liquidity.
Note 10 Subsequent Events
Conversion of Series A-1 Stock and Series A-2 Stock into Common Stock
The Company issued 2,700,000 shares of common stock to an accredited institutional investor
upon such investors conversion on December 31, 2009 of an aggregate of $1,080,000 of the stated
value of the Series A-1 Stock. The Company also issued 93,700 shares of common stock to another
accredited investor upon such investors conversion on December 31, 2009 of $37,480 of the stated
value of the Series A-1 Stock. The Company also issued 245,900 shares of common stock to the latter
investor upon such investors conversion on December 31, 2009 of $98,360 of the stated value of the
Series A-2 Stock.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
In this report, the terms Irvine Sensors, Company, we, us and our refer to Irvine
Sensors Corporation (ISC) and its subsidiaries.
This report contains forward-looking statements regarding Irvine Sensors which include, but
are not limited to, statements concerning our projected revenues, expenses, gross profit and
income, mix of revenue, demand for our products, the need for additional capital, the outcome of
existing litigation and potential settlements of such litigation, our ability to obtain and
successfully perform additional new contract awards and the related funding of such awards, market
acceptance of our products and technologies, the competitive nature of our business and markets,
the success and timing of new product introductions and commercialization of our technologies,
product qualification requirements of our customers, our significant accounting policies and
estimates, and the outcome of expense audits. These forward-looking statements are based on our
current expectations, estimates and projections about our industry, managements beliefs, and
certain assumptions made by us. Words such as anticipates, expects, intends, plans,
predicts, potential, believes, seeks, estimates, should, may, will, with a view
to and variations of these words or similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict. Therefore, our actual results could
differ materially and adversely from those expressed in any forward-looking statements as a result
of various factors. Such factors include, but are not limited to the following:
| our ability to obtain additional financing for working capital on acceptable terms in a timely manner or at all; | ||
| our ability to regain and maintain compliance with Nasdaqs listing requirements; | ||
| the outcome of existing litigation and our ability to settle such litigation on acceptable terms; | ||
| our ability to continue as a going concern; | ||
| our ability to obtain critical and timely product and service deliveries from key vendors due to our working capital limitations, competitive pressures or other factors; | ||
| our ability to successfully execute our business plan and control costs and expenses; | ||
| our ability to obtain expected and timely bookings and orders resulting from existing contracts; | ||
| our ability to secure and successfully perform additional research and development contracts, and achieve greater contracts backlog; | ||
| governmental agendas, budget issues and constraints and funding or approval delays; | ||
| our ability to maintain adequate internal controls and disclosure procedures, and achieve compliance with Section 404 of the Sarbanes-Oxley Act; | ||
| our ability to introduce new products, gain broad market acceptance for such products and ramp up manufacturing in a timely manner; | ||
| new products or technologies introduced by our competitors, many of whom are bigger and better financed than us; | ||
| the pace at which new markets develop; | ||
| our ability to establish strategic partnerships to develop our business; | ||
| our limited market capitalization; | ||
| general economic and political instability; and | ||
| those additional factors which are listed under the section Risk Factors in Part II, Item 1A of this report. |
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We do not undertake any obligation to revise or update publicly any forward-looking statements
for any reason, except as required by law. Additional information on the various risks and
uncertainties potentially affecting our operating results are discussed below and are contained in
our publicly filed documents available through the SECs website (www.sec.gov) or upon written
request to our Investor Relations Department at 3001 Red Hill Avenue, Costa Mesa, California 92626.
Overview
We are a vision systems company enabled by technology for three-dimensional packaging of
electronics and manufacturing of electro-optical products. We design, develop, manufacture and sell
vision systems, miniaturized electronic products and higher level systems incorporating such
products for defense, security and commercial applications. We also perform customer-funded
contract research and development related to these products, mostly for U.S. government customers
or prime contractors. Most of our historical business relates to application of our technologies
for stacking either packaged or unpackaged semiconductors into more compact three-dimensional
forms, which we believe offer volume, power, weight and operational advantages over competing
packaging approaches, and which we believe allows us to offer proprietary higher level products
with unique operational features.
In December 2005, we completed the initial acquisition (the Initial Acquisition) of 70% of
the outstanding capital stock of Optex Systems, Inc. (Optex), a privately held manufacturer of
telescopes, periscopes, lenses and other optical systems and instruments whose customers were
primarily agencies of and prime contractors to the U.S. Government. In consideration for the
Initial Acquisition, we made an initial cash payment to the sole shareholder of Optex, Timothy
Looney, in the amount of $14.0 million and made an additional cash payment of $64,200 to Mr. Looney
in July 2006 upon completion of the audit of Optexs financial statements for the year ended
December 31, 2005. As additional consideration, we were initially required to pay to Mr. Looney
cash earnout payments in the aggregate amount up to $4.0 million based upon the net cash generated
from the Optex business, after debt service, for the fiscal year ended October 1, 2006 (fiscal
2006) and the next two subsequent fiscal years. Mr. Looney was not entitled to any earnout
payments for fiscal 2006, for the fiscal year ended September 30, 2007 (fiscal 2007) or for the
fiscal year ended September 28, 2008 (fiscal 2008). In January 2007, we negotiated an amendment
to our earnout agreement with Mr. Looney that extended his earnout period to December 2009 and
reduced the aggregate maximum potential earnout by $100,000 to $3.9 million in consideration for a
secured subordinated term loan providing for advances from an entity owned by Mr. Looney to Optex
of up to $2 million. This term loan bore interest at 10% per annum and matured on the earlier of
February 2009 or 60 days after repayment of our senior debt. As of September 27, 2009, this term
loan was fully advanced to Optex. Optex ceased operations in October 2008 as a result of a UCC
foreclosure sale (the Optex Asset Sale) as described more fully below. In September 2009, Optex
filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of California. As a result of this filing, the
accounts of Optex have been deconsolidated from the consolidated balance sheet of the Company at
September 27, 2009, including the obligations of Optex to the entity owned by Mr. Looney described
above. The Company believes that Mr. Looney was not entitled to any earnout for fiscal 2009.
However, Mr. Looney has brought a lawsuit against the Company alleging that the Company is
obligated to pay him the full potential earnout as a result of the Optex Asset Sale. (See Note 9 of
the Condensed Notes to the Consolidated Financial Statements).
In connection with the Initial Acquisition, we entered into an agreement with Mr. Looney,
pursuant to which we agreed to purchase the remaining 30% of the capital stock of Optex held by Mr.
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Looney (the Buyer Option), subject to stockholder approval, which approval was received in June
2006. On December 29, 2006, we amended certain of our agreements with Mr. Looney regarding the
Buyer Option. In consideration for such amendments, we issued a one-year unsecured subordinated
promissory note to Mr. Looney in the principal amount of $400,000, bearing interest at a rate of
11% per annum. We exercised the Buyer Option on December 29, 2006 and issued Mr. Looney
approximately 269,231 shares of our common stock, after giving effect to our one-for-ten reverse
stock split effectuated in August 2008 (the 2008 Reverse Split), as consideration for our
purchase of the remaining 30% of the outstanding common stock of Optex held by him. As a result of
the Initial Acquisition and exercise of the Buyer Option, Optex became our wholly-owned subsidiary.
We financed the Initial Acquisition of Optex by a combination of $4.9 million of senior
secured debt from Square 1 Bank under a term loan and $10.0 million of senior subordinated secured
convertible notes from two private equity funds, which are sometimes referred to in this Report
collectively as Pequot. In December 2006, both of these obligations were refinanced with two new
senior lenders, Longview Fund, LP (Longview) and Alpha Capital Anstalt (Alpha) (collectively,
the Lenders). In November 2007, we restructured these obligations, as well as a short-term $2.1
million debt obligation to Longview, to extend the maturity date of all of such obligations,
including the related interest, to December 30, 2009 in consideration for a restructuring fee of
approximately $1.1 million, which fee was also initially payable December 30, 2009, but which was
extended to September 30, 2010 in connection with partial repayment of the original obligations.
In September 2008, we entered into a binding Memorandum of Understanding for Settlement and
Debt Conversion Agreement (the MOU) with the Lenders with the intent to effect a global
settlement and restructuring of our aggregate outstanding indebtedness payable to the Lenders,
which was then approximately $18.4 million. In October 2008, pursuant to the MOU, an entity
controlled by the Lenders delivered a notice to us and to Optex of the occurrence of an event of
default and acceleration of the obligations due to the Lenders and their assignee and conducted the
aforementioned Optex Asset Sale, a public UCC foreclosure sale of the assets of Optex. The entity
controlled by the Lenders credit bid $15 million in the Optex Asset Sale, which was the winning
bid. As a result, $15 million of our aggregate indebtedness to the Lenders was extinguished. All
financial statements and schedules of the Company give effect to this event and report Optex as a
discontinued operation for both the current and prior fiscal periods.
In March 2009, we sold most of our patent portfolio to a patent acquisition company for $9.5
million in cash, $8.5 million of which was paid in March 2009 and $1.0 million of which was paid in
April 2009, and the patent acquisition company granted us a perpetual, worldwide, royalty-free,
non-exclusive license to use the sold patents in our business (the Patent Sale and License). In
order to secure the release of security interests to effectuate the Patent Sale and License, we
agreed to pay $2.8 million of the aggregate principal and accrued interest owed to the Lenders from
the proceeds of the Patent Sale and License. After such payment, our aggregate principal and
accrued interest owed to the Lenders was approximately $1.2 million. As a result of our satisfying
certain conditions, including our consummation of a $1.0 million bridge debt financing, in April
2009, the Lenders exchanged $1.0 million of our residual principal obligations for the issuance of
24,999 shares of our newly-created Series A-2 10% Cumulative Convertible Preferred Stock (the
Series A-2 Stock), a non-voting convertible preferred stock of the Company. The conversion of the
Series A-2 Stock into shares of our common stock is subject to the same conversion blocker as
contained in our Series A-1 10% Cumulative Convertible Preferred Stock (the Series A-1 Stock),
which would prevent each Lenders common stock ownership
at any given time from exceeding 4.99% of our outstanding common stock (which percentage may
increase but not above 9.99%).
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Since 2002, we historically derived a substantial majority of our total revenues from
government-funded research and development rather than from product sales. We anticipate that a
substantial majority of our total revenues will continue to be derived from government-funded
sources in the immediately foreseeable future. In fiscal 2008 and fiscal 2009, our contract
research and development revenues were adversely affected by procurement delays and capital
constraints, as well as diversion of management and financial resources to address issues related
to operations at Optex, the Optex Asset Sale and the various lawsuits with Mr. Looney. Our current
marketing efforts are focused on government programs that we believe have the potential to
transition to government production contracts. If we are successful in this transition, our future
revenues may become more dependent upon production elements of U.S. defense budgets, funding
approvals and political agendas. We are also attempting to increase our revenues from product
sales by introducing new products with commercial applications, in particular, miniaturized cameras
and stacked computer memory chips. We cannot assure you that we will be able to complete
development, successfully launch or profitably manufacture and sell any such products on a timely
basis, if at all. We generally use contract manufacturers to produce these products or their
subassemblies, and all of our other current operations occur at a single, leased facility in Costa
Mesa, California.
Prior to the fiscal year ended September 27, 2009 (fiscal 2009), we had a history of
unprofitable operations due in part to our investment in Optex and in part to discretionary
investments that we made to commercialize our technologies and to maintain our technical staff and
corporate infrastructure at levels that we believed were required for future growth. In fiscal
2009, we did achieve profitable operating results, largely due to certain nonrecurring events such
as the Patent Sale and License and elimination of certain obligations. In the 13-week period ended
December 27, 2009, we again experienced unprofitable operations. With respect to our investments
in staff and infrastructure, the advanced technical and multi-disciplinary content of our
technologies places a premium on a stable and well-trained work force. As a result, we generally
maintain the size of our work force even when anticipated government contracts are delayed, a
circumstance that has occurred with some frequency in the past and that has resulted in
under-utilization of our labor force for revenue generation from time to time. Delays in receipt of
research and development contracts are unpredictable, but we believe such delays represent a
recurring characteristic of our research and development contract business. We anticipate that the
impact on our business of future delays can be mitigated by the achievement of greater contract
backlog and are seeking growth in our research and development contract revenue to that end. We
are also seeking to expand the contribution to our total revenues from product sales, which have
not historically experienced the same types of delays that can occur in research and development
contracts. We have not yet demonstrated the level of sustained research and development contract
revenue or product sales that we believe, by itself, is required to sustain profitable operations.
Our ability to recover our investments through the cost-reimbursement features of our government
contracts is constrained due to both regulatory and competitive pricing considerations.
To offset the adverse working capital effect of our net losses, we have historically financed
our operations through issuance of various equity and debt instruments. To finance the acquisition
of Optex, we also incurred material long-term debt, and we have exchanged a significant portion of
that debt into preferred stock that is convertible into our common stock. In our last four fiscal
years, we have issued approximately 7.8 million shares of our common stock, an increase of over
400% from the approximately 1.9 million shares of our common stock outstanding at the beginning of
that period, which resulted in a substantial dilution of stockholder interests. At December 27,
2009, our fully diluted common stock position was approximately 32.8 million shares, which assumes
the conversion into common stock of all
preferred stock outstanding as of December 27, 2009 and the exercise for cash of all
outstanding warrants and options to purchase the Companys securities. As of December 30, 2009,
this fully diluted common stock position decreased by approximately 1.5 million shares as a result
of the expiration of certain warrants to purchase common stock of the Company. At December 27,
2009, we had approximately
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$588,400 of debt.
None of our subsidiaries accounted for more than 10% of our total assets at December 27, 2009
or have separate employees or facilities. We currently report our operating results and financial
condition in two operating segments, our research and development business and our product
business.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in conformity with GAAP. As such,
management is required to make judgments, estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. The significant accounting
policies that are most critical to aid in fully understanding and evaluating reported financial
results are the same as those disclosed in our Form 10-K for the 52-week period ended September 27,
2009.
Results of Operations
Total Revenues. Our total revenues increased approximately 17% in the 13-week period ended
December 27, 2009 as compared to the 13-week period ended December 28, 2008, reflecting increases
in both contract research and development revenue and product sales as discussed more fully below.
Contract Research and Development Revenue. Contract research and development revenue consists
of amounts realized or realizable from funded research and development contracts, largely from U.S.
government agencies and government contractors. Contract research and development revenues for the
13-week period ended December 27, 2009 increased from contract research and development revenues of
the 13-week period ended December 28, 2008 as shown in the following table:
Contract Research | ||||||||
and Development | Percentage of | |||||||
13-Week Comparisons | Revenue | Total Revenue | ||||||
13 weeks ended December 28, 2008 |
$ | 2,443,200 | 89 | % | ||||
Dollar increase in current comparable 13 weeks |
316,200 | |||||||
13 weeks ended December 27, 2009 |
$ | 2,759,400 | 86 | % | ||||
Percentage increase in current 13 weeks |
13 | % |
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The increase in our contract research and development revenue in the 13-week period ended
December 27, 2009 as compared to the 13-week period ended December 28, 2008 was largely related to
substantially greater subcontractor and vendor support received to fulfill the technical milestones
of research and development contracts underway in the current fiscal years first quarter than in
the prior fiscal year period. We recorded approximately $853,400 more of such support in the
13-week period ended December 27, 2009 as compared to the 13-week period ended December 28, 2008.
Since most of our research and development contracts are of a cost reimbursement nature, this
increase in expense incurred in the performance of such contracts resulted in our corresponding
recognition of greater revenue derived from such expense. We believe that this increase in
subcontractor and vendor support in the current period was primarily a reflection of an increase in
our ability during such period to procure such support due to our September 2009 financing, coupled
with the timing of technical milestones required for the performance of the current research and
development contracts, rather than being indicative of a trend. An increase in subcontractor and
vendor support, and a corresponding increase in our contract research and development revenue, in
future fiscal quarters will likely be dependent on our ability to raise additional capital, which
we cannot guarantee.
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Cost of Contract Research and Development Revenue. Cost of contract research and development
revenue consists of wages and related benefits, as well as subcontractor, independent consultant
and vendor expenses directly incurred in support of research and development contracts, plus
associated indirect expenses permitted to be charged pursuant to the relevant contracts. Our cost
of contract research and development revenue for the first 13 weeks of fiscal 2010 increased as
compared to the first 13 weeks of fiscal 2009 in terms of absolute dollars, but decreased as a
percentage of contract research and development revenue as shown in the following table:
Percentage of | ||||||||
Cost of Contract | Contract Research | |||||||
Research and | and Development | |||||||
13-Week Comparisons | Development Revenue | Revenue | ||||||
13 weeks ended December 28, 2008 |
$ | 1,937,400 | 79 | % | ||||
Dollar increase in current comparable 13 weeks |
98,800 | |||||||
13 weeks ended December 27, 2009 |
$ | 2,036,200 | 74 | % | ||||
Percentage increase in current 13 weeks |
5 | % |
The current period increase in absolute dollar cost of contract research and development
revenue as compared to the prior fiscal years first quarter was largely the result of the increase
in costs of external subcontractor and vendor support in the current period discussed above. This
increase was partially offset by a reduction in direct costs of our labor required to support our
research and development contracts in the fiscal 2010 first quarter as compared to the fiscal 2009
first quarter. This combination of increased external support and decreased internal direct labor
can result in reduced margins, rather than the improvement realized in the current period, since
our costs of contract research and development revenue generated by support from our external
vendors and subcontractors do not recover as much indirect expense through the cost reimbursement
features of many of our contracts as do our own internal direct labor costs. However, in the
13-week period ended December 27, 2009, this structural limitation was overcome by a substantial
reduction in our indirect expenses and the corresponding overhead costs of contract research and
development revenue as compared to such costs in the 13-week period ended December 28, 2008. This
overhead reduction, largely derived from greater revenue generation from our existing staff,
resulted in a disproportionate decrease in our costs of contract research and development revenue
in the current fiscal year period, with the corresponding improvement in costs of contract research
and development revenue as a percentage of such revenue.
Product Sales. Our product sales are generally derived from sales of miniaturized camera
products, specialized chips, modules, stacked chip products and chip stacking services. Product
sales for the 13-week period ended December 27, 2009 increased both in terms of absolute dollars
and as a percentage of total revenue as compared to the 13-week period ended December 28, 2008 as
shown in the following table:
Product | Percentage of | |||||||
13-Week Comparisons | Sales | Total Revenue | ||||||
13 weeks ended December 28, 2008 |
$ | 290,800 | 11 | % | ||||
Dollar increase in current comparable 13 weeks |
156,200 | |||||||
13 weeks ended December 27, 2009 |
$ | 447,000 | 14 | % | ||||
Percentage increase in current 13 weeks |
54 | % |
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The increase in product sales in the current fiscal year period is largely the result of
substantially increased sales of our thermal imaging products in the 13-week period ended December
27, 2009 as compared to the 13-week period ended December 28, 2008. This increase in thermal
imaging product sales was partially offset by a small decrease in sales of stacked chip products,
resulting in our aggregate 54% increase in product sales in the fiscal 2010 first quarter compared
to the fiscal 2009 first quarter. Based on the composition of our backlog at the date of this
report, we expect that sales of thermal imaging products will continue to represent a larger
percentage of our product sales throughout fiscal 2010 as compared to fiscal 2009.
Cost of Product Sales. Cost of product sales consists of wages and related benefits of our
personnel, as well as subcontractor, independent consultant and vendor expenses directly incurred
in the manufacture of products sold, plus related overhead expenses. Our cost of product sales for
the 13-week periods ended December 27, 2009 and December 28, 2008 is shown in the following table:
Cost of | Percentage of | |||||||
13-Week Comparisons | Product Sales | Product Sales | ||||||
13 weeks ended December 28, 2008 |
$ | 378,000 | 130 | % | ||||
Dollar increase in current comparable 13 weeks |
24,800 | |||||||
13 weeks ended December 27, 2009 |
$ | 402,800 | 90 | % | ||||
Percentage increase in current 13 weeks |
7 | % |
The increase in absolute dollars of cost of product sales in the current fiscal year period
was related to the increase in product sales discussed above. However, the absolute dollar
increase in cost of product sales in the 13-week period ended December 27, 2009 as compared to the
13-week period ended December 28, 2008 was disproportionately less than the increase in product
sales for the fiscal 2009 first quarter. Accordingly, the cost of product sales as a percentage of
product sales in the current fiscal year period was reduced compared to the prior fiscal year
period, resulting in positive gross margins on product sales in the 13-week period ended December
27, 2009, as opposed to the negative gross margins on product sales in the 13-week period ended
December 28, 2008. However, the negative gross margins in the 13-week period ended December 28,
2008 were primarily related to increased product support costs associated with thermal imaging
products, including both those delivered in a prior period and those to be shipped in future
periods under an existing order for which revenues had not yet been recognized during the fiscal
2009 first quarter. Product support costs in the 13-week period ended December 27, 2009 reflected
different contractual provisions than in the prior year period and were substantially lower than in
the 13-week period ended December 28, 2008. The impact of such timing and contractual effects may
continue to produce fluctuations in product margins unless and until our sales of thermal imaging
products increase substantially, thereby reducing the percentage impact of product support costs,
which typically are less elastic than the associated revenues.
General and Administrative Expense. General and administrative expense largely consists of
wages and related benefits for our executive, financial, administrative and marketing staff, as
well as professional fees, primarily legal and accounting fees and costs, plus various fixed costs
such as rent, utilities and telephone. The comparison of general and administrative expense for
the 13-week periods ended December 27, 2009 and December 28, 2008 is shown in the following table:
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General and | ||||||||
Administrative | Percentage of | |||||||
13-Week Comparisons | Expense | Total Revenue | ||||||
13 weeks ended December 28, 2008 |
$ | 1,860,800 | 68 | % | ||||
Dollar decrease in current comparable
13 weeks |
(209,400 | ) | ||||||
13 weeks ended December 27, 2009 |
$ | 1,651,400 | 51 | % | ||||
Percentage decrease for current 13 weeks |
(11 | %) |
Approximately $137,800, or 66%, of the dollar decrease in general and administrative expense
in the 13-week period ended December 27, 2009 as compared to the 13-week period ended December 28,
2008, was the result of decreased general and administrative labor expense and related employee
benefits in the current fiscal year period. Our overall reduction in our labor-related overhead
costs also contributed to a $153,100 reduction in bid and proposal and related general and
administrative expenses in the first quarter of fiscal 2010 as compared to the first quarter of
fiscal 2009. Our general and administrative service expense in the 13-week period ended December
27, 2009, largely accounting expenses, also decreased $60,500 compared to the 13-week period ended
December 28, 2008. These current period reductions were partially offset by a $99,700 increase in
our unallowable general and administrative expense for which we cannot seek reimbursement under
most of our government contracts, largely litigation expenses, compared to the prior fiscal year
period. Since our total revenues increased in the fiscal 2010 first quarter as compared to the
first quarter of fiscal 2009, our overall decrease in absolute dollars of general and
administrative expense also resulted in general and administrative expense as a percentage of total
revenue being decreased in the current fiscal year period.
Research and Development Expense. Research and development expense consists of wages and
related benefits for our research and development staff, independent contractor consulting fees and
subcontractor and vendor expenses directly incurred in support of internally funded research and
development projects, plus associated overhead expenses. Research and development expense for the
first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009 is shown in the
following table:
Research and | ||||||||
Development | Percentage of | |||||||
13-Week Comparisons | Expense | Total Revenue | ||||||
13 weeks ended December 28, 2008 |
$ | 350,400 | 13 | % | ||||
Dollar increase in current comparable 13 weeks |
404,800 | |||||||
13 weeks ended December 27, 2009 |
$ | 755,200 | 24 | % | ||||
Percentage increase for current 13 weeks |
116 | % |
The increase in research and development expense in the first quarter of fiscal 2010 as
compared to the first quarter of fiscal 2009 is largely related to labor deployment issues in the
respective fiscal quarters. We use the same technical staff for both internal and customer funded
research and development projects, as well as the preparation of technical proposals, so the
availability of direct labor in terms of man hours and skill mix has a direct bearing on the amount
of internally funded research and development expense we undertake in any given period. As noted in
the discussion of cost of contract research and development revenue above, we used less of our
direct labor on funded contracts in the current fiscal year period than the prior fiscal year
period. Generally, this difference in labor deployment does not reflect any trends, but
rather is tied to specific milestones of both funded and internal research projects.
Accordingly, both the absolute
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dollar and percentage increases in research and development expense in fiscal 2010 as compared
to fiscal 2009 reflect these milestones, rather than a change in priorities related to internally
funded research and development.
Interest Expense. Our interest expense for the first 13 weeks of fiscal 2010, compared to the
first 13 weeks of fiscal 2009, decreased substantially, as shown in the following table:
Interest Expense | ||||
13 weeks ended December 28, 2008 |
$ | 409,100 | ||
Dollar decrease in current comparable 13 weeks |
(294,200 | ) | ||
13 weeks ended December 27, 2009 |
$ | 114,900 | ||
Percentage decrease for current 13 weeks |
(72 | %) |
The decline in interest expense in the first quarter of fiscal 2010 as compared to the first
quarter of fiscal 2009 was primarily due to the reduction in our debt, and corresponding
interest, that resulted from application of proceeds from the Patent Sale and License and the
exchange of a portion of our debt for our Series A-2 Stock.
Income From Discontinued Operations. In the period ended December 28, 2008, we realized a
gain on Optexs discontinued operations of $65,300 for the interval from September 29, 2008 through
October 14, 2008, the date of the Optex Asset Sale. Since Optex had no operations subsequent to
the Optex Asset Sale, no comparable result from discontinued operations was recognized in the
13-week period ended December 27, 2009.
Net Loss. Our net loss decreased in the 13-week period ended December 27, 2009, compared to
the 13-week period ended December 28, 2008, as shown in the following table:
13-Week Comparisons | Net Loss | |||
13 weeks ended December 28, 2008 |
$ | (2,114,100 | ) | |
Dollar change in current comparable 13 weeks |
397,400 | |||
13 weeks ended December 27, 2009 |
$ | (1,716,700 | ) | |
Percentage decrease for current 13 weeks |
(19 | %) |
The decrease in net loss in the first quarter of fiscal 2010 as compared to the first quarter
of fiscal 2009 was substantially attributable to the decrease in interest expense, the improved
margins on both our research and development revenue and our product sales and the reduction in
general and administrative expense in the current fiscal year period as discussed above, which more
than offset the increase in research and development expense in the same period.
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Liquidity and Capital Resources
Our liquidity was largely unchanged in the first 13 weeks of fiscal 2010 in terms of our
consolidated cash and cash equivalents, but our working capital deficit was reduced in the current
13-week period as shown in the following table:
Cash and | Working Capital | |||||||
Cash Equivalents | (Deficit) | |||||||
September 27, 2009
|
$ | 125,700 | $ | (6,271,300 | ) | |||
Dollar change in the 13 weeks ended December 27, 2009
|
(3,200 | ) | 643,100 | |||||
December 27, 2009
|
$ | 122,500 | $ | (5,628,200 | ) | |||
Percentage change in the 13 weeks ended December 27, 2009
|
(3 | %) | 10 | % |
The aggregate of our non-cash depreciation and amortization expense and non-cash deferred
stock-based compensation was $365,600 in the 13 weeks ended December 27, 2009. These non-cash
expenses partially offset the use of cash derived from our net loss and various timing effects and
resulted in an operational use of cash in the amount of $1,548,100 in the current quarter. These
and other uses of cash, including a reduction of $493,500 in factoring advances against
receivables, were offset by $2,049,500 of net proceeds from our preferred stock financing in the
current period, resulting in the net $3,200 decrease of cash in the 13-week period ended December
27, 2009.
During the 13 weeks ended December 27, 2009, we continued to incur fees and expenses in the
lawsuits related to the ongoing disputes with Mr. Looney and his affiliate. In that period, these
fees and expenses aggregated to $173,700. In December 2009, we and Mr. Looney preliminarily agreed
upon the outline of a potential settlement of these lawsuits, subject to certain third party
consents, which we cannot guarantee will be obtained. (See Note 9 of the Condensed Notes to the
Consolidated Financial Statements). We believe an agreement was
subsequently reached between the parties on the essential settlement
terms. However, Mr. Looney has been unwilling to enter into a
definitive settlement agreement and has terminated negotiations with
respect thereto, as of the date of this report. We cannot
assure you that we will be able to enter into a satisfactory
definitive settlement agreement with Mr. Looney on a
timely basis or at all. If this settlement is not effectuated, we anticipate we will continue to
incur substantial expenses in subsequent periods as trial and preparation for trial on these
matters proceed and that such expenses will continue to impair our
liquidity. Any adverse outcome of this litigation could have a
material and adverse effect on our business, financial condition and
results of operations.
Under litigation related to obligations allegedly owed to FirstMark III, LP, formerly
known as Pequot Private Equity Fund III, LP, and FirstMark III Offshore Partners, LP, formerly
known as Pequot Offshore Private Equity Partners III, LP (collectively, FirstMark), FirstMark
filed a motion for summary judgment, which was granted in
January 2010, although to our knowledge, judgment has not
yet been entered as of the date of this report. (See Note 9 of the Condensed Notes to the
Consolidated Financial Statements). We are seeking to settle this matter, but such an
outcome cannot be assured. If we are unable to settle this matter in a satisfactory manner,
execution of this summary judgment could have a material adverse effect on us and our financial
condition, including our liquidity,
The reduction in the working capital deficit in the 13-week period ended December 27, 2009 was
also largely the result of our preferred stock financing in the current period. Deployment of the
net proceeds from that financing allowed us to reduce our accounts payable and accrued expenses by
$451,100 and to reduce our factoring advances against receivables by $493,500 in the quarter.
At December 27, 2009, our factoring lender had advances of approximately $492,300 to us.
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At December 27, 2009, our funded backlog was approximately $12.5 million. We expect, but
cannot guarantee, that a substantial portion of our funded backlog at December 27, 2009 will result
in revenue recognized in fiscal 2010. In addition, our government research and development
contracts typically include unfunded backlog, which is funded when the previously funded amounts
have been expended. As of December 27, 2009, our total backlog, including unfunded portions, was
approximately $14.4 million.
Contracts with government agencies may be suspended or terminated by the government at any
time, subject to certain conditions. Similar termination provisions are typically included in
agreements with prime contractors. While we have only experienced a small number of contract
terminations, none of which were recent, we cannot assure you that we will not experience
suspensions or terminations in the future. Any such termination, if material, could cause a
disruption of our revenue stream, adversely affect our liquidity and results of operations and
could result in employee layoffs.
We have developed an operating plan to manage costs in line with estimated total revenues for
the balance of fiscal 2010 and beyond, including contingencies for cost reductions if projected
revenues are not fully realized. However, there can be no assurance that anticipated revenues will
be realized or that we will successfully implement our plans. Accordingly, it is likely that the
Company will need to raise additional funds in fiscal 2010 to meet its continuing obligations.
Off-Balance Sheet Arrangements
Our conventional operating leases are either immaterial to our financial statements or do not
contain the types of guarantees, retained interests or contingent obligations that would require
their disclosures as an off-balance sheet arrangement pursuant to Regulation S-K Item 303(a)(4).
As of December 27, 2009 and September 27, 2009, we did not have any other relationships with
unconsolidated entities or financial partners, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Contractual Obligations and Commitments
Debt. At December 27, 2009, we had approximately $588,400 of debt, which consisted of (i) a
Secured Promissory Note payable to Longview, described more fully below, the principal amount of
which was reduced from $2.1 million to approximately $188,400 through partial exchange of such debt
pursuant to the credit bid that effectuated the Optex Asset Sale and partial repayment from
proceeds of the Patent Sale and License and (ii) a $400,000 unsecured subordinated promissory note
payable to Timothy Looney, described more fully below. We also had contingent secured
subordinated notes originally issued in the aggregate principal amount of $1,115,000 (the
Contingent Notes), which were issued in connection with our November 2007 debt restructuring,
described more fully below. Of the principal amount of the Contingent Notes, only $17,700 remained
potentially outstanding as of December 27, 2009.
On December 29, 2006, we amended certain of the agreements with Timothy Looney regarding our
Buyer Option to purchase the remaining 30% interest in Optex. In consideration for such
amendments, we issued an unsecured subordinated promissory note to Mr. Looney in the principal
amount of $400,000, bearing interest at a rate of 11% per annum. In January 2007, we
negotiated an amendment to our earnout agreement with Mr. Looney that extended his earnout period
to December 2009 and reduced the aggregate maximum potential earnout to $3.9 million in
consideration for a subordinated secured term loan from TWL Group, LP, an entity owned by Mr.
Looney, providing for advances up to $2.0 million to Optex, bearing 10% interest per annum, which
term loan matured on the
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earlier of February 2009 or sixty days after repayment or refinancing of
our senior debt. At December 27, 2009 and September 27, 2009, the $2.0 million of debt owed by
Optex outstanding under the subordinated secured term loan was no longer consolidated in the
Companys accounts, as a result of the Optex bankruptcy filing in September 2009.
We have received notices from Mr. Looney claiming that we are in default under our $400,000
unsecured subordinated promissory note with Mr. Looney for the alleged nonpayment of principal and
interest. We have received a demand from Mr. Looney for payment pursuant to the $400,000 unsecured
subordinated promissory note. This note is in dispute and is related to on-going litigation
between us and Mr. Looney, the outcome of which is presently not determinable. (See Note 9 to
Condensed Notes to Consolidated Financial Statements). Accordingly, the ultimate amount, if any,
that we may be required to pay pursuant to this note is presently unknown, although we have
recorded the full principal and accrued interest amount of this note in our Consolidated Balance
Sheets at December 27, 2009 and September 27, 2009. (See Note 9 of Condensed Notes to Consolidated
Financial Statements).
On July 19, 2007, we entered into a Loan Agreement, a Secured Promissory Note (the Promissory
Note) and an Omnibus Security Interest Acknowledgement with Longview, pursuant to which we closed
a short-term non-convertible loan in the original principal amount of $2.0 million (the Loan),
the proceeds of which were intended principally for general working capital purposes. The
Promissory Note bore interest at a rate of 12% per annum, due together with the unpaid principal
amount when the Promissory Note matures, which was originally on January 19, 2008, but was extended
to December 30, 2009 pursuant to our November 2007 debt restructuring and further extended to
September 30, 2010 pursuant to partial repayment terms related to the Patent Sale and License. If
we fail to pay the principal and accrued interest within ten days after the maturity date, we will
incur a late fee equal to 5% of such amounts.
We did not exercise a right to prepay the entire outstanding principal under the Promissory
Note on or prior to August 15, 2007 by paying to Longview an amount equal to 120% of the principal
amount of the Promissory Note, together with accrued but unpaid interest. As a result, the
principal amount of the Promissory Note was automatically increased by $100,000 to $2.1 million and
we issued Longview 30,000 shares of the Companys common stock, in lieu of a $400,000 cash
continuation fee for continuing the term of the Promissory Note beyond August 15, 2007, and a
five-year warrant to purchase up to an aggregate of 50,000 shares of the Companys common stock.
Subsequent to its issuance, as a result of various financings and transactions that triggered the
anti-dilution provisions in such warrant, the exercise price of this warrant has been automatically
adjusted from $14.60 per share to $0.40 per share. The exercise price, but not the number of shares
issuable, under this warrant is subject to further adjustment in the event of certain dilutive
issuances and we may be required to grant Longview, at Longviews election, registration rights, if
any, granted in connection with such other dilutive issuance. This warrant also contains a blocker
that would prevent Longviews stock ownership at any given time from exceeding 4.99% of our
outstanding common stock (which percentage may increase but never above 9.99%). In October 2008,
approximately $1,651,100 of the principal due under the Promissory Note was retired pursuant to the
Optex Asset Sale. In March 2009, in connection with the Patent Sale and License, the outstanding
principal of the Promissory Note was further reduced to $188,400, and the maturity date of the
Promissory Note was extended to September 30, 2010.
In consideration for our November 2007 debt restructuring, we issued the Contingent Notes to
Longview and Alpha in the aggregate principal amount of $1.0 million and $115,000, respectively,
which Contingent Notes do not accrue interest, and in general, are not due and payable until
September 30, 2010. The Contingent Notes will be discharged (and cancelled) in pro rata proportion
to the amount that the total indebtedness owed to Longview and Alpha is repaid in full by September
30, 2010. If the total
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principal and accrued interest payable to Longview and Alpha on existing
obligations is repaid in full, then the Contingent Notes will be cancelled in their entirety. The
Contingent Notes are secured by substantially all of the assets of the Company. The reduction of
our obligations to Longview and Alpha pursuant to the Optex Asset Sale, the Patent Sale and License
and the exchange and cancellation of debt for the issuance of Series A-2 Preferred Stock has
correspondingly reduced our potential obligations under the Contingent Notes to approximately
$17,700 at December 27, 2009, which has not been recorded in our accounts due to its contingent
nature. This residual balance under the Contingent Notes only relates to obligations due to
Longview, inasmuch as the debt obligations to Alpha have been fully paid.
Capital Lease Obligations. Our outstanding principal balance on our capital lease obligations
of $5,300 at December 27, 2009 relate primarily to manufacturing and test equipment and are
included as part of current liabilities within our consolidated balance sheet.
Operating Lease Obligations. We have various operating leases covering equipment and
facilities located in Costa Mesa, California.
Deferred Compensation. We have a deferred compensation plan, the Executive Salary
Continuation Plan (the ESCP), for select key employees of the Company. Benefits payable under
the ESCP are established on the basis of years of service with the Company, age at retirement and
base salary, subject to a maximum benefits limitation of $137,000 per year for any individual. The
ESCP is an unfunded plan. The recorded liability for future expense under the ESCP is determined
based on expected lifetime of participants using Social Security mortality tables and discount
rates comparable to that of rates of return on high quality investments providing yields in amount
and timing equivalent to expected benefit payments. At the end of each fiscal year, we determine
the assumed discount rate to be used to discount the ESCP liability. We considered various sources
in making this determination for fiscal 2009, including the Citigroup Pension Liability Index,
which at September 30, 2009 was 5.54%. Based on this review, we used a 5.5% discount rate for
determining the ESCP liability at September 27, 2009. There are presently two retired executives of
the Company who are receiving benefits aggregating $184,700 per annum under the ESCP. As of
December 27, 2009, $1,181,500 has been accrued in the accompanying Consolidated Balance Sheet for
the ESCP, of which amount $184,700 is a current liability we expect to pay during fiscal 2010.
Stock-Based Compensation
Aggregate stock-based compensation for the 13-week periods ended December 27, 2009 and
December 28, 2008 was $26,300 and $25,300, respectively, and was attributable to the following:
13 Weeks Ended | 13 Weeks Ended | |||||||
December 27, 2009 | December 28, 2008 | |||||||
Cost of contract research and
development revenue |
$ | 7,600 | $ | 7,300 | ||||
General and administrative expense |
18,700 | 18,000 | ||||||
$ | 26,300 | $ | 25,300 | |||||
All transactions in which goods or services are the consideration received for equity
instruments issued to non-employees are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine the fair value of any such equity instrument is the earliest
to occur of (i) the date on which the third-party performance is complete, (ii) the date on which
it is probable that performance will
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occur, or (iii) if different, the date on which the
compensation has been earned by the non-employee. In the 13-week period ended December 27, 2009, we
issued a warrant to purchase 350,000 shares of our common stock, valued at $119,000, to an
investment banking firm for a one-year extension of an agreement for said firm to assist us in
raising additional capital and to provide financial advisory services.
We calculate stock option-based compensation by estimating the fair value of each option
granted using the Black-Scholes option valuation model and various assumptions that are described
in Note 1 of Condensed Notes to Consolidated Financial Statements included in this report. Once the
compensation cost of an option is determined, we recognize that cost on a straight-line basis over
the requisite service period of the option, which is typically the vesting period for options
granted by us. We calculate compensation expense of both vested and nonvested stock grants by
determining the fair value of each such grant as of their respective dates of grant using our stock
price at such dates with no discount. We recognize compensation expense on a straight-line basis
over the requisite service period of a nonvested stock award.
For the 13-week period ended December 27, 2009, stock-based compensation included compensation
costs attributable to such period for those options that were not fully vested upon adoption of ASC
718, Compensation Stock Compensation, adjusted for estimated forfeitures. We have estimated
forfeitures to be 7%, which reduced stock-based compensation cost by $100 in the 13-week period
ended December 27, 2009. There were no grants of options or vested stock made in the 13-week period
ended December 27, 2009.
At December 27, 2009, the total compensation costs related to nonvested option awards not yet
recognized was $2,300. The weighted-average remaining vesting period of nonvested options at
December 27, 2009 was 0.5 years.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4T. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation
of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of
the end of the period covered by this report, our disclosure controls and procedures were effective
in ensuring that information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported,
within the time periods specified in the rules and forms of the Securities and Exchange Commission
and (ii) accumulated and communicated to our management, including our principal executive and
principal accounting
officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
(b) Changes to Internal Control over Financial Reporting. We believe that the increasing
experience of our staff in working with enhanced resources and new procedures have produced
improvements to our internal controls over financial reporting over the last several fiscal years.
However, the extent of improvement in the first quarter of fiscal 2010 has been relatively modest,
reflecting what we believe were significant improvements in prior periods. Notwithstanding such
improvement to date,
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we believe that we will have to further strengthen our financial resources if
we undertake the additional growth that we have stated that we seek or if we consummate further
complex transactions. We cannot guarantee that our actions in the future will be sufficient to
accommodate possible future growth or complex transactions, or that such actions will not prevent
material weaknesses in our internal controls over financial reporting. Furthermore, we do not
presently have the financial resources and infrastructure to address our future plans, which puts
us at risk of future material weaknesses.
We have undertaken, and will continue to undertake, an effort for compliance with Section 404
of the Sarbanes-Oxley Act of 2002. This effort, under the direction of senior management, includes
the documentation, testing and review of our internal controls. During the course of these
activities, we have identified other potential improvements to our internal controls over financial
reporting, including some that we have implemented in the first quarter of fiscal 2010 and some
that we are currently evaluating for possible future implementation. We expect to continue
documentation, testing and review of our internal controls on an on-going basis and may identify
other control deficiencies, possibly including material weaknesses, and other potential
improvements to our internal controls in the future. We cannot guarantee that we will remedy any
potential material weaknesses that may be identified in the future, or that we will continue to be
able to comply with Section 404 of the Sarbanes-Oxley Act.
Other than as described above, there have not been any other changes that have materially
affected or are reasonably likely to materially affect our internal control over financial
reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Litigation in Note 9 of Condensed Notes to Unaudited
Consolidated Financial Statements, included in Part I, Item 1 of this report, is incorporated
herein by reference. For an additional discussion of certain risks associated with legal
proceedings, see Risk Factors immediately below.
Item 1A. Risk Factors
A restated description of the risk factors associated with our business is set forth below.
This description includes any changes (whether or not material) to, and supersedes, the description
of the risk factors associated with our business previously discussed in Part I, Item 1A of our
Annual Report on Form 10-K for the fiscal year ended September 27, 2009.
Our future operating results are highly uncertain. Before deciding to invest in our common
stock or to maintain or increase your investment, you should carefully consider the risks described
below, in addition to the other information contained in our Annual Report on Form 10-K, and in our
other filings with the SEC, including any subsequent reports filed on Forms 10-Q and 8-K. The
risks and uncertainties described below are not the only ones that we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also affect our
business and results of operations. If any of these risks actually occur, our business, financial
condition or results of operations could be seriously harmed. In that event, the market price for
our common stock could decline and you may lose all or part of your investment.
We will need to raise additional capital in the near future; additional funds may not be
available on terms that are acceptable to us, on a timely basis or at all. Except for fiscal 2009,
in which we realized substantial income from the Patent Sale and License, the deconsolidation of
the balance sheet of Optex due to its bankruptcy and a significant reduction of potential future
pension expenses, we have historically experienced significant net losses and significant negative
cash flows from operations or other uses of cash. As of December 27, 2009 and September 27, 2009,
our cash and cash equivalents were $122,500 and $125,700, respectively, and our working capital
deficit during such periods was $5.6 million and $6.3 million, respectively. To offset the effect
of negative net cash flows, we have historically funded a portion of our operations through
multiple equity and debt financings, and to a lesser extent through receivable financing. Our
revenues were reduced in fiscal 2009 partially due to our liquidity limitations, which may continue
to adversely affect our revenues in the future. We anticipate that we will require additional
capital to meet our working capital needs. We cannot assure you that any additional capital from
financings or other sources will be available on a timely basis, on acceptable terms, or at all, or
that the proceeds from any financings will be sufficient to address our near term liquidity
requirements. If we are not able to obtain additional capital in the near future, we anticipate
that our business, financial condition and results of operations will be materially and adversely
affected.
We anticipate that our future capital requirements will depend on many factors, including:
| our ability to meet our current obligations, including trade payables, payroll and fixed costs; |
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| our ability to procure additional production contracts and government research and development contracts, and the timing of our deliverables under our contracts; | ||
| the timing of payments and reimbursements from government and other contracts; | ||
| the expenses and outcome of litigation; | ||
| our ability to control costs; | ||
| our ability to commercialize our technologies and achieve broad market acceptance for such technologies; | ||
| research and development funding requirements; | ||
| increased sales and marketing expenses; | ||
| technological advancements and competitors responses to our products; | ||
| capital improvements to new and existing facilities; | ||
| our relationships with customers and suppliers; and | ||
| general economic conditions including the effects of future economic slowdowns, a slump in the semiconductor market, acts of war or terrorism and the current international conflicts. |
Even if available, financings can involve significant costs and expenses, such as legal and
accounting fees, diversion of managements time and efforts, or substantial transaction costs or
break-up fees in certain instances. Financings may also involve substantial dilution to existing
stockholders, and may cause additional dilution through adjustments to certain of our existing
securities under the terms of their antidilution provisions. If adequate funds are not available on
acceptable terms, or at all, our business and revenues will be adversely affected and we may be
unable to finance our operations, develop or enhance our products, expand our sales and marketing
programs, take advantage of future opportunities or respond to competitive pressures.
We are engaged in litigation with Timothy Looney, the former owner of Optex, the outcome of
which could affect us adversely, and we may need to issue securities to Mr. Looney that have
rights, preferences and privileges that are senior to our Common Stock. In January 2008, Mr.
Looney filed a lawsuit in the Superior Court of California, County of Orange against the Company
and its senior lenders alleging that the Company had breached its contract to register the shares
of our common stock issued to Mr. Looney to purchase the final 30% of Optex. In July 2009, a jury
verdict was rendered in this lawsuit requiring the Company to pay $105,000 in partial liquidated
damages, and the Companys cross complaint against Mr. Looney with respect to allegations of fraud
was denied. In December 2009, the Superior Court of California, County of Orange, entered a
judgment in the jury trial of the January 2008 Looney lawsuit in favor of Mr. Looney, including Mr.
Looneys attorneys fees and expenses. The aggregate amount of the judgment was $959,446, inclusive
of the $105,000 in partial liquidated damages discussed above. The Company may file an appeal to
overturn the jurys verdict and the related attorneys fees award, but the outcome of such an
action is uncertain. If the judgment remains unpaid, unvacated, unbonded or unstayed for a period
of sixty days, it will constitute a default under a promissory note and cross-defaults under our
Series A-1 Stock and Series A-2 Stock and our accounts receivable factoring agreement with Summit
Financial Resources, L.P. In September 2008, Mr. Looney also filed a lawsuit in the United States
District Court, Central District of California, against John Carson, the Companys CEO, and John
Stuart, the Companys CFO, alleging that Messrs. Carson and Stuart negligently misrepresented
financial information of the Company when the Company was negotiating with Mr. Looney regarding the
acquisition of Optex. Pursuant to this lawsuit, Mr. Looney is seeking recovery of damages, interest
and costs. Because the alleged actions of Messrs. Carson and Stuart were arguably in their
capacity as officers of the Company, we have agreed to defend Messrs. Carson and Stuart in this
lawsuit, subject to waivers of any conflict of interests that may arise, and we may be required to
indemnify Messrs. Carson and Stuart in this matter. In December 2008, Mr. Looney
filed another lawsuit against the Company in the Superior Court of California, County of Orange
alleging breach of contract. Mr. Looney alleges that the UCC public foreclosure sale of the assets
of Optex constituted a change-in-control and claims that
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the Company is required to pay him an
earn-out payment of $3.9 million. Trial in this matter is set to commence on April 26, 2010, and
the outcome of such litigation is uncertain. In April 2009, Mr. Looney also filed a lawsuit against
the Company in the State District Court of Dallas County, Texas, alleging breach of a $400,000
promissory note. As a result of the Companys filings, the litigation on the $400,000 note has been
removed to the Federal District Court of Northern Texas. This litigation and the Companys
defenses are related to the claims and defenses raised in the California litigation. The outcome of
litigation is inherently uncertain, and an unfavorable outcome to any or all of these actions could
have a material adverse effect on our financial condition and threaten our viability.
Additionally, the attorneys fees and costs of these lawsuits have been substantial, and we expect
that such attorneys fees and costs will continue to be substantial so long as these matters are
pending. In December 2009, we and Mr. Looney agreed in principle upon the outline of a potential
settlement of all of these lawsuits, including the judgment in the January 2008 Looney lawsuit,
subject to certain third party consents, which we cannot guarantee will be obtained. While we
believe that we reached an agreement on the essential terms of this settlement with Mr. Looney, as of the date of this
report, Mr. Looney has been unwilling to execute a definitive settlement agreement in this
regard and has terminated further discussions thereto. We cannot assure you that we will be able to enter into an acceptable settlement agreement
in this regard. If this settlement is not
effectuated on an acceptable basis, we anticipate
we will continue to incur substantial expenses in subsequent periods as trial and preparation for
trial on these matters proceed and that such expenses will continue to impair our liquidity. These
additional expenses and any adverse result in the Looney litigation could have a material adverse
effect on the Company or its financial position.
Our common stock may be delisted by the Nasdaq Capital Market if we cannot maintain Nasdaqs
listing requirements, which could limit your ability to sell shares of common stock and could limit
our ability to raise additional capital. We are not currently in compliance with Nasdaqs $1.00
minimum bid price requirement and have historically failed to meet that requirement from time to
time. On September 15, 2009, we received a written notice from Nasdaq of our present lack of
compliance with this criterion and were given until March 15, 2010 to regain compliance. If we are
not able to meet the minimum bid requirements by such date, we may have to appeal to Nasdaq to
allow us to effect another reverse stock split to avoid being delisted from Nasdaq. In such an
event, we cannot assure you that Nasdaq will allow us to effectuate a reverse stock split to
avoid being delisted that we will propose another reverse split to our stockholders, that our
stockholders will approve such a reverse split if proposed or that a reverse split will be
sufficient to maintain our Nasdaq listing if effectuated. On January 14, 2009, we also received
written notice from Nasdaq of our lack of compliance with a Nasdaq Marketplace Rule that requires
us to have a minimum of $2,500,000 in stockholders equity or $35,000,000 market value of listed
securities or $500,000 of net income from continuing operations for our most recently completed
fiscal year or two of our three most recently completed fiscal years. We ultimately regained
compliance with this requirement in October 2009. We cannot assure you that we will be able to
satisfy Nasdaqs listing maintenance requirements in the future, or be able to maintain our listing
on the Nasdaq Capital Market. If our common stock is delisted from the Nasdaq Capital Market, the
market for your shares may be limited, and as a result, you may not be able to sell your shares at
an acceptable price, or at all. In addition, a delisting may make it more difficult or expensive
for us to raise additional capital in the future. A delisting would also constitute a default
under our Longview agreements.
If we are delisted from the Nasdaq Capital Market, your ability to sell your shares of our
common stock would also be limited by the penny stock restrictions, which could further limit the
marketability of your shares. If our common stock is delisted, it would come within the definition
of penny stock as defined in the Securities Exchange Act of 1934 and would be covered by Rule
15g-9 of the Securities Exchange Act of 1934. That Rule imposes additional sales practice
requirements on broker-dealers who sell securities to persons other than established customers and
accredited investors. For
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transactions covered by Rule 15g-9, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchasers written agreement to the
transaction prior to the sale. Consequently, Rule 15g-9, if it were to become applicable, would
affect the ability or willingness of broker-dealers to sell our securities, and accordingly would
affect the ability of stockholders to sell their securities in the public market. These additional
procedures could also limit our ability to raise additional capital in the future.
Since 2006, we have engaged in multiple financings, which have significantly diluted existing
stockholders and will likely result in substantial additional dilution in the future. Assuming
conversion of all of our existing convertible securities and exercise in full of all options and
warrants outstanding as of December 27, 2009, an additional approximate 21.8 million shares of our
common stock would be outstanding, as compared to the approximately 10.9 million shares of our
common stock that were issued and outstanding at that date. Since the start of fiscal 2006 through
December 27, 2009, we have issued approximately 9.1 million shares of our common stock, largely to
fund our operations and to acquire the remaining 30% interest in Optex, resulting in significant
dilution to our existing stockholders. Further, subsequent to December 27, 2009, we issued an
additional 3.0 million shares of common stock for the conversion of preferred stock. On August 26,
2008, pursuant to approval of our stockholders, we amended our Certificate of Incorporation to
increase our authorized common stock issuable for any purpose from 80,000,000 shares to 150,000,000
shares, which further increased the potential for significant dilution to our existing
stockholders. Our secured bridge note financing in November 2008 through February 2009 resulted in
the automatic application of price anti-dilution features in our existing securities, which in
conjunction with other issuances, substantially increased the potential fully diluted number of
shares of our common stock. The Series A-2 Stock that we issued in April 2009 in exchange for
convertible notes, resulting in the cancellation of $1 million of debt, as well as the shares of
common stock that we issued to the bridge financing investors in April 2009 and the Series B Stock
and common stock warrants that we issued in September 2009 further diluted interests of existing
stockholders, such that our potential fully diluted number of shares of our common stock is
approximately 31.3 million as of December 30, 2009, after giving effect to the expiration of
warrants to purchase approximately 1.5 million shares on that date. We anticipate we will pursue
additional financings in the future. Any additional equity or convertible debt financings in the
future could result in further dilution to our stockholders. Existing stockholders also will suffer
significant dilution in ownership interests and voting rights and our stock price could decline as
a result of potential future application of price anti-dilution features of our Series A-1 Stock
and Series A-2 Stock and certain warrants, if not waived.
Significant sales of our common stock in the public market will cause our stock price to fall.
The average trading volume of our shares in December 2009 was approximately 635,300 shares per day,
compared to the approximately 14.0 million shares outstanding and the additional approximate 17.3
million shares outstanding on a fully diluted basis at December 30, 2009. Other than volume
limitations imposed on our affiliates, most of the issued shares of our common stock are freely
tradable. If the holders of the freely tradable shares were to sell a significant amount of our
common stock in the public market, the market price of our common stock would likely decline. If we
raise additional capital in the future through the sale of shares of our common stock to private
investors, we may, subject to existing restrictions lapsing or being waived, agree to register
these shares for resale on a registration statement as we have done in the past. Upon registration,
these additional shares would become freely tradable once
sold in the public market, assuming the prospectus delivery and other requirements were met by the
sellers, and, if significant in amount, such sales could further adversely affect the market price
of our common stock. We have filed a registration statement covering the resale of approximately
2.5 million shares of our common stock in connection with potential conversion of Series B Stock.
The sale of a large number of shares of our common stock also might make it more difficult for us
to sell equity or equity-related securities in the future at a time and at the prices that we deem
appropriate.
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Our 2008 Reverse Split has had and may continue to have a material adverse effect on our
market capitalization. While our 2008 Reverse Split temporarily addressed Nasdaqs minimum bid
price standard at that time, our market capitalization as of December 31, 2009 dropped to only
approximately $5.8 million and our market float decreased considerably. Adverse market reaction to
the split may have contributed to the decline in our market capitalization that we have recently
experienced. Such reaction and reduced market float and sales volume may result in further
material adverse impact to our market capitalization and the market price of our common stock. We
may be required to conduct an additional reverse stock split in fiscal 2010 to maintain our Nasdaq
listing and cannot assure you of the impact such reverse stock split will have on our market
capitalization and market price of our common stock, if it were to occur.
We have historically generated substantial losses, which, if continued, could make it
difficult to fund our operations or successfully execute our business plan, and could adversely
affect our stock price. Since our inception, we have generated net losses in most of our fiscal
periods. We experienced a net loss of approximately $21.6 million for fiscal 2008, including the
non-recurring charges associated with the retirement of $15 million of debt owed to Longview and
Alpha as a result of the Optex Asset Sale. Had it not been for the gains from the Patent Sale and
License, the deconsolidation of Optex due to its bankruptcy and a significant reduction of
potential future pension expenses, we would have experienced a substantial net loss in fiscal 2009
as well. We experienced a net loss of approximately $1.7 million in our first quarter of fiscal
2010. We cannot assure you that we will be able to achieve or sustain profitability in the future.
In addition, because we have significant expenses that are fixed or difficult to change rapidly, we
generally are unable to reduce expenses significantly in the short-term to compensate for any
unexpected delay or decrease in anticipated revenues. Our present level of contract research and
development revenue also makes us dependent on support from subcontractors to meet our operating
plans and susceptible to losses when such support is delayed. Such factors could cause us to
continue to experience net losses in future periods, which will make it difficult to fund our
operations and achieve our business plan, and could cause the market price of our common stock to
decline.
Our government-funded research and development business depends on a limited number of
customers, and if any of these customers terminate or reduce their contracts with us, or if we
cannot obtain additional government contracts in the future, our revenues will decline and our
results of operations will be adversely affected. For fiscal 2009, approximately 33% of our total
revenues were generated from research and development contracts with the U.S. Air Force and
approximately 16% of our total revenues were generated from research and development contracts with
the U.S. Army. For the first quarter of fiscal 2010, approximately 30%, 26%, 13% and 12% of our
total revenues were generated from research and development contracts with the U. S. Army,
classified agencies, Alion Science and Technology Corporation, a defense contractor, and the U.S.
Air Force, respectively. Although we ultimately plan to shift our focus to include the
commercialization of our technology, we expect to continue to be dependent upon research and
development contracts with federal agencies and their contractors for a substantial portion of our
revenues for the foreseeable future. Our dependency on a few contract sources increases the risks
of disruption in this area of our business or significant
fluctuations in quarterly revenue, either of which could adversely affect our consolidated revenues
and results of operations.
Because our operations currently depend on government contracts and subcontracts, we face
additional risks related to contracting with the federal government, including federal budget
issues and fixed price contracts, that could materially and adversely affect our business. Future
political and economic conditions are uncertain and may directly and indirectly affect the quantity
and allocation of expenditures by federal agencies. Even the timing of incremental funding
commitments to existing, but
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partially funded, contracts can be affected by these factors. Therefore, cutbacks or
re-allocations in the federal budget could have a material adverse impact on our results of
operations as long as research and development contracts remain an important element of our
business. Obtaining government contracts may also involve long purchase and payment cycles,
competitive bidding, qualification requirements, delays or changes in funding, budgetary
constraints, political agendas, extensive specification development and price negotiations and
milestone requirements. Each government agency also maintains its own rules and regulations with
which we must comply and which can vary significantly among agencies. Governmental agencies also
often retain some portion of fees payable upon completion of a project and collection of these fees
may be delayed for several months or even years, in some instances. In addition, a number of our
government contracts are fixed price contracts, which may prevent us from recovering costs incurred
in excess of budgeted costs for such contracts. Fixed price contracts require us to estimate the
total project cost based on preliminary projections of the projects requirements. The financial
viability of any given project depends in large part on our ability to estimate such costs
accurately and complete the project on a timely basis. In the event our actual costs exceed fixed
contractual costs of either our research and development contracts or our production orders, we
will not be able to recover the excess costs.
Our government contracts are also subject to termination or renegotiation at the convenience
of the government, which could result in a large decline in revenue in any given quarter. Although
government contracts have provisions providing for the reimbursement of costs associated with
termination, the termination of a material contract at a time when our funded backlog does not
permit redeployment of our staff could result in reductions of employees. We have in the past
chosen to incur excess overhead in order to retain trained employees during delays in contract
funding. We also have had to reduce our staff from time-to-time because of fluctuations in our
funded government contract base. In addition, the timing of payments from government contracts is
also subject to significant fluctuation and potential delay, depending on the government agency
involved. Any such delay could result in a temporary adverse effect to our liquidity. Since a
substantial majority of our total revenues in the last two fiscal years were derived directly or
indirectly from government customers, these risks can significantly affect our business, results of
operations and financial condition.
If we are not able to commercialize our technology, we may not be able to increase our
revenues or achieve or sustain profitability. Since commencing operations, we have developed
technology, principally under government research contracts, for various defense-based
applications. However, since our margins on government contracts are generally limited, and our
revenues from such contracts are tied to government budget cycles and influenced by numerous
political and economic factors beyond our control, and are subject to our ability to win additional
contracts, our long-term prospects of realizing significant returns from our technology or
achieving and maintaining profitability will likely also require penetration of commercial markets.
In prior years, we have made significant investments to commercialize our technologies without
significant success. These efforts included the purchase and later shut down of a manufacturing
line co-located at an IBM facility, the formation of the Novalog, MSI, Silicon Film, RedHawk and
iNetWorks subsidiaries and the development of various stacked-memory products intended for
commercial markets in addition to military and aerospace applications. These investments have not
resulted in consolidated profitability to date, other than the profit realized in fiscal 2009
largely from the significant gains described above, and a majority of our total revenues for fiscal
2008, fiscal 2009 and the first quarter of fiscal 2010 were still generated from governmental
customers. Furthermore, the Optex Asset Sale has eliminated a substantial future contributor to our
consolidated revenues.
The significant military operations in the Middle East or elsewhere may require diversions of
government research and development funding, thereby causing disruptions to our contracts or
otherwise adversely impact our revenues. In the near term, the funding of significant U.S. military
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operations may cause disruptions in funding of government contracts. Since military operations of
substantial magnitude are not routinely included in U.S. defense budgets, supplemental legislative
funding actions are required to finance such operations. Even when such legislation is enacted, it
may not be adequate for ongoing operations, causing other defense funding sources to be temporarily
or permanently diverted. Such diversion could produce interruptions in funding or delays in receipt
of our research and development contracts, causing disruptions and adverse effects to our
operations. In addition, concerns about international conflicts and the effects of terrorist and
other military activity have resulted in unsettled worldwide economic conditions. These conditions
make it difficult for our customers to accurately forecast and plan future business opportunities,
in turn making it difficult for us to plan our current and future allocation of resources and
increasing the risks that our results of operations could be adversely affected.
If we fail to scale our operations adequately, we may be unable to meet competitive challenges
or exploit potential market opportunities, and our business could be materially and adversely
affected. After giving effect to Optex as a discontinued operation, our consolidated total
revenues in fiscal 2008, fiscal 2009 and the first quarter of fiscal 2010 were $16.7 million, $11.5
million and $3.2 million, respectively. In order to absorb the recurring expenses of a publicly
reporting company and remain profitable, we will need to materially grow our consolidated total
revenues and/or substantially reduce our operating expenses. Such challenges are expected to place
a significant strain on our management personnel, infrastructure and resources. To implement our
current business and product plans, we will need to expand, train, manage and motivate our
workforce, and expand our operational and financial systems, as well as our manufacturing and
service capabilities. All of these endeavors will require additional capital and substantial effort
by our management. If we are unable to effectively manage changes in our operations, we may be
unable to scale our business quickly enough to meet competitive challenges or exploit potential
market opportunities, and our current or future business could be materially and adversely
affected.
Historically, we have primarily depended on third party contract manufacturers for the
manufacture of a majority of our products and any failure to secure and maintain sufficient
manufacturing capacity or quality products could materially and adversely affect our business. For
our existing products, we primarily have used contract manufacturers to fabricate and assemble our
stacked chip, microchip and sensor products. Our internal manufacturing capabilities consist
primarily of assembly, calibration and test functions for our thermal camera products. We have
typically used single contract manufacturing sources for our historical products and do not have
long-term, guaranteed contracts with such sources. As a result, we face several significant risks,
including:
| a lack of guaranteed supply of products and higher prices; | ||
| limited control over delivery schedules, quality assurance, manufacturing yields and production costs; and | ||
| the unavailability of, or potential delays in obtaining access to, key process technologies. |
In addition, the manufacture of our products is a highly complex and technologically demanding
process and we are dependent upon our contract manufacturers to minimize the likelihood of reduced
manufacturing yields or quality issues. We currently do not have any long-term supply contracts
with any of our manufacturers and do not have the capability or capacity to manufacture our
products in-house in large quantities. If we are unable to secure sufficient capacity with our
existing manufacturers, implement manufacturing of some of our new products at other contract
manufacturers or scale our
internal capabilities, our revenues, cost of revenues and results of operations would be
negatively impacted.
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If we are not able to obtain broad market acceptance of our new and existing products, our
revenues and results of operations will be adversely affected. We generally focus on emerging
markets. Market reaction to new products in these circumstances can be difficult to predict. Many
of our planned products incorporate our chip stacking technologies that have not yet achieved broad
market acceptance. We cannot assure you that our present or future products will achieve market
acceptance on a sustained basis. In addition, due to our historical focus on research and
development, we have a limited history of competing in the intensely competitive commercial
electronics industry. As such, we cannot assure you that we will be able to successfully develop,
manufacture and market additional commercial product lines or that such product lines will be
accepted in the commercial marketplace. If we are not successful in commercializing our new
products, our ability to generate revenues and our business, financial condition and results of
operations will be adversely affected.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of
the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price. Our
fiscal 2005, fiscal 2006 and fiscal 2007 audits revealed material weaknesses in our internal
controls over financial reporting, including the failure of such controls to identify the need to
record a post-employment obligation for our Executive Salary Continuation Plan, which resulted in a
restatement of our financial statements. We believe these types of material weaknesses relate
primarily to the size and depth of our accounting staff. We have attempted to address these
material weaknesses by expanding our staff and reassigning responsibilities and, based on
information available to us as of the date of this report, we believe that we have remediated this
condition as of September 28, 2008 and September 27, 2009. Third party testing of our belief will
be conducted pursuant to Section 404 of the Sarbanes-Oxley Act beginning fiscal 2010. Such third
party testing may ultimately reveal that previously identified material weaknesses have not been
remediated or that new material weaknesses have developed. Furthermore, we do not presently have
the financial resources and infrastructure to address our future plans, which puts us at risk of
future material weaknesses. We are in the process of documenting and testing our internal control
processes in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which
requires annual management assessments and a written report on the effectiveness of our internal
controls over financial reporting and, commencing in our fiscal year 2010, a report by our
independent auditors on the effectiveness of our internal controls. During the course of our
testing, we may identify other significant deficiencies or material weaknesses, in addition to the
ones previously identified, which we may not be able to remediate in time to meet future deadlines
imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition,
if we fail to maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time, we will not be able to conclude that we have effective
internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley
Act. Failure to achieve and maintain an effective internal control environment could cause
investors to lose confidence in our reported financial information, which could result in a decline
in the market price of our common stock, and cause us to fail to meet our reporting obligations in
the future.
Our stock price has been subject to significant volatility. The trading price of our common
stock has been subject to wide fluctuations in the past. Since January 2000, our common stock has
traded at prices as low as $0.11 per share in March 2009 and as high as $3,750.00 per share in
January 2000 (after giving effect to two reverse stock splits subsequent to January 2000). The
current market price of our common stock may not increase in the future. As such, you may not be
able to resell your shares of
common stock at or above the price you paid for them. The market price of the common stock could
continue to fluctuate or decline in the future in response to various factors, including, but not
limited to:
| the impact and outcome of pending litigation; | ||
| our cash resources and ability to raise additional funding and repay indebtedness; |
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| our ability to demonstrate compliance with Nasdaqs listing maintenance requirements; | ||
| quarterly variations in operating results; | ||
| government budget reallocations or delays in or lack of funding for specific projects; | ||
| our ability to control costs and improve cash flow; | ||
| our ability to introduce and commercialize new products and achieve broad market acceptance for our products; | ||
| announcements of technological innovations or new products by us or our competitors; | ||
| our cash resources and ability to raise additional funding and repay indebtedness; | ||
| changes in investor perceptions; | ||
| economic and political instability, including acts of war, terrorism and continuing international conflicts; and | ||
| changes in earnings estimates or investment recommendations by securities analysts. |
The trading markets for the equity securities of high technology companies have continued to
experience volatility. Such volatility has often been unrelated to the operating performance of
these companies. These broad market fluctuations may adversely affect the market price of our
common stock. In the past, companies that have experienced volatility in the market price of their
securities have been the subject of securities class action litigation. We were subject to a class
action lawsuit that diverted managements attention and resources from other matters until it was
settled in June 2004. We cannot guarantee you that we will not be subject to similar class action
lawsuits in the future.
Our Patent Sale and License has removed barriers to competition. We sold most of our patents
pursuant to the Patent Sale and License. Although we retain a worldwide, royalty-free,
non-exclusive license to use the patented technology that we sold in our business, the purchaser of
our patent assets is entitled to use those patents for any purpose, including possible competition
with us. We treat technical data as confidential and generally rely on internal nondisclosure
safeguards, including confidentiality agreements with employees, and on laws protecting trade
secrets, to protect our proprietary information and maintain barriers to competition. However, we
cannot assure you that these measures will adequately protect the confidentiality of our
proprietary information or that others will not independently develop products or technology that
are equivalent or superior to ours.
Our ability to exploit our own technologies may be constrained by the rights of third parties
who could prevent us from selling our products in certain markets or could require us to obtain
costly licenses. Other companies may hold or obtain patents or inventions or may otherwise claim
proprietary rights to technology useful or necessary to our business. We cannot predict the extent
to which we may be required to seek licenses under such proprietary rights of third parties and the
cost or availability of these licenses. While it may be necessary or desirable in the future to
obtain licenses relating to one or more proposed products or relating to current or future
technologies, we cannot assure you that we will be able to do so on commercially reasonable terms,
if at all. If our technology is found to infringe upon the rights of third parties, or if we are
unable to gain sufficient rights to use key technologies, our ability to compete would be harmed
and our business, financial condition and results of operations would be materially and adversely
affected.
Enforcing and protecting patents and other proprietary information can be costly. If we are
not able to adequately protect or enforce our proprietary information or if we become subject to
infringement claims by others, our business, results of operations and financial condition may be
materially adversely affected. We may need to engage in future litigation to enforce our future
intellectual property rights or the rights of our customers, to protect our trade secrets or to
determine the validity and scope of proprietary rights of others, including our customers. The
purchaser of our patents may choose to be more aggressive in pursuing its rights with respect to
these patents, which could lead to
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significant litigation and possible attempts by others to
invalidate such patents. If such attempts are successful, we might not be able to use this
technology in the future. We also may need to engage in litigation in the future to enforce patent
rights with respect to future patents. In addition, we may receive in the future communications
from third parties asserting that our products infringe the proprietary rights of third parties. We
cannot assure you that any such claims would not result in protracted and costly litigation. Any
such litigation could result in substantial costs and diversion of our resources and could
materially and adversely affect our business, financial condition and results of operations.
Furthermore, we cannot assure you that we will have the financial resources to vigorously defend
our proprietary information.
Our proprietary information and other intellectual property rights are subject to government
use which, in some instances, limits our ability to capitalize on them. Whatever degree of
protection, if any, is afforded to us through patents, proprietary information and other
intellectual property generally will not extend to government markets that utilize certain segments
of our technology. The government has the right to royalty-free use of technologies that we have
developed under government contracts, including portions of our stacked circuitry technology. While
we are generally free to commercially exploit these government-funded technologies, and we may
assert our intellectual property rights to seek to block other non-government users of the same, we
cannot assure you that we will be successful in our attempts to do so.
We are subject to significant competition that could harm our ability to win new business or
attract strategic partnerships and could increase the price pressure on our products. We face
strong competition from a wide variety of competitors, including large, multinational semiconductor
design firms and aerospace firms. Most of our competitors have considerably greater financial,
marketing and technological resources than we or our subsidiaries do, which may make it difficult
to win new contracts or to attract strategic partners. This competition has resulted and may
continue to result in declining average selling prices for our products. We cannot assure you that
we will be able to compete successfully with these companies. Certain of our competitors operate
their own fabrication facilities and have longer operating histories and presence in key markets,
greater name recognition, larger customer bases and significantly greater financial, sales and
marketing, manufacturing, distribution, technical and other resources than us. As a result, these
competitors may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements. They may also be able to devote greater resources to the promotion and sale
of their products. Increased competition has in the past resulted in price reductions, reduced
gross margins and loss of market share. This trend may continue in the future. We cannot assure you
that we will be able to continue to compete successfully or that competitive pressures will not
materially and adversely affect our business, financial condition and results of operations.
We must continually adapt to unforeseen technological advances, or we may not be able to
successfully compete with our competitors. We operate in industries characterized by rapid and
continuing technological development and advancements. Accordingly, we anticipate that we will be
required to devote substantial resources to improve already technologically complex products. Many
companies in these industries devote considerably greater resources to research and development
than we
do. Developments by any of these companies could have a materially adverse effect on us if we are
not able to keep up with the same developments. Our future success will depend on our ability to
successfully adapt to any new technological advances in a timely manner, or at all.
If we effectuate additional acquisitions, it may further strain our capital resources, result
in additional integration and assimilation challenges, be further dilutive to existing
stockholders, result in unanticipated accounting charges and expenses, or otherwise adversely
affect our results of operations. Our future business strategy may involve expansion through the
acquisitions of businesses,
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assets or technologies that allow us to expand our capabilities and
market coverage and to complement our existing product offerings. Optex, our first acquisition
under this strategy, initially facilitated our market access, but did not achieve financial
objectives. Acquisitions may require significant upfront capital as well as capital infusions, and
typically entail many risks, including unanticipated costs and expenditures, changing relationships
with customers, suppliers and strategic partners, or contractual, intellectual property or
employment issues. We had not engaged in an acquisition strategy prior to our acquisition of Optex;
we experienced difficulties in assimilating and integrating the operations, personnel,
technologies, products and information systems of Optex, and the Optex acquisition was also costly
and resulted in material adverse impacts to our overall financial condition. We may experience
similar difficulties in assimilating any other companies or businesses we may acquire in the
future. In addition, key personnel of an acquired company may decide not to work for us. The
acquisition of another company or its products and technologies may also require us to enter into a
geographic or business market in which we have little or no prior experience. These challenges
could disrupt our ongoing business, distract our management and employees, harm our reputation and
increase our expenses. These challenges are magnified as the size of the acquisition increases.
Acquisitions or asset purchases made entirely or partially with cash or debt could also put a
significant strain on our limited capital resources. Acquisitions may also require large one-time
charges and can result in contingent liabilities, adverse tax consequences, deferred compensation
charges, and the recording and later amortization of amounts related to deferred compensation and
certain purchased intangible assets, any of which items could negatively impact our results of
operations. In addition, we may record goodwill in connection with an acquisition and incur
goodwill impairment charges in the future. Any of these charges could cause the price of our common
stock to decline. In addition, we may issue equity or convertible debt securities in connection
with an acquisition, as we did in connection with our acquisition of Optex. Any issuance of equity
or convertible debt securities may be dilutive to our existing stockholders and such securities
could have rights, preferences or privileges senior to those of our common stock.
We cannot assure you that we will be able to locate or consummate any future acquisitions, or
that we will realize any anticipated benefits from these acquisitions. Even if we do find suitable
acquisition opportunities, we may not be able to consummate the acquisition on commercially
acceptable terms, and any decline in the price of our common stock may make it significantly more
difficult and expensive to initiate or consummate an acquisition.
We do not plan to pay dividends to holders of common stock. We do not anticipate paying cash
dividends to the holders of the common stock at any time. Accordingly, investors in our securities
must rely upon subsequent sales after price appreciation as the sole method to realize a gain on
investment. There are no assurances that the price of common stock will ever appreciate in value.
Investors seeking cash dividends should not buy our securities.
We do not have long-term employment agreements with our key personnel. If we are not able to
retain our key personnel or attract additional key personnel as required, we may not be able to
implement our business plan and our results of operations could be materially and adversely
affected. We depend to a large extent on the abilities and continued participation of our executive
officers and other key employees. The loss of any key employee could have a material adverse effect
on our business. While we have adopted employee equity incentive plans designed to attract and
retain key employees, our stock price has declined in recent periods, and we cannot guarantee that
options or non-vested stock granted under our plans will be effective in retaining key employees.
We do not presently maintain key man insurance on any key employees. We believe that, as our
activities increase and change in character, additional, experienced personnel will be required to
implement our business plan. Competition for such
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personnel is intense and we cannot assure you
that they will be available when required, or that we will have the ability to attract and retain
them.
We may be subject to additional risks. The risks and uncertainties described above are not the
only ones we face. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also adversely affect our business operations.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
As previously disclosed, on September 28, 2009, we issued 300,000 shares of common stock to an
accredited institutional investor upon such investors conversion of $120,000 of the stated value
of Series A-1 Stock. As also previously disclosed, on October 14, 2009, we issued a five-year
warrant to purchase 350,000 shares of common stock at an exercise price of $0.44 per share to an
accredited investor, a financial advisory and investment banking firm that we engaged to assist us
to raise additional capital and to provide financial advisory services. As a result of the issuance
on October 14, 2009, we had issued more than 5% of our outstanding shares of common stock in
unregistered transactions in the aggregate since the last report that we had filed prior to October
14, 2009 with the SEC.
As previously disclosed, on December 2 and December 4, 2009, we issued an aggregate of 550,000
shares of common stock to an accredited institutional investor upon such investors conversion of
$220,000 of the stated value of Series A-1 Stock. As a result of the issuance on December 4, 2009,
we had issued more than 5% of our outstanding shares of common stock in unregistered transactions
in the aggregate since the last report that we had filed prior to December 4, 2009 with the SEC.
The above-described sales were determined to be exempt from registration under the Securities
Act of 1933 in reliance on Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder, as transactions by an issuer not involving a public offering. Each investor
represented that it is an accredited investor, as that term is defined in Regulation D, and that it
has acquired the securities for investment purposes only and not with a view to or for sale in
connection with any distribution thereof.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) | A duly noticed Special Meeting of Stockholders (the Special Meeting) was held on December 10, 2009. | ||
(b) | Our stockholders were asked to approve the issuance of up to $30,000,000 worth of shares of our common stock and/or securities convertible into or exercisable for common stock, not to exceed 15,000,000 shares, in one or more related private placement transactions occurring on or prior to the date six months after the Special Meeting, which shares would be issued at a maximum discount to the then fair market value of 35%. This proposal was approved in accordance with the following vote of stockholders: |
Broker | ||||||||||||
Votes For | Votes Against | Abstentions | Non-Votes | |||||||||
5,315,200 | 286,275 | 26,617 | 4,367,624 |
Item 5. Other Information
On February 8, 2010, Longview consented to extend by an additional 30 days the default grace
period relating to the judgment entered by the Court in the Looney lawsuit, set forth in that
certain Term Loan and Security Agreement dated as of December 29, 2006, that certain Secured
Promissory Note
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dated as of July 19, 2007 and that certain Contingent Secured Promissory Note (Buyout) dated
as of November 28, 2007.
Item 6. Exhibits
3.1
|
Certificate of Incorporation of the Company, as amended (1) | |
3.2
|
By-laws, as amended and currently in effect (2) | |
3.3
|
Certificate of Elimination of the Series B Convertible Cumulative Preferred Stock, Series C Convertible Cumulative Preferred Stock, Series D Convertible Preferred Stock and Series E Convertible Preferred Stock. (3) | |
3.4
|
Certificate of Designations of Rights, Preferences, Privileges and Limitations of Series A-1 10% Cumulative Convertible Preferred Stock. (4) | |
3.5
|
Certificate of Amendment of Certificate of Incorporation to increase the authorized shares of the Corporations common stock and the authorized shares of the Corporations Preferred Stock (5) | |
3.6
|
Certificate of Amendment of Certificate of Incorporation to reclassify, change, and convert each ten (10) outstanding shares of the Corporations common stock into one (1) share of common stock (6) | |
3.7
|
Certificate of Designations of Rights, Preferences, Privileges and Limitations of Series A-2 10% Cumulative Convertible Preferred Stock (7) | |
3.8
|
Certificate of Designations of Rights, Preferences, Privileges and Limitations of Series B Convertible Preferred Stock (8) | |
10.1
|
Form of Subscription Agreement dated September 30, 2009 for Private Placement of Preferred Stock Units and schedule of omitted material details thereto. (9) | |
10.2
|
Form of Warrant dated September 30, 2009 for Private Placement of Preferred Stock Units and schedule of omitted material details thereto. (10) | |
10.3
|
Warrant to Purchase Common Stock dated October 14, 2009 issued to a financial advisory and investment banking firm. (11) | |
10.4
|
Longview consent and waiver extending default grace period relating to the judgment entered by the Court in the Looney lawsuit. | |
31.1
|
Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32
|
Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
(1) | Incorporated by reference to Exhibit 3.1 filed with the Registrants Annual Report on Form 10-K for the fiscal year ended September 28, 2003 | |
(2) | Incorporated by reference to Exhibit 3.1 filed with the Registrants Current Report on Form 8-K as filed with the SEC on September 21, 2007. | |
(3) | Incorporated by reference to Exhibit 3.3 filed with the Registrants Current Report on Form 8-K as filed with the SEC on April 18, 2008. |
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(4) | Incorporated by reference to Exhibit 3.4 filed with the Registrants Current Report on Form 8-K as filed with the SEC on April 18, 2008. | |
(5) | Incorporated by reference to Exhibit 3.5 to the Registrants Current Report on Form 8-K filed on August 27, 2008. | |
(6) | Incorporated by reference to Exhibit 3.6 to the Registrants Current Report on Form 8-K filed on August 27, 2008. | |
(7) | Incorporated by reference to Exhibit 3.1 filed with the Registrants Current Report on Form 8-K as filed with the SEC on March 24, 2009009. | |
(8) | Incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on October 1, 2009. | |
(9) | Incorporated by reference to Exhibit 10.69 filed with the Registrants Annual Report on Form 10-K as filed with the SEC on December 23, 2009. | |
(10) | Incorporated by reference to Exhibit 10.70 filed with the Registrants Annual Report on Form 10-K as filed with the SEC on December 23, 2009. | |
(11) | Incorporated by reference to Exhibit 10.71 filed with the Registrants Annual Report on Form 10-K as filed with the SEC on December 23, 2009. |
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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.
Irvine Sensors Corporation (Registrant) |
||||
Date: February 10, 2010 | By: | /s/ John J. Stuart, Jr. | ||
John J. Stuart, Jr. | ||||
Chief Financial Officer (Principal Financial and Chief Accounting Officer) |
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Exhibit Index
3.1
|
Certificate of Incorporation of the Company, as amended (1) | |
3.2
|
By-laws, as amended and currently in effect (2) | |
3.3
|
Certificate of Elimination of the Series B Convertible Cumulative Preferred Stock, Series C Convertible Cumulative Preferred Stock, Series D Convertible Preferred Stock and Series E Convertible Preferred Stock. (3) | |
3.4
|
Certificate of Designations of Rights, Preferences, Privileges and Limitations of Series A-1 10% Cumulative Convertible Preferred Stock. (4) | |
3.5
|
Certificate of Amendment of Certificate of Incorporation to increase the authorized shares of the Corporations common stock and the authorized shares of the Corporations Preferred Stock (5) | |
3.6
|
Certificate of Amendment of Certificate of Incorporation to reclassify, change, and convert each ten (10) outstanding shares of the Corporations common stock into one (1) share of common stock (6) | |
3.7
|
Certificate of Designations of Rights, Preferences, Privileges and Limitations of Series A-2 10% Cumulative Convertible Preferred Stock (7) | |
3.8
|
Certificate of Designations of Rights, Preferences, Privileges and Limitations of Series B Convertible Preferred Stock (8) | |
10.1
|
Form of Subscription Agreement dated September 30, 2009 for Private Placement of Preferred Stock Units and schedule of omitted material details thereto. (9) | |
10.2
|
Form of Warrant dated September 30, 2009 for Private Placement of Preferred Stock Units and schedule of omitted material details thereto. (10) | |
10.3
|
Warrant to Purchase Common Stock dated October 14, 2009 issued to a financial advisory and investment banking firm. (11) | |
10.4
|
Longview consent and waiver extending default grace period relating to the judgment entered by the Court in the Looney lawsuit. | |
31.1
|
Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32
|
Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
(1) | Incorporated by reference to Exhibit 3.1 filed with the Registrants Annual Report on Form 10-K for the fiscal year ended September 28, 2003 | |
(2) | Incorporated by reference to Exhibit 3.1 filed with the Registrants Current Report on Form 8-K as filed with the SEC on September 21, 2007. | |
(3) | Incorporated by reference to Exhibit 3.3 filed with the Registrants Current Report on Form 8-K as filed with the SEC on April 18, 2008. | |
(4) | Incorporated by reference to Exhibit 3.4 filed with the Registrants Current Report on Form 8-K as filed with the SEC on April 18, 2008. | |
(5) | Incorporated by reference to Exhibit 3.5 to the Registrants Current Report on Form 8-K filed on August 27, 2008. |
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(6) | Incorporated by reference to Exhibit 3.6 to the Registrants Current Report on Form 8-K filed on August 27, 2008. | |
(7) | Incorporated by reference to Exhibit 3.1 filed with the Registrants Current Report on Form 8-K as filed with the SEC on March 24, 2009009. | |
(8) | Incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on October 1, 2009. | |
(9) | Incorporated by reference to Exhibit 10.69 filed with the Registrants Annual Report on Form 10-K as filed with the SEC on December 23, 2009. | |
(10) | Incorporated by reference to Exhibit 10.70 filed with the Registrants Annual Report on Form 10-K as filed with the SEC on December 23, 2009. | |
(11) | Incorporated by reference to Exhibit 10.71 filed with the Registrants Annual Report on Form 10-K as filed with the SEC on December 23, 2009. |