As
filed with the Securities and Exchange Commission on
August 27, 2010
Registration
No. 333-164915
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
Amendment No. 4
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Fallbrook Technologies
Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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3714
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20-1027116
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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9444 Waples Street,
Suite 410
San Diego, California
92121
(858) 623-9557
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
William G. Klehm III
Chairman and Chief Executive
Officer
Fallbrook Technologies
Inc.
9444 Waples Street,
Suite 410
San Diego, California
92121
(858) 623-9557
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent For
Service)
with copies to:
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Craig S. Andrews, Esq.
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Kevin Morris, Esq.
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Matthew W. Leivo, Esq.
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Daniel P. Raglan, Esq.
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C. Christopher Shoff, Esq.
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Torys LLP
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DLA Piper LLP (US)
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237 Park Avenue
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4365 Executive Drive, Suite 1100
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New York, New York 10017
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San Diego, California 92121
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(212) 880-6000
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(858) 677-1400
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
registration statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. 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. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), shall
determine.
The information
in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective.
This prospectus is not an offer to sell nor does it seek an
offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
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Subject to Completion, dated
August 27, 2010
Shares
Fallbrook Technologies
Inc.
Common Stock
This is Fallbrook Technologies Inc.s initial public
offering. We are
selling
shares of our common stock.
We expect the public offering price to be between
$ and
$ per share. Currently, no public
market exists for the shares. After pricing of the offering, we
expect that the shares will trade on
the
under the symbol
.
Investing in our common stock involves risks. See
Risk Factors beginning on page 10.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
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Underwriting
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Initial Public
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Discounts and
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Proceeds to Us,
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Offering Price
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Commissions
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Before Expenses
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Per Share
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$
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$
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$
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Total
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$
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$
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$
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We have granted the underwriters a
30-day
option to purchase up to a maximum
of
additional shares of common stock from us at the public offering
price, less underwriting discounts and commissions, to cover
over-allotment of shares, if any.
Delivery of the shares of common stock will be made on or
about ,
2010.
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CIBC |
Mackie Research Capital |
Prospectus
dated ,
2010
Electric Vehicles Application in Development
Small Wind Turbines Application in Development
Lawn Care Equipment
Application in Development
Automotive Accessory Drives
Application in Development
Bicycles Commercial Application
NuVinci FALLBROOK TECHNOLOGIES
Enabling Energy Efficient Applications.
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Table of
Contents
You should rely only on the information contained in this
prospectus and any free writing prospectus we provide to you. We
have not authorized anyone to provide you with information that
is different. This document may only be used where it is legal
to sell securities.
i
Prospectus
Summary
This summary highlights information contained elsewhere in
this prospectus. As this is a summary, it does not contain all
of the information that you should consider before investing in
our common stock. You should read the entire prospectus
carefully before making an investment decision, including the
information under Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and the related notes included in this
prospectus. Unless the context otherwise requires, the terms
we, us, our,
Company, Fallbrook and Fallbrook
Technologies refer to Fallbrook Technologies Inc. and its
wholly-owned subsidiary, Fallbrook Technologies International
Co.
Overview
Fallbrook Technologies
We are a company that has developed and that markets,
manufactures and distributes a patented technology, sold under
the NuVinci brand. We have operations in
California and Texas, as well as contract manufacturing
capability in China. Our technology, which is currently only
commercially available for bicycles, consists of a new type of
continuously variable transmission (CVT) that we believe can be
used in a wide variety of end market applications. A
transmission is a mechanical device that provides speed and
torque conversion from a rotating power source using gear
ratios, or speeds. A CVT is a transmission that effectively has
an infinite number of gear ratios, or speeds, between its lowest
and highest speeds. Our NuVinci technology is designed to
improve the overall efficiency and performance of vehicles and
equipment that operate at various speeds, such as bicycles,
automobile accessories, wind turbines and lawn mowers. Our
NuVinci technology provides a smooth, continuous
progression from one speed to another through its range with no
breaks or jerks, allowing the transmission output speed to
change, while the engine or motor speed stays at its speed of
peak efficiency or power.
We sell or plan to sell our products directly to vehicle and
equipment manufacturers and aftermarket products distributors.
In some end markets, we license our products to other companies
to manufacture and sell in their respective industries, from
which we derive licensing fees or royalties on the sales of
their products. In other end markets, we intend to enter joint
ventures with development partners that would manufacture and
market our products. We anticipate that we will share in the
sales of such products. We also provide engineering and support
services to vehicle and equipment manufacturers to help them
implement our technology in their products.
Our technology is currently available in the global market for
bicycle transmissions, through bicycle manufacturers,
aftermarket equipment distributors and retailers, where it has
been used to replace the rear wheel gear changing assembly, or
derailleur, and is currently the only commercially available CVT
for bicycles. We are also currently developing applications of
our core technology for a number of other target end markets
that we believe, based on our research, have near-term
commercial potential. These include alternators, air
conditioning compressors, power steering pumps and superchargers
for the automotive accessory drive market where the CVT will
allow the accessory to operate at a constant speed regardless of
the varying engine speed, and primary transmissions for the
electric vehicle, small wind turbine and lawn care equipment
markets where the CVT will provide variable drive speed to the
wind turbines or vehicles.
To date, we have primarily been an early stage development
company focused on the development of our core technology and
formation of initial commercial partnerships. We have raised
approximately $62 million in financing to develop and
patent our core technology, design and produce prototypes to
test the application of our technology in products for our
customers and develop the operational capabilities needed to
support targeted sales of our products. We have developed a
patent portfolio covering our core technology and end market
applications of our technology that includes over 365 patents
and pending applications around the world. We have established a
sales presence in Europe, where we have a branch office for
sales and customer support. We also have a contract
manufacturing relationship with a manufacturer in China and have
begun
1
establishing an office in Shanghai to oversee the activities of
that manufacturer and support exploration of other opportunities
in China. We currently plan to expand our sales efforts to
support increased sales in 2010 and 2011. In 2009, we earned
$1,044,000 in total revenues from products sales and services at
a total net loss of $17,226,000. During the six months ended
June 30, 2010, we earned $460,000 in total revenues from
product sales and services and had a total net loss of
$6,726,000.
Our Strengths
In the end market applications we are focused on, we believe
based on our knowledge and research of industry literature and
internal testing, our NuVinci technology provides many
advantages over existing transmission technology and addresses
the limitations of other currently available CVTs by offering
the following:
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Improved efficiency and performance;
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Adaptable platform technology; and
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Simple, durable and cost-effective design.
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To date, we have invested significant resources developing
applications for a selected set of end market applications that
we believe offer the most attractive competitive advantages and
potential for economic returns.
Markets
The applications for our NuVinci technology in each end
market are at different stages of development and have different
economic prospects. While we have spent several years developing
our core technology, our past experience in launching our
bicycle product and developing other products to date indicates
that the product development process to apply our core
technology to each of our target end market applications takes
from 18 to 34 months from start to finish, depending on the
complexity of the particular application. The key steps of the
development cycle, which are discussed further below, include
product design, prototyping and testing, production design
validation, manufacturing tooling and process development,
including supplier development, and manufacturing launch. Our
technology is already being used in the bicycle market and we
anticipate that we or our licensee will launch products in the
automotive accessory drives and small wind turbines markets in
2011, in the lawn care equipment market in 2012 and in the
electric vehicles market in 2013. We expect, in some cases with
the assistance of licensees or joint venture partners, to fund
the completion of the development of these end market
applications through manufacturing launch with the net proceeds
of this offering and our existing cash and cash equivalents.
Investment in Technology and Patents
As of August 25, 2010, we had raised approximately
$62 million in financing to develop and commercialize our
technology. In December 2008, we closed our largest financing
round of $25 million from a consortium of private investors
and two venture capital firms, NGEN Partners and Dutch
investment firm Robeco, that are significantly involved in the
cleantech sector a market segment dedicated to
reducing adverse environmental impact. Robeco is a wholly-owned
subsidiary of Rabobank Group. This investment followed three
previous private investment rounds. In August 2010, we closed a
private financing round of $6 million to support our continued
operations.
We have developed a patent portfolio covering our core
technology as well as individual applications of it that, as of
July 31, 2010, consisted of 95 U.S. patents, 52
U.S. pending patent applications, 81 foreign issued patents
(including validated countries) and 137 pending foreign patent
applications, the oldest of which will expire at the end of its
20-year term
in 2018. Other patents, which were all filed since the oldest,
will expire 20 years after their respective filing dates.
Each of our foreign patents and applications originate from
patents and applications filed in the U.S. and therefore
are directed to the same or similar products and will expire at
the same time as their respective U.S. counterpart. Our
patent applications in the U.S. usually are granted as
patents within about 3 years from filing, where in foreign
countries it is usually longer, and often as long as
5-7 years.
Our U.S. patent portfolio was ranked as the #1 patent
portfolio in the automotive and transportation industry by The
Patent
Scorecardtm
as reported in the Wall Street Journal on January 13, 2009.
While this ranking was developed by an independent third
2
party, such rankings are inherently subjective and therefore do
not guarantee or provide any indication of success in protecting
our products in the various marketplaces around the world.
Further information regarding our patents can be found in the
Business Section of this Prospectus.
Our NuVinci technology has also won several key industry
awards including:
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R&D Magazines 2007 R&D 100 Award as one of the
100 most technically significant new products of 2007;
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Popular Sciences Best of Whats New, Grand
Award 2007;
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The Dutch bicycle industrys 2007 FietsVak Innovation
of the Year award honoring the years best new
bicycle product;
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2008 iF Design EUROBIKE Gold Award, one of ten Gold Awards
awarded by iF International Forum Design, honoring the best in
bicycle design; and
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The Guardian/Cleantech Groups 2009 Global Cleantech 100
Award.
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Our Growth Strategy
Our goal is to use our transmission and engineering expertise,
commercial relationships and management team to identify and
introduce a number of NuVinci applications into specific
end markets. As we commercialize these applications, we will
consider other end market applications for future development
and launch that we believe would be well-suited to our
NuVinci technology. We currently believe products such as
automotive driveline transmissions, industrial equipment, and
auxiliary power units may provide such opportunities and we are
conducting preliminary market and product research and analysis
on the potential opportunities represented by these end markets.
We intend to pursue the following strategies to attain this goal:
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Expand current markets through continued development and
marketing;
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Pursue new markets where NuVinci technology has a clear
competitive advantage;
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Leverage proven commercialization capabilities from the bicycle
market into other markets;
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Establish relationships with industry leaders to adapt and
commercialize our products;
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Pursue a flexible approach to manufacturing through the use of
contract manufacturers or licensees; and
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Continue to invest in our NuVinci technology in order to
develop additional applications and proprietary technologies
that support a competitive advantage.
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Our Management
Our senior management team is comprised of industry veterans.
Our chief executive officer has over 20 years of automotive
experience with multiple management positions in the automotive
business. Our chief operating officer has over 30 years of
automotive experience in operations, engineering and sales both
domestically and internationally. Our chief technology officer
previously headed the drivetrain group at the Southwest Research
Institute in San Antonio, Texas, and has over 21 years
of automotive and engineering experience. Our president of the
bicycle division has over 20 years of sales, product
development and business development experience in the
automotive industry.
Recent
Developments
On April 23, 2010, we executed a non-binding memorandum of
understanding with Chengdu Bus Company (Chengdu) in Chengdu,
China, which is located in the Sichuan province. The non-binding
memorandum states that the two companies intend to enter an
agreement for the development of a continuously variable
accessory drive for application in Chengdus buses, which
we currently believe will be an air conditioner or alternator
application.
3
On June 4, 2010, we entered a non-binding memorandum of
understanding with a leading manufacturer of power steering
pumps for commercial vehicles under which the parties agreed to
review certain accessory drive applications to identify a target
application and negotiate a joint development agreement for the
development of a commercial product for that accessory drive
application.
In June 2010, we launched the production of our second
generation bicycle product, the N360, and shipped our first
production units to customers in July 2010.
On August 26, 2010, we entered a non-binding memorandum of
understanding with TEAM Industries, Inc. under which we mutually
agreed to negotiate a joint venture for the manufacture of
NuVinci CVTs for small residential and recreational
vehicles including all-terrain vehicles and utility vehicles as
well as low speed vehicles and neighborhood electric vehicles.
On August 26, 2010 we entered a non-binding memorandum of
understanding with Shentong Automotive Decoration Co., which is
located in Ningbo near Shanghai, China. Under the memorandum, we
agreed to negotiate a joint venture for the manufacture of
driveline transmissions for electric passenger cars.
4
Risks
Related to Our Business
Investing in our common stock involves a high degree of risk.
You should consider carefully the risks and uncertainties
summarized below, the risks described under Risk
Factors, the other information contained in this
prospectus and our consolidated financial statements and the
related notes before you decide whether to purchase our common
stock.
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Our patents and other protective measures may not adequately
protect our proprietary intellectual property;
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It is difficult to evaluate our future prospects, as several of
our products are still under development and we have a limited
operating history with limited revenue generation to date;
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If the applications that we develop for our technology fail to
gain market acceptance and adequate market share, our business
will be adversely affected;
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Since our inception, we have never been profitable and we may be
unable to achieve or sustain profitability;
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We use single suppliers for several components specifically
qualified for use in our CVT products. If any of these suppliers
become unable or unwilling to provide their respective
components, we would be forced to qualify, over a period of two
to three months, a different component from another manufacturer
for use in our products, which would adversely impact our or our
licensees ability to deliver products to customers;
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If we do not continue to form and maintain economic arrangements
with original equipment manufacturers, or OEMs, to incorporate
our technology into their products such that we derive revenue
from licensing and royalties on product sales, our profitability
will be impaired;
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Our ability to sell our products to our direct, OEM and tier one
supplier customers depends in part on the quality of our
engineering and customization capabilities. If we fail to offer
high quality engineering support and services, our sales and
operating results will be materially adversely affected; and
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The state of the economy affects each of our target end markets
and a material downturn in the economy will have a materially
adverse effect on these markets.
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These risks and other risks described under Risk
Factors could materially adversely affect our business,
financial condition and results of operations.
Company
Information
We were originally formed on December 11, 2000 as Motion
Systems Technologies, LLC, which was subsequently converted into
Fallbrook Technologies Inc., a Delaware corporation, on
April 13, 2004.
Immediately prior to the closing of this offering, all of our
outstanding shares of preferred stock will be converted into
shares of our common stock. See Conversion of Preferred
Stock into Common Stock. Following this offering, we will
have one class of authorized common stock outstanding and no
preferred stock outstanding.
Our corporate headquarters are located at 9444 Waples Street,
Suite 410, San Diego, California 92121. The telephone
number of our corporate headquarters is
(858) 623-9557.
Our website is www.fallbrooktech.com. The information on,
or that may be accessed through, our website is not a part of
this prospectus.
5
Trademarks,
Trade Names and Service Marks
Fallbrook Technologies, NuVinci,
CruiseController and related trademarks, trade names
and service marks of Fallbrook Technologies appearing in this
prospectus are the property of Fallbrook Technologies. Solely
for convenience, our trademarks referred to in this prospectus
may appear without
the®
or
tm
symbols, but such references are not intended to indicate, in
any way, that we will not assert, to the fullest extent under
applicable law, our rights to these trademarks.
Industry
and Market Data
Market data, industry statistics, forecasts and other
statistical information used throughout this prospectus are
based on independent industry publications (including CSM
Worldwides Global Light Vehicle and Medium/Heavy
Production Forecast March 2010 and the 2009 AWEA
Small Wind Turbine Global Market Study, for example), government
publications, reports by market research firms and other
published independent sources. Some data are also based on our
good faith estimates, which are derived from our review of
internal surveys and data or independent sources listed above.
Although we believe these sources are credible, we have not
independently verified the information obtained from these
sources.
6
The
Offering
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Common stock offered by us |
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shares |
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Common stock to be outstanding after this
offering(1) |
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shares |
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Over-allotment option |
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We have granted to the underwriters an option, exercisable upon
notice to us, to purchase up
to additional shares
of common stock at the offering price to cover over-allotments,
if any, for a period of 30 days from the date of this
prospectus. |
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Use of proceeds |
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We intend to use the net proceeds from this offering for general
corporate purposes, including the repayment of indebtedness. See
Use of Proceeds on page 25 of this prospectus for
more information. |
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Risk factors |
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You should read the information set forth under Risk
Factors beginning on page 9 of this prospectus for a
discussion of factors you should carefully consider before
deciding to invest in shares of our common stock. |
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Dividend policy |
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We currently expect to retain future earnings, if any, for use
in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future. |
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Stock exchange symbol |
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(1)
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The number of shares to be
outstanding after this offering does not
reflect shares
of common stock reserved or issuable pursuant to our 2010 Stock
Plan, shares
of common stock issuable upon exercise of outstanding options
under our 2004 Stock Plan, an outstanding warrant held by the
Jacobs Family Trust to purchase 3,100,753 shares of our
common stock and up to 650,000 shares of common stock issuable
pursuant to contingent warrants that may be granted upon
achievement of certain performance milestones. After the
effective date of the 2010 Stock Plan, we will grant no further
stock options or other awards under the 2004 Stock Plan.
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Unless otherwise indicated, this prospectus reflects and assumes
the following:
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the conversion, immediately prior to the closing of this
offering, of all of our outstanding shares of preferred stock
into shares
of our common stock;
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the issuance
of shares
of our common stock upon the exercise of warrants that would
otherwise expire immediately prior to the closing of the
offering;
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no exercise by the underwriters of their option to purchase up
to additional
shares from us; and
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an initial public offering price of
$ per share, the midpoint of
the estimated public offering price range set forth on the cover
page of the prospectus.
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7
Summary
Consolidated Financial Data
We derived the summary consolidated statement of operations data
and consolidated statement of cash flows data for the years
ended December 31, 2007 and 2008, as restated (see
Note 16 to our audited consolidated financial statements),
and December 31, 2009, and the summary consolidated balance
sheet data as of December 31, 2008, as restated (see
Note 16 to our audited consolidated financial statements),
and December 31, 2009, from our audited consolidated
financial statements included elsewhere in this prospectus. We
derived the summary consolidated balance sheet data as of
December 31, 2007, as restated (see Note 16 to our
audited consolidated financial statements), from our audited
consolidated financial statements, which are not included in
this prospectus. We derived the summary consolidated statement
of operations data and summary consolidated statement of cash
flows data for the six months ended June 30, 2009 and 2010
and the summary consolidated balance sheet data as of
June 30, 2010 from our unaudited condensed consolidated
interim financial statements included elsewhere in this
prospectus.
We have prepared the unaudited consolidated interim financial
statements on the same basis as our audited consolidated
financial statements and, in our opinion, have included all
adjustments, which include only normal recurring adjustments
necessary to present fairly, in all material respects, our
financial position and results of operations. The results for
any interim period are not necessarily indicative of the results
that may be expected for the full year. Additionally, our
historical results are not necessarily indicative of the results
expected for any future period.
You should read the summary historical financial data below
together with the consolidated financial statements and related
notes appearing elsewhere in this prospectus, as well as
Selected Consolidated Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the other
financial information included elsewhere in this prospectus.
8
Consolidated
Statement of Operations Data:
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Six Months Ended
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Year Ended December 31,
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June 30,
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2007(1)
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2008(1)
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2009
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2009
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2010
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($ in thousands)
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Revenues
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$
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714
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$
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2,283
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$
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1,044
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$
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672
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$
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460
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Cost of revenues
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1,892
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2,048
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7,260
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2,129
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521
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Gross (loss) profit
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(1,178
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235
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(6,216
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(1,457
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(61
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Operating expenses
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5,827
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10,321
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10,523
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4,988
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6,614
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Operating loss
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(7,005
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(10,086
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(16,739
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(6,445
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(6,675
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Other income (expense)
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447
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(470
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)
|
|
|
(487
|
)
|
|
|
15
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,558
|
)
|
|
$
|
(10,556
|
)
|
|
$
|
(17,226
|
)
|
|
$
|
(6,430
|
)
|
|
$
|
(6,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
June 30,
|
|
|
|
2007(1)
|
|
|
2008(2)
|
|
|
2009
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Cash and cash
equivalents(3)
|
|
$
|
8,043
|
|
|
$
|
14,565
|
|
|
$
|
9,213
|
|
|
$
|
1,542
|
|
Total assets
|
|
|
10,855
|
|
|
|
25,314
|
|
|
|
13,526
|
|
|
|
9,290
|
|
Total liabilities
|
|
|
2,158
|
|
|
|
3,171
|
|
|
|
3,813
|
|
|
|
6,019
|
|
Total equity
|
|
|
8,697
|
|
|
|
22,143
|
|
|
|
9,713
|
|
|
|
3,271
|
|
Consolidated
Statement of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
2007(1)
|
|
|
2008(2)
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(5,860
|
)
|
|
$
|
(9,496
|
)
|
|
$
|
(12,118
|
)
|
|
$
|
(6,472
|
)
|
|
$
|
(5,960
|
)
|
Investing activities
|
|
|
8,073
|
|
|
|
(7,271
|
)
|
|
|
2,954
|
|
|
|
(6,551
|
)
|
|
|
(305
|
)
|
Financing activities
|
|
|
2,612
|
|
|
|
23,289
|
|
|
|
3,812
|
|
|
|
(5
|
)
|
|
|
(1,404
|
)
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
$
|
4,825
|
|
|
$
|
6,522
|
|
|
$
|
(5,352
|
)
|
|
$
|
(13,028
|
)
|
|
$
|
(7,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On January 3, 2007, we formed
a wholly-owned subsidiary, Viryd Technologies Inc. (Viryd), a
Delaware corporation. On December 18, 2008, we completed a
spin-off of our ownership of Viryd through a pro rata
distribution of shares to our stockholders. The 2007 and 2008
consolidated financial statements include the accounts of the
Fallbrook Technologies Inc. and Viryd through December 18,
2008. All intercompany transactions through December 18,
2008 have been eliminated.
|
|
(2)
|
|
On December 18, 2008, we sold
an aggregate of 63,607,402 shares of our Series D
convertible preferred stock at a purchase price of $0.3992 per
share for a total of $25.4 million, of which
$20.6 million was in cash and $4.8 million was from
the conversion of principal and accrued interest on our then
outstanding convertible debt.
|
|
|
|
(3)
|
|
As of August 25, 2010, cash
and cash equivalents were $5.9 million.
|
9
Risk
Factors
Investing in our common stock involves a high degree of risk.
Before making an investment in our common stock, you should
carefully consider the risks and uncertainties described below
and the other information contained in this prospectus,
including our consolidated financial statements and the related
notes. These risks could materially adversely affect our
business, financial condition and results of operations. As a
result, the market price of our common stock could decline, and
you may lose part or all of your investment.
Risks
Related to Our Business
Our
patents and other protective measures may not adequately protect
our proprietary intellectual property.
We regard our intellectual property, particularly our
proprietary rights in our NuVinci technology, as critical
to our success. We have 365 issued patents or pending
applications worldwide for various applications and aspects of
our technology or processes. In addition, we generally enter
into confidentiality and invention assignment agreements with
our employees and consultants as well as our development
partners and licensees. Such patents and agreements and various
other measures we take to protect our intellectual property from
use by others may not be effective for various reasons,
including the following:
|
|
|
|
|
our pending patent applications may not be granted for various
reasons, including the existence of previously available public
information or other prior art, conflicting patents or defects
in our applications;
|
|
|
|
the patents we have been granted may be challenged or
invalidated because of the pre-existence of prior art;
|
|
|
|
the patents we have been granted may be circumvented depending
upon the strength of the claims granted in each patent;
|
|
|
|
parties to the confidentiality and invention agreements may have
such agreements declared unenforceable or, even if the
agreements are enforceable, may breach such agreements;
|
|
|
|
the costs associated with enforcing patents, confidentiality and
invention agreements or other intellectual property rights may
limit our enforcement of our rights in them;
|
|
|
|
even if we enforce our rights, injunctions, fines and other
penalties may be insufficient to deter violations of our
intellectual property rights; and
|
|
|
|
other persons may independently develop proprietary information
and techniques that are functionally equivalent or superior to
our intellectual proprietary information and techniques but do
not breach our patented or unpatented proprietary rights.
|
It is
difficult to evaluate our future prospects, as several of our
products are still under development and we have a limited
operating history with limited revenue generation to
date.
Efforts to expand our products beyond our existing bicycle
market may never result in new products that achieve market
acceptance, create additional revenue or become profitable.
Several of our products targeted for use in the automotive
industry are still under development, and it is difficult to
determine the timing of our release of new products. The
successful use of our technology in small wind turbines and lawn
care equipment, and the associated licensing revenue, depends on
the success of our licensees, Viryd Technologies Inc. and
Hydro-Gear, respectively. With our limited operating history and
the uncertainty of market dynamics for planned products, it is
difficult to evaluate our future prospects.
If the
applications that we develop for our technology fail to gain
market acceptance and adequate market share, our business will
be adversely affected.
The value proposition for the application of our technology to
bicycles involves some factors such as ride feel/ride enjoyment,
ease of shifting, ability for a rider to find his or her
own gear, which factors are at least partially
subjective. A well-funded competitor may be able to reduce the
value of these advantages through
10
marketing and public relations campaigns or through price cuts
and thereby impact our ability to command a premium price or
grow our market share, which in turn would impact our ability to
achieve our planned revenue and profit levels.
The value proposition for other applications of our technology
involves providing increased system efficiency, fuel economy, or
cost reductions for manufacturers. If we are unable in a timely
fashion, either directly or through licensees, to implement our
technology and manufacture products that provide sufficient,
demonstrable incremental value, we will be unable to achieve our
business objectives.
Since
our inception, we have never been profitable and we may be
unable to achieve or sustain profitability.
We experienced net losses of $6,558,000 for 2007, $10,556,000
for 2008, $17,226,000 for 2009, and $6,726,000 for the six
months ended June 30, 2010. We expect to incur a loss in
2010. We anticipate that we will continue to have negative cash
flow in 2010 and for the foreseeable future as we invest
resources in developing and commercializing our products for our
target end markets. We expect selling, general and
administrative expenses to also increase as we commercialize
additional NuVinci CVT products, increase our business
development and marketing efforts worldwide, and continue to
build out the corporate infrastructure needed to support a
public company. These additional expenses will likely involve
increases to salaries and related expenses, legal and consultant
fees, accounting fees, rent and utilities, director fees,
increased directors and officers insurance premiums,
and fees for investor relations services. These increased
expenditures will make it harder for us to achieve and maintain
future profitability. We may incur losses in the future for a
number of reasons, including the other risks outlined in this
prospectus. Additionally, there may be unanticipated expenses,
difficulties, complications, delays and other unknown events
that may impact our ability to achieve or maintain profitability.
If we
are unable to enter into commercial agreements with third
parties on acceptable terms to assist in the development of our
products, our business will be adversely affected and we will be
unable to achieve our profit goals.
Our business plan depends on licensing our technology to others
and entering joint ventures with others such that those partners
would bear some of the costs of bringing those products to
market. From time to time we enter into memorandums of
understanding (MOUs) with those commercial partners. These MOUs
are usually non-binding, although they may include immaterial
obligations that are binding for the negotiation of the
contemplated business, and while we would anticipate being able
to negotiate definitive agreements with such parties, we may be
unable to do so. If we are unable to enter into such licenses or
joint ventures, our costs and our capital needs will
significantly increase, and our timeline of bringing our
products to market may be extended, which would have a material
adverse effect on our ability to achieve or sustain
profitability.
We use
single suppliers for several components specifically qualified
for use in our CVT products. If any of these suppliers become
unable or unwilling to provide their respective components, we
would be forced to qualify, over a period of two to three
months, a different component from another manufacturer for use
in our products, which would adversely impact our or our
licensees ability to deliver products to
customers.
We use single suppliers for several components in our CVT
products. The component parts for our products are qualified for
production through a rigorous validation process prior to
approval for use. If we were required to utilize another
supplier for some key components that are not readily available
from other sources, we would need to spend some significant time
qualifying the parts from the alternative supplier, which would
require both time and substantial expense. Any resulting delays
in our ability or the ability of our licensees to deliver
products containing such component parts would affect our
profitability, could lead to a loss of future business, and
would harm our reputation.
11
If we
do not continue to form and maintain economic arrangements with
original equipment manufacturers, or OEMs, to incorporate our
technology into their products such that we derive revenue from
licensing and royalties on product sales, our profitability will
be impaired.
Part of our business strategy is to license our NuVinci
technology to OEMs for use in various application areas. We
currently have licenses with two OEMs Viryd
Technologies Inc. has licensed our technology for use in wind
energy applications and Hydro-Gear has licensed our technology
for lawn care equipment products. The development process for
our customers to incorporate our technology not only requires
considerable lead time between the start of design efforts and
commercial availability but also typically involves our
providing engineering services for a fee prior to the
negotiation of licensing and royalty arrangements. Currently, we
have two development agreements for the development of products
for our target end market applications.
If our customers are unable to successfully implement our
technology and develop successful commercial products, we will
not obtain licensing and royalty revenue, which would adversely
affect our revenue and profitability levels. If we are unable to
enter into additional agreements for the use of our technology
in various applications, we will not receive revenue from
engineering services, from the licensing of our technology for
additional application areas, or from royalties on the sales of
resulting commercial products. Consequently both our growth and
profitability could be adversely affected.
Our
ability to sell our products to our customers depends in part on
the quality of our engineering and customization
capabilities.
A high level of support is critical for the successful marketing
and sale of our products. The sale or licensing of our
technology involves significant co-development and customization
work in certain applications. This development process may
require substantial lead time between the commencement of design
efforts for a transmission or the incorporation of a
transmission into an end product and the commencement of volume
shipments of products to customers. The cooperation and
assistance of our customers is also required to determine the
requirements for each specific application. Once our products
are designed for an end market application, customers may depend
on us to resolve issues relating to integrating that design into
their products. If we do not effectively assist our customers in
customizing, integrating and deploying our products in their own
systems or products, or if we do not succeed in helping them
quickly resolve post-deployment issues and provide effective
support, our ability to sell our products would be adversely
affected.
If we
fail to offer high quality engineering support and services, our
sales and operating results will be materially adversely
affected.
While we may have supply and co-development agreements with
customers located in different regions of the world, we do not
have a globally distributed engineering support and services
organization. Currently, issue resolution related to our
products, system deployment or integration is directed to our
engineering and product development group in Cedar Park, Texas
from which we deploy engineers and support personnel. As we grow
our business with our existing customers and beyond the markets
into which we currently sell our products, we may need to
increase the size of our engineering support teams and deploy
them closer to our customers. Any inability to deliver a
consistent level of engineering support and overall service as
we expand our operations would have a material adverse effect on
our business and operating results. Moreover, our products may
contain manufacturing or design defects or exhibit performance
problems at any stage of their lifecycle. These problems could
result in expensive and time-consuming design modifications and
impose additional needs for engineering support and maintenance
services as well as significant warranty charges.
The
state of the economy affects each of our target end markets and
a material downturn in the economy will have a materially
adverse effect on these markets.
The state of the economy as a whole affects each of our target
end markets and a material downturn or economic problems in any
of these industries will have a materially adverse effect on our
business. For example, the effects of the current economic
downturn included a delay in winning additional engineering
services agreements with customers in the automobile industry
because they increased their scrutiny on
12
spending for new technology and we incurred more marketing and
business development expenses. Additionally, we have had to
reduce our engineering services fees in order to win engineering
services business during this period. The financial problems for
the automobile industry have led to a significant decrease in
the amount of automobiles sold worldwide, but have not yet
affected our product sales revenue because the products for that
end market are still in development. Should the decrease in
automobile sales persist as we develop and then launch our
products, our business would be materially adversely affected.
We
rely on contract manufacturers and licensees to produce and sell
products that generate product sales revenue and royalties for
us. If revenue from contract manufacturers and licensees is less
than anticipated, we will be unable to achieve our projected
revenue and profit goals.
We rely on contract manufacturers and licensees to produce
products incorporating our technology. If the demand for our
manufacturers and licensees products declines, they
may reduce production and the revenue we receive from our
related license agreements with these manufacturers and
licensees may also decline. This could cause us to fail to
achieve our projected revenue and profit goals. Additionally,
our success depends on entering into agreements with new
manufacturers and licensees who are able to acquire or
manufacture, incorporate, and successfully market products
utilizing our technology in a reasonable timeframe. While we
assist contract manufacturers and licensees in various ways in
their ability to incorporate our technology, there are many
factors affecting their success or failure over which we have no
control.
Our
principal competitors have, and any future competitors may have,
greater financial and marketing resources than we do, and they
may therefore develop products or other technologies similar or
superior to ours or otherwise compete more successfully than we
do.
The industries in which we compete and will be competing include
major domestic and international companies, most of which have
existing relationships in the markets into which we sell as well
as name recognition, financial, technical, marketing, sales,
manufacturing, growth capacity, distribution and other resources
that are substantially greater than ours. Some of our
competitors have existing and evolving relationships with our
target customers. For example, Shimano has the major market
share of the internal hub bicycle transmissions market and has a
significant relationship with all of our current and projected
future customers in that business.
Potential customers may also choose to do business with our more
established competitors because of their perception that our
competitors are more stable, are more likely to complete various
projects, can grow their operations more quickly, have greater
manufacturing capacity and are more likely to continue as a
going concern. If we are unable to compete successfully against
manufacturers of other products or technologies in any of our
targeted applications, our business will suffer, and we could
lose or be unable to gain market share.
Our
failure to raise additional capital necessary to expand our
operations and invest in our products and manufacturing
facilities could reduce our ability to compete
successfully.
Throughout the global credit and economic crisis, it has been
expensive for us to raise private capital. If we are unable to
raise capital from this public offering, in order to continue to
expand our operations and invest in our products and
manufacturing facilities, we believe we would need to raise
approximately $16.0 million within the next twelve months
through one or more private equity offerings. We would also draw
on the $0.5 million that remains available as of
August 25, 2010 under our existing $3.0 million
revolving line of credit. We do not currently have other
abilities to borrow, and our ability to increase the amount of
available borrowings under our existing line of credit or renew
our existing line of credit, which expires on December 31,
2010, could be subject to negotiations with the financial
institution and could entail some form of guarantee.
Accordingly, we may require additional capital in the future and
we may be unable to obtain additional debt or equity financing
on favorable terms, if at all. If we raise additional equity
financing, our stockholders may experience significant dilution
of their ownership interests, and the per share value of our
common stock could decline. With respect to debt financing, the
credit markets have experienced extreme volatility during the
last year, and worldwide credit markets have remained illiquid
despite injections of capital by the federal government and
foreign governments. Despite these capital injections and
government actions,
13
banks and other lenders (including equipment leasing companies)
have significantly increased credit requirements and reduced the
amounts available to borrowers. For our activities requiring
substantial debt capital or other credit instruments, if current
credit market conditions do not improve, we may not be able to
access debt or leasing markets to finance our growth. Further,
even if we are able to engage in debt financing, we may be
required to accept terms that restrict our ability to incur
additional indebtedness and force us to maintain specified
liquidity or other ratios. If we need additional capital and
cannot raise or otherwise obtain it on acceptable terms, our
ability to expand our business will be severely constrained.
Our
working capital requirements involve estimates based on demand
expectations and may decrease or increase beyond those currently
anticipated, which could harm our operating results and
financial condition.
It is difficult to accurately predict how much capital our
anticipated product launches will require. Inaccurate forecasts
as to our working capital requirements could delay or prevent
effective rollouts of products and interfere with our ability to
market and sell existing products. Additionally, in order to
fulfill the future product delivery requirements of our
customers, we plan for working capital needs in advance of
customer orders. For example, under a manufacturing and supply
agreement with Tri Star Group for the manufacture of our next
generation bicycle CVT (N360) we are required to purchase
certain inventory Tri Star has on hand based on our forecasts of
future demand. As long as the agreement is effective, we may be
required to use working capital to pay for this inventory. If
demand for our products does not increase as quickly as we have
estimated or drops off sharply, our inventory and expenses could
rise, and our business and operating results could suffer.
Alternatively, if we experience sales in excess of our
estimates, our working capital needs may be higher than those
currently anticipated. Our ability to meet this excess customer
demand depends on our ability to arrange for additional
financing for any ongoing working capital shortages, since it is
likely that cash flow from sales will lag behind these
investment requirements.
Our
future success depends on our ability to retain key
personnel.
Our success will depend, to a significant extent, on the
continued services of our senior management team. The loss or
unavailability of one or more members of senior management could
adversely impact our ability to execute our business plan,
maintain important business relationships and complete certain
product-development initiatives. Employment agreements with
members of our senior management team do not require them to
remain with our company. Any one of them could terminate his or
her relationship with us on 30 days notice, and we may be
unable to enforce any applicable employment or non-compete
agreements.
We may
not be able to successfully recruit and retain skilled technical
personnel, particularly those employees with certain technical
skills, such as experience in traction drives, for which demand
exceeds the number available.
Our future success will depend in large part on our ability to
attract and retain highly skilled technical, managerial and
marketing personnel. We plan to continue to expand our work
force both domestically and internationally. These employees
will require specialized skills including, for example,
mechanical and other types of engineering for both designing and
manufacturing products, specialized operational skills in
managing suppliers and customers and also in quality assurance
and control. The demand for certain of such employees,
particularly those with experience in traction drives, however,
exceeds the number of personnel available, and the competition
for attracting and retaining these employees will intensify as
the use of and applications for continuously variable
transmissions increases. As this competition increases, it could
require us to increase compensation for current employees over
time. We compete in the market for personnel against numerous
companies, including larger, more established firms who have
significantly greater financial resources than we do and may be
in a better financial position to offer higher compensation
packages to attract and retain human capital. We cannot be
certain that we will be successful in attracting and retaining
the skilled personnel necessary to operate our business
effectively in the future. Because of the highly technical
nature of our products, the loss of any significant number of
our existing engineering and project management personnel could
adversely affect our business and operating results.
14
Additionally, among our employees are a number of highly skilled
traction drive experts. These individuals have unique and
specialized mechanical engineering experience in the design and
development of particular mechanical devices and are not easily
replaced and if one or more of these individuals is
incapacitated or leaves us, our ability to address problems in
existing products or develop new products will be affected
beyond the impact of normal attrition.
Declines
in product prices may adversely affect our financial
results.
If our NuVinci technology becomes recognized by others as
a competitive threat to their sales or anticipated sales, there
may be increased price pressure as a competitive response, which
could force us to reduce the price of our products. In periods
of decreased demand, such as the current economic recession, the
pressure for us to reduce prices may be even greater. A
reduction in the price of our products would adversely affect
our gross margins and ability to achieve profitability,
especially during periods of decreased demand for our products
as we would expect to occur during a recession.
Increases
in the cost of materials may have a negative impact upon our
ability to achieve profitability.
If the cost of the materials we use to produce our products
increases then our results of operations might be adversely
impacted. For example, Chinas rapid growth and its
increased consumption of raw materials may result in increased
pressure on prices of raw materials, causing them to rise. An
increase in the costs of raw materials would make it more
difficult for us to maintain our gross margins and would
negatively affect our ability to achieve profitability.
Our
inability to effectively and quickly transfer, replicate and
scale new product manufacturing processes from low volume
prototype production to high volume, cost effective
manufacturing, could adversely affect our results of
operations.
Regardless of whether we use contract manufacturers or
licensees, manufacturing processes and systems for new products
are initially established and developed for relatively low
volume production (primarily prototype quantities) and initial
profit margins may be below target levels. As demand increases
for a product, various processes and systems must be used to
support higher volume manufacturing. If we, our contract
manufacturers or our licensees are unable to effectively and
quickly scale manufacturing processes and systems,
customers product quality and quantity requirements may
not be met and we may not be able to attain the anticipated cost
benefits from higher volume and achieve target gross margins.
Consequently, our business and results of operations could be
adversely affected.
We
currently depend on a sole source contract manufacturer to build
bicycle transmissions incorporating our NuVinci technology. If
that contract manufacturer or contract manufacturers engaged by
us for other products are unable to fulfill orders of finished
goods of appropriate quality in a timely fashion, we will be
unable to meet our revenue and profit goals.
We currently rely on a single contract manufacturer for bicycle
transmissions and we intend to rely on future contract
manufacturers for certain of our other products. Our contract
manufacturer relies, in turn, on obtaining raw materials, parts
and components, manufacturing equipment and other supplies from
reliable suppliers in a timely manner. It may be difficult for
our contract manufacturer to substitute one supplier for
another, increase the number of its suppliers or change one
component for another in a timely manner or at all due to the
interruption of supply or increased industry demand. This may
adversely affect our contract manufacturers ability to
supply our product. The prices of raw materials, parts and
components and manufacturing equipment may increase due to
changes in supply and demand. In addition, currency fluctuations
may affect both our and our contract manufacturers
purchasing power. We are dependent on the ability of our
contract manufacturers to manufacture products at a reasonable
schedule and at acceptable cost and quality levels. Failure to
meet our expectations could result in the cost of our product
exceeding the purchase price paid to us by our customers. Delays
in meeting demand and quality requirements could damage our
customer relationships and result in significant lost business
opportunities for us.
15
Our
restatement of our consolidated financial statements, and
possible future restatements, may have a material adverse effect
on us.
We have effected restatements of prior period financial results.
Since inception through December 31, 2008, we valued our
common stock, options, and warrants by a method that was not in
accordance with generally accepted accounting principles in the
United States, or GAAP. We had determined fair value based on
Internal Revenue Code Section 409A, using a
probability-weighted expected return valuation method. With the
assistance of an unrelated valuation specialist, we have since
reassessed the fair value of our common stock in accordance with
GAAP by determining the total enterprise value and then
allocating a portion of that total enterprise value to the
common stock. This reassessment caused us to restate our
consolidated financial statements as of December 31, 2008
and for each of the years ended December 31, 2007 and 2008.
Managements previous election to value our common stock
using a method not in accordance with GAAP was a material
weakness that resulted in a qualified audit opinion. A material
weakness is a significant deficiency, or combination of
significant deficiencies, that result in more than a remote
likelihood that a material misstatement of the financial
statements will not be prevented or detected. We have remediated
this material weakness by establishing an internal policy to
assess the fair value of our common stock only in accordance
with GAAP, by reassessing the prior years fair values of
our common stock in accordance with GAAP and by making the
necessary adjustments to our financial statements included in
this prospectus.
If we are required to restate our consolidated financial
statements in the future, we may be the subject of negative
publicity focusing on financial statement inaccuracies and
resulting restatement. In addition, our financial results as
restated may be more adverse than originally reported. In the
past, certain publicly traded companies that have restated their
consolidated financial statements have been subject to
shareholder actions. The occurrence of any of the foregoing
could harm our business and reputation and cause the price of
our common stock to decline after this offering. Further,
investors perceptions that our internal controls are
inadequate or that we are unable to produce accurate
consolidated financial statements may have a material adverse
effect on our stock price.
If we
fail to maintain proper and effective internal controls, our
ability to produce accurate consolidated financial statements
could be impaired, which could adversely affect our operating
results, our ability to operate our business and the trading
price of our common stock.
As a public company, our management will be responsible for
certifying the design of our internal control over financial
reporting. Internal control over financial reporting is intended
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with applicable generally
accepted accounting principles. Our efforts to institute
effective internal control over financial reporting are likely
to result in increased general and administrative expenses and
the commitment of significant financial and personnel resources.
The restatement of our consolidated financial statements
relating to the valuation of our common stock prior to 2009
evidenced a material weakness in our internal control over
financial reporting, which we have remediated by reassessing the
fair value of our common stock in accordance with GAAP.
Additionally, prior to having quarterly reporting requirements,
we recorded an impairment loss on certain manufacturing assets
during the fourth quarter of 2009. Subsequent to initiating
interim reporting requirements, we recorded an adjustment to
recognize a portion of this impairment in the third quarter of
2009, which evidenced a material weakness in our internal
control over interim financial reporting. Although we have since
instituted internal controls to support interim reporting
requirements that would remediate this material weakness, we
cannot be sure that we will not have other weaknesses in our
internal controls in the future. Any failure to adequately
maintain effective internal control over our financial reporting
or, consequently, our inability to produce accurate consolidated
financial statements on a timely basis, could increase our
operating costs and could materially impair our ability to
operate our business. In addition, investors perceptions
that our internal controls are inadequate or that we are unable
to produce accurate consolidated financial statements will
likely have a negative effect on the trading price of our common
stock.
16
We
will incur increased costs and demands upon management as a
result of complying with the laws and regulations affecting
public companies, which could harm our operating
results.
As a public company, we will incur significant additional legal,
accounting and other expenses that we did not incur as a private
company, including costs associated with public company
reporting requirements. We also have incurred and will incur
costs associated with current corporate governance requirements,
including requirements under Section 404 and other
provisions of the Sarbanes-Oxley Act, as well as rules
implemented by the Securities and Exchange Commission, or SEC,
and other applicable regulators and stock exchanges. The
expenses incurred by public companies for reporting and
corporate governance purposes have increased dramatically in
recent years. We expect these rules and regulations to
substantially increase our legal and financial compliance costs
and to make some activities more time-consuming and costly. We
are unable to currently estimate these costs with any certainty.
We also expect these new rules and regulations will make it more
difficult and more expensive for us to obtain director and
officer liability insurance, and we may be required to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage previously
available. As a result, it may be more difficult for us to
attract and retain qualified individuals to serve on our Board
of Directors or as our executive officers.
Our
international operations subject us to a number of risks,
including unfavorable political, regulatory, labor and tax
conditions.
We have manufacturing operations in China and expect to sell a
significant portion of our products to customers located in
other countries. Risks inherent to international operations and
sales include, but are not limited to, the following:
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difficulty in enforcing agreements and intellectual property
rights, particularly in China;
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fluctuations in exchange rates may affect product demand and our
costs;
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fluctuations in exchange rates may cause foreign currency losses;
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impediments to the flow of foreign exchange capital payments and
receipts;
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changes in general economic and political conditions;
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changes in foreign government regulations and technical
standards;
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requirements or preferences of foreign nations for domestic
products;
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compliance with the U.S. Foreign Corrupt Practices Act;
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diversion of management attention;
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trade barriers such as export requirements, tariffs and taxes;
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tax consequences from operating in multiple
jurisdictions; and
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longer payment cycles typically associated with international
sales and potential difficulties in collecting accounts
receivable.
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Our business in foreign jurisdictions will require us to respond
to rapid changes in market conditions in these countries. Our
overall success will depend on our ability to succeed in
different legal, regulatory, economic, social and political
situations and conditions. We may not be able to develop and
implement effective policies and strategies in each foreign
jurisdiction where we do business. Also, each of the foregoing
risks will likely take on increased significance as we implement
plans to expand foreign manufacturing operations.
Foreign
exchange rate fluctuations may have a material impact on our
operating revenue and product costs.
While to date all of our sales and costs are in U.S. dollars, in
the future foreign exchange rate fluctuations may have a
material impact on our operating and product costs. Our results
of operations will be particularly sensitive to the fluctuation
of the Chinese Renminbi against the U.S. dollar because while
our sales are in U.S. dollars, most of our products will be
manufactured in China. On July 21, 2005, the Chinese government
changed its decade-old policy of pegging the value of the
Renminbi to the U.S. dollar. Under the new policy, the Renminbi
is permitted to fluctuate within a narrow and managed band
against a basket of certain foreign currencies. This change in
policy has resulted in an approximately 17.5% appreciation of
the Renminbi against the U.S. dollar
17
between July 21, 2005 and December 31, 2009. While the
international reaction to the Renminbi revaluation has generally
been positive, there remains significant international pressure
on the Chinese government to adopt an even more flexible
currency policy, which could result in a further and more
significant appreciation of the Renminbi against the U.S.
dollar. If the Renminbi were to appreciate against the U.S.
dollar, the cost of our products manufactured in China would
increase, which would have a negative impact on our margins,
profitability and cash flows. If the U.S. dollar appreciates
against the currencies of the other markets in which we sell,
such as Europe, it may be harder to sell applications with our
NuVinci technology and our product sales revenue may
decrease. We do not currently hedge against foreign exchange
risks.
Our
ongoing manufacturing operations in China are complex and it may
be difficult to establish adequate management and financial
controls in China.
Currently, most of our manufacturing operations are based in
China and are provided by a contract manufacturer. Our
contractor requires our assistance in developing the skills,
processes and knowledge necessary to manufacture and test our
products. Any problems or disruptions requiring significant
assistance from our company will require additional time for
travel to support those operations in China. This may divert
managements attention, lead to disruptions in operations
and delay implementation of our business strategy, all of which
could negatively impact our profitability.
China has only recently begun to adopt management and financial
reporting concepts and practices like those with which investors
in North America are familiar. We may have difficulty in
ensuring our manufacturer in China has the experience necessary
to implement the kind of management and financial controls that
are common for a North American company. If our contract
manufacturer cannot establish and implement appropriate
controls, we may experience great difficulty collecting relevant
data necessary to manage our business effectively.
If our
products fail to perform as expected, we could lose existing and
future business and our ability to develop, market and sell our
products and technology could be harmed.
Our products could have unknown defects or errors, which may
give rise to claims against us, diminish the reputation of our
brand or divert our resources. Despite testing, our existing
products may contain defects and errors. In addition, future
products may contain manufacturing or design defects, errors or
performance problems when first introduced, when new versions or
enhancements are released, or even after these products have
been used by our customers for a period of time. These problems
could result in expensive and time-consuming design
modifications or warranty charges, delays in the introduction of
new products or enhancements, significant increases in our
service and maintenance costs, exposure to liability for
damages, damaged customer relationships and harm to our
reputation, any of which may adversely affect our business and
our operating results.
Our success depends on our ability or that of our licensees to
develop and successfully manufacture and commercialize products
that are recognized as adding significant value. Significant
value would include, with respect to the automotive industry for
example, increased fuel economy, more effective power
generation, longer range, or lower production costs compared to
alternative products or technologies. In the automotive industry
in particular, the design and development of a product or use is
complex, expensive, time-consuming and subject to rigorous
quality and performance requirements. If we are unable to
design, develop and commercially manufacture products that are
accepted for use in all of our target end markets, and in
particular the automotive industry, our business and operating
results may be adversely affected.
Product
liability or other claims could cause us to incur
losses.
We may be exposed to product liability claims for the products
we manufacture and market as well as for products that our
licensees manufacture and market. Although we have product
liability insurance for our products, this may be inadequate to
cover all potential product liability claims. In addition, while
we generally seek to limit our product liability in our
contracts, such limits may be unenforceable or may be subject to
18
exceptions. Any lawsuit seeking significant monetary damages
either in excess of our coverage, or outside of our coverage,
may have a material adverse affect on our business and financial
condition.
We are
subject to financial and reputational risks due to product
recalls resulting from product quality and liability
issues.
Product quality and liability issues present significant risks
and may affect not only our own products but also the
third-party products that incorporate our technology. Our
efforts and the efforts of our contract manufacturers and
licensees to maintain product quality may not be successful, and
if they are not, we may incur expenses in connection with, for
example, product recalls and lawsuits, and our brand image and
reputation as a producer of high-quality products may suffer.
Any product recall or lawsuit seeking significant monetary
damages could have a material adverse effect on our business and
financial condition. A product recall could generate substantial
negative publicity about our products and business, interfere
with our manufacturing plans and product delivery obligations as
we seek to replace or repair affected products, and inhibit or
prevent commercialization of other future product candidates. We
do not have insurance to cover the costs associated with a
product recall. In addition, the expenses and negative publicity
we would incur in connection with a product recall would
adversely affect our business and operating results.
Our
facilities or operations could be damaged or adversely affected
as a result of disasters or unpredictable events, including
widespread public health problems.
Our corporate headquarters is located in San Diego, California.
Some management personnel and the majority of our staff are
located in Texas. If major disasters such as earthquakes, fires,
floods, hurricanes, wars, terrorist attacks, computer viruses,
pandemics or other events occur, or our information system or
communications network breaks down or operates improperly, our
facilities may be seriously damaged, or we may have to stop or
delay production and shipment of our products. We may incur
expenses relating to such damages. In addition, a widespread
health problem, such as the H1N1 flu, in the United States,
China, or elsewhere in the world could have a negative effect on
our operations.
Our
financial results may vary significantly from period-to-period
because of the unpredictability of revenues associated with the
launch of a new product by an early stage company and the
seasonality of our target end markets, which may lead to
volatility in our stock price.
Due to unpredictable demand by consumers, technical risks,
competitive response and other factors associated with early
stage companies, we expect to experience unpredictable sales in
connection with the initial launch of our products in each of
our target end markets.
In addition, we are exposed to the seasonality of our target end
markets. In the bicycle transmission market, 50% of our unit
sales are likely to occur in the period from December to March
because of the model year timing of bicycle OEMs. Only 15% of
unit sales are likely to occur in the period from April to July
and the remaining 35% in the period from July to November.
Additionally, there may be long and unpredictable sales cycles
for some of our other products that we may sell directly or will
be sold by our licensees. For instance, the lawn care equipment
market is subject to substantial seasonal variation in sales,
and also depends heavily on annual precipitation. In addition,
since transmissions with our technology are incorporated into
our customers products for sale into their respective end
markets, the seasonality of our customers product sales
will impact the seasonality of our business.
Because many of our expenses are based on anticipated levels of
annual revenue, our business and operating results could also be
adversely affected if we do not achieve revenue consistent with
our expectations for this seasonal demand. Accordingly, our
financial results could vary significantly from period to period
and if our operating results do not coincide with the
expectations of investors or equity research analysts, the
trading price of our common stock could fall.
19
If our
warranty expense estimates differ materially from our actual
claims, or if we are unable to estimate future warranty expense
for new products, our business and financial results could be
harmed.
Our warranty for our bicycle transmission is currently six
years. We expect that the warranty for our next generation
bicycle transmission, the N360, will be two years, which is
comparable to that offered in the bicycle industry for other
transmissions. Since the bicycle transmissions using our
technology were first sold in the consumer market in 2007, we
have a limited product history on which to base our warranty
estimates. Other products utilizing our technology are not yet
available commercially and there is no warranty history. Because
of our limited operating history, our management is required to
make assumptions and to apply judgment regarding a number of
factors, including anticipated rate of warranty claims, the
durability and reliability of our products, and service delivery
costs. Our assumptions could prove to be materially different
from actual performance, which could cause us to incur
substantial expense to repair or replace defective products in
the future and may exceed expected levels against which we have
reserved. If our estimates prove incorrect, we could be required
to accrue additional expenses from the time we realize our
estimates are incorrect and also face a significant unplanned
cash burden at the time our customers make a warranty claim,
which could adversely affect our business and operating results.
In addition, with our new products and products that remain
under development, we will be required to base our warranty
estimates on historical experience of similar products, testing
of our products and performance information learned during our
development activities with the customer. If we are unable to
estimate future warranty costs for any new product, we may
realize a lower gross margin on such products than we have
estimated, which might result in our financial results varying
significantly from period-to-period.
While
we have not yet been profitable, if we fail to manage our growth
effectively, we may be unable to execute our business plan,
maintain high levels of service or address competitive
challenges adequately.
While there is no guarantee that we will achieve rapid growth,
or any growth at all, we are planning for the possibility of
rapid sales growth for our products. Expanding our sales rapidly
will require increases in expenditures both for personnel and
marketing programs and working capital. In addition, expanding
our organization globally and managing a geographically
dispersed workforce will require substantial management effort
and significant additional investment in support systems. We
will be required to continue to improve our operational,
financial and management controls and reporting. We may not be
able to do so effectively or as rapidly as desired, which could
cause inefficiencies in managing our expenses effectively in the
future, negatively impacting our operating results in any
particular quarter.
We are
currently implementing new software systems to support our
business operations. If these implementations are not
successful, our business and operations could be disrupted and
our operating results could be harmed.
We are currently implementing new software systems to assist us
in the management of our business. The implementation of new
software systems require significant management time, support
and cost. We expect the implementation and enhancements of these
platforms to continue across new and existing sites worldwide.
In addition, as our business continues to develop, we expect to
add or enhance existing systems in the areas of engineering,
sales, and customer support and warranty management. We cannot
be sure that these systems will be fully or effectively
implemented on a timely basis, if at all, and implementation may
take more resources than expected, which could cause disruption
in our operations and an unanticipated increase in our operating
expenses.
Risks
Related to Intellectual Property
Parties
may bring intellectual property infringement claims against us
that would be time-consuming and expensive to defend, and if any
of our products or processes are found to be infringing, we will
be required to attempt to license the necessary patent or
redesign our products or processes, failing which we will be
unable to manufacture, use or sell those respective products or
processes that were found to be infringing.
Our success depends in part on avoiding the infringement of
other parties patents and proprietary rights. We may
inadvertently infringe existing third-party patents or
third-party patents issued on existing patent
20
applications. Around the world, most patent applications are
confidential until they are published 18 months after
filing. However, currently in the U.S. not all patent
applications must be published prior to issuance even after
18 months of filing. With patent applications that have not
been published, we would not have had an opportunity to try and
perform any diligence, as we would be unaware of such pending
applications.
Because of the sheer volume of patents in the U.S. and
other jurisdictions and the various terminology used to describe
components, we can never be sure we do not infringe third-party
patents. Those holding ownership or exclusive rights in any
patents could bring claims against us that, in any event, could
cause us to incur substantial expenses and, if resolved against
us, could also cause us to pay substantial damages. Under
certain circumstances in the United States, these damages could
be triple the actual damages the patent holder incurs. If we
have supplied infringing products to third parties for marketing
or licensed third parties to manufacture, use or market
infringing products, we may be obligated to indemnify these
third parties for any damages they may be required to pay to the
patent holder and for any losses the third parties may sustain
themselves as the result of lost sales or damages paid to the
patent holder. In addition, we may have, and may be required to,
make representations as to our right to supply intellectual
property, license intellectual property and to our compliance
with laws.
If a patent infringement suit were brought against us, we and
our customers, development partners and licensees could be
forced to stop, delay or modify research, development,
manufacture or sales of products based on our technologies in
the country or countries covered by the patent or patents we
infringe, unless we can obtain a license from the patent holder.
Such a license may not be available on acceptable terms, or at
all, particularly if the third party is developing or marketing
a product competitive with products based on our technologies.
Even if we were able to obtain a license, the rights may be
nonexclusive, which could give our competitors access to the
same intellectual property acquired under such a license.
Any successful infringement action brought against us may also
adversely affect marketing of products based on our technologies
in other markets not covered by the infringement action.
Furthermore, even if we are successful in defending or settling
a patent infringement action against, it could be costly to
defend, require significant time and attention of our key
management and technical personnel, and could harm our
reputation and competitive position.
We may
be involved in lawsuits to protect or enforce our patents, which
would be expensive and time consuming.
Competitors or third parties may infringe our patents. We may be
required to file patent infringement claims, which can be
expensive and time-consuming. Patent litigation requires the use
of expert legal counsel and witnesses who are experts in the
field of technology. This litigation is subject to time
consuming processes and because of the complexity involved,
there is a significant amount of uncertainty and cost involved.
This is particularly the case in countries outside the
U.S. due to multiple factors. U.S. patents are only
enforceable in the U.S. in a foreign country we must
have patents issued by that countrys government to enforce
against infringers in that country. We will be subject to
different laws and procedures in that country such as service of
process against a defendant, the requesting and issuance of
temporary or permanent injunctions of infringement, standing to
file an infringement case, and whether jury trials are
available, as examples. Similarly, our foreign patents are not
enforceable in the U.S. and we must therefore rely on
U.S. patents against infringers in the U.S. Due to the
high complexity and cost inherent in any patent litigation,
initiating or defending such actions in foreign countries where
these differences in procedures, the law and languages add
additional strain and uncertainty is even more costly and time
consuming.
In addition, in an infringement proceeding, a court may decide
that a patent of ours is not valid or is unenforceable, or that
the third partys technology does not in fact infringe upon
our patents. An adverse determination of any litigation or
defense proceedings could put one or more of our patents at risk
of being invalidated or interpreted narrowly and could put our
related pending patent applications at risk of not issuing. Even
if successful, litigation may result in substantial costs and be
a distraction to our management.
21
Furthermore, because of the substantial amount of discovery
required in connection with intellectual property litigation,
there is a risk that some of our confidential or sensitive
information could be compromised by disclosure in the event of
litigation. In addition, during the course of litigation there
could be public announcements of the results of hearings,
motions or other interim proceedings or developments. If
securities analysts or investors perceive these results to be
negative, it could have a substantial adverse effect on the
price of our common stock.
Our
patent applications may not result in issued patents, which may
have a material adverse effect on our ability to prevent others
from commercially exploiting products similar to
ours.
Patent applications in the United States are maintained in
secrecy until the patents are published or, in some cases, are
issued. We cannot be certain that we are the first creator of
inventions covered by pending patent applications or the first
to file patent applications on these inventions. We also cannot
be certain that our pending patent applications will result in
issued patents or that any of our issued patents will afford
protection against a competitor. In addition, patent
applications filed in foreign countries are subject to laws,
rules and procedures that differ from those of the United
States, and thus we cannot be certain that foreign patent
applications related to issued United States patents will be
issued. Furthermore, if these patent applications issue, some
foreign countries provide significantly less effective patent
enforcement mechanisms than in the United States.
The patent application process involves complex legal and
factual questions and it is difficult to definitively determine
whether any claimed invention in a patent application will go on
to issue. Accordingly, we cannot be certain that the patent
applications that we file will result in issued patents, or that
our patents and any patents that may be issued to us in the near
future will afford protection against competitors with similar
technology.
Challenges
to our patent rights can result in costly and time-consuming
legal proceedings that may prevent or limit development of our
products.
Outside of the United States, certain jurisdictions, including
in Europe, permit oppositions to be filed against the granting
of patents within a certain period of their grant. Because our
intent is to commercialize products internationally and
specifically in Europe, securing both proprietary protection and
freedom to operate outside of the United States is important to
our business. While we are not currently involved in any
opposition proceedings, it is not uncommon for market incumbents
to seek and institute opposition proceedings against emerging
market companies to gain competitive advantage. European
opposition and appeal proceedings can take several years to
reach final decision and are therefore costly and not expedient
and can cast doubt on the status of the patent during those
proceedings. Patent opposition proceedings are not currently
available in the United States patent system, but are likely to
be instituted in the near future under proposed legislation.
While opposition proceedings as they exist in Europe do not
currently exist in the United States, issued United States
patents can be reexamined by the Patent and Trademark Office
(PTO), at the request of a third party. While we are currently
not involved in any such proceedings, our competitors may decide
to request reexamination by the PTO with respect to any or all
of our issued United States patents if they are in possession of
prior art in relation to an issued patent that represents a
substantial new question of its patentability. Patent
reexamination proceedings, like opposition proceedings, are long
and complex and therefore costly and, as in any legal
proceeding, the outcome of patent reexaminations is uncertain. A
decision adverse to our interests could result in the loss of
valuable patent rights.
Where more than one party seeks United States patent protection
for the same technology, the PTO may declare an interference
proceeding in order to ascertain the party to which the patent
should be issued. Patent interferences are typically complex,
highly contested legal proceedings, subject to appeal, that are
lengthy and expensive and an adverse decision in interference
can result in the loss of important patent rights. As more
groups become engaged in scientific research and product
development related to our NuVinci CVT technology, the
risk of our patents being challenged through patent
interferences, oppositions, reexaminations or other means will
likely increase, and our pending patent applications, or our
issued patents, may be drawn
22
into interference proceedings that may delay or prevent the
issuance of patents, or result in the loss of issued patent
rights.
Successful challenges to our patents through oppositions,
reexamination proceedings or interference proceedings could
result in a loss of patent rights in the relevant jurisdiction.
If we are unsuccessful in actions we bring against the patents
of other parties and it is determined that we infringe the
patents of third-parties, we may be subject to litigation, or
otherwise prevented from commercializing potential products in
the relevant jurisdiction, or may be required to obtain licenses
to those patents or develop or obtain alternative technologies,
any of which could harm our business. Furthermore, if such
challenges to our patent rights are not resolved promptly in our
favor, our existing business relationships may be jeopardized
and we could be delayed or prevented from entering into new
collaborations or from commercializing certain products, which
could adversely affect our business and results of operations.
We may
be unable to adequately prevent disclosure of trade secrets and
other proprietary information.
We rely on trade secrets to protect some aspects of our
proprietary technology, especially where we do not believe
patent protection is appropriate or obtainable. Confidentiality
agreements with our employees, contractors, consultants,
development partners and other advisors to protect our trade
secrets and other proprietary information may not effectively
prevent disclosure of confidential information and may not
provide an adequate remedy in the event of unauthorized
disclosure of confidential information. In addition, others may
independently discover our trade secrets or independently
develop processes or products that are similar or identical to
our trade secrets, and courts outside the United States may be
less willing to protect trade secrets. Costly and time-consuming
litigation could be necessary to enforce and determine the scope
of our proprietary rights, and failure to obtain or maintain
trade secret protection could adversely affect our competitive
business position.
Risks
Related to this Offering and Ownership of Our Common
Stock
Our
management will have broad discretion over the use of the
proceeds we receive in this offering and might not apply the
proceeds in ways that increase the value of your
investment.
Our management will have broad discretion to use our net
proceeds from this offering, and you will be relying on the
judgment of our management regarding the application of these
proceeds. We expect to use the net proceeds from this offering
for general corporate purposes, including the repayment of
indebtedness. However, our management might not apply our net
proceeds from this offering in ways that increase the value of
your investment, and you will not have the opportunity to
influence our decisions on how to use our net proceeds from this
offering.
Our 5%
or greater stockholders and executive officers could have
substantial influence over us, and they may act to the detriment
of other stockholders.
Our 5% or greater stockholders, directors and executive
officers, as a group, beneficially own approximately 63.6% of
our outstanding common stock on an as-converted basis as of
August 25, 2010. However, none of these parties
individually own more than 25% of the voting interests of the
Company and none of these parties individually has control over
our managements operating policies or business decisions.
Following this offering, this group will beneficially own
approximately % of our outstanding
common stock. While there is no voting agreement among this
group that provides it control, this group could have
substantial influence over our business and affairs, including
the ability to influence elections of our directors and any
other actions that may require stockholder approval, such as
amendments to our charter documents and significant corporate
transactions. This concentration of ownership could also have
the effect of delaying or preventing a change in control that
could be beneficial to the other stockholders.
23
An
active trading market for our common stock may not develop, and
you may not be able to resell your shares at or above the
initial public offering price.
Prior to this offering, there has been no public market for
shares of our common stock and we cannot assure you that one
will develop or be sustained after the offering. If a market
does not develop or is not sustained, it may be difficult for
you to sell your shares of our common stock at an attractive
price or at all. The initial public offering price of our common
stock will be determined through negotiations between us and the
underwriters. This initial public offering price may not be
indicative of the market price of our common stock after the
offering. In the absence of an active trading market for our
common stock, investors may not be able to sell their common
stock at or above the initial public offering price or at the
time that they would like to sell.
Our
stock price may be volatile, and the market price of our common
stock after this offering may drop below the price you
pay.
The market price of our common stock could be subject to
significant fluctuations after this offering, and it may decline
below the initial public offering price. Market prices for
securities of early stage companies have historically been
particularly volatile. As a result of this volatility, you may
not be able to sell your common stock at or above the initial
public offering price. In addition, if the market for technology
stocks or the stock market in general experiences a loss of
investor confidence, the trading price of our common stock could
decline for reasons unrelated to our business, financial
condition or results of operations. If any of the foregoing
occurs, it could cause our stock price to fall and may expose us
to class action lawsuits that, even if unsuccessful, could be
costly to defend and a distraction to management. In the past,
securities class action litigation has often been instituted
against companies following periods of volatility in their stock
price. This type of litigation even if it does not result in
liability for us, could result in substantial costs to us and
divert management attention and resources.
A
significant portion of our total outstanding shares may be sold
into the public market in the near future, which could cause the
market price of our common stock to drop significantly, even if
our business is doing well.
Sales of a substantial number of shares of our common stock in
the public market could occur at any time after the expiration
of the
lock-up
agreements described in the Underwriting section of
this prospectus. These sales, or the market perception that the
holders of a large number of shares intend to sell shares, could
reduce the market price of our common stock. Based on shares
outstanding as
of ,
upon completion of this offering we will have
outstanding shares
of common stock, assuming no exercise of the underwriters
over-allotment option. This
includes shares,
which may be resold in the public market immediately. Of the
remaining
shares, shares
of common stock will be subject to a
180-day
contractual
lock-up with
the underwriters. These shares will be able to be sold, subject
to any applicable volume limitations under applicable securities
laws, after the earlier of the expiration of, or release from,
the 180-day
lock-up
period. CIBC World Markets Inc. and Mackie Research Capital
Corporation, on behalf of the underwriters, may permit our
officers, directors, employees and current stockholders who are
subject to the contractual
lock-up to
sell shares prior to the expiration of the
lock-up
agreements.
Purchasers
in this offering will experience immediate and substantial
dilution in the book value of their investment.
The assumed initial public offering price of our common stock is
substantially higher than the net tangible book value per share
of our outstanding common stock immediately after this offering.
Therefore, if you purchase our common stock in this offering,
you will incur immediate dilution of
$ in net tangible book value per
share from the price you paid. Moreover, we issued options in
the past to acquire common stock. As of June 30, 2010,
12,971,571 shares of common stock are issuable upon
exercise of outstanding stock options with a weighted average
exercise price of $0.24 per share, of which 6,221,566 are
vested as of such date. To the extent that these outstanding
options are ultimately exercised, you will incur further
dilution.
24
If
securities or industry analysts do not publish or cease
publishing research or reports about us, our business or our
market, or if they change their recommendations regarding our
stock adversely, our stock price and trading volume could
decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
may publish about us, our business, our market or our
competitors. If any of the analysts who may cover us change
their recommendation regarding our stock adversely, or provide
more favorable relative recommendations about our competitors,
our stock price would likely decline. If any analyst who may
cover us were to cease coverage of our company or fail to
regularly publish reports on us, we could lose visibility in the
financial markets, which in turn could cause our stock price or
trading volume to decline.
Anti-takeover
provisions contained in our certificate of incorporation and
bylaws, as well as provisions of Delaware law, could impair a
takeover attempt.
Delaware law and our certificate of incorporation and bylaws
that will be adopted in connection with the completion of this
offering contain provisions that could have the effect of
rendering more difficult or discouraging an acquisition deemed
undesirable by our Board of Directors. These provisions include:
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authorizing blank check preferred stock, which could be issued
with voting, liquidation, dividend and other rights superior to
our common stock;
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limiting the liability of, and providing indemnification to, our
directors and officers;
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prohibiting our stockholders from taking any action by written
consent in lieu of a meeting;
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prohibiting our stockholders from calling and bringing business
before special meetings; and
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the filling of vacancies or newly created seats on the board to
our Board of Directors then in office.
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As a Delaware corporation, we are also subject to provisions of
Delaware law, including Section 203 of the Delaware General
Corporation law, which prevents some stockholders holding more
than 15% of our outstanding common stock from engaging in
certain business combinations without approval of the holders of
substantially all of our outstanding common stock.
Any provision of our amended and restated certificate of
incorporation or bylaws or Delaware law that has the effect of
delaying or deterring a change in control could limit the
opportunity for our stockholders to receive a premium for their
shares of our common stock, and could also affect the price that
some investors are willing to pay for our common stock.
25
Special
Note Regarding Forward-Looking Statements
This prospectus contains estimates and forward-looking
statements, principally in Prospectus Summary,
Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and Business. Our estimates and forward-looking
statements are mainly based on our current expectations and
estimates of future events and trends, which affect or may
affect our businesses and operations. Although we believe that
these estimates and forward-looking statements are based upon
reasonable assumptions, they are subject to several risks and
uncertainties and are made in light of information currently
available to us. Many important factors, in addition to the
factors described in this prospectus, may adversely affect our
results as indicated in forward-looking statements. You should
read this prospectus and the documents that we have filed as
exhibits to the registration statement of which this prospectus
is a part completely and with the understanding that our actual
future results may be materially different from what we expect.
Our estimates and forward-looking statements may be influenced
by the following factors, among others:
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the factors discussed in this prospectus set forth under the
sections titled Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations;
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the depth and duration of the current economic downturn;
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lack of acceptance of new products or technology;
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projected expenditures and other costs;
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the ability to obtain financing;
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our dependence on our key management personnel and our ability
to attract and retain qualified personnel; and
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changes in the competitive environment in our industry and the
markets where we operate.
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The words believe, may,
will, aim, estimate,
continue, anticipate,
intend, expect, plan and
similar words are intended to identify estimates and
forward-looking statements.
Estimates and forward-looking statements speak only as of the
date they were made and, except to the extent required by
applicable laws, we undertake no obligation to update or to
review any estimate
and/or
forward-looking statement because of new information, future
events or other factors. Estimates and forward-looking
statements involve risks and uncertainties and are not
guarantees of future performance. As a result of the risks and
uncertainties described above, the estimates and forward-looking
statements discussed in this prospectus might not occur and our
future results and our performance may differ materially from
those expressed in these forward-looking statements due to,
including, but not limited to, the factors mentioned above.
Because of these uncertainties, you should not place undue
reliance on these forward-looking statements when making an
investment decision.
26
Use of
Proceeds
We estimate that the net proceeds to us from the sale
of shares
of common stock in this offering will be approximately
$ million, assuming an
initial public offering price of $
per share, which is the midpoint of the range set forth on the
cover page of this prospectus, and after deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us.
We intend to use the net proceeds from this offering for general
corporate purposes and for the repayment of indebtedness on our
line of credit, the proceeds of which $2.0 million was
borrowed on April 2, 2008 to purchase manufacturing assets
and $0.5 million was borrowed on August 2, 2010 to fund
working capital. The revolving line of credit expires
December 31, 2010 and bears interest at a fluctuating rate
equal to the highest of the prime rate, LIBOR plus 1.5%, or the
Federal Funds Rate plus 1.5%. The highest rate was 3.25% under
the prime rate as of June 30, 2010. As a result, management
will retain broad discretion over the allocation of the net
proceeds from this offering. Pending use of the net proceeds
from this offering, we intend to invest the net proceeds in
short-term, interest-bearing, investment-grade securities.
An increase or decrease
of shares
from the expected number of shares to be sold by us in the
offering, assuming no change in the assumed initial public
offering price per share, would increase or decrease our net
proceeds from this offering by
$ . A $1.00 increase or
decrease in the assumed public offering price of
$ per share, the midpoint of the
range set forth on the front cover of this prospectus, would
increase or decrease our expected net proceeds by approximately
$ , assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us. We expect to use any additional net
proceeds from this offering for general corporate purposes.
27
Dividend
Policy
We have never declared or paid cash dividends on our common
stock. However, in connection with the Series E Preferred
Stock private financing that closed in August 2010, dividends
shall accrue on a cumulative annual basis on each share of
Series E Preferred Stock at an annual rate of $0.09160 per
share (10% of original issuance price) whether or not declared.
If the Series E Preferred Stock has not been converted to
common stock on or prior to the two-year anniversary date of
issuance, the annual dividend rate shall increase to $0.11908
per share. Accumulated dividends are payable in the form of
common stock upon conversion of the Series E Preferred
Stock. If the Series E Preferred Stock has not converted on
or before August 13, 2012, then, at the request of the
shareholder, the shares can be redeemed for cash. We currently
intend to retain all of our future earnings, if any, generated
by our operations for the development and growth of our
business. The payment of any dividends in the future will be at
the discretion of our Board of Directors and will depend upon
our financial condition, results of operations, earnings,
capital requirements, contractual restrictions, outstanding
indebtedness, and other factors deemed relevant by our board.
Additionally, our revolving line of credit restricts the
declaration or payment of dividends without the banks
prior written consent. As a result, you may need to sell your
shares of common stock to realize a return on your investment,
and you may not be able to sell your shares at or above the
price you paid for them.
28
Conversion
of Preferred Stock into Common Stock
We currently have five series of outstanding preferred stock:
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Number of Shares Outstanding
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Conversion
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Equivalent Shares of
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Preferred Stock
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as of August 25, 2010
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Ratio
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Common Stock
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Series A
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3,887,577
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1.4424
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5,607,441
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Series B
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4,786,444
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2.0868
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9,988,351
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Series C
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3,012,765
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3.9444
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11,883,550
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Series D
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73,627,442
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1.0000
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73,627,442
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Series E
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6,550,218
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1.0000
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(1)
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6,550,218
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(2)
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Total
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91,864,446
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107,657,002
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(1) |
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The initial conversion ratio for the Series E Preferred
Stock is 1.0000 based on the original issuance price of $0.9160
divided by the conversion price of $0.9160, subject to
adjustment for certain events, such as an initial public
offering. In the event of an initial public offering with
aggregate net proceeds of not less than $20 million or a
reverse take-over of a company listed on an internationally
recognized securities exchange immediately followed by a minimum
$20 million equity financing, the conversion price will be
an amount equal to the lesser of (A) a 20% discount to the
common stock offering price, and (B) a per share price
equal to $120 million divided by the total number of
outstanding shares of common stock deemed to be outstanding
immediately prior to the qualifying event. |
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(2) |
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The number of equivalent shares of common stock does not include
dividends, which shall accrue on a cumulative annual basis on
each share of Series E Preferred Stock at an annual rate of
$0.09160 per share (10% of original issuance price) whether or
not declared. If the Series E Preferred Stock has not been
converted to common stock on or prior to the two-year
anniversary date of issuance, the annual dividend rate shall
increase to $0.11908 per share. Accumulated dividends are
payable in the form of common stock upon conversion of the
Series E Preferred Stock. If the Series E Preferred
Stock has not converted on or before August 13, 2012, then,
at the request of the shareholder, the shares can be redeemed
for cash. |
Effective immediately prior to this offering, all of our
outstanding preferred stock will be converted
into shares
of our common stock.
Indebtedness
We have a $3,000,000 revolving line of credit with Wells Fargo
Bank, National Association, of which $2,500,000 is outstanding
as of August 25, 2010. The line of credit is fully
collateralized by assets held on account with the lender by a
stockholder and director of our company. The line of credit
imposes no restrictive financial covenants on the Company. The
outstanding principal balance bears interest at a fluctuating
rate equal to the highest of the prime rate, LIBOR plus 1.5%, or
the Federal Funds Rate plus 1.5%. The highest rate was 3.25%
under the prime rate as of June 30, 2010. The line of
credit provides for a quarterly unused commitment fee of 0.375%
per annum on the average daily unused amount. Up to $2,000,000
of the line of credit may be used to finance standby letters of
credit, with maximum maturities of one year. The line of credit
expires December 31, 2010.
We intend to repay the outstanding balance under this revolving
line of credit with the net proceeds of this offering.
29
Capitalization
The following table sets forth our capitalization as of
June 30, 2010:
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On a pro forma basis, to give effect to the automatic conversion
of all outstanding shares of our convertible preferred stock
into 101,106,784 shares of common stock (as of
June 30, 2010) upon the closing of this offering,
which we refer to as the Conversion; and
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On an as adjusted basis, giving effect to:
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the issuance
of shares
of our common stock upon the exercise of warrants that would
otherwise expire immediately prior to the closing of the
offering;
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our sale
of shares
of our common stock in this offering (at an assumed initial
public offering price of $ per
share, which is the midpoint of the range set forth on the cover
page of this prospectus and after deducting underwriting
discounts and commissions and estimated offering expenses
payable by us); and
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our repayment of $2.0 million in
short-term
debt with the net proceeds from this offering.
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As of June 30, 2010
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Actual
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Pro Forma
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As
Adjusted(1)
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($ in thousands)
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Cash and cash equivalents
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$
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1,542
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$
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1,542
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Short-term debt
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$
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2,000
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$
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2,000
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Equity:
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Series A convertible preferred stock: $0.001 par
value; 3,887,577 shares authorized, issued and outstanding,
actual
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479
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Series B convertible preferred stock: $0.001 par
value; 4,786,444 shares authorized, issued and outstanding,
actual
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8,202
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Series C convertible preferred stock: $0.001 par
value; 3,012,765 shares authorized, issued and outstanding,
actual
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16,040
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Series D convertible preferred stock: $0.001 par
value; 78,637,462 shares authorized, 73,627,442 shares
issued and outstanding, actual
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27,735
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Common stock: $0.001 par value; 140,000,000 shares
authorized, 11,660,855 shares issued and outstanding,
actual; shares
authorized, shares
issued and outstanding, as adjusted
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12
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113
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Additional paid-in capital
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3,018
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55,373
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Accumulated other comprehensive loss foreign
transaction loss
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(2
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)
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(2
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)
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Accumulated deficit
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(52,213
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)
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(52,213
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Total equity
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3,271
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3,271
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Total capitalization
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$
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5,271
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$
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5,271
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(1) |
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A $1.00 increase or decrease in the assumed initial public
offering price per share would increase or decrease cash and
cash equivalents by
$ million, would increase or
decrease additional paid-in capital by
$ million, and would increase
or decrease total stockholders equity and total
capitalization by $ million,
after deducting the underwriting discount and the estimated
offering expenses payable by us. Similarly, any increase or
decrease in the number of shares that we sell in the offering
will increase or decrease our net proceeds by such increase or
decrease, as applicable, multiplied by the offering price per
share, less underwriting discounts and commissions and offering
expenses. |
30
The table above does not include:
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$6,000,000 in gross cash proceeds from the issuance of
6,550,218 shares of Series E redeemable convertible
preferred stock, $0.001 par value, issued in August 2010, which
will be classified as temporary equity;
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shares
of common stock reserved or issuable pursuant to our 2010 Stock
Plan;
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shares
of common stock issuable upon the exercise of outstanding
options to purchase common stock under our 2004 Stock Plan;
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3,100,753 shares of common stock issuable upon the exercise
of an outstanding warrant held by the Jacobs Family Trust;
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up to 650,000 shares of common stock issuable pursuant to
contingent warrants that may be granted upon achievement of
certain performance milestones; and
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the exercise by the underwriters of their option to purchase up
to additional
shares from us.
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You should read this capitalization table together with
Use of Proceeds, Managements Discussion
and Analysis of Financial Condition and Results of
Operations, Selected Consolidated Financial
Data, and our consolidated financial statements and
related notes included elsewhere in this prospectus.
31
Dilution
Purchasers of the common stock in the offering will suffer an
immediate and substantial dilution in net tangible book value
per share. Dilution is the amount by which the initial public
offering price paid by purchasers of shares of common stock in
this initial public offering exceeds the net tangible book value
per share of our common stock immediately after completion of
the offering. Net tangible book value per share represents the
amount of our total tangible assets (calculated as total assets
minus intangible assets and deferred costs) reduced by our total
liabilities, divided by the number of shares of common stock
outstanding.
As of June 30, 2010, our net tangible book value was
approximately ($3,627,000), or ($0.31) per share, based on
11,660,855 shares of common stock outstanding.
After giving effect to (a) the automatic conversion of all
outstanding shares of our convertible preferred stock
into shares
of common stock, (b) the issuance
of shares
of common stock upon the exercise of warrants that would
otherwise expire immediately prior to the closing of the
offering, (c) our repayment of $2.0 million in
short-term debt with the net proceeds from this offering, and
(d) the sale
of shares
of common stock in this offering at an assumed public offering
price of $ per share, which is the
midpoint of the estimated price range set forth on the cover
page of this prospectus and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us, our as adjusted net tangible book value
as of June 30, 2010 would have been approximately
$ , or
$ per share. This represents an
immediate increase in as adjusted net tangible book value per
share of $ to existing
stockholders and an immediate dilution of
$ per share to new investors. The
following table illustrates this per share dilution:
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Assumed initial public offering price
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$
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Net tangible book value per share as of June 30, 2010
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($
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0.31
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)
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Increase per share attributable to this offering
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As adjusted net tangible book value per share after giving
effect to this offering
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Dilution per share to new investors in this offering
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$
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A $1.00 increase or decrease in the assumed initial public
offering price of $ per share
would increase or decrease, as applicable, our as adjusted net
tangible book value per share of common stock by
$ , and increase or decrease, as
applicable, the dilution per share of common stock to new
investors by $ , assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same, after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us. Similarly, any increase or
decrease in the number of shares that we sell in the offering
will increase or decrease our net proceeds in proportion to such
increase or decrease, as applicable, multiplied by the offering
price per share, less underwriting discounts and commissions and
offering expenses.
The following table sets forth, as of June 30, 2010, on the
as adjusted basis described above, the differences between
existing stockholders and new investors with respect to the
total number of shares of common stock purchased from us, the
total consideration paid, and the average price per share paid
before deducting underwriting discounts and commissions and
estimated offering expenses payable by us, at an assumed initial
public offering price of $ per
share of common stock, which is the midpoint of the range set
forth on the cover page of this prospectus:
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Average
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Shares Purchased
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Total Consideration
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Price per
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Number
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|
Percent
|
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|
Amount
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|
Percent
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|
Share
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Existing stockholders
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|
|
|
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|
%
|
|
$
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|
|
|
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|
%
|
|
$
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|
New investors
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Total
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100.00
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%
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|
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|
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100.00
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%
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32
The foregoing tables and calculations do not include:
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|
|
|
|
$6,000,000 in gross cash proceeds from the issuance of
6,550,218 shares of Series E redeemable convertible
preferred stock, $0.001 par value, issued in August 2010, which
will be classified as temporary equity;
|
|
|
|
|
|
shares
of common stock reserved or issuable pursuant to our 2010 Stock
Plan;
|
|
|
|
shares
of common stock issuable upon the exercise of outstanding
options to purchase common stock under our 2004 Stock Plan;
|
|
|
|
3,100,753 shares of common stock issuable upon the exercise
of an outstanding warrant held by the Jacobs Family Trust;
|
|
|
|
|
|
up to 650,000 shares of common stock issuable pursuant to
contingent warrants that may be granted upon achievement of
certain performance milestones; and
|
|
|
|
|
|
the exercise by the underwriters of their option to purchase up
to additional
shares from us.
|
33
Selected
Consolidated Financial Data
We derived the selected consolidated statement of operations
data and the selected consolidated statement of cash flows data
for the years ended December 31, 2007 and 2008, as restated
(see Note 16 to our audited consolidated financial
statements), and December 31, 2009, and the selected
consolidated balance sheet data as of December 31, 2008, as
restated (see Note 16 to our audited consolidated financial
statements), and December 31, 2009, from our audited
consolidated financial statements included elsewhere in this
prospectus. We derived the selected consolidated statement of
operations data and the selected consolidated statement of cash
flows data for the years ended December 31, 2005 and 2006
and the selected consolidated balance sheet data as of
December 31, 2005, 2006 and 2007 from our audited
consolidated financial statements, as restated, which are not
included in this prospectus and include restatement adjustments
for similar items as discussed in Note 16 to our audited
consolidated financial statements. We derived the selected
consolidated statement of operations data and selected
consolidated statement of cash flows data for the six months
ended June 30, 2009 and 2010 and the selected consolidated
balance sheet data as of June 30, 2010 from our unaudited
condensed consolidated interim financial statements included
elsewhere in this prospectus.
We have prepared the unaudited consolidated interim financial
statements on the same basis as our audited consolidated
financial statements and, in our opinion, have included all
adjustments, which include only normal recurring adjustments
necessary to present fairly, in all material respects, our
financial position and results of operations. The results for
any interim period are not necessarily indicative of the results
that may be expected for the full year. Additionally, our
historical results are not necessarily indicative of the results
expected for any future period.
You should read the selected historical financial data together
with the consolidated financial statements and related notes
appearing elsewhere in this prospectus, as well as
Prospectus Summary Summary Consolidated
Financial Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and the other financial information included elsewhere in this
prospectus.
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
($ in thousands, except per share data)
|
|
|
Revenues
|
|
$
|
40
|
|
|
$
|
97
|
|
|
$
|
714
|
|
|
$
|
2,283
|
|
|
$
|
1,044
|
|
|
$
|
672
|
|
|
$
|
460
|
|
Cost of revenues
|
|
|
12
|
|
|
|
283
|
|
|
|
1,892
|
|
|
|
2,048
|
|
|
|
7,260
|
|
|
|
2,129
|
|
|
|
521
|
|
Gross (loss) profit
|
|
|
28
|
|
|
|
(186
|
)
|
|
|
(1,178
|
)
|
|
|
235
|
|
|
|
(6,216
|
)
|
|
|
(1,457
|
)
|
|
|
(61
|
)
|
Operating expenses
|
|
|
4,961
|
|
|
|
6,558
|
|
|
|
5,827
|
|
|
|
10,321
|
|
|
|
10,523
|
|
|
|
4,988
|
|
|
|
6,614
|
|
Operating loss
|
|
|
(4,933
|
)
|
|
|
(6,744
|
)
|
|
|
(7,005
|
)
|
|
|
(10,086
|
)
|
|
|
(16,739
|
)
|
|
|
(6,445
|
)
|
|
|
(6,675
|
)
|
Other income (expense)
|
|
|
122
|
|
|
|
490
|
|
|
|
447
|
|
|
|
(470
|
)
|
|
|
(487
|
)
|
|
|
15
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,811
|
)
|
|
|
(6,254
|
)
|
|
|
(6,558
|
)
|
|
|
(10,556
|
)
|
|
|
(17,226
|
)
|
|
|
(6,430
|
)
|
|
|
(6,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Discount related to beneficial conversion feature on
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fallbrook Technologies Inc. common
stockholders
|
|
$
|
(4,811
|
)
|
|
$
|
(6,254
|
)
|
|
$
|
(6,558
|
)
|
|
$
|
(11,932
|
)
|
|
$
|
(17,226
|
)
|
|
$
|
(6,430
|
)
|
|
$
|
(6,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per sharebasic and diluted
|
|
$
|
(0.42
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(1.04
|
)
|
|
$
|
(1.48
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.58
|
)
|
Weighted average shares outstandingbasic and diluted
|
|
|
11,422
|
|
|
|
11,422
|
|
|
|
11,437
|
|
|
|
11,462
|
|
|
|
11,656
|
|
|
|
11,654
|
|
|
|
11,661
|
|
Pro forma net loss per sharebasic and diluted
(unaudited)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Pro forma weighted average shares outstandingbasic and
diluted
(unaudited)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006(3)
|
|
|
2007(1)
|
|
|
2008(4)
|
|
|
2009
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
4,195
|
|
|
$
|
3,218
|
|
|
$
|
8,043
|
|
|
$
|
14,565
|
|
|
$
|
9,213
|
|
|
$
|
1,542
|
|
Total assets
|
|
|
11,153
|
|
|
|
14,105
|
|
|
|
10,855
|
|
|
|
25,314
|
|
|
|
13,526
|
|
|
|
9,290
|
|
Total liabilities
|
|
|
505
|
|
|
|
1,764
|
|
|
|
2,158
|
|
|
|
3,171
|
|
|
|
3,813
|
|
|
|
6,019
|
|
Convertible preferred stock
|
|
|
17,091
|
|
|
|
24,721
|
|
|
|
24,721
|
|
|
|
48,566
|
|
|
|
52,456
|
|
|
|
52,456
|
|
Accumulated deficit
|
|
|
(7,252
|
)
|
|
|
(13,506
|
)
|
|
|
(20,064
|
)
|
|
|
(28,261
|
)
|
|
|
(45,487
|
)
|
|
|
(52,213
|
)
|
Total equity
|
|
|
10,648
|
|
|
|
12,341
|
|
|
|
8,697
|
|
|
|
22,143
|
|
|
|
9,713
|
|
|
|
3,271
|
|
Consolidated Statement of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006(3)
|
|
|
2007(1)
|
|
|
2008(1)(4)
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(3,796
|
)
|
|
$
|
(4,564
|
)
|
|
$
|
(5,860
|
)
|
|
$
|
(9,496
|
)
|
|
$
|
(12,118
|
)
|
|
$
|
(6,472
|
)
|
|
$
|
(5,960
|
)
|
Investing activities
|
|
|
(6,393
|
)
|
|
|
(4,034
|
)
|
|
|
8,073
|
|
|
|
(7,271
|
)
|
|
|
2,954
|
|
|
|
(6,551
|
)
|
|
|
(305
|
)
|
Financing activities
|
|
|
8,351
|
|
|
|
7,621
|
|
|
|
2,612
|
|
|
|
23,289
|
|
|
|
3,812
|
|
|
|
(5
|
)
|
|
|
(1,404
|
)
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
$
|
(1,838
|
)
|
|
$
|
(977
|
)
|
|
$
|
4,825
|
|
|
$
|
6,522
|
|
|
$
|
(5,352
|
)
|
|
$
|
(13,028
|
)
|
|
$
|
(7,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On January 3, 2007, we formed
a wholly-owned subsidiary, Viryd Technologies Inc. (Viryd), a
Delaware corporation. On December 18, 2008, we completed a
spin-off of our ownership of Viryd through a pro rata
distribution of shares to our stockholders. The 2007 and 2008
consolidated financial statements include the accounts of
Fallbrook Technologies Inc. and Viryd through December 18,
2008.
|
|
|
|
(2)
|
|
The pro forma basic and diluted net
loss per share is calculated by dividing the net loss by the
weighted average number of common shares outstanding for the
period plus the weighted average number of common shares
resulting from the assumed conversion of the outstanding shares
of convertible preferred stock and the exercise
of
warrants prior to the closing of the offering. The assumed
conversion is calculated using the if-converted method, as if
such conversion had occurred as of the beginning of the period
presented or as of the original issuance date, if later.
|
|
|
|
(3)
|
|
In 2006, we issued
1,429,487 shares of Series C convertible preferred
stock for cash in the amount of $7,636,000, recorded net of
issuance costs of $6,000.
|
|
(4)
|
|
On December 18, 2008, we sold
an aggregate of 63,607,402 shares of our Series D
convertible preferred stock at a purchase price of $0.3992 per
share for a total of $25.4 million, of which
$20.6 million was in cash and $4.8 million was from
the conversion of principal and accrued interest on our then
outstanding convertible debt.
|
35
Managements
Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with Prospectus SummarySummary
Consolidated Financial Data, Selected Consolidated
Financial Data and our consolidated financial statements
included elsewhere in this prospectus. In addition to historical
data, this discussion contains forward-looking statements about
our business, operations and financial performance based on
current expectations that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those
discussed in the forward-looking statements as a result of
various factors, including but not limited to those discussed in
the sections entitled Risk Factors and Special
Note Regarding Forward-Looking Statements included
elsewhere in this prospectus.
Overview
Our NuVinci Technology
We have developed patented transmission technology, sold under
the NuVinci brand. It is designed to improve
the overall efficiency and performance of mechanical systems
that require variation between the speed of a primary drive and
the speed required to operate the mechanical system.
Our NuVinci technology is a new type of continuously
variable transmission (CVT) that can be used in a wide variety
of end market applications. A CVT is a transmission that
effectively has an infinite number of gear ratios within its
range. Our technology is currently available in the global
market for bicycle transmissions, where it has been used to
replace the rear wheel gear assembly. We are also currently
developing applications for a number of other target end
markets. These include alternators, air conditioning compressors
and superchargers for the automotive accessory drives market,
and primary transmissions for the electric vehicles, wind
turbines, and lawn care equipment markets.
We were originally formed in 2000, and to date have raised
approximately $62 million in financing to develop and
commercialize our technology. We have focused on developing
applications for a group of target end markets that offer the
most attractive competitive advantages and potential for
economic returns. As of July 31, 2010, we invested in the
development and protection of intellectual property resulting in
a worldwide portfolio of 176 patents (including validated
countries) and 189 patent applications.
Commercialization
Our first commercial product, a CVT for bicycles, was introduced
in January 2007, under a development and manufacturing license
agreement with Aftermarket Technologies Corp. (ATC) for the
development, manufacturing and sale of our bicycle CVT. Our
revenue from that agreement consisted of royalties on ATCs
product sales, license fees, and revenue from engineering
services. In February 2008, to gain greater control of
manufacturing and sales, we ended our relationship with ATC, and
transitioned to a contract manufacturing arrangement with MTD
Products Inc. (MTD). The contract manufacturing agreement with
MTD was signed in March 2008. At the same time, we assumed
direct responsibilities for sales and marketing. As part of the
transition to MTD, we purchased the manufacturing line and
associated equipment from ATC and moved the manufacturing line
to MTDs facilities. MTD spent approximately six months
setting up and testing the manufacturing line and production of
the bicycle CVT resumed in September 2008. Before manufacturing
resumed at MTD, we sold the bicycle CVTs out of the inventory
that had been built up by ATC. After September 2008, we
purchased bicycle CVTs from MTD and sold them directly to
original equipment manufacturers (OEMs) and distributors.
However, the per unit cost of the bicycle CVTs manufactured by
MTD was prohibitive because the manufacturing process used a
long lead time supply chain. We have determined that it would be
most cost effective and would provide for the largest growth
opportunity to concentrate the supply base in one off-shore
region or location.
In 2009, we began the process of phasing out production of our
existing bicycle CVTs to prepare for the manufacturing launch of
the next generation bicycle CVT, called the N360, which launch
occurred in June 2010. We terminated our contract manufacturing
agreement with MTD in October 2009, after building
36
2,600 units of inventory for us to continue to deliver
products to customers while our next contract manufacturer
prepares for production of the N360. We have engaged a contract
manufacturer, Tri Star Group, located in Shanghai, China, to
manufacture the N360. The production of prototypes began in
December 2009 and we launched manufacturing of the N360 in June
2010 and shipped initial products to customers in July 2010. The
N360 will have many improvements over the current bicycle CVT
including a weight reduction of at least 35%, a size reduction
of at least 10%, improved shift feel and responsiveness, and the
CVT will be easier to assemble with over 50% fewer parts. We
believe the improved design of the N360 will have a much broader
appeal in the marketplace. In addition, as Tri Star is located
in China and is near most of the component suppliers, inbound
logistics costs will be lower and coordination will be easier.
Through the combination of the fixed-priced manufacturing
agreement with Tri Star, new component suppliers, and improved
design, we expect the N360 will have a per unit cost that is at
least 50% less than the per unit cost of the N171 bicycle CVT.
The end markets for our NuVinci technology on which we
are currently focusing are automotive accessory drives, electric
vehicles, bicycles, small wind turbines and lawn care equipment.
We are at different stages of development of the products for
each of these end markets. While we have spent several years
developing our core technology, our past experience in launching
our bicycle product and developing other products to date
indicates that the product development process to apply our core
technology in each of our target end market applications takes
from 18 to 34 months from start to finish, depending on the
complexity of the particular application. The key steps of the
development cycle include product design, prototyping and
testing, production design validation, manufacturing tooling and
process development, including supplier development and
manufacturing launch. Manufacturing of the N360 launched in June
2010. The NuVinci CVT for the automotive accessory drive,
lawn care equipment, and small wind turbines end markets is in
the prototyping and testing stage of development. We anticipate
that we or our licensee will launch production of our products
into the automotive accessory drive and small wind turbines end
markets in 2011 and lawn care equipment market in 2012. The
application for the electric vehicles end market is in the
design stage of development and production is expected to launch
in 2013. Other than for certain applications where we will rely
on the assistance of licensees or joint venture partners, we
expect the net proceeds from this offering and our existing cash
and cash equivalents will provide us with sufficient resources
to fund the development of these product applications.
We expect to manufacture NuVinci CVTs for automotive
accessory drives, electric vehicles, bicycles and small wind
turbines primarily through a contract manufacturer and to sell
these products to distributors, OEMs, or directly to customers.
Starting in 2011, we will manufacture and sell the NuVinci
CVTs to Viryd Technologies Inc. (Viryd). We have also
licensed to Viryd the rights to manufacture and sell the
NuVinci CVTs for the small wind turbines market and we
will receive royalties from Viryd should they manufacture the
CVTs. In the near term, we anticipate this revenue will be
primarily from product sales, but over the longer term it may be
primarily from royalties. We have licensed the rights to
manufacture and sell NuVinci CVTs for lawn care equipment
to Hydro-Gear in that end market and will receive royalties from
them. We may also opportunistically license the manufacturing of
products of other end market applications to certain
manufacturers or OEMs that will commercialize products utilizing
our NuVinci technology. We will receive revenue through
the sale of engineering services, license fees, and royalties on
product sales. In all licensing and development arrangements, we
own all patentable improvements to our NuVinci CVT. In
our view, the use of contract manufacturing to manufacture our
NuVinci CVTs and licensing our technology to OEMs has
several advantages over in-house manufacturing. These advantages
include lower capital requirements, less operational complexity,
the need for fewer permanent employees and faster
commercialization of new applications.
Financial
Overview
Revenues
We primarily derive our revenues from product sales, license
fees and royalties, engineering services, and related party
revenues.
Product sales. These revenues to date consist primarily
of sales of our bicycle CVTs. We started to earn product sales
revenue when we transitioned from the licensing business model
for the bicycle CVTs to a
37
manufacturing model. As part of the transition plan, in
February 2008 we purchased finished bicycle CVTs from our
licensee manufacturer (ATC) for inventory so that we could
continue to fulfill customer orders. In March 2008, we began
outsourcing physical manufacturing to a contract manufacturer
and started selling the NuVinci CVTs directly to OEMs and
distributors. We have been working with a new manufacturer, Tri
Star Group (Tri Star), located in Shanghai, China, to design and
prepare for production of the N360. We believe the improved
design of the N360 bicycle CVT will have a much broader appeal
in the marketplace and that product sales will increase
accordingly. We launched manufacturing of the N360 in June 2010
and shipped initial products to customers in July 2010.
We expect to launch our product for the automotive accessory
drives market in 2011 and electric vehicles market in 2013 using
one or more contract manufacturers.
License fees and royalties. We receive license fees and
royalties from the licensing of our NuVinci technology to
manufacturers and OEMs. We receive license fees up front from
customers upon or shortly after the signing of our licenses and
we recognize license fee revenues when the license term
commences and there are no future performance obligations or
requirements. When the contract requires us to provide
engineering development services during the license term,
license fee revenue is deferred and recognized over the term of
the contract or the remaining estimated period of continuing
involvement. We also receive royalties from product sales by our
licensees. Lawn care equipment CVT production is expected to be
launched in 2012 by Hydro-Gear, who licensed the rights to
manufacturer and sell NuVinci CVTs for that end market.
As we develop and commercialize NuVinci technology,
additional manufacturers and OEMs may sign license agreements
for those products and we would generate additional license fees
and royalty revenue.
Engineering services. These revenues consist
primarily of fees for engineering services that we provide to
manufacturers and OEMs associated with applying the NuVinci
CVT technology to their products. We own all of the
intellectual property that results from our engineering work. In
some engineering services agreements, we may receive partial
payments from manufacturers or OEMs upfront before the project
or pre-determined milestones are completed. Such pre-payments
are recorded as revenue when we meet pre-determined milestones.
Development under engineering services agreements is intended to
lead to commercialization of NuVinci CVTs. For example,
the development performed under the engineering services
agreements with Viryd in 2008 and 2009 for the small wind
turbine end market will result in the launch of the product in
2011. We expect that the engineering services agreements for the
automotive accessory drive for superchargers will lead to
commercialization and manufacturing in 2011 as well as lawn care
equipment CVTs by 2012.
As we advance the development of the NuVinci CVT
technology, we expect other manufacturers and OEMs to sign
engineering services agreements to develop the NuVinci
CVTs for their specific products.
Related-party revenues. These revenues are earned
from providing administrative, operations and engineering
support services to Viryd subsequent to its spin-off on
December 18, 2008. We expect administrative support
services to Viryd to decline as they hire additional
administrative staff. However, we expect to continue to provide
operations and engineering support services as they prepare to
manufacture and sell their products. The engineering support
services that we have provided to Viryd have led to the
development of a product we expect Viryd to launch, under the
license from us, for the small wind turbine end market in 2010.
We expect product sales revenue to increase when we begin to
manufacture and sell our NuVinci CVT for the small wind
turbine end market in 2011.
Cost of
revenues
The cost component for each of our main sources of revenues
consists primarily of cost of product sales, license fees and
royalties, engineering services and related-party revenues.
Cost of product sales. Since March 2008, when
we started the contract manufacturing business model, cost of
product sales represent costs of purchasing the NuVinci
CVTs from contract manufacturers that we then sell to OEMs
and distributors. Prior to March 2008, we employed a licensing
model for the production of the bicycle CVTs when we earned
royalties from sales of the bicycle CVTs by our licensed
manufacturer (ATC). Through
38
the combination of the fixed-priced manufacturing agreement with
Tri Star, new component suppliers, and improved design, we
expect the N360 will have a per unit cost that is at least 50%
less than the per unit cost of the N171 bicycle CVT.
Also included in cost of product sales are depreciation of
assembly line equipment that we purchased from ATC as part of
the transition to MTD and provisions for estimated future
warranty claims expense. Because our cost of product sales has,
to date, exceeded our product selling price, our cost of product
sales also includes provisions to write down the carrying value
of inventories to their net realizable value.
In 2011, we expect our licensee, Viryd, to launch the production
of the NuVinci CVTs for the small wind turbine end
market. We will be selling NuVinci CVTs manufactured by
Tri Star to Viryd. We expect to launch the manufacturing and
sales of automotive accessory drives in 2011 and CVTs for
electric vehicles in 2013. We will be providing these
NuVinci products to our customers through one or more
contract manufacturers.
Cost of license fees and royalties. These represent
the costs of support provided to our licensees. For example,
certain of our license agreements require that we provide
engineering support to the manufacturer for a period of time as
it commences production of our NuVinci bicycle CVTs. If
we enter into additional licensing agreements that will require
us to provide engineering support to the customers, we expect
our costs will increase proportionally with the increases in
revenue.
Cost of engineering services. These represent the
costs of our development, primarily engineering labor and
related expenses, incurred as we perform our obligations under
the engineering services agreements between us and the
manufacturer or OEMs.
In 2009, we signed an engineering services agreement for an
automotive accessory drive for superchargers and another
agreement for the lawn care equipment CVT. Engineering services
revenue and cost of engineering services will be recorded when
we achieve pre-determined milestones.
As we advance the development of the NuVinci CVT
technology, we expect other manufacturers and OEMs to sign
engineering services agreements to develop the NuVinci
CVTs for their specific products. Thus the cost of
engineering services will increase along with engineering
services revenue.
Cost of related-party revenues. These represent the
costs of providing administrative, operations and engineering
support services to Viryd. We expect administrative support
services to Viryd to decline as they hire additional
administrative staff. However, we expect to continue to provide
operations and engineering support services as they prepare to
manufacture and sell their products.
Operating
expenses
Our operating expenses consist primarily of development expenses
and selling, general and administrative expenses.
Research and development expenses. These costs
include salaries and related expenses for engineering personnel,
cost of building and testing product prototypes, rent expense
for our facilities in Cedar Park, Texas and depreciation of
machinery, furniture, and equipment used by the engineering
personnel.
Development expenses will increase as we continue to develop
NuVinci technology. We expect our investment in
development expenses for existing and future potential
applications may lead to future engineering services and license
agreements and ultimately commercialization.
Selling, general and administrative expenses. These
costs consist primarily of salaries and related expenses for
personnel in the business development, administration,
intellectual property and finance departments. Other expenses
include trade show costs, advertising and marketing,
professional fees for legal and accounting, general office
expenses, facility rent for our corporate offices in
San Diego, California, utilities, various insurance
expenses, amortization of capitalized patent costs and
intangibles, depreciation of various furniture and equipment,
and other general administrative expenses.
We expect selling, general and administrative expenses to
increase as we commercialize additional NuVinci CVT
products, increase our business development and marketing
efforts worldwide and as we begin to operate
39
as a public company and continue to build our corporate
infrastructure. These increases will likely include salaries and
related expenses, legal and consultant fees, accounting fees,
rent and utilities, director fees, increased directors and
officers insurance premiums, and fees for investor
relations services.
Interest
income (expense)
Interest and dividend income. This consists of
interest and dividend income earned on our cash, cash
equivalents and short-term investments.
Interest expense. This consists primarily of
interest paid on our line of credit, note payable, capital
lease, and non-cash interest related to convertible unsecured
promissory notes and warrants.
Results
of Operations
Comparison
of the Six Months Ended June 30, 2009 and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2010
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
327
|
|
|
$
|
36
|
|
|
$
|
(291
|
)
|
|
|
(89
|
)%
|
License fees and royalties
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Engineering services
|
|
|
53
|
|
|
|
227
|
|
|
|
174
|
|
|
|
328
|
%
|
Related party revenues
|
|
|
286
|
|
|
|
191
|
|
|
|
(95
|
)
|
|
|
(33
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
672
|
|
|
|
460
|
|
|
|
(212
|
)
|
|
|
(32
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
1,697
|
|
|
|
330
|
|
|
|
(1,367
|
)
|
|
|
(81
|
)%
|
Cost of engineering services
|
|
|
37
|
|
|
|
97
|
|
|
|
60
|
|
|
|
162
|
%
|
Cost of related party revenues
|
|
|
395
|
|
|
|
94
|
|
|
|
(301
|
)
|
|
|
(76
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
2,129
|
|
|
|
521
|
|
|
|
(1,608
|
)
|
|
|
(76
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(1,457
|
)
|
|
|
(61
|
)
|
|
|
1,396
|
|
|
|
(96
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,656
|
|
|
|
3,046
|
|
|
|
390
|
|
|
|
15
|
%
|
Selling, general and administrative
|
|
|
2,332
|
|
|
|
3,568
|
|
|
|
1,236
|
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,988
|
|
|
|
6,614
|
|
|
|
1,626
|
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6,445
|
)
|
|
|
(6,675
|
)
|
|
|
(230
|
)
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
64
|
|
|
|
4
|
|
|
|
(60
|
)
|
|
|
(94
|
)%
|
Interest expense
|
|
|
(49
|
)
|
|
|
(44
|
)
|
|
|
5
|
|
|
|
(10
|
)%
|
Transaction loss on foreign currency exchange
|
|
|
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
15
|
|
|
|
(51
|
)
|
|
|
(66
|
)
|
|
|
(440
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,430
|
)
|
|
$
|
(6,726
|
)
|
|
$
|
(296
|
)
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2010
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Product sales
|
|
$
|
327
|
|
|
$
|
36
|
|
|
$
|
(291
|
)
|
|
|
(89
|
)%
|
License fees and royalties
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Engineering services
|
|
|
53
|
|
|
|
227
|
|
|
|
174
|
|
|
|
328
|
%
|
Related party revenues
|
|
|
286
|
|
|
|
191
|
|
|
|
(95
|
)
|
|
|
(33
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
672
|
|
|
$
|
460
|
|
|
$
|
(212
|
)
|
|
|
(32
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the six months ended June 30, 2010
decreased by $212,000, or 32%, compared to the six months ended
June 30, 2009.
Product sales decreased by $291,000, or 89%, for the six months
ended June 30, 2010 compared to the six months ended
June 30, 2009. This decrease was primarily attributable to
the decrease in the sales volume of the bicycle CVT, while the
unit sales price remained relatively stable. The decrease in CVT
sales volume was the direct result of the phasing out of the
N171 bicycle CVT model, in anticipation of the next generation
N360 bicycle CVT, which commercially launched in July 2010. We
expect that sales of the N171 model will continue to decline,
while sales of the N360 commences. As the N360 is different than
the N171 because the N360 is smaller, lighter and more
efficient, we believe that the N360 will attract more and
different customers in the bicycle market as they are now able
to integrate the N360 in their various bicycle models. As such,
we do not expect to have high levels of customer concentration
with N360 sales compared to N171 sales in 2009.
Engineering services revenue increased by $174,000, or 328%,
during the six months ended June 30, 2010 compared to the
six months ended June 30, 2009. This increase was the
result of the recognition of $227,000 for engineering services
revenue derived from the successful completion of two milestones
on the development of a supercharger for the automotive market
using our continuously variable accessory drive (CVAD) for one
customer, as compared to $53,000 recognized in the first quarter
of 2009 related to engineering services for the collaborative
exploration of using an accessory drive for motorcycle
applications for a different customer in a different market.
Related party revenues are primarily comprised of support
services and engineering services for Viryd (a subsidiary that
was spun-off in December 2008), which decreased by $95,000, or
33%, for the six months ended June 30, 2010 compared to the
six months ended June 30, 2009. Related party revenues from
accounting and administrative support services decreased by
$151,000 during the six months ended June 30, 2010 compared
to the six months ended June 30, 2009 due to additional
support services provided in 2009 following the December 2008
spin-off of Viryd, which required support for its transition
into a newly operating, stand-alone entity. As demonstrated in
the first and second quarters of 2010, we expect support
services to decline going forward as Viryd has hired a chief
financial officer, accounting manager, and administrative
assistant to handle accounting and administration on their own,
thereby no longer requiring support services from us. The
decrease of accounting and administrative support services was
offset by the increase in related party revenues for engineering
services. Related party revenues for engineering services
increased by $54,000 during the six months ended June 30,
2010 compared to the six months ended June 30, 2009, as we
performed engineering and component design services on the CVT
units for use in a full Viryd prototype wind turbine, while
engineering services during the six months ended June 30,
2009 were minimal.
41
Cost of
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2010
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Cost of product sales
|
|
$
|
1,697
|
|
|
$
|
330
|
|
|
$
|
1,367
|
)
|
|
|
(81
|
)%
|
Cost of engineering services
|
|
|
37
|
|
|
|
97
|
|
|
|
60
|
|
|
|
162
|
%
|
Cost of related party revenues
|
|
|
395
|
|
|
|
94
|
|
|
|
(301
|
)
|
|
|
(76
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
2,129
|
|
|
$
|
521
|
|
|
$
|
1,608
|
)
|
|
|
(76
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues for the six months ended June 30,
2010 decreased by $1,608,000, or 76%, compared to the six months
ended June 30, 2009.
Cost of product sales decreased $1,367,000, or 81%, for the six
months ended June 30, 2010 compared to the six months ended
June 30, 2009. This decrease was primarily attributable to
$673,000 in
lower-of-cost-or-market
inventory write-downs that were recognized during the six months
ended June 30, 2009 because the CVT unit cost exceeded the
sales price. This decrease was offset by a $260,000 inventory
write-down on developer kits during the six months ended
June 30, 2010, which resulted from a Professional Services
Agreement entered into in May 2010 that will begin the
development of an auto-shifting system equipped with the N360
CVT, which will essentially replace our existing developer kits.
The decrease in cost of product sales was also due to a $446,000
decrease in depreciation and amortization of manufacturing line
assets during the six months ended June 30, 2010, compared
to the six months ended June 30, 2009, due to the disposal
of manufacturing equipment in the fourth quarter of 2009 and the
write-off of intangible assets associated with the trade secrets
and manufacturing processes used by MTD in third quarter of
2009. The remaining decrease in cost of product sales was due to
the decrease in the total number of N171 CVT units sold during
the six months ended June 30, 2010 compared to the six
months ended June 30, 2009 as a result of the anticipated
release of the next generation N360 bicycle CVT.
Cost of engineering services increased by $60,000, or 162%,
during the six months ended June 30, 2010 compared to the
six months ended June 30, 2009. This increase was due to
$97,000 in cost of engineering services provided during the six
months ended June 30, 2010 for the development of a
supercharger for the automotive market using our CVAD under an
engineering services agreement that commenced in June 2009. This
increase was offset by $37,000 of costs incurred in the first
quarter of 2009 for an engineering services agreement entered
into in October 2008 for a collaborative exploration of using an
accessory drive for motorcycle applications that did not recur
in the six months ended June 30, 2010.
Cost of related party revenues decreased by $301,000, or 76%,
for the six months ended June 30, 2010 compared to the six
months ended June 30, 2009 due primarily to the $228,000
decrease in cost of engineering services provided to Viryd. Cost
of related party revenues for engineering services in the six
months ended June 30, 2009 were higher than the six months
ended June 30, 2010 because we incurred higher engineering
costs associated with the design and development of a NuVinci
CVT for the small wind turbine end market under the
engineering services agreement that we signed with Viryd in
April 2008. In addition, the cost of related party revenues for
accounting and administrative support services decreased by
$75,000 in the six months ended June 30, 2010 as compared
to the six months ended June 30, 2009 due to the decrease
in support services provided to Viryd. We expect cost of related
party revenues for support services to decline going forward, as
Viryd has begun handling accounting and administration on their
own.
42
Operating
expenses
Research
and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percentage
|
|
|
2009
|
|
2010
|
|
(Decrease)
|
|
Change
|
|
|
($ in thousands)
|
|
|
|
Research and development
|
|
$
|
2,656
|
|
|
$
|
3,046
|
|
|
$
|
390
|
|
|
|
15
|
%
|
Research and development expense increased by $390,000, or 15%,
for the six months ended June 30, 2010 compared to the six
months ended June 30, 2009.
Research and development expense increased due to a $241,000
increase in prototype costs, shop supplies and the associated
freight in the six months ended June 30, 2010 as part of
our development of the N360 in preparation for production launch
in July 2010 and our internal continuous development of the
NuVinci technology for the automotive accessory drives
end-market. There was also a $144,000 increase in travel expense
in the six months ended June 30, 2010 compared to the six
months ended June 30, 2009 primarily relating to engineers
traveling to China as they work with Tri Star on the N360
production launch.
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percentage
|
|
|
2009
|
|
2010
|
|
(Decrease)
|
|
Change
|
|
|
($ in thousands)
|
|
|
|
Selling, general and administrative
|
|
$
|
2,332
|
|
|
$
|
3,568
|
|
|
$
|
1,236
|
|
|
|
53
|
%
|
Selling, general and administrative expense for the six months
ended June 30, 2010 increased by $1,236,000, or 53%,
compared to the six months ended June 30, 2009.
The increase in selling, general and administrative expense was
primarily due to a $511,000 increase in salaries and payroll
related expenses in the six months ended June 30, 2010
compared to the six months ended June 30, 2009 due to the
addition of seven new positions, including chief operating
officer and vice president of operations. There was also a
$42,000 increase in share-based compensation expense in the six
months ended June 30, 2010 compared to the six months ended
June 30, 2009 resulting from stock options that were
granted during 2009. There were no stock options granted during
the six months ended June 30, 2010. Additionally, there was
a $171,000 increase during the six months ended June 30,
2010 compared to the six months ended June 30, 2009 for
accounting expenses related to the audit work performed for the
restatement of our 2004 through 2008 financial statements, as
well as completion of the audit of our 2009 financial statements.
The increase in selling, general and administrative expense was
also the result of a $386,000 increase in business and marketing
consulting expense and business development expense during the
six months ended June 30, 2010 compared to the six months
ended June 30, 2009. This increase was primarily
attributable to an increase in travel, meals, and tradeshow
expenses resulting from an increase in trade show activity to
promote the new N360 product, which began commercial sales in
July 2010. We have attended twice as many tradeshows during the
six months ended June 30, 2010 compared to the six months
ended June 30, 2009, which also caused a $42,000 increase
in freight expense.
As we commercialize additional NuVinci CVT products,
increase our business development and marketing efforts
worldwide, and continue to build out the corporate
infrastructure needed to support a public company, we expect
selling, general and administrative expenses to continue to
increase in the near term.
43
Interest
income (expense)
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percentage
|
|
|
2009
|
|
2010
|
|
(Decrease)
|
|
Change
|
|
|
($ in thousands)
|
|
|
|
Interest and dividend income
|
|
$
|
64
|
|
|
$
|
4
|
|
|
$
|
(60
|
)
|
|
|
(94
|
)%
|
Interest and dividend income decreased by $60,000, or 94%, for
the six months ended June 30, 2010 compared to the six
months ended June 30, 2009. This decrease was attributable
to the fact that we did not invest in any debt or equity
securities during the six months ended June 30, 2010,
whereas we held $9,825,000 in investments as of March 31,
2009.
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percentage
|
|
|
2009
|
|
2010
|
|
(Decrease)
|
|
Change
|
|
|
($ in thousands)
|
|
|
|
Interest expense
|
|
$
|
49
|
|
|
$
|
44
|
|
|
$
|
(5
|
)
|
|
|
(10
|
)%
|
Interest expense remained relatively consistent with a $5,000,
or 10%, decrease during the six months ended June 30, 2010
compared to the six months ended June 30, 2009. There were
no borrowings or repayments on the $2,000,000 outstanding on our
revolving line of credit during the six months ended
June 30, 2010 or the six months ended June 30, 2009.
The average interest rate during the six months ended
June 30, 2010 was relatively consistent with the average
interest rate during the six months ended June 30, 2009.
44
Comparison
of the Years Ended December 31, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2009
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
320
|
|
|
$
|
467
|
|
|
$
|
147
|
|
|
|
46
|
%
|
License fees and royalties
|
|
|
914
|
|
|
|
12
|
|
|
|
(902
|
)
|
|
|
(99
|
)%
|
Engineering services
|
|
|
998
|
|
|
|
53
|
|
|
|
(945
|
)
|
|
|
(95
|
)%
|
Related party revenues
|
|
|
19
|
|
|
|
512
|
|
|
|
493
|
|
|
|
2,595
|
%
|
Other
|
|
|
32
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,283
|
|
|
|
1,044
|
|
|
|
(1,239
|
)
|
|
|
(54
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
1,158
|
|
|
|
6,639
|
|
|
|
5,481
|
|
|
|
473
|
%
|
Cost of license fees and royalties
|
|
|
368
|
|
|
|
|
|
|
|
(368
|
)
|
|
|
(100
|
)%
|
Cost of engineering services
|
|
|
488
|
|
|
|
37
|
|
|
|
(451
|
)
|
|
|
(92
|
)%
|
Cost of related party revenues
|
|
|
11
|
|
|
|
584
|
|
|
|
573
|
|
|
|
5,209
|
%
|
Cost of other revenues
|
|
|
23
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
2,048
|
|
|
|
7,260
|
|
|
|
5,212
|
|
|
|
254
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
235
|
|
|
|
(6,216
|
)
|
|
|
(6,451
|
)
|
|
|
(2,745
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,939
|
|
|
|
5,426
|
|
|
|
(513
|
)
|
|
|
(9
|
)%
|
Selling, general and administrative
|
|
|
4,382
|
|
|
|
5,097
|
|
|
|
715
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10,321
|
|
|
|
10,523
|
|
|
|
202
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,086
|
)
|
|
|
(16,739
|
)
|
|
|
(6,653
|
)
|
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
127
|
|
|
|
87
|
|
|
|
(40
|
)
|
|
|
(31
|
)%
|
Interest expense
|
|
|
(597
|
)
|
|
|
(574
|
)
|
|
|
23
|
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(470
|
)
|
|
|
(487
|
)
|
|
|
(17
|
)
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,556
|
)
|
|
$
|
(17,226
|
)
|
|
$
|
(6,670
|
)
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2009
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Product sales
|
|
$
|
320
|
|
|
$
|
467
|
|
|
$
|
147
|
|
|
|
46
|
%
|
License fees and royalties
|
|
|
914
|
|
|
|
12
|
|
|
|
(902
|
)
|
|
|
(99
|
)%
|
Engineering services
|
|
|
998
|
|
|
|
53
|
|
|
|
(945
|
)
|
|
|
(95
|
)%
|
Related party revenues
|
|
|
19
|
|
|
|
512
|
|
|
|
493
|
|
|
|
2,595
|
%
|
Other
|
|
|
32
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,283
|
|
|
$
|
1,044
|
|
|
$
|
(1,239
|
)
|
|
|
(54
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the year ended December 31, 2009
decreased by $1,239,000, or 54%, compared to the year ended
December 31, 2008.
45
Product sales for 2009 increased by $147,000, or 46%, compared
to 2008. In March 2008, we transitioned from a licensing
business model for the bicycle CVT to a manufacturing model that
outsources physical manufacturing to a contract manufacturer. At
that time, we started selling the NuVinci bicycle
CVTs directly to OEMs and distributors. The increase in
product sales in 2009 was the result of a full year of selling
the bicycle CVTs via contract manufacturing.
License fees and royalties decreased by $902,000, or 99%, in
2009 compared to 2008. The $914,000 in license fees and
royalties revenue that were earned from our licensed
manufacturer and OEM customers in 2008 were not replicated in
2009. In February 2008, we terminated our manufacturing license
agreement with ATC, who had paid us $50,000 in May 2005 and
$950,000 in August 2006, for a total of $1,000,000 in
nonrefundable license fees. We were previously recognizing that
license fee revenue over a period of five years. When the
manufacturing license agreement terminated, $733,000 of
unrecognized license fees were immediately recognized. The
remaining $181,000 of license fees and royalties that were
recognized in 2008 were from Valvoline, our trademark licensee,
and royalties from ATC, which did not recur in 2009. In March
2008, we engaged a contract manufacturer for the bicycle CVT. As
a result of replacing our licensed manufacturer with a contract
manufacturer in 2008, there were no manufacturing license fees
from bicycle CVT products in 2009.
Engineering services revenue decreased by $945,000, or 95%, in
2009 compared to 2008. The majority of the $998,000 engineering
services revenue earned in 2008, were from agreements signed in
2007 with various manufacturers and OEMs. When we established
the contract manufacturing arrangement for the NuVinci
CVTs in March 2008, we primarily focused on manufacturing
and selling the bicycle CVTs. Because of limited resources, we
did not focus on selling additional engineering services to
develop NuVinci CVTs for new applications other than
those that were committed to customers in 2007. Nearly all of
our engineering services agreements signed in 2007 were
completed by the end of 2008. In 2009, we signed an engineering
services agreement for an automotive accessory drive for
superchargers and another agreement for the lawn care equipment
CVT. Although we may receive partial payments upfront from these
engineering services agreements, we will not recognize
engineering services revenue until we meet the pre-determined
milestones.
Related-party revenues were recognized for the first time in
December 2008 and continued through 2009, because of contractual
agreements for us to provide support services and engineering
services to Viryd subsequent to the December 18, 2008
spin-off of Viryd.
Cost of
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2009
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Cost of product sales
|
|
$
|
1,158
|
|
|
$
|
6,639
|
|
|
$
|
5,481
|
|
|
|
473
|
%
|
Cost of license fees and royalties
|
|
|
368
|
|
|
|
|
|
|
|
(368
|
)
|
|
|
(100
|
)%
|
Cost of engineering services
|
|
|
488
|
|
|
|
37
|
|
|
|
(451
|
)
|
|
|
(92
|
)%
|
Cost of related party revenues
|
|
|
11
|
|
|
|
584
|
|
|
|
573
|
|
|
|
5,209
|
%
|
Cost of other revenues
|
|
|
23
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
2,048
|
|
|
$
|
7,260
|
|
|
$
|
5,212
|
|
|
|
254
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues for the year ended December 31, 2009
increased by $5,212,000, or 254%, compared to the year ended
December 31, 2008.
This increase was primarily due to the $5,481,000 increase in
cost of product sales of the bicycle CVTs. In March 2008, we
transitioned from a licensing business model for the bicycle CVT
to a manufacturing model that outsources physical manufacturing
to a contract manufacturer. We purchased manufacturing line
equipment for $3,952,000 and intangible assets for $700,000 from
ATC that included trade secrets and manufacturing processes used
to manufacture the N171. We delivered the manufacturing line
equipment to
46
MTD for the manufacture of bicycle CVTs. Prior to the
termination of the Manufacturing Supply Agreement in October
2009, our projected cost of the CVT over the term of the
agreement was expected to decrease to an amount that would yield
a positive margin and the total undiscounted cash flows at
inception and as assessed over the term of the manufacturing
supply agreement would be sufficient to recover the cost of the
tangible and intangible assets associated with the manufacturing
line. Per the terms of the agreement with MTD, there would be
four cost reduction phases. Each phase lasted 120 days,
with the first phase commencing on the day production began,
which was in September 2008. MTD had presented to the Company
its cost reduction production plan and based on the plan, we
expected that the N171 would be sold at a negative gross margin
for approximately the first eight months of production, as MTD
stabilized the supply base and manufacturing processes, and
would not achieve positive gross margin until the third phase,
which would have been by August 2009. Since the period
production commenced in September 2008, we monitored MTDs
progress against the production plan. By the third quarter of
2009, MTD was still utilizing costly parts, and the long supply
chain lead time was contributing to the costly manufacturing
process. Accordingly, MTD was not able to achieve the cost
reductions specified in the production schedule in the time
frame anticipated. In the third quarter of 2009, we had
discussions with MTD regarding the continued high cost and
unstable production levels and whether MTD would be interested
in producing the next generation product. Unresolved
negotiations about product cost, unstable production levels, and
considerations relating to the production of the next generation
product led management to believe that the carrying amounts of
certain tangible and intangible assets associated with the
production line used by MTD may not be recoverable. We then
assessed our manufacturing line equipment and intangibles
associated with trade secrets and manufacturing processes used
by MTD for potential impairment and recorded an impairment loss
of $1,537,000 in the third quarter of 2009 based upon the
estimated fair value of the manufacturing equipment and $490,000
in the third quarter of 2009 for the intangible assets used by
MTD as they would no longer provide future benefit. This was
because of the decision to cease production of the N171 with
which it was associated before the end of the intangible
assets previously estimated useful life. Further, these
unresolved negotiations about product cost and unstable
production levels between the Company and MTD caused us to
terminate the manufacturing supply agreement with MTD. In
connection with the early termination of the manufacturing
supply agreement with MTD, we agreed to transfer the
manufacturing line equipment to MTD and as a result, recorded a
loss on disposal of manufacturing line equipment of $1,455,000
in the fourth quarter of 2009.
The increase in cost of product sales was also due to a $952,000
lower of cost or market charge on inventory incurred during
2009. This charge was the result of the unit cost of the N171
model of the bicycle CVT being higher than the sales price and,
as a result, we recorded a lower of cost or market charge
relating to the inventory on hand. Through the combination of
the fixed-priced manufacturing agreement with Tri Star, new
component suppliers, and improved design, we expect the next
generation bicycle CVT, the N360, will have a per unit cost that
is at least 50% less than the per unit cost of the N171 bicycle
CVT. In connection with the manufacturing launch of the N360 in
June 2010, we recorded an obsolescence charge of $357,000 during
2009, for the excess inventory of the previous N171 bicycle CVTs
on hand. Cost of product sales also increased because of an
increase in depreciation of manufacturing equipment by $199,000,
or 38%, compared to 2008. The remaining increase in cost of
product sales in 2009 was due to a full year of selling the
bicycle CVTs via contract manufacturing.
Costs of license fees and royalties in 2009 decreased by
$368,000, or 100%, compared to 2008. This was the result of the
termination of the manufacturing license agreement with our
former bicycle CVT manufacturer, ATC, in February 2008. Under
the manufacturing license agreement, we provided engineering
support to the manufacturer as it commenced production of our
bicycle CVTs.
Cost of engineering services for 2009 decreased by $451,000, or
92%, compared to 2008. The decrease was due to the decline in
engineering services provided during 2009, as engineering
services agreements signed in 2007 with various manufacturers
and OEMs were completed by the end of 2008. In 2009, we signed
an engineering services agreement for an automotive accessory
drive for superchargers and another agreement for the lawn care
equipment CVT. We are currently providing engineering services
under those agreements. We expect to recognize cost of
engineering services relating to those agreements in 2010 and
2011 when the predetermined engineering milestones are met and
revenues are recognized.
47
Cost of related-party revenues increased by $573,000, or 5,209%,
as they were recognized for the first time starting in December
2008, for contractual agreements to provide support services and
engineering services to Viryd subsequent to the
December 18, 2008 spin-off of Viryd. The engineering
services that we provided to Viryd during 2009 were to design
and develop a NuVinci CVT for the small wind turbine end
market. The NuVinci CVT that we are designing and
developing for Viryd can also be used by other potential
customers in industries outside of the wind turbine end market.
We can either license or arrange contract manufacturing for the
same-size NuVinci CVT for other end markets. We incurred
higher development costs for the NuVinci CVT for Viryd
than expected resulting in a negative gross margin for the
engineering services that we provided to Viryd.
Operating
expenses
Research
and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
Increase
|
|
Percentage
|
|
|
2008
|
|
2009
|
|
(Decrease)
|
|
Change
|
|
|
($ in thousands)
|
|
|
|
Research and development
|
|
$
|
5,939
|
|
|
$
|
5,426
|
|
|
$
|
(513
|
)
|
|
|
(9
|
)%
|
Research and development expense for the year ended
December 31, 2009 decreased by $513,000, or 9%, compared to
the year ended December 31, 2008.
Prior to the spin-off of Viryd in December 2008, we consolidated
Viryds research and development expenses. Included in the
$5,939,000 of research and development expense incurred during
2008 was $874,000 of research and development expense incurred
by Viryd to develop the NuVinci CVTs for the small wind
turbine end market. Excluding Viryds research and
development costs from 2008, our development expense for 2009
increased by $360,000, or 7%. The increase was primarily due to
a $191,000 increase in prototype costs incurred as part of our
internal continuous development of the next generation of the
NuVinci bicycle CVT, as well as supporting the bicycle
CVT that is currently being sold in the market. Salaries and
payroll-related expenses increased by $91,000, as a result of
our engineering team devoting some development efforts to
improve and explore opportunities for the core NuVinci
technology in the automotive accessory drives end market,
which was recognized as research and development expense. In
2008, these labor costs were associated with license fees and
engineering services revenue, which were recognized as costs of
revenue. Engineering consulting expense for 2009 increased by
$112,000, compared to 2008.
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
Increase
|
|
Percentage
|
|
|
2008
|
|
2009
|
|
(Decrease)
|
|
Change
|
|
|
($ in thousands)
|
|
|
|
Selling, general and administrative
|
|
$
|
4,382
|
|
|
$
|
5,097
|
|
|
$
|
715
|
|
|
|
16
|
%
|
Selling, general and administrative expense for the year ended
December 31, 2009 increased by $715,000, or 16%, compared
to the year ended December 31, 2008.
Salaries and payroll-related expenses increased by $175,000 due
to the addition of three employees in 2009, including the Chief
Operating Officer. Share-based compensation expense increased by
$196,000, from $160,000 in 2008 to $356,000 in 2009. During
2009, we incurred an additional $258,000 in accounting expenses
associated with the restatement of our prior year financial
statements. In addition, business and marketing consulting
expense increased by $318,000 and travel expenses increased by
$67,000 in 2009. These increases were offset by a $329,000
decrease in 2009 because of the spin-off of Viryd in December
2008.
48
Interest
income (expense)
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
Increase
|
|
Percentage
|
|
|
2008
|
|
2009
|
|
(Decrease)
|
|
Change
|
|
|
($ in thousands)
|
|
|
|
Interest and dividend income
|
|
$
|
127
|
|
|
$
|
87
|
|
|
$
|
(40
|
)
|
|
|
(31
|
)%
|
Interest and dividend income for the year ended
December 31, 2009, decreased by $40,000, or 31%, compared
to the year ended December 31, 2008.
The decrease of $40,000 was attributable to lower interest rates
in 2009 as compared to 2008 on certificates of deposit, money
market funds, auction rate securities, and checking accounts, as
well as the shorter term investments in which we invested. This
decrease was offset by an increase in average cash, cash
equivalents and short-term investments of $5,584,000 in 2008 to
$12,652,000 in 2009 because of $20,594,000 in cash proceeds from
the Series D Preferred Stock financing that closed in
December 2008 and $4,000,000 in cash proceeds from the
Series D Preferred Stock financing that closed in December
2009.
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
Increase
|
|
Percentage
|
|
|
2008
|
|
2009
|
|
(Decrease)
|
|
Change
|
|
|
($ in thousands)
|
|
|
|
Interest expense
|
|
$
|
597
|
|
|
$
|
574
|
|
|
$
|
(23
|
)
|
|
|
(4
|
)%
|
Interest expense for the year ended December 31, 2009
decreased by $23,000, or 4%, compared to the year ended
December 31, 2008.
Various financing activities generated the interest expense in
2008. During 2008, we recorded $180,000 of non-cash interest
expense and $49,000 for a beneficial conversion charge in
connection with the $4,618,000 convertible unsecured promissory
note dated August 8, 2008, which was converted into
Series D Preferred Stock in December 2008. We also recorded
non-cash interest expense of $212,000 during 2008 for the value
of the detachable warrants that were associated with the
$4,618,000 convertible unsecured promissory note. Also included
in interest expense for 2008 was $98,000 of interest expense
related to an April 2008 promissory note for $1,952,000. The
remaining interest expense recorded in 2008 was related to the
$2,000,000 that was drawn down from the line of credit on
April 2, 2008. Proceeds from the April 2008 promissory note
and draw down on the line of credit were used to purchase the
manufacturing assets from our former bicycle CVT manufacturer,
ATC. We paid off the promissory note and accrued interest in
December 2008.
Interest expense incurred during 2009 was primarily related to
$476,000 in non-cash interest expense associated with a warrant
issued in connection with a guarantee on our line of credit and
interest expense from the $2,000,000 balance that remained
outstanding throughout the year on our line of credit.
49
Comparison
of the Years Ended December 31, 2007 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
|
|
|
$
|
320
|
|
|
$
|
320
|
|
|
|
N/A
|
|
License fees and royalties
|
|
|
295
|
|
|
|
914
|
|
|
|
619
|
|
|
|
210
|
%
|
Engineering services
|
|
|
327
|
|
|
|
998
|
|
|
|
671
|
|
|
|
205
|
%
|
Related party revenues
|
|
|
|
|
|
|
19
|
|
|
|
19
|
|
|
|
N/A
|
|
Other
|
|
|
92
|
|
|
|
32
|
|
|
|
(60
|
)
|
|
|
(65
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
714
|
|
|
|
2,283
|
|
|
|
1,569
|
|
|
|
220
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
|
|
|
|
1,158
|
|
|
|
1,158
|
|
|
|
N/A
|
|
Cost of license fees and royalties
|
|
|
1,005
|
|
|
|
368
|
|
|
|
(637
|
)
|
|
|
(63
|
)%
|
Cost of engineering services
|
|
|
822
|
|
|
|
488
|
|
|
|
(334
|
)
|
|
|
(41
|
)%
|
Cost of related party revenues
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
N/A
|
|
Cost of other revenues
|
|
|
65
|
|
|
|
23
|
|
|
|
(42
|
)
|
|
|
(65
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
1,892
|
|
|
|
2,048
|
|
|
|
156
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(1,178
|
)
|
|
|
235
|
|
|
|
1,413
|
|
|
|
120
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,985
|
|
|
|
5,939
|
|
|
|
2,954
|
|
|
|
99
|
%
|
Selling, general and administrative
|
|
|
2,842
|
|
|
|
4,382
|
|
|
|
1,540
|
|
|
|
54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,827
|
|
|
|
10,321
|
|
|
|
4,494
|
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(7,005
|
)
|
|
|
(10,086
|
)
|
|
|
(3,081
|
)
|
|
|
(44
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
447
|
|
|
|
127
|
|
|
|
(320
|
)
|
|
|
(72
|
)%
|
Interest expense
|
|
|
|
|
|
|
(597
|
)
|
|
|
(597
|
)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
447
|
|
|
|
(470
|
)
|
|
|
(917
|
)
|
|
|
(205
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,558
|
)
|
|
$
|
(10,556
|
)
|
|
$
|
(3,998
|
)
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Product sales
|
|
$
|
|
|
|
$
|
320
|
|
|
$
|
320
|
|
|
|
N/A
|
|
License fees and royalties
|
|
|
295
|
|
|
|
914
|
|
|
|
619
|
|
|
|
210
|
%
|
Engineering services
|
|
|
327
|
|
|
|
998
|
|
|
|
671
|
|
|
|
205
|
%
|
Related party revenues
|
|
|
|
|
|
|
19
|
|
|
|
19
|
|
|
|
N/A
|
|
Other
|
|
|
92
|
|
|
|
32
|
|
|
|
(60
|
)
|
|
|
(65
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
714
|
|
|
$
|
2,283
|
|
|
$
|
1,569
|
|
|
|
220
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the year ended December 31, 2008
increased by $1,569,000, or 220%, compared to the year ended
December 31, 2007.
This increase of $1,569,000 was primarily a result of a $619,000
increase in license fees and royalties and a $671,000 increase
in engineering services. The majority of the $998,000
engineering services revenue earned in 2008 was from agreements
signed in 2007 with various manufacturers and OEMs. We recognize
engineering services revenue when we have completed our services
and met certain pre-determined development milestones under the
engineering services agreements. In 2007, we recognized revenue
for one engineering service project, compared to 2008, when we
recognized engineering services revenue from four different
projects.
In 2008, we recorded $733,000 of license fee revenue when our
manufacturing license agreement with ATC terminated in February
2008. Per our manufacturing license agreement, ATC paid us
$50,000 in May 2005 and $950,000 in August 2006, for a total
$1,000,000 nonrefundable license fee. We were recognizing that
license fee over a period of five years. When the manufacturing
license agreement terminated, $733,000 of unrecognized license
fee was recognized immediately. In 2008, we also recorded
$107,000 fee from Valvoline for a trademark license. The
remaining license fees of $12,000 that were recognized in 2008
were from OEMs, and royalties of $59,000 and $3,000 recognized
in 2008 were from the sale of NuVinci bicycle CVTs by ATC
and for fluid sales by Valvoline, respectively.
We started to earn product sales revenue when we began the
contract manufacturing arrangement for the NuVinci
bicycle CVT after March 2008. Production of the NuVinci
bicycle CVT was launched in January 2007, by ATC under a
manufacturing license agreement. We received royalties from ATC
for all bicycle CVTs it sold from January 2007 through February
2008. In March 2008, we began outsourcing physical manufacturing
to a contract manufacturer, started selling the NuVinci
bicycle CVTs directly to OEMs and distributors, and recorded
product sales revenue for the first time. Total product sales
recorded in 2008 was $320,000.
Other revenue decreased by $60,000, or 65%, in 2008, compared to
2007, because of the termination of the license agreement with
ATC in February 2008. The majority of the other revenue in 2007
was from miscellaneous parts and services sold to ATC.
We earned $19,000 of related-party revenues from the support
services and engineering services provided to Viryd subsequent
to the December 18, 2008 spin-off of Viryd.
51
Cost of
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Cost of product sales
|
|
$
|
|
|
|
$
|
1,158
|
|
|
$
|
1,158
|
|
|
|
N/A
|
|
Cost of license fees and royalties
|
|
|
1,005
|
|
|
|
368
|
|
|
|
(637
|
)
|
|
|
(63
|
)%
|
Cost of engineering services
|
|
|
822
|
|
|
|
488
|
|
|
|
(334
|
)
|
|
|
(41
|
)%
|
Cost of related party revenues
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
N/A
|
|
Cost of other revenues
|
|
|
65
|
|
|
|
23
|
|
|
|
(42
|
)
|
|
|
(65
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
1,892
|
|
|
$
|
2,048
|
|
|
$
|
156
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues for the year ended December 31, 2008
increased by $156,000, or 8%, compared to the year ended
December 31, 2007.
The increase of $156,000 was primarily due to the $1,158,000
increase in cost of product sales. The increase was offset by
the decrease of $637,000 and $334,000 in cost of license fees
and royalties and cost of engineering services, respectively.
Production of the NuVinci bicycle CVT was launched in
January 2007, by ATC under a manufacturing license agreement. We
received royalties from ATC for all bicycle CVTs it sold from
January 2007 through February 2008, and did not incur any cost
of product sales. In March 2008, we transitioned from a
licensing business model for the bicycle CVT to a manufacturing
model that outsources physical manufacturing to a contract
manufacturer. At that time, we started selling the NuVinci
bicycle CVTs directly to OEMs and distributors and recorded
related cost of product sales. In addition to the cost of the
N171 bicycle CVTs we purchased from our contract manufacturer
(MTD), included in cost of product sales were $518,000 of
depreciation expense of the manufacturing equipment we purchased
from ATC and $16,000 of warranty reserve expense. Through the
combination of the fixed-priced manufacturing agreement with Tri
Star, new component suppliers, and improved design, we expect
the N360 will have a per unit cost that is at least 50% less
than the per unit cost of the N171 bicycle CVT.
Cost of license fees was from the engineering support we were
required to provide to ATC. According to the terms of the
manufacturing license agreement, we were to provide engineering
support to ATC for a period of time while it commercialized the
NuVinci bicycle CVTs. In order for us to successfully
launch the first commercial product, the N360, for which we
launched manufacturing in June 2010, we provided as much
engineering support as reasonably necessary for that
manufacturer to develop and sell the bicycle CVTs. Because of a
long lead and unstable component supply base, we provided more
engineering support than expected and incurred a negative gross
margin from the license fees. We terminated the manufacturing
license agreement with ATC in February 2008. In 2008, we
recognized $368,000 of cost of license fees associated with the
manufacturing license agreement.
The majority of the engineering services revenues earned and
expenses incurred in 2007 was from services provided to ATC in
support of ATCs intent to develop the NuVinci
technology for a high-powered application, such as
automobile primary transmissions. We were willing to provide
engineering services for this project at a negative gross margin
because it was an opportunity to demonstrate the NuVinci
technology in an application beyond bicycle. In 2007, this
engineering services project required many more engineering
hours than the other engineering projects in 2008.
Commercializing the automobile primary transmission would
require extensive capital, development and testing over a period
of several years. When we terminated the relationship with ATC
in February 2008, we considered the costs, barriers to entry and
opportunity for this application. Following these deliberations,
we chose not to proceed with the project further, choosing
instead to focus our resources on the development and
commercialization of other near-term revenue opportunities that
require significantly less capital, such as products for the
automotive accessory drive end market. Notwithstanding this
decision, as a result of our development work under the
engineering services agreement with ATC, we were able to apply
for various patents relating to automobile primary transmissions
and we build a fully demonstrable working prototype with
performance test results should we choose to pursue the project
at a later
52
date. We may license the technology for this application to a
manufacturer or OEM in the automotive industry and sign
additional engineering services agreements to further develop
and test the automobile primary transmission.
The majority of the other revenue in 2007 was from miscellaneous
parts and services sold to ATC. Cost of other revenue decreased
in 2008 because of the termination of the relationship with ATC
in February 2008.
Operating
expenses
Research
and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
Increase
|
|
Percentage
|
|
|
2007
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
|
($ in thousands)
|
|
|
|
Research and development
|
|
$
|
2,985
|
|
|
$
|
5,939
|
|
|
$
|
2,954
|
|
|
|
99
|
%
|
Research and development expense for the year ended
December 31, 2008 increased by $2,954,000, or 99%, compared
to the year ended December 31, 2007.
The increase of $2,954,000 was primarily due to an increase in
research and development activities by Viryd. Viryds
research and development was $133,000 and $1,385,000 in 2007 and
2008, respectively. Viryd had one employee (Vice President of
Engineering) at the end of July 2007. As of December 31,
2007 and 2008, Viryd increased its headcount (all engineers) to
three and five, respectively. Excluding the increase from
Viryds activities, the increase in our development expense
in 2008, was $1,702,000, or 60%, compared to 2007. In 2007,
$1,827,000 of development labor costs were incurred as cost of
license fees and cost of engineering services revenue. In 2008,
$971,000 of those development labor costs were incurred as part
of our internal continuous development of the next generation of
the NuVinci bicycle CVT, as well as supporting the
bicycle CVT that is currently being sold in the market. Our
engineering team also devoted some development efforts to
improve and explore opportunities for our NuVinci
technology in the automotive accessory drive end market.
Total engineering salaries and payroll related expenses
increased by $612,000 in 2008, compared to 2007. We increased
the size of our engineering staff by five in 2007 and an
additional five engineers in 2008. Rent, utilities and related
expenses for the year ended December 31, 2008 increased by
$168,000, compared to 2007 as we leased additional space to
accommodate additional test stands and work space.
Selling,
general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
Increase
|
|
Percentage
|
|
|
2007
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
|
($ in thousands)
|
|
|
|
Selling, general and administrative
|
|
$
|
2,842
|
|
|
$
|
4,382
|
|
|
$
|
1,540
|
|
|
|
54
|
%
|
Selling, general and administrative expense for the year ended
December 31, 2008, increased by $1,540,000, or 54%,
compared to the year ended December 31, 2007.
Included in total selling, general and administrative expense in
2007 and 2008 were Viryds activities of $108,000 and
$280,000, respectively. Excluding Viryds activities, our
selling, general and administrative expenses in 2008 increased
by $1,368,000, or 50%, compared to 2007. The increase was
primarily due to costs incurred as part of becoming a
manufacturer in March 2008. Total advertising, marketing, and
trade show expenses increased by $387,000, salaries, bonuses and
payroll related expenses increased by $335,000, business and
marketing consulting expenses increased by $383,000, legal
expenses increased by $191,000, and office, insurance, travel
related, and other administrative expenses increased by
$160,000. We added three employees in selling, general, and
administrative in 2007 and two more employees in 2008.
53
Interest
income (expense)
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
Increase
|
|
Percentage
|
|
|
2007
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
|
($ in thousands)
|
|
|
|
Interest and dividend income
|
|
$
|
447
|
|
|
$
|
127
|
|
|
$
|
(320
|
)
|
|
|
(72
|
)%
|
Interest and dividend income for the year ended
December 31, 2008 decreased by $320,000, or 72%, compared
to the year ended December 31, 2007.
The decrease of $320,000 was attributable to lower average cash,
cash equivalents, and short-term investment balances during the
year ended December 31, 2008. Prior to the closing of the
sale of Series D Preferred Stock on December 18, 2008,
our average cash, cash equivalents, and short-term investment
balances in 2008 was $6,347,000. During 2007, the average cash,
cash equivalents, and short-term investment cash balances was
$8,891,000. In addition, due to lower cash balances during the
first half of 2008, we primarily invested our cash in
money-market and certificate of deposits with shorter terms such
as thirty days. In 2007, we invested our excess cash in longer
term certificate of deposits and thus earned higher yields.
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
Increase
|
|
Percentage
|
|
|
2007
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
|
($ in thousands)
|
|
|
|
Interest expense
|
|
$
|
|
|
|
$
|
597
|
|
|
$
|
597
|
|
|
|
N/A
|
|
We recognized interest expense for the first time in 2008 in the
amount of $597,000.
Beginning in March 2008, we received proceeds from bridge loans
in the amount of $4,618,000 and effective August 8, 2008
entered into a Convertible Note and Warrant Purchase Agreement
and issued Convertible Unsecured Promissory Notes, with interest
at an annual rate of 6%, and detachable warrants to purchase a
certain number of shares in new securities (Series D
Preferred Stock) equal to 20% of the original principal amount
of the applicable Notes. We recorded approximately $180,000 of
interest expense incurred from these Notes from the effective
date to December 18, 2008, when they were converted into
Series D Preferred Stock. We also recorded a non-cash
interest expense of $261,000 for the value of the detachable
warrants and beneficial conversion feature that were associated
with the $4,618,000 promissory note.
We recorded $98,000 of interest that was attributable to a note
payable by us in April 2008 in the amount of $1,952,000, with an
interest rate of 8% per annum, to purchase an assembly line from
ATC so that we could become an outsourced manufacturer. We paid
the note in full in December 2008. In consideration of
prepayment, the interest rate on the note was amended to 7% per
annum. The remaining interest expense was incurred from the
outstanding $2,000,000 balance of the note drawn from the line
of credit in April 2008. As of December 31, 2008, a balance
of $2,000,000 remains outstanding.
54
Liquidity
and Capital Resources
Overview
Since 2000, we have funded our operations primarily through the
private placement of approximately $62 million in the
aggregate of our equity securities. We have also financed our
business through cash generated from our operations and by
borrowing cash under our revolving line of credit or other third
party resources.
To date, we have invested significant resources developing
products for a selected set of end markets. We have also
invested in the development and protection of intellectual
property resulting in a worldwide portfolio of 176 patents
(including validated countries) and 189 pending applications as
of July 31, 2010. We plan to continue to invest in
developing and commercializing the NuVinci CVTs for the
automotive accessory drives, electric vehicles, bicycle, lawn
care equipment and small wind turbine end markets.
While we have spent several years developing our core
technology, our past experience in launching our bicycle product
and developing other products to date indicates that the product
development process to apply our core technology in each of our
target end market applications takes from 18 to 34 months
from start to finish, depending on the complexity of the
particular application. The key steps of the development cycle
include: product design, prototyping and testing; production
design validation; manufacturing tooling and process
development, including supplier development; and manufacturing
launch. The NuVinci CVT for the automotive accessory
drive, lawn care equipment, electric vehicles and small wind
turbines end markets is in the design, prototyping and testing
stage of development. In some of these end markets, we license
our products to other companies to manufacture and sell in their
respective industries, from which we derive licensing fees or
royalties on the sales of their products. In other end markets,
we intend to enter joint ventures with development partners that
would manufacture and market our products, from which we would
share in the sales of such products. If we choose not to enter
joint ventures for such products, we may elect to use third
party contract manufacturers to produce those products.
Our bicycle product has been commercially available since 2007
and we launched our next generation product, the N360, for the
bicycle end market in June 2010 and shipped initial products to
customers in July 2010. We anticipate that we or our licensees
will launch products in the small wind turbines and automotive
accessory drives markets in 2011, lawn care equipment market in
2012 and for the electric vehicle market in 2013.
Over the next twelve months, we expect to fund our operations
through the proceeds of this offering and the proceeds of one or
more private equity offerings.
We believe that the net proceeds from this public offering and
our existing cash and cash equivalents, together with interest
thereon, will provide us with sufficient resources to pay off
our existing revolving line of credit and fund our operations
through at least 2012. While we intend to pay off our existing
line of credit with the proceeds from the public offering, we
may choose to maintain a revolving line of credit for working
capital requirements. In order to fund our operations beyond
2012, we may need to raise additional funds through the issuance
of equity, equity-related or debt securities. This capital will
be necessary to fund our ongoing operations, continue research,
development and design efforts and launch our products. We
cannot be certain that additional funds will be available to us
on favorable terms when required, or at all.
If we choose to develop and commercialize additional products or
make any strategic investments outside of our current plan, we
may need additional funds. We may obtain additional capital from:
|
|
|
|
|
Internally generated funds;
|
|
|
|
Equity, debt financings and borrowings on our line of
credit; and
|
|
|
|
Collaborations such as joint development or joint ventures.
|
As of August 25, 2010, we had cash and cash equivalents of
approximately $5.9 million and borrowing capacity under a
revolving line of credit of $0.5 million. Assuming no
change in present trends, our estimated monthly cash burn rate
is approximately $1.5 million. If we are unable to raise
capital from this public
55
offering, in addition to the $6.0 million raised in a private
equity offering in August 2010, we would need to raise
approximately $16.0 million through private equity
offerings from our existing and new investors, which we believe
would be sufficient for us to continue operations through August
2011. If the closing of the private equity round is delayed, we
may curtail our development efforts to only focus on the
development and commercialization of the bicycle and small wind
turbine end markets. We would also attempt to renew the existing
revolving line of credit that expires on December 31, 2010.
If we are not able to renew the revolving line of credit, the
capital raise from the potential $16.0 million private
equity offering would be sufficient to pay off the outstanding
balance under the revolving line of credit. There is no
guarantee that we would be successful in raising any or all of
the $16.0 million through a private equity offering.
Recent
Transactions Affecting our Liquidity and Capital
Resources
Throughout the global credit and economic crisis, it has been
expensive for us to raise private capital. In order to purchase
the manufacturing tangible and intangible assets from ATC in
February 2008, we drew $2.0 million from our
$5.0 million line of credit (which was amended in March
2010 to be a $3.0 million line of credit), and issued a
promissory note for $2.0 million. Collateral for the line
of credit consisted of the personal guarantee of, but now
consists of assets held on account with the lender by Gary
Jacobs, a stockholder and director of our company. In December
2009, we issued a warrant to purchase 3,100,753 shares of
common stock at a price of $0.3992 in exchange for the personal
guarantee of our line of credit.
Beginning in March 2008, we received proceeds from bridge loans
from existing and new private investors in the amount of
$4.6 million and effective August 2008, entered into a
Convertible Note and Warrant Purchase Agreement and issued
Convertible Unsecured Promissory Notes with interest at an
annual rate of 6%, and detachable warrants to purchase a certain
number of shares in new securities (Series D Preferred
Stock) equal to 20% of the original principal amount of the
applicable Notes. The bridge loans provided us the capital
required to continue operations until we closed the
Series D Preferred Stock financing in December 2008.
In December 2008, we were able to close a private placement of
new securities and issued 51,589,191 shares of
Series D Preferred Stock, at a price of $0.3992 per share
in exchange for gross proceeds of approximately
$20.6 million. The principal of the Convertible Note and
accrued interest of $4.8 million were converted into
12,018,211 shares of Series D Preferred Stock and the
detachable warrants were canceled in exchange for
672,050 shares of Viryd Series A Preferred Stock that
was held by us. The transaction fees in connection with the
Series D Preferred Stock financing include warrants to
purchase 2,004,000 shares of common stock at a price of
$0.3992.
On December 31, 2008, we paid off the $2.0 million
promissory note in full. As of December 31, 2009 and
June 30, 2010, $2.0 million remains outstanding under
the revolving line of credit. On August 2, 2010, we
borrowed an additional $0.5 million against the revolving
line of credit to fund working capital requirements.
In November 2009, we raised $4.0 million by issuing
10,020,040 shares of Series D Preferred Stock. The
transaction fees included warrants to purchase
112,726 shares of common stock at a price of $0.3992 per
share.
In August 2010, we closed a private placement of new securities
by issuing 6,550,218 shares of Series E Redeemable
Convertible Preferred Stock at a price of $0.9160 per share in
exchange for cash proceeds of $6,000,000.
Sources
and Uses of Cash
At June 30, 2010, we had cash and cash equivalents of
$1.5 million, compared to $9.2 million at
December 31, 2009, $14.6 million at December 31,
2008, and $8.0 million at December 31, 2007.
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(5,860
|
)
|
|
$
|
(9,496
|
)
|
|
$
|
(12,118
|
)
|
|
$
|
(6,472
|
)
|
|
$
|
(5,960
|
)
|
Investing activities
|
|
|
8,073
|
|
|
|
(7,271
|
)
|
|
|
2,954
|
|
|
|
(6,551
|
)
|
|
|
(305
|
)
|
Financing activities
|
|
|
2,612
|
|
|
|
23,289
|
|
|
|
3,812
|
|
|
|
(5
|
)
|
|
|
(1,404
|
)
|
Effect of foreign currency transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
$
|
4,825
|
|
|
$
|
6,522
|
|
|
$
|
(5,352
|
)
|
|
$
|
(13,028
|
)
|
|
$
|
(7,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
Cash flows used in operating activities totaled
$6.0 million during the six months ended June 30, 2010
compared to $6.5 million during the six months ended
June 30, 2009. Net cash used in operating activities was
primarily generated from the net loss as adjusted for
lower-of-cost-or-market
write-downs and inventory obsolescence, depreciation and
amortization, and share-based compensation expense. Net loss
totaled $6.7 million for the six months ended June 30,
2010 compared to $6.4 million for the six months ended
June 30, 2009. We incurred
lower-of-cost-or-market
write-downs and inventory obsolescence expense of
$0.3 million during the six months ended June 30, 2010
relating to a provision for obsolescence on developer kits
compared to $0.7 million during the six months ended
June 30, 2009 relating to
lower-of-cost-or-market
write-downs because the N171 CVT unit cost exceeded the sales
price. Depreciation and amortization expense decreased from
$0.7 million during the six months ended June 30, 2009
to $0.2 million during the six months ended June 30,
2010. The decrease in depreciation and amortization was the
result of the disposal of manufacturing equipment and write-off
of intangible assets associated with the trade secrets and
manufacturing processes used by MTD in 2009. As such, there was
no depreciation or amortization on these assets during the six
months ended June 30, 2010. Share-based compensation
expense increased by $91,000 as a result of stock options
granted during 2009 that continue to vest in 2010.
In January 2010, we signed a manufacturing and supply agreement
with Tri Star Group, a manufacturer located in Shanghai, China,
to manufacture the next generation bicycle CVT. Under that
agreement, we are responsible for certain finished goods, work
in process, and raw materials inventory relating to our bicycle
CVT that Tri Star has on hand. As long as the manufacturing and
supply agreement with Tri Star is effective, we may be required
to use working capital to pay for this inventory.
In 2009, cash flows used by operating activities totaled
$12.1 million, compared to $9.5 million in 2008. The
increase in cash used in operations in 2009 was due primarily to
an increase in the net loss of $6.6 million offset by a
noncash impairment of $1.5 million and loss on disposal of
$1.5 million on machinery and equipment, as well as a
$0.5 million impairment loss on the write-off of intangible
assets from ATC that included trade secrets and manufacturing
processes used to manufacture the N171. Additionally, there was
a $1.3 million lower of cost or market write-down and
obsolescence charge on inventory on hand. This was offset by a
$1.7 million increase in cash used to build product
inventory for future sales and product replacements, if any, and
to further develop the core NuVinci technology for our
target end markets.
In 2008, cash flows used by operating activities totaled
$9.5 million, compared to $5.9 million in 2007. The
increase in cash flows used by operating activities was driven
primarily by costs associated with becoming a contract
manufacturer and development efforts to improve and further
develop the core NuVinci technology for the automotive
accessory drive and small wind turbine end markets.
Cash
Flows from Investing Activities
Cash flows used in investing activities totaled
$0.3 million during the six months ended June 30, 2010
compared to $6.6 million during the six months ended
June 30, 2009. During the six months ended June 30,
57
2009, cash used in investing activities primarily consisted of
$8.1 million in purchases of
held-to-maturity
investments, offset by $2.0 million in sales of
held-to-maturity
investments; whereas during the first quarter of 2010, we
elected to maintain liquidity in cash and cash equivalents
instead of investing in debt or equity securities.
In 2009, cash flows provided by investing activities totaled
$3.0 million, compared to $7.3 million used in
investing activities in 2008. In 2009, cash provided by
investing activities primarily consisted of proceeds from sales
of investments, while cash used in investing activities in 2008
consisted of purchases of equipment and leasehold improvements,
purchases of intangible assets and costs incurred for patents,
and purchases of investments.
In 2008, cash flows used in investing activities totaled
$7.3 million, compared to $8.1 million that was
provided by investing activities in 2007. In 2008, we primarily
used cash to purchase manufacturing equipment, intangible assets
and to pay for patent costs. In 2007, proceeds from the sale of
investments exceeded cash flows used to purchase investments.
Cash
Flows from Financing Activities
Cash flows used in financing activities of $5,000 during the six
months ended June 30, 2009 was for repayments of a capital
lease obligation, compared to $1.4 million during the six
months ended June 30, 2010 in cash used for accounting,
legal, underwriting, and other miscellaneous costs associated
with the proposed initial public offering.
In 2009, cash flows provided by financing activities totaled
$3.8 million, compared to $23.3 million in 2008.
Financing activities in 2009 primarily included
$4.0 million in proceeds from the issuance of Series D
Preferred Stock, as compared to $20.1 million in proceeds
from the issuance of Series D Preferred Stock in 2008. In
2008, financing activities also included borrowings of
$4.6 million in Convertible Unsecured Promissory Notes and
borrowings of $2.0 million on the line of credit, offset by
$2.0 million in repayments of notes payable.
In 2008, cash flows provided by financing activities totaled
$23.3 million, compared to $2.6 million in 2007. Cash
provided by financing activities in 2008 was primarily from the
issuance of Series D Preferred Stock in exchange for gross
cash proceeds of $20.6 million and borrowings of
$4.6 million Convertible Unsecured Promissory Notes and
$2.0 million on the line of credit. The cash inflows were
reduced by repayments of $2.0 million note payable,
Series D Preferred Stock issuance cost of
$1.4 million, and spin-off of Viryd of $0.9 million.
Capital
Expenditures
Our capital expenditures include machinery and equipment,
furniture and fixtures, computer equipment, and leasehold
improvements. Under our business model of contract manufacturing
and licensing, one of the several advantages over in-house
manufacturing is lower capital expenditures. We do not expect to
invest significant amounts of capital in facilities and
equipment; however, we do expect to share some tooling costs
with the contract manufacturer of our products. In 2008, we paid
$2.7 million in cash and issued a promissory note in the
amount of $2.0 million to ATC in connection with the
purchase of ATCs manufacturing line equipment. In 2009, we
spent $0.4 million in cash for machinery and equipment.
Revolving
Line of Credit
At December 31, 2008 and 2009, we had $2.0 million of
borrowings outstanding under our revolving line of credit. As of
December 31, 2008 and 2009, we had $3.0 million
available under the revolving line of credit.
In March 2010, we amended the line of credit to remove
restrictive financial covenants. The amendment also decreased
the available credit from $5.0 million to
$3.0 million. At June 30, 2010, we had
$2.0 million outstanding under our revolving line of credit
with $1.0 million remaining available.
On August 2, 2010, we borrowed an additional $0.5 million
against the revolving line of credit to fund working capital
requirements.
58
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements, except for
operating leases for our facilities.
Contractual
Obligations
The following table summarizes our contractual obligations and
commitments as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments by Year
|
|
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
|
($ in thousands)
|
|
|
Operating leases
|
|
$
|
439
|
|
|
$
|
308
|
|
|
$
|
108
|
|
|
$
|
23
|
|
|
$
|
|
|
Debt(1)
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,439
|
|
|
$
|
2,308
|
|
|
$
|
108
|
|
|
$
|
23
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As of December 31, 2009, debt
obligation includes short-term debt of $2.0 million of
outstanding balance on the revolving line of credit, but
excludes related interest payments on the line of credit. The
outstanding principal balance bears interest at a rate of 1.0%
per annum above the base rate, which is a fluctuating rate equal
to the highest of the prime rate (5.0% at December 31, 2009
and 3.25% as of June 30, 2010), LIBOR plus 1.5%, or the
Federal Funds Rate plus 1.5%; but in no case shall the interest
rate be less than 5.0%. Debt obligation also excludes the
quarterly unused commitment fee of 0.375% per annum on the
average daily unused line of credit.
|
We had no long-term debt as of December 31, 2009. Our
current debt as of December 31, 2009 was comprised of
$2.0 million drawn on a revolving line of credit scheduled
to expire on December 31, 2010. Our long-term liabilities
include deferred revenue of $0.3 million as of
December 31, 2009.
In January 2010, we entered into a two year consulting agreement
with Advanced Strategic Leadership Limited (ASL), an unrelated
Shanghai company, under which ASL will provide consulting and
market development services in exchange for a monthly fee of
$10,000 per month, 2% of net sales procured by ASL each calendar
quarter during the term of the agreement, a warrant to purchase
50,000 shares of common stock, and, upon reaching certain
performance milestones, warrants to purchase up to
750,000 shares of common stock at an exercise price of
$0.3992. In August 2010, the Company issued a warrant to
purchase 100,000 shares of common stock due to successful
achievement of certain milestones, thereby leaving contingent
warrants to purchase up to 650,000 shares of common stock
available to ASL. Under the consulting agreement, services and
deliverables that ASL will provide include a China electric
vehicle market analysis and future forecast; support for the
establishment of an electric vehicle business; and support for
building brand/product introduction.
Effective January 30, 2010, we entered into a manufacturing
supply agreement with Tri Star Group (Tri Star) under which Tri
Star will manufacture the next generation bicycle transmission,
the N360, on a contract basis and will participate with us in
the sale of the N360 in China. Tri Star will provide the
manufacturing facility and general purpose equipment, Tri Star
and the Company will share the cost of tooling, and we will bear
the cost of dedicated special purpose equipment needed for
assembly of the product. We issued a blanket purchase order in
the range of $8.0 million to $12.0 million for
forecasted production requirements from May 2010 through August
2011. Regular orders against this blanket purchase order will be
provided to Tri Star based on orders received and forecasted
demand.
Qualitative
and Quantitative Disclosures About Market Risk
Our exposure to market risk for changes to interest rates
relates primarily to our cash and cash equivalents and revolving
line of credit.
We have a $3,000,000 revolving line of credit, which expires
December 31, 2010, with Wells Fargo Bank, National
Association, of which $2,000,000 was outstanding at
December 31, 2009 and June 30, 2010. The line of
credit provides for a quarterly unused commitment fee of 0.375%
per annum on the average daily unused
59
amount. As of December 31, 2009, the outstanding principal
balance bore interest at a rate of 1.0% per annum above the base
rate, which was a fluctuating rate equal to the highest of the
prime rate, LIBOR plus 1.5%, or the Federal Funds Rate plus
1.5%; but in no case would the interest rate be less than 5.0%.
The resultant effective interest rate on the outstanding
principal was 5.0% from the date the interest rate on the
revolving line of credit was amended on June 1, 2009
through December 31, 2009. On March 23, 2010, the
revolving line of credit was amended to decrease the interest
rate to the base rate, which is a fluctuating rate equal to the
highest of the prime rate, LIBOR plus 1.5%, or the Federal Funds
Rate plus 1.5%. The highest rate was 3.25% under the prime rate
as of June 30, 2010. This amendment eliminated the former
5.0% floor rate. If market interest rates increase, this
variable-rate debt will create higher debt service requirements,
which could adversely affect our cash flow. For example, based
on an outstanding balance of $2,000,000 as of June 30,
2010, a 10% increase in a 5.0% interest rate would result in
interest expense of $110,000 per annum based on 5.5% as compared
to $100,000 per annum based on 5.0%. A 10% increase in a 3.25%
interest rate would result in interest expense of $71,500 per
annum based on 3.6% as compared to $65,000 per annum based on
3.25%. We do not enter into agreements to limit our exposure to
higher interest rates.
Our cash, cash equivalents, and short-term investments as of
June 30, 2010, consisted primarily of cash and money market
funds. Our primary exposure to market risk is interest income
sensitivity, which is affected by changes in the general level
of United States interest rates. However, because of the
short-term nature of the instruments in our portfolio, a sudden
change in market interest rates would not be expected to have a
material impact on our financial condition or results of
operation.
We are exposed to foreign currency exchange rate risk inherent
in expenses, assets and liabilities denominated in currencies
other than the U.S. dollar, principally the Euro. The
potential change in foreign currency exchange rates represents a
minimal risk to us and is not material given the size of our
operations in those jurisdictions in the periods included in
this prospectus. We also view our investment in our foreign
operations as long-term and, therefore, have not entered into
any derivative transactions to mitigate the currency effect on
our operating results. We have no intention of hedging our
foreign exchange risk at this time; however, such exposure to
foreign currency exchange rate fluctuations in the future will
be evaluated on an ongoing basis. We do not enter into
derivatives for trading or other speculative purposes.
Accounting
Restatements
Since inception through December 31, 2008, we elected to
value our common stock, options, and warrants by a method not in
accordance with GAAP. We had previously determined fair value
based on Internal Revenue Code Section 409A, using a
probability-weighted expected return valuation method. We have
since reassessed the fair value of our common stock, through the
engagement of a third-party valuation specialist, using
methodologies in accordance with GAAP based our total enterprise
value, which is defined as the market value of equity plus
interest bearing debt less cash and cash equivalents.
We have restated the accompanying consolidated financial
statements as of December 31, 2008 and for each of the
years ended December 31, 2007 and 2008, to correct the
recognition of share-based compensation expense, warrants, and
debt discounts. The net effects of the restatement on our
financial statements are disclosed in Note 16 to the
consolidated financial statements.
In connection with the anticipated filing of the registration
statement in connection with our initial public offering,
certain expenses as originally reported have been reclassified
in the consolidated statements of operations to be consistent
with the classifications adopted in 2009, with no net impact on
the 2007 and 2008 reported net loss, stockholders equity,
and cash flows. These reclassifications allocated certain
research and development and selling, general and administrative
expenses to cost of revenues expense categories. Revenues were
disaggregated into more detailed revenue lines. Stock-based
compensation expense and depreciation and amortization were
allocated to cost of revenues, research and development, and
selling, general and administrative expenses.
Additionally, certain balance sheet reclassifications within
current assets have been made, including consolidating a nominal
interest receivable amount into prepaid expenses and other
current assets, as well as
60
reclassing certain certificates of deposit out of cash and cash
equivalents and into short-term investments based on their
original maturity dates. Reclassifications between liability
accounts have also been made to properly classify long-term
liabilities, such as reclassing deferred rent and deferred
revenue to long-term liabilities based on their long-term nature.
Critical
Accounting Policies and Estimates
Our managements discussion and analysis of financial
condition and results of operations is based on our consolidated
financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United
States of America. The preparation of these consolidated
financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial
statements, as well as the reported revenues and expenses during
the reporting periods. We base our estimates on historical
experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions. While our significant
accounting policies are more fully described in Note 2 to
our audited consolidated financial statements included in this
prospectus, we believe that the following accounting policies
are critical to the process of making significant judgments and
estimates in the preparation of our consolidated financial
statements. Management has discussed the development and
selection of these critical accounting policies and estimates
with the Audit Committee of the Board of Directors.
Inventory
All items in inventory are finished goods and are stated at the
lower of cost, determined on a
first-in-first-out
basis, or market. The Company regularly reviews inventory
quantities on-hand and adjusts inventory values for excess and
obsolete inventory based on overall inventory levels, the
current and projected sales levels for such products, the
projected markets for such products, and the overall projected
demand for products once the next generation of products is
scheduled for release.
The Company recognized $952,000 in write-downs of inventory
based on monthly lower-of-cost-or-market assessments throughout
the year ended December 31, 2009. These monthly assessments
were based on actual sales prices of units sold during the month
compared to actual unit costs of units purchased during that
month, considering the fact that the unit cost of the N171 model
of the bicycle CVT was higher than its sales price. We also took
into account the effect the expected launch of, and preliminary
marketing effort for, the N360 product may have on the sales
price of the existing N171 product. If we changed the assumption
used for unit sales price by 10%, the write-down of inventory
for lower-of-cost-or-market would have either increased or
decreased by approximately $97,000 for the year ended
December 31, 2009.
The Company also recognized $357,000 in write-downs of inventory
during the year ended December 31, 2009 as a result of
evaluations of inventory obsolescence, which were based on the
number of units on hand as compared to managements best
estimates of the timing and volume of future sales of the
existing N171 model, considering the impending launch of the
next generation N360 product. If we increased or decreased the
forecasted sales volume by 10%, the write-down of inventory for
obsolescence would have increased or decreased by approximately
$5,000.
Evaluation
of long-lived assets
The Company assesses its long-lived assets for potential
impairment whenever events or changes in circumstances indicate
that the carrying value of such assets may not be recoverable.
Estimated future cash flows are based upon, among other things,
assumptions about expected future operating performance and may
differ from actual cash flows. Long-lived assets evaluated for
impairment are grouped with other assets to the lowest level for
which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. If the sum
of the projected undiscounted cash flows (excluding interest) is
less than the
61
carrying value of the assets, the assets will be written down to
the estimated fair value in the period in which the
determination is made.
During the third quarter of 2009, the Company recognized an
impairment loss of $1,537,000 on manufacturing equipment and a
$490,000 impairment loss equal to the net book value of certain
intangible assets relating to the manufacturing of the bicycle
CVT. While MTD was manufacturing the bicycle CVT, management
continually assessed, among other criteria, the likelihood and
time period of when the anticipated cost decrease from MTD would
be achieved, the estimated undiscounted cash flows from sales of
units over the course of the manufacturing agreement, and how
the cost reductions were tracking to production and cost
reduction milestones. During the third quarter of 2009,
management determined that the cost reductions would not happen
within the anticipated timeframe and, as a result, the projected
undiscounted cash flows were less than the carrying value of the
assets, which then required management to assess the fair value
of the CVT machinery and equipment. Management utilized the
market approach to estimate fair value of the manufacturing
equipment. The market approach was applied by obtaining quoted
market prices for selected similar assets (based on make, model,
and serial number) and applying the results to the remaining
value of the manufacturing assets. If the quoted market values
obtained had differed by 10%, the impairment recognized during
the third quarter of 2009 would have either increased or
decreased by approximately $154,000, which would have conversely
increased or decreased the loss recognized in the fourth quarter
of 2009 when the manufacturing equipment was transferred to MTD
upon termination of the Manufacturing Supply Agreement.
Intangible
Assets
As discussed in the previous policy regarding our evaluation of
long-lived assets, we have assessed the recoverability of the
patent portfolio based on the associated projected undiscounted
future cash flows derived from our projections of the number of
units sold and their respective selling prices. The projection
of future net cash flows from sales or licenses of products
using the Companys patented technology requires
significant management estimates and judgments, including the
timing, volume, cost and pricing of future product sales, the
expected rollout date of our next generation products, and
expected demand based on discussions with customers. Although we
have limited sales history, management believes that this
information provides it with a reasonable basis to forecast
future cash flows sufficient to support the recoverability of
its patent costs. We believe that a 25% reduction in the
associated projected undiscounted future cash flows would not
affect the recoverability of the patent portfolio. As such, we
have determined that no impairment exists for the years ended
December 31, 2008 and 2009.
Share-based
compensation
We measure all share-based compensation arrangements using a
fair value method and to record the expense in our consolidated
financial statements over the requisite service period.
The fair value of each employee option granted during the year
ended December 31, 2009 was estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
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|
|
|
|
Year Ended December 31, 2009
|
|
Expected volatility
|
|
56%-63%
|
Expected dividends
|
|
None
|
Expected term (in years)
|
|
5.25-6.08
|
Risk-free interest rate
|
|
2.02%-2.77%
|
Expected volatilityThe expected volatility rate
used to value stock option grants is based on volatilities of a
peer group of similar companies whose share prices are publicly
available. The peer group was developed based on observed
comparable companies historical common equity volatility
for the applicable time periods. For 2009 employee awards,
increasing the volatility assumption by 10% to a 62%-69% range
or decreasing the volatility assumption by 10% to a 51%-56%
would have resulted in an approximately $157,000 ($77,000
increase or $80,000 decrease) or 13% change in fair value. These
changes in fair value would have been recognized over the three
to four year vesting period of such awards.
62
Expected termThe Company elected to utilize the
simplified method to estimate the expected term of
stock option grants because the Company does not have sufficient
historical exercise data to provide a reasonable basis upon
which to estimate expected term. Under this approach, the
weighted average expected life is presumed to be the average of
the vesting term and the contractual term of the option. For
2009 employee awards, increasing the expected term
assumption by 10% to 6.056.69 years or decreasing the
expected term assumption by 10% to 4.955.47 years
would have resulted in an approximately $92,000 ($44,000
increase or $48,000 decrease) or 7% change in fair value. These
changes in fair value would have been recognized over the three
to four year vesting period of such awards. It should be noted
that a change in the expected term would cause other changes,
since the risk-free rate and volatility assumptions are specific
to the term; we did not attempt to adjust those assumptions in
performing the sensitivity analysis above.
Common stock fair valueFor purposes of estimating
the fair value of its common stock for stock option grants, the
Company reassessed the estimated fair value of its common stock,
with the assistance of an unrelated valuation specialist, on
selected dates during the years ended December 31, 2007
through 2009. Prior to this reassessment, the Company concluded
that stock options granted had exercise prices equal to the then
estimated fair value of common stock at the date of grant.
Subsequent to reassessment, the Company determined certain stock
options granted during 2007 through 2009 had an exercise price
different than the estimated fair value of the common stock at
the date of grant.
The Companys reassessment was based on a methodology that
first estimated the fair value of the Company as a whole, or
enterprise value, and then allocated a portion of the enterprise
value to its common stock. This approach is consistent with the
methods outlined in the AICPA Practice Aid, Valuation of
Privately-Held-Company Equity Securities Issued as
Compensation. The valuation methodology utilized in the
reassessment of fair value relied primarily on the income
approach and the market approach to estimate enterprise value.
The market approach gave consideration to the total financing
amount received, the implied enterprise value of the Company
based on the convertible preferred stock transactions, pricing
of comparable publicly traded companies, and market-based
private company transactions. Pursuant to the guidance under ASC
Topic 820, the inputs used in the market approach over the
various valuation dates were primarily Level 2 and
Level 3 inputs. The income approach incorporated the
expectations of future cash flows of the Company as of the
valuation dates and market expectations for an estimated
discount rate. The inputs used under the income approach were
primarily Level 3 inputs with some Level 2 inputs
related primarily to the derivation of the estimated appropriate
market participant discount rate. Once the enterprise value was
established, the Company used a method consistent with the
guidance in AICPA Practice Aid, Valuation of
Privately-Held-Company Equity Securities Issued as
Compensation, to determine the value of the underlying
common shares. Specifically, the Company used the Option Pricing
Method to determine the fair of the underlying common stock. The
Company used these fair value estimates derived from its
valuations to determine share-based compensation expense
recorded in the consolidated financial statements.
Given the absence of an active market for our common stock, the
Company estimated the fair value of our common stock, with
assistance from an unrelated valuation specialist, by performing
retrospective valuations for the valuation dates prior to 2009
and contemporaneous valuations during 2009. These estimates of
the fair value of our common stock were made as of the following
dates:
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Fair Value
|
Common Stock Valuation Date
|
|
Per Share
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|
June 30, 2007
|
|
$
|
0.67
|
|
December 31, 2007
|
|
|
0.47
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|
December 31, 2008
|
|
|
0.22
|
|
August 31, 2009
|
|
|
0.11
|
|
December 8, 2009
|
|
|
0.26
|
|
63
The following table sets forth all stock options granted during
the 12 months prior to June 30, 2010:
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|
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|
|
|
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Number of
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|
|
|
|
|
Options
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|
Exercise
|
|
Fair Value
|
Grant Date
|
|
Granted
|
|
Price
|
|
Per Share
|
|
|
(In thousands)
|
|
|
|
|
|
August 26, 2009
|
|
|
193
|
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
October 22, 2009
|
|
|
2,449
|
|
|
|
0.10
|
|
|
|
0.11
|
|
December 3, 2009
|
|
|
102
|
|
|
|
0.10
|
|
|
|
0.26
|
|
December 5, 2009
|
|
|
105
|
|
|
|
0.25
|
|
|
|
0.26
|
|
In order to determine the fair value of our common stock on the
date of grant for purposes of calculating the fair value of our
stock option grants under ASC Topic 718, we utilized the most
current valuation, primarily obtained on the last day of the
fiscal year. If there was a material change in the business or
in the business plan, we obtained an independent valuation prior
to granting stock options.
Accounting
Standards Updates
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. (FIN) 46(R),
(codified in ASC Topic 810), as amended by ASU 2009-17,
Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities, which amends the
consolidation guidance that applies to variable interest
entities (VIE). The amendments will significantly affect the
overall consolidation analysis under FIN 46 (revised
December 2003), Consolidation of Variable Interest
Entities, or FIN 46(R), to improve financial reporting
by enterprises involved with VIEs and to provide more
relevant and reliable information to users of financial
statements. ASC Topic 810, as amended by ASU 2009-17 carries
forward the scope of FIN 46(R), with the addition of
entities previously considered qualifying special-purpose
entities, as the concept of these entities was eliminated in
SFAS No. 166, Accounting for Transfers of Financial
Assets (ASC Topic 860). The principal objectives of these
new disclosures are to provide financial statement users with an
understanding of:
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The significant judgments and assumptions made by an enterprise
in determining whether it must consolidate a VIE
and/or
disclose information about its involvement in a VIE;
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The nature of restrictions on a consolidated VIEs assets
and on the settlement of its liabilities reported by an
enterprise in its statement of financial position, including the
carrying amounts of such assets and liabilities;
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The nature of, and changes in, the risks associated with an
enterprises involvement with the VIE; and
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How an enterprises involvement with the VIE affects the
enterprises financial position, financial performance, and
cash flows.
|
We adopted the new accounting literature specified in ASC Topic
810, Consolidation, on January 1, 2010. The adoption
of this new literature did not have a material effect on the
consolidated financial statements.
In October 2009, ASU
2009-13,
Multiple-Deliverable Revenue Arrangements, codified the
consensus in Emerging Issues Task Force (EITF) Issue
08-1, which
supersedes EITF Issue
00-21
(codified in
ASC Topic 605-25).
The ASU was issued in response to practice concerns related to
the accounting for revenue arrangements with multiple
deliverables under Issue
00-21 and
applies to all deliverables in contractual arrangements in all
industries in which a vendor will perform multiple
revenue-generating activities, except when some or all
deliverables in a multiple-deliverable arrangement are within
the scope of other, more specific sections of the Codification
and other sections of ASC 605 on revenue recognition.
Specifically, the ASU addresses the unit of accounting for
arrangements involving multiple deliverables. It also addresses
how arrangement consideration should be allocated to the
separate units of accounting, when applicable. However, guidance
on determining when the criteria for revenue recognition are met
and on how an entity should recognize revenue for a given unit
of accounting are located in other sections of the Codification
(e.g., Staff Accounting Bulletin Topic 13). Although the
ASU retains the criteria from Issue
00-21 for
when delivered items in a multiple-deliverable arrangement
should be considered separate units of
64
accounting, it removes the previous separation criterion under
Issue 00-21
that objective and reliable evidence of the fair value of any
undelivered items must exist for the delivered items to be
considered a separate unit or separate units of accounting. The
final consensus is effective for fiscal years beginning on or
after June 15, 2010. Entities can elect to apply this ASU
(1) prospectively to new or materially modified
arrangements after the Issues effective date or
(2) retrospectively for all periods presented. We do not
believe the adoption of ASU
2009-13 will
have a material impact on the consolidated financial statements.
In April 2010, the FASB issued ASU
2010-17,
Milestone Method of Revenue Recognition, which
establishes a revenue recognition model for contingent
consideration that is payable upon the achievement of an
uncertain future event, referred to as a milestone. The scope of
the ASU is limited to research or development arrangements and
requires an entity to record the milestone payment in its
entirety in the period received if the milestone meets all the
necessary criteria to be considered substantive. However,
entities would not be precluded from making an accounting policy
election to apply another appropriate accounting policy that
results in the deferral of some portion of the arrangement
consideration. The ASU is effective for fiscal years (and
interim periods within those fiscal years) beginning on or after
June 15, 2010. We will apply this guidance prospectively to
milestones achieved after adoption on January 1, 2011 for
research or development arrangements involving deliverables or
units of accounting in which we satisfy performance obligations
over time and all or a portion of the arrangement consideration
is contingent upon the achievement of a milestone. We do not
believe the adoption of ASU
2010-17 will
have a material impact on the consolidated financial statements.
65
Business
Overview
Our
NuVinci Technology
We have developed products that incorporate our core patented
technology, sold under the NuVinci brand. Our
core technology is a type of transmission a device
that transmits power while converting the rotating input speed
into one of multiple possible output speeds. Our NuVinci
technology is designed to improve the overall efficiency and
performance of vehicles and equipment that operate at various
speeds, such as bicycles, automobile accessories, wind turbines
and lawn mowers.
Our NuVinci technology is a new type of continuously
variable transmission (CVT) that we believe can be used in a
wide variety of end market applications. A CVT is a transmission
that effectively has an infinite number of gear ratios, or
speeds, between its lowest and highest speeds. Our NuVinci
technology provides a smooth, continuous progression from
one speed to another through its range with no breaks or jerks,
allowing the transmission output speed to change, while the
engine or motor speed stays at its speed of peak efficiency or
power.
Our technology is currently available in the global market for
bicycle transmissions, where it has been used to replace the
rear wheel gear changing assembly, or derailleur. We are also
currently developing applications of our core technology for a
number of other target end markets that we believe, based on our
research, to have near term commercial potential. These include
accessory drives for automotive air conditioners, alternators,
power steering pumps and superchargers and primary transmissions
for electric vehicles, lawn care equipment and small wind
turbines.
Based on our research and testing, we believe that the design
and manufacturing cost of the NuVinci technology make it
scalable across multiple applications in various industries,
which we feel makes it a platform technology.
Through our internal testing, we have shown that the NuVinci
CVT improves overall efficiency, performance and
functionality in many existing vehicles and equipment and, as
discussed below, enables functions that currently do not exist
in such systems.
Benefits
of our NuVinci Technology
We believe, based on testing performed internally at our test
facilities and on prototype vehicles and equipment, that our
NuVinci technology provides the following benefits to
specific applications in our target markets:
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Automotive Accessory Drives: Enables
accessories to maintain an optimal operating speed, even as
engine speed increases or decreases. This is important for
vehicle engine accessories such as air conditioners and
alternators, because it allows them to provide optimal cooling
and electric power, respectively, even when the engine is at its
lowest speed. For power steering pumps, this allows sufficient
steering assistance, even when the engine speed is low or at
idle. For superchargers, this improves engine performance and
facilitates the use of smaller engines, or engine
downsizing, to reduce fuel consumption and emissions
without sacrificing performance.
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Electric Vehicles: Enhances the commercial
potential of electric vehicles by creating mechanical
efficiencies that increase vehicle driving range and top speed
in typical day to day driving conditions, improving battery life
and potentially reducing the need for certain inefficient, high
cost power electronics, which would lower manufacturing costs.
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Bicycles: Optimizes ride experience by
providing an unlimited number of speeds between low and high
with smooth, seamless shifting throughout so the rider can
select the exact pedaling speed the rider desires for any
particular riding condition.
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Lawn Care Equipment: Reduces fuel consumption,
emissions and noise of lawn care equipment, while providing the
same or improved performance.
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66
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Small Wind Turbines: Improves the energy
capture and improves reliability of small wind turbines, while
lowering the cost of the wind turbine and thereby reducing the
cost of energy produced.
|
Our
Products
We have developed or are developing several products to address
each of these end markets, some of which we will license to
other manufacturers to make and sell into those markets (as
described below). While we have spent several years developing
our core technology, our past experience in launching our
bicycle product and developing other products to date indicates
that the product development process to apply our core
technology to each of our target end market applications takes
from 18 to 34 months from start to finish, depending on the
complexity of the particular application. The key steps of the
development cycle, which are discussed further below, include:
product design, prototyping and testing; production design
validation; manufacturing tooling and process development,
including supplier development; and manufacturing launch. The
products we are currently selling as well as those under
development and the corresponding stage in the development
process are as follows:
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Anticipated
|
|
|
|
|
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Product
|
|
Product
|
|
End Market
|
|
Development Stage
|
|
Launch Year(1)
|
|
|
Alternator drive
|
|
Automotive accessory drives
|
|
Design, prototyping and testing
|
|
|
2011
|
|
|
|
|
|
|
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Air conditioner drive
|
|
Automotive accessory drives
|
|
Design, prototyping and testing
|
|
|
2011
|
|
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|
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Power steering pump
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|
Automotive accessory drives
|
|
Design, prototyping and testing
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|
2011
|
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Supercharger drive
|
|
Automotive accessory drives
|
|
Design, prototyping and testing
|
|
|
2012
|
|
|
|
|
|
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|
Primary transmission
|
|
Electric vehicles
|
|
Design, prototyping and testing
|
|
|
2013
|
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N171
|
|
Bicycles
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Production completed; ongoing sales of inventory
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2007
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(2)
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N360
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Bicycles
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Manufacturing launch
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2010
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(2)
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Primary transmission
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Small wind turbines
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Design, prototyping and testing
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2011
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(3)
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Primary transmission
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Lawn care equipment
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Design, prototyping and testing
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2012
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(3)
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Notes:
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(1)
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Anticipated Product Launch Year
refers to the particular year identified that we believe, based
on development and planning, a particular product should be
launched in the marketplace. We are unable to predict at this
stage the particular quarter of any given year in which a
product might be launched.
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(2)
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Launched original version in 2007
and next generation version was launched in June 2010.
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(3)
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Although this is the currently
anticipated product launch date, the precise timing is at the
discretion of our licensees.
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Regarding the development process, the product design,
prototyping and testing stage consists of the engineering design
to generate part and assembly drawings, as well as the prototype
manufacturing and testing to test the engineering design. This
stage typically takes 6 to 9 months to complete. The
production design validation stage consists of design revisions
based on testing and validation of those design changes through
repeated testing and typically takes 6 to 15 months to
complete. The next stage is the manufacturing tooling and
process development and supplier development stage, in which all
the processes for manufacturing the individual parts and the
assemblies are established and all tooling and equipment is
manufactured and set up
67
for manufacturing and qualified. This stage typically takes 3
to 6 months to complete. The final step is manufacturing
launch, where each step in the manufacturing process is
qualified and products made through the manufacturing process
are tested to validate the entire process for launch of
production, which typically takes 3 to 4 months to
complete. As we have found in launching our prior commercial
product, the entire development process takes roughly
18 months from beginning of design through production
launch, but can take up to 34 months for complex designs.
Our bicycle product has been commercially available since 2007
and, in June 2010, we launched manufacturing of our next
generation bicycle product, the N360, shipping initial products
to customers in July 2010. We anticipate launching products in
each of the small wind turbines and automotive accessory drives
end markets in 2011, lawn care equipment end market in 2012 and
for the electric vehicles market in 2013. For the products under
development in the table above, and other than those for which
we rely on the assistance of our licensees or joint venture
partners, we believe that the net proceeds from this offering
and our existing cash and cash equivalents will be sufficient to
fund their product development.
Our test facilities are capable of applying a number of testing
protocols on equipment ranging from as low as 200W up through
and beyond 93kW. Our test personnel have designed and built 18
specialized test stands for component-level durability, fatigue
testing, end-of-line production test, long term
transmission-level durability test, and complete transmission
developmental test. We have also built or assisted development
partners in building prototype demonstration vehicles
incorporating our NuVinci technology, including light
electric vehicles, lawn and garden tractors, pedal assist
bicycles, a light utility vehicle, a military medium tactical
vehicle, a full size American SUV and a medium size Asian SUV,
among others. With our test stands and prototypes, we have
conducted tests that simulate a variety of conditions including,
among others, real world simulation, harsh environmental
testing, accelerated life testing and, for products that are on
sale or near production, durability testing.
Our
Markets
We believe that, due to its strengths, our NuVinci
technology can improve the overall efficiency and
performance of mechanical systems that require variation between
the speed of a primary drive and the speed required to operate
the system, and that our NuVinci technology provides a
substantial platform for growth as we seek to commercialize
applications in each of our target markets.
To date, we are developing or have developed applications for a
selected set of end markets that based on our research and
experience we believe offer the most attractive competitive
dynamics and potential for economic returns, namely automotive
accessory drives for air conditioners, alternators, power
steering pumps and superchargers, primary transmissions for
electric vehicles and lawn care equipment, drivetrains for the
wind power systems markets and rear wheel hubs for bicycles.
To help us adapt our technology to the relevant application and
to facilitate market access, we have established commercial
relationships with industry members in each of our target
markets. Our commercial relationships take the form of sales and
support arrangements (under which we agree to sell products and
aid in the marketing efforts of the products with our customer),
manufacturing licenses (under which they gain the right to make
the product), engineering services agreements (under which we
adapt our technology for a specific application) and joint
development agreements (under which we agree to work together
with another company to develop a specific application of our
technology).
In the automotive accessory drive market, we are working under
an engineering services agreement with a major automotive
supplier to develop a supercharger product. We entered into a
memorandum of understanding with a leading manufacturer of power
steering pumps for commercial vehicles for a power steering pump
accessory drive. We also entered into a memorandum of
understanding with Chengdu Bus Company for development and
testing of accessory drives, which we currently believe will be
an air conditioner or alternator application.
In the bicycle market, we have partnered with leading bicycle
manufacturers through sales and support arrangements to drive
sales of our product. In the electric vehicle market, we have
partnered with a strategic
68
automotive industry consultant through a consulting services
contract for market development and consulting services for the
Chinese EV market. In the wind and lawn and garden equipment
markets we have provided manufacturing licenses to key industry
members, enabling them to manufacture and distribute our
technology, thereby increasing our growth prospects, brand
awareness, and short term cash flow.
The following table summarizes the competitive advantages of our
products and the state of the commercial relationships for each
of our target end market applications:
Table 1:
End Markets*
Note:
* There can be no guarantee that we will ever be able to
successfully access any of these markets.
As we commercialize the end market applications in Table 1, we
will consider addressing other end market applications that we
believe would be well-suited to our NuVinci technology.
Currently, we believe products such as automotive transmissions,
industrial equipment, and auxiliary power units may provide such
opportunities, and we are conducting preliminary market and
product research and analysis on the potential opportunities
represented by these end markets. If after further analysis, or
if a potential development partner presents us with a business
opportunity, there is an attractive business case, we will
continue to invest in research and development to develop these
applications and to expand into the associated markets on a
commercial basis.
Our
Patents and Technology Awards
We have developed a patent portfolio covering our core
technology as well as individual applications of it that, as of
July 31, 2010, consisted of 95 U.S. patents, 52
U.S. pending patent applications, 81 foreign issued patents
(including validated countries) and 137 pending foreign patent
applications, the oldest of which will expire at the end of its
20-year term
in 2018. The rest of our U.S. patents and applications will
expire at the end of their respective
20-year
terms as well, with 19 others expiring in 2018, 5 expiring in
2019, 5 expiring in 2020, 14 expiring in 2022 and 38 expiring in
2024, among others. Each of our foreign patents and
69
applications originate from the patents and applications filed
in the U.S. and therefore are directed to the same or
similar products and will expire at the same time as their
respective U.S. counterpart. We currently have issued
patents in Australia, Austria, Belgium, Canada, China, Denmark,
Europe, Finland, France, Germany, Great Britain, Hong Kong,
Ireland, Italy, Japan, Korea, Mexico, Russia, Spain, Sweden,
Switzerland, Taiwan and The Netherlands with pending patent
applications in those countries as well as Brazil and India. Our
pending applications in these and other countries, however, can
take up to 5 years or longer from the date they are filed
to mature into patents depending on various factors by country
including the subject matter and the examiner.
Our U.S. patent portfolio was ranked as the #1 patent
portfolio in the automotive and transportation industry by The
Patent
Scorecardtm
as reported in the Wall Street Journal on January 13, 2009.
While this ranking was developed independently by a third party
with whom we do not have and have not ever had any relationship,
such rankings are inherently subjective and therefore do not
guarantee or provide any indication of success in protecting our
products in the various marketplaces around the world. We
continue to file patent applications internationally as our
development yields new patentable improvements to our technology.
Our NuVinci technology has also won several key industry
awards including:
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R&D Magazines 2007 R&D 100 Award, awarded by an
independent panel of experts and by the editors of R&D
magazine recognizing the 100 most technically significant new
products of 2007 worldwide.
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Popular Sciences Best of Whats New, Grand
Award 2007 for the recreational category, honoring
innovations that made a positive impact on life.
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The Dutch bicycle industrys 2007 FietsVak Innovation
of the Year award honoring the years best new
bicycle product.
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2008 iF Design EUROBIKE Gold Award, one of ten Gold Awards
awarded by iF International Forum Design, honoring the best in
bicycle design, considered one of the industrys most
prestigious design competitions. In 2008, more than 360 entries
from 22 countries competed in 19 categories. The NuVinci
CVT and
CruiseControllertm,
the trade name of the shifter for the bicycle hub, were given a
Gold Award with judges citing the excellence of the NuVinci
products engineering, its simplicity, and its ease of
use as major factors in their decision.
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The Guardian/Cleantech Groups 2009 Global Cleantech 100
Award. This award reflects the collective opinion of a panel of
over 100 cleantech experts and venture capital companies around
the world in evaluating companies with the greatest potential to
achieve high growth and high market impact.
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Our
Strengths
Traditional transmission systems are limited to a fixed number
of discrete gears and utilize complex shifting mechanisms. CVTs
in general provide continuous variation, that is smooth
transition without jerks or shocks, between the speed of the
primary drive, such as an engine or electric motor, and the
operating speed of the vehicle or equipment, from low up through
high and any speed in between. In our target end market
applications, we believe, based on our experience, research and
testing, that our NuVinci technology provides many
advantages over traditional transmissions and addresses the
limitations of other currently available CVTs by offering the
following:
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Improved efficiency and performance. Improves the
overall efficiency and performance of existing mechanical
systems, reducing the energy required for operation.
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Adaptable platform technology. Its size, design,
packaging and economic attributes enable its use in a variety of
end market applications ranging in size from bicycle hubs to
utility class wind turbine systems. Many of these end markets
are currently employing transmission systems that provide lower
overall system efficiency, that are more costly to manufacture,
or that are limited to single-speeds due to technical, economic
or space constraints.
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Simple, durable and cost-effective design. Employs a
simple design with a small number of components that are
relatively simple to produce. This makes the manufacturing of
our technology more reliable and less costly than that of other
transmissions and results in a more durable product.
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We believe this combination of strengths makes NuVinci
technology capable of replacing existing transmissions or
enabling its use in many of the applications in our target end
markets.
Our
Growth Strategy
The combination of a mechanical technology designed to improve
efficiency and performance, an established research and product
development team, an award winning portfolio of patents, and
relationships with industry members, positions us to apply our
NuVinci technology to a number of established end markets.
Our goal is to use our transmission and engineering expertise,
strategic partnerships and experienced management team to
commercialize applications where our NuVinci technology
has a clear competitive advantage. We intend to pursue the
following strategies to attain this goal:
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Expand current markets through continued development, sales
and marketing. In order to expand our market and increase
the demand for our NuVinci technology, we will continue
to develop improvements to our existing products that address
the needs of our OEM customers and the end user. We will also
continue to develop our sales staff, participate in industry
marketing events and conduct targeted marketing efforts to
expand the knowledge and familiarity of the public with our
products and our trademark.
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Pursue new markets and new applications where NuVinci
technology has a clear competitive advantage. We will
continue to focus our development efforts on applications in end
markets where we believe NuVinci technology has
competitive advantages over existing transmission system
technology as well as markets that do not currently employ a
transmission system.
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Continue to invest in research and development. We
believe that our NuVinci technology provides us with a
competitive advantage over existing CVTs and traditional
gear-based transmissions. We intend to continue investing in
research and development to improve and further develop the
design of applications in our current end markets and continue
developing proprietary technologies for other applications where
our technology offers a competitive advantage.
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We intend to implement these strategies through:
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Leveraging commercialization capabilities learned from the
bicycle market into the development of other markets. We
have completed the commercial development of a complete supply
chain in the bicycle market. We intend to use this experience to
commercialize and apply our NuVinci technology to
subsequent end market applications.
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Partnering with industry members to adapt and commercialize
our products. In each end market application, we intend to
develop strategic relationships with industry members as
development partners and customers. This approach should provide
insights into the performance requirements of each market,
increase the likelihood of successful commercialization and
reduce development costs.
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Applying a flexible approach to manufacturing. In
certain target markets, such as bicycle, EVs and
automotive accessory drives, we intend to engage high quality,
cost effective contract manufacturers to make our products. In
other target markets, such as wind and lawn and garden
equipment, we intend to develop licensee relationships with key
manufacturers to maximize our growth and cash flow prospects and
further our brand awareness, while effectively managing our
capital and human resources.
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Our
Management
Our senior management team is comprised of industry veterans
with a wide range of experience in the development and
commercialization of technology and products. Our chief
executive officer has over 20 years of automotive-related
experience with a number of management positions in the
automotive business,
71
including president of Visteon Climate Control System
Ltd at the time a subsidiary of Ford
with experience in growing successful organizations. Our chief
operating officer brings over 30 years of automotive
experience in operations, engineering and sales both
domestically and internationally including management roles at
General Motors and automotive suppliers. Our chief technology
officer, a fellow of the Society of Automotive Engineers,
previously headed the drivetrain group at the Southwest Research
Institute in San Antonio, Texas. Our president of the
bicycle division has over 20 years of sales, product
development and business development experience in the
automotive industry, both domestically and internationally
serving in senior global roles with suppliers such as Visteon,
Federal-Mogul and Echlin Inc.
Company
History
We were originally formed on December 11, 2000 as Motion
Systems Technologies, LLC, which was subsequently converted into
Fallbrook Technologies Inc., a Delaware corporation, on
April 13, 2004.
In 2002, we retained an independent design and testing
laboratory serving automotive OEMs to conduct a series of tests
to verify the potential of our NuVinci technology. The
tests helped identify further development targets and indicated
that our technology had the potential for use in a number of end
market applications including variable speed gearboxes and
generally within the automotive industry. We also separately
confirmed analytically and then with prototypes our
technologys ability to support the implementation of an
infinitely variable transmission (IVT), without additional
shafts and gearsa feature we believe to be unique to
NuVinci technology among CVTs.
Following these tests, we determined that additional engineering
and management expertise was needed to commercialize our
technology. In 2004, we hired auto industry veteran
Mr. William (Bill) Klehm as President and CEO, converted to
a Delaware corporation and changed our name to Fallbrook
Technologies Inc. Bill Klehm assembled a team of senior
engineers from the transmission field and several managers
seasoned in development initiatives. We also accelerated our
research and development initiatives resulting in our first
manufacturing agreement later in 2004. In 2005, we signed a
development agreement and license with Aftermarket Technologies
Corp. for the development and manufacturing of our bicycle
product.
In 2006, we entered into a number of commercial agreements,
including a trademark licensing and development agreement with a
transmission fluid manufacturer to design, test and market
specialty fluids that improve the performance of the NuVinci
CVT, a manufacturing license agreement with Aftermarket
Technology Corp. (ATC) for the manufacture of NuVinci
CVTs and OEM licensing agreements with Ellsworth International,
Inc., Batavus BV, and Currie Technologies to design and market
bicycles and electric scooters featuring the NuVinci
technology.
On January 3, 2007, the Company formed a wholly-owned
subsidiary, Viryd Technologies Inc. (Viryd) (formerly known as
Fallbrook Wind Technology Inc.), a Delaware corporation, for the
further development of applications specifically designed for
the wind turbine market. On December 18, 2008, we completed
a spin-off of Viryd through a pro rata distribution of shares to
our stockholders.
In early 2008, in an effort to gain greater control of the
manufacturing process, we agreed with ATC to terminate its
license agreement and moved to a contract manufacturing platform
by entering a manufacturing supply agreement with MTD Products
Inc, a manufacturer of outdoor power equipment.
In December 2008, we closed our largest financing round of
approximately $25 million from a consortium of private
investors and two leading cleantech venture capital firms; NGEN
Partners and Dutch investment firm Robeco, a wholly-owned
subsidiary of Rabobank Group. In November 2009 we completed a
subsequent closing of this same round for approximately
$4 million, which included new and existing investors. This
investment round followed three previous private investment
rounds that in the aggregate provided approximately
$55 million in financing for the development and
commercialization of our NuVinci technology.
In 2009, we began the process of phasing out production of our
existing bicycle product in order to prepare for the launch of
our next generation bicycle product, the N360, for which we
launched manufacturing in June 2010 and shipped initial products
to customers in July 2010. We terminated our manufacturing
supply
72
agreement with MTD Products Inc. in October 2009. On
January 30, 2010 we signed a supply agreement with Tri Star
Group, a company located in Shanghai, for the manufacture of
N360, thereby completing a selection process that began in 2008.
In August 2010, we closed a private placement financing round of
$6.0 million to support continued operations.
Our
Technology
Existing
Technologies
Heightened concern for the environment and the desire for
reduced dependence on fossil fuels have led to an increased
demand for vehicles and equipment that operate more energy
efficiently, with lower emissions and that provide the same or
superior performance. Vehicle and equipment manufacturers
continue to look for technological improvements that meet the
increasing environmental standards without sacrificing
performance. Increased regulatory standards for efficiency and
reduced emissions also drive the pursuit of such improvements.
For automobiles and other vehicles, improving the operating
efficiency of the engine or motor can have the most significant
impact on the overall efficiency of the vehicle.
Manufacturers of automobiles, other vehicles and equipment often
focus on the transmission as an area in which to achieve such
improvements. Transmissions take the operating speed of a motor
or engine and convert it to the speed necessary for the
operation of the vehicle or equipment. Since there are few
instances where the motor or engine operates optimally at the
same speed as the vehicle or equipment, transmissions are needed
to take the speed of the engine or motor and produce an output
speed that meets the operating speed requirements of the vehicle
or equipment.
As an example, an automobile with a single gear is almost
useless, because if geared low enough to start off or climb a
hill, the car would have an unacceptably low top speed. If
geared high enough to drive on a freeway, a single gear car
would not be functional at startup or able to climb a hill. In
contrast, the same car equipped with a five-speed transmission
can stop and start while pulling a trailer over a mountain and
it can cruise at high speeds on a freeway. The transmission
makes the car functional. In addition, the multi-speed
transmission enables the engine to operate more efficiently. For
example, automobile engines typically operate most efficiently
at a particular engine speed, or RPM. While the transmission is
in each discrete gear, the engine must increase its speed from
low to high before the car is travelling fast enough to allow a
change to the next higher gear. As the engines speed
increases within each discrete gear, the engine must rev up from
a low RPM to a high RPM, thereby moving into and out of its most
efficient operating range. In an automobile equipped with a five
speed transmission, unless the automobile drives primarily at a
fixed speed, the engine typically spends a large amount of
driving time outside its most efficient operating speed and
consequently the engine wastes energy and creates unnecessary,
harmful emissions. By increasing the number of gears in a
transmission, it is possible to increase the energy efficiency
of the engine.
Unlike conventional transmissions that have a fixed number of
gears or output speeds, a continuously variable transmission, or
CVT, is a particular type of transmission that has an unlimited
number of speed ratios between its high and low limits. This
allows the engine or motor to stay within its peak efficiency or
peak power operating speed more than the conventional
transmission. For example, when used in an automotive
transmission, CVTs improve performance by allowing the engine or
motor to continuously deliver peak power and torque to the
drivetrain while steadily allowing the speed of the car to
increase through acceleration. This improves efficiency by
allowing the cars engine to remain in its most efficient
speed as the car speeds up or slows down.
Therefore, because of the unlimited number of gears that allow
engines to operate at their most efficient or highest power
speed, while the speed of the rest of the mechanical system is
allowed to vary, the CVT optimizes the overall system
efficiency, reduces fuel consumption and emissions, thereby
reducing the adverse effects of such mechanical systems on the
environment. Besides automobiles, these benefits of CVTs are
similarly achievable in many other mechanical systems that
require variation between the speed of a primary drive and the
speed required to operate the mechanical system.
73
How Our
NuVinci Technology Works
Our NuVinci technology is a CVT that is based on a set of
rotating, tilting balls clamped between two rings. Figure 1
illustrates the basic components of the NuVinci CVT
technology. As shown in Figure 1, our NuVinci
technology has:
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an input disc, or ring, driven by the motor or engine that is in
contact with and drives the balls on one side,
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a cylindrical support member, or idler, located in the middle of
the balls that keeps the balls in their positions around the
center of the CVT, and
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an output disc, or ring, in contact with and driven by the balls
that forms, or is connected to, the output of the CVT.
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Figure 1 NuVinci Technology
Torque from an engine, motor or other input source (illustrated
in Figure 1 by the lines with arrows going left to right)
is transferred through the input disc to the balls via the
contact between the balls and the input disc. The torque is then
transmitted through the balls, each of which rotates about its
own separate axle, and then to the output disc via the contact
between the ball and the output disc. The input disc and output
disc are clamped onto the balls tightly so that the requisite
amount of clamping force is provided for the amount of torque
being transmitted. A transmission fluid provides traction, and
prevents metal to metal contact, between the balls and discs and
provides lubrication for bearings and other components.
The speed of the input disc compared to the speed of the output
disc, or speed ratio, is controlled by the angle of the ball
axles relative to the axis of the transmission. Figure 2
illustrates that by tilting the ball axles, the transmission
can be shifted from low to high (as shown left to right), or
from high to low, or to any ratio in between. The number of
balls used depends on several factors including torque and speed
requirements, operational requirements and space considerations,
among others.
Figure 2 Shifting NuVinci
Technology
Although we initially developed our NuVinci technology as
a new type of CVT, we discovered after further development that
the same components of the NuVinci technology could be
configured as an IVT capable of forward, reverse and a
powered zero state, where most other CVTs require
extra shafts and gearing. In the powered zero state
for vehicle main driveline transmissions, the NuVinci IVT
will hold the wheels stopped on a vehicle even though the engine
is running and the transmission is engaged, such as on a hill at
a stop.
74
NuVincis
Competitive Advantages
We believe, based on our experience, research and internal
testing, that our NuVinci technology provides enhanced
performance and improved overall system efficiency for
mechanical systems that require variation between the speed of a
primary drive and the speed required to operate the mechanical
system. Considering the pervasive use of mechanical systems, we
believe that technologies, such as the NuVinci
technology, that deliver improved performance, fuel or
energy efficiency or design flexibility combined with reduced
emissions should be of interest to consumers and manufacturers
in todays global climate of concern for emissions and
efficiency improvement.
Compared to conventional transmissions, as with any CVT, our
NuVinci CVT offers seamless and continuous transition to
any ratio within its range, allowing motors and engines to
operate at their most efficient speed thus maximizing overall
efficiency, with no jarring or shocks from the shifting process.
Consequently, NuVinci technology, like other CVTs, can
improve acceleration and performance while providing system
level efficiency improvement over conventional transmissions.
Our NuVinci technology can be configured in several ways
all in one compact package, providing flexible packaging. Due to
its flexible packaging and scalable design, we have shown in
commercial products, prototypes and test vehicles that it can
enable the commercial use of CVTs in applications not currently
using them, such as automotive accessory drives, wind turbines
and bicycles.
Although they have a long history, CVTs have varied designs and,
through our research we believe they have proven difficult or
costly to manufacture to date. They have also been too difficult
to apply, control or scale to the applications that could
benefit from a smooth, quiet and gearless solution. In contrast
to most other CVTs, we believe, based on our experience,
research and internal testing that our NuVinci technology
is less complex, more compact, provides more stable control, is
easier to shift, offers more scalability across product lines,
can be assembled and configured to suit a wider range of
applications and is less expensive to manufacture and assemble.
We believe, based on our experience, that our NuVinci
technology can be viewed as the first truly
functional CVTone that is simple, versatile,
relatively inexpensive and scalable.
Our NuVinci technology uses materials that are commonly
available and widely used today in many industries. The primary
materials used in our technology include steel and aluminum,
both of which are available at commodity prices on mass
production scale. Materials available as commodities are
inexpensive and have more stable pricing than many special
purpose materials that have relatively little, if any, mass
production history. Unlike many green technologies
that are dependent on rare raw materials with volatile pricing,
we believe that our technologies offer a more sustainable
economic proposition.
In summary, we believe NuVinci technology provides
flexibility in design and configuration that makes it well
suited for applications in many major industries including
bicycles, light electric vehicles, agricultural equipment and
tractors, automobiles, trucks, accessory drives, and wind
turbines of all size classes. For many applications, we believe
these advantages should be enabling, meaning that the
application simply is not practical without the assembly and
configuration flexibility of the NuVinci technology.
Market
Opportunities
Overview
Our NuVinci technology is designed to improve the overall
efficiency and performance of vehicles and equipment that
operate at various speeds.
Automotive
Accessory Drives
BackgroundAccessory drives
We believe the opportunity for our NuVinci technology
within the transportation segment is substantial. While our
technology could be applied as the primary vehicle transmission,
our current development and initiatives
75
are focused on improving the performance of automotive accessory
drives, a market we believe should have fewer barriers and take
less time to enter, as well as having lower capital requirements.
Figure 3 below is an illustration of the front end of a
typical engine and various accessories that are driven off the
engines crankshaft by a belt and a series of pulleys. As
illustrated, numerous automotive accessory drives exist in a
vehicular system, including an air conditioning compressor,
alternator, water pump, power steering pump and, in some cases,
a supercharger (not shown).
Continuously
Variable Accessory Drive (CVAD) Applications
Figure 3 Engine Accessories
These automotive accessory drives are powered directly from the
engine and because the belt and pulleys that operate the
accessories act as a single speed transmission, the operating
speeds of the accessories are limited to going up and down as
the engines speed changes. These accessories are typically
sized to provide their required performance even in the worst
case scenariofor instance, the AC compressor is sized to
cool a car with the engine idling, sitting in traffic
conditions, at a very high outside temperature. This means that
anytime the engine is not operating in that worst case scenario,
the accessories are over-performing and are wasting energy. In
other situations, design constraints prevent the use of
accessories sized large enough to meet the worst case
conditions. In such cases the accessory cannot meet its basic
performance requirements.
We are initially focusing on the performance and optimization of
the alternator, supercharger, power steering pump and air
conditioning compressor and will follow with products designed
to improve the overall system by applying the technology to the
crankshaft drive pulley to vary the speed of all the accessories
independently of the engine speed. Based on a review of patents
and technical papers arising from research conducted by other
companies in the field, we believe a number of companies have
spent significant resources attempting to use multi-speed drives
to optimize automotive accessory drives in the quest for greater
fuel economy. To date, there are few if any commercially
successful products in the market addressing this need. We
believe, based on our research and experience in the automotive
industry, that this is due to key technological shortcomings of
competing CVT Technologies.
We have developed the NuVinci continuously variable
accessory drive (CVAD) in order to address the problems in the
automotive accessory drive market. A CVAD is a NuVinci
CVT used to drive automobile engine accessories. It can be
applied to an engines crankshaft such that the operating
speed of all the accessories is optimized together at all engine
speeds.
Alternatively, our NuVinci CVAD can be mounted on an
individual accessory to optimize its performance and efficiency.
While we believe there are many accessories that could benefit
from the application of our NuVinci CVAD technology, we
are currently focusing our resources on applying our CVAD for
the alternator,
76
supercharger, power steering pump and air conditioner
compressor end markets. Our NuVinci technology can be
used by original equipment manufacturers, or OEMs, in new
vehicles or can be applied to most vehicles through the
aftermarket as a means to improve overall fuel efficiency and to
enhance performance.
NuVinci
OpportunityAlternators
Alternators convert mechanical energy created by the engine into
electrical energy to charge the battery and power the
vehicles electric system when the engine is running. The
speed of the alternator, and therefore its ability to generate
electricity, is dependent on the speed of the engine because it
is coupled directly to the engine crankshaft via a belt and
pulleys. Therefore, when engine speed is at its lowestwhen
the engine is idlingthe speed of the alternator is at its
lowest and it generates the least amount of electrical power. In
some cases, this prevents the alternator from creating
sufficient electricity, resulting in excessive battery drain and
reduced electric system function, such as when a bus
lights dim when it stops. Conversely, as the alternator is
designed for worst case conditions, that is at low engine speeds
and high ambient temperatures, when the vehicle is accelerating
and cruising, well above low engine speeds, the alternator
operates at levels above that which is needed
resulting in increased fuel consumption and
unnecessary emissions.
In heavy-duty vehicles, demands on alternators and batteries are
increasing as a result of the addition of numerous electronic
controls and devices that place a great deal of stress on the
electrical system of the vehicle. In order to provide sufficient
electrical power when the engine is idling, or at its lowest
speed, the only current solution is to raise the idle speed of
the engine to increase the alternator speed and associated
electrical output. This is a poor solution due to the resulting
increase in fuel consumption and emissions. Accordingly, we
believe that there is a significant opportunity to upgrade
existing vehicles using our NuVinci technology to improve
performance and extend the life of batteries and alternators.
Our CVAD decouples the speed of the alternator from the speed of
the engine, which we believe, based on our research and testing,
enables the alternator output to meet the vehicles
electric power needs regardless of driving conditions or engine
speed. We demonstrated the potential improvement in alternator
performance in a 2007 project conducted on a heavy duty
government vehicle. The vehicles operators wanted to
understand the potential of the NuVinci technology to
improve the performance of its existing alternators.
Figure 4 NuVinci CVAD Performance
Improvement
77
Figure 4 is a graph of the test results from our internal
tests showing improved alternator performance with the
NuVinci CVAD. The bottom line shows the electrical
current the stock alternator delivers at various engine speeds.
The top line shows the electrical current delivered at various
engine speeds by the same alternator when its speed is
controlled by the NuVinci CVAD. The shaded area shows the
increased electrical current that is available at various engine
speeds when using the NuVinci CVAD.
Testing of the tactical vehicle over a standardized EPA drive
cycle, which simulates real world driving conditions for engine
speed over time, showed what we consider to be dramatic
improvement with the NuVinci CVAD. This test showed that
the NuVinci CVAD delivered over 75% more current at idle
than the stock alternator and over 34% more total energy over
that same 1,200 second test. When that is extrapolated over an
entire 7.5 hour workday the NuVinci CVAD helps
deliver over 750% more energy. The 2007 project successfully
demonstrated to our satisfaction the packaging, control
responsiveness compatibility, proper current at any engine speed
and improved total energy output of the CVAD-equipped
alternator, even at high ambient temperatures, as we expected.
NuVinci
OpportunitySuperchargers
A supercharger is an air compressor that increases the air
flowing into the cylinders of an internal combustion engine. The
increased level of oxygen in the cylinder in each combustion
cycle results in more power output from each such combustion
event than would be available without the supercharger. This
increases the overall output power of the engine. Similar to the
alternator, the speed at which the supercharger operates, and
thus the amount of air it pumps into the engine, is determined
by the speed of the engine.
Our NuVinci CVT technology can vary the speed of the
supercharger independently of the engine speed to provide
maximum boost or the most efficient performance at all engine
speeds. We believe, based on tests performed with our
prototypes, that the use of our technology shows great potential
for improving vehicle performance and fuel economy when coupled
to a supercharger. Specifically, we expect our NuVinci
technology to reduce the fuel consumption of certain engines
equipped with superchargers, or enable smaller engines with a
supercharger to achieve similar performance to larger, less fuel
efficient engines.
We believe there are significant benefits in decoupling
superchargers from the crankshaft on existing engine systems. We
believe, based on our research, that advanced engine designs
using CVTs with superchargers are capable of increasing vehicle
fuel economy by
30-50%
through a 33% reduction in engine size while at the same time
maintaining the power, top speed and acceleration of the vehicle.
Figure 5 Potential Supercharger
Enhancement
Figure 5 illustrates the results of a modeling analysis
performed for us by an independent automotive industry
consulting firm of the improvement that is possible when
combining the NuVinci CVAD with a supercharger drive.
These results demonstrate the opportunity to reduce the size of
car engines to reduce fuel consumption
78
and emissions without sacrificing performance. In the figure, as
identified in the legend, the torque available from a standard
2.0 liter 4 cylinder (I4) engine, the torque output available
from a 3.6 liter 6-cylinder (V6) engine, which is notably higher
than the standard I4 engine, the higher torque available when a
supercharger is added to the I4 engine, and the increased amount
of torque available from the I4 engine equipped with a
supercharger and a NuVinci CVAD are illustrated by their
respective lines. The shaded area shows the increased amount of
torque created by utilizing the NuVinci CVAD-driven
supercharger. This graph shows that at some engine speeds the I4
engine with the CVAD-enhanced supercharger is actually
outperforming the larger V6 engine illustrating the opportunity
to downsize the engine without sacrificing performance.
We are currently working with a major automotive supplier under
an engineering services agreement for the development of a
NuVinci CVAD for automotive superchargers. This supplier
has an option to enter into a commercialization agreement with
us containing predetermined terms including the exclusive right
to purchase NuVinci CVADs for superchargers, pricing and
warranty requirements, among other things. The prototype we are
currently testing is smaller than that tested for the heavy duty
alternator drive, but is configured in a similar fashion and
should provide valuable data on the durability of the design as
we move to commercialization.
NuVinci
OpportunityAir
Conditioner Compressors
Similar to alternators and superchargers, air conditioning
compressor output is also determined by the engine speed. The
compressor is designed to operate at necessary levels in the
worst case operating conditions, which is low engine speeds and
high ambient temperatures and cooling demand, meaning that the
compressor is sized to provide required cooling during engine
idle. However, as the engine speed increases, the compressor is
overworked and consumes more fuel than is necessary.
Furthermore, the automotive industry is attempting to adjust to
increasingly stringent U.S. and European regulations, such
as European Regulation (EC) No 842/2006, that phase out the use
of certain automobile air conditioning system refrigerants in
favor of new, more environmentally friendly system refrigerant
formulations. These new refrigerants have thus far demonstrated
significantly decreased cooling performance at low compressor
speeds. We believe that optimizing the compressor performance
with our NuVinci technology should provide automakers and
suppliers with an economical solution for implementing the new
refrigerant formulations.
Similar to the supercharger application, which is another type
of compressor, our NuVinci CVAD can vary air conditioning
compressor speed independently of the speed of the engine so
that it can provide optimal cooling at all engine speeds. This
allows system designers to optimize the speed of the air
conditioning compressor to provide satisfactory cooling
performance while maximizing fuel efficiency and reducing
emissions.
We are currently working with Hodyon to develop a CVAD
specifically designed to allow Hodyon to optimize the
performance of their AC compressors. On March 5, 2010, we
executed a joint development agreement with Hodyon to develop
interface hardware to connect our CVAD to their AC compressor.
NuVinci
OpportunityPower
Steering Pumps
Power steering pumps, which assist the drivers steering by
pumping power steering fluid, are typically designed to
accommodate the system requirements at their most arduous
situation, referred to as dry park. Dry park is the
situation that occurs when the steering wheel is being turned
significantly while the engine is at a low speed and the turning
surface is dry. For example, when a driver is maneuvering into a
tight parking space, the car or truck is stationary on a dry
parking lot surface, the engine is at or near idle, and the
driver is turning the steering wheel rapidly from one extreme of
its travel to the other. This situation places by far the
highest power demand on the power steering pump, but again the
speed of the pump is tied to a low engine speed and thus must be
sized to produce enough flow to properly steer the vehicle in
this extreme condition. As a result, when the vehicle is going
down the road at higher engine speeds with minimal steering
input, the pump is pumping too much fluid, and more than can be
bypassed through the system. This creates a great deal of heat
in the system and wastes fuel. This predicament has led many
automakers to switch to electric power steering systems that
completely de-couple the power steering system from the engine.
While this has shown
79
to be viable on passenger cars, larger commercial vehicles do
not have enough electrical power available to make such an
electric system viable.
The adverse effects during high speed operations that are
associated with an oversized power steering pump are most severe
on larger vehicles that have the highest dry park loads imposed
due to their large tires and high weight. We are currently
working with a leading supplier of commercial truck power
steering pumps under a memorandum of understanding to develop a
NuVinci CVAD system for their power steering pumps. We
believe, based on our research, that this application will
reduce fuel consumption when compared to the conventional fixed
displacement pump and fixed ratio engine to pump drive system
used presently.
MarketAccessory
drives
We define the global automotive vehicle market, based on our
research, as consisting of two general categories: passenger car
and light truck and heavy duty truck (including buses). We
believe our NuVinci technology has broad applicability in
both categories in both new and used vehicles. Table 2
below provides the unit volumes of the three vehicle
categories and identifies annual new unit sales and the current
installed base for the U.S.
Table
2Automotive Vehicles by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Sales (2009)
|
|
|
Installed Base (2008)
|
|
Vehicle Segment
|
|
U.S. (000 units)
|
|
|
Global (000 units)
|
|
|
U.S. (000 units)
|
|
|
Car & Light Truck
|
|
|
10,432
|
|
|
|
56,000
|
|
|
|
234,067
|
|
Heavy Duty Truck and Bus
|
|
|
228
|
|
|
|
2,681
|
|
|
|
6,619
|
|
We are targeting the heavy duty truck and bus aftermarket in the
near term due to what we believe are low barriers to entry, the
potential for fleet sales and the need in that market for
solutions to the problems identified above make the opportunity
attractive. We believe that the addressable number of these
vehicles in the aftermarket, when considering vehicle types,
engine compartment configurations and other factors, is about
1.5 million units. While we expect some penetration into
the aftermarket for passenger cars and light trucks over the
next five years, the projections of any penetration rates would
involve significant speculation. Over a longer term, we expect
OEM penetration on new sales in passenger car and light truck
and in heavy duty trucks and buses. Due to the same factors as
the aftermarket, we see the OEM market for passenger cars and
light trucks as a 10.5 million annual vehicle market
opportunity and for new heavy duty trucks and buses to be about
800 thousand units. While we are assuming the launch of each of
our CVAD products, we are initially assuming only one CVAD
product per vehicle in the target markets, and therefore we
believe combined OEM sales for heavy duty trucks, bus and
passenger cars and light trucks presents an addressable annual
market of approximately $1.4 billion, while the total
one-time aftermarket opportunity for heavy duty trucks currently
on the market is approximately $1.0 billion.
Commercialization
Plan Accessory drives
To date, our efforts in the automotive accessory drive field
have focused on developing and optimizing the design and system
performance of our technology. In order to gain valuable
industry, manufacturing and product insights, to further develop
brand awareness and increase market acceptance, we have built
and continue to build business relationships with established
industry members in each of our target markets. For example, in
the alternator market we have worked with a leading supplier of
alternators and a niche supplier of military alternators. In the
power steering pump market, we are working with a leading
manufacturer of power steering pumps for commercial vehicles.
Additionally, we are working with a leading automotive supplier
under an engineering services agreement for the development of a
NuVinci CVAD for automotive superchargers and we have
entered a development agreement with an industry manufacturer
and distributor of air-conditioning systems.
We expect to use the experience gained from our contract
manufacturing arrangement in the bicycle market to develop
commercial scale operations in the CVAD market for the
alternator, air conditioner and supercharger
80
applications. The products are at a pre-production design
level, except for supercharger CVAD, which has undergone
preliminary proof of concept testing with further design and
concept testing required, and we have performed preliminary
testing on prototypes. While there should likely be some
difference in the mounting hardware, the alternator product and
the air conditioner compressor product are very similar and we
believe may be manufactured by the same manufacturer. The
supercharger product will be a different sized product from the
alternator and air conditioner products and therefore we may
utilize a different manufacturer for its production. Similarly,
due to its different size, the power steering pump product may
be produced by a different manufacturer.
All of these products are currently in the design, prototyping
and testing phase of development. The prototypes for all of
these have been assembled internally from parts delivered
primarily from Tri Star Group, our manufacturer for our bicycle
CVT product, with some parts made internally. We have spent over
a year working with Tri Star Group for the development of our
initial CVAD products. Through a series of engineering service
programs and production launch of the N360 bicycle CVT, we have
developed an in-depth understanding of Tri Stars
manufacturing capabilities. We believe they could play a
significant role in production of CVAD products. A
pre-production prototype of an alternator CVAD has been
delivered to an OEM customer and installed in its test vehicle
and based on the units performance, the customer has
provided positive feedback. We continue to work with
developmental partners to validate product durability in
multiple applications. These tests and reviews are occurring
with other OEMs, independent global engineering services
providers and fleets.
On April 23, 2010, we executed a memorandum of
understanding with Chengdu Bus Company (Chengdu) in Chengdu,
China, which is located in the Sichuan province. The non-binding
memorandum states that the two companies intend to enter an
agreement for the development of a continuously variable
accessory drive for application in Chengdus buses. We have
begun assembling hardware and testing equipment to run
preliminary testing of an air conditioner drive in
Chengdus buses.
The prototype testing these products are currently undergoing
has resulted in design refinements. When the prototype testing
is complete, changes will be made to the design to generate a
production design and then additional testing will be performed
to validate the production design. Following this production
design validation, the manufacturing tooling and process
development and supplier development will commence, the
completion of which will lead these products to manufacturing
launch.
We expect to begin negotiations in 2010 for the supply of
products for this end market application with the intent to
complete an initial production run in 2011 of the alternator
CVAD product and commercial scale production in 2012.
We currently expect to commence sales of our automotive CVADs
for alternators and air conditioner compressors in 2011 through
aftermarket distributors. This should allow us to demonstrate
our capabilities in this market and develop brand awareness,
which we will then use to drive distribution through OEMs for
these products starting in 2012. We are working under an
engineering services agreement for the development of our
supercharger products with early prototype testing complete and
further design and testing underway. We expect to begin OEM
launch of the supercharger product through our customer in 2012.
We receive partial funding for the development of the
supercharger product from the engineering services agreement.
However, we expect the majority of the funding for the
development of the supercharger product, as well as all of the
funding for the other CVAD products, to come from the net
proceeds from this offering and our existing cash and cash
equivalents or from licensees or joint venture partners.
Electric
Vehicles
Background
Electric vehicles, or EVs, are two, three and four-wheeled
vehicles powered solely by electric motors or by an electric
motor in combination with an internal combustion engine, as in a
hybrid vehicle. With increasing fuel costs and more stringent
engine emissions requirements, EVs are becoming more popular
around the world as
81
consumers are increasingly looking for green
solutions. However, current EV performance and range is
less than that of competitive gasoline-powered vehicles.
The powertrain of a typical EV comprises a power source, usually
a battery, an electric drive motor and controller, and power
transmission devices such as sprockets, chains or gearing. Many
EVs operate in a single speed configuration where the speed of
the vehicle is directly linked to the speed of the drive motor,
by a fixed gear ratio. Although the motor controller for an EV
can direct the motor to operate at high or low speeds or to vary
smoothly between them, the motor has a defined operational speed
that maximizes its efficiency and similar to the gasoline
engine, if the motor can be operated closer to this defined
speed, then would be able to more efficiently provide torque and
power to drive the vehicle, leading to increased vehicle range
and reduced peak current draw among other advantages. As a
result of this condition, achieving practical range compared to
gas or diesel powered vehicles has challenged EV manufacturers,
and their electrical systems have to endure high electrical
current draw when climbing hills or starting from stop. These
realities have led to significant research and development
activities directed toward improved battery technology to
support greater storage of energy in the vehicle and on the
power electronics of such vehicles to meet the operational
requirements of the vehicle.
Furthermore, power electronics, which are increasingly used in
todays vehicles, act as an additional drain on system
power and reduce the overall system efficiency in EVs. Power
electronics are used in electrical devices for many purposes
such as varying voltage or frequency, converting AC to DC or
vice versa, as well as changing the operating speed of motors.
We believe, based on our research, that power electronics for
hybrids represents 20% of the vehicles material costs and
is larger for full electric EVs.
Current EVs are increasingly utilizing components made from rare
earth materials for their operation and performance. However,
our NuVinci technology does not rely on the use of these
materials. Instead, the NuVinci technology uses common,
readily available materials used in a wide array of industries
today, which are available in mass quantities from multiple
sources with generally less pricing volatility than is
associated with special purpose materials.
NuVinci
OpportunityElectric
Vehicles
Based on their relatively low sales and our research, we believe
EVs suffer in their ability to effectively compete with gasoline
powered vehicles as a viable source of reliable daily
transportation because they do not generally have the range, top
speed, hill climbing ability or the ability to pull significant
loads. They therefore generally come up short on expectations
placed on them to replace gasoline engines and thereby reduce
fuel consumption and emissions. Testing we have conducted has
shown that the NuVinci CVT allows EVs to accelerate,
climb hills and pull loads at more efficient motor speeds to
increase vehicle range and limit peak current levels, which
typically improves battery life. Our NuVinci CVT allows
the motor to operate at more efficient or optimal speeds for any
vehicle speed to both improve performance of the EV and increase
its efficiency. NuVinci CVTs will be integrated into the
driveline of an EV as the primary transmission between the motor
and the wheels to allow the motor to operate at a more optimal
speed during different driving conditions and speeds. We have
incorporated our NuVinci CVT into the rear wheel of a
standard electric scooter and have demonstrated several
improvements through empirical analysis and comparative testing.
Specifically, through our demonstration and testing we have
demonstrated to our satisfaction increased acceleration, higher
top speeds, improved hill climbing, extended real world range
and enhanced battery management when the NuVinci CVT is
used as the primary transmission on such electric vehicles.
While this was performed on a scooter, we believe that the
results could be realized in larger vehicles as well.
Table 3 provides an illustration of the actual
improvements we have observed based on test results reported in
our white paper published at the 2007 Ele-Drive Conference.
82
Table
3NuVinci CVT Performance Improvements
|
|
|
|
|
Operating Metric
|
|
|
Empirical Improvements
|
(1)
|
Acceleration(2)
|
|
|
38
|
%
|
Steady State Velocity On A
Hill(3)
|
|
|
24
|
%
|
Maximum
Speed(4)
|
|
|
47
|
%
|
Range(5)
|
|
|
20
|
%
|
|
|
|
(1)
|
|
Results reflect the actual
performance improvements in a 2006 model Currie IZIP 1000
scooter in an unmodified (stock) vehicle against a vehicle
equipped with a NuVinci CVT.
|
|
(2)
|
|
Acceleration is measured as the
improvement in time to increase in speed from 019 KPH.
|
|
(3)
|
|
Steady state velocity on a hill is
measured as the improvement in speed while traveling up a hill.
|
|
(4)
|
|
Maximum speed is the improvement in
the maximum sustained speed.
|
|
(5)
|
|
Range is measured as total
kilometers driven in a city center.
|
We intend to leverage our existing applications and designs in
adapting our NuVinci CVT to provide driveline
transmissions for various vehicles in the EV market. We will
initially focus on smaller vehicles with lower barriers and
shorter time to entry and move towards hybrid automobiles and
full electric automobiles. Our focus for the EV market is to
provide products that can be easily incorporated in to the
design of EVs so that designers can optimize the performance of
electric motors and the vehicle resulting in EVs that are better
able to compete with gasoline powered vehicles.
To date we have developed prototypes of the NuVinci CVT
that demonstrated the performance and functionality necessary to
successfully implement the NuVinci technology in the
EV market. Our first development of a higher powered,
higher torque driveline transmission with the NuVinci CVT
was a driveline transmission for a medium sized agricultural
tractor. The design had to meet several challenging performance
characteristics in order to stand up to the demanding
requirements of the medium agricultural sector. We designed and
manufactured a prototype with which we were able to successfully
demonstrate satisfactory levels of performance throughout the
operating range of the transmission.
Through an engineering services agreement with our former
licensee ATC, we also designed and developed a prototype of our
technology for a medium sized sport utility vehicle. Through
this project we, along with ATC, were able to demonstrate a
fully functional prototype operated by the driver with a
standard transmission control lever having the normal
PRNDL shifter, representing the standard park,
reverse, neutral, drive and low speeds to be selected by
the driver. This prototype included a valve body and electronic
control unit to automatically shift the transmission ratio
according to the driving needs of the operator. Through these
two programs we were able to demonstrate the applicability of
the NuVinci technology to real world automotive
applications thereby lending credibility to our calculations
about the scalability of our technology. While both of these
programs were designed for internal combustion engines in the
target vehicles, they were tested on test stands operated by
electric motors and from our testing of these prototypes and the
smaller light electric vehicle prototypes, we expect the
technology to perform well in real world EVs.
We believe the improved operating performance that can be
achieved using our technology in EVs should increase their
attractiveness as a practical option to gasoline powered
vehicles and boost demand for our products. By allowing the
motor to operate at optimal speeds as the vehicles driving
conditions change, as multispeed transmissions do in other cars,
EVs can realize the same benefit that gasoline powered cars do
from implementing the NuVinci CVT. Furthermore, we
believe that using a NuVinci CVT to optimize the speed of
the motor while allowing for the vehicles varying driving
conditions and speeds provides greater control flexibility and
can be used to simplify the motor controller in either EVs or
hybrid vehicles potentially reducing or eliminating the reliance
on complex, relatively inefficient and expensive power
electronics.
83
MarketElectric
Vehicles
EVs include categories ranging from full size utility or
industrial vehicles, such as fork lifts, to passenger cars and
all the way down in size to light electric vehicles (LEVs), such
as scooters. They also range from full EVs to hybrid electric
vehicles, to plug in hybrid vehicles. We believe the benefits
realized during our testing on scooters applies equally to
larger vehicles such as electric automobiles and electric
industrial vehicles. A growing number of passenger car sized
electric vehicles are being developed for production by existing
automobile OEMs such as GM and Nissan, as well as new entrants
solely focused on electric vehicles, such as Tesla and ZAP.
Estimation of the growth in sales of EVs is still speculative at
this point. Publicly available reports have estimated that
globally, more than 17 million cars will be hybrid or
electric in 2015. We believe the addressable market for electric
cars and hybrid electric cars alone, not including LEVs, to be
at least 4 million units annually by 2015 representing an
addressable annual opportunity of $1.2 billion.
Commercialization
PlanElectric Vehicles
We expect to partner with vehicle manufacturers and their
suppliers to adapt our existing CVT products to their EV. This
application is currently in the design, prototyping and testing
phase of development. We have tested prototypes of the
transmission on automobiles as well as smaller electric
vehicles. The product is currently going through further design
refinement and will require further testing prior to moving to a
production design. Under the current development schedule for
this complex application, we currently expect to move to
production design and validation in 2012 with an expected
production launch in 2013. We believe that, with the assistance
of joint venture partners, the net proceeds from this offering
and our existing cash and cash equivalents will be sufficient to
fund their product development for the electric vehicle products
currently in development.
We have entered a consulting agreement with Advanced Strategic
Leadership Limited (ASL), a Shanghai company, under which ASL
will provide consulting and market development services for the
Chinese EV market. ASL will provide market data and support
sales and development of our NuVinci technology for EVs
in China. We expect to manufacture our products for the EV
market through a contract manufacturing relationship. We will
select the appropriate contract manufacturer for the product
when a target customer and vehicle is identified.
On August 26, 2010, we entered a memorandum of
understanding with TEAM Industries, Inc. under which we mutually
agreed to negotiate a joint venture for the manufacture of
NuVinci CVTs for small residential and recreational
vehicles including all-terrain vehicles and utility vehicles as
well as low speed vehicles and neighborhood electric vehicles.
Also, on August 26, 2010 we entered a memorandum of
understanding with Shentong Automotive Decoration Co., which is
located in Ningbo near Shanghai, China. Under this memorandum,
we agreed to negotiate a joint venture for the manufacture of
driveline transmissions for electric passenger cars. However, we
cannot be sure that these business relationships will result in
the formation of joint ventures.
Lawn Care
Equipment
Background
The lawn and garden equipment market encompasses a wide offering
of products including lawnmowers, turf and grounds equipment,
trimmers and edgers, among others. Powered ride-on mowers or
lawn and garden tractors represent the largest market segment
and include front engine lawn tractors and rear engine mounted
zero turn radius (ZTR) products, which are further segregated
into consumer and commercial use categories. In recent years,
ZTRs have generated significant market share gains due to their
low profile design and independent wheel controls that allow
users to turn the mower a full
360-degrees
in place. Furthermore, ZTRs, which include two IVTs per tractor,
demonstrate superior performance. According to Hustler Turf,
studies indicate that ZTRs can mow about
20-25%
faster than regular lawn tractors on a U.S. football field
size area.
By having an IVT dedicated to each rear wheel of the lawn
tractor, each rear wheel can rotate forward or reverse
independently of the other. This allows the driver to turn the
vehicle in a circle that is the same size as
84
the width of the vehicle by rotating one wheel forward and the
other in reverse. This provides for the zero turn
radius name these lawn tractors are given. The IVT
technology presently used in lawn care equipment is the
hydrostatic transmission. Hydrostatic transmissions use a
hydraulic pump and motor to vary the speed ratio of the
transmission. These transmission types can generally transmit
more torque than inexpensive rubber belt transmissions, but can
be sensitive to contamination. With efficienciesthat is
the percentage of power provided by the engine to the
transmission that is actually delivered out of the transmission
to the drive shaft and wheelsranging as low as 50%, the
purely hydrostatic transmission is limited to low-end
applications like lawn tractors, where its greater durability
and absence of startup slip enables its use over more delicate
rubber belt types. It is also used in some off-road construction
equipment requiring the function of an IVT despite the fuel
economy penalty. In addition to low efficiency and its high
noise level, this transmission type also suffers from
considerable heat generation and substantial fluid cleanliness
requirements.
Technology innovation in the lawn and garden equipment market
has historically focused on general performance improvements and
ergonomic enhancements. However, due to increasing public and
regulatory pressure, many companies are now looking for
innovation to help reduce emissions and noise, to improve the
utility of electric powered products, and to add
user-friendliness features, like simple controls and improved
handling.
NuVinci OpportunityLawn Care Equipment
Under an engineering services agreement with a leading
manufacturer of lawn and garden transmission equipment, we have
developed an IVT that can be used in ZTRs. Preliminary testing
indicates significant improvement in efficiency over existing
hydrostatic transmissions.
Through testing and analysis, we have found the relative
difference in efficiency between our NuVinci IVT and a
hydrostatic transmission to be substantial. The lower efficiency
of the hydrostatic transmission results in increased fuel
consumption and increased vehicle emissions. As the
Environmental Protection Agency has passed regulations in
September 2008 limiting exhaust emissions from lawn and garden
equipment, OEMs need to find ways to limit exhaust emissions
while providing consumers with the same performance.
Additionally, the mechanical connection between engine and drive
wheels available using the NuVinci IVT, versus the fluid
connection in hydrostatic transmissions, provides improved
control and secure feel as well as improved performance for the
rider. We have adapted our NuVinci IVT to enable the
lawnmower to run forward, reverse and in a
powered-zero state, that is the transmission
maintains a zero output speed while engaged and with the engine
running, with no additional shafts or gearing. We believe this
feature is unique to NuVinci technology among mechanical
IVTs and enables the transmission to be built with fewer
components, thereby reducing overall packaging space and
manufacturing costs. The powered-zero state has proven through
testing to be advantageous as it will hold the mower steady on
the side of the hill when the rider lets up off the control,
whether a brake is engaged or not. We have found through testing
that other IVTs will not hold the mowers position and
brakes must be engaged to prevent the mower from rolling.
Finally, the packaging of our NuVinci IVT provides
vehicle designers more options for vehicle powertrain layout to
enhance rider position on the vehicle and vehicle setup.
MarketLawn
Care Equipment
According to the Freedonia Group, the global lawn care equipment
market in 2008 was estimated at approximately $16 billion,
with an annual growth rate of approximately 2.8% and with about
$9.7 billion of that market in the U.S. (Industry
Study 2542, World Power Lawn & Garden Equipment,
Freedonia Group, Aug 2009). The units sold were estimated to
exceed 7.7 million units per year with the ride on lawn and
garden vehicle market estimated to exceed 1.65 million
units annually. Of this market, vehicles with automatic
transmissions (including ZTRs) make up approximately 50%, and of
that 50% hydrostatics have dominant market share. We have
entered an exclusive manufacturing license arrangement for this
end market application under which we should collect royalties
from that licensees sales. We believe the royalties
available from our licensee in this market, considering the unit
sales opportunities available, represents an addressable annual
opportunity of $65 million.
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Commercialization
PlanLawn Care Equipment
In August 2009, we entered into a manufacturing license
agreement and a development agreement with Hydro-Gear Limited
Partnership, which holds the leading market share for ride on
automatic mowers with hydrostatic transmissions. Under the
agreements, we plan to develop and commercialize NuVinci
products within the lawn care equipment field and through
this relationship we expect to receive a development fee upon
reaching certain milestones and a royalty from future sales.
Under our development agreement with Hydro-Gear, this product is
currently completing prototype testing and production design
refinement, and with their current projections for product
development, we expect to demonstrate the fully functional
pre-production prototypes to key customers in 2011, beginning
preparations for production shortly thereafter with production
launch currently projected for later in 2012. The precise date
of any launch however is at Hydro-Gears discretion. The
funding for this development comes primarily from Hydro-Gear
under the development agreement, with the remainder expected to
come from the net proceeds of this offering along with our
existing cash and cash equivalents on hand.
Wind
Power
Background
Over the last 20 years there have been many innovations in
the wind turbine industry designed to increase power output
capacity and lower the production and operating costs of wind
farms. Variable speed turbines and power electronics represent a
significant portion of the technology that wind turbines today
utilize to control or increase their power output. However,
power electronics are costly, representing a large portion of
the cost for smaller turbines. For small wind turbines power
electronics consist primarily of an inverter, which amounts to
approximately 15% of the cost of an 8 kW system. According to
the National Renewable Energy Laboratory (NREL), good inverters
average about 86% efficiency, meaning the inverter is an
expensive component that also reduces power output by at least
14%.
Another technical challenge for small wind turbines is how to
handle high winds. Most small wind turbines employ passive
furling, which turns the rotor out of the wind during periods of
high wind speeds, a time when energy available from the wind is
at its highest. Passive furl is a crude and very noisy method of
regulating rotor speed, and results in suboptimal power
generation at high wind speeds. Once a wind turbine has employed
passive furling, power output will decrease, sometimes
significantly. Maintaining peak power in high winds, a time when
wind energy is abundant, is a technical challenge that small
wind turbine manufacturers are striving to overcome.
Most wind turbines use a drivetrain that is a rigid system and
prone to torque spikes from wind gusts. Many early wind turbines
failed because of the effects of torque spikes damaging the
drivetrain. Drivetrain components tend to be heavy, expensive,
and now typically overbuilt.
NuVinci
OpportunityWind
Power
We believe that our NuVinci technology can reduce the
complexity and cost of wind turbines by maintaining an optimal
speed into the generator as wind speed changes. By doing so, the
NuVinci CVT-enabled wind turbine does not require the
power electronics inverter needed to provide power acceptable to
deliver to the grid. Furthermore, as demonstrated through
testing by Viryd, our wind turbine licensee, the constant speed
into the generator allows the use of simpler more cost-effective
generators as well. Other CVT technologies generally lack the
torque density (that is torque capacity for a given transmission
package size), scalability, assembly and configuration
flexibility, cost effectiveness and efficiency, or some
combination of these factors, we believe are required to be
feasible for use in wind turbines, whether utility class or
small wind. Furthermore, we believe the NuVinci CVT can
be used to control the speed of the turbine blades during high
speed winds instead of employing passive furl, thereby
generating power during the highest powered winds. This allows
designers to use larger more optimized turbine blades to
maximize wind capture.
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Our NuVinci technologys ability to mechanically
change speed of the turbine rotor to produce a stable input
speed to the generator has been shown through testing in the
field to expand maximum power production by allowing a turbine
to operate at a higher rotor speed in high speed winds for a
given maximum generator speed. Viryd, our licensee, has
developed a prototype NuVinci CVT for an 8kW wind turbine
drivetrain, which it has tested in Texas. Viryds current
test data to date indicates a 34% improvement in energy
generation. Furthermore, Viryd has also earned a
U.S. Department of Energy grant for its wind turbine to be
tested by the departments National Renewable Energy
Laboratory in Colorado under a DOE grant.
Figure 6 Enhanced Wind Performance
Figure 6 is a graph provided to us by Viryd illustrating
the improved performance available from wind turbines utilizing
a NuVinci CVT drivetrain compared to traditional wind
turbines, as determined from Viryds test data gathered
from actual field testing. The bottom line with triangles
illustrates the power available from a standard wind turbine at
various wind speeds, and the middle line with circles
illustrates the increased power available from the same turbine
utilizing a NuVinci CVT. The light or top line with
squares illustrates the improved performance available from the
NuVinci-enabled wind turbine when also optimizing the
turbine blades, as the CVT allows. We believe, based on our
research and the described testing that our technology provides
numerous advantages over existing designs of variable speed
motors, electronics and transmissions for wind turbines that
attempt to deliver the level of performance and system
efficiencies required of current turbine technologies. By
providing a solution that promises such improvements, our
NuVinci technology is providing for power to be
transferred in more efficient manner.
In summary, we believe the NuVinci technology offers the
following benefits when used in a wind turbine:
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Enables variable rotor speed without an inverter, increasing
energy production. NREL tests show that inverter efficiency
averages about 86% when inverters on/off cycling at cut-in,
cut-out, and standby time are included.
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Captures gusts and lulls. Much of the power in a
wind gust is lost due to the fact that the rotor is not spinning
at its optimal rate, and strong gusts can put the rotor into
stall. Our NuVinci CVT can quickly increase rotor speed
to capture gusts, and brake the rotor during lulls to extract
the stored energy from the rotor, increasing energy production
approximately 15%. We believe, based on research, that turbulent
winds can reduce power output 20 to 40%.
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Controls power production above peak power without blade
pitching or passive furl. Rotor speed can be reduced
precisely as wind speed increases, and peak power can be
maintained until the wind turbine is shut down and thus avoiding
noisy systems and passive furl.
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Use of a larger diameter rotor. NuVinci
technologys ability to slow the rotor above its peak
power allows it to use a larger rotor. The larger rotor
significantly increases annual energy production.
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Absorbs torque spikes, which can damage wind turbine
drivetrains. Due to its multiple contact points and durable
structure, NuVinci technology can provide mechanical
buffer to allow for and absorb torque spikes by spreading their
resulting force out over time.
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Reduces drivetrain cost to less than half of a typical small
wind turbine drivetrain that uses a permanent magnet (PM)
generator and an inverter. Our NuVinci technology
eliminates the expensive PM generator typically used with small
wind turbines and can be used with an inexpensive induction
generator. It also eliminates the need for the very expensive
inverter.
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MarketWind Power
Overall, we believe industry data indicates that
U.S. wind-based electricity generation is expected to grow
to 20% of total U.S. electricity generating capacity by
2030. Although the entire wind industry may be segmented into
several smaller categories, traditionally, the industry has only
defined two primary segments, small wind from 0 to 100 kW and
large or utility class wind for turbines over 100 kW. We are
currently scheduled to launch our product for the small wind
turbine end market in 2010, which we currently believe to be an
addressable annual opportunity of $40 million. However, as
reported in the April 13, 2009 American Wind Energy
Association Annual Wind Report, the small wind segment grew 96%
in 2008, and the industry projects 30-fold growth in the small
wind segment within as little as five years, despite the recent
global recession. Given the projected growth in the segment over
the next 5 years, we believe this represents an addressable
annual opportunity for our NuVinci CVT of about
$1 billion by 2015.
Commercialization PlanWind Power
We have established a licensing agreement with Viryd, based in
Austin, Texas. Viryd is a former subsidiary of ours and was
formed as a separate company with a sole focus on the
development and distribution of wind turbines and technologies
for generating clean renewable energy.
Under an engineering services agreement for Viryd, we have
designed, prototyped and tested a wind turbine CVT, on which
prototype Viryd then performed further tests including field
testing. This product is currently in the design, prototyping
and testing stage of development and is undergoing further
design refinement. We expect to work with Viryd to develop a
production design for a limited production manufacturing launch
currently scheduled by Viryd for 2011, but the launch date of
this product is at Viryds discretion.
Viryd intends to both sell a complete product on its own and
also to partner with other OEMs to provide them wind
turbine drivetrains that are not otherwise available in the
market. While Viryd is currently scheduled to launch its 8 kW
turbine in 2011, it is planning to develop a product for a
larger wind turbine in the near future as well. We currently
intend to sell Viryd the NuVinci CVTs it requires for its
initial sales but we expect that Viryd will begin manufacturing
themselves in the future and paying us royalties under its
license. We believe our current addressable opportunity for the
small wind turbine market to be $40M. However, given the
projected growth by the industry over the next 5 years, we
believe this represents an addressable annual opportunity for
our NuVinci CVT of about $1 billion a year by 2015.
Current
Commercial ApplicationBicycles
Background
There are approximately one billion bicycles in operation
worldwide todaytwice as many as automobiles. Global
economic conditions and the need to reduce dependence on fossil
fuels favor the continued growth of bicycles for transportation.
We believe, based on our research, that a person riding a bike
once a week instead
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of driving can reduce his transportation carbon footprint by
20%about the same amount as replacing a traditional
vehicle with a hybrid, only less expensive.
Today the bicycle riding experience is heavily impacted by the
process of shifting gears as the rider moves through traffic,
stops and starts and adapts to changing terrain. The benefit of
using different gears is optimizing performance of the human
system, that is, the heart, lungs and legs, by varying or
maintaining pedaling speed. Existing gear systems are seen by a
large group of the population as being complex.
Figure 7 N171 Bicycle
CVP & Cruise Controller
NuVinci
Advantage
Our bicycle CVT transmission, shown in Figure 7,
replaces the derailleur and multiple sprocket geared systems
presently used in bicycles and, as our own consumer testing has
shown, is much smoother and easier to operate. Simply by
rotating a handle grip, which we refer to as the Cruise
Controllertm,
the rider may seamlessly shift the transmission until the
desired gear ratio is attained. There is no temporary loss of
power as experienced by the rider with geared systems that force
the chain to jump from one sprocket to another. Our bicycle CVT
transmission also decreases the effects of mistakes in shifting,
which can lead a rider to slip off the pedals or stall going up
a hill, creating less than satisfactory ride experience and
potentially causing injury. Development of our bicycle CVT has
occurred in phased steps over the past ten years with
improvements in weight, configuration and performance.
Global
MarketBicycle
We estimate the global annual bicycle market to exceed
100 million units based on publicly available information
from Bike Europe, Cycle Press, Japan Bicycle Promotion Institute
and World Watch Society, COLIBIEuropean COmité de
LIaison des Fabricants Européens de BIcyclettes, 2008
Bicycle Report, Danske Cykelhandlere estimate. However, due to
the relatively low cost of bicycles sold in the China and India
markets, we consider the realistic global market to be
approximately 50 million units per year. Because our
product is currently considered targeted to high end bicycles,
we have reduced the target market size to include only those
bicycles distributed through dealers. This yields a market
potential of 14.6 million units. Finally, we further reduce
the size of our addressable market by eliminating bicycles that
fit into categories that are inappropriate, such as
childrens bicycles, high end road bikes and triathlon
bikes. Therefore, we estimate that the global bicycle market
that is addressable by our NuVinci bicycle products to be
approximately 8 million units per year. We believe that
with the mix of products we are considering over the next few
years that this market represents a total annual opportunity of
$1.1 billion.
When considering which key geographic bicycle markets to launch
our NuVinci technology in, we focused on countries and
regions of the world where bicycle ownership per capita,
percentage of trips made on bicycles, bicycle transportation
infrastructure, and local bicycle industry advocacy is strong.
As a result, we initially launched in The Netherlands, followed
by Germany, Switzerland and Denmark, and have continued to
leverage
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knowledge gained from this initial effort to expand into other
key European countries as well as into North America and Asia,
as increasing fuel prices drive up the interest in commuting
bicycles.
Europe: The Netherlands is considered to be the most
bicycle-centric country in the world, with annual bicycle sales
exceeding 1.5 million units, primarily (80+%) sold by
bicycle dealers. With the highest per capita bicycle ownership
in the world, bicycles represent 34% of all modes of
transportation for all trips. Dutch consumers ride an average
950 kilometers per year (#1 in world). The average value of
bicycles sold by independent bike dealers in the Netherlands
alone was 709. Germany is the EU country with the largest
production of bicycles. We believe the 2008 total bicycle sales
in Germany were 4.32 million per year at an average price
of 386 with over 65% of bicycles sold through bicycle
dealers. The German bicycle industry is planning a state-run
program to promote inner-city cycling with a focus on reducing
congestion and exhaust emissions in city centers.
North America: The North American market is dominated in
unit sales by mass merchants. However, in terms of dollar value,
mass merchants only have a 35% market share. Sporting goods
retail chains had a 6% share in 2008 units sold and 9% in
dollar value while Independent Bicycle Dealers (IBDs) had a 17%
share in units and 50% of dollar value with an average per unit
price of $422. The Canadian bicycle market of over
1.3 million units sold per year is dominated by the mass
retailers with over 75% of unit sales through retailers such as
Canadian Tire Corp, Wal-Mart, Zellers, and a variety of sporting
goods chains. Over 2000 IBDs represent the balance of units sold
in Canada.
ProductsBicycle
Our Bicycle Products Division markets NuVinci CVTs into
the global bicycle and
e-bicycle
industry that currently use derailleur and internally geared
hubs. The product includes a CVT transmission, a shifter, and a
CVT interface that connects the cables between the controller
and the CVT for a mechanical shift signal. We sell our bicycle
products directly to original equipment manufacturers, or OEMs,
that assemble or manufacture bicycles and
e-bicycles,
to wholesale distributors that sell bicycle components to
independent bicycle retailers, or IBDs, to fleets that use
bicycle for tourism and trade, and to national retail chains
that source and sell private branded bicycles.
Figure 8 NuVinci CVT improvement
Figure 8 illustrates the development progress we
have made with the NuVinci bicycle CVT. On the left, is
the B15 Prototype, which represents the first commercially
viable bicycle CVT. We currently market our commercial bicycle
NuVinci CVT transmission, model N171, the successor to
the initial product model N170, along with a developer kit. Our
developer kit is an automatic shifting hub system that includes
electronics and the N171 CVT. The N171 CVT is sold into the
bicycle industry via OEMs and aftermarket dealers whereas the
developer kit is sold directly to inventors and developers of
light vehicles and equipment interested in implementing our
NuVinci CVT technology in future vehicles or equipment.
We launched manufacturing of the N360, which is the next
generation CVT for bicycles and e-bicycles. Production of the
N360 began in June 2010 and shipments to customers began in July
2010. The N360 has many improvements over the N171 bicycle CVT
including a weight reduction in over 35%, a size reduction of
over 10%, improved shift feel and responsiveness, and we believe
the CVT will be easier to assemble with
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over 50% fewer parts. We believe the improved design of N360
bicycle CVT will have a much broader appeal in the marketplace.
Following up on private demonstrations to selected bicycle
manufacturers, we initiated official prelaunch marketing
activities by introducing the N360 to the bicycle market on
March 17 to 20, 2010 at the Taipei Cycle show in Taiwan, a major
bicycle industry trade show with wide international attendance.
Reaction to the N360 has been uniformly favorable. To date, over
40 bicycle manufacturers have tested pre-production prototypes
of the N360 and have expressed interest in the product. We have
launched manufacturing of the NuVinci N360 second
generation commercial bicycle product and shipped the first
production units in July 2010 to Simpel.ch, a premium Swiss
city bicycle manufacturer. Response from the market on the N360
has been extremely positive and we have received purchase orders
from customers representing several companies, even prior to
receiving their production samples.
In addition, as Tri Star is located in China and is near most of
the component suppliers, we expect that inbound logistics costs
will be lower and coordination will be easier. Because of
improved logistics, design and a fixed contracted unit price
from Tri Star, we expect the cost per unit for the N360 should
be at least 50% less than the first generation bicycle CVT.
Furthermore, we have leveraged managements experience in
the automotive industry for the manufacturing of this product by
implementing processes for quality and supply base management
characteristic of the automotive industry. So far, more than 100
prototype versions of the N360 have been built for internal
testing and customer demonstration. We continue to develop
additional manufacturing sources for our components in order to
ensure reliable supply of components and pursue cost reduction
opportunities.
CustomersBicycle
The demand for bicycles in Europe and North America is seasonal
in nature with over 50% of the OEM demand ordered between
November and March to prepare for bicycle assembly and shipment
to the retail market in the spring season. The bicycle markets
in China and Asia have less seasonal fluctuations, however, we
anticipate that these markets should represent a relatively
small (<10%) portion of our bicycle sales in the next three
years.
All of our customer orders are placed with purchase order
contracts that require shipment per order with no long term
contracts that would require renegotiation. The Tri Star
production line has a rated production capacity of over
300,000 units per year, to allow flexibility in planning
and managing the growth of our sales.
Going forward, we plan to leverage commercial relationships to
expand distribution in China, Japan and Korea. For China and
Japan, these partners have been identified. We are in the early
stages of reviewing Asian OEM and distribution partners.
Marketing
We believe that our award winning NuVinci technology
represents the smoothest transmission available for bicycles
today. As we have found from consumer testing and comment, to
the bicycle rider, our technology represents a dramatic
improvement in ride experience.
Our marketing strategy for bicycles is based on getting
prospects to Experience NuVinci. We believe
that nothing communicates the seamlessly smooth, easy shifting,
and superior riding qualities of a NuVinci CVT better
than a test ride. Consequently, targeted customer events and key
industry trade shows where large numbers of bicycle OEMs,
retailers and riders are present are central to NuVinci
bicycle marketing. We exhibit and provide test rides at the
leading trade shows in Europe, the United States and Taiwan
where there is a large global show for OEMs and assemblers.
With our initial product best suited for city, commuter,
and comfort bicycles, we focused our initial marketing
program heavily on supporting our OEM customers in The
Netherlands and Germany, the two largest European bicycle
markets with the largest population of city style bikes. To
support our largest Dutch and German OEM bike customers, we
offer co-marketing programs at the dealer and consumer level. In
preparation for the manufacturing launch of the N360 product in
June 2010, and to further encourage dealer
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interest, we held a bicycle dealer training seminar on
April 19, 2010 in The Netherlands with some of the leading
Dutch bicycle dealers in attendance.
In the U.S., we support our largest prospective bike customers
with co-op advertising and merchandising support. To increase
awareness of NuVinci technology and in preparation for
the availability of the N360 model, we have begun a U.S.
grass-roots marketing program. We have attended local tradeshows
and conferences that are focused on dealers and consumers in key
bicycle-centric cities in the U.S. The reactions of
consumers after test rides were consistently favorable.
In the U.S. and Canada, our marketing also includes
distributor and retailer programs to promote a NuVinci
aftermarket conversion kit. This kit can be used to upgrade
either a consumers existing bike or a new bike.
The popularity of electric/pedal assist bikes has added yet
another aspect to our marketing program. We promote an automatic
shifting NuVinci system at key LEV conferences, offer
test rides at bicycle trade shows, use selected web banner and
other advertising to inform developers about our NuVinci
Developer Kit, and pursue targeted press and other promotion
opportunities.
Manufacturing
History
The original commercial version of our NuVinci bicycle
product, the N170S, was produced and sold by Aftermarket
Technology Corp (ATC), our original manufacturing licensee,
beginning in 2006. Bicycle CVTs were assembled in ATCs
facility in Oklahoma City, Oklahoma. We later acquired the
manufacturing line from ATC in early 2008 and established a
contract manufacturing arrangement with MTD Products Inc, a
major manufacturer of lawn and garden equipment, and production
was moved to their facility in Leitchfield, Kentucky. Both of
these manufacturers utilized a long lead time component supply
chain made up of numerous suppliers around the world. About
8,000 units were built between mid-2008 and August 2009, at
which time our N171 model was phased out of production in
preparation for the manufacturing launch of our N360 product in
June 2010. Through our experience with our initial launch of our
N171 bicycle product, we have determined that it will be most
cost effective and provide for the largest growth opportunity to
concentrate the supply base in one off-shore region or location.
We expect that managing suppliers in a concentrated area reduces
risks associated with managing global suppliers. The
manufacturing launch of our N360 product occurred in June 2010,
with the initial products being shipped to customers in July
2010.
Manufacturing
PlansN360 and New Commercial Products
Therefore, we have selected an off-shore manufacturer, Tri Star
Group, headquartered in Shanghai, China, that has a local
component supply base that we believe to be capable of supplying
the parts for our N360 product. We believe establishing a local
component supply base should reduce many of the manufacturing
risks associated with producing a high quality, durable product
in sufficient quantity and on time. Tri Star has been recognized
by Forbes Asia Magazine as one of the 200 Best
Companies Under $1 Billion USD in September 2008.
As Tri Stars manufacturing facility is located two hours
north of Shangai in Nantong, a manufacturing region that
supplies many industries in a wide array of technologies, we
believe that the necessary infrastructure and support services
are available to support large scale manufacturing. Furthermore,
because the component supply base is local to Tri Star, that is
nearly all suppliers are located within roughly 250 miles
of Tri Stars facilities, if problems arise with parts from
suppliers, we believe Tri Star would be able to address them in
a shorter time period than would be possible for parts supplied
via air or sea. In our experience, this has the potential to
provide significant cost advantages when considering the launch
of a new product. We expect to achieve attractive cost targets
with Tri Star, while achieving high standards of quality and
responsiveness.
We have also endeavored to limit the risk associated with
working with an off-shore manufacturer by fostering a
relationship built on an understanding of the long term goals
and interests of both parties to align our collective interests.
To that end, we have been working with Tri Star since the third
quarter of 2008 under
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engineering service agreements (i) to verify its
capabilities of manufacturing the type of parts that are needed,
(ii) to support and work with our operations staff, and
(iii) to develop a relationship based on long term goals
for growth and future product opportunities. We have worked
closely with them through engineering service agreements on
advanced prototypes for our NuVinci product offerings and
we believe that they are capable of manufacturing the parts,
assemblies and prototypes we request to our approval. Each part
for the N360 will be qualified through a production part
approval process (PPAP) discipline to assure that component
quality will meet our standards. Moreover, Tri Stars
assembly process will be validated in a similar manner
concluding with PPAP of the assembled unit. Production will be
ramped up in a controlled manner to assure that volume
production can be achieved with sustainable quality.
Through our agreement with Tri Star, we have endeavored to work
together in a manner that benefits both us and them, which we
believe is more likely to meet our needs both during a period of
aggressive growth and over the long term. We have worked with
our wind partner Viryd to develop prototypes for testing prior
to commercialization, and Tri Star has supplied us with the
parts and some assemblies under service agreements as part of a
process to begin to develop Tri Star as a potential manufacturer
for those transmissions as well. The supply of transmissions to
Viryd allows us to provide additional incentives for Tri Star by
demonstrating the long term potential to supply products that
aligns its interests with ours, thereby reducing our risk.
Manufacturing
StrategyFuture Commercial Products
Different manufacturing models will be utilized for various
applications as the market for each particular application
dictates. We plan to establish contract manufacturing or joint
ventures to manufacture products for each of our target markets.
Where market conditions exist that dictate that we partner with
an incumbent market leader capable of manufacturing our product
in order to introduce our product to such market, we may enter a
manufacturing license where that partner would manufacture the
product and we would thereby earn royalties on its sales and
fees for the development of commercial products under
development agreements. In every case, we intend to continue to
enter into agreements under which we maintain ownership of all
intellectual property and developments of our technology.
While products involving our NuVinci technology utilize
what we believe to be well known and common manufacturing
techniques and processes, the manufacture of any advanced
mechanical device presents challenges to achieve quality,
durability and reliability goals while still meeting the cost
demands of an increasingly competitive marketplace. Therefore,
in order to address the anticipated challenges of managing the
manufacture of our products as we scale to high volume
production, we plan to bolster in-house capabilities in
purchasing, manufacturing and quality functions.
Specifically, as budgets permit, we plan to establish a fully
capable purchasing, manufacturing and quality control function
to do the following:
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Establish and maintain manufacturing strategies, including
consideration of detailed process engineering assessment of
critical NuVinci parts, and process qualification for
adoption in manufacturing NuVinci products;
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Manage make/buy decisions;
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Embed manufacturing process engineering expertise in project
development teams and consider development of processes unique
to NuVinci technology needs;
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Provide robust cost estimating for proposals and program
development;
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Track and manage N360 production program timing;
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Manage volumes documentation and handle production
programming; and
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Provide improved supplier support including technical, quality
processes, commercial liaison and training.
|
Looking ahead, in addition to having tailored manufacturing
strategies from a technical viewpoint, we expect to also bring
geographic considerations into our planning process. Over time,
we anticipate that the placement of our manufacturing facilities
should be defined by our customer needs.
93
Customers
In 2009, revenues from three customers for product sales were
$115,000, $108,000, and $102,000, or 11%, 10%, and 10%,
respectively, of total revenues, while related party revenues
from Viryd Technologies Inc. were $512,000, or 49%, of total
revenues.
None of the three customers referred to in the preceding
sentence represented more than 10% of the Companys total
revenue for the six months ended June 30, 2010. Rather,
during the six months ended June 30, 2010, revenue from one
customer, which was different from the three customers in 2009,
was $227,000, or 49%, of total revenues. These revenues relate
to a one-year engineering services agreement totaling $324,000,
for which we have recognized $227,000 in revenue. The remaining
$97,000 is expected to be recognized during the third and fourth
quarters of 2010 when the work specified in the engineering
services agreement is completed. We do not expect that there
will be additional revenue from this engineering services
agreement thereafter. With the commercial launch of the N360 CVT
in July 2010, we do not believe that the loss of this revenue
will have a materially adverse effect on the Company.
Additionally, during the six months ended June 30, 2010,
related party revenues from Viryd Technologies Inc. were
$191,000, or 42%, of total revenues. With the launch of the N360
in July 2010, we do not expect to have any similar levels of
customer concentration in the future, as the N360 is different
than the previous generation of the bicycle CVT because the N360
is smaller, lighter, and more efficient. As such, we believe
that the N360 will attract more and different customers in the
bicycle market as they are now able to integrate the N360 in
their various bicycle models.
Competition
Suppliers of drive train components in the bicycle industry
currently include two dominant companies, Shimano Corporation
(Japan) and SRAM Corporation (Chicago, IL USA). Commonly cited
problems in the industry include limited flexibility, long lead
time supply and long term purchase commitments. These two
primary competitors produce bicycle drive train products in
derailleur and internal geared hub form. Of these two companies,
Shimano has the largest market share, which is currently
estimated to be above 60% of the worlds drivetrain
requirements, and competes on quality and price. These Shimano
geared systems are well known products that consumers use in
everyday riding. We expect to compete successfully in this
market by offering products with features that are not available
in the products of our competitors, namely an infinite number of
gear ratios, or speeds, from low to high, without any shocks,
jerking or mis-shifting. As we increase our sales, we expect to
reduce the market share of these competitors.
As described above, the NuVinci technology should be
addressing several applications that currently do not utilize
CVTs. However, our plans include the sale of products into the
automotive market, which has a mature competitive base. While we
will not directly compete with automakers or automotive
suppliers on similar products, we may be competing with the
incumbent product manufacturers of alternators and other
accessories that may see our products as a threat to their
higher margin products.
In the lawn and garden equipment end market, we will be
replacing existing hydrostatic transmissions with our own
products. While our licensee, Hydro-Gear, is a significant
manufacturer of hydrostatic transmissions, there are other
manufacturers of hydrostatic transmissions that produce products
against which our products will compete.
For automotive primary transmissions, JATCO, a subsidiary of
Nissan, is recognized as the CVT market leader. Many of our
current or potential competitors have greater market presence,
longer operating histories, stronger name recognition, larger
customer bases and significantly greater financial, technical,
sales and marketing, manufacturing and other resources than we
have. Moreover, if one or more of our competitors were to merge
or partner with another of our competitors, the change in the
competitive landscape could adversely affect our customer
relationships and competitive position or otherwise affect our
ability to compete effectively. Notwithstanding the presence of
JATCO as the market leader, we expect to compete with them in
the automotive industry through introduction of products for end
market applications that are not currently offered by JATCO and
which we believe its products cannot effectively address. Our
CVAD products take advantage of the unique
94
packaging and geometry of our NuVinci technology to allow
packaging a CVT as a drive for accessories in the very limited
space available in an engine compartment.
Intellectual
property
Our intellectual property strategy is comprehensive and
substantial and comprises a combination of patents, trademarks,
trade dress, copyrights, know-how and trade secrets. For
patents, our policy is to seek to protect our competitive
position by filing patent applications for our developments in
the United States and in several foreign jurisdictions that are
important to the manufacturing, shipping, development, sales and
otherwise for the conduct of our business. We also rely on
trademarks, trade secrets, trade dress, know-how, continuing
technological innovation and in-licensing opportunities to
develop and maintain our proprietary position.
As of July 31, 2010, our patent portfolio consists of 95
United States patents, 52 United States pending patent
applications, 81 foreign issued patents (including validated
countries), and 137 pending foreign patent applications. While
none of our patents will expire in the next 5 years, 38 of
our total 176 worldwide patents are set to expire in 2018. Each
of our other patents and applications, which have been filed
subsequent to our oldest ones, will expire at the end of their
respective 20-year terms as well. Each of our foreign patents
and applications originate from patents and applications filed
in the U.S. and therefore are directed to the same or similar
products and will expire at the same time as their respective
U.S. counterpart. While we currently have issued patents in
several countries in Europe and Asia among others, our pending
applications in these and other countries can take up to 5 years
or longer from the date they are filed to mature into patents
depending on various factors by country including the subject
matter and the examiner. Our U.S. patent portfolio was ranked as
the #1 patent portfolio in the automotive and transportation
industry by The Patent
Scorecardtmas
reported in the Wall Street Journal on January 13, 2009. While
this ranking was developed independently by a third party with
whom we do not have nor have ever had any relationship, such
rankings are inherently subjective and therefore do not
guarantee or provide any indication of success in protecting our
products in the various marketplaces around the world in which
we sell our products. We continue to file patent applications
internationally as our development yields new patentable
improvements to our technology.
We use trademarks on our products and marketing materials and
believe that having distinctive marks is an important factor in
marketing our products, as the products are visible to or
selected by the customer. We have registered our NuVinci
mark and associated logos in the United States and in over
twenty foreign countries and our Fallbrook Technologies
mark in the United States. In our printed and market facing
materials we have developed a consistent look and feel for our
brand and products in order to develop an association in the
publics mind of that look and feel with the brand to
create a trade dress for our technology. We believe
there is value in such trade dress and we will continue to
develop such trade dress.
There are risks associated with enforcing our intellectual
property and with our freedom to operate without affecting the
rights of others that could greatly impact our business and
these risks are amplified when considering different laws,
languages and added logistics required to carry on these
activities in a foreign country. For a description of the risks
associated with our intellectual property, please see Risk
FactorsRisks Related to Intellectual Property.
Employees
As of June 30, 2010, we had 58 employees, with 28 in
research and product development, 9 in operations, 7 in sales
and marketing, 10 in finance, human resources and legal and 4 in
senior executive management, and we had 6 independent
contractors and 3 part-time consultants. All of our
employees, contractors and consultants are under agreements that
include provisions relating to confidentiality and assignment of
inventions among other terms.
Of the 58 employees as of June 30, 2010, all except for 1
in The Netherlands were located in the United States
including 46 in Texas, 9 in California, 1 in Michigan and 1 in
Oklahoma. We also have a contract agent who represents our
interests in China, a sales contractor in Oregon, and a contract
agent who
95
provides sales and customer service in Europe. We consider our
current relationship with our permanent employees and our
contract agents to be good.
None of our employees are represented by labor unions or have
collective bargaining agreements.
Government
regulation
Our business is reliant to a significant degree on the
regulation of patents by the U.S. Department of Commerce
and by other such agencies around the world. Changes in the laws
or regulations pertaining to patents could have a materially
adverse effect on our ability to protect our technology from
competitors. In the U.S., bills have been introduced in both
houses of congress that would, if made into law, adversely
affect the ways damages are determined in infringement cases,
that will make it more difficult to receive enhanced damages for
egregious infringement and copying and that would make it
possible for competitors to subject our patents to costly
post-grant opposition proceedings, among other changes.
Our operations are subject to a variety of federal, provincial,
state, international and local laws and regulations relating to
environmental protection and hazardous substances. Such laws and
regulations relate to, among other things, the discharge of
contaminants into water and air and onto land, the disposal of
waste, and the handling, storage and transportation of hazardous
materials and recycling requirements. We believe that we have
conducted and are conducting our business in compliance with all
applicable environmental laws in all material respects.
Property
Our executive offices are currently located in San Diego,
California, where we lease approximately 5,500 square feet
of office space. The lease will continue until May 31, 2012.
We also maintain research, development, fabrication and testing
facilities in Cedar Park, Texasnear Austinin two
different facilities, our Cypress Creek facility and our
Whitestone facility. At our Cypress Creek facility, in which we
conduct research and development, light fabrication, operations
and some administration, we lease approximately
22,000 square feet of space. This lease expires on
January 31, 2011. At our Whitestone facility, which is
dedicated primarily to testing, we lease approximately
4,300 square feet of space. This lease expires
December 31, 2010, but may be terminated with ninety
days prior notice. Fallbrook is actively pursuing
relocation opportunities that would permit the consolidation of
all operations and engineering functions and provide added space
to meet the growing organizations needs. We are currently
considering a move sometime in 2011.
Legal
proceedings
We believe that we are not a party to any current litigation in
any jurisdiction. We are not aware of any claims that any third
party may have against us. We do not believe we infringe any
third partys patent or trademark rights and have never
received any notice of such infringement or any threat of such
litigation.
96
Management
Executive
officers and directors
Our executive officers and directors and their ages and
positions as of June 30, 2010 are set forth below:
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Name
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Age
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Position
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Place of Residence
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William G. Klehm III
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|
|
47
|
|
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Chairman and Chief Executive Officer
|
|
Carlsbad, California
|
Gary E.
Jacobs(1)(2)
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|
|
53
|
|
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Director
|
|
San Diego, California
|
Steven E.
Parry(1)(2)
|
|
|
55
|
|
|
Director
|
|
Goleta, California
|
Keimpe
Keuning(1)
|
|
|
35
|
|
|
Director
|
|
Feldmeilen, Switzerland
|
Allan R. Kammerer
|
|
|
59
|
|
|
Director
|
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Bloomfield Hills, Michigan
|
Edward L. Mercaldo
|
|
|
68
|
|
|
Director
|
|
Del Mar, California
|
Vincenza
Sera(1)
|
|
|
53
|
|
|
Director
|
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Toronto, Ontario, Canada
|
Jeremiah B.
Robins(2)
|
|
|
51
|
|
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Director
|
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San Diego, California
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Nicole T. Nicks
|
|
|
37
|
|
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Chief Financial Officer, Treasurer and Assistant Secretary
|
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San Diego, California
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Paul A. DeHart
|
|
|
52
|
|
|
Chief Operating Officer
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Austin, Texas
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Alan M. Nordin
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|
|
47
|
|
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President, Bicycle Products Division
|
|
Carlsbad, California
|
|
|
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Robert A. Smithson
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|
|
46
|
|
|
Chief Technology Officer and Vice President, Business Development
|
|
Cedar Park, Texas
|
Jeffrey A. Birchak
|
|
|
42
|
|
|
Vice President, Intellectual Property and Secretary
|
|
San Diego, California
|
George L. Lowe
|
|
|
67
|
|
|
Vice President, Operations
|
|
Austin, Texas
|
David W. Markley
|
|
|
46
|
|
|
Vice President, Product Development
|
|
Austin, Texas
|
|
|
|
(1)
|
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Member of audit committee
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(2)
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Member of compensation committee
|
William G. Klehm III, Chairman and Chief Executive
Officer. Mr. Klehm joined us as Chief Executive
Officer in April 2004. He brings over 20 years of
automotive-related experience to Fallbrook Technologies. He has
held several positions with management responsibilities in the
automotive business, including finance, marketing, sales,
product development, and manufacturing operations. Prior to
joining us, Mr. Klehm served as the president and general
manager of Newgen Results Corporation, an automotive customer
relationship management firm. Prior to joining Newgen,
Mr. Klehm served as president and SBU director for Visteon
Climate Control Systems Ltd. He helped develop and launch
Visteons Aftermarket Division. Mr. Klehm started his
career with Ford Motor Company in 1985 and held a variety of
posts within the Ford Customer Service Division where he was
responsible for developing and executing the marketing/growth
strategy for its customer service parts business. Mr. Klehm
holds a B.A. in Management and Marketing from Northwood
University and also participated in the Harvard Business School
Executive Education Programs. Mr. Klehm was selected to
serve on our Board of Directors because of his knowledge of our
company and technology, the Boards belief that the Company
is best served by its Chief Executive Officer serving as a
director, his many years of experience in a variety of
positions, and his experience in the automotive industry.
Gary E. Jacobs, Director. Mr. Jacobs is
an investor and philanthropist and has been a member of our
Board of Directors since March 31, 2004. Since 1997, he has
served as the Managing Director of Jacobs Investment Company
LLC, which participates in real estate development and other
investment activities throughout the United States and abroad.
He also owns and operates a professional minor league baseball
team, the Lake Elsinore Storm, affiliated with the
San Diego Padres. Mr. Jacobs serves as chairman of the
Board of Trustees High Tech High, a public charter high school
and is a board member of the UCSD Board of Overseers.
Mr. Jacobs other philanthropic work includes being a
past president of the United Jewish Federation of San Diego
County. Additionally, Mr. Jacobs and his wife created and
funded the Mr. Jacobs and Jerri-Ann Jacobs International
Teen Leadership Institute which promotes
Muslim / Jewish understanding. Prior to his current
investment and philanthropic activities, Mr. Jacobs worked
as a Software Engineer and Senior
97
Education Specialist at QUALCOMM, Inc. and as a Software
Programmer at Linkabit Incorporated. Mr. Jacobs left
QUALCOMM in 2000. Mr. Jacobs holds a B.A. in Management
Science from the University of California at San Diego.
Mr. Jacobs was selected to serve on our Board of Directors
because of his experience as a member of many boards, his
background in engineering, and his vast network of business
contacts.
Steven E. Parry, Director. Mr. Parry has
been a member of our Board of Directors since December 18,
2008. Since 2001, he has been a managing director of NGEN
Partners, an investment firm specializing in the cleantech
sector. He began his career as a professional geologist and
worked in the minerals industry for more than 25 years.
Prior to NGEN, at Billiton plc and BHP Billiton, Mr. Parry
held the position of vice president business development and
general manager, innovation for the companys exploration
subsidiary. As a principal in BHP Billitons venture
capital group, he was responsible for creating its first
technology venture fund in 2001. Mr. Parry is also a member
of the board of directors of EnviroTower, where he is chairman
of the Audit Committee, eps corp, Powerspan, Rayne Corporation,
SolFocus and Tioga Energy and is Treasurer of the Nuclear Age
Peace Foundation. Mr. Parry holds a BSc degree from
Queens University, Canada, and an MSc degree from the
University of Western Ontario. He has been awarded the Canada
125 Medal for his activist role in support of sustainability in
northern Canadian resource communities. Mr. Parry was
selected to serve on our Board of Directors because of his
experience in the financing and operations of private companies
in the cleantech sector and his experience on the boards of many
technology companies.
Keimpe Keuning, Director. Mr. Keuning
has been a member of our Board of Directors since
December 18, 2008 and is an investment director at SAM
Private Equity AG, which provides investment advisory services
to Robeco Group N.V., a Dutch-headquartered asset management
firm wholly owned by Rabobank. Robeco was established in
Rotterdam in 1929 and has offices located world-wide. Robeco
offers a wide range of investment products and services to
institutional and private investors. Mr. Keuning joined
Robeco in 2006 and subsequently joined SAM in July 2009, with a
focus on clean technology investments. He is also on the board
of directors of Enerpulse Inc., AWS Eco Plastics Ltd. and SPG
Solar, Inc. Prior to Robeco, Mr. Keuning worked from 2001
to 2006 at Fortis Bank as Associate Director where he advised a
broad range of clients on numerous transactions. He began his
working career at Ernst & Young as a tax advisor.
Mr. Keuning studied U.S. and International tax law at
the University of Florida and received a masters degree in
tax law from the University of Leiden. He has also participated
in executive education at the Amsterdam Institute of Finance and
INSEAD. Mr. Keuning was selected to serve on our Board of
Directors because of his international experience in business,
investment banking and finance as well as his technical
experience in finance and accounting principles.
Allan R. Kammerer,
Director. Mr. Kammerer has been a member of our
Board of Directors since February 10, 2009. He is a
seasoned automotive industry veteran who spent 34 years
with Ford Motor Company before retiring in 2008 as product
development director for Jaguar Land Rover. Prior to this
assignment, he served as executive director for SUV and
body-on-frame
vehicles in North America, where he led product development
activities for Ford, Lincoln and Mercury vehicles with these
platforms. In his previous work with Ford, he also served as
vehicle line director for the group that developed the
critically-acclaimed Ford Focus. Mr. Kammerer holds a B.S.
in mechanical engineering from California State University at
San Luis Obispo, and an M.S. in mechanical engineering from
Stanford University. Mr. Kammerer was selected to serve on
our Board of Directors because of his experience in the
automotive industry and engineering background.
Edward L. Mercaldo,
Director. Mr. Mercaldo has been a member of our
Board of Directors since November 25, 2009. He has been
involved in the financing of natural resource exploration and
development companies for almost thirty years. He has been a
director of Norwood Resources, a TSX Venture company engaged in
oil and gas exploration, since August 2001. As Executive Vice
President, CFO and Director of Diamond Fields Resources Inc., he
negotiated its acquisition in August 1996 by Inco Ltd. Following
that transaction, he served on the Inco Ltd. board until
September 2000 where he served as a member of its Audit
Committee and its Management Resources and Compensation
Committee. He has provided financial and strategic business
advice to numerous natural resource companies and has also
served on the boards of several U.S. and Canadian
companies. He enjoyed a career of more than 25 years as an
International Commercial and
98
Investment Banker with several leading financial institutions
including Wachovia, Bank of Montreal, Bankers Trust Company
of New York, Gordon Capital and First Marathon Securities.
Mr. Mercaldo is a graduate of the School of Foreign Service
at Georgetown University and has completed the Advanced
Management Program of the Harvard Business School.
Mr. Mercaldo was selected to serve on our Board of
Directors because of his U.S. and international experience
with public and private companies, both at
start-up and
mature stages, as well as his finance and banking background.
Vincenza Sera, Director. Ms. Sera has
been a member of our Board of Directors since December 5,
2009. With more than 25 years of investment banking
experience, Ms. Sera is an advisor to senior executives and
boards of directors. She is currently chair of the Ontario
Pension Board, which she joined in 2004. From 1992 to 2004,
Ms. Sera served as Managing Director of Financial
Institutions Group, Investment Banking for National Bank
Financial. During 2003 and 2004, she was co-head of the Canadian
Financial Institutions Group (FIG) practice of Putnam Lovell
NBF, which specializes in investment banking activity for global
FIG clients. Ms. Sera has an MBA (finance) degree from the
University of Toronto and an honors bachelor business
administration (accounting) degree from the University of
Windsor. Ms. Sera was selected to serve on our Board of
Directors because of her investment banking experience and
experience with both U.S. and Canadian companies.
Jeremiah B. Robins, Director. Mr. Robins
has been a member of our Board of Directors since April 3,
2007. He is the chairman and CEO of Great Pond Management
Company (GPMC), a private equity firm he formed in 1979. Over
the past three decades, Mr. Robins has participated in the
development of companies in a wide range of industries,
including Iron and Steel, Specialty Chemicals, HVAC, and
Semiconductor Packaging. Mr. Robins also currently serves
as chairman and CEO of Thermal Dynamics Corporation (TDX), a
manufacturer of specialty heat exchangers for the North American
OE Automotive and Industrial markets, and chairman of Rotation
Dynamics Corporation (Rotadyne) a multinational manufacturer of
consumables for the commercial printing industry with facilities
in North, Central and South America, Eastern and Western Europe,
and the Peoples Republic of China. Mr. Robins
maintains residences both in San Diego, California and
Shanghai, PRC and divides his time between the U.S. and
China. Mr. Robins was selected to serve on our Board of
Directors because of his executive and operational experience
with a diverse range of companies.
Nicole T. Nicks, Chief Financial Officer, Treasurer
and Assistant Secretary. Ms. Nicks joined us in
June 2004 and has over 12 years of accounting, financial
reporting and SEC filing experience. She has worked in various
industries such as database management and customer retention,
real estate investment trust, home building and land developing,
healthcare, public sector-enterprise fund, manufacturing, and
not-for-profit.
Immediately prior to joining Fallbrook Technologies,
Ms. Nicks worked as an independent consultant specializing
in Sarbanes-Oxley compliance. Previously, she served as
controller for Newgen Results Corporation. Ms. Nicks also
served as Senior Audit Accountant for the San Diego office
of Deloitte & Touche LLP. Ms. Nicks holds a
Business Administration/Accounting degree magna cum laude
from San Diego State Universitys Honors Business
Program. She is a California Certified Public Accountant
(inactive).
Paul A. DeHart, Chief Operating
Officer. Mr. DeHart joined us in October 2009 and
has more than 25 years experience in manufacturing
management, program development and strategic planning. He
oversees our engineering and manufacturing operations, which are
based at the Companys facility in Austin, Texas. Prior to
joining Fallbrook Technologies, Mr. DeHart served from 2006
to 2009 as president of Alex Dean Consulting, a
manufacturing-focused interim management and consulting firm
based in Ortonville, Michigan. From 2005 to 2006, he served as
chief operating officer of Springfield Wire Corporation located
in Springfield, Massachusetts. From 1997 to 2005,
Mr. DeHart was the general manager and director of
international development at L&L Products of Romeo,
Michigan. Mr. DeHart holds a BSEE from the University of
Rochester and an MBA from the Harvard Business School.
Alan M. Nordin, President, Bicycle Products
Division. Mr. Nordin joined us in November 2004
and has 20 years of sales, product development, and
business development experience in the automotive component
industry, both in the U.S. and international markets. Most
recently, he served as our vice president of sales and business
development. Prior to joining Fallbrook Technologies,
Mr. Nordin was the vice president of sales for Newgen
Results Corporation, an automotive customer relationship
management firm. Mr. Nordins previous
99
experience also includes service as divisional manager of Global
Aftermarket Operations for Visteon Corporation and global
sales/marketing roles at Federal-Mogul and Echlin Inc.
Mr. Nordin holds a B.A. in Business Administration from
Western Michigan University.
Robert A. Smithson, FSAE, Chief Technology Officer and
Vice President, Business
Development. Mr. Smithson joined us in March
2004 and is an author of several publications in the area of
motor vehicle transmissions with over 21 years of
engineering and management experience in the automotive,
aerospace, and robotics fields. He previously served as our vice
president of product development and was instrumental in our
early focus on intellectual property. Prior to joining Fallbrook
Technologies, Mr. Smithson served as group leader of the
Drivetrain Design & NVH Group for Southwest Research
Institute (SwRI) in San Antonio, Texas and as an advisor to
several early stage companies in the clean tech sector.
Mr. Smithsons career includes serving as a product
development engineer for Ford Motor Company in Dearborn,
Michigan. He also was vice president of robot design and a
co-founder of ARM Automation, Inc., and worked as a spaceflight
hardware engineer for the McDonnell-Douglas Astronautics
Company. Mr. Smithson holds a B.S. in Mechanical
Engineering from Auburn University and an M.S. in Mechanical
Engineering from the University of Texas at Austin.
Additionally, he holds an Executive M.S. in Science &
Technology Commercialization (named Kozmetzsky Scholar and
Outstanding Graduate) from the IC2 Institute at the University
of Texas at Austin. In 2009, Mr. Smithson was named a
Fellow of the Society of Automotive Engineers (SAE).
Jeffrey A. Birchak, Vice President, Intellectual
Property and Secretary. Mr. Birchak joined us in
November 2003 and is an intellectual property (IP) attorney
specializing in IP portfolio management and strategy as well as
patent defense and enforcement strategies for mechanical
devices. Prior to joining Fallbrook Technologies,
Mr. Birchak was an associate at Knobbe, Martens,
Olson & Bear LLP, a California-based IP law firm.
Previously, Mr. Birchak served as a nuclear engineering
instructor in the U.S. Navy submarine force, and worked as
a program engineer for AlliedSignal Corporation.
Mr. Birchak holds a B.S.E. cum laude in Mechanical
Engineering from Arizona State University and a J.D. cum
laude from California Western School of Law where he was the
managing editor of the California Western Law Review and
the California Western International Law Journal. He is a
member of the State Bar of California and is admitted or
registered to practice before the Supreme Court of the United
States, the U.S. Patent and Trademark Office and the
U.S. District Court for the Southern District of California.
George L. Lowe, Vice President,
Operations. Mr. Lowe joined us in January 2009 and
has an extensive background in the automotive industry, which
includes over 30 years with Ford Motor Company. At Ford, he
held a variety of positions involving leadership roles in
Quality, Service, Sales, Marketing, and Product Development,
both in the U.S. and globally. In June 2000, after leaving
Ford, he founded his own consulting
businessLowe & Associates, LLC, providing a wide
range of tailored consulting, communications, and organizational
development services to the automotive industry and other
businesses. Mr. Lowe has served as president of Lowe &
Associates, LLC since 2000, though Lowe & Associates, LLC
has not provided any services for Fallbrook since he joined us
in 2009. Mr. Lowe served in the U.S. Army Corp of
Engineers from
1969-1971.
He holds a Bachelors Degree in Automotive Engineering
Technology from Western Michigan University (Cum Laude)
and a MBA from Michigan State University.
David W. Markley, Vice President, Product
Development. Mr. Markley joined us in May 2004
and, prior to his current position, served as our director of
engineering. Prior to joining Fallbrook Technologies,
Mr. Markley worked for BAE Systems where he led the Low
Cost Precision Kill laser-guided missile development project. As
a rotating machinery consultant with Radian International and
Mechanical & Materials Engineering, he was the program
manager for
Datalerttm,
which provided engineering and maintenance services to 120
plants in the utility, chemical, and petrochemical industries.
While working for General Dynamics Fighter Aircraft Division,
Mr. Markley provided analytical and test support for the
F-16, YF-22, and other military aircraft. Mr. Markley holds
B.S. and M.S. degrees in Mechanical Engineering from Auburn
University and is a registered Professional Engineer (PE) and
Project Management Professional (PMP).
100
Board of
Directors
Effective upon the closing of this offering, our board will
consist of 8 directors. A majority of the directors will be
independent as defined under and required by
applicable securities laws. At each annual meeting, our
stockholders will elect our full Board of Directors and our
directors will serve until their successors are elected or
appointed, unless their office is vacated earlier. Directors may
be removed at any time for cause by the affirmative vote of the
holders of a majority of the voting power then entitled to vote.
Committees
of the Board of Directors
Our Board of Directors directs the management of our business
and affairs, as provided by Delaware law, and conducts its
business through meetings of the Board of Directors. In October
2009, our Board of Directors formed an audit committee and a
compensation committee. Effective upon the closing of this
offering, our Board of Directors will amend the charter and
function of the compensation committee to make it a
compensation, nominating and corporate governance committee. The
current compensation committee and the compensation, nominating
and corporate governance committee are referred to in this
prospectus as the compensation committee. In
addition, from time to time, special committees may be
established under the direction of the Board of Directors when
necessary to address specific issues. The composition of the
board committees will comply, when required, with applicable
securities laws. Our Board of Directors will adopt a written
charter for each of the standing committees. These charters will
be available on our website following the completion of the
offering.
Audit Committee. Upon the closing of this offering,
our audit committee will consist of at least 3 members,
each of whom will be an independent director as
defined under and required by applicable securities laws. Our
audit committee will be directly responsible for, among other
things, the appointment, compensation, retention, and oversight
of our independent registered public accounting firm. The
oversight includes reviewing the plans and results of the audit
engagement with the firm, approving any additional professional
services provided by the firm and reviewing the independence of
the firm. Commencing with our first report on internal controls
over financial reporting, the committee will be responsible for
discussing the effectiveness of the internal controls over
financial reporting with the firm and relevant financial
management.
Compensation, Nominating and Governance
Committee. Upon the closing of this offering, our
compensation, nominating and governance committee will consist
solely of directors who are non-employee directors
under Section 16 of the Exchange Act, and outside
directors for purposes of Section 162(m) of the
Internal Revenue Code of 1986, as amended, or the Code and each
such director will be independent as defined under
and required by applicable securities laws. The committee will
be responsible for, among other things, supervising and
reviewing our affairs as they relate to the compensation and
benefits of our executive officers and directors. In carrying
out these responsibilities, the compensation committee reviews
all components of executive and director compensation for
consistency with our compensation philosophy and with the
interests of our stockholders. The committee will also be tasked
with identifying individuals qualified to become board members;
selecting, or recommending to the board, director nominees for
each election of directors; developing and recommending to the
board criteria for selecting qualified director candidates;
considering committee member qualifications, appointment and
removal; recommending corporate governance principles, codes of
conduct and compliance mechanisms; and providing oversight in
the evaluation of the board and each committee.
Compensation
Committee Interlocks and Insider Participation
We do not anticipate any interlocking relationships between any
member of our compensation, nominating and governance committee
and any of our executive officers.
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Board
Leadership
Our Board of Directors has adopted a Charter of the Lead
Independent Director, providing that in circumstances where the
Chairman of the Board of Directors is not independent, our Board
considers it to be useful and appropriate to designate a Lead
Independent Director to coordinate the activities of the other
independent directors and to perform such other duties and
responsibilities as our Board may determine from time to time.
Because William G. Klehm III is our Chief Executive
Officer, as well as Chairman of the Board, we have designated a
Lead Independent Director. Steven Parry currently serves as the
Lead Independent Director.
The Lead Independent Director (if so designated) is responsible
for coordinating the activities of the independent directors.
The designation of a Lead Independent Director is intended to
facilitate communication between the independent directors and
the Chairman/Chief Executive Officer and not to diminish the
ability of any other independent director to communicate
directly with the Chairman/Chief Executive Officer at any time.
Our Board of Directors believes that this leadership structure
is best for the Company at the current time, as it appropriately
balances the need for the Chief Executive Officer to run the
Company on a
day-to-day
basis with significant involvement and authority vested in an
outside independent director memberthe Lead Independent
Director. The role of our Lead Independent Director is
fundamental to our decision to combine the Chief Executive
Officer and Chairman of the Board positions. Our Lead
Independent Director assumes many functions traditionally within
the purview of a Chairman of the Board. Under our Charter of the
Lead Independent Director, our Lead Independent Director must be
independent. The specific responsibilities of the Lead
Independent Director include the following:
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In consultation with the other independent directors, consult
with the Chairman as to an appropriate schedule of Board
meetings, seeking to ensure that the independent directors can
perform their duties responsibly without interfering with
ongoing Company operations;
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Consult with the Chairman regarding the information and agendas
of the meetings of the Board of Directors and its committees;
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Advise the Chairman as to the quality, quantity, and timeliness
of information submitted by management that is necessary or
appropriate for the independent directors to effectively and
responsibly perform their duties;
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Serve on the compensation committee;
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Call meetings and prepare agendas for the independent directors,
as appropriate;
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Serve as the Chairman of and prepare the agenda for the
executive sessions of the independent directors and its
non-employee directors;
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Serve as the principal liaison between the independent directors
and the Chairman and senior management;
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Chair the meetings of the Board of Directors when the Chairman
is not present; and
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Respond directly to stockholder and other stakeholder questions
and comments that are directed to the Lead Independent Director
or to the independent directors as a group, with such
consultation with the Chairman and the other directors as the
Lead Independent Director may deem appropriate.
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Director
Qualifications
Each of our directors brings to our Board extensive management
and leadership experience gained through their service in senior
positions of diverse businesses. In these roles, they have taken
hands-on,
day-to-day
responsibility for strategy and operations, including management
of capital, risk and business cycles. In addition, many
directors bring significant experience on other boards or long
service on our Board of Directors, broadening their knowledge of
board of director policies and processes, rules and regulations,
issues and solutions. In the biographies of each of the
directors provided above, we describe specific individual
qualifications and skills of our directors that contribute to
the overall effectiveness of our Board of Directors and its
committees.
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In addition to the information presented above regarding each
nominees specific experience, qualifications, attributes
and skills that led our Board of Directors to the conclusion
that he or she should serve as a director, we also believe that
all of our directors have a reputation for integrity, honesty
and adherence to high ethical standards. They each have
demonstrated business acumen and an ability to exercise sound
judgment, as well as a commitment of service to our company and
our Board.
While we do not have a formal diversity policy, our Board of
Directors believes its important for our Board to have
diversity of knowledge base, professional experience and skills,
and takes age, gender and ethnic background into account when
considering director nominees. As part of its annual
self-evaluation, our compensation committee will assess whether
it properly considered diversity in identifying director
nominees.
Risk
Management
Our Board of Directors is responsible for reviewing and
assessing business enterprise risk and other major risks facing
the Company, and evaluating managements approach to
addressing such risks. At each quarterly meeting, our Board
reviews all key risks facing the Company, managements
plans for addressing these risks and the Companys risk
management practices overall. To assist the Board in this
oversight role, our Board of Directors seeks to have one or more
directors with experience managing business enterprise risk. In
addition, the committees of our Board of Directors consider and
address risk as they perform their respective committee
responsibilities. For example, financial risks are overseen by
our Audit Committee and our compensation committee periodically
reviews the most important enterprise risks to ensure that our
compensation programs do not encourage excessive risk-taking.
All committees report to the full Board of Directors as
appropriate, including when a matter rises to the level of a
material or enterprise risk.
Our management is responsible for
day-to-day
risk management and regularly reports on risks to our Board of
Directors or relevant committee. Our accounting and legal
departments fulfill the primary monitoring and testing functions
for company-wide policies and procedures, and manage the
day-to-day
oversight of the risk management strategy for our ongoing
business. This oversight includes identifying, evaluating, and
addressing potential risks that may exist at the enterprise,
strategic, financial, operational, and compliance and reporting
levels.
We believe the division of risk management responsibilities
described above is an effective approach for addressing the
risks facing our company and that the leadership structure of
our Board of Directors supports this approach.
Compensation
Risk Assessment
In setting each element of executive compensation, our Board of
Directors and compensation committee is also mindful of the
level of risk-taking that any element may promote. Our Board of
Directors and compensation committee believe it is important to
incentivize our executive officers to achieve annual Company and
individual objectives, but balance promotion of such short-term
interests with incentives that promote building long-term
stockholder value. Our Board of Directors and compensation
committee believe the amount of long-term equity incentives
included in our executive compensation packages mitigates the
potential for excessive risk-taking. All of our named executive
officers equity awards vest over a period of time,
generally annually over four years from the date of grant,
rather than upon achievement of specific performance objectives,
and our Board of Directors has historically granted additional
equity awards annually, which incentivizes these officers to
continue to focus on our long-term interest.
Our compensation committee has conducted an internal assessment
of our compensation policies and practices in response to
current public and regulatory concern about the link between
incentive compensation and excessive risk taking by
corporations. We concluded that our compensation program does
not motivate excessive risk-taking and any risks involved in
compensation are not reasonably likely to have a material
adverse effect on our company. Included in the analysis were
such factors as the behaviors being induced by our fixed
compensation system, the absence of any incentive awards, the
oversight of our compensation committee in the operation of our
incentive plans and the high level of Board involvement in
approving material investments and capital expenditures.
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Compensation
Discussion and Analysis
Overview
Our compensation program is designed to attract and retain
talented employees, motivate them to achieve our key financial,
operational and strategic goals and reward them for superior
performance. We believe that attracting and retaining high
caliber executives and employees and providing them with
appropriate compensation plans is critical to helping us achieve
our financial, operational, personnel and strategic goals and
building long-term value for our stockholders.
Compensation
Determinations
Prior to this offering, we have been a private company and we
have not been subject to exchange listing requirements requiring
us to have a majority independent board or to exchange or SEC
rules relating to the formation and functioning of board
committees, including the audit committee and the compensation
committee. As such, most, if not all, of our compensation
policies, and determinations applicable to our named executive
officers, have been the product of negotiation between our named
executive officers and our Board of Directors.
In October 2009, our Board of Directors formed an audit
committee and a compensation committee. Effective upon the
closing of this offering, our Board of Directors will amend the
charter and function of the compensation committee to make it a
compensation, nominating and corporate governance committee. The
current compensation committee and the compensation, nominating
and corporate governance committee are referred to in this
prospectus as the compensation committee.
The compensation committee is responsible for recommending to
our full Board of Directors for approval the annual compensation
and compensation plans for the members of our executive team,
which currently includes the following executives:
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Chief Executive Officer
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Chief Financial Officer
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Chief Operating Officer
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Chief Technical Officer and Vice President, Business Development
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President, Bicycle Products Division
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Vice President, Intellectual Property
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Vice President, Operations
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Vice President, Product Development
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The compensation committee also approves the compensation
programs for our other employees on an annual basis. The
compensation of these employees is typically based on the level
and scope of their responsibilities and their individual
performance during the fiscal year as determined through an
annual review process.
Overview
of Executive Compensation Program
The elements of our executive compensation program include:
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Base salary
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Short-term cash incentives
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Stock option awards
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We also provide the members of our executive team with insurance
and a limited number of additional benefits that are typical for
companies in our industry. Each of these compensation elements
is described in more detail below.
In recommending to our Board of Directors the appropriate
compensation to be awarded to the members of our executive team,
our compensation committee includes the following objectives:
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Equity Awards Should Comprise a Portion of Executive
Compensation. We believe that a portion of executive
compensation should be delivered in the form of stock option
awards in order to align the long-term interests of our
executives with those of our stockholders and in order to
provide a retention incentive to our executives.
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Our Executive Compensation Should Be Competitive and
Fair. In order to help us attract and retain talented
executives, we believe that our compensation programs should be
competitive when compared to our peers and also be perceived as
fair, when considered both externally as well as internally. We
have not to date utilized surveys or bench-marking in
determining competitive compensation rates of our executives. We
have relied on the experience and personal knowledge of the
members of our Board of Directors and through interactions with
the executive search firm we have used to fill executive level
positions in determining competitive salary levels.
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Compensation
Process
Our compensation committee conducts a formal review of our
compensation program annually. As part of this process, the
compensation committee evaluates the existing compensation of
each member of our executive team, each members individual
contributions and performance, our overall financial
performance, including our revenue and gross margin, and our
success in achieving our overall financial, operational and
strategic goals during the fiscal year. In December 2009, we
engaged the services of a compensation consultant James F. Rada
& Associates LLC, to make recommendations to our
compensation committee regarding our compensation policies and
individual compensation determinations.
Components
of Compensation
As indicated above, we compensate the members of our executive
team through base salary, short-term cash incentives and stock
option awards, with the overall goal of motivating our key
executives to help us achieve our key financial, operational and
strategic goals and build long-term value for our stockholders.
Base
Salary
We provide the members of our executive team with a base salary
to compensate them for services provided to our company during
the fiscal year.
In recommending to our Board of Directors the base salaries for
our executive team members, the compensation committee considers
the individual performance and contributions of the executive,
our overall financial performance and relevant market data. The
compensation committee evaluates the base salaries for our
executive team members on an annual basis in connection with
performance reviews, as well as upon a promotion or other change
in responsibility.
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For fiscal 2009, the base salaries of the members of our
executive team were as follows:
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Name and Title
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Base Salary
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William G. Klehm III, Chairman and Chief Executive Officer
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$
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400,000
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Nicole T. Nicks, Chief Financial Officer, Treasurer and
Assistant Secretary
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$
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150,000
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Alan M. Nordin, President, Bicycle Products Division
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$
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213,500
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Paul A. DeHart, Chief Operating Officer
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$
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200,000
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George L. Lowe, Vice President, Operations
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$
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200,000
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Robert A. Smithson, Chief Technology Officer and Vice President,
Business Development
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$
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168,000
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Jeffrey A. Birchak, Vice President of Intellectual Property
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$
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160,000
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David W. Markley, Vice President Product Development
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$
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125,000
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In December 2009, our Board of Directors approved the same base
salaries for our executive team for fiscal 2010.
Short-Term Cash Incentives
Although we have provided annual cash bonus awards to members of
our executive team in the past to reward our executives for
their performance, there are no bonus plans currently in place.
Our compensation committee is responsible for recommending to
our Board of Directors target and maximum bonus amounts that may
be awarded and approving the corporate and individual
performance goals and criteria that will be evaluated following
the completion of the fiscal year in determining any bonus
amounts to be awarded. After the end of each fiscal year, the
compensation committee, with input from our Chief Executive
Officer, will evaluate our companys fiscal position and
each executives performance relative to the corporate and
individual performance goals set for the fiscal year. Following
this evaluation, the compensation committee is responsible for
recommending to our Board of Directors the actual, if any, bonus
amounts to be awarded.
Stock Option Awards
Our Board of Directors, upon recommendation of our compensation
committee, grants stock options under our 2004 Stock Plan. The
stock options have an exercise price equal to the fair market
value of our common stock on the date of grant. Typically, 25%
of the stock underlying the stock options vest and become
exercisable on the one year anniversary of the date of grant
with the remaining 75% vesting over 36 equal monthly
installments thereafter. Vesting may be accelerated in the event
of certain corporate transactions in accordance with the terms
of the 2004 Stock Plan and terms in employment agreements with
certain of the executive management team (as discussed below).
Other Benefits
In order to attract, retain and pay market levels of
compensation, we provide the members of our executive team with
the following benefits:
Health Insurance. We provide the members of our
executive team and their eligible dependents, health, dental and
vision insurance coverage. For fiscal 2009, the aggregate cost
of these benefits was approximately $82,000.
Life and Disability Insurance. We provide our
executives with life insurance coverage equal to one times the
executives annual salary up to a maximum of $50,000. We
provide disability
and/or
additional life insurance coverage for our Chairman and Chief
Executive Officer, William G. Klehm III. By agreement with the
Board of Directors, Mr. Klehm pays 15% of the premium for
the policy on his life and his estate is the named beneficiary
of 15% of any distributions from that policy.
Pension Benefits. We do not provide pension
arrangements or post-retirement health coverage for our
executives.
Perquisites. We do not have a policy of providing
perquisites to our executive officers. They may on a
case-by-case
basis, if included in their initial offer of employment, receive
reimbursement for some relocation expenses and they may receive
other benefits of nominal value.
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Stock
Option Plans
2004
Stock Plan
Our 2004 Stock Plan was adopted by our Board of Directors and
approved by our stockholders on April 16, 2004.
The 2004 Stock Plan provides for the grant of incentive stock
options, nonstatutory stock options, restricted stock and other
stock-based awards. Our officers, employees, consultants,
advisors and directors, and those of any subsidiaries, are
eligible to receive awards under the 2004 Stock Plan; however,
incentive stock options may only be granted to our employees. In
accordance with the terms of the 2004 Stock Plan, our Board of
Directors administers the 2004 Stock Plan and our Board of
Directors has the authority to select the recipients of awards
and to determine:
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the number of shares of common stock covered by options and the
dates upon which those options become exercisable;
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the exercise prices of options;
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the duration of options;
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the methods of payment of the exercise price; and
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the number of shares of common stock subject to any restricted
stock or other stock-based awards and the terms and conditions
of those awards, including the conditions for repurchase, issue
price and repurchase price.
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Pursuant to the terms of the 2004 Stock Plan, in the event of a
change of control, the 2004 Stock Plan provides for acceleration
of vesting of stock options under certain circumstances
described below under Executive
CompensationEmployment, Termination of Employment and
Change in Control Arrangements.
As of June 30, 2010, there were outstanding options to
purchase an aggregate of 12,971,571 shares of common stock
under the 2004 Stock Plan at a weighted average exercise price
of $0.24 per share, and there were 3,527,957 shares of
common stock reserved for issuance upon exercise of options
available for future grant under the 2004 Stock Plan. An
aggregate of 269,351 shares of common stock have been
issued upon the exercise of stock options.
2010
Stock Plan
We currently plan to adopt a new 2010 Stock Plan prior to the
closing of this offering. After the effective date of the 2010
Stock Plan, we will grant no further stock options or other
awards under the 2004 Stock Plan. The 2010 Stock Plan will
maintain a number of shares reserved or issuable pursuant to the
plan equal to % of the common stock
issued and outstanding.
Policies
and Procedures for Related Person Transactions
In connection with this offering, we intend to adopt a written
code of business conduct and ethics, or code of conduct,
effective as of the date of, and applicable to transactions on
or after, the offering, pursuant to which our executive
officers, directors, and principal stockholders, including their
immediate family members and affiliates, will not be permitted
to enter into a related person transaction with us without the
prior consent of our audit committee, or other independent
committee of our Board of Directors in the event it is
inappropriate for our audit committee to review such transaction
due to a conflict of interest. Any request for us to enter into
a transaction with an executive officer, director, principal
stockholder or any of such persons immediate family
members or affiliates, in which the amount involved exceeds
$120,000, will first be presented to our audit committee (or the
relevant independent committee) for review, consideration, and
approval. All of our directors, executive officers, and
employees will be required to report any such related person
transaction to our audit committee. In approving or rejecting
the proposed agreement, our audit committee shall consider the
107
facts and circumstances available and deemed relevant to the
audit committee (or the relevant independent committee),
including, but not limited to, the risks, costs and benefits to
us, the terms of the transaction, the availability of other
sources for comparable services or products, and, if applicable,
the impact on a directors independence. Our audit
committee (or the relevant independent committee) shall approve
only those agreements that, in light of known circumstances, are
in, or are not inconsistent with, our best interests, as our
audit committee (or the relevant independent committee)
determines in the good faith exercise of its discretion. Under
the policy, if we should discover related person transactions
that have not been approved, the audit committee will be
notified and will determine the appropriate action, including
ratification, rescission, or amendment of the transaction.
Employment,
Termination of Employment and Change in Control
Arrangements
Employment Agreement with William G. Klehm III. We
have entered into an employment agreement with our Chief
Executive Officer, William G. Klehm III, effective May 3,
2007, which agreement was amended January 16, 2008. The
initial term under this employment agreement expired May 2,
2008 and thereafter the agreement term is automatically extended
for additional one-year periods unless either we or
Mr. Klehm give written notice of the termination of the
agreement at least 90 days prior to the end of any
extension of the term.
This employment agreement provides that in the event of a
termination of Mr. Klehms employment by us without
cause or a termination of employment by him for good reason,
Mr. Klehms remaining unvested stock awards will fully
vest and Mr. Klehm will be entitled to payment of his base
salary for 6 months (exclusive of bonus or incentive
payments) and the continuation of his benefits for 6 months
following the date of termination.
For purposes of this employment agreement, cause
means, as determined in good faith by our Board of Directors,
(i) willful misconduct which materially damages us;
(ii) willful and material misappropriation of our assets;
or (iii) conviction of, or a plea of guilty or
no contest to a felony under the laws of the
United States or any state thereof; and good
reason means Mr. Klehms resignation within
60 days of (i) any reduction in his base salary, other
than a reduction in base salary in connection with general
cost-cutting objectives instituted by us which reduction is
proportional when compared to reductions of other of our
employees; (ii) termination of his service as a member of
our Board of Directors (other than a termination as a result of
his voluntary resignation from the Board of Directors);
(iii) a change in title or a change in his position which
materially reduces his duties, authority, reporting, position or
level of responsibility without his consent; or (iv) any
requirement that he relocate his place of employment by more
than 50 miles from his then-current office without his
consent.
Employment Agreements with other Named Executive
Officers. We have entered into employment agreements
with Nicole T. Nicks, Alan M. Nordin, and Robert A. Smithson,
each of which were effective April 15, 2008, and George L.
Lowe, effective January 22, 2010. Each agreement expires
following a two-year term and thereafter will automatically
extend for another twelve months unless either we or the
executive give written notice of the termination of the
agreement at least 30 days prior to the end of the term.
These employment agreements provide that in the event of a
termination of the executives employment by us without
cause or a termination of employment by the executive for good
reason, the executives remaining unvested stock awards
will fully vest and the executive will be entitled to payment of
his base salary for 6 months (exclusive of bonus or
incentive payments) and the continuation of his benefits for
6 months following the date of termination.
For purposes of these employment agreements, cause
means (i) any willful and material breach of the agreement
by the executive; (ii) any willful or gross neglect by the
executive of his duties and responsibilities under the
agreement; (iii) any fraud, criminal misconduct, breach of
fiduciary duty, dishonesty, or gross and willful misconduct by
the executive in connection with the performance of his duties
and responsibilities under the agreement; (iv) the
executive being legally intoxicated or under the influence of
illegal or illegally obtained drugs during business hours or
while on call, or being habitually drunk or addicted to drugs
(provided that this shall not restrict the executive from taking
physician-prescribed medication in accordance
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with the applicable prescription); (v) conviction of, or a
plea of guilty or no contest to a felony
or crime of moral turpitude under the laws of the United States
or any state thereof; (vi) any action by the executive that
may materially impair or materially damage our reputation;
(vii) insubordinate disregard of any lawful direction of
material consequence given to the executive by us; or
(viii) repeated failure or refusal to comply with our
policies and procedures; provided that if the executive is to be
terminated pursuant to subsections (i), (ii), (vi), (vii), or
(viii), the executive will receive notice and 30 days to
cure; and good reason means (A) any reduction
by us of the executives base salary, or (B) an action
by us that causes the executive, without executives
consent, to relocate to a facility or location more than
50 miles from his then current location; provided that in
any of the above-circumstances, we shall not have cured any such
matter within 30 days after written notice with
executives intention to terminate for good reason has been
given by the executive to us.
Change of Control Arrangements. Our 2004 Stock Plan
provides that in the event of a corporate transaction (including
without limitation a change of control), each outstanding option
or stock purchase right shall be assumed or an equivalent option
or right shall be substituted by such successor corporation or a
parent or subsidiary of such successor corporation, unless the
successor corporation does not agree to assume the award or to
substitute an equivalent option or right, in which case such
option or stock purchase right shall terminate upon the
consummation of the transaction; provided that in the event
(i) of a change of control, and (ii) a person holding
an option or stock purchase right assumed or substituted by a
successor corporation or a parent or subsidiary of such
successor corporation in the change of control, or holding
restricted stock issued upon exercise of an option or stock
purchase right with respect to which the successor corporation
has succeeded to a repurchase right as a result of the change of
control, is involuntarily terminated by the successor
corporation without cause at the time of, or within eighteen
months following the consummation of, the transaction, then any
assumed or substituted option or stock purchase right held by
the terminated participant at the time of termination shall
accelerate and become exercisable as to the number of shares
then unvested, and any repurchase right applicable to any shares
shall lapse as to 100% of the number of shares as to which the
repurchase right would otherwise be applicable, in each case
assuming the participant remained in continuous service status
for such period. The acceleration of vesting and lapse of
repurchase rights provided for in the previous sentence would
occur immediately prior to the effective date of termination of
the participants continuous service status.
In addition, notwithstanding anything to the contrary in our
2004 Stock Plan, the stock option agreements of our first
30 employees, which includes William G. Klehm III, Nicole
T. Nicks, Alan M. Nordin and Robert A. Smithson, provide for
acceleration of vesting of stock options held by such persons as
follows: in the event of a change of control, (i) if the
optionee remains as a service provider with the successor
corporation or a parent or subsidiary of the successor
corporation after the change of control, then the stock options
of each such optionee must be assumed or an equivalent option or
right shall be substituted by the successor corporation; and
(ii) if the optionee does not remain as a service provider
with the successor corporation immediately after the
consummation of the change of control, at the successor
corporations election, or such optionees stock
option is assumed or substituted by the successor corporation in
the change of control and the optionee is subject to an
involuntary termination by the successor corporation at the time
of, or at any time following the consummation of the change of
control and during the vesting period of such optionees
stock option, then any assumed or substituted stock option of
the successor corporation held by the terminated optionee at the
time of termination shall accelerate and become exercisable as
to the number of shares then unvested immediately prior to the
effective date of termination of the optionees status as a
service provider.
For these purposes, the following terms have the definitions
described below under our 2004 Stock Plan:
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corporate transaction means a sale of all or
substantially all of our assets, or a merger, consolidation or
other capital reorganization or business combination transaction
of us with or into another corporation, entity or person, or the
direct or indirect acquisition (including by way of a tender or
exchange offer) by any person, or persons acting as a group, of
beneficial ownership or a right to acquire beneficial ownership
of shares representing a majority of the voting power of our
then outstanding shares of capital stock;
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109
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change of control means (i) a sale of all or
substantially all of our assets, or (ii) any merger,
consolidation or other business combination transaction of us
with or into another corporation, entity or person, other than a
transaction in which the holders of at least a majority of the
shares of our voting capital stock outstanding immediately prior
to such transaction continue to hold (either by such shares
remaining outstanding or by their being converted into shares of
voting capital stock of the surviving entity) a majority of the
total voting power represented by the shares of our voting
capital stock (or the surviving entity) outstanding immediately
after such transaction, (iii) the direct or indirect
acquisition (including by way of a tender or exchange offer) by
any person, or persons acting as a group, of beneficial
ownership or a right to acquire beneficial ownership of shares
representing a majority of the voting power of the then
outstanding shares of our capital stock, or (iv) a
contested election of directors, as a result of which or in
connection with which the persons who were directors before such
election or their nominees (the incumbent directors)
cease to constitute a majority of our Board of Directors;
provided however that if the election or nomination for election
by our stockholders, of any new director was approved by a vote
of at least 50% of the incumbent directors, such new director
shall be considered as an incumbent director;
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involuntary termination means termination of status
as a service provider under the following circumstances:
(i) termination without cause; or (ii) voluntary
termination within 30 days following (A) a material
reduction in job responsibilities, provided that neither a mere
change in title alone nor reassignment following a change of
control to a position that is substantially similar to the
position held prior to the change of control shall constitute a
material reduction in job responsibilities; (B) relocation
of the work site to a facility or location more than
50 miles from the principal work site at the time of the
change of control; or (C) a reduction in the then-current
base salary provided that an
across-the-board
reduction in the salary level of all other employees or
consultants in similar positions by the same percentage amount
as part of a general salary level reduction shall not constitute
such a salary reduction; and
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cause means (i) the willful failure
substantially to perform duties and responsibilities to us or a
deliberate violation of our policies; (ii) commission of
any act of fraud, embezzlement, dishonesty or any other willful
misconduct that has caused or is reasonably expected to result
in material injury to us; (iii) unauthorized use or
disclosure of any of our proprietary information or trade
secrets or the proprietary information or trade secrets of any
other party to whom the person owes an obligation of
nondisclosure as a result of his or her relationship with us; or
(iv) willful breach of any obligations under any written
agreement or covenant with us.
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Indemnification
of Officers
Our amended and restated certificate of incorporation provides
that we may indemnify our officers to the fullest extent
permitted by Delaware law.
Our amended and restated bylaws provide that (i) we are
required to indemnify our officers to the fullest extent
permitted by Delaware law, subject to certain very limited
exceptions, (ii) we are required to advance expenses, as
incurred, to our officers in connection with a legal proceeding
to the fullest extent permitted by Delaware law, subject to
certain very limited exceptions and (iii) the rights
conferred in the amended and restated bylaws are not exclusive.
We have entered into indemnification agreements with each of our
executive officers to give these individuals additional
contractual assurances regarding the scope of the
indemnification set forth in our amended and restated
certificate of incorporation and amended and restated bylaws and
to provide additional procedural protections. We have obtained
directors and officers insurance providing coverage
for all of our officers for certain liabilities. We believe that
these provisions and this insurance are necessary to attract and
retain qualified officers.
110
Tax and
Accounting Considerations
Deductibility of Executive
Compensation. Section 162(m) of the Internal
Revenue Code of 1986, as amended, generally limits the
deductibility of certain compensation in excess of $1,000,000
paid in any one year to our chief executive officer and our
other four highest paid executive officers. Qualifying
performance-based compensation will not be subject to this
deduction limit if certain requirements are met. The
non-performance-based compensation paid in cash to our executive
officers in 2009 did not exceed the $1 million limit per
officer, and the compensation committee does not anticipate that
the non-performance-based compensation to be paid to our
executive officers for 2010 will exceed that limit.
The compensation committee has and will continue to periodically
review and consider the deductibility of executive compensation
under Section 162(m) in designing our compensation programs
and arrangements. The compensation committee reserves the right
to use its judgment to authorize compensation payments that do
not comply with the exemptions in Section 162(m) when it
believes that such payments are appropriate and in the best
interests of the stockholders, after taking into consideration
changing business conditions or the officers performance.
Compensation
of Named Executive Officers
The following table sets forth the compensation earned by our
principal executive officer, our principal financial officer and
our three most highly compensated executive officers for the
fiscal year ended December 31, 2009. These five officers
are referred to as our named executive officers in
this registration statement. Bonuses are generally paid in the
year following the year in which the bonus is earned. The
compensation described in this table does not include medical,
group life insurance, or other benefits which are available
generally to all of our salaried employees.
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2009 SUMMARY COMPENSATION TABLE
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Non-
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Equity
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Incentive
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Stock
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Option
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Plan
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All Other
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Name and Principal
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Compensation
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Total
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Position
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Year
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($)(1)
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($)
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($)
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($)(2)
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($)
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($)
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($)
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William G. Klehm III, Chief Executive Officer
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2009
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400,000
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50,000
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821,921
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1,271,921
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Nicole T. Nicks, Chief Financial Officer
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2009
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148,022
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8,000
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36,613
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192,635
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Alan M. Nordin, President, Bicycle Division
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2009
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212,608
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8,000
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37,807
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258,415
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George L. Lowe, Vice President, Operations
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2009
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200,000
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5,630
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25,000
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(3)
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230,630
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Robert A. Smithson, Chief Technology Officer and Vice President,
Business Development
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2009
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164,737
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22,000
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|
92,246
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278,983
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(1)
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Represents actual salary paid in
the fiscal year ended December 31, 2009, as certain
salaries were changed after January 1, 2009.
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(2)
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The amounts in the Option
Awards column reflect the aggregate grant date fair values
of options granted during 2009 for each named executive officer,
computed in accordance with ASC Topic 718,
CompensationStock Compensation, excluding the
impact of estimated forfeitures related to service-based vesting
conditions. The assumptions used by us with respect to the
valuation of option awards are set forth in Note 10 to our
consolidated financial statements included elsewhere in this
Prospectus.
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(3)
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Mr. Lowe received a $25,000
allowance for relocation expenses.
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111
Grants of
Plan-Based Awards in Fiscal Year 2009
We made the following stock option grants or restricted stock
awards to our named executive officers during the fiscal year
ended December 31, 2009.
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No. of Securities
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Option
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Grant
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Underlying
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Exercise Price
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Date Fair
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Name
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Grant Date
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Options
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per Share
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Value
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William G. Klehm III
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2/08/2009
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5,472,769
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$
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0.22
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$
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821,921
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Nicole T. Nicks
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2/08/2009
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243,790
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$
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0.22
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$
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36,613
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Alan M. Nordin
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2/08/2009
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251,740
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$
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0.22
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$
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37,807
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Robert A. Smithson
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2/08/2009
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614,223
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$
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0.22
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$
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92,246
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George L. Lowe
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4/24/2009
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25,000
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$
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0.22
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$
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3,939
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10/22/2009
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25,000
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$
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0.10
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$
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1,691
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Outstanding
Equity Awards at 2009 Fiscal Year-End
The following table shows outstanding equity awards held by our
named executive officers as of December 31, 2009.
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Option
Awards(1)
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Number of
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Number of
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Securities
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Securities
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Underlying
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Underlying
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Option
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Unexercised
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Unexercised
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Exercise
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Option
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Option (#)
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Options (#)
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Price
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Expiration
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Name
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Grant Date
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Exercisable
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Unexercisable
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($)
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Date
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William G. Klehm III
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5/06/2004
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(2)
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1,315,734
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146,193
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0.0720
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5/05/2014
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7/13/2007
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236,645
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63,355
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1.3000
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7/12/2017
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2/08/2009
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5,472,769
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0.2200
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2/07/2019
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Nicole T. Nicks
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1/28/2005
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10,000
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0.1720
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1/27/2015
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6/25/2005
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30,000
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0.2300
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6/24/2015
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6/20/2006
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|
12,000
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|
0.7478
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|
6/19/2016
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9/10/2007
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16,111
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|
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|
3,889
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|
|
|
1.3000
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|
|
|
9/09/2017
|
|
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|
2/08/2009
|
|
|
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|
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243,790
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|
|
|
0.2200
|
|
|
|
2/07/2019
|
|
Alan M. Nordin
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1/28/2005
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|
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|
41,000
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|
|
|
|
|
|
|
0.1720
|
|
|
|
1/27/2015
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|
6/25/2005
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|
22,000
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|
|
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|
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|
0.2300
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|
6/24/2015
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|
6/20/2006
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|
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|
12,000
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|
|
|
|
|
|
|
0.7478
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|
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|
6/19/2016
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|
4/03/2007
|
|
|
|
8,000
|
|
|
|
|
|
|
|
1.3000
|
|
|
|
4/02/2017
|
|
|
|
|
2/08/2009
|
|
|
|
|
|
|
|
251,740
|
|
|
|
0.2200
|
|
|
|
2/07/2019
|
|
Robert A. Smithson
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|
4/16/2004
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(3)
|
|
|
248,600
|
|
|
|
|
|
|
|
0.0720
|
|
|
|
4/15/2014
|
|
|
|
|
6/20/2006
|
|
|
|
30,000
|
|
|
|
|
|
|
|
0.7478
|
|
|
|
6/19/2016
|
|
|
|
|
2/08/2009
|
|
|
|
|
|
|
|
614,223
|
|
|
|
0.2200
|
|
|
|
2/07/2019
|
|
George L. Lowe
|
|
|
4/24/2009
|
(4)
|
|
|
|
|
|
|
25,000
|
|
|
|
0.2200
|
|
|
|
4/23/2019
|
|
|
|
|
10/22/2009
|
|
|
|
|
|
|
|
25,000
|
|
|
|
0.1000
|
|
|
|
10/21/2019
|
|
|
|
|
(1)
|
|
Unless indicated otherwise, options
to purchase common stock vest
1/3rd on
the first anniversary of the grant date and in 24 equal monthly
installments thereafter.
|
|
(2)
|
|
Options to purchase 584,771 shares
of common stock vest based on achievement of certain performance
goals. Three of these performance goals were met as of
December 31, 2005. The remaining options to purchase
877,156 shares of common stock vest
1/6th
after six months from the date of grant and in 30 equal monthly
installments thereafter.
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|
(3)
|
|
Vests monthly over 36 months.
|
|
(4)
|
|
Vests
1/4th on
the first anniversary of the date of grant and in 36 equal
monthly installments thereafter.
|
Option
Exercises and Stock Vested
Our named executive officers did not exercise any options in the
fiscal year ended December 31, 2009 and there are currently
no outstanding stock awards (other than options).
112
Director
Compensation
The compensation committee is responsible for evaluating and
recommending to our Board of Directors the compensation to be
paid to the non-employee members of our Board of Directors for
their service. No compensation is paid to any director who is
also an employee of our company for the services provided as a
director.
Current
Director Compensation
Cash
payments
Mr. Allan R. Kammerer receives a cash payment of $1,250 for
each Board of Directors meeting that he attends in person. No
other directors received cash payments for their director
service in 2009. We reimburse all directors for reasonable
expenses incurred to attend our board and board committee
meetings.
Stock
Option Awards
It is the current policy of the Board of Directors to grant to
each individual who joins our board as a non-employee director
at the time of such initial election or appointment, an option
to purchase a number of shares of our common stock vesting over
a three-year period. Each option granted is to have an exercise
price per share equal to the fair market value per share of our
common stock on the grant date and will have a maximum term of
ten years, subject to earlier termination should the optionee
cease to serve as a member of our Board of Directors, and in
such case within 90 days thereafter.
Future
Director Compensation
In 2010, we will pay each director who is not an employee and
does not represent a principal stockholder an annual cash
retainer of $15,000. Additionally, we will pay each director
that serves as a committee chair an annual cash retainer of
$5,000. We intend to review our director compensation policies
annually to determine if any changes to our director
compensation are advisable.
Director
Summary Compensation Table
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 DIRECTOR COMPENSATION
|
|
|
|
Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned or
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
All Other
|
|
|
|
|
|
|
Paid in
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
Compensation
|
|
|
|
|
Name
|
|
Cash ($)
|
|
|
Awards ($)
|
|
|
Awards ($)(1)
|
|
|
Compensation ($)
|
|
|
($)
|
|
|
Total ($)
|
|
|
Gary E. Jacobs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven E. Parry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keimpe Keuning
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allan R. Kammerer
|
|
|
5,000
|
|
|
|
|
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
|
13,400
|
|
Edward L. Mercaldo
|
|
|
|
|
|
|
|
|
|
|
8,201
|
|
|
|
|
|
|
|
|
|
|
|
8,201
|
|
Vincenza Sera
|
|
|
|
|
|
|
|
|
|
|
8,206
|
|
|
|
|
|
|
|
|
|
|
|
8,206
|
|
Jeremiah B. Robins
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts in the Option
Awards column reflect the aggregate grant date fair values
of options granted during 2009 for each director, computed in
accordance with ASC Topic 718, CompensationStock
Compensation, excluding the impact of estimated forfeitures
related to service-based vesting conditions. The assumptions
used by us with respect to the valuation of option awards are
set forth in Note 10 to our consolidated financial
statements included elsewhere in this Prospectus.
|
113
Limitation
of Liability and Indemnification of Directors
Our amended and restated certificate of incorporation limits the
liability of our directors to the maximum extent permitted by
Delaware law. Delaware law provides that a corporation may
eliminate the personal liability of its directors for monetary
damages for breach of their fiduciary duties as directors,
except liability for any of the following acts:
|
|
|
|
|
breach of their duty of loyalty to us or our stockholders;
|
|
|
|
acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
|
|
|
|
unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
|
|
|
|
any transaction from which the director derived an improper
personal benefit.
|
Our amended and restated certificate of incorporation also
provides that we may indemnify our directors to the fullest
extent permitted by Delaware law.
Our amended and restated bylaws provide that (i) we are
required to indemnify our directors to the fullest extent
permitted by Delaware law, subject to certain very limited
exceptions, (ii) we are required to advance expenses, as
incurred, to our directors in connection with a legal proceeding
to the fullest extent permitted by Delaware law, subject to
certain very limited exceptions, and (iii) the rights
conferred in the amended and restated bylaws are not exclusive.
We have entered into indemnification agreements with each of our
directors to give these individuals additional contractual
assurances regarding the scope of the indemnification set forth
in our amended and restated certificate of incorporation and
restated bylaws and to provide additional procedural
protections. We have obtained directors and officers
insurance providing coverage for all of our directors for
certain liabilities. We believe that these provisions and this
insurance are necessary to attract and retain qualified
directors.
114
Certain
Relationships and Related Party Transactions
Since January 1, 2006, we have engaged in the following
transactions with our directors, executive officers and holders
of more than 5% of our voting securities, and affiliates or
immediate family members of our directors, executive officers
and holders of more than 5% of our voting securities. We believe
that all of these transactions were on terms as favorable as
could have been obtained from unrelated third parties.
Series E
Redeemable Convertible Preferred Private Placement
August 2010 Private Placement
In August 2010, we issued an aggregate of 6,550,218 shares
of Series E redeemable convertible preferred stock to three
accredited investors at a purchase price of $0.9160 per share
for aggregate proceeds totaling $6,000,000. Immediately prior to
the closing of this offering, these shares will automatically
convert into 6,550,218 shares of common stock. Upon
conversion of the Series E redeemable convertible preferred
stock into common stock, cumulative accrued and unpaid dividends
will convert into common stock at the conversion price. The
table below sets forth the number of shares of our Series E
redeemable convertible preferred stock sold to our directors and
5% or greater stockholders and their affiliates in connection
with our Series E redeemable convertible preferred stock
financing in August 2010:
|
|
|
|
|
|
|
|
|
|
|
Shares of Series E
|
|
|
|
|
|
|
Redeemable
|
|
|
Aggregate
|
|
|
|
Convertible
|
|
|
Purchase
|
|
Name
|
|
Preferred Stock
|
|
|
Price
|
|
|
Affiliates of Robeco Group
N.V.(1)
|
|
|
2,183,406
|
|
|
$
|
2,000,000
|
|
NGEN III,
L.P.(2)
|
|
|
2,183,406
|
|
|
$
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,366,812
|
|
|
$
|
4,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Affiliates of Robeco Group N.V.
consist of Robeco Clean Tech Private Equity II (EUR)
(CT EUR), Robeco Master Clean Tech Private
Equity II (USD) (CT USD) and Robeco Clean Tech
Co-Investment Fund II (CT II LP).
|
|
|
|
|
|
CT EUR and CT USD (collectively,
the Robeco Funds) are Dutch law funds for joint
accounts (fondsen voor gemene rekening). The Robeco Funds do not
have legal status but are each formed by means of a contractual
arrangement between a special purpose manager and a special
purpose custodian. The manager of each Robeco Fund is a Dutch
law private limited liability company (besloten vennootschap)
and the custodian is the Dutch law equivalent of a foundation
(stichting). The custodians of CT EUR and CT USD are Stichting
Custody Robeco Master Clean Tech II (EUR) and Stichting
Custody Robeco Master Clean Tech II (USD), respectively.
Each custodian is the legal owner of the assets of the
respective Robeco Fund and investors in the funds are the
economic beneficiaries of the funds. Robeco Institutional Asset
Management BV (RIAM) owns and manages the manager of
each Robeco Fund through a subsidiary limited liability company
and controls each custodian. RIAM may be deemed to have sole
power to vote and dispose of the shares held by CT EUR and CT
USD, and Cornelis Theodorus Leonardus Korthout, Hester Wendela
Desiree Gillia Borrie and Hans Albertus Andreas Rademaker, the
directors of RIAM, may be deemed to have shared power to vote
and dispose of such shares.
|
|
|
|
|
|
CT II LP is a Delaware limited
partnership with a Delaware limited liability company as the
general partner. A trust is the sole member of the general
partner. The trust has U.S. natural persons not otherwise
affiliated with Robeco as trustees. RIAM is appointed as
investment manager to CT II LP. RIAM may be deemed to have sole
power to vote and dispose of the shares held by CT II LP, and
Cornelis Theodorus Leonardus Korthout, Hester Wendela Desiree
Gillia Borrie and Hans Albertus Andreas Rademaker, the directors
of RIAM, may be deemed to have shared power to vote and dispose
of such shares.
|
|
|
|
|
|
RIAM has outsourced the investment
advisory services of the Robeco Funds to SAM Private Equity AG,
a Swiss limited liability company. Mr. Keuning, a member of
our Board of Directors, is an investment director at and
employed by SAM Private Equity AG.
|
|
|
|
(2)
|
|
Steven E. Parry, a member of our
Board of Directors, is a managing director of NGEN Mgt. II, LLC,
which is the manager of NGEN Partners III, LLC, which is the
general partner of NGEN III, L.P.
|
Series D
Convertible Preferred Private Placement
November 2009 Private Placement
On November 16, 2009, we issued an aggregate of
10,020,040 shares of Series D convertible preferred
stock to 28 accredited investors at a price of $0.3992 per share
for aggregate proceeds of approximately $4 million.
Immediately prior to the closing of this offering, these shares
will automatically convert into 10,020,040 shares
115
of common stock. The table below sets forth the number of shares
of our Series D convertible preferred stock sold to our
directors and 5% or greater stockholders and their affiliates in
connection with our Series D convertible preferred stock
financing in November 2009:
|
|
|
|
|
|
|
|
|
|
|
Shares of Series D
|
|
|
Aggregate
|
|
|
|
Convertible
|
|
|
Purchase
|
|
Name
|
|
Preferred Stock
|
|
|
Price
|
|
|
Affiliates of Robeco Group
N.V.(1)
|
|
|
2,156,054
|
|
|
$
|
860,697
|
|
NGEN III,
L.P.(2)
|
|
|
1,628,256
|
|
|
$
|
650,000
|
|
Mercaldo Family Trust Dated October 8,
2002(3)
|
|
|
2,302,800
|
|
|
$
|
919,278
|
|
Jacobs Investment Company
LLC(4)
|
|
|
556,286
|
|
|
$
|
222,069
|
|
Vincenza
Sera(5)
|
|
|
187,875
|
|
|
$
|
75,000
|
|
Allan R.
Kammerer(6)
|
|
|
125,250
|
|
|
$
|
50,000
|
|
Ron
Mercaldo(7)
|
|
|
125,250
|
|
|
$
|
50,000
|
|
Lee H. Davis, Trustee of the Lee H. Davis Revocable Trust dated
9/1/75(8)
|
|
|
125,250
|
|
|
$
|
50,000
|
|
Barbara Mellman Davis Revocable
Trust(9)
|
|
|
125,250
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,332,271
|
|
|
$
|
2,927,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Affiliates of Robeco Group N.V.
consist of Robeco Clean Tech Private Equity II (EUR)
(CT EUR), Robeco Master Clean Tech Private
Equity II (USD) (CT USD) and Robeco Clean Tech
Co-Investment Fund II (CT II LP).
|
|
|
|
|
|
CT EUR and CT USD (collectively,
the Robeco Funds) are Dutch law funds for joint
accounts (fondsen voor gemene rekening). The Robeco Funds do not
have legal status but are each formed by means of a contractual
arrangement between a special purpose manager and a special
purpose custodian. The manager of each Robeco Fund is a Dutch
law private limited liability company (besloten vennootschap)
and the custodian is the Dutch law equivalent of a foundation
(stichting). The custodians of CT EUR and CT USD are Stichting
Custody Robeco Master Clean Tech II (EUR) and Stichting
Custody Robeco Master Clean Tech II (USD), respectively.
Each custodian is the legal owner of the assets of the
respective Robeco Fund and investors in the funds are the
economic beneficiaries of the funds. Robeco Institutional Asset
Management BV (RIAM) owns and manages the manager of
each Robeco Fund through a subsidiary limited liability company
and controls each custodian. RIAM may be deemed to have sole
power to vote and dispose of the shares held by CT EUR and CT
USD, and Cornelis Theodorus Leonardus Korthout, Hester Wendela
Desiree Gillia Borrie and Hans Albertus Andreas Rademaker, the
directors of RIAM, may be deemed to have shared power to vote
and dispose of such shares.
|
|
|
|
|
|
CT II LP is a Delaware limited
partnership with a Delaware limited liability company as the
general partner. A trust is the sole member of the general
partner. The trust has U.S. natural persons not otherwise
affiliated with Robeco as trustees. RIAM is appointed as
investment manager to CT II LP. RIAM may be deemed to have sole
power to vote and dispose of the shares held by CT II LP, and
Cornelis Theodorus Leonardus Korthout, Hester Wendela Desiree
Gillia Borrie and Hans Albertus Andreas Rademaker, the directors
of RIAM, may be deemed to have shared power to vote and dispose
of such shares.
|
|
|
|
|
|
RIAM has outsourced the investment
advisory services of the Robeco Funds to SAM Private Equity AG,
a Swiss limited liability company. Mr. Keuning, a member of
our Board of Directors, is an investment director at and
employed by SAM Private Equity AG.
|
|
(2)
|
|
Steven E. Parry, a member of our
Board of Directors, is a managing director of NGEN Mgt. II, LLC,
which is the manager of NGEN Partners III, LLC, which is the
general partner of NGEN III, L.P.
|
|
(3)
|
|
Edward L. Mercaldo, a member of our
Board of Directors, is the trustee of the Mercaldo Family
Trust Dated October 8, 2002.
|
|
(4)
|
|
Gary E. Jacobs, a member of our
Board of Directors, is the Managing Director of the Jacobs
Investment Company LLC.
|
|
(5)
|
|
Vincenza Sera is a member of our
Board of Directors.
|
|
(6)
|
|
Allan R. Kammerer is a member of
our Board of Directors.
|
|
(7)
|
|
Ron Mercaldo is the brother of
Edward Mercaldo, a member of our Board of Directors.
|
|
(8)
|
|
Lee H. Davis is a former member of
our Board of Directors.
|
|
(9)
|
|
Barbara Mellman is the wife of Lee
Davis, a former member of our Board of Directors.
|
December 2008 Private Placement
On December 18, 2008, we issued an aggregate of
63,607,402 shares of Series D convertible preferred
stock to 28 accredited investors at a price of $0.3992 per share
for gross proceeds before offering costs of approximately
$20.6 million and $4.8 million conversion of principal
and accrued interest on convertible debt. Immediately prior to
the closing of this offering, these shares will automatically
convert into 63,607,402 shares of common stock. The table
below sets forth the number of shares of our Series D
convertible preferred stock
116
sold to our directors and 5% or greater stockholders and their
affiliates in connection with our Series D convertible
preferred stock financing in December 2008:
|
|
|
|
|
|
|
|
|
|
|
Shares of Series D
|
|
Aggregate
|
|
|
Convertible
|
|
Purchase
|
Name
|
|
Preferred Stock
|
|
Price
|
|
Affiliates of Robeco Group
N.V.(1)
|
|
|
25,050,100
|
|
|
$
|
10,000,000
|
|
NGEN III,
L.P.(2)
|
|
|
25,050,100
|
|
|
$
|
10,000,000
|
|
Affiliates of Fallbrook Series of LTS Capital Partners II, LLC
|
|
|
5,459,706
|
|
|
$
|
2,179,515
|
|
Jacobs Investment Company
LLC(3)
|
|
|
4,128,391
|
|
|
$
|
1,648,054
|
|
Jeremiah B. Robins
Trust(4)
|
|
|
654,356
|
|
|
$
|
261,219
|
|
Timothy S. Davis
Trust(5)
|
|
|
22,287
|
|
|
$
|
8,897
|
|
Barry M. Davis, Trustee of the Benjamin Segall Davis
Trust(6)
|
|
|
27,732
|
|
|
$
|
11,071
|
|
Mark S.
Davis(7)
|
|
|
45,332
|
|
|
$
|
18,097
|
|
Hugh C. Thompson, III Revocable
Trust 11/11/91(8)
|
|
|
62,625
|
|
|
$
|
25,000
|
|
Ernest H.
Pomerantz(9)
|
|
|
260,754
|
|
|
$
|
104,093
|
|
Big Wood Holdings
L.P.(10)
|
|
|
261,742
|
|
|
$
|
104,487
|
|
Davis Affiliates,
LP(11)
|
|
|
274,266
|
|
|
$
|
109,487
|
|
Madison Ventures,
LLC(12)
|
|
|
523,155
|
|
|
$
|
208,843
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
61,820,546
|
|
|
$
|
24,678,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Affiliates of Robeco
Group N.V. consist of Robeco Clean Tech Private
Equity II (EUR) (CT EUR), Robeco Master Clean
Tech Private Equity II (USD) (CT USD) and
Robeco Clean Tech Co-Investment Fund II (CT II
LP).
|
|
|
|
|
|
CT EUR and CT USD (collectively,
the Robeco Funds) are Dutch law funds for joint
accounts (fondsen voor gemene rekening). The Robeco Funds do not
have legal status but are each formed by means of a contractual
arrangement between a special purpose manager and a special
purpose custodian. The manager of each Robeco Fund is a Dutch
law private limited liability company (besloten vennootschap)
and the custodian is the Dutch law equivalent of a foundation
(stichting). The custodians of CT EUR and CT USD are Stichting
Custody Robeco Master Clean Tech II (EUR) and Stichting
Custody Robeco Master Clean Tech II (USD), respectively.
Each custodian is the legal owner of the assets of the
respective Robeco Fund and investors in the funds are the
economic beneficiaries of the funds. Robeco Institutional Asset
Management BV (RIAM) owns and manages the manager of
each Robeco Fund through a subsidiary limited liability company
and controls each custodian. RIAM may be deemed to have sole
power to vote and dispose of the shares held by CT EUR and CT
USD, and Cornelis Theodorus Leonardus Korthout, Hester Wendela
Desiree Gillia Borrie and Hans Albertus Andreas Rademaker, the
directors of RIAM, may be deemed to have shared power to vote
and dispose of such shares.
|
|
|
|
|
|
CT II LP is a Delaware limited
partnership with a Delaware limited liability company as the
general partner. A trust is the sole member of the general
partner. The trust has U.S. natural persons not otherwise
affiliated with Robeco as trustees. RIAM is appointed as
investment manager to CT II LP. RIAM may be deemed to have sole
power to vote and dispose of the shares held by CT II LP, and
Cornelis Theodorus Leonardus Korthout, Hester Wendela Desiree
Gillia Borrie and Hans Albertus Andreas Rademaker, the directors
of RIAM, may be deemed to have shared power to vote and dispose
of such shares.
|
|
|
|
|
|
RIAM has outsourced the investment
advisory services of the Robeco Funds to SAM Private Equity AG,
a Swiss limited liability company. Mr. Keuning, a member of
our Board of Directors, is an investment director at and
employed by SAM Private Equity AG.
|
|
(2)
|
|
Steven E. Parry, a member of our
Board of Directors, is a managing director of NGEN Mgt. II, LLC,
which is the manager of NGEN Partners III, LLC, which is the
general partner of NGEN III, L.P.
|
|
(3)
|
|
Gary E. Jacobs, a member of our
Board of Directors, is the Managing Director of the Jacobs
Investment Company LLC.
|
|
(4)
|
|
Jeremiah B. Robins, a member of our
Board of Directors, is the trustee of the Jeremiah B. Robins
Trust.
|
|
(5)
|
|
Timothy S. Davis is the brother of
Lee Davis, a former member of our Board of Directors.
|
|
(6)
|
|
Barry M. Davis is the brother of
Lee Davis, a former member of our Board of Directors.
|
|
(7)
|
|
Mark S. Davis is the brother of Lee
Davis, a former member of our Board of Directors.
|
|
(8)
|
|
Hugh C. Thompson is a former member
of our Board of Directors.
|
|
(9)
|
|
Ernest Pomerantz is a former member
of our Board of Directors.
|
|
(10)
|
|
Big Wood Holdings L.P. is
controlled by Jim Bartlett, a former member of our Board of
Directors, or an affiliate of his.
|
|
(11)
|
|
Lee Davis is a former member of our
Board of Directors.
|
|
(12)
|
|
Madison Ventures, LLC is controlled
by Lee Davis, a former member of our Board of Directors, or an
affiliate of his.
|
117
Viryd
Technologies Inc.
We have entered into the following agreements with Viryd
Technologies Inc.:
|
|
|
|
|
License Agreement with Viryd Technologies Inc.
(Viryd) dated February 14, 2008, as amended
November 25, 2008 (the License Agreement).
Under the terms of the License Agreement, we granted an
exclusive license to Viryd under certain of our patents for use
in the field of wind turbines for conversion of wind energy into
electrical power, and potentially other fields of use if we
reach agreement with Viryd in the future. Viryd will pay us a
royalty for products it commercializes that incorporate our
patented technology. Viryd has obligations it would need to
satisfy in order to retain exclusivity under the License
Agreement.
|
|
|
|
Patent Assignment Agreement with Viryd Technologies, Inc. dated
February 15, 2008, as amended November 25, 2008. We
assigned certain patent applications to Viryd that had
application in the field of wind turbines for conversion of wind
energy into electrical power. Viryd will pay us a royalty for
products it commercializes that incorporate the technology
covered by the transferred patent applications, unless we are
already receiving a royalty under the License Agreement on the
same product or if the product incorporates a continuously
variable transmission that we supplied to Viryd.
|
|
|
|
|
|
Engineering Services Agreement with Viryd Technologies Inc.
dated April 28, 2008, as amended June 10, 2008 and
November 25, 2008. Under the terms of the Engineering
Services Agreement, we provide services to Viryd that consist of
developing a specific design of our NuVinci technology
for Viryds applications. Viryd pays us fees for these
services. We recorded revenues for engineering services of
approximately $88,000 during the year ended December 31,
2009 and approximately $74,000 during the six months ended
June 30, 2010.
|
|
|
|
|
|
Master Agreement with Viryd Technologies Inc. dated
November 25, 2008. We entered into this Master Agreement
with Viryd in order to amend various terms of the License
Agreement, Patent Assignment Agreement, Engineering Services
Agreement and Support Services Agreement that we previously
entered into with Viryd.
|
|
|
|
|
|
Support Services Agreement with Viryd Technologies Inc. dated
February 15, 2008, as amended by the First Amendment dated
March 3, 2008. Under the terms of the Support Services
Agreement, we provide various services to Viryd, including but
not limited to non-project specific engineering consulting,
patent prosecution services and back-office support (including
human resources and accounting). Viryd pays us fees for these
services. We recorded revenues for support services of
approximately $407,000 during the year ended December 31,
2009 and approximately $113,000 during the six months ended
June 30, 2010.
|
Our directors and executive officers as a group, and
Gary E. Jacobs as an individual, beneficially own, as of
June 30, 2010, approximately 18% and 16%, respectively, of
the outstanding voting securities of Viryd Technologies Inc.
Agreements
with our Stockholders
We have entered into a registration rights agreement with our
holders of convertible preferred stock. The registration rights
agreement provides (i) that holders of convertible
preferred stock and certain holders of warrants to purchase
common stock have the right to demand that we file a
registration statement, subject to certain limitations, and
(ii) that holders of convertible preferred stock and
certain holders of warrants to purchase common stock have the
right to request that their shares be covered by a registration
statement that we are otherwise filing. See the
Shares Eligible for Future SaleRegistration
Rights section of this prospectus for a further discussion
of these registration rights.
118
Agreements
with Directors
We have entered into a Professional Services agreement with
Automotive Support Group LLC, which is an entity affiliated with
our director, Allan R. Kammerer. This agreement provides for
payment of a fee of $1,250 plus approved expenses for each day
or any substantial portion thereof that Mr. Kammerer
provides services on site at the Companys facilities as
requested by the Company.
Gary E. Jacobs has personally guaranteed our line of credit with
Wells Fargo. In consideration of such guarantee, we have issued
to the Jacobs Family Trust a warrant to purchase
3,100,753 shares of the Companys common stock at an
exercise price of $0.3992.
Agreements
with Executive Officers
We entered into a Professional Services Agreement with Design
and Conquer Creative Alliance, which is an entity affiliated
with our vice president of operations, George L. Lowe.
Mr. Lowe has not provided us any services under this
agreement since his employment by the Company, but we continue
to use the services of his associate under the same consulting
agreement, and in 2009 we paid $500.00 for consulting services
to his associate under this agreement. This agreement, as
amended, provides for consulting services at compensation rates
ranging from $75 to $96 per hour plus approved expenses.
Mr. Lowe has not provided consulting services to us
subsequent to his employment with us.
119
Principal
Stockholders
The following table sets forth as of August 25, 2010
information regarding the beneficial ownership of shares of our
common stock for:
|
|
|
|
|
each person, or group of affiliated persons, known to us to own
beneficially 5% or more of our outstanding shares of common
stock;
|
|
|
|
each of our directors;
|
|
|
|
each of our executive officers; and
|
|
|
|
all of our directors and executive officers as a group.
|
Information with respect to beneficial ownership has been
furnished by each director, executive officer or beneficial
owner of more than 5% of our common stock. Beneficial ownership
has been determined in accordance with the rules of the SEC. The
percentage of beneficial ownership as to any person as of a
particular date is calculated by dividing the number of shares
beneficially owned by such person, which includes the number of
shares as to which such person has the right to acquire voting
or investment power within 60 days after such date, by the
sum of the number of shares outstanding as of such date plus the
number of shares as to which such person has the right to
acquire voting or investment power within 60 days after
such date. Consequently, the denominator for calculating
beneficial ownership percentages may be different for each
beneficial owner. SEC rules generally attribute beneficial
ownership of securities to persons who possess sole or shared
voting power and investment power with respect to those
securities. Unless otherwise indicated by footnote, and subject
to applicable community property laws, the persons and entities
named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially
owned by them.
For purposes of calculating beneficial ownership, we have
assumed that, as of August 25, 2010:
|
|
|
|
|
There are 119,317,857 shares outstanding, assuming the
conversion of all outstanding shares of preferred stock
to shares
of common stock, immediately prior to the closing of this
offering;
|
|
|
|
|
|
We will
issue shares
of common stock in the offering; and
|
|
|
|
The underwriters have not exercised their option to purchase
additional shares.
|
Unless otherwise noted below, the address for each holder listed
below is
c/o Fallbrook
Technologies Inc., 9444 Waples Street, Suite 410,
San Diego, California 92121.
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Shares
|
|
|
Beneficially
|
|
|
|
Beneficially
|
|
|
Owned
|
|
|
|
Owned Before Offering
|
|
|
After Offering
|
|
|
|
Shares
|
|
|
Percent
|
|
|
Shares
|
|
|
Percent
|
|
|
5% or Greater Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities associated with Robeco Group
N.V.(1)
|
|
|
29,389,560
|
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
NGEN III,
L.P.(2)
|
|
|
28,861,762
|
|
|
|
24.2
|
%
|
|
|
|
|
|
|
|
|
Entities associated with Gary E.
Jacobs(3)
|
|
|
13,713,158
|
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
Motion Systems,
Inc.(4)
|
|
|
9,976,571
|
|
|
|
8.4
|
%
|
|
|
|
|
|
|
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William G.
Klehm III(5)
|
|
|
4,656,161
|
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
Gary E.
Jacobs(3)
|
|
|
13,713,158
|
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
Steven E.
Parry(6)
|
|
|
28,861,762
|
|
|
|
24.2
|
%
|
|
|
|
|
|
|
|
|
Keimpe
Keuning(1)
|
|
|
29,389,560
|
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
Allan R.
Kammerer(7)
|
|
|
142,750
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Edward L.
Mercaldo(8)
|
|
|
2,500,019
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
Vincenza
Sera(9)
|
|
|
187,875
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Jeremiah B.
Robins(10)
|
|
|
709,481
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Nicole T.
Nicks(11)
|
|
|
250,280
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Paul A.
DeHart(12)
|
|
|
200,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Alan M.
Nordin(13)
|
|
|
265,238
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Robert A.
Smithson(14)
|
|
|
621,235
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Jeffrey A.
Birchak(15)
|
|
|
321,381
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
George L.
Lowe(16)
|
|
|
20,833
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
David W.
Markley(17)
|
|
|
96,450
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group
(15 persons)
|
|
|
81,936,183
|
|
|
|
63.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Represents beneficial ownership of
less than 1%
|
|
|
|
(1)
|
|
Consists of
(a) 8,890,341 shares of common stock held by Robeco
Clean Tech Private Equity II (EUR) (CT EUR)
issuable upon conversion of convertible preferred stock,
(b) 7,273,918 shares of common stock held by Robeco
Master Clean Tech Private Equity II (USD) (CT
USD) issuable upon conversion of convertible preferred
stock, and (c) 13,225,301 shares of common stock held
by Robeco Clean Tech Co-Investment Fund II (CT II
LP). issuable upon conversion of convertible preferred
stock. The address of Robeco is Coolsingel 120, 3011 AG
Rotterdam, The Netherlands.
|
|
|
|
|
|
CT EUR and CT USD (collectively,
the Robeco Funds) are Dutch law funds for joint
accounts (fondsen voor gemene rekening). The Robeco Funds do not
have legal status but are each formed by means of a contractual
arrangement between a special purpose manager and a special
purpose custodian. The manager of each Robeco Fund is a Dutch
law private limited liability company (besloten vennootschap)
and the custodian is the Dutch law equivalent of a foundation
(stichting). The custodians of CT EUR and CT USD are Stichting
Custody Robeco Master Clean Tech II (EUR) and Stichting
Custody Robeco Master Clean Tech II (USD), respectively.
Each custodian is the legal owner of the assets of the
respective Robeco Fund and investors in the funds are the
economic beneficiaries of the funds. Robeco Institutional Asset
Management BV (RIAM) owns and manages the manager of
each Robeco Fund through a subsidiary limited liability company
and controls each custodian. RIAM may be deemed to have sole
power to vote and dispose of the shares held by CT EUR and CT
USD, and Cornelis Theodorus Leonardus Korthout, Hester Wendela
Desiree Gillia Borrie and Hans Albertus Andreas Rademaker, the
directors of RIAM, may be deemed to have shared power to vote
and dispose of such shares.
|
|
|
|
|
|
CT II LP is a Delaware limited
partnership with a Delaware limited liability company as the
general partner. A trust is the sole member of the general
partner. The trust has U.S. natural persons not otherwise
affiliated with Robeco as trustees. RIAM is appointed as
investment manager to CT II LP. RIAM may be deemed to have sole
power to vote and dispose of the shares held by CT II LP, and
Cornelis Theodorus Leonardus Korthout, Hester Wendela Desiree
Gillia Borrie and Hans Albertus Andreas Rademaker, the directors
of RIAM, may be deemed to have shared power to vote and dispose
of such shares.
|
121
|
|
|
|
|
RIAM has outsourced the investment
advisory services of the Robeco Funds to SAM Private Equity AG,
a Swiss limited liability company. Mr. Keuning, a member of
our Board of Directors, is an investment director at and
employed by SAM Private Equity AG. Mr. Keuning disclaims
beneficial ownership of the shares held by CT EUR, CT USD and CT
II LP except to the extent of his pecuniary interest therein.
|
|
|
|
(2)
|
|
Consists of 28,861,762 shares
of common stock issuable upon conversion of convertible
preferred stock held by NGEN III, L.P. The address of NGEN III,
L.P. is 1114 State Street, Suite 247, Santa Barbara,
California 93101. NGEN Partners III, L.L.C, the general partner
of NGEN III, L.P., through its manager, NGEN Mgt. II, LLC, may
be deemed to have sole power to vote and dispose of the shares
that are directly owned by NGEN III, L.P. and Peter Grubstein,
Rosemary Ripley, Rob Koch and Mr. Parry, the managing
directors of NGEN Mgt. II, LLC, may be deemed to have shared
power to vote and dispose of such shares.
|
|
|
|
(3)
|
|
Consists of
(a) 5,701,830 shares of common stock issuable upon
conversion of convertible preferred stock held by Jacobs
Investment Company LLC, (b) 34,730 shares of common
stock and 2,456,507 shares of common stock issuable upon
conversion of convertible preferred stock held by Jacobs Family
Trust, (c) 1,171,169 shares of common stock issuable
upon conversion of the convertible preferred stock held by Gary
E. Jacobs Grantor Retained Annuity Trust dated January 12,
2010, (d) 1,171,169 shares of common stock issuable
upon conversion of convertible preferred stock held by Jerri-Ann
Jacobs Grantor Retained Annuity Trust dated January 12,
2010, (e) 3,100,753 shares of common stock issuable
upon exercise of an outstanding warrant held by Jacobs Family
Trust and (f) 77,000 shares of common stock issuable
upon exercise of outstanding options held by Mr. Jacobs.
Mr. Jacobs, the manager of Jacobs Investment Company LLC
and trustee of Jacobs Family Trust, trustee of Gary E. Jacobs
Grantor Retained Annuity Trust dated January 12, 2010, and
trustee of Jerri-Ann Jacobs Grantor Retained Annuity Trust dated
January 12, 2010 may be deemed to have sole power to
vote and dispose of the shares that are directly owned by Jacobs
Investment Company LLC, Jacobs Family Trust, Gary E. Jacobs
Grantor Retained Annuity Trust dated January 12, 2010,
Jerri-Ann Jacobs Grantor Retained Annuity Trust dated
January 12, 2010.
|
|
(4)
|
|
Consists of 9,976,571 shares
of common stock issuable upon conversion of convertible
preferred stock held by Motion Systems, Inc., Donald Miller, the
president of Motion Systems, Inc, may be deemed to have sole
power to vote and dispose of the shares that are directly owned
by Motion Systems, Inc.
|
|
|
|
(5)
|
|
Consists
of 4,656,161 shares of common stock issuable upon
exercise of outstanding options held by Mr. Klehm.
|
|
|
|
(6)
|
|
Consists of 28,861,762 shares
of common stock issuable upon conversion of convertible
preferred stock held by NGEN III, L.P. NGEN Partners III, L.L.C,
the general partner of NGEN III, L.P., through its manager, NGEN
Mgt. II, LLC, may be deemed to have sole power to vote and
dispose of the shares that are directly owned by NGEN III, L.P.
and Peter Grubstein, Rosemary Ripley, Rob Koch and
Mr. Parry, the managing directors of NGEN Mgt. II, LLC, may
be deemed to have shared power to vote and dispose of such
shares. Mr. Parry disclaims beneficial ownership in the
shares held by NGEN III, L.P., except to the extent of his
pecuniary interest therein.
|
|
|
|
(7)
|
|
Consists of 142,750 shares of
common stock issuable upon conversion of convertible preferred
stock held by Mr. Kammerer.
|
|
|
|
(8)
|
|
Consists of 2,500,019 shares
of common stock issuable upon conversion of convertible
preferred stock held by Mercaldo Family Trust Dated
October 8, 2002. Mr. Mercaldo, the trustee of Mercaldo
Family Trust Dated October 8, 2002, may be deemed to
have sole power to vote and dispose of the shares that are
directly owned by Mercaldo Family Trust Dated
October 8, 2002.
|
|
|
|
(9)
|
|
Consists of 187,875 shares of
common stock issuable upon conversion of convertible preferred
stock held by Ms. Sera.
|
|
|
|
(10)
|
|
Consists of
(a) 654,356 shares of common stock issuable upon
conversion of convertible preferred stock held by the Jeremiah
B. Robins Trust. (b) 55,125 shares of common stock
issuable exercise of outstanding options held by
Mr. Robins. Mr. Robins, the trustee of the Jeremiah B.
Robins Trust, may be deemed to have sole power to vote and
dispose of the shares that are directly owned by the Jeremiah B.
Robins Trust.
|
|
|
|
(11)
|
|
Consists of
(a) 20,000 shares of common stock and
22,841 shares of common stock issuable upon conversion of
convertible preferred stock held by Jeffrey & Nicole
Nicks Family Trust DTD 5/10/2002, and
(b) 207,439 shares of common stock issuable upon
exercise of outstanding options held by Ms. Nicks.
Ms. Nicks, the trustee of the Jeffrey & Nicole
Nicks Family Trust DTD 5/10/2002, may be deemed to have
sole power to vote and dispose of the shares that are directly
owned by the Jeffrey & Nicole Nicks Family
Trust DTD 5/10/2002.
|
|
|
|
(12)
|
|
Consists of 200,000 shares of
common stock issuable upon exercise of outstanding options held
by Mr. DeHart.
|
|
|
|
(13)
|
|
Consists of
(a) 12,000 shares of common stock and
30,383 shares of common stock issuable upon conversion of
convertible preferred stock held by The Alan M. Nordin and Megan
E. Nordin Living Trust, and (b) 222,855 shares of
common stock issuable upon exercise of outstanding options held
by Mr. Nordin. Mr. Nordin, the trustee of The Alan M.
Nordin and Megan E. Nordin Living Trust, may be deemed to have
sole power to vote and dispose of the shares that are directly
owned by The Alan M. Nordin and Megan E. Nordin Living
Trust.
|
|
|
|
(14)
|
|
Consists
of (a) 1,400 shares of common stock held by
Mr. Smithson, and (b) 619,835 shares of common
stock issuable upon exercise of outstanding options held by
Mr. Smithson.
|
|
|
|
(15)
|
|
Consists
of (a) 35,000 shares of common stock held by
Mr. Birchak, and (b) 286,381 shares of common
stock issuable upon exercise of outstanding options held by
Mr. Birchak.
|
|
|
|
(16)
|
|
Consists of 20,833 shares of common
stock issuable upon exercise of outstanding options held by
Mr. Lowe.
|
|
|
|
(17)
|
|
Consists
of (a) 40,000 shares of common stock held by
Mr. Markley, and (b) 56,450 shares of common
stock issuable upon exercise of outstanding options held by
Mr. Markley.
|
122
Description
of Capital Stock
General
As of August 25, 2010, our authorized capital stock
consists of 250,000,000 shares of common stock,
$0.001 par value per share, of which 11,660,855 are
outstanding, and 107,148,290 shares of preferred stock,
$0.001 par value per share, designated in series, as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
|
|
|
Equivalent Shares of
|
|
Preferred Stock
|
|
Shares Authorized
|
|
|
Shares Outstanding
|
|
|
Ratio
|
|
|
Common Stock
|
|
|
Series A
|
|
|
3,887,577
|
|
|
|
3,887,577
|
|
|
|
1.4424
|
|
|
|
5,607,441
|
|
Series B
|
|
|
4,786,444
|
|
|
|
4,786,444
|
|
|
|
2.0868
|
|
|
|
9,988,351
|
|
Series C
|
|
|
3,012,765
|
|
|
|
3,012,765
|
|
|
|
3.9444
|
|
|
|
11,883,550
|
|
Series D
|
|
|
73,627,442
|
|
|
|
73,627,442
|
|
|
|
1.0000
|
|
|
|
73,627,442
|
|
Series E
|
|
|
21,834,062
|
|
|
|
6,550,218
|
|
|
|
1.0000
|
(1)
|
|
|
6,550,218
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
107,148,290
|
|
|
|
91,864,446
|
|
|
|
|
|
|
|
107,657,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The initial conversion ratio for
the Series E Preferred Stock is 1.0000 based on the
original issuance price of $0.9160 divided by the conversion
price of $0.9160, subject to adjustment for certain events, such
as an initial public offering. In the event of an initial public
offering with aggregate net proceeds of not less than
$20 million or a reverse take-over of a company listed on
an internationally recognized securities exchange immediately
followed by a minimum $20 million equity financing, the
conversion price will be an amount equal to the lesser of
(A) a 20% discount to the common stock offering price, and
(B) a per share price equal to $120 million divided by
the total number of outstanding shares of common stock deemed to
be outstanding immediately prior to the qualifying event.
|
|
|
|
(2)
|
|
The number of equivalent shares of
common stock does not include dividends, which shall accrue on a
cumulative annual basis on each share of Series E Preferred
Stock at an annual rate of $0.09160 per share (10% of original
issuance price) whether or not declared. If the Series E
Preferred Stock has not been converted to common stock on or
prior to the two-year anniversary date of issuance, the annual
dividend rate shall increase to $0.11908 per share. Accumulated
dividends are payable in the form of common stock upon
conversion of the Series E Preferred Stock. If the
Series E Preferred Stock has not converted on or before
August 13, 2012, then, at the request of the shareholder,
the shares can be redeemed for cash.
|
All outstanding shares of our preferred stock will be converted
into shares
of our common stock effective immediately prior to the
completion of this offering.
Immediately after completion of this offering, our authorized
capital stock will consist
of shares
of common stock, $ par value per
share,
and shares
of undesignated preferred stock, $
par value per share.
The following description of the material provisions of our
capital stock and our charter and bylaws is only a summary, does
not purport to be complete and is qualified by applicable law
and the full provisions of our charter and bylaws that will be
in effect upon completion of the offering. You should refer to
our charter and bylaws as in effect upon the closing of this
offering, which will be included as exhibits to the registration
statement of which this prospectus is a part.
Common
stock
As of August 25, 2010, assuming conversion of all
outstanding shares of preferred stock
to shares
of common stock, which will occur immediately prior to the
closing of this offering, there
were shares
of our common stock outstanding which were held of record by
approximately 250 stockholders.
Voting Rights. Holders of common stock are entitled
to one vote per share on any matter to be voted upon by
stockholders. All shares of common stock rank equally as to
voting and all other matters. The shares of common stock have no
preemptive or conversion rights, no redemption or sinking fund
provisions, are not liable for further call or assessment and
are not entitled to cumulative voting rights.
123
Dividend Rights. For as long as such stock is
outstanding, the holders of common stock are entitled to receive
ratably any dividends when and as declared from time to time by
our Board of Directors out of funds legally available for
dividends. We currently intend to retain all future earnings for
the operation and expansion of our business and do not
anticipate paying cash dividends on our common stock in the
foreseeable future.
Liquidation Rights. Upon a liquidation or
dissolution of our company, whether voluntary or involuntary,
creditors will be paid before any distribution to holders of our
common stock. After such distribution, holders of common stock
are entitled to receive a pro rata distribution per share of any
excess amount.
Warrants. As of August 25, 2010, there were
outstanding warrants to purchase an aggregate of
5,367,487 shares of our common stock at a price of $0.3992
per share. This consisted of a warrant held by the Jacobs Family
Trust to purchase 3,100,753 shares, which will be subject
to the
lock-up
agreements described under Underwriting and will be
eligible for sale following the
180-day
lock-up
period, and warrants to purchase a total of
2,116,734 shares, which we expect to be exercised as of the
closing. In January 2010, we entered into a consulting agreement
with ASL pursuant to which we issued to ASL warrants to purchase
50,000 shares of our common stock, which we expect to be
exercised upon the closing, and pursuant to which ASL can earn,
upon achievement of certain performance milestones, additional
warrants to purchase up to 750,000 shares of our common
stock, which we refer to as contingent warrants in
this prospectus. In August 2010, we determined that ASL
successfully achieved certain milestones and, as such, we issued
to ASL warrants to purchase 100,000 shares of our common stock,
which we expect to be exercised upon the closing, thereby
leaving contingent warrants to purchase 650,000 shares of our
common stock available to ASL. All warrants are exercisable at a
price of $0.3992 per share.
Undesignated
preferred stock
Under our charter, which will be effective upon the completion
of this offering, our Board of Directors has authority to issue
undesignated preferred stock without stockholder approval. Our
Board of Directors may also determine or alter for each class of
preferred stock the voting powers, designations, preferences,
and special rights, qualifications, limitations, or restrictions
as permitted by law. Our Board of Directors may authorize the
issuance of preferred stock with voting or conversion rights
that could adversely affect the voting power or other rights of
the holders of the common stock. Issuing preferred stock
provides flexibility in connection with possible acquisitions
and other corporate purposes, but could also, among other
things, have the effect of delaying, deferring or preventing a
change in control of our company and may adversely affect the
market price of our common stock and the voting and other rights
of the holders of common stock.
Anti-takeover
matters
Charter
and Bylaw Provisions
Our charter and bylaws will, upon completion of this offering,
include a number of provisions that may have the effect of
encouraging persons considering unsolicited tender offers or
other unilateral takeover proposals to negotiate with our Board
of Directors rather than pursue non-negotiated takeover
attempts. These provisions include the items described below.
No written consent of stockholders. Our charter will
provide that no action shall be taken by the stockholders except
at an annual meeting of stockholders called in accordance with
the Bylaws, and no action shall be taken by the stockholders by
written consent in lieu of a meeting.
Special meetings of stockholders. Our charter will
provide that only our Chairman, a majority of the members of our
Board of Directors then in office, the Chief Executive Officer
or the holders of not less than 5% of all shares entitled to
cast votes at the meeting may call special meetings of
stockholders. Our bylaws will limit the business that may be
conducted at a meeting of stockholders to those matters properly
brought before the meeting.
Amendment to charter. As required by the Delaware
General Corporation Law, or DGCL, any amendment of our charter
must first be approved by a majority of our Board of Directors
and, if required by law or our
124
charter, thereafter be approved by a majority of the
outstanding shares entitled to vote on the amendment, except
that the amendment of certain provisions of our charter,
including provisions relating to stockholder action, directors,
limitation of liability, indemnification, amendment of our
bylaws and amendment of our charter, must be approved by no less
than a majority of the issued and outstanding shares of capital
stock issued and outstanding and entitled to vote at the
meeting, present in person or by proxy.
Amendment to bylaws. Our bylaws may be amended by
the affirmative vote of a majority of the directors then in
office, subject to any limitations set forth in the bylaws; and
may also be amended by the majority of the outstanding shares
entitled to vote on the amendment; except that the amendment of
certain provisions of our bylaws, including provisions relating
to stockholder action, directors, limitation of liability and
the amendment of our bylaws, must be approved by no less than
662/3%
of the voting power of all of the shares of capital stock issued
and outstanding and entitled to vote at a meeting, present in
person or by proxy.
Blank check preferred stock. Our charter will
provide
for
authorized shares of preferred stock. The existence of
authorized but unissued shares of preferred stock may enable our
Board of Directors to render more difficult or to discourage an
attempt to obtain control of us by means of a merger, tender
offer, proxy contest, or otherwise. For example, if in the due
exercise of its fiduciary obligations, our Board of Directors
were to determine that a takeover proposal is not in the best
interests of us or our stockholders, our Board of Directors
could cause shares of preferred stock to be issued without
stockholder approval in one or more private offerings or other
transactions that might dilute the voting or other rights of the
proposed acquirer or insurgent stockholder or stockholder group.
In this regard, our certificate of incorporation grants our
Board of Directors broad power to establish the rights and
preferences of authorized and unissued shares of preferred
stock. The issuance of shares of preferred stock could decrease
the amount of earnings and assets available for distribution to
holders of shares of common stock. The issuance may also
adversely affect the rights and powers, including voting rights,
of these holders and may have the effect of delaying, deterring,
or preventing a change in control of us.
Size of Board and Vacancies. Our bylaws will provide
that the number of directors on our Board of Directors will be
fixed exclusively by our Board of Directors. Newly created
directorships resulting from any increase in our authorized
number of directors will be filled solely by the majority vote
of the remaining directors in office. Any vacancies in our Board
of Directors resulting from death, resignation, retirement or
removal from office or other cause will be filled solely by the
majority vote of our remaining directors in office, even if less
than a quorum of directors is present.
Delaware
general corporate law
Upon completion of this offering, we will be subject to the
provisions of Section 203 of the DGCL. In general,
Section 203 prohibits a publicly held Delaware corporation
from engaging in a business combination with an
interested stockholder for a three-year period
following the time that this stockholder becomes an interested
stockholder, unless the business combination is approved in a
prescribed manner. A business combination includes,
among other things, a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested
stockholder. An interested stockholder is a person
who, together with affiliates and associates, owns, or did own
within three years prior to the determination of interested
stockholder status, 15% or more of the corporations voting
stock. Under Section 203, a business combination between a
corporation and an interested stockholder is prohibited unless
it satisfies one of the following conditions:
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before the stockholder became interested, the Board of Directors
approved either the business combination or the transaction
which resulted in the stockholder becoming an interested
stockholder;
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upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the voting stock
outstanding, shares owned by persons who are directors and also
officers, and employee stock plans, in some instances; or
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at or after the time the stockholder became interested, the
business combination was approved by the Board of Directors of
the corporation and authorized at an annual or special meeting
of the stockholders by the affirmative vote of at least
two-thirds of the outstanding voting stock which is not owned by
the interested stockholder.
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Limitations
of director liability and indemnification directors, officers,
and employees
As permitted by the DGCL, provisions in our charter and bylaws
that will be in effect at the closing of this offering will
limit or eliminate the personal liability of our directors to
the fullest extent permitted by the DGCL. Consequently,
directors will not be personally liable to us or our
stockholders for monetary damages or breach of fiduciary duty as
a director, except for liability for:
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any breach of the directors duty of loyalty to us or our
stockholders;
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any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;
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any unlawful payments related to dividends or unlawful stock
repurchases, redemptions or other distributions; or
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any transaction from which the director derived an improper
personal benefit.
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These limitations of liability do not alter director liability
under applicable securities laws and do not affect the
availability of equitable remedies, such as an injunction or
rescission.
In addition, our bylaws will provide that:
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we will indemnify our directors and officers and other persons
serving at the request of our corporation to the fullest extent
permitted by the DGCL, subject to limited exceptions, including
an exception for indemnification in connection with a proceeding
(or counterclaim) initiated by such persons; and
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we will advance expenses, including attorneys fees, to our
directors and, in the discretion of our Board of Directors,
certain officers and employees, in connection with legal
proceedings, subject to limited exceptions.
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We have entered into indemnification agreements with each of our
executive officers and directors. These agreements provide that,
subject to limited exceptions and among other things, we will
indemnify each of our executive officers and directors to the
fullest extent permitted by law and advance expenses to each
indemnitee in connection with any proceeding in which a right to
indemnification is available.
We also intend to maintain general liability insurance that
covers certain liabilities of our directors and officers arising
out of claims based on acts or omissions in their capacities as
directors or officers, including liabilities under the
Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors,
officers, or persons who control Fallbrook Technologies, we have
been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
These provisions may discourage stockholders from bringing a
lawsuit against our directors for breach of their fiduciary
duty. These provisions may also have the effect of reducing the
likelihood of derivative litigation against directors and
officers, even though such an action, if successful, might
otherwise benefit us and our stockholders. Furthermore, a
stockholders investment may be adversely affected to the
extent we pay the costs of settlement and damage awards against
directors and officers pursuant to these indemnification
provisions. We believe that these provisions, the
indemnification agreements and the insurance are necessary to
attract and retain talented and experienced directors and
officers.
At present, there is no pending litigation or proceeding
involving any of our directors or officers where indemnification
will be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim
for such indemnification.
126
Stock
Exchange
Before the date of this prospectus, there has been no public
market for our common stock. We intend to apply to have our
common stock approved for listing
on ,
subject to notice of issuance, under the symbol
.
Transfer
agent and registrar
The transfer agent and registrar for our common stock
is .
127
Shares Eligible
for Future Sale
Upon the closing of this offering, we will have outstanding an
aggregate of
approximately
shares of common stock. Of these
shares,
shares of common stock to be sold in this offering,
or shares
if the underwriters exercise their over-allotment option in
full, will be freely tradable without restriction or further
registration under the Securities Act, unless the shares are
held by any of our affiliates, as that term is defined in
Rule 144 of the Securities Act. All remaining shares were
issued and sold by us in private transactions and are eligible
for public sale only if registered under the Securities Act or
sold in accordance with Rule 144 or Rule 701, each of
which is discussed below. In addition, upon completion of this
offering, we will have outstanding stock options held by
employees and directors for the purchase
of shares
of common stock.
As a result of the
lock-up
agreements described below and the provisions of Rule 144
and Rule 701 under the Securities
Act,
shares of our common stock (excluding the shares to be sold in
this offering) will be available for sale in the public market
as follows:
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shares
will be eligible for sale on the date of this prospectus;
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shares
will be eligible for sale under Rule 144 or Rule 701
beginning 90 days after the date of this
prospectus; and
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shares
will be eligible for sale upon the expiration of the
lock-up
agreements, as more particularly and except as described below,
beginning after expiration of the
lock-up
period pursuant to Rule 144 or Rule 701.
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We expect the
remaining shares
to become eligible for future sale in the public market pursuant
to Rule 144 at varying times after six months from the date
of this prospectus.
Rule 144
In general, under Rule 144, beginning 90 days after
the date of this prospectus, a person who is not our affiliate,
has not been our affiliate for the previous three months, and
who has beneficially owned shares of our common stock for at
least six months may sell all such shares.
An affiliate or a person who has been our affiliate within the
previous 90 days, and who has beneficially owned shares of
our common stock for at least six months, may sell within any
three-month period a number of shares that does not exceed the
greater of:
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one percent of the number of shares of common stock then
outstanding, which will equal approximately shares immediately
after this offering; and
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the average weekly trading volume of our common stock during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
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All sales under Rule 144 are subject to the availability of
current public information about us. Sales under Rule 144
by affiliates or persons who have been affiliates within the
previous 90 days are also subject to manner of sale
provisions and notice requirements.
Rule 701
In general, under Rule 701 as currently in effect, any of
our employees, directors, consultants or advisors who purchase
shares from us in connection with a compensatory stock or option
plan or other written agreement in a transaction before the
effective date of this offering that was completed in reliance
on, and complied with the requirements of Rule 701 will,
subject to the lock-up period described above, be eligible to
resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance
with certain restrictions, including the holding period,
contained in Rule 144.
128
Registration
Statement on
Form S-8
We intend to file one or more registration statements on
Form S-8
under the Securities Act covering up
to shares
of common stock reserved for issuance under our 2004 Stock Plan
and our 2010 Stock Plan. These registration statements are
expected to be filed soon after the date of this prospectus and
will automatically become effective upon filing. Accordingly,
shares registered under such registration statements will be
available for sale in the open market, unless such shares are
subject to vesting restrictions with us or are otherwise subject
to the
lock-up
agreements and manner of sale and notice requirements that apply
to affiliates under Rule 144 described above.
Lock-up
agreements
Our directors, executive officers and holders of more than 5% of
our common stock are subject to
lock-up
agreements under which they have agreed, subject to certain
exceptions, not to dispose of any of their common stock or
securities convertible into or exchangeable for shares of common
stock, during the period from the date of this prospectus
continuing through the date that is 180 days after the
closing of this offering.
Warrants
At the closing of this offering, 3,100,753 shares of common
stock issuable upon exercise of a warrant held by the Jacobs
Family Trust will be subject to the
lock-up
agreements described under Underwriting and will be
eligible for sale following the
180-day
lock-up
period. At the closing of the offering, there will be no other
warrants outstanding. However, there are contingent warrants to
purchase up to 650,000 shares of our common stock that may
be granted upon achievement of certain performance milestones.
Registration
Rights
Beginning 180 days following the consummation of this
offering, and subject to the lock-up restrictions described
above, the holders
of shares
of common stock or their transferees will be entitled to various
rights with respect to the registration of their shares under
the Securities Act under the Registration Rights Agreement.
Registration of these shares under the Securities Act would
result in such shares becoming freely tradable without
restrictions under the Securities Act immediately upon the
effectiveness of registration, except for shares purchased by
affiliates. See Certain Relationships and Related Party
Transactions Agreements with Stockholders.
129
Material
U.S. Federal Tax Considerations for
Non-U.S.
Holders
The following is a general discussion of the material
U.S. federal income and estate tax consequences to
Non-U.S. Holders
with respect to the acquisition, ownership and disposition of
our common stock. In general, a
Non-U.S. Holder
is any beneficial owner of our common stock other than the
following, as determined for U.S. federal income and estate
tax purposes:
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a citizen or resident of the United States, including an alien
individual who is a lawful permanent resident of the United
States or meets the substantial presence test under
section 7701(b)(3) of the Code;
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a corporation (or an entity treated as a corporation) created or
organized in the United States or under the laws of the United
States, any state thereof, or the District of Columbia;
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an estate, the income of which is subject to U.S. federal
income tax regardless of its source; or
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a trust, if (i) a U.S. court can exercise primary
supervision over the administration of the trust and one or more
U.S. persons can control all substantial decisions of the
trust, or (ii) it has a valid election to be treated as a
U.S. person in effect.
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This discussion is based on current provisions of the Code,
Treasury Regulations promulgated under the Code, judicial
opinions, published positions of the Internal Revenue Service,
or IRS, and all other applicable authorities, all of which are
subject to change, possibly with retroactive effect. This
discussion does not address all aspects of U.S. federal
income and estate taxation or any aspects of state, local, or
non-U.S. taxation,
nor does it consider any specific facts or circumstances that
may apply to particular
Non-U.S. Holders
that may be subject to special treatment under the
U.S. federal income tax or estate tax laws, such as
insurance companies,
tax-exempt
organizations, financial institutions, brokers, dealers in
securities, and U.S. expatriates. If a partnership is a
beneficial owner of our common stock, the treatment of a partner
in the partnership will generally depend upon the status of the
partner and the activities of the partnership. This discussion
assumes that the
Non-U.S. Holder
will hold our common stock as a capital asset, generally
property held for investment.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS
REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND
NON-U.S. INCOME
AND OTHER TAX CONSIDERATIONS OF ACQUIRING, HOLDING, AND
DISPOSING OF SHARES OF COMMON STOCK.
Dividends
As described above under Dividend Policy, we do not
anticipate declaring or paying any cash dividends on our common
stock in the foreseeable future. However, if we do make
distributions on our common stock, those payments will
constitute dividends for U.S. tax purposes to the extent
paid from our current and accumulated earnings and profits, as
determined under U.S. federal income tax principles. To the
extent those distributions exceed our current and accumulated
earnings and profits, they will constitute a return of capital
and will first reduce the recipients basis in our common
stock, but not below zero, and then will be treated as gain from
the sale of stock as described below under
Gain on sale or other disposition of common
stock.
In general, dividends paid to a
Non-U.S. Holder
will be subject to U.S. withholding tax at a rate equal to
30% of the gross amount of the dividend, or a lower rate
prescribed by an applicable income tax treaty, unless the
dividends are effectively connected with a trade or business
carried on by the
Non-U.S. Holder
within the United States. Under applicable Treasury Regulations,
a
Non-U.S. Holder
will be required to satisfy certain certification requirements,
generally on IRS
Form W-8BEN,
directly or through an intermediary, in order to claim a reduced
rate of withholding under an applicable income tax treaty. If
tax is withheld in an amount in excess of the amount prescribed
by an applicable income tax treaty, a refund of the excess
amount may generally be obtained by filing an appropriate claim
for refund with the IRS. In the case of a
Non-U.S. Holder
entitled to the benefits of the income tax treaty between the
U.S. and Canada, the tax rate generally may be reduced to
15%.
130
Dividends that are effectively connected with such a
U.S. trade or business (and where a tax treaty applies, are
attributable to a U.S. permanent establishment of the
recipient) generally will not be subject to
U.S. withholding tax if the
Non-U.S. Holder
files the required forms, including IRS
Form W-8ECI,
or any successor form, with the payor of the dividend, but
instead generally will be subject to U.S. federal income
tax on a net income basis in the same manner as if the
Non-U.S. Holder
were a resident of the United States. A corporate
Non-U.S. Holder
that receives effectively connected dividends may be subject to
an additional branch profits tax at a rate of 30%, or a lower
rate prescribed by an applicable income tax treaty, with respect
to effectively connected dividends (subject to adjustment).
Gain on
sale or other disposition of common stock
In general, a
Non-U.S. Holder
will not be subject to U.S. federal income tax on any gain
realized upon the sale or other taxable disposition of the
Non-U.S. Holders
shares of common stock unless:
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the gain is effectively connected with a trade or business
carried on by the
Non-U.S. Holder
within the United States;
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the
Non-U.S. Holder
is an individual who holds shares of common stock as capital
assets and is present in the United States for 183 days or
more in the taxable year of disposition and various other
conditions are met; or
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our common stock constitutes a U.S. real property interest
by reason of our status as a United States real property
holding corporation, or USRPHC, for U.S. federal
income tax purposes at any time within the shorter of the
five-year period preceding the disposition or the
Non-U.S. Holders
holding period for our common stock.
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If the recipient is a
non-United
States holder described in the first bullet above, the recipient
will be required to pay tax on the net gain derived from the
sale under regular graduated U.S. federal income tax rates,
and corporate
non-United
States holders described in the first bullet above may be
subject to the branch profits tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. If
the recipient is an individual
non-United
States holder described in the second bullet above, the
recipient will be required to pay a flat 30% tax on the gain
derived from the sale, which tax may be offset by United States
source capital losses.
We believe that we are not currently and will not become a
USRPHC. However, because the determination of whether we are a
USRPHC depends on the fair market value of our U.S. real
property relative to the fair market value of our other business
assets, there can be no assurance that we will not become a
USRPHC in the future. Even if we become a USRPHC, however, as
long as our common stock is regularly traded on an established
securities market, such common stock will be treated as a
U.S. real property interest only if the
Non-U.S. Holder
actually or constructively held more than 5% of our common stock
during the applicable period.
Information
reporting and backup withholding
Generally, we must report annually to the IRS the amount of
dividends paid, the name and address of the recipient, and the
amount, if any, of tax withheld. A similar report is sent to the
recipient. These information reporting requirements apply even
if withholding was not required because the dividends were
effectively connected dividends or withholding was reduced by an
applicable income tax treaty. Under tax treaties or other
agreements, the IRS may make its reports available to tax
authorities in the recipients country of residence.
Payments made to a
Non-U.S. Holder
that is not an exempt recipient generally will be subject to
backup withholding, currently at a rate of 28%, unless a
Non-U.S. Holder
certifies as to its foreign status, which certification may be
made on IRS
Form W-8BEN.
131
Proceeds from the disposition of common stock by a
Non-U.S. Holder
effected by or through a United States office of a broker (or,
under certain circumstances, by or through a
non-U.S. office
of a broker) generally will be subject to information reporting
and backup withholding, currently at a rate of 28% of the gross
proceeds, unless the
Non-U.S. Holder
certifies to the payor under penalties of perjury as to, among
other things, its address and status as a
Non-U.S. Holder
or otherwise establishes an exemption.
Backup withholding is not an additional tax. Rather, the amount
of tax withheld is applied to the U.S. federal income tax
liability of persons subject to backup withholding. If backup
withholding results in an overpayment of U.S. federal
income taxes, a refund may be obtained, provided the required
documents are filed with the IRS.
Estate
tax
Shares of our common stock owned or treated as owned by an
individual who is not a citizen or resident of the United States
(as specifically defined for U.S. federal estate tax
purposes) at the time of death are considered U.S. situs
assets includible in the individuals gross estate for
U.S. federal estate tax purposes and therefore may be
subject to U.S. federal estate tax, unless an applicable
estate tax treaty provides otherwise. The United States federal
estate tax was automatically repealed effective January 1,
for the estates of decedents dying in the year 2010.
Accordingly, at present, there is no United States federal
estate tax. However, Congress could pass a law reinstating the
estate tax that has retroactive effect. In addition, unless
Congress acts to make the current repeal permanent, the estate
tax will be reinstated with respect to decedents who die after
December 31, 2010. In view of the continuing uncertainty
regarding the federal estate tax law, prospective investors are
urged to consult their tax advisors regarding the
U.S. federal estate tax considerations of acquiring,
holding, and disposing of shares of common stock.
132
Underwriting
Subject to the terms and conditions contained in an underwriting
agreement among us and the underwriters named below, such
underwriters have agreed to purchase, and we have agreed to sell
to them, the number of shares indicated below on the closing
date:
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Underwriter
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Number of Shares
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CIBC World Markets Inc.
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Mackie Research Capital Corporation
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Total
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CIBC World Markets Inc. and Mackie Research Capital Corporation
are the representatives of the underwriters. The underwriters
are offering the common stock subject to their acceptance of the
shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the common stock
offered by this prospectus are subject to the approval of
certain legal matters by their counsel and to certain other
conditions. The obligations of the underwriters under the
underwriting agreement are conditional and may be terminated at
their discretion if there has been a material adverse change in
the state of the financial markets and may also be terminated in
other stated circumstances and upon the occurrence of other
stated events that they deem to be material and adverse. The
underwriters are, however, severally obligated to take up and
pay for all of the shares that they have agreed to purchase if
any shares are purchased under the underwriting agreement.
However, the underwriters are not required to take or pay for
the shares covered by the underwriters over-allotment
option. We have agreed to indemnify the several underwriters
against certain liabilities, including liabilities under the
Securities Act of 1933.
Commissions
and Discounts
The underwriters representatives have advised us that the
underwriters propose initially to offer the shares to the public
at the initial public offering price on the cover page of this
prospectus and to dealers at that price less a concession not in
excess
of
per share. The underwriters may allow, and the dealers may
re-allow, a
discount not in excess
of
per share to other dealers.
The following table shows the public offering price,
underwriting discounts and commissions and proceeds to us before
expenses. The information assumes either no exercise or full
exercise by the underwriters of their over-allotment option to
purchase additional shares of our common stock:
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Without
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With
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Over-Allotment
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Over-Allotment
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Per Share
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Option
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Option
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Public offering price
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Underwriting discounts and commissions
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Proceeds, before expenses, to us
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We estimate that our share of the total expenses of this
offering, excluding the underwriting discounts and commissions,
will be approximately $ .
Over-allotment
Option
The underwriters have been granted an over-allotment option,
exercisable for a period of 30 days from the closing of the
offering, to purchase up to a total
of
additional shares from us (being 15% of the number of shares
offered by us hereby) on the same terms as set out above solely
to cover over-allotments, if any, and for market stabilization
purposes.
133
Pricing
of the Offering
Before this offering, there has been no public market for our
common stock. The initial public offering price was determined
through negotiations among us and the underwriters. In addition
to prevailing market conditions, the factors considered in
determining the initial public offering price included:
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the valuation multiples of publicly traded companies that the
underwriters believe to be comparable to us;
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our financial information;
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the history of, and the prospects for, our company and the
industry in which we compete;
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an assessment of our management, its past and present
operations, and the prospects for, and timing of, our future
revenue and cash flow;
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the present state of our development; and
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the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.
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An active trading market for the shares may not develop. It is
also possible that after the offering the shares will not trade
in the public market at or above the initial public offering
price.
Standstill
Provisions
We and our directors, executive officers and holders of more
than 5% of our common stock, have agreed with the underwriters,
subject to certain exceptions, not to dispose of any of our or
their common stock or securities convertible into or
exchangeable for shares of common stock during the period from
the date of this prospectus continuing through the date that is
180 days after the closing of this offering, except with
the prior written consent of CIBC World Markets Inc. and Mackie
Research Capital Corporation.
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, Securities
and Exchange Commission rules may limit underwriters and selling
group members from bidding for and purchasing our common stock.
However, the underwriters representatives may engage in
transactions that stabilize the price of our common stock, such
as bids or purchases to peg, fix or maintain that price.
If the underwriters create a short position in the common stock
in connection with the offering, (i.e., if they sell more
shares than are listed on the cover of this prospectus), the
underwriters representatives may reduce that short
position by purchasing shares in the open market. The
underwriters representatives may also elect to reduce any
short position by exercising all or part of the over-allotment
option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the
price of the common stock to be higher than it might be in the
absence of such purchases.
Neither we nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common stock. In addition, neither we nor any of the
underwriters make any representation that the underwriters
representatives or lead manager will engage in these
transactions or that these transactions, once commenced, will
not be discontinued without notice.
Legal
Matters
The validity of the shares of common stock offered by this
prospectus and other legal matters will be passed upon for us by
DLA Piper LLP (US), San Diego, California. The underwriters
have been represented by Torys LLP.
134
Experts
The consolidated financial statements as of December 31, 2009,
and for the year then ended, included in this prospectus, have
been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report
appearing herein. Such consolidated financial statements are
included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
McGladrey & Pullen, LLP, independent registered public
accounting firm, has audited our consolidated financial
statements as of December 31, 2008, and for each of the two
years in the two-year period ended December 31, 2008, as
set forth in their report. We have included such consolidated
financial statements in this prospectus and elsewhere in the
registration statement in reliance on McGladrey &
Pullen, LLPs report, given their authority as experts in
accounting and auditing.
Change in
Accountants
We engaged Deloitte & Touche LLP (Deloitte &
Touche) as our independent registered public accounting
firm effective December 18, 2009. Concurrent with this
appointment, we dismissed McGladrey & Pullen, LLP
(McGladrey & Pullen), effective
December 18, 2009, subject to completion of additional
audit procedures on the 2007 and 2008 consolidated financial
statements, which occurred through February 15, 2010, for
the removal of a qualified opinion on the 2007 and 2008 audit
reports and for the expansion of footnote disclosures in
compliance with SEC Regulations, which resulted in the dual
dating of their opinion. The decision to change our principal
independent registered public accounting firm was approved by
our audit committee.
The reports of McGladrey & Pullen on our consolidated
financial statements for each of the fiscal years ended
December 31, 2007 and 2008 did not contain an adverse
opinion or disclaimer of opinion, nor were such reports
qualified or modified as to uncertainty, audit scope or
accounting principles, except for certain effects of accounting
for share-based compensation, warrants and note discount. Since
inception through December 31, 2008, we previously elected
to value our common stock, options and warrants using a method
not in accordance with GAAP. We had previously determined fair
value as allowed by Internal Revenue Code Section 409A, using a
probability-weighted expected return valuation method. With the
assistance of an unrelated valuation specialist, we have since
reassessed the fair value of our common stock in accordance with
GAAP by determining the total enterprise value and then
allocating a portion of that total enterprise value to the
common stock. See Note 10 in the accompanying consolidated
financial statements for further discussion of the methodology
used to determine the fair value of the Companys common
stock.
During our fiscal years ended December 31, 2007 and 2008,
and during the subsequent period through the date of
McGladrey & Pullens dismissal, there were no
disagreements between us and McGladrey & Pullen
whether or not resolved, on any matter of accounting principles
or practices, consolidated financial statements disclosure, or
auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of McGladrey & Pullen,
would have caused McGladrey & Pullen to make reference
in their reports on our audited consolidated financial
statements except as originally described therein prior to
restating our consolidated financial statements and as discussed
in Note 16 to the consolidated financial statements
included elsewhere in the registration statement. During the
fiscal years ended December 31, 2007 and 2008, and during
the subsequent period through the date of McGladrey &
Pullens dismissal, there were no reportable
events as such term is defined in Item 304(a)(1)(v)
of
Regulation S-K
(Reportable Event), except for the material weakness
resulting from the methodology previously utilized to determine
the fair value of the Companys common stock.
During the two years ended December 31, 2008, and through
the date of our retention of Deloitte & Touche as our
independent registered public accounting firm on
December 18, 2009, we did not consult with Deloitte &
Touche on matters that involved the application of accounting
principles to a specified transaction, the type of audit opinion
that might be rendered on our consolidated financial statements
or any other matter that was either the subject of a
disagreement or a Reportable Event.
We have provided McGladrey & Pullen with a copy of the
above statements and have requested that it furnish a letter
addressed to the SEC stating whether McGladrey &
Pullen agrees with such statements. A copy of that letter is
filed as an exhibit to the registration statement of which this
prospectus forms a part.
135
Where You
Can Find More Information
We have filed with the Securities and Exchange Commission a
registration statement on
Form S-1,
which includes amendments and exhibits, under the Securities Act
and the rules and regulations under the Securities Act for the
registration of common stock being offered by this prospectus.
This prospectus, which constitutes a part of the registration
statement, does not contain all the information that is in the
registration statement and its exhibits and schedules. Certain
portions of the registration statement have been omitted as
allowed by the rules and regulations of the Securities and
Exchange Commission. Statements in this prospectus that
summarize documents are not necessarily complete, and in each
case you should refer to the copy of the document filed as an
exhibit to the registration statement. You may read and copy the
registration statement, including exhibits and schedules filed
with it, and reports or other information we may file with the
Securities and Exchange Commission at the public reference
facilities of the Securities and Exchange Commission at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may call the Securities and
Exchange Commission at
1-800-SEC-0330
for further information on the operation of the public reference
rooms. In addition, the registration statement and other public
filings can be obtained from the Securities and Exchange
Commissions Internet site at
http://www.sec.gov.
Upon completion of this offering, we will become subject to
information and periodic reporting requirements of the Exchange
Act and we will file annual, quarterly and current reports,
proxy statements, and other information with the Securities and
Exchange Commission. We intend to make these filings available
on our website once the offering is completed. You may read and
copy any reports, statements or other information on file at the
public reference rooms. You can also request copies of these
documents, for a copying fee, by writing to the SEC, or you can
review these documents on the SECs website, as described
above.
136
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Fallbrook Technologies Inc.
San Diego, California
We have audited the accompanying consolidated balance sheet of
Fallbrook Technologies Inc. and subsidiary (the
Company) as of December 31, 2009, and the
related consolidated statements of operations, equity, and cash
flows for the year then ended. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Fallbrook Technologies Inc. and subsidiary as of
December 31, 2009, and the results of their operations and
their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
San Diego, California
March 25, 2010
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Fallbrook Technologies Inc.
San Diego, California
We have audited the accompanying consolidated balance sheet of
Fallbrook Technologies Inc. and Subsidiary as of
December 31, 2008 and the related consolidated statements
of operations, equity and cash flows for each of the two years
in the period ended December 31, 2008. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above, as
restated, present fairly, in all material respects, the
financial position of Fallbrook Technologies Inc. and Subsidiary
as of December 31, 2008, and the results of their
operations and their cash flows for each of the two years in the
period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 2 to the consolidated financial
statements, the Company retrospectively revised the presentation
and disclosure in the accompanying financial statements for the
change in the method of accounting for noncontrolling interests.
As discussed in Note 12 to the consolidated financial
statements, the accompanying financial statements have been
retrospectively adjusted for the adoption of the guidance
originally issued in Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109
(codified in FASB ASC Topic 740 Income Taxes),
effective January 1, 2007.
As discussed in Note 16 to the consolidated financial
statements, the consolidated financial statements have been
restated for errors in the application of accounting principles.
/s/ McGladrey & Pullen, LLP
San Diego, California
June 29, 2009, except for Notes 2, 3, 10, 12, 15 and
16,
as to which the date is February 15, 2010
F-3
FALLBROOK
TECHNOLOGIES INC.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(As restated,
|
|
|
|
|
|
|
Note 16)
|
|
|
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,565
|
|
|
$
|
9,213
|
|
Trade accounts receivable, net of allowance for doubtful
accounts of $1 at December 31, 2008 and 2009
|
|
|
130
|
|
|
|
11
|
|
Accounts receivable, related party
|
|
|
101
|
|
|
|
|
|
Inventory
|
|
|
54
|
|
|
|
151
|
|
Investments
|
|
|
3,700
|
|
|
|
|
|
Deferred offering costs
|
|
|
|
|
|
|
636
|
|
Prepaid expenses and other current assets
|
|
|
154
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
18,704
|
|
|
|
10,400
|
|
Deferred contract costs
|
|
|
|
|
|
|
189
|
|
Equipment and leasehold improvements, net
|
|
|
4,118
|
|
|
|
465
|
|
Intangible assets, net
|
|
|
2,465
|
|
|
|
2,185
|
|
Inventory
|
|
|
|
|
|
|
260
|
|
Other assets
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
25,314
|
|
|
$
|
13,526
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
502
|
|
|
$
|
401
|
|
Accrued expenses
|
|
|
556
|
|
|
|
978
|
|
Capital lease obligation, current
|
|
|
9
|
|
|
|
|
|
Deferred revenue
|
|
|
65
|
|
|
|
164
|
|
Line of credit
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,132
|
|
|
|
3,543
|
|
Deferred rent
|
|
|
16
|
|
|
|
14
|
|
Deferred revenue
|
|
|
23
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,171
|
|
|
|
3,813
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
EQUITY
|
Convertible preferred stock, aggregate liquidation preference of
$52,502 and $56,502 at December 31, 2008 and 2009,
respectively
|
|
|
48,566
|
|
|
|
52,456
|
|
Common stock, $0.001 par value; 125,000 and
140,000 shares authorized at December 31, 2008 and
2009, respectively; 11,655 and 11,661 issued and outstanding at
December 31, 2008 and 2009, respectively
|
|
|
12
|
|
|
|
12
|
|
Additional paid-in capital
|
|
|
1,826
|
|
|
|
2,732
|
|
Accumulated deficit
|
|
|
(28,261
|
)
|
|
|
(45,487
|
)
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
22,143
|
|
|
|
9,713
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
25,314
|
|
|
$
|
13,526
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
FALLBROOK
TECHNOLOGIES INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(As restated, Note 16)
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
|
|
|
$
|
320
|
|
|
$
|
467
|
|
License fees and royalties
|
|
|
295
|
|
|
|
914
|
|
|
|
12
|
|
Engineering services
|
|
|
327
|
|
|
|
998
|
|
|
|
53
|
|
Related party revenues
|
|
|
|
|
|
|
19
|
|
|
|
512
|
|
Other
|
|
|
92
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
714
|
|
|
|
2,283
|
|
|
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
|
|
|
|
1,158
|
|
|
|
6,639
|
|
Cost of license fees and royalties
|
|
|
1,005
|
|
|
|
368
|
|
|
|
|
|
Cost of engineering services
|
|
|
822
|
|
|
|
488
|
|
|
|
37
|
|
Cost of related party revenues
|
|
|
|
|
|
|
11
|
|
|
|
584
|
|
Cost of other revenues
|
|
|
65
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
1,892
|
|
|
|
2,048
|
|
|
|
7,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(1,178
|
)
|
|
|
235
|
|
|
|
(6,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,985
|
|
|
|
5,939
|
|
|
|
5,426
|
|
Selling, general and administrative
|
|
|
2,842
|
|
|
|
4,382
|
|
|
|
5,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,827
|
|
|
|
10,321
|
|
|
|
10,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(7,005
|
)
|
|
|
(10,086
|
)
|
|
|
(16,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
447
|
|
|
|
127
|
|
|
|
87
|
|
Interest expense
|
|
|
|
|
|
|
(597
|
)
|
|
|
(574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
447
|
|
|
|
(470
|
)
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(6,558
|
)
|
|
|
(10,556
|
)
|
|
|
(17,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to the noncontrolling interest
(Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fallbrook Technologies Inc.
|
|
|
(6,558
|
)
|
|
|
(10,556
|
)
|
|
|
(17,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Discount related to beneficial conversion feature on
Preferred Stock
|
|
|
|
|
|
|
(1,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fallbrook Technologies Inc. common
stockholders
|
|
$
|
(6,558
|
)
|
|
$
|
(11,932
|
)
|
|
$
|
(17,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per sharebasic and diluted
|
|
$
|
(0.57
|
)
|
|
$
|
(1.04
|
)
|
|
$
|
(1.48
|
)
|
Weighted average shares outstandingbasic and diluted
|
|
|
11,437
|
|
|
|
11,462
|
|
|
|
11,656
|
|
Pro forma net loss per sharebasic and diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Pro forma weighted average shares outstandingbasic and
diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
FALLBROOK
TECHNOLOGIES INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance, January 1, 2007 (as restated)
|
|
|
11,687
|
|
|
$
|
24,721
|
|
|
|
11,423
|
|
|
$
|
11
|
|
|
$
|
1,115
|
|
|
$
|
(13,506
|
)
|
|
$
|
|
|
|
$
|
12,341
|
|
Increase in noncontrolling interest in consolidated subsidiary
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,619
|
|
|
|
2,619
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
293
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,558
|
)
|
|
|
|
|
|
|
(6,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 (as restated)
|
|
|
11,687
|
|
|
|
24,721
|
|
|
|
11,449
|
|
|
|
11
|
|
|
|
1,410
|
|
|
|
(20,064
|
)
|
|
|
2,619
|
|
|
|
8,697
|
|
Increase in noncontrolling interest in consolidated subsidiary
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218
|
|
|
|
218
|
|
Increase in noncontrolling interest in consolidated subsidiary
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
Issuance of Series D Preferred Stock, net
|
|
|
51,589
|
|
|
|
19,047
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
19,237
|
|
Issuance of Series D Preferred Stock through conversion of
debt and accrued interest
|
|
|
12,018
|
|
|
|
4,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,798
|
|
Beneficial conversion charge on Preferred Stock
|
|
|
|
|
|
|
(1,376
|
)
|
|
|
|
|
|
|
|
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of beneficial conversion charge on Preferred Stock
|
|
|
|
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
(1,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature on convertible note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
Warrants exchanged for consolidated subsidiary preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212
|
|
|
|
|
|
|
|
212
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
206
|
|
|
|
1
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
|
|
|
|
|
|
169
|
|
|
|
322
|
|
Spin-off of noncontrolling interest in consolidated subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,012
|
|
|
|
(3,012
|
)
|
|
|
|
|
Spin-off of net assets to noncontrolling interest in
consolidated subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(865
|
)
|
|
|
|
|
|
|
(865
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,556
|
)
|
|
|
|
|
|
|
(10,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 (as restated)
|
|
|
75,294
|
|
|
|
48,566
|
|
|
|
11,655
|
|
|
|
12
|
|
|
|
1,826
|
|
|
|
(28,261
|
)
|
|
|
|
|
|
|
22,143
|
|
Issuance of Series D Preferred Stock, net
|
|
|
10,020
|
|
|
|
3,890
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
3,894
|
|
Warrant issued for consulting agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Warrant issued for guarantee on line of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
|
476
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
|
422
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,226
|
)
|
|
|
|
|
|
|
(17,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
85,314
|
|
|
$
|
52,456
|
|
|
|
11,661
|
|
|
$
|
12
|
|
|
$
|
2,732
|
|
|
$
|
(45,487
|
)
|
|
$
|
|
|
|
$
|
9,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
FALLBROOK
TECHNOLOGIES INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(As restated, Note 16)
|
|
|
|
|
|
|
(In thousands)
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,558
|
)
|
|
$
|
(10,556
|
)
|
|
$
|
(17,226
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for bad debts
|
|
|
2
|
|
|
|
1
|
|
|
|
69
|
|
Provision for lower of cost or market write-downs and inventory
obsolescence
|
|
|
|
|
|
|
3
|
|
|
|
1,309
|
|
Amortization of premiums and discounts on investments
|
|
|
69
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
324
|
|
|
|
1,028
|
|
|
|
1,234
|
|
(Gain) loss on asset disposals and impairments
|
|
|
|
|
|
|
(1
|
)
|
|
|
3,483
|
|
Provision for warranty reserve
|
|
|
|
|
|
|
16
|
|
|
|
|
|
Share-based compensation
|
|
|
293
|
|
|
|
322
|
|
|
|
422
|
|
Noncash interest expense on debt and warrants
|
|
|
|
|
|
|
441
|
|
|
|
477
|
|
Net changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(338
|
)
|
|
|
211
|
|
|
|
50
|
|
Accounts receivable, related party
|
|
|
|
|
|
|
(93
|
)
|
|
|
101
|
|
Inventory
|
|
|
|
|
|
|
(57
|
)
|
|
|
(1,666
|
)
|
Prepaid expenses and other current assets
|
|
|
(39
|
)
|
|
|
4
|
|
|
|
(235
|
)
|
Deferred contract costs
|
|
|
|
|
|
|
|
|
|
|
(189
|
)
|
Other assets
|
|
|
(11
|
)
|
|
|
(3
|
)
|
|
|
|
|
Accounts payable
|
|
|
49
|
|
|
|
426
|
|
|
|
(197
|
)
|
Accrued expenses
|
|
|
47
|
|
|
|
283
|
|
|
|
(79
|
)
|
Deferred revenue
|
|
|
288
|
|
|
|
(1,521
|
)
|
|
|
331
|
|
Deferred rent
|
|
|
14
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(5,860
|
)
|
|
|
(9,496
|
)
|
|
|
(12,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of equipment and leasehold improvements
|
|
|
(363
|
)
|
|
|
(2,469
|
)
|
|
|
(356
|
)
|
Proceeds from the disposal of equipment
|
|
|
11
|
|
|
|
3
|
|
|
|
6
|
|
Purchases of intangible assets and costs incurred for patents
|
|
|
(441
|
)
|
|
|
(1,505
|
)
|
|
|
(396
|
)
|
Restricted cash
|
|
|
1,197
|
|
|
|
|
|
|
|
|
|
Purchases of held-to-maturity investments
|
|
|
(8,596
|
)
|
|
|
(3,525
|
)
|
|
|
(8,080
|
)
|
Proceeds from maturities of held-to-maturity investments
|
|
|
16,265
|
|
|
|
225
|
|
|
|
11,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
8,073
|
|
|
|
(7,271
|
)
|
|
|
2,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of capital lease obligation
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Borrowings of convertible debt
|
|
|
|
|
|
|
4,618
|
|
|
|
|
|
Repayments of notes payable
|
|
|
|
|
|
|
(1,952
|
)
|
|
|
|
|
Borrowings on line of credit
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
Deferred offering costs
|
|
|
|
|
|
|
|
|
|
|
(76
|
)
|
Proceeds from issuance of Series D Preferred Stock
|
|
|
|
|
|
|
20,594
|
|
|
|
4,000
|
|
Issuance costs from Series D Preferred Stock
|
|
|
|
|
|
|
(1,357
|
)
|
|
|
(106
|
)
|
Proceeds from exercise of common stock options
|
|
|
2
|
|
|
|
25
|
|
|
|
3
|
|
Proceeds from issuance of consolidated subsidiary preferred stock
|
|
|
2,619
|
|
|
|
568
|
|
|
|
|
|
Payment for redemption of consolidated subsidiary preferred stock
|
|
|
|
|
|
|
(350
|
)
|
|
|
|
|
Issuance of consolidated subsidiary common stock
|
|
|
|
|
|
|
6
|
|
|
|
|
|
Spin-off of investment in consolidated subsidiary
|
|
|
|
|
|
|
(854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,612
|
|
|
|
23,289
|
|
|
|
3,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
4,825
|
|
|
|
6,522
|
|
|
|
(5,352
|
)
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
3,218
|
|
|
|
8,043
|
|
|
|
14,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
8,043
|
|
|
$
|
14,565
|
|
|
$
|
9,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(As restated, Note 16)
|
|
|
|
|
|
|
(In thousands)
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
|
|
|
$
|
154
|
|
|
$
|
98
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D Preferred Stock issuance costs paid via common
stock warrant
|
|
$
|
|
|
|
$
|
190
|
|
|
$
|
4
|
|
|
|
|
|
|
|
Conversion of notes payable to Series D Preferred Stock
|
|
$
|
|
|
|
$
|
4,618
|
|
|
$
|
|
|
|
|
|
|
|
|
Conversion of accrued interest to Series D Preferred Stock
|
|
$
|
|
|
|
$
|
180
|
|
|
$
|
|
|
|
|
|
|
|
|
Spin-off of investment in consolidated subsidiary
|
|
$
|
|
|
|
$
|
3,012
|
|
|
$
|
|
|
|
|
|
|
|
|
Purchase of equipment through issuance of note payable
|
|
$
|
|
|
|
$
|
1,952
|
|
|
$
|
|
|
|
|
|
|
|
|
Equipment purchases and patent costs in accounts payable and
accrued expenses
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
37
|
|
|
|
|
|
|
|
Deferred offering costs in accounts payable and accrued expenses
|
|
$
|
|
|
|
$
|
|
|
|
$
|
560
|
|
|
|
|
|
|
|
Spin-off of investment in consolidated subsidiary:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
$
|
16
|
|
|
|
|
|
Equipment and leasehold improvements, net
|
|
|
|
|
|
|
114
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
71
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
(156
|
)
|
|
|
|
|
Accrued expenses
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
Accounts payable, affiliate
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
Noncontrolling interest in consolidated subsidiary:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated subsidiary common stock options
|
|
|
|
|
|
|
(169
|
)
|
|
|
|
|
Consolidated subsidiary common stock
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
Consolidated subsidiary preferred stock
|
|
|
|
|
|
|
(2,837
|
)
|
|
|
|
|
Controlling interest in consolidated subsidiary
common and
preferred stock
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,012
|
)
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Concluded)
See notes to consolidated financial statements.
F-8
FALLBROOK
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE 1
|
DESCRIPTION
OF BUSINESS
|
Fallbrook Technologies Inc. (the Company) was originally formed
on December 11, 2000 as a California limited liability
company (LLC) called Motion Systems Technologies, LLC. On
April 13, 2004, the Company changed its name to Fallbrook
Technologies Inc. and changed its legal structure from an LLC to
a Delaware corporation. On January 3, 2007, the Company
formed a wholly-owned subsidiary, Viryd Technologies Inc.
(Viryd) (formerly known as Fallbrook Wind Technology Inc.), a
Delaware corporation. Since its formation, Viryd raised private
capital from external sources to support its operations,
changing it to a subsidiary that is majority owned by the
Company. On December 18, 2008, the Company completed a
spin-off of its majority ownership of Viryd through a pro rata
distribution of shares to the Companys stockholders
(Note 13). On October 5, 2009, the Company formed a
wholly owned subsidiary, Fallbrook Technologies International
Co., a Nevada corporation, for its international business
operations. To date, this subsidiary remains dormant with
operations expected to commence in 2010.
The Company has developed patented mechanical technology, sold
under the NuVinci
®
brand, which is designed to improve the overall performance and
efficiency of mechanical systems that require variation between
the input speed of a primary drive and the output speed required
to operate the system or its accessory devices. The
Companys NuVinci technology is a new type of
continuously variable transmission (CVT) that can be used in a
wide variety of applications. The Companys principal
operations of selling the NuVinci CVT products through a
contract manufacturing arrangement commenced in March 2008. The
technology is currently being sold in the global market for
bicycle transmissions (rear wheel hubs) and the Company is
designing and developing applications for a selected set of
other end markets, including automotive accessories (such as air
conditioners, alternators, and superchargers), electric vehicles
(primary transmissions), lawn care equipment (primary
transmissions), and wind power systems (turbine drive trains).
|
|
NOTE 2
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Basis of
Presentation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). The
consolidated financial statements include the accounts of the
Company and its subsidiary, Viryd, from January 3, 2007
(date of Viryds inception) through December 18, 2008
(date that the Company completed a spin-off of Viryd). All
intercompany transactions from January 3, 2007 through
December 18, 2008 have been eliminated. Due to significant
continuing involvement (Note 13), the operations and cash
flows of Viryd have not been reported as discontinued operations.
The Company has incurred net losses from operations since its
inception and has accumulated a deficit. Management expects
operating losses to continue through the foreseeable future
until additional product lines are manufactured and
commercialized. Management is pursuing an initial public
offering (IPO) to fund projected future working capital
requirements, future growth, and future operating losses.
However, if the offering is not successful, management has plans
to pursue a private placement of new securities which it
believes will support ongoing operations until product sales
related to the core technology are at a level that can fund
operations. In addition, if the closing of the private equity
round is delayed, the Company may curtail its development
efforts to only focus on the development and commercialization
of the bicycle and small wind turbine end markets. The failure
of the Company to obtain sufficient funds on acceptable terms
when needed could have a material adverse effect on the
Companys business, results of operations, and financial
condition.
Use of
Estimates and Assumptions
The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, and
disclosure of contingent assets and
F-9
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Significant estimates and assumptions in the
Companys consolidated financial statements include, but
are not limited to, the allowance for doubtful accounts,
inventory obsolescence and lower of cost or market
determination, fair value of the Companys share-based
instruments, income tax valuation allowances for deferred tax
assets, and the useful lives, carrying value, and recoverability
of long-lived assets. Actual results could differ from those
estimates.
Significant
Concentrations
As of December 31, 2008, there were three customers that
represented 51% of accounts receivable. No other single customer
represented over 10% of accounts receivable at December 31,
2008 and 2009.
The Company maintains its cash and cash equivalents and
short-term investments in bank deposit accounts, which, at
times, may exceed Federal Deposit Insurance Corporation (FDIC)
limits. Account balances exceeded FDIC limits by approximately
$7,634,000 at December 31, 2009. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant credit risk related to these deposits.
Cash and
Cash Equivalents
The Company considers all cash accounts, which are not subject
to withdrawal restrictions or penalties, and all highly liquid
investments purchased with an original maturity of three months
or less to be cash equivalents.
Trade
Accounts Receivable
Accounts receivable are carried at original invoice amount less
an estimate for doubtful accounts. Management determines the
allowance for doubtful accounts based on a review of all
outstanding amounts and any specific customer collection issues
that have been identified. Accounts receivable balances are
written-off against the allowance for doubtful accounts, when it
is probable that a receivable will not be recovered. Recoveries
of accounts receivable previously written-off are recorded when
received. An account receivable is considered past due if any
portion of the receivable balance is outstanding beyond normal
terms for a customer. The Company does not charge interest on
past due accounts. To date, losses on accounts receivable have
been minimal in relation to the volume of sales.
Inventory
All items in inventory are finished goods and are stated at the
lower of cost, determined on a
first-in-first-out
basis, or market. The Company regularly reviews inventory
quantities on-hand and adjusts inventory values for excess and
obsolete inventory based on overall inventory levels, the
current and projected sales levels for such products, the
projected markets for such products, and the overall projected
demand for products once the next generation of products is
scheduled for release. The inventory balance has been adjusted
to net realizable value using managements best estimates
of future sales as of December 31, 2008 and 2009. The
Company recognized a write-down of inventory from cost to market
and for inventory obsolescence in cost of product sales in the
consolidated statements of operations of $3,000 and $1,309,000
during the years ended December 31, 2008 and 2009,
respectively.
Investments
The Companys investments at December 31, 2008
consisted of certificates of deposit and auction rate
securities, which were classified as short-term investments.
Management determines the appropriate classification of the
securities at the time they are acquired and evaluates the
appropriateness of such classifications at each balance sheet
date.
Certificates of deposit classified as short-term investments are
those with original maturities at the date of purchase in excess
of three months, are maturing within twelve months, and are
classified as short-term as they represent investments that are
available for use in current operations. The auction rate
securities are
F-10
perpetual preferred securities that are typically re-auctioned
every seven days. At December 31, 2008, Moodys
Investors Services ratings and Standard and Poors
ratings of these securities was AAA.
The Company currently classifies all securities as
held-to-maturity,
as the Company has the positive intent and ability to hold such
securities to maturity. These securities are reported at cost,
which approximates fair value because of the relatively short
period of time between the origination of the instruments and
their expected realization. Interest on certificates of deposit
is recognized in income as earned, and dividends on auction rate
securities are recognized in income when declared. Realized
gains and losses, including losses from declines in value of
specific securities determined by management to be
other-than-temporary,
are included in other income (expense).
Investments classified as
held-to-maturity
are considered impaired when a decline in fair value is judged
to be
other-than-temporary.
The Company evaluates securities for
other-than-temporary
impairment at least on a quarterly basis, and more frequently,
when economic or market concerns warrant such evaluation. The
Company employs a systematic methodology that considers
available evidence in evaluating potential impairment of its
investments. In the event that the cost of an investment exceeds
its fair value, the Company evaluates, among other factors, the
magnitude and duration of the decline in fair value; the
financial condition of the issuer of the security; and the
Companys intent and ability to hold the security to
recovery. Once a decline in fair value is determined to be
other-than-temporary,
an impairment charge is recorded in other income (expense) and a
new cost basis in the investment is established. Management has
determined no
other-than-temporary
declines in fair value exist as of December 31, 2008.
Fair
Value of Financial Instruments
The fair value of the Companys financial and non-financial
assets and liabilities are determined in accordance with the
fair value hierarchy established in ASC Topic 820, Fair Value
Measurements and Disclosures. ASC Topic 820 defines fair
value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an
orderly transaction between market participants on the
measurement date. The fair value hierarchy of ASC Topic 820
requires an entity to maximize the use of observable inputs when
measuring fair value and classifies those inputs into three
levels:
Level 1Quoted prices in active markets for identical
assets or liabilities.
Level 2Inputs other than Level 1 prices that are
observable, either directly or indirectly, such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the
full term of the assets or liabilities.
Level 3Unobservable inputs that are supported by
little or no market activity and that are significant to the
fair value of the assets or liabilities.
The Companys financial assets and liabilities include cash
equivalents, trade accounts receivable, investments, accounts
payable, accrued expenses, and a revolving line of credit. These
financial assets and liabilities are stated at cost, which
approximate their fair values.
Deferred
Offering Costs
The Company has capitalized certain direct and incremental
external costs, consisting principally of legal, accounting, and
other fees, associated with the proposed IPO. These costs are
reflected as deferred offering costs in the consolidated balance
sheets and will be charged against the gross proceeds of the
offering upon completion of the IPO or expensed if a
determination is made that the IPO will not occur or is
significantly delayed.
F-11
Deferred
Contract Costs
Deferred contract costs, including salary and other overhead
costs, are costs related to activities performed under certain
engineering service agreements for which the related revenue is
also deferred. Deferred contract costs are recognized in the
same period that the related revenues are recognized. Deferred
contract costs have been classified as a noncurrent asset, since
a portion of the related deferred revenues is classified as a
noncurrent liability.
Equipment
and Leasehold Improvements
Equipment and leasehold improvements are stated at cost.
Depreciation expense is provided using the straight-line method
over the estimated useful lives of the assets, ranging from
three to five years. Depreciation of leasehold improvements is
over the shorter of their economic useful lives or lease terms.
Expenditures for repairs and maintenance are expensed as
incurred. Expenditures for major renewals and betterments that
extend the useful lives of the assets are capitalized as
additions to the related assets and depreciated over the
remaining lives.
Intangible
Assets
Intangible assets include certain costs related to patent
applications and licensed technology rights. Patents are
amortized on a straight-line basis over the estimated useful
life of the patent, originally 15 to 20 years, and
commences at the time the patent application is filed.
Evaluation
of Long-Lived Assets
The Company assesses its long-lived assets for potential
impairment whenever events or changes in circumstances indicate
that the carrying value of such assets may not be recoverable.
The estimated future cash flows are based upon, among other
things, assumptions about expected future operating performance
and may differ from actual cash flows. Long-lived assets
evaluated for impairment are grouped with other assets to the
lowest level for which identifiable cash flows are largely
independent of the cash flows of other groups of assets and
liabilities. If the sum of the projected undiscounted cash flows
(excluding interest) is less than the carrying value of the
assets, the assets will be written down to the estimated fair
value in the period in which the determination is made.
Management has determined that no impairment of long-lived
assets exists for the year ended December 31, 2008.
During the year ended December 31, 2009, the Company
recognized an impairment loss on manufacturing equipment and the
trade secrets and manufacturing processes intangible asset of
$1,537,000 and $490,000, respectively (Note 14).
Deferred
Revenue
Amounts received from customers in excess of revenue earned are
recognized as deferred revenue until the revenue recognition
criteria are met. The Company defers engineering service
revenues at the time of billing, and then recognizes the
revenues as the Company renders the services over the contract
life.
Revenue
Recognition
Product SalesThe Companys product sales primarily
consist of NuVinci CVTs. The Company recognizes
revenue upon delivery of the product, provided that
(a) persuasive evidence of an arrangement exists;
(b) delivery has occurred; (c) the fee is fixed or
determinable; and (d) collectability is reasonably assured.
The Companys sales terms provide no right of return.
License Fees and RoyaltiesLicense fee revenue is
recognized when the intellectual property is physically
delivered, the license term commences, and there are no future
performance obligations or requirements. When the Company is
obligated to provide research and development during the license
term, license fee revenue is deferred and recognized over the
term of the contract or the remaining estimated period of
continuing involvement, whichever is longer. Nonrefundable, lump
sum license fees are recognized as
F-12
revenues upon receipt when there is no future performance
obligation and when the earnings process is culminated. Royalty
revenue is recognized as licensees report royalties to the
Company and payment is submitted concurrently with the report.
The Company recognizes royalty revenues from licensed products
when earned in accordance with the terms of the license
agreements.
Engineering ServicesThe Company performs third party
research and development activities, which are typically
provided on a time and materials basis. Revenue for research and
development is recorded as performance progresses under the
applicable agreement. Revenues for engineering services derived
from nonrefundable research and development payments are
recognized when the milestone is reached, provided the payment
associated with the milestone is commensurate with either the
effort required to achieve the milestone or the enhancement of
value of the delivered items as a result of achievement of the
milestone. When the milestone payment relates to the remaining
deliverables, revenues are deferred to the date milestones are
considered to be substantive.
Related Party RevenuesRelated party revenues include
support services provided to Viryd, which are recognized monthly
as services are provided (Note 13).
Other RevenueThe Company recognizes other revenue upon
delivery of miscellaneous parts and raw materials to customers,
similar to product sales.
Shipping
and Handling Costs
Shipping and handling amounts billed to customers are recorded
as product sales. Freight costs related to shipping goods to
customers are included in cost of product sales.
Warranty
Costs
Substantially all of the Companys products are sold with a
six-year warranty. Warranty reserve is included in accrued
expenses in the consolidated balance sheets. The Company records
a reserve for estimated warranty costs for all products under
warranty. The Company assesses the adequacy of its recorded
warranty reserve and adjusts the amounts as necessary throughout
the year. The Company has not experienced any significant
product warranty costs and the amount of warranty reserve is not
significant at December 31, 2008 and 2009.
Advertising
Costs
The Company expenses advertising costs as incurred. Advertising
costs for the years ended December 31, 2007, 2008, and 2009
were $7,000, $281,000, and $69,000, respectively, and are
included in selling, general and administrative expenses in the
consolidated statements of operations.
Research
and Development Costs
Research and development costs consist primarily of salaries and
other personnel-related costs, bonuses, prototype costs,
facility costs, and depreciation expense. The Company expenses
all research and development costs as incurred.
Income
Taxes
The Company accounts for income taxes in accordance with ASC
Topic 740, Income Taxes. Under ASC Topic 740, deferred
taxes are provided on an asset and liability method whereby
deferred tax assets are recognized for deductible temporary
differences and operating loss carryforwards. Deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported
amounts of assets and liabilities and the tax bases. Deferred
tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more-likely-than-not that some
portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment.
F-13
The Company adopted the provisions of ASC Subtopic
740-10-05-6
on accounting for uncertainty in income taxes on January 1,
2007. This guidance prescribes a recognition threshold and
measurement attribute criteria for the financial statement
recognition and measurement of tax positions taken or expected
to be taken in a tax return. As such, the Company recognizes the
financial statement benefit of a tax position only if it is
more-likely-than-not to be sustained upon examination by taxing
authorities. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the consolidated financial
statements is the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the
relevant tax authority. The Company has a policy of recognizing
interest and penalties related to unrecognized tax benefits
within income tax expense in the consolidated statements of
operations and within current or noncurrent liability in the
consolidated balance sheets.
Share-Based
Compensation
Effective January 1, 2006, the Company adopted the
provisions of ASC Topic 718,
CompensationStock-Compensation,
under the prospective method, which requires the Company to
recognize expense for all share-based compensation awards
granted to employees after December 31, 2005. Compensation
expense is determined based on the grant date fair value of
share-based compensation awards and is recognized on a
straight-line basis over the requisite service period of the
award. Under the prospective method, ASC Topic 718 applies to
new awards and to awards modified, repurchased, or canceled
after December 31, 2005. The Company will continue to
account for the share-based compensation awards granted before
December 31, 2005 using the intrinsic value method and will
recognize compensation expense on options that vest based on
performance measures or if the fair value of the underlying
common stock is greater than the exercise price of the stock
option.
Stock options and warrants granted to nonemployees are accounted
for using the fair value method. All transactions in which
services are received for the issuance of equity instruments 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 of
the fair value of the equity instrument issued is the date at
which a commitment for performance by the counterparty to earn
the equity instruments is reached or the date at which the
counterpartys performance is complete.
Accounting
Standards Updates
In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51,
(codified in ASC Topic 810), as amended by Accounting Standard
Update (ASU)
2010-02,
Accounting and Reporting for Decreases in Ownership of a
Subsidiarya Scope Clarification, which requires the
recognition of a noncontrolling interest (minority interest) as
equity in the consolidated financial statements and separate
from the parents equity. The amount of net income
attributable to the noncontrolling interest will be included in
consolidated net income. It also amends certain consolidation
procedures for consistency with the requirements of ASC Topic
805, Business Combinations. The provisions also include
expanded disclosure requirements regarding the interests of the
parent and its noncontrolling interest. Although the Company no
longer has a noncontrolling interest in Viryd, the Company
adopted the retrospective presentation and disclosure
requirements of this standard on January 1, 2009. As a
result, the Companys noncontrolling interest in Viryd,
which was previously included in other non-current liabilities,
was reclassified to noncontrolling interest in total equity for
all periods presented.
In April 2008, the FASB issued FASB Staff Position (FSP)
No. FAS 142-3,
Determination of the Useful Life of Intangible Assets
(codified in ASC Topic 350). FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible
Assets. FSP
FAS 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years and should be applied prospectively to
intangible assets acquired after the effective date. Early
adoption is not permitted. FSP
FAS 142-3
also requires expanded disclosure related to the determination
of intangible asset
F-14
useful lives and should be applied to all intangible assets
recognized as of, and subsequent to, the effective date. The
adoption of
FSP FAS 142-3
did not have a material effect on the consolidated financial
statements.
In May 2009, the FASB issued SFAS No. 165,
Subsequent Events, (codified in ASC Topic 855), as
amended by ASU
2010-09,
Amendments to Certain Recognition and Disclosure
Requirements, which provides guidance on managements
assessment of subsequent events. The new standard clarifies that
management must evaluate, as of each reporting period, events or
transactions that occur after the balance sheet date through the
date that the financial statements are issued or available to be
issued. Management has evaluated all events or transactions that
occurred after December 31, 2009 up through March 25,
2010, the date the consolidated financial statements were
available to be issued.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. (FIN) 46(R),
(codified in ASC Topic
810-10), as
amended by ASU
2009-17,
Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities, which amends the
consolidation guidance that applies to variable interest
entities (VIE). The amendments will significantly affect the
overall consolidation analysis under FIN 46 (revised
December 2003), Consolidation of Variable Interest
Entities, or FIN 46(R), to improve financial reporting
by enterprises involved with VIEs and to provide more
relevant and reliable information to users of financial
statements. SFAS No. 167 carries forward the scope of
FIN 46(R), with the addition of entities previously
considered qualifying special-purpose entities, as the concept
of these entities was eliminated in SFAS No. 166,
Accounting for Transfers of Financial Assets (ASC Topic
860). The principal objectives of these new disclosures are to
provide financial statement users with an understanding of:
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a)
|
The significant judgments and assumptions made by an enterprise
in determining whether it must consolidate a VIE
and/or
disclose information about its involvement in a VIE;
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b)
|
The nature of restrictions on a consolidated VIEs assets
and on the settlement of its liabilities reported by an
enterprise in its statement of financial position, including the
carrying amounts of such assets and liabilities;
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c)
|
The nature of, and changes in, the risks associated with an
enterprises involvement with the VIE; and
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d)
|
How an enterprises involvement with the VIE affects the
enterprises financial position, financial performance, and
cash flows.
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SFAS No. 167 is effective as of the beginning of the
first fiscal year that begins after November 15, 2009 (the
Company must adopt the standard as of January 1, 2010).
Early adoption is prohibited. Based on the Companys
evaluation of ASC Topic 810, Consolidation, management
does not believe the adoption of SFAS No. 167 will
have a material impact on the consolidated financial statements.
In June 2009, ASU
2009-01,
Topic 105Generally Accepted Accounting Principles
amendments based on Statement of Financial Accounting Standards
No. 168The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles,
(the Codification) was issued. This ASU amends the FASB ASC for
the issuance of SFAS No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles. The Codification is the source of
authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. On the effective date
of SFAS No. 168, the Codification superseded all
then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not
included in the Codification became nonauthoritative.
SFAS No. 168 was effective for financial statements
issued for interim and annual periods ending after
September 15, 2009. Following SFAS No. 168, the
Board will not issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts.
Instead, it will issue Accounting Standards Updates. The GAAP
hierarchy will be modified to include only two levels of GAAP:
authoritative and nonauthoritative. Adoption of the Codification
did not impact our practice of preparing consolidated financial
statements in conformity with GAAP.
In October 2009, ASU
2009-13,
Multiple-Deliverable Revenue Arrangements, codified the
consensus in Emerging Issues Task Force (EITF) Issue
08-1, which
supersedes EITF Issue
00-21
(codified in ASC Topic
F-15
605-25). The
ASU was issued in response to practice concerns related to the
accounting for revenue arrangements with multiple deliverables
under Issue
00-21 and
applies to all deliverables in contractual arrangements in all
industries in which a vendor will perform multiple
revenue-generating activities, except when some or all
deliverables in a multiple-deliverable arrangement are within
the scope of other, more specific sections of the Codification
and other sections of ASC Topic 605 on revenue recognition.
Specifically, the ASU addresses the unit of accounting for
arrangements involving multiple deliverables. It also addresses
how arrangement consideration should be allocated to the
separate units of accounting, when applicable. However, guidance
on determining when the criteria for revenue recognition are met
and how an entity should recognize revenue for a given unit of
accounting are located in other sections of the Codification
(e.g., Staff Accounting Bulletin Topic 13). Although the
ASU retains the criteria from Issue
00-21 for
when delivered items in a multiple-deliverable arrangement
should be considered separate units of accounting, it removes
the previous separation criterion under Issue
00-21 that
objective and reliable evidence of the fair value of any
undelivered items must exist for the delivered items to be
considered a separate unit or separate units of accounting. The
final consensus is effective for fiscal years beginning on or
after June 15, 2010. Entities can elect to apply this ASU
(1) prospectively to new or materially modified
arrangements after the Issues effective date or
(2) retrospectively for all periods presented. The Company
does not believe the adoption of ASU
2009-13 will
have a material impact on the consolidated financial statements.
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NOTE 3
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EARNINGS
(LOSS) PER SHARE
|
Basic earnings (loss) per share is calculated by dividing the
reported earnings (loss) by the weighted average number of
common shares outstanding for the period, without consideration
for common stock equivalents. Diluted earnings (loss) per share
reflect the additional dilution from all potentially dilutive
securities outstanding for the period. For purposes of this
calculation, preferred stock is considered to be common stock
equivalents on an if-converted basis and stock options and
warrants are considered to be common stock equivalents using the
treasury stock method and are only included in the calculation
of diluted earnings (loss) per share when their effect is not
antidilutive. There was no adjustment to net loss and weighted
average common shares outstanding to compute basic and diluted
earnings (loss) per share.
Potentially dilutive securities not included in the calculation
of diluted earnings (loss) per share because to do so would be
antidilutive are as follows (in common equivalent shares) (in
thousands):
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December 31,
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2007
|
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2008
|
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2009
|
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Weighted-average preferred stock, as converted
|
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11,687
|
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30,717
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92,322
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Weighted-average common stock options
|
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3,110
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3,568
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12,251
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Weighted-average common stock warrants
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71
|
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2,035
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Pro Forma
Earnings (Loss) Per Share (Unaudited)
The pro forma basic and diluted earnings (loss) per share is
calculated by dividing the earnings (loss) by the weighted
average number of common shares outstanding for the period plus
the weighted average number of common shares resulting from the
exercise
of
warrants prior to the closing of the IPO, which would otherwise
terminate if not exercised, and the assumed conversion of the
outstanding shares of convertible preferred stock into
101,107,000 shares of common stock (Note 8). The assumed
conversion is calculated using the if-converted method, as if
such conversion had occurred as of the beginning of the period
presented or as of the original issuance date, if later,
weighted for the period outstanding. Pro forma basic and diluted
earnings (loss) per share has been computed to give effect to
the exercise of these warrants prior to the closing
F-16
of the IPO and the assumed conversion of convertible preferred
stock into common stock upon the closing of the Companys
IPO on an if-converted basis for the year ended
December 31, 2009 as follows (in thousands):
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Year Ended
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December 31,
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2009
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Pro FormaDenominator (Unaudited):
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Weighted-average common shares outstanding
|
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11,656
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Pro forma adjustments to reflect assumed weighted-average effect
of conversion of convertible preferred stock
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92,322
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Pro forma adjustments to reflect assumed
weighted-average
effect of warrants exercised
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|
|
|
|
Pro forma weighted-average shares used in computing pro forma
basic and diluted earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4
|
BALANCE
SHEET DETAILS
|
Deferred
Offering Costs
Deferred offering costs consist of the following as of
December 31, 2009 (in thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Legal fees
|
|
$
|
519
|
|
Accounting
|
|
|
108
|
|
Other
|
|
|
9
|
|
|
|
|
|
|
|
|
$
|
636
|
|
|
|
|
|
|
Equipment
and Leasehold Improvements
Equipment and leasehold improvements consist of the following as
of December 31, 2008 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Machinery and equipment
|
|
$
|
4,868
|
|
|
$
|
990
|
|
Furniture and fixtures
|
|
|
72
|
|
|
|
78
|
|
Computer equipment
|
|
|
547
|
|
|
|
607
|
|
Leasehold improvements
|
|
|
209
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,696
|
|
|
|
1,884
|
|
Less accumulated depreciation and amortization
|
|
|
(1,578
|
)
|
|
|
(1,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,118
|
|
|
$
|
465
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense, including depreciation on
equipment acquired under a capital lease, for the years ended
December 31, 2007, 2008, and 2009 was $260,000, $834,000,
and $1,011,000, respectively.
During the third quarter of fiscal 2009, the Company recorded a
$1,537,000 impairment loss on the write-down of machinery and
equipment. On October 30, 2009, in connection with the
early termination of the Manufacturing Supply Agreement, the
Company agreed to transfer the machinery and equipment to the
manufacturing partner. As a result, during the fourth quarter of
fiscal 2009, the Company recorded an additional $1,455,000 loss
on disposal of machinery and equipment for the remaining net
book value (Note 14).
F-17
Accrued
Expenses
Accrued expenses consist of the following as of
December 31, 2008 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Accrued vacation
|
|
$
|
226
|
|
|
$
|
262
|
|
Deferred offering costs
|
|
|
|
|
|
|
476
|
|
Accounting and legal fees
|
|
|
121
|
|
|
|
109
|
|
Salaries and bonuses
|
|
|
108
|
|
|
|
|
|
Warranty reserve
|
|
|
16
|
|
|
|
16
|
|
Other
|
|
|
85
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
556
|
|
|
$
|
978
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys investment in
held-to-maturity
securities at cost as of December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
|
|
|
|
|
|
|
Aggregate
|
|
|
Holding Gain
|
|
|
Net Carrying
|
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
Amount
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
3,525
|
|
|
$
|
|
|
|
$
|
3,525
|
|
Auction rate securities
|
|
|
175
|
|
|
|
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,700
|
|
|
$
|
|
|
|
$
|
3,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments included in current assets on the accompanying
consolidated balance sheets represent the amounts expected to
mature during the next twelve months.
A summary of investment earnings recognized in income during the
years ended December 31, 2007, 2008, and 2009 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Held-to-maturity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earned
|
|
$
|
38
|
|
|
$
|
11
|
|
|
$
|
81
|
|
Dividends
|
|
|
268
|
|
|
|
11
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
306
|
|
|
$
|
22
|
|
|
$
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6
|
INTANGIBLE
ASSETS
|
Intangible assets consist of the following at December 31,
2008 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
2,133
|
|
|
$
|
(263
|
)
|
|
$
|
1,870
|
|
Trade secrets and manufacturing process
|
|
|
700
|
|
|
|
(105
|
)
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,833
|
|
|
$
|
(368
|
)
|
|
$
|
2,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
2,567
|
|
|
$
|
(382
|
)
|
|
$
|
2,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
Amortization expense for the years ended December 31, 2007,
2008, and 2009 was $64,000, $194,000, and $223,000,
respectively. As of December 31, 2009, estimated
amortization expense for each of the next five years is as
follows (in thousands), which could be affected by additions,
dispositions, or impairments:
|
|
|
|
|
Year ended December 31:
|
|
|
|
|
2010
|
|
$
|
135
|
|
2011
|
|
|
135
|
|
2012
|
|
|
135
|
|
2013
|
|
|
135
|
|
2014
|
|
|
135
|
|
During the third quarter of fiscal 2009, the Company recorded a
$490,000 impairment loss on the write-off of the trade secrets
and manufacturing process intangible assets, with an original
cost of $700,000 and accumulated amortization of $210,000
(Note 14).
Revolving
Line of Credit
On March 31, 2007, the Company entered into a revolving
line of credit with a bank in the amount of $2,000,000, with
interest payable monthly at the banks prime rate. The
agreement expired on March 31, 2008, but was amended
effective April 1, 2008, increasing the amount available to
$5,000,000. Up to $2,000,000 of the line of credit may be used
to finance standby letters of credit, with maximum maturities of
one year. The line of credit expired on April 1, 2009. The
Company renewed the line of credit on June 1, 2009 under
similar terms. The new line of credit expires on
December 31, 2010. The outstanding principal balance bears
interest at a rate of 1.0% per annum above the base rate, which
is a fluctuating rate equal to the highest of the prime rate
(5.0% at December 31, 2009), LIBOR plus 1.5%, or the
Federal Funds Rate plus 1.5%; but in no case shall the interest
rate be less than 5.0%. Of the $5,000,000 available under the
line, there was a balance due in the amount of $2,000,000 at
December 31, 2008 and 2009.
The line of credit provides for a quarterly unused commitment
fee of 0.375% per annum on the average daily unused amount.
Collateral for this line of credit consists of the personal
guarantee of a stockholder and director of the Company and a
security interest in certain assets of the Company
(Note 9). The line of credit is subject to certain
restrictive covenants requiring the Company to maintain a
quarterly earnings before interest, taxes, depreciation, and
amortization (EBITDA) loss not greater than $4.2 million
for the quarter ending June 30, 2009, $3.5 million for
the quarter ending September 30, 2009, $4.2 million
for the quarter ending December 31, 2009 (excluding up to
$3.5 million of loss on disposal of assets relating to
change in manufacturers (Note 14)), $3.5 million for
the quarter ending March 31, 2010, $3.3 million for
the quarter ending June 30, 2010, $2.9 million for the
quarter ending September 30, 2010, and $2.5 million
for the quarter ending December 31, 2010. In addition, the
line of credit contains various restrictions, including
restrictions on the purchase of property and equipment,
incurring new debt, and declaring or paying dividends without
the banks prior written consent.
On December 31, 2009, the liquidity covenant, which
previously required the Company to maintain aggregate cash and
investments in excess of $15 million, was amended to
maintain a liquidity ratio (defined as aggregate cash and cash
equivalents and readily marketable securities divided by EBITDA
loss and non-financed capital expenditures for the month then
ended) of not less than 6 to 1.0. As of December 31, 2009,
the Company was in compliance with all debt covenants.
On March 23, 2010, the revolving line of credit was amended
to decrease the principal amount available from $5,000,000 to
$3,000,000, fully collateralize the line of credit against
assets held on account with the lender by a stockholder and
director of the Company, remove the restrictive financial
covenants, and decrease the interest rate to the base rate,
which is a fluctuating rate equal to the highest of the prime
rate, LIBOR plus 1.5%, or the Federal Funds Rate plus 1.5%.
F-19
Note
Payable
On April 1, 2008, in connection with a Tangible Asset
Purchase Agreement, dated February 15, 2008, as amended on
March 18, 2008, the Company entered into a note payable in
the amount of $1,952,000, with interest at a rate of 8% per
annum, to purchase machinery and equipment (Note 14). The
note was payable in 12 monthly installments of $179,000
beginning January 1, 2009, with all outstanding principal
and accrued interest due on December 31, 2009. The Company
paid the note in full in December 2008. In consideration of
prepayment, the interest rate on the note was amended to 7% per
annum.
|
|
NOTE 8
|
CONVERTIBLE
PREFERRED STOCK
|
The Company has four series of convertible preferred stock
authorized, issued, and outstanding, Series A, B, C, and D.
Each series is recorded net of issuance costs.
Series A
Convertible Preferred Stock
In April 2004, in conjunction with the Company changing its
legal structure from a LLC to a Delaware corporation, the
Company converted 28,000 units of the LLC preferred
Class A, 24,000 units of the LLC preferred
Class B, and 1,499,000 units of the LLC preferred
Class C to 2,881,000 shares of Series A Preferred
Stock and 11,392,000 shares of common stock.
In April 2003, the Company issued $725,000 in notes that were
convertible into LLC preferred Class B at a price of $1,000
per unit. The notes accrued interest at 8% per annum, were
convertible at the option of the holder, and were due and
payable five years after date of issuance if not converted. In
June 2004, the notes were converted into 1,007,000 shares
of Series A Preferred Stock at $0.71989 per share. Accrued
interest on the notes totaled approximately $50,000, of which
$46,000 was converted into 27,000 shares of Series B
Preferred Stock at $1.717 per share.
Series B
Convertible Preferred Stock
In April 2004, the Company executed a convertible bridge
financing promissory note for $1,500,000 with an existing
stockholder. The note bore interest at 8% per annum and was due
and payable five years after the date of issuance of the note
unless converted at the option of the stockholder prior to
maturity. In August 2004, the note and accrued interest were
converted into 873,000 shares of Series B Preferred
Stock at $1.717 per share.
In 2004, the Company issued 3,876,000 shares of
Series B Preferred Stock for cash in the amount of
$6,655,000, recorded net of $19,000 in issuance costs.
In 2005, the Company issued 10,000 shares of Series B
Preferred Stock for cash in the amount of $17,000.
Series C
Convertible Preferred Stock
In 2005, the Company issued 1,583,000 shares of
Series C Preferred Stock for cash in the amount of
$8,457,000, at a price of $5.3415 per share, recorded net of
issuance costs of $47,000.
In 2006, the Company issued 1,430,000 shares of
Series C Preferred Stock for cash in the amount of
$7,636,000, recorded net of issuance costs of $6,000.
Series D
Convertible Preferred Stock
On December 18, 2008, the Company closed a private
placement of new securities and issued 51,589,000 shares of
Series D Preferred Stock, at a price of $0.3992 per share
in exchange for proceeds of $20,594,000, recorded net of
issuance costs of $1,547,000, which includes $190,000 for an
equity-classified warrant to purchase common stock (Note 9).
Beginning in March 2008, the Company received proceeds from
bridge loans in the amount of $4,618,000, and effective
August 8, 2008, entered into a convertible note and warrant
purchase agreement providing
F-20
interest at an annual rate of 6% and detachable
liability-classified warrants. The conversion terms of the note
allowed the holder to convert the principal and accrued interest
into shares of the next financing round at the effective share
price of that round. The number of shares and their exercise
price under the warrants were determined by a set of conditions,
which included the timing of, and investors in, the next
financing round. The number of shares provided under the various
conditions ranged from no shares to shares equal in value to 20%
of the original principal amount of the notes. The exercise
price of shares provided under the various conditions was either
the price of the next financing round or the issuance price of
the Series B Preferred Stock. The fair value of the
detachable warrants was determined by weighting the estimated
probabilities of the various conditions at the date of the
issuance. The value of the warrants at the date of issuance was
calculated in each of the conditions using the Black-Scholes
pricing methodology with the following assumptions: no dividend
yield, expected volatility of 60%, risk-free interest rate of
3.51%, and a term of seven years. The warrants had a resulting
fair value of $49,000, which was recorded as a discount on the
debt. At the time of issuance of the convertible notes in August
2008, an associated beneficial conversion feature totaling
$49,000 was recorded as a debt discount based on the intrinsic
value of the notes recorded on the books (net of the discount
associated with the value of the warrants) and the value of the
stock into which the notes were convertible.
In connection with the private placement of new securities
(Series D Preferred Stock) on December 18, 2008 and in
accordance with the terms of the convertible unsecured
promissory notes, principal and accrued interest of $4,798,000
on the notes were converted into 12,018,000 shares of
Series D Preferred Stock, at a price of $0.3992 per share,
and the detachable warrants were canceled in exchange for
672,000 shares of Viryd preferred stock. At the time the
warrants were canceled through the exchange, the fair value of
the detachable warrants was determined using the Black-Scholes
pricing methodology with the following assumptions: no dividend
yield, expected volatility of 60%, risk-free interest rate of
1.52%, and a term of 6.64 years, resulting in a fair value
of $212,000. The Company accelerated the amortization of the
debt discounts to interest expense so that all amounts were
amortized upon conversion of the notes. Given the absence of an
active market for the Viryd preferred stock, the Company
estimated the fair value of the Viryd preferred stock with the
assistance of an unrelated valuation specialist. The
Companys valuation was based on a methodology that first
estimated the fair value of Viryd as a whole, or enterprise
value, and then allocated a portion of the enterprise value to
its preferred stock. The fair value of the Viryd preferred stock
tendered in exchange approximated the fair value of the warrants
with no gain or loss recognized on the exchange.
The December 18, 2008 private placement included the sale
of 6,223,000 shares with aggregate proceeds of $2,484,000
to 10% or greater stockholders, directors, executive officers,
and affiliates or immediate family members of 10% or greater
stockholders, directors, and executive officers.
In November 2009, the Company amended and restated its
certificate of incorporation to authorize the issuance of a
total of 90,324,000 shares of preferred stock by increasing
the shares authorized for Series D Preferred Stock from
63,607,000 to 78,637,000. The Company issued 10,020,000
additional shares of Series D Preferred Stock in exchange
for proceeds of $4,000,000, recorded net of issuance costs of
$110,000, which includes $4,000 for an equity-classified warrant
to purchase common stock (Note 9). This private placement
included the sale of 6,944,000 shares with aggregate
proceeds of $2,772,000 to 10% or greater stockholders,
directors, executive officers, and affiliates or immediate
family members of 10% or greater stockholders, directors, and
executive officers.
F-21
The Companys convertible preferred stock and related
information as of and for the years ended December 31, 2008
and 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2009
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Series A, $0.001 par
|
|
|
3,888
|
|
|
$
|
479
|
|
|
|
3,888
|
|
|
$
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B, $0.001 par
|
|
|
4,786
|
|
|
|
8,202
|
|
|
|
4,786
|
|
|
|
8,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C, $0.001 par:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of year
|
|
|
3,013
|
|
|
|
16,040
|
|
|
|
3,013
|
|
|
|
16,040
|
|
Beneficial conversion charge
|
|
|
|
|
|
|
(1,376
|
)
|
|
|
|
|
|
|
|
|
Accretion of beneficial conversion charge
|
|
|
|
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,013
|
|
|
|
16,040
|
|
|
|
3,013
|
|
|
|
16,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D, $0.001 par:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of year
|
|
|
|
|
|
|
|
|
|
|
63,607
|
|
|
|
23,845
|
|
Issuance, net
|
|
|
51,589
|
|
|
|
19,047
|
|
|
|
10,020
|
|
|
|
3,890
|
|
Issuance from conversion of debt and accrued interest
|
|
|
12,018
|
|
|
|
4,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,607
|
|
|
|
23,845
|
|
|
|
73,627
|
|
|
|
27,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible preferred stock
|
|
|
75,294
|
|
|
$
|
48,566
|
|
|
|
85,314
|
|
|
$
|
52,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company is authorized to issue
shares of convertible preferred stock, with a par value of
$0.001 per share, as follows (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Equivalent
|
|
|
|
|
|
|
Issued and
|
|
|
Liquidation
|
|
|
Liquidation
|
|
|
Conversion
|
|
|
Shares of
|
|
Series
|
|
Authorized
|
|
|
Outstanding
|
|
|
Price
|
|
|
Preference
|
|
|
Price
|
|
|
Common Stock
|
|
|
A
|
|
|
3,888
|
|
|
|
3,888
|
|
|
$
|
0.71989
|
|
|
$
|
2,799
|
|
|
$
|
0.49910
|
|
|
|
5,608
|
|
B
|
|
|
4,786
|
|
|
|
4,786
|
|
|
|
1.71700
|
|
|
|
8,218
|
|
|
|
0.82280
|
|
|
|
9,988
|
|
C
|
|
|
3,013
|
|
|
|
3,013
|
|
|
|
5.34150
|
|
|
|
16,093
|
|
|
|
1.35420
|
|
|
|
11,884
|
|
D
|
|
|
78,637
|
|
|
|
73,627
|
|
|
|
0.39920
|
|
|
|
29,392
|
|
|
|
0.39920
|
|
|
|
73,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,324
|
|
|
|
85,314
|
|
|
|
|
|
|
$
|
56,502
|
|
|
|
|
|
|
|
101,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
Each share of Series A, B, and C Preferred Stock
(collectively, Junior Preferred Stock) and each share of
Series D Preferred Stock is immediately convertible at the
holders option into shares of common stock based on the
original issuance price divided by the conversion price. In
connection with the issuance of Series D Preferred Stock on
December 18, 2008, which had a lower per share price than
the previous issuances, and in accordance with the
Companys articles of incorporation, the Company modified
the conversion price for the Junior Preferred Stock. The
modification of the conversion price resulted in an increase in
the original number of equivalent shares of common stock
convertible for each share of Junior Preferred Stock. The
modified conversion price was greater than the estimated fair
value of the common stock as of each series date of issuance
except for the shares of Series C Preferred Stock. A
beneficial conversion charge of $1,376,000 resulting from the
intrinsic value of the adjusted conversion price was recorded on
the Series C Preferred Stock incremental shares, since the
modified conversion price of $1.3542 was less than the fair
value of the common stock of $1.47 as of the issuance date of
the Series C Preferred Stock financing rounds. The
beneficial conversion was immediately accreted and affected the
earnings available to common stockholders, increasing basic and
diluted net loss per share for the year ended December 31,
2008 to $1.04.
Voting
Rights
The holders of convertible preferred stock are entitled to vote,
together with the holders of common stock, on all matters
submitted to stockholders for a vote. The holders of shares of
convertible preferred stock are entitled to the number of votes
equal to the number of shares of common stock into which each
preferred share is convertible at the time of such vote.
F-22
Dividends
Holders of Series D Preferred Stock, in preference of the
holders of Junior Preferred Stock or the common stock, are
entitled to noncumulative dividends equal to 8% of the issuance
price per share, payable in cash or in shares of Series D
Preferred Stock, at the election of the holder, on a stockholder
by stockholder basis, out of assets legally available, when
declared by the board of directors, and at the discretion of the
board of directors. To date, no dividends have been declared.
Liquidation
Preference
In the event of liquidation, including a merger, acquisition or
sale of assets where there is a change in control, the holders
of Series D Preferred Stock are entitled to receive, prior
to any distribution to any other stockholders, the original
issue price of the Series D Preferred Stock plus any
declared but unpaid dividends. After payment of the full
liquidation preference to the holders of Series D Preferred
Stock, the remaining assets of the Company legally available for
distribution will be distributed ratably to the holders of the
Series A, B, and C Preferred Stock, prior to any
distribution to any holders of common stock, at the original
issue price of the respective preferred stock series plus any
declared but unpaid dividends (Junior Preferred Stock
Preference). After full preferential amounts due to the holders
of Series D Preferred Stock and holders of the Junior
Preferred Stock have been paid, an amount equal to the Junior
Preferred Stock Preference shall be distributed ratably among
the holders of common stock (Common Preference). After full
preferential amounts due to the holders of Series D
Preferred Stock, holders of the Junior Preferred Stock, and
holders of common stock have been paid, any remaining available
assets of the Company shall be distributed ratably to the
holders of Junior Preferred Stock equal to one-half of the
Junior Preferred Stock Preference. After full preferential
amounts due to the holders of Series D Preferred Stock,
holders of the Junior Preferred Stock, and holders of common
stock have been paid, any remaining assets of the Company shall
be distributed ratably to the holders of common stock and
Series D Preferred Stock, on an equal priority, in
proportion to the number of shares of common stock then held by
the holders of common stock and issuable upon conversion of the
shares of Series D Preferred Stock then held by the holders
of Series D Preferred Stock.
Redemption
The Series A, B, C, and D Preferred Stock are not
redeemable.
The Company is authorized to issue 140,000,000 shares of
common stock, with a par value of $0.001 per share. The Company
has 11,655,000 and 11,661,000 shares issued and outstanding
at December 31, 2008 and 2009, respectively.
Each share of common stock is entitled to one vote. The holders
of common stock are also entitled to receive noncumulative
dividends whenever funds are legally available and when declared
by the board of directors, subject to the prior rights of
holders of all classes of stock outstanding. To date, no
dividends have been declared.
The Company has 11,661,000 shares of common stock and
85,314,000 shares of preferred stock, which are convertible
into 101,107,000 shares of common stock, outstanding at
December 31, 2009. Of the total 112,768,000 shares of
common stock, on an as-converted basis, 68,049,000 shares,
or 60%, are owned by twelve persons who are directors or
executive officers and 270,000 shares, or 0.2%, are owned
by members of immediate families of directors and executive
officers. Additionally, of the 68,049,000 shares,
53,884,000 shares are owned by beneficial owners of more
than 10% of the voting interests of the Company. These
beneficial owners, both of whom are directors, hold
27,206,000 shares, or 24.1%, and 26,678,000 shares, or
23.7%, respectively, on an as-converted basis. While none of
these parties individually has control over the Companys
operating policies or business decisions, the beneficial owners
could have substantial influence over the Companys
business and affairs, including the ability to influence
elections of directors or any other actions that may require
stockholder approval, such as amendments to charter documents
and significant corporate transactions.
F-23
Common
Stock Warrants
Transaction fees in connection with the December 18, 2008
round of Series D Preferred Stock financing
(Note 8) include warrants to purchase
2,004,000 shares of common stock at a price of $0.3992 per
share with a fair value of approximately $190,000. The warrants
expire seven years from the date of issuance and are recorded as
issuance costs and reflected as a reduction of the proceeds from
the Series D Preferred Stock issuance and an increase in
additional paid-in capital within the consolidated statements of
equity. The warrants must be exercised prior to the closing of
an IPO. The Company determined the fair value of the warrants
based on the Black-Scholes pricing methodology using the
following assumptions: fair value of the underlying common stock
of $0.22, no dividend yield, expected volatility of 60%,
risk-free interest rate of 3.51%, and a term of seven years.
Although the terms of these warrants were mutually agreed upon
by all parties on December 18, 2008, the warrants were not
delivered until November 13, 2009, at which time they were
delivered together with the warrants issued in connection with
the November 2009 financing round.
During the year ended December 31, 2008, the Companys
board of directors authorized the issuance of a warrant to
purchase shares of common stock to a director and stockholder of
the Company in exchange for a personal guarantee of the
Companys line of credit (Note 7). As of
December 31, 2008, a mutual understanding between the
parties of the key terms and conditions of the share-based
payment award had not been established. Accordingly, a grant
date had not been determined and, as of December 31, 2008,
a warrant had not been granted or recorded. In December 2009,
the Company and the director and stockholder mutually agreed
upon the key terms and conditions of the share-based payment
award. As a result, the Company granted a warrant to purchase
3,101,000 shares of common stock at a price of $0.3992 per
share, which expires December 2017. The Company valued the
warrant at the measurement date using the Black-Scholes pricing
methodology. The assumptions used in this model were as follows:
fair value of the underlying common stock of $0.26, no dividend
yield, expected volatility of 62%, risk-free interest rate of
3.49%, and a term of eight years, resulting in a fair value of
the warrant of $476,000 at the date of issuance. The fair value
of the warrant is classified as an equity instrument and was
recognized as interest expense on the date of grant.
In connection with the November 2009 round of Series D
Preferred Stock financing (Note 8), the Company issued
warrants to purchase 113,000 shares of common stock at a
price of $0.3992 per share related to the issuance costs. The
Company valued the warrants at the issuance date,
November 13, 2009, using the Black-Scholes pricing
methodology. The fair value of the warrants was not significant.
The fair value of the warrants classified as equity instruments
was reflected as a reduction of the proceeds from the
Series D Preferred Stock issuance. The warrants must be
exercised prior to the closing of an IPO. These warrants were
delivered together with the warrants granted in connection with
the December 18, 2008 financing round.
In January 2010, the Company entered into a two year consulting
agreement, which provides for warrants to purchase
50,000 shares of common stock and further provides for,
upon reaching certain performance milestones, the issuance of
contingent warrants to purchase up to an additional
750,000 shares of common stock at an exercise price of
$0.3992 per share (Note 14).
F-24
A summary of the Companys warrants to purchase common
stock is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Common
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants outstandingJanuary 1, 2008
|
|
|
|
|
|
$
|
|
|
Issued
|
|
|
2,004
|
|
|
|
0.3992
|
|
Exercised
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstandingDecember 31, 2008
|
|
|
2,004
|
|
|
|
0.3992
|
|
Issued
|
|
|
3,214
|
|
|
|
0.3992
|
|
Exercised
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstandingDecember 31, 2009
|
|
|
5,218
|
|
|
|
0.3992
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10
|
STOCK
OPTIONS AND SHARE-BASED COMPENSATION
|
In 2004, the board of directors approved the 2004 Stock Plan.
The plan provides for the direct sale of shares of restricted
stock and the granting of incentive stock options (ISOs) and
nonstatutory stock options (NSOs). The total grants available
under the plan, as amended, are 16,769,000 shares of common
stock to employees, officers, consultants, and directors. The
plan provides for options to be priced at not less than the fair
market value of the shares of the Companys common stock.
Options granted by the Company vest at rates determined by the
board of directors over three or four years. Options expire
within a period of not more than 10 years from the date of
grant. An option granted to a person who is a 10% or greater
stockholder on the date of grant shall not be exercisable more
than five years after the date it is granted. As of
December 31, 2008 and 2009, 13,309,000 and 3,505,000,
respectively, shares under the plan were available for future
grant.
Share-based compensation expense is recognized based on the
estimated portion of the awards that are expected to vest.
Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from estimates. The Company estimates forfeitures based on its
historical experience.
The fair value of each employee option granted during the years
ended December 31, 2007 and 2009 was estimated on the date
of grant using the Black-Scholes option pricing model with the
following assumptions (no options were granted to employees
during the year ended December 31, 2008):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
|
2009
|
|
Expected volatility
|
|
60%
|
|
|
N/A
|
|
|
56% - 63%
|
Expected dividends
|
|
None
|
|
|
N/A
|
|
|
None
|
Expected term (in years)
|
|
5.82
|
|
|
N/A
|
|
|
5.25 - 6.08
|
Risk-free interest rate
|
|
4.54%
|
|
|
N/A
|
|
|
2.02% - 2.77%
|
The fair value of each non-employee option granted during the
years ended December 31, 2007 and 2009 was estimated on the
date of grant using the Black-Scholes option pricing model with
the following assumptions (no options were granted to
non-employees during the year ended December 31, 2008):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
|
2009
|
|
Expected volatility
|
|
60%
|
|
|
N/A
|
|
|
59% - 63%
|
Expected dividends
|
|
None
|
|
|
N/A
|
|
|
None
|
Expected term (in years)
|
|
5.82
|
|
|
N/A
|
|
|
7.82 - 10.00
|
Risk-free interest rate
|
|
4.54%
|
|
|
N/A
|
|
|
3.07% - 3.80%
|
F-25
Expected VolatilityThe expected volatility rate
used to value stock option grants is based on volatilities of a
peer group of similar companies whose share prices are publicly
available. The peer group was developed based on observed
comparable companies historical common equity volatility
for the applicable time periods.
Expected DividendsThe Company has never declared or
paid any cash dividends and does not presently plan to pay cash
dividends in the foreseeable future.
Expected TermThe Company elected to utilize the
simplified method to estimate the expected term of
stock option grants because the Company does not have sufficient
historical exercise data to provide a reasonable basis upon
which to estimate expected term. Under this approach, the
weighted average expected life is presumed to be the average of
the vesting term and the contractual term of the option.
Risk-free Interest RateThe risk-free interest rate
assumption was based on zero-coupon United States Treasury
instruments that had terms consistent with the expected term of
the stock option grants.
For purposes of estimating the fair value of the common stock
for stock option grants, the Company reassessed the estimated
fair value of the common stock on selected dates during the
years ended December 31, 2007 through December 31,
2009, with the assistance of an unrelated valuation specialist.
Prior to this reassessment, the Company concluded that stock
options granted had exercise prices equal to the then estimated
fair value of common stock at the date of grant. Subsequent to
reassessment, the Company determined certain stock options
granted during 2007 through 2009 had an exercise price different
than the estimated fair value of the common stock at the date of
grant. Given the absence of an active market for the common
stock, the Company estimated the fair value of the common stock,
with the assistance of an unrelated valuation specialist, by
performing retrospective valuations for the valuation dates
prior to fiscal year 2009 and contemporaneous valuations during
2009. The estimates of the fair value of the common stock were
made as of the following dates:
|
|
|
|
|
|
|
Fair Value
|
|
Common Stock Valuation Date
|
|
Per Share
|
|
|
June 30, 2007
|
|
$
|
0.67
|
|
December 31, 2007
|
|
|
0.47
|
|
December 31, 2008
|
|
|
0.22
|
|
August 31, 2009
|
|
|
0.11
|
|
December 8, 2009
|
|
|
0.26
|
|
The Companys reassessment was based on a methodology that
first estimated the fair value of the Company as a whole, or
enterprise value, and then allocated a portion of the enterprise
value to its common stock. This approach is consistent with the
methods outlined in the American Institute of Certified Public
Accountants (AICPA) Practice Aid, Valuation of
Privately-Held-Company Equity Securities Issued as
Compensation. The valuation methodology utilized in the
reassessment of fair value relied on the income approach and the
market approach to estimate enterprise value. The market
approach gave consideration to the total financing amount
received, the implied enterprise value of the Company based on
the convertible preferred stock transactions, pricing of
comparable publicly traded companies, and market-based private
company transactions. Pursuant to the guidance under ASC Topic
820, the inputs used in the market approach over the various
valuation dates were Level 2 and Level 3 inputs. The
income approach incorporated the expectations of future cash
flows of the Company as of the valuation dates and market
expectations for an estimated discount rate. The inputs used
under the income approach were primarily Level 3 inputs
with some Level 2 inputs related to the derivation of the
estimated appropriate market participant discount rate. Once the
enterprise value was established, the Company used a method
consistent with the guidance in AICPA Practice Aid, Valuation
of Privately-Held-Company Equity Securities Issued as
Compensation, to determine the value of the underlying
common shares. Specifically, the Company used the Option Pricing
Method to determine the fair value of the underlying common
stock. The Company used these fair value estimates derived from
its valuations to determine share-based compensation expense
recorded in the consolidated financial statements.
F-26
The following table sets forth all stock options granted during
the 12 months prior to December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Fair Value
|
|
|
Value
|
|
Grant Date
|
|
Granted
|
|
|
Price
|
|
|
Per Share
|
|
|
Per Share
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
February 8, 2009
|
|
|
6,927
|
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
$
|
|
|
April 24, 2009
|
|
|
135
|
|
|
|
0.22
|
|
|
|
0.22
|
|
|
|
|
|
August 26, 2009
|
|
|
193
|
|
|
|
0.22
|
|
|
|
0.22
|
|
|
|
|
|
October 22, 2009
|
|
|
2,449
|
|
|
|
0.10
|
|
|
|
0.11
|
|
|
|
0.01
|
|
December 3, 2009
|
|
|
102
|
|
|
|
0.10
|
|
|
|
0.26
|
|
|
|
0.16
|
|
December 5, 2009
|
|
|
105
|
|
|
|
0.25
|
|
|
|
0.26
|
|
|
|
0.01
|
|
A summary of the Companys stock option activity and
related information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at January 1, 2009
|
|
|
2,612
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
9,911
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6
|
)
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(107
|
)
|
|
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
12,410
|
|
|
$
|
0.25
|
|
|
|
8.55
|
|
|
$
|
956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
2,494
|
|
|
$
|
0.42
|
|
|
|
5.42
|
|
|
$
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2009
|
|
|
9,855
|
|
|
$
|
0.25
|
|
|
|
8.40
|
|
|
$
|
829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the options, subject to ASC Topic 718,
Compensation Stock Compensation, vested was
$233,000, $171,000, and $96,000 during the years ended
December 31, 2007, 2008, and 2009, respectively. During the
years ended December 31, 2007 and 2009, the
weighted-average grant date fair value for options granted was
$0.28 and $0.13, respectively, per share, while the total
intrinsic value of options exercised during the years ended
December 31, 2007, 2008, and 2009 was $12,000, $75,000, and
$0, respectively.
Performance-Based
Options
On May 3, 2004, the Company entered into an employment
agreement with one of its executive officers. According to the
terms of the agreement, the board of directors granted 1,462,000
options, under the 2004 Stock Plan, to purchase shares of common
stock at a price of $0.072 per share, whereby 877,000 options
vest over three years and 585,000 options vest upon the
achievement of certain specified performance goals. The
performance-based options, which are not reflected in the table
above, have a contractual life of 10 years and a remaining
contractual life of 4.3 years as of December 31, 2009.
As of December 31, 2009, 439,000 of the performance-based
options have vested with an aggregate intrinsic value of $82,000.
The value of the performance-based options is recognized using
the intrinsic valuation method and is revalued each reporting
period based on the current fair value of the underlying common
stock. If such goals are not met, no compensation expense is
recognized and any recognized compensation expense is reversed.
The expected term for the performance-based options as of
December 31, 2007, 2008, and 2009 is 5 years,
4 years, and 3 years, respectively. The Company
recorded total share-based compensation (benefit) expense of
($12,000), ($7,000), and $8,000 for the years ended
December 31, 2007, 2008, and 2009, respectively. As of
December 31, 2008 and 2009, there was $9,000 and $10,000,
respectively, of total unrecognized compensation cost related to
nonvested share-based compensation on the performance-based
options.
Viryd
Stock Plan
In 2008, the Viryd 2008 Stock Plan was approved. The plan was
included in the December 18, 2008 spin-off of Viryd
(Note 13). The plan provides for the direct sale of shares
of restricted stock or restricted stock bonus and the granting
of options. The total grants available under the plan are
1,979,000 shares of common stock to
F-27
employees, officers, consultants, and directors and includes
ISOs and NSOs. The plan provides for options to be priced at not
less than the fair market value of the shares of Viryds
common stock at the date of grant. Rights to exercise ISOs and
NSOs vest at rates determined by the board of directors over one
to three years. Options expire within a period of not more than
10 years from the date of grant. An option granted to a
person who is a 10% or greater Viryd stockholder on the date of
grant shall not be exercisable more than five years after the
date it is granted. There were 1,221,000 shares available
for future grant under the plan as of December 18, 2008,
the date of spin-off of the consolidated subsidiary.
The fair value of options granted during the year ended
December 31, 2008 was estimated on the date of grant using
the Black-Scholes option pricing model with the following
assumptions: expected volatility of 70%, no dividends, expected
term of 5.84 years, and risk-free interest rate of 2.98%.
The fair value of the options vested was $134,000 during the
year ended December 31, 2008. The Company recognized
$169,000 as share-based compensation expense during the year
ended December 31, 2008. During the year ended
December 31, 2008, the weighted-average grant date fair
value for options granted was $0.32 per share, while the total
intrinsic value of options exercised was $0.
Share-Based
Compensation Expense
Total share-based compensation expense recognized in the
statements of operations during the years ended
December 31, 2007, 2008, and 2009 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Cost of revenues
|
|
$
|
46
|
|
|
$
|
10
|
|
|
$
|
39
|
|
Research and development
|
|
|
28
|
|
|
|
152
|
|
|
|
27
|
|
Selling, general and administrative
|
|
|
219
|
|
|
|
160
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
293
|
|
|
$
|
322
|
|
|
$
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the amounts above, the Company has recognized
additional share-based compensation expense of $112,000,
$25,000, and $0 during the years ended December 31, 2007,
2008, and 2009, respectively, for options granted during fiscal
years 2004 and 2005, prior to adoption of ASC Topic 718 on
January 1, 2006, equal to the difference between the
exercise price and the fair market value of the underlying
shares at the date of grant.
At December 31, 2009, there was approximately $910,000 of
total unrecognized compensation costs related to outstanding
non-vested options granted to employees, which is expected to be
recognized over a weighted average period of 2.6 years.
Since the Company had a net operating loss carryforward as of
December 31, 2007, 2008, and 2009, no excess tax benefits
for the tax deductions related to stock-based awards were
recognized in the statements of operations. Additionally, no
incremental tax benefits were recognized from stock options
exercised during the years ended December 31, 2007, 2008
and 2009 that would have resulted in a reclassification to
reduce net cash provided by operating activities with an
offsetting increase in net cash provided by financing activities.
|
|
NOTE 11
|
EMPLOYEE
BENEFIT PLAN
|
The Company participates in The Administaff 401(k) Plan,
which is a multi-employer 401(k) defined contribution plan (the
Plan). The Plan is available to all eligible full-time employees
over age 21 with six months of service. Employee
contributions are voluntary and are determined on an individual
basis with a maximum annual amount not to exceed the annual
Internal Revenue Service contribution limitations. All
participants are fully vested in their contributions. Employer
contributions to the Plan are made at the discretion of
management. There have been no employer contributions to the
Plan for the years ended December 31, 2007, 2008, and 2009.
F-28
For the years ended December 31, 2007, 2008, and 2009, the
Company recorded no current income tax expense (benefit) due to
the taxable losses for those periods.
A reconciliation of the Federal statutory tax rate of 34% to the
Companys effective tax rate at December 31, 2007,
2008, and 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Income tax (benefit) at the U.S. statutory tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
Change in valuation allowance
|
|
|
32.9
|
|
|
|
26.2
|
|
|
|
33.3
|
|
Spin-off of consolidated subsidiary
|
|
|
|
|
|
|
5.1
|
|
|
|
|
|
Other non-deductible expenses
|
|
|
1.1
|
|
|
|
2.7
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of the Companys deferred tax assets
are shown below (in thousands). A valuation allowance has been
established to offset the deferred tax assets, as realization of
such assets has not met the more-likely-than-not threshold. If
the Companys judgment changes and it is determined that
the Company will be able to realize these deferred tax assets,
the tax benefits relating to any reversal of the valuation
allowance on deferred tax assets at December 31, 2009 will
be accounted for as a reduction of income tax expense.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
24
|
|
|
$
|
58
|
|
Other
|
|
|
88
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
349
|
|
Noncurrent deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
|
9,277
|
|
|
|
14,586
|
|
Intangible assets
|
|
|
|
|
|
|
381
|
|
Deferred revenue
|
|
|
8
|
|
|
|
91
|
|
Research credits
|
|
|
|
|
|
|
87
|
|
Fixed assets
|
|
|
|
|
|
|
61
|
|
Other
|
|
|
284
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,569
|
|
|
|
15,323
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
9,681
|
|
|
|
15,672
|
|
Less valuation allowance
|
|
|
(9,585
|
)
|
|
|
(15,672
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
59
|
|
|
|
|
|
Accounts receivable, related party
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The net operating loss carryforward for federal income tax
purposes at December 31, 2008 and 2009 was approximately
$25,707,000 and $40,825,000, respectively, and expires through
2029, and for state income tax purposes at December 31,
2008 and 2009 was approximately $14,850,000 and $18,363,000,
respectively, and expires through 2019. The timing and manner in
which the Company can utilize operating loss carryforwards and
future tax deductions in any year is limited by provisions of
the Internal Revenue Code Section 382 regarding changes in
ownership of corporations. The Company believes an ownership
change occurred in 2008 as a result of the Series D
Preferred Stock financing round (Note 8) that will limit the
timing of the Companys use of its net operating loss
carryforwards. However, the Company does not believe this
limitation will cause its net operating loss carryforwards to
expire unused. Such limitation has reduced the 2008 federal
F-29
and state research and development tax credit carryforwards by
$817,000. The research and development credit is approximately
$573,000 as of December 31, 2009 and begins to expire in
2024.
The Company adopted the new accounting guidance related to
accounting for uncertainty in income taxes on January 1,
2007, which prescribes a recognition threshold and measurement
attribute criteria for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position
must be more-likely-than-not to be sustained upon examination by
taxing authorities. The following table summarizes the
Companys liability for uncertain tax positions during the
years ended December 31, 2007, 2008, and 2009 (in
thousands):
|
|
|
|
|
Gross unrecognized tax benefits at January 1, 2007
|
|
$
|
602
|
|
Increase in current year tax position
|
|
|
292
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2007
|
|
|
894
|
|
Decrease in prior year tax position
|
|
|
(435
|
)
|
Increase in current year tax position
|
|
|
285
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2008
|
|
|
744
|
|
Increase in current year tax position
|
|
|
27
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2009
|
|
$
|
771
|
|
|
|
|
|
|
The Company had approximately $894,000 of gross unrecognized tax
benefits as of December 31, 2007 that were recorded as a
reduction to deferred tax assets, which caused a corresponding
reduction in the Companys valuation allowance of $894,000.
During the year ended December 31, 2008, the Company
derecognized approximately $435,000 of the uncertain tax
position due to an Internal Revenue Service Section 382
change in ownership resulting from the Series D Preferred
Stock financing round (Note 8). The Company had
approximately $771,000 of gross unrecognized tax benefits as of
December 31, 2009 that were recorded as a reduction to
deferred tax assets, which caused a corresponding reduction in
the Companys valuation allowance of $771,000.
The Company does not anticipate that the amount of unrecognized
tax benefits as of December 31, 2009 will significantly
increase or decrease within the next twelve months.
The Company has not recognized any accrued interest or penalties
related to unrecognized tax benefits during the years ended
December 31, 2007, 2008, and 2009.
The Company is subject to taxation in the United States and
various state jurisdictions. The Company currently has no years
under examination by the Internal Revenue Service or any state
jurisdiction. Effectively, all of the Companys historical
tax years are subject to examination by the Internal Revenue
Service and various state jurisdictions due to the generation of
net operating loss carryforwards.
F-30
|
|
NOTE 13
|
SPIN-OFF
OF CONSOLIDATED SUBSIDIARY AND CONTINUING INVOLVEMENT
|
Spin-off
of Consolidated Subsidiary
The Companys ownership interest in its majority owned,
consolidated subsidiary from January 3, 2007 (date of
Viryds inception) to December 18, 2008 (date that the
Company completed a spin-off of Viryd) changed as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Transfers from (to) the noncontrolling interest:
|
|
|
|
|
|
|
|
|
Increase in Fallbrook Technologies Inc.s paid-in capital
for sale of 2,623 and 568 shares during the years ended
December 31, 2007 and 2008, respectively, of consolidated
subsidiary preferred stock
|
|
$
|
2,619
|
|
|
$
|
568
|
|
Decrease in Fallbrook Technologies Inc.s paid-in capital
for redemption of 350 shares of consolidated subsidiary
preferred stock
|
|
|
|
|
|
|
(350
|
)
|
Increase in Fallbrook Technologies Inc.s paid-in capital
for sale of 129 shares of consolidated subsidiary common
stock
|
|
|
|
|
|
|
6
|
|
Increase in Fallbrook Technologies Inc.s paid-in capital
for share-based compensation of consolidated subsidiary common
stock
|
|
|
|
|
|
|
169
|
|
Spin-off of investment in consolidated subsidiary
|
|
|
|
|
|
|
(3,012
|
)
|
|
|
|
|
|
|
|
|
|
Net transfers from (to) noncontrolling interest
|
|
$
|
2,619
|
|
|
$
|
(2,619
|
)
|
|
|
|
|
|
|
|
|
|
The private placement of Series D Preferred Stock
(Note 8) required the Company to spin-off its
remaining investment in Viryd and, on December 18, 2008,
the Company returned to Viryd 100,000 shares of Viryd
common stock and made a pro rata distribution to the
Companys stockholders of the remaining
9,228,000 shares of Viryd preferred stock held by the
Company. After the spin-off, the Company does not beneficially
own any shares of Viryd common stock. The Company evaluated the
spin-off of Viryd in accordance with ASC Topic
205-20,
Discontinued Operations. The Company expected to
recognize continuing direct cash flows from Viryd after the
spin-off related to service agreements between the entities, as
described below. The continuing cash inflows and associated cost
of service are insignificant to the Company. However, the
technology licensed from the Company is significant to the
competitive advantage of Viryd. In addition, the service
agreements and arrangements provide for support to Viryd from
the Companys executive officers and management for an
extended period that, in substance, enables the Company to have
significant continuing involvement in the operating and
financial policies of Viryd. As such, the Company determined
that it would not be appropriate to classify the spin-off of
Viryd as a discontinued operation due to the significant
continuing involvement of management, continuing cash flows and
the reliance of Viryd on the Companys intellectual
property assets. The consolidated statements of operations
include Viryds operations from January 3, 2007 (date
of inception) to December 18, 2008, which includes expenses
of $269,000 for the year ended December 31, 2007, and
revenues and expenses of $4,000 and $1,739,000, respectively,
for the year ended December 31, 2008.
The Company also considered whether Viryd, a development stage
enterprise, should be consolidated as a VIE under FIN 46R,
Consolidation of Variable Interest Entities (Codified in
ASC Topic 810, Consolidation). In its qualitative
analysis, the Company determined that Viryd is a VIE because it
could potentially lack sufficient equity at risk to fund its
development stage activities without additional subordinated
financial support. In order to determine who is the primary
beneficiary of the VIE, the Company performed a qualitative
assessment by considering the variable interests it holds
directly in Viryd, which includes the contractual licensing
arrangement with Viryd where the Company would receive certain
royalty payments if and when Viryd uses the Companys
licensed technology in their products once Viryd has reached
commercialization and begins selling products in a future phase,
as well as variable interests held by its related parties as its
own interests. As certain related parties of the Company do have
equity ownership interests in Viryd, the Company evaluated the
related party groups ownership interests in Viryd. The
Company determined that the related party group held a variable
interest related to the royalty arrangement with Viryd and also
held a variable
F-31
interest related to minority equity ownership by related
parties. As such, the Company evaluated the related party group
for determination of whether the group, as a whole, would be the
primary beneficiary of the VIE.
The Company considered the risks and associated variability that
Viryd was designed to create and pass along to its variable
interest holders. Viryd was designed to create risks associated
with the development and sale of their products, which includes
the technological feasibility of their products. This risk was
designed to be passed along to their equity holders. The Company
has no direct equity ownership interest in Viryd; however, there
is a minority equity ownership via related parties through
common board members and Company employees of approximately 22%,
as of December 31, 2009. In addition, the license
arrangement with Viryd was not created with the intention to
absorb the intended risks of Viryd (specifically as it pertains
to Viryds current phase of development where no sales are
being made and, thus, no royalties are being received by the
Company). After considering these factors, the Company has
concluded that neither the related party group nor the Company
itself within the related party group would be the primary
beneficiary of the VIE. As such, the Company has not
consolidated the financial information of Viryd subsequent to
its December 18, 2008 spin-off.
Support
Services Agreement
On February 18, 2008, the Company entered into a Support
Services Agreement with a three year term for engineering
services and project management, intellectual property
management, business development services, and accounting and
management services, as well as the use of certain office space,
and reimbursement of operating expenses paid by the Company on
behalf of Viryd, a majority owned subsidiary from
January 3, 2007 (date of inception) to December 18,
2008, and related party at December 31, 2008 and 2009.
On November 25, 2008, the Company entered into a seven year
Master Agreement with Viryd. According to terms of the Master
Agreement, the Support Services Agreement was amended to include
support in fundraising, introduction to contacts, preparation of
offering memoranda and presentations, assistance in raising
capital, and negotiation of legal documents. In addition, the
Master Agreement provides Viryd with access to the
Companys engineering facility. The Support Services
Agreement terminates in February 2011, unless terminated
earlier, as mutually agreed upon by both parties.
The Company recorded revenues for support services of $90,000,
$429,000, and $407,000 during the years ended December 31,
2007, 2008, and 2009, respectively, of which $90,000, $410,000,
and $0, respectively, has been eliminated as intercompany
transactions. The Company received payments of $33,000,
$431,000, and $444,000 for support services during the years
ended December 31, 2007, 2008, and 2009, respectively.
There was $37,000 and $0 due from Viryd under the Support
Services Agreement at December 31, 2008 and 2009,
respectively, of which $57,000 has been eliminated as an
intercompany transaction as of December 31, 2007. In
addition, the Company received payments from Viryd of $170,000,
$98,000, and $17,000 for reimbursement of direct expenses during
the years ended December 31, 2007, 2008, and 2009,
respectively.
Patent
Assignment Agreement
On February 20, 2008, in connection with the initial
capitalization of Viryd, the Company entered into a Patent
Assignment Agreement for certain wind technology with Viryd.
According to the terms of the agreement, Viryd must pay a
royalty equal to 3% of net revenues from the sale of product
that includes patented technology and 12% of net licensing
revenue from the patented technology until the expiration of the
patents. There have been no royalties received or receivable
under this agreement through December 31, 2008 and 2009.
License
Agreement
On February 14, 2008, the Company entered into a License
Agreement for certain transmission technology with Viryd.
According to the terms of the agreement, the Company shall
receive a license fee equal to the greater of 6% of revenues
from the sale of a licensed transmission, or 2% of revenues from
the sale of a
F-32
system that includes a licensed transmission, and the greater of
6% of revenues from the leases that include licensed
transmissions, or 25% of related gross profit.
The License Agreement was amended through the execution of the
Master Agreement, dated November 25, 2008. According to the
terms of the Master Agreement, the License Agreement is amended
by defining a transmission product, drive-train product, and
system product, and their respective sales prices, for purposes
of applying license fees. The Master Agreement also extended the
term of the License Agreement to November 25, 2015, with an
option to extend the term an additional seven years with a
renewal fee of $100,000. The Master Agreement amends the License
Agreement, providing for the right to grant sublicenses through
multiple tiers, at specified royalty rates, subject to certain
terms and conditions. There have been no royalties received or
receivable under the License Agreement, as amended by the Master
Agreement through December 31, 2008 and 2009.
Engineering
Service Agreement
On April 28, 2008, the Company entered into an Engineering
Services Agreement with Viryd. The final phase of the agreement
was completed in December 2008, with the delivery of a prototype.
The Engineering Services Agreement was amended through the
execution of a seven-year Master Agreement, dated
November 25, 2008, which may be extended an additional
seven years after the initial term for a renewal fee. According
to the terms of the Master Agreement, the Company shall provide,
no later than May 25, 2010, preproduction engineering
design drawings for a certain continuously variable transmission
as it exists as of the date of the Master Agreement, or if Viryd
provides an engineer to share the efforts through the expiration
of the Master Agreement, the Company, at a cost not to exceed
135% of fully burdened costs, shall provide detail design part
drawings for a solid model design by May 25, 2010.
The Company recorded revenue for engineering services of
$339,000 for the year ended December 31, 2008, which has
been eliminated as an intercompany transaction, and $88,000 for
the year ended December 31, 2009. The Company received
payments of $341,000 and $152,000 during the years ended
December 31, 2008 and 2009, respectively. There was $64,000
and $0 due from Viryd under the Engineering Services Agreement
at December 31, 2008 and 2009, respectively.
|
|
NOTE 14
|
COMMITMENTS
AND CONTINGENCIES
|
Lease
Commitments
The Company leased certain equipment under a capital lease that
expired in December 2009. The Company leases office space and a
warehouse building under noncancelable operating lease
agreements, which expire through March 2012. Certain operating
leases contain predetermined fixed escalations of minimum rent
during the term of the lease. Escalations are recognized in rent
expense on a straight-line basis over the lease term. The
difference between the amount charged to rent expense on a
straight-line basis and the lease payments made is recorded to
deferred rent. The leases generally provide for the lessee to
pay taxes, maintenance, insurance, and certain operating costs
of the leased property.
Future minimum payments under operating leases are as follows
(in thousands):
|
|
|
|
|
|
|
Operating
|
|
Year Ended December 31,
|
|
Leases
|
|
|
2010
|
|
$
|
308
|
|
2011
|
|
|
108
|
|
2012
|
|
|
23
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
439
|
|
|
|
|
|
|
Rent expense was $224,000, $308,000, and $308,000 for the years
ended December 31, 2007, 2008, and 2009, respectively.
F-33
Asset
Purchase Agreement
On February 15, 2008, the Company entered into a Tangible
Asset Purchase Agreement and an Intangible Asset Purchase
Agreement with Aftermarket Technology Corp. (ATC) to purchase
certain assets for cash in the aggregate amount of $2,700,000
plus a note in the amount of $1,952,000, with interest at rate
of 8%, due in 12 equal installments of $179,000 beginning
January 1, 2009, with all outstanding principal and accrued
interest due December 31, 2009. The outstanding principal
and accrued interest was paid in full in December 2008.
According to the terms of the agreements, the Company acquired
$3,952,000 in tangible manufacturing production line assets and
$700,000 in associated intangible trade secrets and
manufacturing processes. The acquisition was accounted for as a
purchase of assets and did not constitute a business.
In addition, on February 15, 2008, a Development License
Agreement dated May 13, 2005 and a Manufacturing License
Agreement dated August 9, 2006 between the Company and ATC
were terminated, and the Company recognized revenue for the
remaining deferred revenue balance of $733,000 related to the
$1,000,000 nonrefundable lump sum payment received upon entering
into the Manufacturing License Agreement and previously recorded
as deferred revenue.
Manufacturing
Supply Agreements
MTD
Products, Inc.
On March 12, 2008, the Company entered into a Manufacturing
Supply Agreement with MTD Products, Inc. (MTD), an unrelated
entity. The agreement would terminate on the earlier of an event
of default or December 31, 2013. According to the terms of
the agreement, the Company agreed to deliver the manufacturing
production line acquired from ATC to MTD for the manufacture of
transmissions incorporating the Companys technology. The
Company also agreed to purchase products at agreed upon prices
that MTD agreed to exclusively manufacture, subject to estimated
annual quantities and a production capacity of 440 units
per business day during the first twelve months of the
agreement. The agreement provided MTD a non-exclusive,
worldwide, transferable license to make, use, have made, and
sell product only to the Company utilizing the Companys
technology for the duration of the agreement. In the event of
default by the Company, MTD could sell to anyone product
utilizing the Companys technology and provide the Company
a royalty of 6% of all net sales of product sold by MTD.
During the third quarter of fiscal 2009, events and changes in
circumstances associated with the manufacturing agreement with
MTD led management to believe that the carrying amounts of
certain tangible and intangible assets associated with the CVT
production line being used by MTD may not be recoverable. Per
the terms of the agreement with MTD, there would be four cost
reduction phases. Each phase lasted 120 days, with the
first phase commencing on the day production began, which was in
September 2008. MTD had presented to the Company its cost
reduction production plan and based on the plan, the Company
expected that the N171 would be sold at a negative gross margin
for approximately the first eight months of production, as MTD
stabilized the supply base and manufacturing processes, and
would not achieve positive gross margin until the third phase,
which would have been by August 2009. Since the period
production commenced in September 2008, the Company monitored
MTDs progress against the production plan. By the third
quarter of 2009, MTD was still utilizing costly parts, and the
long supply chain lead time was contributing to the costly
manufacturing process. Accordingly, MTD was not able to achieve
the cost reductions specified in the production schedule in the
time frame anticipated. Unresolved negotiations about product
cost and unstable production levels between the Company and MTD
caused management to doubt whether the contractual relationship
would continue and whether the carrying value of the tangible
and intangible assets would be recovered before the end of their
previously estimated useful life.
As a result, the Company performed an impairment analysis and
determined that the undiscounted cash flows were less than the
carrying value of the assets, which then required the Company to
assess the fair value of the CVT machinery and equipment and
related intangibles. The Company utilized the market approach to
estimate fair value of the machinery and equipment. The market
approach was applied by obtaining quoted market prices for
selected similar assets (based on make, model, and serial
number) and applying the results to the remaining value of the
manufacturing assets. The fair value indicated by this approach
resulted in an
F-34
estimated impairment of $1,537,000 during the third quarter of
fiscal 2009, which was recorded in cost of product sales. The
Company determined that adjustments that were based on
unobservable inputs in the market approach, as it relates to
guidance under ASC Topic 820, were significant to the fair value
measurement such that the overall fair value measurement is
considered a Level 3 measurement.
The Company also determined that the associated trade secrets
and manufacturing processes used by MTD, with a carrying value
of $490,000 as of September 30, 2009, were obsolete due to
the decision in the third quarter of fiscal 2009 to cease
production of the product with which it was associated before
the end of the intangible assets previously estimated
useful life. As a result, the Company recognized an impairment
loss of $490,000 on these intangible assets during the third
quarter of fiscal 2009, which was recorded in cost of product
sales.
On October 30, 2009, the Company terminated the
Manufacturing Supply Agreement with MTD. As part of the
termination agreement, the Company agreed to transfer the
machinery and equipment to MTD. As a result, during the fourth
quarter of fiscal 2009, the Company recorded an additional
$1,455,000 loss on disposal of machinery and equipment for the
remaining net book value.
Tri Star
Group
On January 9, 2009, the Company entered into a Professional
Services Agreement with Tri Star Group (Tri Star), an unrelated
Shanghai China company, to explore the addition of a second
manufacturing partner for future products using NuVinci
technology. Tri Star agreed to provide information and
consulting regarding manufacturing techniques for the
Companys future products on an as-requested basis.
Additionally, Tri Star agreed to prepare a quote for
manufacturing new products based on the volume estimates
provided by the Company. The agreement provided that successful
experiences in these preliminary projects would permit the
Company to consider Tri Star, in good faith, for the manufacture
and sale of future products under its intellectual property
rights.
Effective January 30, 2010, the Company and Tri Star
entered into a manufacturing supply agreement under which Tri
Star will manufacture the next generation bicycle transmission
on a contract basis and will participate with the Company in the
sale of the next generation bicycle transmission in China. Tri
Star will provide the manufacturing facility and general purpose
equipment, Tri Star and the Company will share the cost of
tooling, and the Company will bear the cost of dedicated special
purpose equipment needed for assembly of the product. The
Company has issued a blanket purchase order in the range of
$8,000,000 to $12,000,000 for forecasted production requirements
from May 2010 through August 2011. Regular orders against this
blanket purchase order will be provided to Tri Star based on
orders received and forecasted demand.
Professional
Services Agreements with Related Parties
In September 2008, the Company entered into a professional
services agreement, for a term of one year unless terminated
earlier, with an entity affiliated with the Companys vice
president of operations. This agreement provides for payment of
a fee plus approved expenses for marketing and communications
strategy services. During the years ended December 31, 2008
and 2009, amounts paid to this affiliated entity were not
significant.
In February 2009, the Company entered into a professional
services agreement, for a term of one year unless terminated
earlier, with an entity affiliated with a member of the
Companys board of directors. This agreement provides for
payment of a fee plus approved expenses for product development
and manufacturing consulting services. During the year ended
December 31, 2009, the Company paid this affiliated entity
$30,000, which was recognized as consulting expense within
selling, general and administrative expenses in the consolidated
statements of operations.
Consulting
Agreement
In January 2010, the Company entered into a two year consulting
agreement with Advanced Strategic Leadership Limited (ASL), an
unrelated Shanghai company, under which ASL will provide
consulting and market development services in exchange for a
monthly fee of $10,000 per month, 2% of net sales procured
F-35
by ASL each calendar quarter during the term of the agreement,
warrants to purchase 50,000 shares of common stock, and,
upon reaching certain performance milestones, contingent
warrants to purchase up to 750,000 shares of common stock
(Note 9). Under the consulting agreement, services and
deliverables that ASL will provide include a China electric
vehicle market analysis and future forecast; support for the
establishment of an electric vehicle business; and support for
building brand/product introduction.
|
|
NOTE 15
|
SEGMENT
INFORMATION
|
The Company operated in one reportable segment from inception
through December 2006 and again after December 2008. From the
date when Viryd was formed on January 3, 2007 through
December 18, 2008, when the Company completed a spin-off of
its majority ownership of Viryd, the Company had two operating
segments: Wind Energy Application (Viryd) and Other
Applications. The key financial drivers that the Companys
chief operating decision maker, the Chief Executive Officer,
uses are revenues, operating loss, interest and dividend income,
interest expense, depreciation and amortization expense, and
expenditures for long-lived assets to track uses of cash by each
segment to make operating decisions, allocate resources, and
capital raising decisions within the segments. These segments
were managed separately because each has separate and distinct
customers requiring different marketing strategies and services.
Transfers between the segments were established at intercompany
selling prices. Each segment raises capital independently from
one another.
Since January 2007, the Other Applications segment distributes
products to customers throughout North America, Europe,
Australia, and Asia. The reportable segments accounting
policies are the same as those of the Company.
F-36
The following table presents operations by each reportable
segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other applications
|
|
$
|
804
|
|
|
$
|
3,027
|
|
|
$
|
1,044
|
|
Wind energy application
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Intercompany elimination
|
|
|
(90
|
)
|
|
|
(748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
714
|
|
|
$
|
2,283
|
|
|
$
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-company revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other applications
|
|
$
|
90
|
|
|
$
|
748
|
|
|
$
|
|
|
Wind energy application
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany elimination
|
|
|
(90
|
)
|
|
|
(748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other applications
|
|
$
|
(6,812
|
)
|
|
$
|
(8,913
|
)
|
|
$
|
(16,739
|
)
|
Wind energy application
|
|
|
(283
|
)
|
|
|
(1,921
|
)
|
|
|
|
|
Intercompany elimination
|
|
|
90
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,005
|
)
|
|
$
|
(10,086
|
)
|
|
$
|
(16,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other applications
|
|
$
|
433
|
|
|
$
|
84
|
|
|
$
|
87
|
|
Wind energy application
|
|
|
14
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
447
|
|
|
$
|
127
|
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other applications
|
|
$
|
|
|
|
$
|
(571
|
)
|
|
$
|
(574
|
)
|
Wind energy application
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(597
|
)
|
|
$
|
(574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other applications
|
|
$
|
324
|
|
|
$
|
999
|
|
|
$
|
1,234
|
|
Wind energy application
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
324
|
|
|
$
|
1,028
|
|
|
$
|
1,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets, end of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other applications
|
|
$
|
8,365
|
|
|
$
|
25,314
|
|
|
$
|
13,526
|
|
Wind energy application
|
|
|
2,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,855
|
|
|
$
|
25,314
|
|
|
$
|
13,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to third parties are attributed to continents based on
customer location. Geographic information about revenues is
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
681
|
|
|
$
|
2,049
|
|
|
$
|
849
|
|
Europe
|
|
|
33
|
|
|
|
206
|
|
|
|
180
|
|
Australia
|
|
|
|
|
|
|
15
|
|
|
|
3
|
|
Asia
|
|
|
|
|
|
|
13
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
714
|
|
|
$
|
2,283
|
|
|
$
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
During the years ended December 31, 2007, 2008, and 2009,
revenues to external customers exceeded 10% of total revenues,
as follows (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
2009
|
|
|
%
|
|
|
Revenues from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
658
|
|
|
|
92
|
%
|
|
$
|
1,164
|
|
|
|
51
|
%
|
|
$
|
|
|
|
|
|
|
Customer B
|
|
|
|
|
|
|
|
|
|
|
330
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
Customer C
|
|
|
|
|
|
|
|
|
|
|
254
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
Customer D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
|
|
|
|
11
|
%
|
Customer E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
10
|
%
|
Customer F
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
|
|
10
|
%
|
Related party revenues
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
1
|
%
|
|
|
512
|
|
|
|
49
|
%
|
All other customers
|
|
|
56
|
|
|
|
8
|
%
|
|
|
516
|
|
|
|
23
|
%
|
|
|
207
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
714
|
|
|
|
100
|
%
|
|
$
|
2,283
|
|
|
|
100
|
%
|
|
$
|
1,044
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 16
|
FINANCIAL
STATEMENT RESTATEMENTS
|
Restatement
of financial statements for 2007 and 2008
Since inception through December 31, 2008, the Company had
previously elected to value its common stock, options, and
warrants using a method not in accordance with GAAP. The Company
had previously determined fair value as allowed by Internal
Revenue Code Section 409A, using a probability-weighted
expected return valuation method. With the assistance of an
unrelated valuation specialist, the Company has since reassessed
the fair value of the Companys common stock in accordance
with GAAP by determining the total enterprise value and then
allocating a portion of that total enterprise value to the
common stock. See Note 10 for further discussion of the
methodology used to determine the fair value of the
Companys common stock.
The Company has restated the consolidated financial statements
as of and for the years ended December 31, 2007 and 2008,
to correct the recognition of share-based compensation expense,
warrants, and debt discounts.
The net effects of the restatements on previously reported net
loss for the years ended December 31, 2007 and 2008 by the
nature of the adjustment are as follows (in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
Basic and
|
|
|
|
|
|
Basic and
|
|
|
|
Net
|
|
|
Diluted Loss
|
|
|
Net
|
|
|
Diluted Loss
|
|
|
|
Loss
|
|
|
Per Share
|
|
|
Loss
|
|
|
Per Share
|
|
|
As previously reported
|
|
$
|
(6,465
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(10,530
|
)
|
|
$
|
(0.92
|
)
|
Share-based compensation expense
|
|
|
(93
|
)
|
|
|
|
|
|
|
(244
|
)
|
|
|
(0.02
|
)
|
Interest expense on warrants, convertible debt, and beneficial
conversion feature
|
|
|
|
|
|
|
|
|
|
|
218
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
(6,558
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(10,556
|
)
|
|
$
|
(0.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion charge on Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
(1,376
|
)
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fallbrook Technologies Inc. common
stockholders, as restated
|
|
$
|
(6,558
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(11,932
|
)
|
|
$
|
(1.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
The net effects of the restatements on previously reported
stockholders equity in the consolidated balance sheets as
of December 31, 2007 and 2008 by the nature of the
adjustment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
|
As Restated
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
$
|
24,721
|
|
|
$
|
48,730
|
|
|
$
|
24,721
|
|
|
$
|
48,566
|
|
Common stock
|
|
|
11
|
|
|
|
12
|
|
|
|
11
|
|
|
|
12
|
|
Additional paid-in capital
|
|
|
518
|
|
|
|
621
|
|
|
|
1,410
|
|
|
|
1,826
|
|
Accumulated deficit
|
|
|
(19,172
|
)
|
|
|
(27,220
|
)
|
|
|
(20,064
|
)
|
|
|
(28,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity, before noncontrolling interest
|
|
$
|
6,078
|
|
|
$
|
22,143
|
|
|
$
|
6,078
|
|
|
$
|
22,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net effects of the restatements on previously reported
balances in the consolidated statements of equity for the years
ended December 31, 2007 and 2008 by the nature of the
adjustment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
As Restated
|
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
Share-based compensation
|
|
$
|
200
|
|
|
$
|
78
|
|
|
$
|
293
|
|
|
$
|
153
|
|
Issuance of Series D Preferred Stock, net
|
|
|
|
|
|
|
19,212
|
|
|
|
|
|
|
|
19,237
|
|
Beneficial conversion charge on Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,376
|
)
|
Accretion of beneficial conversion charge on Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,376
|
|
Beneficial conversion feature for convertible note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
Warrants exchanged for consolidated subsidiary preferred stock
|
|
|
|
|
|
|
479
|
|
|
|
|
|
|
|
212
|
|
Spin-off of noncontrolling interest in consolidated subsidiary
|
|
|
|
|
|
|
2,003
|
|
|
|
|
|
|
|
3,012
|
|
Spin-off of net assets to noncontrolling interest in
consolidated subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(865
|
)
|
F-39
Classification
Corrections
In connection with the Companys anticipated filing of its
IPO, certain expenses as originally reported have been
reclassified in the consolidated statements of operations to be
consistent with the classifications adopted in 2009, with no net
impact on the 2007 and 2008 reported net loss,
stockholders equity, and cash flows. These
reclassifications allocated certain research and development and
selling, general and administrative expenses to cost of revenues
expense categories. Revenues were disaggregated into more
detailed revenue lines. Stock-based compensation expense and
depreciation and amortization were allocated to cost of
revenues, research and development, and selling, general and
administrative expenses. The following is a summary of the
impact of the reclassifications and restatements on the
accompanying consolidated statements of operations (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
|
As Restated
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
|
|
|
$
|
320
|
|
|
$
|
|
|
|
$
|
320
|
|
License and engineering service fees
|
|
|
595
|
|
|
|
1,931
|
|
|
|
|
|
|
|
|
|
License fees and royalties
|
|
|
|
|
|
|
|
|
|
|
295
|
|
|
|
914
|
|
Engineering services
|
|
|
|
|
|
|
|
|
|
|
327
|
|
|
|
998
|
|
Related party revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Other
|
|
|
119
|
|
|
|
32
|
|
|
|
92
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
714
|
|
|
|
2,283
|
|
|
|
714
|
|
|
|
2,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
557
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,158
|
|
Cost of license fees and royalties
|
|
|
|
|
|
|
|
|
|
|
1,005
|
|
|
|
368
|
|
Cost of engineering services
|
|
|
|
|
|
|
|
|
|
|
822
|
|
|
|
488
|
|
Cost of related party revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Cost of other revenue
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
|
|
|
|
557
|
|
|
|
1,892
|
|
|
|
2,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
714
|
|
|
|
1,726
|
|
|
|
(1,178
|
)
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,529
|
|
|
|
6,867
|
|
|
|
2,985
|
|
|
|
5,939
|
|
Selling, general and administrative
|
|
|
3,097
|
|
|
|
4,677
|
|
|
|
2,842
|
|
|
|
4,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,626
|
|
|
|
11,544
|
|
|
|
5,827
|
|
|
|
10,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6,912
|
)
|
|
|
(9,818
|
)
|
|
|
(7,005
|
)
|
|
|
(10,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
447
|
|
|
|
(712
|
)
|
|
|
447
|
|
|
|
(470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,465
|
)
|
|
$
|
(10,530
|
)
|
|
$
|
(6,558
|
)
|
|
$
|
(10,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount related to beneficial conversion charge on Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fallbrook Technologies Inc. common
stockholders
|
|
$
|
(6,465
|
)
|
|
$
|
(10,530
|
)
|
|
$
|
(6,558
|
)
|
|
$
|
(11,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per sharebasic and diluted
|
|
$
|
(0.57
|
)
|
|
$
|
(0.92
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(1.04
|
)
|
Weighted average number of shares used in per share
calculationbasic and diluted
|
|
|
11,437
|
|
|
|
11,462
|
|
|
|
11,437
|
|
|
|
11,462
|
|
Additionally, certain balance sheet reclassifications within
current assets have been made, including consolidating a nominal
interest receivable amount into prepaid expenses and other
current assets, as well as reclassing certain certificates of
deposit out of cash and cash equivalents and into short-term
investments based on their original maturity dates.
Reclassifications between liability accounts have also been made
to properly classify long-term liabilities, such as reclassing
deferred rent and deferred revenue to long-term
F-40
liabilities based on their long-term nature. The following is a
summary of the impact of the reclassifications on the
accompanying consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
As
|
|
|
Reported
|
|
Restated
|
|
|
December 31, 2008
|
|
December 31, 2008
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,445
|
|
|
$
|
14,565
|
|
Investments
|
|
|
1,820
|
|
|
|
3,700
|
|
Prepaid expenses and other current assets
|
|
|
154
|
|
|
|
154
|
|
Accrued expenses
|
|
|
572
|
|
|
|
556
|
|
Deferred revenue
|
|
|
88
|
|
|
|
65
|
|
Total current liabilities
|
|
|
3,171
|
|
|
|
3,132
|
|
Deferred rent
|
|
|
|
|
|
|
16
|
|
Deferred revenue
|
|
|
|
|
|
|
23
|
|
Reclassifications within the consolidated balance sheets
resulted in certain reclassifications within the consolidated
statements of cash flows, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
|
As Restated
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Net cash used in operating activities
|
|
$
|
(5,858
|
)
|
|
$
|
(9,428
|
)
|
|
$
|
(5,860
|
)
|
|
$
|
(9,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
8,071
|
|
|
|
(5,426
|
)
|
|
|
8,073
|
|
|
|
(7,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,612
|
|
|
|
23,256
|
|
|
|
2,612
|
|
|
|
23,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
4,825
|
|
|
|
8,402
|
|
|
|
4,825
|
|
|
|
6,522
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
3,218
|
|
|
|
8,043
|
|
|
|
3,218
|
|
|
|
8,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
8,043
|
|
|
$
|
16,445
|
|
|
$
|
8,043
|
|
|
$
|
14,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-41
FALLBROOK
TECHNOLOGIES INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(See Note 2)
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,213
|
|
|
$
|
1,542
|
|
|
|
|
|
Trade accounts receivable, net of allowance for doubtful
accounts of $1 and $5 at December 31, 2009 and
June 30, 2010, respectively
|
|
|
11
|
|
|
|
2
|
|
|
|
|
|
Accounts receivable, related party
|
|
|
|
|
|
|
24
|
|
|
|
|
|
Inventory
|
|
|
151
|
|
|
|
101
|
|
|
|
|
|
Deferred offering costs
|
|
|
636
|
|
|
|
3,820
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
389
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,400
|
|
|
|
5,857
|
|
|
|
|
|
Deferred contract costs
|
|
|
189
|
|
|
|
371
|
|
|
|
|
|
Equipment and leasehold improvements, net
|
|
|
465
|
|
|
|
666
|
|
|
|
|
|
Intangible assets, net
|
|
|
2,185
|
|
|
|
2,339
|
|
|
|
|
|
Inventory
|
|
|
260
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
27
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,526
|
|
|
$
|
9,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
401
|
|
|
$
|
1,529
|
|
|
|
|
|
Accrued expenses
|
|
|
978
|
|
|
|
1,968
|
|
|
|
|
|
Deferred revenue
|
|
|
164
|
|
|
|
12
|
|
|
|
|
|
Line of credit
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,543
|
|
|
|
5,509
|
|
|
|
|
|
Deferred rent
|
|
|
14
|
|
|
|
16
|
|
|
|
|
|
Deferred revenue
|
|
|
256
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,813
|
|
|
|
6,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
Convertible preferred stock, aggregate liquidation preference of
$56,502 at December 31, 2009 and June 30, 2010
|
|
|
52,456
|
|
|
|
52,456
|
|
|
$
|
|
|
Common stock, $0.001 par value; 140,000 shares
authorized and 11,661 shares issued and outstanding at
December 31, 2009 and June 30, 2010;
112,768 shares outstanding pro forma at June 30, 2010
|
|
|
12
|
|
|
|
12
|
|
|
|
113
|
|
Additional paid-in capital
|
|
|
2,732
|
|
|
|
3,018
|
|
|
|
55,373
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Accumulated deficit
|
|
|
(45,487
|
)
|
|
|
(52,213
|
)
|
|
|
(52,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
9,713
|
|
|
|
3,271
|
|
|
$
|
3,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
13,526
|
|
|
$
|
9,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
F-42
FALLBROOK
TECHNOLOGIES INC.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
327
|
|
|
$
|
36
|
|
License fees and royalties
|
|
|
6
|
|
|
|
6
|
|
Engineering services
|
|
|
53
|
|
|
|
227
|
|
Related party revenues
|
|
|
286
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
672
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
1,697
|
|
|
|
330
|
|
Cost of engineering services
|
|
|
37
|
|
|
|
97
|
|
Cost of related party revenues
|
|
|
395
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
2,129
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(1,457
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,656
|
|
|
|
3,046
|
|
Selling, general and administrative
|
|
|
2,332
|
|
|
|
3,568
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,988
|
|
|
|
6,614
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6,445
|
)
|
|
|
(6,675
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
64
|
|
|
|
4
|
|
Interest expense
|
|
|
(49
|
)
|
|
|
(44
|
)
|
Transaction loss on foreign currency exchange
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
15
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,430
|
)
|
|
$
|
(6,726
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per sharebasic and diluted
|
|
$
|
(0.55
|
)
|
|
$
|
(0.58
|
)
|
Weighted average shares outstandingbasic and diluted
|
|
|
11,654
|
|
|
|
11,661
|
|
Pro forma net loss per sharebasic and diluted
|
|
|
|
|
|
$
|
|
|
Pro forma weighted average shares outstandingbasic and
diluted
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
F-43
FALLBROOK
TECHNOLOGIES INC.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,430
|
)
|
|
$
|
(6,726
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Provision for bad debts
|
|
|
2
|
|
|
|
4
|
|
Provision for lower of cost or market write-downs and inventory
obsolescence
|
|
|
673
|
|
|
|
261
|
|
Depreciation and amortization
|
|
|
675
|
|
|
|
190
|
|
Share-based compensation
|
|
|
193
|
|
|
|
284
|
|
Transaction loss on foreign currency exchange
|
|
|
|
|
|
|
11
|
|
Net changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
98
|
|
|
|
5
|
|
Accounts receivable, related party
|
|
|
45
|
|
|
|
(24
|
)
|
Inventory
|
|
|
(1,052
|
)
|
|
|
48
|
|
Prepaid expenses and other current assets
|
|
|
(292
|
)
|
|
|
(30
|
)
|
Deferred contract costs
|
|
|
|
|
|
|
(180
|
)
|
Other assets
|
|
|
|
|
|
|
(30
|
)
|
Accounts payable
|
|
|
(180
|
)
|
|
|
4
|
|
Accrued expenses
|
|
|
(144
|
)
|
|
|
135
|
|
Deferred revenue
|
|
|
(59
|
)
|
|
|
86
|
|
Deferred rent
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(6,472
|
)
|
|
|
(5,960
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of equipment and leasehold improvements
|
|
|
(332
|
)
|
|
|
(266
|
)
|
Proceeds from sale of equipment
|
|
|
6
|
|
|
|
|
|
Purchases of intangible assets and costs incurred for patents
|
|
|
(102
|
)
|
|
|
(39
|
)
|
Purchases of
held-to-maturity
investments
|
|
|
(8,080
|
)
|
|
|
|
|
Proceeds from maturities of
held-to-maturity
investments
|
|
|
1,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(6,551
|
)
|
|
|
(305
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Repayments of capital lease obligation
|
|
|
(5
|
)
|
|
|
|
|
Deferred offering costs
|
|
|
|
|
|
|
(1,404
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(5
|
)
|
|
|
(1,404
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(13,028
|
)
|
|
|
(7,671
|
)
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
14,565
|
|
|
|
9,213
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
1,537
|
|
|
$
|
1,542
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
F-44
FALLBROOK
TECHNOLOGIES INC.
UNAUDITED
|
|
NOTE 1
|
DESCRIPTION
OF BUSINESS
|
Fallbrook Technologies Inc. (the Company) has developed patented
mechanical technology, sold under the
NuVinci®
brand, which is designed to improve the overall performance and
efficiency of mechanical systems that require variation between
the input speed of a primary drive and the output speed required
to operate the system or its accessory devices. The
Companys NuVinci technology is a new type of
continuously variable transmission (CVT) that can be used in a
wide variety of applications. The Companys principal
operations of selling the NuVinci CVT products through a
contract manufacturing arrangement commenced in March 2008. The
technology is currently being sold in the global market for
bicycle transmissions (rear wheel hubs) and the Company is
designing and developing applications for a selected set of
other end markets, including automotive accessories (such as air
conditioners, alternators, and superchargers), electric vehicles
(primary transmissions), lawn care equipment (primary
transmissions), and wind power systems (turbine drive trains).
|
|
NOTE 2
|
BASIS OF
PRESENTATION
|
Condensed
Consolidated Financial Statements
The condensed consolidated financial statements as of
June 30, 2010 and for the six months ended June 30,
2009 and 2010 are unaudited. In the opinion of management, the
unaudited condensed consolidated financial statements include
all adjustments, consisting of normal recurring adjustments,
necessary for the fair presentation of the financial position
and results of operations as of such date and for such periods.
Results of interim periods are not necessarily indicative of the
results to be expected for the entire fiscal year. Certain
information in footnote disclosures normally included in annual
financial statements has been condensed or omitted for the
interim periods presented, in accordance with the rules and
regulations of the Securities and Exchange Commission (SEC) for
interim financial statements.
The Company has incurred net losses from operations since its
inception and has accumulated a deficit. Management expects
operating losses to continue through the foreseeable future
until additional product lines are manufactured and
commercialized. Management is pursuing an Initial Public
Offering (IPO) to fund projected future working capital
requirements, future growth, and future operating losses.
However, if the offering is not successful, management has plans
to pursue one or more private equity offerings, which the
Company believes will support ongoing operations until product
sales related to the core technology are at a level that can
fund operations. The Company raised $6,000,000 in August 2010
from a private equity offering by issuing Series E
Preferred Stock (Note 7) to existing and new, foreign
investors, in an initial closing of the private equity round.
The Company expects to raise additional capital as part of this
private equity offering. If the subsequent closings of the
private equity round are delayed, the Company may curtail its
development efforts to only focus on the development and
commercialization of the bicycle and small wind turbine end
markets. The failure of the Company to obtain sufficient funds
on acceptable terms when needed could have a material adverse
effect on the Companys business, results of operations,
and financial condition.
Management has evaluated and disclosed subsequent events and
transactions that occurred after June 30, 2010 up through
August 27, 2010, the date the condensed consolidated
financial statements were available to be issued.
Pro Forma
Balance Sheet and Earnings (Loss) Per Share
The pro forma balance sheet data presented as of June 30,
2010 reflects the conversion of all outstanding shares of
convertible preferred stock as of that date into
101,107,000 shares of common stock, which will occur
immediately prior to closing of the proposed IPO, as if the
conversion had occurred on June 30, 2010. The pro forma
basic and diluted net loss per common share and the pro forma
weighted-average number of shares for the six months ended
June 30, 2010 have been computed to give effect to exercise
of
F-45
warrants prior to the closing of the IPO, which would otherwise
terminate if not exercised, and the assumed conversion of the
Companys convertible preferred stock (using the
if-converted method) into common stock as though the conversion
had occurred on the original dates of issuance (weighted for the
period outstanding).
Foreign
Currency Translation
The functional currency of the Companys foreign subsidiary
is the local currency. Accordingly, assets and liabilities
denominated in foreign currencies are translated into United
States dollars at the exchange rate in effect on the balance
sheet date. Revenues and expenses are translated at the average
rate of exchange for the period. Translation adjustments are
recorded as a component of other comprehensive loss in equity in
the consolidated balance sheets. Net gains or losses resulting
from foreign currency exchange transactions are included as a
component of other income (expense) in the consolidated
statements of operations. Cash flows of the consolidated foreign
subsidiary are translated to United States dollars using average
exchange rates for the period. The Company reports the effect of
exchange rate changes on cash balances held in foreign
currencies as a separate item in the reconciliation of the
changes in cash and cash equivalents during the period.
Accounting
Standards Updates
In June 2009, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS)
No. 167, Amendments to FASB Interpretation No. (FIN)
46(R), (codified in ASC Topic
810-10), as
amended by ASU
2009-17,
Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities, which amends the
consolidation guidance that applies to variable interest
entities (VIE). The amendments significantly affect the overall
consolidation analysis under FIN 46 (revised December
2003), Consolidation of Variable Interest Entities, or
FIN 46(R), to improve financial reporting by enterprises
involved with VIEs and to provide more relevant and
reliable information to users of financial statements. ASC Topic
810-10, as
amended by ASU
2009-17,
carries forward the scope of FIN 46(R), with the addition
of entities previously considered qualifying special-purpose
entities, as the concept of these entities was eliminated in
SFAS No. 166, Accounting for Transfers of Financial
Assets (ASC Topic 860). The principal objectives of these
new disclosures are to provide financial statement users with an
understanding of:
|
|
a) |
The significant judgments and assumptions made by an enterprise
in determining whether it must consolidate a VIE
and/or
disclose information about its involvement in a VIE;
|
|
|
b) |
The nature of restrictions on a consolidated VIEs assets
and on the settlement of its liabilities reported by an
enterprise in its statement of financial position, including the
carrying amounts of such assets and liabilities;
|
|
|
c) |
The nature of, and changes in, the risks associated with an
enterprises involvement with the VIE; and
|
|
|
d) |
How an enterprises involvement with the VIE affects the
enterprises financial position, financial performance, and
cash flows.
|
The Company adopted the new accounting literature specified in
ASC Topic 810, Consolidation, on January 1, 2010.
The adoption of this new literature did not have a material
effect on the consolidated financial statements.
In April 2010, the FASB issued ASU
2010-17,
Milestone Method of Revenue Recognition, which
establishes a revenue recognition model for contingent
consideration that is payable upon the achievement of an
uncertain future event, referred to as a milestone. The scope of
the ASU is limited to research or development arrangements and
requires an entity to record the milestone payment in its
entirety in the period received if the milestone meets all the
necessary criteria to be considered substantive. However,
entities would not be precluded from making an accounting policy
election to apply another appropriate accounting policy that
results in the deferral of some portion of the arrangement
consideration. The ASU is effective for fiscal years (and
interim periods within those fiscal years) beginning on or after
June 15, 2010. The Company will apply this guidance
prospectively to milestones achieved after adoption on
January 1, 2011 for research or development arrangements
involving deliverables or units of accounting in which the
Company satisfies its
F-46
performance obligations over time and all or a portion of the
arrangement consideration is contingent upon the achievement of
a milestone. The Company does not believe the adoption of ASU
2010-17 will
have a material impact on the consolidated financial statements.
|
|
NOTE 3
|
EARNINGS
(LOSS) PER SHARE
|
Basic earnings (loss) per share is calculated by dividing the
reported earnings (loss) by the weighted average number of
common shares outstanding for the period, without consideration
for common stock equivalents. Diluted earnings (loss) per share
reflect the additional dilution from all potentially dilutive
securities outstanding for the period. For purposes of this
calculation, preferred stock is considered to be common stock
equivalents on an if-converted basis and stock options and
warrants are considered to be common stock equivalents using the
treasury stock method and are only included in the calculation
of diluted earnings (loss) per share when their effect is not
antidilutive. There was no adjustment to net loss and weighted
average common shares outstanding to compute basic and diluted
earnings (loss) per share.
Potentially dilutive securities not included in the calculation
of diluted earnings (loss) per share because to do so would be
antidilutive are as follows (in common equivalent shares) (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Weighted-average preferred stock, as converted
|
|
|
91,087
|
|
|
|
101,107
|
|
Weighted-average common stock options
|
|
|
8,611
|
|
|
|
12,980
|
|
Weighted-average common stock warrants
|
|
|
2,004
|
|
|
|
5,244
|
|
Pro Forma
Earnings (Loss) Per Share
The pro forma basic and diluted earnings (loss) per share is
calculated by dividing the earnings (loss) by the weighted
average number of common shares outstanding for the period plus
the weighted average number of common shares resulting from the
exercise
of
warrants prior to the closing of the IPO, which would otherwise
terminate if not exercised, and the assumed conversion of the
outstanding shares of convertible preferred stock. The assumed
conversion is calculated using the if-converted method, as if
such conversion had occurred as of the beginning of the period
presented or as of the original issuance date, if later. Pro
forma basic and diluted earnings (loss) per share has been
computed to give effect to the exercise of these warrants prior
to the closing of the IPO and the assumed conversion of
convertible preferred stock into common stock upon the closing
of the IPO on an if-converted basis for the six months ended
June 30, 2010 as follows (in thousands):
|
|
|
|
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
Pro FormaDenominator:
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
11,661
|
|
Pro forma adjustments to reflect assumed weighted-average effect
of conversion of convertible preferred stock
|
|
|
101,107
|
|
Pro forma adjustments to reflect assumed weighted-average effect
of warrants
|
|
|
|
|
|
|
|
|
|
Pro forma weighted-average shares used in computing pro forma
basic and diluted earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
F-47
|
|
NOTE 4
|
BALANCE
SHEET DETAILS
|
Deferred
Offering Costs
Deferred offering costs consist of the following as of
December 31, 2009 and June 30, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Legal fees
|
|
$
|
519
|
|
|
$
|
1,641
|
|
Underwriting fees
|
|
|
|
|
|
|
929
|
|
Accounting fees
|
|
|
108
|
|
|
|
950
|
|
Printer and filing fees
|
|
|
|
|
|
|
265
|
|
Other
|
|
|
9
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
636
|
|
|
$
|
3,820
|
|
|
|
|
|
|
|
|
|
|
Accrued
Expenses
Accrued expenses consist of the following as of
December 31, 2009 and June 30, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Deferred offering costs
|
|
$
|
476
|
|
|
$
|
1,280
|
|
Accrued vacation
|
|
|
262
|
|
|
|
321
|
|
Consultants
|
|
|
43
|
|
|
|
94
|
|
Accounting and legal fees
|
|
|
109
|
|
|
|
83
|
|
Accrued compensation
|
|
|
|
|
|
|
66
|
|
Warranty reserve
|
|
|
16
|
|
|
|
15
|
|
Other
|
|
|
72
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
978
|
|
|
$
|
1,968
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5
|
INTANGIBLE
ASSETS
|
Intangible assets consist of the following as of
December 31, 2009 and June 30, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Patents:
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
2,567
|
|
|
$
|
2,789
|
|
Accumulated amortization
|
|
|
(382
|
)
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
2,185
|
|
|
$
|
2,339
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the six months ended June 30, 2009
and 2010 was $127,000, and $68,000, respectively. As of
June 30, 2010, estimated amortization expense for the
remainder of fiscal year 2010 and each of the subsequent years
is as follows (in thousands), which could be affected by
additions, dispositions, or impairments:
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2010 (remainder of the fiscal year)
|
|
$
|
73
|
|
2011
|
|
|
146
|
|
2012
|
|
|
146
|
|
2013
|
|
|
146
|
|
2014
|
|
|
146
|
|
2015
|
|
|
146
|
|
F-48
On March 23, 2010, the revolving line of credit was amended
to decrease the principal amount available from $5,000,000 to
$3,000,000, fully collateralize the line of credit against
assets held on account with the lender by a stockholder and
director of the Company, remove restrictive financial covenants,
and decrease the interest rate to the base rate, which is a
fluctuating rate equal to the highest of the prime rate, LIBOR
plus 1.5%, or the Federal Funds Rate plus 1.5%. The highest rate
was 3.25% under the prime rate as of June 30, 2010. Up to
$2,000,000 of the line of credit may be used to finance standby
letters of credit, with maximum maturities of one year. The line
of credit expires on December 31, 2010. The line of credit
provides for a quarterly unused commitment fee of 0.375% per
annum on the average daily unused amount. Outstanding borrowings
under the line of credit were $2,000,000 at December 31,
2009 and June 30, 2010. On August 2, 2010, an
additional $500,000 was borrowed against the line of credit to
fund working capital requirements.
|
|
NOTE 7
|
CONVERTIBLE
PREFERRED STOCK
|
As of June 30, 2010, the Company is authorized to issue
shares of convertible preferred stock, with a par value of
$0.001 per share, as follows (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Equivalent
|
|
|
|
|
|
|
Issued and
|
|
|
Liquidation
|
|
|
Liquidation
|
|
|
Conversion
|
|
|
Shares of
|
|
Series
|
|
Authorized
|
|
|
Outstanding
|
|
|
Price
|
|
|
Preference
|
|
|
Price
|
|
|
Common Stock
|
|
|
A
|
|
|
3,888
|
|
|
|
3,888
|
|
|
$
|
0.71989
|
|
|
$
|
2,799
|
|
|
$
|
0.49910
|
|
|
|
5,608
|
|
B
|
|
|
4,786
|
|
|
|
4,786
|
|
|
|
1.71700
|
|
|
|
8,218
|
|
|
|
0.82280
|
|
|
|
9,988
|
|
C
|
|
|
3,013
|
|
|
|
3,013
|
|
|
|
5.34150
|
|
|
|
16,093
|
|
|
|
1.35420
|
|
|
|
11,884
|
|
D
|
|
|
78,637
|
|
|
|
73,627
|
|
|
|
0.39920
|
|
|
|
29,392
|
|
|
|
0.39920
|
|
|
|
73,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,324
|
|
|
|
85,314
|
|
|
|
|
|
|
$
|
56,502
|
|
|
|
|
|
|
|
101,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8
|
STOCK
OPTIONS AND SHARE-BASED COMPENSATION
|
In 2004, the board of directors approved the 2004 Stock Plan.
The plan provides for the direct sale of shares of restricted
stock and the granting of incentive stock options and
nonstatutory stock options. The total grants available under the
plan, as amended, are 16,769,000 shares of common stock to
employees, officers, consultants, and directors. As of
December 31, 2009 and June 30, 2010, 3,505,000 and
3,528,000, respectively, shares under the plan were available
for future grant.
A summary of the Companys stock option information is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
12,410
|
|
|
$
|
0.25
|
|
|
|
8.55
|
|
|
$
|
956
|
|
Exercisable
|
|
|
2,494
|
|
|
$
|
0.42
|
|
|
|
5.42
|
|
|
$
|
262
|
|
Vested and expected to vest
|
|
|
9,855
|
|
|
$
|
0.25
|
|
|
|
8.40
|
|
|
$
|
829
|
|
As of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
12,387
|
|
|
$
|
0.25
|
|
|
|
8.06
|
|
|
$
|
954
|
|
Exercisable
|
|
|
5,783
|
|
|
$
|
0.33
|
|
|
|
7.10
|
|
|
$
|
389
|
|
Vested and expected to vest
|
|
|
11,529
|
|
|
$
|
0.26
|
|
|
|
7.98
|
|
|
$
|
856
|
|
During the six months ended June 30, 2010, no options were
granted or exercised and 23,000 options were forfeited. At
June 30, 2010, there was approximately $691,000 of total
unrecognized compensation cost related to outstanding non-vested
options granted to employees, which is expected to be recognized
over a weighted average period of 2.19 years.
F-49
Performance-Based
Options
On May 3, 2004, the Company entered into an employment
agreement with one of its executive officers. According to the
terms of the agreement, the board of directors granted 1,462,000
options, under the 2004 Stock Plan, to purchase shares of common
stock at a price of $0.072 per share, whereby 877,000 options
vest over three years and 585,000 options vest upon the
achievement of certain specified performance goals. The
performance-based options, which are not reflected in the table
above, have a contractual life of 10 years and a remaining
contractual life of 3.8 years as of June 30, 2010. As
of December 31, 2009 and June 30, 2010, 439,000 of the
performance-based options have vested with an aggregate
intrinsic value of $82,000.
The value of the performance-based options is recognized using
the intrinsic valuation method and is revalued each reporting
period based on the current fair value of the underlying common
stock. If such goals are not met, no compensation expense is
recognized and any recognized compensation expense is reversed.
The expected term for the performance-based options as of
December 31, 2009 and June 30, 2010 is 3 years
and 2.5 years, respectively. As of June 30, 2010,
there was $7,000 of total unrecognized compensation cost related
to nonvested share-based compensation on the performance-based
options.
|
|
NOTE 9
|
COMMITMENTS
AND CONTINGENCIES
|
Support
Services Agreement with Related Party
On February 18, 2008, the Company entered into a Support
Services Agreement with a three year term for engineering
services and project management, intellectual property
management, business development services, and accounting and
management services, as well as the use of certain office space,
and reimbursement of operating expenses paid by the Company on
behalf of Viryd Technologies Inc. (Viryd), a majority owned
subsidiary from January 3, 2007 (date of inception) to
December 18, 2008 (date that the Company completed a
spin-off of Viryd), and related party through common board
members at December 31, 2009 and June 30, 2010.
On November 25, 2008, the Company entered into a seven year
Master Agreement with Viryd. According to the terms of the
Master Agreement, the Support Services Agreement was amended to
include support in fundraising, introduction to contacts,
preparation of offering memoranda and presentations, assistance
in raising capital, and negotiation of legal documents. In
addition, the Master Agreement provides Viryd with access to the
Companys engineering facility. The Support Services
Agreement terminates in February 2011, unless terminated
earlier, as mutually agreed upon by both parties.
The Company recorded related party revenue for support services
of $264,000 and $113,000 during the six months ended
June 30, 2009 and 2010, respectively. The Company received
payments of $107,000 and $98,000 for support services during the
six months ended June 30, 2009 and 2010, respectively.
There was $0 and $7,000 due from Viryd under the Support
Services Agreement at December 31, 2009 and June 30,
2010, respectively. In addition, the Company received payments
from Viryd of $2,000 and $1,000 for reimbursement of direct
expenses during the six months ended June 30, 2009 and
2010, respectively.
Engineering
Services Agreement with Related Party
On April 28, 2008, the Company entered into an Engineering
Services Agreement with Viryd, a related party at
December 31, 2009 and June 30, 2010. The final phase
of the agreement was completed in December 2008, with the
delivery of a prototype. On November 25, 2008, the
Engineering Services Agreement was amended through the execution
of the Master Agreement, requiring the Company to provide
preproduction engineering design drawings for a certain
continuously variable transmission as it existed as of the date
of the Master Agreement and detail design part drawings for a
solid model design, which obligations have been satisfied.
The Company recorded related party revenue for engineering
services of $20,000 and $74,000 during the six months ended
June 30, 2009 and 2010, respectively, as well as $3,000 in
product sales during the six months ended June 30, 2010.
The Company received payments of $143,000 and $57,000 for
engineering services and $0 and $3,000 for product sales during
the six months ended June 30, 2009 and 2010, respectively.
There was
F-50
$0 and $17,000 due from Viryd under the Engineering Services
Agreement at December 31, 2009 and June 30, 2010,
respectively.
The Company adopted the new accounting literature specified in
ASC Topic
810-10, as
amended by ASU
2009-17, on
January 1, 2010 (Note 2). In conjunction with the
aforementioned agreements with Viryd, the Company reconsidered
its relationship with Viryd during the six months ended
June 30, 2010. The Company considered the significant
activities of Viryd and determined that neither the ownership
interests of certain related parties of the Company
(related party group) that were considered as the
Companys own interests nor the Company itself within the
related party group has control or the ability to direct the
activities of Viryd that most significantly impact Viryds
economic performance. In addition, the license arrangement
between Viryd and the Company does not provide the Company or
the related party group with the power to direct the activities
of Viryd that most significantly impact Viryds economic
performance. Therefore, the conclusions that neither the related
party group nor the Company itself would be the primary
beneficiary and would not be required to consolidate the VIE did
not change as a result of the adoption of ASU
2009-17 for
the six months ended June 30, 2010. The Company has not
entered into any guarantees or other financial arrangements with
Viryd and, as of June 30, 2010, the receivable balance of
$24,000 is the maximum exposure of loss for the Company.
Professional
Services Agreement with Related Party
In February 2009, the Company entered into a professional
services agreement, for a term of one year unless terminated
earlier, with an entity affiliated with a member of the
Companys board of directors. This agreement provides for
payment of a fee plus approved expenses for product development
and manufacturing consulting services provided onsite at the
Companys facilities. During the six months ended
June 30, 2009 and 2010, the Company paid this affiliated
entity $0 and $28,000, which was recognized as consulting
expense within selling, general and administrative expenses in
the consolidated statements of operations.
Manufacturing
Supply Agreement
Effective January 30, 2010, the Company and Tri Star Group
(Tri Star) entered into a manufacturing supply agreement under
which Tri Star will manufacture the next generation bicycle
transmission on a contract basis and will participate with the
Company in the sale of the next generation bicycle transmission
in China. The term of the agreement shall commence on the
effective date and continue until the earlier of (a) five
years after the date (July 15, 2010) that Tri Star
shipped the first volume production product intended for
customers under confirmed purchase orders; and
(b) 66 months after the effective date, unless
terminated earlier. Tri Star will provide the manufacturing
facility and general purpose equipment, Tri Star and the Company
will share the cost of tooling, and the Company will bear the
cost of dedicated special purpose equipment needed for assembly
of the product. The Company has issued a blanket purchase order
in the range of $8,000,000 to $12,000,000 for forecasted
production requirements from May 2010 through August 2011.
Regular orders against this blanket purchase order will be
provided to Tri Star based on orders received and forecasted
demand. The Company has submitted approximately $207,000 in
purchase orders against this blanket purchase order as of
June 30, 2010.
Consulting
Agreement
In January 2010, the Company entered into a two year consulting
agreement with Advanced Strategic Leadership Limited (ASL), an
unrelated Shanghai company, under which ASL will provide
consulting and market development services in exchange for a
monthly fee of $10,000 per month, 2% of net sales procured by
ASL each calendar quarter during the term of the agreement, a
warrant to purchase 50,000 shares of common stock, and,
upon reaching certain performance milestones, contingent
warrants to purchase up to 750,000 shares of common stock.
Under the consulting agreement, services and deliverables that
ASL will provide include a China electric vehicle market
analysis and future forecast; support for the establishment of
an electric vehicle business; and support for building
brand/product introduction.
F-51
As provided for in the two year consulting agreement with ASL,
the Company issued a warrant to purchase 50,000 shares of
common stock at a price of $0.3992 per share. The Company valued
the warrant at the issuance date using the Black-Scholes pricing
methodology and the following assumptions: fair value of the
underlying common stock of $0.26, no dividend yield, expected
volatility of 62%, risk-free interest rate of 1.14%, and a term
of three years, resulting in a fair value of $1,000 at the date
of issuance. The fair value of the warrant is classified as an
equity instrument and was recognized as selling, general and
administrative expense in the condensed consolidated statements
of operations.
As it relates to the contingent warrants to purchase up to
750,000 shares of common stock, the Company will assess the
probability of the performance milestones being achieved during
the term of the two-year consulting agreement. Accruals of
compensation cost for the contingent warrants will be based on
the probable outcome of the specific performance milestone and
the estimated fair value of the warrants. Compensation cost will
be accrued if it is probable that a performance milestone will
be achieved and recognized on a straight-line basis over the
service period of the milestone. If, after accruing compensation
cost, the performance milestone is not met, the Company will
reverse any previously recognized compensation cost. The nature
of the performance milestones include the achievement of certain
sales orders and revenue targets from ASLs targeted
customers, obtaining government funding for certain projects,
and the consummation of a strategic deal for a specific
application of the technology. During the six months ended
June 30, 2010, the Company determined that it is probable
that some of the performance milestones will be achieved and, as
a result, warrants to purchase 750,000 shares will be
issued. The Company valued these warrants using the
Black-Scholes pricing methodology and the following assumptions:
fair value of the underlying common stock of $0.18, no dividend
yield, expected volatility of 83%, risk-free interest rate of
0.77%, and a remaining contractual term of 2.42 years.
During the six months ended June 30, 2010, the Company
recognized a resultant $22,000 in selling, general and
administrative expenses in the consolidated statements of
operations.
On August 25, 2010, the Company issued a warrant to
purchase 100,000 shares of common stock at a price of
$0.3992 per share due to the successful achievement of certain
milestones. As such, contingent warrants to purchase up to
650,000 shares of common stock remain available to ASL.
|
|
NOTE 10
|
SEGMENT
INFORMATION
|
The Company operated in one reportable segment from inception
through December 2006 and again after December 2008. Net sales
to third parties are attributed to continents based on customer
location. Geographic information about revenues is summarized as
follows (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
%
|
|
|
2010
|
|
|
%
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
528
|
|
|
|
79
|
%
|
|
$
|
434
|
|
|
|
94
|
%
|
Europe
|
|
|
134
|
|
|
|
20
|
%
|
|
|
21
|
|
|
|
5
|
%
|
Other
|
|
|
10
|
|
|
|
1
|
%
|
|
|
5
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
672
|
|
|
|
100
|
%
|
|
$
|
460
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
During the six months ended June 30, 2009 and 2010,
revenues to external customers exceeded 10% of total revenues,
as follows (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
%
|
|
|
2010
|
|
|
%
|
|
|
Revenues from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
|
|
|
|
|
|
|
$
|
227
|
|
|
|
49
|
%
|
Customer B
|
|
|
115
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
Customer C
|
|
|
104
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
Customer D
|
|
|
53
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
Related party revenues
|
|
|
286
|
|
|
|
43
|
%
|
|
|
191
|
|
|
|
42
|
%
|
All other customers
|
|
|
114
|
|
|
|
17
|
%
|
|
|
42
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
672
|
|
|
|
100
|
%
|
|
$
|
460
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11
|
SUBSEQUENT
EVENT
|
In August 2010, the Company amended and restated its certificate
of incorporation to authorize the Company to issue up to
21,834,000 shares of Series E Redeemable Convertible
Preferred Stock (Series E Preferred Stock) with a par value
of $0.001 per share and up to 250,000,000 shares of common
stock with a par value of $0.001 per share. Terms relating to
conversion, dividends, and liquidation preference were also
amended to include the Series E Preferred Stock. In
addition, in August 2010, the Company closed a private placement
of Series E Preferred Stock and issued
6,550,000 shares at a price of $0.9160 per share in
exchange for aggregate gross proceeds of $6,000,000. This
private placement included the sale of 4,367,000 shares of
Series E Preferred with aggregate proceeds of $4,000,000 to
10% or greater stockholders and directors. The Series E
Preferred Stock will be classified as temporary equity in the
consolidated balance sheets.
Conversion
Holders of preferred stock have both optional and automatic
conversion rights. Each share of Series A, B, and C
Preferred Stock (Junior Preferred Stock) and each share of
Series D and Series E Preferred Stock (Senior
Preferred Stock) is immediately convertible at the holders
option into shares of common stock based on the original
issuance price divided by the applicable conversion price
(Conversion Price). The Conversion Price for each share of
preferred stock is subject to proportional adjustments for
certain dilutive issuances, splits, and combinations and other
recapitalizations or reorganizations. Conversion of each share
of preferred stock is automatic in the event of a public
offering of the Companys common stock meeting certain
specified criteria including aggregate net proceeds to the
Company of at least $20 million or a reverse take-over of a
company listed, or that obtains a listing, on an internationally
recognized securities exchange conducted contemporaneously with
or immediately followed by a minimum $20 million equity
financing (Qualifying Event). In addition, conversion of each
share of preferred stock is automatic upon the vote or election
to convert by the holders of at least 60% of the outstanding
shares of the Senior Preferred Stock and a majority of the
outstanding shares of Junior Preferred Stock, voting
collectively and not as separate series. Further, all accrued
and unpaid dividends at the time of conversion, for either
optional or automatic conversion, shall be converted into common
stock at the Conversion Price.
The initial Series E Conversion Price, subject to
adjustment for certain dilutive issuances is $0.9160. The
Series E Conversion Price is subject to further adjustment
in the event of a merger, reorganization, consolidation or
similar transaction, or sale or transfer of substantially all
assets of the Company (Change in Control Transaction) or a
Qualifying Event. In the event of a Change in Control
Transaction, the Series E Conversion Price will be an
amount equal to the lesser of (A) a 20% discount to the
price per share payable with respect to one share of common
stock by the person(s) acquiring control, and (B) a per
share price equal
F-53
to $120 million divided by the total number of outstanding
shares of common stock outstanding or deemed to be outstanding
immediately prior to the Change in Control Transaction. In the
event of a Qualifying Event, the Series E Conversion Price
will be an amount equal to the lesser of (A) a 20% discount
to the common stock offering price pursuant to the Qualifying
Event, and (B) a per share price equal to $120 million
divided by the total number of outstanding shares of common
stock outstanding or deemed to be outstanding immediately prior
to the Qualifying Event.
Dividends
The holders of the then outstanding Series E Preferred
Stock shall be entitled to receive dividends at the annual rate
of $0.0916 per share (10% of original purchase price). If the
Series E Preferred Stock has not been converted to common
stock on or prior to the two-year anniversary date of issuance,
the annual dividend rate shall increase to $0.11908 per share.
Dividends shall accrue on a cumulative annual basis on each
share from the date of issuance, whether or not declared. Upon
conversion of a share of Series E Preferred Stock into
common stock, accumulated dividends shall be converted into
common stock at the Conversion Price.
Liquidation
Preference
In the event of liquidation, dissolution or winding up of the
Company, the holders of Senior Preferred Stock are entitled to
receive, on a pari passu basis, prior to any distribution to any
other stockholders, an amount equal to $0.9160 per share of
Series E Preferred Stock plus all accrued and unpaid
dividends thereon and $0.3992 per share of Series D
Preferred Stock plus any declared but unpaid dividends. After
payment of the full liquidation preference to the holders of
Senior Preferred Stock, the remaining assets of the Company
legally available for distribution will be distributed ratably
to the holders of the Junior Preferred Stock, prior to any
distribution to any holders of common stock, at the original
issue price of the respective preferred stock series plus any
declared but unpaid dividends (Junior Preferred Stock
Preference). After full preferential amounts due to the holders
of Senior Preferred Stock and holders of the Junior Preferred
Stock have been paid, an amount equal to the Junior Preferred
Stock Preference shall be distributed ratably among the holders
of common stock. After full preferential amounts due to the
holders of Senior Preferred Stock, holders of the Junior
Preferred Stock, and holders of common stock have been paid, an
amount equal to
one-half of
the Junior Preferred Stock Preference shall be distributed
ratably to the holders of Junior Preferred Stock. After full
preferential amounts due to the holders of Senior Preferred
Stock, holders of the Junior Preferred Stock, and holders of
common stock have been paid, any remaining assets of the Company
shall be distributed ratably to the holders of common stock and
Senior Preferred Stock, on an equal priority, in proportion to
the number of shares of common stock then held by the holders of
common stock and issuable upon conversion of the shares of
Senior Preferred Stock then held by the holders of Senior
Preferred Stock.
Redemption
Anytime after August 13, 2012, the Company shall, within
90 days after receipt of a written request from any holder
of Series E Preferred Stock for the redemption of all or a
specified percentage of such holders shares of
Series E Preferred Stock, redeem such shares by paying for
each share an amount of cash equal to the sum of $0.9160 per
share and all accrued and unpaid dividends thereon. If the funds
of the Company legally available for redemption of Series E
Preferred Stock on the redemption date are insufficient to
redeem the total number of shares of Series E Preferred
Stock to be redeemed on such date, those funds that are legally
available shall be used to redeem the maximum possible number of
such shares ratably among the holders of such shares to be
redeemed. The shares of Series E Preferred Stock not
redeemed shall remain outstanding and entitled to all the rights
and preferences of the Series E Preferred Stock. At any time
thereafter when additional funds are legally available, such
funds will immediately be used to redeem the balance of the
shares that the Company has become obliged to redeem on the
redemption date, which have not yet been redeemed.
* * * * * *
F-54
|
|
CIBC |
Mackie Research Capital |
Until ,
2010 (the 25th day after the date of this prospectus), all
dealers, whether or not participating in this offering, that
effect transactions in these securities may be required to
deliver a prospectus. This is in addition to the dealers
obligation to deliver a prospectus when acting as an underwriter
in this offering and when selling previously unsold allotments
or subscriptions.
Part II
Information
not required in prospectus
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The following are the estimated expenses to be incurred in
connection with the issuance and distribution of the securities
registered under this registration statement, other than
underwriting discounts and commissions. All amounts shown are
estimates except the SEC registration fee and FINRA filing fee.
The following expenses will be borne solely by the registrant.
|
|
|
|
|
SEC registration fee
|
|
$
|
3,565
|
|
FINRA filing fee
|
|
|
*
|
|
Listing fee
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Printing expenses
|
|
|
*
|
|
Transfer agent fees and expenses
|
|
|
*
|
|
Miscellaneous expenses
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
* |
|
To be included by amendment |
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 145(a) of the Delaware General Corporation Law
(DGCL) provides, in general, that a corporation may indemnify
any person who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or
investigative (other than an action by or in the right of the
corporation), because he or she is or was a director, officer,
employee, or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture,
trust, or other enterprise, against expenses (including
attorneys fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by the person in
connection with such action, suit, or proceeding, if he or she
acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Section 145(b) of the DGCL provides, in general, that a
corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the corporation
to procure a judgment in its favor because the person is or was
a director, officer, employee, or agent of the corporation, or
is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against
expenses (including attorneys fees) actually and
reasonably incurred by the person in connection with the defense
or settlement of such action or suit if he or she acted in good
faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the corporation, except
that no indemnification shall be made with respect to any claim,
issue, or matter as to which he or she shall have been adjudged
to be liable to the corporation unless and only to the extent
that the Court of Chancery or other adjudicating court
determines that, despite the adjudication of liability but in
view of all of the circumstances of the case, he or she is
fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or other adjudicating court shall
deem proper.
Section 145(g) of the DGCL provides, in general, that a
corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee, or agent of
the corporation, or is or was serving at the request of the
corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person
and incurred by such person in any such capacity, or arising out
of his or her status as such, whether or not the
II-1
corporation would have the power to indemnify the person against
such liability under Section 145 of the DGCL.
Our amended and restated bylaws that will be in effect
immediately prior to the completion of this offering will
provide that we will indemnify, to the fullest extend permitted
by the DGCL, any person who was or is made or is threatened to
be made a party or is otherwise involved in any action, suit, or
proceeding, whether civil, criminal, administrative, or
investigative, by reason of the fact that he, or a person for
whom he is the legal representative, is or was one of our
directors or officers or, while serving as one of our directors
or officers, is or was serving at our request as a director,
officer, employee, or agent of another corporation or of another
entity, against all liability and loss suffered and expenses
(including attorneys fees) reasonably incurred by such
person, subject to certain exclusions and limitations. Our
amended and restated bylaws that will be in effect immediately
prior to the completion of this offering will further provide
for the advancement of expenses to each of our officers and
directors.
Our amended and restated certificate of incorporation that will
be in effect immediately prior to the completion of this
offering will provide that, to the fullest extent permitted by
the DGCL, as the same exists or may be amended from time to
time, our directors shall not be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty
as a director. Under Section 102(b)(7) of the DGCL, the
personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty
can be limited or eliminated except (i) for any breach of
the directors duty of loyalty to the corporation or its
stockholders; (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law; (iii) under Section 174 of the DGCL (relating
to unlawful payment of dividend or unlawful stock purchase or
redemption); or (iv) for any transaction from which the
director derived an improper personal benefit.
We also intend to maintain a general liability insurance policy
which covers certain liabilities of directors and officers of
our company arising out of claims based on acts or omissions in
their capacities as directors or officers.
We have entered into indemnification agreements with each of our
directors and our executive officers. These agreements will
provide that we will indemnify each of our directors and such
officers to the fullest extent permitted by law and by our
charter and bylaws.
In the underwriting agreement we enter into in connection with
the sale of common stock being registered hereby, the
underwriters will agree to indemnify, under certain conditions,
us, our directors, our officers and persons who control us,
within the meaning of the Securities Act, against certain
liabilities.
|
|
Item 15.
|
Recent
sales of unregistered securities.
|
Set forth below is information regarding securities we have
issued in the three years preceding the filing of this
registration statement that were not registered under the
Securities Act. Also included is the consideration, if any,
received by us for such securities and information relating to
the section of the Securities Act, or rule of the SEC, under
which exemption from registration was claimed. No underwriters
were involved in any such sales.
(a) Equity Issuances
|
|
|
|
|
In August 2010, we sold an aggregate of 6,550,218 shares of
our Series E redeemable convertible preferred stock to
three accredited investors at a purchase price of $0.9160 per
share for aggregate proceeds totaling $6,000,000.
|
|
|
|
|
|
On November 16, 2009, we sold an aggregate of
10,020,040 shares of our Series D convertible
preferred stock to 29 accredited investors at a purchase price
of $0.3992 per share for aggregate proceeds of $4 million.
|
|
|
|
On December 18, 2008, we sold an aggregate of
63,607,402 shares of our Series D convertible
preferred stock to 28 accredited investors at a purchase price
of $0.3992 per share for total proceeds of
|
II-2
|
|
|
|
|
$25.4 million, of which $20.6 million was in cash and
$4.8 million was from the conversion of principal and
accrued interest on our then outstanding convertible debt.
|
|
|
|
|
|
Between November 1, 2005 and August 30, 2006, we sold
an aggregate of 3,012,765 shares of our Series C
convertible preferred stock to 132 accredited investors at a
purchase price of $5.342 per share for aggregate proceeds of
$16.1 million, of which 1,583,278 shares were sold in
2005 for aggregate proceeds of approximately $8.5 million
and 1,429,487 shares were sold in 2006 for aggregate
proceeds of approximately $7.6 million.
|
(b) Warrants
|
|
|
|
|
In March and August 2010, we issued warrants to purchase up to
50,000 and 100,000 shares, respectively, of our common
stock to ASL at an exercise price of $0.3992 per share as
consideration for China sales representative services to be
provided under a consulting agreement, which services we valued
at $601 and $5,215, respectively.
|
|
|
|
|
|
On December 29, 2009, we issued a warrant to purchase
3,100,753 shares of our common stock to Gary E. Jacobs and
Jerri-Ann Jacobs, Trustees of the Jacobs Family Trust Dated
November 9, 1999 at an exercise price of $0.3992 per share
as consideration for the guarantee by Mr. Jacobs of our
credit line with Wells Fargo, which guarantee we valued at
$475,740.
|
|
|
|
On November 13, 2009, we issued a warrant to purchase up to
495,316 shares of our common stock to Norm Clarke at an
exercise price of $0.3992 per share as consideration for
investment banking services rendered, which services we valued
at $45,586.
|
|
|
|
On November 13, 2009, we issued a warrant to purchase up to
495,316 shares of our common stock to Kevin Loud at an
exercise price of $0.3992 per share as consideration for
investment banking services rendered, which services we valued
at $45,586.
|
|
|
|
On November 13, 2009, we issued a warrant to purchase up to
438,164 shares of our common stock to WCP Advisors, Inc. at
an exercise price of $0.3992 per share as consideration for
investment banking services rendered, which services we valued
at $40,326.
|
|
|
|
On November 13, 2009, we issued a warrant to purchase up to
211,673 shares of our common stock to Wm.H. MURPHY&
Co., Inc., at an exercise price of $0.3992 per share as
consideration for investment banking services rendered, which
services we valued at $19,481.
|
|
|
|
On November 13, 2009, we issued a warrant to purchase up to
190,506 shares of our common stock to Jay St. Clair at an
exercise price of $0.3992 per share as consideration for
investment banking services rendered, which services we valued
at $17,533.
|
|
|
|
On November 13, 2009, we issued a warrant to purchase up to
190,506 shares of our common stock to Bob Peach at an
exercise price of $0.3992 per share as consideration for
investment banking services rendered, which services we valued
at $17,533.
|
|
|
|
On November 13, 2009, we issued a warrant to purchase up to
95,253 shares of our common stock to Roy Serventi at an
exercise price of $0.3992 per share as consideration for
investment banking services rendered, which services we valued
at $8,767.
|
(c) Options under 2004 Stock Plan
|
|
|
|
|
From the period beginning January 1, 2006 through
June 30, 2010, we have granted stock options to purchase an
aggregate of 13,594,890 shares of our common stock with
exercise prices ranging from $.072 to $1.30 per share, to
employees, directors and consultants pursuant to our 2004 Stock
Plan. As of June 30, 2010, options to purchase 12,971,571
shares of common stock are issued and outstanding. An aggregate
of 269,351 shares of common stock have been issued upon the
exercise of stock options for an aggregate consideration of
$31,920 as of June 30, 2010. The shares of common stock issued
upon exercise of options are deemed restricted securities for
the purposes of the Securities Act.
|
II-3
The securities described in paragraphs (a) and (b) of
this Item 15 were issued in reliance on the exemption
provided by Section 4(2) of the Securities Act and, in
certain cases, in reliance on Regulation D promulgated
thereunder. The recipients of such securities represented their
intentions to acquire the securities for investment purposes
only and not with a view to, or for sale in connection with, any
distribution thereof.
The securities described in paragraph (c) of this
Item 15 were issued pursuant to written compensatory plans
or arrangements with our employees, directors and consultants in
reliance on the exemptions provided by either Section 4(2)
of the Securities Act or Rule 701 promulgated under
Section 3(b) of the Securities Act.
All securities described in this Item 15 are deemed
restricted securities for purposes of the Securities Act. The
instruments representing such issued securities included
appropriate legends setting forth that the securities had not
been registered and the applicable restrictions on transfer.
There were no underwriters employed in connection with any of
the transactions set forth above.
(a) Exhibits.
The following exhibits are filed as part of this registration
statement:
|
|
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement*
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation, as of
November 16, 2009**
|
|
3
|
.2
|
|
Amended and Restated Bylaws, as of December 4, 2008**
|
|
3
|
.3
|
|
Form of Amended and Restated Certificate of Incorporation, to be
in effect immediately prior to the completion of this offering*
|
|
3
|
.4
|
|
Form of Amended and Restated Bylaws, to be in effect immediately
prior to the completion of this offering*
|
|
4
|
.1
|
|
Specimen of Common Stock Certificate*
|
|
4
|
.2
|
|
Registration Rights Agreement, dated January 11, 2010, by
and among Fallbrook Technologies Inc. and the investors listed
therein**
|
|
4
|
.3
|
|
Common Stock Purchase Warrant issued to WCP Advisors, Inc. on
November 13, 2009**
|
|
4
|
.4
|
|
Common Stock Purchase Warrant issued to Norm Clarke on
November 13, 2009**
|
|
4
|
.5
|
|
Common Stock Purchase Warrant issued to Gary E. Jacobs and
Jerri-Ann Jacobs, Trustees of the Jacobs Family Trust on
December 29, 2009**
|
|
4
|
.6
|
|
Common Stock Purchase Warrant issued to Kevin R. Loud on
November 13, 2009**
|
|
4
|
.7
|
|
Common Stock Purchase Warrant issued to Wm. H.
Murphy & Co., Inc. on November 13, 2009**
|
|
4
|
.8
|
|
Common Stock Purchase Warrant issued to Robert Peach on
November 13, 2009**
|
|
4
|
.9
|
|
Common Stock Purchase Warrant issued to Roy Serventi on
November 13, 2009**
|
|
4
|
.10
|
|
Common Stock Purchase Warrant issued to Allen Jay St. Clair on
November 13, 2009**
|
|
4
|
.11
|
|
Common Stock Purchase Warrant issued to Advanced Strategic
Leadership Limited (ASL) on March 24, 2010
|
|
4
|
.12
|
|
Common Stock Purchase Warrant issued to ASL on August 25,
2010
|
|
5
|
.1
|
|
Opinion of DLA Piper LLP (US)*
|
|
10
|
.1
|
|
2004 Stock Plan**
|
|
10
|
.2
|
|
Form of Notice of Stock Option Grant and Stock Option Agreement
under the 2004 Stock Plan**
|
|
10
|
.4
|
|
Engineering Services Agreement by and between Fallbrook
Technologies Inc. and The Gates Corporation dated
October 7, 2008**
|
|
10
|
.5
|
|
Manufacturing License Agreement between Fallbrook Technologies
Inc. and Hydro-Gear Limited Partnership dated August 20,
2009**
|
II-4
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.6
|
|
Development Agreement between Fallbrook Technologies Inc. and
Hydro-Gear Limited Partnership dated August 20, 2009**
|
|
10
|
.7
|
|
License Agreement between Fallbrook Technologies Inc. and Viryd
Technologies Inc. dated February 14, 2008**
|
|
10
|
.8
|
|
Master Agreement between Viryd Technologies Inc. and Fallbrook
Technologies Inc. dated November 25, 2008**
|
|
10
|
.9
|
|
Trademark License Agreement between Fallbrook Technologies Inc.
and Ashland Inc., by and through its division Valvoline
dated January 17, 2006**
|
|
10
|
.10
|
|
B35 Manufacturing and Supply Agreement by and between Fallbrook
Technologies Inc. and Tri Star Group dated January 30,
2010**
|
|
10
|
.11
|
|
Consulting Agreement by and between Fallbrook Technologies Inc.
and Advanced Strategic Leadership Limited dated December 1,
2009**
|
|
10
|
.11.1
|
|
Amendment No. 1 to Consulting Agreement by and between Fallbrook
Technologies Inc. and Advanced Strategic Leadership Limited
dated March 24, 2010**
|
|
10
|
.12
|
|
Support Services Agreement between Fallbrook Technologies Inc.
and Viryd Technologies Inc. dated February 15, 2008**
|
|
10
|
.13
|
|
Credit Agreement by and between Fallbrook Technologies Inc. and
Wells Fargo Bank, National Association dated March 31,
2007**
|
|
10
|
.13.1
|
|
Fifth Amendment to Credit Agreement by and between Fallbrook
Technologies Inc. and Wells Fargo Bank, National Association
dated March 23, 2010**
|
|
10
|
.14
|
|
Employment Agreement between Fallbrook Technologies Inc. and
William G. Klehm III dated May 3, 2007, as amended
January 16, 2008**
|
|
10
|
.15
|
|
Employment Agreement between Fallbrook Technologies Inc. and
Nicole T. Nicks dated April 15, 2008**
|
|
10
|
.16
|
|
Employment Agreement between Fallbrook Technologies Inc. and
Alan M. Nordin dated April 15, 2008**
|
|
10
|
.17
|
|
Employment Agreement between Fallbrook Technologies Inc. and
Robert A. Smithson dated April 15, 2008**
|
|
10
|
.18
|
|
Employment Agreement between Fallbrook Technologies Inc. and
George L. Lowe dated January 22, 2010**
|
|
10
|
.19
|
|
Form of indemnification agreement for executive officers and
directors**
|
|
16
|
.1
|
|
Letter regarding change in certifying
accountant**
|
|
21
|
.1
|
|
Subsidiaries of the
registrant**
|
|
23
|
.1
|
|
Consent of DLA Piper LLP (US) (included in Exhibit 5.1)*
|
|
23
|
.2
|
|
Consent of McGladrey & Pullen, LLP
|
|
23
|
.3
|
|
Consent of Deloitte & Touche LLP
|
|
24
|
.1
|
|
Power of Attorney (included in signature page)**
|
|
|
|
*
|
|
To be filed by amendment.
|
|
**
|
|
Previously filed.
|
|
|
|
|
|
Certain confidential information
contained in this exhibit was omitted by means of redacting a
portion of the text and replacing it with an asterisk. This
exhibit has been filed separately with the Secretary of the SEC
without the redaction pursuant to a Confidential Treatment
Request under Rule 406 of the Securities Act.
|
II-5
|
|
(a) |
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the provisions
described in Item 14, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the
successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
|
|
|
(b) |
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
|
|
|
(c) |
The undersigned registrant hereby undertakes that:
|
|
|
|
|
(i)
|
for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
|
|
|
(ii)
|
for purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
|
II-6
Signatures
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California
on August 27, 2010.
FALLBROOK TECHNOLOGIES INC.
|
|
|
|
By:
|
/s/ William
G. Klehm III
|
Name: William G. Klehm III
|
|
|
|
Title:
|
Chairman and Chief Executive Officer
|
POWER
OF ATTORNEY
Pursuant to the requirements of the Securities Act, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ William
G. Klehm III
William
G. Klehm III
|
|
Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
August 27, 2010
|
|
|
|
|
|
/s/ Nicole
T. Nicks
Nicole
T. Nicks
|
|
Chief Financial Officer and Executive Vice President (Principal
Financial and Principal Accounting Officer)
|
|
August 27, 2010
|
|
|
|
|
|
*
Gary
E. Jacobs
|
|
Director
|
|
August 27, 2010
|
|
|
|
|
|
*
Steven
E. Parry
|
|
Director
|
|
August 27, 2010
|
|
|
|
|
|
*
Keimpe
Keuning
|
|
Director
|
|
August 27, 2010
|
|
|
|
|
|
*
Allan
R. Kammerer
|
|
Director
|
|
August 27, 2010
|
|
|
|
|
|
*
Edward
L. Mercaldo
|
|
Director
|
|
August 27, 2010
|
|
|
|
|
|
*
Vincenza
Sera
|
|
Director
|
|
August 27, 2010
|
II-7
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
Jeremiah
B. Robins
|
|
Director
|
|
August 27, 2010
|
|
|
|
|
|
|
|
*By:
|
|
/s/ William
G. Klehm III
William
G. Klehm
Attorney-in-Fact
|
|
|
|
|
II-8
Exhibit
index
|
|
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement*
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation, as of
November 16, 2009**
|
|
3
|
.2
|
|
Amended and Restated Bylaws, as of December 4, 2008**
|
|
3
|
.3
|
|
Form of Amended and Restated Certificate of Incorporation, to be
in effect immediately prior to the completion of this offering*
|
|
3
|
.4
|
|
Form of Amended and Restated Bylaws, to be in effect immediately
prior to the completion of this offering*
|
|
4
|
.1
|
|
Specimen Common of Stock Certificate*
|
|
4
|
.2
|
|
Registration Rights Agreement, dated January 11, 2010 by
and among Fallbrook Technologies Inc. and the investors listed
therein**
|
|
4
|
.3
|
|
Common Stock Purchase Warrant issued to WCP Advisors, Inc. on
November 13, 2009**
|
|
4
|
.4
|
|
Common Stock Purchase Warrant issued to Norm Clarke on
November 13, 2009**
|
|
4
|
.5
|
|
Common Stock Purchase Warrant issued to Gary E. Jacobs and
Jerri-Ann Jacobs, Trustees of the Jacobs Family Trust on
December 29, 2009**
|
|
4
|
.6
|
|
Common Stock Purchase Warrant issued to Kevin R. Loud on
November 13, 2009**
|
|
4
|
.7
|
|
Common Stock Purchase Warrant issued to Wm. H.
Murphy & Co., Inc. on November 13, 2009**
|
|
4
|
.8
|
|
Common Stock Purchase Warrant issued to Robert Peach on
November 13, 2009**
|
|
4
|
.9
|
|
Common Stock Purchase Warrant issued to Roy Serventi on
November 13, 2009**
|
|
4
|
.10
|
|
Common Stock Purchase Warrant issued to Allen Jay St. Clair on
November 13, 2009**
|
|
4
|
.11
|
|
Common Stock Purchase Warrant issued to Advanced Strategic
Leadership Limited (ASL) on March 24, 2010
|
|
4
|
.12
|
|
Common Stock Purchase Warrant issued to ASL on August 25,
2010
|
|
5
|
.1
|
|
Opinion of DLA Piper LLP (US)*
|
|
10
|
.1
|
|
2004 Stock Plan**
|
|
10
|
.2
|
|
Form of Notice of Stock Option Grant and Stock Option Agreement
under the 2004 Stock Plan**
|
|
10
|
.4
|
|
Engineering Services Agreement by and between Fallbrook
Technologies Inc. and The Gates Corporation dated
October 7, 2008**
|
|
10
|
.5
|
|
Manufacturing License Agreement between Fallbrook Technologies
Inc. and Hydro-Gear Limited Partnership dated August 20,
2009**
|
|
10
|
.6
|
|
Development Agreement between Fallbrook Technologies Inc. and
Hydro-Gear Limited Partnership dated August 20, 2009**
|
|
10
|
.7
|
|
License Agreement between Fallbrook Technologies Inc. and Viryd
Technologies Inc. dated February 14, 2008**
|
|
10
|
.8
|
|
Master Agreement between Viryd Technologies Inc. and Fallbrook
Technologies Inc. dated November 25, 2008**
|
|
10
|
.9
|
|
Trademark License Agreement between Fallbrook Technologies Inc.
and Ashland Inc., by and through its division Valvoline
dated January 17, 2006**
|
|
10
|
.10
|
|
B35 Manufacturing and Supply Agreement by and between Fallbrook
Technologies Inc. and Tri Star Group dated January 30,
2010**
|
|
10
|
.11
|
|
Consulting Agreement by and between Fallbrook Technologies Inc.
and Advanced Strategic Leadership Limited dated December 1,
2009**
|
|
10
|
.11.1
|
|
Amendment No. 1 to Consulting Agreement by and between
Fallbrook Technologies Inc. and Advanced Strategic Leadership
Limited dated March 24, 2010**
|
|
10
|
.12
|
|
Support Services Agreement between Fallbrook Technologies Inc.
and Viryd Technologies Inc. dated February 15, 2008**
|
II-9
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.13
|
|
Credit Agreement by and between Fallbrook Technologies Inc. and
Wells Fargo Bank, National Association dated March 31,
2007**
|
|
10
|
.13.1
|
|
Fifth Amendment to Credit Agreement by and between Fallbrook
Technologies Inc. and Wells Fargo Bank, National Association
dated March 23, 2010**
|
|
10
|
.14
|
|
Employment Agreement between Fallbrook Technologies Inc. and
William G. Klehm III dated May 3, 2007, as amended
January 16, 2008**
|
|
10
|
.15
|
|
Employment Agreement between Fallbrook Technologies Inc. and
Nicole T. Nicks dated April 15, 2008**
|
|
10
|
.16
|
|
Employment Agreement between Fallbrook Technologies Inc. and
Alan M. Nordin dated April 15, 2008**
|
|
10
|
.17
|
|
Employment Agreement between Fallbrook Technologies Inc. and
Robert A. Smithson dated April 15, 2008**
|
|
10
|
.18
|
|
Employment Agreement between Fallbrook Technologies Inc. and
George L. Lowe dated January 22, 2010**
|
|
10
|
.19
|
|
Form of indemnification agreement for executive officers and
directors**
|
|
16
|
.1
|
|
Letter regarding change in certifying
accountant**
|
|
21
|
.1
|
|
Subsidiaries of the
registrant**
|
|
23
|
.1
|
|
Consent of DLA Piper LLP (US) (included in Exhibit 5.1)*
|
|
23
|
.2
|
|
Consent of McGladrey & Pullen, LLP
|
|
23
|
.3
|
|
Consent of Deloitte & Touche LLP
|
|
24
|
.1
|
|
Power of Attorney (included in signature page)**
|
|
|
|
*
|
|
To be filed by amendment.
|
|
**
|
|
Previously filed.
|
|
|
|
Certain confidential information
contained in this exhibit was omitted by means of redacting a
portion of the text and replacing it with an asterisk. This
exhibit has been filed separately with the Secretary of the SEC
without the redaction pursuant to a Confidential Treatment
Request under Rule 406 of the Securities Act.
|
II-10