Attached files
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EX-32 - EXHIBIT 32 - ISC8 INC. /DE | c18013exv32.htm |
EX-31.1 - EXHIBIT 31.1 - ISC8 INC. /DE | c18013exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - ISC8 INC. /DE | c18013exv31w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - ISC8 INC. /DE | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 3, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-8402
IRVINE SENSORS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 33-0280334 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
3001 Red Hill Avenue,
Costa Mesa, California 92626
(Address of Principal Executive Offices) (Zip Code)
Costa Mesa, California 92626
(Address of Principal Executive Offices) (Zip Code)
(714) 549-8211
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, (the Exchange
Act) during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
As of August 11, 2011, there were 113,542,472 shares of common stock outstanding.
IRVINE SENSORS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL PERIOD ENDED JULY 3, 2011
FOR THE FISCAL PERIOD ENDED JULY 3, 2011
TABLE OF CONTENTS
In this report, the terms Irvine Sensors, the Company, we, us and our refer to Irvine
Sensors Corporation (ISC) and its subsidiaries.
Irvine Sensors®, Neo-Chip, Neo-Stack®, TOWHAWK, Novalog, Personal Miniature Thermal
Viewer, PMTV®, Cam-Noir®, Eagle Boards, Vault, RedHawk and Silicon MicroRing Gyro are among
the Companys trademarks. Any other trademarks or trade names mentioned in this report are the
property of their respective owners.
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
IRVINE SENSORS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
July 3, 2011 | ||||||||
(Unaudited) | October 3, 2010 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2,983,900 | $ | 281,600 | ||||
Accounts receivable, net of allowance for doubtful accounts of $13,600 and $15,000, respectively |
1,170,800 | 382,100 | ||||||
Proceeds receivable, subordinated secured convertible promissory notes financing |
2,000,000 | | ||||||
Unbilled revenues on uncompleted contracts |
609,800 | 630,300 | ||||||
Inventory, net |
1,179,400 | 1,715,800 | ||||||
Prepaid expenses and other current assets |
192,100 | 182,300 | ||||||
Total current assets |
8,136,000 | 3,192,100 | ||||||
Property and equipment, net (including construction in process of $716,100 and $35,000, respectively) |
2,735,700 | 2,730,000 | ||||||
Intangible assets, net |
10,900 | 12,400 | ||||||
Deferred financing costs |
1,101,100 | 302,900 | ||||||
Deposits |
184,000 | 87,400 | ||||||
Total assets |
$ | 12,167,700 | $ | 6,324,800 | ||||
Liabilities and Stockholders Deficit |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 891,700 | $ | 4,724,100 | ||||
Accrued expenses |
1,406,400 | 4,097,700 | ||||||
Accrued estimated loss on contracts |
| 29,000 | ||||||
Advance billings on uncompleted contracts |
387,800 | 321,800 | ||||||
Advances against accounts receivable |
| 99,700 | ||||||
Deferred revenue |
690,300 | 1,515,400 | ||||||
Restructured debt, net of debt discounts |
| 163,100 | ||||||
Secured promissory note, current portion |
1,878,300 | 402,500 | ||||||
Debentures, net of debt discounts |
| 1,935,200 | ||||||
Settlement agreements obligations, current portion |
827,200 | | ||||||
Capital lease obligations, current portion |
13,400 | | ||||||
Total current liabilities |
6,095,100 | 13,288,500 | ||||||
Secured promissory note, less current portion |
460,800 | 2,097,500 | ||||||
Senior subordinated secured promissory notes |
4,133,900 | | ||||||
Subordinated secured convertible promissory notes, net of discounts |
3,986,500 | | ||||||
Settlement agreement obligations, less current portion |
21,500 | | ||||||
Derivative liability |
13,745,000 | 4,000 | ||||||
Executive Salary Continuation Plan liability |
968,000 | 1,030,700 | ||||||
Capital lease obligations, less current portion |
83,700 | | ||||||
Total liabilities |
29,494,500 | 16,420,700 | ||||||
Commitments and contingencies (Note 7) |
||||||||
Stockholders deficit: |
||||||||
Convertible preferred stock, $0.01 par value, 1,000,000 and 1,000,000 shares authorized, respectively; |
| 500 | ||||||
Series A-2 0 and 8,300 shares issued and outstanding, respectively (1);
liquidation preference of $0 and $333,300, respectively; |
||||||||
Series B 1,800 and 1,900 shares issued and outstanding, respectively (1);
liquidation preference of $1,785,600 and $1,892,700, respectively |
||||||||
Series C 0 and 37,500 shares issued and outstanding, respectively (1);
liquidation preference of $0 and $1,125,000, respectively |
||||||||
Common stock, $0.01 par value, 500,000,000 and 150,000,000 shares authorized, respectively;
113,542,500 and 33,535,400 shares issued and outstanding, respectively (1) |
1,135,400 | 335,400 | ||||||
Prepaid stock-based compensation |
(114,200 | ) | | |||||
Common stock held by Rabbi Trust |
(1,020,700 | ) | (1,169,600 | ) | ||||
Deferred compensation liability |
1,020,700 | 1,169,600 | ||||||
Paid-in capital |
171,006,200 | 165,039,200 | ||||||
Accumulated deficit |
(189,678,600 | ) | (175,795,400 | ) | ||||
Irvine Sensors Corporation stockholders deficit |
(17,651,200 | ) | (10,420,300 | ) | ||||
Noncontrolling interest |
324,400 | 324,400 | ||||||
Total stockholders deficit |
(17,326,800 | ) | (10,095,900 | ) | ||||
Total liabilities and stockholders deficit |
$ | 12,167,700 | $ | 6,324,800 | ||||
(1) | The numbers of shares of preferred stock and common stock issued and outstanding have been rounded to the nearest one hundred (100). |
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
Table of Contents
IRVINE SENSORS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||
July 3, | June 27, | July 3, | June 27, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total revenues |
$ | 2,974,200 | $ | 3,576,100 | $ | 10,645,500 | $ | 9,507,700 | ||||||||
Cost and expenses |
||||||||||||||||
Cost of revenues |
2,360,100 | 2,900,800 | 9,484,500 | 7,513,000 | ||||||||||||
General and administrative expense |
1,951,800 | 1,565,100 | 6,009,700 | 4,693,100 | ||||||||||||
Research and development expense |
809,200 | 655,200 | 2,047,300 | 2,011,400 | ||||||||||||
Total costs and expenses |
5,121,100 | 5,121,100 | 17,541,500 | 14,217,500 | ||||||||||||
Gain on sale or disposal of assets |
| 100 | | 12,600 | ||||||||||||
Loss from operations |
(2,146,900 | ) | (1,544,900 | ) | (6,896,000 | ) | (4,697,200 | ) | ||||||||
Interest expense |
(1,054,200 | ) | (636,500 | ) | (6,236,800 | ) | (882,600 | ) | ||||||||
Provision for litigation judgment |
| | | (20,200 | ) | |||||||||||
Litigation settlement expense |
| (450,000 | ) | | (2,270,700 | ) | ||||||||||
Change in fair value of derivative liability |
7,697,800 | 7,000 | (742,700 | ) | 67,000 | |||||||||||
Other income (expense) |
6,200 | (1,000 | ) | (4,400 | ) | (1,300 | ) | |||||||||
Income (loss) from operations before provision for income taxes |
4,502,900 | (2,625,400 | ) | (13,879,900 | ) | (7,805,000 | ) | |||||||||
Benefit (provision) for income taxes |
(3,300 | ) | | (3,300 | ) | 43,300 | ||||||||||
Net income (loss) |
4,499,600 | (2,625,400 | ) | (13,883,200 | ) | (7,761,700 | ) | |||||||||
Less net income (loss) attributable to noncontrolling
interests in subsidiary |
| | | | ||||||||||||
Net income (loss) attributable to
Irvine Sensors Corporation |
$ | 4,499,600 | $ | (2,625,400 | ) | $ | (13,883,200 | ) | $ | (7,761,700 | ) | |||||
Basic net income (loss) attributable to
Irvine Sensors Corporation
per common share |
$ | 0.04 | $ | (0.15 | ) | $ | (0.17 | ) | $ | (0.66 | ) | |||||
Weighted average number of common shares
outstanding, basic |
107,504,800 | 17,302,800 | 83,105,800 | 13,932,100 | ||||||||||||
Diluted net income (loss) attributable to
Irvine Sensors Corporation
per common share |
$ | 0.02 | $ | (0.15 | ) | $ | (0.17 | ) | $ | (0.66 | ) | |||||
Weighted average number of common shares
and common share equivalents outstanding, diluted |
260,723,100 | 17,302,800 | 83,105,800 | 13,932,100 | ||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
Table of Contents
IRVINE SENSORS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
Common | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A-1 and A-2 | Series B | Series C | Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Warrants | Prepaid | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Shares Issued (1) | Shares Issued (1) | Shares Issued (1) | Shares Issued (1) | Issued (1) | Stock-Based | Accumulated | Noncontrolling | Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Compensation | Paid-in Capital | Deficit | Interest | Deficit | |||||||||||||||||||||||||||||||||||||||||||
Balance at September 27, 2009 |
124,900 | $ | 1,200 | | $ | | | $ | | 9,694,500 | $ | 96,900 | 1,461,300 | $ | | $ | 162,497,700 | $ | (167,299,100 | ) | $ | 324,400 | $ | (4,378,900 | ) | |||||||||||||||||||||||||||||||
Cumulative-effect adjustment of adopting ASC 815-40 |
| | | | | | | | | | (4,230,000 | ) | 4,130,500 | | (99,500 | ) | ||||||||||||||||||||||||||||||||||||||||
Common stock issued to employee retirement plan |
| | | | | | 2,673,800 | 26,700 | | (750,000 | ) | 723,300 | | | | |||||||||||||||||||||||||||||||||||||||||
Sale of preferred stock, net of financing costs and
value assigned to warrants issued to investors |
| | 3,500 | | | | | | | | 1,307,900 | | | 1,307,900 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of preferred stock as litigation settlement expense |
| | | | 37,500 | 400 | | | | | 1,124,600 | | | 1,125,000 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of warrants as litigation settlement expense |
| | | | | | | | 1,000,000 | | 150,000 | | | 150,000 | ||||||||||||||||||||||||||||||||||||||||||
Common stock warrants issued to preferred stock investors |
| | | | | | | | 2,094,000 | | 424,000 | | | 424,000 | ||||||||||||||||||||||||||||||||||||||||||
Sale of common stock units, net of issuance costs |
| | | | | | 3,469,500 | 34,700 | 693,900 | | 437,000 | | | 471,700 | ||||||||||||||||||||||||||||||||||||||||||
Sale of common stock |
| | | | | | 138,500 | 1,400 | | | 16,600 | | | 18,000 | ||||||||||||||||||||||||||||||||||||||||||
Common stock issued to pay interest |
| | | | | | 693,600 | 6,900 | | | 270,500 | | | 277,400 | ||||||||||||||||||||||||||||||||||||||||||
Common stock options exercised |
| | | | | | 10,000 | 100 | | | 1,500 | | | 1,600 | ||||||||||||||||||||||||||||||||||||||||||
Deemed dividend of beneficial conversion feature of
preferred stock issuance |
| | | | | | | | | | 1,471,000 | (1,471,000 | ) | | | |||||||||||||||||||||||||||||||||||||||||
Common stock issued upon conversion of preferred stock |
(116,600 | ) | (1,100 | ) | (1,600 | ) | | | | 16,851,000 | 168,500 | | | (167,400 | ) | | | | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense vested stock |
| | | | | | 1,800 | 200 | | | 600 | | | 800 | ||||||||||||||||||||||||||||||||||||||||||
Beneficial conversion feature of debentures |
| | | | | | | | | | 102,200 | | | 102,200 | ||||||||||||||||||||||||||||||||||||||||||
Common stock warrants issued to debenture investors |
| | | | | | | | 860,000 | | 163,500 | | | 163,500 | ||||||||||||||||||||||||||||||||||||||||||
Common stock warrants issued to investment banking firm |
| | | | | | | | 2,695,100 | | 643,800 | | | 643,800 | ||||||||||||||||||||||||||||||||||||||||||
Additional shares of common stock issuable pursuant to
application of warrant anti-dilution provisions |
| | | | | | | | 715,500 | | | | | | ||||||||||||||||||||||||||||||||||||||||||
Common stock warrants expired |
| | | | | | | | (1,477,500 | ) | | | | | | |||||||||||||||||||||||||||||||||||||||||
Issuance of nonvested stock, net |
| | | | | | 2,700 | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||
Amortization of deferred stock-based compensation |
| | | | | | | | | | 65,100 | | | 65,100 | ||||||||||||||||||||||||||||||||||||||||||
Amortization of employee retirement plan contributions |
| | | | | | | | | 750,000 | | | | 750,000 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense options |
| | | | | | | | | | 37,300 | | | 37,300 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
| | | | | | | | | | | (11,155,800 | ) | | (11,155,800 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at October 3, 2010 |
8,300 | 100 | 1,900 | | 37,500 | 400 | 33,535,400 | 335,400 | 8,042,300 | | 165,039,200 | (175,795,400 | ) | 324,400 | (10,095,900 | ) | ||||||||||||||||||||||||||||||||||||||||
Common stock issued to employee retirement plan |
| | | | | | 6,666,700 | 66,700 | | (800,000 | ) | 733,300 | | | | |||||||||||||||||||||||||||||||||||||||||
Common stock issued upon conversion of preferred stock |
(8,300 | ) | (100 | ) | (100 | ) | | (37,500 | ) | (400 | ) | 7,518,400 | 75,200 | | | (74,700 | ) | | | | ||||||||||||||||||||||||||||||||||||
Issuance of common stock as debt discount |
| | | | | | 5,758,100 | 57,600 | | | 692,400 | | | 750,000 | ||||||||||||||||||||||||||||||||||||||||||
Sale of common stock, net of issuance costs |
| | | | | | 51,788,600 | 517,900 | | | 2,789,300 | | | 3,307,200 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of nonvested stock, net |
| | | | | | 4,600 | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||
Common stock warrants issued to investment banking firm |
| | | | | | | | 2,382,400 | | 190,600 | | | 190,600 | ||||||||||||||||||||||||||||||||||||||||||
Common stock issued pursuant to cashless warrant exercise |
| | | | | | 221,000 | 2,200 | (308,900 | ) | | 30,900 | | | 33,100 | |||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense vested stock |
| | | | | | 177,300 | 1,800 | | | 20,700 | | | 22,500 | ||||||||||||||||||||||||||||||||||||||||||
Common stock issued to pay interest |
| | | | | | 682,300 | 6,700 | | | 266,100 | | | 272,800 | ||||||||||||||||||||||||||||||||||||||||||
Common stock options exercised |
| | | | | | 20,000 | 200 | | | 3,000 | | | 3,200 | ||||||||||||||||||||||||||||||||||||||||||
Common stock issued upon conversion of debt |
| | | | | | 7,170,100 | 71,700 | | | 430,200 | | | 501,900 | ||||||||||||||||||||||||||||||||||||||||||
Elimination of derivative liability from conversion of debt to
common stock |
| | | | | | | | | | 69,100 | | | 69,100 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense options |
| | | | | | | | | | 809,100 | | | 809,100 | ||||||||||||||||||||||||||||||||||||||||||
Amortization of deferred stock-based compensation |
| | | | | | | | | | 7,000 | | | 7,000 | ||||||||||||||||||||||||||||||||||||||||||
Amortization of employee retirement plan contributions |
| | | | | | | | | 685,800 | | | | 685,800 | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
| | | | | | | | | | | (13,883,200 | ) | | (13,883,200 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at July 3, 2011 (Unaudited) |
| $ | | 1,800 | $ | | | $ | | 113,542,500 | $ | 1,135,400 | 10,115,800 | $ | (114,200 | ) | $ | 171,006,200 | $ | (189,678,600 | ) | $ | 324,400 | $ | (17,326,800 | ) | ||||||||||||||||||||||||||||||
(1) | Amounts of preferred stock, common stock and warrants issued have been rounded to nearest one hundred (100). Warrant amounts are number of shares of common stock issuable pursuant thereto. |
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
Table of Contents
IRVINE SENSORS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
39 Weeks Ended | ||||||||
July 3, 2011 | June 27, 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (13,883,200 | ) | $ | (7,761,700 | ) | ||
Adjustments to reconcile net loss
to net cash used in operating activities: |
||||||||
Depreciation and amortization |
822,600 | 1,002,900 | ||||||
Provision for allowance for inventory valuation |
212,100 | 148,900 | ||||||
Non-cash interest expense |
3,937,400 | 343,900 | ||||||
Non-cash employee retirement plan contributions |
685,800 | 403,000 | ||||||
Gain on sales of assets |
| (12,600 | ) | |||||
Non-cash litigation settlement |
| 2,270,700 | ||||||
Change in fair value of derivative liability |
742,800 | (67,000 | ) | |||||
Non-cash stock-based compensation |
838,600 | 60,900 | ||||||
Increase in accounts receivable |
(788,700 | ) | (333,800 | ) | ||||
Decrease in unbilled revenues on uncompleted contracts |
20,500 | 174,400 | ||||||
(Increase) decrease in inventory |
324,300 | (532,700 | ) | |||||
Increase in prepaid expenses and other current assets |
(9,800 | ) | (53,000 | ) | ||||
Increase in deposits |
(96,600 | ) | (49,900 | ) | ||||
Increase (decrease) in accounts payable and accrued expenses |
(3,507,700 | ) | 2,084,400 | |||||
Increase (decrease) in accrued estimated loss on contracts |
(29,000 | ) | 15,000 | |||||
Decrease in Executive Salary Continuation Plan liability |
(62,700 | ) | (182,600 | ) | ||||
Increase in advance billings on uncompleted contracts |
66,000 | 51,400 | ||||||
Decrease in deferred revenue |
(825,100 | ) | (24,600 | ) | ||||
Total adjustments |
2,330,500 | 5,299,300 | ||||||
Net cash used in operating activities |
(11,552,700 | ) | (2,462,400 | ) | ||||
Cash flows from investing activities: |
||||||||
Property and equipment expenditures |
(673,200 | ) | (781,800 | ) | ||||
Gross proceeds from sales of fixed assets |
| 12,500 | ||||||
Transfer of fixed asset from contract expense |
| (28,000 | ) | |||||
Net cash used in investing activities |
(673,200 | ) | (797,300 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from sale of common stock, net of issuance costs |
3,307,200 | 303,300 | ||||||
Proceeds from sale of preferred stock |
| 2,049,500 | ||||||
Proceeds from sale of debenture units |
| 1,651,300 | ||||||
Proceeds from senior subordinated secured promissory notes |
4,000,000 | | ||||||
Proceeds from subordinated secured convertible promissory notes |
11,224,800 | | ||||||
Proceeds from unsecured convertible promissory notes |
3,000,000 | | ||||||
Proceeds from options exercised |
3,200 | | ||||||
Debt issuance costs paid |
(1,548,200 | ) | (297,700 | ) | ||||
Decrease in advances against accounts receivable |
(99,700 | ) | (381,000 | ) | ||||
Principal payments of notes payable and settlement agreements |
(4,958,800 | ) | (25,300 | ) | ||||
Principal payments of capital leases |
(300 | ) | (11,200 | ) | ||||
Net cash provided by financing activities |
14,928,200 | 3,288,900 | ||||||
Net increase in cash and cash equivalents |
2,702,300 | 29,200 | ||||||
Cash and cash equivalents at beginning of period |
281,600 | 125,700 | ||||||
Cash and cash equivalents at end of period |
$ | 2,983,900 | $ | 154,900 | ||||
Non-cash investing and financing activities: |
||||||||
Non-cash conversion of preferred stock to common stock |
$ | 1,565,400 | $ | 4,292,200 | ||||
Issuance of warrants recorded as deferred financing costs |
$ | | $ | 643,800 | ||||
Property and equipment acquired for note payable |
$ | 56,200 | | |||||
Equipment financed with capital leases |
$ | 97,400 | | |||||
Conversion of notes and accrued interest to common stock |
$ | 463,900 | $ | 138,800 | ||||
Common stock issued to pay accrued interest |
$ | 272,800 | | |||||
Accrued expenses settled with settlement agreement obligations |
$ | 1,235,000 | | |||||
Issuance of common stock as deferred financing |
$ | 750,000 | | |||||
Warrants issued to investment banking firm |
$ | 190,600 | | |||||
Note payable collected subsequent to July 3, 2011 |
$ | 2,000,000 | | |||||
Cashless warrant exercise |
$ | 33,100 | | |||||
Supplemental cash flow information: |
||||||||
Cash paid for interest |
$ | 408,600 | $ | 305,800 | ||||
Cash paid for income taxes |
$ | 3,200 | $ | 7,700 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
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IRVINE SENSORS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 General
The information contained in the following Notes to Condensed Consolidated Financial
Statements is condensed from that which appear in the audited consolidated financial statements for
Irvine Sensors Corporation (ISC) and its subsidiaries (together with ISC, the Company), and the
accompanying unaudited condensed consolidated financial statements do not include certain financial
presentations normally required under accounting principles generally accepted in the United States
of America (GAAP). Accordingly, the unaudited condensed consolidated financial statements
included herein should be read in conjunction with the audited consolidated financial statements
and related notes thereto contained in the Annual Report on Form 10-K of the Company for the fiscal
year ended October 3, 2010 (fiscal 2010). It should be understood that accounting measurements
at interim dates inherently involve greater reliance on estimates than at year-end. The results of
operations for the interim periods presented are not necessarily indicative of the results expected
for the entire year.
The consolidated financial information for the 13-week and 39-week periods ended July 3, 2011
and June 27, 2010 included herein is unaudited but includes all normal recurring adjustments which,
in the opinion of management of the Company, are necessary to present fairly the consolidated
financial position of the Company at July 3, 2011, and the results of its operations and its cash
flows for the 13-week and 39-week periods ended July 3, 2011 and June 27, 2010.
None of the Companys subsidiaries accounted for more than 10% of the Companys total assets
at July 3, 2011 and October 3, 2010 or had separate employees or facilities at such dates.
The condensed consolidated financial information as of October 3, 2010 included herein has
been derived from the Companys audited consolidated financial statements as of, and for the year
ended, October 3, 2010.
Description of Business
The Company is a technology company engaged in the design, development, manufacture and sale
of security products, software, vision systems and miniaturized electronic products and higher
level systems incorporating such products for defense, information technology and physical security
for government and commercial applications. The Company also performs customer-funded contract
research and development related to these systems and products, mostly for U.S. government
customers or prime contractors. Most of the Companys historical business relates to application
of its technologies for stacking either packaged or unpackaged semiconductors into more compact
three-dimensional forms, which the Company believes offer volume, power, weight and operational
advantages over competing packaging approaches, and which the Company believes allows it to offer
higher-level products with unique operational features. The Company has introduced certain
higher-level products in the fields of thermal imaging cores and high speed processing for
information security that take advantage of the Companys packaging technologies. The Company is
currently placing particular emphasis on the development of cyber-security products, such as
high-speed processing boards and subsystems, intended for commercial and governmental applications
and, in April 2011, opened and commenced staffing a new office in Texas for such activity.
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Summary of Significant Accounting Policies
Consolidation. The consolidated financial statements include the accounts of ISC and its
subsidiaries, Novalog, Inc. (Novalog), MicroSensors, Inc. (MSI), RedHawk Vision Systems, Inc.
(RedHawk) and iNetWorks Corporation (iNetWorks). The Companys subsidiaries do not presently
have material operations or assets. All significant intercompany transactions and balances have
been eliminated in the consolidation.
Fiscal Periods. The Companys fiscal year ends on the Sunday nearest September 30. Fiscal
2010 ended on October 3, 2010 and included 53 weeks. The fiscal year ending October 2, 2011
(fiscal 2011) will include 52 weeks. The Companys first three quarters of fiscal 2011 was the
39-week period ended July 3, 2011.
Reportable Segments and Reclassifications. In the 39-week period ended July 3, 2011, the
Company restructured, in conjunction with a financing, to focus its operations on development and
sale of products derived from its technology. As a result, the Company is presently managing its
operations as a single business segment and has presented its consolidated statements of operations
for the 13-week and 39-week periods ended July 3, 2011 accordingly. The consolidated statements of
operations for the 13-week and 39-week periods ended June 27, 2010 have been reclassified to
conform to the current period presentation. Comparable reclassification of the remaining fiscal
2010 periods may occur as future periods of fiscal 2011 are presented. The Company is continuing
to evaluate the current and potential business derived from sales of its products and, in the
future, may present its consolidated statement of operations in more than one segment if the
Company segregates the management of various product lines in response to business and market
conditions. In addition, to facilitate comparison to the significant derivative liability recorded
in the 13-week and 39-week periods ended July 3, 2011, the derivative liability at October 3, 2010
has been reclassified and presented separately in the Consolidated Balance Sheets included in this
report, as opposed to being included in accrued expenses as presented in the Companys Form 10-K
for fiscal 2010.
Warrant Valuation and Beneficial Conversion Feature. The Company calculates the fair value of
warrants issued with debt or preferred stock and not accounted for as derivatives using the
Black-Scholes valuation method. The total proceeds received in the sale of debt or preferred stock
and related warrants is allocated among these financial instruments based on their relative fair
values. The discount arising from assigning a portion of the total proceeds to the warrants issued
is recognized as interest expense for debt from the date of issuance to the earlier of the maturity
date of the debt or the conversion dates using the effective yield method. Additionally, when
issuing convertible instruments (debt or preferred stock), including convertible instruments issued
with detachable warrants, the Company tests for the existence of a beneficial conversion feature.
The Company records the amount of any beneficial conversion feature (BCF), calculated in
accordance with GAAP, whenever it issues convertible instruments that have conversion features at
fixed rates that are in-the-money using the effective per share conversion price when issued. The
calculated amount of the BCF is accounted for as a contribution to additional paid-in capital and
as a discount to the convertible instrument. A BCF resulting from issuance of convertible debt is
recognized as interest expense from the date of issuance to the earlier of the maturity date of the
debt or the conversion dates using the effective yield method. A BCF resulting from the issuance of
convertible preferred stock is recognized as a deemed dividend and amortized over the period of the
securitys earliest conversion or redemption date. The maximum amount of BCF that can be
recognized is limited to the amount that will reduce the net carrying amount of the debt or
preferred stock to zero.
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Derivatives. A derivative is an instrument whose value is derived from an underlying
instrument or index such as a future, forward, swap, option contract, or other financial instrument
with
similar characteristics, including certain derivative instruments embedded in other contracts
(embedded derivatives) and for hedging activities. As a matter of policy, the Company does not
invest in separable financial derivatives or engage in hedging transactions. However, the Company
has entered into complex financing transactions, including the convertible debt transactions
entered into in the 39-week period ended July 3, 2011, that involve financial instruments
containing certain features that have resulted in the instruments being deemed derivatives or
containing embedded derivatives. The Company may engage in other similar complex debt transactions
in the future, but not with the intention to enter into derivative instruments. Derivatives and
embedded derivatives, if applicable, are measured at fair value using the binomial lattice pricing
model and marked to market through earnings. However, such new and/or complex instruments may have
immature or limited markets. As a result, the pricing models used for valuation of derivatives
often incorporate significant estimates and assumptions, which may impact the level of precision in
the financial statements. Furthermore, depending on the terms of a derivative or embedded
derivative, the valuation of derivatives may be removed from the financial statements upon
conversion of the underlying instrument into some other security.
Recently Issued Accounting Pronouncements. In June 2008, the Financial Accounting Standards
Board (FASB) ratified guidance issued by the Emerging Issue Task Force (EITF) as codified in
Accounting Standards Codification (ASC) 815-40, Derivatives and Hedging Contracts in Entitys
Own Equity (previously EITF Issue No. 07-05, Determining Whether an Instrument (or an Embedded
Feature) is Indexed to an Entitys Own Stock). ASC 815-40 specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to the companys own stock
and (b) classified in stockholders equity in the statement of financial position would not be
considered a derivative financial instrument. ASC 815-40 provides a new two-step model to be
applied in determining whether a financial instrument or an embedded feature is indexed to an
issuers own stock and thus able to qualify for the ASC 815-10 scope exception. ASC 815-40 is
effective for fiscal years beginning after December 15, 2008, which for the Company was fiscal
2010, and early adoption was not permitted. On the first day of fiscal 2010, pursuant to ASC
815-40, the Company was required to reclassify certain warrants from equity to liabilities,
resulting in a cumulative effect adjustment to reduce paid-in capital for the original allocated
value recorded for the these affected warrants and a corresponding reduction in accumulated deficit
and recording of the fair market value of the associated warrant derivative liability, which was
then subsequently re-measured and adjusted to report the change in fair value at the end of each
subsequent fiscal quarter, including the 13-week period ended July 3, 2011. In addition, as noted
above, the Company entered into a transaction on December 23, 2010 that, pursuant to ASC 815-40,
required the Company to estimate the fair market value of features deemed to be embedded
derivatives in convertible debt instruments issued in or related to this transaction and to again
re-measure this derivative liability at July 3, 2011. As a result of this issuance and the
pre-existing warrant derivative, the Companys aggregate derivative liability was valued at
$13,745,000 at July 3, 2011, of which $(742,700) was a change in derivative liability, largely as a
result of a change in the market value of the Companys common stock between December 23, 2010 and
July 3, 2011.
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving
Disclosures about Fair Value Measurements amending ASC 820, Fair Value Measurements and Disclosures
requiring additional disclosure and clarifying existing disclosure requirements about fair value
measurements. ASU 2010-06 requires entities to provide fair value disclosures by each class of
assets and liabilities, which may be a subset of assets and liabilities within a line item in the
statement of financial position. The additional requirements also include disclosure regarding the
amounts and reasons for significant transfers in and out of Level 1 and 2 of the fair value
hierarchy and separate presentation of purchases, sales, issuances and settlements of items within
Level 3 of the fair value hierarchy. The guidance clarifies existing disclosure requirements
regarding the inputs and valuation techniques used to measure fair value for measurements that fall
in either Level 2 or Level 3 of the hierarchy. ASU 2010-06
is effective for interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances and settlements which is effective for
fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
There was no impact from the Companys adoption of this guidance.
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In April 2010, the FASB issued ASU 2010-17, Milestone Method of Revenue Recognition, which
provides guidance related to Revenue Recognition that applies to arrangements with milestones
relating to research or development deliverables. This guidance provides criteria that must be met
to recognize consideration that is contingent upon achievement of a substantive milestone in its
entirety in the period in which the milestone is achieved. This guidance is effective for the
Company starting fiscal year 2011. There was no impact from the Companys adoption of this
guidance.
Subsequent Events.
Management
has evaluated events subsequent to July 3, 2011 through the date the accompanying condensed
consolidated financial statements were filed with the Securities and Exchange Commission for transactions
and other events that may require adjustment of and/or disclosure in such financial statements.
Note 2 Debt Instruments
Restructured Debt, Net of Debt Discounts
The restructured debt, net of debt discounts, consisted of the remainder of a 12% secured
promissory note payable to Longview Fund, L.P. (Longview) originally entered into by the Company
in July 2007 (the Longview Note) with a $2.0 million principal due initially, which had been
reduced to an outstanding principal balance of $163,100 at October 3, 2010 as a result of various
payments. In December 2010, the Company paid all remaining obligations of the Longview Note in
full.
Debentures, Net of Debt Discounts
In March 2010, the Company sold and issued to 55 accredited investors (the Debenture
Investors) an aggregate of 275.22 convertible debenture units (the Debenture Units) at a
purchase price of $6,000 per Debenture Unit (the Debenture Unit Price) in two closings of a
private placement (the Debenture Private Placement). The $1,651,300 aggregate purchase price for
these Debenture Units was paid in cash to the Company.
Each Debenture Unit was comprised of (i) one one-year, unsecured convertible debenture with a
principal repayment obligation of $5,000 (the Convertible Debenture) that was convertible at the
election of the holder into shares of the Companys common stock at a conversion price of $0.40 per
share (the Principal Conversion Shares); (ii) one one-year, unsecured non-convertible debenture
with a principal repayment obligation of $5,000 that was not convertible into common stock (the
Non-Convertible Debenture and, together with the Convertible Debenture, the Debentures); and
(iii) a five-year warrant to purchase 3,125 shares of the Companys common stock (the Debenture
Investor Warrant). The conversion price applicable to the Debentures was $0.40 per share, and the
exercise price applicable to the Debenture Investor Warrants is $0.40 per share. The total number
of shares of common stock issuable upon exercise of the Debenture Investor Warrants at the exercise
price of $0.40 per share is 860,000 in the aggregate.
The Debentures bore simple interest at a rate of 20% per annum. Interest on the Debentures
accrued and was payable quarterly in arrears and was convertible at the election of the Company
into shares of common stock at a conversion price of $0.40 per share. In the 13-week and 39-week
periods ended July 3, 2011, interest on the Debentures in the amount of $0 and $272,800,
respectively, was converted into 0 and 682,300 shares of common stock, respectively. (See Note 3).
In March 2011, the Company paid the principal balance of the Debentures in full.
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In consideration for services rendered as the lead placement agent in the Debenture Private
Placement, the Company paid the placement agent cash commissions, a management fee and an expense
allowance fee aggregating $214,700, which represents 13% of the gross proceeds of the closings of
the Debenture Private Placement, and issued to the placement agent five-year warrants to purchase
an aggregate of 536,700 shares of the Companys common stock at an exercise price of $0.40 per
share and, as a retainer, a five-year warrant to purchase an aggregate of 450,000 shares of the
Companys common stock at an exercise price of $0.40 per share. (See Note 3).
Aggregate gross proceeds of $1,651,300 received by the Company in connection with the
Debenture Private Placement was comprised of the aggregate principal balance of $2,752,200 of the
Debentures, net of a corresponding original issue discount of $1,100,900 and was allocated to the
individual components comprising the Debenture Unit on a relative fair value basis. This resulted
in approximately $163,500 allocated to the five-year investor warrants and approximately $1,487,800
allocated to the Debentures. In addition, because the effective conversion price of the Convertible
Debentures was below the current trading price of the Companys common shares at the date of
issuance, the Company recorded a BCF of approximately $102,200. The values of the warrants and the
BCF have been recorded as additional paid in capital in the accompanying consolidated financial
statements.
Secured Promissory Note
The Secured Promissory Note issued to Timothy Looney in April 2010 by the Company in the
principal amount of $2,500,000 (the Looney Note) as a result of the Settlement Agreement with Mr.
Looney (the Looney Settlement Agreement) bears simple interest at a rate per annum of 10% of the
outstanding principal balance and is secured by substantially all of the assets of the Company (the
Collateral) pursuant to the terms and conditions of a Security Agreement and Intellectual
Property Security Agreement related thereto (the Security Agreements), but such security
interests are subject to and subordinate to the existing perfected security interests and liens of
the Companys senior creditor, Summit Financial Resources, L.P. (Summit). The Looney Note
requires the Company to remit graduated monthly installment payments over a 27-month period to Mr.
Looney beginning with a payment of $8,000 in May 2010 and ending with a payment of $300,000 in June
2012. All graduated payments are applied first to unpaid interest and then to outstanding
principal. Scheduled payments through April 2011 applied only to interest. A final payment of the
remaining unpaid principal and interest under the Looney Note is due and payable in July 2012. Past
due payments will bear simple interest at a rate per annum of 18%. As of July 3, 2011, the
principal balance due under the Looney Note was $2,339,100. In the event the Company prepays all
amounts owing under the Looney Note within eighteen months after April 9, 2010, the $50,000 cash
payment made to Mr. Looney pursuant to the Looney Settlement Agreement will either be returned to
the Company or deducted from the final payment due on the Looney Note. The $50,000 cash payment is
recorded as a prepaid charge on the consolidated balance sheets as of October 3, 2010 and July 3,
2011.
Debt Issued in Fiscal 2011
During the 39-week period ended July 3, 2011, the Company issued the following debt
instruments:
Principal balance at issuance date | ||||
Unsecured Convertible Promissory Notes |
$ | 3,000,000 | ||
Senior Subordinated Secured Promissory Notes |
$ | 4,000,000 | ||
Subordinated Secured Convertible Promissory
Notes, exclusive
of conversions of Unsecured
Convertible Promissory Notes |
$ | 13,224,800 |
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The terms of the foregoing notes are as follows:
Unsecured Convertible Promissory Notes, Net of Discounts
In November and December 2010, the Company sold and issued to 47 accredited investors 10%
unsecured convertible promissory notes of the Company (the Bridge Notes) in multiple closings of
a private placement (the Bridge Private Placement). The $3,000,000 aggregate principal balance of
the Bridge Notes in said closings was paid in cash to the Company.
The Bridge Notes bore simple interest at a rate per annum of 10% and had a maturity date of
May 31, 2011. Interest on the Notes accrued and was payable in arrears at maturity. Pursuant to the
terms of the Bridge Notes, at the discretion of an investor holding a Bridge Note (a Bridge Note
Holder), any outstanding principal and accrued interest remaining under the Bridge Note at
maturity was convertible into shares of the Companys common stock at a conversion price equal to
$0.13 per share (the Conversion Price), provided, however, that the Company had a sufficient
number of authorized shares of common stock to allow such conversion at such time, and that the
investor was an accredited investor at the time of such conversion as such term is defined in Rule
501 under the Securities Act of 1933, as amended (the Securities Act). Unpaid and unconverted
principal balance and accrued interest of the Bridge Notes was repayable in cash prior to maturity
in whole or in part at any time without premium or penalty.
Also pursuant to the terms of the Bridge Notes, at the discretion of each Bridge Note Holder,
any outstanding principal and accrued interest under a Bridge Note held by said Bridge Note Holder
was convertible as a result of the closing of a subsequent private placement of the Companys
securities with gross proceeds of at least $8.0 million (a Subsequent Financing) into the
securities issued in a Subsequent Financing on the same terms and conditions as the other investors
in said Subsequent Financing, provided, however, that the Bridge Note Holder was an accredited
investor at the time of such conversion as such term is defined in Rule 501 under the Securities
Act; and provided, further, that such Bridge Note Holder entered into and executed the same
documents, satisfied the same conditions and agreed to be bound by the same terms as all other
investors in said Subsequent Financing. The Company consummated such a Subsequent Financing in
December 2010 and, as described below, certain of the Bridge Note Holders elected to convert their
Bridge Notes, in accordance with the terms thereof, into the securities issued in the Subsequent
Financing. Bridge Notes that were not converted pursuant to their terms were repaid in full upon
their maturity on May 31, 2011.
As additional consideration for the Bridge Notes, in December 2010, the Company issued an
aggregate of 5,758,100 shares of its common stock to the Bridge Note Holders with a value equal to
25% of the principal amount of the Bridge Notes purchased by the Bridge Note Holders, based on a
valuation per share (the Initial Valuation) which was the greater of (i) the fair market value of
the Companys common stock (as determined by the last closing sales price of the Companys common
stock prior to the date of issuance of the Bridge Notes) (the Market Value), and (ii) $0.13 per
share, but not greater than $0.14 per share.
In consideration for services rendered as the lead placement agent in the Bridge Private
Placement, the Company paid the placement agent cash commissions, a management fee and an expense
allowance fee aggregating $309,700, which represents 10.3% of the gross proceeds of the Bridge
Private Placement, and issued the placement agent a five-year warrant to purchase an aggregate of
2,227,400 shares of the Companys common stock at an exercise price of $0.13 per share and a
five-year warrant to purchase an aggregate of 155,000 shares of the Companys common stock at an
exercise price of $0.135 per share, which prices were equal to the Market Value at the time such
warrants were issued
(collectively, the Bridge Agent Warrants).
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The Companys obligation to issue the Bridge Agent Warrants was established in December 2010,
but the Bridge Agent Warrants were not exercisable until stockholder authority was obtained to
increase the Companys authorized shares of common stock to a number adequate to reserve for both
any shares of common stock to be issued in connection with the Subsequent Financing and the Bridge
Agent Warrants, as well as any other known issuances of common stock for which the Company must
reserve shares for issuance. Such stockholder authority was obtained in March 2011. The Bridge
Agent Warrants have a net cashless exercise feature.
Senior Subordinated Secured Promissory Notes
In March 2011, the Company issued and sold to two accredited investors, Costa Brava
Partnership III L.P. (Costa Brava) and The Griffin Fund LP (Griffin) 12% Senior Subordinated
Secured Promissory Notes due March 2013 (the Senior Subordinated Notes) in the aggregate
principal amount of $4,000,000. In July 2011, the Senior Subordinated Notes were amended to permit
the holders to demand repayment any time on or after July 16, 2012, in partial consideration for
permitting the issuance of additional Subordinated Secured Convertible Promissory Notes as
discussed below.
The Senior Subordinated Notes bear interest at a rate of 12% per annum, due and payable
quarterly in cash within 10 business days of the end of each calendar quarter, calculated on the
simple interest basis of a 365-day year for the actual number of days elapsed. The foregoing
notwithstanding, until the Looney Note is repaid in full, cash interest on the Senior Subordinated
Notes must instead be paid by adding the amount of such interest to the outstanding principal
amount of the Senior Subordinated Notes as PIK interest. As a result of the addition of such
interest, the outstanding principal amount of the Senior Subordinated Notes at July 3, 2011 was
$4,133,900.
The Senior Subordinated Notes are secured by substantially all of the assets of the Company
pursuant to Security Agreements dated March 16, 2011 and March 31, 2011 between the Company and
Costa Brava as representative of the Senior Subordinated Note holders, but the liens securing the
Senior Subordinated Notes are subordinate to the liens securing the indebtedness of the Company to
Summit Financial Resources, L.P. under that certain Financing Agreement dated as of June 16, 2009
and subordinated in right of payment to the Looney Note.
The Senior Subordinated Notes restrict the Company from (A) directly or indirectly, incurring
or guaranteeing, assuming or suffering to exist any indebtedness, other than (i) the Senior
Subordinated Notes, (ii) certain permitted indebtedness and (iii) the Looney Note; (B) allowing or
suffering to exist any mortgage, lien, pledge, charge, security interest or other similar
encumbrance upon or in any property or assets (including accounts and contract rights) owned by the
Company or any of its subsidiaries other than (i) existing liens securing the Looney Note and (ii)
certain permitted liens; and (C) during an event of default, directly or indirectly, redeeming,
defeasing, repurchasing, repaying or making any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases, tender offers,
private transactions or otherwise), all or any portion of any indebtedness expressly subordinate to
the Senior Subordinated Notes.
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Subordinated Secured Convertible Promissory Notes
In December 2010, the Company entered into a Securities Purchase Agreement (the Purchase
Agreement) with Costa Brava and Griffin, pursuant to which the Company issued and sold to Costa
Brava and Griffin 12% Subordinated Secured Convertible Notes due December 23, 2015 (the
Subordinated Notes) in the aggregate principal amount of $7,774,800 and an aggregate of
51,788,571 shares of common stock of the Company for $3,625,200, or $0.07 per share, and agreed to
issue and sell in a subsequent closing not later than April 30, 2011 (subject to the amendment of
the Companys Certificate of Incorporation to increase the Companys authorized common stock and
provided that there had not been a material adverse change in the Companys relationship with
Optics 1, Inc.) additional Subordinated Notes (the Milestone Notes) to Costa Brava and Griffin
for an aggregate purchase price of $1.2 million (collectively, the Institutional Financing). The
Milestone Notes were issued in March 2011. On July 1, 2011, the Company sold additional
Subordinated Notes to four accredited investors, including Costa Brava and Griffin, in the
aggregate principal amount of $4,250,000, of which $2,000,000 was received subsequent to July 3,
2011. Subsequent to July 3, 2011, the Company sold an additional Subordinated Note to another
accredited investor in the principal amount of $750,000. (See Note 9).
The Subordinated Notes bear interest at a rate of 12% per annum, due and payable quarterly
within 10 business days of the end of each calendar quarter, calculated on the simple interest
basis of a 365-day year for the actual number of days elapsed. For the first two years of the term
of the Subordinated Notes, the Company has the option, subject to the satisfaction of certain
customary equity conditions, to pay all or a portion of the interest due on each interest payment
date in shares of common stock, with the price per share calculated based on the weighted average
price of the Companys common stock over the last 20 trading days ending on the second trading day
prior to the interest payment date. The foregoing notwithstanding, until the Looney Note is repaid
in full, cash interest on the Subordinated Notes must instead be paid by adding the amount of such
interest to the outstanding principal amount of the Subordinated Notes as PIK interest. The
principal and accrued but unpaid interest under the Subordinated Notes is convertible at the option
of the holder, any time after amendment of the Companys Certificate of Incorporation to increase
the Companys authorized common stock, into shares of the Companys common stock at an initial
conversion price of $0.07 per share. The conversion price is subject to full ratchet adjustment for
certain price dilutive issuances of securities by the Company and proportional adjustment for
events such as stock splits, dividends, combinations and the like. Beginning after the first two
years of the term of the Subordinated Notes, the Company can force the Subordinated Notes to
convert to common stock if certain customary equity conditions have been satisfied and the volume
weighted average price of the common stock is $0.25 or greater for 30 consecutive trading days.
The Subordinated Notes are secured by substantially all of the assets of the Company pursuant
to a Security Agreement dated December 23, 2010 and July 1, 2011, as applicable, between the
Company and Costa Brava as representative of the Subordinated Note holders, but the liens securing
the Subordinated Notes are subordinate to the liens securing the indebtedness of the Company to
Summit Financial Resources, L.P. under that certain Financing Agreement dated as of June 16, 2009
and the liens securing the indebtedness of the Company under the Senior Subordinated Notes, and
subordinate in right of payment to the Looney Note.
The Subordinated Notes restrict the Company from (A) directly or indirectly, incurring or
guaranteeing, assuming or suffering to exist any indebtedness, other than (i) the Subordinated
Notes, (ii) certain permitted indebtedness (including the Senior Subordinated Notes) and (iii) the
Looney Note; (B) allowing or suffering to exist any mortgage, lien, pledge, charge, security
interest or other similar encumbrance upon or in any property or assets (including accounts and
contract rights) owned by the Company or any of its subsidiaries other than (i) existing liens
securing the Looney Note and (ii) certain permitted liens (including liens securing the Senior
Subordinated Notes); and (C) during an event of default, directly or indirectly, redeeming,
defeasing, repurchasing, repaying or making any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases, tender offers,
private transactions or otherwise), all or any portion of any indebtedness expressly subordinate to
the Subordinated Notes.
The Subordinated Notes have not been registered under the Securities Act of 1933 and may not
be offered or sold absent registration or an applicable exemption from registration.
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As a result of the issuances of Subordinated Notes discussed above, the conversion of Bridge
Notes to Subordinated Notes discussed below and the application of PIK interest, the aggregate
principal balance of the Subordinated Notes at July 3, 2011, exclusive of the effect of debt
discounts, was $14,907,500. The balance of the Subordinated Notes, net of discounts, at July 3,
2011 was $3,986,500. The debt discounts will be amortized over the term of the Subordinated
Notes, unless such amortization is accelerated due to earlier conversion of the Subordinated Notes
pursuant to their terms.
Conversion of Bridge Notes into Subordinated Notes
As discussed above, the Company had previously sold Bridge Notes to investors in an aggregate
principal amount of $3,000,000, the terms of which permit the Bridge Note Holders to convert up to
and including the aggregate outstanding principal amount of such Bridge Notes and any accrued
interest thereon (the amount converted, the Conversion Amount) into the same securities issued
in, and upon the same terms and conditions of, the Institutional Financing (the Bridge Note
Conversion). Pursuant to the terms of the Bridge Private Placement, in December 2010, holders of
Bridge Notes with a principal balance of $1,208,200 (including accrued interest of $9,600)
converted their Bridge Notes into securities issued in the Institutional Financing. Of the Bridge
Notes converted in December 2010, Costa Brava and Griffin were holders of Bridge Notes with an
aggregate principal balance of $581,300 (including accrued interest of $2,700). Under the terms of
the Purchase Agreement, the Bridge Notes converted in December 2010 were converted into 5,488,800
shares of common stock valued at $384,200 and Subordinated Notes with a principal balance of
$824,000. In January 2011, under the terms of the Purchase Agreement, holders of Bridge Notes
with a principal balance of $250,600 (including accrued interest of $4,200) also converted their
Bridge Notes into 1,138,400 shares of common stock valued at $79,700 and Subordinated Notes with a
principal balance of $170,900. In April 2011, under the terms of the Purchase Agreement, holders
of Bridge Notes with a principal balance of $119,500 (including accrued interest of $4,500) also
converted their Bridge Notes into 543,000 shares of common stock valued at $38,000 and Subordinated
Notes with a principal balance of $81,500. As a result of the Bridge Note conversions in December
2010, January 2011 and April 2011 and the application of PIK interest, the unconverted Bridge Notes
aggregate principal balance at their maturity date of May 31, 2011 was $1,519,600, which was paid
in full by the Company in cash. The conversions of Bridge Notes to common stock in the 39-week
period ended July 3, 2011 resulted in the elimination of $69,100 of derivative liability, which was
recorded as an adjustment to paid-in capital during the period.
Conversion Features of the Bridge Notes and the Subordinated Notes.
The conversion features of the Subordinated Notes, and the Bridge Notes while they were
outstanding, contain provisions that adjust the conversion price in the event of certain dilutive
issuances of securities. Accordingly, the Company considered such conversion features to be
derivatives and recorded their fair value of $6,867,100 at the date of issuance as a liability and
as a discount to the underlying notes. At July 3, 2011, the derivative liability of the Bridge
Notes had been eliminated as a result of their conversion or repayment. The Company re-measured
the fair value of the derivative liability of the Subordinated Notes to be $13,745,000 as of July
3, 2011.
The following outlines the significant assumptions the Company used
to estimate the fair value information presented, with respect to
derivative liabilities utilizing the Binomial Lattice pricing model
at the date of issuance and July 3, 2011:
Risk free interest rate |
1.55% 2.09% | |
Expected volatility |
74.8% 77.6% | |
Expected dividends |
None |
15
Table of Contents
Note 3 Common Stock and Common Stock Warrants, Preferred Stock, Stock Incentive Plans,
Employee Retirement Plan and Deferred Compensation Plans
During the 39-week period ended July 3, 2011, the Company issued an aggregate of 80,007,100
shares of common stock, with an aggregate gross valuation of $7,555,500, in both cash and non-cash
transactions.
Cash Common Stock Transactions. In December 2010, the Company issued an aggregate of
approximately 51,788,600 shares of common stock of the Company for approximately $3,625,200, or
$0.07 per share, in the Institutional Financing. (See Note 2.) In June 2011, the Company issued
20,000 shares of common stock of the Company for $3,200 pursuant to the exercise of an employee
stock option.
Non-Cash Common Stock Transactions. During the 39-week period ended July 3, 2011, the Company
issued an aggregate of 28,198,500 shares of common stock, net of forfeitures, with an aggregate
valuation of $3,927,000, in the following non-cash transactions: (i) an aggregate of 5,758,100
shares of common stock of the Company, valued at $750,000, were issued to the Bridge Note Holders
pursuant to the Bridge Private Placement (see Note 2); (ii) an aggregate of 7,170,100 shares of
common stock of the Company, valued at $501,900, were issued to certain Bridge Note Holders for
conversion of the aggregate outstanding principal amount of the Bridge Notes and any accrued
interest thereon held by said Bridge Note Holders into the same securities issued in, and upon the
same terms and conditions of, the Institutional Financing (see Note 2); (iii) an aggregate of
3,554,100 shares of common stock of the Company were issued in various transactions in exchange for
conversion and cancellation of $333,300 of the stated value of the Companys Series A-2 10%
Cumulative Convertible Preferred Stock (the Series A-2 Stock); (iv) an aggregate of 214,300
shares of common stock of the Company was issued in various transactions in exchange for conversion
and cancellation of $107,200 of the stated value of the Companys Series B Convertible Preferred
Stock (the Series B Stock); (v) an aggregate of 3,750,000 shares of common stock of the Company
was issued in various transactions in exchange for conversion and cancellation of $1,125,000 of the
stated value of the Companys Series C Convertible Preferred Stock (the Series C Stock); (vi)
682,300 shares of common stock of the Company were issued to pay interest in the amount of $272,800
on the Companys Debentures pursuant to their terms (See Note 2); (vii) 221,000 shares of common
stock of the Company were issued pursuant to cashless exercise of warrants; (viii) 177,300 shares
of common stock of the Company, valued at $22,500, were issued to employees and directors as
compensation expense; (ix) 6,666,700 shares of common stock of the Company were issued to
effectuate $800,000 of non-cash contributions by the Company to the Companys employee retirement
plan, the Cash or Deferred & Stock Bonus Plan (ESBP), for fiscal 2011, $685,800 of which has been
recognized as expense in the 39-week period ended July 3, 2011 and the balance of which is
reflected as a deferred expense expected to be realized in the fourth quarter of fiscal 2011; and
(x) 7,200 shares of nonvested shares of common stock of the Company were forfeited.
Common Stock Warrants. In the 39-week period ended July 3, 2011, as a result of the
Institutional Financing, and pursuant to existing price anti-dilution provisions, the exercise
prices of the Class A Common Stock Purchase Warrants (the Class A Warrants) and the Class B
Common Stock Purchase Warrant (the Class B Warrant) issued by the Company in December 2006 and
August 2007, respectively, were automatically adjusted to $0.07 per share. The number of shares of
common stock of the Company issuable upon exercise of the Class A Warrants and Class B Warrant did
not change. In
February 2011, Longview exercised its rights to purchase an aggregate of 308,900 shares of
common stock on a cashless basis pursuant to its Class A Warrant and Class B Warrant resulting in
the net issuance of 221,000 shares of common stock of the Company. As a result of Longviews
exercise, only a single Class A Warrant to purchase 50,000 shares of common of the Company held by
another accredited investor remained outstanding at July 3, 2011. Other than this single Class A
Warrant, none of the other warrants of the Company outstanding at July 3, 2011 contain price
anti-dilution provisions.
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In the 39-week period ended July 3, 2011, the Bridge Private Placement established an
obligation for the Company to issue Bridge Agent Warrants, consisting of a warrant to purchase
approximately 2,227,400 shares of common stock of the Company at an exercise price of $0.13 per
share and a warrant to purchase approximately 155,000 shares of common stock of the Company at an
exercise price of $0.135 per share, subject to the requirement that said warrants were not
exercisable unless and until stockholder authority was obtained to increase the Companys
authorized shares of common stock to a number adequate to reserve for both any shares of common
stock to be issued in connection with the Institutional Financing and the Bridge Agent Warrants, as
well as any other known issuances of common stock for which the Company must reserve shares for
issuance. Such stockholder authority was obtained in March 2011. In the 39-week period ended July
3, 2011, the Company recorded the $190,600 expense of the Bridge Agent Warrants as a debt discount
to be amortized over the term of the Bridge Notes. The Company used the Black-Scholes model to
value the Bridge Agent Warrants using the following assumptions; volatility of 74.82%, common stock
price $0.13 per share, exercise price of $0.13, risk-free interest rate of 1.89% and an expected
term of five years.
At July 3, 2011 and October 3, 2010, there were warrants outstanding to purchase 10,115,800
and 8,042,300 shares of the Companys common stock, respectively.
Preferred Stock. In the 39-week period ended July 3, 2011, as a result of the Institutional
Financing, and pursuant to existing price anti-dilution provisions of the Companys Certificate of
Incorporation, as amended, the conversion price of the Series A-2 Stock was automatically adjusted
to $0.07 per share.
In the 39-week period ended July 3, 2011, the approximately 8,331 shares of the Series A-2
Stock that were issued and outstanding at the start of said period were converted by Longview into
3,554,100 shares of common stock, resulting in no shares of Series A-2 Stock remaining outstanding
at July 3, 2011. In the 39-week period ended July 3, 2011, approximately 107 shares of Series B
Stock were converted into approximately 214,300 shares of common stock, resulting in approximately
1,786 shares of Series B Stock remaining outstanding at July 3, 2011. In the 39-week period ended
July 3, 2011, 37,500 shares of Series C Stock were converted by Longview into 3,750,000 shares of
common stock, resulting in no shares of Series C Stock remaining outstanding at July 3, 2011.
Stock Incentive Plans. In June 2006, the Companys stockholders approved the Companys 2006
Omnibus Incentive Plan (the 2006 Plan), which is designed to serve as a comprehensive equity
incentive program to attract and retain the services of individuals essential to the Companys
long-term growth and financial success. The 2006 Plan permits the granting of stock options
(including both incentive and non-qualified stock options), stock-only stock appreciation rights,
nonvested stock and nonvested stock units, performance awards of cash, stock or property, dividend
equivalents and other stock grants. Upon approval of the 2006 Plan in June 2006, the Companys 2003
Stock Incentive Plan (the 2003 Plan), 2001 Non-Qualified Stock Option Plan (the 2001
Non-Qualified Plan), 2001 Stock Option Plan (the 2001 Plan) and 2000 Non-Qualified Stock Option
Plan (the 2000 Plan) (collectively, the Prior Plans) were terminated, but existing options
issued pursuant to the Prior Plans remain outstanding in accordance with the terms of their
original grants.
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As of July 3, 2011, there were no options to purchase shares of the Companys common stock
outstanding and exercisable under the 2000 Plan, options to purchase 2,500 shares of the Companys
common stock at an exercise price of $11.50 per share were outstanding and exercisable under the
2001 Plan, options to purchase 40,500 shares of the Companys common stock were outstanding and
exercisable under the 2001 Non-Qualified Plan, at exercise prices ranging from $8.60 to $13.50 per
share, and options to purchase 249,900 shares of the Companys common stock were outstanding under
the 2003 Plan at exercise prices ranging from $10.40 to $36.20 per share, of which all were
exercisable at July 3, 2011.
Pursuant to an amendment of the 2006 Plan by stockholders in March 2009, the number of shares
of common stock reserved for issuance under the 2006 Plan shall automatically increase at the
beginning of each subsequent fiscal year by the lesser of 1,250,000 shares or 5% of the common
stock of the Company outstanding on the last day of the preceding fiscal year. As a result of
that provision, the number of shares issuable under the 2006 Plan increased by 1,250,000 shares in
the 39-week period ended July 3, 2011. As of July 3, 2011, there were options to purchase 1,904,600
shares of the Companys common stock outstanding under the 2006 Plan, at exercise prices ranging
from $0.09 to $14.10 per share, of which options to purchase 593,100 shares were exercisable at
July 3, 2011. In addition, as of July 3, 2011, 17,700 shares of nonvested stock were issued and
outstanding pursuant to the 2006 Plan and 346,200 shares of vested stock were issued and
outstanding pursuant to the 2006 Plan. The aggregate number of shares of common stock issuable
under all future stock-based awards that may be made under the 2006 Plan at July 3, 2011 is
approximately 498,100 shares.
In December 2010, in connection with the Institutional Financing, the Companys Board adopted
the Companys 2010 Non-Qualified Stock Option Plan (the 2010 Plan) under which the Companys
eligible officers, directors and employees, consultants and advisors who qualify as accredited
investors within the meaning of Rule 501 under the Securities Act, may be granted non-incentive
stock options. 18,500,000 shares of the Companys common stock were reserved for issuance under the
2010 Plan, and options to purchase 18,500,000 shares of the Companys common stock at an exercise
price of $0.09 per share were issued to certain of the Companys officers and directors in December
2010 pursuant to the 2010 Plan. No further grants may presently be made under the 2010 Plan.
In March 2011, the Companys stockholders approved the Companys 2011 Omnibus Incentive Plan
(the 2011 Plan) and reserved 46,500,000 shares of common stock of the Company for potential
issuance pursuant to the 2011 Plan. The 2011 Plan is designed to promote the interests of the
Company and its stockholders by serving as a comprehensive equity incentive program to attract and
retain the services of individuals capable of assuring the future success of the Company and to
afford such persons an opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Company. The 2011 Plan permits grants of stock options (including
both incentive and non-qualified stock options), stock-only appreciation rights, restricted stock,
restricted stock units, dividend equivalents, performance awards of cash, stock or property, other
stock grants and other stock-based awards. In the 39-week period ended July 3, 2011, options to
purchase 23,750,000 shares of common stock of the Company at an exercise price of $0.15 per share,
options to purchase 375,000 shares of common stock of the Company at an exercise price of $0.14 per
share, options to purchase 4,000,000 shares of common stock of the Company at an exercise price of
$0.13 per share and options to purchase 2,927,500 shares of common stock of the Company at an
exercise price of $0.11 per share were issued to certain of the Companys officers, directors and
service providers pursuant to the 2011 Plan.
The Company used the Black-Scholes option-pricing model to estimate the fair value of options
issued in the 39-week period ended July 3, 2011 on the dates of the respective option grants using
the following assumptions.
Risk free interest rate |
1.89% 2.91% | |
Expected life |
5.3 7.0 years | |
Expected volatility |
71.6% 74.8% | |
Expected dividend yield |
None |
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Table of Contents
The following table summarizes stock options outstanding as of July 3, 2011 as well as
activity during the 39-week period then ended:
Weighted Average | ||||||||
Shares (1) | Exercise Price | |||||||
Outstanding at October 3, 2010 |
1,373,900 | $ | 7.44 | |||||
Granted |
50,552,500 | 0.12 | ||||||
Exercised |
(20,000 | ) | 0.16 | |||||
Expired |
(6,200 | ) | 181.49 | |||||
Forfeited |
(212,700 | ) | 1.32 | |||||
Outstanding at July 3, 2011 |
51,687,500 | $ | 0.29 | |||||
Exercisable at July 3, 2011 |
9,642,200 | $ | 1.00 | |||||
(1) | Rounded to nearest one hundred (100). |
At July 3, 2011, the aggregate intrinsic value of unvested options outstanding and options
exercisable was $290,000 and $100,000, respectively. Options to purchase 20,000 shares of common
stock were exercised during the 39 weeks ended July 3, 2011, and the total intrinsic value of said
options exercised during that period was $100. The intrinsic value of a stock option is the amount
by which the market value of the underlying stock exceeds the exercise price of the option. At July
3, 2011, the weighted-average remaining contractual life of options outstanding and exercisable was
9.6 years and 9.2 years, respectively. The weighted average grant date fair value of options
granted during the 39 weeks ended July 3, 2011 was $0.08 per share.
The amount of compensation expense related to outstanding stock options not yet recognized at
July 3, 2011 was $2,852,200 and, assuming the grantees continue to be employed by or remain as
directors of the Company, that amount will be recognized as compensation expense as follows:
FY 2011 (remainder of year) |
$ | 293,100 | ||
FY 2012 |
918,000 | |||
FY 2013 |
997,100 | |||
FY 2014 |
632,100 | |||
FY 2015 |
10,800 | |||
FY 2016 |
1,100 | |||
Total |
$ | 2,852,200 | ||
The following table summarizes nonvested stock grants outstanding as of July 3, 2011 as well
as activity during the 39-week period then ended:
Weighted Average | ||||||||
Grant Date Fair | ||||||||
Nonvested Shares (1) | Value per Share | |||||||
Outstanding at October 3, 2010 |
40,700 | $ | 1.57 | |||||
Granted |
11,800 | 0.11 | ||||||
Vested |
(27,600 | ) | 1.13 | |||||
Forfeited |
(7,200 | ) | 0.29 | |||||
Outstanding at July 3, 2011 |
17,700 | $ | 1.80 | |||||
(1) | Rounded to nearest one hundred (100). |
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The amount of compensation expense related to nonvested stock grants not yet recognized at
July 3, 2011 was $1,600 and, assuming the grantees continue to be employed by or remain as
directors of the Company, that amount will be recognized as compensation expense as follows:
FY 2011 (remainder of year) |
$ | 300 | ||
FY 2012 |
800 | |||
FY 2013 |
400 | |||
FY 2014 |
100 | |||
Total |
$ | 1,600 | ||
Note 4 Net Income (Loss) per Share
The Company had a net loss for all current and prior periods presented except for the 13-week
period ended July 3, 2011. Accordingly, for the 39-week period ended July 3, 2011, the 13-week
period ended June 27, 2010 and the 39-week period ended June 27, 2010, there was no difference
between basic and diluted loss per share in each period. In all periods presented, application of
the as-if-converted method to outstanding shares of the Companys convertible preferred stock
resulted in said instruments being anti-dilutive and therefore not impacting the calculation of
income per share. However, as of July 3, 2011, the Company had outstanding stock options, nonvested
stock and convertible debt with exercise, valuation or conversion prices less than the average
closing market price of the Companys common stock over the 39-week period ended July 3, 2011.
Such in-the money instruments are assumed to have been exercised or vested at the beginning of a
period (or at time of issuance, if later) for purposes of calculating diluted income per share if
the Company has recorded income for said period, which was the case in the 13-week period ended
July 3, 2011. In addition, interest on convertible debentures in the 13-week period ended July 3,
2011 is treated as an adjustment to income for purposes of determining diluted net income per
common share. Further, outstanding shares of the Companys Series B Stock are assumed to be
converted for purposes of determining diluted net income per share in the 13-week period ended July
3, 2011. As a result, basic and diluted net income per common share are different for the 13-week
period ended July 3, 2011. The beneficial conversion feature associated with the issuance of the
Companys Series B Stock in the 39-week period ended June 27, 2010, although not recorded as an
expense, is treated as a deemed dividend and, therefore, an incremental expense for purposes of
determining basic and diluted net loss per common share.
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The following table sets forth the computation of basic and diluted loss per common share:
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||
July 3, | June 27, | July 3, | June 27, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic Net Income (Loss) Numerator: |
||||||||||||||||
Net income (loss) attributable to Irvine Sensors
Corporation |
$ | 4,499,600 | $ | (2,625,400 | ) | $ | (13,883,200 | ) | $ | (7,761,700 | ) | |||||
Deemed dividend for beneficial conversion
feature related to Series B Stock |
| | | (1,471,000 | ) | |||||||||||
Adjusted net income (loss) attributable to Irvine
Sensors Corporation common stockholders |
$ | 4,499,600 | $ | (2,625,400 | ) | $ | (13,883,200 | ) | $ | (9,232,700 | ) | |||||
Diluted Net Income (Loss) Numerator: |
||||||||||||||||
Net income (loss) attributable to Irvine Sensors
Corporation |
$ | 4,499,600 | $ | (2,625,400 | ) | $ | (13,883,200 | ) | $ | (7,761,700 | ) | |||||
Interest on convertible debt |
802,700 | | | | ||||||||||||
Deemed dividend for beneficial conversion
feature related to Series B Stock |
| | | (1,471,000 | ) | |||||||||||
Adjusted net income (loss) attributable to Irvine
Sensors Corporation common stockholders |
$ | 5,302,300 | $ | (2,625,400 | ) | $ | (13,883,200 | ) | $ | (9,232,700 | ) | |||||
Basic Net Income (Loss) Denominator: |
||||||||||||||||
Weighted average number
of common shares outstanding, basic |
107,504,800 | 17,302,800 | 83,105,800 | 13,932,100 | ||||||||||||
Basic net income (loss) attributable
to Irvine Sensors Corporation
per common share |
$ | 0.04 | $ | (0.15 | ) | $ | (0.17 | ) | $ | (0.66 | ) | |||||
Diluted Net Income (Loss) Denominator: |
||||||||||||||||
Assumed net exercise and vesting of options,
warrants and nonvested stock |
752,200 | | | | ||||||||||||
Assumed conversion of convertible debt |
148,894,500 | | | | ||||||||||||
Assumed conversion of preferred stock |
3,571,100 | | | | ||||||||||||
Weighted average number
of common shares outstanding, basic |
107,504,800 | 17,302,800 | 83,105,800 | 13,932,100 | ||||||||||||
Assumed weighted average number
of common shares and common share
equivalents outstanding, diluted |
260,723,100 | 17,302,800 | 83,105,800 | 13,932,100 | ||||||||||||
Diluted net income (loss) attributable
to Irvine Sensors Corporation
per common share |
$ | 0.02 | $ | (0.15 | ) | $ | (0.17 | ) | $ | (0.66 | ) | |||||
Note 5 Inventories, Net
Net inventories at July 3, 2011 and October 3, 2010 are set forth below.
July 3, | October 3, | |||||||
2011 | 2010 | |||||||
Inventory: |
||||||||
Work in process |
$ | 241,700 | $ | 360,800 | ||||
Raw materials |
666,800 | 781,500 | ||||||
Finished goods |
520,900 | 823,500 | ||||||
1,429,400 | 1,965,800 | |||||||
Less reserve for obsolete inventory |
(250,000 | ) | (250,000 | ) | ||||
$ | 1,179,400 | $ | 1,715,800 | |||||
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The Company uses the average cost method for valuation of its product inventory.
Title to all inventories remains with the Company. Inventoried materials and costs relate to:
work orders from customers; the Companys generic module parts and memory stacks; and capitalized
material, labor and overhead costs expected to be recovered from probable new research and
development contracts. Work in process includes amounts that may be sold as products or under
contracts. Such inventoried costs are stated generally at the total of the direct production costs
including overhead. Inventory valuations do not include general and administrative expenses.
Inventories are reviewed quarterly to determine salability and obsolescence. The net book value of
capitalized pre-contract costs, which gross costs are included in the caption Work in process, at
July 3, 2011 and October 3, 2010 was $0 and $360,800, respectively.
Note 6 Concentration of Revenues and Sources of Supply
In the 13-week and 39-week periods ended July 3, 2011, direct contracts with the U.S.
government accounted for 28% and 19%, respectively, of the Companys total revenues, and
second-tier government contracts with prime government contractors accounted for 66% and 78% of
total revenues, respectively. The remaining 6% and 3% of the Companys total revenues in the
13-week and 39-week periods ended July 3, 2011, respectively, were derived from non-government
sources. Of the revenues derived directly or indirectly from U.S. government agencies, Optics 1, a
defense contractor, the U. S. Air Force, and BBN Technologies, a defense contractor, accounted for
46%, 14% and 14%, respectively, of the Companys total revenues in the 13-week period ended July 3,
2011, and Optics 1 accounted for 62% of the Companys total revenues in the 39-week period ended
July 3, 2011. Loss of any of these customers would have a material adverse impact on our business,
financial condition and results of operations. No other single governmental or non-governmental
customer accounted for more than 10% of the Companys total revenues in the 13-week and 39-week
periods ended July 3, 2011.
In the 13-week and 39-week periods ended June 27, 2010, direct contracts with the U.S.
government accounted for 40% and 58%, respectively, of the Companys total revenues, and
second-tier government contracts with prime government contractors accounted for 59% and 40% of
total revenues, respectively. The remaining 1% and 2% of the Companys total revenues in the
13-week and 39-week periods ended June 27, 2010, respectively, were derived from non-government
sources. Of the revenues derived directly or indirectly from U.S. government customers, Optics 1,
certain classified agencies and the U. S. Army accounted for 42%, 21% and 13%, respectively, of the
Companys total revenues in the 13-week period ended June 27, 2010, and certain classified
agencies, the U. S. Army and Optics 1 accounted for 28%, 20%, and 19%, respectively, of the
Companys total revenues in the 39-week period ended June 27, 2010. No other single
governmental or non-governmental customer accounted for more than 10% of the Companys total
revenues in the 13-week and 39-week periods ended June 27, 2010.
The Company primarily uses contract manufacturers to fabricate and assemble its stacked chip,
microchip, information security and sensor products. At its current limited levels of sales, the
Company typically uses a single contract manufacturer for such products and, as a result, is
vulnerable to disruptions in supply. The Company also uses contract manufacturers for production of
its visible camera products, except for final testing, which the Company performs itself. The
Company currently assembles, calibrates and tests its thermal camera and software products itself.
The Companys various thermal and visible camera products presently rely on a limited number of
suppliers of imaging chips that
meet the quality and performance requirements of the Companys products, which makes the
Company vulnerable to potential disruptions in supply of such imaging chips. Any such disruptions
described above would have a material adverse impact on our business, financial condition and
results of operations.
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Note 7 Commitments and Contingencies
Litigation. In March 2009, FirstMark III, LP, formerly known as Pequot Private Equity Fund
III, LP, and FirstMark III Offshore Partners, LP, formerly known as Pequot Offshore Private Equity
Partners III, LP (collectively, FirstMark), filed a lawsuit in the state Supreme Court, State of
New York, County of New York, against the Company. FirstMark alleged that the Company breached a
settlement agreement dated December 29, 2006 with them that allegedly required the Company to make
certain payments to FirstMark that were not made, in the principal amounts of approximately
$539,400 and $230,000 plus interest thereon allegedly accruing at 18% from March 14, 2007 and May
31, 2007, respectively. At October 3, 2010, the Company had approximately $1,269,600 of expense
accrued reflecting these alleged obligations, consisting of approximately $1,039,600 of accrued
interest and $230,000 of accrued professional fees.
In December 2010, the Company entered into a Settlement Agreement and Release with FirstMark,
pursuant to which the Company settled all claims between the Company and FirstMark, including those
relating to the lawsuit discussed above. Pursuant to the Settlement Agreement and Release, the
Company will pay FirstMark a total sum of $1,235,000 in eighteen monthly payments commencing
January 15, 2011. In the event that a monthly installment payment is not paid by the Company
within 30 days of the date it is due, FirstMark may enter a Confession of Judgment in the amount of
the total settlement less any payment made by the Company prior to such default. This lawsuit was
dismissed with prejudice in December 2010. At July 3, 2011, the balance of this obligation was
$810,000, which represents interest and professional fees expensed in prior fiscal years and is
included in settlement agreement obligations in the accompanying condensed consolidated balance
sheet.
The Company has been, and may from time to time, become a party to various other legal
proceedings arising in the ordinary course of its business. The Company does not presently know of
any such other matters, the disposition of which would be likely to have a material effect on the
Companys consolidated financial position, results of operations or liquidity.
Note 8 Fair Value Measurements
The Company measures the fair value of applicable financial and non-financial assets and
liabilities based on the following levels of inputs.
| Level 1 inputs: Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. | ||
| Level 2 inputs: Level 2 inputs are from other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. | ||
| Level 3 inputs: Level 3 inputs are unobservable and should be used to measure fair value to the extent that observable inputs are not available. |
23
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The hierarchy noted above requires the Company to minimize the use of unobservable inputs and
to use observable market data, if available, when determining fair value. There were no transfers
between Level 1, Level 2 and/or Level 3 during the 39 weeks ended July 3, 2011. Financial
liabilities carried at fair value as of July 3, 2011 are classified below:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Derivative liabilities |
$ | | $ | 13,745,000 | $ | | $ | 13,745,000 | ||||||||
Total |
$ | | $ | 13,745,000 | $ | | $ | 13,745,000 |
Note 9 Subsequent Event
On July 19, 2011, the Company issued and sold to an accredited investor an additional
Subordinated Note in the aggregate principal amount of $750,000 in a second closing of the
financing described in the Companys Current Report on Form 8-K filed with the SEC on July 7, 2011.
The material terms of this $750,000 Subordinated Note are the same as those of the other
Subordinated Notes previously issued. (See Note 2).
24
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
In this report, the terms Irvine Sensors, Company, we, us and our refer to Irvine
Sensors Corporation (ISC) and its subsidiaries.
This report contains forward-looking statements regarding Irvine Sensors which include, but
are not limited to, statements concerning our projected revenues, expenses, gross profit and
income, mix of revenue, demand for our products, the need for additional capital, our ability to
obtain and successfully perform additional new contract awards and the related funding of such
awards, our ability to repay our outstanding debt, market acceptance of our products and
technologies, the competitive nature of our business and markets, the success and timing of new
product introductions and commercialization of our technologies, product qualification requirements
of our customers, the need to divest assets, our significant accounting policies and estimates, and
the outcome of expense audits. These forward-looking statements are based on our current
expectations, estimates and projections about our industry, managements beliefs, and certain
assumptions made by us. Words such as anticipates, expects, intends, plans, predicts,
attempting, potential, believes, seeks, estimates, should, may, will, with a view
to and variations of these words or similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict. Therefore, our actual results could
differ materially and adversely from those expressed in any forward-looking statements as a result
of various factors. Such factors include, but are not limited to the following:
| our ability to obtain additional financing for working capital, if required, on acceptable terms, in a timely manner or at all; | ||
| changes in the fair value of derivative instruments expense; | ||
| our ability to repay our outstanding debt and settlement obligations when due; | ||
| governmental agendas, budget issues and constraints and funding or approval delays; | ||
| our ability to obtain critical and timely product and service deliveries from key vendors; | ||
| our ability to successfully execute our business and operating plans and control costs and expenses; | ||
| our ability to obtain expected and timely bookings and orders resulting from existing contracts; | ||
| our ability to secure and successfully execute additional product orders and contracts, and achieve greater backlog; | ||
| our ability to fulfill our backlog; | ||
| our ability to divest assets as we deem necessary on favorable terms, in a timely manner or at all; | ||
| our ability to maintain adequate internal controls and disclosure procedures, and maintain compliance with Section 404 of the Sarbanes-Oxley Act; | ||
| our ability to introduce new products, gain broad market acceptance for such products and ramp up manufacturing in a timely manner; | ||
| new products or technologies introduced by our competitors, many of whom are bigger and better financed than us; | ||
| the pace at which new markets develop; | ||
| our ability to establish and maintain strategic partnerships to develop our business; |
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| our market capitalization; | ||
| general economic and political instability; and | ||
| those additional factors which are listed under the section Risk Factors in Part II, Item 1A of this report. |
We do not undertake any obligation to revise or update publicly any forward-looking statements
for any reason, except as required by law. Additional information on the various risks and
uncertainties potentially affecting our operating results are discussed below and are contained in
our publicly filed documents available through the SECs website (www.sec.gov) or upon written
request to our Investor Relations Department at 3001 Red Hill Avenue, Costa Mesa, California 92626.
Overview
We are a technology company engaged in the design, development, manufacture and sale of
security products, software, vision systems and miniaturized electronic products and higher level
systems incorporating such products for defense, information technology and physical security for
government and commercial applications. We also perform customer-funded contract research and
development related to these products, mostly for U.S. government customers or prime contractors.
Most of our historical business relates to application of our technologies for stacking either
packaged or unpackaged semiconductors into more compact three-dimensional forms, which we believe
offer volume, power, weight and operational advantages over competing packaging approaches, and
which we believe allows us to offer higher level products with unique operational features. We
have introduced certain higher-level products in the fields of thermal imaging cores and high speed
processing for information security that take advantage of our packaging technologies.
We have historically derived a substantial majority of our total revenues from
government-funded sources and anticipate that a substantial majority of our total revenues will
continue to be derived from government-funded sources in the immediately foreseeable future. We
have introduced thermal imaging and information security products incorporating our technologies
that are initially intended for government applications. We have achieved initial market
penetration for some of these products and are seeking growth in revenues derived from sale of
these products. If we are successful in achieving such growth, our future revenues may become more
dependent upon production elements of U.S. defense budgets, funding approvals and political
agendas. We are also attempting to increase our revenues from product sales by introducing new
products with commercial applications, in particular, products with information security
applications. We are currently placing substantial emphasis on the development of cyber-security
products, such as high-speed processing boards and subsystems, and, in April 2011, we opened and
commenced staffing a new office in Texas for such activity. We cannot assure you that we will be
able to complete development, successfully launch or profitably manufacture and sell any such
products on a timely basis, if at all. We generally use contract manufacturers to produce these
products or their subassemblies, and all of our other current operations occur at a leased facility
in Costa Mesa, California.
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Other than the fiscal year ended September 27, 2009 (fiscal 2009), we have a history of
unprofitable operations due in part to our investment in an unprofitable subsidiary and in part to
discretionary investments that we made to commercialize our technologies and to maintain our
technical staff and corporate infrastructure at levels that we believed were required for future
growth. In fiscal 2010 and the first 39 weeks of fiscal 2011, we continued to experience
unprofitable operations, due to insufficient total revenues to fully absorb our costs and expenses.
With respect to our investments in
staff and infrastructure, the advanced technical and multi-disciplinary content of our
technologies places a premium on a stable and well-trained work force. As a result, we have
historically maintained our work force as much as possible even when anticipated revenues were
delayed, a circumstance that has occurred with some frequency in the past and that has resulted in
under-utilization of our labor force for revenue generation from time to time. Our current
increased emphasis on securing sales of our products is, in part, motivated by the desire to
achieve more predictable revenues that should mitigate this effect, but we anticipate we may
continue to experience underutilization of our workforce in the near future. In February 2011, we
implemented a reduction-in-force to decrease this anticipated effect. We have not yet demonstrated
the level of sustained revenue that we believe, by itself, is required to sustain profitable
operations. Our ability to recover our investments through the cost-reimbursement features of
certain of our government contracts is constrained due to both regulatory and competitive pricing
considerations.
To offset the adverse working capital effect of our net losses, we have historically financed
our operations through multiple debt and equity financings. To finance the December 2005
acquisition of a subsidiary, now discontinued, we had incurred material long-term debt at that
time, and we exchanged a significant portion of that debt into preferred stock that was convertible
into our common stock. Since September 30, 2007 through July 3, 2011, we have issued approximately
110.9 million shares of our common stock, an increase of approximately 4,130% from the
approximately 2.7 million shares of our common stock outstanding at that date, which has resulted
in a substantial dilution of stockholder interests. At July 3, 2011, our fully diluted common stock
position was approximately 388.1 million shares, which assumes the conversion into common stock of
all of the Companys preferred stock and convertible notes outstanding as of July 3, 2011 and the
exercise for cash of all warrants and options to purchase the Companys securities outstanding as
of July 3, 2011. At July 3, 2011, we had approximately $21.4 million of debt, of which a
substantial majority was incurred in the first three quarters of fiscal 2011.
None of our subsidiaries accounted for more than 10% of our total assets at July 3, 2011 or
have separate employees or facilities. As a result of the Institutional Financing and the related
management and organizational changes that occurred in the 39-week period ended July 3, 2011, we
currently report our operating results and financial condition in a single segment.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in conformity with GAAP. As such,
management is required to make judgments, estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. The significant accounting
policies that are most critical to aid in fully understanding and evaluating reported financial
results are the same as those disclosed in our Form 10-K for the 53-week period ended October 3,
2010 filed with the Securities and Exchange Commission on December 17, 2010.
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Results of Operations
Total Revenues. Our total revenues are generally derived from sales of miniaturized camera
products, specialized chips, modules, stacked chip products and amounts realized or realizable from
funded research and development contracts, largely from U.S. government agencies and government
contractors. Our product sales in both the fiscal 2011 and fiscal 2010 periods were primarily
derived from the sale of thermal imaging camera products. Our total revenues decreased in the
13-week period ended July 3, 2011 as compared to the 13-week ended June 27, 2010, but increased in
the 39-week period
ended July 3, 2011, as compared to the 39-week period ended June 27, 2010, as shown in the
following table and discussed more fully below.
13-Week Comparisons | Total Revenues | |||
13 weeks ended June 27, 2010 |
$ | 3,576,100 | ||
Dollar decrease in current comparable 13 weeks |
(601,900 | ) | ||
13 weeks ended July 3, 2011 |
$ | 2,974,200 | ||
Percentage decrease in current 13 weeks |
(17 | %) | ||
39-Week Comparisons | Total Revenues | |||
39 weeks ended June 27, 2010 |
$ | 9,507,700 | ||
Dollar increase in current comparable 39 weeks |
1,137,800 | |||
39 weeks ended July 3, 2011 |
$ | 10,645,500 | ||
Percentage increase in current 39 weeks |
12 | % |
The decrease in our total revenues in the 13-week period ended July 3, 2011 as compared to the
13-week period ended June 27, 2010 was primarily due to a decrease in revenues derived from funded
research and development contracts in the current fiscal year period. We believe this decrease was
substantially related to the delay in approval of the U.S. defense budget for fiscal 2011. This
budget delay introduced uncertainty into the timing of funding or shipment releases under existing
contracts and the possible award of new contracts. The fiscal 2011 U.S. defense budget has now
been finalized, but the scope of new procurement actions of our government customers based on
approval of the fiscal 2011 U.S. defense budget have not yet been made fully visible to us. In
addition, it is presently unknown what effects the recent federal debt ceiling spending cuts
agreement may have on the allocation of funds to our government customers. Accordingly, we are
unable to ascertain what future effects the U.S. defense budget delay and possible cuts may have on
our total revenues for the balance of this fiscal year and beyond. This government budget effect
also impacted the entire current year 39-week period, but increased sales of our thermal imaging
products in that period, particularly our cores for clip-on thermal imager (COTI) products
intended to add thermal imaging capability to existing night vision goggles, more than offset
reduced revenues derived from funded research and development contracts, resulting in the aggregate
increase in total revenues for the 39-week period ended July 3, 2011 as compared to the 39-week
period ended June 27, 2010. The increase in sales of our COTI products in the current fiscal year
period was substantially derived from a government contract awarded in fiscal 2010 to our strategic
partner Optics 1, Inc., with whom we have a teaming agreement, but not released for significant
shipments by the government customer until the first three quarters of fiscal 2011, thereby
accounting for the increase in total revenue derived from these products in the 39-week period
ended July 3, 2011 as compared to the 39-week period ended June 27, 2010.
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Cost of Revenues. Cost of revenues includes wages and related benefits of our personnel, as
well as subcontractor, independent consultant and vendor expenses directly incurred in the
manufacture of products sold or in the performance of funded research and development contracts,
plus related overhead expenses and, in the case of funded research and development contracts, such
other indirect expenses as are permitted to be charged pursuant to the relevant contracts. Our
cost of revenues for the 13 weeks ended July 3, 2011 decreased as compared to the 13 weeks ended
June 27, 2010, but increased in the 39 weeks ended July 3, 2011 as compared to the 39 weeks ended
June 27, 2010 in terms of both absolute dollars and as a percentage of total revenues, as shown in
the following table:
Percentage of | ||||||||
13-Week Comparisons | Cost of Revenues | Total Revenues | ||||||
13 weeks ended June 27, 2010 |
$ | 2,900,800 | 81 | % | ||||
Dollar decrease in current comparable 13 weeks |
(540,700 | ) | ||||||
13 weeks ended July 3, 2011 |
$ | 2,360,100 | 79 | % | ||||
Percentage decrease in current 13 weeks |
(19 | %) |
Percentage of | ||||||||
39-Week Comparisons | Cost of Revenues | Total Revenues | ||||||
39 weeks ended June 27, 2010 |
$ | 7,513,000 | 79 | % | ||||
Dollar increase in current comparable 39 weeks |
1,971,500 | |||||||
39 weeks ended July 3, 2011 |
$ | 9,484,500 | 89 | % | ||||
Percentage increase in current 39 weeks |
26 | % |
The decrease in absolute dollar cost of revenues in the 13-week period ended July 3, 2011 as
compared to the 13-week period ended June 27, 2010 is largely the result of the corresponding
decline in total revenues in the current fiscal year period. Although there was also a decline in
cost of revenues as a percentage of total revenues in the current fiscal 2011 third quarter as
compared to the third quarter of fiscal 2010, the aggregate amount of such percentage decline was
not substantial, reflecting reduced costs of our thermal imaging products offset by increased
direct and overhead costs associated with our funded research and development contracts. In
contrast, the increase in both absolute dollar cost of revenues and cost of revenues as a
percentage of total revenues in the 39-week period ended July 3, 2011 as compared to the 39-week
period ended June 27, 2010 was disproportionately greater than the corresponding increase in total
revenues in the fiscal 2011 period. This disproportionate increase in cost of revenues for the
39-week period ended July 3, 2011 compared to the 39-week period ended June 27, 2010 was partially
the result of greater overhead expenses allocated to cost of revenues, certain of which were
recorded in the current fiscal year period and which did not occur in the comparable period of the
prior fiscal year. In December 2010, we accrued and paid non-recurring compensation to our staff
in consideration of the salary reductions and deferrals they had experienced in fiscal 2010 and the
first quarter of fiscal 2011, of which $200,300 was allocated to overhead applied to cost of
revenues in the 39-week period ended July 3, 2011. No comparable expense was incurred in the
39-week period ended June 27, 2010. In addition, the specific technical milestones of some of our
funded research and development contracts required proportionately greater utilization of our
direct labor in the 39-week period ended July 3, 2011 than in the 39-week period ended June 27,
2010. Because of these types of variances and non-recurring expenses, we do not believe that the
increase in cost of revenues as a percentage of total revenues in the 39-week period ended July 3,
2011 as compared to the 39-week period ended June 27, 2010 is indicative of a continuing trend.
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General and Administrative Expense. General and administrative expense largely consists of
wages and related benefits for our executive, financial, administrative and marketing staff, as
well as professional fees, primarily legal and accounting fees and costs, plus various fixed costs
such as rent, utilities and telephone. The comparison of general and administrative expense for
the 13-week and 39-week periods ended July 3, 2011 and June 27, 2010 is shown in the following
table:
General and | ||||||||
Administrative | Percentage of | |||||||
13-Week Comparisons | Expense | Total Revenue | ||||||
13 weeks ended June 27, 2010 |
$ | 1,565,100 | 44 | % | ||||
Dollar increase in current comparable 13 weeks |
386,700 | |||||||
13 weeks ended July 3, 2011 |
$ | 1,951,800 | 66 | % | ||||
Percentage increase in current 13 weeks |
25 | % |
General and | ||||||||
Administrative | Percentage of | |||||||
39-Week Comparisons | Expense | Total Revenue | ||||||
39 weeks ended June 27, 2010 |
$ | 4,693,100 | 49 | % | ||||
Dollar increase in current comparable 39 weeks |
1,316,600 | |||||||
39 weeks ended July 3, 2011 |
$ | 6,009,700 | 56 | % | ||||
Percentage increase in current 39 weeks |
28 | % |
The largest contributor to the increases in general and administrative expense in the current
fiscal year periods as opposed to the comparable periods of the prior fiscal year was an increase
in stock-based compensation. In connection with management and organizational changes related to
our Institutional Financing, we issued various stock option grants in the 13-week and 39-week
periods ended July 3, 2011 that increased stock-based compensation expense in the current fiscal
year periods as compared to the 13-week and 39-week periods ended June 27, 2010. We incurred
$242,300 and $769,900 more stock-based compensation expense allocated to general and administrative
expense in the 13-week and 39-week periods ended July 3, 2011, respectively, than we did in the
13-week and 39-week periods ended June 27, 2010. In addition, in the 13-week and 39-week periods
ended July 3, 2011, salary reductions that had been implemented in fiscal 2010 for senior
executives were eliminated and two new senior executives were added to our general and
administrative staff. The aggregate impact of the salary adjustments, the new executives and the
stock-based compensation expense was to increase general and administrative labor and labor-related
expense by approximately $634,400 and $1,826,800 in the 13-week and 39-week periods ended July 3,
2011, respectively, as compared to the 13-week and 39-week periods ended June 27, 2010. The
increases in general and administrative expenses from these sources in the current fiscal year
periods were offset by reductions in other categories of general and administrative expense, the
largest such reduction being an approximate $259,700 decrease in the 39-week period ended July 3,
2011 compared to the 39-week period ended June 27, 2010 in our unallowable general and
administrative expense for which we cannot seek reimbursement under most of our government
contracts, largely litigation expenses. During a portion of the comparable fiscal 2010 period, we
were still involved in litigation related to our discontinued Optex subsidiary, but that litigation
was subsequently settled and did not produce legal expenses in fiscal 2011.
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Research and Development Expense. Research and development expense primarily consists of wages
and related benefits for our research and development staff, independent contractor consulting fees
and subcontractor and vendor expenses directly incurred in support of internally funded research
and development projects, plus associated overhead expenses. Research and development expense for
the 13-week and 39-week periods ended July 3, 2011 as compared to the 13-week and 39-week periods
ended June 27, 2010 is shown in the following table:
Research and | ||||||||
Development | Percentage of | |||||||
13-Week Comparisons | Expense | Total Revenue | ||||||
13 weeks ended June 27, 2010 |
$ | 655,200 | 18 | % | ||||
Dollar increase in current comparable 13 weeks |
154,000 | |||||||
13 weeks ended July 3, 2011 |
$ | 809,200 | 27 | % | ||||
Percentage increase in current 13 weeks |
24 | % |
Research and | ||||||||
Development | Percentage of | |||||||
39-Week Comparisons | Expense | Total Revenue | ||||||
39 weeks ended June 27, 2010 |
$ | 2,011,400 | 21 | % | ||||
Dollar increase in current comparable 39 weeks |
35,900 | |||||||
39 weeks ended July 3, 2011 |
$ | 2,047,300 | 19 | % | ||||
Percentage increase in current 39 weeks |
2 | % |
During the 13-week period ended July 3, 2011, we opened and commenced staffing an office in
Texas for development of our intended cyber-security products. Many of the expenses of this office
have been allocated to research and development expense. Concurrent with implementation of this
focused cyber-security product development activity, we de-emphasized other internal research and
development activities. The net effect of these changes was an increase in absolute dollars of
research and development expense in both the 13-week and 39-week periods ended July 3, 2011 as
compared to the 13-week and 39-week periods ended June 27, 2010. We expect to continue to allocate
significant resources to the development of our cyber-security products in future periods, which
may result in further increases in research and development expense as compared to prior fiscal
year periods.
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Interest Expense. Our interest expense for the 13-week and 39-week periods ended July 3, 2011,
compared to the 13-week and 39-week periods ended June 27, 2010, increased substantially, as shown
in the following table:
13-Week Comparisons | Interest Expense | |||
13 weeks ended June 27, 2010 |
$ | 636,500 | ||
Dollar increase in current comparable 13 weeks |
417,700 | |||
13 weeks ended July 3, 2011 |
$ | 1,054,200 | ||
Percentage increase in current 13 weeks |
66 | % |
39-Week Comparisons | Interest Expense | |||
39 weeks ended June 27, 2010 |
$ | 882,600 | ||
Dollar increase in current comparable 39 weeks |
5,354,200 | |||
39 weeks ended July 3, 2011 |
$ | 6,236,800 | ||
Percentage increase in current 39 weeks |
607 | % |
The increase in interest expense in the fiscal 2011 periods as compared to the fiscal 2010 periods
was primarily due to the increase in our debt at July 3, 2011 as compared to June 27, 2010, and the
corresponding interest and amortization of debt discounts recorded as interest, that resulted from
the issuance of our Bridge Notes in November and December 2010, our Subordinated Notes in December
2010, January 2011, March 2011 and on July 1, 2011 and our Senior Subordinated Notes in March 2011,
all of which debt issuances occurred subsequent to June 27, 2010.
Litigation Settlement Expense. In March 2010, we entered into the Looney Settlement Agreement,
pursuant to which we agreed to pay Timothy Looney $50,000 and to issue to Mr. Looney a secured
promissory note in the principal amount of $2,500,000 in settlement of litigation with Mr. Looney.
We recorded the Secured Promissory Note in our consolidated financial statements for the 39-week
period ended June 27, 2010 and extinguished the previously recorded expenses for litigation
judgments related to these matters in the same period. The effectiveness of the Looney Settlement
Agreement was conditioned upon our receipt of consents from our senior creditors, Summit and
Longview. As one of the conditions of obtaining Longviews Consent, we agreed to issue to Longview
equity securities with a value of $825,000 (the Waiver Securities) in consideration for
Longviews waiver of potential future entitlement to all accumulated, but undeclared and unpaid,
dividends on our Series A-1 Stock and our Series A-2 Stock held by Longview from the respective
dates of issuance of the Series A-1 Stock and Series A-2 Stock through July 15, 2010. The Waiver
Securities were issued to Longview on April 30, 2010 in the form of 27,500 shares of our newly
created Series C Convertible Preferred Stock (the Series C Stock). We recorded the expense of the
obligation to issue the Waiver Securities in the 39-week period ended June 27, 2010. In connection
with Longviews consent for the Looney Settlement Agreement, the Company and Longview entered into
an Agreement, Consent and Waiver (the Longview Agreement) pursuant to which the Company and
Longview made certain agreements related to such consent. One of those agreements was that if the
Company did not arrange for a third-party investor to purchase Longviews holdings of the Company/s
preferred stock on or before July 15, 2010, the Company was obligated to issue to Longview (a)
non-voting equity securities, with terms junior to the Companys Series B Stock, convertible into
1,000,000 shares of the Companys common stock (the Contingent Securities) and (b) a two-year
warrant to purchase 1,000,000 shares of the Companys common stock at an exercise price per share
of $0.30 (the Contingent Warrant). The terms of the Contingent Securities and the Contingent
Warrant were mutually agreed upon by the parties such that the Contingent Securities were to
consist of 10,000 shares of the Series C Stock convertible into
1,000,000 shares of common stock, subject to receipt of stockholder approval for such issuance
if required by Nasdaq. The Buyout did not occur on or before July 15, 2010, and stockholder
approval for the issuance of the Contingent Securities in the form of Series C Stock was obtained
on July 28, 2010. Accordingly, the Contingent Securities and Contingent Warrant were issued to
Longview in August 2010. The Company recorded a $450,000 expense for the obligation to issue the
Contingent Securities and the Contingent Warrant in the 13-week and 39-week periods ended June 27,
2010. The net effect was an aggregate recording of $450,000 and $2,270,700 as a litigation
settlement expense in the 13-week and 39-week periods ended June 27, 2010. No comparable expense
was incurred in the current fiscal year periods.
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Change in Fair Value of Derivative Liability. We recorded substantial changes in fair value of
derivative liability for the 13-week and 39-week periods ended July 3, 2011, compared to the
13-week and 39-week periods ended July 3, 2010, as shown in the following table:
Change in Fair Value of | ||||
13-Week Comparisons | Derivative Liability | |||
13 weeks ended June 27, 2010 |
$ | 7,000 | ||
Dollar change in current comparable 13 weeks |
7,690,800 | |||
13 weeks ended July 3, 2011 |
$ | 7,697,800 | ||
Percentage change in current 13 weeks |
109,869 | % | ||
Change in Fair Value of | ||||
39-Week Comparisons | Derivative Liability | |||
39 weeks ended June 27, 2010 |
$ | 67,000 | ||
Dollar change in current comparable 39 weeks |
(809,700 | ) | ||
39 weeks ended July 3, 2011 |
$ | (742,700 | ) | |
Percentage change in current 39 weeks |
(1,209 | %) |
In the 13 weeks and 39 weeks ended June 27, 2010, our only outstanding instruments deemed to
be derivatives were certain warrants, and the estimation of the value of those warrants at June 27,
2010 resulted in the recording of $7,000 and $67,000 reductions in the value of those warrants in
the 13-week period and 39-week periods ended June 27, 2010, respectively. At July 3, 2011, in
addition to those warrants, we also had Subordinated Notes outstanding, which were deemed to
contain embedded derivatives. The derivative liabilities of these instruments were required to be
valued both at their issuance dates, the earliest of which was December 23, 2010 and the latest of
which was July 1, 2011, when they were deemed to have been established, and again at the end of
subsequent fiscal quarters. Largely because of the change in market value of our common stock
between these various dates, this re-measurement of value resulted in the recording of a $7,697,800
and $(742,700) aggregate change in fair value of derivative liability for the 13-week and 39-week
periods ended July 3, 2011. Given the price volatility of our common stock, we anticipate that
there could be additional substantial change in fair value of derivative liability expense that we
will be required to record in future reporting periods, unless and until the Subordinated Notes are
converted into our common stock pursuant to their terms. In the event of such conversion, which
we cannot guarantee, the derivative liability associated with these instruments would be
eliminated.
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Net Income (Loss) Attributable to Irvine Sensors Corporation. Our net income (loss)
attributable to Irvine Sensors Corporation in the 13-week and 39-week periods ended July 3, 2011,
compared to the 13-week and 39-week periods ended June 27, 2010, is shown in the following table:
Net Income (Loss) | ||||
Attributable to Irvine | ||||
13-Week Comparisons | Sensors Corporation | |||
13 weeks ended June 27, 2010 |
$ | (2,625,400 | ) | |
Dollar change in current comparable 13 weeks |
7,125,000 | |||
13 weeks ended July 3, 2011 |
$ | 4,499,600 | ||
Percentage change for current 13 weeks |
271 | % | ||
Net Income (Loss) | ||||
Attributable to Irvine | ||||
39-Week Comparisons | Sensors Corporation | |||
39 weeks ended June 27, 2010 |
$ | (7,761,700 | ) | |
Dollar change in current comparable 39 weeks |
(6,121,500 | ) | ||
39 weeks ended July 3, 2011 |
$ | (13,883,200 | ) | |
Percentage change for current 39 weeks |
(79 | %) |
The net income attributable to Irvine Sensors Corporation in the 13-week period ended July 3,
2011, as compared to the 13-week period ended June 27, 2010 was largely derived from the change in
fair value of derivative liability in the current fiscal period discussed above. This change in
fair value of derivative liability in the current fiscal period was also a primary contributor to
the reduction in net loss attributable to Irvine Sensors Corporation in the 39-week period ended
July 3, 2011 as compared to the 39-week period ended June 27, 2010. Also contributing to the
improvement in net income (loss) attributable to Irvine Sensors Corporation in the current 39-week
period was the aggregate litigation settlement expense of $2,270,700 that was recorded in the
fiscal 2010 39-week period for which no comparable expense was incurred in the fiscal 2011 39-week
period. These improvements were partially offset in the fiscal 2011 periods by the increased
interest expense related to debt financings and the non-recurring compensation as discussed above.
Since all of these factors either represent timing or non-recurring factors or do not relate to our
basic operations, we do not believe that the changes in net income (loss) attributable to Irvine
Sensors Corporation in the 13-week and 39-week periods ended July 3, 2011 as compared to the
13-week and 39-week periods ended June 27, 2010 are indicative of an underlying operational trend.
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Liquidity and Capital Resources
Our liquidity in terms of both cash and cash equivalents and elimination of working capital
deficit was substantially improved in the first 39 weeks of fiscal 2011, largely as a result of the
proceeds realized from our private placements of debt and equity during the current period, as
shown in the following table:
Cash and | Working Capital | |||||||
Cash Equivalents | (Deficit) | |||||||
October 3, 2010 |
$ | 281,600 | $ | (10,096,400 | ) | |||
Dollar change in the 39 weeks ended July 3, 2011 |
2,702,300 | 12,137,300 | ||||||
July 3, 2011 |
$ | 2,983,900 | $ | 2,040,900 | ||||
Percentage change in the 39 weeks ended July 3, 2011 |
960 | % | 120 | % |
The aggregate of our non-cash depreciation and amortization expense, non-cash interest
expense, non-cash change in fair value of derivative instruments and non-cash stock-based
compensation was $7,031,100 in the 39 weeks ended July 3, 2011. These non-cash operational
expenses partially offset the use of cash derived from our net loss from operations and various
timing and cash deployment effects, the largest of which were a $3,511,600 decrease in our accounts
payable and accrued expenses and a $788,700 increase in accounts receivable. We also generated
$324,300 of cash from the net decrease in our inventory during the first three quarters of fiscal
2011, largely due to the increased shipments of our COTI products during the period. The aggregate
of these and other less significant factors was an operational use of cash in the amount of
$11,552,700 in the 39 weeks ended July 3, 2011. During the 39-week period ended July 3, 2011, we
also used an aggregate of $4,958,800 in cash to pay the principal balance of our Debentures in
full, to pay the principal balance of our unconverted Bridge Notes in full and to make current
payments due under settlement agreements. We also used $673,200 of cash for equipment expenditures
in the first three quarters of fiscal 2011. These and other uses of cash were offset by
$19,983,800 of net proceeds from our debt and equity financings in the current fiscal year,
resulting in the net $2,702,300 increase of cash in the 39-week period ended July 3, 2011. These
financing proceeds and the $2,000,000 of financing proceeds receivable at July 3, 2011 were also
the primary source of improvement in our working capital in the current period. However, the
repayment obligations of our debt over the next twelve months will be substantial, and if we are
unable to meet these obligations in a timely manner, or at all, our business, results of operations
and financial condition could be materially and adversely affected.
To meet our liquidity needs over the next twelve months, we may need to enter into other
financing transactions, sell significant assets or engage in licensing transactions. We may not be
able to complete any such transactions on acceptable terms, on a timely basis or at all, and even
if completed, such transactions could materially and adversely affect our future revenues.
Furthermore, we have lenders with security interests in substantially all of our assets, and any
asset-based transactions would require such lenders consent and not be likely to generate any
direct benefits to stockholders.
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At July 3, 2011, our funded backlog was approximately $3.6 million. We expect, but cannot
guarantee, that a substantial portion of our funded backlog at July 3, 2011 will result in revenue
recognized in the next twelve months. In addition, our government research and development
contracts and product purchase orders typically include unfunded backlog, which is funded when the
previously funded amounts
have been expended or product delivery schedules are released. As of July 3, 2011, our total
backlog, including unfunded portions, was approximately $24.2 million.
Contracts with government agencies may be suspended or terminated by the government at any
time, subject to certain conditions. Similar termination provisions are typically included in
agreements with prime contractors. While we have only experienced a small number of contract
terminations, none of which were recent, we cannot assure you that we will not experience
suspensions or terminations in the future. Any such termination, if material, could cause a
disruption of our revenue stream, materially adversely affect our liquidity and results of
operations and could result in employee layoffs.
Off-Balance Sheet Arrangements
Our conventional operating leases are either immaterial to our financial statements or do not
contain the types of guarantees, retained interests or contingent obligations that would require
their disclosures as an off-balance sheet arrangement pursuant to Regulation S-K Item 303(a)(4).
As of July 3, 2011 and October 3, 2010, we did not have any other relationships with unconsolidated
entities or financial partners, such as entities often referred to as structured finance or special
purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
Contractual Obligations and Commitments
Debt. At July 3, 2011, we had approximately $21,380,500 of debt, which consisted of (i) the
Looney Note, with a principal balance of approximately $2,339,100; (ii) Subordinated Notes with an
aggregate principal balance of approximately $14,907,500; and (iii) Senior Subordinated Notes with
an aggregate principal balance of approximately $4,133,900. Each of these instruments is described
more fully below. (See Note 2 of Notes to Condensed Consolidated Financial Statements).
The Looney Note issued by the Company in connection with the Looney Settlement Agreement bears
simple interest at a rate per annum of 10% of the outstanding principal balance and is secured by
substantially all of our assets (the Collateral) pursuant to the terms and conditions of a
Security Agreement and Intellectual Property Security Agreement with Mr. Looney (the Security
Agreements), but such security interests are subject to and subordinate to the existing perfected
security interests and liens of our senior creditor, Summit. The Looney Note requires the Company
to remit graduated monthly installment payments over a 27-month period to Mr. Looney beginning with
a payment of $8,000 in May 2010 and ending with a payment of $300,000 in June 2012. All such
graduated payments are applied first to unpaid interest and then to outstanding principal. A final
payment of the remaining unpaid principal and interest under the Looney Note is due and payable in
July 2012. Past due payments will bear simple interest at a rate per annum of 18%. In the event we
prepay all amounts owing under the Looney Note by October 9, 2011, the $50,000 cash payment made to
Mr. Looney pursuant to the Looney Settlement Agreement will either be returned to us or will be
deducted from our final payment due on the Looney Note.
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In December 2010, we issued and sold to two accredited investors, Costa Brava Partnership III
L.P. (Costa Brava) and The Griffin Fund LP (Griffin), 12% Subordinated Secured Convertible
Notes due December 23, 2015 (the Subordinated Notes) in the aggregate principal amount of
$7,774,800, and agreed to issue and sell in a subsequent closing not later than April 30, 2011
(subject to certain conditions) additional Subordinated Notes (the Milestone Notes) to Costa
Brava and Griffin for an
aggregate purchase price of $1.2 million (collectively, the Institutional Financing). The
Milestone Notes were issued in March 2011. We sold an additional $4,250,000 of Subordinated Notes
to four accredited investors, including Costa Brava and Griffin, in July 2011, with $2,000,000 of
the proceeds this sale being received subsequent to July 3, 2011. In addition, in the 39-week
period ended July 3, 2011 certain holders of unsecured convertible promissory notes that we issued
in November and December 2010 elected to convert an aggregate of $1,560,000 of principal and
accrued interest of said notes into the securities issued in the Institutional Financing, a portion
of which involved conversion into Subordinated Notes.
The Subordinated Notes bear interest at a rate of 12% per annum, due and payable quarterly
within 10 business days of the end of each calendar quarter, calculated on the simple interest
basis of a 365-day year for the actual number of days elapsed. For the first two years of the term
of the Subordinated Notes, we have the option, subject to the satisfaction of certain customary
equity conditions, to pay all or a portion of the interest due on each interest payment date in
shares of common stock, with the price per share calculated based on the weighted average price of
our common stock over the last 20 trading days ending on the second trading day prior to the
interest payment date. The foregoing notwithstanding, until the Looney Note is repaid in full, cash
interest on the Subordinated Notes must instead be paid by adding the amount of such interest to
the outstanding principal amount of the Subordinated Notes as PIK interest. As a result of the
addition of such interest, the outstanding principal balance of the Subordinated Notes at July 3,
2011, exclusive of the effect of debt discounts, was approximately $14,907,500. The principal and
accrued but unpaid interest under the Subordinated Notes is convertible at the option of the holder
into shares of our common stock at an initial conversion price of $0.07 per share. The conversion
price is subject to full ratchet adjustment for certain price dilutive issuances of securities by
us and proportional adjustment for events such as stock splits, dividends, combinations and the
like. Beginning after the first two years of the term of the Subordinated Notes, we can force the
Subordinated Notes to convert to common stock if certain customary equity conditions have been
satisfied and the volume weighted average price of our common stock is $0.25 or greater for 30
consecutive trading days.
The Subordinated Notes are secured by substantially all of our assets pursuant to a Security
Agreement dated December 23, 2010 and July 1, 2011, as applicable, between us and Costa Brava as
representative of the Subordinated Note holders, but the liens securing the Subordinated Notes are
subordinate to the liens securing our indebtedness to Summit Financial Resources, L.P. under that
certain Financing Agreement dated as of June 16, 2009 and the liens securing our indebtedness under
the Senior Subordinated Notes, and subordinate in right of payment to the Looney Note.
The Subordinated Notes have not been registered under the Securities Act and may not be
offered or sold absent registration or an applicable exemption from registration.
In March 2011, we issued and sold in two closings to Costa Brava and Griffin 12% Senior
Subordinated Secured Notes due March 2013 (the Senior Subordinated Notes) in the aggregate
principal amount of $4,000,000. In July 2011, the Senior Subordinated Notes were amended to permit
the holders to demand repayment any time on or after July 16, 2012, in partial consideration for
permitting the issuance of additional Subordinated Notes.
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The Senior Subordinated Notes bear interest at a rate of 12% per annum, due and payable
quarterly in cash within 10 business days of the end of each calendar quarter, calculated on the
simple interest basis of a 365-day year for the actual number of days elapsed. The foregoing
notwithstanding, until the Looney Note is repaid in full, cash interest on the Senior Subordinated
Notes must instead be paid by adding the amount of such interest to the outstanding principal
amount of the Senior
Subordinated Notes as PIK interest. As a result of the addition of such interest, the
outstanding principal balance of the Senior Subordinated Notes at July 3, 2011 was approximately
$4,133,900.
The Senior Subordinated Notes are secured by substantially all of the assets of the Company
pursuant to Security Agreements dated March 16, 2011 and March 31, 2011 between us and Costa Brava
as representative of the Senior Subordinated Note holders, but the liens securing the Senior
Subordinated Notes are subordinate to the liens securing our indebtedness to Summit Financial
Resources, L.P. under that certain Financing Agreement dated as of June 16, 2009 and subordinated
in right of payment to the Looney Note.
Capital Lease Obligations. Our outstanding principal balance on our capital lease obligations
of $97,100 at July 3, 2011 relate primarily to computer equipment and software and are included as
part of current and non-current liabilities within our consolidated balance sheet.
Operating Lease Obligations. We have various operating leases covering equipment and
facilities located in Costa Mesa, California.
Deferred Compensation. We have a deferred compensation plan, the Executive Salary Continuation
Plan (the ESCP), for select key employees. Benefits payable under the ESCP are established on
the basis of years of service with the Company, age at retirement and base salary, subject to a
maximum benefits limitation of $137,000 per year for any individual. The ESCP is an unfunded plan.
The recorded liability for future expense under the ESCP is determined based on expected lifetime
of participants using Social Security mortality tables and discount rates comparable to that of
rates of return on high quality investments providing yields in amount and timing equivalent to
expected benefit payments. At the end of each fiscal year, we determine the assumed discount rate
to be used to discount the ESCP liability. We considered various sources in making this
determination for fiscal 2010, including the Citigroup Pension Liability Index, which at September
30, 2010 was 5.158%. Based on this review, we used a 5.2% discount rate for determining the ESCP
liability at October 3, 2010. There are presently two of our retired executives who are receiving
benefits aggregating $184,700 per annum under the ESCP. As of July 3, 2011, $1,152,700 has been
accrued in the accompanying consolidated balance sheet for the ESCP, of which amount $184,700 is a
current liability we expect to pay during the last quarter of fiscal 2011 and the first three
quarters of fiscal 2012.
Settlement Obligation. In December 2010, we entered into a Settlement Agreement and Release
with FirstMark III, LP, formerly known as Pequot Private Equity Fund III, LP, and FirstMark III
Offshore Partners, LP, formerly known as Pequot Offshore Private Equity Partners III, LP
(collectively, FirstMark), pursuant to which we settled all claims between us and FirstMark,
including those relating to a lawsuit that was commenced in March 2009. (See Note 7 to Condensed
Consolidated Financial Statements). Pursuant to the Settlement Agreement and Release, we are
obligated to pay FirstMark a total sum of $1,235,000 in eighteen monthly payments commencing
January 15, 2011. At July 3, 2011, the remaining obligation pursuant to this settlement was
$810,000, all of which amount is a current liability we expect to pay during the last quarter of
fiscal 2011 and the first three quarters of fiscal 2012.
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Stock-Based Compensation
Aggregate stock-based compensation for the 39-week periods ended July 3, 2011 and June 27,
2010 was $838,600 and $60,900, respectively, and was attributable to the following:
39 Weeks Ended | 39 Weeks Ended | |||||||
July 3, 2011 | June 27, 2010 | |||||||
Cost of revenues |
$ | 21,800 | $ | 13,900 | ||||
General and administrative expense |
816,800 | 47,000 | ||||||
$ | 838,600 | $ | 60,900 | |||||
All transactions in which goods or services are the consideration received for equity
instruments issued to non-employees are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine the fair value of any such equity instrument is the earliest
to occur of (i) the date on which the third-party performance is complete, (ii) the date on which
it is probable that performance will occur, or (iii) if different, the date on which the
compensation has been earned by the non-employee. In the 39-week period ended July 3, 2011, we
issued warrants to purchase 2,382,400 shares of our common stock, valued at $190,600, to an
investment banking firm for services rendered in our Bridge Private Placement. We have recorded
this expense as a debt discount, which was fully amortized during the 39-week period ended July 3,
2011.
We calculate stock option-based compensation by estimating the fair value of each option
granted using the Black-Scholes option valuation model and various assumptions that are described
in Note 1 of Condensed Notes to Consolidated Financial Statements included in this report. Once the
compensation cost of an option is determined, we recognize that cost on a straight-line basis over
the requisite service period of the option, which is typically the vesting period for options
granted by us. We calculate compensation expense of both vested and nonvested stock grants by
determining the fair value of each such grant as of their respective dates of grant using our stock
price at such dates with no discount. We recognize compensation expense on a straight-line basis
over the requisite service period of a nonvested stock award.
For the 13-week and 39-week periods ended July 3, 2011, stock-based compensation included
compensation costs attributable to such periods for those options that were not fully vested upon
adoption of ASC 718, Compensation Stock Compensation, adjusted for estimated forfeitures. We
have estimated forfeitures to be 7%, which reduced stock-based compensation cost by $18,000 and
$61,000 in the 13-week and 39-week periods ended July 3, 2011, respectively. We made grants of
options to purchase 6,927,500 and 50,552,500 shares of common stock in the 13-week and 39-week
periods ended July 3, 2011. We made no grants of options in the 13-week and 39-week periods ended
June 27, 2010. We made aggregate awards of 0 and 1,800 shares of vested stock to employees in the
13-week and 39-week periods ended June 27, 2010.
At July 3, 2011, the total compensation costs related to nonvested option awards not yet
recognized was $2,852,200. The weighted-average remaining vesting period of nonvested options at
July 3, 2011 was 1.5 years.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not required for smaller reporting companies.
Item 4. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation
of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of
the end of the period covered by this report, our disclosure controls and procedures were effective
in ensuring that information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported,
within the time periods specified in the rules and forms of the Securities and Exchange Commission
and (ii) accumulated and communicated to our management, including our principal executive and
principal accounting officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
(b) Changes to Internal Control over Financial Reporting. We have undertaken, and will
continue to undertake, an effort for compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
This effort, under the direction of senior management, includes the documentation, testing and
review of our internal controls. During the course of these activities, we have identified
potential improvements to our internal controls over financial reporting, including some that we
have implemented in the first three quarters of fiscal 2011, largely the modification or expansion
of internal process documentation, and some that we are currently evaluating for possible future
implementation. We expect to continue documentation, testing and review of our internal controls
on an on-going basis and may identify other control deficiencies, possibly including material
weaknesses, and other potential improvements to our internal controls in the future. We cannot
guarantee that we will remedy any potential material weaknesses that may be identified in the
future, or that we will continue to be able to comply with Section 404 of the Sarbanes-Oxley Act.
Other than as described above, there have not been any other changes that have materially
affected or are reasonably likely to materially affect our internal control over financial
reporting.
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PART II
OTHER INFORMATION
Item 1. | Legal Proceedings |
The information set forth under Litigation in Note 7 of Condensed Notes to Unaudited
Consolidated Financial Statements, included in Part I, Item 1 of this report, is incorporated
herein by reference. For an additional discussion of certain risks associated with legal
proceedings, see Risk Factors immediately below.
Item 1A. | Risk Factors |
A restated description of the risk factors associated with our business is set forth below.
This description includes any changes (whether or not material) to, and supersedes, the description
of the risk factors associated with our business previously discussed in Part I, Item 1A of our
Annual Report on Form 10-K for the fiscal year ended October 3, 2010 filed with the Securities and
Exchange Commission on December 17, 2010.
Our future operating results are highly uncertain. Before deciding to invest in our common
stock or to maintain or increase your investment, you should carefully consider the risks described
below, in addition to the other information contained in our Annual Report on Form 10-K, and in our
other filings with the SEC, including any subsequent reports filed on Forms 10-Q and 8-K. The
risks and uncertainties described below are not the only ones that we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also affect our
business and results of operations. If any of these risks actually occur, our business, financial
condition or results of operations could be seriously harmed. In that event, the market price for
our common stock could decline and you may lose all or part of your investment.
We have significant debt that must be serviced in cash over the next twelve months. In this
interval, this obligation will place priority demands on our liquidity and additional risks if the
repayment and covenant obligations of this debt are not fulfilled. As of July 3, 2011, we have a
secured subordinated promissory note, with a remaining principal balance of approximately $2.3
million, payable to Timothy Looney pursuant to settlement of litigation, which has existing and
increasing monthly debt service obligations through July 2012. We also have approximately $4.1
million of subordinated secured promissory notes, the holders of which can demand repayment any
time on or after July 16, 2012. If we choose to allocate some of the proceeds from our various
financings to the retirement or service of these notes, such action will substantially decrease our
discretionary liquidity and potentially restrict our prospects to increase our total revenues to
levels necessary to achieve self-sustaining cash flow from operations. In such an instance or in
the event that we are unable to repay our debt when due, we may have to seek additional financing,
and there can be no guarantee that such financing would be available on a timely basis, on terms
that are acceptable or at all. Failure to meet the repayment or other obligations of our existing
debt could result in acceleration of debt maturity, which could materially adversely affect our
business, results of operations and financial condition and threaten our financial viability.
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We may consider divesting assets to improve our liquidity or to focus our business operations.
We sold a large portion of our patent portfolio in 2009 to address our financial needs and may
enter into agreements to sell other assets in the future. In order to fund our operations and
repay our existing
obligations, we may need to sell certain other significant assets and have engaged in
preliminary discussions in this regard. We also may wish to divest assets to focus our resources on
selected business opportunities. We may not be able to complete such sales, if any, on acceptable
terms, on a timely basis or at all, and such sales, if any, could materially adversely affect our
future revenues. Furthermore, we have lenders with security interests in substantially all of our
assets, and such sales would therefore require such lenders consent and not be likely to generate
any direct benefits to stockholders and could materially impair our ability to maintain our current
operations.
Since 2006, we have engaged in multiple financings, which have significantly diluted existing
stockholders and will likely result in substantial additional dilution in the future. Assuming
conversion of all of our existing convertible securities as presently authorized and exercise in
full of all options and warrants outstanding as of July 3, 2011, an additional approximate 274.6
million shares of our common stock would be outstanding, as compared to the approximately 113.5
million shares of our common stock that were issued and outstanding at that date. Since the start
of fiscal 2008 through July 3, 2011, we have issued approximately 110.9 million shares of our
common stock, largely to fund our operations and retire debt, resulting in significant dilution to
our existing stockholders. Any additional equity or convertible debt financings in the future will
likely result in further dilution to our stockholders. Existing stockholders also will suffer
significant dilution in ownership interests and voting rights and our stock price could decline as
a result of potential future application of price anti-dilution features of our Subordinated Notes,
if not waived.
We may need to raise additional capital to fund our operations and service our debt, and if
such capital is not available to us on terms that are acceptable to us, on a timely basis or at
all, our operations could be seriously curtailed. Largely as a result of the Institutional
Financing and Senior Subordinated Notes financing in the first three quarters of fiscal 2011, at
July 3, 2011, our working capital deficit had been eliminated but our positive working capital was
only approximately $2.0 million. We experienced an operational use of cash in the amount of
approximately $13.6 million in the 39-week period ended July 3, 2011. If we are not able to
substantially grow our revenues in the near future, we anticipate that we may require additional
capital to meet our working capital needs, fund our operations and meet our debt service
obligations. We cannot assure you that any additional capital from financings or other sources will
be available on a timely basis, on acceptable terms, or at all, or that the proceeds from any
financings will be sufficient to address our near term liquidity requirements. If we are not able
to obtain needed additional capital, our business, financial condition and results of operations
could be materially and adversely affected, and we may be forced to curtail our operations.
We anticipate that our future capital requirements will depend on many factors, including:
| our ability to meet our current obligations, including trade payables, payroll and fixed costs; | ||
| our required service on our debt and settlement obligations payable over the next twelve months; | ||
| our ability to procure additional contracts, and the timing of our deliverables under our contracts; | ||
| the timing of payments and reimbursements from government and other contracts; | ||
| our ability to control costs; | ||
| our ability to commercialize our technologies and achieve broad market acceptance for such technologies; | ||
| increased sales and marketing expenses; | ||
| our ability to divest assets as we deem necessary; | ||
| technological advancements and competitors responses to our products; | ||
| capital improvements to new and existing facilities; |
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| our relationships with customers and suppliers; and | ||
| general economic conditions including the effects of future economic slowdowns, a slump in the semiconductor market, acts of war or terrorism and the current international conflicts. |
Our ability to raise additional capital may be limited because, as a company that is quoted on
the OTCBB, we are no longer eligible to use Form S-3 to register the resale of securities issued in
private financings. Even if available, financings can involve significant costs and expenses, such
as legal and accounting fees, diversion of managements time and efforts, or substantial
transaction costs or break-up fees in certain instances. Financings may also involve substantial
dilution to existing stockholders, and may cause additional dilution through adjustments to certain
of our existing securities under the terms of their antidilution provisions. If adequate funds are
not available on acceptable terms, or at all, our business and revenues will be adversely affected
and we may be unable to continue our operations at current levels, develop or enhance our products,
expand our sales and marketing programs, take advantage of future opportunities or respond to
competitive pressures.
Our Institutional Financing has created substantial and continuing non-cash accounting charges
that will make it difficult for us to achieve net profit and positive net worth while our new debt
instruments are outstanding. The Subordinated Notes we issued in the Institutional Financing in
December 2010, March 2011 and July 2011 contain features that are deemed to create a derivative
liability under accounting literature. At July 3, 2011, our aggregate derivative liability was
valued at $13,745,000, largely as a result of these instruments. Because of the price volatility
of our common stock, this derivative liability could increase substantially in future reporting
periods if the market value of our common stock were to increase from the $0.11 per share value of
July 3, 2011. Such change in the value of derivative liability would be recorded as an expense in
our consolidated statement of operations, making it difficult to achieve net profit. In addition,
the aggregate recorded derivative liability has already adversely affected our stockholders
deficit and any future increases in derivative liability would further adversely affect such
stockholders deficit, making it more difficult for us to meet criteria for re-listing our common
stock on Nasdaq or some other national securities exchange. The effect of these derivative
liabilities would ultimately be eliminated if the associated debt instruments were converted to
equity pursuant to their terms, but we cannot guarantee such an outcome.
Our Institutional Financing has also established substantial control by our new investors over
the outcome of stockholder voting and Board decisions. Costa Brava and Griffin, our new
institutional investors, collectively control approximately 49% of our presently issued and
outstanding common stock and have the ability to convert their Subordinated Notes into additional
shares of common stock at any time, thereby increasing their aggregate percentage ownership. In
addition, they have nominated five of the ten directors that serve on our Board of Directors.
Accordingly, Costa Brava and Griffin have significant influence over the outcome of matters that
require stockholder votes or actions by our Board of Directors, and the ability of other
stockholders to influence such outcomes have been correspondingly diminished.
In September 2010, our common stock was delisted from the Nasdaq Capital Market for
non-compliance with Nasdaqs $1.00 per share minimum bid price continued listing requirement and
commenced trading on the Over-the-Counter Bulletin Board (the OTCBB), thereby causing your
ability to sell your shares of our common stock to be limited by penny stock restrictions and our
ability to raise additional capital to potentially be compromised. With the delisting of our common
stock, it comes within the definition of penny stock as defined in the Securities Exchange Act of
1934
and is covered by Rule 15g-9 of the Securities Exchange Act of 1934. That Rule imposes
additional sales practice requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors. For transactions covered by Rule 15g-9, the
broker-dealer must make a special suitability determination for the purchaser and receive the
purchasers written agreement to the transaction prior to the sale. Consequently, Rule 15g-9
potentially affects the ability or willingness of broker-dealers to sell our securities, and
accordingly would also affect the ability of stockholders to sell their securities in the public
market. These additional procedures could also limit our ability to raise additional capital in the
future.
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Significant sales of our common stock in the public market will likely cause our stock price
to fall. The average trading volume of our shares in June 2011 was approximately 30,800 shares per
day, compared to the approximately 113.5 million shares outstanding and the additional approximate
274.6 million shares potentially outstanding on a fully diluted basis at July 3, 2011. Other than
volume limitations imposed on our affiliates, many of the issued and issuable shares of our common
stock are freely tradable. If the holders of freely tradable shares were to sell a significant
amount of our common stock in the public market, the market price of our common stock would likely
decline. We have obligations to holders of our Subordinated Notes that could require us to register
shares of common stock held by them and shares issuable upon conversion of those instruments for
resale on a registration statement. If we raise additional capital in the future through the sale
of shares of our common stock or instruments convertible into shares of our common stock to private
investors, we may, subject to existing restrictions lapsing or being waived, agree to register
these shares for resale on a registration statement as we have done in the past. Upon registration,
these additional shares would become freely tradable once sold in the public market, assuming the
prospectus delivery and other requirements were met by the sellers, and, if significant in amount,
such sales could further adversely affect the market price of our common stock. The sale of a large
number of shares of our common stock also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and at the prices that we deem appropriate.
Because our operations currently depend on government sales, contracts and subcontracts, we
face additional risks related to contracting with the federal government, including federal budget
issues and fixed price contracts, that could materially and adversely affect our business. Future
political and economic conditions are uncertain and may directly and indirectly affect the quantity
and allocation of expenditures by federal agencies. Even the timing of incremental funding
commitments to existing, but partially funded, contracts or purchase orders can be affected by
these factors. The U.S. defense budget for fiscal 2011 was only finalized after a lengthy delay,
and we do not yet have full visibility into the scope and timing of possible new government
procurement actions to us and the resulting impact of the budgetary delay to our future sales.
Cutbacks or re-allocations in the federal budget could have a material adverse impact on our
results of operations as long as we sell our products and perform our funded research and
development largely for government customers. In this regard, the possible impact, if any, of the
recent federal debt ceiling spending agreement is presently unknown. Obtaining government
contracts may also involve long purchase and payment cycles, competitive bidding, qualification
requirements, delays or changes in funding, budgetary constraints, political agendas, extensive
specification development and price negotiations and milestone requirements. Each government agency
also maintains its own rules and regulations with which we must comply and which can vary
significantly among agencies. Governmental agencies also often retain some portion of fees payable
upon completion of a project and collection of these fees may be delayed for several months or even
years, in some instances. In addition, a number of our government contracts are fixed price
contracts, which may prevent us from recovering costs incurred in excess of budgeted costs for such
contracts. Fixed price contracts require us to estimate the total project cost based on preliminary
projections of the projects requirements. The financial viability of any given project depends in
large
part on our ability to estimate such costs accurately and complete the project on a timely basis.
In the event our actual costs exceed fixed contractual costs of either our research and development
contracts or our production orders, we will not be able to recover the excess costs.
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Our government contracts are also subject to termination or renegotiation at the convenience
of the government, which could result in a large decline in revenue in any given quarter. Although
government contracts have provisions providing for the reimbursement of costs associated with
termination, the termination of a material contract at a time when our funded backlog does not
permit redeployment of our staff could result in reductions of employees. We have in the past
chosen to incur excess overhead in order to retain trained employees during delays in contract
funding. We also have had to reduce our staff from time-to-time because of fluctuations in our
funded government contract base. In addition, the timing of payments from government contracts is
also subject to significant fluctuation and potential delay, depending on the government agency
involved. Any such delay could result in a material adverse effect on our liquidity. Since a
substantial majority of our total revenues in the last two fiscal years were derived directly or
indirectly from government customers, these risks can materially adversely affect our business,
results of operations and financial condition.
We have cash payment obligations pursuant to a settlement agreement that, if not satisfied,
could put a significant strain on our liquidity. In December 2010, we entered into a Settlement
Agreement and Release with FirstMark, pursuant to which we settled a lawsuit between FirstMark and
us. Pursuant to this Settlement Agreement and Release, we are obligated to pay FirstMark a total
sum of $1,235,000 in eighteen monthly payments commencing January 15, 2011. In the event that we do
not make a monthly installment payment within 30 days of the date it is due, FirstMark may enter a
Confession of Judgment in the amount of the total settlement less any payment made by us prior to
such default. If FirstMark were to enter and seek to enforce such a judgment, our liquidity and
financial condition could be adversely affected and it would cause a default under our other debt
obligations, possibly threatening our financial viability.
We have historically generated substantial losses, which, if continued, could make it
difficult to fund our operations or successfully execute our business plan, and could adversely
affect our stock price. Since our inception, we have generated net losses in most of our fiscal
periods. Had it not been for the gains from a sale of patent assets, the deconsolidation of Optex
due to its bankruptcy and a significant reduction of potential future pension expenses, we would
have experienced a substantial net loss in fiscal 2009. We experienced a net loss of approximately
$11.2 million in fiscal 2010 and approximately $13.9 million in the first three quarters of fiscal
2011. We cannot assure you that we will be able to achieve or sustain profitability in the future.
In addition, because we have significant expenses that are fixed or difficult to change rapidly, we
generally are unable to reduce expenses significantly in the short-term to compensate for any
unexpected delay or decrease in anticipated revenues. We are dependent on support from
subcontractors to meet our operating plans and susceptible to losses when such support is delayed.
Such factors could cause us to continue to experience net losses in future periods, which will make
it difficult to fund our operations and achieve our business plan, and could cause the market price
of our common stock to decline.
Our current business depends on a limited number of customers, and if any of these customers
terminate or reduce their contracts with us, or if we cannot obtain additional government business
in the future, our revenues will decline and our results of operations will be adversely affected.
For fiscal 2010, approximately 28%, 20% and 19% of our total revenues were generated from sales and
contracts with certain classified U. S. government agencies, the U. S. Army and Optics 1, Inc., a
defense contractor, respectively. For the first three quarters of fiscal 2011, sales to Optics 1
accounted for 62% of our total revenues. Although we plan to shift our focus to include the
commercialization of our
technology, we expect to continue to be dependent upon business with federal agencies and their
contractors for a substantial portion of our revenues for the foreseeable future. Our dependency on
a few customers increases the risks of disruption in our business or significant fluctuations in
quarterly revenue, either of which could adversely affect our total revenues and results of
operations.
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If we are not able to commercialize our technology, we may not be able to increase our
revenues or achieve or sustain profitability. Since commencing operations, we have developed
technology, principally under government research contracts, for various defense-based
applications. However, since our margins on government contracts are generally limited, and our
revenues from such contracts are tied to government budget cycles and influenced by numerous
political and economic factors beyond our control, and are subject to our ability to win additional
contracts, our long-term prospects of realizing significant returns from our technology or
achieving and maintaining profitability will likely also require penetration of commercial markets.
In prior years, we have made significant investments to commercialize our technologies without
significant success. These efforts included the purchase and later shut down of a manufacturing
line co-located at an IBM facility, the formation of the Novalog, MSI, Silicon Film, RedHawk and
iNetWorks subsidiaries and the development of various stacked-memory products intended for
commercial markets in addition to military and aerospace applications. These investments have not
resulted in consolidated profitability to date, other than the profit realized in fiscal 2009
largely from the significant gains described above. Furthermore, a majority of our historical
total revenues, including the first three quarters of fiscal 2011, have been generated directly or
indirectly from governmental customers.
If we fail to scale our operations adequately, we may be unable to meet competitive challenges
or exploit potential market opportunities, and our business could be materially and adversely
affected. Our consolidated total revenues in fiscal 2009, fiscal 2010 and the first three quarters
of fiscal 2011 were $11.5 million, $11.7 million and $10.6 million, respectively. To become and
remain profitable, we will need to materially grow our consolidated total revenues or substantially
reduce our operating expenses. Such challenges are expected to place a significant strain on our
management personnel, infrastructure and resources. To implement our current business and product
plans, we will need to expand, train, manage and motivate our workforce, and expand our operational
and financial systems, as well as our manufacturing and service capabilities. All of these
endeavors will require substantial additional capital and substantial effort by our management. If
we are unable to effectively manage changes in our operations, we may be unable to scale our
business quickly enough to meet competitive challenges or exploit potential market opportunities,
and our current or future business could be materially and adversely affected.
Historically, we have primarily depended on third party contract manufacturers for the
manufacture of a majority of our products and any failure to secure and maintain sufficient
manufacturing capacity or quality products could materially and adversely affect our business. For
our existing products, we primarily have used contract manufacturers to fabricate and assemble our
stacked chip, microchip and sensor products. Our internal manufacturing capabilities consist
primarily of assembly, calibration and test functions for our thermal camera products. We have
typically used single contract manufacturing sources for our historical products and do not have
long-term, guaranteed contracts with such sources. As a result, we face several significant risks,
including:
| a lack of guaranteed supply of products and higher prices; | ||
| limited control over delivery schedules, quality assurance, manufacturing yields and production costs; and | ||
| the unavailability of, or potential delays in obtaining access to, key process technologies. |
In addition, the manufacture of our products is a highly complex and technologically demanding
process and we are dependent upon our contract manufacturers to minimize the likelihood of reduced
manufacturing yields or quality issues. We currently do not have any long-term supply contracts
with any of our manufacturers and do not have the capability or capacity to manufacture our
products in-house in
large quantities. If we are unable to secure sufficient capacity with our existing
manufacturers, implement manufacturing of some of our new products at other contract manufacturers
or scale our internal capabilities, our revenues, cost of revenues and results of operations would
be materially adversely impacted.
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If we are not able to obtain broad market acceptance of our new and existing products, our
revenues and results of operations will be materially adversely affected. We generally focus on
emerging markets. Market reaction to new products in these circumstances can be difficult to
predict. Many of our planned products incorporate our chip stacking technologies that have not yet
achieved broad market acceptance. We cannot assure you that our present or future products will
achieve market acceptance on a sustained basis. In addition, due to our historical focus on
research and development, we have a limited history of competing in the intensely competitive
commercial electronics industry. As such, we cannot assure you that we will be able to successfully
develop, manufacture and market additional commercial product lines or that such product lines will
be accepted in the commercial marketplace. If we are not successful in commercializing our new
products, our ability to generate revenues and our business, financial condition and results of
operations will be adversely affected.
Our stock price has been subject to significant volatility. The trading price of our common
stock has been subject to wide fluctuations in the past. Since January 2000, our common stock has
traded at prices as low as $0.08 per share in September 2010 and December 2010 and as high as
$3,750.00 per share in January 2000 (after giving effect to two reverse stock splits subsequent to
January 2000). The current market price of our common stock may not increase in the future. As
such, you may not be able to resell your shares of common stock at or above the price you paid for
them. The market price of the common stock could continue to fluctuate or decline in the future in
response to various factors, including, but not limited to:
| our cash resources and ability to raise additional funding and repay indebtedness; | ||
| changes in the fair value of derivative instruments expense; | ||
| reduced trading volume on the OTCBB; | ||
| quarterly variations in operating results; | ||
| government budget reallocations or delays in or lack of funding for specific projects; | ||
| our ability to control costs and improve cash flow; | ||
| our ability to introduce and commercialize new products and achieve broad market acceptance for our products; | ||
| announcements of technological innovations or new products by us or our competitors; | ||
| changes in investor perceptions; | ||
| economic and political instability, including acts of war, terrorism and continuing international conflicts; and | ||
| changes in earnings estimates or investment recommendations by securities analysts. |
The trading markets for the equity securities of high technology companies have continued to
experience volatility. Such volatility has often been unrelated to the operating performance of
these companies. These broad market fluctuations may adversely affect the market price of our
common stock. In the past, companies that have experienced volatility in the market price of their
securities have been the subject of securities class action litigation. We were subject to a class
action lawsuit that diverted managements attention and resources from other matters until it was
settled in June 2004. We cannot guarantee you that we will not be subject to similar class action
lawsuits in the future.
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We are subject to technological risk from the developments of competitors, and our fiscal 2009
sale of patent assets has removed barriers to competition. We sold most of our then-issued and
pending patents in fiscal 2009. Although we retained a worldwide, royalty-free, non-exclusive
license to use the patented technology that we sold in our business, the purchaser of our patent
assets is entitled to use those patents for any purpose, including possible competition with us. We
treat technical data as confidential and generally rely on internal nondisclosure safeguards,
including confidentiality agreements with employees, and on laws protecting trade secrets, to
protect our proprietary information and maintain barriers to competition. However, we cannot assure
you that these measures will adequately protect the confidentiality of our proprietary information
or that others will not independently develop products or technology that are equivalent or
superior to ours.
Our ability to exploit our own technologies may be constrained by the rights of third parties
who could prevent us from selling our products in certain markets or could require us to obtain
costly licenses. Other companies may hold or obtain patents or inventions or may otherwise claim
proprietary rights to technology useful or necessary to our business. We cannot predict the extent
to which we may be required to seek licenses under such proprietary rights of third parties and the
cost or availability of these licenses. While it may be necessary or desirable in the future to
obtain licenses relating to one or more proposed products or relating to current or future
technologies, we cannot assure you that we will be able to do so on commercially reasonable terms,
if at all. If our technology is found to infringe upon the rights of third parties, or if we are
unable to gain sufficient rights to use key technologies, our ability to compete would be harmed
and our business, financial condition and results of operations would be materially and adversely
affected.
Enforcing and protecting patents and other proprietary information can be costly. If we are
not able to adequately protect or enforce our proprietary information or if we become subject to
infringement claims by others, our business, results of operations and financial condition may be
materially adversely affected. We may need to engage in future litigation to enforce our
intellectual property rights or the rights of our customers, to protect our trade secrets or to
determine the validity and scope of proprietary rights of others, including our customers. The
purchaser of our patents may choose to be more aggressive in pursuing its rights with respect to
the patents it purchased from us, which could lead to significant litigation and possible attempts
by others to invalidate such patents. If such attempts are successful, we might not be able to use
this technology in the future. We also may need to engage in litigation in the future to enforce
patent rights with respect to future patents, if any. In addition, we may receive in the future
communications from third parties asserting that our products infringe the proprietary rights of
third parties. We cannot assure you that any such claims would not result in protracted and costly
litigation. Any such litigation could result in substantial costs and diversion of our resources
and could materially and adversely affect our business, financial condition and results of
operations. Furthermore, we cannot assure you that we will have the financial resources to
vigorously defend our proprietary information.
Our proprietary information and other intellectual property rights are subject to government
use which, in some instances, limits our ability to capitalize on them. Whatever degree of
protection, if any, is afforded to us through patents, proprietary information and other
intellectual property generally will not extend to government markets that utilize certain segments
of our technology. The government has the right to royalty-free use of technologies that we have
developed under government contracts, including portions of our stacked circuitry technology. While
we are generally free to commercially exploit these government-funded technologies, and we may
assert our intellectual property rights to seek to block other non-government users of the same, we
cannot assure you that we will be successful in our attempts to do so.
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We are subject to significant competition that could harm our ability to win new business or
attract strategic partnerships and could increase the price pressure on our products. We face
strong competition from a wide variety of competitors, including large, multinational semiconductor
design firms and aerospace firms. Most of our competitors have considerably greater financial,
marketing and technological resources than we or our subsidiaries do, which may make it difficult
to win new contracts or to attract strategic partners. This competition has resulted and may
continue to result in declining average selling prices for our products. We cannot assure you that
we will be able to compete successfully with these companies. Certain of our competitors operate
their own fabrication facilities and have longer operating histories and presence in key markets,
greater name recognition, larger customer bases and significantly greater financial, sales and
marketing, manufacturing, distribution, technical and other resources than us. As a result, these
competitors may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements. They may also be able to devote greater resources to the promotion and sale
of their products. Increased competition has in the past resulted in price reductions, reduced
gross margins and loss of market share. This trend may continue in the future. We cannot assure you
that we will be able to continue to compete successfully or that competitive pressures will not
materially and adversely affect our business, financial condition and results of operations.
We must continually adapt to unforeseen technological advances, or we may not be able to
successfully compete with our competitors. We operate in industries characterized by rapid and
continuing technological development and advancements. Accordingly, we anticipate that we will be
required to devote substantial resources to improve already technologically complex products. Many
companies in these industries devote considerably greater resources to research and development
than we do. Developments by any of these companies could have a materially adverse effect on us if
we are not able to keep up with the same developments. Our future success will depend on our
ability to successfully adapt to any new technological advances in a timely manner, or at all.
We do not plan to pay dividends to holders of common stock. We do not anticipate paying cash
dividends to the holders of the common stock at any time. Accordingly, investors in our securities
must rely upon subsequent sales after price appreciation as the sole method to realize a gain on
investment. There are no assurances that the price of common stock will ever appreciate in value.
Investors seeking cash dividends should not buy our securities.
If we are not able to retain our key personnel or attract additional key personnel as
required, we may not be able to implement our business plan and our results of operations could be
materially and adversely affected. We depend to a large extent on the abilities and continued
participation of our executive officers and other key employees. The loss of any key employee could
have a material adverse effect on our business. While we have adopted employee equity incentive
plans designed to attract and retain key employees, our stock price has declined in recent periods,
and we cannot guarantee that options or non-vested stock granted under our plans will be effective
in retaining key employees. We believe that, as our activities increase and change in character,
additional, experienced personnel will be required to implement our business plan. Competition for
such personnel is intense and we cannot assure you that they will be available when required, or
that we will have the ability to attract and retain them.
We may be subject to additional risks. The risks and uncertainties described above are not the
only ones we face. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also materially adversely affect our business operations.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | (Removed and Reserved) |
Item 5. | Other Information |
None.
Item 6. | Exhibits |
3.1 | Certificate of Incorporation of the Company, as amended (1) |
|||
3.2 | By-laws, as amended and currently in effect (2) |
|||
3.3 | Certificate of Elimination of the Series B Convertible Cumulative Preferred
Stock, Series C Convertible Cumulative Preferred Stock, Series D Convertible
Preferred Stock and Series E Convertible Preferred Stock (3) |
|||
3.4 | Certificate of Designations of Rights, Preferences, Privileges and
Limitations of Series A-1 10% Cumulative Convertible Preferred Stock (4) |
|||
3.5 | Certificate of Amendment of Certificate of Incorporation to increase the
authorized shares of the Corporations common stock and the authorized
shares of the Corporations Preferred Stock (5) |
|||
3.6 | Certificate of Amendment of Certificate of Incorporation to reclassify,
change, and convert each ten (10) outstanding shares of the Corporations
common stock into one (1) share of common stock (6) |
|||
3.7 | Certificate of Designations of Rights, Preferences, Privileges and
Limitations of Series A-2 10% Cumulative Convertible Preferred Stock (7) |
|||
3.8 | Certificate of Designations of Rights, Preferences, Privileges and
Limitations of Series B Convertible Preferred Stock (8) |
|||
3.9 | Certificate of Designations of Rights, Preferences, Privileges and
Limitations of Series C Convertible Preferred Stock (9) |
|||
3.10 | Certificate of Amendment dated March 9, 2011 to Certificate of Incorporation
to increase the authorized shares of the Companys Common Stock (10) |
|||
10.1 | Form of Joinder Agreement (11) |
|||
10.2 | 2011 Omnibus Incentive Plan (12) |
|||
10.3 | Form of Non-Incentive Stock Option Agreement under the 2011 Omnibus
Incentive Plan (13) |
|||
10.4 | Form of Incentive Stock Option Agreement under the 2011 Omnibus Incentive
Plan (14) |
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10.5 | Form of Restricted Stock Agreement under the 2011 Omnibus Incentive Plan (15) |
|||
10.6 | Senior Management Performance Bonus Plan (16) |
|||
10.7 | Form of 12% Subordinated Secured Convertible Notes due December 23, 2015
issued on July 1, 2011 (17) |
|||
10.8 | Security Agreement dated July 1, 2011 (18) |
|||
10.9 | Second Omnibus Amendment dated July 1, 2011 (19) |
|||
31.1 | Certification of the Chief Executive Officer pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of the Chief Financial Officer pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|||
32 | Certifications of the Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith). |
|||
101 | The following materials from the Companys Quarterly Report on Form 10-Q for
the quarterly period ended July 3, 2011, formatted in XBRL (eXtensible
Business Reporting Language); (i) the Condensed Consolidated Balance Sheets
at July 3, 2011 and October 3, 2010, (ii) the Condensed Consolidated
Statements of Operations for the 13 weeks and 39 weeks ended July 3, 2011
and June 27, 2010, (iii) the Condensed Consolidated Statement of
Stockholders Deficit, (iv) the Condensed Consolidated Statements of Cash
Flows for the 39 weeks ended July 3, 2011 and June 27, 2010, and (v) the
Notes to Condensed Consolidated Financial Statements.* |
(1) | Incorporated by reference to Exhibit 3.1 filed with the Registrants Annual Report on Form 10-K for the fiscal year ended September 28, 2003. | |
(2) | Incorporated by reference to Exhibit 3.1 filed with the Registrants Current Report on Form 8-K as filed with the SEC on September 21, 2007 and by reference to Exhibit 3.1 filed with the Registrants Current Report on Form 8-K as filed with the SEC on December 29, 2010. | |
(3) | Incorporated by reference to Exhibit 3.3 filed with the Registrants Current Report on Form 8-K as filed with the SEC on April 18, 2008. | |
(4) | Incorporated by reference to Exhibit 3.4 filed with the Registrants Current Report on Form 8-K as filed with the SEC on April 18, 2008. | |
(5) | Incorporated by reference to Exhibit 3.5 to the Registrants Current Report on Form 8-K filed on August 27, 2008. | |
(6) | Incorporated by reference to Exhibit 3.6 to the Registrants Current Report on Form 8-K filed on August 27, 2008. | |
(7) | Incorporated by reference to Exhibit 3.1 filed with the Registrants Current Report on Form 8-K as filed with the SEC on March 24, 2009. | |
(8) | Incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on October 1, 2009. | |
(9) | Incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on May 4, 2010. | |
(10) | Incorporated by reference to Exhibit No. 3.1 to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 2011. | |
(11) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on January 6, 2011. |
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(12) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on March 15, 2011. | |
(13) | Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on March 15, 2011. | |
(14) | Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on March 15, 2011. | |
(15) | Incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on March 15, 2011. | |
(16) | Incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K filed on March 15, 2011. | |
(17) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on July 7, 2011. | |
(18) | Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on July 7, 2011. | |
(19) | Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on July 7, 2011. | |
* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Irvine Sensors Corporation (Registrant) |
||||
Date: August 17, 2011 | By: | /s/ John J. Stuart, Jr. | ||
John J. Stuart, Jr. | ||||
Chief Financial Officer (Principal Financial and Chief Accounting Officer) |
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Exhibit Index
3.1 | Certificate of Incorporation of the Company, as amended (1) |
|||
3.2 | By-laws, as amended and currently in effect (2) |
|||
3.3 | Certificate of Elimination of the Series B Convertible Cumulative Preferred
Stock, Series C Convertible Cumulative Preferred Stock, Series D Convertible
Preferred Stock and Series E Convertible Preferred Stock (3) |
|||
3.4 | Certificate of Designations of Rights, Preferences, Privileges and
Limitations of Series A-1 10% Cumulative Convertible Preferred Stock (4) |
|||
3.5 | Certificate of Amendment of Certificate of Incorporation to increase the
authorized shares of the Corporations common stock and the authorized
shares of the Corporations Preferred Stock (5) |
|||
3.6 | Certificate of Amendment of Certificate of Incorporation to reclassify,
change, and convert each ten (10) outstanding shares of the Corporations
common stock into one (1) share of common stock (6) |
|||
3.7 | Certificate of Designations of Rights, Preferences, Privileges and
Limitations of Series A-2 10% Cumulative Convertible Preferred Stock (7) |
|||
3.8 | Certificate of Designations of Rights, Preferences, Privileges and
Limitations of Series B Convertible Preferred Stock (8) |
|||
3.9 | Certificate of Designations of Rights, Preferences, Privileges and
Limitations of Series C Convertible Preferred Stock (9) |
|||
3.10 | Certificate of Amendment dated March 9, 2011 to Certificate of Incorporation
to increase the authorized shares of the Companys Common Stock (10) |
|||
10.1 | Form of Joinder Agreement (11) |
|||
10.2 | 2011 Omnibus Incentive Plan (12) |
|||
10.3 | Form of Non-Incentive Stock Option Agreement under the 2011 Omnibus
Incentive Plan (13) |
|||
10.4 | Form of Incentive Stock Option Agreement under the 2011 Omnibus Incentive
Plan (14) |
|||
10.5 | Form of Restricted Stock Agreement under the 2011 Omnibus Incentive Plan (15) |
|||
10.6 | Senior Management Performance Bonus Plan (16) |
|||
10.7 | Form of 12% Subordinated Secured Convertible Notes due December 23, 2015
issued on July 1, 2011 (17) |
|||
10.8 | Security Agreement dated July 1, 2011 (18) |
|||
10.9 | Second Omnibus Amendment dated July 1, 2011 (19) |
|||
31.1 | Certification of the Chief Executive Officer pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of the Chief Financial Officer pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|||
32 | Certifications of the Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith). |
|||
101 | The following materials from the Companys Quarterly Report on Form 10-Q for
the quarterly period ended July 3, 2011, formatted in XBRL (eXtensible
Business Reporting Language); (i) the Condensed Consolidated Balance Sheets
at July 3, 2011 and October 3, 2010, (ii) the Condensed Consolidated
Statements of Operations for the 13 weeks and 39 weeks ended July 3, 2011
and June 27, 2010, (iii) the Condensed Consolidated Statement of
Stockholders Deficit, (iv) the Condensed Consolidated Statements of Cash
Flows for the 39 weeks ended July 3, 2011 and June 27, 2010, and (v) the
Notes to Condensed Consolidated Financial Statements.* |
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(1) | Incorporated by reference to Exhibit 3.1 filed with the Registrants Annual Report on Form 10-K for the fiscal year ended September 28, 2003. | |
(2) | Incorporated by reference to Exhibit 3.1 filed with the Registrants Current Report on Form 8-K as filed with the SEC on September 21, 2007 and by reference to Exhibit 3.1 filed with the Registrants Current Report on Form 8-K as filed with the SEC on December 29, 2010. | |
(3) | Incorporated by reference to Exhibit 3.3 filed with the Registrants Current Report on Form 8-K as filed with the SEC on April 18, 2008. | |
(4) | Incorporated by reference to Exhibit 3.4 filed with the Registrants Current Report on Form 8-K as filed with the SEC on April 18, 2008. | |
(5) | Incorporated by reference to Exhibit 3.5 to the Registrants Current Report on Form 8-K filed on August 27, 2008. | |
(6) | Incorporated by reference to Exhibit 3.6 to the Registrants Current Report on Form 8-K filed on August 27, 2008. | |
(7) | Incorporated by reference to Exhibit 3.1 filed with the Registrants Current Report on Form 8-K as filed with the SEC on March 24, 2009. | |
(8) | Incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on October 1, 2009. | |
(9) | Incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on May 4, 2010. | |
(10) | Incorporated by reference to Exhibit No. 3.1 to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 2011. | |
(11) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on January 6, 2011. | |
(12) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on March 15, 2011. | |
(13) | Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on March 15, 2011. | |
(14) | Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on March 15, 2011. | |
(15) | Incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on March 15, 2011. | |
(16) | Incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K filed on March 15, 2011. | |
(17) | Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on July 7, 2011. | |
(18) | Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on July 7, 2011. | |
(19) | Incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on July 7, 2011. | |
* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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