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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 27, 2014

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 0-21074

 

 

SUPERCONDUCTOR TECHNOLOGIES INC.

(Exact name of registrant as specified in our charter)

 

 

 

Delaware   77-0158076

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

460 Ward Drive,

Santa Barbara, California 93111-2356

(Address of principal executive offices & zip code)

(805) 690-4500

(Registrant’s telephone number including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   ¨  (do not check if smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨ or     No  x

We had 13,249,421 shares of our common stock outstanding as of the close of business on November 7, 2014.

 

 

 


Table of Contents

SUPERCONDUCTOR TECHNOLOGIES INC.

INDEX TO FORM 10-Q

Three and Nine Months Ended September 27, 2014

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

     2   

PART I - FINANCIAL INFORMATION

  

ITEM 1. Financial Statements

  

Condensed Consolidated Statements of Operations

     3   

Condensed Consolidated Balance Sheets

     4   

Condensed Consolidated Statements of Cash Flows

     5   

Notes to Unaudited Interim Condensed Consolidated Financial Statements

     6   

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     17   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     23   

ITEM 4. Controls and Procedures

     23   

PART II - OTHER INFORMATION

  

ITEM 1. Legal Proceedings

     24   

ITEM 1A. Risk Factors

     24   

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

     24   

ITEM 3. Defaults Upon Senior Securities

     24   

ITEM 4. Mine Safety Disclosures

     24   

ITEM 5. Other Information

     24   

ITEM 6. Exhibits

     24   

SIGNATURES

     25   


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995 for these forward looking statements. Our forward-looking statements relate to future events or our future performance and include, but are not limited to, statements concerning our business strategy, future commercial revenues, market growth, capital requirements, new product introductions, expansion plans and the adequacy of our funding. Other statements contained in this Report that are not historical facts are also forward-looking statements. We have tried, wherever possible, to identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and other comparable terminology.

We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time, are based on our beliefs and assumptions made by, and information currently available to, us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following:

 

    limited cash and a history of losses;

 

    our ability to incorporate and fully assemble new equipment effectively and on time into our production processes;

 

    our ability to calibrate and use new equipment to produce wire in accordance with our timetable;

 

    our need to raise additional capital for our business;

 

    our need to overcome additional technical challenges necessary to develop and commercialize HTS wire;

 

    the possibility of delays in customer evaluation and acceptance of our HTS wire;

 

    limited number of potential customers;

 

    rapidly advancing technology in our target markets;

 

    the impact of competitive products, technologies and pricing;

 

    limited number of suppliers for some of our components;

 

    no significant backlog from quarter to quarter;

 

    our proprietary rights, while important to our business, are difficult and costly to protect;

 

    manufacturing capacity constraints and difficulties;

 

    the impact of regional, national or global economic uncertainty; and

 

    cost and uncertainty from compliance with environmental regulations.

For further discussion of these and other factors see, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in our Annual Report on Form 10-K for 2013.

This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.

 

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

SUPERCONDUCTOR TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     September 27,
2014
    September 28,
2013
    September 27,
2014
    September 28,
2013
 

Net revenues

   $ 86,000      $ 229,000      $ 550,000      $ 1,560,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Cost of commercial product revenues

     390,000        290,000        1,112,000        910,000   

Research and development

     1,531,000        1,875,000        4,517,000        4,724,000   

Selling, general and administrative

     1,281,000        1,434,000        3,995,000        3,909,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     3,202,000        3,599,000        9,624,000        9,543,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (3,116,000     (3,370,000     (9,074,000     (7,983,000

Other Income and Expense:

        

Gain (loss) from investment in Resonant

     (323,000     —          3,142,000        (238,000

Adjustments to fair value of warrant derivatives

     983,000        (85,000     96,000        (85,000

Other income

     44,000        1,000        433,000        7,000   

Interest income

     —          —          1,000        1,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (2,412,000   $ (3,454,000   $ (5,402,000   $ (8,298,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss per common share

   $ (0.19   $ (0.42   $ (0.43   $ (1.48
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted weighted average number of common shares outstanding

     12,917,653        8,176,262        12,615,356        5,612,636   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited interim condensed consolidated financial statements.

 

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SUPERCONDUCTOR TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     September 27,     December 31,  
     2014     2013  
     (Unaudited)     (See Note)  
ASSETS     

Current Assets:

    

Cash and cash equivalents

   $ 978,000      $ 7,459,000   

Investment in Resonant

     3,327,000        —     

Accounts receivable, net

     32,000        6,000   

Inventory, net

     86,000        76,000   

Prepaid expenses and other current assets

     146,000        437,000   
  

 

 

   

 

 

 

Total Current Assets

     4,569,000        7,978,000   
  

 

 

   

 

 

 

Property and equipment, net of accumulated depreciation of $6,821,000 and $11,626,000, respectively

     8,042,000        5,473,000   

Patents, licenses and purchased technology, net of accumulated amortization of $776,000 and $722,000, respectively

     887,000        888,000   

Other assets

     257,000        501,000   
  

 

 

   

 

 

 

Total Assets

   $ 13,755,000      $ 14,840,000   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current Liabilities:

    

Accounts payable

   $ 636,000      $ 703,000   

Accrued expenses

     594,000        637,000   
  

 

 

   

 

 

 

Total Current Liabilities

     1,230,000        1,340,000   

Other long term liabilities

     6,023,000        6,194,000   
  

 

 

   

 

 

 

Total Liabilities

     7,253,000        7,534,000   
  

 

 

   

 

 

 

Commitments and contingencies-Notes 5 and 6

    

Stockholders’ Equity:

    

Preferred stock, $.001 par value, 2,000,000 shares authorized, 328,925 and 328,925 shares issued and outstanding, respectively

     —          —     

Common stock, $.001 par value, 250,000,000 shares authorized, 13,249,421 and 11,634,950 shares issued and outstanding, respectively

     13,000        12,000   

Capital in excess of par value

     286,008,000        281,411,000   

Accumulated deficit

     (279,519,000     (274,117,000
  

 

 

   

 

 

 

Total Stockholders’ Equity

     6,502,000        7,306,000   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 13,755,000      $ 14,840,000   
  

 

 

   

 

 

 

See accompanying notes to the unaudited interim condensed consolidated financial statements.

Note – December 31, 2013 balances were derived from the audited consolidated financial statements.

 

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SUPERCONDUCTOR TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended  
     September 27,
2014
    September 28,
2013
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (5,402,000   $ (8,298,000

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     999,000        946,000   

Stock-based compensation expense

     513,000        418,000   

Write-off of intangibles

     —          93,000   

Adjustment to fair value of warrant derivatives

     (96,000     85,000   

(Gain) loss on disposal of property and equipment

     (108,000     331,000   

(Gain) loss from investment in Resonant

     (3,142,000     238,000   

Changes in assets and liabilities:

    

Accounts receivable

     (26,000     (5,000

Inventories

     (10,000     (41,000

Prepaid expenses and other current assets

     290,000        (150,000

Patents and licenses

     (54,000     (64,000

Other assets

     58,000        2,000   

Accounts payable, accrued expenses and other current liabilities

     (164,000     436,000   
  

 

 

   

 

 

 

Net cash used in operating activities

     (7,142,000     (6,009,000
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (3,520,000     (209,000

Net proceeds from sale of property and equipment

     96,000        7,000   
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,424,000     (202,000
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net proceeds from the sale of common stock

     —          12,844,000   

Net proceeds from the exercise of warrants

     4,085,000        —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     4,085,000        12,844,000   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (6,481,000     6,633,000   

Cash and cash equivalents at beginning of period

     7,459,000        3,634,000   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 978,000      $ 10,267,000   
  

 

 

   

 

 

 

See accompanying notes to the unaudited interim condensed consolidated financial statements.

 

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SUPERCONDUCTOR TECHNOLOGIES INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. General

We are a leading company in developing and commercializing high temperature superconductor (“HTS”) materials and related technologies. Superconductivity is the unique ability to conduct various signals or energy (e.g., electrical current or radio frequency (“RF”) signals) with little or no resistance when cooled to “critical” temperatures. HTS materials are a family of elements that demonstrate superconducting properties at temperatures significantly warmer than previous superconducting materials. Electric currents that flow through conventional conductors encounter resistance that requires power to overcome and generates heat. HTS materials can substantially improve the performance characteristics of electrical systems by reducing power loss, lowering heat generation, and decreasing electrical noise.

We were established in 1987 shortly after the discovery of HTS materials with an objective of developing products based on these materials for the commercial marketplace. After analyzing the market opportunities available, we decided to pursue a strategic revenue opportunity developing products for the electronics industry. Our initial product was completed in 1998 and we began delivery to a number of wireless network providers. In the following 13 years, we continued to refine and improve the platform, with the primary focus on improving reliability, increasing performance and runtime, and most importantly, removing cost from the manufacturing process of the required subsystems. Our cost reducing efforts led to the invention of our proprietary, high-yield and high throughput HTS material deposition manufacturing process.

In the last several years we have focused our research and development efforts on adapting our successful HTS materials deposition techniques to production of HTS Conductus® wire for next generation power applications. While most our current commercial product revenues come from the sale of high performance wireless infrastructure products, production of our HTS Conductus wire is our principal opportunity to grow our future revenue.

The unaudited condensed consolidated financial information furnished herein has been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are necessary for a fair statement of the results of operations for the periods presented.

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements. This quarterly report on Form 10-Q should be read in conjunction with our Form 10-K for 2013. The results of operations for the nine months ended September 27, 2014 are not necessarily indicative of the results for all of 2014.

2. Summary of Significant Accounting Policies

Basis of Presentation

At September 27, 2014, we had $1.0 million in cash and cash equivalents. We have incurred significant net losses since our inception and had an accumulated deficit of $274.1 million through 2013 and $279.5 million through September 27, 2014. For the nine months ended September 27, 2014, we incurred a net loss of $5.4 million and sustained negative cash flows from operations of $7.1 million. For all of 2013, we incurred a net loss of $12.2 million and had negative cash flows from operations of $8.3 million. These factors raise substantial doubt about our ability to continue as a going concern.

Our cash resources will not be sufficient to fund our business for the next twelve months. We may need additional funds to meet our working capital needs and financing may not be available on acceptable terms or at all. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise the needed funds, we might be forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company. Our independent registered public accounting firm has also included in their audit reports for 2013 and 2012 an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

Our plans regarding improving our future liquidity will require us to successfully use our expertise and our technology to generate revenues in various ways, including commercial operations, joint ventures and licenses. We have invested and will continue to invest significant capital in our Austin, Texas manufacturing facility to enable us to produce our

 

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Conductus wire products. Delays in the timing of our ability to, including but not limited to, raise additional capital, manufacture products, and sell our Conductus wire products in large scale could substantially impact our estimates used in the determination of expected future cash flows and/or expected future profitability. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

We have reviewed recently issued Financial Accounting Standards Board pronouncements and do not believe they will have a material impact on our condensed consolidated financial statements.

Principles of Consolidation

The interim condensed consolidated financial statements include the accounts of Superconductor Technologies Inc. and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated from the condensed consolidated financial statements.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. Cash and cash equivalents are maintained with what we believe to be quality financial institutions and from time to time exceed FDIC limits. Historically, we have not experienced any losses due to such concentration of credit risk.

Accounts Receivable

We sell predominantly to entities in the wireless communications industry. We grant uncollateralized credit to our customers. We perform usual and customary credit evaluations of our customers before granting credit. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience. Past due balances are reviewed for collectibility. Accounts balances are charged off against the allowance when we deem it is probable the receivable will not be recovered. We do not have any off -balance sheet credit exposure related to our customers.

Revenue Recognition

Commercial revenues are derived from the sale of our Conductus wire products, SuperLink, AmpLink and SuperPlex family of products and are recognized once all of the following conditions have been met: a) an authorized purchase order has been received in writing, b) the customer’s credit worthiness has been established, c) shipment of the product has occurred, d) title has transferred, and e) if stipulated by the contract, customer acceptance has occurred and all significant vendor obligations, if any, have been satisfied.

Shipping and Handling Fees and Costs

Shipping and handling fees billed to customers are included in net commercial product revenues. Shipping and handling fees associated with freight are generally included in cost of commercial product revenues.

Warranties

We offer warranties generally ranging from one to five years, depending on the product and negotiated terms of purchase agreements with our customers. Such warranties require us to repair or replace defective product returned to us during such warranty period at no cost to the customer. An estimate by us for warranty related costs is recorded by us at the time of sale based on our actual historical product return rates and expected repair costs. Such costs have been within our expectations.

Indemnities

In connection with the sales and manufacturing of our commercial products, we indemnify, without limit or term, our customers and contract manufacturers against all claims, suits, demands, damages, liabilities, expenses, judgments, settlements and penalties arising from actual or alleged infringement or misappropriation of any intellectual property relating to our products or other claims arising from our products. We cannot reasonably develop an estimate of the maximum potential amount of payments that might be made under our indemnities because of the uncertainty as to whether a claim might arise and how much it might total. Historically, we have not incurred any expenses related to these indemnities.

 

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Research and Development Costs

Research and development costs are charged to expense as incurred and include salary, facility, depreciation and material expenses. Research and development costs are charged to research and development expense.

Inventories

Inventories are stated at the lower of cost or market, with costs primarily determined using standard costs, which approximate actual costs utilizing the first-in, first-out method. We review inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory and/or vendor cancellation charges related to purchase commitments. If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and are not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements. Costs associated with idle capacity are charged to expense immediately.

Marketable Securities

The Company determines the appropriate classification of its investments in equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Marketable securities that are bought and held principally for the purpose of selling in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. Marketable equity securities not classified as trading, are classified as available for sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in shareholders’ equity.

Property and Equipment

Property and equipment are recorded at cost. Equipment is depreciated using the straight-line method over their estimated useful lives ranging from three to seven years. Leasehold improvements and assets financed under capital leases are amortized over the shorter of their useful lives or the lease term. Furniture and fixtures are depreciated over seven years. Expenditures for additions and major improvements are capitalized. Expenditures for minor tooling, repairs and maintenance and minor improvements are charged to expense as incurred. When property or equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the balance sheet. Gains or losses from retirements and disposals are recorded in selling, general and administration expenses. In the nine months ended September 27, 2014, there were $5.8 million of retirements and disposals. In the three and nine months ended September 27, 2014 we realized gains of $0 and $96,000, respectively, from sale of this equipment. In 2013, there were $9.4 million of disposals and retirements and $98,000 of gains from disposals.

Patents, Licenses and Purchased Technology

Patents and licenses are recorded at cost and are amortized using the straight-line method over the shorter of their estimated useful lives or approximately seventeen years.

Long-Lived Assets

The realizability of long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover the carrying amount. Long-lived assets that will no longer be used in the business are written off in the period identified since they will no longer generate any positive cash flows for us. Periodically, long lived assets that will continue to be used by us will need to be evaluated for recoverability. Such evaluation is based on various analyses, including cash flow and profitability projections. The analyses necessarily involve significant management judgment. In the event the projected undiscounted cash flows are less than net book value of the assets, the carrying value of the assets will be written down to their estimated fair value.

We have invested and will continue to invest significant capital in our Austin, Texas manufacturing facility to enable us to produce our Conductus wire products.

Investment in Resonant

In July 2012, we contributed 14 issued and pending patents regarding our innovative Reconfigurable Resonance™ (RcR) technology, limited use of our Santa Barbara facility, and experienced executive leadership and technical expertise as our minority investment in Resonant LLC. As of December 31, 2012 and June 18, 2013, our interest in Resonant LLC was 30%, and the net value of the assets contributed, estimated to approximate fair value, was $423,000 and $185,000, respectively. We accounted for our investment using the equity method and included it in Other assets for both periods.

 

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At June 18, 2013, we exchanged our equity interest in Resonant LLC, a wholly owned subsidiary of Resonant Inc. (“Resonant”), for a $2.4 million subordinated convertible note receivable from the new Resonant. No gain was recognized for the exchange of our net equity interest on the date of issuance for the note receivable due to uncertainties in connection with the collectability of this subordinated note receivable. Our note was subordinated to a third party lender and was only convertible in the event Resonant conducted an initial public offering and certain other conditions. We determined that our net equity interest of $185,000 approximated the fair value of the note receivable at December 31, 2013 and March 29, 2014, respectively. As of May 29, 2014, the note receivable was converted into 700,000 common shares of Resonant. These common shares represented 10.2% of Resonant’s outstanding shares (including over-allotment) and could not be traded without the consent of the underwriter of the initial public offering for a period of twelve months after the initial public offering date of May 29, 2014. Our level 3 fair value of these shares at May 29, 2014 and June 28, 2014 was approximately $3.6 million and was included in Current Assets. In late September 2014, we entered into a private transaction to sell this minority interest to various buyers for an aggregate of $3,564,400. At September 27, 2014, our $3,327,100 expected net proceeds from this transaction were included on our balance sheet as Investment in Resonant and on September 30, 2014, this $3,327,100 investment was converted to cash. During the three months ended September 27, 2014, we recognized a loss of $323,000 in connection with this investment.

Other Investments

From time to time we may pursue joint ventures with other entities to commercialize our technology. In 2007, we formed a joint venture with Hunchun BaoLi Communication Co. Ltd. to manufacture and sell our SuperLink interference elimination solution in China. We use the equity method of accounting for our 45 percent joint venture interest. The joint venture agreement called for our joint venture partner to supply the capital and local expertise, and for us to provide a license of certain technology and supply key parts for manufacturing. Since 2007, we have been conducting lab and field trials in the existing China 2G market using our TD-SCDMA and SuperLink solutions. Although those activities continue, the parties have not completed their contributions to the joint venture, including most of the funding and our license, within the two year period specified by the agreement and Chinese law. The future of the joint venture, including any commencement of manufacturing and the transfer of our processes, will depend on product demand in China, completion of funding by our joint venture partner, as well as a number of other conditions, including obtaining certain critical approvals from the Chinese and U.S. governments. There continues to be no assurance that these conditions will be met. Even if these conditions are met and the approvals received, the results from our joint venture will be subject to a number of significant risks associated with international operations and new ventures, some of which are set forth in our public filings, including in particular the “Risk Factors” included in Item 1A of this Report. We incurred no expenses in the three and nine months ended September 27, 2014 or in the full year 2013 as a result of this joint venture.

Loss Contingencies

In the normal course of our business we are subject to claims and litigation, including allegations of patent infringement. Liabilities relating to these claims are recorded when it is determined that a loss is probable and the amount of the loss can be reasonably estimated. The costs of our defense in such matters are expensed as incurred. Insurance proceeds recoverable are recorded when deemed probable.

Income Taxes

We recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized. The guidance further clarifies the accounting for uncertainty in income taxes and sets a consistent framework to determine the appropriate level of tax reserve to maintain for uncertain tax positions. This interpretation uses a two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not to be sustained. The amount of the benefit is then measured to be the highest tax benefit that is greater than 50% likely to be realized and sets out disclosure requirements to enhance transparency of our tax reserves. The adoption of this guidance has not had a material impact on our consolidated financial statements as we concluded our tax positions are highly certain of being settled at 100% of the benefit claimed. Guidance is also provided on the accounting for the related interest and penalties, financial statement and disclosure. We are currently not under examination by any taxing authority nor have we been notified of an impending examination. The oldest tax year that remains open to possible evaluation and interpretation of our tax position is 2010.

As of December 31, 2013, we had net operating loss carryforwards for federal and state income tax purposes of approximately $313.8 million and $160.6 million, respectively, which expire in the years 2014 through 2033. However, during 2013, we concluded that under the Internal Revenue Code change of control limitations, a maximum of $17.4 million and $16.8 million, respectively, would be available for reduction of taxable income and reduced both the deferred tax asset and valuation allowance accordingly. Due to the uncertainty surrounding their realization, we recorded a full valuation allowance against our net deferred tax assets. Accordingly, no deferred tax asset has been recorded in the accompanying condensed consolidated balance sheets.

 

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Marketing Costs

All costs related to marketing and advertising our products are charged to expense as incurred or at the time the advertising takes place. Advertising costs were not material in each of the nine months ended September 27, 2014 and September 28, 2013.

Net Loss Per Share

Basic and diluted net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding in each year. Potential common shares are not included in the calculation of diluted loss per share because their effect is anti-dilutive.

Stock-based Compensation

We grant both restricted stock awards and stock options to our key employees, directors and consultants. There were no grants in the three months ended September 27, 2014 and September 28, 2013. For the nine months ended September 27, 2014 and September 28, 2013, the weighted average fair value of options was estimated at the date of the grant using the Black-Scholes option-pricing model. The following are the significant weighted average assumptions used for estimating the fair value under our stock option plans:

 

     Three months ended      Nine months ended  
     September 27,
2014
     September 28,
2013
     September 27,
2014
    September 28,
2013
 

Expected life in years

     —           —           4.0        4.0   

Risk free interest rate

     —           —           1.1     0.6

Expected volatility

     —           —           100.2     93.3

Dividend yield

     —           —           0     0

The stock-based compensation expense for our restricted stock awards is measured at fair value on the date of grant based on the number of shares expected to vest and the quoted market price of our common stock. The expected life was based on the contractual term of the options and expected employee exercise behavior. Typically, options to our employees have a 2 to 4 year vesting term and a 10 year contractual term. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected option life assumed at the grant date. The future volatility is based on our 4 year historical volatility. We used an expected dividend yield of 0% because we have never paid a dividend and do not anticipate paying dividends. Our actual 2013 forfeiture rate was 25% and we assumed a 20% forfeiture rate in the three and nine month period ending September 27, 2014 based on our historical stock option cancellation rates over the last 4 years.

The following table presents details of total stock-based compensation expense that is included in each functional line item on our condensed consolidated statements of operations:

 

     Three months ended      Nine months ended  
     September 27,
2014
     September 28,
2013
     September 27,
2014
     September 28,
2013
 

Cost of Revenue

   $ —         $ —         $ —         $ 1,000   

Research and development

     40,000         44,000         131,000         144,000   

Selling, general and administrative

     118,000         78,000         382,000         273,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 158,000       $ 122,000       $ 513,000       $ 418,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The significant estimates in the preparation of the condensed consolidated financial statements relate to the assessment of the carrying amount of accounts receivable, inventory, fixed assets, intangibles, estimated provisions for warranty costs, fair value of warrant derivatives, fair value of our investment in Resonant, income taxes and disclosures related to litigation. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.

 

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Fair Value of Financial Instruments

We have estimated the fair value amounts of our financial instruments using the available market information and valuation methodologies considered appropriate. We determined the book value of our cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets and other current liabilities as September 27, 2014 approximate fair value.

Fair value for financial reporting purposes is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date, ASC 820, “Fair Value Measurement and Disclosures”, also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

The fair value of our warrant liabilities was determined based on level 3 inputs. Their fair value at September 27, 2014 was $5.6 million and was estimated using the Binomial Lattice option valuation model. Specific model assumptions are shown below under Warrants. These derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as Adjustments to fair value of warrant derivatives.

The fair value of our Resonant securities held-for-sale was also determined based on level 3 inputs. As noted above, these shares represented 10.2% of Resonant’s outstanding shares and could not be traded without the consent of their underwriter for a period of twelve months from May 29, 2014. Factors used in, but not limited to, considering their fair value included: quoted prices for freely traded shares; limited trading period and volume; their limited history as a company and; other restrictions. As of May 29, 2014 and June 28, 2014, we used the net IPO per share purchase price of $5.21 as the basis for its level 3 fair value estimate, which we believe approximated fair value using the trading price of the common stock of Resonant, as adjusted for an estimated discount ranging from 35% to 45% for lack of marketability and other restrictions described herein. 

Comprehensive Income(Loss)

Resonant completed its initial public offering during the three month period ended on June 28, 2014, at which time our note was converted into 700,000 common shares of Resonant. Our level 3 fair value of these shares at May 29, 2014 and June 28, 2014 was approximately $3.6 million. These shares were marketed and sold in September 2014 in a private transaction and the three and nine month gain (loss) on investment of $(323,000) and $3,142,000 is included on the Statements of Operations.

Segment Information

We operate in a single business segment, the research, development, manufacture and marketing of high performance products used in cellular base stations to maximize the performance of wireless telecommunications networks by improving the quality of uplink signals from mobile wireless devices. We currently derive net commercial product revenues primarily from the sales of our SuperLink, AmpLink and SuperPlex products. We currently sell most of our products directly to wireless network operators in the United States.

Certain Risks and Uncertainties

Our long-term prospects are dependent upon the successful commercialization and market acceptance or our Conductus wire products.

We currently sell most of our products directly to wireless network operators in the United States and our product sales have historically been concentrated in a small number of customers. At September 27, 2014, we had two customers that represented 41% and 25% of total net revenues and 100% of accounts receivable. In 2013, these two customers represented 62% and 36% of total net revenues and 98% of accounts receivable. The loss of or reduction in sales, or the inability to collect outstanding accounts receivable, from any of these customers could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We currently rely on a limited number of suppliers for key components of our products. The loss of any of these suppliers could have material adverse effect on our business, financial condition, results of operations and cash flows.

 

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In connection with the sales of our commercial products, we indemnify, without limit or term, our customers against all claims, suits, demands, damages, liabilities, expenses, judgments, settlements and penalties arising from actual or alleged infringement or misappropriation of any intellectual property relating to our products or other claims arising from our products. We cannot reasonably develop an estimate of the maximum potential amount of payments that might be made under our indemnity obligations because of the uncertainty as to whether a claim might arise and how much it might total.

3. Stockholders’ Equity

The following is a summary of stockholders’ equity transactions for the nine months ended September 27, 2014:

 

     Convertible Preferred
Shares
                   Capital in               
        Common Stock      Excess of      Accumulated        
     Shares      Amount      Shares      Amount      Par Value      Deficit     Total  

Balance at December 31, 2013

     328,925       $ —           11,634,950       $ 12,000       $ 281,411,000       ($ 274,117,000   $ 7,306,000   

Issuance of common stock from exercise of outstanding warrants

           1,589,471         1,000         4,084,000           4,085,000   

Stock-based compensation

           25,000            513,000           513,000   

Net loss

                    (5,402,000     (5,402,000
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at September 27, 2014

     328,925       $ —           13,249,421       $ 13,000       $ 286,008,000       ($ 279,519,000   $ 6,502,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Stock Options

At September 27, 2014, we had two active equity award option plans, the 2003 Equity Incentive Plan and the 2013 Equity Incentive Plan (collectively, the “Stock Option Plan”), although we can only grant new options under the 2013 Equity Incentive Plan. Under the Stock Option Plans, stock awards were made to our directors, key employees, consultants, and non-employee directors and consisted of stock options, stock appreciation rights, restricted stock awards, performance awards, and performance share awards. Stock options were granted at prices no less than the market value on the date of grant. There were no stock option exercises during the three and nine months ended September 27, 2014 or during the three and nine months ended September 28, 2013.

The impact to the condensed consolidated statements of operations for the three and nine months ended September 27, 2014 on net loss was $137,000 and $433,000 and $0.01 and $0.03 on basic and diluted net loss per common share, respectively, compared to $82,000 and $243,000 and $0.01 and $0.04 on basic and diluted net loss per common share for the three and nine months ended September 28, 2013. No stock compensation cost was capitalized during either period. The total compensation cost related to nonvested awards not yet recognized was $1.2 million and the weighted-average period over which the cost is expected to be recognized was 1.7 years at September 27, 2014.

The following is a summary of stock option transactions under our stock option plans at September 27, 2014:

 

     Number of
Shares
    Price Per Share      Weighted
Average
Exercise
Price
     Number of
Options
Exercisable
     Weighted
Average
Exercise
Price
 

Balance at December 31, 2013

     1,152,074      $ 2.12 - $843.60       $ 5.58         91,738       $ 44.18   

Granted

     50,000        2.85         2.85         

Exercised

     —             —           

Canceled

     (970     96.00 - 165.60         165.56         
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 27, 2014

     1,201,104      $ 2.12 – $555.00       $ 5.34         114,372       $ 35.50   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

The outstanding options expire on various dates through the end of December 2023. The weighted-average contractual term of options outstanding is 8.8 years and the weighted-average contractual term of stock options currently exercisable is 5.1 years. The exercise prices for these options range from $2.12 to $555 per share, for an aggregate exercise price of approximately $6.4 million. At September 27, 2014, outstanding options covering 1,053,334 shares, with an intrinsic value of $650,000, had an exercise price less than the current market value and 16,668 of these options were exercisable, with an intrinsic value of $4,000.

 

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Restricted Stock Awards

The grant date fair value of each share of our restricted stock awards is equal to the fair value of our common stock at the grant date. Shares of restricted stock under awards all have service conditions and vest over one to four years. Some of our grants also have performance conditions. The following is a summary of our restricted stock award transactions at September 27, 2014:

 

     Number of
Shares
    Weighted
Average Grant
Date Fair Value
 

Balance nonvested at December 31, 2013

     43,165      $ 4.28   

Granted

     25,000        2.76   

Vested

     (16,916     7.42   

Forfeited

     —          —     
  

 

 

   

 

 

 

Balance nonvested at September 27, 2014

     51,249      $ 2.59   
  

 

 

   

 

 

 

The impact to the condensed consolidated statements of operations was $20,000 and $80,000 and $0.00 and $0.01, on basic and diluted net loss per common share for both the three and nine months ended September 27, 2014, respectively, and was $40,000 and $175,000 and $0.01 and $0.03 on basic and diluted net loss per common share for the three and nine months ended September 28, 2013, respectively. No stock compensation cost was capitalized during the period. The total compensation cost related to nonvested awards not yet recognized was $103,000 and the weighted-average period over which the cost is expected to be recognized was 1.1 years.

Warrants

The following is a summary of outstanding warrants at September 27, 2014:

 

     Common Shares  
     Total      Currently
Exercisable
     Price per Share      Expiration Date  

(1) Warrants related to February 2012 financing

     419,451         419,451       $ 16.20         February 22, 2017   

(2) Warrants related to November 2012 financing

     8,333         8,333         4.50         November 26, 2015   

(3) Warrants related to December 2012 financing

     15,625         15,625         4.50         December 18, 2015   

(4) Warrants related to April 2013 financing

     256,914         256,914         5.45         April 26, 2015   

(5) Warrants related to April 2013 financing

     256,913         256,913         5.45         April 26, 2019   

(6) Warrants related to August 2013 financing

     117,670         117,670         2.25         August 5, 2016   

(7) Warrants related to August 2013 financing

     6,117,383         6,117,383         2.57         August 9, 2018   

(8) Warrants related to August 2013 financing

     2,306,660         2,306,660         2.57         August 9, 2015   

Warrants (1)-(6) are exercisable by paying cash or, solely in the absence of an effective registration statement or prospectus, by cashless exercise for unregistered shares of common stock. The exercise price of the warrants is subject to standard antidilutive provision adjustment in the case of stock dividends or other distributions on shares of common stock or any other equity or equity equivalent securities payable in shares of common stock, stock splits, stock combinations, reclassifications or similar events affecting our common stock and also subject to limitations upon any distribution of assets including cash, stock or other property to our stockholders. The exercise price of the warrants is not subject to “price-based” anti-dilution adjustment. We have determined that these warrants related to issuance of common stock are subject to equity treatment because the warrant holder has no right to demand cash settlement and there are no unusual anti-dilution rights.

We have determined that warrants (7) and (8) are not considered indexed to our common shares under ASC 815-40, and require separate accounting as derivative instruments with changes in fair value recognized in earnings each period. The warrants contain a provision whereby the warrant exercise price would be decreased in the event that future common stock issuances are made at a price less than the then exercise price. Due to the potential variability of their exercise price, these warrants do not qualify for equity treatment, and therefore are recognized as a liability. The warrant liability is adjusted to fair value each reporting period, and any change in value is recognized in the statement of operations. Their initial August 9, 2013 valuation was determined using the binomial lattice valuation model, including an equal probabilities tree and early exercise factor of 30%, the significant weighted average assumptions for estimating the fair value of these warrants were, respectively, as follows: expected life of five years and two years; risk free interest rates of 1.36% and 0.32%; expected volatility of 111% and 116% and; dividend yield of 0% and 0%. The initial fair value at August 9, 2013 was estimated to be slightly less than $4.2 million.

 

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The significant weighted average assumptions for estimating the fair value of these warrants at December 31, 2013 were, respectively, as follows: expected life of 4.6 years and 1.6 years; risk free interest rates of 1.75% and 0.38%; expected volatility of 97% and 126% and; dividend yield of 0% and 0%. The December 31, 2013 fair value of these warrants was estimated to be $5.7 million. The fair value change from August 9, 2013 to December 31, 2013 was $1.6 million.

At September 27, 2014 the significant weighted average assumptions for estimating the fair value of these warrants were, respectively, as follows: expected life of 3.9 years and 0.9 years; risk free interest rates of 1.2% and 0.1%; expected volatility of 101% and 68% and; dividend yield of 0% and 0%. The September 27, 2014 fair value of these warrants was estimated to be $5.6 million. The fair value change decreased $96,000 from December 31, 2013 to September 27, 2014.

In the three and nine months ended September 27, 2014, we received $0.3 million and $4.1 million, respectively, from the exercise of 130,073 and 1,589,471outstanding warrants issued in connection with our August 2013 underwritten public offering.

4. Earnings Per Share

Basic and diluted net earnings (loss) per share is based on the weighted-average number of common shares outstanding.

Since their impact would be anti-dilutive, our net loss per common share does not include the effect of the assumed exercise or vesting of the following shares:

 

     September 27, 2014      September 28, 2013  

Outstanding stock options

     1,201,104         135,166   

Unvested restricted stock awards

     51,249         37,332   

Outstanding warrants

     9,498,949         11,088,420   
  

 

 

    

 

 

 

Total

     10,751,302         11,260,918   
  

 

 

    

 

 

 

Also, the preferred stock convertible into 274,104 shares of common stock was not included since its impact would be anti-dilutive.

5. Commitments and Contingencies

Operating Leases

We lease our offices and production facilities under non-cancelable operating leases in Santa Barbara, CA and Austin, TX that expire in November 2016 and March 2017, respectively. The leases contain minimum rent escalation clauses that require additional rental amounts after the first year. Rent expense for these leases with minimum annual rent escalation is recognized on a straight line basis over the minimum lease term. These leases also require us to pay utilities, insurance, taxes and other operating expenses and contain one five-year renewal option.

In April 2014 documents were signed to amend our Santa Barbara, CA building operating lease and reduce our lease commitment. Instead of leasing approximately 71,000 square feet and partially subleasing to other tenants, we will now lease approximately 35,000 square feet and our former principal tenant will lease their portion of the building directly from our landlord. Other terms and conditions of the lease remain the same.

In July 2014 we amended our Austin, TX building operating lease and increased our leased premises to 94,000 square feet. Base rent and operating expenses were revised and are included in the table below. Other terms and conditions of the lease remain the same.

For the three and nine months ended September 27, 2014 rent expense was $160,000 and $619,000, respectively, and for the three and nine months ended September 28, 2013 rent expense was $213,000 and $659,000, respectively.

Patents and Licenses

We have entered into various licensing agreements requiring royalty payments ranging from 0.13% to 2.5% of specified product sales. Certain of these agreements contain provisions for the payment of guaranteed or minimum royalty amounts. In the event that we fail to pay minimum annual royalties, these licenses may automatically become non-exclusive or be terminated. These royalty obligations terminate at various times from 2014 to 2021. For the three and nine months ended September 27, 2014 royalty expense totaled $6,000 and $19,000, respectively, compared to an expense of $6,000 and $19,000, respectively, for the three and nine months ended September 28, 2013. Under the terms of certain royalty agreements, royalty payments made may be subject to audit. There have been no audits to date and we do not expect future audit adjustments to be significant.

 

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The minimum lease payments under operating leases and license obligations as of September 27, 2014 are as follows:

 

Years ending December 31,

   Licenses      Operating Leases  

Remainder of 2014

   $ —         $ 290,000   

2015

     45,000         1,351,000   

2016

     45,000         1,461,000   

2017

     45,000         233,000   

2018

     45,000         37,000   

Thereafter

     —           25,000   
  

 

 

    

 

 

 

Total payments

   $ 180,000       $ 3,397,000   
  

 

 

    

 

 

 

6. Contractual Guarantees and Indemnities

During our normal course of business, we make certain contractual guarantees and indemnities pursuant to which we may be required to make future payments under specific circumstances. We have not recorded any liability for these contractual guarantees and indemnities in the accompanying condensed consolidated financial statements.

Warranties

We establish reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with our customers. Our warranty reserves are established at the time of sale and updated throughout the warranty period based upon numerous factors including historical warranty return rates and expenses over various warranty periods.

Intellectual Property Indemnities

We indemnify certain customers and our contract manufacturers against liability arising from third-party claims of intellectual property rights infringement related to our products. These indemnities appear in development and supply agreements with our customers as well as manufacturing service agreements with our contract manufacturers, are not limited in amount or duration and generally survive the expiration of the contract. Given that the amount of potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, we are unable to determine the maximum amount of losses that we could incur related to such indemnities.

Director and Officer Indemnities and Contractual Guarantees

We have entered into indemnification agreements with our directors and executive officers which require us to indemnify such individuals to the fullest extent permitted by Delaware law. Our indemnification obligations under such agreements are not limited in amount or duration. Certain costs incurred in connection with such indemnities may be recovered under certain circumstances under various insurance policies. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed against a director or executive officer, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities. Historically, any amounts payable pursuant to such director and officer indemnities have not had a material negative effect on our business, financial condition or results of operations.

We have also entered into severance and change in control agreements with certain of our executives. These agreements provide for the payment of specific compensation benefits to such executives upon the termination of their employment.

General Contractual Indemnities/Products Liability

During the normal course of business, we enter into contracts with customers where we agree to indemnify the other party for personal injury or property damage caused by our products. Our indemnification obligations under such agreements are not generally limited in amount or duration. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities. Historically, any amounts payable pursuant to such indemnities have not had a material negative effect our business, financial condition or results of operations. We maintain general and product liability insurance as well as errors and omissions insurance which may provide a source of recovery to us in the event of an indemnification claim.

 

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7. Details of Certain Financial Statement Components and Supplemental Disclosures of Cash Flow Information and Non-Cash Activities

Balance Sheet Data:

 

     September 27, 2014     December 31, 2013  

Accounts receivable:

    

Accounts receivable-trade

   $ 33,000      $ 7,000   

Less: allowance for doubtful accounts

     (1,000     (1,000
  

 

 

   

 

 

 
   $ 32,000      $ 6,000   
  

 

 

   

 

 

 
     September 27, 2014     December 31, 2013  

Inventories:

    

Raw materials

   $ 588,000      $ 563,000   

Less: Raw material reserves

     (542,000     (542,000

Work-in-process

     31,000        31,000   

Less: Work-in-process reserves

     (25,000     (25,000

Finished goods

     195,000        204,000   

Less: Finished goods reserves

     (161,000     (155,000
  

 

 

   

 

 

 
   $ 86,000      $ 76,000   
  

 

 

   

 

 

 
     September 27, 2014     December 31, 2013  

Property and Equipment:

    

Equipment

   $ 12,834,000      $ 9,315,000   

Leasehold improvements

     1,642,000        7,397,000   

Furniture and fixtures

     387,000        387,000   
  

 

 

   

 

 

 
     14,863,000        17,099,000   

Less: accumulated depreciation and amortization

     (6,821,000     (11,626,000
  

 

 

   

 

 

 
   $ 8,042 ,000      $ 5,473,000   
  

 

 

   

 

 

 

Depreciation expense amounted to $316,000 and $945,000, respectively, for the three and nine months ended September 27, 2014 and $338,000 and $893,000, respectively, for the three and nine months ended September 28, 2013.

 

     September 27, 2014     December 31, 2013  

Patents and Licenses:

  

Patents pending

   $ 437 ,000      $ 434,000   
  

 

 

   

 

 

 

Patents issued

     1,226,000        1,176,000   

Less accumulated amortization

     (776,000     (722,000
  

 

 

   

 

 

 

Net patents issued

     450,000        454,000   
  

 

 

   

 

 

 
   $ 887,000      $ 888,000   
  

 

 

   

 

 

 

Amortization expense related to these items totaled $18,000 and $54,000, respectively, for the three and nine months ended September 27, 2014 and $17,000 and $51,000, respectively, for the three and nine months ended September 28, 2013. Amortization expenses are expected to total $18,000 for the remainder of 2014 and $71,000 for 2015 and 2016.

 

     September 27, 2014     December 31, 2013  

Accrued Expenses and Other Long Term Liabilities:

  

Salaries payable

   $ 134,000      $ 98,000   

Compensated absences

     238,000        206,000   

Compensation related

     43,000        25,000   

Warranty reserve

     53,000        151,000   

Deferred rent

     371,000        443,000   

Other

     166,000        200,000   

Fair value of warrant derivatives

     5,612,000        5,708,000   
  

 

 

   

 

 

 
     6,617,000        6,831,000   

Less current portion

     (594,000     (637,000
  

 

 

   

 

 

 

Long term portion

   $ 6,023,000      $ 6,194,000   
  

 

 

   

 

 

 

 

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Table of Contents
     For the nine months ended,  
     September 27, 2014     September 28, 2013  

Warranty Reserve Activity:

    

Beginning balance

   $ 151,000      $ 227,000   

Additions

     —          19,000   

Deductions

     (98,000     (41,000
  

 

 

   

 

 

 

Ending balance

   $ 53,000      $ 205,000   
  

 

 

   

 

 

 

8. Subsequent Events

In late September 2014, we entered into a private transaction to sell our minority position of 700,000 common shares of Resonant to various buyers for an aggregate of $3,564,400. At September 27, 2014, our $3,327,100 expected net proceeds from this transaction were included on our balance sheet as Investment in Resonant and on September 30, 2014, this $3,327,100 investment was converted to cash.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

We are a leading company in developing and commercializing high temperature superconductor (“HTS”) materials and related technologies. Superconductivity is the unique ability to conduct various signals or energy (e.g., electrical current or radio frequency (“RF”) signals) with little or no resistance when cooled to “critical” temperatures. HTS materials are a family of elements that demonstrate superconducting properties at temperatures significantly warmer than previous superconducting materials. Electric currents that flow through conventional conductors encounter resistance that requires power to overcome and generates heat. HTS materials can substantially improve the performance characteristics of electrical systems, reducing power loss, lowering heat generation, and decreasing electrical noise.

Commercialization

Our development efforts over the last 27 years have yielded an extensive patent portfolio as well as critical trade secrets, unpatented technology and proprietary knowledge. We have commercialized wireless products and cryogenic coolers using our proprietary technology and are currently focusing our efforts on this technology in superconducting power applications.

 

    Wireless Communications. Our current commercial products help maximize the performance of wireless telecommunications networks by improving the quality of uplink signals from mobile wireless devices. Our products increase capacity utilization, lower dropped and blocked calls, extend coverage, and enable higher wireless data throughput — all while reducing capital and operating costs.

 

    Cryocoolers. We developed a unique cryocooler that can efficiently and reliably cool HTS circuits to the critical temperature (77 degrees Kelvin), and as a result, our wireless products are maintenance free and reliable enough to be deployed for many years.

 

    Electric Power Utilities. As discussed above, we are adapting our unique HTS materials deposition techniques to deliver energy efficient, cost-effective and high performance Conductus wire technology for next generation power applications. We have identified several large initial target markets for our Conductus wire including energy (wind turbines, cables, fault current limiters) and industrial (motors, generators) applications. We are partnering with HTS industry leaders to accelerate our development and manufacturing processes for our Conductus wire. We expect to begin commercial production of Conductus wire later this year.

Our development efforts (including those described under “Our Strategic Initiatives” below) can take a significant number of years to commercialize, as we must overcome significant technical barriers and deal with other significant risks, some of which are set out in our public filings, including in particular the “Risk Factors” included in Item 1A of this Report.

Our Wireless Business

Substantially all our current revenue comes from the design, manufacture, and sale of high performance infrastructure products for wireless communication applications. We have three current product lines all of which relate to wireless base stations:

 

    SuperLink®, a highly compact and reliable receiver front-end HTS wireless filter system to eliminate out-of-band interference for wireless base stations, combining filters with a proprietary cryogenic cooler and a cooled low-noise amplifier;

 

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    AmpLink®, a ground-mounted unit for wireless base stations that includes a high-performance amplifier and up to six dual duplexers; and

 

    SuperPlex, a high-performance multiplexer that provides extremely low insertion loss and excellent cross-band isolation designed to eliminate the need for additional base station antennas and reduce infrastructure costs.

We sell most of our current commercial products to a small number of wireless carriers in the United States, including AT&T and Verizon Wireless. Verizon Wireless and AT&T each accounted for more than 10% of our commercial revenues in each of the last three years. Demand for wireless communications equipment fluctuates dramatically and unpredictably and recently has been trending downward. As a result of this downward trend, we have managed our inventory to historically low levels, which may result in longer delivery lead times that may not be acceptable to our customers. If this downward trend continues we may be compelled to refocus our manufacturing away from wireless products altogether. We continue to evaluate the various options available for our wireless business as we transform ourselves into a Conductus wire manufacturer. Our commercial operations are subject to a number of significant risks, some of which are set out in our public filings, including in particular the “Risk Factors” included in Item 1A of this Report.

Our Strategic Initiatives

We have created several unique capabilities and a HTS manufacturing system related to our new Conductus wire platform, and cryocoolers that we are seeking to commercially deploy by leveraging our leadership in superconducting technologies, extensive intellectual property, and HTS manufacturing expertise.

HTS Wire Platform

Our Conductus wire product development is focused on large markets where the advantages of HTS wire are recognized by the industry. Our initial product roadmap targets three important applications: superconducting high power transmission cable, superconducting fault current limiters (SFCL) and superconducting rotating machines such as motors and generators.

Superconducting High Power Transmission Cable:

Superconducting high power transmission and distribution cable transmit 5 to 10 times the electrical current of traditional copper or aluminum cables with significantly improved efficiency. HTS power cable systems consist of the cable, which is comprised of hundreds of strands of HTS wire wrapped around a copper core, and the cryogenic cooling system to maintain proper operating conditions. HTS power cables are particularly suited to high load areas such as the dense urban business districts of large cities, where purchases of easements and construction costs for traditional low capacity cables may be cost prohibitive. The primary application for HTS cables is medium voltage feeds to load pockets in dense urban areas. In these high demand zones the grid is often saturated with aging infrastructure. HTS technology brings a considerable amount of power to new locations where the construction of additional transmission to distribution substations, with major transformer assets, is not feasible. Another potential use of HTS power cable is to improve grid power transmission by connecting two existing substations. In dense urban environments many substations often reach capacity limits and require redundant transformer capacity to improve reliability. HTS cables can tie these existing stations together, avoiding very costly transformer upgrades and construction costs.

Superconducting Fault Current Limiter (SFCL):

With power demand on the rise and new power generation sources being added, the grid has become overcrowded and vulnerable to catastrophic faults. Faults are abnormal flows of electrical current like a short circuit. As the grid is stressed, faults and power blackouts increase in frequency and severity. SFCLs act like powerful surge protectors, preventing harmful faults from taking down substation equipment by reducing the fault current to a safer level (20 – 50% reduction) so that the existing switchgear can protect the grid. Currently, electrical-utilities use massive 80kA circuit breakers, oversized transformers and fuses to prevent faults from damaging their equipment and protect against surges. However, once a fault has occurred, standard circuit breakers suffer destructive failure and need to be replaced before service can be restored. In addition, Smart Grid and embedded alternative energy generation enhancements will increase the need for SCFLs. Grid operators face a major challenge in moving power safely and efficiently, from generators to consumers, through several stages of voltage transformation step downs and step ups. At each stage, valuable energy is lost in the form of waste heat. Moreover, while demands are continually rising, space for transformers and substations—especially in dense urban areas—is severely limited. Conventional oil-cooled transformers pose a fire and environmental hazard. By contrast, compact, efficient superconducting transformers are cooled by safe, abundant and environmentally benign liquid nitrogen. As an additional benefit, these actively-cooled devices will offer the capability of operating in overload, to twice the nameplate rating, without any loss of life to meet occasional utility peak load demands.

 

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Superconducting Rotating Machines—Motors and Generators:

Superconducting motors, generators, turbines and other rotating machines are expected to generate large future demand for our Conductus wire. Coils utilizing Conductus wire will enable electric motors and generators to operate at much higher power densities. When compared to a copper wire based electric machine with equivalent output power, future superconducting motors and generators will enable a significant size reductions for the motors with higher efficiency. One potential application for high-powered superconducting generators is expected to be 10+ megawatt offshore wind turbines. Offshore superconducting wind turbines promise to capture clean energy at a lower cost than competing renewables, while delivering power directly to growing coastal cities. Superconducting wind turbines are expected to play a unique role offshore since conventional technology cannot achieve the “power per tower” requirement.

Superconducting High Field magnets:

There are a variety of applications that utilize superconducting magnets in order to capitalize on their unique ability to create extremely high magnetic fields. The NMR (Nuclear Magnetic Resonance) and MRI (Magnetic Resonance Imaging) machines of today utilize such superconducting magnets for this very reason. Currently, high-field superconducting magnets are manufactured using commercially available superconducting wire such as niobium-titanium (NbTi) or niobium-tin (Nb3Sn). NMR and MRI device manufacturers look towards advances in superconducting technologies to improve the overall performance of their systems by dramatically increasing the magnetic fields while reducing size. High demand for a robust, high performance and low cost superconducting wire has spurred rapid development of a next generation alternative. In the last 10 years, new second generation (2G) Rare Earth, Barium, Copper Oxide (ReBCO) superconducting materials have been proven to drastically increase magnetic field strengths, especially at low temperatures. These advanced ReBCO based superconductors now provide an excellent alternative to NbTi and Nb3Sn based materials.

Advanced RF Filters for mobile communications

In February 2012 our then newly formed subsidiary, Resonant LLC., entered into an agreement to develop its innovative technology in the rapidly growing mobile communications products industry. See further explanation below in Resonant and other investments regarding the recent initial public offering of Resonant, the successor to Resonant LLC, and our interests therein.

Resonant and other investments

From time to time we may pursue joint ventures with other entities to commercialize our technology. As mentioned above, in July 2012, we contributed 14 issued and pending patents regarding our innovative technology, limited use of our Santa Barbara facility, and experienced executive leadership and technical expertise as our minority investment in Resonant LLC. As of December 31, 2012 and June 18, 2013, our interest in Resonant LLC was 30%, and the net value of the assets contributed, estimated to approximate fair value, was $423,000 and $185,000, respectively. We had accounted for this investment using the equity method and included it in Other assets for both periods.

At June 18, 2013, we exchanged our equity interest in Resonant LLC, a wholly owned subsidiary of Resonant, for a $2.4 million subordinated convertible note receivable. No gain was recognized for the exchange of our net equity interest on the date of issuance for the note receivable due to uncertainties in connection with the collectability of this subordinated note receivable. Our note was subordinated to a third party lender and was only convertible in the event Resonant conducted an initial public offering and certain other conditions. We determined that our net equity interest of $185,000 approximated the fair value of the note receivable at December 31, 2013 and March 29, 2014, respectively. As of May 29, 2014, the note receivable was converted into 700,000 common shares of Resonant. These shares represented 10.2% of Resonant’s outstanding shares and could not be traded without the consent of their underwriter for a period of twelve months after their May 29, 2014 effective date. As of May 29, 2014 and June 28, 2014, we used the net IPO per share purchase price of $5.21 as the basis for its level 3 fair value estimate, which we believe approximated fair value using the trading price of the common stock of Resonant, as adjusted for an estimated discount ranging from 35% to 45% for lack of marketability and other restrictions described herein. Our level 3 fair value of these shares at May 29, 2014 and June 28, 2014 was approximately $3.6 million.

These shares were marketed and sold in September 2014 in a private transaction and the three and nine month gain (loss) on investment of $(323,000) and $3,142,000 is included on the Statements of Operations.

 

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In 2007, we formed a joint venture with Hunchun BaoLi Communication Co. Ltd. (“BAOLI”) to manufacture and sell our SuperLink interference elimination solution in China. We use the equity method of accounting for our 45 percent joint venture interest. The joint venture agreement called for our joint venture partner to supply the capital and local expertise, and for us to provide a license of certain technology and supply key parts for manufacturing. Since 2007, we have been conducting lab and field trials in the existing China 2G market using our TD-SCDMA and SuperLink solutions. Although those activities continue, the parties have not completed their contributions to the joint venture, including most of the funding and our license, within the two year period specified by the agreement and Chinese law. The future of the joint venture, including any commencement of manufacturing and the transfer of our processes, will depend on product demand in China, completion of funding by our joint venture partner, as well as a number of other conditions, including obtaining certain critical approvals from the Chinese and United States governments. There continues to be no assurance that these conditions will be met. Even if these conditions are met and the approvals received, the results from our joint venture will be subject to a number of significant risks associated with international operations and new ventures, some of which are set forth in our public filings, including in particular the “Risk Factors” included in Item 1A of this Report.

Results of Operations

Three and nine months ended September 27, 2014 compared to the three and nine months ended September 28, 2013

Net revenues decreased by $143,000 or 62%, to $86,000 in the third quarter of 2014 from $229,000 in the third quarter of 2013. Total net revenues decreased by $1,010,000, or 65%, to $550,000 in the first nine months of 2014 from $1,560,000 in the same period of 2013. The decrease is the result of lower sales volume for our SuperLink products. Sales of our Conductus wire products are not yet significant.

We sell our SuperLink and other performance enhancement products to large North American wireless operators. As our customers continue to invest in 4G networks, spending on 3G data networks, where our products are deployed, has become a secondary priority. We believe this market dynamic has impacted and will continue to impact our commercial revenue. The average sales prices for our products were unchanged. Our two largest customers accounted for 66% of our total net commercial product revenues in the first nine months of 2014 and 98% in the same period of 2013. These customers generally purchase products through non-binding commitments with minimal lead-times. We also continue to experience challenges to revenue growth in the commercial wireless market. Consequently, our commercial product revenues can fluctuate dramatically from quarter to quarter based on changes in our customers’ capital spending patterns, and revenues may continue to be impacted by such challenges.

Cost of commercial product revenues includes all direct costs, manufacturing overhead and provision for excess and obsolete inventories. The cost of commercial product revenues increased by $100,000 or 34%, to $390,000 in the third quarter of 2014 from $290,000 in the same period of 2013. The cost of commercial product revenues increased by $202,000, or 22%, to $1,112,000 in the first nine months of 2014 from $910,000 in the same period of 2013. The higher costs relative to reduced sales resulted principally from fixed manufacturing cost components.

Our cost of commercial sales includes both variable and fixed cost components. The variable component consists primarily of materials, assembly and test labor and overhead, which includes transportation costs and warranty costs. The fixed component includes equipment and facility depreciation, purchasing and procurement expenses and quality assurance costs. Given the fixed nature of such costs, the absorption of our production overhead costs into inventory decreases and the amount of production overhead variances expensed to cost of sales increases as production volumes decline since we have fewer units against which to absorb our overhead costs. Conversely, the absorption of our production overhead costs into inventory increases and the amount of production overhead variances expensed to cost of sales decreases as production volumes increase since we have more units against which to absorb our overhead costs. As a result, our gross profit margins generally decrease as revenue and production volumes decline due to lower sales volume and higher amounts of production overhead variances expensed to cost of sales and our gross profit margins generally increase as our revenue and production volumes increase due to higher sales volume and lower amounts of production overhead variances expensed to cost of sales.

 

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The following is an analysis of our commercial product gross gain (loss):

 

Dollars in thousands    Three Months Ended     Nine Months Ended  
     September 27,
2014
    September 28,
2013
    September 27,
2014
    September 28,
2013
 

Net commercial product sales

   $ 86        100   $ 229        100   $ 550        100   $ 1,560         100

Cost of commercial product sales

     390        453     290        127     1,112        202     910         58
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross gain (loss)

   $ (304     (353 )%    $ (61     (27 )%    $ (562     (102 )%    $ 650         42
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

We had a gross loss of $304,000 in the third quarter of 2014 from the sale of our commercial products compared to a gross loss of $61,000 in the third quarter of 2013. As noted above, this gross loss in the third quarter, and year to date in 2014, resulted from a level of commercial sales insufficient to cover our fixed manufacturing overhead costs and increased efforts at our Austin, Texas facility to manufacture our Conductus wire. We regularly review inventory quantities on hand and provide an allowance for excess and obsolete inventory based on numerous factors including sales backlog, historical inventory usage, forecasted product demand and production requirements for the next twelve months. Gross margin in the third quarters and first nine months of 2014 and 2013 were not impacted by the sale of previously written-off inventory.

Research and development expenses relate to development of our new wire products and wire products manufacturing processes. These expenses totaled $1.5 million and $4.5 million, respectively, in the three and nine months ended September 27, 2014 compared to $1.9 million and $4.7 million, respectively, in the three and nine month period ended September 28, 2013. Our higher 2013 expenses included a $337,000 capital equipment obsolescence write-off.

Selling, general and administrative expenses totaled $1.3 million, and $4 million, respectively, in the three and nine months ended September 27, 2014 compared to $1.4 million and $3.9 million in the three and nine months ended September 28, 2013.

For the three and nine months ended September 27, 2014, we had a loss of $323,000 and a gain of $3.1 million from our investment in Resonant, respectively. Resonant completed its initial public offering during the period ended June 28, 2014, at which time our note was converted into 700,000 common shares of Resonant with an estimated fair value of $3.6 million. In late September 2014 we entered into a private transaction to sell this minority interest to various buyers for an aggregate of $3.6 million. At September 27, 2014, our $3.3 million expected net proceeds from this transaction were included on our balance sheet as Investment in Resonant and on September 30, 2014, this investment was converted to cash.

Other income from the sale of property and equipment totaled $44,000 and $433,000, respectively, in for the three and nine months ended September 27, 2014.

Interest income totaled $0 and $1,000, respectively, for the three and nine months ended September 27, 2014 compared to similar amounts in the three and nine months ended September 28, 2013.

We had a net loss of $2.4 million for the quarter ended September 27, 2014, compared to a net loss of $3.5 million in the same period of 2013. Nearly all of this reduced loss can be attributed to adjustments to the fair value of our warrant derivatives. For the nine months ended September 27, 2014 our loss totaled $5.4 million compared to a net loss of $8.3 million for the nine months ended September 28, 2013. Nearly all of this reduced loss can be attributed to our $3.1 million gain from our investment in Resonant.

The net loss available to common stockholders totaled $0.19 per common share in the third quarter of 2014, compared to a net loss of $0.42 per common share in the same period of 2013. The net loss available to common stockholders totaled $0.43 per common share in the first nine months of 2014, compared to $1.48 per common share in the first nine months of 2013.

 

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Liquidity and Capital Resources

Cash Flow Analysis

As of September 27, 2014, we had working capital of $3.3 million, including $1 million in cash and cash equivalents, compared to working capital of $6.6 million at December 31, 2013, which included $7.5 million in cash and cash equivalents. We currently invest our excess cash in short-term, investment-grade, money-market instruments with maturities of three months or less.

Cash and cash equivalents decreased by $6.5 million from $7.5 million at December 31, 2013 to $1 million at September 27, 2014. Cash was used in operations and to purchases of property and equipment, and was partially offset by financing activities.

Cash used in operations totaled $7.1 million in the first nine months of 2014. We used $7.2 million to fund the cash portion of our net loss, and cash was provided by a $0.1 million change in our working capital.

Net cash used in investing activities totaled $3.4 million in the first nine months of 2014. Purchases of equipment for our HTS wire initiative were $3.5 million, $96,000 of which was provided by equipment sales.

Cash provided from financing activities totaled $4.1 million from the exercise of 1,589,471 outstanding warrants issued in connection with our August 2013 underwritten public offering.

Financing Activities

We have historically financed our operations through a combination of cash on hand, cash provided from operations, equipment lease financings, available borrowings under bank lines of credit and both private and public equity offerings. In the first nine months of 2014, cash provided by financing activities totaled $4.1 million from the exercise of outstanding warrants.

Contractual Obligations and Commercial Commitments

In April 2014 documents were signed to amend our Santa Barbara, CA building operating lease and reduced our lease commitment. Instead of leasing approximately 71,000 square feet and partially subleasing to other tenants, we will now lease approximately 35,000 square feet and our former principal tenant will lease their portion of the building directly from our landlord. Other terms and conditions of the lease remain the same. In July 2014 we amended our Austin, TX building operating lease and increased our leased premises to 94,000 square feet. Base rent and operating expenses were revised and other terms and conditions of the lease remain the same. We have not had other material changes outside of the ordinary course of business in our contractual obligations as disclosed in our Annual Report on Form 10-K for 2013.

Capital Expenditures

We invested $3.5 million in fixed assets in the first nine months of 2014. We plan to invest approximately $0.3 million in fixed assets during the remainder of 2014. These amounts are for the purchase of equipment and facilities improvements for our HTS wire initiative. We do not plan on having any additional fixed asset expenditures in 2014 for our existing wireless business.

Future Liquidity

For the first nine months of 2014, we incurred a net loss of $5.4 million and had negative cash flows from operations of $7.1 million. In the full 2013 year, we incurred a net loss of $12.2 million and had negative cash flows from operations of $8.3 million. Our independent registered public accounting firm has included in their audit reports for 2013 and 2012 an explanatory paragraph expressing significant doubt about our ability to continue as a going concern.

At September 27, 2014, we had $1 million in cash and cash equivalents. On September 30, 2014, we received $3.3 cash from the sale of our Resonant common shares. Our cash resources are not sufficient to fund our planned operations for the next twelve months. We believe the key factors to our future liquidity will be our ability to successfully use our expertise and our technology to generate revenues in various ways, including commercial operations, joint ventures, and licenses. We plan to leverage our leadership in superconducting technologies, extensive intellectual property, and HTS manufacturing expertise to develop and produce Conductus wire. Because of the expected timing and uncertainty of these factors, we may need to raise funds to meet our working capital needs.

Additional financing may not be available on acceptable terms or at all. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise any needed funds, we might be forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company.

 

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Net Operating Loss Carryforward

As of December 31, 2013, we had net operating loss carryforwards for federal and state income tax purposes of approximately $313.8 million and $160.6 million, respectively, which expire in the years 2014 through 2033. However, during 2013, we concluded that under the Internal Revenue Code change of control limitations, a maximum of $17.4 million and $16.8 million, respectively, would be available for reduction of taxable income and reduced both the deferred tax asset and valuation allowance accordingly. Due to the uncertainty surrounding their realization, we recorded a full valuation allowance against our net deferred tax assets. Accordingly, no deferred tax asset has been recorded in the accompanying condensed consolidated balance sheets.

Critical Accounting Policies and Estimates

Our discussion and analysis of our historical financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements in conformity with those principles requires us to make estimates of certain items and judgments as to certain future events including, for example, those related to valuation of our investment in Resonant, bad debts, inventories, recovery of long-lived assets (including intangible assets), income taxes, warranty obligations, valuation of outstanding stock warrants, and contingencies. These determinations, even though inherently subjective and subject to change, affect the reported amounts of our assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. While we believe that our estimates are based on reasonable assumptions and judgments at the time they are made, some of our assumptions, estimates and judgments will inevitably prove to be incorrect. As a result, actual outcomes will likely differ from our accruals, and those differences—positive or negative—could be material. Some of our accruals are subject to adjustment, as we believe appropriate, based on revised estimates and reconciliation to the actual results when available.

In addition, we identified certain critical accounting policies which affect certain of our more significant estimates and assumptions used in preparing our consolidated financial statements in our Annual Report on Form 10-K for 2013. We have not made any material changes to these policies.

Backlog

Our commercial backlog consists of accepted product purchase orders with scheduled delivery dates during the next twelve months. We had commercial backlog of $65,000 at September 27, 2014, compared to $88,000 at December 31, 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We do not believe that there was a material change in our exposure to market risk at September 27, 2014 compared with our market risk exposure on December 31, 2013. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk” in our Annual Report on Form 10-K for 2013.

Item 4. Controls and Procedures.

We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). As of the end of the period covered by this report we carried out an evaluation under the supervision and with the participation of our management, including the our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There were no changes in our internal controls over financial reporting during the quarter ended September 27, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We do not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

 

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. Excluding ordinary, routine litigation incidental to our business, we are not currently a party to any legal proceedings that we believe would reasonably be expected to have a material adverse effect on our business, financial condition or results of operation or cash flow.

Item 1A. Risk Factors.

A description of the risk factors associated with our business is contained in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for 2013 filed with the Securities and Exchange Commission on March 28, 2014. We are not aware of any material changes to those risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

 

Number

  

Description of Document

31.1    Statement of CEO Pursuant to 302 of the Sarbanes-Oxley Act of 2002*
31.2    Statement of CFO Pursuant to 302 of the Sarbanes-Oxley Act of 2002*
32.1    Statement of CEO Pursuant to 906 of the Sarbanes-Oxley Act of 2002*
32.2    Statement of CFO Pursuant to 906 of the Sarbanes-Oxley Act of 2002*
101.INS    XBRL Instance Document*
101.SCH    XBRL Taxonomy Extension Schema Document*
101.CAL    XBRL Calculation Linkbase Document*
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB    XBRL Label Linkbase Document*
101.PRE    XBRL Taxonomy Presentation Linkbase Document*

 

* Filed herewith, except exhibits 32.1 and 32.2 are furnished, not filed.

 

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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 our behalf by the undersigned thereunto duly authorized.

 

      SUPERCONDUCTOR TECHNOLOGIES INC.
Dated: November 12, 2014      

/s/ William J. Buchanan

      William J. Buchanan
      Chief Financial Officer
     

/s/ Jeffrey A. Quiram

      Jeffrey A. Quiram
      President and Chief Executive Officer

 

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