SAFEGUARD SCIENTIFICS INC - FORM 10-K - EX-99.1 - EXHIBIT 99.1 - March 6, 2015

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Exhibit 99.1

PixelOptics, Inc.
(A Development Stage Company)

Unaudited Financial Statements

Years Ended December 31, 2012 and 2011 and
For the Period August 13, 2005 (date of inception) to December 31, 2012




Contents

 
 
 
Balance Sheets
2

Statements of Operations
3

Statements of Changes in Equity
4

Statements of Cash Flows
5

Notes to Financial Statements
6


1


PixelOptics, Inc.
(A Development Stage Company)
Unaudited Balance Sheets
(In Thousands, Except Share and per Share Data)
 
 
December 31,
 
 
2012
 
2011
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
211

 
$
9,474

Accounts receivable – net
 
7

 
581

Inventory
 
—

 
1,702

Prepaid expenses
 
105

 
1,505

Total current assets
 
323

 
13,262

Property and equipment – net
 
3,042

 
2,562

Intangible assets
 
2,007

 
2,249

Other assets
 
210

 
255

Total assets
 
$
5,582

 
$
18,328

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
1,521

 
$
1,827

Accrued expenses
 
3,528

 
1,909

Current portion of long-term debt and capital lease obligation
 
25,825

 
2,371

Warrant liability
 
1,971

 
—

Deferred revenue
 
1,339

 
1,090

Total current liabilities
 
34,184

 
7,197

Long-term debt – less current portion
 
3,944

 
7,519

Deferred revenue
 
6,284

 
7,461

Total long-term liabilities
 
10,228

 
14,980

Total liabilities
 
44,412

 
22,177

Stockholders’ equity:
 
 
 
 
8% noncumulative preferred stock:
 
 
 
 
Series D ($35,048 aggregate liquidation preference)
 
3

 
3

Series C ($30,000 aggregate liquidation preference)
 
2

 
2

Series B ($23,835 aggregate liquidation preference)
 
1

 
1

Series A-1 ($6,750 aggregate liquidation preference)
 
1

 
1

Series A ($8,951 aggregate liquidation preference)
 
1

 
1

Common stock ($0.0001 par value, 120,000,000 shares authorized,
 
 
 
 
7,731,719 and 7,673,803 shares issued and outstanding at
 
 
 
 
December 31, 2012 and 2011, respectively)
 
1

 
1

Additional paid-in capital
 
107,299

 
106,808

Accumulated deficit during the development stage
 
(146,138
)
 
(110,666
)
 
 
(38,830
)
 
(3,849
)
Total liabilities and stockholders’ equity
 
$
5,582

 
$
18,328

See accompanying notes.
 
 
 
 

2


PixelOptics, Inc.
(A Development Stage Company)
Unaudited Statements of Operations
(In Thousands)
 
 
 
 
 
 
August 13, 2005
 
 
 
 
 
 
(Inception)
    
 
 
 
 
 
Through
    
 
Year Ended December 31,
 
December 31,
    
 
2012
 
2011
 
2012
Revenue
 
 
 
 
 
 
Lenses
 
$
45

 
$
583

 
$
2,789

License fee revenue
 
1,047

 
1,047

 
2,668

Government projects
 
—

 
—

 
2,977

Total revenue
 
1,092

 
1,630

 
8,434

Operating expenses
 
 
 
 
 
 
Cost of sales - lenses
 
3,614

 
4,963

 
10,477

Cost of sales - government projects
 
—

 
—

 
2,826

Quality assurance and warehouse
 
4,277

 
1,478

 
8,640

Research and development
 
6,813

 
9,484

 
58,162

Sales and marketing
 
6,947

 
11,151

 
31,887

General and administrative
 
7,865

 
5,856

 
31,943

Other operating expenses
 
3,801

 
1,664

 
6,160

Total operating expenses
 
33,317

 
34,596

 
150,095

Operating loss
 
(32,225
)
 
(32,966
)
 
(141,661
)
Interest expense
 
(2,683
)
 
(1,809
)
 
(5,475
)
Change in fair value of warrants
 
(566
)
 
—

 
(566
)
Other income
 
2

 
6

 
1,564

Provision for income taxes
 
—

 
—

 
—

Net loss
 
$
(35,472
)
 
$
(34,769
)
 
$
(146,138
)
See accompanying notes.
 
 
 
 
 
 

3


PixelOptics, Inc.
(A Development Stage Company)
Unaudited Statements of Changes in Equity
(In Thousands)
 
 
 
 
Additional
 
 
 
Additional
 
Accumulated
 
 
 
 
 
 
Paid-In
 
 
 
Paid-In
 
Deficit During
 
 
 
 
 
 
Capital
 
 
 
Capital
 
The
 
 
 
 
Common
 
Common
 
Preferred
 
Preferred
 
Development
 
 
 
 
Stock
 
Stock
 
Stock
 
Stock
 
Stage
 
Total
Balance (deficit) at August 13, 2005
 
$ –

 
$ –

 
$ –

 
$ –

 
$ –

 
$ –

Contributed capital
 
1

 
5

 
—

 
—

 
—

 
6

Stock option compensation
 
—

 
4

 
—

 
—

 
—

 
4

Net loss
 
—

 
—

 
—

 
—

 
(1,424
)
 
(1,424
)
Balance (deficit) at December 31, 2005
 
1

 
9

 
—

 
—

 
(1,424
)
 
(1,414
)
Contributed capital
 
—

 
985

 
2

 
15,610

 
—

 
16,597

Stock issuance costs
 
—

 
—

 
—

 
(665
)
 
—

 
(665
)
Stock option compensation
 
—

 
71

 
—

 
—

 
—

 
71

Net loss
 
—

 
—

 
—

 
—

 
(5,225
)
 
(5,225
)
Balance (deficit) at December 31, 2006
 
1

 
1,065

 
2

 
14,945

 
(6,649
)
 
9,364

Contributed capital
 
—

 
—

 
1

 
23,834

 
—

 
23,835

Stock issuance costs
 
—

 
—

 
—

 
(37
)
 
—

 
(37
)
Stock option compensation
 
—

 
46

 
—

 
—

 
—

 
46

Net loss
 
—

 
—

 
—

 
—

 
(9,525
)
 
(9,525
)
Balance (deficit) at December 31, 2007
 
1

 
1,111

 
3

 
38,742

 
(16,174
)
 
23,683

Contributed capital
 
—

 
—

 
2

 
29,998

 
—

 
30,000

Stock issuance costs
 
—

 
—

 
—

 
(106
)
 
—

 
(106
)
Stock option compensation
 
—

 
239

 
—

 
—

 
—

 
239

Net loss
 
—

 
—

 
—

 
—

 
(20,260
)
 
(20,260
)
Balance (deficit) at December 31, 2008
 
1

 
1,350

 
5

 
68,634

 
(36,434
)
 
33,556

Stock options exercised
 
—

 
11

 
—

 
—

 
—

 
11

Stock issuance costs
 
—

 
—

 
—

 
(100
)
 
—

 
(100
)
Stock option compensation
 
—

 
464

 
—

 
—

 
—

 
464

Warrants issued
 
—

 
—

 
—

 
226

 
—

 
226

Net loss (as restated)
 
—

 
—

 
—

 
—

 
(20,071
)
 
(20,071
)
Balance (deficit) at December 31, 2009
 
1

 
1,825

 
5

 
68,760

 
(56,505
)
 
14,086

Stock option compensation
 
—

 
374

 
—

 
—

 
—

 
374

Common stock repurchase
 
—

 
(190
)
 
—

 
—

 
—

 
(190
)
Warrants exercised
 
—

 
—

 
—

 
93

 
—

 
93

Net loss (as restated)
 
—

 
—

 
—

 
—

 
(19,392
)
 
(19,392
)
Balance (deficit) at December 31, 2010
 
1

 
2,009

 
5

 
68,853

 
(75,897
)
 
(5,029
)
Preferred stock issuance
 
—

 
—

 
3

 
35,045

 
—

 
35,048

Stock issuance costs
 
—

 
—

 
—

 
(221
)
 
—

 
(221
)
Stock option compensation
 
—

 
531

 
—

 
—

 
—

 
531

Warrants issued
 
—

 
—

 
—

 
591

 
—

 
591

Net loss
 
—

 
—

 
—

 
—

 
(34,769
)
 
(34,769
)
Balance (deficit) at December 31, 2011
 
1

 
2,540

 
8

 
104,268

 
(110,666
)
 
(3,849
)
Stock option compensation
 
—

 
491

 
—

 
—

 
—

 
491

Net loss
 
—

 
—

 
—

 
—

 
(35,472
)
 
(35,472
)
Balance (deficit) at December 31, 2012
 
$
1

 
$
3,031

 
$
8

 
$
104,268

 
$
(146,138
)
 
$
(38,830
)
See accompanying notes.
 
 
 
 
 
 
 
 
 
 
 
 

4


PixelOptics, Inc.
(A Development Stage Company)
Unaudited Statements of Cash Flows
(In Thousands)
 
 
 
 
 
 
August 13, 2005
 
 
 
 
 
 
(Inception)
 
 
 
 
 
 
Through
 
 
Year Ended December 31,
 
December 31,
 
 
2012
 
2011
 
2012
Operating activities
 
 
 
 
 
 
Net loss
 
$
(35,472
)
 
$
(34,769
)
 
$
(146,138
)
Adjustments to reconcile to net cash from operating activities:
 
 
 
 
 
 
Change in fair value of warrants
 
566

 
—

 
$
566

Depreciation and amortization
 
1,213

 
$
1,090

 
$
4,209

Stock option compensation
 
491

 
$
531

 
$
2,219

Loss on sale of property and equipment
 
145

 
—

 
$
267

Bad debt (recovery) expense
 
4

 
—

 
$
8

Inventory valuation reserves
 
2,439

 
$
1,140

 
$
3,578

Amortization of debt discount
 
774

 
$
639

 
$
1,481

Changes in operating assets and liabilities:
 
 
 
 
 
 
Accounts receivable
 
570

 
$
(306
)
 
$
(14
)
Inventory
 
(736
)
 
(2,295
)
 
(3,578
)
Prepaid expenses and other assets
 
1,445

 
(449
)
 
(220
)
Rent deposit
 
—

 
—

 
(21
)
Accounts payable
 
(306
)
 
(108
)
 
1,521

Accrued expenses
 
1,618

 
921

 
3,527

Deferred revenue
 
(929
)
 
(875
)
 
7,625

Net cash used in operating activities
 
(28,178
)
 
(34,481
)
 
(124,970
)
Investing activities
 
 
 
 
 
 
Proceeds from sales of marketable securities
 
—

 
—

 
3,000

Investment in marketable securities
 
—

 
—

 
(3,000
)
Purchase of property and equipment
 
(1,595
)
 
(710
)
 
(6,830
)
Proceeds from sale of property and equipment
 
—

 
—

 
80

Purchase of intangibles
 
—

 
—

 
(2,775
)
Net cash used in investing activities
 
(1,595
)
 
(710
)
 
(9,525
)
Financing activities
 
 
 
 
 
 
Proceeds from debt
 
22,610

 
10,000

 
37,610

Proceeds from capital lease
 
—

 
—

 
17

Payments on capital lease
 
—

 
(5
)
 
(17
)
Payments on debt
 
(2,100
)
 
(4,290
)
 
(7,100
)
Debt issuance costs
 
—

 
(75
)
 
(75
)
Issuance of common stock
 
—

 
—

 
1,002

Repurchase of common stock
 
—

 
—

 
(190
)
Issuance of preferred stock
 
—

 
35,048

 
104,588

Stock issuance costs
 
—

 
(221
)
 
(1,129
)
Net cash provided by financing activities
 
20,510

 
40,457

 
134,706

Net (decrease) increase in cash and cash equivalents
 
(9,263
)
 
5,266

 
211

Cash and cash equivalents at beginning of period
 
9,474

 
4,208

 
—

Cash and cash equivalents at end of period
 
$
211

 
$
9,474

 
$
211

Supplemental disclosure of cash flow information:
 
 
 
 
 
 
Cash paid for interest
 
$
1,000

 
$
1,092

 
$
2,092

Supplemental disclosure of noncash financing activities:
 
 
 
 
 
 
Warrants issued
 
$
1,405

 
$
591

 
$
1,996

See accompanying notes.
 
 
 
 
 
 

5


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

December 31, 2012

1. Organization and Nature of Business
PixelOptics, Inc. (Company), a Delaware corporation, formed and began operations on August 13, 2005. The Company is engaged in the development stage of creating electronic dynamic spectacle lenses used to correct presbyopia, a condition which requires most people over the age of 45 to wear bifocals, trifocals or progressive addition lenses. The Company is headquartered in Roanoke, Virginia.
2. Going Concern
The financial statements have been prepared assuming that the Company will continue as a going concern. The Company’s limited available capital, financial position and operating results as of and for the period ended December 31, 2012, and for the period from August 13, 2005 (date of inception) to December 31, 2012 raise substantial doubt about the Company’s ability to continue as a going concern. As of December 31, 2012, the Company’s stockholders’ deficit was $(38,830) and available cash and cash equivalents was $211. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon commencing operations, developing sales and obtaining additional capital and financing.
The Company is currently seeking additional capital to allow it to continue operations and achieve its financing and operating objectives. In the first quarter of 2013, the Company received approximately $8,000 of bridge loan financing from its current investors and anticipates receiving an additional $12,000 of funding in late March 2013. In February 2013, the Company signed a term sheet for an aggregate amount of $18,000 with Hercules Technology Growth Capital. The initial $12,000 of debt funding will be available upon the loan closing date and the remaining $6,000 will be available upon the Company completing a future capital funding round. The cash provided by this venture debt will be used to pay down the Horizon Loan and to fund ongoing operations. Finally, the Company is seeking additional capital of approximately $35,000 - $50,000 via a Series E financing round. This financing, once completed, is expected to allow the Company to continue to operate through the end of 2014 and provide for sufficient capital to sustain operations.
The Company has incurred significant losses in the past, and will continue to incur losses in the future. Management believes additional financing will be required to provide sufficient funds to enable the Company to reach profitability and sustain its operations. There can, however, be no assurance that the Company will be profitable in the future, nor that additional future financing can be obtained on terms acceptable to the Company.
3. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements were prepared in conformity with U.S. generally accepted accounting principles applied on a basis consistent with that of the preceding periods. Certain prior year amounts have been reclassified to conform to 2012 presentation.

6

PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

Cash and Cash Equivalents
The Company considers all highly liquid investments with a remaining maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are stated at cost which approximates fair value.
Accounts Receivable 
Accounts receivable are recorded net of the allowance for doubtful accounts. The Company regularly evaluates the collectibility of accounts receivable based on a variety of factors, including the length of time the receivables are past due, the financial health of the customer and historical experience. Based on this evaluation, the Company records reserves to reduce the related receivables to amounts reasonably believed to be collectible. The reserve for uncollectible accounts receivable was not significant as of December 31, 2012 and 2011. Actual write-offs have approximated management’s estimates.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. The Company periodically reviews its inventory for slow-moving or obsolete items and writes down the related products to estimated net realizable value.
During 2012 and 2011, the Company recorded reserves of $2,439 and $1,140, respectively related to certain product inventory that will not be sold due to obsolescence or quality issues.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred, while expenditures for additions or improvements that extend the life of an asset are capitalized. Depreciation of property and equipment is calculated principally using the straight-line method over the estimated useful lives as follows:
 
 
 
Leasehold improvements
6 to 8 years
Furniture and fixtures
7 to 12 years
Machinery and equipment
2 to 5 years

Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of interest-bearing transaction accounts and money market deposit accounts. The Company maintains its interest-bearing transaction accounts in high credit quality commercial bank and investment accounts. The Company has not experienced any losses in these accounts. At December 31, 2012 and 2011, the Company had on deposit $0 and $9,556, respectively, in excess of the amount insured by the Federal Deposit Insurance Corporation (FDIC).

7

PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

Research and Development
Research and development costs, including new product development programs, regulatory compliance and clinical research are expensed as incurred.
Stock-Based Compensation
The Company recognizes share-based compensation at the grant date of the award based on the fair value, and is recognized on a straight-line basis as expense in the accompanying statements of operations over the vesting period of the award, net of estimated forfeitures. The Company estimates forfeitures based on historical experience with further consideration given to the class of employees to whom the equity awards were granted. As of December 31, 2012, the Company expects that all outstanding options will vest.
Intangible Assets
The Company records intangible assets at historical cost and amortizes them over their estimated useful life. Amortization is generally computed by the straight-line method over the estimated useful lives of the assets. The estimated useful life of the license intangible is approximately 12 years.
The Company reviews its intangible assets subject to amortization annually to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, a product recall, or an adverse action or assessment by a regulator. As of December 31, 2012 and 2011, the Company determined that none of its intangible assets were impaired.
Revenue Recognition
The Company generates revenue primarily from the sale of lenses, modules, and chargers to its distribution partners. Revenue is considered realized or realizable and earned when all of the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectibility is reasonably assured. Revenue is recognized upon passage of title and risk of loss to customers. The Company generally allows its customers to return defective or damaged products for credit or repair. Estimates for sales returns are based upon historical trends and are recorded as a reduction to revenue when the product is sold. The Company records all shipping and handling fees in revenue and records all of the related costs in Lenses - cost of sales.
During 2011, the Company began to sell emPower!, the world’s first and only electronic focusing eyewear, through its typical distribution channels. The Company is in the initial launch period of emPower!. During this period, customers may return previously purchased products for credit to satisfy consumer preference as well as to cover errors made in cutting the final prescription into the lens. The Company has determined that it is unable to make a reasonable estimate of product returns during this period due to the lack of sufficient history with sales of the emPower! product and the relatively wide range of reasons for accepted returns. In addition, the Company has established a one-year warranty to cover material defects in the operation of the

8

PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

emPower! product. The Company has determined that the limited history of the new emPower! product precludes the Company from making a reasonable estimate of warranty claims against sales.
As a result of its inability to make a reasonable estimate of product returns, the Company recognizes revenue for emPower! on the “sell-through” method. Under the “sell-through” method, the Company does not recognize revenue upon sale to an optical lab, its primary customer, but defers recognition of revenue until the optical lab sells the product to an eye care professional. However, as the Company is unable to make a reasonable estimate of warranty claims related to the emPower! product, the Company further defers the recognition of revenue related to emPower! until the end of the product’s warranty period. The Company will reassess its ability to make estimates of product returns and warranty claims at each reporting period in accordance with applicable guidance. During the years ended December 31, 2012 and 2011, sales of emPower! totaling approximately $162 and $129, respectively, were deferred and have been recorded as Deferred revenue in the December 31, 2012 and 2011 balance sheets.
During the year ended December 31, 2010, the Company received approximately $10,000 related to its arrangement with Aspex Eyewear, Inc. (Aspex). The cash payment will be recognized into income over the term of the related license agreement. During each of the years ended December 31, 2012 and 2011, the Company recognized $1,047 of license fee revenue.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are based on differences between the financial reporting and tax bases of the assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that the Company will not realize some portion or all of its deferred tax assets. The Company considers relevant evidence, both positive and negative, to determine the need for a valuation allowance. Information evaluated includes our financial position and results of operations for the current and preceding years, the availability of deferred tax liabilities and tax carrybacks, as well as an evaluation of currently available information about future years.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the relevant taxing authorities, based on the technical merits of its position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company classifies interest and penalties related to income tax matters as a component of income tax expense.
Years ending on or after December 31, 2008 remain subject to examination by federal and state tax authorities.

9

PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

Fair Value of Financial Instruments
The fair values of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses are not materially different than their carrying amounts, as reported, since they approximate the amount for which the assets could be sold or the liabilities could be settled.
The fair value of debt instruments are estimated to approximate carrying amounts since interest rates approximate rates at which the Company could obtain similar financing at December 31, 2012. Derivative financial instruments are recorded at fair value at December 31, 2012.
Fair value guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
•
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
•
Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data.
•
Level 3 - Unobservable inputs that are not corroborated by market data.
The following are the assets and liabilities measured at fair value as of December 31, 2012:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Warrant liability
 
$
—

 
$
—

 
$
1,971

 
$
1,971


The reconciliation of the warrant liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:
 
 
 
 
Warrant Liability
 
 
Balance at December 31, 2011
$
—

Issuance of new warrants with Bridge Loan
1,405

Change in fair value of warrants
566

Balance at December 31, 2012
$
1,971


The fair value of the warrants is determined using a scenario-based option pricing model. The valuation of warrants is subjective and is affected by significant inputs, including product launch timing, cost of product sales, and ultimate market penetration, as well as other changes in inputs to the valuation model including the price per share of the Company’s common stock, assumptions regarding the expected amounts and dates of future equity financing activities, the historical volatility of the stock prices of the Company’s peer group, and risk-free rates. Changes in these assumptions can materially affect the fair value estimate, and the warrant liability could at any future point in time, be significantly different that the carrying value at December 31, 2012.

10

PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management 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 period. Actual results could differ from those estimates and may affect future periods.
4. Accounts Receivable
Accounts receivable consist of the following as of December 31:
 
 
2012
 
2011
Trade receivables
 
$
13

 
$
250

Other receivables
 
—

 
333

Less - allowance for doubtful accounts
 
(6
)
 
(2
)
 
 
$
7

 
$
581


5. Prepaid Expenses

Prepaid expenses consist of the following as of December 31:
 
 
2012
 
2011
Manufacturing supplies
 
$
—

 
$
673

Prepayments to suppliers
 
—

 
730

Other prepaid expenses
 
105

 
102

 
 
$
105

 
$
1,505


11


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

6. Property and Equipment
Property and equipment consist of the following as of December 31:
 
 
2012
 
2011
Leasehold improvements
 
$
637

 
$
637

Machinery and equipment
 
4,190

 
4,146

Furniture and fixtures
 
78

 
77

Capital assets in process
 
1,175

 
33

 
 
6,080

 
4,893

Less - accumulated depreciation
 
(3,038
)
 
(2,331
)
 
 
$
3,042

 
$
2,562


Depreciation expense was $970 and $847 during 2012 and 2011, respectively.
7. Intangibles
The Company has capitalized its payments to Johnson & Johnson Vision Care, Inc., as co-obligator with E­Vision, LLC (see Notes 12 and 15), for the right to use certain intellectual property. The Company has also capitalized its payments to High Performance Optics, Inc. (see Note 12) for the right to manufacture certain products using intellectual property. The total cash paid for these intangibles was $2,775. The net balance of intangible assets at December 31, 2012 and 2011 was $2,007 and $2,249, respectively. Amortization expense for intangible assets was $243 during each of 2012 and 2011. As of December 31, 2012, the estimated amortization expense associated with our intangible assets for each of the next five fiscal years is expected to be $243.
8. Bridge Loans and Long-Term Debt
On April 12, 2012, July 5, 2012, and September 27, 2012, the Company entered into a note and warrant purchase agreement (“Bridge Loan”) with certain of its existing investors for the purchase of approximately $7,210, $6,800, and $8,600, respectively, of 8% convertible notes due June 30, 2013. The Bridge Loan is subordinated to the Company’s currently outstanding $10,000 loan with Horizon Technology entered into on April 6, 2011. Interest on the Bridge Loan is payable at maturity. The Bridge Loan will automatically convert into the Company’s preferred shares if a qualified equity financing, defined as the issuance of preferred stock of at least $20,000, occurs. At conversion, all outstanding principal and accrued interest will convert at a price determined in the subsequent equity financing.
The Bridge Loan provides for the issuance of 5,137,585 warrants (issued at the various funding dates) to purchase the Company’s preferred stock as determined in the next qualified equity financing. The warrants are exercisable for a period of 10 years. The number of warrants issued under this arrangement will be determined by dividing 25% of the value received in the bridge financing by the lowest price per share issued in the next qualified financing.

12


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

On April 6, 2011, the Company closed a $10,000 aggregate principal amount debt financing with Horizon Technology Finance (“Horizon Note”). The Horizon Note has an interest rate of 10.75% and is secured by substantially all of the Company’s assets, except for intellectual property. The Horizon note requires interest only payments for the first 12 months; the remaining balance will be paid over 30 monthly installments. In connection with the issuance of the Horizon Note, the Company issued 181,818 warrants to purchase Series D preferred shares. The warrants have an exercise price equal to the Series D preferred stock price of $1.10.
On February 25, 2011, the Company closed a $5,500 aggregate principal bridge financing from certain existing investors of the Company. The loan had an interest rate of 8% and was convertible into the Company’s preferred shares. In connection with the issuance of this bridge financing, the Company issued 582,565 warrants to purchase Series D preferred shares. The warrants have an exercise price equal to the Series D preferred stock price of $1.10. The notes were converted to Series D preferred stock on April 6, 2011.
Debt consists of the following as of December 31:
 
 
2012
 
2011
Horizon Note
 
$
7,900

 
$
10,000

Bridge Loan
 
22,610

 
—

Less - unamortized debt discount
 
(741
)
 
(110
)
 
 
29,769

 
9,890

Less - current portion
 
(25,825
)
 
(2,371
)
 
 
$
3,944

 
$
7,519


Estimated principal repayments on long-term debt for future years ending December 31 are as follows:
 
 
 
2013
$
26,530

2014
3,980

2015
—

2016
—

2017
—

Thereafter
—

 
$
30,510



9. Capital
As of December 31, 2012, the authorized capital stock of the Company consists of 120,000,000 shares of common stock and 86,707,758 shares of preferred stock, each having a par value of $0.0001 per share. Preferred stock is issued in series, subject to terms established by the Board of Directors. On April 6, 2011, the Company closed on a Series D preferred stock equity financing. The capital raised was approximately $35,048. The following table describes the key features of the Company’s outstanding preferred stock.

13


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

 
 
 
Issue Date/Shares outstanding/ Conversion Price
Series A - On September 5, 2006, the Company authorized and issued 13,841,791 shares (12,972,321 currently outstanding) of Series A preferred stock with a conversion price per share of $0.69.
Series A-1 - On December 22, 2006, the Company authorized and issued 8,437,499 shares (8,437,499 currently outstanding) of Series A-1 preferred stock with a conversion price per share of $0.80.
Series B - On June 29, 2007, the Company authorized and issued 14,103,524 shares (14,103,524 currently outstanding) of Series B preferred stock with a conversion price per share of $1.69.
Series C - On September 26, 2008, the Company authorized and issued 17,324,944 shares (17,125,150 currently outstanding) of Series C preferred stock with a conversion price per share of $1.7518.
Issue Date/Shares outstanding/ Conversion Price
Series D - On April 6, 2011, the Company authorized and issued 33,000,000 shares (31,861,909 currently outstanding) of Series D preferred stock with a conversion price per share of $1.10.
Dividend and liquidation preferences
All the preferred stock is senior to the rights, benefits, obligations, and restrictions of all other equity securities of the Company. The holders of each outstanding series of preferred stock shall be entitled to a noncumulative 8% dividend per annum, if declared, payable in cash or in-kind at the option of the holder, in preference to any distribution on any other equity securities. The preferred stockholders are also entitled to certain liquidation preferences upon any liquidation, dissolution or winding up of the Company as further defined in the stock agreement. Each share of Series A and A-1, B, C and D preferred stock is initially convertible into one share of common stock, subject to adjustment as provided in the anti-dilution features.
Participation rights
Each share of Series A, A-1, B, C and D preferred stock participates fully with common once any liquidation preferences are satisfied.
Voting rights
All outstanding series of preferred stock have the right to vote together with common stock holders on an as-converted basis on all matters submitted for vote of the holders of common stock. Each share of preferred stock is initially convertible into one share of common stock, subject to adjustment as provided in the anti-dilution features more fully explained in the stock agreement.
Changes in preferred shares
There have been no other changes in the number of issued shares in any class of the Company’s outstanding preferred stock in the periods ended 2012.

14


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

10. Warrants
The Company accounts for preferred stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement. Preferred stock warrants are accounted for as derivative liabilities if the warrants allow for cash settlement or provide for modification of the warrant exercise price in the event subsequent sales of preferred or common stock are at a lower price per share than the then-current warrant exercise price. Derivative warrant liabilities are classified on the balance sheet as a current liability, which is remeasured to fair value at each balance sheet date.
As of December 31, 2012, the following stock warrants were outstanding:
Equity-classified warrants
 
 
Number
 
Issuance
Date
 
Date Exercisable
 
Expiration Date
 
Underlying Security
 
Exercise Price Per Share
2006 Warrants
 
869,470

 
May 2006
 
Sept. 2006
 
May 2014
 
Series A Preferred
 
$
0.69

2009 Warrants
 
199,794

 
Dec. 2009
 
Dec. 2009
 
Dec. 2019
 
Series C Preferred
 
$
1.7518

Bridge Loan Warrants
 
582,565

 
April 2011
 
April 2011
 
April 2021
 
Series D Preferred
 
$
1.10

2011 Warrants
 
181,818

 
April 2011
 
April 2011
 
April 2021
 
Series D Preferred
 
$
1.10

 
 
1,833,647

 
 
 
 
 
 
 
 
 
 

Equity-classified warrants: The Company has recorded the preferred stock warrant awards from 2006 through 2011 within stockholders’ equity on the balance sheet as the Company concluded that each issuance was determined to be indexed to the Company’s stock and the warrant provisions did not embody an obligation of the Company. The proceeds of the February 25, 2011 bridge loan and the Horizon Note were allocated between the debt issuances and the related preferred stock warrants based upon their relative fair values, which resulted in the recording of a discount on the debt upon issuance that reflects the value allocated to the warrants. The discounts are being accreted as additional interest expense over the term of the related debt instruments using the effective interest method. The assigned consideration received at the date of grant for each tranche of warrants issued in 2006 through 2011 was not significant.

15


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

Liability-classified warrants
 
 
Number
 
Issuance
Date
 
Date Exercisable
 
Expiration Date
Bridge Loan Warrants
 
1,637,585

 
April 2012
 
June 2013
 
April 2022
Bridge Loan Warrants
 
1,545,455

 
July 2012
 
June 2013
 
April 2022
Bridge Loan Warrants
 
1,954,545

 
Sept. 2012
 
June 2013
 
April 2022
 
 
5,137,585

 
 
 
 
 
 

Liability-classified warrants: The Company has recorded the 2012 preferred stock warrants awards as a liability on the balance sheet as the Company concluded that the issuances were determined not to be indexed to the Company’s stock and therefore the warrant provisions embodied an obligation of the Company. Each warrant is exercisable in whole or in part at any time until June 30, 2013 at a per share exercise price of $1.10, subject to certain adjustments as specified in the warrant agreement. Additionally, the warrants contain provisions that require the modification of the exercise price and shares to be issued under certain circumstances, including in the event the Company completes subsequent equity financing at a price per share lower than the then-current warrant exercise price. The Company valued the warrants as derivative financial instruments as of the dates of issuance of $282, $503 and $620, respectively, and will continue to do so at each reporting date, with any changes in fair value being recorded on the Statement of Operations. During the year ended December 31, 2012, the Company recorded a loss of $566 due to an increase in the estimated fair value of these warrants. The warrant liability was $1,971 as of December 31, 2012. The Company will continue to classify the fair value of the warrants as a liability until the warrants are exercised, expire, or are amended in a way that would no longer require these warrants to be classified as a liability.
The proceeds of the 2012 bridge loans were allocated between the debt issuances and the related preferred stock warrants based upon their relative fair values, which resulted in the recording of a discount on the debt upon issuance of $1,405 that reflects the value allocated to the warrants. The discounts are being accreted as additional interest expense over the term of the related debt instruments using the effective interest method.

16


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

The following table details warrant activity during the periods ended December 31, 2012 and 2011.
 
 
2012
 
2011
Outstanding at beginning of period
 
1,833,647

 
1,069,264

Granted
 
5,137,585

 
764,383

Exercised
 
—

 
—

Expired or forfeited
 
—

 
—

Outstanding at end of period
 
6,971,232

 
1,833,647

Exercisable at end of year
 
1,833,647

 
1,833,647

Range of exercise prices
 
$0.69 - $1.75

 
$0.69 - $1.75

Weighted-average remaining contractual life in years
 
8.2

 
4.9


11. Stock-Based Compensation
The Company has one stock-based compensation plan adopted in 2005, (the “2005 Plan”). The 2005 Plan is administered by the Company’s Board of Directors. Stock-based compensation is granted to officers and certain key employees in accordance with the provisions of the 2005 Plan. The 2005 Plan provides for grants of nonstatutory stock options, stock purchase rights and incentive stock options. These awards have ten-year contractual terms and vest based on the terms of the individual awards. The options are generally forfeitable upon termination of a holder’s service as an employee or director, unless the individual’s service is terminated due to retirement, death or permanent disability. The Company recognizes compensation cost on a straight-line basis over the vesting period for the award. The total aggregate number of shares of the Company’s common stock that may be issued under the 2005 Plan is 20,078,486 shares.
During 2012 and 2011, stock compensation expense related to awards under the 2005 Plan was $491 and $531, respectively. This expense is included in “other operating expenses” in the accompanying statements of operations.
As of December 31, 2012, there was $821 of unrecognized compensation cost related to outstanding stock options expected to be recognized over a weighted-average period of approximately 2.7 years. The fair value of each stock option award is estimated on the date of grant using a Black-Scholes option-pricing model. Significant inputs in the option-pricing model are determined using publicly available information or with assistance from an external valuation firm. The external valuation firm also assists the Company in determining the fair value of its outstanding equity instruments. For stock options issued in the years ended December 31, 2012 and 2011, the assumptions shown in the following table were used:

17


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

 
 
Year Ended December 31
 
 
2012
 
2011
Dividend yield
 
—
%
 
—
%
Risk-free interest rate
 
1.8
%
 
2.3
%
Expected term (years)
 
7

 
7

Volatility
 
77.0
%
 
77.0
%

Expected Volatility. Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company has used the historical volatility of a group of guideline public companies over the average expected term of the options granted as the expected volatility.
Risk-Free Interest Rate. This is the U.S. Treasury rate having a term that most closely resembles the expected term of the option.
Expected Term. The expected term is the period of time that the stock option granted is expected to remain unexercised. Stock options granted during the years ended December 31, 2012 and 2011 had a maximum term of ten years. The Company does not have sufficient historical experience to provide a reasonable basis upon which to estimate the expected term of its awards. Accordingly, the Company estimates the expected term using the “simplified” method which represents the mid-point between the vesting date of its outstanding awards and the contractual term.
The weighted-average grant date fair value of stock options granted during 2012 and 2011 was $0.09 and $0.24 per share, respectively.
Stock option activity under the 2005 Plan is as follows:
 
 
Options
 
Weighted-Average Exercise Price Per Share
 
Weighted-Average Remaining Contractual
Life
Outstanding December 31, 2011
 
12,709,746

 
$
0.20

 
7.2

Granted
 
5,358,512

 
$
0.23

 
 
Exercised
 
(57,916
)
 
$
0.29

 
 
Expired or forfeited
 
(1,451,515
)
 
$
0.29

 
 
Outstanding December 31, 2012
 
16,558,827

 
$
0.25

 
7.1

Exercisable at December 31, 2012
 
10,662,314

 
$
0.25

 
6.2


18


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

12. Related-Party Transactions
On January 1, 2010, the Company paid High Performance Optics, Inc. (HPO) $25 pursuant to an agreement which allowed the Company to exclusively offer sublicenses of certain technology rights controlled by HPO for seven months. This has been expensed on the statement of operations in 2010. Additionally, on March 2, 2010, the Company entered into a new license agreement with HPO in which the Company licensed certain technology rights for use in some of the Company’s products. The Company paid HPO $25 for the license, which has been capitalized as an intangible asset on the balance sheet. There are no future royalties payable to HPO under this license. See Note 15 for a separate license agreement with HPO that was updated in 2010.
In November 2010, the Company received an offer from another corporation to provide services for products not related to the Company’s core business. A new entity, Opti-Cool LLC was created, with essentially the same ownership as the Company. A development contract with potential revenues of approximately $100, and estimated potential expenses of approximately $100 was entered into between the Company and the other corporation and then assigned to Opti-Cool, LLC. The development project did not move forward and Opti-Cool LLC will be dissolved.
E-Vision, LLC (E-Vision), a common stockholder of the Company, has a License and Development Agreement dated September 2, 2005 with Johnson & Johnson Vision Care, Inc. (Johnson & Johnson) for intellectual property. E-Vision has licensed this intellectual property to the Company. As disclosed in Note 7 and 15, the Company is a co-obligor with E-Vision for amounts due to Johnson & Johnson. The Company paid $275 and $158 in licensing agreement fees, which have been expensed on the statements of operations in 2012 and 2011, respectively. Payments in 2005 through 2012 were $2,750 for the right to use the intellectual property according to the License and Development Agreement, and have been capitalized as intangible assets on the balance sheet. The Company also paid royalties to E-Vision of $0 and $17 during 2012 and 2011, respectively.
On June 29, 2007, the Company entered into a license agreement with E-A Ophthalmics, LLC (E-A), in which the Company licensed certain rights related to the Company’s intellectual property, in exchange for 21,275,073 of the series A units of E-A. The Company concurrently declared a dividend of the E-A series A units, to the holders of the Company’s Series A preferred stock and series A-1 preferred stock. On June 13, 2008, E-A entered into a sublicense agreement with a newly formed entity, Ocular Optics, Inc. (d/b/a Elenza, Inc.), in which E-A sublicensed those rights, in exchange for 1,063,735 units of common stock of Elenza, Inc. The Company and Elenza, Inc. share some common management and stockholders. The parties entered into the Amendment No. 3 to License Agreement and Amendment No. 2 to the Clarifying Agreement on October 1, 2012, whereby the Company paid $100 and then is obligated to pay Elenza another $50 on October 1, 2013. Further, a Elenza will receive a $200 credit against royalties, and the credits shall be applied in increments of up to $50 per year until the entire $200 credit is satisfied, provided that during any period where royalties are due to E-Vision by the Company before any credit is applied, Elenza shall pay the Company the amount equal to the royalty payable to E-Vision by the Company.

19


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

13. Leases
The Company leases office space under two operating leases expiring on May 31, 2013 and July 31, 2014. Rental expense was $327 and $279 during 2012 and 2011, respectively.
Future minimum lease payments to be paid under existing noncancelable operating leases are as follows:
 
 
 
2013
$
304

2014
159

2015
—

2016
—

2017
—

Thereafter
—

 
$
463


14. Income Tax
Significant components of the Company’s deferred tax assets and liabilities are as follows as of December 31:
 
 
2012
 
2011
Deferred tax assets:
 
 
 
 
Net operating loss carryforward
 
$
51,053

 
$
38,717

General business credit carryforward
 
1,271

 
1,571

Deferred revenue
 
2,973

 
3,268

Inventory reserves
 
951

 
—

Other deferred tax assets
 
410

 
129

 
 
56,658

 
43,685

Deferred tax liabilities:
 
 
 
 
Other deferred tax liabilities
 
(506
)
 
(493
)
Net deferred tax assets
 
56,152

 
43,192

Less - deferred tax asset valuation allowance
 
(55,961
)
 
(42,956
)
 
 
$
191

 
$
236


Management makes an assessment to determine if its deferred tax assets are more likely than not to be realized. Valuation allowances are established in the event that management believes the related tax benefits will not be realized. The Company has determined that the deferred tax assets do not satisfy the realizability criteria and, accordingly, has recorded a full valuation allowance against the deferred tax assets at December 31, 2012 and 2011. During fiscal 2012, the valuation allowance increased by $13,005 resulting primarily from the additional net operating losses generated during the period.

20


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

The income tax provision for 2012 and 2011 differs from the income tax expense (benefit) that would result from applying federal statutory rates to loss before income tax (benefit) and extraordinary items mainly due to the change in the valuation allowance.
The Company has net operating loss carryforwards of approximately $130,904 at December 31, 2012, available to offset future federal and state taxable income to the extent allowable. These net operating losses will expire between the years 2025 and 2030. The Company has a general business credit carryforward of approximately $1,271 at December 31, 2012, resulting from credits for research and development costs incurred. These credits are available to offset future federal income taxes to the extent allowable. These general business credits will expire between the years 2025 and 2030.
As of December 31, 2012 and 2011, the Company’s accrual for uncertain tax positions was $191 and $236, respectively. There were no payments made against the accrual during 2012 and 2011.
15. Commitments and Contingencies
Commitments
As co-obligor with E-Vision on the License and Development Agreement with Johnson & Johnson (see Note 12), the Company may be obligated to pay Johnson & Johnson up to $10,000 based on a present value calculation in 2005 dollars. The annual discount rate per the agreement is 3%. The Company has already paid $2,750 of this obligation. After those payments, the remaining obligation payable to Johnson & Johnson will be in the form of a royalty fee of 3% of net sales of licensed ophthalmic products. The Company paid $1 and $17 in royalty fees during 2012 and 2011, respectively. These amounts have been expensed on the statement of operations. On December 8, 2010, the Company entered into a memorandum of understanding with E-Vision to secure E­Vision’s participation in a development agreement with an unrelated party for $250. The Company paid $50 and $200 during 2012 and 2011, respectively, which has been expensed on the statement of operations.
North American Frame Agreement
On March 13, 2012, the Company notified its North American frame licensee that it believed that the licensee was in default of the Manufacture, Supply, Marketing and Sales Agreement dated July 6, 2010 by and between the Company and the licesee (the “Agreement”) for, among other reasons, failure to pay approximately $15,000 due to the Company under the Agreement. At that time, the Company notified the licensee that it had until June 11, 2012 to cure the default by paying the amounts owed under the Agreement to the Company, and, if the breach remained uncured, the Company was terminating the Agreement according to its terms. In response, the licensee denied that it had breached its obligation to pay the $15,000 and also asserted that the Company is not entitled to the $9,000 it previously paid to the Company under the Agreement and demanded repayment of such amount plus accrued interest. The parties agreed that the cure period would be extended until June 30, 2012 to permit additional time for negotiations.
On June 26, 2012, the licensee notified the Company of its demand for mediation as to the matter. On June 28, 2012, the licensee obtained a temporary restraining order prohibiting the Company from terminating the Agreement and entering into a relationship with an alternative vendor that would conflict with the licensee’s

21


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

rights under the Agreement until at least August 7, 2012, at which time the parties were to argue a motion for preliminary injunction filed by the licensee. On July 20, 2012 the licensee filed a request for arbitration, to which the Company agreed. The court deferred ruling on the injunction pending a decision from the arbitration panel.
The parties participated in an arbitration hearing in November 2012 and submitted post-hearing closing briefs to the arbitration panel during the week of December 17, 2012. The parties received a partial final award from the panel on January 14, 2013 finding that (i) the Company was not entitled to payment of the $15,000 as additional license fees as of the date claimed by the Company and that the 10-year term commencing on the date of Second Commercial Availability (as defined in the Agreement) had not yet begun on the dates claimed by the Company, (ii) the Agreement remains in full force and effect. The panel deferred ruling on remaining claims and asked the parties to report back after 30 days as to any remaining disputes.
The parties reported back to the panel on February 13, 2013 that there were remaining unresolved disputes. The parties discussed those reports with the panel on February 22, 2013, at which time the panel requested a supplemental submission from the licensee as to the bases for its stated claims for relief, including whether each is properly before the panel, and from the Company the bases for any remaining claims and the requested relief. The parties submitted the requested submissions to the panel on February 27, 2013. In its submission, the licensee stated that its remaining claims consisted of a claim for injunctive relief, a claim for declaratory relief and a claim for award of attorneys’ fees. In its submission, the Company set forth the bases for counterclaims for anticipatory repudiation and breach of the duty to pay royalties. Each party submitted a response to the other’s submission on March 6, 2013. On March 12, 2013, the panel issued a Procedural Order stating (1) that the licensee’s remaining claims for relief were in the nature of additional remedy to be ruled on in the Final Award; and (2) that, in its discretion, the panel would permit the Company to assert its counterclaims for anticipatory repudiation and breach for failure to pay royalties. The panel directed the Company to submit by March 18, 2013, a Supplemental Statement setting forth its counterclaims, along with any exhibits, written testimony or memorandum of law deemed appropriate. The Company submitted is Supplemental Statement and accompanying materials on March 18, 2013. The licensee is to submit a response on March 25, 2013. The panel has requested that the parties submit dates in early April for a one-day oral hearing on the counterclaims or consent to waive such oral hearing.
The Company currently does not believe a loss is probable as of the date of this report. The Company intends to vigorously defend against its partner’s remaining claims and to aggressively pursue its own remaining claims with respect to the Agreement. Given the inherent uncertainty of the outcome for this claim, it is possible that the total costs incurred related to this claim could be material. The Company cannot reasonably estimate the maximum potential exposure or the range of possible loss for this contingency. The Company will continue to review the amount of any necessary accruals or other related expenses and record charges in the period in which the determination is made that an adjustment is required.
Sublicense Settlement
On January 12, 2012, the Company received a demand letter from Elenza, Inc. (a related party), alleging that PixelOptics wrongfully caused Elenza to pay $589 for intellectual property that should have been paid for by PixelOptics. In June 2012, the Company negotiated a settlement agreement related to this matter for

22


PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

approximately $200 and paid $150 of the settlement during the year ended December 31, 2012. The remainder of this settlement has been accrued as of December 31, 2012.
Vendor Complaint
On June 22, 2012, the Company received a demand letter from a Canadian module assembly vendor, alleging that the Company, (1) has not met its obligations to fulfill material supply obligations, (2) has made misrepresentations that caused damages to the vendor, and (3) that the Company does not have rights to use certain intellectual property. The vendor further notified the Company that it was terminating the Purchase Order that both parties had entered into in 2011 for the supply of electronic modules. In December 2012, the Company negotiated a settlement agreement related to this matter for approximately $280 and has accrued this settlement at December 31, 2012.
16. Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through March 25, 2013, the date the financial statements were available to be issued.
2013 Bridge Loan
On January 4, 2013, February 4, 2013, and March 13, 2013, the Company entered into a note and warrant agreement (“2013 Bridge Loan”) with certain of its existing investors for the purchase of approximately $3,500,$2,500, and $2,000 respectively of 14% convertible notes due June 30, 2013. The 2013 Bridge Loan will be subordinate to the Company’s currently outstanding $10,000 Horizon Note entered into on April 6, 2011. Interest on the 2013 Bridge Loan is payable at maturity. The 2013 Bridge Loan is immediately exercisable into Series D preferred shares or will automatically convert into the Company’s preferred shares if a qualified equity financing, defined as the issuance of preferred stock of at least $20,000 occurs. At conversion, all outstanding principle and accrued interest will convert at a price determined in the subsequent equity financing. The 2013 Bridge Loan also provides for the issuance of warrants that are immediately exercisable into the Company’s Series D preferred stock or will automatically convert into the Company’s preferred shares if a qualified equity financing, defined as the issuance of preferred stock of at least $20,000, occurs. The warrants are exercisable for a period of 10 years. The number of warrants issued under this arrangement is equal to 100% of the value received in the bridge financing.
The Company anticipates an incremental $12,000 of bridge loan funding to occur in late March 2013 under similar terms to those listed above. The final terms and conditions of this funding are currently being negotiated.
Venture Debt Term Sheet
On February 13, 2013, the Company signed a term sheet for an aggregate amount of $18,000 with Hercules Technology Growth Capital. The initial $12,000 of debt funding will be available upon the loan closing date and the remaining $6,000 will be available upon the Company completing a future capital funding round. The debt has an interest rate of 11.75% and is secured by a perfected first position lien on all of the Company’s

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PixelOptics, Inc.
(A Development Stage Company)

Notes to Unaudited Financial Statements (continued)
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

assets including intellectual property. The loan will require interest only payments for the first six months; the remaining balance will be paid over 30 monthly installments. In connection with the issuance of these notes the Company will issue 11% of the aggregate loan amount in warrants to purchase Series D preferred shares or shares of a subsequent round of funding. The warrants have an exercise price of $1.10 to purchase Series D warrants or at the price per share of a subsequent round.


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SAFEGUARD SCIENTIFICS INC Reports