UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
October 3,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-8402
IRVINE SENSORS
CORPORATION
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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33-0280334
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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3001 Red Hill Avenue,
Costa Mesa, California 92626
(Address of Principal
Executive Offices) (Zip Code)
Registrants telephone number, including area code:
(714) 549-8211
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended
(Exchange Act) during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the registrants common stock
held beneficially by non-affiliates of the registrant on
March 26, 2010, the last business day of the
registrants most recently completed second fiscal quarter,
was approximately $3.6 million, based on the closing sales
price of the registrants common stock as reported by the
Nasdaq Capital Market on that date (which was the market on
which the common stock was traded at such time). For the
purposes of the foregoing calculation only, all of the
registrants directors, executive officers and holders of
ten percent or greater of the registrants outstanding
common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status
is not a determination for other purposes.
As of December 15, 2010, there were 35,135,301 shares
of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Information required by Items 10 through 14 of
Part III of this
Form 10-K,
to the extent not set forth herein, is incorporated herein by
reference to portions of the registrants definitive proxy
statement for the registrants 2011 Annual Meeting of
Stockholders, which will be filed with the Securities and
Exchange Commission not later than 120 days after the end
of the fiscal year ended October 3, 2010. Except with
respect to the information specifically incorporated by
reference in this
Form 10-K,
the registrants definitive proxy statement is not deemed
to be filed as a part of this
Form 10-K.
IRVINE
SENSORS CORPORATION
ANNUAL
REPORT ON
FORM 10-K
FOR THE
FISCAL YEAR ENDED OCTOBER 3, 2010
TABLE OF
CONTENTS
Irvine
Sensors®,
Neo-Chiptm,
Neo-Stack®,
TOWHAWKtm,
Novalogtm,
Personal Miniature Thermal
Viewertm,
PMTV®,
Cam-Noir®,
Eagle
Boardstm,
Vaulttm,
RedHawktm
and Silicon MicroRing
Gyrotm
are among the Companys trademarks. Any other trademarks or
trade names mentioned in this report are the property of their
respective owners.
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this report, the terms Irvine Sensors,
Company, we, us and
our refer to Irvine Sensors Corporation
(ISC) and its subsidiaries.
This report contains forward-looking statements regarding Irvine
Sensors which include, but are not limited to, statements
concerning our projected revenues, expenses, gross profit and
income, mix of revenue, demand for our products, the need for
additional capital, the outcome of existing litigation and any
potential settlement of such litigation, our ability to obtain
and successfully perform additional new contract awards and the
related funding of such awards, market acceptance of our
products and technologies, the competitive nature of our
business and markets, the success and timing of new product
introductions and commercialization of our technologies, product
qualification requirements of our customers, our significant
accounting policies and estimates, and the outcome of expense
audits. These forward-looking statements are based on our
current expectations, estimates and projections about our
industry, managements beliefs, and certain assumptions
made by us. Words such as anticipates,
expects, intends, plans,
predicts, potential,
believes, seeks, estimates,
should, may, will,
with a view to and variations of these words or
similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual
results could differ materially and adversely from those
expressed in any forward-looking statements as a result of
various factors. Such factors include, but are not limited to
the following:
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our ability to obtain additional financing for working capital
on acceptable terms in a timely manner or at all;
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our ability to settle a pending judgment on existing litigation
with FirstMark on acceptable terms;
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our ability to continue as a going concern;
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our ability to obtain critical and timely product and service
deliveries from key vendors due to our working capital
limitations, competitive pressures or other factors;
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our ability to successfully execute our business plan and
control costs and expenses;
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our ability to obtain expected and timely bookings and orders
resulting from existing contracts;
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our ability to secure and successfully perform additional
research and development contracts, and achieve greater
contracts backlog;
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our ability to fulfill our backlog;
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governmental agendas, budget issues and constraints and funding
or approval delays;
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our ability to maintain adequate internal controls and
disclosure procedures, and achieve compliance with
Section 404(a) of the Sarbanes-Oxley Act;
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our ability to introduce new products, gain broad market
acceptance for such products and ramp up manufacturing in a
timely manner;
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new products or technologies introduced by our competitors, many
of whom are bigger and better financed than us;
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the pace at which new markets develop;
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our ability to establish and maintain strategic partnerships to
develop our business;
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our limited market capitalization;
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general economic and political instability; and
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those additional factors which are listed under the section
Risk Factors in Item 1A of this report.
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We do not undertake any obligation to revise or update publicly
any forward-looking statements for any reason, except as
required by law. Additional information on the various risks and
uncertainties potentially affecting our operating results are
discussed below and are contained in our publicly filed
documents available through the SECs website (www.sec.gov)
or upon written request to our Investor Relations Department at
3001 Red Hill Avenue, Costa Mesa, California 92626.
3
PART I
General
We are a vision systems company enabled by technology for
three-dimensional packaging of electronics and manufacturing of
electro-optical products. We design, develop, manufacture and
sell vision systems, miniaturized electronic products and higher
level systems incorporating such products for defense, security
and commercial applications. We also perform customer-funded
contract research and development related to these products,
mostly for U.S. government customers or prime contractors.
Most of our historical business relates to application of our
technologies for stacking either packaged or unpackaged
semiconductors into more compact three-dimensional forms, which
we believe offer volume, power, weight and operational
advantages over competing packaging approaches, and which we
believe allows us to offer proprietary higher level products
with unique operational features. We have recently introduced
certain higher level products in the fields of thermal imaging
cores, unmanned surveillance aircraft and high speed processing
that take advantage of the Companys packaging technologies.
In December 2005, we completed the initial acquisition (the
Initial Acquisition) of 70% of the outstanding
capital stock of Optex Systems, Inc. (Optex), a
privately held manufacturer of telescopes, periscopes, lenses
and other optical systems and instruments whose customers were
primarily agencies of and prime contractors to the
U.S. Government. In consideration for the Initial
Acquisition, we paid the sole shareholder of Optex, Timothy
Looney, cash in the amount of approximately $14.1 million.
As additional consideration, we were initially required to pay
to Mr. Looney cash earnout payments in the aggregate amount
up to $4.0 million based upon the net cash generated from
the Optex business, after debt service, during the three fiscal
years following the closing of the Initial Acquisition. In
January 2007, we negotiated and amended the earnout agreement
with Mr. Looney to extend his earnout period to December
2009 and reduce the aggregate maximum potential earnout by
$100,000 to $3.9 million in consideration for a secured
subordinated term loan providing for advances from an entity
owned by Mr. Looney to Optex of up to $2 million. As
of September 27, 2009, this term loan was fully advanced to
Optex. Optex ceased operations in October 2008 as a result of a
UCC foreclosure sale (the Optex Asset Sale) as
described more fully below. In September 2009, Optex filed a
voluntary petition for relief under Chapter 7 of the United
States Bankruptcy Code in the United States Bankruptcy Court for
the District of California. As a result of this filing, the
accounts of Optex have been deconsolidated from the consolidated
balance sheet of the Company at September 27, 2009 and
October 3, 2010, including the obligations of Optex to the
entity owned by Mr. Looney described above. While we
believe that Mr. Looney was not entitled to any earnout
payments, Mr. Looney brought a lawsuit against us alleging
that we were obligated to pay him the full potential earnout as
a result of the Optex Asset Sale. To mitigate the risks of this
and other related lawsuits brought by Mr. Looney and his
affiliated entity, we entered into a settlement of various legal
disputes with Mr. Looney, including the earnout matter, in
March 2010 (the Looney Settlement Agreement)
pursuant to which we issued Mr. Looney a $2.5 million
secured promissory note (the Looney Note). (See
Note 3 of the Notes to the Consolidated Financial
Statements).
In connection with the Initial Acquisition, we entered into an
agreement with Mr. Looney, pursuant to which we agreed to
purchase the remaining 30% of the capital stock of Optex held by
Mr. Looney (the Buyer Option), subject to
stockholder approval, which approval was received in June 2006.
On December 29, 2006, we amended certain of our agreements
with Mr. Looney regarding the Buyer Option. In
consideration for such amendments, we issued a one-year
unsecured subordinated promissory note to Mr. Looney in the
principal amount of $400,000, bearing interest at a rate of 11%
per annum. This obligation was extinguished in March 2010 upon
issuance of the Looney Note. We exercised the Buyer Option on
December 29, 2006 and issued Mr. Looney approximately
269,231 shares of our common stock, after giving effect to
our
one-for-ten
reverse stock split effectuated in August 2008 (the 2008
Reverse Split), as consideration for our purchase of the
remaining 30% of the outstanding common stock of Optex held by
him. As a result of the Initial Acquisition and exercise of the
Buyer Option, Optex became our wholly-owned subsidiary.
We financed the Initial Acquisition of Optex by a combination of
$4.9 million of senior secured debt from Square 1 Bank
under a term loan and $10.0 million of senior subordinated
secured convertible notes from two
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private equity funds, which are sometimes referred to in this
report collectively as Pequot. In December 2006,
both of these obligations were refinanced with two new senior
lenders, Longview Fund, LP (Longview) and Alpha Capital
Anstalt (Alpha) (collectively, the
Lenders). In November 2007, we restructured these
obligations, as well as a short-term $2.1 million debt
obligation to Longview, to extend the maturity date of all of
such obligations, including the related interest, to
December 30, 2009 in consideration for a restructuring fee
of approximately $1.1 million, which fee was also initially
payable December 30, 2009, but which was extended to
September 30, 2010 in connection with partial repayment of
the original obligations. The maturity of the remaining unpaid
principal and accrued interest under these obligations was
subsequently extended to the earlier of December 31, 2010
or our raising of gross proceeds of $1.5 million or more in
financings after September 30, 2010.
In September 2008, we entered into a binding Memorandum of
Understanding for Settlement and Debt Conversion Agreement (the
MOU) with the Lenders with the intent to effect a
global settlement and restructuring of our aggregate outstanding
indebtedness payable to the Lenders, which was then
approximately $18.4 million. In October 2008, pursuant to
the MOU, an entity controlled by the Lenders delivered a notice
to us and to Optex of the occurrence of an event of default and
acceleration of the obligations due to the Lenders and their
assignee and conducted the aforementioned Optex Asset Sale, a
public UCC foreclosure sale of the assets of Optex. The entity
controlled by the Lenders credit bid $15 million in the
Optex Asset Sale, which was the winning bid. As a result,
$15 million of our aggregate indebtedness to the Lenders
was extinguished. In December 2010, we repaid all of the
remaining obligations to the Lenders. All financial statements
and schedules of the Company give effect to this event and
report Optex as a discontinued operation.
In March 2009, we sold most of our patent portfolio to a patent
acquisition company for $9.5 million in cash,
$8.5 million of which was paid in March 2009 and
$1.0 million of which was paid in April 2009, and the
patent acquisition company granted us a perpetual, worldwide,
royalty-free, non-exclusive license to use the sold patents in
our business (the Patent Sale and License). In order
to secure the release of security interests to effectuate the
Patent Sale and License, we agreed to pay $2.8 million of
the aggregate principal and accrued interest owed to the Lenders
from the proceeds of the Patent Sale and License. After such
payment, our aggregate principal and accrued interest owed to
the Lenders was approximately $1.2 million. As a result of
our satisfying certain conditions, including our consummation of
a $1.0 million bridge debt financing, in April 2009, the
Lenders exchanged $1.0 million of our residual principal
obligations for the issuance of 24,999 shares of our
newly-created
Series A-2
10% Cumulative Convertible Preferred Stock (the
Series A-2
Stock), a non-voting convertible preferred stock of the
Company. The conversion of the
Series A-2
Stock into shares of our common stock is subject to the same
conversion blocker as was contained in our
Series A-1
10% Cumulative Convertible Preferred Stock (the
Series A-1
Stock), which would prevent each Lenders common
stock ownership at any given time from exceeding 4.99% of our
outstanding common stock (which percentage may increase but not
above 9.99%).
Since 2002, we historically derived a substantial majority of
our total revenues from government-funded research and
development rather than from product sales. We anticipate that
the percentage of our revenues derived from product sales will
increase, but that a substantial majority of our total revenues
will continue to be derived from government-funded sources in
the immediately foreseeable future. In the fiscal year ended
September 27, 2009 (fiscal 2009) and the fiscal
year ended October 3, 2010 (fiscal 2010), our
contract research and development revenues were adversely
affected by procurement delays and capital constraints, as well
as diversion of management and financial resources to address
issues related to the Optex Asset Sale and the various lawsuits
with Mr. Looney. Our current marketing efforts are focused
on government programs that we believe have the potential to
transition to government production contracts. Based upon the
present composition of our backlog, we believe that an
increasing percentage of our total revenues will be derived from
government-related product sales in our next fiscal year, and
that our future revenues may become more dependent upon
production elements of U.S. defense budgets, funding
approvals and political agendas. We are also attempting to
increase our revenues from product sales by introducing new
products with commercial applications, in particular,
miniaturized cameras and stacked computer memory chips. We
cannot assure you that we will be able to complete development,
successfully launch or profitably manufacture and sell any such
products on a timely basis, if at all. We generally use contract
manufacturers to produce these products or their subassemblies,
and all of our other current operations occur at a single,
leased facility in Costa Mesa, California.
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Prior to fiscal 2009, we had a history of unprofitable
operations due in part to our investment in Optex and in part to
discretionary investments that we made to commercialize our
technologies and to maintain our technical staff and corporate
infrastructure at levels that we believed were required for
future growth. In fiscal 2009, we did achieve profitable
operating results, largely due to certain nonrecurring events
such as the Patent Sale and License and elimination of certain
obligations. In fiscal 2010, we again experienced unprofitable
operations. With respect to our investments in staff and
infrastructure, the advanced technical and multi-disciplinary
content of our technologies places a premium on a stable and
well-trained work force. As a result, we generally maintain the
size of our work force even when anticipated government
contracts are delayed, a circumstance that has occurred with
some frequency in the past and that has resulted in
under-utilization of our labor force for revenue generation from
time to time. Delays in receipt of research and development
contracts are unpredictable, but we believe such delays will
continue to represent a recurring characteristic of our research
and development contract business. We anticipate that the impact
on our business of future delays can be mitigated by the
achievement of greater contract backlog and are seeking growth
in our research and development contract revenue to that end. We
are also seeking to expand the contribution to our total
revenues from product sales, which have not historically
experienced the same types of delays that can occur in research
and development contracts. We have not yet demonstrated the
level of sustained research and development contract revenue or
product sales that we believe are required to sustain profitable
operations. Our ability to recover our investments through the
cost-reimbursement features of our government contracts is also
constrained due to both regulatory and competitive pricing
considerations.
In February 2010, one of our existing purchase orders with
Optics 1, Inc., of Manchester, New Hampshire, an optical systems
designer and manufacturer and our strategic partner for certain
thermal imaging products, was modified to include initial units
of Clip-On Thermal Imager (COTI) systems to be built
under a $37.8 million contract awarded to Optics 1 by the
Naval Surface Warfare Center of Crane, Indiana. We are acting as
the subcontractor for this contract and are supplying thermal
imaging cores to Optics 1 for integration into COTIs. Prior to
this award, we and Optics 1 had been jointly developing the COTI
over the last several years under government sponsorship, based
on technology originally conceived by us. The COTI system has
been designed to clip onto existing military night vision
goggles and provide users with thermal images to complement the
amplified low-light images that such goggles currently provide.
Such dual capability is intended to both enhance imagery
obtainable from the existing night vision goggles as well as
provide images in circumstances where physical barriers,
atmospheric conditions or lack of light limit the effectiveness
of the existing goggles. We have subsequently received
additional releases of COTI imager orders from Optics 1 that
have contributed to a substantial increase in our backlog and
our realized product sales in fiscal 2010. We believe that
further substantial increases in our backlog and product sales,
and the related shift in emphasis in our overall business, could
result from future COTI sales if we are able to improve our
liquidity to support such growth, which is an outcome we cannot
assure.
To offset the adverse working capital effect of our net losses,
we have historically financed our operations through various
equity and debt financings. To finance the acquisition of Optex,
we also incurred material long-term debt, and we have exchanged
a significant portion of that debt into preferred stock that is
convertible into our common stock. Since September 30, 2007
through the date of this report, we have issued approximately
32.5 million shares of our common stock, an increase of
approximately 1,209% from the approximately 2.7 million
shares of our common stock outstanding at that date, which has
resulted in a substantial dilution of stockholder interests. At
October 3, 2010, our fully diluted common stock position
was approximately 56.5 million shares, which assumes the
conversion into common stock of all of the Companys
preferred stock and convertible debentures outstanding or
obligated for issuance as of October 3, 2010 and the
exercise for cash of all warrants and options to purchase the
Companys securities outstanding as of October 3,
2010. At October 3, 2010, we had approximately
$5.4 million of debt.
None of our subsidiaries accounted for more than 10% of our
total assets at October 3, 2010 or have separate employees
or facilities. We currently report our operating results and
financial condition in two operating segments, our research and
development business and our product business.
ISC was incorporated in California in December 1974 and was
reincorporated in Delaware in January 1988. Our principal
executive offices are located at 3001 Red Hill Avenue, Building
4, Costa Mesa, California 92626. Our telephone number is
(714) 549-8211,
and our website is www.irvine-sensors.com. The inclusion
of our website
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address in this report does not include or incorporate by
reference into this report any information contained in, or that
can be accessed through, our website.
Products
and Technologies
As a result of both our externally funded contracts and our
internally funded research and development, we have developed a
wide variety of technologies derived from or related to the
field of three-dimensional chip stacking and electronic
miniaturization. In turn, we have developed a number of products
based on these technologies for use at various levels of system
integration as discussed more fully below.
We are currently offering products in the following areas:
Miniaturized Infrared Cameras. We have a
number of products that incorporate imaging devices using
infrared detectors that create images by sensing the heat
emitted by objects being viewed. We believe such technology is
directly applicable to applications requiring vision at night or
in smoke-filled environments. We have initially focused on
low-power, rugged infrared cameras for military, security and
surveillance applications. The combination of our
miniaturization capabilities with advanced electronic packaging
has led to the development of virtually instant-on
infrared cameras and thermal imagers, a related Personal
Miniature Thermal
Viewertm
or
PMTVtm
and our COTI system electronic cores. We have shipped such
products to several customers for use in military applications.
We also intend to market products utilizing this core technology
in potential commercial applications such as thermal viewers for
firefighters.
High Speed Processing Boards and
Subsystems. Under government sponsorship, we have
developed processing boards and related subsystems and
electronic chassis that utilize our proprietary packaging
technology to achieve very high processing speeds. We refer to
board products in this family of products as
EAGLEtm
boards. We believe such boards have a number of potential
government and commercial applications, including network and
electronic security. Under government development contracts, we
have delivered low volumes of EAGLE-10 boards, capable of
continuous deep packet inspection of network data streams at 10
gigabits per second.
Flash Memory Products. We offer a line of
flash drives that are designed to achieve high storage density
and speed and to embed advanced technologies developed by us and
U.S. Government agencies to protect stored data from
improper access or tampering. We refer to this line of products
as
VAULTtm
drives. Under government contract, we have delivered initial
units of a 128 GigaByte (GB) VAULT flash drive.
Unattended Aerial Sensor Systems. We offer an
unattended aerial sensor system,
TOWHAWKtm,
which consists of a small unmanned airplane with integrated
sensor systems initially designed for tactical military
applications that can be launched from ground combat vehicles
without exposing the crews of such vehicles to hostile fire. We
are also exploring applications of this system to other possible
markets such as border security. We have achieved successful
demonstrations of TOWHAWK that have elicited expressions of
interest from potential military customers, but have not yet
generated any material sales of this product.
Stacked Chip Assemblies. We have developed a
family of standard products consisting of stacked memory chips
that are used for numerous applications, both governmental and
commercial. Our technology is applicable to stacking of a
variety of microchips, both packaged and unpackaged, that we
believe can offer demonstrable benefits to designers of systems
that incorporate numerous integrated circuits, both memory and
otherwise, by improving speed and reducing size, weight and
power usage. In addition, since our technology reduces the
number of interconnections between chips, we believe potential
system failure points can also be reduced through chip stacking.
We anticipate that the features achievable with our chip
stacking technology could have applications in space and in
aircraft applications where weight and volume considerations are
dominant, as well as in various other commercial and
governmental applications in which portability is required and
speed is important.
We have introduced a number of stacked-chip products that are
primarily oriented toward the needs of potential commercial
customers who are seeking to emulate the performance of advanced
monolithic memory chip packages through the stacking of two or
more prior generation packages. We believe this approach can
offer economic advantages because of the high costs of advanced
monolithic chip packages during early
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phases of the monolithic product lifetime. These types of
stacked chip-package products are also available from
competitors, but we believe that our chip-package stacking
technology has advantages in terms of board space utilized and
performance over that of competitors. Since our introduction of
such products, we have achieved limited market penetration,
primarily for non-commercial applications, although we have
qualified and sold such products for commercial applications as
well.
Customer demand for enhanced performance of electronic systems
has produced a wide variety of competitors and competitive
systems offering higher density microelectronics ranging from
various three-dimensional designs to highly dense
two-dimensional designs. Although some of our competitors are
better financed, more experienced and organizationally stronger
than us, we are not aware of any system in existence or under
development that can stack chips more densely than our
three-dimensional approach. See Business
Competition.
Miniaturized Visible Spectrum Cameras. As a
result of our miniaturized infrared camera activities, we have
also established relationships with suppliers and potential
customers for miniaturized cameras that are designed to operate
in illumination visible to the human eye. Such cameras are in
development by various suppliers to meet new driver and
passenger seat monitoring requirements for automobiles, among
other uses. Although we are not currently providing products for
the automotive markets, we have developed and are currently
selling visible spectrum cameras to a variety of original
equipment manufacturers (OEMs) for potential use in
other applications. Our sales of these cameras to date have
largely been for evaluation and qualification purposes, although
we have shipped limited production quantities of our
miniaturized visible spectrum camera to one OEM.
Microchips and Sensors. Through our
majority-owned subsidiary, MicroSensors, Inc. (MSI),
we introduced ASIC readout chips for manufacturers of
micromachined products that require low noise electronic readout
circuitry. We have historically shipped engineering samples,
qualification volumes and small production volumes of such chips
to various customers through ISC. MSI also developed an inertial
sensor, the Silicon MicroRing
Gyrotm,
which is intended to provide an inexpensive means to measure
rotational motion for a wide variety of potential applications.
We expect that the commercial sales, if any, of the Silicon
MicroRing Gyro will be paced by product design-in lead times of
customers, principally OEMs. Similarly, MSI has also developed a
3-axis
silicon accelerometer that is also dependent on OEM schedule
considerations. We have granted a non-exclusive perpetual
license to MSIs gyro and accelerometer technology to a
third party for further development targeted for automotive and
certain aerospace applications. MSI is not actively pursuing
further development of this technology on its own. Furthermore,
the purchaser of our patent assets in the Patent Sale and
License has rights to certain royalties we might receive under
this license for MSIs gyro and accelerometer technology.
Accordingly, we are currently unable to project when, or if, we
might receive material revenues from our gyro and accelerometer
technologies.
Potential
Product Applications
Active Imaging Systems. Many of the potential
government applications for which we have received developmental
funding over the years have involved advanced techniques for
acquiring and interpreting images. In the fiscal year ended
October 1, 2006 (fiscal 2006), we successfully
developed and delivered a space-based active imaging system that
has been deployed and, in the fiscal year ended
September 30, 2007, (fiscal 2007), we received
a contract to develop another such system. We have received
additional contract awards for related projects that may help us
to further explore active imaging product applications.
Embedded Systems. In the fiscal year ended
September 27, 1998, we commenced exploration of a
technology to stack chips of different functionality and
dimensions within the same chip stack, in effect creating a
complete, miniaturized electronic system that can be embedded in
a higher-level product. We refer to this technology as
NeoStacktm.
In the fiscal year ended October 3, 1999, a
U.S. patent was granted on our NeoStack technology. We
initially demonstrated our NeoStack technology to support a
government program to develop a wearable computer. We are
presently developing potential commercial applications of this
technology under other government contracts. We believe, but
cannot assure, that our NeoStack approach will offer advantages
in terms of compactness and power consumption to developers of a
wide variety of embedded computer and control systems.
8
However, we have not yet developed this technology to the point
at which we can make forecasts of potential revenue, if any,
resulting from our licensing to or application by OEMs.
Application Specific Electronic Systems. We
have developed a number of application specific electronic
systems to prototype status under various government development
contracts. Potential applications include physical and
electronic security, visible spectrum cameras, and biomedical
instrumentation and monitoring. We are seeking government and
commercial sponsors or partners to advance these developments to
product status, but we cannot guarantee our success in these
endeavors.
Cognitive Systems. We have received a number
of contracts in recent years from government agencies regarding
the development of cognitive systems employing artificial neural
networks and applications thereof. Neural networks contain large
numbers of processing nodes that continuously interact with each
other, similar to the way that the neurons of a human brain
interact to process sensory stimuli. Neural networks are the
subject of scientific inquiry because pattern recognition and
learning tasks, which humans perform well, and computers perform
poorly, appear to be dependent on such processing. Neither
conventional computers nor advanced parallel processors
currently have the interconnectivity needed to emulate neural
network processing techniques. We have received substantial
funding of government research and development contracts in
recent fiscal years intended to advance the maturity of the
technologies required for cognitive sensors employing neural
networks. We are presently pursuing additional government
research and development contracts to provide demonstration
products to various branches of the Department of Defense
incorporating this technology. We believe our chip stacking
technologies could provide a way to achieve the very high levels
of interconnectivity necessary to construct an efficient
artificial neural network. While the full embodiment of our
neural network technology is expected to be years away, if at
all, we intend to continue to pursue research and development in
this area in order to broaden the potential product application
of the technology.
Infrared Sensors. The focus of our original
government funded research and development and some of our
subsequent follow-on contract awards in recent years has been in
the field of government applications of infrared sensors. We
intend to continue to pursue such contracts with the goal of
developing and selling infrared sensors for surveillance,
acquisition, tracking and interception applications for a
variety of Department of Defense applications and NASA missions.
Manufacturing
We primarily use contract manufacturers to fabricate and
assemble our stacked chip, microchip and sensor products. At our
current limited levels of sales of these products, we typically
use single contract manufacturing sources for such products and,
as a result, we are vulnerable to disruptions in supply.
However, for these single sourced products, we use semiconductor
fabrication and related manufacturing sources that we believe
are generally widely available. We currently assemble and test
our thermal camera products ourselves, given their relatively
low volumes, although we rely on contract manufacturers for the
sub-assemblies
involved in the manufacture of such products. We have started to
expand our manufacturing capacity for such products. Our
manufacturing activities for thermal camera products primarily
consist of assembly, calibration and test. We use contract
manufacturers for production of our visible camera products,
except for final testing, which we perform ourselves. Our
various thermal and visible camera products presently rely on a
limited number of suppliers of imaging chips that are adequate
for the quality and performance requirements of our products,
which makes us vulnerable to potential disruptions in supply.
Our original bare chip stacking technology involves a standard
manufacturing process that fabricates cubes comprising multiple
die layers along with ceramic cap and base substrates laminated
with an extremely thin
non-silicon
layer and interconnected with a thin-film bus metallization to
bring the chip input/output signals out to the top surface of
the stacks. The cubes can then be segmented or split into
subsections as required for the particular product configuration
being built. Finally, the cubes, mini-cubes or short stacks are
burned in, tested, graded, kitted for packaging, out-sourced for
packaging and screening, and returned for final test. Our
facility is designed for low volume and prototype production of
such parts.
We have also developed an advanced process of ultra-high density
stacking in which we first embed more than one bare chip or
supporting electronics component in an adhesive layer, thereby
creating what we refer to as a
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Neo-Chip.tm
We then use manufacturing processes similar to our original bare
chip stacking technology to stack these Neo-Chips, resulting in
a Neo-Stack.
In the last several years, we have introduced what we believe
are more cost-competitive stacked packaged chip products that
are manufactured with current
state-of-the-art
manufacturing technologies. Some of our newer products use
manufacturing processes that are designed to also be compatible
with stacking of Neo-Chip products in the future. We use
independent third party qualified source vendors for the
manufacturing of these products. We currently do not have any
long-term manufacturing contracts for any of our products.
The primary components of our camera products are integrated
circuits and detectors. We typically design the integrated
circuits for manufacture by third parties from silicon wafers
and other materials readily available from multiple sources.
While we do not have any long-term arrangements with suppliers
for the purchase of these materials, we believe we should have
sufficient capacity to address our near term manufacturing needs.
We obtain the small unmanned airplane element of TOWHAWK from a
supplier that offers such units for other applications. We
assemble the sensor elements of the TOWHAWK system and integrate
such sensors elements with the TOWHAWK airframe in our own
facility.
Because of the nature of the sophisticated work performed under
our research and development contracts, we design and assemble
equipment for testing and prototype development. We also use
this equipment to seek, qualify for and perform additional
contract research and development for our customers.
Backlog
Funded backlog includes amounts under contracts that have been
awarded to us and for which we have authority to bill for work
under such contracts. At November 28, 2010, our
consolidated funded backlog was approximately $7.4 million
compared to approximately $4.7 million at November 22,
2009. We expect that more than a majority of our funded backlog
at November 28, 2010 will result in revenue recognized in
the fiscal year ending October 2, 2011 (fiscal
2011). In addition, we have unfunded backlog on contracts
that we have won, but that have not yet been fully funded, in
which funding increments are expected to be received when the
previously funded amounts have been expended. We are also
continuing to negotiate for additional research contracts and
commercial product sales. Many of these proposals for additional
research contracts are submitted under the Small Business
Innovation Research (SBIR) provisions of all
government agencies that conduct funded research and
development. In fiscal 2009 and fiscal 2010, we generated
approximately $3.0 million and $1.8 million,
respectively, of funded contract revenue from SBIR proposals.
Although our reliance on SBIR contracts as a revenue source has
declined as our contracts procured through other channels have
increased, we continue to view SBIR contracts as an important
source of both revenues and technology improvement. However, we
cannot guarantee you that future SBIR contracts will be awarded,
or if awarded, will match or exceed our historical experience or
that such contract awards will be profitable or lead to other
projects. We may not be successful in securing any additional
SBIR contract awards in the future. Failure to continue to
obtain these SBIR awards and other funded research and
development contracts in a timely manner, or at all, could
materially and adversely affect our business, financial
condition and results of operations.
Customers
and Marketing
Historically, we have primarily focused our marketing of
research and development contracts directly on
U.S. government agencies or contractors to those agencies.
We intend to continue to seek and prepare proposals for
additional contracts from such sources. We are also developing
potential non-military uses of our technology. We believe that
there will continue to be funds directed to advanced technology
systems and research programs for which we are qualified to
compete. We believe that we are well positioned to compete for
some potential programs of this nature, although we cannot
guarantee our success.
We market our stacked, packaged memory products to both
aerospace and commercial users of such devices, at both OEMs and
component manufacturers. We have only achieved modest success in
receiving production orders for our stacked, packaged memory
products from commercial customers. We have marketing staff with
relevant
10
industry experience for these products, but do not yet have
sufficient history to predict our potential penetration of
commercial opportunities in this area.
We believe that our technology for miniaturized infrared cameras
and related thermal viewers may offer us prospects for
penetration of new product markets in the future. We have
completed development of such products under government
contracts in our last several fiscal years. We increased our
marketing of such products during this period. We expect to
continue this increased marketing emphasis on such products in
fiscal 2011.
Our microchip products are generally marketed directly to OEMs.
Our related inertial sensors, namely gyros and accelerometers,
are marketed through our licensee of such products, with an
initial emphasis on automotive applications. The ability of this
licensee to successfully market these products may be reduced as
a result of the Patent Sale and License.
In fiscal 2010, direct contracts with various military services
and branches of the U.S. government accounted for
approximately 58% of our total revenues and subcontracts with
prime government contractors accounted for approximately 41% of
our total revenues. The remaining approximately 1% of our total
revenues in fiscal 2010 was derived from non-government sources.
During fiscal 2010, revenues derived directly or indirectly from
certain classified U.S. agencies, the U.S. Army and
Optics 1, Inc., a defense contractor, accounted for
approximately 28%, 20% and 19% respectively, of the
Companys total revenues in fiscal 2010. The loss of any of
these customers would have a material adverse impact on the
Companys business, financial condition and results of
operations. No other single governmental or non-governmental
customer accounted for more than 10% of the Companys total
revenues in fiscal 2010.
Contracts with government agencies may be suspended or
terminated by the government at any time, subject to certain
conditions. Similar termination provisions are typically
included in agreements with prime contractors. We cannot assure
you that we will not experience suspensions or terminations in
the future.
We focus marketing in specific areas of interest in order to
best use our relatively limited marketing resources. We are
managing our marketing through centralized coordination of the
lead individuals with specific responsibilities for our
different product families.
Competition
The demand for high performance semiconductors has produced a
wide variety of competitors and competitive systems, ranging
from various three-dimensional designs to highly dense
two-dimensional designs. For most commercial applications, the
principal competitive factor is cost, although we believe
operating speed is increasingly becoming a factor. For some
applications in which volume and weight are critical, such as
space or avionics, we believe density is the principal
competitive factor. We believe that many of our competitors are
better financed, more experienced and have more extensive
support infrastructure than us. Accordingly, we may not be able
to successfully compete in such markets in the future.
We are aware of two primary competitors that have developed or
acquired competing approaches to
high-density
chip stacking: 3D Plus and Vertical Circuits, Inc. In addition,
there are several independent companies such as Staktek
Corporation, DST Modules, and Tessera Technologies and divisions
of large companies that have various competitive technologies
for stacking a limited number of chips in packaged form.
We are also aware of many companies that are currently servicing
the military market for electro-optical sensors of the type that
our products are also designed to support. We believe the
principal competitive factor in this business area is the
performance sensitivity and selectivity achievable by
alternative sensor approaches and designs. Our primary
competitors in this area include Texas Instruments, Inc.,
Lockheed Martin Corporation, L-3 Communications, Northrop
Grumman, BAE Systems, EG&G Judson, OptoElectronics-Textron,
Inc. and Boeing Corporation. We believe that most of our
competitors in this area have greater financial, labor and
capital resources than us, and accordingly, we may not be able
to compete successfully in this market.
We believe that our major competitors for miniaturized infrared
camera products are FLIR Systems, Inc., Indigo Operations and
Insight Technology, Inc. We believe that our current
miniaturized infrared camera product has some size, weight and
power advantages over comparable products of these competitors,
but these competitors
11
have greater financial, labor and capital resources than us, and
accordingly, we may not be able to compete successfully in this
market.
We are unaware of any current competitors for our TOWHAWK and
Eagle Board products.
Research
and Development
We believe that government and commercial research contracts
will provide a portion of the funding necessary for continuing
development of some of our products. However, the manufacture of
stacked circuitry modules in volume will require substantial
additional funds, which may involve additional equity or debt
financing or a joint venture, license or other arrangement.
Furthermore, the development of some of the products originated
in our subsidiaries is likely to require substantial external
funding. We cannot assure you that sufficient funding will be
available from government or other sources or that we will
successfully develop new products for volume production.
Our consolidated research and development expenses for fiscal
2010 and fiscal 2009 were approximately $2.6 million and
$2.3 million, respectively. These expenditures were in
addition to the cost of revenues associated with our
customer-sponsored research and development activities. The
greater spending level of our own funds on research and
development in fiscal 2010, as opposed to fiscal 2009, was
partly due to our deployment of
under-utilized
direct personnel to such activities during periods when
government contracts were delayed or not obtained.
We have historically funded our research and development
activities primarily through contracts with the federal
government and with funds from our equity and debt financings.
Patents,
Trademarks and Licenses
We primarily protect our proprietary technology by seeking to
obtain, where practical, patents on the inventions made by our
employees. As of October 3, 2010, we had 49
U.S. patent applications pending. We also have a perpetual,
world-wide, royalty-free, non-exclusive license to 85 currently
effective U.S. and foreign patents and 14 U.S. patent
applications pending that had been assigned to us, and that we
sold pursuant to the Patent Sale and License. Foreign patent
applications corresponding to several of the U.S. patents
and patent applications sold in the Patent Sale and License were
also pending as of October 3, 2010. As discussed above, in
March 2009, we sold most of our then-existing patent and patent
applications in the Patent Sale and License for
$9.5 million of cash consideration and a world-wide,
royalty-free, non-exclusive license to continue to use the
patented technology in our business. We cannot assure you that
any additional patents will be issued in the U.S. or
elsewhere and assigned to us. Moreover, the issuance of a patent
does not carry any assurance of successful application,
commercial success or adequate protection. We cannot assure you
that any patents that may issue and be assigned to us in the
future will be upheld if we seek enforcement of our patent
rights against an infringer or that we will have sufficient
resources to prosecute our rights. We also cannot assure you
that any future patents will provide meaningful protection from
competition. Furthermore, the purchaser of the patents and
patent applications sold pursuant to the Patent Sale and License
is able to use those patents for any purpose, including possible
competition with us, or to pursue potential infringers of these
patents, which could result in defensive challenges to the
validity of such patents. If others were to claim that we are
using technology covered by patents held by them, we would
evaluate the necessity and desirability of seeking a license
from the patent holder. Such claims of infringement could
adversely affect out sales and prospects. We cannot assure you
that we are not infringing on other patents or that we could
obtain a license if we were so infringing.
The products and improvements that we develop under government
contracts are generally subject to
royalty-free
use by the government for government applications. However, we
have negotiated certain
non-space
exclusions in government contracts and have the right to file
for patent protection on commercial products that may result
from government-funded research and development activities.
In February 1998, we entered into an assignment of patent and
intellectual rights agreement with F.K. Eide, a retired employee
who was formerly our Vice President. As part of an agreement,
Mr. Eide assigned to us all rights and interests to five
U.S. Provisional Patent Applications owned by him. Those
applications subsequently resulted
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in three issued U.S. Patents assigned to us covering
various chip package stacking techniques. In consideration for
this assignment, Mr. Eide receives a 1% royalty on the
gross sales revenues, if any, of any products incorporating the
technology of these patent assignments for the lifetime of these
patents. To date, royalty payments to Mr. Eide under this
agreement have not been material.
We have granted a perpetual non-exclusive license to our MSI
subsidiarys gyro and accelerometer technology to a third
party for further development of this technology targeted for
automotive and certain aerospace applications. To date, this
license has not generated any material royalties, and we cannot
assure you that it will generate any material royalties in the
future. Furthermore, to the extent that any future royalties are
based on use of the technology sold in the Patent Sale and
License, the purchaser of those patent assets would be entitled
to such royalties.
Certification
Standard
In October 2004, our business and quality management systems
were certified to be compliant with the International
Organization for Standardization ISO 9001:2000 Standard. In
November 2006, May 2007, October 2008 and October 2009, our
certification to this standard was reaffirmed. In October 2010,
our business and quality management systems were certified to be
compliant with the International Organization for
Standardization ISO 9001:2008 Standard.
Employees
As of December 3, 2010, we had 67 full time employees, four
part time employees and ten consultants. Of the full time
employees, 50 were engaged in engineering, production and
technical support and 17 were engaged in sales, marketing and
administration. None of our employees are represented by a labor
union, and we have experienced no work stoppages due to labor
problems. We consider our employee relations to be good.
ISC
Subsidiaries
We historically sought to commercialize some of our technologies
by creating independently managed subsidiaries that could pursue
their own financing strategies separately from ISC, including
Novalog, Inc. (Novalog), which developed and sold
serial infrared communication chips and modules, MSI, which
developed miniaturized inertial sensors and an application
specific integrated circuit (ASIC) for readout of
sensors; RedHawk Vision, Inc. (RedHawk), which
developed and sold proprietary software for extracting still
photographs from video sources; and iNetWorks Corporation
(iNetWorks), which developed proprietary technology
related to internet routing. All of these historical
subsidiaries still exist as separate legal entities, but none of
them presently have separate operations due to a reorganization
in fiscal 2003. We manage and are still seeking licensing
relationships and third-party strategic partners to further the
potential commercial exploitation of some of the technologies
developed by our historical subsidiaries. As a result of the
Optex Asset Sale, Optex, which was a separate legal entity, is
reflected as discontinued operations in the accompanying
consolidated financial statements and schedules. Also, as a
result of the September 2009 Chapter 7 bankruptcy filing in
September 2009 by Optex, the accounts of Optex are not included
in the consolidated balance sheets of the Company at
September 27, 2009 and October 3, 2010.
As of October 3, 2010, our ownership of the issued and
outstanding capital stock of Novalog, MSI, RedHawk, iNetWorks
and Optex was approximately 96%, 98%, 81%, 95% and 100%,
respectively. With the exception of Optex, which is inactive
because of its bankruptcy, John C. Carson, our Chief Executive
Officer and Chairman of the Board, also serves as Chief
Executive Officer or President of all of our subsidiaries and
John Stuart, our Chief Financial Officer, serves as the Chief
Financial Officer of each of our subsidiaries. Mr. Carson
and Mr. Stuart serve as Directors of each of our
subsidiaries.
Novalog, MSI, RedHawk and iNetWorks all have substantial
intercompany debts payable to ISC. At October 3, 2010, the
amount of these intercompany obligations were approximately
$3.3 million, $11.0 million, $1.6 million and
$2.4 million for Novalog, MSI, RedHawk and iNetWorks,
respectively. These obligations are not interest bearing and
contain no conversion rights. ISC could elect to cancel some of
the indebtedness from Novalog as consideration to exercise
outstanding warrants to purchase up to 3.0 million shares
of Novalogs common stock at
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the exercise price of $1.00 per share and to cancel some of the
indebtedness from MSI as consideration to exercise outstanding
warrants to purchase up to 4.0 million shares of MSIs
common stock at the exercise price of $1.00 per share. Given the
discontinuation of Novalogs operations and the
licensing-only nature of MSIs current operations, we do
not presently consider either of these permissible warrant
exercises to be likely in the foreseeable future.
Our future operating results are highly uncertain. Before
deciding to invest in our common stock or to maintain or
increase your investment, you should carefully consider the
risks described below, in addition to the other information
contained in our Annual Report on
Form 10-K,
and in our other filings with the SEC, including any subsequent
reports filed on
Forms 10-Q
and 8-K. The
risks and uncertainties described below are not the only ones
that we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also affect
our business and results of operations. If any of these risks
actually occur, our business, financial condition or results of
operations could be seriously harmed. In that event, the market
price for our common stock could decline and you may lose all or
part of your investment.
We will need to raise additional capital in the near future
to fund our operations, and if such capital is not available to
us on terms that are acceptable to us, on a timely basis or at
all, our viability will be threatened and we may be forced to
discontinue our operations. Except for fiscal
2009, in which we realized substantial income from the Patent
Sale and License, the deconsolidation of the balance sheet of
Optex due to its bankruptcy and a significant reduction of
potential future pension expenses, we have historically
experienced significant net losses and significant negative cash
flows from operations or other uses of cash. As of
October 3, 2010 and September 27, 2009, our cash and
cash equivalents were $281,600 and $125,700, respectively, and
our working capital deficit at said dates was $10.1 million
and $6.3 million, respectively. To offset the effect of
negative net cash flows, we have historically funded a portion
of our operations through multiple equity and debt financings,
and to a lesser extent through receivable financing. Our
revenues were reduced in fiscal 2009 partially due to our
liquidity limitations, which may continue to adversely affect
our revenues in the future. We anticipate that we will require
additional capital to meet our working capital needs and fund
our operations. We cannot assure you that any additional capital
from financings or other sources will be available on a timely
basis, on acceptable terms, or at all, or that the proceeds from
any financings will be sufficient to address our near term
liquidity requirements. If we are not able to obtain additional
capital in the near future, we anticipate that our business,
financial condition and results of operations will be materially
and adversely affected and we may be forced to discontinue our
operations.
We anticipate that our future capital requirements will depend
on many factors, including:
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our ability to meet our current obligations, including trade
payables, payroll and fixed costs;
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our ability to procure additional production contracts and
government research and development contracts, and the timing of
our deliverables under our contracts;
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the timing of payments and reimbursements from government and
other contracts;
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the expenses and outcome of litigation or the enforcement of the
FirstMark judgment;
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our ability to control costs;
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our ability to commercialize our technologies and achieve broad
market acceptance for such technologies;
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research and development funding requirements;
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increased sales and marketing expenses;
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technological advancements and competitors responses to
our products;
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capital improvements to new and existing facilities;
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our relationships with customers and suppliers; and
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general economic conditions including the effects of future
economic slowdowns, a slump in the semiconductor market, acts of
war or terrorism and the current international conflicts.
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Our ability to raise additional capital may be limited because,
as a company that is quoted on the OTCBB, we are no longer
eligible to use
Form S-3
to register the resale of securities issued in private
financings. Even if available, financings can involve
significant costs and expenses, such as legal and accounting
fees, diversion of managements time and efforts, or
substantial transaction costs or
break-up
fees in certain instances. Financings may also involve
substantial dilution to existing stockholders, and may cause
additional dilution through adjustments to certain of our
existing securities under the terms of their antidilution
provisions. If adequate funds are not available on acceptable
terms, or at all, our business and revenues will be adversely
affected and we may be unable to continue our operations,
develop or enhance our products, expand our sales and marketing
programs, take advantage of future opportunities or respond to
competitive pressures.
In September 2010, our common stock was delisted from the
Nasdaq Capital Market for non-compliance with Nasdaqs
$1.00 per share minimum bid price continued listing requirement
and commenced trading on the
Over-the-Counter
Bulletin Board (the OTCBB), thereby causing
your ability to sell your shares of our common stock to be
limited by penny stock restrictions and our ability
to raise additional capital to potentially be
compromised. With the delisting of our common
stock, it comes within the definition of penny stock
as defined in the Securities Exchange Act of 1934 and is covered
by
Rule 15g-9
of the Securities Exchange Act of 1934. That Rule imposes
additional sales practice requirements on broker-dealers who
sell securities to persons other than established customers and
accredited investors. For transactions covered by
Rule 15g-9,
the broker-dealer must make a special suitability determination
for the purchaser and receive the purchasers written
agreement to the transaction prior to the sale. Consequently,
Rule 15g-9
potentially affects the ability or willingness of broker-dealers
to sell our securities, and accordingly would also affect the
ability of stockholders to sell their securities in the public
market. These additional procedures could also limit our ability
to raise additional capital in the future.
Since 2006, we have engaged in multiple financings, which
have significantly diluted existing stockholders and will likely
result in substantial additional dilution in the
future. Assuming conversion of all of our
existing convertible securities and exercise in full of all
options and warrants outstanding as of October 3, 2010, an
additional approximate 23.0 million shares of our common
stock would be outstanding, as compared to the approximately
33.5 million shares of our common stock that were issued
and outstanding at that date. Since the start of fiscal 2008
through the date of this report, we have issued approximately
32.5 million shares of our common stock, largely to fund
our operations, resulting in significant dilution to our
existing stockholders. On August 26, 2008, pursuant to
approval of our stockholders, we amended our Certificate of
Incorporation to increase our authorized common stock issuable
for any purpose from 80,000,000 shares to
150,000,000 shares, which further increased the potential
for significant dilution to our existing stockholders. Our
secured bridge note financing in November 2008 through February
2009 resulted in the automatic application of price
anti-dilution features in our existing securities, which in
conjunction with other issuances, substantially increased the
potential fully diluted number of shares of our common stock.
The
Series A-2
Stock that we issued in April 2009 in exchange for convertible
notes, resulting in the cancellation of $1 million of debt,
as well as the shares of common stock that we issued to the
bridge financing investors in April 2009, the Series B
Stock and common stock warrants that we issued in September
2009, the convertible debentures and warrants that we issued in
our debenture financing in March 2010, the Series C
Convertible Preferred Stock (Series C Stock)
that we issued in April 2010, the common stock and common stock
warrants that we issued in June 2010, the automatic application
of price anti-dilution features in our existing securities
resulting from the second close of our common stock private
placement in July 2010 and the issuance of the Series C
Stock and common stock Warrant to Longview in August 2010
further diluted interests of existing stockholders, such that
our potential fully diluted number of shares of our common stock
is approximately 56.5 million as of October 3, 2010.
In November and December 2010, in conjunction with the private
placement of unsecured promissory notes, we incurred the
obligation to issue an additional approximate 5.7 million
shares of common stock. We anticipate we will pursue additional
financings in the future. Any additional equity or convertible
debt financings in the future will likely result in further
dilution to our stockholders. Existing stockholders also will
suffer significant dilution in ownership interests and voting
rights and our stock price could decline as a result of
potential future application of price anti-dilution features of
our
Series A-2
Stock and certain warrants, if not waived.
We may consider divesting assets to improve our
liquidity. We sold a large portion of our patent
portfolio in 2009 to address our financial needs and may enter
into agreements to sell other assets in the future. In order to
fund our operations and repay our existing obligations, we may
need to sell certain other significant assets and have engaged
in preliminary discussions in this regard. We may not be able to
complete such sales on acceptable terms,
15
on a timely basis or at all, and such sales could adversely
affect our future revenues. Furthermore, we have lenders with
security positions in such assets, and such sales would
therefore not be likely to generate any direct benefits to
stockholders and could materially impair our ability to maintain
our current operations.
Significant sales of our common stock in the public market
will cause our stock price to fall. The average
trading volume of our shares in September 2010 was approximately
239,100 shares per day, compared to the approximately
33.5 million shares outstanding and the additional
approximate 23.0 million shares potentially outstanding on
a fully diluted basis at October 3, 2010. Other than volume
limitations imposed on our affiliates, most of the issued shares
of our common stock are freely tradable. If the holders of the
freely tradable shares were to sell a significant amount of our
common stock in the public market, the market price of our
common stock would likely decline. If we raise additional
capital in the future through the sale of shares of our common
stock to private investors, we may, subject to existing
restrictions lapsing or being waived, agree to register these
shares for resale on a registration statement as we have done in
the past. Upon registration, these additional shares would
become freely tradable once sold in the public market, assuming
the prospectus delivery and other requirements were met by
the sellers, and, if significant in amount, such sales could
further adversely affect the market price of our common stock.
The sale of a large number of shares of our common stock also
might make it more difficult for us to sell equity or
equity-related securities in the future at a time and at the
prices that we deem appropriate.
The settlement of our various lawsuits with Timothy Looney,
the former owner of Optex, resulted in us issuing
$2.5 million of secured debt to Mr. Looney, the
service of which will pose a significant strain on our
liquidity. In April 2010, we issued a
27-month
promissory note to Mr. Looney secured by liens and security
interests against all of our assets (to the extent permitted by
contract, the UCC or other applicable laws), subject to and
subordinate to the existing perfected security interests and
liens of our senior creditors, Summit Financial Resources, L.P.
(Summit) and Longview. This note requires us to
remit graduated monthly installment payments over a
27-month
period to Mr. Looney beginning with a payment of $8,000 in
May 2010 and ending with a payment of $300,000 in June 2012. All
such payments are applied first to unpaid interest and then to
outstanding principal. A final payment of all remaining unpaid
principal and interest is due and payable in July 2012. These
loan payments may be difficult for us to make from our cash flow
from operations and will likely necessitate future financing,
the success of which cannot be assured.
Enforcement of an anticipated final judgment could threaten
our financial viability. Investors that originally financed
our acquisition of Optex filed a motion for summary judgment
against us regarding alleged unpaid obligations under a December
2006 settlement agreement between us and them and, although the
motion was granted in January 2010, the judgment has not yet
been entered as of the date of this report. We have recorded
approximately $1.3 million of expense in our financial
statements related to these obligations at October 3, 2010,
which we expect to be the approximate amount of this judgment
when it is entered. We have attempted to settle this dispute
with the plaintiffs, but with no success to date. If the
plaintiffs attempt to enforce collection of the expected final
judgment, rather than entering into some kind of manageable
settlement agreement, our financial condition could be
materially and adversely impacted and our ability to continue
our operations could be threatened.
We have historically generated substantial losses, which, if
continued, could make it difficult to fund our operations or
successfully execute our business plan, and could adversely
affect our stock price. Since our inception, we
have generated net losses in most of our fiscal periods. Had it
not been for the gains from the Patent Sale and License, the
deconsolidation of Optex due to its bankruptcy and a significant
reduction of potential future pension expenses, we would have
experienced a substantial net loss in fiscal 2009. We
experienced a net loss of approximately $11.2 million in
fiscal 2010. We cannot assure you that we will be able to
achieve or sustain profitability in the future. In addition,
because we have significant expenses that are fixed or difficult
to change rapidly, we generally are unable to reduce expenses
significantly in the short-term to compensate for any unexpected
delay or decrease in anticipated revenues. We are dependent on
support from subcontractors to meet our operating plans and
susceptible to losses when such support is delayed. Such factors
could cause us to continue to experience net losses in future
periods, which will make it difficult to fund our operations and
achieve our business plan, and could cause the market price of
our common stock to decline.
Our government-funded research and development business
depends on a limited number of customers, and if any of these
customers terminate or reduce their contracts with us, or if we
cannot obtain additional government contracts in the future, our
revenues will decline and our results of operations will be
adversely affected. For fiscal
16
2009, approximately 33% of our total revenues were generated
from research and development contracts with the U.S. Air
Force and approximately 16% of our total revenues were generated
from research and development contracts with the U.S. Army.
For fiscal 2010, approximately 28%, 20% and 19% of our total
revenues were generated from research and development contracts
with certain classified U.S. government agencies, the
U.S. Army and Optics 1, Inc., a defense contractor,
respectively. Although we ultimately plan to shift our focus to
include the commercialization of our technology, we expect to
continue to be dependent upon research and development contracts
with federal agencies and their contractors for a substantial
portion of our revenues for the foreseeable future. Our
dependency on a few contract sources increases the risks of
disruption in this area of our business or significant
fluctuations in quarterly revenue, either of which could
adversely affect our consolidated revenues and results of
operations.
Because our operations currently depend on government
contracts and subcontracts, we face additional risks related to
contracting with the federal government, including federal
budget issues and fixed price contracts, that could materially
and adversely affect our business. Future
political and economic conditions are uncertain and may directly
and indirectly affect the quantity and allocation of
expenditures by federal agencies. Even the timing of incremental
funding commitments to existing, but partially funded, contracts
can be affected by these factors. Therefore, cutbacks or
re-allocations in the federal budget could have a material
adverse impact on our results of operations as long as research
and development contracts remain an important element of our
business. Obtaining government contracts may also involve long
purchase and payment cycles, competitive bidding, qualification
requirements, delays or changes in funding, budgetary
constraints, political agendas, extensive specification
development and price negotiations and milestone requirements.
Each government agency also maintains its own rules and
regulations with which we must comply and which can vary
significantly among agencies. Governmental agencies also often
retain some portion of fees payable upon completion of a project
and collection of these fees may be delayed for several months
or even years, in some instances. In addition, a number of our
government contracts are fixed price contracts, which may
prevent us from recovering costs incurred in excess of budgeted
costs for such contracts. Fixed price contracts require us to
estimate the total project cost based on preliminary projections
of the projects requirements. The financial viability of
any given project depends in large part on our ability to
estimate such costs accurately and complete the project on a
timely basis. In the event our actual costs exceed fixed
contractual costs of either our research and development
contracts or our production orders, we will not be able to
recover the excess costs.
Our government contracts are also subject to termination or
renegotiation at the convenience of the government, which could
result in a large decline in revenue in any given quarter.
Although government contracts have provisions providing for the
reimbursement of costs associated with termination, the
termination of a material contract at a time when our funded
backlog does not permit redeployment of our staff could result
in reductions of employees. We have in the past chosen to incur
excess overhead in order to retain trained employees during
delays in contract funding. We also have had to reduce our staff
from
time-to-time
because of fluctuations in our funded government contract base.
In addition, the timing of payments from government contracts is
also subject to significant fluctuation and potential delay,
depending on the government agency involved. Any such delay
could result in a material adverse effect on our liquidity.
Since a substantial majority of our total revenues in the last
two fiscal years were derived directly or indirectly from
government customers, these risks can materially adversely
affect our business, results of operations and financial
condition.
If we are not able to commercialize our technology, we may
not be able to increase our revenues or achieve or sustain
profitability. Since commencing operations, we
have developed technology, principally under government research
contracts, for various defense-based applications. However,
since our margins on government contracts are generally limited,
and our revenues from such contracts are tied to government
budget cycles and influenced by numerous political and economic
factors beyond our control, and are subject to our ability to
win additional contracts, our long-term prospects of realizing
significant returns from our technology or achieving and
maintaining profitability will likely also require penetration
of commercial markets. In prior years, we have made significant
investments to commercialize our technologies without
significant success. These efforts included the purchase and
later shut down of a manufacturing line co-located at an IBM
facility, the formation of the Novalog, MSI, Silicon Film,
RedHawk and iNetWorks subsidiaries and the development of
various stacked-memory products intended for commercial markets
in addition to military and aerospace applications. These
investments have not resulted in consolidated profitability to
date, other than the profit realized in fiscal 2009 largely from
the significant gains described above, and a majority of our
total
17
revenues for fiscal 2009 and fiscal 2010 were still generated
from governmental customers. Furthermore, the Optex Asset Sale
has eliminated a substantial future contributor to our
consolidated revenues.
The significant overseas military operations may require
diversions of government research and development funding,
thereby causing disruptions to our contracts or otherwise
adversely impact our revenues. In the near term,
the funding of significant U.S. military operations may
cause disruptions in funding of government contracts. Since
military operations of substantial magnitude are not routinely
included in U.S. defense budgets, supplemental legislative
funding actions are required to finance such operations. Even
when such legislation is enacted, it may not be adequate for
ongoing operations, causing other defense funding sources to be
temporarily or permanently diverted. Such diversion could
produce interruptions in funding or delays in receipt of our
research and development contracts, causing disruptions to and
material adverse effects on our operations. In addition,
concerns about international conflicts and the effects of
terrorist and other military activity have resulted in unsettled
worldwide economic conditions. These conditions make it
difficult for our customers to accurately forecast and plan
future business opportunities, in turn making it difficult for
us to plan our current and future allocation of resources and
increasing the risks that our results of operations could be
materially adversely affected.
If we fail to scale our operations adequately, we may be
unable to meet competitive challenges or exploit potential
market opportunities, and our business could be materially and
adversely affected. Our consolidated total
revenues in fiscal 2009 and fiscal 2010 were $11.5 million
and $11.7 million, respectively. To become and remain
profitable, we will need to materially grow our consolidated
total revenues or substantially reduce our operating expenses.
Such challenges are expected to place a significant strain on
our management personnel, infrastructure and resources. To
implement our current business and product plans, we will need
to expand, train, manage and motivate our workforce, and expand
our operational and financial systems, as well as our
manufacturing and service capabilities. All of these endeavors
will require substantial additional capital and substantial
effort by our management. If we are unable to effectively manage
changes in our operations, we may be unable to scale our
business quickly enough to meet competitive challenges or
exploit potential market opportunities, and our current or
future business could be materially and adversely affected.
Historically, we have primarily depended on third party
contract manufacturers for the manufacture of a majority of our
products and any failure to secure and maintain sufficient
manufacturing capacity or quality products could materially and
adversely affect our business. For our existing
products, we primarily have used contract manufacturers to
fabricate and assemble our stacked chip, microchip and sensor
products. Our internal manufacturing capabilities consist
primarily of assembly, calibration and test functions for our
thermal camera products. We have typically used single contract
manufacturing sources for our historical products and do not
have long-term, guaranteed contracts with such sources. As a
result, we face several significant risks, including:
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a lack of guaranteed supply of products and higher prices;
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limited control over delivery schedules, quality assurance,
manufacturing yields and production costs; and
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the unavailability of, or potential delays in obtaining access
to, key process technologies.
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In addition, the manufacture of our products is a highly complex
and technologically demanding process and we are dependent upon
our contract manufacturers to minimize the likelihood of reduced
manufacturing yields or quality issues. We currently do not have
any long-term supply contracts with any of our manufacturers and
do not have the capability or capacity to manufacture our
products in-house in large quantities. If we are unable to
secure sufficient capacity with our existing manufacturers,
implement manufacturing of some of our new products at other
contract manufacturers or scale our internal capabilities, our
revenues, cost of revenues and results of operations would be
materially adversely impacted.
If we are not able to obtain broad market acceptance of our
new and existing products, our revenues and results of
operations will be materially adversely
affected. We generally focus on emerging markets.
Market reaction to new products in these circumstances can be
difficult to predict. Many of our planned products incorporate
our chip stacking technologies that have not yet achieved broad
market acceptance. We cannot assure you that our present or
future products will achieve market acceptance on a sustained
basis. In addition, due to our historical focus on research and
development, we have a limited history of competing in the
intensely competitive commercial electronics industry. As such,
we cannot assure you that we will be able to successfully
develop, manufacture and
18
market additional commercial product lines or that such product
lines will be accepted in the commercial marketplace. If we are
not successful in commercializing our new products, our ability
to generate revenues and our business, financial condition and
results of operations will be adversely affected.
Failure to achieve and maintain effective internal controls
in accordance with Section 404 of the Sarbanes-Oxley Act
could have a material adverse effect on our business and stock
price. Our fiscal 2005, fiscal 2006 and fiscal
2007 audits revealed material weaknesses in our internal
controls over financial reporting, including the failure of such
controls to identify the need to record a post-employment
obligation for our Executive Salary Continuation Plan, which
resulted in a restatement of our financial statements. Future
testing could reveal that previously identified material
weaknesses have not been remediated or that new material
weaknesses have developed. Furthermore, we do not presently have
the financial resources and infrastructure to address our future
plans, which puts us at risk of future material weaknesses.
During the course of future testing, we may identify other
significant deficiencies or material weaknesses, in addition to
the ones previously identified, which we may not be able to
remediate in time to meet future deadlines imposed by the
Sarbanes-Oxley Act for compliance with the requirements of
Section 404(a). In addition, if we fail to maintain the
adequacy of our internal controls, as such standards are
modified, supplemented or amended from time to time, we will not
be able to conclude that we have effective internal controls
over financial reporting in accordance with Section 404(a)
of the Sarbanes-Oxley Act. Failure to achieve and maintain an
effective internal control environment could cause investors to
lose confidence in our reported financial information, which
could result in a decline in the market price of our common
stock, and cause us to fail to meet our reporting obligations in
the future.
Our stock price has been subject to significant
volatility. The trading price of our common stock
has been subject to wide fluctuations in the past. Since January
2000, our common stock has traded at prices as low as $0.08 per
share in September 2010 and as high as $3,750.00 per share in
January 2000 (after giving effect to two reverse stock splits
subsequent to January 2000). The current market price of our
common stock may not increase in the future. As such, you may
not be able to resell your shares of common stock at or above
the price you paid for them. The market price of the common
stock could continue to fluctuate or decline in the future in
response to various factors, including, but not limited to:
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the impact and outcome of pending litigation;
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our cash resources and ability to raise additional funding and
repay indebtedness;
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reduced trading volume on the OTCBB;
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quarterly variations in operating results;
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government budget reallocations or delays in or lack of funding
for specific projects;
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our ability to control costs and improve cash flow;
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our ability to introduce and commercialize new products and
achieve broad market acceptance for our products;
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announcements of technological innovations or new products by us
or our competitors;
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changes in investor perceptions;
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economic and political instability, including acts of war,
terrorism and continuing international conflicts; and
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changes in earnings estimates or investment recommendations by
securities analysts.
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The trading markets for the equity securities of high technology
companies have continued to experience volatility. Such
volatility has often been unrelated to the operating performance
of these companies. These broad market fluctuations may
adversely affect the market price of our common stock. In the
past, companies that have experienced volatility in the market
price of their securities have been the subject of securities
class action litigation. We were subject to a class action
lawsuit that diverted managements attention and resources
from other matters until it was settled in June 2004. We cannot
guarantee you that we will not be subject to similar class
action lawsuits in the future.
19
We are subject to technological risk from the developments of
competitors, and our Patent Sale and License has removed
barriers to competition. We sold most of our
then-issued and pending patents pursuant to the Patent Sale and
License. Although we retain a worldwide, royalty-free,
non-exclusive license to use the patented technology that we
sold in our business, the purchaser of our patent assets is
entitled to use those patents for any purpose, including
possible competition with us. We treat technical data as
confidential and generally rely on internal nondisclosure
safeguards, including confidentiality agreements with employees,
and on laws protecting trade secrets, to protect our proprietary
information and maintain barriers to competition. However, we
cannot assure you that these measures will adequately protect
the confidentiality of our proprietary information or that
others will not independently develop products or technology
that are equivalent or superior to ours.
Our ability to exploit our own technologies may be
constrained by the rights of third parties who could prevent us
from selling our products in certain markets or could require us
to obtain costly licenses. Other companies may
hold or obtain patents or inventions or may otherwise claim
proprietary rights to technology useful or necessary to our
business. We cannot predict the extent to which we may be
required to seek licenses under such proprietary rights of third
parties and the cost or availability of these licenses. While it
may be necessary or desirable in the future to obtain licenses
relating to one or more proposed products or relating to current
or future technologies, we cannot assure you that we will be
able to do so on commercially reasonable terms, if at all. If
our technology is found to infringe upon the rights of third
parties, or if we are unable to gain sufficient rights to use
key technologies, our ability to compete would be harmed and our
business, financial condition and results of operations would be
materially and adversely affected.
Enforcing and protecting patents and other proprietary
information can be costly. If we are not able to adequately
protect or enforce our proprietary information or if we become
subject to infringement claims by others, our business, results
of operations and financial condition may be materially
adversely affected. We may need to engage in
future litigation to enforce our intellectual property rights or
the rights of our customers, to protect our trade secrets or to
determine the validity and scope of proprietary rights of
others, including our customers. The purchaser of our patents
may choose to be more aggressive in pursuing its rights with
respect to the patents it purchased from us, which could lead to
significant litigation and possible attempts by others to
invalidate such patents. If such attempts are successful, we
might not be able to use this technology in the future. We also
may need to engage in litigation in the future to enforce patent
rights with respect to future patents, if any. In addition, we
may receive in the future communications from third parties
asserting that our products infringe the proprietary rights of
third parties. We cannot assure you that any such claims would
not result in protracted and costly litigation. Any such
litigation could result in substantial costs and diversion of
our resources and could materially and adversely affect our
business, financial condition and results of operations.
Furthermore, we cannot assure you that we will have the
financial resources to vigorously defend our proprietary
information.
Our proprietary information and other intellectual property
rights are subject to government use which, in some instances,
limits our ability to capitalize on
them. Whatever degree of protection, if any, is
afforded to us through patents, proprietary information and
other intellectual property generally will not extend to
government markets that utilize certain segments of our
technology. The government has the right to royalty-free use of
technologies that we have developed under government contracts,
including portions of our stacked circuitry technology. While we
are generally free to commercially exploit these
government-funded technologies, and we may assert our
intellectual property rights to seek to block other
non-government users of the same, we cannot assure you that we
will be successful in our attempts to do so.
We are subject to significant competition that could harm our
ability to win new business or attract strategic partnerships
and could increase the price pressure on our
products. We face strong competition from a wide
variety of competitors, including large, multinational
semiconductor design firms and aerospace firms. Most of our
competitors have considerably greater financial, marketing and
technological resources than we or our subsidiaries do, which
may make it difficult to win new contracts or to attract
strategic partners. This competition has resulted and may
continue to result in declining average selling prices for our
products. We cannot assure you that we will be able to compete
successfully with these companies. Certain of our competitors
operate their own fabrication facilities and have longer
operating histories and presence in key markets, greater name
recognition, larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution,
technical and other resources than us. As a result, these
competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements. They may also
be able to devote greater resources to the
20
promotion and sale of their products. Increased competition has
in the past resulted in price reductions, reduced gross margins
and loss of market share. This trend may continue in the future.
We cannot assure you that we will be able to continue to compete
successfully or that competitive pressures will not materially
and adversely affect our business, financial condition and
results of operations.
We must continually adapt to unforeseen technological
advances, or we may not be able to successfully compete with our
competitors. We operate in industries
characterized by rapid and continuing technological development
and advancements. Accordingly, we anticipate that we will be
required to devote substantial resources to improve already
technologically complex products. Many companies in these
industries devote considerably greater resources to research and
development than we do. Developments by any of these companies
could have a materially adverse effect on us if we are not able
to keep up with the same developments. Our future success will
depend on our ability to successfully adapt to any new
technological advances in a timely manner, or at all.
We do not plan to pay dividends to holders of common
stock. We do not anticipate paying cash dividends
to the holders of the common stock at any time. Accordingly,
investors in our securities must rely upon subsequent sales
after price appreciation as the sole method to realize a gain on
investment. There are no assurances that the price of common
stock will ever appreciate in value. Investors seeking cash
dividends should not buy our securities.
We do not have long-term employment agreements with our key
personnel. If we are not able to retain our key personnel or
attract additional key personnel as required, we may not be able
to implement our business plan and our results of operations
could be materially and adversely affected. We
depend to a large extent on the abilities and continued
participation of our executive officers and other key employees.
The loss of any key employee could have a material adverse
effect on our business. While we have adopted employee equity
incentive plans designed to attract and retain key employees,
our stock price has declined in recent periods, and we cannot
guarantee that options or non-vested stock granted under our
plans will be effective in retaining key employees. We do not
presently maintain key man insurance on any key
employees. We believe that, as our activities increase and
change in character, additional, experienced personnel will be
required to implement our business plan. Competition for such
personnel is intense and we cannot assure you that they will be
available when required, or that we will have the ability to
attract and retain them.
We may be subject to additional risks. The
risks and uncertainties described above are not the only ones we
face. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also materially
adversely affect our business operations.
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Item 1B.
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Unresolved
Staff Comments
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Not applicable.
We currently occupy leased facilities in Costa Mesa, California
for our operations and those of our subsidiaries. The Costa Mesa
facilities include approximately 42,500 square feet in two
separate, but adjacent buildings for which we hold leases that
terminate in September 2013. Our average monthly rent for this
space over this term is approximately $68,750 per month.
Our Costa Mesa facilities include laboratories containing clean
rooms for operations requiring a working environment with
reduced atmospheric particles. We believe that our facilities
are adequate for our operations for fiscal 2010.
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Item 3.
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Legal
Proceedings
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The information set forth under Note 11 of Notes to
Consolidated Financial Statements, included in Part IV,
Item 15 of this report, is incorporated herein by
reference. For an additional discussion of certain risks
associated with legal proceedings, see Risk Factors
in Item 1A of this Report.
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Item 4.
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(Removed
and Reserved)
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21
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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The following table sets forth the range of high and low sales
prices of our common stock for the periods indicated, as
reported by Nasdaq Capital Market under the trading symbol IRSN
until September 10, 2010 and as quoted on the OTCBB under
the trading symbol IRSN.OB after September 10, 2010.
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High
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Low
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Fiscal Year Ending October 2, 2011:
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First Quarter (through December 15, 2010)
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$
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0.15
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$
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0.08
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Fiscal Year Ended October 3, 2010:
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First Quarter
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$
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0.57
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$
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0.30
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Second Quarter
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0.56
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0.23
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Third Quarter
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0.44
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0.24
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Fourth Quarter
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0.27
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0.08
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Fiscal Year Ended September 27, 2009:
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First Quarter
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$
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1.00
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$
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0.22
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Second Quarter
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0.43
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0.11
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Third Quarter
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0.62
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0.29
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Fourth Quarter
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0.95
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0.27
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On December 15, 2010, the last sales price for our common
stock as reported by the OTCBB was $0.115. On December 15,
2010, there were approximately 740 stockholders of record based
on information provided by our transfer agent.
We have never declared or paid cash dividends on our common
stock and do not anticipate paying any cash dividends on our
common stock in the foreseeable future.
Recent
Sales of Unregistered Securities
None.
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Item 6.
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Selected
Financial Data
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Not required for smaller reporting companies.
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Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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Overview
We are a vision systems company enabled by proprietary
technology for three-dimensional packaging of electronics and
manufacturing of electro-optical products. We design, develop,
manufacture and sell vision systems, miniaturized electronic
products and higher level systems incorporating such products
for defense, security and commercial applications. We also
perform customer-funded contract research and development
related to these systems and products, mostly for
U.S. government customers or prime contractors. Most of our
historical business relates to application of our technologies
for stacking either packaged or unpackaged semiconductors into
more compact three-dimensional forms, which we believe offer
volume, power, weight and operational advantages over competing
packaging approaches, and which we believe allows us to offer
higher level products with unique operational features.
Our acquisition of Optex, the financing and refinancing of the
related acquisition indebtedness and subsequent financings, and
the litigation with Mr. Looney have put a significant
strain on our capital resources and required us to engage in
multiple debt and equity financings since December 2005. As of
October 3, 2010, we had approximately $5.4 million of
debt, exclusive of debt discounts, and approximately
$8.8 million of accounts payable and accrued expenses. In
October 2008, our Lenders conducted the Optex Asset Sale, which
was a public UCC foreclosure. The entity controlled by the
Lenders credit bid $15 million in the Optex Asset Sale,
which was the winning bid. In September 2009, Optex filed for
relief under Chapter 7 of the Bankruptcy Code. As a result
of such filing, the accounts of Optex have been removed from our
accounts at September 27, 2009 and October 3, 2010.
Critical
Accounting Estimates
Our consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America (GAAP). As such, management
is required to make judgments, estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period.
The significant accounting policies that are most critical to
aid in fully understanding and evaluating reported financial
results include the following:
Revenue Recognition. Our consolidated total
revenues during fiscal 2010 were primarily derived from two
sources, (i) contracts to develop prototypes and provide
research, development, design, testing and evaluation of complex
detection and control defense systems and (ii) product
sales.
Contract Research and Development
Revenue. Our research and development
contracts are usually cost reimbursement plus a fixed fee, fixed
price with billing entitlements based on the level of effort we
expended or occasionally firm fixed price. Our cost
reimbursement plus fixed fee research and development contracts
require our good faith performance of a statement of work within
overall budgetary constraints, but with latitude as to resources
utilized. Our fixed price level of effort research and
development contracts require us to deliver a specified number
of labor hours in the performance of a statement of work. Our
firm fixed price research and development contracts require us
to deliver specified items of work independent of resources
utilized to achieve the required deliverables. For all types of
research and development contracts, we recognize revenues as we
incur costs and include applicable fees or profits primarily in
the proportion that costs incurred bear to estimated final
costs. Costs and estimated earnings in excess of billings under
government research and development contracts are accounted for
as unbilled revenues on uncompleted contracts, stated at
estimated realizable value and are expected to be realized in
cash within one year.
Upon the initiation of each research and development contract, a
detailed cost budget is established for direct labor, material,
subcontract support and allowable indirect costs based on our
proposal and the required scope of the contract as may have been
modified by negotiation with the customer, usually a
U.S. government agency or prime contractor. A program
manager is assigned to secure the needed labor, material and
subcontract in the program budget
23
to achieve the stated goals of the contract and to manage the
deployment of those resources against the program plan. Our
accounting department collects the direct labor, material and
subcontract charges for each contract on a weekly basis and
provides such information to the respective program managers and
senior management.
The program managers review and report the performance of their
contracts against the respective program plans with our senior
management on a monthly basis. These reviews are summarized in
the form of estimates of costs to complete the contracts
(ETCs). If an ETC indicates a potential overrun
against budgeted program resources, it is the responsibility of
the program manager to revise the program plan in a manner
consistent with the customers objectives to eliminate such
overrun and achieve planned contract profitability, and to seek
necessary customer agreement to such revision. To mitigate the
financial risk of such re-planning, we attempt to negotiate the
deliverable requirements of our research and development
contracts to allow as much flexibility as possible in technical
outcomes. Given the inherent technical uncertainty involved in
research and development contracts, in which new technology is
being invented, explored or enhanced, such flexibility in terms
is frequently achievable. When re-planning does not appear
possible within program budgets, senior management makes a
judgment as to whether the program statement of work will
require additional resources to be expended to meet contractual
obligations or whether it is in our interest to supplement the
customers budget with our own funds. If either
determination is made, we record an accrual for the anticipated
contract overrun based on the most recent ETC of the particular
contract.
We provide for anticipated losses on contracts by recording a
charge to earnings during the period in which a potential for
loss is first identified. We adjust the accrual for contract
losses quarterly based on the review of outstanding contracts.
Upon completion of a contract, we reduce any associated accrual
of anticipated loss on such contract as the previously recorded
obligations are satisfied.
We consider many factors when applying GAAP related to revenue
recognition. These factors generally include, but are not
limited to:
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|
|
The actual contractual terms, such as payment terms, delivery
dates, and pricing terms of the various product and service
elements of a contract;
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|
|
Time period over which services are to be performed;
|
|
|
|
Costs incurred to date;
|
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|
|
Total estimated costs of the project;
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Anticipated losses on contracts; and
|
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|
|
Collectibility of the revenues.
|
We analyze each of the relevant factors to determine its impact,
individually and collectively with other factors, on the revenue
to be recognized for any particular contract with a customer.
Our management is required to make judgments regarding the
significance of each factor in applying the revenue recognition
standards, as well as whether or not each factor complies with
such standards. Any misjudgment or error by our management in
evaluation of the factors and the application of the standards
could have a material adverse affect on our future operating
results.
Product Sales. Our revenues derived
from product sales in fiscal 2010 and fiscal 2009 were primarily
the result of shipments of sales of our miniaturized infrared
imaging cameras, and sales of stacked chip products, largely
memory stacks. Production orders for our products are generally
priced in accordance with established price lists. We primarily
ship memory stack products and visible spectrum cameras to
original equipment manufacturers (OEMs). Infrared
imaging cameras are both subsystem and system level products for
shipment to either OEMs or to end user customers, initially for
military applications.
We recognize revenue from product sales upon shipment, provided
that the following conditions are met:
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There are no unfulfilled contingencies associated with the sale;
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|
We have a sales contract or purchase order with the
customer; and
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|
We are reasonably assured that the sales price can be collected.
|
24
The absence of any of these conditions, including the lack of
shipment, would cause revenue recognition to be deferred. Our
terms are freight on board (FOB) shipping point.
Historically, our products have not generally been sold under
formal warranty terms. However, effective fiscal 2010, we have
commenced sale of clip-on thermal imaging products with a
one-year warranty and have correspondingly commenced to record
reserves for returns under warranty for such products. In
addition, we record product support expenses incurred and accrue
such expenses expected to be incurred in relation to shipped
products. We do not offer contractual price protection on any of
our products. Accordingly, we do not maintain any reserves for
post-shipment price adjustments.
We do not utilize distributors for the sale of our products nor
do we enter into revenue transactions in which the customer has
the right to return product. Accordingly, we do not make any
provisions for sales returns or adjustments in the recognition
of revenue.
Inventory. Each quarter, we evaluate our
inventories for excess quantities and obsolescence. We write-off
inventories that are considered obsolete and adjust remaining
inventory balances to approximate the lower of cost or market
value. The valuation of inventories at the lower of cost or
market requires us to estimate the amounts of current
inventories that will be sold. These estimates are dependent on
our assessment of current and expected orders from our customers.
Costs on long-term contracts and programs in progress generally
represent recoverable costs incurred. The marketing of our
research and development contracts involves the identification
and pursuit of contracts under specific government budgets and
programs. We are frequently involved in the pursuit of a
specific anticipated contract that is a follow-on or related to
an existing contract. We sometimes determine that it is probable
that a subsequent award will be successfully received,
particularly if continued progress can be demonstrated against
anticipated technical goals of the projected new program while
the government goes through its lengthy approval process
required to allocate funds and award contracts. When such a
determination occurs, we capitalize material, labor and overhead
costs that we expect to recover from a follow-on or new
contract. Due to the uncertainties associated with new or
follow-on research and development contracts, we maintain
significant reserves for this inventory to avoid overstating its
value. We have adopted this practice because we believe that we
are typically able to more fully recover such costs under the
provisions of government contracts by direct billing of
inventory rather than by seeking recovery of such costs through
permitted indirect rates, which may be more vulnerable to
competitive market pressures. (See Note 12 of the Notes to
the Consolidated Financial Statements).
Cost of our product inventory includes direct material and labor
costs, as well as manufacturing overhead costs allocated based
on direct labor dollars. Inventory cost is determined using the
average cost method. Pursuant to contract provisions, agencies
of the U.S. Government and certain other customers may have
title to, or a security interest in, inventories related to
certain contracts as a result of advances and progress payments.
In such instances, we reflect those advances and payments as an
offset against the related inventory balances. Inventories are
reviewed quarterly to determine salability and obsolescence. A
reserve is established for slow moving and obsolete product
inventory items.
Valuation Allowances. We maintain allowances
for doubtful accounts for estimated losses resulting from a
deterioration of a customers ability to make required
payments to the point where we believe it is likely there has
been an impairment of its ability to make payments. Such
allowances are established, maintained or modified at each
reporting date based on the most current available information.
We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. We have considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the
need for the valuation allowance.
Intangible Assets. We amortize the cost of
other intangibles over their estimated useful lives unless such
lives are deemed indefinite. Amortizable intangible assets are
tested for impairment based on undiscounted cash flows and, if
impaired, written down to fair value based on either discounted
cash flows or appraised values. Intangible assets with definite
lives at October 3, 2010 and September 27, 2009
consist principally of patents and trademarks related to the
Companys various technologies. Capitalized costs include
amounts paid to third parties for legal fees,
25
application fees and other direct costs incurred in the filing
and prosecution of patent and trademark applications. These
assets are amortized on a straight-line method over the shorter
of their useful or legal life, generally ten years.
Stock-Based Compensation. We calculate stock
option-based compensation by estimating the fair value of each
option using the Black-Scholes option-pricing model. Our
determination of fair value of stock option-based payment awards
is made as of their respective dates of grant using the
option-pricing model and is affected by our stock price, as well
as assumptions regarding a number of other variables, including
the expected stock price volatility over the term of the awards,
the portion of stock options granted that will ultimately vest,
and the periods from the grant date until the options vest and
expire. The Black-Scholes option-pricing model was developed for
use in estimating the value of traded options that have no
vesting or hedging restrictions and are fully transferable.
Because our employee stock options have certain characteristics
that are significantly different from traded options, the
existing valuation models may not provide an accurate measure of
the fair value of our outstanding employee stock options. We
recognize compensation expense on a straight-line basis over the
vesting period of the option after consideration of the
estimated forfeiture rate.
We calculate compensation expense for both vested and nonvested
stock awards by determining the fair value of each such grant as
of their respective dates of grant using the closing sales price
of our common stock on the Nasdaq Capital Market and the OTCBB,
as applicable, at such dates without any discount. We recognize
compensation expense for nonvested stock awards on a
straight-line basis over the vesting period.
Executive Salary Continuation Plan (ESCP)
Liability. We have estimated the ESCP liability
based on the expected lifetime of participants using Social
Security mortality tables and discount rates comparable to that
of rates of return on high quality investments providing yields
in amount and timing equivalent to expected benefit payments. At
the end of each fiscal year, we determine the assumed discount
rate to be used to discount the ESCP liability. We considered
various sources in making this determination, including the
Citigroup Pension Liability Index, which at September 30,
2010 was 5.158%. Based on this review, we used a 5.2% discount
rate for determining ESCP liability at October 3, 2010. In
September 2009, our Chief Executive Officer, John Carson, and
our Chief Financial Officer, John Stuart, voluntarily
permanently waived entitlement to all potential benefits under
the ESCP, resulting in a reduction of approximately
$2.4 million in our ESCP liability at September 27,
2009.
Derivatives. GAAP requires us to record and
carry all derivatives on the balance sheet as either liabilities
or assets at fair value. Derivatives are measured at fair value
with changes in fair value recognized through earnings as they
occur.
COMPARISON
OF FISCAL YEARS ENDED OCTOBER 3, 2010 AND SEPTEMBER 27,
2009
Results
of Operations
Total Revenues. Our total revenues increased
by approximately $180,600 in fiscal 2010 as compared to total
revenues in fiscal 2009, reflecting an increase in our product
sales in fiscal 2010 that more than offset a decline in our
contract research and development revenue in the current fiscal
year, as discussed more fully below.
Contract Research and Development
Revenue. Contract research and development
revenue consists of amounts realized or realizable from funded
research and development contracts, largely from
U.S. government agencies and government contractors.
Contract research and development revenues for fiscal 2010
declined compared to fiscal 2009 as shown in the following table:
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Contract Research
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and Development
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|
Percentage of
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|
|
|
Revenue
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|
|
Total Revenue
|
|
|
Fiscal 2009
|
|
$
|
10,003,500
|
|
|
|
87
|
%
|
Dollar decrease in fiscal 2010
|
|
|
(1,477,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
$
|
8,526,200
|
|
|
|
73
|
%
|
Percentage decrease for fiscal 2010
|
|
|
(15
|
%)
|
|
|
|
|
The decline in our contract research and development revenue in
fiscal 2010 as compared to fiscal 2009 was primarily due to both
our liquidity limitations during fiscal 2010 and delays in
receipt of contracts throughout the
26
current fiscal year. Our liquidity limitations impacted our
ability to timely pay for and receive subcontractor and vendor
support required to fulfill some of the technical milestones of
research and development contracts underway in the current
fiscal year. We received approximately $562,000 less of such
support in fiscal 2010 as compared to fiscal 2009. Since most of
our research and development contracts are of a cost
reimbursement nature, this reduction in expense incurred in the
performance of such contracts directly impacted our
corresponding recognition of revenue derived from such expense.
The delays in receipt of some contracts in fiscal 2010 also
limited our ability to recognize revenue from such contracts in
the current period.
Cost of Contract Research and Development
Revenue. Cost of contract research and
development revenue consists of wages and related benefits, as
well as subcontractor, independent consultant and vendor
expenses directly incurred in support of research and
development contracts, plus associated indirect expenses
permitted to be charged pursuant to the relevant contracts. Our
cost of contract research and development revenue for fiscal
2010, both in terms of absolute dollars and as a percentage of
contract research and development revenue, compared to fiscal
2009 is shown in the following table:
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|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Contract Research
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|
|
|
Cost of Contract Research and
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and Development
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|
|
|
Development Revenue
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|
|
Revenue
|
|
|
Fiscal 2009
|
|
$
|
8,467,800
|
|
|
|
85
|
%
|
Dollar decrease in fiscal 2010
|
|
|
(1,808,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
$
|
6,659,000
|
|
|
|
78
|
%
|
Percentage decrease for fiscal 2010
|
|
|
(21
|
%)
|
|
|
|
|
A substantial portion of our contract research and development
revenue is derived from cost reimbursable contracts, and we
recognize revenue as we incur costs. Accordingly, under our
research and development contracts, costs and revenues
frequently tend to increase or decrease proportionately, absent
significant cost overruns. The decrease in fiscal 2010 in
absolute dollar cost of contract research and development
revenue as compared to fiscal 2009 exhibited this relationship
by reflecting the decrease in contract research and development
revenue discussed above. The improved margin reflected by the 7%
decrease in cost of contract research and development revenue as
a percentage of contract research and development revenue in
fiscal 2010 over the comparable percentage in fiscal 2009 was
largely the result of a substantial reduction in our indirect
expenses and the corresponding overhead costs of contract
research and development revenue in the current fiscal year as
compared to fiscal 2009. This overhead reduction, substantially
derived from reduced labor and labor-related expenses and
reduced depreciation and amortization expense, resulted in a
disproportionate decrease in our costs of contract research and
development revenue in fiscal 2010, with the corresponding
improvement in costs of contract research and development
revenue as a percentage of such revenue.
Product Sales. Our product sales are derived
from sales of miniaturized camera products, specialized chips,
modules, stacked chip products and chip stacking services.
Product sales for fiscal 2010 increased both in terms of
absolute dollars and as a percentage of total revenue as
compared to fiscal 2009 as shown in the following table:
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|
|
|
|
|
|
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|
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|
Percentage of
|
|
|
|
Product Sales
|
|
|
Total Revenue
|
|
|
Fiscal 2009
|
|
$
|
1,515,900
|
|
|
|
13
|
%
|
Dollar increase in fiscal 2010
|
|
|
1,661,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
$
|
3,177,800
|
|
|
|
27
|
%
|
Percentage increase for fiscal 2010
|
|
|
110
|
%
|
|
|
|
|
The increase in product sales in fiscal 2010 as compared to
fiscal 2009 was largely the result of substantially increased
sales of our thermal imaging products, particularly our COTI
systems, both in terms of absolute dollars and as a percentage
of total revenue. Based on the composition of our backlog at the
date of this report, we believe that the percentage of our
product sales derived from sales of thermal imaging products,
particularly COTI systems, will continue to increase in fiscal
2011 as compared to fiscal 2010 due to our expectation of higher
unit sales of such products.
27
Cost of Product Sales. Cost of product sales
consists of wages and related benefits of our personnel, as well
as subcontractor, independent consultant and vendor expenses
directly incurred in the manufacture of products sold, plus
related overhead expenses. Our cost of product sales for fiscal
2010 as compared to fiscal 2009 is shown in the following table:
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|
|
|
|
|
|
|
|
|
|
Cost of Product Sales
|
|
|
Percentage of Product Sales
|
|
|
Fiscal 2009
|
|
$
|
1,494,400
|
|
|
|
99
|
%
|
Dollar increase in fiscal 2010
|
|
|
1,656,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
$
|
3,150,900
|
|
|
|
99
|
%
|
Percentage increase for fiscal 2010
|
|
|
111
|
%
|
|
|
|
|
The percentage increase in absolute dollar cost of product sales
in fiscal 2010 as compared to fiscal 2009 reflected the
substantially similar percentage increase in product sales in
fiscal 2010 as compared to fiscal 2009. Margins on product sales
in fiscal 2010 compared to fiscal 2009, as measured by the cost
of products sales as a percentage of product sales, were
unchanged, reflecting both the component costs of our thermal
imaging products at our production volumes in the two fiscal
years and the effect of product support costs. Product support
costs include costs of material control, diagnostics and
calibration, that are necessary to maintain a normal
manufacturing capacity. A certain level of such product support
costs are required, particularly for new products such as our
COTI system, independent of the production volume and product
sales realized from such products. In fiscal 2010 and fiscal
2009, the dollar value of product support costs accounted for a
substantial portion of our cost of product sales. The impact of
product support costs on product margins may continue to be a
major component of our cost of product sales in future periods
unless and until our product sales increase substantially,
thereby reducing the percentage impact of the relatively
inelastic product support costs.
General and Administrative Expense. General
and administrative expense largely consists of wages and related
benefits for our executive, financial, administrative and
marketing staff, as well as professional fees, primarily legal
and accounting fees and costs, plus various fixed costs such as
rent, utilities and telephone. General and administrative
expense for fiscal 2010 declined substantially from general and
administrative expense in fiscal 2009 as shown in the following
table:
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|
|
|
|
|
|
|
|
|
|
General and
|
|
|
|
|
|
|
Administrative
|
|
|
Percentage of
|
|
|
|
Expense
|
|
|
Total Revenue
|
|
|
Fiscal 2009
|
|
$
|
9,561,700
|
|
|
|
83
|
%
|
Dollar decrease in fiscal 2010
|
|
|
(2,971,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
$
|
6,589,900
|
|
|
|
56
|
%
|
Percentage decrease for fiscal 2010
|
|
|
(31
|
%)
|
|
|
|
|
The largest factor in the dollar decrease in general and
administrative expense in fiscal 2010 as compared to fiscal 2009
was a $1,441,100 reduction in the current fiscal year in
unallowable general and administrative expense for which we
cannot seek reimbursement under most of our government
contracts, primarily litigation expenses. This was largely the
result of reduced legal expenses due to settling our litigation
in March 2010 with Timothy Looney, the original owner of Optex,
our discontinued subsidiary. Approximately $743,300, or 25%, of
the dollar decrease in general and administrative expense in
fiscal 2010 as compared to fiscal 2009 was the result of
decreased labor expense and related employee benefits in the
current fiscal year. Since a significant element of bid and
proposal expenses are the labor costs incurred for such
activities, our overall reduction in our labor-related overhead
costs also contributed to a $478,600 reduction in bid and
proposal general and administrative expenses in fiscal 2010, as
compared to fiscal 2009. Our general and administrative service
expense in fiscal 2010, largely accounting expenses, also
decreased $188,000 compared to fiscal 2009. Since our total
revenues for fiscal 2010 were not substantially greater than
total revenues for fiscal 2009, the magnitude of our decrease in
absolute dollars of general and administrative expense in fiscal
2010 as compared to the absolute dollars of general and
administrative expense in fiscal 2009 also resulted in general
and administrative expense as a percentage of total revenue
being substantially decreased in the current fiscal year.
28
Research and Development Expense. Research and
development expense consists of wages and related benefits for
our research and development staff, independent contractor
consulting fees and subcontractor and vendor expenses directly
incurred in support of internally funded research and
development projects, plus associated overhead expenses.
Research and development expense for fiscal 2010 as compared to
fiscal 2009 increased as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
Research and
|
|
|
Percentage of
|
|
|
|
Development Expense
|
|
|
Total Revenue
|
|
|
Fiscal 2009
|
|
$
|
2,266,700
|
|
|
|
20
|
%
|
Dollar increase in fiscal 2010
|
|
|
372,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
$
|
2,639,000
|
|
|
|
23
|
%
|
Percentage increase for fiscal 2010
|
|
|
16
|
%
|
|
|
|
|
The increase in research and development expense in fiscal 2010
as compared to fiscal 2009 is largely related to labor
deployment issues in the respective fiscal years. We use the
same technical staff for both internal and customer funded
research and development projects, as well as the preparation of
technical proposals, so the availability of direct labor in
terms of man hours and skill mix has a strong bearing on the
amount of internally funded research and development expense we
undertake in any given period. We used less of our direct labor
on funded contracts in fiscal 2010 than fiscal 2009,
contributing to greater labor deployment and associated expense
to research and development expense for the current fiscal year.
This increase may have been greater had it not been for the
deployment of $516,900 of labor and associated overhead to
capital projects related to our COTI product. Generally, this
difference in labor deployment does not reflect any trends, but
rather is tied to specific milestones of both funded and
internal research projects. Accordingly, the absolute dollar
increase in research and development expense in fiscal 2010 as
compared to fiscal 2009 reflect these milestones, rather than a
change in priorities related to internally funded research and
development.
Gain (Loss) on Sale or Disposal of Assets. We
recorded a gain of $8,640,800 in fiscal 2009, largely as a
result of our Patent Sale and License, which closed in March
2009. No transaction of comparable size occurred in fiscal 2010,
although we did record a gain of $12,600 on disposal of assets
in fiscal 2010.
Gain On Elimination of Consolidated Debt. We
recorded a gain of $2,539,200 in fiscal 2009 due to the
September 2009 bankruptcy of Optex and the corresponding
elimination of Optex from our consolidated balance sheet at
September 27, 2009. No comparable gain occurred in fiscal
2010.
Gain from Reduction in Pension Liability. We
recorded a gain of $2,442,900 in fiscal 2009 due to the
voluntary waiver of entitlements under our ESCP by our CEO and
CFO. No comparable gain occurred in fiscal 2010.
Interest Expense. Our interest expense for
fiscal 2010, compared to that of fiscal 2009, increased slightly
as shown in the following table:
|
|
|
|
|
|
|
Interest Expense
|
|
|
Fiscal 2009
|
|
$
|
1,635,500
|
|
Dollar increase in fiscal 2010
|
|
|
57,100
|
|
|
|
|
|
|
Fiscal 2010
|
|
$
|
1,692,600
|
|
Percentage increase in fiscal 2010
|
|
|
3
|
%
|
The increase in interest expense in fiscal 2010 as compared to
fiscal 2009 was primarily due to interest on our Debentures
issued in the current fiscal year, which was offset in part by
the reduction in our debt, and corresponding interest, that
resulted from application of proceeds from the Patent Sale and
License, the exchange of a portion of our debt for our
Series A-2
Stock and the partial repayment of debt from proceeds of the
Debenture Private Placement.
Litigation Settlement Expense. In September
2009, a court order was issued potentially obligating us to
$834,300 in attorneys fees related to a jury trial. We
recorded a provision of $834,300 for this pending judgment in
fiscal 2009. In March 2010, we entered into the Looney
Settlement Agreement, pursuant to which we agreed to pay
29
Timothy Looney $50,000 and to issue to Mr. Looney the
Looney Note in the principal amount of $2,500,000 in settlement
of this and other litigation with Mr. Looney. We recorded
the Looney Note in our consolidated financial statements for
fiscal 2010 and extinguished the previously recorded expenses
for litigation judgments related to these matters in fiscal
2010. The effectiveness of the Looney Settlement Agreement was
conditioned upon our receipt of consents from our senior
creditors, Summit and Longview. As one of the conditions of
obtaining Longviews Consent, we agreed to issue to
Longview equity securities with a value of $825,000 (the
Waiver Securities) in consideration for
Longviews waiver of potential future entitlement to all
accumulated, but undeclared and unpaid, dividends on our
Series A-1
Stock and our
Series A-2
Stock held by Longview from the respective dates of issuance of
the
Series A-1
Stock and
Series A-2
Stock through July 15, 2010. We issued the Waiver
Securities to Longview on April 30, 2010 in the form of
27,500 shares of the newly created Series C
Convertible Preferred Stock (the Series C
Stock). We recorded the expense of the Waiver Securities
in fiscal 2010. In connection with Longviews consent for
the Looney Settlement Agreement, we and Longview entered into an
Agreement, Consent and Waiver (the Longview
Agreement) pursuant to which we and Longview made certain
agreements related to such consent. One of those agreements was
that if we did not arrange for a third-party investor to
purchase Longviews holdings of the Companys
preferred stock on or before July 15, 2010 (the
Buyout), we were obligated to issue to Longview
(a) non-voting equity securities, with terms junior to our
Series B Convertible Preferred Stock, convertible into
1,000,000 shares of our common stock (the Contingent
Securities) and (b) a two-year warrant to purchase
1,000,000 shares of our common stock at an exercise price
per share of $0.30 (the Contingent Warrant). The
terms of the Contingent Securities and the Contingent Warrant
were mutually agreed upon by the parties such that the
Contingent Securities were to consist of 10,000 shares of
Series C Stock convertible into 1,000,000 shares of
common stock, subject to receipt of stockholder approval for
such issuance if required by Nasdaq. The Buyout did not occur on
or before July 15, 2010, and stockholder approval for the
issuance of the Contingent Securities in the form of
Series C Stock was obtained on July 28, 2010.
Accordingly, we issued the Contingent Securities and Contingent
Warrant to Longview in August 2010. We recorded a $450,000
expense for the obligation to issue the Contingent Securities
and the Contingent Warrant in fiscal 2010. The net effect of
these various expenses was an aggregate recording of $2,270,700
as a litigation settlement expense in fiscal 2010, respectively.
(See Note 3 of the Notes to the Consolidated Financial
Statements).
Income From Discontinued Operations. As a
result of the Optex Asset Sale, in fiscal 2009, we realized a
gain on Optexs discontinued operations of $58,400,
reflecting results for the interval from September 29, 2008
through October 14, 2008, the date of the Optex Asset Sale.
Since Optex had no operations subsequent to the Optex Asset
Sale, no comparable result from discontinued operations was
recognized in fiscal 2010.
Net Income (Loss) Attributable to Company. Our
net income (loss) attributable to the Company for fiscal 2010,
as compared to fiscal 2009, is shown in the following table:
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
Fiscal 2009
|
|
$
|
914,800
|
|
Dollar change in fiscal 2010
|
|
|
(12,070,600
|
)
|
|
|
|
|
|
Fiscal 2010
|
|
$
|
(11,155,800
|
)
|
Percentage change in fiscal 2010
|
|
|
(1,319
|
%)
|
Our net income attributable to the Company in fiscal 2009 was
substantially the result of our gain on sale or disposal of
assets resulting from our non-recurring Patent Sale and License
in March 2009. The absence of a comparable-sized gain in fiscal
2010 was the principal cause for the change in our results for
the current fiscal year compared to fiscal 2009. The net loss
attributable to the Company in fiscal 2010 was reduced by the
reduction in general and administrative expense offset by the
increase of litigation settlement expense in the current fiscal
year discussed above.
30
Liquidity
and Capital Resources
Our liquidity changed in fiscal 2010 as shown in the following
table:
|
|
|
|
|
|
|
|
|
|
|
Cash and
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
Working Capital (Deficit)
|
|
|
September 27, 2009
|
|
$
|
125,700
|
|
|
$
|
(6,271,300
|
)
|
Dollar change in fiscal 2010
|
|
|
155,900
|
|
|
|
(3,829,100
|
)
|
|
|
|
|
|
|
|
|
|
October 3, 2010
|
|
$
|
281,600
|
|
|
$
|
(10,100,400
|
)
|
Percentage change in fiscal 2010
|
|
|
124
|
%
|
|
|
(61
|
%)
|
The aggregate of our non-cash expenses in fiscal 2010 was
$6,099,400, largely consisting of non-cash litigation settlement
expense related to the Looney litigation discussed above and
depreciation and amortization expense, and to a lesser extent,
non-cash employee retirement plan contributions, non-cash
interest expense, change in fair value of derivative instruments
and non-cash stock-based compensation. These non-cash expenses
partially offset the use of cash derived from our net loss and
various timing effects and resulted in an operational use of
cash in the amount of $1,767,000 in fiscal 2010. These and other
uses of cash, including property and equipment expenditures of
$1,042,200 and a reduction of $886,100 in factoring advances
from Summit to us against receivables, were offset by $2,049,500
of net proceeds from our Series B preferred stock
financing, $1,651,300 from our debenture unit financing and
$489,700 of net proceeds from our common stock unit financing in
fiscal 2010, contributing to the net $155,900 increase of cash
in fiscal 2010.
During a portion of fiscal 2010, we continued to incur fees and
expenses in the lawsuits related to the ongoing disputes with
Mr. Looney and his affiliated entity. In fiscal 2010, these
fees and expenses amounted to an aggregate of approximately
$329,400. In March 2010, we settled these lawsuits with
Mr. Looney and his affiliated entity in consideration of
our payment of $50,000 in cash and issuance of the Looney Note,
which consisted of a $2.5 million
27-month
promissory note to Mr. Looney that is secured by
substantially all of the Companys assets. (See Note 3
of the Notes to the Consolidated Financial Statements). Debt
service on this note will have a material adverse effect on our
future liquidity so long as the note remains outstanding.
Under litigation related to obligations allegedly owed to
FirstMark III, LP, formerly known as Pequot Private Equity
Fund III, LP, and FirstMark III Offshore Partners, LP,
formerly known as Pequot Offshore Private Equity Partners III,
LP (collectively, FirstMark), FirstMark filed a
motion for summary judgment, which was granted in January 2010,
although to our knowledge, judgment has not yet been entered as
of the date of this report. We have recorded approximately
$1,269,00 of expense related to this pending judgment at
October 3, 2010. (See Note 13 of the Notes to the
Consolidated Financial Statements). We have attempted to settle
this matter, but such an outcome cannot be assured. If we are
unable to settle this matter in a satisfactory manner, execution
on the anticipated final judgment could have a material adverse
effect on our liquidity.
The increase in the working capital deficit in fiscal 2010 was
largely the result of the impact of our net loss partially
offset by the net proceeds from our sale of Series B
preferred stock, debenture unit and common stock unit financings
in the current fiscal year. Deployment of the net proceeds from
those financings allowed us to reduce our factoring advances
against receivables by $886,100 in fiscal 2010. At
October 3, 2010, our factoring lender had advances to us of
approximately $99,700.
At October 3, 2010, our funded backlog was approximately
$9.4 million. We expect, but cannot guarantee, that a
substantial portion of our funded backlog at October 3,
2010 will result in revenue recognized in the next twelve
months, provided that we are able to enhance our liquidity to
meet our working capital requirements. In addition, our
government research and development contracts and product
purchase orders typically include unfunded backlog, which is
funded when the previously funded amounts have been expended or
product delivery schedules are released. As of October 3,
2010, our total backlog, including unfunded portions, was
approximately $30.1 million.
Contracts with government agencies may be suspended or
terminated by the government at any time, subject to certain
conditions. Similar termination provisions are typically
included in agreements with prime contractors. While we have
only experienced a small number of contract terminations, none
of which were recent, we cannot assure you that we will not
experience suspensions or terminations in the future. Any such
termination, if material,
31
could cause a disruption of our revenue stream, materially
adversely affect our liquidity and results of operations and
could result in employee layoffs.
We will need to raise additional funds in the near future to
meet our continuing obligations. We raised $3.0 million of
gross proceeds in a financing of unsecured promissory notes due
May 31, 2011 and have been exploring possible additional
financing. However, there can be no assurance that we will be
able to secure such additional financing in a timely manner, on
acceptable terms or at all. (See Note 17 of the Notes to
the Consolidated Financial Statements).
Off-Balance
Sheet Arrangements
Our conventional operating leases are either immaterial to our
financial statements or do not contain the types of guarantees,
retained interests or contingent obligations that would require
their disclosures as an off-balance sheet
arrangement pursuant to
Regulation S-K
Item 303(a)(4). As of October 3, 2010 and
September 27, 2009, we did not have any other relationships
with unconsolidated entities or financial partners, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Contractual
Obligations and Commitments
Debt. At October 3, 2010, we had
approximately $5,415,300 of debt, which consisted of (i) a
secured promissory note payable to Longview, described more
fully below, the principal amount of which was reduced from
$2.1 million to approximately $163,100 through partial
exchange of such debt pursuant to the credit bid that
effectuated the Optex Asset Sale and partial repayment from
proceeds of the Patent Sale and License and the Debenture
Private Placement; (ii) unsecured convertible and
non-convertible debentures issued in the Debenture Private
Placement with an aggregate principal balance of $2,752,200; and
(iii) the Looney Note, a $2,500,000 secured subordinated
promissory note payable to Timothy Looney pursuant to settlement
of litigation, described more fully below.
On July 19, 2007, we entered into a Loan Agreement, a
secured promissory note (the Longview Note) and an
Omnibus Security Interest Acknowledgement with Longview,
pursuant to which we closed a short-term non-convertible loan in
the original principal amount of $2.0 million (the
Loan), which was subsequently increased by $100,000
to $2.1 million pursuant to the terms of the Longview Note.
The Longview Note bore interest at a rate of 12% per annum, due
together with the unpaid principal amount when the Longview Note
matures, which was originally on January 19, 2008, but was
extended to December 30, 2009 pursuant to our November 2007
debt restructuring, further extended to September 30, 2010
pursuant to partial repayment terms related to the Patent Sale
and License and further extended to the earlier of
December 31, 2010 or our raising of gross proceeds of
$1.5 million or more in financings after September 30,
2010.
In October 2008, approximately $1,651,100 of the principal due
under the Longview Note was retired pursuant to the Optex Asset
Sale. In March 2009, in connection with the Patent Sale and
License, the outstanding principal of the Longview Note was
further reduced to $188,400, and the maturity date of the
Longview Note was extended to September 30, 2010. In March
2010, in connection with the Debenture Private Placement, the
outstanding principal of the Longview Note was further reduced
to $163,100. In December 2010, we repaid the outstanding balance
on the Longview Note in full. (See Note 17 of the Notes to
Consolidated Financial Statements).
In March 2010, we sold and issued convertible debenture units
(the Units) with an aggregate principal balance of
$2,752,200 in two closings of a private placement (the
Debenture Private Placement). Each Unit is comprised
of (i) one one-year, unsecured convertible debenture with a
principal repayment obligation of $5,000 (the Convertible
Debenture) that is convertible at the election of the
holder into shares of our common stock at a conversion price of
$0.40 per share (the Principal Conversion Shares);
(ii) one one-year, unsecured non-convertible debenture with
a principal repayment obligation of $5,000 that is not
convertible into common stock (the Non-Convertible
Debenture and, together with the Convertible Debenture,
the Debentures); and (iii) a five-year warrant
to purchase 3,125 shares of our common stock (the
Debenture Investor Warrant). The conversion price
applicable to the Debentures and the exercise price applicable
to the Debenture Investor Warrants is $0.40 per share. The
Debentures bear simple interest at a rate per annum of 20% of
their principal value. Interest on the
32
Debentures accrues and is payable quarterly in arrears and is
convertible at our election into shares of our common stock at a
conversion price of $0.40 per share. We elected to pay the first
and second quarterly interest payments due in June 2010 and
September 2010, respectively, on the Debentures in the aggregate
amount of $277,500 through conversion into 693,600 shares
of our common stock. The conversion price of the Debentures is
subject to adjustment for stock splits, stock dividends,
recapitalizations and the like. We may repay any unpaid and
unconverted principal amount of the Debentures in cash prior to
maturity at 110% of such principal amount.
The Looney Note issued by the Company in connection with the
Looney Settlement Agreement bears simple interest at a rate per
annum of 10% of the outstanding principal balance and is secured
by substantially all of our assets (the Collateral)
pursuant to the terms and conditions of a Security Agreements
and Intellectual Property Security Agreement with
Mr. Looney (the Security Agreements), but such
security interests are subject to and subordinate to the
existing perfected security interests and liens of our senior
creditors, Summit and Longview. The Looney Note requires the
Company to remit graduated monthly installment payments over a
27-month
period to Mr. Looney beginning with a payment of $8,000 in
May 2010 and ending with a payment of $300,000 in June 2012. All
such payments are applied first to unpaid interest and then to
outstanding principal. A final payment of the remaining unpaid
principal and interest under the Looney Note is due and payable
in July 2012. Past due payments will bear simple interest at a
rate per annum of 18%. In the event we prepay all amounts owing
under the Looney Note by October 9, 2011, the $50,000 cash
payment made to Mr. Looney pursuant to the Looney
Settlement Agreement will either be returned to us or will be
deducted from our final payment due on the Looney Note.
Capital Lease Obligations. We had no
outstanding principal balance on capital lease obligations at
October 3, 2010.
Operating Lease Obligations. We have various
operating leases covering equipment and facilities located at
our facility in Costa Mesa, California.
Deferred Compensation. We have a deferred
compensation plan, the Executive Salary Continuation Plan (the
ESCP), for select key employees. Benefits payable
under the ESCP are established on the basis of years of service
with the Company, age at retirement and base salary, subject to
a maximum benefits limitation of $137,000 per year for any
individual. The ESCP is an unfunded plan. The recorded liability
for future expense under the ESCP is determined based on
expected lifetime of participants using Social Security
mortality tables and discount rates comparable to that of rates
of return on high quality investments providing yields in amount
and timing equivalent to expected benefit payments. At the end
of each fiscal year, we determine the assumed discount rate to
be used to discount the ESCP liability. We considered various
sources in making this determination for fiscal 2010, including
the Citigroup Pension Liability Index, which at
September 30, 2010 was 5.158%. Based on this review, we
used a 5.2% discount rate for determining the ESCP liability at
October 3, 2010. There are presently two of our retired
executives who are receiving benefits aggregating $184,700 per
annum under the ESCP. As of October 3, 2010, $1,215,400 has
been accrued in the accompanying consolidated balance sheet for
the ESCP, of which amount $184,700 is a current liability we
expect to pay during fiscal 2011.
Stock-Based
Compensation
Aggregate stock-based compensation for fiscal 2010 and fiscal
2009 was $103,200 and $142,000, respectively, and was included
in:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
|
Fiscal 2009
|
|
|
Cost of contract research and development revenue
|
|
$
|
37,400
|
|
|
$
|
40,800
|
|
General and administrative expense
|
|
|
65,800
|
|
|
|
101,200
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103,200
|
|
|
$
|
142,000
|
|
|
|
|
|
|
|
|
|
|
All transactions in which goods or services are the
consideration received for equity instruments issued to
non-employees are accounted for based on the fair value of the
consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. The
measurement date used to determine the fair value of any such
equity instrument is the earliest to occur of (i) the date
on which the third-party performance is complete, (ii) the
date on which it is probable that performance will occur, or
(iii) if different, the date on which the
33
compensation has been earned by the non-employee. In fiscal
2010, we issued warrants to purchase an aggregate of
350,000 shares of our common stock, valued at $119,000, to
an investment banking firm for a one-year extension of an
agreement for said firm to assist us in raising additional
capital and to provide financial advisory services. In fiscal
2010, we also issued 27,500 shares of the Companys
newly created Series C Stock, valued at $825,000, to
Longview in consideration for Longviews consent to the
issuance of the Looney Note and waiver of potential future
entitlement to all accumulated, but undeclared and unpaid,
dividends on the Companys
Series A-1
Stock and the Companys
Series A-2
Stock held by Longview from the respective dates of issuance of
the
Series A-1
Stock and the
Series A-2
Stock through July 15, 2010. We issued an additional
10,000 shares of the Companys Series C Stock,
valued at $300,000, and a two-year warrant to purchase
1,000,000 shares of the Companys common stock, valued
at $150,000, to Longview in satisfaction of one of the
conditions of Longviews consent to the Looney Settlement
Agreement.
We have historically issued stock options to employees and
outside directors whose only condition for vesting were
continued employment or service during the related vesting
period. Typically, the vesting period has been up to four years
for employee awards and immediate vesting for director awards,
although awards have sometimes been granted with two year
vesting periods. In some fiscal years, we have also issued
nonvested stock grants to new employees and outside directors.
The typical restriction period for such grants is three years.
We may impose other performance criteria for the vesting of
options or nonvested stock granted in the future.
We calculate stock option-based compensation by estimating the
fair value of each option granted using the Black-Scholes option
valuation model and various assumptions that are described in
Note 1 to our Consolidated Financial Statements. Once the
compensation cost of an option is determined, we recognize that
cost on a straight-line basis over the requisite service period
of the option, which is typically the vesting period for options
granted by us. We calculate compensation expense of both vested
and nonvested stock grants by determining the fair value of each
such grant as of their respective dates of grant using our stock
price at such dates with no discount. We recognize compensation
expense on a straight-line basis over the requisite service
period of a nonvested stock award.
For fiscal 2010, stock-based compensation included compensation
costs attributable to such period for those options that were
not fully vested upon adoption of ASC 718,
Compensation Stock Compensation, compensation
costs for options and non-vested stock grants that were awarded
during the period, prorated from the date of award to
October 3, 2010, adjusted for estimated forfeitures and
compensation costs for vested stock grants made during fiscal
2010. During fiscal 2010, options to purchase
833,000 shares of our common stock were granted, awards of
11,300 shares of nonvested stock were made and previously
made awards of 15,300 shares of nonvested stock were
forfeited. During fiscal 2010, there were awards of
1,800 shares of vested stock granted to employees. We have
estimated forfeitures to be 7%, which reduced stock-based
compensation cost by $2,600 in fiscal 2010.
At October 3, 2010, the total compensation costs related to
nonvested option awards not yet recognized was $28,800. The
weighted-average remaining vesting period of nonvested options
at October 3, 2010 was 1.3 years.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Not required for a smaller reporting company.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The financial statements, together with the report thereon of
Squar, Milner, Peterson, Miranda & Williamson, LLP
dated December 17, 2010, as listed under Item 15,
appear in a separate section of this report beginning on
page F-1.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
34
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation of Disclosure Controls and
Procedures. Our management, with the
participation of our Chief Executive Officer and our Chief
Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934) as of the end of
the period covered by this report. Based upon that evaluation,
the Chief Executive Officer and the Chief Financial Officer
concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were effective in
ensuring that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act
of 1934 is (i) recorded, processed, summarized and
reported, within the time periods specified in the rules and
forms of the Securities and Exchange Commission and
(ii) accumulated and communicated to our management,
including our principal executive and principal accounting
officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
Changes to Internal Control over Financial
Reporting. We have undertaken, and will continue
to undertake, an effort for compliance with Section 404 of
the Sarbanes-Oxley Act of 2002. This effort, under the direction
of senior management, includes the documentation, testing and
review of our internal controls. During the course of these
activities, we have identified potential improvements to our
internal controls over financial reporting, including some that
we have implemented in fiscal 2010, largely the modification or
expansion of internal process documentation, and some that we
are currently evaluating for possible future implementation. We
expect to continue documentation, testing and review of our
internal controls on an on-going basis and may identify other
control deficiencies, possibly including material weaknesses,
and other potential improvements to our internal controls in the
future. We cannot guarantee that we will remedy any potential
material weaknesses that may be identified in the future, or
that we will continue to be able to comply with Section 404
of the Sarbanes-Oxley Act.
Other than as described above, there have not been any other
changes that have materially affected or are reasonably likely
to materially affect our internal control over financial
reporting.
Report
of Management on Internal Control over Financial
Reporting
The following report shall not be deemed to be filed for
purposes of Section 18 of the Exchange Act or otherwise
subject to the liabilities of that section, unless we
specifically state that the report is to be considered
filed under the Exchange Act or incorporate it by
reference into a filing under the Securities Act or the Exchange
Act.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined
under Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of our financial
reporting and preparation of financial statements for external
purposes in accordance with U.S. GAAP. Internal control
over financial reporting includes maintaining records that in
reasonable detail accurately and fairly reflect our
transactions; providing reasonable assurance that transactions
are recorded as necessary for preparation of our financial
statements in accordance with U.S. GAAP; providing
reasonable assurance that our receipts and expenditures are made
in accordance with authorizations of our management and
directors; and providing reasonable assurance that unauthorized
acquisition, use or disposition of our assets that could have a
material effect on our financial statements would be prevented
or detected on a timely basis.
Our management conducted an assessment of the effectiveness of
our internal control over financial reporting based on the
framework set forth in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
assessment, our management concluded that our internal control
over financial reporting was effective as of October 3,
2010 to provide reasonable assurance regarding the reliability
of financial reporting and preparation of financial statements
for external reporting purposes in accordance with
U.S. GAAP.
|
|
Item 9B.
|
Other
Information
|
None.
35
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
(a) Identification of Directors.
The information under the captions
Proposal One: Election of
Directors and Corporate Governance, Board
Composition and Board Committees, appearing in our proxy
statement for our 2011 annual meeting of stockholders, is hereby
incorporated by reference.
(b) Identification of Executive Officers and Certain
Significant Employees.
The information under the caption Executive
Officers, appearing in our proxy statement for our 2011
annual meeting of stockholders, is hereby incorporated by
reference.
(c) Compliance with Section 16(a) of the Exchange Act.
The information under the caption Section 16(a)
Beneficial Ownership Reporting Compliance, appearing in
our proxy statement for our 2011 annual meeting of stockholders,
is hereby incorporated by reference.
(d) Code of Ethics.
The Company has adopted a code of ethics and conduct that
applies to all of its employees including its principal
executive officer, its principal financial and accounting
officer, and all members of its finance department performing
similar functions. The full text of the Companys code of
ethics and conduct is posted on the Companys website at
http://www.irvine-sensors.com
under the Investors section. The Company intends to disclose
future amendments to certain provisions of the Companys
code of ethics and conduct, or waivers of such provisions,
applicable to the Companys directors and executive
officers, at the same location on the Companys website
identified above. The inclusion of the Companys website
address in this report does not include or incorporate by
reference the information on the Companys website into
this report.
Upon request, the Company will provide without charge to any
person who so requests, a copy of its code of ethics and
conduct. Requests for such copies should be submitted to the
Corporate Secretary, at Irvine Sensors Corporation, 3001 Red
Hill Avenue, Bldg. 4-108, Costa Mesa, California or by telephone
at
(714) 549-8211.
(e) Corporate Governance.
The information under the caption Corporate Governance,
Board Composition and Board Committees, appearing in our
proxy statement for our 2011 annual meeting of stockholders, is
hereby incorporated by reference.
|
|
Item 11.
|
Executive
Compensation
|
The information under the caption Executive
Compensation, appearing in our proxy statement for our
2011 annual meeting of stockholders, is hereby incorporated
herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information under the captions Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters and Securities Authorized for Issuance Under
Equity Compensation Plans, appearing in our proxy
statement for our 2011 annual meeting of stockholders, is hereby
incorporated by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
(a) Certain Relationships and Related Transactions
The information under the caption Certain Relationships
and Related Person Transactions appearing in our proxy
statement for our 2011 annual meeting of stockholders, is hereby
incorporated by reference.
(b) Director Independence
36
The information under the captions
Proposal One: Election of
Directors and Corporate Governance, Board
Composition and Board Committees, appearing in our proxy
statement for our 2011 annual meeting of stockholders, is hereby
incorporated by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information under the caption Principal Accountant
Fees and Services, and Audit Committee Pre-Approval
of Audit and Permissible Non-Audit Services of Independent
Auditors, appearing in our proxy statement for our 2011
annual meeting of stockholders, is hereby incorporated by
reference.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
(a)
|
(1) Financial
Statements
|
See Index to Consolidated Financial Statements on
page F-1
|
|
(2)
|
Financial
Statement Schedules:
|
All schedules have been omitted because they are not applicable,
not required for a smaller reporting company, or the information
is included in the consolidated financial statements or notes
thereto.
The following is a list of the exhibits encompassed in this
Annual Report on
Form 10-K:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
3
|
.1
|
|
Certificate of Incorporation of the Registrant, as amended and
currently in effect(1)
|
|
3
|
.2
|
|
By-laws, as amended and currently in effect(2)
|
|
3
|
.3
|
|
Certificate of Elimination of the Series B Convertible
Cumulative Preferred Stock, Series C Convertible Cumulative
Preferred Stock, Series D Convertible Preferred Stock and
Series E Convertible Preferred Stock(3)
|
|
3
|
.4
|
|
Certificate of Designations of Rights, Preferences, Privileges
and Limitations of
Series A-1
10% Cumulative Convertible Preferred Stock(4)
|
|
3
|
.5
|
|
Certificate of Amendment of Certificate of Incorporation to
increase the authorized shares of the Corporations Common
Stock and the authorized shares of the Corporations
Preferred Stock(5)
|
|
3
|
.6
|
|
Certificate of Amendment of Certificate of Incorporation to
reclassify, change, and convert each ten (10) outstanding
shares of the Corporations Common Stock into
one(1) share of Common Stock(6)
|
|
3
|
.7
|
|
Certificate of Designations of Rights, Preferences, Privileges
and Limitations of
Series A-2
10% Cumulative Convertible Preferred Stock(7)
|
|
3
|
.8
|
|
Certificate of Designations of Rights, Preferences, Privileges
and Limitations of Series B Convertible Preferred Stock(8)
|
|
3
|
.9
|
|
Certificate of Designations of Rights, Preferences, Privileges
and Limitations of Series C Convertible Preferred Stock(9)
|
|
10
|
.1*
|
|
2000 Non-Qualified Stock Option Plan(10)
|
|
10
|
.2*
|
|
2001 Stock Option Plan(11)
|
|
10
|
.3*
|
|
2001 Non-Qualified Stock Option Plan(12)
|
|
10
|
.4*
|
|
2001 Compensation Plan, as amended December 13, 2001(13)
|
|
10
|
.5*
|
|
2003 Stock Incentive Plan as amended March 1, 2005(14)
|
|
10
|
.6*
|
|
Deferred Compensation Plan(15)
|
|
10
|
.7*
|
|
Amended and Restated 2006 Omnibus Incentive Plan(16)
|
|
10
|
.8*
|
|
Executive Salary Continuation Plan, as amended and restated
December 26, 2007(17)
|
37
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
10
|
.9
|
|
Form of Indemnification Agreement between the Registrant and its
directors and officers(18)
|
|
10
|
.10
|
|
Lease Agreement for premises at 3001 Red Hill Avenue, Bldg. 3,
Costa Mesa, California, renewal effective October 1,
2008(19)
|
|
10
|
.11
|
|
Lease Agreement for premises at 3001 Red Hill Avenue, Bldg. 4,
Costa Mesa, California, renewal effective October 1,
2008(20)
|
|
10
|
.12
|
|
Class A Warrant to Purchase Common Stock dated
December 29, 2006 issued by the Company to Longview Fund,
LP(21)
|
|
10
|
.13
|
|
Class A Warrant to Purchase Common Stock dated
December 29, 2006 issued by the Company to
Alpha Capital Anstalt(22)
|
|
10
|
.14
|
|
Settlement Agreement and Mutual Release dated December 29,
2006 between the Company and Pequot(23)
|
|
10
|
.15*
|
|
Form of Stock Appreciation Rights Agreement (Stock Settled)
under the Companys 2006 Omnibus Incentive Plan(24)
|
|
10
|
.16*
|
|
Form of Non-Incentive Stock Option Agreement under the
Companys 2006 Omnibus Incentive Plan(25)
|
|
10
|
.17*
|
|
Form of Incentive Stock Option Agreement under the
Companys 2006 Omnibus Incentive Plan(26)
|
|
10
|
.18*
|
|
Form of Restricted Stock Unit Agreement under the Companys
2006 Omnibus Incentive Plan(27)
|
|
10
|
.19*
|
|
Form of Restricted Stock Award Agreement under the
Companys 2006 Omnibus Incentive Plan(28)
|
|
10
|
.20
|
|
Class B Warrant dated August 15, 2007 issued by the
Company to Longview Fund, L.P.(29)
|
|
10
|
.21*
|
|
Form of Incentive Stock Option Agreement under the
Companys 2006 Omnibus Incentive Plan(30)
|
|
10
|
.22*
|
|
Form of Non-Incentive Stock Option Agreement under the
Companys 2006 Omnibus Incentive Plan(31)
|
|
10
|
.23*
|
|
Form of Stock Appreciation Rights Agreement (Stock Settled)
under the Companys 2006 Omnibus Incentive Plan(32)
|
|
10
|
.24*
|
|
Irvine Sensors Corporation Deferred Compensation Plan, as
amended and restated June 6, 2008, effective
January 1, 2005(33)
|
|
10
|
.25
|
|
Form of Subscription Agreement for Secured Promissory Notes for
2008 Private Placement(34)
|
|
10
|
.26
|
|
Form of Secured Promissory Note for 2008 Private Placement(35)
|
|
10
|
.27
|
|
Security Agreement for 2008 Private Placement(36)
|
|
10
|
.28
|
|
Collateral Agent Agreement for 2008 Private Placement(37)
|
|
10
|
.29
|
|
Intercreditor Agreement for 2008 Private Placement(38)
|
|
10
|
.30
|
|
Warrant to Purchase Common Stock dated February 4, 2008
issued to Maxim Partners LLC(39)
|
|
10
|
.31
|
|
Form of Subscription Agreement for Secured Promissory Notes for
2009 Private Placement(40)
|
|
10
|
.32
|
|
Form of Secured Promissory Note for 2009 Private Placement(41)
|
|
10
|
.33
|
|
Form of Warrant to Purchase Common Stock issued to J.P.
Turner & Company, LLC pursuant to 2009 Private
Placement(42)
|
|
10
|
.34
|
|
Patent Purchase Agreement as amended March 18, 2009 by and
between the Company and Aprolase Development Co., LLC(43)
|
|
10
|
.35
|
|
Lien Release Agreement dated March 18, 2009 and Release of
Security Interest by and among the Company, Longview Fund, LP
and Alpha Capital Anstalt(44)
|
|
10
|
.36
|
|
Form of Lien Release Agreement dated March 18, 2009 and
Release of Security Interest by and among the Company and the
Bridge Investors(45)
|
|
10
|
.37
|
|
Subscription Agreement dated March 18, 2009 by and among
the Company, Longview Fund, LP and Alpha Capital Anstalt(46)
|
|
10
|
.38
|
|
Patent License Agreement dated as of March 18, 2009 by and
between the Company and Aprolase Development Co., LLC(47)
|
|
10
|
.39
|
|
Financing Agreement dated June 16, 2009 between the Company
and Summit Financial Resources, L.P.(48)
|
38
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
10
|
.40
|
|
Intercreditor Agreement dated June 16, 2009 by and among
Summit Financial Resources, L.P., Longview Fund, L.P., Alpha
Capital Anstalt, Michael S. Rudolph as collateral agent and the
Company.(49)
|
|
10
|
.41
|
|
Form of Subscription Agreement dated September 30, 2009 for
Private Placement of Preferred Stock Units and schedule of
omitted material details thereto.(50)
|
|
10
|
.42
|
|
Form of Warrant dated September 30, 2009 for Private
Placement of Preferred Stock Units and schedule of omitted
material details thereto.(51)
|
|
10
|
.43
|
|
Warrant to Purchase Common Stock dated October 14, 2009
issued to a financial advisory and investment banking firm(52)
|
|
10
|
.44
|
|
Waiver by John C. Carson and John J. Stuart, Jr. of entitlement
to benefits under Executive Salary Continuation Plan(53)
|
|
10
|
.45
|
|
Agreement, Consent and Waiver dated April 9, 2010 by and
between Irvine Sensors Corporation and Longview(54)
|
|
10
|
.46
|
|
Longview consent and waiver extending default grace period
relating to the judgment entered by the Court in the Looney
lawsuit.(55)
|
|
10
|
.47
|
|
Teaming Agreement between Irvine Sensors Corporation and Optics
1, Inc.(56)
|
|
10
|
.48
|
|
Settlement and Release Agreement dated March 26, 2010 by
and between Timothy Looney, Barbara Looney and TWL Group,
L.P., on the one hand, and Irvine Sensors Corporation, John C.
Carson and John J. Stuart, Jr., on the other hand.(57)
|
|
10
|
.49
|
|
Agreement, Consent and Waiver dated April 9, 2010 by and
between Irvine Sensors Corporation and Longview.(58)
|
|
10
|
.50
|
|
Secured Promissory Note to Timothy Looney dated April 14,
2010(59)
|
|
10
|
.51
|
|
Security Agreement to Timothy Looney dated April 14,
2010(60)
|
|
10
|
.52
|
|
Intellectual Property Security Agreement to Timothy Looney dated
April 14, 2010(61)
|
|
10
|
.53
|
|
Form of Subscription Agreement for Debenture Financing(62)
|
|
10
|
.54
|
|
Form of Unsecured Convertible Debenture(63)
|
|
10
|
.55
|
|
Form of Unsecured Non-Convertible Debenture(64)
|
|
10
|
.56
|
|
Form of Investor Common Stock Warrant for Debenture Financing(65)
|
|
10
|
.57
|
|
Form of Placement Agent Common Stock Warrant for Debenture
Financing(66)
|
|
10
|
.58
|
|
Clarification dated April 27, 2010 between Irvine Sensors
Corporation and Longview(67)
|
|
10
|
.59
|
|
June 8, 2010 Waiver of Letter of Intent requirement of
Agreement, Consent and Waiver dated April 9, 2010 by and
between Irvine Sensors Corporation and Longview(68)
|
|
10
|
.60
|
|
Form of Subscription Agreement for Common Stock Unit
Financing(69)
|
|
10
|
.61
|
|
Form of Investor Common Stock Warrant for Common Stock Unit
Financing(70)
|
|
10
|
.62
|
|
Form of Placement Agent Common Stock Warrant for Common Stock
Unit Financing(71)
|
|
10
|
.63
|
|
Form of Common Stock Warrant issued to Longview on
August 2, 2010(72)
|
|
10
|
.64
|
|
Waiver and Consent of Longview Fund, L.P. and Alpha Capital
Anstalt(73)
|
|
10
|
.65
|
|
Agreement Amending July 2007 Promissory Note and Cancelling
Contingent Secured Promissory Note(74)
|
|
10
|
.66
|
|
Summary of Accredited Investor Stock Purchase Agreement
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Squar, Milner, Peterson, Miranda &
Williamson, LLP, Independent Registered Public Accounting Firm
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer pursuant to
Exchange Act
Rule 13a-14(a)
or 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
39
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
31
|
.2
|
|
Certification of the Chief Financial Officer pursuant to
Exchange Act
Rule 13a-14(a)
or 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
|
|
Certifications of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (furnished herewith).
|
|
|
|
(1) |
|
Incorporated by reference to Exhibit 3.1 filed with the
Registrants Annual Report on Form
10-K for the
fiscal year ended September 28, 2003. |
|
(2) |
|
Incorporated by reference to Exhibit 3.1 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on September 21, 2007. |
|
(3) |
|
Incorporated by reference to Exhibit 3.3 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on April 18, 2008. |
|
(4) |
|
Incorporated by reference to Exhibit 3.4 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on April 18, 2008. |
|
(5) |
|
Incorporated by reference to Exhibit 3.5 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on August 27, 2008. |
|
(6) |
|
Incorporated by reference to Exhibit 3.6 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on August 27, 2008. |
|
(7) |
|
Incorporated by reference to Exhibit 3.1 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on March 24, 2009. |
|
(8) |
|
Incorporated by reference to Exhibit 3.1 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on October 1, 2009. |
|
(9) |
|
Incorporated by reference to Exhibit 3.1 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on May 4, 2010. |
|
(10) |
|
Incorporated by reference to Exhibit 10.5 filed with the
Registrants Annual Report on Form
10-K for the
fiscal year ended September 29, 2002. |
|
(11) |
|
Incorporated by reference to Appendix B to the
Registrants Definitive Proxy Statement for the
March 7, 2001 Annual Meeting of Stockholders, filed
February 9, 2001. |
|
(12) |
|
Incorporated by reference to Exhibit 99 filed with the
Registrants Registration Statement on
Form S-8
(File No. 333-102284),
filed December 31, 2002. |
|
(13) |
|
Incorporated by reference to Exhibit 99.1 filed with the
Registrants Registration Statement on
Form S-8
(File No. 333-76756),
filed January 15, 2002. |
40
|
|
|
(14) |
|
Incorporated by reference to Exhibit 99 filed with the
Registrants Registration Statement on
Form S-8
(File No. 333-124868),
filed May 12, 2005. |
|
(15) |
|
Incorporated by reference to Exhibit 10.9 filed with the
Registrants Annual Report on Form
10-K for the
fiscal year ended October 3, 2004. |
|
(16) |
|
Incorporated by reference to Exhibit 10.13 filed with the
Registrants Quarterly Report on
Form 10-Q
as filed with the SEC on May 13, 2009. |
|
(17) |
|
Incorporated by reference to Exhibit 99.1 filed with the
Registrants Current Report on Form
8-K filed
December 31, 2007. |
|
(18) |
|
Incorporated by reference to Exhibit 10.9 filed with the
Registrants Annual Report on Form
10-K for the
fiscal year ended October 1, 2000. |
|
(19) |
|
Incorporated by reference to Exhibit 10.1 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on December 24, 2008. |
|
(20) |
|
Incorporated by reference to Exhibit 10.2 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on December 24, 2008. |
|
(21) |
|
Incorporated by reference to Exhibit 10.11 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on January 3, 2007. |
|
(22) |
|
Incorporated by reference to Exhibit 10.12 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on January 3, 2007. |
|
(23) |
|
Incorporated by reference to Exhibit 10.16 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on January 3, 2007. |
|
(24) |
|
Incorporated by reference to Exhibit 10.59 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended April 1, 2007. |
|
(25) |
|
Incorporated by reference to Exhibit 10.60 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended April 1, 2007. |
|
(26) |
|
Incorporated by reference to Exhibit 10.61 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended April 1, 2007. |
|
(27) |
|
Incorporated by reference to Exhibit 10.62 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended April 1, 2007. |
|
(28) |
|
Incorporated by reference to Exhibit 10.63 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended April 1, 2007. |
|
(29) |
|
Incorporated by reference to Exhibit 99.1 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on August 17, 2007. |
|
(30) |
|
Incorporated by reference to Exhibit 10.15 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 29, 2008. |
|
(31) |
|
Incorporated by reference to Exhibit 10.16 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 29, 2008. |
|
(32) |
|
Incorporated by reference to Exhibit 10.17 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 29, 2008. |
|
(33) |
|
Incorporated by reference to Exhibit 10.18 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 29, 2008. |
|
(34) |
|
Incorporated by reference to Exhibit 10.1 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on December 16, 2008. |
|
(35) |
|
Incorporated by reference to Exhibit 10.2 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on December 16, 2008. |
|
(36) |
|
Incorporated by reference to Exhibit 10.3 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on December 16, 2008. |
41
|
|
|
(37) |
|
Incorporated by reference to Exhibit 10.4 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on December 16, 2008. |
|
(38) |
|
Incorporated by reference to Exhibit 10.5 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on December 16, 2008. |
|
(39) |
|
Incorporated by reference to Exhibit 10.15 filed with the
Registrants Quarterly Report on
Form 10-Q
as filed with the SEC on May 15, 2008. |
|
(40) |
|
Incorporated by reference to Exhibit 10.1 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on December 16, 2008 and Exhibit 10.1
filed with the Registrants Current Report on
Form 8-K
as filed with the SEC on February 9, 2009. |
|
(41) |
|
Incorporated by reference to Exhibit 10.2 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on December 16, 2008 and Exhibit 10.2
filed with the Registrants Current Report on
Form 8-K
as filed with the SEC on February 9, 2009. |
|
(42) |
|
Incorporated by reference to Exhibit 10.6 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on January 9, 2009. |
|
(43) |
|
Incorporated by reference to Exhibit 10.1 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on March 24, 2009. |
|
(44) |
|
Incorporated by reference to Exhibit 10.2 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on March 24, 2009. |
|
(45) |
|
Incorporated by reference to Exhibit 10.3 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on March 24, 2009. |
|
(46) |
|
Incorporated by reference to Exhibit 10.4 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on March 24, 2009. |
|
(47) |
|
Incorporated by reference to Exhibit 10.12 filed with the
Registrants Quarterly Report on
Form 10-Q
as filed with the SEC on May 13, 2009. |
|
(48) |
|
Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
filed on June 22, 2009. |
|
(49) |
|
Incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on
Form 8-K
filed on June 22, 2009. |
|
(50) |
|
Incorporated by reference to Exhibit 10.69 filed with the
Registrants Annual Report on Form
10-K for the
fiscal year ended September 27, 2009. |
|
(51) |
|
Incorporated by reference to Exhibit 10.70 filed with the
Registrants Annual Report on Form
10-K for the
fiscal year ended September 27, 2009. |
|
(52) |
|
Incorporated by reference to Exhibit 10.71 filed with the
Registrants Annual Report on Form
10-K for the
fiscal year ended September 27, 2009. |
|
(53) |
|
Incorporated by reference to Exhibit 10.72 filed with the
Registrants Annual Report on Form
10-K for the
fiscal year ended September 27, 2009. |
|
(54) |
|
Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
filed on April 15, 2010. |
|
(55) |
|
Incorporated by reference to Exhibit 10.4 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended December 27, 2009. |
|
(56) |
|
Incorporated by reference to Exhibit 10.2 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 28, 2010. |
|
(57) |
|
Incorporated by reference to Exhibit 10.3 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 28, 2010. |
|
(58) |
|
Incorporated by reference to Exhibit 10.4 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 28, 2010. |
42
|
|
|
(59) |
|
Incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on
Form 8-K
filed on April 15, 2010. |
|
(60) |
|
Incorporated by reference to Exhibit 10.6 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 28, 2010. |
|
(61) |
|
Incorporated by reference to Exhibit 10.7 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 28, 2010. |
|
(62) |
|
Incorporated by reference to Exhibit 10.8 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 28, 2010. |
|
(63) |
|
Incorporated by reference to Exhibit 10.9 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 28, 2010. |
|
(64) |
|
Incorporated by reference to Exhibit 10.10 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 28, 2010. |
|
(65) |
|
Incorporated by reference to Exhibit 10.11 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 28, 2010. |
|
(66) |
|
Incorporated by reference to Exhibit 10.12 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 28, 2010. |
|
(67) |
|
Incorporated by reference to Exhibit 10.13 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 28, 2010. |
|
(68) |
|
Incorporated by reference to Exhibit 10.6 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 27, 2010. |
|
(69) |
|
Incorporated by reference to Exhibit 10.7 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 27, 2010. |
|
(70) |
|
Incorporated by reference to Exhibit 10.8 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 27, 2010. |
|
(71) |
|
Incorporated by reference to Exhibit 10.9 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 27, 2010. |
|
(72) |
|
Incorporated by reference to Exhibit 10.10 filed with the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 27, 2010. |
|
(73) |
|
Incorporated by reference to Exhibit 10.1 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on August 24, 2010. |
|
(74) |
|
Incorporated by reference to Exhibit 10.1 filed with the
Registrants Current Report on Form
8-K as filed
with the SEC on October 5, 2010. |
|
* |
|
Denotes management contract or compensatory plan or arrangement |
|
|
|
Confidential treatment was previously requested for certain
confidential portions of this exhibit pursuant to
Rule 24b-2
under the Securities Exchange Act of 1934. In accordance with
Rule 24b-2, these confidential portions were omitted from this
exhibit and filed separately with the Securities and Exchange
Commission |
The exhibits filed as part of this report are listed in
Item 15(a)(3) of this
Form 10-K.
|
|
(c)
|
Financial
Statement Schedules
|
The Financial Statement Schedules required by
Regulation S-X
and Item 8 of this Form are listed in Item 15(a)(2) of
this
Form 10-K.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
IRVINE SENSORS CORPORATION
John C. Carson
Chief Executive Officer, President and Chairman
of the Board
(Principal Executive Officer)
Dated: December 17, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated:
|
|
|
/s/ John
C. Carson
|
|
/s/ John
J. Stuart, Jr.
|
John C. Carson
Chief Executive Officer, President and Chairman
of the Board
(Principal Executive Officer)
Dated: December 17, 2010
|
|
John J. Stuart, Jr.
Chief Financial Officer and Secretary
(Principal Financial and
Chief Accounting Officer)
Dated: December 17, 2010
|
|
|
|
|
|
|
/s/ Marc
Dumont
|
|
/s/ Thomas
M. Kelly
|
Marc Dumont, Director
Dated: December 17, 2010
|
|
Thomas M. Kelly, Director
Dated: December 17, 2010
|
|
|
|
|
|
|
/s/ Jack
Johnson
|
|
/s/ Frank
Ragano
|
Jack Johnson, Director
Dated: December 17, 2010
|
|
Frank Ragano, Director
Dated: December 17, 2010
|
|
|
|
|
|
|
/s/ Robert
G. Richards
|
|
|
Robert G. Richards, Director
Dated December 17, 2010
|
|
|
44
IRVINE
SENSORS CORPORATION
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Financial Statements
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-37
|
|
F-1
Irvine
Sensors Corporation
|
|
|
|
|
|
|
|
|
|
|
October 3, 2010
|
|
|
September 27, 2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
281,600
|
|
|
$
|
125,700
|
|
Accounts receivable, net of allowance for doubtful accounts of
$13,600 and $15,000, respectively
|
|
|
382,100
|
|
|
|
1,396,300
|
|
Unbilled revenues on uncompleted contracts
|
|
|
630,300
|
|
|
|
885,300
|
|
Inventory, net
|
|
|
1,715,800
|
|
|
|
441,100
|
|
Prepaid expenses and other current assets
|
|
|
182,300
|
|
|
|
53,200
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,192,100
|
|
|
|
2,901,600
|
|
Property and equipment, net (including construction in process
of $204,000 and $35,000, respectively)
|
|
|
2,730,000
|
|
|
|
2,898,100
|
|
Intangible assets, net
|
|
|
12,400
|
|
|
|
14,400
|
|
Deferred financing costs
|
|
|
302,900
|
|
|
|
|
|
Deposits
|
|
|
87,400
|
|
|
|
37,500
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,324,800
|
|
|
$
|
5,851,600
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Deficit
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,724,100
|
|
|
$
|
3,427,100
|
|
Accrued expenses
|
|
|
4,101,700
|
|
|
|
3,730,800
|
|
Accrued estimated loss on contracts
|
|
|
29,000
|
|
|
|
|
|
Advance billings on uncompleted contracts
|
|
|
321,800
|
|
|
|
249,600
|
|
Advances against accounts receivable
|
|
|
99,700
|
|
|
|
985,800
|
|
Deferred revenue
|
|
|
1,515,400
|
|
|
|
180,000
|
|
Restructured debt, net of debt discounts
|
|
|
163,100
|
|
|
|
188,400
|
|
Promissory note payable related party
|
|
|
|
|
|
|
400,000
|
|
Secured promissory note, current portion
|
|
|
402,500
|
|
|
|
|
|
Debentures, net of debt discounts
|
|
|
1,935,200
|
|
|
|
|
|
Capital lease obligations
|
|
|
|
|
|
|
11,200
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,292,500
|
|
|
|
9,172,900
|
|
Secured promissory note
|
|
|
2,097,500
|
|
|
|
|
|
Executive Salary Continuation Plan liability
|
|
|
1,030,700
|
|
|
|
1,057,600
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
16,420,700
|
|
|
|
10,230,500
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
Convertible Preferred stock, $0.01 par value, 1,000,000 and
1,000,000 shares authorized, respectively;
|
|
|
500
|
|
|
|
1,200
|
|
Series A-1
0 and 99,900 shares issued and outstanding,
respectively(1); liquidation preference of 0 and $3,586,200,
respectively;
|
|
|
|
|
|
|
|
|
Series A-2
8,300 and 25,000 shares issued and outstanding,
respectively(1); liquidation preference of $333,300 and
$1,043,500, respectively;
|
|
|
|
|
|
|
|
|
Series B 1,900 and 0 shares issued and
outstanding, respectively(1); liquidation preference of
$1,892,700 and $0, respectively
|
|
|
|
|
|
|
|
|
Series C 37,500 and 0 shares issued and
outstanding, respectively(1); liquidation preference of
$1,125,000 and $0, respectively
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 150,000,000 and
150,000,000 shares authorized, respectively; 33,535,400 and
9,694,500 shares issued and outstanding, respectively(1)
|
|
|
335,400
|
|
|
|
96,900
|
|
Common stock held by Rabbi Trust
|
|
|
(1,169,600
|
)
|
|
|
(1,169,600
|
)
|
Deferred compensation liability
|
|
|
1,169,600
|
|
|
|
1,169,600
|
|
Paid-in capital
|
|
|
165,039,200
|
|
|
|
162,497,700
|
|
Accumulated deficit
|
|
|
(175,795,400
|
)
|
|
|
(167,299,100
|
)
|
|
|
|
|
|
|
|
|
|
Irvine Sensors Corporation stockholders deficit
|
|
|
(10,420,300
|
)
|
|
|
(4,703,300
|
)
|
Noncontrolling interest
|
|
|
324,400
|
|
|
|
324,400
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(10,095,900
|
)
|
|
|
(4,378,900
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
6,324,800
|
|
|
$
|
5,851,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of shares of preferred stock and common stock issued
and outstanding have been rounded to the nearest one hundred
(100). |
See Accompanying Notes to Consolidated Financial Statements
F-2
Irvine
Sensors Corporation
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
October 3, 2010
|
|
|
September 27, 2009
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Contract research and development revenue
|
|
$
|
8,526,200
|
|
|
$
|
10,003,500
|
|
Product sales
|
|
|
3,177,800
|
|
|
|
1,515,900
|
|
Other revenue
|
|
|
12,800
|
|
|
|
16,800
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
11,716,800
|
|
|
|
11,536,200
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of contract research and development revenue
|
|
|
6,659,000
|
|
|
|
8,467,800
|
|
Cost of product sales
|
|
|
3,150,900
|
|
|
|
1,494,400
|
|
General and administrative expense
|
|
|
6,589,900
|
|
|
|
9,561,700
|
|
Research and development expense
|
|
|
2,639,000
|
|
|
|
2,266,700
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
19,038,800
|
|
|
|
21,790,600
|
|
Gain on sale or disposal of assets
|
|
|
12,600
|
|
|
|
8,640,800
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,309,400
|
)
|
|
|
(1,613,600
|
)
|
Interest expense
|
|
|
(1,692,600
|
)
|
|
|
(1,635,500
|
)
|
Provision for litigation judgment
|
|
|
(20,200
|
)
|
|
|
(834,300
|
)
|
Litigation settlement expense
|
|
|
(2,270,700
|
)
|
|
|
|
|
Gain on elimination of consolidated debt
|
|
|
|
|
|
|
2,539,200
|
|
Gain from reduction in pension liability
|
|
|
|
|
|
|
2,442,900
|
|
Change in fair value of derivative instrument
|
|
|
95,500
|
|
|
|
|
|
Interest and other income
|
|
|
48,900
|
|
|
|
31,200
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before minority
interest and benefit (provision) for income taxes
|
|
|
(11,148,500
|
)
|
|
|
929,900
|
|
Provision for income taxes
|
|
|
(7,300
|
)
|
|
|
(73,600
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(11,155,800
|
)
|
|
|
856,300
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
58,400
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,155,800
|
)
|
|
$
|
914,700
|
|
Add net income attributable to noncontrolling interests in
subsidiary
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Company
|
|
$
|
(11,155,800
|
)
|
|
$
|
914,800
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share information:
|
|
|
|
|
|
|
|
|
From continuing operations attributable to Company
|
|
$
|
(0.70
|
)
|
|
$
|
0.06
|
|
From discontinued operations attributable to Company
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) attributable to Company per common share
|
|
$
|
(0.70
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share information
|
|
|
|
|
|
|
|
|
From continuing operations attributable to Company
|
|
$
|
(0.70
|
)
|
|
$
|
0.05
|
|
From discontinued operations attributable to Company
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) attributable to Company per common
share
|
|
$
|
(0.70
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding
|
|
|
18,116,700
|
|
|
|
6,730,500
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares outstanding
|
|
|
18,116,700
|
|
|
|
16,735,900
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
F-3
Irvine
Sensors Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1 and A-2
|
|
|
Series B
|
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Prepaid
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Shares Issued(1)
|
|
|
Shares Issued(1)
|
|
|
Shares Issued(1)
|
|
|
Shares Issued(1)
|
|
|
Warrants Issued (1)
|
|
|
Stock-Based
|
|
|
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Stockholders
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Compensation
|
|
|
Paid-in Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Deficit
|
|
|
Balance at September 28, 2008
|
|
|
126,000
|
|
|
$
|
1,300
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
3,557,200
|
|
|
$
|
35,600
|
|
|
|
717,900
|
|
|
$
|
|
|
|
$
|
159,717,800
|
|
|
$
|
(168,213,900
|
)
|
|
$
|
411,600
|
|
|
$
|
(8,047,600
|
)
|
Common stock issued to employee retirement plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,785,700
|
|
|
|
17,900
|
|
|
|
|
|
|
|
(750,000
|
)
|
|
|
732,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to pay operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,800
|
|
|
|
3,400
|
|
|
|
|
|
|
|
|
|
|
|
129,700
|
|
|
|
|
|
|
|
|
|
|
|
133,100
|
|
Common stock issued to investment banking firm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315,000
|
|
|
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
122,400
|
|
|
|
|
|
|
|
|
|
|
|
125,500
|
|
Common stock issued to purchasers of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
575,600
|
|
|
|
5,800
|
|
|
|
|
|
|
|
|
|
|
|
244,200
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
Stock-based compensation expense vested stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
Common stock warrants issued to investment banking firm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299,300
|
|
|
|
|
|
|
|
92,100
|
|
|
|
|
|
|
|
|
|
|
|
92,100
|
|
Additional common stock warrants issued under anti-dilution
provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
504,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,900
|
|
|
|
|
|
|
|
|
|
|
|
27,900
|
|
Preferred stock issued to retire debt
|
|
|
25,000
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
999,700
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
Common stock issued upon conversion of preferred stock
|
|
|
(26,100
|
)
|
|
|
(400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,956,300
|
|
|
|
19,600
|
|
|
|
|
|
|
|
|
|
|
|
(19,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to convert debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,089,000
|
|
|
|
10,800
|
|
|
|
|
|
|
|
|
|
|
|
337,600
|
|
|
|
|
|
|
|
|
|
|
|
348,400
|
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,500
|
|
|
|
|
|
|
|
|
|
|
|
113,500
|
|
Issuance of nonvested stock, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,300
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of employee retirement plan contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750,000
|
|
Optex minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,100
|
)
|
|
|
(87,100
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
914,800
|
|
|
|
(100
|
)
|
|
|
914,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 27, 2009
|
|
|
124,900
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,694,500
|
|
|
|
96,900
|
|
|
|
1,461,300
|
|
|
|
|
|
|
|
162,497,700
|
|
|
|
(167,299,100
|
)
|
|
|
324,400
|
|
|
|
(4,378,900
|
)
|
Cumulative-effect adjustment of adopting
ASC 815-40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,230,000
|
)
|
|
|
4,130,500
|
|
|
|
|
|
|
|
(99,500
|
)
|
Common stock issued to employee retirement plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,673,800
|
|
|
|
26,700
|
|
|
|
|
|
|
|
(750,000
|
)
|
|
|
723,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of preferred stock, net of financing costs and value
assigned to warrants issued to investors
|
|
|
|
|
|
|
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,307,900
|
|
|
|
|
|
|
|
|
|
|
|
1,307,900
|
|
Issuance of preferred stock as litigation settlement expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,500
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,124,600
|
|
|
|
|
|
|
|
|
|
|
|
1,125,000
|
|
Issuance of warrants as litigation settlement expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
Common stock warrants issued to preferred stock investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,094,000
|
|
|
|
|
|
|
|
424,000
|
|
|
|
|
|
|
|
|
|
|
|
424,000
|
|
Sale of common stock units, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,469,500
|
|
|
|
34,700
|
|
|
|
693,900
|
|
|
|
|
|
|
|
437,000
|
|
|
|
|
|
|
|
|
|
|
|
471,700
|
|
Sale of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,500
|
|
|
|
1,400
|
|
|
|
|
|
|
|
|
|
|
|
16,600
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
Common stock issued to pay interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
693,600
|
|
|
|
6,900
|
|
|
|
|
|
|
|
|
|
|
|
270,500
|
|
|
|
|
|
|
|
|
|
|
|
277,400
|
|
Common stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
1,600
|
|
Deemed dividend of beneficial conversion feature of preferred
stock issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,471,000
|
|
|
|
(1,471,000
|
)
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of preferred stock
|
|
|
(116,600
|
)
|
|
|
(1,100
|
)
|
|
|
(1,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,851,000
|
|
|
|
168,500
|
|
|
|
|
|
|
|
|
|
|
|
(167,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense vested stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,800
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
800
|
|
Beneficial conversion feature of debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,200
|
|
|
|
|
|
|
|
|
|
|
|
102,200
|
|
Common stock warrants issued to debenture investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
860,000
|
|
|
|
|
|
|
|
163,500
|
|
|
|
|
|
|
|
|
|
|
|
163,500
|
|
Common stock warrants issued to investment banking firm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,695,100
|
|
|
|
|
|
|
|
643,800
|
|
|
|
|
|
|
|
|
|
|
|
643,800
|
|
Common stock warrants expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,477,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional common stock warrants issued under anti-dilution
provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
715,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of nonvested stock, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,100
|
|
|
|
|
|
|
|
|
|
|
|
65,100
|
|
Amortization of employee retirement plan contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750,000
|
|
Stock-based compensation expense options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,300
|
|
|
|
|
|
|
|
|
|
|
|
37,300
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,155,800
|
)
|
|
|
|
|
|
|
(11,155,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 3, 2010
|
|
|
8,300
|
|
|
$
|
100
|
|
|
|
1,900
|
|
|
$
|
|
|
|
|
37,500
|
|
|
$
|
400
|
|
|
|
33,535,400
|
|
|
$
|
335,400
|
|
|
|
8,042,300
|
|
|
$
|
|
|
|
$
|
165,039,200
|
|
|
$
|
(175,795,400
|
)
|
|
$
|
324,400
|
|
|
$
|
(10,095,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts of preferred stock, common stock and warrants issued
have been rounded to nearest one hundred (100). |
See Accompanying Notes to Consolidated Financial Statements
F-4
Irvine
Sensors Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
October 3, 2010
|
|
|
September 27, 2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
$
|
(11,155,800
|
)
|
|
|
|
|
|
$
|
914,800
|
|
Add back (income) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
|
|
|
|
(11,155,800
|
)
|
|
|
|
|
|
|
856,400
|
|
Adjustments to reconcile income (loss) from continuing
operations to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,280,300
|
|
|
|
|
|
|
$
|
1,762,900
|
|
|
|
|
|
(Use of) provision for allowance for inventory valuation
|
|
|
(3,800
|
)
|
|
|
|
|
|
|
402,100
|
|
|
|
|
|
Non-cash interest expense
|
|
|
751,500
|
|
|
|
|
|
|
|
829,200
|
|
|
|
|
|
Non-cash gain on elimination of consolidated debt
|
|
|
|
|
|
|
|
|
|
|
(2,539,200
|
)
|
|
|
|
|
Non-cash litigation settlement
|
|
|
2,270,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash employee retirement plan contributions
|
|
|
750,000
|
|
|
|
|
|
|
|
750,000
|
|
|
|
|
|
Gain on sale or disposal of assets
|
|
|
(12,600
|
)
|
|
|
|
|
|
|
(8,640,800
|
)
|
|
|
|
|
Change in fair value of derivative instrument
|
|
|
(95,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
Common stock and warrants issued to pay operating expenses
|
|
|
|
|
|
|
|
|
|
|
508,600
|
|
|
|
|
|
Non-cash stock-based compensation
|
|
|
103,200
|
|
|
|
|
|
|
|
141,900
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
1,014,200
|
|
|
|
|
|
|
|
(733,900
|
)
|
|
|
|
|
Decrease in unbilled revenues on uncompleted contracts
|
|
|
255,000
|
|
|
|
|
|
|
|
394,400
|
|
|
|
|
|
(Increase) decrease in inventory
|
|
|
(1,319,600
|
)
|
|
|
|
|
|
|
283,700
|
|
|
|
|
|
(Increase) decrease in prepaid expenses and other current assets
|
|
|
(10,100
|
)
|
|
|
|
|
|
|
11,600
|
|
|
|
|
|
(Increase) decrease in deposits
|
|
|
(49,900
|
)
|
|
|
|
|
|
|
63,500
|
|
|
|
|
|
Increase in accounts payable and accrued expenses
|
|
|
3,045,700
|
|
|
|
|
|
|
|
265,500
|
|
|
|
|
|
Increase (decrease) in accrued estimated loss on contracts
|
|
|
29,000
|
|
|
|
|
|
|
|
(144,500
|
)
|
|
|
|
|
Decrease in income taxes payable
|
|
|
|
|
|
|
|
|
|
|
(51,600
|
)
|
|
|
|
|
Decrease in Executive Salary Continuation Plan liability
|
|
|
(26,900
|
)
|
|
|
|
|
|
|
(2,427,200
|
)
|
|
|
|
|
Increase in advance billings on uncompleted contracts
|
|
|
72,200
|
|
|
|
|
|
|
|
227,700
|
|
|
|
|
|
Increase (decrease) in deferred revenue
|
|
|
1,335,400
|
|
|
|
|
|
|
|
(205,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
|
|
|
|
(9,388,800
|
)
|
|
|
|
|
|
|
(9,101,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities of continuing operations
|
|
|
|
|
|
|
(1,767,000
|
)
|
|
|
|
|
|
|
(8,244,800
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment expenditures
|
|
|
(1,042,200
|
)
|
|
|
|
|
|
|
(90,400
|
)
|
|
|
|
|
Gross proceeds from sale of fixed assets and intangibles
|
|
|
12,600
|
|
|
|
|
|
|
|
9,500,000
|
|
|
|
|
|
Transfer of fixed asset (from) to contract expense
|
|
|
(19,300
|
)
|
|
|
|
|
|
|
33,300
|
|
|
|
|
|
Acquisition and costs related to patents
|
|
|
|
|
|
|
|
|
|
|
(143,700
|
)
|
|
|
|
|
Decrease in restricted cash
|
|
|
|
|
|
|
|
|
|
|
41,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
|
|
|
|
(1,048,900
|
)
|
|
|
|
|
|
|
9,340,900
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of preferred stock, net of issuance costs
|
|
|
2,049,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments of notes payable
|
|
|
(25,300
|
)
|
|
|
|
|
|
|
(3,063,700
|
)
|
|
|
|
|
Proceeds from secured promissory notes
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
Proceeds from sale of debenture units
|
|
|
1,651,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock and units, net of issuance
costs
|
|
|
489,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs paid
|
|
|
(297,700
|
)
|
|
|
|
|
|
|
(227,000
|
)
|
|
|
|
|
Proceeds from options exercised
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (decrease in) advances against accounts receivable
|
|
|
(886,100
|
)
|
|
|
|
|
|
|
985,800
|
|
|
|
|
|
Principal payments of capital leases
|
|
|
(11,200
|
)
|
|
|
|
|
|
|
(29,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
|
|
|
|
2,971,800
|
|
|
|
|
|
|
|
(1,334,000
|
)
|
Cash flows from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows
|
|
|
|
|
|
|
|
|
|
|
(275,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(275,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
|
155,900
|
|
|
|
|
|
|
|
(512,900
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
|
|
|
|
125,700
|
|
|
|
|
|
|
|
638,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
|
|
|
$
|
281,600
|
|
|
|
|
|
|
$
|
125,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash debt extinguishment resulting from Optex Asset Sale
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
15,000,000
|
|
Noncash conversion of preferred stock to common stock
|
|
|
|
|
|
$
|
4,292,200
|
|
|
|
|
|
|
$
|
|
|
Noncash debt conversion to common stock
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
330,000
|
|
Issuance of warrants to investment banking firm
|
|
|
|
|
|
$
|
643,800
|
|
|
|
|
|
|
$
|
|
|
Noncash interest conversion to common stock
|
|
|
|
|
|
$
|
277,600
|
|
|
|
|
|
|
$
|
18,500
|
|
Noncash debt conversion to preferred stock
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
1,000,000
|
|
Noncash litigation settlement expense
|
|
|
|
|
|
$
|
2,270,700
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
|
|
|
$
|
356,100
|
|
|
|
|
|
|
$
|
340,000
|
|
Cash paid for income taxes
|
|
|
|
|
|
$
|
7,700
|
|
|
|
|
|
|
$
|
34,900
|
|
See Accompanying Notes to Consolidated Financial Statements
F-5
Irvine
Sensors Corporation
Note 1
Description of Business and Summary of Significant Accounting
Policies
Description
of Business
Irvine Sensors Corporation (ISC) and its
subsidiaries (collectively, the Company) is a vision
systems company enabled by technology for three-dimensional
packaging of electronics and manufacturing of electro-optical
products. The Company designs, develops, manufactures and sells
vision systems, miniaturized electronic products and higher
level systems incorporating such products for defense, security
and commercial applications. The Company also performs
customer-funded contract research and development related to
these systems and products, mostly for U.S. government
customers or prime contractors. Most of the Companys
historical business relates to application of its technologies
for stacking either packaged or unpackaged semiconductors into
more compact three-dimensional forms, which the Company believes
offer volume, power, weight and operational advantages over
competing packaging approaches, and which the Company believes
allows it to offer higher level products with unique operational
features. The Company has recently introduced certain higher
level products in the fields of thermal imaging cores, unmanned
surveillance aircraft and high speed processing that take
advantage of the Companys packaging technologies.
On October 14, 2008, substantially all of the assets of
Optex Systems, Inc. (Optex), a Texas corporation and
a wholly-owned subsidiary of ISC, were sold pursuant to a UCC
public foreclosure sale (the Optex Asset Sale). The
Optex Asset Sale was completed as contemplated by a binding
Memorandum of Understanding for Settlement and Debt Conversion
Agreement dated September 19, 2008 (the MOU)
between the Company and its senior lenders, Longview Fund, L.P.
(Longview) and Alpha Capital Anstalt
(Alpha). Longview and Alpha are sometimes
collectively referred to as the Lenders. As agreed
to in the MOU, Optex Systems, Inc., a Delaware corporation
controlled by the Lenders (Optex-Delaware), credit
bid $15 million in this UCC public foreclosure sale, and
its offer was the winning bid. As a result, $15 million of
the Companys aggregate indebtedness to the Lenders was
extinguished. All the Companys financial statements and
notes and schedules thereto give effect to this event and report
Optex as a discontinued operation for both the current and prior
fiscal periods. Optex filed a voluntary petition for relief
under Chapter 7 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of California in
September 2009 (the Optex bankruptcy). None of the
Companys subsidiaries accounted for more than 10% of the
Companys total assets at October 3, 2010 or had
separate employees or facilities at such date. None of the
Companys subsidiaries accounted for more than 10% of the
Companys total assets at September 27, 2009.
Summary
of Significant Accounting Policies
Consolidation. The consolidated financial
statements include the accounts of ISC and its subsidiaries,
Novalog, Inc. (Novalog), MicroSensors, Inc.
(MSI), RedHawk Vision Systems, Inc.
(RedHawk) and iNetWorks Corporation
(iNetWorks). The Companys subsidiaries do not
presently have material operations or assets. All significant
intercompany transactions and balances have been eliminated in
the consolidation. The accounts for Optex have been eliminated
from the balance sheets from September 27, 2009 forward due
to the Optex bankruptcy in September 2009.
Fiscal Year. The Companys fiscal year
ends on the Sunday nearest September 30. Fiscal
2010 ended October 3, 2010 and included
53 weeks. Fiscal 2009 ended on
September 27, 2009 and included 52 weeks. The fiscal
year ending October 2, 2011 (fiscal 2011) will
include 52 weeks.
Use of Estimates. The preparation of the
financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. Management
prepares estimates for a number of factors, including
stock-based compensation, deferred tax assets, inventory
reserves and estimated costs to complete contracts. The Company
believes its estimates of inventory reserves and estimated costs
to complete
F-6
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
contracts, as further discussed below, to be the most sensitive
estimates impacting financial position and results of operations
in the near term.
Inventory Reserves. Each quarter, the
Company evaluates its inventories for excess quantities and
obsolescence. Inventories that are considered obsolete are
written off. Remaining inventory balances are adjusted to
approximate the lower of cost or market value. The valuation of
inventories at the lower of cost or market requires the use of
estimates as to the amounts of current inventories that will be
sold. These estimates are dependent on managements
assessment of current and expected orders from the
Companys customers.
From time to time, the Company capitalizes material, labor and
overhead costs expected to be recovered from a probable new
contract. Due to the uncertain timing of new or follow-on
research and development contracts, the Company maintains
significant reserves for this inventory to avoid overstating its
value. The Company has adopted this practice because it is
typically able to more fully recover such costs under the
provisions of government contracts by direct billing of
inventory rather than by seeking recovery of such costs through
permitted indirect rates.
Estimated Costs to Complete and Accrued Estimated Loss on
Contracts. The Company reviews and reports on
the performance of its contracts and product orders against the
respective resource plans for such contracts and orders. These
reviews are summarized in the form of estimates of costs to
complete (ETCs). ETCs include managements
current estimates of remaining amounts for direct labor,
material, subcontract support and indirect costs based on each
contracts or product orders completion status and
either the current or re-planned future requirements under the
contract or product order. If an ETC indicates a potential
overrun against budgeted resources for a cost reimbursable
contract or a fixed price level of effort contract, management
generally seeks to revise the program plan in a manner
consistent with customer objectives to eliminate such overrun
and to secure necessary customer agreement to such revision. To
mitigate the financial risk of such re-planning, the Company
attempts to negotiate the deliverable requirements of its
research and development contracts to allow as much flexibility
as possible in technical outcomes.
If an ETC indicates a potential overrun against budgeted
resources for a fixed price contract or a product order,
management first seeks to evaluate lower cost solutions to
achieve requirements of the fixed price contract or product
order, and if such solutions do not appear practicable, makes a
determination whether to seek renegotiation of contract or order
requirements from the customer. If neither re-planning within
budgets nor renegotiation appear probable, an accrual for
contract overrun is recorded based on the most recent ETC of the
particular program or product order.
During fiscal 2010, the Companys accrued estimated loss on
contracts increased $29,000, from $0 to $29,000. This increase
reflects a change in the Companys estimate (excluding
contingencies), which management believes reflects ETCs for
contracts in progress based on their completion status at
October 3, 2010 and current and future technical
requirements under the program contracts.
Revenues. The Company derives revenue from
contract research and development, as well as from product
sales. Revenues derived from contracts to develop prototypes and
provide research, development, design, testing and evaluation of
complex detection and control defense systems were a substantial
contributor to total revenues in fiscal 2010 and fiscal 2009.
The Companys research and development contracts are
usually cost reimbursement plus fixed fee, fixed price level of
effort or occasionally firm fixed price. The Companys cost
reimbursement plus fixed fee research and development contracts
require the Companys good faith performance of a statement
of work within overall budgetary constraints, but with latitude
as to resources utilized. The Companys fixed price level
of effort research and development contracts require the Company
to deliver a specified number of labor hours in the performance
of a statement of work. The Companys firm fixed price
research and development contracts require the Company to
deliver specified items of work independent of resources
utilized to achieve the required deliverables. Revenues for all
types of research and development contracts are recognized as
costs are incurred and include applicable fees or profits
primarily in the proportion that costs incurred bear to
estimated final costs.
F-7
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
Costs and estimated earnings in excess of billings under
government research and development contracts are accounted for
as unbilled revenues on uncompleted contracts, stated at
estimated realizable value and are expected to be realized in
cash within one year. Billings in excess of costs and estimated
earnings under government research and development contracts are
accounted for as advanced billings on uncompleted contracts.
United States government research and development contract
costs, including indirect costs, are subject to audit and
adjustment from time to time by negotiations between the Company
and government representatives. The government has approved the
Companys indirect contract costs through the 53 weeks
ended October 3, 2004 (fiscal 2004) and has
started but has not yet completed audit of the Companys
indirect contract costs for the 52 weeks ended
October 2, 2005 (fiscal 2005). The government
has not yet scheduled audit of the Companys indirect
contract costs for the 52 weeks ended October 1, 2006
(fiscal 2006), the 52 weeks ended
September 30, 2007 (fiscal 2007), the
52 weeks ended September 28, 2008 (fiscal
2008) and fiscal 2009. Research and development contract
revenues have been recorded in amounts that are expected to be
realized upon final determination of allowable direct and
indirect costs for the affected contracts.
Revenues derived from product sales in fiscal 2010 and fiscal
2009 were primarily the result of shipments of sales of the
Companys miniaturized infrared imaging cameras, and sales
of stacked chip products, largely memory stacks. Production
orders for the Companys products are generally priced in
accordance with established price lists. Memory stack products
and visible spectrum cameras are primarily shipped to original
equipment manufacturers (OEMs). Infrared imaging
cameras are both subsystem and system level products for
shipment to either OEMs or to end user customers, initially for
military applications. Revenues are recorded when products are
shipped, provided that the following conditions are met:
|
|
|
|
|
there are no unfulfilled contingencies associated with the sale;
|
|
|
|
the Company has a sales contract or purchase order with the
customer; and
|
|
|
|
the Company is reasonably assured that the sales price can be
collected.
|
The absence of any of these conditions, including the lack of
shipment, would cause revenue recognition to be deferred. Terms
are Freight on Board (FOB) shipping point.
Prior to fiscal 2010, the Companys products were primarily
shipped for developmental and qualification use or were not been
sold under formal warranty terms. Effective fiscal 2010, the
Company commenced sale of clip-on thermal imaging products with
a one-year warranty and has correspondingly commenced to record
reserves for returns under warranty for such products. The
Company does not offer contractual price protection on any of
its products. Accordingly, the Company does not presently
maintain any reserves for returns for post-shipment price
adjustments.
The Company does not utilize distributors for the sale of its
products nor does it enter into revenue transactions in which
the customer has the right to return product. Accordingly, no
provisions are made for sales returns or adjustments in the
recognition of revenue.
Accounts Receivable. Accounts receivable
consists of amounts billed and currently due from customers. The
Company monitors the aging of its accounts receivable and
related facts and circumstances to determine if an allowance
should be established for doubtful accounts.
Advances Against Accounts Receivable. From
time-to-time,
the Company engages in accounts receivables financing or
factoring. When such arrangements involve full-recourse
agreements with lenders, the advances received by the Company
are recorded as current liabilities and the gross amount of the
financed or factored receivables are included in current
accounts receivables.
Allowance for Doubtful Accounts. Trade
accounts receivable are recorded at the invoiced amount and do
not bear interest. The Companys allowance for doubtful
accounts is managements best estimate of losses resulting
from the inability of the Companys customers to make their
required payments. The Company maintains an
F-8
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
allowance for doubtful accounts based on a variety of factors,
including historical experience, length of time receivables are
past due, current economic trends and changes in customer
payment behavior. Also, the Company records specific provisions
for individual accounts when management becomes aware of a
customers inability to meet its financial obligations to
the Company, such as in the case of bankruptcy filings or
deterioration in the customers operating results or
financial position. If circumstances related to a customer
change, the Companys estimates of the recoverability of
the receivables would be further adjusted, either upward or
downward.
Research and Development Costs. A major
portion of the Companys operations is comprised of
customer-funded research and prototype development or related
activities that are recorded as cost of contract revenues. The
Company also incurs costs for internal research and development
of new concepts in products. Such non-customer sponsored
research and development costs are charged to research and
development expense as incurred.
Inventory. Product inventory is valued at the
lower of cost or market. Cost of the Companys product
inventory includes direct material and labor costs, as well as
manufacturing overhead costs allocated based on direct labor
dollars. Inventory cost is determined using the average cost
method. Inventories are reviewed quarterly to determine
salability and obsolescence. A reserve is established for slow
moving and obsolete product inventory items. In addition, the
Company believes that its marketing of probable new research and
development contracts under specific government budgets and
programs is facilitated by the capitalization of material, labor
and overhead costs that are eventually recoverable under such
contracts. Due to the uncertain timing of such contract awards,
the Company maintains significant reserves for this inventory to
avoid overstating its value. (See Note 12).
Property and Equipment. The Company
capitalizes costs of additions to property and equipment,
together with major renewals and betterments. The Company takes
several years to complete some in-house projects, which are
classified as construction in progress and are not subject to
depreciation until placed into service. Such in-house projects
include expansion of the Companys clean room facilities
and related equipment. The Company capitalizes overhead costs,
including interest costs, for all in-house capital projects.
Maintenance, repairs, and minor renewals and betterments are
charged to expense. When assets are sold or otherwise disposed
of, the cost and related accumulated depreciation for such
assets are removed from the accounts and any resulting gain or
loss is recognized. Depreciation of property and equipment is
provided over the estimated useful lives of the assets,
primarily using the straight-line method. The useful lives of
such assets are typically three to five years. Leasehold
improvements are amortized over their useful lives or, if
shorter, the terms of the leases.
Deferred Costs. The Company has incurred debt
issuance costs in connection with various financings, which are
amortized over the term of the related debt instruments using
the effective interest method.
Accounting for Stock-Based Compensation. The
Company accounts for stock-based compensation under Accounting
Standards Codification (ASC) 718,
Compensation Stock Compensation, which
requires the fair value of all option grants or stock issuances
made to employees or directors on or after the beginning of
fiscal 2006, as well as a portion of the fair value of each
option and stock grant made to employees or directors prior to
that date which represents the nonvested portion of these
share-based awards as of such implementation date, to be
recognized as an expense. These amounts are expensed over the
respective vesting periods of each award using the straight-line
attribution method. The Company calculates stock option-based
compensation by estimating the fair value of each option as of
its date of grant using the Black-Scholes option pricing model.
The Company has historically issued stock options and vested and
nonvested stock grants to employees and outside directors whose
only condition for vesting has been continued employment or
service during the related vesting or restriction period.
Typically, the vesting period for such stock option grants has
been four years for non-officer employee awards, and either
two-year or immediate vesting for officers and directors,
although options have sometimes been granted with other vesting
periods. In some fiscal years, the Company has also issued
nonvested stock grants to new employees and outside directors,
typically with vesting periods of three years.
F-9
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
During fiscal 2010 and fiscal 2009, the Company granted options
to purchase 833,000 and 122,000 shares of its common stock,
respectively. The following assumptions were used for the
valuation of the grants in fiscal 2010 and fiscal 2009.
|
|
|
|
|
|
|
Fiscal 2010
|
|
Fiscal 2009
|
|
Risk free interest rate
|
|
0.44%
|
|
1.93% - 4.00%
|
Expected life
|
|
4.0 years
|
|
2.5 - 4.0 years
|
Expected volatility
|
|
97.0%
|
|
84.6% - 89.4%
|
Expected dividend yield
|
|
None
|
|
None
|
Expected life of options granted is computed using the mid-point
between the vesting period and contractual life of the options
granted (the simplified method). Expected
volatilities are based on the historical volatility of the
Companys stock price and other factors.
Cash flows from the tax benefits resulting from tax deductions
in excess of the compensation cost recognized for those options
(excess tax benefits) are classified as financing cash flows.
There are no tax benefits resulting from the exercise of stock
options for fiscal 2010 and fiscal 2009.
The Companys subsidiaries did not grant any options during
fiscal 2010 or fiscal 2009.
The Company recognizes compensation expense on a straight-line
basis over the vesting period of the option after consideration
of the estimated forfeiture rate, which was 7% during fiscal
2010 and fiscal 2009. At October 3, 2010, the total
compensation costs related to nonvested option awards not yet
recognized was $28,800 and the weighted-average remaining
vesting period of nonvested options at October 3, 2010 was
1.3 years. Such amounts do not include the cost of new
options that may be granted in future periods or any changes in
the Companys forfeiture rate.
Accounting for Stock and Warrant-Based Operating
Expense. For stock and warrants issued to
non-employees in exchange for services, the Company records
expense based on the fair value of common stock and warrants
issued to service providers at the date of such issuance or the
fair value of the services received, whichever is more reliably
measurable, and is recognized over the vesting period. In fiscal
2010, the Company issued warrants to purchase an aggregate of
350,000 shares of its common stock, valued at $119,000, to
an investment banking firm for a one-year extension of an
agreement for said firm to assist the Company in raising
additional capital and to provide financial advisory services.
In fiscal 2010, the Company also issued 27,500 shares of
the Companys newly created Series C Convertible
Preferred Stock (the Series C Stock), valued at
$825,000, to its senior lender, Longview Fund, L.P.
(Longview) in consideration for Longviews
consent to the issuance of the Looney Note and waiver of
potential future entitlement to all accumulated, but undeclared
and unpaid, dividends on the
Series A-1
10% Cumulative Convertible Preferred Stock (the
Series A-1
Stock) and the Companys
Series A-2
10% Cumulative Convertible Preferred Stock (the
Series A-2
Stock) held by Longview from the respective dates of
issuance of the
Series A-1
Stock and the
Series A-2
Stock through July 15, 2010. In fiscal 2010, the Company
issued an additional 10,000 shares of the Companys
Series C Stock, valued at $300,000, and a two-year warrant
to purchase 1,000,000 shares of the Companys common
stock, valued at $150,000, to Longview in satisfaction of one of
the conditions of Longviews consent to the settlement of
litigation with Timothy Looney, the former owner of the
Companys discontinued Optex subsidiary. (See Notes 3
and 5). In fiscal 2009, the Company issued 339,800 shares
of common stock, valued at $133,100 to a non-employee service
provider as operating expense. In fiscal 2009, the Company
issued no warrants to non-employee service providers as
operating expense, although warrants were issued to an
investment banker in connection with a financing. (See
Note 7 and Warrant Valuation and Beneficial
Conversion Feature below).
Software Development and Purchased
Software. The Company capitalizes certain
software costs incurred, either from internal or external
sources, as part of intangible assets and amortizes these costs
on a straight-line basis over the useful life of the software.
Planning, training, support and maintenance costs incurred
either prior to or
F-10
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
following the implementation phase are recognized as expense in
the period in which they occur. The Company evaluates the
carrying values of capitalized software to determine if the
carrying values are impaired, and, if necessary, the Company
would recognize an impairment loss in the period in which the
impairment occurred. At October 3, 2010, the Company had
capitalized software of approximately $11,600, net of
accumulated amortization of $2,398,100.
Intangible Assets. The Company amortizes the
cost of intangibles over their estimated useful lives unless
such lives are deemed indefinite. When certain impairment
indicators are present, amortizable intangible assets are tested
for impairment based on undiscounted cash flows and, if
impaired, written down to fair value based on either discounted
cash flows, appraised values or other market-based information.
Intangible assets with indefinite lives are tested annually for
impairment as of the first day of the Companys fourth
fiscal quarter and between annual periods if impairment
indicators exist, and are written down to fair value as
required. The Companys intangible assets with definite
lives at October 3, 2010 and September 27, 2009
consisted principally of patents, patent applications and
trademarks related to the Companys various technologies.
In March 2009, the Company sold most of its patent assets for
cash proceeds of $9.5 million and a worldwide, royalty-free
license to use the sold patent assets (the Patent Sale and
License). Capitalized costs include amounts paid to third
parties for legal fees, application fees and other direct costs
incurred in the filing and prosecution of patent and trademark
applications. These assets are amortized on a straight-line
method over the shorter of their useful or legal life, generally
ten years.
Warrant Valuation and Beneficial Conversion
Feature. The Company calculates the fair value of
warrants issued with debt or preferred stock using the
Black-Scholes valuation method. The total proceeds received in
the sale of debt or preferred stock and related warrants is
allocated among these financial instruments based on their
relative fair values. The discount arising from assigning a
portion of the total proceeds to the warrants issued is
recognized as interest expense for debt from the date of
issuance to the earlier of the maturity date of the debt or the
conversion dates using the effective yield method. Additionally,
when issuing convertible instruments (debt or preferred stock),
including convertible instruments issued with detachable
warrants, the Company tests for the existence of a beneficial
conversion feature. The Company records the amount of any
beneficial conversion feature (BCF), calculated in
accordance with the accounting standards, whenever it issues
convertible instruments that have conversion features at fixed
rates that are
in-the-money
using the effective per share conversion price when issued. The
calculated amount of the BCF is accounted for as a contribution
to additional paid-in capital and as a discount to the
convertible instrument. A BCF resulting from issuance of
convertible debt is recognized as interest expense from the date
of issuance to the earlier of the maturity date of the debt or
the conversion dates using the effective yield method. A BCF
resulting from the issuance of convertible preferred stock is
recognized as a deemed dividend and amortized over the period of
the securitys earliest conversion or redemption date. The
maximum amount of BCF that can be recognized is limited to the
amount that will reduce the net carrying amount of the debt or
preferred stock to zero.
Tangible Long-Lived Assets. The Company
frequently monitors events or changes in circumstances that
could indicate that the carrying amount of tangible long-lived
assets to be held and used may not be recoverable. The
determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the
asset and its eventual disposition. When impairment is indicated
for a tangible long-lived asset, the amount of impairment loss
is the excess of net book value of the asset over its fair
value. Tangible long-lived assets to be disposed of are reported
at the lower of carrying amount or fair value less costs to
sell. At October 3, 2010, management believed no
indications of impairment existed.
Income Taxes. The Company provides for income
taxes under the liability method. Deferred tax assets and
liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities as
measured by the enacted tax rates which are expected to be in
effect when these differences reverse. To the extent net
deferred tax assets are not realizable on a more likely than not
basis, a valuation allowance is provided against such net
deferred tax assets. An individual tax position has to meet for
some or all of the benefits of that position to be recognized in
the Companys financial statements. (See Note 14).
F-11
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
Basic and Diluted Net Income (Loss) per
Share. Basic net income (loss) per share is based
upon the weighted average number of shares of common stock
outstanding. Diluted net income (loss) per share is based on the
assumption that options, warrants and other instruments
convertible into common stock are included in the calculation of
diluted net income (loss) per share, except when their effect
would be anti-dilutive. For instruments in which consideration
is to be received for exercise, such as options or warrants,
dilution is computed by applying the treasury stock method.
Under this method, options and warrants are assumed to be
exercised at the beginning of the period (or at the time of
actual issuance, if later), and as if funds obtained thereby
were used to purchase common stock at the average market price
during the period. Cumulative dividends on the Companys
cumulative convertible preferred stock, although not declared,
constitute a preferential claim against future dividends, if
any, and are treated as an incremental decrease in net income
from continuing operations or increase in net loss from
continuing operations for purposes of determining basic net
income (loss) from continuing operations per common share. Such
preferred dividends, if dilutive, are added back to the net
income or loss from continuing operations as it is assumed that
the preferred shares were converted to common shares as of the
beginning of the period for purposes of determining diluted net
income (loss) from continuing operations per common share. (See
Note 9).
Cash and Cash Equivalents. For purposes of the
Consolidated Financial Statements, the Company considers all
demand deposits and certificates of deposit with original
maturities of 90 days or less to be cash equivalents.
Fair Value of Financial Instruments. Financial
instruments include cash and cash equivalents, accounts
receivable and payable, other current liabilities and long-term
debt. The carrying amounts reported in the balance sheets for
cash and cash equivalents, accounts receivable and payable and
other current liabilities approximate fair value due to the
short-term nature of these items. Because of the substantial
initial debt discounts involved in the debt transactions
discussed further in Note 3, management believes that it is
not practicable to estimate the fair value of the remaining
principal balance due under the Promissory Note at
October 3, 2010 without incurring unreasonable costs.
Furthermore, because of the scale of the discounts already
recorded, management does not believe that an estimation of the
fair value of the debt instruments would result in a materially
different result than what the Company has already recorded. The
fair value due of notes payable to related party are not
determinable without unreasonable cost due to their related
party nature.
Concentration of Credit Risk. Most of the
Companys accounts receivable are derived from sales to
U.S. government agencies or prime government contractors.
The Company does not believe that this concentration increases
credit risks because of the financial strength of the payees. At
times, the Company has cash deposits at U.S. banks and
financial institutions, which exceed federally insured limits.
The Company is exposed to credit loss for amounts in excess of
insured limits in the event of non-performance by the
institution; however, the Company does not anticipate such loss.
Reclassifications. Certain reclassifications
have been made to the consolidated balance sheet as of
September 27, 2009 to conform to the current year
presentation to reflect the adoption of new accounting guidance
regarding the presentation of minority interests in
subsidiaries, as discussed below.
Derivatives. A derivative is an instrument
whose value is derived from an underlying instrument
or index such as a future, forward, swap, option contract, or
other financial instrument with similar characteristics,
including certain derivative instruments embedded in other
contracts (embedded derivatives) and for hedging
activities. As a matter of policy, the Company does not invest
in separable financial derivatives or engage in hedging
transactions. However, complex transactions that the Company
entered into in order to originally finance the Initial
Acquisition of Optex, and the subsequent restructuring of such
debt transactions, involved financial instruments containing
certain features that have resulted in the instruments being
deemed derivatives or containing embedded derivatives. The
Company may engage in other similar complex debt transactions in
the future, but not with the intention to enter into derivative
instruments. Derivatives and embedded derivatives, if
applicable, are measured at fair value and marked to market
through earnings. However, such new
and/or
complex instruments may have immature or limited markets. As a
result, the pricing models used for valuation often incorporate
significant estimates and assumptions, which may impact the
level of precision in the financial statements.
F-12
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
Recently Issued Accounting Pronouncements. In
June 2008, the FASB ratified guidance issued by the Emerging
Issue Task Force (EITF) as codified in
ASC 815-40,
Derivatives and Hedging Contracts in
Entitys Own Equity (previously EITF Issue
No. 07-05,
Determining Whether an Instrument (or an Embedded Feature) is
Indexed to an Entitys Own Stock).
ASC 815-40
specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the
companys own stock and (b) classified in
stockholders equity in the statement of financial position
would not be considered a derivative financial instrument.
ASC 815-40
provides a new two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed
to an issuers own stock and thus able to qualify for the
ASC 815-10
scope exception. ASC
815-40 is
effective for fiscal years beginning after December 15,
2008, which for the Company is fiscal 2010, and early adoption
was not permitted. Pursuant to
ASC 815-40,
the Company was required to reclassify certain warrants from
equity to liabilities, which resulted in a cumulative effect
adjustment of approximately $4,230,000 to reduce paid-in capital
for the original allocated value recorded for these affected
warrants, a corresponding reduction in accumulated deficit of
$4,230,000 and recording of the fair market value of the warrant
derivative liability of $99,500 effective September 28,
2009, the first day of fiscal 2010. The fair market value of the
warrant derivative liability was re-measured at October 3,
2010 and adjusted to report the change in fair value, which was
$95,500 for fiscal 2010. The warrant derivative liability is
included in accrued expenses on the consolidated balance sheet.
In January 2010, the FASB issued Accounting Standards Update
(ASU)
2010-06,
Improving Disclosures about Fair Value Measurements
amending ASC 820, Fair Value Measurements and
Disclosures requiring additional disclosure and clarifying
existing disclosure requirements about fair value measurements.
ASU 2010-06
requires entities to provide fair value disclosures by each
class of assets and liabilities, which may be a subset of assets
and liabilities within a line item in the statement of financial
position. The additional requirements also include disclosure
regarding the amounts and reasons for significant transfers in
and out of Level 1 and 2 of the fair value hierarchy and
separate presentation of purchases, sales, issuances and
settlements of items within Level 3 of the fair value
hierarchy. The guidance clarifies existing disclosure
requirements regarding the inputs and valuation techniques used
to measure fair value for measurements that fall in either
Level 2 or Level 3 of the hierarchy. ASU
2010-06 is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements which is effective
for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. There was no impact
from the Companys adoption of this guidance.
In April 2010, the FASB issued ASU
2010-17,
Milestone Method of Revenue Recognition, which provides
guidance related to Revenue Recognition that applies to
arrangements with milestones relating to research or development
deliverables. This guidance provides criteria that must be met
to recognize consideration that is contingent upon achievement
of a substantive milestone in its entirety in the period in
which the milestone is achieved. This guidance is effective for
the Company starting fiscal year 2011. The Company is currently
assessing the impact of the guidance, if any, on its financial
statements.
Note 2
Going Concern
The consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of
assets and settlement of obligations in the normal course of
business. The Company generated significant net losses in fiscal
years prior to fiscal 2009. In fiscal 2009, the Company
generated net income of $914,800, but this was primarily
attributable to the approximately $8.6 million of aggregate
non-recurring gains realized by the Companys sale of
patent assets and substantial gains on the elimination of
consolidated debt and reduction in pension liability. In fiscal
2010, the Company had a net loss of $11,155,800.
Management believes that the Companys losses in recent
years have primarily resulted from a combination of insufficient
contract research and development revenue to support the
Companys skilled and diverse technical staff believed to
be necessary to support monetization of the Companys
technologies, amplified by the effects of discretionary
investments to productize a variety of those technologies. The
Company has not yet been successful in
F-13
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
most of these product activities, nor has it been able to raise
sufficient capital to fund the future development of many of
these technologies. Accordingly, the Company has sharply
curtailed the breadth of its product investments, and instead
has focused on the potential growth of its chip stacking
business, various miniaturized camera products and a system
application incorporating such camera products. In addition, the
initial acquisition of Optex in December 2005 and the ultimate
discontinuation of Optexs operations in October 2008
pursuant to the Optex Asset Sale contributed to increases in the
Companys consolidated accumulated deficit, largely due to
inadequate gross margins on Optexs products and the
related litigation, as well as insufficient capital resources.
As of October 3, 2010, the Company also had negative
working capital and stockholders deficit of approximately
$10.1 million and $10.1 million, respectively. As of
October 3, 2010, the Company also had a litigation judgment
pending, for which the Company has recorded expected liability
of approximately $1.3 million. (See Note 13).
Management is focused on managing costs in line with estimated
total revenues, including contingencies for cost reductions if
projected revenues are not fully realized. However, there can be
no assurance that anticipated revenues will be realized or that
the Company will be able to successfully implement its plans.
Accordingly, the Company will need to raise additional funds to
meet its continuing obligations in the near future and may incur
additional future losses.
In September 2010, the Companys common stock was delisted
from the Nasdaq Capital Market for non-compliance with
Nasdaqs $1.00 per share minimum bid price continued
listing requirement and commenced trading on the
Over-the-Counter
Bulletin Board. Delisting from the Nasdaq Capital Market
could significantly limit the Companys ability to raise
capital and adversely impact the price of and market for the
Companys common stock. If the Company requires additional
financing to meet its working capital needs, there can be no
assurance that suitable financing will be available on
acceptable terms, on a timely basis, or at all.
The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and
classification of liabilities that might result should the
Company be unable to continue as a going concern.
Note 3
Settlement of Litigation
Timothy Looney, Barbara Looney and TWL Group, L.P.
(collectively, Looney), on the one hand, and the
Company and its Chief Executive Officer, John C. Carson and its
Chief Financial Officer, John J. Stuart, Jr., on the other
hand, had been engaged in litigation since January 2008
regarding the acquisition of Optex and related matters. In March
2010, the Company and Messrs. Carson and Stuart entered
into a Settlement and Release Agreement with Looney pursuant to
which the Company and Messrs. Carson and Stuart, on the one
hand, and Looney, on the other hand, settled and released all
claims and agreed to dismiss all litigation against each other
relating to the Companys acquisition of Optex in December
2005 and various transactions related thereto (the Looney
Settlement Agreement).
Pursuant to the terms of the Looney Settlement Agreement, the
Company agreed to pay Mr. Looney $50,000 and to issue to
Mr. Looney a secured promissory note in the principal
amount of $2,500,000 (the Looney Note). (See
Note 4). In connection with issuing the Looney Note, the
Company also entered into a Security Agreement and an
Intellectual Property Security Agreement with Mr. Looney
(collectively, the Security Agreements), which
collectively provide a security interest in all the
Companys assets subject to and subordinate to the existing
perfected security interests and liens of the Companys
senior creditors, Summit Financial Resources, L.P.
(Summit) and Longview.
The effectiveness of the Looney Settlement Agreement was
conditioned upon the Companys receipt of consents from
Summit and Longview. The Company obtained said consents, and the
Looney Settlement Agreement was effective as of March 26,
2010. As one of the conditions of obtaining the Longview
consent, the Company agreed to issue Longview equity securities
with a value of $825,000 (the Waiver Securities) in
consideration for
F-14
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
Longviews waiver of potential future entitlement to all
accumulated, but undeclared and unpaid, dividends on the
Companys
Series A-1
Stock and the Companys
Series A-2
Stock held by Longview from the respective dates of issuance of
the
Series A-1
Stock and the Series
A-2 Stock
through July 15, 2010. The amount of said accumulated, but
undeclared and unpaid dividends through July 15, 2010 was
estimated to be approximately equal to the value of the Waiver
Securities. The Waiver Securities were issued to Longview on
April 30, 2010 in the form of 27,500 shares of the
Companys newly created Series C Stock. (See
Note 5).
As another condition for Longviews consent for the Looney
Settlement Agreement, the Company and Longview agreed that if
the Company did not arrange for a third-party investor to
purchase Longviews holdings of the Companys
Series A-1
Stock and
Series A-2
Stock on or before July 15, 2010 (the Buyout),
the Company would be obligated to issue to Longview
(a) non-voting equity securities, with terms junior to the
Companys Series B Convertible Preferred Stock (the
Series B Stock), convertible into
1,000,000 shares of the Companys common stock (the
Contingent Securities) and (b) a two-year
warrant to purchase 1,000,000 shares of the Companys
common stock at an exercise price per share of $0.30 (the
Contingent Warrant). The terms of the Contingent
Securities and the Contingent Warrant were mutually agreed upon
by the parties such that the Contingent Securities were to
consist of 10,000 shares of the Companys
Series C Stock convertible into 1,000,000 shares of
the Companys common stock, subject to receipt of
stockholder approval for such issuance if required by Nasdaq.
The Buyout did not occur on or before July 15, 2010, and
stockholder approval for the issuance of the Contingent
Securities in the form of Series C Stock was obtained on
July 28, 2010. Accordingly, the Contingent Securities and
Contingent Warrant were issued to Longview in August 2010. (See
Notes 5 and 7.)
The Company recorded the $2.5 million Looney Note in its
consolidated financial statements for fiscal 2010 and
extinguished $1,504,300 of previously recorded accrued expenses
for litigation judgments related to these matters. The Company
also recorded an expense of $825,000 for the issuance of the
Waiver Securities in fiscal 2010. The Company also recorded a
$450,000 expense for the obligation to issue the Contingent
Securities and the Contingent Warrant in fiscal 2010. The net
effect was a litigation settlement expense of $2,270,700
recorded in fiscal 2010.
Note 4
Debt Instruments
Restructured
Debt, Net of Debt Discounts
The restructured debt, net of debt discounts, consists of the
remainder of a 12% secured promissory note payable to Longview
originally entered into by the Company in July 2007, initially
with a six-month term, under a secured promissory note (the
Longview Note) with a $2.0 million principal
due initially. The principal amount of the Longview Note was
automatically increased by $100,000 on August 15, 2007,
when the Company elected not to exercise an early payment
feature of the Longview Note. In connection with the Optex Asset
Sale in October 2008, approximately $1,651,100 of the principal
balance of the Longview Note was retired. In March 2009,
$260,500 of the then outstanding principal balance of the
Longview Note was repaid from proceeds of the Companys
sale of patents, resulting in an outstanding principal balance
of the Longview Note of $188,400 at September 27, 2009. In
March 2010, $25,300 of the then outstanding principal balance of
the Longview Note was repaid from proceeds of the Debenture
Private Placement (described more fully below), resulting in an
outstanding principal balance of the Longview Note of $163,100
at October 3, 2010. As of October 3, 2010, the
maturity date of the Longview Note was the earlier of
December 31, 2010 or the Companys raising of gross
proceeds of $1.5 million or more in financings after
September 30, 2010. In December 2010, the Company paid all
remaining obligations of the Longview Note in full. (See
Note 17).
Note
Payable Related Party
In December 2006, in consideration for amendments to the Stock
Purchase Agreement, the Buyer Option Agreement and the Escrow
Agreement with Timothy Looney initially entered into on
December 30, 2005 for the acquisition of Optex, the Company
issued an unsecured subordinated promissory note to
Mr. Looney in the original
F-15
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
principal amount of $400,000, bearing interest at a rate of 11%
per annum. The principal and accrued interest under this note
was due and payable in full to Mr. Looney on
December 29, 2007. The Company had recorded the principal
and accrued interest amount of this note in its consolidated
balance sheets at September 27, 2009 as a current
liability. At October 3, 2010, this note had been
extinguished as a result of the Looney Settlement Agreement.
Debentures
In March 2010, the Company sold and issued to 55 accredited
investors (the Debenture Investors) an aggregate of
275.22 convertible debenture units (the Debenture
Units) at a purchase price of $6,000 per Unit (the
Debenture Unit Price) in two closings of a private
placement (the Debenture Private Placement). The
$1,651,300 aggregate purchase price for these Debenture Units
was paid in cash to the Company.
Each Debenture Unit was comprised of (i) one one-year,
unsecured convertible debenture with a principal repayment
obligation of $5,000 (the Convertible Debenture)
that is convertible at the election of the holder into shares of
the Companys common stock at a conversion price of $0.40
per share (the Principal Conversion Shares);
(ii) one one-year, unsecured non-convertible debenture with
a principal repayment obligation of $5,000 that is not
convertible into common stock (the Non-Convertible
Debenture and, together with the Convertible Debenture,
the Debentures); and (iii) a five-year warrant
to purchase 3,125 shares of the Companys common stock
(the Debenture Investor Warrant). The conversion
price applicable to the Debentures and the exercise price
applicable to the Debenture Investor Warrants is $0.40 per share.
The Debentures bear simple interest at a rate of 20% per annum.
Interest on the Debentures accrues and is payable quarterly in
arrears and is convertible at the election of the Company into
shares of common stock at a conversion price of $0.40 per share.
In fiscal 2010, interest in the amount of $277,400 was converted
into 693,600 shares of common stock. (See Note 6). The
conversion price of the Debentures is subject to adjustment for
stock splits, stock dividends, recapitalizations and the like.
Any unpaid and unconverted principal amount of the Debentures
may be repaid in cash prior to maturity at 110% of such
principal amount. The amounts owing under the Debentures may be
accelerated upon the occurrence of certain events of default as
set forth in the Debentures.
If all interest on the Debentures is converted into shares of
common stock and the Convertible Debentures are held to maturity
and then converted, the total number of shares of Common Stock
issuable upon conversion of the principal and interest under the
Debentures at the conversion price is 4,816,300 in the
aggregate. The total number of shares of common stock issuable
upon exercise of the Debenture Investor Warrants at the exercise
price of $0.40 per share is 860,000 in the aggregate.
In consideration for services rendered as the lead placement
agent in the Debenture Private Placement, the Company paid the
placement agent cash commissions, a management fee and an
expense allowance fee aggregating $214,700, which represents 13%
of the gross proceeds of the closings of the Debenture Private
Placement, and issued to the placement agent five-year warrants
to purchase an aggregate of 536,700 shares of the
Companys common stock at an exercise price of $0.40 per
share and, as a retainer, a five-year warrant to purchase an
aggregate of 450,000 shares of the Companys Common
Stock at an exercise price of $0.40 per share. (See Note 5).
Aggregate gross proceeds of $1,651,300 received by the Company
in connection with the Debenture Private Placement is comprised
of the aggregate principal value of $2,752,200 of the
Debentures, net of a corresponding original issue discount of
$1,101,000 and was allocated to the individual components
comprising the Debenture Unit on a relative fair value basis.
This resulted in approximately $163,000 allocated to the five
year investor warrants and approximately $1,488,000 allocated to
the Debentures. In addition, because the effective conversion
price of the Convertible Debentures was below the current
trading price of the Companys common shares at the date of
issuance, the Company recorded a BCF of approximately $102,200.
The value of the warrants and the BCF have been recorded as
additional paid in capital in the accompanying consolidated
financial statements.
F-16
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
Secured
Promissory Note
The Looney Note issued by the Company as a result of the Looney
Settlement Agreement bears simple interest at a rate per annum
of 10% of the outstanding principal balance and is secured by
substantially all of the assets of the Company (the
Collateral) pursuant to the terms and conditions of
the Security Agreements, but such security interests are subject
to and subordinate to the existing perfected security interests
and liens of the Companys senior creditors, Summit and
Longview. The Looney Note requires the Company to remit
graduated monthly installment payments over a
27-month
period to Mr. Looney beginning with a payment of $8,000 in
May 2010 and ending with a payment of $300,000 in June 2012. All
such payments are applied first to unpaid interest and then to
outstanding principal. Scheduled payments through April 2011
apply only to interest. A final payment of the remaining unpaid
principal and interest under the Looney Note is due and payable
in July 2012. Past due payments will bear simple interest at a
rate per annum of 18%. In the event the Company prepays all
amounts owing under the Looney Note within eighteen months after
April 9, 2010, the $50,000 cash payment made to
Mr. Looney pursuant to the Looney Settlement Agreement will
either be returned to the Company or deducted from the final
payment due on the Looney Note. The $50,000 cash payment is
recorded as a prepaid charge on the consolidated balance sheet
as of October 3, 2010.
Note 5
Issuance of Preferred Stock
The Companys
Series A-1
Stock was issued to its senior lenders, Longview and Alpha
Capital Anstalt (Alpha) (collectively, the
Lenders) during fiscal 2008 in exchange for
cancellation of approximately $1,188,500 of accrued and unpaid
interest and approximately $2,811,500 of principal balance of
debt owed by the Company to the Lenders.
Each share of
Series A-1
Stock was initially convertible at any time at the holders
option into 10 shares of common stock at an initial
conversion price of $3.00 per share of common stock. The
conversion price of the
Series A-1
Stock was subject to ratchet price dilution protection in the
event the Company issued securities (other than certain excepted
issuances) at a price below the then current conversion price,
subject to the limitation of the authorized capital of the
Company. As a result of a reverse stock split and various
issuances of common stock subsequent to the issuance of the
Series A-1
Stock, by July 2010, the conversion price of the
Series A-1
Stock had been adjusted pursuant to its terms to $0.12825 per
share. In the event the Company declares dividends in the
future, the
Series A-1
Stock was preferentially entitled to receive 10% cumulative
dividends per annum compounding monthly, payable in arrears
starting December 30, 2009, which could have increased to
20% during the existence of certain events of default. In April
2010, Longview waived entitlement to all accumulated, but
undeclared and unpaid, dividends on the
Series A-1
Stock held by Longview from the date of issuance of the
Series A-1
Stock through July 15, 2010 in consideration for the
issuance of the Waiver Securities. (See Note 3). In fiscal
2010, Longview and Alpha converted all of their holdings of
Series A-1
Stock into shares of common stock. Accordingly, at
October 3, 2010, there were no shares of
Series A-1
Stock outstanding.
On March 31, 2009, the Companys stockholders approved
the creation and issuance of the Companys
Series A-2
Stock, a 10% cumulative convertible non-voting preferred stock.
The February 2009 completion of the Companys Private
Placement, raising $1.0 million of gross proceeds,
satisfied the requirements of the Companys binding
Memorandum of Understanding with Longview and Alpha for the
exchange of $1.0 million of obligations under the
Restructured Debt for new convertible preferred stock, and the
Company entered into a Subscription Agreement in March 2009 for
such exchange. The approval of the Companys stockholders
and the occurrence of certain other events satisfied the
conditions in the Subscription Agreement and, accordingly, on
April 30, 2009, the Company issued an aggregate of
24,999 shares of the
Series A-2
Stock to Longview and Alpha at a purchase price of $40 per
share. The approximate $1,000,000 aggregate purchase price for
the
Series A-2
Stock was paid solely by Longviews and Alphas
exchange of all the remaining portion of certain debt of the
Company held by them.
Each share of
Series A-2
Stock was initially convertible at any time at the holders
option into 100 shares of common stock at an initial
conversion price of $0.40 per share of common stock. The
conversion price of the
F-17
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
Series A-2
Stock is subject to ratchet price dilution protection in the
event the Company issues securities (other than certain excepted
issuances) at a price below the then current conversion price,
subject to the limitation of the authorized capital of the
Company. The conversion price of the
Series A-2
Stock also is subject to adjustment for stock splits, stock
dividends, recapitalizations and the like. As a result of
various issuances of common stock subsequent to the issuance of
the
Series A-2
Stock, by July 2010, the conversion price of the
Series A-2
Stock had been adjusted pursuant to its terms to $0.12825 per
share. The
Series A-2
Stock is non-voting (except to the extent required by law), but
ranks senior to the common stock, with respect to dividends and
with respect to distributions upon a deemed dissolution,
liquidation or
winding-up
of the Company. The
Series A-2
Stock is entitled to 10% cumulative dividends per annum, payable
in arrears starting December 30, 2010, which may increase
to 20% during the existence of certain events of default. In
April 2010, Longview waived entitlement to all accumulated, but
undeclared and unpaid, dividends on the
Series A-2
Stock held by Longview from the date of issuance of the
Series A-2
Stock through July 15, 2010 in consideration for the
issuance of the Waiver Securities. (See Note 3).
Absent the declaration of dividends, the cumulative feature of
the
Series A-1
Stock and the
Series A-2
Stock does not result in an accrual of a liability, but does
affect the net income (loss) applicable to common stockholders.
(See Note 9). The Company has not recorded a liability for
these dividends that have not been waived, since the Company is
not legally able to declare or pay dividends on any classes of
its stock until it meets certain financial conditions under
Delaware law, which conditions it does not currently meet nor is
able to estimate when, or if, it may meet in the future. The
Series A-2
Stock is not redeemable by the holder thereof, but is callable
at the election of the Company (provided an event of default has
not occurred and is continuing) upon 30 days prior notice
at a redemption price equal to their respective initial purchase
price plus any accumulated but unpaid dividends. The
Series A-2
Stock is subject to a blocker (the Blocker) that
would prevent Longviews common stock ownership at any
given time from exceeding 4.99% of the Companys
outstanding common stock (which percentage may increase but
never above 9.99%). The liquidation preference of the
Series A-2
Stock consists of its respective initial purchase price plus any
accumulated, but unpaid dividends. At October 3, 2010, the
liquidation preference for the
Series A-2
Stock was $333,300. At September 27, 2009, the liquidation
preference for the
Series A-1
Stock and the
Series A-2
Stock was $3,586,200 and $1,043,500 respectively.
During fiscal 2010, 99,915 shares of the
Series A-1
Stock were converted by Longview and Alpha into
8,978,985 shares of the Companys common stock. During
fiscal 2010, 16,668 shares of the
Series A-2
Stock were converted by Longview and Alpha into
4,677,459 shares of the Companys common stock. During
fiscal 2009, 26,083 shares of the
Series A-1
Stock were converted by Longview and Alpha into
1,956,250 shares of the Companys common stock.
In fiscal 2010, the Company sold and issued an aggregate of
3,490 preferred stock units (the Preferred Stock
Units) at a purchase price of $700 per Preferred Stock
Unit. The $2,443,000 aggregate purchase price for the Preferred
Stock Units was paid in cash to the Company, from which fees and
expenses of $393,500 were disbursed to the placement agent and
its counsel, resulting in net proceeds of $2,049,500 to the
Company. Each Preferred Stock Unit was comprised of one share of
the Companys newly-created Series B Convertible
Preferred Stock (the Series B Stock), plus a
five-year warrant to purchase 600 shares of the
Companys common stock at an exercise price of $0.55 per
share. Each share of Series B Stock is convertible at any
time at the holders option into 2,000 shares of
common stock at a conversion price per share of common stock
equal to $0.50. During fiscal 2010, approximately
1,597 shares of the Series B Stock were converted into
approximately 3,194,566 shares of the Companys common
stock. As of October 3, 2010, an aggregate of approximately
3,785,400 shares of the Companys common stock were
issuable upon conversion of the remaining shares of
Series B Stock.
The Series B Stock is non-voting, except to the extent
required by law. With respect to distributions upon a deemed
dissolution, liquidation or
winding-up
of the Company, the Series B Stock ranks senior to the
common stock and the Companys new Series C Stock and
junior to the Companys
Series A-2
Stock. The liquidation preference per share of Series B
Stock equals its stated value, $1,000 per share. The
Series B Stock is not entitled to any preferential cash
dividends; however, the Series B Stock is entitled to
receive, pari passu with the Companys
F-18
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
common stock, such dividends on the common stock as may be
declared from time to time by the Companys Board of
Directors.
The Companys aggregate gross proceeds of $2,443,000
received from the sale of the Series B Stock was allocated
to the individual components comprising the stock units on a
relative fair value basis, resulting in approximately $424,000
of the proceeds allocated to the five-year warrant and
approximately $2,019,000 allocated to the Series B Stock.
In addition, because the effective conversion price of the
Series B Stock was below the current trading price of the
Companys shares at the date of issuance, the Company
recorded a BCF of approximately $1,471,000. Since the preferred
shares contain no set redemption date and they are convertible
from inception by the holder, the entire BCF amount was accreted
as a preferred dividend as of the issuance date.
The Company used the Black-Scholes model to value the warrants
issued to the placement agent and those issued to the
Series B Stock investors discussed above using the
following assumptions; volatility of 93.2%, stock price $0.50
per share, exercise price $0.55 per share, risk-free interest
rate of 2.3% and an expected term of five years.
In fiscal 2010, the Company issued 27,500 shares of the
Companys newly created Series C Stock to Longview to
effectuate the requirement to issue Waiver Securities related to
the Looney Settlement Agreement. (See Note 3.) Each share
of Series C Stock is convertible at any time at the
holders option into 100 shares of common stock at an
initial conversion price per share of common stock equal to
$0.30. The Series C Stock is non-voting, except to the
extent required by law. With respect to distributions upon a
deemed dissolution, liquidation or
winding-up
of the Company, the Series C Stock ranks senior to the
common stock and junior to the Companys
Series A-2
Stock and Series B Stock. The liquidation preference per
share of Series C Stock equals its stated value, $30 per
share. The Series C Stock is not entitled to any
preferential cash dividends; however, the Series C Stock is
entitled to receive on an as-converted basis, pari passu
with the Companys common stock, but after payment of
dividends to the
Series A-1
Stock,
Series A-2
Stock and Series B Stock at the time outstanding, such
dividends on the common stock as may be declared from time to
time by the Companys Board of Directors. The Series C
Stock is not redeemable by the holder thereof, but the Company
will have the right, upon 30 calendar days prior written
notice, to redeem the Series C Stock at its stated value,
$30 per share. The Series C Stock is also subject to a
blocker that would prevent each holders common stock
ownership at any given time from exceeding 4.99% of the
Companys outstanding common stock (which percentage may
increase but never above 9.99%).
During fiscal 2010, the Company also had an obligation to issue
the Contingent Securities to Longview, including an additional
10,000 shares of the Series C Stock, convertible into
1,000,000 shares of the Companys common stock, if
Longviews holdings of
Series A-1
Stock,
Series A-2
Stock and Series C Stock had not been purchased at their
aggregate Stated Value by a third party on or before
July 15, 2010. Such purchase did not occur, and the Company
issued the Contingent Securities, pursuant to stockholder
authorization, in August 2010. (See Note 3).
Note 6
Issuance of Common Stock
Fiscal
2009 Issuances
During fiscal 2009, the Company issued an aggregate of
6,137,300 shares of its common stock, net of the forfeiture
of 2,300 shares of nonvested stock, in various
transactions. All of the 6,137,300 shares were issued in
non-cash transactions to effectuate various transactions with an
aggregate valuation of $2,397,000, net of forfeitures. These
transactions are separately discussed below.
The 6,137,300 shares of common stock issued during fiscal
2009 in non-cash transactions were issued in the following
amounts:
(1) 1,785,700 shares were issued to effectuate
$750,000 of non-cash contributions by the Company to the
Companys ESBP for fiscal 2009.
F-19
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
(2) 1,600 shares, valued at $600, were issued to
employees as compensation for services.
(3) After giving effect to the forfeiture of
2,300 shares of nonvested stock, there was a net increase
of 74,300 nonvested shares issued to certain employees as
retention incentives, valued in the aggregate at $7,600.
(4) 315,000 shares, valued at $146,600, were issued to
an investment banking firm for services rendered in connection
with the Optex Asset Sale, the Companys debt workout with
Longview and Alpha and the Bridge Financing.
(5) 339,800 shares, valued at $133,100, were issued to
a non-employee service provider as compensation for services.
(6) In accordance with terms of the Companys
aggregate $1 million of secured promissory notes purchased
by investors in November 2008, December 2008, January 2009 and
February 2009, 575,600 shares, valued at $250,000, were
issued to investors that purchased said secured promissory notes.
(7) 1,089,000 shares, valued at $348,500, were issued
in exchange for the cancellation of $348,500 of principal and
interest obligations owed pursuant to said secured promissory
notes.
(8) 1,956,300 shares were issued pursuant to
conversion of shares of
Series A-1
Stock. (See Note 6.)
Fiscal
2010 Issuances
During fiscal 2010, the Company issued an aggregate of
23,840,900 shares of its common stock, net of the
forfeiture of 14,000 shares of nonvested stock, in various
transactions. Of these issuances, 3,618,000 shares were
issued in cash transactions with an aggregate valuation of
$601,500. The remaining 20,222,900 shares were issued in
non-cash transactions with an aggregate valuation of $6,287,900,
net of forfeitures. These transactions are separately discussed
below.
Fiscal
2010 Cash Transactions
The 3,618,000 shares of common stock issued during fiscal
2010 in cash transactions were issued in the following amounts:
(1) 3,469,500 shares were issued as a result of a
private placement in which the Company sold and issued to 30
accredited investors (the Common Stock Investors)
common stock units (the Common Stock Units) (the
Common Stock Private Placement). The approximate
$581,900 aggregate purchase price for these Common Stock Units
was paid in cash to the Company. Each Common Stock Unit was
comprised of (i) 100 shares of the Companys
Common Stock (the Shares) and (ii) a five-year
warrant to purchase 20 shares of the Companys Common
Stock (the Common Stock Investor Warrants).
(2) 138,500 shares were issued to an accredited
investor in a private transaction. The $18,000 aggregate
purchase price for these shares was paid in cash to the Company.
(3) 10,000 shares were issued as a result of the
exercise of options for a purchase price of $1,600.
Fiscal
2010 Non-Cash Transactions
The 20,222,900 shares of common stock issued during fiscal
2010 in non-cash transactions were issued in the following
amounts:
(1) an aggregate of 8,979,000 shares of common stock
of the Company were issued in various transactions in exchange
for conversion and cancellation of $2,997,500 of the stated
value of the Companys
Series A-1
Stock.
F-20
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
(2) an aggregate of 4,677,400 shares of common stock
of the Company were issued in various transactions in exchange
for conversion and cancellation of $666,700 of the stated value
of the Companys
Series A-2
Stock.
(3) an aggregate of 3,194,600 shares of common stock
of the Company were issued in various transactions in exchange
for conversion and cancellation of $1,597,300 of the stated
value of the Companys Series B Stock.
(4) 2,673,800 shares of common stock of the Company
were issued to effectuate $750,000 of non-cash contributions by
the Company to the Companys employee retirement plan, the
Cash or Deferred & Stock Bonus Plan
(ESBP), for fiscal 2010, all of which has been
recognized as expense in fiscal 2010.
(5) 693,600 shares of common stock of the Company were
issued to pay interest in the amount of $277,400 on the
Companys Debentures pursuant their terms. (See
Note 4).
(6) after giving effect to the forfeiture of
14,000 shares of nonvested stock, there was a net increase
of 4,500 shares and a net expense decrease of $1,000
associated with issuance of common stock to employees as
compensation for services rendered.
The value of all of the non-cash issuances of common stock was
based on the last reported closing sales price of the
Companys common stock as reported by the Nasdaq Capital
Market prior to the various issuances or entering into the
contractual obligations for such issuances.
Note 7
Common Stock Warrants
In fiscal 2009, five-year warrants to purchase an aggregate of
299,300 shares of common stock, at exercise prices ranging
from $0.40 per share to $0.47 per share, were issued to an
investment banker as partial consideration for services rendered
in the private placement of a debt financing. The estimated fair
value of these warrants, $92,100, is a portion of the deferred
debt issuance costs that was amortized over the term of the debt
instruments. (See also Note 4). In fiscal 2009, as a result
of the Companys issuance of common shares to the ESBP in
October 2008, issuance of common shares and options to employees
in October 2008, issuance of common shares to a service provider
in February 2009, closings of a bridge financing in November
2008, December 2008, January 2009 and February 2009, issuance of
the
Series A-2
stock in April 2009, exchange of a portion of the Bridge Notes
for common stock in April 2009 and issuance of shares to an
investment banker in August 2009, warrants to purchase
258,100 shares at $9.39 per share were automatically
adjusted to purchase 762,000 shares at $3.18 per share.
Warrants to purchase 59,900 shares of the Companys
common stock expired during fiscal 2009.
In fiscal 2010, the Company issued a five-year warrant to
purchase 907,400 shares of common stock at an exercise
price of $0.55 per share to its investment banking firm as
partial consideration for services rendered in the private
placement of the Series B preferred stock unit financing.
(See Note 5). As an element of that financing, the Company
issued five-year warrants to the investors, valued at $424,000
pursuant to the Black-Scholes model, to purchase an aggregate of
2,094,000 shares of common stock at an exercise price of
$0.55 per share. In fiscal 2010, the Company also issued a
five-year warrant to purchase 350,000 shares of the
Companys common stock at an exercise price of $0.44 per
share to its investment banking firm for a one-year extension of
an agreement with said firm to assist the Company to raise
additional capital and to provide financial advisory services.
The estimated fair value of this warrant, $119,000, is being
amortized over the
12-month
term of the extension.
As a result of the closing of the Series B preferred stock
financing and the warrant issued to the investment banking firm
in connection with the agreement extension discussed above,
warrants to purchase 762,000 shares of common stock at
$3.18 per share were automatically adjusted to purchase
1,477,500 shares at $1.64 per share effective
December 27, 2009, which warrants subsequently expired on
December 30, 2009.
In fiscal 2010, the Company issued five-year warrants to
purchase 986,700 shares of common stock at an exercise
price of $0.40 per share to its investment banking firm as
partial consideration for services rendered in the
F-21
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
Debenture Private Placement. As an element of that financing,
the Company issued five-year warrants to the investors to
purchase an aggregate of 860,000 shares of common stock at
an exercise price of $0.40 per share. (See Note 4). The
Company used the Black-Scholes model to value the warrants
issued to the investment banking firm and investors pursuant to
the Debenture Private Placement using the following assumptions;
volatility of 95.9%, stock price $0.30 per share, exercise price
$0.40 per share, risk-free interest rate of 2.7%, and an
expected term of five years.
In fiscal 2010, the Company issued five-year warrants to
purchase approximately 247,300 shares of common stock and
203,700 shares of common stock at exercise prices of $0.32
per share and $0.21 per share, respectively, to its investment
banking firm as partial consideration for services rendered in
the Common Stock Private Placement. (See Note 6). As an
element of that financing, the Company issued five-year warrants
to the Common Stock Investors to purchase an aggregate of
approximately 380,400 shares of common stock and
approximately 313,500 shares of common stock at exercise
prices of $0.32 per share and $0.21 per share, respectively.
In fiscal 2010, in satisfaction of certain requirements related
to Longviews consent to the Looney Settlement Agreement,
the Company issued a two-year warrant to Longview to purchase
1,000,000 shares of the Companys common stock at an
exercise price per share of $0.30. (See Note 3). The
Company used the Black-Scholes model to value the warrant issued
to Longview using the following assumptions; volatility of
97.2%, stock price $0.30 per share, exercise price $0.30 per
share, risk-free interest rate of 0.36%, and an expected term of
two years. The Company recorded the resulting $150,000 expense
for the issuance of this warrant in fiscal 2010.
Outstanding
Warrants
As of October 3, 2010, warrants to purchase a total of
8,042,300 shares of the Companys common stock were
outstanding, with a weighted average exercise price of $0.49 per
share and exercise prices ranging from $0.12825 per share to
$13.00 per share, of which 1,350,000 warrants expire in fiscal
2012, 50,000 warrants expire in fiscal 2013, 3,300,690 warrants
expire in fiscal 2014 and 3,341,600 warrants expire in fiscal
2015.
Note 8
Stock Incentive Plans, Employee Retirement Plan and Deferred
Compensation Plans
Stock Incentive Plans. In June 2006, the
Companys stockholders approved the Companys 2006
Omnibus Incentive Plan (the 2006 Plan), which is
designed to serve as a comprehensive equity incentive program to
attract and retain the services of individuals essential to the
Companys long-term growth and financial success. The 2006
Plan permits the granting of stock options (including both
incentive and non-qualified stock options), stock-only stock
appreciation rights, nonvested stock and nonvested stock units,
performance awards of cash, stock or property, dividend
equivalents and other stock grants. Upon approval of the 2006
Plan in June 2006, the Companys 2003 Stock Incentive Plan
(the 2003 Plan), 2001 Non-Qualified Stock Option
Plan (the 2001 Non-Qualified Plan), 2001 Stock
Option Plan (the 2001 Plan) and 2000 Non-Qualified
Stock Option Plan (the 2000 Plan) (collectively, the
Prior Plans) were terminated, but existing options
issued pursuant to the Prior Plans remain outstanding in
accordance with the terms of their original grants. As of
October 3, 2010, options to purchase 4,000 shares of
the Companys common stock at an exercise price of $265.62
per share were outstanding and exercisable under the 2000 Plan,
options to purchase 2,500 shares of the Companys
common stock at an exercise price of $11.50 per share were
outstanding and exercisable under the 2001 Plan, options to
purchase 43,300 shares of the Companys common stock
were outstanding and exercisable under the 2001 Non-Qualified
Option Plan, at exercise prices ranging from $8.60 to $13.50 per
share, and options to purchase 268,000 shares of the
Companys common stock were outstanding and exercisable
under the 2003 Plan at exercise prices ranging from $10.40 to
$36.20 per share.
Pursuant to an amendment of the 2006 Plan by stockholders in
March 2009, the number of shares of common stock reserved for
issuance under the 2006 Plan shall automatically increase at the
beginning of each subsequent fiscal year by the lesser of
1,250,000 shares or 5% of the common stock of the Company
outstanding on the last day of the preceding fiscal year. As a
result of that provision, the number of shares issuable under
the 2006 Plan
F-22
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
increased by 484,800 shares in fiscal 2010. The aggregate
number of shares of common stock issuable under all stock-based
awards that may be made under the 2006 Plan at October 3,
2010 is 85,400 shares. As of October 3, 2010, there
were options to purchase 1,056,100 shares of the
Companys common stock outstanding under the 2006 Plan, at
exercise prices ranging from $0.16 to $14.10 per share, of which
options to purchase 648,100 shares were exercisable at
October 3, 2010. As of October 3, 2010,
39,100 shares of nonvested stock were issued and
outstanding pursuant to the 2006 Plan and 291,100 shares of
vested stock were issued and outstanding pursuant to the 2006
Plan.
There were no options granted by any of the Companys
subsidiaries during fiscal 2010 and fiscal 2009.
The exercise prices of stock options granted during the two
fiscal years ended October 3, 2010 were equal to the
closing price of the Companys common stock at the date of
grant. The following table summarizes stock options outstanding
as of October 3, 2010 as well as activity during the
two-fiscal year period then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
No. of Shares(1)
|
|
|
Exercise Price
|
|
|
Options outstanding at September 28, 2008
|
|
|
477,900
|
|
|
$
|
22.49
|
|
Granted
|
|
|
122,000
|
|
|
|
0.37
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(31,000
|
)
|
|
|
21.87
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 27, 2009
|
|
|
568,900
|
|
|
$
|
17.78
|
|
Granted
|
|
|
833,000
|
|
|
|
0.16
|
|
Exercised
|
|
|
(10,000
|
)
|
|
|
0.16
|
|
Forfeited
|
|
|
(18,000
|
)
|
|
|
1.09
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at October 3, 2010
|
|
|
1,373,900
|
|
|
$
|
7.44
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at October 3, 2010
|
|
|
965,900
|
|
|
$
|
10.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Rounded to nearest one hundred (100). |
For fiscal years 2010 and 2009, the weighted-average grant-date
fair value of options granted was $0.08 and $0.20, respectively.
At October 3, 2010, the aggregate intrinsic value of
nonvested options outstanding and options exercisable was $0 and
$0, respectively. For fiscal year 2010, there was one option
exercised, but that option had an option exercise price greater
than the market price, resulting in the total intrinsic value of
options exercised being $0. The intrinsic value of a stock
option is the amount by which the market value of the underlying
stock exceeds the exercise price of the option, determined as of
the date of the option exercise. At October 3, 2010, the
weighted-average remaining contractual life of options
outstanding and exercisable was 7.6 years and
6.7 years, respectively.
F-23
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
A summary of outstanding options and exercisable options under
the Companys 2000, 2001, 2003 and 2006 Qualified and
Non-Qualified Plans at October 3, 2010 is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
Exercisable Options
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
Weighted
|
|
|
|
|
Range of
|
|
|
|
|
Contractual Life
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
Exercise Prices
|
|
Number(1)
|
|
|
(Years)
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Number(1)
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
|
$ 0.16 - 1.70
|
|
|
933,500
|
|
|
|
9.0
|
|
|
$
|
0.20
|
|
|
$
|
|
|
|
|
525,500
|
|
|
$
|
0.22
|
|
|
$
|
|
|
8.60 - 14.10
|
|
|
209,800
|
|
|
|
5.1
|
|
|
|
12.66
|
|
|
|
|
|
|
|
209,800
|
|
|
|
12.66
|
|
|
|
|
|
15.60 - 22.50
|
|
|
72,600
|
|
|
|
4.4
|
|
|
|
21.11
|
|
|
|
|
|
|
|
72,600
|
|
|
|
21.11
|
|
|
|
|
|
23.50 - 36.20
|
|
|
154,000
|
|
|
|
4.0
|
|
|
|
31.12
|
|
|
|
|
|
|
|
154,000
|
|
|
|
31.12
|
|
|
|
|
|
265.62
|
|
|
4,000
|
|
|
|
0.2
|
|
|
|
265.62
|
|
|
|
|
|
|
|
4,000
|
|
|
|
265.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,373,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
965,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Rounded to nearest one hundred (100). |
The aggregate intrinsic values set forth in the above table,
which represent the total pre-tax intrinsic values, are based on
the closing stock price of the Companys common stock of
$0.124 as of October 1, 2010, the last trading date prior
to October 3, 2010, and assuming all the optionees had
exercised their options as of that date. At October 3,
2010, there were no
in-the-money-options.
By comparison, as of September 25, 2009, the last trading
date prior to September 27, 2009, the closing stock price
of the Companys common stock was $0.49, and there were
options to purchase a total of 110,000 shares outstanding
at September 27, 2009 at a weighted-average exercise price
of $0.35 per share, which made those options
in-the-money.
The Boards of Directors of most of the Companys
subsidiaries have adopted, and the Company has approved, stock
option plans. Under the subsidiary option plans, options may be
granted to employees, non-employee directors and other
individual service providers of the subsidiary or the Company.
Options granted under the subsidiary option plans may be either
incentive stock options or non-statutory stock options. As of
October 3, 2010, the Companys subsidiaries have
granted outstanding options to purchase an aggregate of
10,594,100 shares of their respective common stock, net of
cancellations from terminations, all of which options were
exercisable at October 3, 2010.
Previously granted options to purchase 408,000 shares of
the Companys common stock with a weighted average exercise
price of $0.17 per share and a weighted average fair value of
$0.37 per share were nonvested as of October 3, 2010. Total
stock-based compensation expense during fiscal 2010 was
approximately $103,200, of which $37,400 was charged to cost of
contract research and development and $65,800 was charged to
general and administrative expense. Total stock-based
compensation expense during fiscal 2009 was approximately
$142,000, of which $40,800 was charged to cost of contract
research and development and $101,200 was charged to general and
administrative expense.
The total amount of compensation expense related to option
awards not yet recognized at October 3, 2010 was $28,800.
The amount of compensation expense related to such existing
option awards expected to be recognized is as follows:
|
|
|
|
|
FY 2011
|
|
$
|
16,300
|
|
FY 2012
|
|
|
12,500
|
|
|
|
|
|
|
Total
|
|
$
|
28,800
|
|
|
|
|
|
|
However, such amounts do not include the cost of new options
that may be granted in future periods nor any changes in the
Companys forfeiture percentage.
F-24
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
In fiscal 2010, the Company granted 1,800 shares of vested
stock and 52,400 previously nonvested shares vested, for an
aggregate value of $93,600. In fiscal 2009, the Company granted
1,600 shares of vested stock and 10,800 previously
nonvested shares vested, for an aggregate value of $63,400.
The following table summarizes nonvested stock grants
outstanding as of October 3, 2010 as well as activity
during fiscal 2009 and fiscal 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
|
Date Fair Value
|
|
|
|
Nonvested Shares
|
|
|
per Share
|
|
|
Outstanding at September 28, 2008
|
|
|
26,900
|
|
|
$
|
11.30
|
|
Granted
|
|
|
76,600
|
|
|
|
0.37
|
|
Vested
|
|
|
(10,800
|
)
|
|
|
10.84
|
|
Forfeited
|
|
|
(2,300
|
)
|
|
|
8.83
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 27, 2009
|
|
|
90,400
|
|
|
|
2.15
|
|
Granted
|
|
|
11,300
|
|
|
|
0.32
|
|
Vested
|
|
|
(52,400
|
)
|
|
|
1.77
|
|
Forfeited
|
|
|
(15,300
|
)
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 3, 2010
|
|
|
34,000
|
|
|
$
|
2.88
|
|
|
|
|
|
|
|
|
|
|
The total amount of compensation expense related to nonvested
stock grants not yet recognized at October 3, 2010 was
$9,700 and the amount expected to be recognized as compensation
expense is as follows:
|
|
|
|
|
FY 2011
|
|
$
|
8,400
|
|
FY 2012
|
|
|
1,000
|
|
FY 2013
|
|
|
300
|
|
|
|
|
|
|
Total
|
|
$
|
9,700
|
|
|
|
|
|
|
However, such amounts do not include the cost of new nonvested
stock grants that may be granted in future periods nor any
changes in the Companys forfeiture percentage.
Employee Stock Benefit Plan. In fiscal 1982,
the Company established an employee retirement plan, the ESBP,
which is effective for fiscal year 1982 and thereafter. This
plan provides for annual contributions to the Companys
Employee Stock Bonus Trust (SBT) to be determined by
the Board of Directors and which will not exceed 15% of total
payroll. At the discretion of the Trustee, the SBT will purchase
common stock at fair market value or other interest-bearing
securities or investments for the accounts of individual
employees who, as of October 3, 2010, will gain a vested
interest of 20% in their accounts after their first year of
service, and 20% each year of service thereafter, until fully
vested after five years of service. Employees who attain
age 65 will be fully vested in contributions to their
account regardless of years of service. Pursuant to the ESBP
provision, vesting requirements are met as services are
performed and fulfilled at each fiscal year end. That portion of
cash or stock held in an employees account and not vested
at termination of employment will be redistributed in accordance
with a prearranged formula. Management believes that the
contributions made by the Company to the SBT, to the extent they
relate to government cost-plus-fixed-fee contracts, will be
reimbursable by the U.S. government. In fiscal years 2010
and 2009, the Companys aggregate contributions to the SBT
were 2,673,800 and 1,785,700 shares of common stock,
respectively, which had estimated market values of $750,000 and
$750,000, respectively.
Deferred Compensation Plan. In September 2002,
the Company established a deferred compensation plan, the
Non-Qualified Deferred Compensation Plan, for certain key
employees with long-term service with the Company. Annual
contributions of common stock of the Company are made to a Rabbi
Trust under such plan to be
F-25
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
held for the benefit of the deferred compensation plan
participants. The Board of Directors did not authorize a
contribution to the Non-Qualified Deferred Compensation Plan for
fiscal 2009 or fiscal 2010. Participants potential
distributions from the Rabbi Trust represent unsecured claims
against the Company. The Rabbi Trust was established by the
Company and is subject to creditors claims. Shares in this
plan may be distributed to each plan beneficiary when they
retire from service with the Company. At October 3, 2010,
66,000 shares of the Companys common stock were in
the Rabbi Trust.
Executive Salary Continuation Plan. In
February 1996, the Company established a deferred compensation
plan (the ESCP) for select key employees of the
Company. Benefits payable under the ESCP are established on the
basis of years of service with the Company, age at retirement
and base salary, subject to a maximum benefits limitation of
$137,000 per year for any individual. The ESCP is an unfunded
plan. The recorded liability for future expense under the ESCP
is determined based on expected lifetime of participants using
Social Security mortality tables and discount rates comparable
to that of rates of return on high quality investments providing
yields in amount and timing equivalent to expected benefit
payments. At the end of each fiscal year, the Company determines
the assumed discount rate to be used to discount the ESCP
liability. The Company considered various sources in making this
determination for fiscal 2010, including the Citigroup Pension
Liability Index, which at September 30, 2010 was 5.158%.
Based on this review, the Company used a 5.2% discount rate for
determining the ESCP liability at October 3, 2010. There
are presently two retired executives of the Company who are
receiving lifetime benefits aggregating $184,700 per annum under
the ESCP. Two current executives of the Company, the
Companys CEO and the Companys CFO, were eligible for
lifetime benefits of $137,000 per annum each upon their
retirement. However, these executives voluntarily permanently
waived their entitlement to such benefits in September 2009. As
a result of this action, the Company recorded a gain for
reduction in pension liability of $2,442,900 in fiscal 2009. The
current and long-term portions of the ESCP liability at
October 3, 2010 are $184,700 and $1,030,700, respectively,
for an aggregate liability of $1,215,400. The current and
long-term portions of the ESCP liability at September 27,
2009 were $184,700 and $1,057,600, respectively, for an
aggregate liability of $1,242,300.
Note 9
Income (Loss) per Share
Since the Company had a net loss for fiscal 2010, basic and
diluted net loss per common share for fiscal 2010 is the same
and is computed based solely on the weighted average number of
shares of common stock outstanding for the fiscal year. In
fiscal 2010, application of the if-converted method
to the Companys convertible preferred stock and
convertible debt resulted in said instruments being
anti-dilutive and therefore not impacting the calculation of
income per share. However, as of September 27, 2009, the
Company had outstanding stock options, nonvested stock and
convertible preferred stock with exercise or valuation prices
less than the average closing market price of the Companys
common stock over fiscal 2009. Such in-the money
instruments are assumed to have been exercised or vested at the
beginning of a period (or at time of issuance, if later) for
purposes of calculating diluted income per share if the Company
has recorded a
year-to-date
income through said period, which was the case in fiscal 2009.
As a result, basic and diluted net income per common share must
be separately calculated for fiscal 2009.
Cumulative dividends on the
Series A-1
Stock and
Series A-2
Stock for fiscal 2010 and fiscal 2009, although not declared,
constitute a preferential claim against future dividends, if
any, and are treated as an incremental expense of continuing
operations for purposes of determining basic and diluted net
loss from continuing operations per common share. As of
October 3, 2010, cumulative dividends on the
Series A-1
Stock and
Series A-2
Stock held by Longview through July 15, 2010 had been
waived pursuant to the Looney Settlement Agreement. (See
Note 3). In like manner, the BCF associated with the
issuance of the Companys Series B Stock in fiscal
2010, although not recorded as an expense, is treated as a
deemed dividend and, therefore, an incremental expense of
continuing operations for purposes of determining basic and
diluted net loss from continuing operations per common share.
F-26
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
The following table sets forth the computation of basic and
diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
Continuing Operations Numerator:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to Company
|
|
$
|
(11,155,800
|
)
|
|
$
|
856,400
|
|
Undeclared cumulative dividends on
Series A-1
and
Series A-2
preferred stock*
|
|
|
(19,700
|
)
|
|
|
(455,500
|
)
|
Deemed dividend for beneficial conversion feature related to
Series B preferred stock
|
|
|
(1,471,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted basic and diluted net income (loss) applicable to
Company common stockholders
|
|
$
|
(12,646,500
|
)
|
|
$
|
400,900
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations Numerator:
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
|
|
|
$
|
58,400
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income (Loss) from Continuing and Discontinued
Operations Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
18,116,700
|
|
|
|
6,730,500
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share information:
|
|
|
|
|
|
|
|
|
From continuing operations attributable to Company
|
|
$
|
(0.70
|
)
|
|
$
|
0.06
|
|
From discontinued operations attributable to Company
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$
|
(0.70
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Diluted Net Income (Loss) from Continuing and Discontinued
Operations Denominator:
|
|
|
|
|
|
|
|
|
Assumed net exercise and vesting of options and nonvested stock
and conversion of preferred stock
|
|
|
|
|
|
|
10,005,400
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
18,116,700
|
|
|
|
6,730,500
|
|
|
|
|
|
|
|
|
|
|
Assumed weighted average number of common shares outstanding
|
|
|
18,116,700
|
|
|
|
16,735,900
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share information:
|
|
|
|
|
|
|
|
|
From continuing operations attributable to Company
|
|
$
|
(0.70
|
)
|
|
$
|
0.05
|
|
From discontinued operations attributable to Company
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) attributable to Company per
common share
|
|
$
|
(0.70
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Potential undeclared dividends accumulated prior to
July 15, 2010 were waived in April 2010. (See Note 3). |
Options, warrants and convertible instruments outstanding at
October 3, 2010 and September 27, 2009 to purchase
approximately 22,990,300 and 1,409,800 shares of the
Companys common stock, respectively, were not included in
the above computation because they were anti-dilutive.
Note 10
Minority Interest in Subsidiaries
Novalog did not grant any options to purchase shares of
Novalogs common stock in fiscal 2010 and fiscal 2009. As
of October 3, 2010, there were no options to purchase
shares of common stock of Novalog outstanding. At
October 3, 2010, the Company owned 96% of Novalogs
common stock.
F-27
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
MSI did not grant any options to purchase common shares of MSI
stock in fiscal 2010 and fiscal 2009. As of October 3,
2010, there were no options to purchase shares of common stock
of MSI outstanding. At October 3, 2010, the Company owned
98% of MSIs common stock. The Company has granted a
perpetual non-exclusive license to a third party for technology
developed by MSI. This license has not generated any material
royalties to date.
RedHawk did not grant any options to purchase shares of
RedHawks common stock in fiscal 2010 and fiscal 2009. As
of October 3, 2010, there were no options to purchase
shares of common stock of RedHawk outstanding. At
October 3, 2010, the Company owned 81% of RedHawks
common stock.
iNetWorks did not grant any options to purchase shares of its
common stock in fiscal 2010 and fiscal 2009. As of
October 3, 2010, there were options to purchase
10,594,100 shares of iNetWorks common stock outstanding
with a weighted average exercise price of $0.04 per share and a
weighted average remaining life of 0.18 years. There is no
public market for shares of iNetWorks common stock. At
October 3, 2010, the Company owned 95% of iNetWorks
common stock.
Note 11
Discontinued Operations
In September 2008, the Company entered into a binding agreement
with its senior lenders regarding the Optex Asset Sale, which
was subsequently consummated in October 2008. Consequently, the
accompanying consolidated financial statements reflect Optex as
discontinued operations, and the results of operations and cash
flows of Optexs business have been classified as
discontinued for all periods presented. As of October 3,
2010 and September 27, 2009, there were no assets or
liabilities of discontinued operations. Operations of the
discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
Product sales, net
|
|
$
|
|
|
|
$
|
871,900
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
74,800
|
|
Interest and other expense
|
|
|
|
|
|
|
(9,500
|
)
|
Provision for income tax
|
|
|
|
|
|
|
(6,900
|
)
|
|
|
|
|
|
|
|
|
|
Income from operations of discontinued subsidiary
|
|
|
|
|
|
|
58,400
|
|
Loss on disposal of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
|
|
|
$
|
58,400
|
|
|
|
|
|
|
|
|
|
|
Note 12
Composition of Certain Financial Statement Captions
Accounts receivable and unbilled revenues on uncompleted
contracts are largely derived from the Companys contracts
with various U.S. government agencies and contractors, as
shown below.
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accounts receivable and unbilled revenues on uncompleted
contracts:
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
997,800
|
|
|
$
|
2,180,700
|
|
Other customers
|
|
|
28,200
|
|
|
|
115,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,026,000
|
|
|
|
2,296,600
|
|
Less allowance for doubtful accounts
|
|
|
(13,600
|
)
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,012,400
|
|
|
$
|
2,281,600
|
|
|
|
|
|
|
|
|
|
|
F-28
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
Unbilled amounts of $630,300 and $885,300 at October 3,
2010 and September 27, 2009, respectively, represent
contract revenues for which billings have not been presented to
customers at year-end. These amounts are billed in accordance
with applicable contract terms, usually within 30 days.
Included in these amounts are unbilled retentions of $392,700
and $278,500 at October 3, 2010 and September 27,
2009, respectively. The unbilled retentions are normally
collected upon final audit of costs by the U.S. government.
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
Inventory:
|
|
|
|
|
|
|
|
|
Work in process
|
|
$
|
360,800
|
|
|
$
|
1,128,000
|
|
Raw materials
|
|
|
781,500
|
|
|
|
326,800
|
|
Finished goods
|
|
|
823,500
|
|
|
|
161,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,965,800
|
|
|
|
1,615,800
|
|
Less reserve for obsolete inventory
|
|
|
(250,000
|
)
|
|
|
(1,174,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,715,800
|
|
|
$
|
441,100
|
|
|
|
|
|
|
|
|
|
|
The Company uses the average cost method for valuation of its
product inventory.
Title to all inventories remains with the Company. Inventoried
materials and costs relate to: work orders from customers; the
Companys generic module parts and memory stacks; and
capitalized material, labor and overhead costs expected to be
recovered from probable new research and development contracts.
Work in process includes amounts that may be sold as products or
under contracts. Such inventoried costs are stated generally at
the total of the direct production costs including overhead.
Inventory valuations do not include general and administrative
expenses. Inventories are reviewed quarterly to determine
salability and obsolescence. The net book value of capitalized
pre-contract costs, which gross costs are included in the
caption Work in process, at October 3, 2010 and
September 27, 2009 was $360,800 and $774,700, respectively.
The Companys property and equipment at October 3,
2010 and September 27, 2009 is shown below.
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Engineering and production equipment
|
|
$
|
18,853,800
|
|
|
$
|
18,003,800
|
|
Furniture and fixtures
|
|
|
442,700
|
|
|
|
442,700
|
|
Construction in progress
|
|
|
203,700
|
|
|
|
35,100
|
|
Leasehold improvements
|
|
|
2,101,200
|
|
|
|
2,096,700
|
|
Software
|
|
|
2,409,700
|
|
|
|
2,394,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,011,100
|
|
|
|
22,972,900
|
|
Less accumulated depreciation and amortization
|
|
|
(21,281,100
|
)
|
|
|
(20,074,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,730,000
|
|
|
$
|
2,898,100
|
|
|
|
|
|
|
|
|
|
|
Capitalized software is being amortized on a straight-line basis
over its useful life of two to eight years. Capitalized costs of
patents and trademarks include amounts paid to third parties for
legal fees, application fees and other direct costs incurred in
the filing and prosecution of patent and trademark applications.
These assets are amortized on a straight-line method over the
shorter of their estimated useful or legal life, generally ten
years. (See also Note 1).
F-29
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
The net book value of assets under capital leases at
October 3, 2010 and September 27, 2009 was
approximately $0 and $11,200, respectively, which amounts are
net of accumulated depreciation of approximately $0 and $51,500,
respectively.
The Companys intangible assets are reported at cost less
accumulated amortization and consist of patents and trademarks
related to the Companys various technologies. Net
intangible assets at October 3, 2010 and September 27,
2009 are set forth below.
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
Intangible assets, net:
|
|
|
|
|
|
|
|
|
Patents and trademarks
|
|
$
|
19,600
|
|
|
$
|
19,600
|
|
Less accumulated amortization
|
|
|
(7,200
|
)
|
|
|
(5,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,400
|
|
|
$
|
14,400
|
|
|
|
|
|
|
|
|
|
|
The patent and trademark amortization expense for the fiscal
years ended October 3, 2010 and September 27, 2009 was
$2,000 and $72,100, respectively. A substantial portion of the
fiscal 2009 patent sale and license amortization expense relates
to patents no longer owned by the Company at September 27,
2009 as a result of the Patent Sale and License in March 2009.
The unamortized balance of intangible assets is estimated to be
amortized as follows:
|
|
|
|
|
|
|
Estimated Amortization Expense
|
For the Fiscal Year
|
|
Patents and Trademarks
|
|
2011
|
|
$
|
700
|
|
2012
|
|
|
700
|
|
2013
|
|
|
700
|
|
2014
|
|
|
700
|
|
2015
|
|
|
700
|
|
2016
|
|
|
700
|
|
Thereafter
|
|
|
8,200
|
|
The Company reviews its intangible assets for impairment when
and if impairment indicators occur. At October 3, 2010,
management believed no indications of impairment existed
relative to the above listed intangible assets.
Accrued expenses as of October 3, 2010 and
September 27, 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
1,662,700
|
|
|
$
|
405,500
|
|
Vacation
|
|
|
550,000
|
|
|
|
637,100
|
|
Payroll taxes
|
|
|
98,300
|
|
|
|
35,700
|
|
Interest
|
|
|
1,131,400
|
|
|
|
1,060,700
|
|
Deferred compensation (current ESCP liability)
|
|
|
184,700
|
|
|
|
184,700
|
|
Provision for litigation judgment
|
|
|
|
|
|
|
834,300
|
|
Professional fees
|
|
|
250,500
|
|
|
|
370,000
|
|
Other accrued expenses
|
|
|
224,100
|
|
|
|
202,800
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,101,700
|
|
|
$
|
3,730,800
|
|
|
|
|
|
|
|
|
|
|
F-30
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
Note 13
Commitments and Contingencies
The Company leases certain facilities and equipment under
cancelable and non-cancelable operating leases, with escalating
rent provisions for facility leases. Future minimum payments
under capital lease obligations and operating lease commitments
for the next five years as of October 3, 2010 are as
follows:
|
|
|
|
|
|
|
Operating
|
|
Fiscal Year
|
|
Leases
|
|
|
2011
|
|
$
|
870,000
|
|
2012
|
|
|
892,000
|
|
2013
|
|
|
911,000
|
|
2014
|
|
|
21,000
|
|
2015
|
|
|
18,000
|
|
|
|
|
|
|
Future minimum lease payments
|
|
$
|
2,712,000
|
|
|
|
|
|
|
Total rent expense for operating leases amounted to $842,000 and
$781,000 for the fiscal years ended October 3, 2010 and
September 27, 2009, respectively. Rent expense is
recognized on a straight-line basis over the lease period.
Deferred rent amounts are immaterial.
Litigation
In March 2009, FirstMark III, LP, formerly known as Pequot
Private Equity Fund III, LP, and FirstMark III
Offshore Partners, LP, formerly known as Pequot Offshore Private
Equity Partners III, LP, filed a lawsuit in the state Supreme
Court, State of New York, County of New York, against the
Company. The plaintiffs allege the Company breached a settlement
agreement dated December 29, 2006 with them that allegedly
required the Company to make certain payments to the plaintiffs
that were not made, in the principal amounts of approximately
$539,400 and $230,000 plus interest thereon allegedly accruing
at 18% from March 14, 2007 and May 31, 2007,
respectively. At October 3, 2010, the Company has
approximately $1,269,600 of expense accrued reflecting these
alleged obligations. The plaintiffs filed a motion for summary
judgment in this matter, which was granted in January 2010,
although judgment has not yet been entered as of the date of
this report. The Company has sought to settle this matter, but
such an outcome cannot be assured.
The Company has been, and may from time to time, become a party
to various other legal proceedings arising in the ordinary
course of its business. The Company does not presently know of
any such other matters, the disposition of which would be likely
to have a material effect on the Companys consolidated
financial position, results of operations or liquidity.
Note 14
Income Taxes
The income tax provision is based upon managements review
of the Companys estimated annual income tax rate,
including state taxes. The income tax provision for fiscal 2010
and fiscal 2009 consists of state minimum taxes currently
payable.
F-31
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
The provision for income taxes from continuing operations is
comprised of:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
October 3, 2010
|
|
|
September 27, 2009
|
|
|
Current federal
|
|
$
|
|
|
|
$
|
|
|
Current state
|
|
|
7,300
|
|
|
|
73,600
|
|
Deferred federal
|
|
|
|
|
|
|
|
|
Deferred state
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense
|
|
$
|
7,300
|
|
|
$
|
73,600
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes from continuing
operations differs from the amount computed by applying the
statutory federal income tax rate to income (loss) before
(provision) benefit for income taxes. The sources and tax
effects of the differences are as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
October 3, 2010
|
|
|
September 27, 2009
|
|
|
Income tax provision (benefit) at the federal statutory rate of
34%
|
|
$
|
(3,807,700
|
)
|
|
$
|
316,500
|
|
State income tax provision, net of federal benefit
|
|
|
4,800
|
|
|
|
72,300
|
|
Expiration of operating loss carryforwards
|
|
|
|
|
|
|
44,801,600
|
|
Other
|
|
|
(50,000
|
)
|
|
|
11,400
|
|
Valuation allowance changes affecting the provision for income
taxes
|
|
|
3,860,200
|
|
|
|
(45,128,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,300
|
|
|
$
|
73,600
|
|
|
|
|
|
|
|
|
|
|
The tax effect of significant temporary items comprising the
Companys deferred taxes as of October 3, 2010 and
September 27, 2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Reserves not currently deductible
|
|
$
|
934,700
|
|
|
$
|
1,210,600
|
|
Current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(934,700
|
)
|
|
|
(1,210,600
|
)
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets (liabilities)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Operating loss carryforwards
|
|
$
|
5,715,000
|
|
|
$
|
908,200
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(5,715,000
|
)
|
|
|
(908,200
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax asset (liability)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of October 3, 2010 the Company has federal and
California net operating loss (NOL) carryover of
$13,700,000 and $13,100,000 respectfully. As a result of the
ownership change that occurred during the year ended
September 27, 2009, the Companys
pre-September 27,2009 NOLs are subject to annual IRC
section 382 limitation of approximately $105,000 per annum.
At September 27, 2009, the Company had NOL carryforwards of
approximately $2,300,000 for federal income tax purposes
expiring in fiscal year 2029, and $1,700,000 for California tax
purposes expiring in fiscal year 2029.
F-32
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
Because realization of the tax benefit of deferred tax assets is
uncertain, the Company has provided a 100% valuation allowance
against such assets as of October 3, 2010 and
September 27, 2009.
FIN 48 prescribes a recognition threshold and measurement
process for recording in the financial statements uncertain tax
positions taken or expected to be taken in a tax return.
Additionally, FIN 48 provides guidance on the
derecognition, classification, accounting in interim periods and
disclosure requirements for uncertain tax positions. The
accounting provisions of FIN 48 became effective for the
Company beginning October 1, 2007. The Company has
evaluated the application of FIN 48 for the quarter ended
December 30, 2007 and subsequent periods and has concluded
that under its provisions no additional accrual for taxes,
penalty or interest is required. Interest and penalties related
to uncertain tax positions will be reflected in income tax
expense.
Note 15
Concentration of Revenues and Sources of Supply
In fiscal 2010, direct contracts with various military services
and branches of the U.S. government accounted for
approximately 58% of the Companys total revenues and
subcontracts with prime government contractors accounted for
approximately 41% of the Companys total revenues. The
remaining approximately 1% of total revenues in fiscal 2010 was
derived from non-government sources. During fiscal 2010, of the
revenues derived directly or indirectly from
U.S. government customers, certain classified agencies, the
U.S. Army and Optics 1, Inc., a defense contractor,
accounted for 28%, 20% and 19% respectively, of the
Companys total revenues in fiscal 2010. Loss of any of
these customers would have a material adverse impact on the
Companys business, financial condition and results of
operations. No other single governmental or non-governmental
customer accounted for more than 10% of the Companys total
revenues in fiscal 2010.
In fiscal 2009, prime contracts with the U.S. government
accounted for 61% of the Companys total revenues, and
subcontracts with prime government contractors accounted for 26%
of total revenues. The remaining 13% of the Companys total
revenues fiscal 2009 were derived from non-government sources.
Of the revenues derived directly or indirectly from
U.S. government agencies, the U.S. Air Force and the
U.S. Army accounted for 33% and 16%, respectively, of total
revenues in fiscal 2009. Loss of either of these customers would
have a material adverse impact on our business, financial
condition and results of operations. No other single
governmental or non-governmental customer accounted for more
than 10% of the total consolidated revenues in fiscal 2009.
The Company primarily uses contract manufacturers to fabricate
and assemble its stacked chip, microchip and sensor products. At
current limited levels of sales, the Company typically uses a
single contract manufacturer for such products and, as a result,
is vulnerable to disruptions in supply. The Company also uses
contract manufacturers for production of its visible camera
products, except for final testing, which the Company performs
itself. The Company currently assembles, calibrates and tests
its thermal camera and software products itself, given the
relatively low volumes of these products. The Companys
various thermal and visible camera products presently rely on a
limited number of suppliers of imaging chips that meet the
quality and performance requirements of the Companys
products, which makes the Company vulnerable to potential
disruptions in supply of such imaging chips.
Note 16
Reportable Segments
The Company manages its operations through two reportable
segments, the contract research and development segment and the
product segment.
The Companys contract research and development segment
provides services, largely to U.S. government agencies and
government contractors, under contracts to develop prototypes
and provide research, development, design, testing and
evaluation of complex detection and control defense systems. The
Companys research and development contracts are usually
cost reimbursement plus fixed fee, which require the
Companys good faith performance of a statement of work
within overall budgetary constraints, but with latitude as to
resources utilized, or fixed price level of effort, which
require the Company to deliver a specified number of labor hours
in the
F-33
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
performance of a statement of work. Occasionally, the
Companys research and development contracts are firm fixed
price, which require the delivery of specified work products
independent of the resources or means employed to satisfy the
required deliveries.
Currently, the Companys product segment primarily consists
of stacked semiconductor chip assemblies, electronic chips and
miniaturized cameras, largely all of which are based on
proprietary designs of the Company.
The Companys management evaluates financial information to
review the performance of the Companys research and
development contract business separately from the Companys
product business, but only to the extent of the revenues and the
cost of revenues of the two segments. Because the various
indirect expense operations of the Company, as well as its
assets, now support all of its revenue-generating operations in
a matrix manner, frequently in circumstances in which a
distinction between research and development contract support
and product support is difficult to identify, segregation of
these indirect costs and assets is impracticable. The revenues
and gross profit or loss of the Companys two reportable
segments for fiscal 2010 and fiscal 2009 are shown in the
following table. The accounting policies used to develop segment
information correspond to those described in the summary of
significant accounting policies.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
Contract research and development revenue
|
|
$
|
8,526,200
|
|
|
$
|
10,003,500
|
|
Cost of contract research and development revenue
|
|
|
6,659,000
|
|
|
|
8,467,800
|
|
|
|
|
|
|
|
|
|
|
Contract research and development segment gross profit
|
|
$
|
1,867,200
|
|
|
$
|
1,535,700
|
|
Product sales
|
|
$
|
3,177,800
|
|
|
$
|
1,515,900
|
|
Cost of product sales
|
|
|
3,150,900
|
|
|
|
1,494,400
|
|
|
|
|
|
|
|
|
|
|
Product segment gross profit
|
|
$
|
26,900
|
|
|
$
|
21,500
|
|
Reconciliations of segment revenues to total revenues are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
Contract research and development revenue
|
|
$
|
8,526,200
|
|
|
$
|
10,003,500
|
|
Product Sales
|
|
|
3,177,800
|
|
|
|
1,515,900
|
|
Other revenue
|
|
|
12,800
|
|
|
|
16,800
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
11,716,800
|
|
|
$
|
11,536,200
|
|
|
|
|
|
|
|
|
|
|
F-34
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
Reconciliations of segment gross profit (loss) to income (loss)
from continuing operations before minority interest and
provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
Contract research and development segment gross profit
|
|
$
|
1,867,200
|
|
|
$
|
1,535,700
|
|
Product segment gross profit
|
|
|
26,900
|
|
|
|
21,500
|
|
|
|
|
|
|
|
|
|
|
Net segment gross profit
|
|
|
1,894,100
|
|
|
|
1,557,200
|
|
Add (deduct)
|
|
|
|
|
|
|
|
|
Other revenue
|
|
|
12,800
|
|
|
|
16,800
|
|
General and administrative expense
|
|
|
(6,589,900
|
)
|
|
|
(9,561,700
|
)
|
Research and development expense
|
|
|
(2,639,000
|
)
|
|
|
(2,266,700
|
)
|
Interest expense
|
|
|
(1,692,600
|
)
|
|
|
(1,635,500
|
)
|
Provision for litigation judgment
|
|
|
(20,200
|
)
|
|
|
(834,300
|
)
|
Litigation settlement expense
|
|
|
(2,270,700
|
)
|
|
|
|
|
Gain on elimination of consolidated debt
|
|
|
|
|
|
|
2,539,200
|
|
Gain on sale or disposal of assets
|
|
|
12,600
|
|
|
|
8,640,800
|
|
Gain from reduction in pension liability
|
|
|
|
|
|
|
2,442,900
|
|
Change in fair value of derivative instrument
|
|
|
95,500
|
|
|
|
|
|
Interest and other income
|
|
|
48,900
|
|
|
|
31,200
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before minority
interest and provision for income taxes
|
|
$
|
(11,148,500
|
)
|
|
$
|
929,900
|
|
|
|
|
|
|
|
|
|
|
Note 17
Subsequent Events
Private
Placement of Unsecured Promissory Notes
In November and December 2010, the Company entered into a
Subscription Agreement (the Subscription Agreement)
with forty-seven accredited investors, pursuant to which the
Company sold and issued to the investors unsecured convertible
promissory notes of the Company (the Notes) in
multiple closings of a private placement (the Private
Placement). The $3,000,000 aggregate principal value of
the Notes in said closings was paid in cash to the Company.
The Notes bear simple interest at a rate per annum of 10% and
have a maturity date of May 31, 2011. Interest on the Notes
accrues and is payable in arrears at maturity. At the discretion
of an investor holding a Note, any outstanding principal and
accrued interest remaining under the Note at maturity may be
converted into shares of the Companys common stock at a
conversion price equal to $0.13 per share (the Conversion
Price), provided, however, that the Company has a
sufficient number of authorized shares of common stock to allow
such conversion at such time, and that the investor is an
accredited investor at the time of such conversion as such term
is defined in Rule 501 under the Securities Act of
1933, as amended. There is no assurance that a sufficient number
of authorized shares of the Companys common stock will be
available for conversion of any outstanding principal and
accrued interest under the Notes. Also at the discretion of an
investor holding a Note, any outstanding principal and accrued
interest under said Note may be converted at the closing of a
subsequent private placement of the Company with gross proceeds
of at least $8.0 million (a Subsequent
Financing) into the securities issued in a Subsequent
Financing on the same terms and conditions as the other
investors in said Subsequent Financing, provided, however, that
the investor is an accredited investor at the time
of such conversion as such term is defined in Rule 501
under the Securities Act of 1933, as amended; and provided,
further, that such investor enters into and executes the same
F-35
Irvine
Sensors Corporation
Notes to
Consolidated Financial
Statements (Continued)
documents, satisfies the same conditions and agrees to be bound
by the same terms as all other investors in said Subsequent
Financing. There is no assurance that the Company will
consummate any Subsequent Financing. Unpaid and unconverted
principal value and accrued interest of the Notes may be repaid
in cash prior to maturity in whole or in part at any time
without premium or penalty. The amounts owing under the Notes
may be accelerated upon the occurrence of certain events of
default.
As additional consideration for the Notes, the Company shall
issue shares of its common stock to each investor with a value
equal to 25% of the principal amount of the Notes purchased by
such investor, based on a valuation per share (the Initial
Valuation) which was the greater of (i) the fair
market value of the Companys common stock (as determined
by the last closing sales price of the Companys common
stock prior to the date of issuance of the Notes) (the
Market Value), and (ii) $0.13 per share, but
not greater than $0.14 per share (the Shares). For
the various closings of the Private Placement, the Initial
Valuation ranged between $0.13 per share and $0.135 per share.
The Company will issue the Shares to the investors upon the
earlier of (i) the closing of a Subsequent Financing, and
(ii) seven months following the issuance date of the Notes
or as soon as practicable thereafter as permitted by law or
regulation. Pending such issuance, the Company will reserve the
appropriate number of shares of its common stock to permit the
issuance of the Shares.
The total number of Shares issuable and shares of common stock
of the Company potentially issuable upon conversion of the
principal and accrued interest under the Notes at maturity is
29,954,836 in the aggregate, assuming that the Company does not
repay the Notes before maturity and investors holding Notes
convert all outstanding principal and accrued interest at
maturity into common stock of the Company.
In consideration for services rendered as the lead placement
agent in the Private Placement, the Company paid the placement
agent cash commissions, a management fee and an expense
allowance fee aggregating $309,712, which represents 10.3% of
the gross proceeds of the Private Placement, and agreed to issue
to the placement agent five-year warrants to purchase an
aggregate of 2,382,397 shares of the Companys common
stock at exercise prices ranging from $0.13 per share to $0.135
per share, which prices were equal to the Initial Valuations of
the Companys common stock immediately preceding the
Company entering into the agreements to issue such warrants. The
warrants issued to the placement agent are referred to in this
report as the Agent Warrants.
The Agent Warrants shall be issued on the same date as the
Shares are issued to the investors in the Private Placement. The
Agent Warrants shall not be exercisable until stockholder
authority has been obtained to increase the Companys
authorized shares of common stock to a number adequate to
reserve for both any shares of common stock to be issued in a
Subsequent Financing, if any, and the Agent Warrants, as well as
any other known issuances of common stock for which the Company
must reserve shares for issuance. The Agent Warrants shall have
a net cashless exercise feature.
None of the Notes, Shares or Agent Warrants, or the shares of
the Companys common stock issuable upon conversion or
exercise thereof, has been registered under the Securities Act
of 1933 and none may be offered or sold absent registration or
an applicable exemption from registration. The Company does not
plan to register the Notes, Shares or Agent Warrants, or the
shares of the Companys common stock issuable upon
conversion or exercise thereof.
Repayment
of Longview Note
In December 2010, after consummation of the Private Placement of
unsecured promissory notes discussed immediately above, the
Company paid the principal balance and accrued interest of the
Longview Note in the aggregate amount of approximately $177,700,
pursuant to its terms. (See Note 4).
F-36
To the Board of Directors
Irvine Sensors Corporation
Costa Mesa, California
We have audited the accompanying consolidated balance sheets of
Irvine Sensors Corporation as of October 3, 2010 and
September 27, 2009, and the related consolidated statements
of operations, stockholders deficit and cash flows for the
years then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Irvine Sensors Corporation as of October 3,
2010 and September 27, 2009, and the results of its
operations and its cash flows for the years then ended, in
conformity with U.S. generally accepted accounting
principles in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2, as of October 3, 2010
the Company has negative working capital of $10.1 million
and a stockholders deficit of $10.1 million. These factors,
among others, raise substantial doubt about the Companys
ability to continue as a going concern. Managements plans
in regard to these matters are described in Note 2 to the
consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Squar,
Milner, Peterson, Miranda & Williamson, LLP
Irvine, California
December 17, 2010
F-37