SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
|
| For the quarterly period ended March 31, 2007 |
|
|
|
|
| OR |
|
|
|
o |
| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
|
| For the transition period from to |
|
|
|
|
| Commission File No. 0-22384 |
MICRO COMPONENT TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Minnesota |
| 41-0985960 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
| ||
2340 West County Road C, St. Paul, MN 55113-2528 | ||
(Address of principal executive offices) | ||
| ||
(651) 697-4000 | ||
(Registrant’s telephone number) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o |
| Accelerated Filer o |
| Non-Accelerated Filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the Registrant’s Common Stock, as of May 11, 2007 was 36,665,322.
MICRO COMPONENT TECHNOLOGY, INC.
FORM 10-Q
TABLE OF CONTENTS
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
|
|
| |
|
|
| |
|
|
| |
| |
| |
|
|
|
|
2
MICRO COMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
|
| March 31, |
| December 31, |
| ||
|
| 2007 |
| 2006 |
| ||
Assets |
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 354 |
| $ | 200 |
|
Accounts receivable, less allowance for doubtful accounts of $126 and $126, |
| 2,648 |
| 2,816 |
| ||
Inventories |
| 2,464 |
| 2,016 |
| ||
Other |
| 159 |
| 169 |
| ||
Total current assets |
| 5,625 |
| 5,201 |
| ||
|
|
|
|
|
| ||
Property, plant and equipment, net |
| 104 |
| 91 |
| ||
|
|
|
|
|
| ||
Debt issuance costs, net of accumulated amortization of $1,412 and $1,383, |
| 267 |
| 246 |
| ||
Other assets |
| 19 |
| 18 |
| ||
|
|
|
|
|
| ||
Total assets |
| $ | 6,015 |
| $ | 5,556 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders’ Deficit |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current portion of long-term debt |
| $ | 1,467 |
| $ | 228 |
|
Bank line of credit, net of discounts of $0 and $0, respectively |
| 3,873 |
| 3,906 |
| ||
Accounts payable |
| 945 |
| 440 |
| ||
Accrued compensation |
| 412 |
| 413 |
| ||
Accrued interest |
| 156 |
| 144 |
| ||
Accrued warranty |
| 103 |
| 101 |
| ||
Customer prepayments and unearned service revenue |
| 560 |
| 382 |
| ||
Other accrued liabilities |
| 135 |
| 251 |
| ||
Total current liabilities |
| 7,651 |
| 5,865 |
| ||
|
|
|
|
|
| ||
Long-term debt, net of discounts of $1,956 and $836, respectively |
| 3,206 |
| 5,506 |
| ||
Total liabilities |
| 10,857 |
| 11,371 |
| ||
|
|
|
|
|
| ||
Stockholders’ deficit: |
|
|
|
|
| ||
Preferred stock, $.01 par value, 1,000,000 authorized, none issued and outstanding |
| — |
| — |
| ||
Common stock, $.01 par value, 55,000,000 authorized, 36,665,322 and 36,665,322 issued, respectively |
| 367 |
| 367 |
| ||
Additional paid-in capital |
| 103,591 |
| 102,459 |
| ||
Accumulated deficit |
| (108,800 | ) | (108,641 | ) | ||
Total stockholders’ deficit |
| (4,842 | ) | (5,815 | ) | ||
Total liabilities and stockholders’ deficit |
| $ | 6,015 |
| $ | 5,556 |
|
See notes to unaudited condensed consolidated financial statements
3
MICRO COMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
| Three Months Ended |
| ||||
|
| March 31, |
| April 1, |
| ||
|
| 2007 |
| 2006 |
| ||
Net sales |
| $ | 3,377 |
| $ | 2,375 |
|
Cost of sales |
| 1,604 |
| 1,181 |
| ||
Gross profit |
| 1,773 |
| 1,194 |
| ||
|
|
|
|
|
| ||
Operating expenses: |
|
|
|
|
| ||
Selling, general and administrative |
| 1,105 |
| 945 |
| ||
Research and development |
| 500 |
| 518 |
| ||
|
|
|
|
|
| ||
Total operating expenses |
| 1,605 |
| 1,463 |
| ||
|
|
|
|
|
| ||
Income (loss) from operations |
| 168 |
| (269 | ) | ||
|
|
|
|
|
| ||
Interest income |
| 3 |
| — |
| ||
Interest expense and other |
| (330 | ) | (814 | ) | ||
|
|
|
|
|
| ||
Total interest and other |
| (327 | ) | (814 | ) | ||
|
|
|
|
|
| ||
Net loss |
| $ | (159 | ) | $ | (1,083 | ) |
|
|
|
|
|
| ||
Net loss per share: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Basic |
| $ | (0.00 | ) | $ | (0.04 | ) |
Diluted |
| $ | (0.00 | ) | $ | (0.04 | ) |
|
|
|
|
|
| ||
Weighted average common and equivalent shares outstanding: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Basic |
| 36,665 |
| 27,225 |
| ||
Diluted |
| 36,665 |
| 27,225 |
|
See notes to unaudited condensed consolidated financial statements
4
MICRO COMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
| Three Months Ended |
| ||||
|
| March 31, |
| April 1, |
| ||
|
| 2007 |
| 2006 |
| ||
|
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net loss |
| $ | (159 | ) | $ | (1,083 | ) |
Adjustments to reconcile net loss to net cash used in operating Activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 170 |
| 554 |
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
| 168 |
| (355 | ) | ||
Inventories |
| (448 | ) | (229 | ) | ||
Other assets |
| 9 |
| 28 |
| ||
Accounts payable |
| 505 |
| 358 |
| ||
Other accrued liabilities |
| 75 |
| 87 |
| ||
|
|
|
|
|
| ||
Net cash provided (used) in operating activities |
| 320 |
| (640 | ) | ||
|
|
|
|
|
| ||
Cash flow from investing activities: |
|
|
|
|
| ||
Purchases of property, plant and equipment |
| (38 | ) | (3 | ) | ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (38 | ) | (3 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Payments of long-term debt |
| — |
| (96 | ) | ||
Repayment of long term note |
| — |
| (4,000 | ) | ||
Proceeds on long term note, net of discounts |
| (128 | ) | 4,907 |
| ||
Proceeds from issuance of stock |
| — |
| 54 |
| ||
|
|
|
|
|
| ||
Net cash provided (used) by financing activities |
| (128 | ) | 865 |
| ||
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
| 154 |
| 222 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 200 |
| 77 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 354 |
| $ | 299 |
|
|
|
|
|
|
| ||
Supplemental cash flow information: |
|
|
|
|
| ||
Non-cash financing activities: |
|
|
|
|
| ||
Stock issued in lieu of interest |
| $ | — |
| $ | 146 |
|
Cash paid for interest |
| 261 |
| 205 |
|
See notes to unaudited condensed consolidated financial statements
5
MICRO COMPONENT TECHNOLOGY, INC.
FORM 10-Q
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
Basis of Presentation
The consolidated financial statements include the accounts of the parent company and our subsidiaries after elimination of all significant intercompany balances and transactions. All significant subsidiaries are 100% owned.
The unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (generally accepted accounting principles) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management all adjustments, including normal recurring adjustments, necessary for a fair presentation of the interim periods presented have been included. The interim results are not necessarily indicative of the operating results expected for the full fiscal year ending on December 31, 2007.
Our consolidated financial statements have been prepared on the assumption that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Report of the Independent Registered Public Accounting Firm on the financial statements of the Company as of and for the fiscal year ended December 31, 2006 included in Form 10-K contained an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
As of March 31, 2007, the Company had an accumulated deficit of $108.8 million and incurred a net loss of $159,000 for the three-month period ended March 31, 2007. As of March 31, 2007, the Company had cash and cash equivalents of $354,000, working capital of negative $2.0 million, a current ratio of negative 0.74, total assets of $6.0 million and total liabilities of $10.9 million. Our ability to generate cash and operating income is dependent on increasing our customer base to expand the penetration of our product technology and the realization of our lower operating expense targets.
As discussed in Note 4, On March 29, 2007, we again restructured the financing with Laurus Master Fund, Ltd. (“Laurus”), and increased the total secured indebtedness to $10.25 million. The restructured financing includes a $5.25 million term note. Interest is payable monthly on the
6
term note at the prime rate plus 2.5%. The note is non-convertible. Beginning March 1, 2008, we are required to make monthly payments equal to 1/60th of the principal amount until February 17, 2009, at which time the entire remaining principal and accrued interest is due and payable in full. In addition to the $5.25 million note, there is a $4.0 million working capital line of credit, which is payable in full on March 8, 2008. Interest is payable monthly on the line at the prime rate plus 2.5%. As of March 30, 2007, there was an $800,000 over-advance in excess of the borrowing base on the working capital line of credit. Principal on the over-advance is repayable in $100,000 monthly payments beginning on February 28, 2008. The restructured financing also includes an additional $1.0 million term note. The proceeds from the $1 million term note, net of fees and expenses from the 2007 refinancing, are required to be held in a restricted account at a bank, and will only be released by the bank to the Company, upon approval of Laurus in its discretion, for the manufacture of demo equipment. Interest is payable monthly at the prime rate plus 2.0% and the principal is payable in full on March 31, 2008. As part of the 2007 restructuring, the Company also issued Laurus a 10-year option to purchase 5,000,000 shares at an exercise price of $0.01 per share. The shares issuable upon exercise of the option have standard registration rights.
Interim unaudited financial results should be read in conjunction with the audited financial statements included in the SEC Report on Form 10-K, for the period ended December 31, 2006.
2. EARNINGS PER SHARE
Basic earnings per share are computed using the weighted average number of common shares outstanding during each period. Diluted earnings per share include the dilutive effect of common shares potentially issuable upon the exercise of stock options, warrants and the convertible term note outstanding. The following table reconciles the denominators used in computing basic and diluted earnings per share:
| Three Months Ended |
| |||
|
| March 31, |
| April 1, |
|
(in thousands) |
| 2007 (1) |
| 2006 (1) |
|
Weighted average common shares outstanding |
| 36,665 |
| 27,225 |
|
Effect of dilutive stock options, warrants and notes |
| — |
| — |
|
|
|
|
|
|
|
|
| 36,665 |
| 27,225 |
|
(1) We reported a loss for the period indicated. No adjustments were made for the effect of stock options and warrants, which represented 6,015,230 and 7,305,398 shares at March 31, 2007 and April 1, 2006, respectively, as the effect is antidilutive.
3. BALANCE SHEET INFORMATION
Major components of inventories were as follows (in thousands):
| March 31, |
| December 31, |
| |||
|
| 2007 |
| 2006 |
| ||
Raw materials |
| $ | 1,622 |
| $ | 1,314 |
|
Work-in-process |
| 639 |
| 377 |
| ||
Finished goods |
| 203 |
| 325 |
| ||
|
| $ | 2,464 |
| $ | 2,016 |
|
7
In accordance with accounting principles generally accepted in the United States of America, we value our inventories at the lower of cost or market.
The following table provides the inventory reserves for the quarter ended March 31, 2007.
Inventory reserve balance at December 31, 2006 |
| $ | 5,613 |
|
Release of inventory reserve on sale of goods |
| — |
| |
Release of inventory reserve on scrap of goods |
| (3 | ) | |
Additional/(reduction) inventory reserve |
| (100 | ) | |
Inventory reserve balance at March 31, 2007 |
| $ | 5,510 |
|
We provide a standard thirteen month warranty program for our equipment products. We record provisions for warranty claims for these products based upon historical claim performance. The following table provides the expense recorded and charges against our reserves for the quarter ended March 31, 2007.
Accrued warranty balance at December 31, 2006 |
| $ | 101 |
|
Provision |
| 16 |
| |
Warranty claims |
| (14 | ) | |
Accrued warranty balance at March 31, 2007 |
| $ | 103 |
|
4. FINANCING TRANSACTIONS
On March 9, 2004, we completed a $5.0 million financing transaction with an institutional lender, Laurus Master Fund, Ltd. (“Laurus”), secured by all of the assets of the Company. The financing included a $3.0 million working capital line of credit and a $2.0 million long-term note. The notes were partially convertible into shares of our common stock. In connection with the transaction, we issued to Laurus a seven-year warrant to purchase 400,000 shares of common stock at exercise prices ranging from $2.30 to $2.88 per share. The secured loan in existence at that time with a prior lender was terminated.
On January 28, 2005, we completed an amendment to the financing agreement with Laurus to defer payments on the long-term convertible note. As part of this amendment, the conversion prices on both notes were reduced. We also issued Laurus at that time a seven-year warrant to purchase 150,000 shares of common stock at $.67 per share.
On April 29, 2005, we completed another financing transaction with Laurus in which we borrowed an additional $2.5 million, and which was convertible into shares of common stock. We also issued Laurus at that time an option to purchase 2,556,651 shares of common stock at an exercise price of $.01 per share. We received net proceeds of approximately $2.4 million at the closing.
8
On February 17, 2006, we restructured the financing with Laurus, and increased the total maximum secured indebtedness with Laurus to $9.25 million. The Company also issued Laurus a 10-year option to purchase 2,500,000 shares at an exercise price of $.01 per share. The shares issuable upon exercise of the option have standard registration rights. As a result of the new financing with Laurus, the conversion price for all of the Noteholders who accepted the prior restructuring agreements was reduced to $0.56 per share.
On March 29, 2007, we again restructured the financing with Laurus, and increased the total secured indebtedness to $10.25 million. The restructured financing includes a $5.25 million term note. Interest is payable monthly on the term note at the prime rate plus 2.5%. The note is non-convertible. Beginning March 1, 2008, we are required to make monthly payments equal to 1/60th of the principal amount until February 17, 2009, at which time the entire remaining principal and accrued interest is due and payable in full. In addition to the $5.25 million note, there is a $4.0 million working capital line of credit, which is payable in full on March 8, 2008. Interest is payable monthly on the line at the prime rate plus 2.5%. As of March 30, 2007, there was an $800,000 over-advance in excess of the borrowing base on the working capital line of credit. Principal on the over-advance is repayable in $100,000 monthly payments beginning on February 28, 2008. The restructured financing also includes an additional $1.0 million term note. The proceeds from the $1 million term note, net of fees and expenses from the 2007 refinancing, are required to be held in a restricted account at a bank, and will only be released by the bank to the Company, upon approval of Laurus in its discretion, for the manufacture of demo equipment. Interest is payable monthly at the prime rate plus 2.0% and the principal is payable in full on March 31, 2008. As part of the 2007 restructuring, the Company also issued Laurus a 10-year option to purchase 5,000,000 shares at an exercise price of $0.01 per share. The shares issuable upon exercise of the option have standard registration rights.
5. STOCK BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R “Share-Based Payment”, on January 1, 2006. This statement requires us to recognize the cost of employee and director services received in exchange for the stock options it has awarded. Under SFAS 123R, we are required to recognize compensation expense over an award’s vesting period based on the award’s fair value at the date of grant. We have elected to adopt SFAS 123R on a modified prospective basis; accordingly the financial statements for periods prior to January 1, 2006 do not include stock-based compensation costs calculated under the fair value method.
The fair value of options granted under the stock options for the quarters ended March 31, 2007 and April 1, 2006 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the three months ended March 31, 2007 and April 1, 2006.
| Quarters ended |
| |||||
|
| March 31, |
| April 1, |
| ||
|
| 2007 |
| 2006 |
| ||
Dividend yield |
| 0.00 | % | 0.00 | % | ||
Expected volatility |
| 88.63 | % | 122.09 | % | ||
Risk-free interest rate |
| 4.54 | % | 4.62 | % | ||
Expected life of options |
| 10 years |
| 10 years |
| ||
Fair value per share of options granted |
| $ | 0.23 |
| $ | 0.33 |
|
9
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006; therefore, the Company will adopt the new requirements for fiscal 2007. We do not expect the adoption of this pronouncement to have a material impact on our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which effective for interim and annual reporting periods beginning after November 15, 2007. This statement provides a definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements for future transactions. The Company has not yet assessed the impact of this Statement on the Company’s financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). The Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 will be effective for the first fiscal year that begins after November 15, 2007. The company has not yet assessed the impact of this Statement on the Company’s financial statements.
10
MICRO COMPONENT TECHNOLOGY, INC.
FORM 10-Q
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on our current expectations, estimates and projections about the semiconductor capital equipment industry, and our beliefs and assumptions. We intend words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control and are difficult to predict. These factors could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties are described elsewhere in this report on Form 10-Q and our report on Form 10-K for the year ended December 31, 2006. We caution you not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this Report on Form 10-Q. We are not obligated to update these statements or publicly release the result of any revisions to them to reflect events or circumstances after the date of this Report on Form 10-Q or to reflect the occurrence of unanticipated events.
Overview
We supply equipment automation solutions for the global semiconductor test and assembly manufacturing market. Our solutions include automated test handlers, factory automation software and our new integrated Smart Solutions equipment product line. We believe that our products can significantly improve the productivity, yield and throughput of the back-end, or to the post-wafer manufacturing process, including assembling, packaging, testing and singulating semiconductor devices.
Beginning in 1999 and continuing into 2000, we broadened our strategy from that of a test handler manufacturer to becoming a provider of comprehensive equipment automation solutions for the back-end of the semiconductor manufacturing process. First, we developed and introduced in February 1999 our Tapestry strip handler. Tapestry combines strip handling capability with robotics, machine vision technology and critical software, enabling the testing and tracking of semiconductor devices in strip form and the generation of critical process data throughout the test process. Second, in June 1999 we acquired the Infinity Systems division of Fico. Infinity Systems has been involved in the development of factory automation software for the semiconductor manufacturing industry. Infinity Systems’ software expertise was integral to the development of our integrated Smart Solutions equipment product line, introduced in May 2000. Together with a third party tester, our Smart Solutions equipment products including our Tapestry handler enable complete automation of the test, laser mark, mark inspect and other processes of the back end.
The demand for our products and services is dependent upon growth in the semiconductor industry and the increasing automation needs of semiconductor manufacturers and independent test and assembly facilities. In the fourth quarter of 2000, the semiconductor industry went into a sharp downturn, which continued through 2005, and began to improve in 2006. However, the level of improvement and the ability for the market to sustain an improvement continues to be uncertain.
11
Therefore, we will continue to monitor the market and if required, examine opportunities to further reduce our costs through further consolidation of operations, limiting capital expenditures, monitoring inventory purchases and additional strategic restructuring initiatives. Certain of these types of actions have the potential for further charges in future periods. The impact of a renewed contraction of the semiconductor capital equipment market has the potential to have a material adverse effect on our financial condition, results of operations, and cash flows.
Critical Accounting Policies
Revenue Recognition
Under SAB 104, we recognize revenue upon shipment, as our terms are FOB shipping point, for established equipment products that have previously satisfied existing customer performance specifications and that provide for full payment tied to shipment. Revenue for products that have not previously satisfied customer performance specifications or from sales where all or a portion of customer payment is based upon acceptance are only recognized upon customer acceptance. As such, in periods of increasing shipments, revenues will be deferred if the shipments are for new customers; new products or the payment terms are tied to acceptance criteria. Consequently, if these conditions exist, we may report revenue levels that are not reflective of actual shipment growth rates. Conversely, in periods of decreasing shipments, we potentially could recognize revenues related to shipments made in prior periods. Consequently, if these conditions exist, we may report revenue levels that are greater than actual shipments. During the quarter ended March 31, 2007, revenue recorded approximated shipments.
Allowance for Doubtful Accounts
We record a provision for doubtful accounts based on specific identification of our accounts receivable. This involves a degree of judgment based on discussion with our internal sales and marketing groups, our customer base and the examination of the financial stability of our customers. There can be no assurance that our estimates will match actual amounts ultimately written off. During periods of downturn in the market for semiconductor capital equipment or economic recession, a greater degree of risk exists concerning the ultimate collectability of our accounts receivable due to the impact that these conditions might have on our customer base. No provisions were recorded for the quarter ended March 31, 2007.
Valuation of Inventories
Our inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method. We maintain a standard costing system for our inventories. Assumptions with respect to direct labor utilization, standard direct and indirect cost rates, vendor pricing and utilization of factory capacities are formulated in the development of our standard costing system. Sudden or continuing changes in the semiconductor capital equipment market affecting our shipments can result in significant production variances from our standard rates. These variances directly impact our gross profit performance and may cause variability in gross profits results from reporting period-to-reporting period. Our labor and overhead rates are set for production rates that match typical market conditions. Production variances are charged to cost of sales each quarter as incurred. Material standards are based upon normal purchase volumes. Purchase price variances are charged to costs of sales each quarter as incurred.
12
Provisions to reduce inventories to the lower of cost or market are made based on a review of excess and obsolete inventories through an examination of historical component consumption, current market demands and shifting product technology. Significant assumptions with respect to market trends and customer product acceptance are utilized to formulate our provision methods. Sudden or continuing downward changes in the semiconductor capital equipment market may cause us to record additional inventory revaluation charges in future periods. No write-down of our inventories occurred for the quarter ended March 31, 2007.
Accrued Warranty
We provide a standard thirteen month warranty program for our equipment products. We record provisions for warranty claims for these products based upon historical claim performance. This approach has been applied since the inception of the warranty program and involves a degree of subjectivity in that historical performance is used to estimate future warranty claims. There can be no assurance that our estimates will match the actual amount of future warranty claims.
Results of Operations for the Three Months Ended March 31, 2007 and April 1, 2006
Net sales for the three months ended March 31, 2007 increased by $1.0 million or 42% to $3.4 million compared to $2.4 million for the three months ended April 1, 2006. The Strip Test and Mark product line enjoyed the largest percentage increase.
Gross profit for the three months ended March 31, 2007 increased by $579,000 to $1.8 million or 52.5% of net sales from $1.2 million or 50.3% of net sales for the comparable period in the prior year. The increase in gross margin in the current year period is directly attributable to the increase in sales resulting in fixed costs being spread over a larger sales volume.
Total operating expense increased by $142,000 or 9.7% from $1.5 million to $1.6 million. Selling, general and administrative expenses for the three months ended March 31, 2007 were $1.1 million or 32.7% of net sales compared to $0.9 million or 39.8% of net sales for the three months ended April 1, 2006. Substantially all of these increases were planned, and included $70,000 of increased selling and marketing expenses over the prior year’s period due primarily to additional commissions and travel expenses, and $90,000 of increased general and administrative expenses over the prior year’s period due primarily to additional consulting and legal fees for corporate development projects and refinancing of the Laurus debt. Research and development expenses for the first quarter of 2007 were $500,000 or 14.8% of net sales compared to $518,000 or 21.8% of net sales in the first quarter of 2006.
The net loss for the three months ended March 31, 2007 was $159,000 or $0.00 per basic and fully-diluted share compared to net loss for the three months ended April 1, 2006 of $1.1 million or $0.04 per basic and fully-diluted share. Included in the prior year’s net loss were write-offs of $414,000 that relate to prior year’s debt issuance cost and FAS 123 discounts from the Laurus financing. Without this write-off, net loss for the first quarter of 2006 would be $669,000 or $0.02 per basic and fully-diluted share.
13
Liquidity and Capital Resources
Cash was generated in operations of $320,000 in the first quarter of 2007 as compared to cash usage of $640,000 in the first quarter of 2006. Accounts receivables decreased from 2006 year-end to $2.6 million from $2.8 million. Inventory finished at $2.5 million, which consists of $8.0 million of gross inventories and $5.5 million of reserves. Capital expenditures were $38,000 for the first quarter of 2007 compared to $3,000 in the first quarter of 2006.
We ended the quarter with $354,000 in cash and cash equivalents up from $200,000 at the end of 2006 and cash availability from our credit line and term note of $1.1 million. Working capital finished at a negative $2.0 million compared to a negative $664,000 at the end of 2006. The majority of the negative working capital position is due to the Laurus $1.2 million term note coming into classification from long term to short term, as this debt is due within the upcoming 12 months.
On March 29, 2007, we again restructured the financing with Laurus, and increased the total secured indebtedness to $10.25 million. The restructured financing includes a $5.25 million term note. Interest is payable monthly on the term note at the prime rate plus 2.5%. The note is non-convertible. Beginning March 1, 2008, we are required to make monthly payments equal to 1/60th of the principal amount until February 17, 2009, at which time the entire remaining principal and accrued interest is due and payable in full. In addition to the $5.25 million note, there is a $4.0 million working capital line of credit, which is payable in full on March 8, 2008. Interest is payable monthly on the line at the prime rate plus 2.5%. As of March 30, 2007, there was an $800,000 over-advance in excess of the borrowing base on the working capital line of credit. Principal on the over-advance is repayable in $100,000 monthly payments beginning on February 28, 2008. The restructured financing also includes an additional $1.0 million term note. The proceeds from the $1 million term note, net of fees and expenses from the 2007 refinancing, are required to be held in a restricted account at a bank, and will only be released by the bank to the Company, upon approval of Laurus in its discretion, for the manufacture of demo equipment. Interest is payable monthly at the prime rate plus 2.0% and the principal is payable in full on March 31, 2008. As part of the 2007 restructuring, the Company also issued Laurus a 10-year option to purchase 5,000,000 shares at an exercise price of $0.01 per share. The shares issuable upon exercise of the option have standard registration rights.
A material portion of the principal and interest due from the Company to Laurus on the existing financing agreements becomes due and payable in March of 2008. In the event that we are unable to repay or refinance our debt in March of 2008, Laurus could potentially take a number of actions as secured creditor which would have a material negative impact on the Company and its shareholders, including foreclosure, a forced sale of all or part of the Company, and/or liquidation.
IMPACT OF ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15,
14
2006; therefore, the Company will adopt the new requirements for fiscal 2007. We do not expect the adoption of this pronouncement to have a material impact on our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which effective for interim and annual reporting periods beginning after November 15, 2007. This statement provides a definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements for future transactions. The Company has not yet assessed the impact of this Statement on the Company’s financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). The Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 will be effective for the first fiscal year that begins after November 15, 2007. The company has not yet assessed the impact of this Statement on the Company’s financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The vast majority of our transactions are denominated in U.S. dollars; as such, fluctuations in foreign currency exchange rates have historically had little impact on us. Inflation has not been a significant factor in our operations in any of the periods presented, and it is not expected to affect operations in the future. A 1% increase in interest rates would increase our interest expense by $100,000 per year. Our short term revolving line of credit and long-term convertible debt carried interest at the prime rate plus 2.5%. There is no material market risk relating to our long-term debt.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the evaluation date, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
(b) Changes in internal controls over financial reporting.
15
No changes in the Company’s internal control over financial reporting occurred during the first quarter of 2007 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
16
MICRO COMPONENT TECHNOLOGY, INC.
FORM 10-Q
PART II. OTHER INFORMATION
Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds
In connection with the refinancing of the Laurus financing that occurred on March 29, 2007, the Company issued Laurus a 10-year option to purchase 5,000,000 shares at an exercise price of $0.01 per share. The issuance was exempt from registration under Rules 505 and 506 under the Securities Act of 1933, because Laurus is an accredited investor, the Company disclosed all material information about the issuance to Laurus in advance, there was no general solicitation or advertisement, the securities are subject to restrictions on transfer, and a Form D was filed with the Securities and Exchange Commission.
Item 6. Exhibits
31.1 Certification of Chief Executive Officer (filed herewith).
31.2 Certification of Chief Financial Officer (filed herewith).
32 Section 1350 Certification (filed herewith).
17
MICRO COMPONENT TECHNOLOGY, INC.
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Micro Component Technology, Inc. | |||||
|
|
| ||||
|
|
| ||||
Dated: | May 11, 2007 |
| By: | /s/ Roger E. Gower |
| |
|
| Roger E. Gower | ||||
|
|
| ||||
|
|
| ||||
|
| And | ||||
|
|
| ||||
|
|
| ||||
Dated: | May 11, 2007 |
| By: | /s/ BachThuy T. Vo |
| |
|
| BachThuy T. Vo | ||||
18