UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2009
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number: 000-23576
STRASBAUGH
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0057484
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
825 BUCKLEY ROAD, SAN LUIS OBISPO, CALIFORNIA 93401
(Address of principal executive offices) (Zip Code)
(805) 541-6424
(Registrant's telephone number, including area code)
NOT APPLICABLE.
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
(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 [ ] No |X|
As of July 31, 2009, there were 14,201,587 shares of the issuer's
common stock issued and outstanding.
================================================================================
CAUTIONARY STATEMENT
All statements included or incorporated by reference in this Quarterly
Report on Form 10-Q, other than statements or characterizations of historical
fact, are "forward-looking statements." Examples of forward-looking statements
include, but are not limited to, statements concerning projected net sales,
costs and expenses and gross margins; our accounting estimates, assumptions and
judgments; the demand for our products; the competitive nature of and
anticipated growth in our industry; and our prospective needs for additional
capital. These forward-looking statements are based on our current expectations,
estimates, approximations and projections about our industry and business,
management's beliefs, and certain assumptions made by us, all of which are
subject to change. Forward-looking statements can often be identified by such
words as "anticipates," "expects," "intends," "plans," "predicts," "believes,"
"seeks," "estimates," "may," "will," "should," "would," "could," "potential,"
"continue," "ongoing," similar expressions and variations or negatives of these
words. 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, some
of which are set forth in the "Risk Factors" section of our Annual Report on
Form 10-K for the year ended December 31, 2008, which could cause our financial
results, including our net income or loss or growth in net income or loss to
differ materially from prior results, which in turn could, among other things,
cause the price of our common stock to fluctuate substantially. These
forward-looking statements speak only as of the date of this report. We
undertake no obligation to revise or update publicly any forward-looking
statement for any reason, except as otherwise required by law.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements..............................................................................1
Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and
December 31, 2008 (audited)....................................................................1
Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2009 and 2008 (unaudited).............................................................2
Condensed Consolidated Statement of Redeemable Convertible Preferred Stock
and Shareholders' Deficit for the Six Months Ended June 30, 2009 (unaudited)...................3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2009 and 2008 (unaudited).............................................................4
Notes to Condensed Consolidated Financial Statements for the Three and Six Months Ended
June 30, 2009 (unaudited)......................................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............26
Item 3. Quantitative and Qualitative Disclosures About Market Risk ......................................37
Item 4. Controls and Procedures .........................................................................37
PART II
OTHER INFORMATION
Item 1. Legal Proceedings ...............................................................................39
Item 1A. Risk Factors ....................................................................................40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .....................................40
Item 3. Defaults Upon Senior Securities .................................................................40
Item 4. Submission of Matters to a Vote of Security Holders .............................................40
Item 5. Other Information ...............................................................................40
Item 6. Exhibits ........................................................................................41
Signatures .................................................................................................42
Exhibits Filed with this Report
ITEM 1. FINANCIAL STATEMENTS
STRASBAUGH AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008 (AUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
JUNE 30, DECEMBER 31,
2009 2008
----------- -----------
CURRENT ASSETS (unaudited)
Cash and cash equivalents $ 642 $ 49
Accounts receivable, net of allowance for doubtful accounts of $224 at June 30, 2009 and
December 31, 2008 665 1,309
Investments in securities -- 239
Inventories 5,473 5,659
Prepaid expenses 209 264
----------- -----------
6,989 7,520
----------- -----------
PROPERTY, PLANT, AND EQUIPMENT 2,097 2,150
----------- -----------
OTHER ASSETS
Capitalized intellectual property, net of accumulated amortization
of $67 at June 30, 2009 and $54 at December 31, 2008 398 381
Other assets 32 36
----------- -----------
430 417
----------- -----------
TOTAL ASSETS $ 9,516 $ 10,087
=========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable, current portion $ 100 $ 100
Accounts payable 633 1,231
Accrued expenses 1,955 1,963
Customer deposits 2,241 147
Deferred revenue 50 70
----------- -----------
4,979 3,511
----------- -----------
OTHER LIABILITIES
Preferred stock related embedded derivative 119 --
Warrants 14 --
----------- -----------
133 --
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 6, 7, 8 AND 9)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock ("Series A"), no par value, $14,639
aggregate preference in liquidation at June 30, 2009, 15,000,000 shares
authorized, 5,909,089 shares issued and
outstanding 9,952 11,964
SHAREHOLDERS' DEFICIT
Preferred stock ("Participating"), no par value, 5,769,736 shares authorized, zero shares
issued and outstanding -- --
Common stock, no par value, 100,000,000 shares authorized, 14,201,587 issued and outstanding 56 56
Additional paid-in capital 24,667 26,803
Accumulated other comprehensive loss -- (61)
Accumulated deficit (30,271) (32,186)
----------- -----------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND (5,548) (5,388)
----------- -----------
SHAREHOLDERS' DEFICIT $ 9,516 $ 10,087
=========== ===========
1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2009 2008 2009 2008
------------- ------------- ------------- -------------
(unaudited) (unaudited)
REVENUES
Tools $ 589 $ 1,719 $ 1,086 $ 1,822
Parts and Service 1,206 2,080 2,216 3,529
------------- ------------- ------------- -------------
NET REVENUES 1,795 3,799 3,302 5,351
------------- ------------- ------------- -------------
COST OF SALES
Tools 458 1,292 772 1,549
Parts and Service 608 968 1,314 1,660
------------- ------------- ------------- -------------
TOTAL COST OF SALES 1,066 2,260 2,086 3,209
------------- ------------- ------------- -------------
GROSS PROFIT 729 1,539 1,216 2,142
------------- ------------- ------------- -------------
OPERATING EXPENSES
Selling, general and administrative expenses 820 1,186 1,780 2,211
Research and development 1,026 732 1,986 1,642
------------- ------------- ------------- -------------
1,846 1,918 3,766 3,853
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (1,117) (379) (2,550) (1,711)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Rental income 144 74 292 105
Interest income 2 15 6 24
Interest expense (6) -- (11) --
(Loss) gain on change in value of embedded derivative
and warrants (Note 2) (49) -- 1,559 --
Other (expense) income, net (19) 21 (31) 49
------------- ------------- ------------- -------------
72 110 1,815 178
------------- ------------- ------------- -------------
LOSS BEFORE BENEFIT FROM INCOME TAXES (1,045) (269) (735) (1,533)
BENEFIT FROM INCOME TAXES 14 -- 13 --
------------- ------------- ------------- -------------
NET LOSS $ (1,031) $ (269) $ (722) $ (1,533)
============= ============= ============= =============
NET LOSS PER COMMON SHARE
Basic $ (0.11) $ (0.05) $ (0.13) $ (0.16)
============= ============= ============= =============
Diluted $ (0.11) $ (0.05) $ (0.13) $ (0.16)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 14,202 14,202 14,202 14,202
============= ============= ============= =============
Diluted 14,202 14,202 14,202 14,202
============= ============= ============= =============
2
CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 2009 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
TOTAL
SHAREHOLDERS'
DEFICIT AND
REDEEMABLE
CONVERTIBLE
PREFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK
--------- ------- ------- ------- ----------- ------ --------- ------ --------- ------------
Balance, December 31, 2008 5,909,089 $11,964 -- $ -- 14,201,587 $ 56 $ 26,803 $ (61) $(32,186) $ 6,576
Cumulative effect of change in
accounting principle (Note 2) -- (3,191) -- -- -- -- (1,138) -- 2,637 (1,692)
Comprehensive income (loss):
Net loss -- (722) (722)
Other comprehensive income (loss):
Unrealized gains on investments,
net of tax of $0 61 -- 61
------------
Total comprehensive loss (661)
------------
Stock-based compensation expenses -- -- -- -- -- -- 181 -- -- 181
Accretion of redeemable convertible
preferred stock -- 613 -- -- -- -- (613) -- -- --
Preferred stock dividend
accumulated -- 566 -- -- -- -- (566) -- -- --
--------- ------- ------- ------- ----------- ------ --------- ------ --------- ------------
Balance, June 30, 2009 5,909,089 $ 9,952 -- $ -- 14,201,587 $ 56 $ 24,667 $ -- $(30,271) $ 4,404
========= ======= ======= ======= =========== ====== ========= ====== ========= ============
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
----------------------
2009 2008
------- -------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (722) $(1,533)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation and amortization 187 185
Change in allowance for doubtful accounts -- 164
Change in inventory reserve 51 106
Non-cash interest expense 11 --
Stock-based compensation 181 94
Gain on embedded derivative (Note 2) (1,374) --
Gain on warrants (Note 2) (185) --
Losses on sales of investment securities 6 --
Changes in assets and liabilities:
Accounts receivable 644 927
Inventories 135 307
Prepaid expenses 55 (53)
Deposits and other assets -- (25)
Accounts payable (598) 161
Accrued expenses (19) (183)
Deferred revenue (20) (42)
Customer deposits 2,094 --
------- -------
Net Cash Provided By Operating Activities 446 108
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of investment securities 294 387
Proceeds from maturity of investment securities -- 233
Purchase of property and equipment (114) (11)
Capitalized cost for intellectual property (33) (39)
------- -------
Net Cash Provided By Investing Activities 147 570
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance cost of redeemable convertible preferred stock -- (311)
Preferred dividends paid -- (633)
------- -------
Net Cash Used In Financing Activities -- (944)
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 593 (266)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 49 1,864
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 642 $ 1,598
======= =======
4
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
The condensed consolidated financial statements include the accounts of
Strasbaugh, a California corporation formerly known as CTK Windup Corporation
("Strasbaugh"), and its wholly-owned subsidiary, R. H. Strasbaugh, a California
corporation ("R. H. Strasbaugh," and together with Strasbaugh, the "Company").
All material inter-company accounts and transactions have been eliminated in the
consolidation.
The Company designs and manufactures precision surfacing systems and solutions
for the global semiconductor, electronics, precision optics, and aerospace
industries. Products are sold to customers throughout the United States, Europe,
and Asia and Pacific Rim countries.
SHARE EXCHANGE TRANSACTION
On May 24, 2007, Strasbaugh (formerly known as CTK Windup Corporation) completed
a share exchange transaction (the "Share Exchange Transaction") with R. H.
Strasbaugh (formerly known as Strasbaugh). Upon completion of the Share Exchange
Transaction, Strasbaugh acquired all of the issued and outstanding shares of R.
H. Strasbaugh's capital stock in exchange for an aggregate of 13,770,366 shares
of Strasbaugh's common stock. The Share Exchange Transaction was accounted for
as a recapitalization of R. H. Strasbaugh with R. H. Strasbaugh being the
accounting acquiror. As a result, the historical financial statements of R. H.
Strasbaugh are the financial statements of the legal acquiror, Strasbaugh
(formerly known as CTK Windup Corporation).
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission (the "SEC" or the "Commission") and therefore do not include
all information and footnotes necessary for a complete presentation of the
financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America.
BASIS OF PRESENTATION (CONTINUED)
The unaudited condensed consolidated financial statements do, however, reflect
all adjustments, consisting of only normal recurring adjustments, which are, in
the opinion of management, necessary to state fairly the financial position as
of June 30, 2009 and the results of operations and cash flows for the related
interim periods ended June 30, 2009 and 2008. However, these results are not
necessarily indicative of results for any other interim period or for the year.
It is suggested that the accompanying condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.
We have evaluated subsequent events through August 13, 2009, which is the date
these financial statements were issued.
5
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, or GAAP, requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of increases and decreases in
revenues and expenses during the reporting periods. Actual results could differ
from those estimates and those differences could be material. Significant
estimates include the fair value of the Company's common stock and the fair
value of options, preferred stock related embedded derivatives and warrants to
purchase common stock, inventory obsolescence, and depreciation and
amortization. Certain prior year amounts in the accompanying condensed
consolidated financial statements have been reclassified to conform to the
current year's presentation.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2009 2008 2009 2008
------------ ------------- ------------ ------------
Cash paid for income taxes........................... $ 1,000 $ -- $ 1,000 $ --
============ ============= ============ ============
Fair value accretion on redeemable
convertible preferred stock....................... $ 312,000 $ 122,000 $ 613,000 $ 235,000
============ ============= ============ ============
Preferred stock dividend............................. $ 286,000 $ 264,000 $ 566,000 $ 527,000
============ ============= ============ ============
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist primarily
of cash, cash equivalents and trade accounts receivable. With regard to cash and
cash equivalents, the Company maintains its excess cash balances in checking and
money market accounts at high-credit quality financial institution(s). The
Company has not experienced any significant losses in any of the short-term
investment instruments we have used for excess cash balances. The Company does
not require collateral on its trade receivables. Historically, the Company has
not suffered significant losses with respect to trade accounts receivable.
However, recent developments in the global economy and credit markets have
caused unusual fluctuations in the values of various investment instruments.
Additionally, these developments have, in some cases, limited the availability
of credit funds that borrowers such as the Company normally utilize in
day-to-day operations which could impact the timing or ultimate recovery of
trade accounts. No assurances can be given that these recent developments will
not negatively impact the Company's operations as a result of concentrations of
these investments.
The Company sells its products on credit terms, performs ongoing credit
evaluations of its customers, and maintains an allowance for potential credit
losses. During the three and six month periods ended June 30, 2009, the
Company's top 10 customers accounted for 65% and 59% of net revenues,
respectively, and 70% and 66% for the three and six month periods ended June 30,
2008, respectively. Sales to major customers (over 10%) as a percentage of net
revenues were 31% and 23%, for the three and six months ended June 30, 2009,
respectively, and 47% and 39%, for the three and six month periods ended June
30, 2008, respectively.
6
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK (CONTINUED)
A decision by a significant customer to substantially decrease or delay
purchases from the Company, or the Company's inability to collect receivables
from these customers, could have a material adverse effect on the Company's
financial condition and results of operations. As of June 30, 2009, the amount
due from the major customers (over 10%) discussed above represented 1% of the
Company's total accounts receivable.
PRODUCT WARRANTIES
The Company provides limited warranty for the replacement or repair of defective
products at no cost to its customers within a specified time period after the
sale. The Company makes no other guarantees or warranties, expressed or implied,
of any nature whatsoever as to the goods including without limitation,
warranties to merchantability, fit for a particular purpose of non-infringement
of patent or the like unless agreed upon in writing. The Company estimates the
costs that may be incurred under its limited warranty and maintains reserves
based on actual historical warranty claims coupled with an analysis of
unfulfilled claims at the balance sheet date. Warranty claims costs are not
material given the nature of the Company's products and services which normally
result in repairs and returns in the same accounting period.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The carrying value of financial instruments approximates their fair values. The
carrying values of cash and cash equivalents, accounts receivable, accounts
payable, and accrued expenses approximate fair value because of the short-term
maturity of these instruments. The carrying values of notes payable approximate
fair value because the interest rates on these instruments approximate market
interest rates currently available to the Company.
The Company's assets (liabilities) measured at fair value on a recurring basis
were determined using the following inputs:
FAIR VALUE MEASUREMENTS AT JUNE 30, 2009
---------------------------------------------------------------
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
------------ ------------ ---------
ASSETS INPUTS INPUTS
TOTAL (LEVEL 1) (LEVEL 2) (LEVEL 3)
--------- ------------ ------------ ---------
Preferred stock related embedded derivative $(119,000) $ -- $ -- $(119,000)
Warrants (14,000) -- -- (14,000)
--------- ------------ ------------ ---------
Total $(133,000) $ -- $ -- $(133,000)
========= ============ ============ =========
7
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED)
FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2008
---------------------------------------------------------------
QUOTED
PRICES IN
ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
------------ ------------ ---------
TOTAL (LEVEL 1) (LEVEL 2) (LEVEL 3)
--------- ------------ ------------ ---------
Fixed income available-for-sale securities $ 239,000 $ -- $ 239,000 $ --
========= ============ ============ =========
The Company's investments were comprised of available-for-sale securities with
carrying amounts totaling $239,000 at December 31, 2008. The Company has no
assets measured at fair value on a recurring basis at June 30, 2009. The
Company's financial assets that were measured at fair value on a recurring basis
were comprised of fixed income available for sale securities at December 31,
2008.
At December 31, 2008, fixed income available-for-sale securities generally
included U.S. government agency securities, state and municipal bonds, and
corporate bonds and notes. Valuations were based on observable inputs other than
Level 1 prices, such as quoted prices for similar assets or liabilities; quoted
prices for securities that were traded less frequently than exchange-traded
instruments or quoted prices in markets that were not active; or other inputs
that were observable or could have been corroborated by observable market data.
Beginning January 1, 2009, the Company carried its preferred stock related
embedded derivative and investor warrants on its balance sheet as liabilities
(see Note 2) carried at fair value determined by using the Black Scholes
valuation model. As of June 30, 2009, the assumptions used in the valuation of
the preferred stock related embedded derivative included the Series A Preferred
Stock conversion price of $2.20 and in the valuation of the investor warrants
the conversion price of $2.42, as well as the Company's stock price of $0.50,
discount rate of 1.6%, and volatility of 52.4%.
There are no assets or liabilities measured at fair value on a nonrecurring
basis.
SEGMENT INFORMATION
The Company's results of operations for the six months ended June 30, 2009 and
2008 represent a single segment referred to as global semiconductor and
semiconductor equipment, silicon wafer and silicon wafer equipment, LED, data
storage and precision optics industries. Export sales represent approximately
29% and 23% of sales for the three and six months ended June 30, 2009, and
approximately 14% and 17% of sales for the three and six months ended June 30,
2008, respectively.
8
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The geographic breakdown of the Company's sales was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2009 2008 2009 2008
---- ---- ---- ----
United States 71% 86% 77% 83%
Europe 22% 8% 8% 8%
Asia and Pacific Rim countries 7% 6% 15% 9%
The geographic breakdown of the Company's accounts receivable was as follows:
JUNE 30, DECEMBER 31,
2009 2008
---- ----
United States 56% 43%
Europe 6% 21%
Asia and Pacific Rim countries 38% 36%
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are due from companies operating primarily in the global
semiconductor, electronics, precision optics, and aerospace industries located
throughout the United States, Europe, Asia and the Pacific Rim countries. Credit
is extended to both domestic and international customers based on an evaluation
of the customer's financial condition and generally collateral is usually not
required. For international customers, additional evaluation steps are
performed, where required, and more stringent terms, such as letters of credit,
are used as necessary.
The Company estimates an allowance for uncollectible accounts receivable. The
allowance for probable uncollectible receivables is based on a combination of
historical data, cash payment trends, specific customer issues, write-off
trends, general economic conditions and other factors. These factors are
continuously monitored by management to arrive at the estimate for the amount of
accounts receivable that may be ultimately uncollectible. In circumstances where
the Company is aware of a specific customer's inability to meet its financial
obligations, the Company records a specific allowance for doubtful accounts
against amounts due, to reduce the net recognized receivable to the amount it
reasonably believes will be collected. Management believes that the allowance
for doubtful accounts at June 30, 2009 is reasonably stated.
9
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS IN SECURITIES
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company determines
the appropriate classification of its investments in debt and equity securities
at the time of purchase and reevaluates such determinations at each balance
sheet date. Debt securities are classified as held-to-maturity when the Company
has the positive intent and ability to hold the securities to maturity. Debt
securities for which the Company does not have the intent or ability to hold to
maturity are classified as available-for-sale. Held-to-maturity securities are
recorded as either short term or long term on the balance sheet based on the
contractual maturity date and are stated at amortized cost. Marketable
securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading securities and are reported at fair
value, with unrealized gains and losses recognized in earnings (loss). Debt and
marketable equity securities not classified as held-to-maturity or as trading,
are classified as available-for-sale, and are carried at fair market value, with
the unrealized gains and losses, net of tax, included in the determination of
comprehensive income (loss) and reported in shareholders' equity (deficit).
At December 31, 2008, the Company's investments were classified as
available-for-sale and were included in current assets because the investments
were likely to be sold prior to maturity and within one year from the balance
sheet date. The Company's investments in corporate debt securities had maturity
dates ranging from 2 to 10 years at December 31, 2008. The Company had realized
losses on the sales of securities of $6,000, for the three and six months ended
June 30, 2009, and had no realized gains or losses from sales of investments in
2008. Total other than temporary impairment recognized in accumulated other
comprehensive income was $0, at June 30, 2009 and December 31, 2008. Total gains
for securities with net gains in accumulated other comprehensive income was $0,
at June 30, 2009 and December 31, 2008.
There were no investments in securities at June 30, 2009. Investments in
securities at December 31, 2008 were as follows:
AGGREGATE AMORTIZED COST UNREALIZED GAIN
FAIR VALUE BASIS (LOSS)
---------------- ---------------- -----------------
Corporate debt securities $ 118,000 $ 125,000 $ (7,000)
Municipal and State debt securities 121,000 175,000 (54,000)
---------------- ---------------- -----------------
$ 239,000 $ 300,000 $ (61,000)
================ ================ =================
At December 31, 2008 all investments with unrealized losses were in loss
positions for less than 12 months. The breakdown of investments with unrealized
losses at December 31, 2008 was as follows:
AGGREGATE FAIR VALUE OF
INVESTMENTS WITH UNREALIZED AGGREGATE AMOUNT OF
LOSSES UNREALIZED LOSSES
---------------------- ----------------------
Corporate debt securities $ 118,000 $ (7,000)
Municipal and State debt securities 121,000 (54,000)
---------------------- ----------------------
$ 239,000 $ (61,000)
====================== =======================
10
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss) and other gains and
losses affecting shareholders' equity (deficit) that, under generally accepted
accounting principles are excluded from net income (loss). The Company's other
comprehensive gains and losses (net of taxes of $0) consisted of unrealized
gains on investments of $16,000 and $61,000 for the three and six month periods
ended June 30, 2009, respectively, and unrealized losses on investments of
$23,000 and $38,000 for the three and six month periods ended June 30, 2008,
respectively.
REVENUE RECOGNITION
The Company derives revenues principally from the sale of tools, parts and
services. The Company recognizes revenue pursuant to Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition." Revenue is recognized when there is
persuasive evidence an arrangement exists, delivery has occurred or services
have been rendered, the Company's price to the customer is fixed or
determinable, and collection of the related receivable is reasonably assured.
Selling arrangements may include contractual customer acceptance provisions and
installation of the product occurs after shipment and transfer of title. The
Company recognizes revenue upon shipment of products or performance of services
and defers recognition of revenue for any amounts subject to acceptance until
such acceptance occurs. Provisions for the estimated future cost of warranty are
recorded at the time the products are shipped.
Generally, the Company obtains a non-refundable down-payment from the customer.
These fees are deferred and recognized as the tool is shipped. All sales
contract fees are payable no later than 60 days after delivery and payment is
not contingent upon installation. In addition, the Company's tool sales have no
right of return, or cancellation rights. Tools are typically modified to some
degree to fit the needs of the customer and, therefore, once a purchase order
has been accepted by the Company and the manufacturing process has begun, there
is no right to cancel, return or refuse the order.
The Company has evaluated its arrangements with customers and revenue
recognition policies under Emerging Issues Task Force ("EITF") Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables," and determined
that its components of revenue are separate units of accounting. Each unit has
value to the customer on a standalone basis, there is objective and reliable
evidence of the fair value of each unit, and there is no right to cancel, return
or refuse an order. The Company's revenue recognition policies for its specific
units of accounting are as follows:
1 Tools - The Company recognizes revenue once a customer has
visited the plant and signed off on the tool or it has met the
required specifications and the tool is completed and shipped.
2 Parts - The Company recognizes revenue when the parts are
shipped.
3 Service - Revenue from maintenance contracts is deferred and
recognized over the life of the contract, which is generally
one to three years. Maintenance contracts are separate
components of revenue and not bundled with our tools. If a
customer does not have a maintenance contract, then the
customer is billed for time and material and the Company
recognizes revenue after the service has been completed.
11
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
4 Upgrades - The Company offers a suite of products known as
"enhancements" which are generally comprised of one-time parts
and/or software upgrades to existing Strasbaugh and
non-Strasbaugh tools. These enhancements are not required for
the tools to function, are not part of the original contract
and do not include any obligation to provide any future
upgrades. The Company recognizes revenue once these upgrades
and enhancements are complete. Revenue is recognized on
equipment upgrades when the Company completes the installation
of the upgrade parts and/or software on the customer's
equipment and the equipment is accepted by the customer. The
upgrade contracts cover a one-time upgrade of a customer's
equipment with new or modified parts and/or software. After
installation of the upgrade, the Company has no further
obligation on the contracts, other than standard warranty
provisions.
The Company includes software in its tools. Software is considered an incidental
element of the tooling contracts and only minor modifications which are
incidental to the production effort may be necessary to meet customer
requirements. The software is used solely in connection with operating the tools
and is not sold, licensed or marketed separately. The tools and software are
fully functional when the tool is completed, and after shipment, the software is
not updated for new versions that may be subsequently developed and, the Company
has no additional obligations relative to the software. However, software
modifications may be included in tool upgrade contracts. The Company's software
is incidental to the tool contracts as a whole. The software and physical tool
modifications occur and are completed concurrently. The completed tool is tested
by either the customer or the Company to ensure it has met all required
specifications and then accepted by the customer prior to shipment, at which
point revenue is recognized. The revenue recognition requirements of Statement
of Position ("SOP") 97-2, "Software Revenue Recognition," are met when there is
persuasive evidence an arrangement exists, the fee is fixed or determinable,
collectability is probable and delivery and acceptance of the equipment has
occurred, including upgrade contracts for parts and/or software, to the
customer.
Installation of a tool occurs after the tool is completed, tested, formally
accepted by the customer and shipped. The Company does not charge the customer
for installation nor recognize revenue for installation as it is an
inconsequential or perfunctory obligation and it is not considered a separate
element of the sales contract or unit of accounting. If the Company does not
perform the installation service there is no effect on the price or payment
terms, there are no refunds, and the tool may not be rejected by the customer.
In addition, installation is not essential to the functionality of the equipment
because the equipment is a standard product, installation does not significantly
alter the equipment's capabilities, and other companies are available to perform
the installation. Also, the fair value of the installation service has
historically been insignificant relative to the Company's tools.
12
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE INCOME
In accordance with EITF Issue No. 07-5 (Note 2), the Company is required to
account for the preferred stock related embedded derivative and investor
warrants as derivative liabilities. The Company is required to mark to market
each reporting quarter the value of the embedded derivative and investor
warrants. The Company revalues these derivative liabilities at the end of each
reporting period. The periodic change in value of the derivative liabilities is
recorded as either non-cash derivative income (if the value of the embedded
derivative and investor warrants decrease) or as non-cash derivative expense (if
the value of the embedded derivative and investor warrants increase). Although
the values of the embedded derivative and warrants are affected by interest
rates, the remaining contractual conversion period and the Company's stock
volatility, the primary cause of the change in the values will be the value of
the Company's Common Stock. If the stock price goes up, the value of these
derivatives will generally increase and if the stock price goes down the value
of these derivatives will generally decrease.
SHIPPING COSTS
During the three and six month periods ended June 30, 2009, freight and handling
amounts billed to customers by the Company and included in revenues totaled
approximately $3,000 and $8,000, respectively, and $2,000 and $7,000 for the
three and six month periods ended June 30, 2008, respectively. Freight and
handling fees incurred by the Company of approximately $17,000 and $29,000 are
included in cost of sales for the three and six month periods ended June 30,
2009, respectively, and $17,000 and $34,000 for the three and six month periods
ended June 30, 2008, respectively.
FOREIGN CURRENCY TRANSACTIONS
The accounts of the Company are maintained in U.S. dollars. Transactions
denominated in foreign currencies are recorded at the rate of exchange in effect
on the dates of the transactions. Balances payable in foreign currencies are
translated at the current rate of exchange when settled.
EARNINGS PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of outstanding
common shares for the period. Diluted net income (loss) per share is computed by
using the treasury stock method and dividing net income available to common
stockholders plus the effect of assumed conversions (if applicable) by the
weighted average number of outstanding common shares after giving effect to all
potential dilutive common stock, including options, warrants, common stock
subject to repurchase and convertible preferred stock, if any.
13
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (CONTINUED)
Reconciliations of the numerator and denominator used in the calculation of
basic and diluted net loss per common share are as follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ---------------------------------
2009 2008 2009 2008
-------------- -------------- -------------- ----------------
Numerator:
Net loss $ (1,031,000) $ (269,000) $ (722,000) $ (1,533,000)
Preferred stock accretion (312,000) (122,000) (613,000) (235,000)
Preferred stock dividend (286,000) (264,000) (566,000) (527,000)
-------------- -------------- -------------- ----------------
Net loss available to common shareholders - basic (1,629,000) (655,000) (1,901,000) (2,295,000)
Adjustment to net loss for assumed conversions -- -- -- --
-------------- -------------- -------------- ----------------
Net loss available to common shareholders - diluted $ (1,629,000) $ (655,000) $ (1,901,000) $ (2,295,000)
============== ============== ============== ================
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- --------------------------------
2009 2008 2009 2008
-------------- -------------- -------------- ---------------
Denominator:
Shares outstanding, beginning 14,201,587 14,201,587 14,201,587 14,201,587
Weighted-average shares issued -- -- -- --
-------------- -------------- -------------- ---------------
Weighted-average shares outstanding--basic 14,201,587 14,201,587 14,201,587 14,201,587
-------------- -------------- -------------- ---------------
Effect of dilutive securities -- -- -- --
-------------- -------------- -------------- ---------------
Weighted-average shares outstanding--diluted 14,201,587 14,201,587 14,201,587 14,201,587
============== ============== ============== ===============
14
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (CONTINUED)
For the three and six months ended June 30, 2009, the Company has excluded from
the computation of diluted earnings per common share 5,909,089 shares issuable
pursuant to the Series A Preferred Stock, 1,271,797 shares issuable pursuant to
outstanding warrants and 1,327,416 shares issuable upon exercise of outstanding
stock options because the Company had a loss from continuing operations for the
period and to include the representative share increments would have been
anti-dilutive. For the three and six months ended June 30, 2008, the 5,909,089
shares issuable pursuant to the Series A Preferred Stock, 1,271,797 shares
issuable pursuant to outstanding warrants and 1,299,330 shares issuable upon the
exercise of outstanding stock options were excluded from the computation of
diluted earnings per share because the Company had a loss from continuing
operations for the period and to include the representative share increments
would have been anti-dilutive. Accordingly, for the three and six months ended
June 30, 2009 and 2008, basic and diluted net loss per common share is computed
based solely on the weighted average number of shares of common stock
outstanding during the period.
INCOME TAXES AND DEFERRED INCOME TAXES
Income taxes are provided for the effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of certain assets and
liabilities for financial and income tax reporting. Deferred taxes are
classified as current or noncurrent depending on the classification of the
assets and liabilities to which they relate. Deferred taxes arising from
temporary differences that are not related to an asset or liability are
classified as current or noncurrent, depending on the periods in which the
temporary differences are expected to reverse. A valuation allowance is
established when necessary to reduce deferred tax assets if it is more likely
than not that all, or some portion of, such deferred tax assets will not be
realized.
SERIES A PREFERRED STOCK AND WARRANTS
The Company evaluates its Series A Preferred Stock and Warrants (as defined in
Note 8) on an ongoing basis considering the provisions of Statement of Financial
Accounting Standards (SFAS) No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," which
establishes standards for issuers of financial instruments with characteristics
of both liabilities and equity related to the classification and measurement of
those instruments The Series A Preferred Stock conversion feature and Warrants
are evaluated considering the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities, considering
EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock," and EITF Issue No. 07-5,
"Determining Whether an Instrument (Or an Embedded Feature) is Indexed to an
Entity's Own Stock."
15
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS
In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) Financial Accounting Standard (FAS) 157-4 "Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly".
Based on the guidance, if an entity determines that the level of activity for an
asset or liability has significantly decreased and that a transaction is not
orderly, further analysis of transactions or quoted prices is needed, and a
significant adjustment to the transaction or quoted prices may be necessary to
estimate fair value in accordance with SFAS No. 157 "Fair Value Measurements".
This FSP is to be applied prospectively and is effective for interim and annual
periods ending after June 15, 2009 with early adoption permitted for periods
ending after March 15, 2009. Implementation of this FSP during the quarter
ending June 30, 2009 had no impact on the Company's financial condition or
results of operations.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 "Recognition and
Presentation of Other-Than-Temporary Impairments". The guidance applies to
investments in debt securities for which other-than-temporary impairments may be
recorded. If an entity's management asserts that it does not have the intent to
sell a debt security and it is more likely than not that it will not have to
sell the security before recovery of its cost basis, then an entity may separate
other-than-temporary impairments into two components: 1) the amount related to
credit losses (recorded in earnings), and 2) all other amounts (recorded in
other comprehensive income). This FSP is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009 with early
adoption permitted for periods ending after March 15, 2009. Implementation of
this FSP during the quarter ending June 30, 2009 had no impact on the Company's
financial condition or results of operations.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board
(APB) 28-1 "Interim Disclosures about Fair Value of Financial Instruments". The
FSP amends SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
to require an entity to provide disclosures about fair value of financial
instruments in interim financial information. This FSP is to be applied
prospectively and is effective for interim and annual periods ending after June
15, 2009 with early adoption permitted for periods ending after March 15, 2009.
The Company has included the required disclosures in these condensed
consolidated financial statements.
In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an
Instrument (Or an Embedded Feature) is Indexed to an Entity's Own Stock." EITF
Issue No. 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF Issue No. 07-5 is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
Early application is not permitted. Implementation of this EITF has had a
significant impact on the Company's financial condition and results of
operations (See Note 2).
16
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," which
establishes general standards of accounting for, and requires disclosure of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. We adopted the provisions of SFAS 165
for the quarter ended June 30, 2009. The adoption of these provisions did not
have a material effect on our condensed consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets - an amendment of FASB Statement No. 140" and SFAS No. 167,
"Amendments to FASB Interpretation No. 46(R)." SFAS 166 will require more
information about transfers of financial assets, eliminates the qualifying
special purpose entity (QSPE) concept, changes the requirements for
derecognizing financial assets and requires additional disclosures. SFAS 167
amends FASB Interpretation No. 46(R), "Consolidation of Variable Interest
Entities" regarding certain guidance for determining whether an entity is a
variable interest entity and modifies the methods allowed for determining the
primary beneficiary of a variable interest entity. In addition, SFAS 167
requires ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity and enhanced disclosures related to an
enterprise's involvement in a variable interest entity. We do not expect the
adoption of SFAS 166 or SFAS 167 to have a material impact on the Company's
financial condition or results of operations. SFAS 166 and SFAS 167 are
effective for the first annual reporting period that begins after November 15,
2009.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No. 162." SFAS 168 provides for the FASB
Accounting Standards CodificationTM (the "Codification") to become the single
official source of authoritative, nongovernmental U.S. generally accepted
accounting principles (GAAP). The Codification did not change GAAP but
reorganizes the literature. SFAS 168 is effective for interim and annual periods
ending after September 15, 2009.
In April 2008, the FASB issued FSP FAS No. 142-3 "Determination of the Useful
Life of Intangible Assets." This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and
Other Intangible Assets." The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141 (revised 2007), "Business Combinations," and other GAAP. FSP
FAS No. 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. Implementation of this EITF has had no impact
on the Company's financial condition or results of operations.
17
NOTE 2 - IMPLEMENTATION OF EITF ISSUE NO. 07-5, "DETERMINING WHETHER AN
INSTRUMENT (OR AN EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN STOCK"
In June 2008, the FASB ratified EITF Issue No. 07-5 which provides that an
entity should use a two-step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock,
including evaluating the instrument's contingent exercise and settlement
provisions. EITF Issue No. 07-5 contains provisions describing conditions when
an instrument or embedded feature would be considered indexed to an entity's own
stock for purposes of evaluating the instrument or embedded feature under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133) which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts. Paragraph 11(a) of SFAS No. 133 indicates that "contracts issued or
held by that reporting entity that are both (1) indexed to its own stock and (2)
classified in stockholders' equity in its statement of financial position"
should not be considered derivative instruments.
The Company's convertible Series A Preferred Stock (Note 8) has been recognized
as "temporary equity," or outside of permanent equity and liabilities, in the
Company's consolidated balance sheet. The Series A Preferred Stock does not meet
the definition of mandatorily redeemable under SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity," because redemption is contingent upon the holders not exercising their
conversion option and the host contract is classified as temporary equity in
accordance with ASR 268 and EITF Abstracts, Topic D-98, "Classification and
Measurement of Redeemable Securities." The two embedded features in the Series A
Preferred Stock did not require bifurcation under SFAS No. 133 since, prior to
the implementation of EITF Issue No. 07-5, the conversion feature met the
paragraph 11(a) scope exception and the applicable criteria in EITF Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," and the redemption feature was
determined to be clearly and closely related to the host contract, therefore,
failing the paragraph 12 (a) criteria requiring bifurcation. Since there was no
bifurcation of the embedded features there was no separate accounting for those
features.
The Investor Warrants (Note 8) have previously been recognized as permanent
equity in the Company's statement of financial position. Prior to the
implementation of EITF Issue No. 07-5, the Investor Warrants were classified as
permanent equity because they met the paragraph 11(a) scope exception in SFAS
No. 133 and all of the criteria in EITF Issue No. 00-19. However, both the
convertible Series A Preferred Stock conversion feature and Investor Warrants
contain settlement provisions such that if the Company makes certain equity
offerings in the future at a price lower than the conversion prices of the
instruments, the conversion ratio would be adjusted.
EITF Issue No. 07-5 provides that an instrument's strike price or the number of
shares used to calculate the settlement amount are not fixed if its terms
provide for any potential adjustment, regardless of the probability of such
adjustment(s) or whether such adjustments are in the entity's control. If the
instrument's strike price or the number of shares used to calculate the
settlement amount are not fixed, the instrument (or embedded feature) would
still be considered indexed to an entity's own stock if the only variables that
could affect the settlement amount would be inputs to the fair value of a
"fixed-for-fixed" forward or option on equity shares.
18
NOTE 2 - IMPLEMENTATION OF EITF ISSUE NO. 07-5, "DETERMINING WHETHER AN
INSTRUMENT (OR AN EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN STOCK"
(CONTINUED)
Accordingly, under the provisions of EITF Issue No. 07-5 the embedded conversion
feature in the Company's Series A Preferred Stock (the "Series A Conversion
Feature") and the Investor Warrants are not considered indexed to the Company's
stock because future equity offerings (or sales) of the Company's stock are not
an input to the fair value of a "fixed-for-fixed" option on equity shares. As a
result of the settlement provisions in the Company's Series A Conversion Feature
and the application of EITF Issue No. 07-5, effective January 1, 2009, the
Series A Conversion Feature no longer qualified for the paragraph 11(a) scope
exception in SFAS No. 133, and was required to be bifurcated from its host, in
accordance with paragraph 12 of SFAS No. 133, and accounted for as a derivative
instrument. Also, as a result of the settlement provision in the Investor
Warrants and the application of EITF Issue No. 07-5, effective January 1, 2009,
the Investor Warrants no longer qualified for the paragraph 11(a) scope
exception in FAS 133, and were required to be accounted for as derivatives. In
determining the classification of the Series A Conversion Feature and the
Investor Warrants the Company considered guidance in EITF Issue No. 07-5
indicating that an instrument considered indexed to its own stock is evaluated
under the provisions of EITF Issue No. 00-19 to determine whether it should be
classified as equity, or as an asset or a liability, however, if the terms are
such that it is not considered to be indexed to the entity's own stock then
equity classification is precluded. Accordingly, effective January 1, 2009 the
Company's Series A Conversion Feature and Investor Warrants are recognized as
liabilities in the Company's consolidated balance sheet.
In accordance with EITF Issue No. 07-5, the cumulative effect of this change in
accounting principle is recognized as an adjustment to the opening balance of
the Company's equity on January 1, 2009. The Series A Preferred Stock host, the
Series A Conversion Feature, the Investor Warrant and the cumulative effect
adjustment are determined based on amounts that would have been recognized if
the guidance in EITF Issue No. 07-5 had been applied from the date the preferred
stock and warrants were issued. The Series A Preferred Stock host will remain
classified in temporary equity and stated at its fair value as the accounting
for the instrument, excluding the Series A Conversion Feature, follows the
applicable GAAP including ASR 268 and EITF Abstract, Topic D-98. In accordance
with SFAS No. 133, the fair value of the Series A Conversion Feature is
bifurcated from the host instrument and recognized as a liability on the
Company's consolidated balance sheet. The Investor Warrants are recognized at
fair value as a liability on the Company's consolidated balance sheet. The fair
value of the conversion feature, the warrants and other issuance costs of the
Series A Preferred Stock financing transaction, are recognized as a discount to
the Series A Preferred Stock host. The discount will be accreted to the Series A
Preferred Stock host from the Company's paid in capital, treated as a deemed
dividend, over the period from the issuance date through the earliest redemption
date of the Series A Preferred Stock.
19
NOTE 2 - IMPLEMENTATION OF EITF ISSUE NO. 07-5, "DETERMINING WHETHER AN
INSTRUMENT (OR AN EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN STOCK"
(CONTINUED)
The following table illustrates the changes to the Company's consolidated
balance sheet resulting from the implementation of EITF Issue No. 07-5 effective
January 1, 2009:
BALANCE CUMULATIVE EFFECT BALANCE
DECEMBER 31, 2008 ADJUSTMENT JANUARY 1, 2009
----------------- ---------- ---------------
Preferred stock related embedded derivative $ -- $ 1,493,000 $ 1,493,000
Warrants $ -- $ 199,000 $ 199,000
Series A preferred stock $ 11,964,000 $ (3,191,000) $ 8,733,000
Additional paid-in capital $ 26,803,000 $ (1,138,000) $ 25,665,000
Accumulated deficit $ (32,186,000) $ 2,637,000 $ (29,549,000)
The fair value of the Series A Conversion Feature at the issuance date of the
Series A Preferred Stock (May 24, 2007) was estimated to be $4,085,000 using the
Black Scholes model. The assumptions used in the model included the Series A
Preferred Stock conversion price of $2.20, the Company's stock price of $1.71,
discount rate of 4.8%, and volatility of 48%. The accretion of the additional
discount to the preferred stock resulting from bifurcating the Series A
Conversion Feature totaled $894,000 through January 1, 2009. The cumulative
effect of these adjustments on January 1, 2009 was a reduction of the Series A
Preferred Stock balance of $3,191,000.
The fair value of the Investor Warrants of $244,000 was included in additional
paid in capital on the issuance date of the warrants (May 24, 2007). As a result
of reclassifying these warrants from equity to liabilities, and the additional
preferred stock accretion noted above, the cumulative effect of these
adjustments on January 1, 2009 was a reduction of additional paid in capital of
$1,138,000. The fair value of the Series A Conversion Feature, included in the
"Preferred stock related embedded derivative" liability on the Company's
consolidated balance sheet, on January 1, 2009 was estimated to be $1,493,000
using the Black Scholes model. The assumptions used in the model included the
Series A Preferred Stock conversion price of $2.20, the Company's stock price on
January 1, 2009 of $1.19, discount rate of 1.12%, and volatility of 53%. The
fair value of the Investor Warrants, included in the "Warrants" liability on the
Company's consolidated balance sheet, on January 1, 2009 was estimated to be
$199,000 using the Black Scholes model. The assumptions used in the model
included the Investor Warrants conversion prices of $2.42, the Company's stock
price on January 1, 2009 of $1.19, discount rate of 1.12%, and volatility of
53%.
The Company determined that, using the Black Scholes model, the fair value of
the preferred stock related embedded derivative and investor warrants had
declined as of January 1, 2009. Accordingly, the Company recorded as a
cumulative effect adjustment, the reduction of the fair value of these
derivative liabilities totaling $2,637,000 as a reduction of the Company's
accumulated deficit.
20
NOTE 2 - IMPLEMENTATION OF EITF ISSUE NO. 07-5, "DETERMINING WHETHER AN
INSTRUMENT (OR AN EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN STOCK"
(CONTINUED)
As of June 30, 2009, the Company determined that, using the Black Scholes model,
the fair value of the preferred stock related embedded derivative and the
investor warrants had declined since January 1, 2009. Accordingly, the Company
has recorded a gain on the change in fair value of the embedded derivative and
warrants and recorded a corresponding reduction in the "Preferred stock related
embedded derivative" and "Warrant" liability of $1,374,000, and $185,000,
respectively, for the period from January 1, 2009 to June 30, 2009. The effect
of the income from these derivatives on the loss from continuing operations and
net loss for the six months ended June 30, 2009 was to reduce the net loss of
$2,281,000 to a net loss of $722,000, and to reduce the net loss per common
share from $0.24 to a net loss per common share of $0.13. For the three months
ended June 30, 2009, the Company recorded a loss on the change in fair value of
the embedded derivative and warrants and recorded a corresponding increase in
the "Preferred stock related embedded derivative" and "Warrant" liability of
$44,000 and $5,000, respectively. The effect of the expense from these
derivatives on the loss from continuing operations and net loss for the three
months ended June 30, 2009 was to increase the net loss of $982,000 to a net
loss of $1,031,000, however, the expense had no effect on the net loss per
common share.
NOTE 3 - MANAGEMENT'S PLANS
For the six months ended June 30, 2009, the Company had a net loss of
approximately $1,031,000; however, excluding the non-cash gains from the
preferred stock related embedded derivative and warrants the loss from
operations was approximately $2,281,000, and as of June 30, 2009, the Company
had an accumulated deficit of approximately $30,271,000. The Company has
invested substantial resources in product development, which has negatively
impacted its cost structure and contributed to a significant portion of its
recent losses. Additionally, the decline in the semiconductor industry during
2007, 2008 and into 2009 has added to those losses as revenues declined.
Management's plans with respect to these matters include efforts to increase
revenues through the sale of existing products and new technology and continuing
to reduce certain operating expenses. Management believes that the Company's
current backlog and working capital is sufficient to maintain operations in the
near term and that product development can be reduced or curtailed in the future
to further manage cash expenditures. There are no current plans to seek
additional outside capital at this time. There are no assurances that the
Company will achieve profitable operations in the future or that additional
capital will be raised or obtained by the Company if cash generated from
operations is insufficient to pay current liabilities.
On December 4, 2007, the Company entered into two Loan and Security Agreements
with Silicon Valley Bank ("SVB") providing for a credit facility in the
aggregate amount of $7.5 million, under which the Company had no borrowings or
amounts outstanding. The Company was not in compliance with all of the covenants
in the agreements, and was unable to negotiate suitable amendments to the
agreements; accordingly, the line of credit with SVB is no longer available to
the Company, and in the quarter ended June 30, 2009 management determined to
allow the line of credit to expire. Management believes that, barring unforeseen
events, there will be no need to seek additional credit in the foreseeable
future, and given the high cost of credit under the current market conditions,
management is not seeking alternative credit facilities at this time.
21
NOTE 4 - INVENTORIES
Inventories consist of the following:
JUNE 30, DECEMBER 31,
2009 2008
--------------- ---------------
(unaudited)
Parts and raw materials $ 5,249,000 $ 5,562,000
Work-in-process 2,108,000 2,156,000
Finished goods 1,763,000 1,537,000
--------------- ---------------
9,120,000 9,255,000
Inventory reserves (3,647,000) (3,596,000)
--------------- ---------------
$ 5,473,000 $ 5,659,000
=============== ===============
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
JUNE 30, DECEMBER 31,
2009 2008
--------------- ---------------
(unaudited)
Buildings and improvements $ 2,282,000 $ 2,283,000
Shop and lab equipment 6,126,000 6,012,000
Transportation equipment 166,000 166,000
Furniture and fixtures 1,113,000 1,113,000
Computer equipment 2,326,000 2,326,000
--------------- ---------------
12,013,000 11,900,000
Less: accumulated depreciation and amortization (9,916,000) (9,750,000)
--------------- ---------------
$ 2,097,000 $ 2,150,000
=============== ===============
Depreciation expense totaled approximately $84,000 and $85,000 for the three
month periods ended June 30, 2009 and 2008, respectively, and $167,000 and
$173,000 for the six month periods ended June 30, 2009 and 2008, respectively.
NOTE 6 - STOCK COMPENSATION PLANS
Share based compensation expense is measured at grant date, based on the fair
value of the award, and is recognized over the employees requisite service
period. The share based compensation expense for the three month periods ended
June 30, 2009 and 2008 was $90,000 and $48,000, respectively, and $181,000 and
$94,000 for the six month periods ended June 30, 2009 and 2008, respectively.
22
NOTE 6 - STOCK COMPENSATION PLANS (CONTINUED)
The breakdown of share-based compensation charges by category of expense is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ----------------------------------
2009 2008 2009 2008
--------------- ------------- ------------- -------------
Selling, general and administrative $ 68,000 $ 35,000 $ 137,000 $ 68,000
Research and development $ 13,000 $ 7,000 $ 25,000 $ 14,000
Cost of goods sold $ 9,000 $ 6,000 $ 19,000 $ 12,000
As of June 30, 2009, there was $341,000 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements. The cost is expected
to be recognized over a weighted-average remaining recognition period of 0.7
years.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a party to an action filed by April Paletsas, former wife of Alan
Strasbaugh, Chairman and a significant shareholder of the Company, requesting a
declaration by the court that its subsidiary, R. H. Strasbaugh, is required to
install a new roof on the leased facilities in San Luis Obispo under the repair
and maintenance covenants of the lease covering its corporate facilities,
between Alan Strasbaugh and Ms. Paletsas, as co-landlords, and R. H. Strasbaugh,
as lessee. The Company is presently unable to evaluate the likelihood of an
unfavorable result in this dispute or the range of potential loss. However,
management intends to vigorously defend against this case and believes that all
of its defenses are meritorious.
The court issued an order appointing a receiver to sell the property;
thereafter, the receiver received an offer to purchase the premises from Alan
Strasbaugh. The offer was accepted and confirmed by the San Luis Obispo County
Superior Court in March of 2009. Mr. Strasbaugh had until May 5, 2009 in which
to complete his purchase of the property or it would again be placed on the open
market for sale. Mr. Strasbaugh was unable to complete the purchase, but has
advised the Company that he plans to continue with his efforts to acquire the
property.
The Company does not have a lease for its premises, except for a holdover
month-to-month tenancy at this time. Although management believes that purchase
of the property by Mr. Strasbaugh, if consummated, may resolve the claim
relating to roof maintenance, that claim remains pending.
The Company is subject to various lawsuits and claims with respect to such
matters as product liabilities, employment matters and other actions arising out
of the normal course of business. While the effect on future financial results
is not subject to reasonable estimation because considerable uncertainty exists,
in the opinion of Company counsel, the ultimate liabilities resulting from such
lawsuits and claims will not materially affect the financial condition or
results of operations.
23
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
SUBLEASE AGREEMENT
The Company entered into two sublease agreements with unaffiliated third parties
during 2008. The first sublease agreement provides for monthly rent of
approximately $24,000 and expires on February 28, 2010 and the second agreement
provides for monthly rent of approximately $11,000 and expires July 31, 2011.
Rental income totaled approximately $144,000 and $74,000 for the three month
periods ended June 30, 2009 and 2008, respectively, and $292,000 and $105,000
for the six month periods ended June 30, 2009 and 2008, respectively.
NOTE 8 - REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK
SERIES A PREFERRED STOCK FINANCING
On May 24, 2007, immediately after the closing of the Share Exchange
Transaction, the Company entered into an agreement with 21 accredited investors
for the sale by it in a private offering of 5,909,089 shares of its Series A
Preferred Stock at a purchase price of $2.20 per share, for gross proceeds of
$13,000,000.
The Series A Preferred Stock ranks senior in liquidation and dividend
preferences to the Company's common stock. Holders of the Series A Preferred
Stock are entitled to semi-annual cumulative dividends payable in arrears in
cash in an amount equal to 8% of the purchase price per share of the Series A
Preferred Stock. Each share of Series A Preferred Stock is convertible by the
holder at any time after its initial issuance at an initial conversion price of
$2.20 per share such that one share of common stock would be issued for each
share of Series A Preferred Stock. Subject to certain exceptions, the conversion
ratio is subject to customary antidilution adjustments and adjustments if the
Company subsequently issues certain equity securities at a price equivalent of
less than $2.20 per share. The conversion ratio is not subject to an
antidilution adjustment as a result of stock option grants under the Company's
2007 Plan with exercise prices lower than the conversion price of the Series A
Preferred Stock. In addition, the Company has no present intention to issue
equity securities at a price equivalent of less than $2.20 per share. The shares
of Series A Preferred Stock are also subject to forced conversion, at a
conversion price as last adjusted, anytime after May 24, 2008, if the closing
price of the Company's common stock exceeds 200% of the conversion price then in
effect for 20 consecutive trading days. As of June 30, 2009, the shares of
Series A Preferred Stock have not been subject to forced conversion. The holders
of Series A Preferred Stock vote together as a single class with the holders of
the Company's other classes and series of voting stock on all actions to be
taken by its shareholders. Each share of Series A Preferred Stock entitles the
holder to the number of votes equal to the number of shares of our common stock
into which each share of Series A Preferred Stock is convertible. In addition,
the holders of Series A Preferred Stock are afforded numerous customary
protective provisions with respect to certain actions that may only be approved
by holders of a majority of the shares of Series A Preferred Stock. The Company
is also required at all times to reserve and keep available out of its
authorized but unissued shares of common stock, such number of shares of common
stock sufficient to effect the conversion of all outstanding shares of Series A
Preferred Stock. On or after May 24, 2012 the holders of then outstanding shares
of our Series A Preferred Stock will be entitled to redemption rights. The
redemption price is equal to the per-share purchase price of the Series A
Preferred Stock, which is subject to adjustment as discussed above and in the
Company's articles of incorporation, plus any accrued but unpaid dividends. The
Series A Preferred Stock contain provisions prohibiting certain conversions of
the Series A Preferred Stock.
24
NOTE 8 - REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK (CONTINUED)
WARRANTS
In connection with the Series A Preferred Stock Financing, the Company issued to
the investors five-year warrants ("Investor Warrants") to purchase an aggregate
of 886,363 shares of common stock and issued to its placement agent, B. Riley
and Co. Inc. and its assignees, five-year warrants ("Placement Warrants") to
purchase an aggregate of 385,434 shares of common stock. As of June 30, 2009,
the Investor Warrants and the Placement Warrants remain outstanding and have an
exercise price of $2.42 per share. The Investor Warrants became exercisable
beginning 180 days after May 24, 2007 and the Placement Warrants became
immediately exercisable upon issuance on May 24, 2007.
NOTE 9 - EQUITY
REGISTRATION RIGHTS AGREEMENT
The Company is obligated under a registration rights agreement related to the
Series A Preferred Stock Financing to file a registration statement with the
Commission, registering for resale shares of common stock underlying the Series
A Preferred Stock and shares of common stock underlying Investor Warrants,
issued in connection with the Series A Preferred Stock Financing. The
registration obligations require, among other things, that a registration
statement be declared effective by the Commission on or before October 6, 2007.
As the Company was unable to meet this obligation in accordance with the
requirements contained in the registration rights agreement the Company entered
into with the investors, the Company is required to pay to each investor
liquidated damages equal to 1% per month of the amount paid by the investor for
the common shares still owned by the investor on the date of the default and 1%
of the amount paid by the investor for the common shares still owned by the
investor on each monthly anniversary of the date of the default that occurs
prior to the cure of the default. The maximum aggregate liquidated damages
payable to any investor will be equal to 10% of the aggregate amount paid by the
investor for the shares of the Company's Series A Preferred Stock. Accordingly,
the maximum aggregate liquidation damages that the Company would be required to
pay under this provision is $1,300,000. However, the Company is not obligated to
pay any liquidated damages with respect to any shares of common stock not
included on the registration statement as a result of limitations imposed by the
SEC relating to Rule 415 under the Securities Act.
The Company's registration statement was declared effective by the SEC on
November 6, 2008. Based on the number of shares registered and the length of the
default period, the penalties and interest under the agreement were estimated
and accrued at June 30, 2009 and December 31, 2008, in the amounts of $233,000
and $223,000, respectively.
NOTE 10 - INCOME TAXES
The Company estimates its income tax expense for interim periods using an
estimated annual effective tax rate. The tax benefit recognized for the six
months ended June 30, 2009 resulted from refunds received during the period of
taxes paid in prior years. There was no provision for the three or six months
ended June 30, 2008 as a result of the net operating losses. The Company has a
valuation allowance covering its deferred tax assets, including its net
operating loss carryforwards, because management believes that it is more likely
than not that all, or some portion of, such deferred tax assets will not be
realized.
25
NOTE 10 - INCOME TAXES (CONTINUED)
The Company has federal and state net operating loss carryforwards of
approximately $29,650,000 and $11,870,000, respectively, at June 30, 2009, which
will begin to expire in 2019 for federal purposes. Annual utilization of the
federal net operating loss carryforward may be limited for federal tax purposes
as a result of an Internal Revenue Code Section 382 change in ownership rules.
The state net operating loss carryforwards expire at various dates through 2029.
Included in the balance at June 30, 2009, are $0 of tax positions for which the
ultimate deductibility is highly certain but for which there is uncertainty
about the timing of such deductibility. Because of the impact of deferred tax
accounting, other than interest and penalties, the disallowance of the shorter
deductibility period would not affect the annual effective tax rate but would
accelerate the payment of cash to taxing authorities to an earlier period. Also
included in the balance at June 30, 2009, are $0 of unrecognized tax benefits
that, if recognized, would impact the effective tax rate. The Company made no
adjustment to its amount of unrecognized tax benefits during the three month
period ended June 30, 2009.
The Company recognizes interest and penalties accrued related to unrecognized
tax benefits in income tax expense. The Company had no amount accrued for the
payment of interest and penalties at June 30, 2009.
NOTE 11 - SUBSEQUENT EVENTS
TENDER OFFER STATEMENT
Subsequent to the period ended June 30, 2009 the Company filed, with the
Securities and Exchange Commission ("SEC"), a Tender Offer Statement on Schedule
TO relating to an offer by Strasbaugh to all its employees and Directors to
exchange (the "Exchange Offer") up to 663,708 shares of Common Stock for options
to purchase an aggregate of 1,327,416 shares of Common Stock of the Company. The
Exchange Offer covers both vested and unvested options that were granted under
the Company's 2007 Share Incentive Plan (the "Eligible Options"). Making the
election to exchange the options for stock on a 2 for 1 basis (two options for
one share of common stock) is completely voluntary on the part of each employee
and Director. For compensation expense purposes, the transaction will be valued
at the average trading price of the stock five business days prior to the
exercise date, which is scheduled for August 19, 2009 unless extended by the
Company. The Company has the right to extend or cancel the offer prior to August
19, 2009.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
unaudited condensed consolidated financial statements for the three and six
months ended June 30, 2009 and the related notes and the other financial
information included elsewhere in this report. This report and our financial
statements and notes to financial statements contain forward-looking statements,
which generally include the plans and objectives of management for future
operations, including plans and objectives relating to our future economic
performance and our current beliefs regarding revenues we might generate and
profits we might earn if we are successful in implementing our business
strategies. Our actual results could differ materially from those expressed in
these forward-looking statements as a result of any number of factors, including
26
those set forth under the "Risk Factors" section of our Annual Report on Form
10-K for the year ended December 31, 2008 and elsewhere in this report. The
forward-looking statements and associated risks may include, relate to or be
qualified by other important factors, including, without limitation:
1 the projected growth or contraction in the industries within
which we operate;
2 our business strategy for expanding, maintaining or
contracting our presence in these markets;
3 anticipated trends in our financial condition and results of
operations, including the recent decline in sales which
resulted in lower net revenues for 2008 as compared to 2007
and an overall net loss for the year ended December 31, 2008
and 2007; and
4 our ability to distinguish ourselves from our current and
future competitors.
We do not undertake to update, revise or correct any forward-looking
statements.
Any of the factors described above or in the "Risk Factors" section of
our Annual Report on Form 10-K for the year ended December 31, 2008 could cause
our financial results, including our net income or loss or growth in net income
or loss to differ materially from prior results, which in turn could, among
other things, cause the price of our common stock to fluctuate substantially.
OVERVIEW
We develop, manufacture, market and sell an extensive line of precision
surfacing products, including polishing, grinding and precision optics tools and
systems, to customers in the semiconductor and silicon wafer fabrication, data
storage, LED and precision optics markets worldwide. Many of our products are
used by our customers in the fabrication of semiconductors and silicon wafers.
Our net revenues decreased by $2,004,000, or 53%, to $1,795,000 for the
three months ended June 30, 2009 as compared to $3,779,000 for the three months
ended June 30, 2008 and decreased by $2,049,000, or 38%, to $3,302,000 for the
six months ended June 30, 2009 as compared to $5,351,000 for the six months
ended June 30, 2008. We reported a net loss of $1,031,000 for the three months
ended June 30, 2009 as compared to a net loss of $269,000 for the three months
ended June 30, 2008, and a net loss of $722,000 for the six months ended June
30, 2009 as compared to a net loss of $1,533,000 for the six months ended June
30, 2008. Excluding the non-cash gains totaling $1,559,000 on our preferred
stock related embedded derivative and warrants, our net loss increased by
$748,000 during the six months ended June 30, 2009 compared to the same period
in 2008. Our financial performance during the first six months of 2009 and 2008
has been negatively affected by a slowdown in the semiconductor industry. As a
result of the industry slowdown, we experienced a substantial decline in tool
system sales as customers delayed major purchasing decisions and we expect this
slowdown to continue well into 2009. Our priority over the next several months
is to continue to find ways to strengthen our balance sheet and conserve cash.
With that in mind, our total headcount has been reduced to 73 full and part-time
employees at June 30, 2009. While additional headcount reductions are not
planned at this time, we may need to further reduce our headcount in order to
reduce expenses if the decline in our business continues for a prolonged length
of time.
IMPLEMENTATION OF EITF ISSUE NO. 07-5, "DETERMINING WHETHER AN INSTRUMENT (OR AN
EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN STOCK"
In June 2008, the FASB ratified Emerging Issues Task Force ("EITF")
Issue No. 07-5 which provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF Issue No. 07-5 contains provisions
describing conditions when an instrument or embedded feature would be considered
27
indexed to an entity's own stock for purposes of evaluating the instrument or
embedded feature under Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133) which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts. Paragraph 11(a) of SFAS No. 133 indicates that "contracts issued or
held by that reporting entity that are both (1) indexed to its own stock and (2)
classified in stockholders' equity in its statement of financial position"
should not be considered derivative instruments.
The Company's convertible Series A Preferred Stock has been recognized
as "temporary equity," or outside of permanent equity and liabilities, in the
Company's consolidated balance sheet. The Series A Preferred Stock does not meet
the definition of mandatorily redeemable under SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity," because redemption is contingent upon the holders not exercising their
conversion option and the host contract is classified as temporary equity in
accordance with ASR 268 and EITF Abstracts, Topic D-98, "Classification and
Measurement of Redeemable Securities." The two embedded features in the Series A
Preferred Stock did not require bifurcation under SFAS No. 133 since, prior to
the implementation of EITF Issue No. 07-5, the conversion feature met the
paragraph 11(a) scope exception and the applicable criteria in EITF Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," and the redemption feature was
determined to be clearly and closely related to the host contract, therefore,
failing the paragraph 12 (a) criteria requiring bifurcation. Since there was no
bifurcation of the embedded features there was no separate accounting for those
features.
The Investor Warrants have previously been recognized as permanent
equity in the Company's statement of financial position. Prior to the
implementation of EITF Issue No. 07-5, the Investor Warrants were classified as
permanent equity because they met the paragraph 11(a) scope exception in SFAS
No. 133 and all of the criteria in EITF Issue No. 00-19. However, both the
convertible Series A Preferred Stock conversion feature and Investor Warrants
contain settlement provisions such that if the Company makes certain equity
offerings in the future at a price lower than the conversion prices of the
instruments, the conversion ratio would be adjusted.
EITF Issue No. 07-5 provides that an instrument's strike price or the
number of shares used to calculate the settlement amount are not fixed if its
terms provide for any potential adjustment, regardless of the probability of
such adjustment(s) or whether such adjustments are in the entity's control. If
the instrument's strike price or the number of shares used to calculate the
settlement amount are not fixed, the instrument (or embedded feature) would
still be considered indexed to an entity's own stock if the only variables that
could affect the settlement amount would be inputs to the fair value of a
"fixed-for-fixed" forward or option on equity shares.
Accordingly, under the provisions of EITF Issue No. 07-5 the embedded
conversion feature in the Company's Series A Preferred Stock (the "Series A
Conversion Feature") and the Investor Warrants are not considered indexed to the
Company's stock because future equity offerings (or sales) of the Company's
stock are not an input to the fair value of a "fixed-for-fixed" option on equity
shares. As a result of the settlement provisions in the Company's Series A
Conversion Feature and the application of EITF Issue No. 07-5, effective January
1, 2009, the Series A Conversion Feature no longer qualified for the paragraph
11(a) scope exception in SFAS No. 133, and was required to be bifurcated from
its host, in accordance with paragraph 12 of SFAS No. 133, and accounted for as
a derivative instrument. Also, as a result of the settlement provision in the
Investor Warrants and the application of EITF Issue No. 07-5, effective January
1, 2009, the Investor Warrants no longer qualified for the paragraph 11(a) scope
exception in FAS 133, and were required to be accounted for as derivatives. In
determining the classification of the Series A Conversion Feature and the
Investor Warrants the Company considered guidance in EITF Issue No. 07-5
28
indicating that an instrument considered indexed to its own stock is evaluated
under the provisions of EITF Issue No. 00-19 to determine whether it should be
classified as equity, or as an asset or a liability, however, if the terms are
such that it is not considered to be indexed to the entity's own stock then
equity classification is precluded. Accordingly, effective January 1, 2009 the
Company's Series A Conversion Feature and Investor Warrants are recognized as
liabilities in the Company's consolidated balance sheet.
In accordance with EITF Issue No. 07-5, the cumulative effect of this
change in accounting principle is recognized as an adjustment to the opening
balance of the Company's equity on January 1, 2009. The Series A Preferred Stock
host, the Series A Conversion Feature, the Investor Warrant and the cumulative
effect adjustment are determined based on amounts that would have been
recognized if the guidance in EITF Issue No. 07-5 had been applied from the date
the preferred stock and warrants were issued. The Series A Preferred Stock host
will remain classified in temporary equity and stated at its fair value as the
accounting for the instrument, excluding the Series A Conversion Feature,
follows the applicable GAAP including ASR 268 and EITF Abstract Topic D-98. In
accordance with SFAS No. 133, the fair value of the Series A Conversion Feature
is bifurcated from the host instrument and recognized as a liability on the
Company's consolidated balance sheet. The Investor Warrants are recognized at
fair value as a liability on the Company's consolidated balance sheet. The fair
value of the conversion feature, the warrants and other issuance costs of the
Series A Preferred Stock financing transaction, are recognized as a discount to
the Series A Preferred Stock host. The discount will be accreted to the Series A
Preferred Stock host from the Company's paid in capital, treated as a deemed
dividend, over the period from the issuance date through the earliest redemption
date of the Series A Preferred Stock.
The following table illustrates the changes to the Company's
consolidated balance sheet resulting from the implementation of EITF Issue No.
07-5 effective January 1, 2009:
BALANCE CUMULATIVE EFFECT BALANCE
DECEMBER 31, 2008 ADJUSTMENT JANUARY 1, 2009
----------------- ----------------- -----------------
Preferred stock related embedded derivative $ -- $ 1,493,000 $ 1,493,000
Warrants $ -- $ 199,000 $ 199,000
Series A preferred stock $ 11,964,000 $ (3,191,000) $ 8,733,000
Additional paid-in capital $ 26,803,000 $ (1,138,000) $ 25,665,000
Accumulated deficit $ (32,186,000) $ 2,637,000 $ (29,549,000)
The fair value of the Series A Conversion Feature at the issuance date
of the Series A Preferred Stock (May 24, 2007) was estimated to be $4,085,000
using the Black Scholes model. The assumptions used in the model included the
Series A Preferred Stock conversion price of $2.20, the Company's stock price of
$1.71, discount rate of 4.8%, and volatility of 48%. The accretion of the
additional discount to the preferred stock resulting from bifurcating the Series
A Conversion Feature totaled $894,000 through January 1, 2009. The cumulative
effect of these adjustments on January 1, 2009 was a reduction of the Series A
Preferred Stock balance of $3,191,000.
The fair value of the Investor Warrants of $244,000 was included in
additional paid in capital on the issuance date of the warrants (May 24, 2007).
As a result of reclassifying these warrants from equity to liabilities, and the
additional preferred stock accretion noted above, the cumulative effect of these
adjustments on January 1, 2009 was a reduction of additional paid in capital of
$1,138,000. The fair value of the Series A Conversion Feature, included in
"Preferred stock related embedded derivative" liability on the Company's
consolidated balance sheet, on January 1, 2009 was estimated to be $1,493,000
29
using the Black Scholes model. The assumptions used in the model included the
Series A Preferred Stock conversion price of $2.20, the Company's stock price on
January 1, 2009 of $1.19, discount rate of 1.12%, and volatility of 53%. The
fair value of the Investor Warrants, included in "Warrants" liability on the
Company's consolidated balance sheet, on January 1, 2009 was estimated to be
$199,000 using the Black Scholes model. The assumptions used in the model
included the Investor Warrants conversion prices of $2.42, the Company's stock
price on January 1, 2009 of $1.19, discount rate of 1.12%, and volatility of
53%.
The Company determined that, using the Black Scholes model, the fair
value of the preferred stock related embedded derivative and investor warrants
had declined as of January 1, 2009. Accordingly, the Company recorded as a
cumulative effect adjustment, the reduction of the fair value of these
derivative liabilities totaling $2,637,000 as a reduction of the Company's
accumulated deficit.
As of June 30, 2009, the Company determined that, using the Black
Scholes model, the fair value of the preferred stock related embedded derivative
and the investor warrants had declined since January 1, 2009. Accordingly, the
Company has recorded a gain on the change in fair value of the embedded
derivative and warrants and recorded a corresponding reduction in the "Preferred
stock related embedded derivative" and "Warrant" liability of $1,374,000, and
$185,000, respectively, for the period from January 1, 2009 to June 30, 2009.
The effect of the income from these derivatives on the loss from continuing
operations and net loss for the six months ended June 30, 2009 was to reduce the
net loss of $2,281,000 to a net loss of $722,000, and to reduce the net loss per
common share from $0.24 to a net loss per common share of $0.13. For the three
months ended June 30, 2009, the Company recorded a loss on the change in fair
value of the embedded derivative and warrants and recorded a corresponding
increase in the "Preferred stock related embedded derivative" and "Warrant"
liability of $44,000 and $5,000, respectively, for the three months ending June
30, 2009. The effect of the expense from these derivatives on the loss from
continuing operations and net loss for the three months ended June 30, 2009 was
to increase the net loss of $982,000 to a net loss of $1,031,000, however, the
expense had no effect on the net loss per common share.
CRITICAL ACCOUNTING POLICIES
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis of
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe that the following critical accounting policies, among
others, affect our more significant judgments and estimates used in the
preparation of our financial statements:
REVENUE RECOGNITION. We derive revenues principally from the sale of
tools, parts and services. We recognize revenue pursuant to Staff Accounting
Bulletin No. 104, "Revenue Recognition." Revenue is recognized when there is
persuasive evidence an arrangement exists, delivery has occurred or services
have been rendered, our price to the customer is fixed or determinable, and
collection of the related receivable is reasonably assured. Selling arrangements
30
may include contractual customer acceptance provisions and installation of the
product occurs after shipment and transfer of title. We recognize revenue upon
shipment of products or performance of services and defer recognition of revenue
for any amounts subject to acceptance until such acceptance occurs. Provisions
for the estimated future cost of warranty are recorded at the time the products
are shipped.
Generally, we obtain a non-refundable down-payment from the customer.
These fees are deferred and recognized as the tool is shipped. All sales
contract fees are payable no later than 60 days after delivery and payment is
not contingent upon installation. In addition, our tool sales have no right of
return, or cancellation rights. Tools are typically modified to some degree to
fit the needs of the customer and, therefore, once a purchase order has been
accepted by us and the manufacturing process has begun, there is no right to
cancel, return or refuse the order.
We have evaluated our arrangements with customers and revenue
recognition policies under EITF Issue No. 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables," and determined that our components of
revenue are separate units of accounting. Each unit has value to the customer on
a standalone basis, there is objective and reliable evidence of the fair value
of each unit, and there is no right to cancel, return or refuse an order. Our
revenue recognition policies for our specific units of accounting are as
follows:
1 Tools - We recognize revenue once a customer has visited the
plant and signed off on the tool or it has met the required
specifications and the tool is completed and shipped.
2 Parts - We recognize revenue when the parts are shipped.
3 Service - Revenue from maintenance contracts is deferred and
recognized over the life of the contract, which is generally
one to three years. Maintenance contracts are separate
components of revenue and not bundled with our tools. If a
customer does not have a maintenance contract, then the
customer is billed for time and material and we recognize
revenue after the service has been completed.
4 Upgrades - We offer a suite of products known as
"enhancements" which are generally comprised of one-time parts
and/or software upgrades to existing Strasbaugh and
non-Strasbaugh tools. These enhancements are not required for
the tools to function, are not part of the original contract
and do not include any obligation to provide any future
upgrades. We recognize revenue once these upgrades and
enhancements are complete. Revenue is recognized on equipment
upgrades when we complete the installation of the upgrade
parts and/or software on the customer's equipment and the
equipment is accepted by the customer. The upgrade contracts
cover a one-time upgrade of a customer's equipment with new or
modified parts and/or software. After installation of the
upgrade, we have no further obligation on the contracts, other
than standard warranty provisions.
We include software in our tools. Software is considered an incidental
element of the tooling contracts and only minor modifications which are
incidental to the production effort may be necessary to meet customer
requirements. The software is used solely in connection with operating the tools
and is not sold, licensed or marketed separately. The tools and software are
fully functional when the tool is completed, and after shipment, the software is
not updated for new versions that may be subsequently developed and, we have no
additional obligations relative to the software. However, software modifications
may be included in tool upgrade contracts. Our software is incidental to the
tool contracts as a whole. The software and physical tool modifications occur
and are completed concurrently. The completed tool is tested by either the
31
customer or us to ensure it has met all required specifications and then
accepted by the customer prior to shipment, at which point revenue is
recognized. The revenue recognition requirements of Statement of Position
("SOP") 97-2, "Software Revenue Recognition," are met when there is persuasive
evidence an arrangement exists, the fee is fixed or determinable, collectibility
is probable and delivery and acceptance of the equipment has occurred, including
upgrade contracts for parts and/or software, to the customer.
Installation of a tool occurs after the tool is completed, tested,
formally accepted by the customer and shipped. We do not charge the customer for
installation nor recognize revenue for installation as it is an inconsequential
or perfunctory obligation and it is not considered a separate element of the
sales contract or unit of accounting. If we do not perform the installation
service there is no effect on the price or payment terms, there are no refunds,
and the tool may not be rejected by the customer. In addition, installation is
not essential to the functionality of the equipment because the equipment is a
standard product, installation does not significantly alter the equipment's
capabilities, and other companies are available to perform the installation.
Also, the fair value of the installation service has historically been
insignificant relative to our tools.
DERIVATIVE INCOME. In accordance with EITF Issue No. 07-5 (see
"Implementation of EITF Issue No. 07-5, "Determining Whether an Instrument (Or
an Embedded Feature) is Indexed to an Entity's Own Stock" "), the Company is
required to account for the preferred stock related embedded derivative and
investor warrants as derivative liabilities. The Company is required to mark to
market each reporting quarter the value of the embedded derivative and investor
warrants. The Company revalues these derivative liabilities at the end of each
reporting period. The periodic change in value of the derivative liabilities is
recorded as either non-cash derivative income (if the value of the embedded
derivative and investor warrants decrease) or as non-cash derivative expense (if
the value of the embedded derivative and investor warrants increase). Although
the values of the embedded derivative and warrants are affected by interest
rates, the remaining contractual conversion period and the Company's stock
volatility, the primary cause of the change in the values will be the value of
the Company's Common Stock. If the stock price goes up, the value of these
derivatives will generally increase and if the stock price goes down the value
of these derivatives will generally decrease.
WARRANTY COSTS. Warranty reserves are provided by management based on
historical experience and expected future claims. Management believes that the
current reserves are adequate to meet any foreseeable contingencies with respect
to warranty claims.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. The allowance for doubtful accounts is based on specific
identification of customer accounts and our best estimate of the likelihood of
potential loss, taking into account such factors as the financial condition and
payment history of major customers. We evaluate the collectability of our
receivables at least quarterly. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Management believes that our current
allowances for doubtful accounts are adequate to meet any foreseeable
contingencies.
INVENTORY. We write down our inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value-based upon assumptions about future demand, future
pricing and market conditions. If actual future demand, future pricing or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required and the differences could be material.
Once established, write-downs are considered permanent adjustments to the cost
basis of the obsolete or unmarketable inventories.
VALUATION OF INTANGIBLES. From time to time, we acquire intangible
assets that are beneficial to our product development processes. We use our best
judgment based on the current facts and circumstances relating to our business
when determining whether any significant impairment factors exist.
32
DEFERRED TAXES. We record a valuation allowance to reduce the deferred
tax assets to the amount that is more likely than not to be realized. We have
considered estimated future taxable income and ongoing tax planning strategies
in assessing the amount needed for the valuation allowance. Based on these
estimates, all of our deferred tax assets have been reserved. If actual results
differ favorably from those estimates used, we may be able to realize all or
part of our net deferred tax assets.
LITIGATION. We account for litigation losses in accordance with
Statement of Financial Accounting Standards, or SFAS, No. 5, "Accounting for
Contingencies." Under SFAS No. 5, loss contingency provisions are recorded for
probable losses at management's best estimate of a loss, or when a best estimate
cannot be made, a minimum loss contingency amount is recorded. These estimates
are often initially developed substantially earlier than the ultimate loss is
known, and the estimates are refined each accounting period, as additional
information is known. Accordingly, we are often initially unable to develop a
best estimate of loss; therefore, the minimum amount, which could be zero, is
recorded. As information becomes known, either the minimum loss amount is
increased or a best estimate can be made, resulting in additional loss
provisions. Occasionally, a best estimate amount is changed to a lower amount
when events result in an expectation of a more favorable outcome than previously
expected. Due to the nature of current litigation matters, the factors that
could lead to changes in loss reserves might change quickly and the range of
actual losses could be significant, which could adversely affect our results of
operations and cash flows from operating activities.
SERIES A PREFERRED STOCK AND WARRANTS. We evaluate our Series A
Preferred Stock and warrants on an ongoing basis considering the provisions of
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity," which establishes standards for issuers of
financial instruments with characteristics of both liabilities and equity
related to the classification and measurement of those instruments. The Series A
Preferred Stock conversion feature and Warrants are evaluated considering the
provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities, considering EITF Issue No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock," and EITF Issue No. 07-5, "Determining
Whether an Instrument (Or an Embedded Feature) is Indexed to an Entity's Own
Stock"
RESULTS OF OPERATIONS
The tables presented below, which compare our results of operations
from one period to another, present the results for each period, the change in
those results from one period to another in both dollars and percentage change,
and the results for each period as a percentage of net revenues. The columns
present the following:
1 The first two data columns in each table show the absolute
results for each period presented.
2 The columns entitled "Dollar Variance" and "Percentage
Variance" show the change in results, both in dollars and
percentages. These two columns show favorable changes as a
positive and unfavorable changes as negative. For example,
when our net revenues increase from one period to the next,
that change is shown as a positive number in both columns.
Conversely, when expenses increase from one period to the
next, that change is shown as a negative in both columns.
3 The last two columns in each table show the results for each
period as a percentage of net revenues.
33
THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2008
DOLLAR PERCENTAGE
VARIANCE VARIANCE
----------------------------- ------------- ------------- ----------------------
FAVORABLE FAVORABLE
2009 2008 (UNFAVORABLE) (UNFAVORABLE) 2009 2008
------------- ------------- ------------- ------------- --------- ---------
(IN THOUSANDS)
Net revenues................................. $ 1,795 $ 3,799 $ (2,004) (53%) 100% 100%
Cost of sales................................ 1,066 2,260 1,194 53% 59% 59%
------------- ------------- ------------- ------------- --------- ---------
Gross profit................................. 729 1,539 (810) (53%) 41% 41%
Selling, general and administrative expenses. 820 1,186 366 31% 46% 31%
Research and development expenses............ 1,026 732 (294) (40%) 57% 19%
------------- ------------- ------------- ------------- --------- ---------
Loss from operations......................... (1,117) (379) (738) (195%) (62%) (10%)
Total other income (expense)................. 72 110 (38) (35%) 4% 3%
------------- ------------- ------------- ------------- --------- ---------
Loss from operations before income taxes..... (1,045) (269) (776) (288%) (58%) (7%)
Benefit from income taxes.................... 14 -- 14 -- 1% --
------------- ------------- ------------- ------------- --------- ---------
Net loss..................................... $ (1,031) $ (269) $ (762) (283%) (57%) (7%)
============= ============= ============= ============= ========= =========
NET REVENUES. Net revenues decreased by $2,004,000, to $1,795,000 in
the second quarter of 2009 compared to the same period in 2008. Sales of tool
systems decreased by $1,130,000, to $589,000, in the second quarter of 2009
compared to $1,719,000 for the same period in 2008. Revenue from parts and
services declined by $874,000, to $1,206,000 in the second quarter of 2009,
compared to $2,080,000 for the same period in 2008.
GROSS PROFIT. The $810,000 decrease in gross profit was primarily due
to the lower volume of product shipments. The gross margin as a percentage of
sales was held constant in the second quarter of 2009 compared to the same
period in 2008 primarily as a result of a favorable mix of higher-margin parts
sales in the second quarter of 2009 compared to the sales mix in the prior year.
We anticipate that our gross profit margin will be approximately 40% of net
revenues for the remainder of 2009.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $366,000 decrease in
selling, general and administrative expenses is a result of cost cutting
measures, including lower head-count of employees, initiated during 2008.
RESEARCH AND DEVELOPMENT EXPENSES. The $294,000 increase in research
and development expense represents primarily on-going engineering improvements
on existing product lines developed over the past five years, as well as efforts
to develop new technology for our future. We expect that research and
development spending will continue to increase during the remainder of 2009.
OTHER INCOME (EXPENSE). The $38,000 decrease in other income was
primarily due to non-cash expenses totaling $49,000 resulting from the increase
in the fair value of our preferred stock related embedded derivative and warrant
liabilities during the three months ended June 30, 2009.
34
SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2008
DOLLAR PERCENTAGE
VARIANCE VARIANCE
----------------------------- ------------- ------------- ----------------------
FAVORABLE FAVORABLE
2009 2008 (UNFAVORABLE) (UNFAVORABLE) 2009 2008
------------- ------------- ------------- ------------- --------- ---------
(IN THOUSANDS)
Net revenues................................. $ 3,302 $ 5,351 $ (2,049) (38%) 100% 100%
Cost of sales................................ 2,086 3,209 1,123 35% 63% 60%
------------- ------------- ------------- ------------- --------- ---------
Gross profit................................. 1,216 2,142 (926) (43%) 37% 40%
Selling, general and administrative expenses. 1,780 2,211 431 19% 54% 41%
Research and development expenses............ 1,986 1,642 (344) (21%) 60% 31%
------------- ------------- ------------- ------------- --------- ---------
Loss from operations......................... (2,550) (1,711) (839) (49%) (77%) (32%)
Total other income (expense)................. 1,815 178 1,637 920% 55% 3%
------------- ------------- ------------- ------------- --------- ---------
Loss from operations before income taxes..... (735) (1,533) 798 52% (22%) (29%)
Benefit from income taxes.................... 13 -- 13 -- -- --
------------- ------------- ------------- ------------- --------- ---------
Net loss..................................... $ (722) $ (1,533) $ 811 53% (22%) (29%)
============= ============= ============= ============= ========= =========
NET REVENUES. Net revenues decreased by $2,049,000, to $3,302,000 in
the first half of 2009 compared to the same period in 2008. Sales of tool
systems decreased by $736,000 to $1,086,000, in the first half of 2009 compared
to $1,822,000 for the same period in 2008. Revenue from parts sales and services
declined by $1,313,000 to $2,216,000, in the first half of 2009, compared to
$3,529,000 for the same period in 2008.
GROSS PROFIT. The $926,000 decrease in gross profit was primarily due
to the lower volume of product shipments. The gross margin as a percentage of
sales was lower for the first six months of 2009 compared to the same period in
2008 primarily as a result of spreading fixed factory overhead costs over fewer
product shipments in the first half of 2009 compared to the higher level of
product shipments and revenue base in 2008.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $431,000 decrease in
selling, general and administrative expenses is a result of cost cutting
measures, including lower head-count of employees, initiated during 2008.
RESEARCH AND DEVELOPMENT EXPENSES. The $344,000 increase in research
and development expense represents primarily on-going engineering improvements
on existing product lines developed over the past five years, as well as efforts
to develop new technology for our future. We expect that research and
development spending will continue to increase during the remainder of 2009.
OTHER INCOME (EXPENSE). The $1,637,000 increase in other income was
primarily due to non-cash gains totaling $1,559,000 resulting from the decrease
in the fair value of our preferred stock related embedded derivative and warrant
liabilities during the six months ended June 30, 2009.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2009, we had working capital of $2,010,000, as compared
to $4,009,000 at December 31, 2008, as cash from collections of receivables,
customer deposits on tool contracts and proceeds from sales of investment
securities were used to support operations during the first half of 2009. At
June 30, 2009 and December 31, 2008 we had an accumulated deficit of $30,271,000
and $32,186,000, respectively, and cash and cash equivalents of $642,000 and
$49,000, respectively.
35
Our available capital resources at June 30, 2009 consisted primarily of
approximately $642,000 in cash and cash equivalents and $665,000 in accounts
receivable. We expect that our future available capital resources will consist
primarily of cash on hand, cash generated from our business, and future debt
and/or equity financings, if any.
Cash provided by operating activities for the six months ended June 30,
2009 was $446,000, as compared to $108,000 of cash provided by operating
activities for the six months ended June 30, 2008, and included net losses of
$722,000 and $1,533,000 for the six months ended June 30, 2009 and 2008,
respectively. Included in the results for the first half of 2009 were non-cash
gains of $1,559,000 from derivative liabilities, as well as non-cash charges for
depreciation and amortization of $187,000 and stock-based compensation of
$181,000. Material changes in assets and liabilities at June 30, 2009 occurring
since December 31, 2008 that affected these results include:
1 a decrease in accounts receivable before reserves of $644,000;
2 a decrease in inventory before reserves of $135,000;
3 a decrease in accounts payable of $598,000; and
4 an increase in customer deposits of $2,094,000.
Cash provided by investing activities totaled $147,000 for the six
months ended June 30, 2009 as compared to $570,000 of cash provided by investing
activities for the six months ended June 30, 2008. Included in the results for
the six months ended June 30, 2009 are proceeds of $294,000 from sales of
investment securities, $114,000 of equipment purchases and $33,000 representing
the capitalized cost of intellectual property.
There were no cash flows from financing activities in the first half of
2009 compared to net cash used in financing activities totaling $944,000 for the
six months ended June 30, 2008. The cash used in financing activities in the
first half of 2008 was attributable to the dividend payment and issuance costs
related to the Series A Preferred Stock.
On December 4, 2007, we entered into two Loan and Security Agreements
with Silicon Valley Bank ("SVB") providing for a credit facility in the
aggregate amount of $7.5 million, under which the Company had no borrowings or
amounts outstanding. The Company was not in compliance with all of the covenants
in the agreements, and was unable to negotiate suitable amendments to the
agreements; accordingly, the line of credit with SVB is no longer available to
the Company, and in the quarter ended June 30, 2009 management determined to
allow the line of credit to expire. Management believes that, barring unforeseen
events, there will be no need to seek additional credit in the foreseeable
future, and given the high cost of credit under the current market conditions,
management is not seeking alternative credit facilities at this time.
On May 24, 2007, immediately after the closing of the Share Exchange
Transaction, we issued to 21 accredited investors in the Series A Preferred
Stock Financing an aggregate of 5,909,089 shares of our Series A Preferred Stock
at a purchase price of $2.20 per share and five-year investor warrants, or
Investor Warrants, to purchase an aggregate of 886,363 shares of common stock at
an exercise price of $2.42 per share, for total gross proceeds of $13,000,000.
The Investor Warrants are initially exercisable 180 days after May 24, 2007. We
paid cash placement agent fees and expenses of approximately $1.1 million and
issued five-year placement warrants, or Placement Warrants, to purchase 385,434
shares of common stock at an exercise price of $2.42 per share in connection
with the offering. Additional costs related to the financing including placement
agent, legal, accounting and consulting fees that totaled approximately
$2,482,000 through December 31, 2008.
36
We are obligated under a registration rights agreement related to the
Series A Preferred Stock Financing to file a registration statement with the
SEC, registering for resale shares of common stock underlying the Series A
Preferred Stock and shares of common stock underlying Investor Warrants, issued
in connection with the Series A Preferred Stock Financing. The registration
obligations require, among other things, that a registration statement be
declared effective by the SEC on or before October 6, 2007. Because we were
unable to have the initial registration statement declared effective by the SEC
by October 6, 2007, we are generally required to pay to each investor liquidated
damages equal to 1% of the amount paid by the investor for the underlying shares
of common stock still owned by the investor on the date of the default and 1% of
the amount paid by the investor for the underlying shares of common stock still
owned by the investor on each monthly anniversary of the date of the default
that occurs prior to the cure of the default. However, we are not obligated to
pay any liquidated damages with respect to any shares of common stock not
included on the registration statement as a result of limitations imposed by the
SEC relating to Rule 415 under the Securities Act. The maximum aggregate
liquidated damages payable to any investor will be equal to 10% of the aggregate
amount paid by the investor for the shares of our Series A Preferred Stock.
Accordingly, the maximum aggregate liquidation damages that we would be required
to pay under this provision is $1.3 million. The registration statement was
declared effective on November 6, 2008 and the Company has accrued approximately
$233,000 as liquidated damages and is accruing 10% interest per annum on that
amount until such time as the payment is made to the preferred shareholders.
We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
will be adequate to meet our anticipated working capital and capital expenditure
requirements for at least the next twelve months. If, however, our capital
requirements or cash flow vary materially from our current projections or if
unforeseen circumstances occur, we may require additional financing. Our failure
to raise capital, if needed, could restrict our growth, limit our development of
new products or hinder our ability to compete.
BACKLOG
As of August 3, 2009, we had a backlog of approximately $11.1 million.
Our backlog includes firm non-cancelable customer commitments for 13 tools and
approximately $680,000 in parts and upgrades. Management believes that all
products currently in our backlog will be shipped by January 31, 2010.
EFFECTS OF INFLATION
The impact of inflation and changing prices has not been significant on
the financial condition or results of operations of either our company or our
operating subsidiary.
IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS
In April 2009, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-4 "Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly".
Based on the guidance, if an entity determines that the level of activity for an
asset or liability has significantly decreased and that a transaction is not
orderly, further analysis of transactions or quoted prices is needed, and a
significant adjustment to the transaction or quoted prices may be necessary to
estimate fair value in accordance with Statement SFAS No. 157 "Fair Value
Measurements". This FSP is to be applied prospectively and is effective for
interim and annual periods ending after June 15, 2009 with early adoption
permitted for periods ending after March 15, 2009. Implementation of this FSP
during the quarter ending June 30, 2009 had no impact on the Company's financial
condition or results of operations.
37
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 "Recognition
and Presentation of Other-Than-Temporary Impairments". The guidance applies to
investments in debt securities for which other-than-temporary impairments may be
recorded. If an entity's management asserts that it does not have the intent to
sell a debt security and it is more likely than not that it will not have to
sell the security before recovery of its cost basis, then an entity may separate
other-than-temporary impairments into two components: 1) the amount related to
credit losses (recorded in earnings), and 2) all other amounts (recorded in
other comprehensive income). This FSP is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009 with early
adoption permitted for periods ending after March 15, 2009. Implementation of
this FSP during the quarter ending June 30, 2009 had no impact on the Company's
financial condition or results of operations.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles
Board (APB) 28-1 "Interim Disclosures about Fair Value of Financial
Instruments". The FSP amends SFAS No. 107 "Disclosures about Fair Value of
Financial Instruments" to require an entity to provide disclosures about fair
value of financial instruments in interim financial information. This FSP is to
be applied prospectively and is effective for interim and annual periods ending
after June 15, 2009 with early adoption permitted for periods ending after March
15, 2009. The Company has included the required disclosures in the accompanying
condensed consolidated financial statements.
In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining
Whether an Instrument (Or an Embedded Feature) is Indexed to an Entity's Own
Stock." EITF Issue No. 07-5 provides that an entity should use a two-step
approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument's
contingent exercise and settlement provisions. EITF Issue No. 07-5 is effective
for financial statements issued for fiscal years beginning after December 15,
2008. Early application is not permitted. Implementation of this EITF has had a
significant impact on the Company's financial condition and results of
operations (See "Accounting Change" above).
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," which
establishes general standards of accounting for, and requires disclosure of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. We adopted the provisions of SFAS 165
for the quarter ended June 30, 2009. The adoption of these provisions did not
have a material effect on our condensed consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers
of Financial Assets - an amendment of FASB Statement No. 140" and SFAS No. 167,
"Amendments to FASB Interpretation No. 46(R)." SFAS 166 will require more
information about transfers of financial assets, eliminates the qualifying
special purpose entity (QSPE) concept, changes the requirements for
derecognizing financial assets and requires additional disclosures. SFAS 167
amends FASB Interpretation No. 46(R), "Consolidation of Variable Interest
Entities" regarding certain guidance for determining whether an entity is a
variable interest entity and modifies the methods allowed for determining the
primary beneficiary of a variable interest entity. In addition, SFAS 167
requires ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity and enhanced disclosures related to an
enterprise's involvement in a variable interest entity. We do not expect the
adoption of SFAS 166 or SFAS 167 to have a material impact on the Company's
financial condition or results of operations. SFAS 166 and SFAS 167 are
effective for the first annual reporting period that begins after November 15,
2009.
38
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting
Standards CodificationTM and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No. 162." SFAS 168 provides for the
FASB Accounting Standards CodificationTM (the "Codification") to become the
single official source of authoritative, nongovernmental U.S. generally accepted
accounting principles (GAAP). The Codification did not change GAAP but
reorganizes the literature. SFAS 168 is effective for interim and annual periods
ending after September 15, 2009.
In April 2008, the FASB issued FSP FAS No. 142-3 "Determination of the
Useful Life of Intangible Assets." This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and
Other Intangible Assets." The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141 (revised 2007), "Business Combinations," and other GAAP. FSP
FAS No. 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. Implementation of this EITF has had no impact
on the Company's financial condition or results of operations.
TENDER OFFER STATEMENT
Subsequent to the period ended June 30, 2009 the Company filed, with
the Securities and Exchange Commission ("SEC"), a Tender Offer Statement on
Schedule TO relating to an offer by Strasbaugh to all its employees and
Directors to exchange (the "Exchange Offer") up to 663,708 shares of Common
Stock for options to purchase an aggregate of 1,327,416 shares of Common Stock
of the Company. The Exchange Offer covers both vested and unvested options that
were granted under the Company's 2007 Share Incentive Plan (the "Eligible
Options"). Making the election to exchange the options for stock on a 2 for 1
basis (two options for one share of common stock) is completely voluntary on the
part of each employee and Director. For compensation expense purposes, the
transaction will be valued at the average trading price of the stock five
business days prior to the exercise date, which is scheduled for August 19, 2009
unless extended by the Company. The Company has the right to extend or cancel
the offer prior to August 19, 2009.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange
Act")) was carried out under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and the Chief
Financial Officer ("the Certifying Officers") as of June 30, 2009. Based on that
evaluation, the Certifying Officers concluded that the Company's disclosure
controls and procedures are effective. There have been no changes in the
Company's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
June 30, 2009 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
39
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various legal proceedings, claims and litigation with
respect to such matters as product liabilities, employment matters and other
actions arising out of the normal course of business. While the amounts claimed
may be substantial, the ultimate liability cannot presently be determined
because of considerable uncertainties that exist. Therefore, it is possible that
the outcome of those legal proceedings, claims and litigation could adversely
affect our quarterly or annual operating results or cash flows when resolved in
a future period. However, based on facts currently available, management
believes such matters will not adversely affect our financial position, results
of operations or cash flows.
The Company is a party to an action filed by April Paletsas, former
wife of Alan Strasbaugh, Chairman and a significant shareholder of the Company,
requesting a declaration by the court that its subsidiary, R. H. Strasbaugh, is
required to install a new roof on the leased facilities in San Luis Obispo under
the repair and maintenance covenants of the lease covering its corporate
facilities, between Alan Strasbaugh and Ms. Paletsas, as co-landlords, and R. H.
Strasbaugh, as lessee. The Company is presently unable to evaluate the
likelihood of an unfavorable result in this dispute or the range of potential
loss. However, management intends to vigorously defend against this case and
believes that all of its defenses are meritorious. The court issued an order
appointing a receiver to sell the property; thereafter, the receiver received an
offer to purchase the premises from Alan Strasbaugh. The offer was accepted and
confirmed by the San Luis Obispo County Superior Court in March of 2009. Mr.
Strasbaugh had until May 5, 2009 in which to complete his purchase of the
property. Mr. Strasbaugh was unable to complete the purchase, but has advised
the Company that he plans to continue with his efforts to acquire the property.
The Company does not have a lease for its premises, except for a
holdover month-to-month tenancy at this time. Although, management believes that
purchase of the property by Mr. Strasbaugh, if consummated, may resolve the
claim relating to roof maintenance, that claim remains pending.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you
should carefully consider the factors discussed under "Risk Factors" in our
Annual Report on Form 10-K for the year ended December 31, 2008, which could
materially affect our business, financial condition and results of operations.
The risks described in our Annual Report on Form 10-K for the year ended
December 31, 2008 are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
40
ITEM 5. OTHER INFORMATION
On August 7, 2009, Danilo Cacciamatta, David Porter and John Givens
resigned from the Board of Directors. On that date the remaining directors
appointed Tom Walsh, Daniel J. O'Hare, and Dr. Marin Kulawski to fill the
vacancies created by the resignations.
Mr. Walsh, age 67, was employed by the Company between 1959 and 2005,
most recently as Vice President-Engineering, but remains a consultant to the
Company. Mr. Walsh is responsible for the design and engineering direction of
over one hundred products and over twelve thousand machine tools manufactured
during the past forty years by the Company. While directing the Engineering
Department at the Company, Mr. Walsh studied mechanical engineering at
California State University at Long Beach.
Mr. O'Hare, age 45, is Managing Principal of Glenn, Burdette, Phillips
and Bryson, Certified Public Accountants, where he has been employed since 1989.
He specializes in tax planning and business consulting. Prior to that time he
held positions at Arthur Young and Ernst and Whinney. He has also served board
and officer positions at the California Society of Certified Public Accountants.
He currently serves on the Board of Directors of Heritage Oaks Bank. Mr. O'Hare
earned a Bachelor of Business Administration Degree in 1985 from Notre Dame
University.
Dr. Kulawski, age 38, is president of Advaplan, a CMP foundry and
consulting service. From 2000 to 2007 he was Project Manager at the Government
Technical Institute of Finland. From 1998 to 2000 he was a team leader for CMP
tool installation and process integration at customer sites for Peter Wolters
Company. Dr. Kulawski is a member of CMP user groups in the United States and
Europe and has been a speaker and lecturer at semiconductor conferences in the
United States, Europe and Asia. He has authored more than 15 papers published in
scientific journals. Dr. Kulawski was awarded a Master of Science Degree in
Electrical Engineering with a Solid State Electronics minor in 1998 from
Christian Albrecht University and a Ph.D. with a CMP thesis from the Technical
University of Helsinki.
41
ITEM 6. EXHIBITS
Exhibit
Number Description
- ------ -----------
31.1 Certification Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (*)
31.2 Certification Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (*)
32.1 Certification of President 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 (*)
- -------------------
(*) Filed herewith.
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.
STRASBAUGH
Dated: August 13, 2009 By: /s/ RICHARD NANCE
--------------------------------------
Richard Nance, Chief Financial Officer
(principal financial and accounting
officer)
EXHIBITS FILED WITH THIS REPORT
Exhibit
Number Description
- ------ -----------
31.1 Certification Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of President 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