SIMTEK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value and share amounts)
ASSETS
------
September 30, 2007 December 31, 2006
------------------ -----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,448 $ 4,522
Restricted investments 1,775 1,775
Accounts receivable - trade, net 5,393 5,537
Inventory, net 6,295 6,596
Prepaid expenses and other current assets 683 312
-------- --------
Total current assets 18,594 18,742
EQUIPMENT AND FURNITURE, net 1,769 1,239
DEFERRED FINANCING COSTS AND DEBT ISSUANCE COSTS 23 54
GOODWILL 992 992
NON-COMPETITION AGREEMENT, NET 5,790 7,126
OTHER ASSETS 142 89
-------- --------
TOTAL ASSETS $ 27,310 $ 28,242
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,147 $ 3,771
Accrued expenses 1,647 939
Accrued vacation payable 309 229
Accrued wages 173 814
Line of credit 387 681
Obligation under capital lease 30 -
Debentures, current 480 480
-------- --------
Total current liabilities 6,173 6,914
DEBENTURES, NET OF CURRENT 1,620 2,220
-------- --------
Total liabilities 7,793 9,134
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 200,000 shares authorized,
none issued - -
Common stock, $.0001 par value; 30,000,000 shares authorized,
16,505,933 and 16,504,933 shares issued and outstanding
at September 30, 2007 and 16,146,679 and 16,145,679 shares issued
and outstanding at December 31, 2006 2 2
Additional paid-in capital 68,856 67,173
Treasury stock, at cost; 1,000 shares (1) (1)
Accumulated deficit (49,693) (48,198)
Accumulated other comprehensive income:
Cumulative translation adjustment 353 132
-------- --------
Total shareholders' equity 19,517 19,108
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 27,310 $ 28,242
======== ========
The accompanying notes are an integral part of these financial statements.
|
3
SIMTEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
2007 2006 2007 2006
---- ---- ---- ----
REVENUE:
Product sales, net $ 8,696 $ 8,251 $ 24,645 $ 19,436
Royalty revenue - - - 1,518
------------ ------------ ------------ ------------
Total revenue 8,696 8,251 24,645 20,954
Cost of sales 4,435 4,979 12,729 13,016
------------ ------------ ------------ ------------
GROSS PROFIT 4,261 3,272 11,916 7,938
OPERATING EXPENSES:
Research and development costs 1,930 1,351 6,103 4,578
Sales and marketing 1,209 1,250 3,609 3,233
General and administrative 1,252 838 3,552 2,595
------------ ------------ ------------ ------------
Total operating expenses 4,391 3,439 13,264 10,406
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (130) (167) (1,348) (2,468)
OTHER INCOME (EXPENSE):
Interest income 53 36 148 112
Interest expense (108) (113) (296) (247)
Foreign currency transaction gain 9 (7) 33 (4)
Other income 4 2 6 2
------------ ------------ ------------ ------------
Total other expense (42) (82) (109) (137)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (172) (249) (1,457) (2,605)
Provision for income taxes (14) - (38) -
------------ ------------ ------------ ------------
NET LOSS $ (186) $ (249) $ (1,495) $ (2,605)
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
Basic and diluted $ (.01) $ (.02) $ (.09) $ (.18)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic and diluted 16,503,778 14,966,916 16,368,623 14,791,191
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
|
4
SIMTEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended
September 30,
--------------------------
2007 2006
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,495) $(2,605)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 482 361
Amortization 48 37
Expense related to stock options 842 417
Issuance of common stock per compensation agreements - 53
Amortization of non-competition agreement 1,339 1,339
Net change in allowance accounts (442) 577
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 403 (3,687)
Inventory 643 (3,799)
Prepaid expenses and other (390) 282
Increase (decrease) in:
Accounts payable (650) 461
Accrued expenses (236) 996
------- -------
Net cash provided by (used in) operating activities 544 (5,568)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture, net (990) (914)
Patents (44) -
Purchase of certain assets from ZMD - (116)
------- -------
Net cash used in investing activities (1,034) (1,030)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation (6) (13)
Borrowings from capital lease obligation 36 -
Receipts from restricted cash - 200
Funds receiving from December 2005 equity financing, net - 1,874
Warrants issued for license rights - 1,478
Payments from restricted investment - 306
Funds received from September 2006 equity financing, net - 4,515
Proceeds from warrant exercises 222 -
Exercise of stock options 19 78
------- -------
Net cash provided by financing activities 271 8,438
------- -------
Effect of exchange rate changes on cash 145 47
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (74) 1,887
CASH AND CASH EQUIVALENTS, beginning of period 4,522 1,766
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 4,448 $ 3,653
======= =======
Cash paid for interest $ 265 $ 222
======= =======
Warrants issued for debt issuance cost $ - $ 53
======= =======
Conversion of debentures $ 600 $ 300
======= =======
The accompanying notes are an integral part of these financial statements.
|
5
SIMTEK CORPORATION
1. Basis of Presentation
The consolidated financial statements include the accounts of Simtek
Corporation ("Simtek" or the "Company") and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated. The financial
statements included herein are presented in accordance with the requirements of
Form 10-Q and consequently do not include all of the disclosures normally made
in the registrant's annual Form 10-K filing. These financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Annual Report and Form 10-K, Annual Report and Form
10-K/A for Simtek filed on April 2, 2007 and April 30, 2007, respectively, for
fiscal year 2006.
In the opinion of management, the unaudited financial statements reflect
all adjustments of a normal recurring nature necessary to present a fair
statement of the results of operations for the respective interim periods. The
year-end balance sheet data was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally
accepted in the United States of America. Results of operations for the interim
periods are not necessarily indicative of the results of operations for the full
fiscal year.
Stock-Based Compensation
Equity Incentive Plan.
At the annual meeting on June 14, 2007, the Company's shareholders approved
a new Equity Incentive Plan (the "2007 EIP") that authorizes 2,800,000 shares
that may be granted under either incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986 (the "Code"), nonqualified
stock options, restricted stock awards or other stock grants. The 2007 EIP
became effective on June 15, 2007. With the approval of the 2007 EIP, the
Company does not intend to grant further options under the Non-Qualified Stock
Option Plan described below; however, options outstanding under that plan remain
outstanding until they are exercised or expire by their terms. The 2007 EIP
provides that the maximum number of shares with respect to which an individual
can receive a grant of options in a calendar year is 500,000 shares. Options may
be granted to key employees, consultants, and non-employee directors. The 2007
EIP provides that an individual can receive grants of both incentive options and
nonqualified options. However, only employees may be granted incentive options.
The minimum exercise price for options is 100% of the fair market value of the
Company's stock on the date of grant and a maximum term of 10 years. Generally,
upon termination of employment or service, options expire three months after
termination. Incentive options granted to an employee who holds more than 10% of
the Company's stock must have an exercise price of at least 110% of the fair
market value of the Company's stock on the date of grant and a maximum term of
no more than 5 years.
The Compensation Committee (the "Committee") of the Board of Directors
administers the 2007 EIP with respect to grants to employees, consultants and
6
SIMTEK CORPORATION
non-employee directors. With respect to grants to officers and directors, the
Committee is constituted in a manner that satisfies applicable laws and
regulations, including Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, as amended, and Code section 162(m). The 2007 EIP also provides that
the full board of directors can perform any function of the Committee, subject
to the requirements of the NASDAQ rules and Code section 162(m). The Committee
has the authority to delegate to specified officers of the Company the grants of
stock options and other awards to specified employees of the Company, and the
Committee has delegated such grant-making authority.
Each option granted under the 2007 EIP is evidenced by a written stock
option agreement. Each option holder shall become vested in the shares
underlying the option in such installments and over such period or periods of
time, if any, or upon such events, as are determined by the Committee in its
discretion and set forth in the option agreement. As of September 30, 2007,
523,900 non-qualified stock options had been granted under the 2007 EIP. All
options granted under the 2007 EIP during the third quarter of 2007 will expire
seven years from the grant date. Vesting of the options is as follows:
o If an officer or employee has been employed for 12 months or more,
stock options will vest over 48 months at 1/48th per month, and
vesting will begin immediately at 1/48th per month for the four year
period.
o If an officer or employee has been employed for less than 12 months,
no vesting will occur until the officer or employee has been employed
for 12 months at which time the officer or employee will be caught up
at 1/48th per month for each month since the option grant and then the
options will continue to vest at 1/48th per month for the remaining
portion of the four year period.
o If an officer or employee is a new hire, no vesting will occur until
the officer or employee has been employed for 12 months at which time
the officer or employee will receive 12/48th of the vesting and then
the options will continue to vest at 1/48th per month for the
remaining portion of the four year period.
o All options granted to outside directors of the Company will be 100%
vested after six months from the grant date.
The Committee may grant a participant a number of shares of restricted stock as
determined by the Committee in its sole discretion. Grants of restricted stock
may be subject to such restrictions, including for example, continuous
employment with the Company for a stated period of time or the attainment of
performance goals and objectives, as determined by the Committee in its sole
discretion. The restrictions may vary among awards and participants. As of
September 30, 2007, no grants of restricted stock awards had occurred.
From time to time, in its sole discretion, the Committee may grant awards under
the 2007 EIP in connection with one or more incentive compensation arrangements
under which participants may acquire shares of common stock by purchase, grant,
or otherwise. All such awards are subject to the terms of the 2007 EIP. As of
September 30, 2007, no Other Stock Awards occurred.
Employee Stock Purchase Plan.
On July 1, 2007, the Simtek Corporation Employee Stock Purchase Plan
("ESPP"), which was approved by the shareholders at the annual meeting on June
14, 2007, became effective. Under the ESPP, a broad-based group of employees can
have payroll deductions of up to 10% of their pay used to purchase shares of the
Company's stock on a quarterly basis. However, employees whose customary
employment is for less than 20 hours per week or for less than 5 months per
calendar year and employees who own more than 5% of the Company's stock are not
eligible to participate. There are 500,000 shares authorized for issuance under
the ESPP. The purchase price for the stock is the lesser of (1) 85% of the fair
market value of the Company's stock on the first day of the calendar quarter or
(2) 85% of the fair market value of the Company's stock on the last day of the
calendar quarter. Employees can enroll in the ESPP as of the first day of a
calendar quarter. On the first trading day after the end of the calendar
quarter, shares are purchased with the payroll deductions accumulated during the
calendar quarter. Upon termination of employment, the employee's participation
in the ESPP will cease and amounts accumulated since the beginning of the
calendar quarter and not used to purchase common stock will be refunded to the
employee without interest. As of July 1, 2007, 13 employees had enrolled in the
ESPP. The first purchase of shares occurred on the first trading day after the
close of the third quarter of 2007.
7
SIMTEK CORPORATION
Non-Qualified Stock Option Plan.
Through June 13, 2007, the Company granted options under the 1994
Non-Qualified Stock Option Plan (the "1994 Plan"). The 1994 Plan authorizes
2,060,000 non-qualified stock options that may be granted to directors,
employees, and consultants. The plan permits the issuance of non-statutory
options and provide for a minimum exercise price equal to 100% of the fair
market value of the Company's common stock on the date of grant. The maximum
term of options granted under the plan is 10 years and options granted to
employees expire 90 days after the termination of employment. In 2004, the
Non-Qualified Stock Option Plan was extended for 10 more years. No further
options have been granted under the 1994 Plan since the 2007 EIP became
effective, and the Company does not intend to issue any more options under the
1994 Plan in the future. All terms and conditions of the options granted under
the 1994 Plan will remain the same. All options granted prior to March 24, 2006,
began vesting after six months after the date of grant, and would become fully
vested after three years and expire seven years from date of grant. On March 24,
2006, the Board of Directors changed the vesting schedule of stock options
granted after March 24, 2006 to be as follows:
o If an officer or employee has been employed for 12 months or more,
stock options will vest over 48 months at 1/48th per month, and
vesting will begin immediately at 1/48th per month for the four year
period.
o If an officer or employee has been employed for less than 12 months,
no vesting will occur until the officer or employee has been employed
for 12 months at which time the officer or employee will be caught up
at 1/48th per month for each month since the option grant and then the
options will continue to vest at 1/48th per month for the remaining
portion of the four year period.
o If an officer or employee is a new hire, no vesting will occur until
the officer or employee has been employed for 12 months at which time
the officer or employee will receive 12/48th of the vesting and then
the options will continue to vest at 1/48th per month for the
remaining portion of the four year period.
o All options granted to outside directors of the Company will be 100%
vested after six months from the grant date.
o All options will expire seven years from date of grant.
The tables below reflect options granted and outstanding under the 1994
Plan and the 2007 EIP. Total share-based compensation recognized in the
Company's consolidated statements of operations for the three and nine months
ended September 30, 2007 and 2006 are as follows:
Income Statement Classifications
Three Months Nine Months
Ended Septemer 30, Ended Septemer 30,
2007 2006 2007 2006
---- ---- ---- ----
(In thousands)
Research and development $ 99 $ 43 $ 229 $ 129
Sales and marketing 33 20 84 60
General and administration 166 76 529 228
--------- --------- --------- ---------
$ 298 $ 139 $ 842 $ 417
========= ========= ========= =========
|
8
SIMTEK CORPORATION
As of September 30, 2007, there was approximately $3.1 million of
unrecognized compensation costs, adjusted for estimated forfeitures, related to
non-vested options granted to the Company's employees and directors, which will
be recognized through September 30, 2011. Total unrecognized compensation will
be adjusted for future changes in estimated forfeitures.
The fair value for stock options was estimated at the date of grant using
the Black-Scholes option pricing model, which requires management to make
certain assumptions. Expected volatility was based on the historical volatility
of the Company's stock over the past 5 years. The Company based the risk-free
interest rate that was used in the option valuation mode on U.S. Treasury notes.
The Company does not anticipate paying cash dividends in the foreseeable future
and therefore uses an expected dividend yield of 0%.
The fair value of each option granted in the quarterly periods ending
September 30, 2007 and September 30, 2006 and the nine months ended September
30, 2007 and 2006 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following:
Three Months Nine Months
Ended September 30, Ended September 30,
2007 2006 2007 2006
---- ---- ---- ----
Expected volatility 77.00% 79.38% 77.92% 80.22%
Risk-free interest rate 4.77% 5.33% 4.78% 5.02%
Expected dividends - - - -
Expected terms (in years) 5 Years 5 years 5 years 4.80 years
|
The weighted average fair value per share of options granted during the
three months ended September 30, 2007 and 2006 were $3.05 and 3.00,
respectively. The weighted average per share fair value of stock options granted
during the nine months ended September 30, 2007 and 2006 were $3.17 and $2.30,
respectively.
The following table summarizes stock options outstanding and changes during
the quarterly period ended September 30, 2007.
9
SIMTEK CORPORATION
Outstanding Options
-------------------------------------------------------------
Weighted
Average
Remaining Aggregate
Weighted Contractual Intrinsic
Number of Average Term Value (In
Shares Exercise Price (in years) Thousands)
--------- -------------- ----------- ----------
Options outstanding at January 1, 2007 1,302,593 $5.24
Granted 613,900 4.83
Exercised (7,285) (2.61) $ 18(1)
Cancelled or forfeited (32,410) (8.27)
--------- -----
Options outstanding at September 30, 2007 1,876,798 $5.06
========= ===== ======= =========
Options exercisable at September 30, 2007 824,629 $5.71 $ 265(2)
========= ===== ======= =========
|
1) Represents the difference between the exercise price and the value of
Simtek stock at the time of exercise.
2) Represents the difference between the market value as of September 30, 2007
and the exercise price of the shares. The market value as of September 30,
2007 was $4.05 as reported by The NASDAQ Capital Market.
Stock options outstanding and currently exercisable at September 30, 2007 are as
follows:
Outstanding Exercisable
--------------------------------------------------------------------------- ------------------------------------
Weighted Average
------------------------------------------------------
Remaining Weighted
Number Contractual Life Average Number Weighted Average
Exercise Price Outstanding in Months Exercise Price Exercisable Exercise Price
------------------- ------------------ ------------------ ----------------- ------------------ ------------------
$1.60-$3.50 349,804 46 $ 2.95 182,211 $ 2.75
$3.60-$4.85 859,959 67 $ 4.45 149,376 $ 3.93
$5.00-$6.00 364,888 59 $ 5.58 215,253 $ 5.42
$6.20-$9.00 213,913 41 $ 6.59 189,555 $ 6.59
$11.60-$19.00 88,234 42 $ 13.62 88,234 $ 13.62
--------- -------
1,876,798 824,629
========= =======
|
Non-competition Agreement
In December 2005, the Company entered into a non-competition agreement with
Zentrum Mikroelektronik Dresden AG ("ZMD") as part of the acquisition of ZMD's
nvSRAM product line. The Company assigned a value of $8,910,000 to the
non-competition agreement in December 2005. The value assigned to the
non-competition agreement is being amortized on a straight-line basis over its
five-year life. The Company recorded an expense, for the amortization, of
approximately $445,000 and $445,000 for the three months ended September 30,
2007 and 2006, respectively and $1,339,000 and $1,339,000 for the nine months
ended September 30, 2007 and 2006, respectively.
10
SIMTEK CORPORATION
Goodwill
Goodwill represents the excess of the total amount paid to ZMD for the
nvSRAM assets acquired on December 30, 2005 and the fair value assigned to
specific assets. This amount will not be amortized, but will be reviewed for
impairment on a periodic basis. As of September 30, 2007 no impairment of value
has been recorded.
Accumulated other comprehensive income (loss)
The functional currency for Simtek GmbH is the local currency, the Euro.
Assets and liabilities for this foreign operation are translated at the exchange
rate in effect at the balance sheet date, and income and expenses are translated
at average exchange rates prevailing during the period. Translation gains or
losses are included within shareholders' equity as part of accumulated other
comprehensive income (loss). As of September 30, 2007, the Company recorded
approximately $353,000 in comprehensive income.
Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of
the implementation of Interpretation 48, the Company recognized no adjustments
to liabilities or shareholders' equity.
When tax returns are filed, it is highly certain that some positions taken
would be sustained upon examination by the taxing authorities, while others are
subject to uncertainty about the merits of the position taken or the amount of
the position that would be ultimately sustained. Under FIN 48, the benefit of an
uncertain tax position is recognized in the financial statements in the period
during which, based on all available evidence, management believes it is more
likely than not that the position will be sustained upon examination, including
the resolution of appeals or litigation processes, if any. Tax positions taken
are not offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. As of
September 30, 2007, the Company has not recorded any such liability.
The Company files consolidated income tax returns in the U.S. federal
jurisdiction and several state jurisdictions. The Company is not aware of any
jurisdictions where they would be subject to U.S. federal or state income tax
examinations by tax authorities for years before 2003.
Our policy is that we recognize interest and penalties accrued on any
uncertain tax benefits as a component of income tax expense. As of the date of
adoption of FIN 48, we did not have any accrued interest or penalties associated
with any uncertain tax benefits, nor was any interest expense recognized during
the quarter.
11
SIMTEK CORPORATION
2. Liquidity
During the three and nine months ended September 30, 2007 and the
twelve months ended December 31, 2006, the Company incurred a net loss of
approximately $186,000, $1,495,000 and $2,007,000, respectively. The Company has
an accumulated deficit of $49,693,000 as of September 30, 2007.
The Company operates in a volatile industry, whereby its average selling
prices and product costs are influenced by competitive factors. Furthermore, the
Company continues to incur significant research and development costs for
product development. These factors create pressures on sales, costs, earnings
and cash flows, which will impact liquidity.
If the Company is unable to generate positive cashflow from operations, it
may result in increased liquidity pressure on the Company, whereby it might be
required to enter into debt or equity arrangements that may not be as otherwise
favorable to the Company.
3. Revenue Recognition
Revenue Recognition - Product sales revenue is recognized when a valid
purchase order has been received with a fixed price and the products are shipped
to customers FOB origin (Colorado Springs, Colorado, Manilla, Philipines or
Dresden, Germany), including distributors. Based on historic business with the
majority of the Company's customers and, in the case of new customers, based on
credit checks, the Company is reasonably assured that collectability on our
shipments will occur. Customers receive a one-year product warranty and sales to
distributors are subject to a limited product exchange program and a price
protection in the event of changes in the Company's product prices. The Company
provides a reserve for possible product returns, product price protection and
warranty costs at the time the sale is recognized. The Company has a detailed
procedure to ensure that its estimates for reserves are reasonable and reliable.
The reserve for product returns is based on the actual inventory value of the
Company's semiconductor products held by its distributors. The Company's
distributors are permitted to rotate up to 5% of their stock every six months
with the stipulation that they must submit a replacement order of equal dollar
value to the stock that they are returning. The reserve for price protection is
used when the Company authorizes special pricing to one of its distributors for
a specific customer. To date, the estimates have not been materially different
from the credits the Company has issued under these reserves.
Revenue from royalties related to non-refundable prepaid royalty payments
is recognized upon receipt. Revenue from royalties related to sales of products
by license partners is recognized upon the notification to us of shipment of
product from the Company's technology license partners to direct customers.
4. Inventories
The Company records inventory using the lower of cost (first-in, first-out)
or market. Inventory at September 30, 2007 and December 31, 2006 included:
September 30, 2007 December 31, 2006
------------------ -----------------
(In thousands)
Raw Materials $ 38 $ 21
Work in progress 5,227 4,603
Finished Goods 1,470 2,737
---------- ---------
6,735 7,361
Less reserves for excess inventory (440) (765)
---------- ---------
$ 6,295 $ 6,596
========== =========
|
12
SIMTEK CORPORATION
5. Line of Credit
On June 2, 2006, the Company secured a $3.6 million revolving line of
credit by entering into an Account Purchase Agreement (the "Agreement") with
Wells Fargo Bank, National Association ("Wells Fargo"). Pursuant to the
Agreement, the Company may sell, subject to recourse in the event of nonpayment,
up to $3.6 million of eligible accounts receivable to Wells Fargo. Advances of
the purchase price for the eligible receivables will be at an agreed upon
discount to the face value of the eligible receivable. The amount actually
collected on any receivable by Wells Fargo that is beyond the advance will be
forwarded to the Company, less certain discounts and fees retained by Wells
Fargo (including a minimum fee of $7,500 per month for the term of the
Agreement). To secure the Company's obligations under the Agreement, the Company
granted Wells Fargo a security interest in certain of the Company's property.
The Agreement has a term of two years, but may be terminated at any time by the
Company upon 60 days' written notice. As of September 30, 2007, the Company had
financed receivables with Wells Fargo for approximately $387,000.
6. Convertible Debentures
On July 1, 2002, the Company received funding of $3,000,000 in a financing
transaction with Renaissance Capital Growth and Income Fund III, Inc.,
Renaissance US Growth Investment Trust PLC and US Special Opportunities Trust
PLC. RENN Capital Group, Inc. is the agent for the RENN investment funds. One of
the Company's directors holds the position of Senior Vice President of RENN
Capital Group. The $3,000,000 funding consists of convertible debentures with a
7-year term at a 7.5% per annum interest rate. Each fund equally invested
$1,000,000. The holder of the debenture shall have the right, at any time, to
convert all, or in multiples of $100,000, any part of the Debenture into fully
paid and nonassessable shares of Simtek Corporation common stock. The debentures
were originally convertible into Simtek common stock at $3.12 per share, which
was in excess of the market price per share on July 1, 2002. The Convertible
Debentures allows for an adjustment in the conversion price, if the Company
issues Common Stock in connection with an equity financing, where the sale price
is less than the conversion price of $3.12. This occurred in December 2005 in
connection with the common stock sale of $11,000,000 at a price of $1.60 per
share. Pursuant to the terms of the 2002 convertible debentures, the Company
agreed with the RENN Capital Group that the conversion price would be reduced to
$2.20 per share. Based on the conversion rate of $2.20 per share, each RENN
investment fund is entitled to 318,182 shares upon conversion (assuming
conversion of $700,000).
On June 28, 2005, the Company received a waiver from the debenture holders
extending until July 1, 2006 the commencement date for principal payments of the
$3 million aggregate principal amount, see Note 6 Shareholders' Equity in the
Company's 10-K filed on April 2, 2007 for additional information. On May 9, 2007
and July 24, 2006, each of the debenture holders converted $200,000 and
$100,000, respectively, of the principal amount into 90,909 and 45,455 shares of
the Company's common stock, respectively, in lieu of the Company making the
principal payments it was required to make for the period commencing July 1,
2006 through June 30, 2008.
At September 30, 2007, the Company was not in compliance with one of the
covenants set forth in the loan agreement. This covenant relates to the interest
coverage ratio. On October 22, 2007, the Company received a waiver from
complying with this covenant through July, 2008. However, significant variances
in future actual operations from the Company's current estimates could result in
the reclassification of this note to current liabilities.
13
SIMTEK CORPORATION
7. Non-Refundable Prepaid Royalties
On March 24, 2006, the Company entered into a License and Development
Agreement with Cypress Semiconductor Corporation ("Cypress") pursuant to which,
among other things, Cypress agreed to license certain intellectual property from
the Company to develop and manufacture standard, custom and embedded nvSRAM
products and Cypress agreed to pay to the Company $4,000,000 in non-refundable
pre-paid royalties of which $2 million was paid upon signing of the agreement,
$1 million was paid on June 30, 2006 and $1 million was paid on December 18,
2006. In addition, the Company licensed rights to use certain intellectual
property from Cypress for use in its products. As part of the License and
Development Agreement, the Company agreed to issue Cypress warrants to purchase
2 million shares of the Company's common stock for $7.50 per share. The warrants
have a ten year life. The warrants were issued upon receipt of each of the
prepaid royalty amounts. The value of the warrants issued of $1,930,000 was
determined using the Black Scholes option-pricing model and has been recorded as
an increase in additional paid-in capital. The net balance of the non-refundable
prepaid royalties of $2,070,000 were recognized as revenue at the time the
payments were received.
8. Geographic Concentration
Sales of the Company's semiconductor products by location, based on where
the products are shipped to, for the three and nine months ended September 30,
2007 and 2006 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2007 2006 2007 2006
---- ---- ---- ----
United States 14% 29% 16% 23%
Europe 24% 23% 27% 27%
Far East 46% 41% 42% 42%
All Others 16% 7% 15% 8%
--- ---- --- ----
Total 100% 100% 100% 100%
|
9. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) net of tax is as follows:
Foreign Currency
Translation Adjustment
Balance at January 1, 2007 $ 132
Current period change 221
-------------
Balance September 30, 2007 $ 353
|
14
SIMTEK CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis in this quarterly report on Form 10-Q
is intended to provide greater details of the results of operations and
financial condition of our Company. The following discussion should be read in
conjunction with our condensed consolidated financial statements and notes
thereto and other financial data included elsewhere herein. Certain statements
under this caption constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The reader should not place undue reliance on these forward looking
statements for many reasons including those risks discussed in this document. In
addition, when used in this quarterly report, the words "believes,"
"anticipates," "expects," "plans," "intends" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements and
statements of expectations, plans and intent are subject to a number of risks
and uncertainties. Actual results in the future could differ materially from
those described in the forward-looking statements, as a result, among other
things, of changes in technology, customer requirements and needs. We undertake
no obligation to release publicly the results of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
require us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses and the related disclosures. Our
accounting policies are discussed in Note 1 of the Notes to Consolidated
Financial Statements included in our 2006 Form 10-K filed with the Securities
and Exchange Commission on April 2, 2007. The estimates used by us are based
upon our historical experiences combined with our understanding of current facts
and circumstances. Certain of our accounting polices are considered critical as
they are both important to the portrayal of our financial condition and the
results of our operations and require significant or complex judgments on our
part. We believe that the following represent the critical accounting policies
of Simtek as described in Financial Reporting Release No. 60, Cautionary Advice
Regarding Disclosure About Critical Accounting Policies, which was issued by the
Securities and Exchange Commission: inventories; deferred income taxes;
allowance for doubtful accounts; and, allowance for sales returns.
The valuation of inventories involves complex judgments on our part. Excess
finished goods inventories are a natural component of market demand for
semiconductor devices. We continually evaluate and balance the levels of
inventories based on sales projections, current orders scheduled for future
delivery and historical product demand. While certain finished goods items will
sell out, quantities of other finished goods items will remain. These finished
goods are reserved as excess inventory. We believe we have adequate controls
with respect to the amount of finished goods inventories that are anticipated to
become excess. While we believe this process produces a fair valuation of
inventories, changes in general economic conditions of the semiconductor
industry could materially affect valuation of our inventories.
The allowance for doubtful accounts reflects a reserve that reduces
customer accounts receivable to the net amount estimated to be collectible.
Estimating the credit worthiness of customers and the recoverability of customer
accounts requires management to exercise considerable judgment. In estimating
uncollectible amounts, we consider factors such as industry specific economic
conditions, historical customer performance and anticipated customer
performance. While we believe our processes to be adequate to effectively
quantify our exposure to doubtful accounts, changes in industry or specific
customer conditions may require us to adjust our allowance for doubtful
accounts.
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SIMTEK CORPORATION
We record an allowance for sales returns as a net adjustment to revenue and
customer accounts receivable. The allowance for sales returns consists of two
separate segments, distributor stock rotation and distributor price reductions.
When we record the allowance, the net method reduces customer accounts
receivables and gross sales. Generally, we calculate the stock rotation portion
of the allowance based upon actual reported distributor inventory levels. The
agreements we have with certain of our distributors generally allow them to
return to us up to 5% percent of their inventory every 6 months, in exchange for
inventory that better meets their demands. At times, with our approval, our
distributors reduce the selling price of a specific device in order to meet
competition related to a specific end customer program, which we support through
a credit back to the distributor for that specific program. The actual amount of
the credit issued is based on the actual sales to the end customers reported by
the distributor. When this occurs, we record an allowance for potential credit
that our distributors will be requesting. This allowance is based on approved
pricing changes, inventory affected and historical data. We believe that our
processes are adequate to reasonably predict and estimate the allowance for
sales returns.
We record an allowance that directly relates to the warranty of our
products for one year. The allowance for warranty return reduces our gross
sales. This allowance is calculated by looking at annual revenue and historical
rates of our products returned due to warranty issues. While we believe this
process adequately predicts our allowance for warranty returns, changes in the
manufacturing or design of our product could materially affect valuation of our
warranty reserve.
We assess the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. Factors that we consider in deciding when to perform an impairment
review include significant under-performance of the business in relation to
expectations, significant negative industry or economic trends, and significant
changes or planned changes in our use of the assets. Recoverability of assets
that will continue to be used in our operations is measured by comparing the
carrying amount of the assets to our estimate of the related future net cash
flows. If the asset's carrying amount is not recoverable through the related
future cash flows, the asset is considered to be impaired. The impairment is
measured by the difference between the asset's carrying amount and its fair
value, based on the best information available, including market prices or
discounted cash flows.
Goodwill represents the excess of the purchase price over the fair value of
identifiable net tangible and intangible assets acquired in the acquisition of
the nvSRAM assets from ZMD. Goodwill is required to be tested for impairment
annually. We performed goodwill impairment testing as of December 31, 2006 and
determined that no impairment existed at that date. This assessment requires
estimates of future revenue, operating results and cash flows, as well as
estimates of critical valuation inputs such as discount rates, terminal values
and similar data. We will continue to perform annual impairment analyses of
goodwill. As a result of such impairment analyses, impairment charges may be
recorded and may have a material adverse impact on our financial position and
operating results. Additionally, we may make strategic business decisions in
future periods which impact the fair value of goodwill, which could result in
significant impairment charges. There can be no assurance that future goodwill
impairments will not occur.
We have recorded a valuation allowance for the full amount deferred tax
assets, which principally relate to future utilization of net operating losses.
Future operations may change our estimate in connection with potential
utilization of these assets.
Results of Operations:
Revenue
Total revenue for the three months ended September 30, 2007 was $8,696,000
compared to $8,251,000 for the same period in 2006. Total revenue for the nine
16
SIMTEK CORPORATION
months ended September 30, 2007 was $24,645,000 compared to $20,954,000 for the
same period in 2006. The 2006 amount includes $1,518,000 of royalty revenue for
the nine months ended September 30, 2006. We earned no royalty revenue in the
three and nine months ended September 30, 2007 or the three month period ended
September 30, 2006. Product sales for the three month period ended September 30,
2007 were $8,696,000 compared to $8,251,000 for the same period in 2006, an
increase of 5%. Product sales for the nine month period ended September 30, 2007
were $24,645,000 compared to $19,436,000 for the same period in 2006, an
increase of 27%.
The following table sets forth our net product revenue for semiconductor
devices by product markets for the three and nine months ended September 30,
2007 and 2006 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------------
2007 2006 Variance 2007 2006 Variance
---- ---- -------- ---- ---- --------
Commercial $ 7,988 $ 7,754 $ 234 $ 22,631 $ 17,736 $ 4,895
High-end industrial and
military 708 497 $ 211 $ 2,014 $ 1,700 $ 314
------- --------- --------- --------- --------- --------
Total Semiconductor
Revenue $ 8,696 $ 8,251 $ 445 $ 24,645 $ 19,436 $ 5,209
======= ========= ========= ========= ========= ========
|
Commercial revenue include revenue generated from our 0.8-micron products
built from silicon wafers received from Chartered Semiconductor or purchased as
finished units from ZMD, and from our 0.25-micron products built from silicon
wafers received from Dongbu Electronics (DBE). Commercial revenue increased by
$234,000 and $4,895,000 for the three and nine months ended September 30, 2007,
respectively, as compared to the three and nine months ended September 30, 2006.
This increase was due primarily to increased product demand for our legacy
products and our 1 megabit products. In addition, revenue was also higher
compared to the 2006 periods due to increased selling prices for our highest
volume 256 kilobit devices. These increases took place in the second half of
2006 and held firm through the third quarter of 2007. The price increases were
announced to customers in the early part of 2006 but did not take full effect
until the third quarter of 2006.
High-end industrial and military product revenue increased by $211,000 and
$314,000 for the three and nine months ended September 30, 2007, respectively,
as compared to the same periods in 2006. Customer demand for these devices is
generally not predictable and tends to be volatile from period to period.
One distributor and two direct customers together accounted for
approximately 48% of our revenue for the quarter ended September 30, 2007 and
one distributor and two direct customers accounted for approximately 42% of our
revenue for the nine months ended September 30, 2007. Our customers often
include Contract Manufacturers ("CMs"), principally located in Asia, who
contract with Original Equipment Manufacturers ("OEMs") to implement our
products into systems designed by the OEMs. We negotiate prices directly with
the OEMs, but actually receive orders from, and ships parts to, the CMs.
Generally, the CMs contract with multiple OEMs. Thus, sales to any one CM
usually represents eventual implementation of our products with multiple OEMs.
Products sold to distributors are sold without material recourse. Distributors
sell our products to various end customers. If our leading distributor were to
terminate its relationship with us, we believe that there would not be a
material impact on our product sales, as we believe that we would be able to
service these various end customers through other distributors.
17
SIMTEK CORPORATION
Cost of Sales and Gross Profit
We recorded cost of sales of $4,435,000 and $12,729,000 for the three and
nine months ended September 30, 2007, respectively, as compared to $4,979,000
and $13,016,000 for the comparable periods in 2006. These costs reflect an
approximate 9 and 15 percentage point improvement in gross margin percentage for
our semiconductor products for the three and nine months ended September 30,
2007, respectively, as compared to the same periods in 2006. Actual product
gross margin percentages for the three and nine months ended September 30, 2007
were 49% and 48%, respectively, as compared to 40% and 33% for the same periods
in 2006. This increase reflects the higher average selling prices described
above, higher unit shipments of 1 megabit devices, increased sales of our
high-end industrial and military products, reduced product costs due to lower
wafer prices and cost improvements as a result of transferring test operations
to Asia.
Research and Development
Continued investments in new product development are required for us to
remain competitive in the markets we serve and to grow our revenue. In 2007, our
research and development department continued its efforts on the final
development of our new product family in conjunction with Cypress. This new
product family will be based on Cypress' 0.13-micron "S8" process and will
include memory densities up to and beyond 4-megabits. During the nine months
ended September 30, 2007 and September 30, 2006, we recognized expenses of
$735,000 and $642,000, respectively, in connection with achievement of certain
milestones under the development with Cypress. In addition, in 2007, the Company
began initial development of a new product initiative to develop high density
nvRAM devices. As part of this new initiative, we opened a design center in San
Diego, CA.
Total research and development expenses were $1,930,000 and $6,103,000 for
the three and nine months ended September 30, 2007, respectively, as compared to
$1,351,000 and $4,578,000 for the comparable periods in 2006.
The increase of $579,000 for the three month period ended September 30,
2007 compared to the three month period ended September 30, 2006 was primarily
related to increases in consulting fees of $210,000, payroll and overhead costs
of $350,000 and travel of $60,000, which increases were offset by a decrease in
equipment related expenses of $70,000. The increases in consulting fees and
payroll costs were primarily related to the high density nvRAM development
effort.
The increase of $1,525,000 for the nine month period ended September 30,
2007 compared to the nine month period ended September 30, 2006 was primarily
related to increase in payroll related expenses of $970,000, consulting services
of $410,000, equipment related expenses of $188,000 and travel expenses of
$48,000, which increases were offset by decreases in product development costs
of $120,000. The increase in payroll related expenses included $350,000 related
to our high density nvRAM development effort and increases in headcount in the
United States and Germany engineering departments. The increase in consulting
services included approximately $300,000 related to our high density nvRAM
development effort. The decrease in product development costs was primarily
related to Cypress milestone payments.
Administration
Total administration expenses were $1,252,000 and $3,552,000 for the three
and nine months ended September 30, 2007, respectively, as compared to $838,000
and $2,595,000 for the same periods in 2006.
The $414,000 increase for the three month period ended September 30, 2007
compared to the three month period ended September 30, 2006 was due primarily to
increases in payroll related costs of $220,000, stock option expenses of
18
SIMTEK CORPORATION
$100,000, board costs of $76,000 and expenses related to compliance with Section
404 of the Sarbanes-Oxley Act of $290,000, which increases were offset by
decreases in legal and accounting fees of $190,000 and professional and
consulting services of $58,000.
The $957,000 increase for the nine month period ended September 30, 2007
compared to the nine month period ended September 30, 2006 was due primarily to
increases in payroll related costs of $350,000, stock option expenses of
$230,000, board costs of $80,000, expenses related to compliance with Section
404 of the Sarbanes-Oxley Act of $360,000, professional and consulting fees of
$130,000 and expenses related to our NASDAQ listing of $75,000, these increases
were offset by decreases in legal and accounting fees of $260,000.
The increases in payroll related costs for both periods were primarily due
to additional headcount. The increase in board of directors costs are due to
revisions made to director compensation and costs associated with recruiting a
new director.
Sales and Marketing
Total sales and marketing expenses were $1,209,000 and $3,609,000 for the
three and nine months ended September 30, 2007, respectively, as compared to
$1,250,000 and $3,233,000 for the same periods in 2006.
The $41,000 decrease for the three month period ended September 30, 2007
compared to the three month period ended September 30, 2006 was primarily due to
decreases in payroll and related expenses of $70,000 and sales commissions of
$10,000, which decreases were offset by increases in travel and advertising of
$40,000.
The $376,000 increase for the nine month period ended September 30, 2007
compared to the nine month period ended September 30, 2006 was primarily due to
increases in payroll related expenses of $50,000, sales commissions of $178,000,
travel expenses of $90,000 and professional and consulting services of $40,000.
The increases in payroll related expenses, travel expenses and professional and
consulting services were primarily due to changes in sales and marketing
personnel. The increases in sales commission were a direct result of increased
revenue.
Net Loss
We recorded a net loss of $186,000 and $1,495,000 for the three and nine
months ended September 30, 2007, respectively, as compared to net losses of
$249,000 and $2,605,000 for the same periods in 2006. The reduction in net loss
for both periods reflects the higher revenue and the improved gross margins and
expense items discussed above.
Liquidity and Capital Resources
As of September 30, 2007, we had a net working capital of $12,421,000 as
compared to a net working capital of $11,828,000 as of December 31, 2006.
Cash flows provided by operating activities for the nine months ended
September 30, 2007 were $544,000 compared to cash flows used in operating
activities of $5,568,000 in the same period in 2006. The following table shows
the components of each item in operating activities (amounts in thousands):
19
SIMTEK CORPORATION
Nine Months Ended September 30,
-------------------------------
2007 2006
---- ----
Net loss $ (1,495) $ (2,605)
Depreciation and amortization 530 398
Expense related to stock compensation 842 417
Issuance of common stock per compensation agreements - 53
Amortization of non-competition agreement 1,339 1,339
Net change in allowance accounts (442) 577
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 403 (3,687)
Inventory 643 (3,799)
Prepaid expenses and other (390) 282
Increase (decrease) in:
Accounts payable (650) 461
Accrued expenses (236) 996
-------- ---------
Net cash provided by (used in) operating activities $ 544 (5,568)
======== ==========
|
Excluding the effect of changes in assets and liabilities and allowance
accounts, cash generated by operating activities was $1,216,000 in the nine
months ended September 30, 2007 compared to cash used of $398,000 in the nine
months ended September 30, 2006. We used existing inventory to support a portion
of our product sales in the third quarter of 2007, which accounted for the
decrease in inventory. The decrease in accounts receivable was due to decreased
sales volume in the third quarter of 2007 as compared to the fourth quarter of
2006.
Cash flows used in investing activities for the nine months ended September
30, 2007 as compared to the nine months ended September 30, 2006 were
essentially unchanged.
Cash flows provided by financing activities were $271,000 in the nine
months ended September 30, 2007 compared to $8,438,000 in the nine months ended
September 30, 2006. The decrease of $8,167,000 in cash flows provided by
financing activities was primarily due to the receipt of funds related to the
sale of common stock completed on December 30, 2005, for which some funds were
received on January 3, 2006, the value of the warrants issued to Cypress for the
Development and License Agreement in the 2006 period and the funds received for
the sale of common stock that was completed in September 2006, for all of which
there were no comparable items in 2007.
Short-term liquidity.
Our unrestricted cash balance at September 30, 2007 was $4,448,000.
Our future liquidity will depend on continued revenue growth, continued
improvement in gross margins and control of operating expenses. We expect
revenue to continue to increase in 2007. In addition, gross margins are expected
to improve and we expect to be profitable before expenses related to employee
stock options and amortization of the non-compete agreement with ZMD for 2007.
Investment in research and development is also expected to increase in the
remainder of 2007. We believe that the cash generated by operations plus the
available credit under our current credit facilities will be sufficient to fund
our operations for the foreseeable future. However, if we fail to meet our
revenue targets or choose to accelerate product development, it may be necessary
for us to raise additional capital or incur additional debt.
20
SIMTEK CORPORATION
Long-term liquidity.
We continue to evaluate our long-term liquidity. Our growth plans may
require additional funding from outside sources. While we have no firm plans, we
are in ongoing discussions with investment banking organizations and potential
investors and lenders to ensure access to funds as required.
21
SIMTEK CORPORATION
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States interest rates and changes in foreign
currency exchange rates as measured against the United States dollar. These
exposures are directly related to our normal operating activities. We currently
have no derivative financial instruments.
Interest payable on our convertible debentures is fixed at 7.5% over the
term of the debentures. As such, changes in interest rates should not affect
future expenses or cash flows.
Interest payable on our revolving line of credit entered into with Wells
Fargo is a fixed amount of the face value of eligible receivables they purchase
from us. As such, changes in interest rates should not affect future expenses or
cash flows.
We manage interest income by investing our excess cash in cash equivalents
bearing variable interest rates, which are tied to various market indices. We do
not believe that near-term changes in interest rates will result in a material
effect on future earnings, fair values or cash flows.
We do not speculate in the foreign exchange market and do not manage
exposures that arise in the normal course of business related to fluctuations in
foreign currency exchange rates by entering into offsetting positions through
the use of foreign exchange forward contracts.
Average selling prices of our products have not increased significantly as
a result of inflation during the past several years, primarily due to intense
competition within the semiconductor industry. The effect of inflation on our
costs of production has been minimized through improvements in production
efficiencies. We anticipate that these factors will continue to minimize the
effects of any foreseeable inflation and other price pressures within the
industry and markets in which we participate.
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SIMTEK CORPORATION