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 SEPTEMBER 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 |_| (Do not check if a smaller reporting company) Smaller reporting company |X|
|
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 October 31, 2009, there were 14,705,587 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.
-i-
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements..................................................1
Condensed Consolidated Balance Sheets as of September 30, 2009
(unaudited) and December 31, 2008 (audited)........................1
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2009 and 2008 (unaudited)......2
Condensed Consolidated Statement of Redeemable Convertible
Preferred Stock and Shareholders' Deficit for the Nine
Months Ended September 30, 2009 (unaudited)........................3
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2009 and 2008 (unaudited)...............4
Notes to Condensed Consolidated Financial Statements for the
Three and Nine Months Ended September 30, 2009 (unaudited).........5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................31
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..........43
Item 4. Controls and Procedures .............................................44
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings ...................................................44
Item 1A. Risk Factors ........................................................45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .........45
Item 3. Defaults Upon Senior Securities .....................................45
Item 4. Submission of Matters to a Vote of Security Holders .................45
Item 5. Other Information ...................................................45
Item 6. Exhibits ............................................................46
Signatures ...................................................................46
Exhibits Filed with this Report
|
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STRASBAUGH AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008 (AUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2009 2008
----------------- -----------------
CURRENT ASSETS (unaudited)
Cash and cash equivalents $ 3,356 $ 49
Accounts receivable, net of allowance for doubtful accounts of $224 at
September 30, 2009 and December 31, 2008 803 1,309
Investments in securities -- 239
Inventories 5,566 5,659
Prepaid expenses 352 264
--------------- ---------------
10,077 7,520
--------------- ---------------
PROPERTY, PLANT, AND EQUIPMENT 2,059 2,150
--------------- ---------------
OTHER ASSETS
Capitalized intellectual property, net of accumulated amortization
of $75 at September 30, 2009 and $54 at December 31, 2008 402 381
Other assets 30 36
--------------- ---------------
432 417
--------------- ---------------
TOTAL ASSETS $ 12,568 $ 10,087
=============== ===============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable, current portion $ 19 $ 100
Accounts payable 865 1,231
Accrued expenses 2,110 1,963
Customer deposits 5,723 147
Deferred revenue 48 70
--------------- ---------------
8,765 3,511
--------------- ---------------
OTHER LIABILITIES
Preferred stock related embedded derivative 12 --
Warrants 1 --
--------------- ---------------
13 --
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (NOTES 6, 7, 8 AND 9)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock ("Series A"), no par value, $14,929
aggregate preference in liquidation at September 30, 2009, 15,000,000
shares authorized, 5,909,089 shares issued and outstanding 10,568 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 24,232 26,803
Accumulated other comprehensive loss -- (61)
Accumulated deficit (31,066) (32,186)
--------------- ---------------
(6,778) (5,388)
--------------- ---------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND SHAREHOLDERS' DEFICIT $ 12,568 $ 10,087
=============== ===============
The accompanying notes are an integral part of these statements.
-1-
|
STRASBAUGH AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2009 2008 2009 2008
-------------- -------------- -------------- --------------
(unaudited) (unaudited)
REVENUES
Tools $ 1,551 $ 893 $ 2,637 $ 2,715
Parts and Service 1,338 1,574 3,554 5,103
-------------- -------------- -------------- --------------
NET REVENUES 2,889 2,467 6,191 7,818
-------------- -------------- -------------- --------------
COST OF SALES
Tools 1,484 615 2,255 2,164
Parts and Service 641 815 1,956 2,475
-------------- -------------- -------------- --------------
TOTAL COST OF SALES 2,125 1,430 4,211 4,639
-------------- -------------- -------------- --------------
GROSS PROFIT 764 1,037 1,980 3,179
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Selling, general and administrative expenses 1,081 991 2,861 3,202
Research and development 834 625 2,820 2,267
-------------- -------------- -------------- --------------
1,915 1,616 5,681 5,469
-------------- -------------- -------------- --------------
LOSS FROM OPERATIONS (1,151) (579) (3,701) (2,290)
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE)
Rental income 144 92 436 197
Interest income 2 15 8 39
Interest expense (6) -- (17) --
Gain on change in value of embedded derivative
and warrants (Note 2) 120 -- 1,679 --
Other income, net 96 49 65 98
-------------- -------------- -------------- --------------
356 156 2,171 334
-------------- -------------- -------------- --------------
LOSS BEFORE BENEFIT FROM INCOME TAXES (795) (423) (1,530) (1,956)
BENEFIT FROM INCOME TAXES -- -- 13 --
-------------- -------------- -------------- --------------
NET LOSS $ (795) $ (423) $ (1,517) $ (1,956)
============== ============== ============== ==============
NET LOSS PER COMMON SHARE
Basic $ (0.10) $ (0.06) $ (0.23) $ (0.22)
============== ============== ============== ==============
Diluted $ (0.10) $ (0.06) $ (0.23) $ (0.22)
============== ============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 14,202 14,202 14,202 14,202
============== ============== ============== ==============
Diluted 14,202 14,202 14,202 14,202
============== ============== ============== ==============
The accompanying notes are an integral part of these statements.
-2-
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STRASBAUGH AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
TOTAL
SHARE
ACCUMU- HOLDERS'
REDEEMABLE LATED DEFICIT AND
CONVERTIBLE OTHER REDEEMABLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL COMPRE- CONVERTIBLE
-------------------- ----------------- -------------------- PAID-IN INCOME ACCUMULATED PREFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (LOSS) DEFICIT 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 -- (1,517) (1,517)
Other comprehensive
income (loss):
Unrealized gains
on investments,
net of tax of $0 61 -- 61
-----------
Total comprehensive
loss (1,456)
-----------
Stock-based
compensation
expenses -- -- -- -- -- -- 362 -- -- 362
Accretion of
redeemable
convertible
preferred stock -- 937 -- -- -- -- (937) -- -- --
Preferred stock
dividend
accumulated -- 858 -- -- -- -- (858) -- -- --
--------- --------- -------- ------- ----------- ------- ---------- --------- ----------- -----------
Balance,
September 30, 2009 5,909,089 $ 10,568 -- $ -- 14,201,587 $ 56 $ 24,232 $ -- $ (31,066) $ 3,790
========= ========= ======== ======= =========== ======= ========== ========= =========== ===========
The accompanying notes are an integral part of these statements.
-3-
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STRASBAUGH AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2009 2008
-------------- --------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,517) $ (1,956)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation and amortization 274 274
Change in allowance for doubtful accounts -- 167
Change in inventory reserve 95 336
Non-cash interest expense 17 --
Stock-based compensation 362 138
Gain on embedded derivative (Note 2) (1,481) --
Gain on warrants (Note 2) (198) --
Gain on extinguishment of debt (81) --
Losses on sales of investment securities 6 --
Changes in assets and liabilities:
Accounts receivable 506 846
Inventories (21) (155)
Prepaid expenses, deposits and other assets (88) (75)
Accounts payable (366) 220
Accrued expenses 130 (365)
Deferred revenue (22) (54)
Customer deposits 5,576 --
-------------- --------------
Net Cash Provided By (Used In) Operating Activities 3,192 (624)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of investment securities 294 488
Proceeds from maturity of investment securities -- 233
Purchase of property and equipment (137) (127)
Capitalized cost for intellectual property (42) (63)
-------------- --------------
Net Cash Provided By Investing Activities 115 531
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance cost of redeemable convertible preferred stock -- (483)
Preferred dividends paid -- (633)
-------------- --------------
Net Cash Used In Financing Activities -- (1,116)
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,307 (1,209)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 49 1,864
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,356 $ 655
============== ==============
The accompanying notes are an integral part of these statements.
-4-
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STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
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.
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 September 30, 2009 and the results of operations and cash flows for the
related interim periods ended September 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 November 12, 2009, which is the date
these financial statements were issued.
-5-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
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
NINE MONTHS ENDED
SEPTEMBER 30,
2009 2008
------------- -------------
Cash paid for income taxes..................... $ -- $ --
============= =============
Fair value accretion on redeemable
convertible preferred stock................. $ 937,000 $ 366,000
============= =============
Preferred stock dividend....................... $ 858,000 $ 797,000
============= =============
Property and equipment transferred to/from
inventory, net $ 19,000 $ 71,000
============= =============
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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 nine month periods ended September 30, 2009, the
Company's top 10 customers accounted for 80% and 65% of net revenues,
respectively, and 67% and 64% for the three and nine month periods ended
September 30, 2008, respectively. Sales to major customers (over 10%) as a
percentage of net revenues were 52% and 45%, for the three and nine months ended
September 30, 2009, respectively, and 40% and 32%, for the three and nine month
periods ended September 30, 2008, respectively.
-6-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
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 September 30, 2009, the
amount due from the major customers (over 10%) discussed above represented 35%
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 SEPTEMBER 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 $ (12,000) $ -- $ -- $ (12,000)
Warrants (1,000) -- -- (1,000)
------------- --------------- --------------- -------------
Total $ (13,000) $ -- $ -- $ (13,000)
============= =============== =============== =============
|
-7-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
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 September 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 September 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
$0.25, discount rate of 1.1%, and volatility of 56%.
There are no assets or liabilities measured at fair value on a nonrecurring
basis.
SEGMENT INFORMATION
The Company's results of operations for the nine months ended September 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
31% and 26% of sales for the three and nine months ended September 30, 2009, and
approximately 71% and 33% of sales for the three and nine months ended September
30, 2008, respectively.
-8-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
United States 69% 29% 74% 67%
Europe 2% 54% 5% 23%
Asia and Pacific Rim countries 29% 17% 21% 10%
|
The geographic breakdown of the Company's accounts receivable was as follows:
SEPTEMBER 30, DECEMBER 31,
2009 2008
--------------- --------------
United States 66% 43%
Europe 6% 21%
Asia and Pacific Rim countries 28% 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 September 30, 2009 is reasonably stated.
-9-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
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 nine months ended
September 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 September 30, 2009 and
December 31, 2008. Total gains for securities with net gains in accumulated
other comprehensive income were $0, at September 30, 2009 and December 31, 2008.
There were no investments in securities at September 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-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
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 $0 and $61,000 for the three and nine month periods
ended September 30, 2009, respectively, and unrealized losses on investments of
$24,000 and $62,000 for the three and nine month periods ended September 30,
2008, respectively.
REVENUE RECOGNITION
The Company derives revenues principally from the sale of tools, parts and
services. The Company recognizes revenue pursuant to SEC staff guidance covering
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 the Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") 605-25, "Revenue
Recognition-Multiple-Element Arrangements," 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.
-11-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
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.
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 FASB ASC
985-605, "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-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE INCOME
In accordance with FASB ASC 815-40-15 "Derivatives and Hedging-Contracts in
Entity's Own Equity-Scope and Scope Exceptions" (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 nine month periods ended September 30, 2009, freight and
handling amounts billed to customers by the Company and included in revenues
totaled approximately $ 0 and $8,000, respectively, and $0 and $7,000 for the
three and nine month periods ended September 30, 2008, respectively. Freight and
handling fees incurred by the Company of approximately $5,000 and $34,000 are
included in cost of sales for the three and nine month periods ended September
30, 2009, respectively, and $9,000 and $43,000 for the three and nine month
periods ended September 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-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
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 FOR THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2009 2008 2009 2008
-------------- -------------- -------------- --------------
Numerator:
Net loss $ (795,000) $ (423,000) $ (1,517,000) $ (1,956,000)
Preferred stock accretion (324,000) (131,000) (937,000) (366,000)
Preferred stock dividend (292,000) (270,000) (858,000) (797,000)
-------------- -------------- -------------- --------------
Net loss available to common shareholders - basic (1,411,000) (824,000) (3,312,000) (3,119,000)
Adjustment to net loss for assumed conversions -- -- -- --
-------------- -------------- -------------- --------------
Net loss available to common shareholders - diluted $ (1,411,000) $ (824,000) $ (3,312,000) $ (3,119,000)
============== ============== ============== ==============
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 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-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (CONTINUED)
For the three and nine months ended September 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, 285,846 shares issuable upon exercise of
outstanding stock options and 1,008,000 stock options cancelled pending the
issuance of 504,000 restricted common shares (see Note 6), 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
nine months ended September 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 1,339,166 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 nine months ended September 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 FASB ASC Topic 480,
"Distinguishing Liabilities from 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 FASB ASC Topic 815, "Derivatives and Hedging," which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities,
considering FASB ASC 815-40, "Derivatives and Hedging-Contracts in Entity's Own
Equity."
-15-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS
In April 2009, the Financial Accounting Standards Board issued 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" which was primarily
codified into Topic 820, "Fair Value Measurements and Disclosures." 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 this guidance. This guidance 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 standard 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," which was primarily codified
into Topic 320, "INVESTMENTS -- DEBT AND EQUITY SECURITIES" and Topic 325
"INVESTMENTS -- OTHER" in the ASC. 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 guidance is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009.
Implementation of this guidance 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,"
which was primarily codified into Topic 825 "FINANCIAL INSTRUMENTS" in the ASC.
This standard extends the disclosure requirements concerning the fair value of
financial instruments to interim financial statements of publicly traded
companies. This standard 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," which
was primarily codified into FASB ASC 815-40, "Derivatives and Hedging-Contracts
in Entity's Own Equity." The guidance 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. This guidance was
effective for financial statements issued for fiscal years beginning after
December 15, 2008. Early application is not permitted. Implementation of this
guidance has had a significant impact on the Company's financial condition and
results of operations (See Note 2).
-16-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
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 was
primarily codified into Topic 855 "SUBSEQUENT EVENTS" in the ASC. This guidance
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 September 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. 167 "AMENDMENTS TO FASB INTERPRETATION
NO. 46(R)", which has not yet been codified in the ASC. This guidance is a
revision to pre-existing guidance pertaining to the consolidation and
disclosures of variable interest entities. Specifically, it changes how a
reporting entity determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity's purpose and design
and the reporting entity's ability to direct the activities of the other entity
that most significantly impact the other entity's economic performance. This
guidance will require a reporting entity to provide additional disclosures about
its involvement with variable interest entities and any significant changes in
risk exposure due to that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity affects the
reporting entity's financial statements. This guidance will be effective at the
start of a reporting entity's first fiscal year beginning after November 15,
2009. Early application is not permitted. The Company is currently evaluating
the impact on its financial statements, if any, upon adoption.
In April 2008, the FASB issued FSP FAS No. 142-3 "Determination of the Useful
Life of Intangible Assets," which was primarily codified into Topic 350
"INTANGIBLES - GOODWILL AND OTHER" in the ASC. This guidance amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset and requires enhanced
related disclosures. This guidance must be applied prospectively to all
intangible assets acquired as of and subsequent to fiscal years beginning after
December 15, 2008. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008. Although future transactions
involving intangible assets may be impacted by this guidance, it did not impact
the Company's financial statements as the Company did not acquire any intangible
assets during the nine months ended September 30, 2009.
-17-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 2009, the FASB issued SFAS No. 168, "THE FASB ACCOUNTING STANDARDS
CODIFICATION AND THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES",
which was primarily codified into Topic 105 "GENERALLY ACCEPTED ACCOUNTING
STANDARDS" in the ASC. This standard will become the single source of
authoritative nongovernmental U.S. generally accepted accounting principles
("GAAP"), superseding existing FASB, American Institute of Certified Public
Accountants ("AICPA"), Emerging Issues Task Force ("EITF"), and related
accounting literature. This standard reorganizes the thousands of GAAP
pronouncements into roughly 90 accounting topics and displays them using a
consistent structure. Also included is relevant Securities and Exchange
Commission guidance organized using the same topical structure in separate
sections. The FASB will not issue new standards in the form of Statements, FASB
Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue
Accounting Standards Updates ("ASUs"). The FASB will not consider ASUs as
authoritative in their own right. ASUs will serve only to update the
Codification, provide background information about the guidance and provide the
bases for conclusions on the change(s) in the Codification. This guidance will
be effective for financial statements issued for reporting periods that end
after September 15, 2009. Beginning in the third quarter of 2009, this guidance
impacts the Company's financial statements and related disclosures as all
references to authoritative accounting literature reflect the newly adopted
codification.
In October 2009, the FASB issued ASU 2009-13, MULTIPLE-DELIVERABLE REVENUE
ARRANGEMENTS, (amendments to FASB ASC Topic 605, REVENUE RECOGNITION) ("ASU
2009-13") and ASU 2009-14, CERTAIN ARRANGEMENTS THAT INCLUDE SOFTWARE ELEMENTS,
(amendments to FASB ASC Topic 985, SOFTWARE) ("ASU 2009-14"). ASU 2009-13
requires entities to allocate revenue in an arrangement using estimated selling
prices of the delivered goods and services based on a selling price hierarchy.
The amendments eliminate the residual method of revenue allocation and require
revenue to be allocated using the relative selling price method. ASU 2009-14
removes tangible products from the scope of software revenue guidance and
provides guidance on determining whether software deliverables in an arrangement
that includes a tangible product are covered by the scope of the software
revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective
basis for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with early adoption permitted. The
Company does not expect adoption of ASU 2009-13 or ASU 2009-14 to have a
material impact on the Company's consolidated results of operations or financial
condition.
-18-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 2 - IMPLEMENTATION OF FASB ASC 815-40-15 "DERIVATIVES AND HEDGING-CONTRACTS
IN ENTITY'S OWN EQUITY-SCOPE AND SCOPE EXCEPTIONS"
In June 2008, the FASB ratified guidance included in ASC 815-40-15 "Derivatives
and Hedging-Contracts in Entity's Own Equity-Scope and Scope Exceptions," 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. ASC 815-40-15 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 FASB
ASC Topic 815, "Derivatives and Hedging," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts. FASB ASC 815-10-15-74(a) 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 ("Topic 815
Scope Exception").
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 FASB ASC Topic 480,
"Distinguishing Liabilities from 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 SEC guidance. The two embedded
features in the Series A Preferred Stock did not require bifurcation under ASC
Topic 815 since, prior to the implementation of ASC 815-40-15, the conversion
feature met the Topic 815 Scope Exception and the applicable criteria in the
FASB guidance covering the 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 FASB 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 ASC 815-40-15, the Investor Warrants were classified as
permanent equity because they met the Topic 815 Scope Exception and all of the
criteria in the FASB guidance covering the accounting for derivative financial
instruments indexed to, and potentially settled in, a company's own stock.
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.
FASB ASC 815-40-15 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.
-19-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 2 - IMPLEMENTATION OF FASB ASC 815-40-15 "DERIVATIVES AND HEDGING-CONTRACTS
IN ENTITY'S OWN EQUITY-SCOPE AND SCOPE EXCEPTIONS" (CONTINUED)
Accordingly, under the provisions of ASC 815-40-15 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 ASC 815-40-15, effective January 1, 2009, the Series A
Conversion Feature no longer qualified for the Topic 815 Scope Exception, and
was required to be bifurcated from its host, in accordance with FASB guidance
covering the recognition of embedded derivatives in ASC Topic 815, and accounted
for as a derivative instrument. Also, as a result of the settlement provision in
the Investor Warrants and the application of ASC 815-40-15, effective January 1,
2009, the Investor Warrants no longer qualified for the Topic 815 Scope
Exception, 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 ASC 815-40-15 indicating that an instrument
considered indexed to its own stock is evaluated under the applicable FASB
guidance 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 FASB ASC 815-10-65-3 "Derivatives and
Hedging-Overall-Transition and Open Effective Date Information-Transition
Related to EITF Issue No. 07-5, "Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity's Own Stock," 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 ASC 815-40-15 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 SEC guidance. In accordance with FASB guidance covering
the recognition of embedded derivatives in ASC Topic 815, 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.
-20-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 2 - IMPLEMENTATION OF FASB ASC 815-40-15 "DERIVATIVES AND HEDGING-CONTRACTS
IN ENTITY'S OWN EQUITY-SCOPE AND SCOPE EXCEPTIONS" (CONTINUED)
The following table illustrates the changes to the Company's consolidated
balance sheet resulting from the implementation of ASC 815-40-15 effective
January 1, 2009:
BALANCE CUMULATIVE BALANCE
DECEMBER 31, EFFECT JANUARY 1,
2008 ADJUSTMENT 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.
-21-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 2 - IMPLEMENTATION OF FASB ASC 815-40-15 "DERIVATIVES AND HEDGING-CONTRACTS
IN ENTITY'S OWN EQUITY-SCOPE AND SCOPE EXCEPTIONS" (CONTINUED)
As of September 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 $1,481,000, and $198,000,
respectively, for the period from January 1, 2009 to September 30, 2009. The
effect of the income from these derivatives on the loss from continuing
operations and net loss for the nine months ended September 30, 2009 was to
reduce the net loss of $3,196,000 to a net loss of $1,517,000, and to reduce the
net loss per common share from $0.35 to a net loss per common share of $0.23.
For the three months ended September 30, 2009, the Company recorded a gain on
the change in fair value of the embedded derivative and warrants and recorded a
corresponding decrease in the "Preferred stock related embedded derivative" and
"Warrant" liability of $107,000 and $13,000, respectively. The effect of the
gain from these derivatives on the loss from continuing operations and net loss
for the three months ended September 30, 2009 was to decrease the net loss of
$915,000 to a net loss of $795,000, and to reduce the net loss per common share
from $0.11 to a net loss per common share of $0.10.
NOTE 3 - MANAGEMENT'S PLANS
For the nine months ended September 30, 2009, the Company had a net loss of
approximately $1,517,000; however, excluding the non-cash gains from the
preferred stock related embedded derivative and warrants, the loss was
approximately $3,196,000, and as of September 30, 2009, the Company had an
accumulated deficit of approximately $31,066,000. 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 at December 31, 2008 and in 2009, and was unable to negotiate
suitable amendments to the agreements; accordingly, the line of credit with SVB
is no longer available to the Company. 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.
-22-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 4 - INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2009 2008
----------------- -----------------
(unaudited)
Parts and raw materials $ 5,318,000 $ 5,562,000
Work-in-process 2,257,000 2,156,000
Finished goods 1,682,000 1,537,000
----------------- -----------------
9,257,000 9,255,000
Inventory reserves (3,691,000) (3,596,000)
----------------- -----------------
$ 5,566,000 $ 5,659,000
================= =================
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
2009 2008
----------------- -----------------
(unaudited)
Buildings and improvements $ 2,283,000 $ 2,283,000
Shop and lab equipment 6,168,000 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
----------------- -----------------
12,056,000 11,900,000
Less: accumulated depreciation and amortization (9,997,000) (9,750,000)
----------------- -----------------
$ 2,059,000 $ 2,150,000
================= =================
|
Depreciation expense totaled approximately $80,000 and $82,000 for the three
month periods ended September 30, 2009 and 2008, respectively, and $247,000 and
$255,000 for the nine month periods ended September 30, 2009 and 2008,
respectively.
-23-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 6 - STOCK COMPENSATION PLANS
In February 2007, the Company established the 2007 Share Incentive Plan (the
"2007 Plan"), under which 2,000,000 shares of the Company's common stock are
available for issuance. The 2007 Plan provides for the grant to employees,
consultants and outside directors, of equity based awards including stock
options and restricted shares of the Company's common stock. On August 1, 2009,
options to purchase 36,000 shares of common stock with an exercise price of
$1.10 per share were granted to certain members of the Company's board of
directors. The options expire ten years from the date of issuance and vest over
a period of three years. On July 22, 2009, the Company issued an offer to
holders of outstanding stock options issued under the 2007 Plan ("Eligible
Options"), to exchange their Eligible Options for shares of common stock of the
Company on a 2 for 1 basis. The offer expired on September 25, 2009. As result
of this offer, as of September 30, 2009, 1,008,000 stock options were accepted
for exchange and cancellation.
STOCK OPTIONS
The Company uses the Black-Scholes option pricing model to calculate the
grant-date fair value of an award. The fair values of option grants were
calculated using the following estimated weighted-average assumptions:
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, 2009
Options granted 36,000
Weighted-average exercise prices of options $1.10
Weighted-average stock price $1.10
Assumptions:
Weighted-average expected volatility 56%
Weighted-average expected term 4.6 years
Risk-free interest rate 2.14%
Expected dividend yield 0% 0%
|
The exercise prices of the options granted were determined based on the market
price of the Company's stock on the date of the grant. The fair value per share
of the common stock on the date of grant was deemed to be equal to the closing
selling price per share of the Company's common stock at the close of regular
hours trading on the OTC Bulletin Board on that date, as the price was reported
by the National Association of Securities Dealers. The volatility and expected
life for the options have been determined based on an analysis of reported data
for a peer group of companies that issued options with substantially similar
terms. The expected volatility of options granted has been determined using an
average of the historical volatility measures of this peer group of companies
for a period equal to the expected life of the option. The risk-free interest
rate is based on United States treasury instruments whose terms are consistent
with the expected life of the stock options. The Company does not anticipate
paying cash dividends on its shares of common stock; therefore, the expected
dividend yield is assumed to be zero. In addition, FASB ASC Topic 718,
"Compensation-Stock Compensation" requires companies to utilize an estimated
forfeiture rate when calculating the expense for the period. As a result, the
Company applied an estimated annual forfeiture rate over the vesting period,
based on adjusted historical experience, of 10% for the three and nine months
ended September 30, 2009.
-24-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 6 - STOCK COMPENSATION PLANS (CONTINUED)
STOCK OPTIONS (CONTINUED)
The status of the options under the 2007 Plan is summarized below:
WEIGHTED
AVERAGE
WEIGHTED REMAINING AGGREGATE
AVERAGE CONTRACTUAL INTRINSIC
SHARES PRICE TERM (YEARS) VALUE
------------- -------------- ------------------ --------------
Outstanding at December 31, 2008 1,327,416 $ 1.69
Granted 36,000 $ 1.10
Cancelled (see "Restricted Stock" below) (1,008,000) $ 1.71
Forfeited (81,740) $ 1.37
-------------
Outstanding at September 30, 2009 285,846 $ 1.61 8.1 $ --
=============
Exercisable at September 30, 2009 160,139 $ 1.70 7.8 $ --
=============
Vested and expected to vest after
September 30, 2009 274,412 $ 1.61 8.1 $ --
=============
|
RESTRICTED STOCK
As of September 30, 2009, the Company had accepted and cancelled 1,008,000
Eligible Options in exchange for 504,000 shares of its restricted common stock,
which were issued on October 12, 2009. Fair value of this award on the grant
date was $.25 per share. The grant date fair value of the restricted stock award
was determined by using the closing price of the Company's common stock on
September 25, 2009.
The excess of the aggregate grant date fair value of the Company's restricted
common stock of $126,000 over the fair value of the stock options canceled of
$15,000 was added to the unamortized value of the options canceled on September
25, 2009, which amounted to $205,000. The total of the unamortized value of the
canceled options and the modification charge are being amortized over the
vesting period of the restricted common stock. The restricted shares vest on
March 31, 2010.
At September 30, 2009, the unamortized value of the restricted share award was
approximately $103,000, net of estimated forfeitures. The unamortized portion
will be expensed over a weighted average period of six months. For the three and
nine months ended September 30, 2009, a cost of $3,000 was recognized in
connection with the vesting of the restricted share award.
The Company's executive officers were entitled to participate in the exchange
offer, and as a group accounted for approximately 66% of the stock options
exchanged and cancelled and 66% of the shares of restricted common stock issued
in the offer.
The weighted average grant-date fair value of options granted during the three
and nine months ended September 30, 2009 was $0.53. As of September 30, 2009, a
total of 1,210,154 common shares were available for future grants under the
Company's 2007 Plan.
-25-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 6 - STOCK COMPENSATION PLANS (CONTINUED)
RESTRICTED STOCK (CONTINUED)
Share based compensation expense is measured at grant date, based on the fair
value of the award, and is recognized over the employee's requisite service
period. The share based compensation expense for the three months ended
September 30, 2009 and 2008 was $180,000 and $44,000, respectively, and $362,000
and $138,000 for the nine months ended September 30, 2009 and 2008,
respectively. For the three and nine months ended September 30, 2009 and 2008,
the breakdown of share-based compensation charges by category of expense was as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2009 2008 2009 2008
--------------- --------------- --------------- ---------------
Selling, general and administrative $ 112,000 $ 32,000 $ 224,000 $ 100,000
Research and development $ 43,000 $ 7,000 $ 87,000 $ 21,000
Cost of goods sold $ 25,000 $ 5,000 $ 51,000 $ 17,000
|
As of September 30, 2009, there was $361,000 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, but Mr. Strasbaugh was unable to complete the
transaction due to lack of available financing. Mr. Strasbaugh submitted another
offer to purchase the property, and a hearing has been scheduled on the
receiver's motion to accept the offer. However, the offer is contingent on
obtaining financing for the purchase, and such financing is subject to the
execution of an acceptable lease with the Company. Mr. Strasbaugh 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.
-26-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION (CONTINUED)
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.
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 $92,000 for the three month
periods ended September 30, 2009 and 2008, respectively, and $436,000 and
$197,000 for the nine month periods ended September 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.
-27-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 8 - REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK (CONTINUED)
SERIES A PREFERRED STOCK FINANCING (CONTINUED)
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 September 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.
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 September 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.
-28-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
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 September 30, 2009 and December 31, 2008, in the amounts of
$240,000 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 nine
months ended September 30, 2009 resulted from refunds received during the period
of taxes paid in prior years. There was no provision for the three or nine
months ended September 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.
The Company has federal and state net operating loss carryforwards of
approximately $30,525,000 and $12,686,000, respectively, at September 30, 2009,
which will begin to expire in 2019 for federal purposes. Annual utilization of
the federal net operating loss carryforwards 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 September 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 September 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 September 30, 2009.
-29-
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
NOTE 10 - INCOME TAXES (CONTINUED)
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 September 30, 2009.
NOTE 11 - SUBSEQUENT EVENT
ISSUANCE OF RESTRICTED SHARES
On October 12, 2009, the Company issued 504,000 shares of restricted Common
Stock to holders of its employee stock options, in exchange for cancellation of
options to purchase 1,008,000 shares of Common Stock (see Note 6). The issuance
was pursuant to the Company's Option Exchange Program, in which employees were
entitled to exchange options for Common Stock at the rate of two options for one
share of Common Stock. The shares issued are subject to vesting, so that any of
the shares issued to an employee who ceases to be employed on or before March
31, 2010 will be cancelled.
The options surrendered were exercisable at prices ranging from $1.20 to $1.71
per share. There was no other consideration given.
-30-
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 nine months ended
September 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 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 increased by $422,000, or 17%, to $2,889,000 for the
three months ended September 30, 2009 as compared to $2,467,000 for the three
months ended September 30, 2008 and decreased by $1,627,000, or 21%, to
$6,191,000 for the nine months ended September 30, 2009 as compared to
$7,818,000 for the nine months ended September 30, 2008. We reported a net loss
of $795,000 for the three months ended September 30, 2009 as compared to a net
loss of $423,000 for the three months ended September 30, 2008, and a net loss
of $1,517,000 for the nine months ended September 30, 2009 as compared to a net
loss of $1,956,000 for the nine months ended September 30, 2008. Excluding the
non-cash gains totaling $1,679,000 on our preferred stock related embedded
derivative and warrants, our net loss increased by $1,240,000 during the nine
months ended September 30, 2009 compared to the same period in 2008. Our
financial performance during the first nine months of 2009 and 2008 has been
negatively affected by a slowdown in the semiconductor industry. As a result of
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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 for the remainder of 2009, though management is of the opinion the
industry is poised for some level of growth in the fourth quarter of 2009 and
into 2010. 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 maintained at a reduced level of approximately 74 full and
part-time employees at September 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 FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") ACCOUNTING
STANDARDS CODIFICATION ("ASC") 815-40-15 "DERIVATIVES AND HEDGING-CONTRACTS IN
ENTITY'S OWN EQUITY-SCOPE AND SCOPE EXCEPTIONS"
In June 2008, the FASB ratified guidance included in ASC 815-40-15
"Derivatives and Hedging-Contracts in Entity's Own Equity-Scope and Scope
Exceptions," 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. ASC 815-40-15 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 FASB ASC Topic 815, "Derivatives and Hedging," which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts. FASB ASC 815-10-15-74(a)
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
("Topic 815 Scope Exception").
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 FASB ASC Topic 480,
"Distinguishing Liabilities from 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 SEC guidance. The two embedded
features in the Series A Preferred Stock did not require bifurcation under ASC
Topic 815 since, prior to the implementation of ASC 815-40-15, the conversion
feature met the Topic 815 Scope Exception and the applicable criteria in the
FASB guidance covering the 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 FASB 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
ASC 815-40-15, the Investor Warrants were classified as permanent equity because
they met the Topic 815 Scope Exception and all of the criteria in the FASB
guidance covering the accounting for derivative financial instruments indexed
to, and potentially settled in, a company's own stock. 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.
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FASB ASC 815-40-15 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 ASC 815-40-15 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 ASC 815-40-15, effective January 1, 2009, the Series A
Conversion Feature no longer qualified for the Topic 815 Scope Exception, and
was required to be bifurcated from its host, in accordance with FASB guidance
covering the recognition of embedded derivatives in ASC Topic 815, and accounted
for as a derivative instrument. Also, as a result of the settlement provision in
the Investor Warrants and the application of ASC 815-40-15, effective January 1,
2009, the Investor Warrants no longer qualified for the Topic 815 Scope
Exception, 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 ASC 815-40-15 indicating that an instrument
considered indexed to its own stock is evaluated under the applicable FASB
guidance 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 FASB ASC 815-10-65-3 "Derivatives and
Hedging-Overall-Transition and Open Effective Date Information-Transition
Related to EITF Issue No. 07-5, "Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity's Own Stock," 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 ASC 815-40-15 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 SEC guidance. In accordance with FASB guidance covering
the recognition of embedded derivatives in ASC Topic 815, 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.
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The following table illustrates the changes to the Company's consolidated
balance sheet resulting from the implementation of ASC 815-40-15 effective
January 1, 2009:
BALANCE CUMULATIVE BALANCE
DECEMBER 31, EFFECT JANUARY 1,
2008 ADJUSTMENT 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.
As of September 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 $1,481,000, and
$198,000, respectively, for the period from January 1, 2009 to September 30,
2009. The effect of the income from these derivatives on the loss from
continuing operations and net loss for the nine months ended September 30, 2009
was to reduce the net loss of $3,196,000 to a net loss of $1,517,000, and to
reduce the net loss per common share from $0.35 to a net loss per common share
of $0.23. For the three months ended September 30, 2009, the Company recorded a
gain on the change in fair value of the embedded derivative and warrants and
recorded a corresponding decrease in the "Preferred stock related embedded
derivative" and "Warrant" liability of $107,000 and $13,000, respectively. The
effect of the gain from these derivatives on the loss from continuing operations
and net loss for the three months ended September 30, 2009 was to decrease the
net loss of $915,000 to a net loss of $795,000, and to reduce the net loss per
common share from $0.11 to a net loss per common share of $0.10.
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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 SEC staff guidance
covering 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 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 FASB ASC 605-25, "Revenue Recognition-Multiple-Element
Arrangements," 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.
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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
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 FASB ASC 985-605,
"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 FASB ASC 815-40-15 "Derivatives and
Hedging-Contracts in Entity's Own Equity-Scope and Scope Exceptions," 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.
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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.
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 FASB ASC
450-20, "Contingencies-Loss Contingencies." Under ASC 450-20, 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 FASB ASC
Topic 480, "Distinguishing Liabilities from 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 FASB ASC Topic 815, "Derivatives and Hedging,"
which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities, considering FASB ASC 815-40, "Derivatives and
Hedging-Contracts in Entity's Own Equity."
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.
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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.
THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2008
DOLLAR PERCENTAGE
VARIANCE VARIANCE
------------------------ ------------- ------------- ------------------------
FAVORABLE FAVORABLE
2009 2008 (UNFAVORABLE) (UNFAVORABLE) 2009 2008
----------- ----------- ------------- ------------- ----------- -----------
(IN THOUSANDS)
Net revenues................................. $ 2,889 $ 2,467 $ 422 17% 100% 100%
Cost of sales................................ 2,125 1,430 (695) (49%) 74% 58%
----------- ----------- ------------- ------------- ----------- -----------
Gross profit................................. 764 1,037 (273) (26%) 26% 42%
Selling, general and administrative expenses. 1,081 991 (90) (9%) 37% 40%
Research and development expenses............ 834 625 (209) (33%) 29% 25%
----------- ----------- ------------- ------------- ----------- -----------
Loss from operations......................... (1,151) (579) (572) (99%) (40%) (23%)
Total other income (expense)................. 356 156 200 128% 12% 6%
----------- ----------- ------------- ------------- ----------- -----------
Loss from operations before income taxes..... (795) (423) (372) (88%) (28%) (17%)
Benefit from income taxes.................... -- -- -- -- -- --
----------- ----------- ------------- ------------- ----------- -----------
Net loss..................................... $ (795) $ (423) $ (372) (88%) (28%) (17%)
=========== =========== ============= ============= =========== ===========
|
NET REVENUES. Net revenues increased by $422,000, to $2,889,000 in the
third quarter of 2009 compared to the same period in 2008. Sales of tool systems
increased by $658,000, to $1,551,000, in the third quarter of 2009 compared to
$893,000 for the same period in 2008. Revenue from parts and services declined
by $236,000, to $1,338,000 in the third quarter of 2009, compared to $1,574,000
for the same period in 2008.
GROSS PROFIT. The $273,000 decrease in gross profit as well as the drop in
gross margin to 26% in 2009 versus 42% for the same period in 2008 is a result
of discounts offered to customers in 2009, which management approved as part of
the Company's efforts to complete sales in a down-economy. Management considers
that the discounts offered are more generous than usual for the Company and does
not anticipate that such deep-discounts will be repeated in the foreseeable
future. In general, the Company's gross margin tends to report in the low 40%
range. In addition, the Company, as a result of an anticipated growth in the
industry, has recently increased the base price of its tools as demand for those
tools appears to be increasing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased only $90,000 as the Company continues its cost
cutting measures, including a lower head-count of employees, initiated during
2008.
RESEARCH AND DEVELOPMENT EXPENSES. The $209,000 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 as we complete
the work on new technology and position the Company to launch those products.
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OTHER INCOME (EXPENSE). The $200,000 increase in other income was
primarily due to non-cash gains totaling $120,000 resulting from the decrease in
the fair value of our preferred stock related embedded derivative and warrant
liabilities during the three months ended September 30, 2009, and a $52,000
increase in rental income.
NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2008
DOLLAR PERCENTAGE
VARIANCE VARIANCE
------------------------ ------------- ------------- ------------------------
FAVORABLE FAVORABLE
2009 2008 (UNFAVORABLE) (UNFAVORABLE) 2009 2008
----------- ----------- ------------- ------------- ----------- -----------
(IN THOUSANDS)
Net revenues................................. $ 6,191 $ 7,818 $ (1,627) (21%) 100% 100%
Cost of sales................................ 4,211 4,639 428 9% 68% 59%
----------- ----------- ------------- ------------- ----------- -----------
Gross profit................................. 1,980 3,179 (1,199) (38%) 32% 41%
Selling, general and administrative expenses. 2,861 3,202 341 11% 46% 41%
Research and development expenses............ 2,820 2,267 (553) (24%) 46% 29%
----------- ----------- ------------- ------------- ----------- -----------
Loss from operations......................... (3,701) (2,290) (1,411) (62%) (60%) (29%)
Total other income (expense)................. 2,171 334 1,837 550% 35% 4%
----------- ----------- ------------- ------------- ----------- -----------
Loss from operations before income taxes..... (1,530) (1,956) 426 22% (25%) (25%)
Benefit from income taxes.................... 13 -- 13 -- -- --
----------- ----------- ------------- ------------- ----------- -----------
Net loss..................................... $ (1,517) $ (1,956) $ 439 22% (25%) (25%)
=========== =========== ============= ============= =========== ===========
|
NET REVENUES. Net revenues decreased by $1,627,000, to $6,191,000 in the
first three quarters of 2009 compared to the same period in 2008. Sales of tool
systems decreased by $78,000 to $2,637,000, in the first three quarters of 2009
compared to $2,715,000 for the same period in 2008. Revenue from parts sales and
services declined by $1,549,000 to $3,554,000, in the first three quarters of
2009, compared to $5,103,000 for the same period in 2008.
GROSS PROFIT. The $1,199,000 decrease in gross profit was primarily due to
the lower volume of product shipments and unfavorable product mix. The gross
margin as a percentage of sales was lower for the first nine months of 2009
compared to the same period in 2008 primarily as a result of discounts offered
to customers in 2009. As discussed above, management does not expect to repeat
those discounts in the foreseeable future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $386,000 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 $598,000 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 $1,837,000 increase in other income was
primarily due to non-cash gains totaling $1,679,000 resulting from the decrease
in the fair value of our preferred stock related embedded derivative and warrant
liabilities during the nine months ended September 30, 2009.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2009, we had working capital of $1,312,000, 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 three
quarters of 2009. At September 30, 2009 and December 31, 2008 we had an
accumulated deficit of $31,066,000 and $32,186,000, respectively, and cash and
cash equivalents of $3,356,000 and $49,000, respectively.
-39-
Our available capital resources at September 30, 2009 consisted primarily
of approximately $3,356,000 in cash and cash equivalents and $803,000 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 nine months ended September
30, 2009 was $3,192,000, as compared to $624,000 of cash used in operating
activities for the nine months ended September 30, 2008, and included net losses
of $1,517,000 and $1,956,000 for the nine months ended September 30, 2009 and
2008, respectively. Included in the results for the first three quarters of 2009
were non-cash gains of $1,679,000 from derivative liabilities, as well as
non-cash charges for depreciation and amortization of $274,000 and stock-based
compensation of $362,000. Material changes in assets and liabilities at
September 30, 2009 occurring since December 31, 2008 that affected these results
include:
1 a decrease in accounts receivable before reserves of $506,000;
2 a decrease in accounts payable of $366,000; and
3 an increase in customer deposits of $5,576,000.
Cash provided by investing activities totaled $115,000 for the nine months
ended September 30, 2009 as compared to $531,000 of cash provided by investing
activities for the nine months ended September 30, 2008. Included in the results
for the nine months ended September 30, 2009 are proceeds of $294,000 from sales
of investment securities, $137,000 of equipment purchases and $42,000
representing the capitalized cost of intellectual property.
There were no cash flows from financing activities in the first nine
months of 2009 compared to net cash used in financing activities totaling
$1,116,000 for the nine months ended September 30, 2008. The cash used in
financing activities in the first nine months 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 at December 31, 2008 and in 2009, and was unable to negotiate
suitable amendments to the agreements; accordingly, the line of credit with SVB
is no longer available to the Company. 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. Management has informed Silicon Valley Bank that it will revisit the topic
of a credit line sometime in 2010 as market and banking conditions improve.
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.
-40-
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
$240,000 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 November 12, 2009, we had a backlog of approximately $11 million.
Our backlog includes firm customer commitments for 10 tools and approximately
$981,000 in parts and upgrades. Management believes that all products currently
in our backlog will be shipped by the first quarter of 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 issued 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" which
was primarily codified into Topic 820, "Fair Value Measurements and
Disclosures." 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 this guidance. This guidance
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 standard on April 1, 2009 had no
impact on the Company's financial condition or results of operations.
-41-
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 "Recognition
and Presentation of Other-Than-Temporary Impairments," which was primarily
codified into Topic 320, "INVESTMENTS -- DEBT AND EQUITY SECURITIES" and Topic
325 "INVESTMENTS -- OTHER" in the ASC. 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 guidance is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009.
Implementation of this guidance on April 1, 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," which was primarily codified into Topic 825 "FINANCIAL
INSTRUMENTS" in the ASC. This standard extends the disclosure requirements
concerning the fair value of financial instruments to interim financial
statements of publicly traded companies. This standard 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,"
which was primarily codified into FASB ASC 815-40, "Derivatives and
Hedging-Contracts in Entity's Own Equity." The guidance 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. This
guidance was effective for financial statements issued for fiscal years
beginning after December 15, 2008. Early application is not permitted.
Implementation of this guidance 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 was
primarily codified into Topic 855 "SUBSEQUENT EVENTS" in the ASC. This guidance
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 September 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. 167 "AMENDMENTS TO FASB
INTERPRETATION NO. 46(R)", which has not yet been codified in the ASC. This
guidance is a revision to pre-existing guidance pertaining to the consolidation
and disclosures of variable interest entities. Specifically, it changes how a
reporting entity determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity's purpose and design
and the reporting entity's ability to direct the activities of the other entity
that most significantly impact the other entity's economic performance. This
guidance will require a reporting entity to provide additional disclosures about
its involvement with variable interest entities and any significant changes in
risk exposure due to that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity affects the
reporting entity's financial statements. This guidance will be effective at the
start of a reporting entity's first fiscal year beginning after November 15,
2009. Early application is not permitted. The Company is currently evaluating
the impact on its financial statements, if any, upon adoption.
-42-
In April 2008, the FASB issued FSP FAS No. 142-3 "Determination of the
Useful Life of Intangible Assets," which was primarily codified into Topic 350
"INTANGIBLES - GOODWILL AND OTHER" in the ASC. This guidance amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset and requires enhanced
related disclosures. This guidance must be applied prospectively to all
intangible assets acquired as of and subsequent to fiscal years beginning after
December 15, 2008. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008. Although future transactions
involving intangible assets may be impacted by this guidance, it did not impact
the Company's financial statements as the Company did not acquire any intangible
assets during the nine months ended September 30, 2009.
In June 2009, the FASB issued SFAS No. 168, "THE FASB ACCOUNTING STANDARDS
CODIFICATION AND THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES",
which was primarily codified into Topic 105 "GENERALLY ACCEPTED ACCOUNTING
STANDARDS" in the ASC. This standard will become the single source of
authoritative nongovernmental U.S. generally accepted accounting principles
("GAAP"), superseding existing FASB, American Institute of Certified Public
Accountants ("AICPA"), Emerging Issues Task Force ("EITF"), and related
accounting literature. This standard reorganizes the thousands of GAAP
pronouncements into roughly 90 accounting topics and displays them using a
consistent structure. Also included is relevant Securities and Exchange
Commission guidance organized using the same topical structure in separate
sections. The FASB will not issue new standards in the form of Statements, FASB
Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue
Accounting Standards Updates ("ASUs"). The FASB will not consider ASUs as
authoritative in their own right. ASUs will serve only to update the
Codification, provide background information about the guidance and provide the
bases for conclusions on the change(s) in the Codification. This guidance will
be effective for financial statements issued for reporting periods that end
after September 15, 2009. Beginning in the third quarter of 2009, this guidance
impacts the Company's financial statements and related disclosures as all
references to authoritative accounting literature reflect the newly adopted
codification.
In October 2009, the FASB issued ASU 2009-13, MULTIPLE-DELIVERABLE REVENUE
ARRANGEMENTS, (amendments to FASB ASC Topic 605, REVENUE RECOGNITION) ("ASU
2009-13") and ASU 2009-14, CERTAIN ARRANGEMENTS THAT INCLUDE SOFTWARE ELEMENTS,
(amendments to FASB ASC Topic 985, SOFTWARE) ("ASU 2009-14"). ASU 2009-13
requires entities to allocate revenue in an arrangement using estimated selling
prices of the delivered goods and services based on a selling price hierarchy.
The amendments eliminate the residual method of revenue allocation and require
revenue to be allocated using the relative selling price method. ASU 2009-14
removes tangible products from the scope of software revenue guidance and
provides guidance on determining whether software deliverables in an arrangement
that includes a tangible product are covered by the scope of the software
revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective
basis for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with early adoption permitted. The
Company does not expect adoption of ASU 2009-13 or ASU 2009-14 to have a
material impact on the Company's consolidated results of operations or financial
condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-43-
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 September 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
September 30, 2009 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
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, but Mr. Strasbaugh was unable to complete the
transaction due to lack of available financing. Mr. Strasbaugh submitted another
offer to purchase the property, and a hearing has been scheduled on the
receiver's motion to accept the offer. However, the offer is contingent on
obtaining financing for the purchase, and such financing is subject to the
execution of an acceptable lease with the Company. Mr. Strasbaugh 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.
-44-
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
On October 12, 2009, the Company issued 504,000 shares of restricted
Common Stock to holders of its employee stock options, in exchange for
cancellation of options to purchase 1,008,000 shares of Common Stock. The
issuance was pursuant to the Company's Option Exchange Program, in which
employees were entitled to exchange options for Common Stock at the rate of two
options for one share of Common Stock. The shares issued are subject to vesting,
so that any of the shares issued to an employee who ceases to be employed on or
before March 31, 2010 will be cancelled.
The options surrendered were exercisable at prices ranging from $1.20 to
$1.71 per share. There was no other consideration given.
The Company believes that the issuance of the shares of restricted Common
Stock was exempt from the registration requirements of the Securities Act of
1933, as amended, by reason of Section 4(2) thereof and Regulation D thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
-45-
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: November 16, 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
|
-46-
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