This Prospectus Supplement No. 1 is being filed solely to include the date of
the filing that was inadvertently left blank on the Prospectus Supplement No. 1
filed with the Securities and Exchange Commission on November 13, 2008.
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION FILE NO. 333-144787
STRASBAUGH
PROSPECTUS SUPPLEMENT NO. 1 DATED NOVEMBER 13, 2008
TO PROSPECTUS DATED NOVEMBER 6, 2008
The prospectus of Strasbaugh dated November 6, 2008 is supplemented to
include information from our quarterly report on Form 10-Q for the quarterly
period ended September 30, 2008 filed with the Securities and Exchange
Commission on November 13, 2008 and to include other updated information. Our
consolidated financial statements and related notes for the quarterly period
ended September 30, 2008 are included commencing on page F-1 of this supplement.
THE RISK FACTORS SECTION IS UPDATED TO INCLUDE THE FOLLOWING REVISED
RISK FACTOR:
RISKS RELATING TO OUR BUSINESS
WE HAVE INCURRED LOSSES IN THE PAST AND WE MAY INCUR LOSSES IN THE FUTURE.
IF WE INCUR LOSSES IN THE FUTURE, WE WILL EXPERIENCE NEGATIVE CASH FLOW,
WHICH MAY HAMPER OUR OPERATIONS, MAY PREVENT US FROM EXPANDING OUR BUSINESS
AND MAY CAUSE OUR STOCK PRICE TO DECLINE.
We incurred net losses of $777,000, $365,000, $775,000, $3.4 million
and $3.7 million for the years ended December 31, 2007, 2005, 2004, 2003 and
2002, respectively, and we recorded net income of $1.2 million for the year
ended December 31, 2006. We incurred a net loss of $1,956,000 for the nine
months ended September 30, 2008, we expect to incur a net loss for the year
ended December 31, 2008 and we may incur losses in future years due to, among
other factors, instability in the industries within which we operate, uncertain
economic conditions worldwide or lack of acceptance of our products in the
marketplace. If we incur losses in the future, it may make it difficult for us
to raise additional capital to the extent needed for our continued operations,
particularly if we are unable to maintain profitable operations in the future.
Consequently, future losses will result in negative cash flow, which may hamper
current operations and may prevent us from expanding our business. We may be
unable to attain, sustain or increase profitability on a quarterly or annual
basis in the future. If we do not attain, sustain or increase profitability, our
stock price may decline.
THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SECTION IS REPLACED WITH THE FOLLOWING:
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, 2008 and the related notes and the other financial
information included elsewhere in this prospectus. This prospectus 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. The
forward-looking statements and associated risks may include, relate to or be
qualified by other important factors, including, without limitation:
-1-
o the projected growth or contraction in the industries within
which we operate;
o our business strategy for expanding, maintaining or
contracting our presence in these markets;
o 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 2006 and an overall net loss for the nine months ended
September 30, 2008 and for 2007; and
o 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
could cause our financial results, including our net income or loss or growth in
net income or loss to differ materially from prior results, which in turn could,
among other things, cause the price of our common stock to fluctuate
substantially.
OVERVIEW
We develop, manufacture, market and sell an extensive line of precision
surfacing products, including polishing, grinding and precision optics tools and
systems, to customers in the semiconductor and silicon wafer fabrication, data
storage, LED and precision optics markets worldwide. Many of our products are
used by our customers in the fabrication of semiconductors and silicon wafers.
Our net revenues decreased by $1,340,000, or 35%, to $2,467,000 for the
three months ended September 30, 2008 as compared to $3,807,000 for the three
months ended September 30, 2007 and decreased by $8,743,000, or 53%, to
$7,818,000 for the nine months ended September 30, 2008 as compared to
$16,561,000 for the nine months ended September 30, 2007. We reported a net loss
of $423,000 for the three months ended September 30, 2008 as compared to a net
loss of $600,000 for the three months ended September 30, 2007 and a net loss of
$1,956,000 for the nine months ended September 30, 2008 as compared to net
income of $94,000 for the nine months ended September 30, 2007. The decline in
our financial performance during the first three quarters of 2008 is a direct
result of a slowdown in the semiconductor industry worldwide. As a result of the
industry slowdown, we experienced a substantial decline in tool system sales as
customers delayed major purchasing decisions. The decline in revenues commenced
during the third quarter of 2007 and we expect that it will continue through
2008 and into 2009. As a result, we expect to report lower revenues in 2008 as
compared to 2007 and we expect to report a net loss for 2008. Our priority over
the next several months is to find ways to strengthen our balance sheet and
conserve cash. With that in mind, our total headcount has been further reduced
to 70 full and part-time employees at September 30, 2008 (seven additional
employees have been temporarily furloughed), down from approximately 100
employees during 2007. 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.
-2-
SHARE EXCHANGE TRANSACTION
On May 24, 2007, we completed the Share Exchange Transaction with the
shareholders of R. H. Strasbaugh. Upon completion of the Share Exchange
Transaction, we acquired all of the issued and outstanding shares of capital
stock of R. H. Strasbaugh which resulted in a change in control of our company.
In connection with the Share Exchange Transaction, we issued an aggregate of
13,770,366 shares of our common stock to the shareholders of R. H. Strasbaugh.
The Share Exchange Transaction has been 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 now the
historical financial statements of the legal acquiror, Strasbaugh.
At the time of the closing of the Share Exchange Transaction, we were
not engaged in any active business operations. Our current business is comprised
solely of the business of our wholly-owned operating subsidiary, R. H.
Strasbaugh.
CRITICAL ACCOUNTING POLICIES
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis of
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe that the following critical accounting policies, among
others, affect our more significant judgments and estimates used in the
preparation of our financial statements:
REVENUE RECOGNITION. We derive revenues principally from the sale of
tools, parts and services. We recognize revenue pursuant to Staff Accounting
Bulletin No. 104, "Revenue Recognition." Revenue is recognized when there is
persuasive evidence an arrangement exists, delivery has occurred or services
have been rendered, our price to the customer is fixed or determinable, and
collection of the related receivable is reasonably assured. Selling arrangements
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.
-3-
We have evaluated our arrangements with customers and revenue
recognition policies under Emerging Issues Task Force ("EITF") Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables," and determined
that 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:
o 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.
o Parts - We recognize revenue when the parts are shipped.
o 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.
o Upgrades - We offer a suite of products known as
"enhancements" which are generally comprised of one-time parts
and/or software upgrades to existing Strasbaugh and
non-Strasbaugh tools. These enhancements are not required for
the tools to function, are not part of the original contract
and do not include any obligation to provide any future
upgrades. We recognize revenue once these upgrades and
enhancements are complete. Revenue is recognized on equipment
upgrades when we complete the installation of the upgrade
parts and/or software on the customer's equipment and the
equipment is accepted by the customer. The upgrade contracts
cover a one-time upgrade of a customer's equipment with new or
modified parts and/or software. After installation of the
upgrade, we have no further obligation on the contracts, other
than standard warranty provisions.
We include software in our tools. Software is considered an incidental
element of the tooling contracts and only minor modifications which are
incidental to the production effort may be necessary to meet customer
requirements. The software is used solely in connection with operating the tools
and is not sold, licensed or marketed separately. The tools and software are
fully functional when the tool is completed, and after shipment, the software is
not updated for new versions that may be subsequently developed and, we have no
additional obligations relative to the software. However, software modifications
may be included in tool upgrade contracts. Our software is incidental to the
tool contracts as a whole. The software and physical tool modifications occur
and are completed concurrently. The completed tool is tested by either the
customer or us to ensure it has met all required specifications and then
accepted by the customer prior to shipment, at which point revenue is
recognized. The revenue recognition requirements of Statement of Position
("SOP") 97-2, "Software Revenue Recognition," are met when there is persuasive
evidence an arrangement exists, the fee is fixed or determinable, collectibility
is probable and delivery and acceptance of the equipment has occurred, including
upgrade contracts for parts and/or software, to the customer.
Installation of a tool occurs after the tool is completed, tested,
formally accepted by the customer and shipped. We do not charge the customer for
installation nor recognize revenue for installation as it is an inconsequential
or perfunctory obligation and it is not considered a separate element of the
sales contract or unit of accounting. If we do not perform the installation
service there is no effect on the price or payment terms, there are no refunds,
and the tool may not be rejected by the customer. In addition, installation is
not essential to the functionality of the equipment because the equipment is a
standard product, installation does not significantly alter the equipment's
capabilities, and other companies are available to perform the installation.
Also, the fair value of the installation service has historically been
insignificant relative to our tools.
-4-
WARRANTY COSTS. Warranty reserves are provided by management based on
historical experience and expected future claims. Management believes that the
current reserves are adequate to meet any foreseeable contingencies with respect
to warranty claims.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. The allowance for doubtful accounts is based on specific
identification of customer accounts and our best estimate of the likelihood of
potential loss, taking into account such factors as the financial condition and
payment history of major customers. We evaluate the collectability of our
receivables at least quarterly. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Management believes that our current
allowances for doubtful accounts are adequate to meet any foreseeable
contingencies.
INVENTORY. We write down our inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value-based upon assumptions about future demand, future
pricing and market conditions. If actual future demand, future pricing or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required and the differences could be material.
Once established, write-downs are considered permanent adjustments to the cost
basis of the obsolete or unmarketable inventories.
VALUATION OF INTANGIBLES. From time to time, we acquire intangible
assets that are beneficial to our product development processes. We use our best
judgment based on the current facts and circumstances relating to our business
when determining whether any significant impairment factors exist.
DEFERRED TAXES. We record a valuation allowance to reduce the deferred
tax assets to the amount that is more likely than not to be realized. We have
considered estimated future taxable income and ongoing tax planning strategies
in assessing the amount needed for the valuation allowance. Based on these
estimates, all of our deferred tax assets have been reserved. If actual results
differ favorably from those estimates used, we may be able to realize all or
part of our net deferred tax assets.
LITIGATION. We account for litigation losses in accordance with
Statement of Financial Accounting Standards, or SFAS, No. 5, "Accounting for
Contingencies." Under SFAS No. 5, loss contingency provisions are recorded for
probable losses at management's best estimate of a loss, or when a best estimate
cannot be made, a minimum loss contingency amount is recorded. These estimates
are often initially developed substantially earlier than the ultimate loss is
known, and the estimates are refined each accounting period, as additional
information is known. Accordingly, we are often initially unable to develop a
best estimate of loss; therefore, the minimum amount, which could be zero, is
recorded. As information becomes known, either the minimum loss amount is
increased or a best estimate can be made, resulting in additional loss
provisions. Occasionally, a best estimate amount is changed to a lower amount
when events result in an expectation of a more favorable outcome than previously
expected. Due to the nature of current litigation matters, the factors that
could lead to changes in loss reserves might change quickly and the range of
actual losses could be significant, which could adversely affect our results of
operations and cash flows from operating activities.
SERIES A PREFERRED STOCK AND WARRANTS. We evaluate our Series A
Preferred Stock and warrants on an ongoing basis considering the provisions of
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity," which establishes standards for issuers of
financial instruments with characteristics of both liabilities and equity
related to the classification and measurement of those instruments. The Series A
Preferred Stock conversion feature and warrants are evaluated considering the
provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities, and EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock."
-5-
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:
o The first two data columns in each table show the absolute
results for each period presented.
o 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.
o The last two columns in each table show the results for each
period as a percentage of net revenues.
THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2007
RESULTS AS A PERCENTAGE
OF NET REVENUES FOR THE
THREE MONTHS ENDED DOLLAR DOLLAR THREE MONTHS ENDED
SEPTEMBER 30, VARIANCE VARIANCE SEPTEMBER 30,
-------------------- -------------------- ---------------------
FAVORABLE FAVORABLE
2008 2007 (UNFAVORABLE) (UNFAVORABLE) 2008 2007
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
Net revenues .................................... $ 2,467 $ 3,807 $(1,340) (35%) 100% 100%
Cost of sales ................................... 1,430 2,473 1,043 42% 58% 65%
------- ------- ------- ------- ------- -------
Gross profit .................................... 1,037 1,334 (297) (22%) 42% 35%
Selling, general and administrative expenses .... 991 1,353 362 27% 40% 36%
Research and development expenses ............... 625 600 (25) (4%) 25% 16%
------- ------- ------- ------- ------- -------
Loss from operations ............................ (579) (619) (40) (6%) (23%) (16)%
Total other income (expense) .................... 156 27 129 478% 6% 1%
------- ------- ------- ------- ------- -------
Loss from operations before income taxes ........ (423) (592) 169 29% (17%) (16%)
Provision for income taxes ...................... -- 8 8 100% -- --
------- ------- ------- ------- ------- -------
Net loss ........................................ $ (423) $ (600) $ 177 30% (17%) (16)%
======= ======= ======= ======= ======= =======
|
NET REVENUES. The $1,340,000 decrease in net revenues is due in large
part to a slowdown in the semiconductor and silicon wafer industry which
commenced during the third quarter of 2007 and has continued into 2008. Sales of
tool systems declined by $1,003,000 to $893,000, in the third quarter of 2008
compared to $1,896,000 for the same period in 2007. Revenue from parts and
services declined by $337,000 to $1,574,000, in the third quarter of 2008,
compared to $1,911,000 for the same period in 2007. Because of this slowdown,
our customers are requiring additional time to make final purchase decisions.
-6-
GROSS PROFIT. The $297,000 decrease in gross profit was primarily due
to lower sales. The higher gross margin as a percentage of sales resulted
primarily from shipping higher-margin products in the third quarter of 2008
compared to the same period in 2007. In addition, two one-week plant shut-downs
lowered labor and overhead costs in the third quarter of 2008. We anticipate
that our gross profit margin will remain at approximately 41% of net revenues
for the remainder of 2008.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $362,000 decrease in
selling, general and administrative expenses is a result of cost cutting
measures, including two one-week plant shut-downs and lower head-count of
employees, initiated during 2008.
RESEARCH AND DEVELOPMENT EXPENSES. The $25,000 increase in research and
development expense represents primarily on-going engineering improvements on
existing product lines developed over the past five years. We expect that
research and development spending will continue to increase during the remainder
of 2008.
OTHER INCOME (EXPENSE). The $129,000 increase in other income was
primarily due to an increase in rental income.
NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2007
RESULTS AS A PERCENTAGE
OF NET REVENUES FOR THE
NINE MONTHS ENDED DOLLAR DOLLAR NINE MONTHS ENDED
SEPTEMBER 30, VARIANCE VARIANCE SEPTEMBER 30,
-------------------- -------------------- ---------------------
FAVORABLE FAVORABLE
2008 2007 (UNFAVORABLE) (UNFAVORABLE) 2008 2007
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
Net revenues..................................... $ 7,818 $16,561 $(8,743) (53%) 100% 100%
Cost of sales.................................... 4,639 9,872 5,233 53% 59% 60%
------- ------- ------- ------- ------- -------
Gross profit..................................... 3,179 6,689 (3,510) (52%) 41% 40%
Selling, general and administrative expenses..... 3,202 4,727 1,525 32% 41% 29%
Research and development expenses................ 2,267 1,452 (815) (56%) 29% 9%
------- ------- ------- ------- ------- -------
(Loss) income from operations.................... (2,290) 510 (2,800) (549%) (29%) 3%
Total other income (expense)..................... 334 (344) 678 197% 4% (2%)
------- ------- ------- ------- ------- -------
(Loss) income from operations before
income taxes................................... (1,956) 166 (2,122) (1,278%) (25%) 1%
Provision for income taxes....................... -- 72 72 100% -- --
------- ------- ------- ------- ------- -------
Net (loss) income................................ $(1,956) $ 94 $(2,050) (2,181%) (25%) 1%
======= ======= ======= ======= ======= =======
|
NET REVENUES. The $8,743,000 decrease in net revenues is due in large
part to a slowdown in the semiconductor and silicon wafer industry which
commenced during the third quarter of 2007 and has continued into 2008. Lower
tool system sales accounted for $8,001,000 of the decrease in the year to date
net revenues. Because of this slowdown, our customers are requiring additional
time to make final purchase decisions.
GROSS PROFIT. The $3,510,000 decrease in gross profit was primarily due
to lower sales. Our gross margin is expected to remain at approximately 41%
during 2008.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $1,525,000 decrease
in selling, general and administrative expenses is due in large part to cost
cutting measures initiated by management, especially the reduction in headcount.
RESEARCH AND DEVELOPMENT EXPENSES. The $815,000 increase in research
and development expense represents primarily on-going engineering improvements
on existing product lines developed over the past five years.
-7-
OTHER INCOME (EXPENSE). The $678,000 increase in other income was
primarily due to a decrease in interest expense as a result of paying of certain
indebtedness, an increase in rental income as a result of sub-leasing office
space to un-affiliated third parties in 2008, and an increase in interest
income.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2008, we had working capital of $6,275,000 as
compared to $8,271,000 at December 31, 2007 as cash and other liquid assets were
used to support operations. At September 30, 2008 and December 31, 2007 we had
an accumulated deficit of $29,634,000 and $27,678,000, respectively, and cash
and cash equivalents of $655,000 and $1,864,000, respectively, as well as
investments in securities of $346,000 and $1,129,000, respectively.
Our available capital resources at September 30, 2008 consisted
primarily of approximately $655,000 in cash and cash equivalents and $346,000 of
investments in securities. These amounts were primarily raised through the
Series A Preferred Stock Financing (as defined below). We expect that our future
available capital resources will consist primarily of cash on hand, cash
generated from our business, if any, and future debt and/or equity financings,
if any. We have a $7.5 million credit facility with Silicon Valley Bank that
expires on December 4, 2009. However, at September 30, 2008 we were in default
of one of the financial covenants which could restrict our ability to borrow. We
currently have no outstanding borrowings under the credit facility and
management believes it will not be necessary to borrow in the foreseeable
future. However, to the extent circumstances change and we desire to borrow
funds under the facility, there is no assurance that Silicon Valley Bank will
extend credit to us under the existing facility. In addition, recent adverse
developments in the global credit markets may make bank financing from Silicon
Valley Bank or any other lending institution more expensive and/or more
difficult to obtain in the future.
Cash used in operating activities for the nine months ended September
30, 2008 was $624,000 as compared to $527,000 of cash used by operating
activities for the nine months ended September 30, 2007, and includes a net loss
of $1,956,000, depreciation and amortization of $274,000 and stock-based
compensation of $138,000. Material changes in asset and liabilities at September
30, 2008 as compared to December 31, 2007 that affected these results include:
o a decrease in accounts receivable before reserves of $846,000;
o a decrease in inventory before reserves of $155,000 (inventory
represented 51% of our total assets as of September 30, 2008);
and
o a net decrease in accrued expenses of $365,000 which includes
commissions payable in connection with shipments made during
the quarter ended September 30, 2008 and vacation and sick pay
accruals.
Cash provided by investing activities totaled $531,000 for the nine
months ended September 30, 2008 as compared to $1,040,000 of cash used in
investing activities for the nine months ended September 30, 2007. Included in
the results for the nine months ended September 30, 2008 are the sale of
$488,000 of investments in securities, $233,000 proceeds from the maturity of
investment securities, $127,000 of purchased equipment and $63,000 representing
the capitalized cost for intellectual property.
Net cash used in financing activities totaled $1,116,000 for the nine
months ended September 30, 2008 as compared to $3,375,000 in net cash provided
by financing activities for the nine months ended September 30, 2007. The Series
A Preferred Stock Financing generated funds from financing activities in 2007,
and the dividend payment and issuance costs related to the Series A Preferred
Stock resulted in the cash used in financing activities in 2008.
-8-
On December 4, 2007, we entered into two Loan and Security Agreements
with Silicon Valley Bank providing for a credit facility in the aggregate amount
of $7.5 million, or SVB Credit Facility. The first component, or EXIM Facility,
provides for a two-year $2.5 million revolving line of credit, secured by
substantially all of our assets, that requires us to obtain a guarantee from the
Export Import Bank of the United States of the credit extensions under the
agreement before a credit extension will be made. The second component of the
SVB Credit Facility, or Non-EXIM Facility, is a two-year, revolving line of
credit secured by substantially all of our assets pursuant to which we can
borrow up to $7.5 million dollars less the principal balance borrowed under the
EXIM Facility. The guarantee from Export Import Bank of the United States must
be in full force and effect throughout the term of the EXIM Facility and so long
as any credit extensions under the EXIM Facility are outstanding. We will be in
default under the EXIM Facility if the EXIM guaranty ceases to be in full force
and effect as required by the Loan and Security Agreement applicable to the EXIM
Facility. Events of default under either component of the SVB Credit Facility
will constitute an event of default on the other SVB Credit Facility. At
September 30, 2008, there was no outstanding balance on the SVB Credit Facility.
The SVB Credit Facility is subject to various financial covenants,
applicable to us and our subsidiary, R. H. Strasbaugh, on a consolidated basis,
including the following: the ratio of certain assets to current liabilities (the
"Quick Ratio"), measured on a monthly basis, must not be less than 1.0:1.0; and
the ratio of total liabilities less subordinated debt to tangible net worth plus
subordinated debt, measured on a monthly basis, must be not more than 0.60:1.0.
At September 30, 2008, we were not in compliance with the Quick Ratio covenant
and Silicon Valley Bank may, at its discretion, restrict our ability to borrow
against the line. Accordingly, no assurances can be given that Silicon Valley
Bank will extend any credit to us under the SVB Credit Facility at any time in
the future.
The Non-EXIM Facility is formula-based which generally provides that
the outstanding borrowings under the line of credit may not exceed an aggregate
of 85% of eligible accounts receivable and 30% of eligible inventory. The EXIM
Facility is also formula-based and provides that the outstanding borrowings
under the line of credit may not exceed an aggregate of 90% of eligible accounts
receivable and 50% of eligible inventory.
Interest on the SVB Credit Facility is payable monthly. The interest
rate applicable to the SVB Credit Facility is a variable per annum rate equal to
0.75 percentage points above the prime rate as published by Silicon Valley Bank.
Upon the occurrence and during the continuation of an event of default, the
interest rate applicable to the outstanding balance under the SVB Credit
Facility will increase by five percentage points above the per annum interest
rate that would otherwise be applicable.
Terms of the SVB Credit Facility include commitment fees of $56,250 on
the Non-EXIM Facility and $37,500 on the EXIM Facility. Both the EXIM Facility
and the Non-EXIM Facility are subject to an unused line fee of 0.25% per annum,
payable monthly, on any unused portion of the respective revolving credit
facility.
On May 24, 2007, immediately after the closing of the Share Exchange
Transaction, we issued to 21 accredited investors 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. We refer to this offering of securities in
this report as the "Series A Preferred Stock Financing." The Investor Warrants
became 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 include legal, accounting and consulting fees
that totaled approximately $1,345,000 through September 30, 2008 and continue to
be incurred in connection with various securities filings and the registration
statement described below.
-9-
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 commons 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 will not be
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. As of September 30, 2008,
management believes it is probable that penalties under the agreement will be
incurred and has accrued $290,000 of expense related to our registration rights
agreement calculated based on the terms of the agreement and the number of
shares included in the registration statement. Management is unable to determine
if any additional penalties may be incurred under the terms of the registration
rights agreement due to the restrictions imposed upon us by the SEC relating to
Rule 415 under the Securities Act. We anticipate that we will have sufficient
cash available to pay these liquidated damages as required.
We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity, and
the remaining proceeds we have from our Series A Preferred Stock Financing, will
be adequate to meet our anticipated working capital and capital expenditure
requirements for at least the foreseeable future. Additionally, if required, we
intend to renegotiate our existing credit facility with Silicon Valley Bank in
an effort to obtain terms and conditions which will allow us to access funds
under the facility. Although our preliminary discussions with representatives of
Silicon Valley Bank indicate that they are willing to renegotiate the terms of
our credit facility, there can be no assurances that we will be successful in
these efforts. Also, if 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 3, 2008, we had a backlog of approximately $4.1 million.
Our backlog includes firm non-cancelable customer commitments for 9 tools and
approximately $689,000 in parts and upgrades. Management believes that products
totaling approximately $3.9 million in our backlog will be shipped by December
31, 2008.
-10-
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 October 2008, the Financial Accounting Standards Board, or FASB,
issued FSP FAS No. 157-3, "Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active." This FASB Staff Position, or FSP,
clarifies the application of SFAS No. 157, "Fair Value Measurements," in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. This FSP applies to financial
assets within the scope of accounting pronouncements that require or permit fair
value measurements in accordance with SFAS No. 157. This FSP shall be effective
upon issuance, including prior periods for which financial statements have not
been issued. Revisions resulting from a change in the valuation technique or its
application shall be accounted for as a change in accounting estimate (SFAS No.
154, "Accounting Changes and Error Corrections," paragraph 19). The disclosure
provisions of SFAS No. 154 for a change in accounting estimate are not required
for revisions resulting from a change in valuation technique or its application.
Management is assessing the impact, if any, of the adoption of this statement on
our financial condition, cash flows and results of operations.
In June 2008, the FASB issued FSP, EITF Issue No. 03-6-1, "Determining
Whether Instruments Granted in Share-based Payment Transactions are
Participating Securities." FSP EITF Issue No. 03-6-1 addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting, and therefore need to be included in the earnings
allocation in computing earnings per share under the two-class method as
described in SFAS No. 128, "Earnings Per Share." Under the guidance of FSP EITF
Issue No. 03-6-1, unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and must be included in the computation of
earnings-per-share pursuant to the two-class method. FSP EITF Issue No. 03-6-1
is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and all prior-period earnings per share data presented shall
be adjusted retrospectively. Early application is not permitted. We are
assessing the potential impact of this FSP on our earnings per share
calculation.
In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining
Whether an Instrument (Or an Embedded Feature) is Indexed to an Entity's Own
Stock." EITF Issue No. 07-5 provides that an entity should use a two-step
approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument's
contingent exercise and settlement provisions. EITF Issue No. 07-5 is effective
for financial statements issued for fiscal years beginning after December 15,
2008. Early application is not permitted. We are assessing the potential impact
of this EITF on our financial condition and results of operations.
-11-
In June 2008, the FASB ratified EITF Issue No. 08-4, "Transition
Guidance for Conforming Changes" to EITF Issue No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios." This Issue applies to the conforming changes made
to EITF Issue No. 98-5 that resulted from EITF Issue No. 00-27 and SFAS No. 150.
Conforming changes made to EITF Issue No. 98-5 that resulted from EITF Issue No.
00-27 and SFAS No. 150 shall be effective for financial statements issued for
fiscal years ending after December 15, 2008. Earlier application is permitted.
The impact, if any, of applying the conforming changes, if any, shall be
presented retrospectively with the cumulative-effect of the change being
reported in retained earnings in the statement of financial position as of the
beginning of the first period presented. We are assessing the potential impact
of this EITF on our financial condition and results of operations.
In May 2008, the FASB issued SFAS No. 162 "The Hierarchy of Generally
Accepted Accounting Principles". This statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. We do not expect any impact on our financial
condition, cash flows or results of operations resulting from this statement.
In April 2008, the FASB issued FSP FAS No. 142-3 "Determination of the
Useful Life of Intangible Assets." This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and
Other Intangible Assets." The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141 (revised 2007), "Business Combinations," and other GAAP. FSP
FAS No. 142-3 is effective for fiscal years beginning after December 15, 2008.
Management is currently assessing the impact, if any, of adopting this statement
on our financial condition, cash flows and results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities," an amendment of SFAS No. 133,
which requires additional disclosures about the objectives of the derivative
instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a tabular
disclosure of the effects of such instruments and related hedged items on our
financial position, financial performance, and cash flows. SFAS No. 161 is
effective for us beginning January 1, 2009. We are currently assessing the
potential impact that adoption of SFAS No. 161 may have on our financial
statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
"Business Combinations," which replaces SFAS No. 141. The statement retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
the purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R is effective for us
beginning January 1, 2009 and will apply prospectively to business combinations
completed on or after that date. We do not expect the adoption of SFAS No. 141R
to have a material impact on our financial position, cash flows or result of
operations.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB 51," which
changes the accounting and reporting for minority interests. Minority interests
will be recharacterized as noncontrolling interests and will be reported as a
component of equity separate from the parent's equity, and purchases or sales of
equity interests that do not result in a change in control will be accounted for
as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and, upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS No. 160 is effective for us beginning January 1,
2009 and will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. We are currently assessing the
potential impact that adoption of SFAS No. 160 would have on our financial
position, cash flows, or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities," which permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS No. 159
was adopted by us on January 1, 2008. The adoption of SFAS No. 159 has not had a
material impact on our financial position, cash flows, and results of
operations.
-12-
STRASBAUGH AND SUBSIDIARY
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited)
and December 31, 2007 (audited)..............................................F-1
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2008 and 2007 (unaudited).........................F-2
Condensed Consolidated Statement of Redeemable Convertible Preferred
Stock and Shareholders' Equity (Deficit) for the Nine Months Ended
September 30, 2008 (unaudited)...............................................F-3
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2008 and 2007 (unaudited)................................F-4
Notes to Condensed Consolidated Financial Statements for the Three and
Nine Months Ended September 30, 2008 (unaudited).............................F-5
-13-
STRASBAUGH AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2008 (UNAUDITED)
AND DECEMBER 31, 2007 (AUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2008 2007
-------- --------
CURRENT ASSETS (unaudited)
Cash and cash equivalents $ 655 $ 1,864
Accounts receivable, net of allowance for doubtful accounts of $222 at
September 30, 2008 and $55 at December 31, 2007 1,972 2,985
Investments in securities 346 244
Inventories 6,059 6,169
Prepaid expenses 362 282
Short-term deposits and other assets 24 69
-------- --------
9,418 11,613
-------- --------
PROPERTY, PLANT, AND EQUIPMENT 2,185 2,384
-------- --------
OTHER ASSETS
Investments in securities -- 885
Capitalized intellectual property, net of accumulated amortization
of $48 at September 30, 2008 and $29 at December 31, 2007 350 306
Other assets 40 --
-------- --------
390 1,191
-------- --------
TOTAL ASSETS $ 11,993 $ 15,188
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable, current portion $ 100 $ 100
Accounts payable 737 517
Accrued expenses 2,241 2,606
Deferred revenue 65 119
-------- --------
3,143 3,342
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 8)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock ("Series A"), no par value,
$13,797 aggregate preference in liquidation at September 30, 2008,
15,000,000 shares authorized, 5,909,089 shares issued and outstanding 11,589 11,542
-------- --------
SHAREHOLDERS' EQUITY (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 26,901 27,926
Accumulated other comprehensive loss (62) --
Accumulated deficit (29,634) (27,678)
-------- --------
(2,739) 304
-------- --------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT) $ 11,993 $ 15,188
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-1
|
STRASBAUGH AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2008 2007 2008 2007
-------- -------- -------- --------
(unaudited) (unaudited)
REVENUES
Tools $ 893 $ 1,896 $ 2,715 $ 10,716
Parts and Service 1,574 1,911 5,103 5,845
-------- -------- -------- --------
NET REVENUES 2,467 3,807 7,818 16,561
-------- -------- -------- --------
COST OF SALES
Tools 615 1,321 2,164 6,486
Parts and Service 815 1,152 2,475 3,386
-------- -------- -------- --------
TOTAL COST OF SALES 1,430 2,473 4,639 9,872
-------- -------- -------- --------
GROSS PROFIT 1,037 1,334 3,179 6,689
-------- -------- -------- --------
OPERATING EXPENSES
Selling, general and administrative expenses 991 1,353 3,202 4,727
Research and development 625 600 2,267 1,452
-------- -------- -------- --------
1,616 1,953 5,469 6,179
-------- -------- -------- --------
(LOSS) INCOME FROM OPERATIONS (579) (619) (2,290) 510
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Rental income 92 -- 197 --
Interest income 15 56 39 56
Interest expense -- (21) -- (330)
Other income (expense), net 49 (8) 98 (70)
-------- -------- -------- --------
156 27 334 (344)
-------- -------- -------- --------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (423) (592) (1,956) 166
PROVISION FOR INCOME TAXES -- 8 -- 72
-------- -------- -------- --------
NET (LOSS) INCOME $ (423) $ (600) $ (1,956) $ 94
======== ======== ======== ========
NET (LOSS) INCOME PER COMMON SHARE
Basic $ (0.06) $ (0.07) $ (0.22) $ 0.36
======== ======== ======== ========
Diluted $ (0.06) $ (0.07) $ (0.22) $ 0.29
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 14,202 14,202 14,202 14,308
======== ======== ======== ========
Diluted 14,202 14,202 14,202 19,638
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-2
|
STRASBAUGH AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK PREFERRED STOCK
---------------------------- ----------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2007 5,909,089 $ 11,542 14,201,587 $ 56 -- $ --
Comprehensive income:
Net loss
Other comprehensive loss:
Unrealized gain (loss) on
investment, net of tax of $0
Total comprehensive loss
Series A issuance costs -- (483) -- -- -- --
Stock-based compensation expenses -- -- -- -- -- --
Accretion of redeemable convertible
preferred stock -- 366 -- -- -- --
Preferred stock dividend
accumulated -- 797 -- -- -- --
Preferred stock dividend paid -- (633) -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 2008 5,909,089 $ 11,589 14,201,587 $ 56 -- $ --
=========== =========== =========== =========== =========== ===========
TOTAL
SHAREHOLDERS'
ACCUMULATED EQUITY AND
OTHER REDEEMABLE
ADDITIONAL COMPREHENSIVE CONVERTIBLE
PAID-IN INCOME ACCUMULATED PREFERRED
CAPITAL (LOSS) DEFICIT STOCK
----------- ----------- ----------- -----------
Balance, December 31, 2007 $ 27,926 $ -- $ (27,678) $ 11,846
Comprehensive income:
Net loss -- (1,956) (1,956)
Other comprehensive loss:
Unrealized gain (loss) on
investment, net of tax of $0 (62) -- (62)
------------
Total comprehensive loss (2,018)
------------
Series A issuance costs -- -- -- (483)
Stock-based compensation expenses 138 -- -- 138
Accretion of redeemable convertible
preferred stock (366) -- -- --
Preferred stock dividend
accumulated (797) -- -- --
Preferred stock dividend paid -- -- -- (633)
----------- ----------- ----------- -----------
Balance, September 30, 2008 $ 26,901 $ (62) $ (29,634) $ 8,850
=========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-3
|
STRASBAUGH AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2008 2007
-------- --------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (1,956) $ 94
Adjustments to reconcile net (loss) income
to net cash from operating activities:
Depreciation and amortization 274 234
Change in allowance for doubtful accounts 167 --
Change in inventory reserve 336 151
Noncash interest expense -- 113
Stock-based compensation 138 60
Changes in assets and liabilities:
Accounts receivable 846 934
Inventories (155) 221
Prepaid expenses (80) 16
Deposits and other assets 5 91
Accounts payable 220 (321)
Accrued expenses (365) (598)
Deferred revenue (54) (1,072)
Accrued warrant -- (450)
-------- --------
Net Cash Used in Operating Activities (624) (527)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in securities -- (922)
Proceeds from the sale of investment securities 488 --
Proceeds from maturity of investment securities 233 --
Purchase of property and equipment (127) (16)
Capitalized cost for intellectual property (63) (102)
-------- --------
Net Cash Provided By (Used In) Investing Activities 531 (1,040)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in line of credit -- (2,650)
Repayment of notes payable -- (1,798)
Repurchase of participating preferred stock -- (3,000)
Issuance of redeemable convertible preferred stock -- 12,650
Issuance cost of redeemable convertible preferred stock (483) (1,528)
Issuance of warrants -- 350
Proceeds from stock options exercised -- 38
Proceeds from issuance of shares in share exchange transaction -- 63
Preferred dividends paid (633) --
Repurchase of common stock -- (750)
-------- --------
Net Cash (Used In) Provided By Financing Activities (1,116) 3,375
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,209) 1,808
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,864 1,205
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 655 $ 3,013
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
F-4
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (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 has been 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).
Immediately prior to the consummation of the Share Exchange Transaction, CTK
Windup Corporation amended and restated its articles of incorporation to (i)
effectuate a 1-for-31 reverse split of its common stock, (ii) change its name
from CTK Windup Corporation to Strasbaugh, (iii) increase its authorized common
stock from 50,000,000 shares to 100,000,000 shares, (iv) increase its authorized
preferred stock from 2,000,000 shares to 15,000,000 shares (of which 5,909,089
shares have been designated Series A Cumulative Redeemable Convertible Preferred
Stock (the "Series A Preferred Stock")) and (v) eliminate its Series A
Participating Preferred Stock. On May 17, 2007, prior to the filing of CTK
Windup Corporation's amended and restated articles of incorporation, the
Company's subsidiary, R. H. Strasbaugh (then known as Strasbaugh), amended its
articles of incorporation to change its name from Strasbaugh to R. H.
Strasbaugh.
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.
F-5
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
The unaudited condensed consolidated financial statements do, however, reflect
all adjustments, consisting of only normal recurring adjustments, which are, in
the opinion of management, necessary to state fairly the financial position as
of September 30, 2008 and the results of operations and cash flows for the
related interim periods ended September 30, 2008 and 2007. 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, 2007.
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 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 and warrants
to purchase common stock, inventory obsolescence, and depreciation and
amortization.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30,
2008 2007
---------- ----------
Cash paid for interest............................. $ -- $ 203,000
========== ==========
Cash paid for income taxes......................... $ -- $ 18,000
========== ==========
Fair value accretion on redeemable
convertible preferred stock..................... $ 366,000 $ 113,000
========== ==========
Preferred stock dividend........................... $ 797,000 $ 367,000
========== ==========
Property and equipment transferred to/from
inventory, net.................................. $ 71,000 $ --
========== ==========
|
F-6
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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. The Company's top 10 customers accounted for 67% and 64% of net revenues
during the three and nine month periods ended September 30, 2008, respectively,
and 30% and 69% of net revenues during the three and nine month periods ended
September 30, 2007, respectively. Sales to major customers (over 10%) as a
percentage of net revenues were 40% and 32%, for the three and nine month
periods ended September 30, 2008, respectively, and 0% and 40% for the three and
nine month periods ended September 30, 2007, respectively.
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, 2008, the
amount due from the major customers (over 10%) discussed above represented 48%
of the Company's total accounts receivable.
PRODUCT WARRANTIES
The Company provides limited warranty for the replacement or repair of defective
product 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 reserve 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.
F-7
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
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 and notes payable approximate
fair value because the interest rates on these instruments approximate market
interest rates currently available to the Company.
The Company's investments are comprised of held to maturity and available for
sale securities with carrying amounts totaling $10,000 and $336,000,
respectively, at September 30, 2008. The Company's financial assets that are
measured at fair value on a recurring basis are comprised of fixed income
available for sale securities at September 30, 2008. The fair value of these
financial assets was determined using the following inputs at September 30,
2008:
FAIR VALUE MEASUREMENTS AT REPORTING DATE USING
-----------------------------------------------------
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 $ 336,000 $ -- $ 336,000 $ --
=========== =========== =========== ===========
|
Fixed income available-for-sale securities generally include U.S. government
agency securities, state and municipal bonds, and corporate bonds and notes.
Valuations are based on observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities; quoted prices for securities
that are traded less frequently than exchange-traded instruments or quoted
prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data.
There are no liabilities carried at fair value and there are no assets or
liabilities measured at fair value on a nonrecurring basis.
F-8
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT INFORMATION
The Company's results of operations for the three and nine months ended
September 30, 2008 and 2007, 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 71% and 33% of sales for the three and nine months ended
September 30, 2008, respectively, and approximately 47% and 61% of sales for the
three and nine months ended September 30, 2007, respectively.
The geographic breakdown of the Company's sales was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2008 2007 2008 2007
------- ------- ------- -------
United States 29% 53% 67% 39%
Europe 54% 21% 23% 25%
Asia and Pacific Rim countries 17% 26% 10% 36%
|
The geographic breakdown of the Company's accounts receivable was as follows:
SEPTEMBER 30, DECEMBER 31,
2008 2007
------------- -------------
United States 40% 50%
Europe 49% 42%
Asia and Pacific Rim countries 11% 8%
|
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, and Asia and 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, 2008 is reasonably stated.
F-9
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (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 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, are included in the determination
of comprehensive income (loss) and reported in shareholders' equity (deficit).
At September 30, 2008, the short-term investments held to maturity include
certificates of deposits originally maturing in over 90 days and less than one
year. The Company's other investments have maturity dates generally from 2 to 10
years, are classified as available for sale and are included in current assets
because the investments will likely be sold prior to maturity and within one
year from the balance sheet date. The Company had no material realized gains or
losses on the sales of securities in 2008 or 2007. Investments in securities at
September 30, 2008 were as follows:
AGGREGATE UNREALIZED GAIN
FAIR VALUE COST BASIS (LOSS)
--------- --------- ---------
Certificates of deposit, held to maturity $ 10,000 $ 10,000 $ --
US government debt securities 50,000 50,000 --
Corporate debt securities 149,000 173,000 (24,000)
State and municipal debt securities 137,000 175,000 (38,000)
--------- --------- ---------
$ 346,000 $ 408,000 $ (62,000)
========= ========= =========
|
ACCUMULATED 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). For the three and
nine months ended September 30, 2008, the Company's accumulated other
comprehensive losses of $24,000 and $62,000, respectively, consisted of
unrealized losses on investments. For the three and nine months ended September
30, 2007, the accumulated other comprehensive losses totaled $2,000 and
consisted of unrealized losses on investments.
F-10
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company derives revenues principally from the sale of tools, parts and
services. The Company recognizes revenue pursuant to Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition." Revenue is recognized when there is
persuasive evidence an arrangement exists, delivery has occurred or services
have been rendered, the Company's price to the customer is fixed or
determinable, and collection of the related receivable is reasonably assured.
Selling arrangements may include contractual customer acceptance provisions and
installation of the product occurs after shipment and transfer of title. The
Company recognizes revenue upon shipment of products or performance of services
and defers recognition of revenue for any amounts subject to acceptance until
such acceptance occurs. Provisions for the estimated future cost of warranty are
recorded at the time the products are shipped.
Generally, the Company obtains a non-refundable down-payment from the customer.
These fees are deferred and recognized as the tool is shipped. All sales
contract fees are payable no later than 60 days after delivery and payment is
not contingent upon installation. In addition, the Company's tool sales have no
right of return, or cancellation rights. Tools are typically modified to some
degree to fit the needs of the customer and, therefore, once a purchase order
has been accepted by the Company and the manufacturing process has begun, there
is no right to cancel, return or refuse the order.
The Company has evaluated its arrangements with customers and revenue
recognition policies under Emerging Issues Task Force ("EITF") Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables," and determined
that its components of revenue are separate units of accounting. Each unit has
value to the customer on a standalone basis, there is objective and reliable
evidence of the fair value of each unit, and there is no right to cancel, return
or refuse an order. The Company's revenue recognition policies for its specific
units of accounting are as follows:
o 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.
o Parts - The Company recognizes revenue when the parts are
shipped.
o 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 the after the service has been completed.
F-11
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
o Upgrades - The Company offers a suite of products known as
"enhancements" which are generally comprised of one-time parts
and/or software upgrades to existing Strasbaugh and
non-Strasbaugh tools. These enhancements are not required for
the tools to function, are not part of the original contract
and do not include any obligation to provide any future
upgrades. The Company recognizes revenue once these upgrades
and enhancements are complete. Revenue is recognized on
equipment upgrades when the Company completes the installation
of the upgrade parts and/or software on the customer's
equipment and the equipment is accepted by the customer. The
upgrade contracts cover a one-time upgrade of a customer's
equipment with new or modified parts and/or software. After
installation of the upgrade, the Company has no further
obligation on the contracts, other than standard warranty
provisions.
The Company includes software in its tools. Software is considered an incidental
element of the tooling contracts and only minor modifications which are
incidental to the production effort may be necessary to meet customer
requirements. The software is used solely in connection with operating the tools
and is not sold, licensed or marketed separately. The tools and software are
fully functional when the tool is completed, and after shipment, the software is
not updated for new versions that may be subsequently developed and, the Company
has no additional obligations relative to the software. However, software
modifications may be included in tool upgrade contracts. The Company's software
is incidental to the tool contracts as a whole. The software and physical tool
modifications occur and are completed concurrently. The completed tool is tested
by either the customer or the Company to ensure it has met all required
specifications and then accepted by the customer prior to shipment, at which
point revenue is recognized. The revenue recognition requirements of Statement
of Position ("SOP") 97-2, "Software Revenue Recognition," are met when there is
persuasive evidence an arrangement exists, the fee is fixed or determinable,
collectability is probable and delivery and acceptance of the equipment has
occurred, including upgrade contracts for parts and/or software, to the
customer.
Installation of a tool occurs after the tool is completed, tested, formally
accepted by the customer and shipped. The Company does not charge the customer
for installation nor recognize revenue for installation as it is an
inconsequential or perfunctory obligation and it is not considered a separate
element of the sales contract or unit of accounting. If the Company does not
perform the installation service there is no effect on the price or payment
terms, there are no refunds, and the tool may not be rejected by the customer.
In addition, installation is not essential to the functionality of the equipment
because the equipment is a standard product, installation does not significantly
alter the equipment's capabilities, and other companies are available to perform
the installation. Also, the fair value of the installation service has
historically been insignificant relative to the Company's tools.
F-12
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHIPPING COSTS
During the three and nine month periods ended September 30, 2008, freight and
handling amounts billed to customers by the Company and included in revenues
totaled approximately $0 and $7,000, respectively, and $0 and $7,000 for the
three and nine month periods ended September 30, 2007, respectively. Freight and
handling fees incurred by the Company of approximately $9,000 and $43,000 are
included in cost of sales for the three and nine month periods ended September
30, 2008, respectively, and $34,000 and $68,000 for the three and nine month
periods ended September 30, 2007, respectively.
STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123 (revised 2004),
"Share-Based Payment," ("SFAS No. 123(R)"), which is a revision of SFAS No. 123,
"Accounting for Stock Issued to Employees." SFAS No. 123(R) supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No.
95, "Statement of Cash Flows." Generally, the approach in SFAS No.123(R) is
similar to the approach described in SFAS No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative.
SFAS No. 123(R) also established accounting requirements for measuring,
recognizing and reporting share-based compensation, including income tax
considerations. One such change was the elimination of the minimum value method,
which under SFAS No. 123 permitted the use of zero volatility when performing
Black-Scholes valuations. Under SFAS No. 123(R), companies are required to use
expected volatilities derived from the historical volatility of the company's
stock, implied volatilities from traded options on the company's stock and other
factors. SFAS No. 123(R) also requires the benefits of tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under previous accounting literature.
The provisions of SFAS No. 123(R) were effective for and adopted by the Company
as of January 1, 2006. Prior to the adoption, the Company was using the
intrinsic-value method of accounting for stock based compensation pursuant to
APB Opinion No. 25. Required pro forma information was presented under the fair
value method using a Black-Scholes option-pricing model pursuant to SFAS No.
123. The adoption of SFAS No. 123(R) was made using the prospective transition
method. Under this method, the statement applied to new awards and awards
modified, repurchased or cancelled after the required effective date.
Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered that are outstanding as of effective
date were recognized as the requisite service is rendered. The adoption of SFAS
No. 123(R) did not have a significant impact on the Company's results of
operations, income taxes or earnings per share.
F-13
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
Reconciliations of the numerator and denominator used in the calculation of
basic and diluted net income per common share are as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Numerator:
Net (loss) income $ (423,000) $ (600,000) $(1,956,000) $ 94,000
Preferred stock accretion (131,000) (80,000) (366,000) (113,000)
Preferred stock dividend (270,000) (261,000) (797,000) (367,000)
Excess of carrying value of preferred stock
over cash paid upon redemption -- -- -- 5,595,000
----------- ----------- ----------- -----------
Net (loss) income available to common
shareholders - basic (824,000) (941,000) (3,119,000) 5,209,000
Adjustment to net (loss) income for
assumed conversions -- -- -- 480,000
----------- ----------- ----------- -----------
Net (loss) income available to common
shareholders - diluted $ (824,000) $ (941,000) $(3,119,000) $ 5,689,000
=========== =========== =========== ===========
F-14
|
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (CONTINUED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Denominator:
Shares outstanding, beginning 14,201,587 14,201,587 14,201,587 13,992,828
Weighted-average shares issued -- -- -- 314,680
---------- ---------- ---------- ----------
Weighted-average shares outstanding--basic 14,201,587 14,201,587 14,201,587 14,307,508
---------- ---------- ---------- ----------
Effect of dilutive securities
Weighted-average preferred stock outstanding -- -- -- 4,955,175
Weighted-average warrants outstanding (Note 7) -- -- -- 304,103
Weighted-average options outstanding -- -- -- 71,154
---------- ---------- ---------- ----------
-- -- -- 5,330,432
---------- ---------- ---------- ----------
Weighted-average shares outstanding--diluted 14,201,587 14,201,587 14,201,587 19,637,940
========== ========== ========== ==========
|
For the three and nine months ended September 30, 2008, the Company has excluded
from the computation of diluted loss per common share 5,909,089 shares issuable
pursuant to the Series A Preferred Stock, 1,271,797 shares issuable pursuant to
outstanding warrants and 1,339,166 shares issuable upon exercise of outstanding
stock options because the Company had a loss from continuing operations for the
periods and to include the representative share increments would be
anti-dilutive. Accordingly, for the three and nine months ended September 30,
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
periods. For the three and nine months ended September 30, 2007, the 1,271,797
shares issuable pursuant to outstanding warrants and 1,339,166 shares issuable
upon the exercise of outstanding stock options were not included in the
computation of diluted earnings per common share for the period because the
exercise prices were greater than the average market price of the common stock,
and therefore, the effects on dilutive earnings per common share would have been
anti-dilutive.
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.
F-15
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SERIES A PREFERRED STOCK AND WARRANTS
The Company evaluates its Series A Preferred Stock and Warrants (as defined in
Note 7) on an ongoing basis considering the provisions of SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity," which establishes standards for issuers of financial
instruments with characteristics of both liabilities and equity related to the
classification and measurement of those instruments The Series A Preferred Stock
conversion feature and Warrants are evaluated considering the provisions of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities, and considering EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock."
IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS
In October 2008, the FASB issued FSP FAS No. 157-3, "Determining the Fair Value
of a Financial Asset When the Market for That Asset Is Not Active." This FASB
Staff Position ("FSP") clarifies the application of SFAS No. 157, "Fair Value
Measurements," in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. This FSP applies to
financial assets within the scope of accounting pronouncements that require or
permit fair value measurements in accordance with SFAS No. 157. This FSP was
effective upon issuance, including prior periods for which financial statements
have not been issued. Revisions resulting from a change in the valuation
technique or its application shall be accounted for as a change in accounting
estimate (SFAS No. 154, "Accounting Changes and Error Corrections," paragraph
19). The disclosure provisions of SFAS No. 154 for a change in accounting
estimate are not required for revisions resulting from a change in valuation
technique or its application. Management is assessing the impact, if any, of the
adoption of this statement on the Company's financial condition, cash flows and
results of operations.
In June 2008, the FASB issued FSP EITF Issue No. 03-6-1, "Determining Whether
Instruments Granted in Share-based Payment Transactions are Participating
Securities." FSP EITF Issue No. 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting,
and therefore need to be included in the earnings allocation in computing
earnings per share under the two-class method as described in SFAS No. 128,
"Earnings Per Share." Under the guidance of FSP EITF Issue No. 03-6-1, unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings-per-share pursuant to the
two-class method. FSP EITF Issue No. 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and all
prior-period earnings per share data presented shall be adjusted
retrospectively. Early application is not permitted. The Company is assessing
the potential impact of this FSP on its earnings per share calculation.
F-16
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an
Instrument (Or an Embedded Feature) is Indexed to an Entity's Own Stock." EITF
Issue No. 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF Issue No. 07-5 is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
Early application is not permitted. The Company is assessing the potential
impact of this EITF on its financial condition and results of operations.
In June 2008, the FASB ratified EITF Issue No. 08-4, "Transition Guidance for
Conforming Changes" to EITF Issue No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios." This issue applies to the conforming changes made to EITF
Issue No. 98-5 that resulted from EITF Issue No. 00-27 and SFAS No. 150.
Conforming changes made to EITF Issue No. 98-5 that resulted from EITF Issue No.
00-27 and SFAS No. 150 are effective for financial statements issued for fiscal
years ending after December 15, 2008. Earlier application is permitted. The
impact, if any, of applying the conforming changes, if any, shall be presented
retrospectively with the cumulative-effect of the change being reported in
retained earnings in the statement of financial position as of the beginning of
the first period presented. The Company is assessing the potential impact of
this EITF on its financial condition and results of operations.
In May 2008, the FASB issued SFAS No. 162 "The Hierarchy of Generally Accepted
Accounting Principles." SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. The Company expects no impact on its
financial condition, cash flows or results of operations resulting from this
statement.
In April 2008, the FASB issued FSP FAS No. 142-3 "Determination of the Useful
Life of Intangible ASSETS." This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and
Other Intangible Assets." The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141 (revised 2007), "Business Combinations," and other GAAP. FSP
FAS No. 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. Management is currently assessing the impact,
if any, of adopting this statement on the Company's financial condition, cash
flows and results of operations.
NOTE 2 - MANAGEMENT'S PLANS
For the nine months ended September 30, 2008, the Company had a net loss of
approximately $1,956,000 and as of September 30, 2008, the Company had an
accumulated deficit of approximately $29,634,000. 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 and into
2008 has added to those losses as revenues declined.
F-17
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 2 - MANAGEMENT'S PLANS (CONTINUED)
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.
The Company has a $7.5 million line of credit with Silicon Valley Bank that
expires on December 4, 2009. However, the Company is not in compliance with one
of the financial covenants of the credit facility. As a result, Silicon Valley
Bank may, at its discretion, restrict access to the line until the Company
regains compliance. There are no amounts outstanding under the credit facility,
and management believes that, barring unforeseen events, there will be no need
to utilize the credit facility in the foreseeable future. In addition, recent
developments in the global credit markets may make bank financing more expensive
and/or more difficult to obtain, and there is no assurance that Silicon Valley
Bank will extend credit to the Company under the existing facility at this time.
NOTE 3 - INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2008 2007
----------- -----------
(unaudited)
Parts and raw materials $ 5,494,000 $ 5,876,000
Work-in-process 2,810,000 2,212,000
Finished goods 58,000 48,000
----------- -----------
8,362,000 8,136,000
Inventory reserves (2,303,000) (1,967,000)
----------- -----------
$ 6,059,000 $ 6,169,000
=========== ===========
|
F-18
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
2008 2007
------------ ------------
(unaudited)
Buildings and improvements $ 2,238,000 $ 2,198,000
Shop and lab equipment 6,018,000 6,399,000
Transportation equipment 166,000 166,000
Furniture and fixtures 1,113,000 1,106,000
Computer equipment 2,326,000 2,326,000
------------ ------------
11,861,000 12,195,000
Less: accumulated depreciation and amortization (9,676,000) (9,811,000)
------------ ------------
$ 2,185,000 $ 2,384,000
============ ============
|
Depreciation expense totaled approximately $82,000 and $64,000 for the three
month periods ended September 30, 2008 and 2007, respectively, and $255,000 and
$217,000 for the nine month periods ended September 30, 2008 and 2007,
respectively.
NOTE 5 - STOCK COMPENSATION PLANS
2007 SHARE INCENTIVE PLAN
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. On April 25, 2008, options to purchase 36,000 shares of
common stock with an exercise price of $1.50 per share, and on August 1, 2008,
options to purchase 40,836 shares of common stock with an exercise price of
$1.38 per share, were granted to certain members of the Company's board of
directors under the 2007 Plan. The options expire ten years from the date of
issuance and vest over a period of three years.
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:
F-19
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 5 - STOCK COMPENSATION PLANS (CONTINUED)
2007 SHARE INCENTIVE PLAN (CONTINUED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2008
Options granted 76,836
Weighted-average exercise prices of options $1.44
Weighted-average stock price $1.44
Assumptions:
Weighted-average expected volatility 49%
Weighted-average expected term 4.4 years
Risk-free interest rate 3.29%
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 Pink OTC Markets 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, SFAS No. 123(R) requires companies to
utilize an estimated forfeiture rate when calculating the expense for the
period. The Company uses estimated annual forfeiture rates ranges from 13% to
40% based on classifications such as director grants and grants to different
categories of employees. As a result, the Company applied an estimated annual
forfeiture rate over the vesting period, based on adjusted historical
experience, of 14.7% for the three and nine months ended September 30, 2008.
F-20
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 5 - STOCK COMPENSATION PLANS (CONTINUED)
2007 SHARE INCENTIVE PLAN (CONTINUED)
The status of the options under the 2007 Plan is summarized below:
WEIGHTED AVERAGE
REMAINING
AVERAGE CONTRACTUAL AGGREGATE
SHARES PRICE TERM (YEARS) INTRINSIC VALUE
----------- ----------- ----------- -----------
Outstanding at December 31, 2007 1,338,000 $ 1.71
Granted 76,836 $ 1.44
Forfeited (75,670) $ 1.71 $ --
-----------
Outstanding at September 30, 2008 1,339,166 $ 1.69 8.8 $ --
===========
Exercisable at September 30, 2008 417,120 $ 1.69 8.8
===========
Vested and expected to vest after
September 30, 2008 621,491 $ 1.69 8.8 $ --
===========
|
The weighted average grant-date fair value of options granted during the three
and nine months ended September 30, 2008 was $0.60 and $0.63, respectively. As
of September 30, 2008, a total of 660,834 common shares were available for
future grants under the Company's 2007 Plan.
The share based compensation expense for the three months ended September 30,
2008 and 2007 was $44,000 and $52,000, respectively, and $138,000 and $60,000
for the nine months ended September 30, 2008 and 2007, respectively. For the
three and nine months ended September 30, 2008, share-based compensation expense
totaling $32,000 and $100,000 was included in selling, general and
administrative expenses, respectively, $7,000 and $21,000 was included in
research and development expenses, respectively, and $5,000 and $17,000 was
included in cost of sales, respectively. As of September 30, 2008, there was
$340,000 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 1.6 years.
F-21
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
LITIGATION
During the year ended December 31, 2006, the Company entered into a legal
dispute with its co-landlord, who is the former spouse of the chairman and
significant shareholder of the Company, of its current facility regarding the
Company's potential liability for capital repairs. 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. On July
22, 2008, the court appointed a referee to sell the property on which the
Company's corporate headquarters are located. As required by the court, the
parties met with the referee on August 1, 2008 to discuss whether the property
can be sold by one party to the other. The parties were unable to agree on the
sale of the property at that meeting. Because the sale of the property by one
party to the other was not negotiated by August 15, 2008, the referee was
ordered to engage a real estate broker by no later than September 15, 2008 for
the purpose of selling the property. As of November 10, 2008, the sale of the
property by one party to the other had not been negotiated and a real estate
broker had not been engaged. Management believes that a real estate broker will
be engaged to place the property on the market in the near future. 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 one of the current
landlords will ultimately buy out the other, management and a committee
consisting of disinterested members of the Company's board of directors is
exploring opportunities to secure a long term lease with the current owners of
the property that will carry-over to any potential new owner.
On or about August 15, 2006, a complaint was filed in the Commonwealth of
Massachusetts Superior Court against R. H. Strasbaugh alleging negligence and
breach of implied warranty. The claimant alleges that he was injured while using
a product the Company designed, manufactured and sold to his employer. The
claimant demands a judgment in an amount sufficient to compensate him for his
losses and damages but does not allege with specificity his injuries or the
relief sought.
As of the date of these condensed consolidated financial statements, management
is unable to reasonably estimate a potential range of loss and, further,
believes that the possibility of any payment is remote. The Company's insurance
carrier has assumed the defense of this action.
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 $92,000 and $197,000 for the three and nine
month periods ended September 30, 2008, respectively.
F-22
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 7 - CONDITIONALLY REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK
SERIES A PREFERRED STOCK FINANCING
On May 24, 2007, immediately after the closing of the Share Exchange
Transaction, the Company entered into an agreement with 21 accredited investors
for the sale by it in a private offering of 5,909,089 shares of its Series A
Preferred Stock at a purchase price of $2.20 per share for gross proceeds of
$13,000,000.
The Series A Preferred Stock ranks senior in liquidation and dividend
preferences to the Company's common stock. Holders of the Series A Preferred
Stock are entitled to semi-annual cumulative dividends payable in arrears in
cash in an amount equal to 8% of the purchase price per share of the Series A
Preferred Stock. Each share of Series A Preferred Stock is convertible by the
holder at any time after its initial issuance at an initial conversion price of
$2.20 per share such that one share of common stock would be issued for each
share of Series A Preferred Stock. Subject to certain exceptions, the conversion
ratio is subject to customary antidilution adjustments 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, 2008, 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,
2008, 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.
F-23
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 8 - 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. The Company anticipates that it will
have sufficient cash available to pay these liquidated damages, if required.
However, the Company will not be 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.
In December 2006, the FASB issued FSP EITF Issue No. 00-19-2, "Accounting for
Registration Payment Arrangements." This FSP specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate agreement or
included as a provision of a financial instrument or other agreement, should be
separately recognized and measured in accordance with SFAS No. 5, "Accounting
for Contingencies."
In accordance with FSP EITF Issue No. 00-19-2, on the date of the private
offering the Company reviewed the terms of the registration rights agreements,
and as of that date, management believed that the Company would meet all of the
required deadlines under the agreement. However, as of September 30, 2008,
management believes it is probable that penalties under the agreement will be
incurred and believes the accrual of $290,000 of expense related to the
Company's registration rights agreement is reasonable as calculated based on the
terms of the agreement and the number of shares included in the latest
registration statement filing. Management is unable to determine if any
additional penalties may be incurred under the terms of the registration rights
agreement due to the restrictions imposed upon the Company by the SEC relating
to Rule 415 under the Securities Act.
F-24
STRASBAUGH AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 9 - INCOME TAXES
The Company estimates its income tax expense for interim periods using an
estimated annual effective tax rate. There was $0 tax expense for the three and
nine months ended September 30, 2008 due to net operating losses. Tax expense
for the three and nine month periods ended September 30, 2007 resulted primarily
from foreign taxes paid. 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 $26,005,000 and $8,505,000, respectively, at September 30, 2008,
which will begin to expire in 2019 for federal purposes. Annual utilization of
the federal net operating loss carryforward may be limited for federal tax
purposes as a result of an Internal Revenue Code Section 382 change in ownership
rules. The state net operating loss carryforwards expire at various dates
through 2013. Included in the balance at September 30, 2008, 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,
2008, 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 or nine month periods ended September 30, 2008.
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, 2008.
F-25
Strasbaugh (CE) (USOTC:STRB)
Gráfico Histórico do Ativo
De Jan 2025 até Fev 2025
Strasbaugh (CE) (USOTC:STRB)
Gráfico Histórico do Ativo
De Fev 2024 até Fev 2025
