UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
SIMTEK CORPORATION
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(Exact name small business issuer as specified in its charter)
Colorado 84-1057605
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4250 Buckingham Dr. #100; Colorado Springs, CO 80907
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(Address of principal executive offices)
(719) 531-9444
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(issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at October 29, 2004
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(Common Stock, $.01 par value) 62,863,346
SIMTEK CORPORATION
INDEX
For Quarter Ended September 30, 2004
PART 1. FINANCIAL INFORMATION
Page
----
ITEM 1
Condensed Consolidated Balance Sheets as of September 30, 2004
and December 31, 2003 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6-8
ITEM 2
Management's Discussion and Analysis of Results of
Operations and Financial Condition 9-17
ITEM 3 Controls and Procedures 18
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings 19
ITEM 2 Changes in Securities 19
ITEM 3 Defaults upon Senior Securities 19
ITEM 4 Matters Submitted to a Vote of Securities Holders 19
ITEM 5 Other Information 19
ITEM 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
SIMTEK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
September 30, 2004 December 31, 2003
------------------ -----------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 1,705,387 $ 3,431,679
Certificate of deposit, restricted...................................... 300,000 300,000
Accounts receivable - trade, net........................................ 1,204,716 1,923,542
Inventory, net ........................................................ 1,295,013 1,201,432
Prepaid expenses and other.............................................. 107,560 129,554
----------- -----------
Total current assets................................................ 4,612,676 6,986,207
EQUIPMENT AND FURNITURE, net............................................... 819,955 862,009
DEFERRED FINANCING COSTS................................................... 78,833 91,280
OTHER ASSETS............................................................... 39,720 58,291
----------- -----------
TOTAL ASSETS............................................................... $ 5,551,184 $ 7,997,787
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable ...................................................... $ 1,903,905 $ 1,038,634
Accrued expenses........................................................ 313,832 390,079
Accrued wages........................................................... 19,011 -
Line of credit ........................................................ - 150,000
Accrued vacation payable................................................ 211,902 179,580
Obligation under capital leases......................................... 49,927 123,585
----------- -----------
Total current liabilities........................................... 2,498,577 1,881,878
NOTES PAYABLE.............................................................. - 5,000
DEBENTURES................................................................ 3,000,000 3,000,000
OBLIGATION UNDER CAPITAL LEASES............................................ 25,856 61,221
----------- -----------
Total liabilities................................................... 5,524,433 4,948,099
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 2,000,000 shares
authorized and none issued and outstanding ........................ - -
Common stock, $.01 par value, 300,000,000 shares authorized,
57,703,387 and 56,713,352 shares issued and outstanding
at September 30, 2004 and December 31, 2003, respectively........... 577,034 567,134
Additional paid-in capital.............................................. 39,576,270 39,230,210
Treasury Stock.......................................................... (12,504) (12,504)
Accumulated deficit..................................................... (40,114,049) (36,735,152)
----------- -----------
Shareholders' equity.................................................... 26,751 3,049,688
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................ $ 5,551,184 $ 7,997,787
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
SIMTEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
---- ---- ---- ----
NET SALES............................................ $ 2,877,575 $ 3,422,039 $10,381,210 $10,777,139
Cost of sales.................................. 2,123,753 2,303,117 7,101,323 7,223,644
----------- ----------- ----------- -----------
GROSS MARGIN......................................... 753,822 1,118,922 3,279,887 3,553,495
OPERATING EXPENSES:
Design, research and development................ 1,448,876 985,755 4,249,136 3,468,898
Administrative.................................. 226,768 216,749 833,428 692,647
Marketing....................................... 435,568 380,105 1,410,089 1,200,432
----------- ----------- ----------- -----------
Total Operating Expenses.................... 2,111,212 1,582,609 6,492,653 5,361,977
NET LOSS FROM OPERATIONS............................. (1,357,390) (463,687) (3,212,766) (1,808,482)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income................................. 5,655 5,177 19,178 22,613
Interest expense................................ (58,889) (64,724) (179,357) (189,360)
Other income (expense), net..................... (887) 10,092 (5,952) 8,699
----------- ----------- ----------- -----------
Total other income (expense)................ (54,121) (49,455) (166,131) (158,048)
----------- ----------- ----------- -----------
LOSS BEFORE TAXES.................................... (1,411,511) (513,142) (3,378,897) (1,966,530)
Provision for income taxes...................... - - - -
----------- ----------- ----------- -----------
NET LOSS............................................. $(1,411,511) $ (513,142) $(3,378,897) $(1,966,530)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE:
Basic and diluted EPS.......................... $ (.02) $ (.01) $ (.06) $ (.04)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic and diluted.............................. 57,703,387 54,648,069 57,375,272 54,510,142
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SIMTEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30,
-------------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................... $(3,378,897) $(1,966,530)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................. 356,344 361,271
Net change in allowance and reserve accounts.................. 33,124 988
Deferred financing fees....................................... 12,447 12,447
Loss on disposal of assets.................................... 75,110 -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable....................................... 706,115 692,510
Inventory................................................. (103,754) (166,239)
Prepaid expenses and other .............................. 21,994 113,320
Increase (decrease) in:
Accounts payable.......................................... 865,271 (390,351)
Accrued expenses.......................................... (40,151) 137,878
Deferred revenue.......................................... - (40,500)
----------- -----------
Net cash used in operating activities............................ (1,452,397) (1,245,206)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture ............................... (370,831) (402,795)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable and lines of credit..................... - 250,000
Payments on notes payable and lines of credit....................... (150,000) (47)
Payments on capital lease obligation................................ (109,024) (111,187)
Exercise of stock options........................................... 355,960 150,703
----------- -----------
Net cash provided by financing activities........................... 96,936 289,469
----------- -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS........................................................ (1,726,292) (1,358,532)
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of period........................... 3,431,679 3,127,732
----------- -----------
CASH AND CASH EQUIVALENTS, end of period................................. $ 1,705,387 $ 1,769,200
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Purchase of equipment through payables and capital leases........... $ - $ 144,160
=========== ===========
Cash paid for interest.............................................. $ 179,357 $ 188,447
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The financial statements included herein are presented in accordance with
the requirements of Form 10-QSB and consequently do not include all of the
disclosures normally made in the registrant's annual Form 10-KSB filing. These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included the Annual Report and Form
10-KSB for Simtek Corporation ("Simtek" or the "Company") filed on March 4, 2004
for fiscal year 2003.
In the opinion of management, the unaudited financial statements reflect
all adjustments of a normal recurring nature necessary to present a fair
statement of the results of operations for the respective interim periods. The
year-end balance sheet data was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally
accepted in the United States of America. Results of operations for the interim
periods are not necessarily indicative of the results of operations for the full
fiscal year.
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock options which are granted to its employees.
Accordingly, no compensation cost has been recognized for grants of options to
employees since the exercise prices were not less than the market value of the
Company's common stock on the grant dates. Had compensation cost been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of the fair value approach, the Company's net loss
and Earnings Per Share ("EPS") would have been adjusted to the pro forma amounts
indicated below.
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss as reported $(1,411,511) $ (513,142) $(3,378,897) $(1,966,530)
Add: stock based compensation
included in reported net loss - - - -
Deduct: Stock-based compensation
cost under the fair value approach (208,621) (130,018) (625,864) (390,055)
----------- ----------- ----------- -----------
Pro Forma net loss $(1,620,132) $ (643,160) $(4,004,761) $(2,356,585)
=========== =========== =========== ===========
Pro forma basic and diluted net loss per share:
Pro forma shares used in the
calculation of pro forma net loss
per common share basic and diluted 57,703,387 54,648,069 57,375,272 54,510,142
Reported net loss per common
share basic and diluted $ (.02) $ (.01) $ (.06) $ (.04)
Pro forma net loss per common
share basic and diluted $ (.03) $ (.01) $ (.07) $ (.04)
6
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. LINE OF CREDIT:
In April 2004, Simtek renewed its revolving line of credit in the amount of
$250,000 on the existing terms of such line of credit. In September, 2004,
Simtek's revolving line of credit was canceled.
3. CONVERTIBLE DEBENTURES:
On July 1, 2002, the Company received $3,000,000 in a financing transaction
with BFSUS Special Opportunities Trust Plc, Renaissance US Growth & Investment
Trust Plc and Renaissance Capital Growth & Income Fund III, Inc (collectively,
"RENN Capital") pursuant to a Convertible Loan Agreement. RENN Capital is the
agent for the three investment funds. One of the Company's directors, Mr. Robert
Pearson, holds the position of Senior Vice President of RENN Capital. The
$3,000,000 funding consists of convertible debentures with a 7-year term at a
7.5% per annum interest rate; each of the three investment funds invested
$1,000,000. The holder of the debentures has the right, at any time, to convert
all, or in multiples of $100,000, any part of the debenture into fully paid and
nonassessable shares of the Company's common stock. The debentures are
convertible into the Company's common stock at $0.312 per share, which was in
excess of the market price per share on July 1, 2002. Based on the conversion
rate of $0.312 per share, it would entitle each investment fund to 3,205,128
shares of the Company's outstanding common stock. Through September 30, 2004,
the Company was not in compliance with two of the covenants set forth in the
loan agreement which covenants relate to the interest coverage ratio and debt to
equity ratio. On October 28, 2004, the Company received a waiver for the two
covenants through October 1, 2005. However, significant variances in future
actual operations from the Company's current estimates could result in the
reclassification of this note to current liabilities.
4. GEOGRAPHIC CONCENTRATION:
Sales of the Company's semiconductor products by location for the three
months and nine months ended September 30, 2004 and 2003 were as follows (as a
percentage of semiconductor product sales only):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
United States 34% 34% 33% 37%
Europe 9% 11% 10% 12%
Far East 51% 50% 46% 45%
All others 6% 5% 11% 6%
---- ---- ---- ----
100% 100% 100% 100%
5. BUSINESS SEGMENTS:
The Company has two reportable segments. One segment designs and produces
semiconductor devices for sale into the semiconductor market. The second segment
specializes in advanced technology research and development for data
acquisition, signal processing, imaging and data communications that is
supported by government and commercial contracts. Although both segments are
managed as part of an integrated enterprise, they are reported herein in a
manner consistent with the internal reports prepared for management.
7
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Transactions between reportable segments are recorded at cost.
Substantially all operating expenses are identified per each segment.
Substantially all of the Company's assets are located in the United States of
America.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Description
Net Sales:
Semiconductor Devices $ 2,445,916 $2,858,818 $ 9,067,197 $ 9,191,114
Government Contracts 431,659 563,221 1,314,013 1,586,025
----------- ---------- ----------- ----------
Total $ 2,877,575 $3,422,039 $10,381,210 $10,777,139
Net Profit (loss):
Semiconductor Devices $ (1,512,991) $ (530,570) $(3,424,480) $(1,912,800)
Government Contracts 101,480 17,428 45,583 (53,730)
------------ ---------- ----------- ----------
Total $ (1,411,511) $ (513,142) $(3,378,897) $(1,966,530)
September 30, 2004 December 31, 2003
------------------ -----------------
Total Assets:
Semiconductor Devices $4,916,265 $7,302,828
Government Contracts 634,919 694,959
---------- ----------
Total $5,551,184 7,997,787
6. SUBSEQUENT EVENTS:
On October 12, 2004, the Company closed a $2,500,000 equity financing with
three separate investment funds, SF Capital Partners, Ltd., Bluegrass Growth
Fund LP and Bluegrass Growth Fund LTD. In exchange for the $2,500,000, the
Company issued 4,127,967 shares of its common stock to SF Capital Partners, Ltd,
515,996 shares of its common stock to Bluegrass Growth Fund LP and 515,996
shares of its common stock to Bluegrass Growth Fund LTD. The purchase price was
based on a 15% discount to the closing price of the Company's common stock as
reported on the Over-the-Counter Bulletin Board on October 11, 2004, resulting
in a price of $0.4845 per share. In addition to the shares of common stock, SF
Capital Partners Ltd., Bluegrass Growth Fund LP, and Bluegrass Growth Fund LTD
received warrants to acquire 2,063,984, 257,998, and 257,998 shares of the
Company's common stock, respectively. The warrants have a 5-year term with an
exercise price of $0.627 per share. Merriman Curhan Ford & Co., the placement
agent for the $2,500,000 equity financing received a cash payment of $187,500
and warrants to acquire 386,997 shares of the Company's common stock.
8
SIMTEK CORPORATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
OVERVIEW
The Company has seen a decrease in unit shipments for the three months
ended September 30, 2004 as compared to the three months ended September 30,
2003. Unit shipments for the nine months ended September 30, 2004 as compared to
the nine months ended September 30, 2003 saw a slight increase. The decrease in
unit shipments for the three month period was due to a decrease in product
availability, due primarily to the Company's transition from its long term wafer
fabrication facility to a new wafer fabrication facility. The Company's net
revenue was $2,900,000 for the three months ended September 30, 2004 down from
the $3,400,000 for the comparable period of 2003. This decrease was due
primarily to decreased product availability and an approximate 30% decrease in
revenue from the research and development contracts portion of the Company's
business. The Company's net revenue was $10,400,000 for the nine months ended
September 30, 2004 as compared to $10,800,000 for the comparable period of 2003.
The decrease in revenue was due to the elimination of revenue from the Company's
logic products and an approximate 21% decrease in revenue from the research and
development contacts portion of the Company's business. The loss of revenue from
the Company's logic products was offset by an increase in revenue from the
Company's high end industrial and military products. The loss of revenue from
the Company's logic products was a result of the Company's decision to
discontinue this product line at the end of 2003. The decrease of revenue for
the three and nine month periods ending September 30, 2004 as compared to the
same periods in 2003 was the result of a decrease in billable labor and a
decrease in materials billed against certain government contracts and an
increase in research and development expenditures committed to internal product
developments.
Increased operating expenses had an impact on the Company's profitability
for the three and nine months ended September 30, 2004 compared to the three and
nine months ended September 30, 2003.
RESULTS OF OPERATIONS:
REVENUES - SEMICONDUCTOR DEVICES.
The following table sets forth the Company's net revenues by product
markets for the three and nine months ended September 30, 2004 and 2003 (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 Variance 2004 2003 Variance
---- ---- -------- ---- ---- --------
Commercial $1,836 $2,243 $ (407) $7,243 $7,344 $(101)
High-end industrial
and military $ 610 $ 424 $ 186 $1,824 $1,240 $ 584
Logic products $ - $ 192 $ (192) $ - $ 607 $(607)
------ ------ ------- ------ ------ -----
Total Semiconductor
Revenue $2,446 $2,859 $ (413) $9,067 $9,191 $(124)
Commercial revenues decreased by $407,000 and $101,000 for the three and
nine months ended September 30, 2004, respectively, when compared to the
comparable periods in 2003. The decreases for the three and nine month periods
were due to a decrease in product availability of the Company's commercial
nonvolatile semiconductor memory products.
9
SIMTEK CORPORATION
High-end industrial and military product revenues increased by $186,000 and
$584,000 for the three and nine months ended September 30, 2004, respectively,
when compared to the comparable periods in 2003. The increase was primarily due
to completing shipments of the Company's nonvolatile semiconductor memory
products against on-going military contracts.
Revenues from the Company's logic products decreased by $192,000 and
$607,000 for the three and nine months ended September 30, 2004 as compared to
2003, respectively. The decreases were due to a reduction in demand for this
product and the Company's decision to eliminate this product line effective
December 31, 2003.
Two distributors and two direct customers accounted for approximately 50%
of the Company's semiconductor device product sales for the quarter ended
September 30, 2004. Products sold to distributors are re-sold to various end
customers.
COST OF SALES AND GROSS MARGIN - SEMICONDUCTOR DEVICES
The Company recorded cost of sales for semiconductor devices of $1,950,000
and $6,441,000 for the three and nine months ended September 30, 2004 as
compared with the $1,984,000 and $6,391,000 for the three and nine months ended
September 30, 2003. These costs reflect an approximate 10% and 2% decrease in
gross profit margin percentages for the third quarter and nine months ended
September 30, 2004 as compared to the third quarter and nine months ended
September 30, 2003. Actual gross profit margin percentages for the third quarter
and nine month periods ending September 30, 2004 were 20% and 29%, respectively.
The decreases in gross margin percentages for the three and nine month periods
were due to an increase in production costs.
The Company purchased all of its silicon wafers to produce its 0.8 micron
nonvolatile static random access memory products from a single supplier,
Chartered Semiconductor Manufacturing Plc. ("Chartered") of Singapore to support
sales of its nonvolatile semiconductor memory products. Sales of products built
on these wafers accounted for approximately 97% of the Company's semiconductor
product revenue for each of the three and nine month periods ending September
30, 2004. The Company purchased its silicon wafers to produce its 1 megabit
nonvolatile static random access memory products built on 0.25 micron technology
from Dongbu Anam Semiconductor. Sales of the 1 megabit semiconductor products
built on these wafers accounted for approximately 3% of the Company's
semiconductor product revenue for each of the three and nine month periods ended
September 30, 2004.
The Company had an agreement with Chartered to provide wafers through
September 1998. Although Chartered continues to provide the Company wafers under
the terms defined in this contract the Company does not have a current signed
agreement with Chartered. In March 2004, Chartered closed its wafer fabrication
facility #1 where the Company's memory wafers were manufactured. The Company
received its final shipments from Chartered's facility #1 at the end of March
2004. The Company has been working with Chartered to transfer the process of the
manufacturing of its memory wafers to Chartered's facility #2. The Company began
receiving its memory wafers manufactured in Facility #2 in the late second
quarter of 2004 and through the third quarter 2004. However, with this process
being transferred to an alternative manufacturing facility, the Company has seen
lower than average production yields, which in turn has lowered its gross
margins. The Company is continuing to work with Chartered to improve its
production yields. If the Company cannot improve its production yields, it will
have a material negative impact on the Company's future revenues and earnings.
Through the middle of the third quarter of 2004, the Company was engaged
with X-FAB Texas, Inc. ("X-FAB") of Texas to install the Company's nonvolatile
semiconductor memory process. Due to a lack of the Company's and X-FAB's
10
SIMTEK CORPORATION
resources required to install the Company's nonvolatile semiconductor memory
process into X-FAB and the marginal anticipated return-on-investment, the
Company ceased the installation of its nonvolatile semiconductor memory process
into X-FAB's wafer fabrication facility in August 2004.
RESEARCH AND DEVELOPMENT - SEMICONDUCTOR DEVICES
The Company believes that continued investments into new product
development are required for us to remain competitive in the markets we serve.
Beginning in the fourth quarter 2001, the Company's research and development
department has been focusing its efforts on developing a 3 volt 256 kilobit
nonvolatile semiconductor memory and the installation of the Company's process
at Dongbu Anam Semiconductor for the development of a 1 megabit 3 volt
nonvolatile semiconductor memory. During the first nine months of 2004, the
Company continued to see increased demand for its 3 volt 256 kilobit nonvolatile
semiconductor memories. Development of the 1 megabit 3 volt nonvolatile
semiconductor memory is continuing and the Company began shipping samples of its
1 megabit 3 volt nonvolatile semiconductor during the third quarter of 2003.
During the third quarter of 2004, the Company began receiving initial production
orders. Sales of the Company's 1 megabit 3 volt products accounted for
approximately 3% of the Company's revenue for the three and nine months ended
September 30, 2004.
Research and development expenses for the three and nine month periods
ending September 30, 2004 have been directly related to the development and
qualification of the Company's family of 0.25 micron nonvolatile semiconductor
memory products at Dongbu Anam Semiconductor, the transfer of the Company's 3
volt 256 kilobit nonvolatile semiconductor memory into Chartered's facility #2,
and the transfer of the Company's 5 volt 64 kilobit and 256 kilobit nonvolatile
semiconductor memory products into Chartered's facility #2 and into X-FAB. In
August 2004, the Company stopped its transfer of the Company's 5 volt 64 kilobit
and 5 volt 256 kilobit nonvolatile semiconductor memory into X-FAB. The Company
qualified and began shipping its 3 volt 256 kilobit nonvolatile semiconductor
memory product built on silicon wafers received from Chartered's facility #2 in
the third quarter of 2004. The Company began shipping its 5 volt 256 kilobit
nonvolatile semiconductor memory products, tested to production requirements on
a provisional qualification, built on silicon wafers received from Chartered's
facility #2 in the third quarter of 2004. The Company's research and development
activities related to the 3 volt 256 kilobit nonvolatile semiconductor memory
product have been redirected to yield improvement. The Company anticipates that
qualification of the 0.25 micron nonvolatile semiconductor memory products from
Dongbu Anam Semiconductor and the 5 volt 64 kilobit and 5 volt 256 kilobit
nonvolatile semiconductor memory products from Chartered's facility #2 will be
completed early in the fourth quarter of 2004. While the qualification of these
products is nearing completion, the Company's research and development
activities have begun focusing more of its efforts on yield improvements of its
0.25 micron product family and 5 volt 64 kilobit and 5 volt 256 kilobit
nonvolatile semiconductor product family memory products, enhancements to the 1
megabit 3 volt product family, and development of its next-generation 0.18
micron nonvolatile memory process.
Total research and development expenses related to the semiconductor
portion of the Company's business were $1,397,000 and $3,999,000 for the three
and nine months ended September 30, 2004 compared to $917,000 and $3,037,000 for
the three and nine months ended September 30, 2003.
The $480,000 increase in research and development expenses for the three
month period was related to increases in payroll and payroll overhead costs of
$84,000, product development costs of $334,000, equipment leases, maintenance
agreements for software and depreciation of $44,000, qualification costs of
$9,000 and miscellaneous expenses of $9,000. The increase of $962,000 for the
nine month period was related to the net between increases in payroll and
payroll costs of $193,000, product development costs of $908,000, qualification
costs of $19,000 and a decrease in contract engineering services of $158,000.
The primary increase in payroll costs is related to an increase in employee
headcount which is required to meet production schedules of the Company's new
products. The primary increase in product development costs was due to an
increase in silicon wafer purchases, reticles, assembly and testing of the
Company's 1 megabit products from Dongbu Anam Semiconductor, 64 kilobit and 256
11
SIMTEK CORPORATION
kilobit products from X-FAB and 64 kilobit and 256 kilobit products from
Chartered's wafer fabrication facility #2 and an increase in costs related to
the commercial development of datacomm products performed by the Company's Q-DOT
subsidiary. The increase in product development costs included a one-time write
off of capital purchases, of approximately $61,000, related to the development
at X-FAB that ended in August 2004. The increase of $44,000 in equipment leases,
maintenance agreements for software and depreciation for the three month period
was due primarily to the renewal of maintenance agreements for software.
ADMINISTRATION - SEMICONDUCTOR DEVICES
Total administration expenses related to the semiconductor portion of the
Company's business were $198,000 and $729,000 for the three and nine months
ended September 30, 2004 as compared to the $170,000 and $579,000 for the three
and nine months ended September 30, 2003.
The $28,000 increase for the three month period was due to increases in
accounting and legal fees of $9,000, professional services of $12,000 and
payroll and payroll overhead costs of $7,000. The $150,000 increase for the nine
month period was due to increases in accounting and legal fees of $45,000,
professional fees of $57,000, costs associated with the Company's annual meeting
of shareholder's of $47,000 and other miscellaneous expenses including travel of
$21,000 and a decrease in payroll and payroll overhead costs of $20,000. The
increases in legal fees were primarily related to costs incurred in relation to
the Company's annual meeting of shareholders and increased legal fees related to
the Company's registration statements on Form SB-2 that the Company is
contractually obligated to file with the Securities and Exchange Commission. The
increase in professional services was primarily due to an increase in fees paid
to the Company's Board of Directors and fees paid for financial consulting. The
increases in accounting fees were due to increased audit fees related to the
Company's registration statements on Form SB-2.
MARKETING - SEMICONDUCTOR DEVICES
Total marketing expenses related to the semiconductor portion of the
Company's business were $359,000 and $1,161,000 for the three and nine months
ended September 30, 2004 as compared to the $270,000 and $941,000 for the three
and nine months ended September 30, 2003.
The $89,000 increase for the three month period ended September 30, 2004 as
compared to September 30, 2003 was due primarily to increases in payroll and
payroll related costs of $72,000, travel and other miscellaneous expenses of
$8,000 and advertising expenses of $13,000, offset by a decrease in sales
commissions of $4,000. The increase of $220,000 for the nine month period ended
September 30, 2004 as compared to September 30, 2003 was due to increases in
payroll and payroll related costs of $172,000, advertising expenses of $40,000
and travel and other miscellaneous expenses of $26,000, offset by a decrease in
sales commissions of $18,000. The increase in payroll and payroll overhead costs
was a result of increased headcount.
NET LOSS - SEMICONDUCTOR DEVICES
The Company recorded a net loss of $1,513,000 and $3,424,000 for the three
and nine months ended September 30, 2004 as compared to a net loss of $530,000
and $1,913,000 for the three and nine months ended September 30, 2003. The
increase in net loss for the three month period was due primarily to decreased
revenue, decreased gross margins and increased operating expenses. The decreased
revenue was a direct result of product availability and the increase in
operating expenses was primarily related to increased research and development
expenses. The increase in net loss for the nine month period was due primarily
to increased operating expenses which were primarily related to research and
development expenses.
REVENUES - GOVERNMENT CONTRACTS
The following table sets forth the Company's net revenues from its
government contracts portion of its business for the three and nine months ended
September 30, 2004 and 2003 (in thousands):
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SIMTEK CORPORATION
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 Variance 2004 2003 Variance
---- ---- -------- ---- ---- --------
Government Contracts $ 432 $ 563 $ (131) $1,314 $1,586 $ (272)
The decrease of revenue for the three and nine month periods ending
September 30, 2004 as compared to the same periods in 2003 was the result of a
decrease in billable labor and a decrease in materials billed against certain
government contracts and an increase in research and development expenditures
committed to internal product developments.
COST OF SALES AND GROSS MARGIN - GOVERNMENT CONTRACTS
The cost of sales for the government contracts portion of the Company's
business was $174,000 and $660,000 for the three and nine months ended September
30, 2004 as compared to the $319,000 and $833,000 for the same periods in 2003.
This was equivalent to gross margin percentages of 60% and 50% for the three and
nine months ended September 30, 2004 as compared to gross margin percentages of
43% and 47% for the same periods in 2003. The increases in gross margin
percentages for the three and nine month periods were primarily due to a
decrease in direct labor, materials and services.
RESEARCH AND DEVELOPMENT - GOVERNMENT CONTRACTS
Total research and development expenses related to the government contracts
portion of the Company's business were $52,000 and $250,000 for the three and
nine months ended September 30, 2004 compared to $69,000 and $432,000 for the
three and nine months ended September 30, 2003.
The $17,000 decrease in research and development expenses for the three
months ended September 30, 2004 as compared to the same period in 2003 was
related to increases of $13,000 in employment related expenses and $26,000
related to equipment and software maintenance and a decrease of $56,000 of
overhead costs that were transferred to the semiconductor portion of the
business. The $182,000 decrease for the nine month period ending September 30,
2004 as compared to the same period in 2003 was related to decreases of $15,000
in employment related expenses, $25,000 in software maintenance contracts and
equipment leases, $8,000 in miscellaneous expenses and $134,000 of overhead
costs that were transferred to the semiconductor portion of the business. The
overhead costs that were transferred to the semiconductor portion of the
business were related to the labor associated with the commercial development of
datacomm products.
ADMINISTRATION - GOVERNMENT CONTRACTS
Total administration expenses related to the government contracts portion
of the Company's business were $29,000 and $104,000 for the three and nine
months ended September 30, 2004 as compared to the $47,000 and $114,000 for the
three and nine months ended September 30, 2003.
The $18,000 decrease in administration expenses for the three month period
was due to decreases of $5,000 in employee related expenses and a $13,000 in
overhead costs that were transferred to the semiconductor portion of the
business. The $10,000 decrease in administration expenses for the nine month
period was due to an increase in employee related expenses of $10,000 and
miscellaneous expenses of $5,000 which were offset by a decrease of $25,000 in
overhead costs that were transferred to the semiconductor portion of the
business. The overhead costs that were transferred to the semiconductor portion
of the business were related to the labor associated with the commercial
development of datacomm products.
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SIMTEK CORPORATION
MARKETING - GOVERNMENT CONTRACTS
Total marketing expenses related to the government contracts portion of the
Company's business were $77,000 and $249,000 for the three and nine months ended
September 30, 2004 as compared to the $110,000 and $259,000 for the three and
nine months ended September 30, 2003.
The decrease of $33,000 in marketing expenses for the three months ended
September 30, 2004 as compared to the same period in 2003 was related to a
decrease of $23,000 in employment related expenses and a $10,000 decrease of
overhead costs that were transferred to the semiconductor portion of the
business. The $10,000 decrease for the nine months ended September 30, 2004 as
compared to the same period in 2003 was related to increases in bid and proposal
labor of $15,000 and travel expenses of $5,000 which were offset by $25,000 of
overhead costs that were transferred to the semiconductor portion of the
business. The overhead costs that were transferred to the semiconductor portion
of the business were related to the labor associated with the commercial
development of datacomm products.
NET INCOME (LOSS) - GOVERNMENT CONTRACTS
The Company recorded a net income of $101,000 and $45,000 for the three and
nine months ended September 30, 2004 as compared to a net income of $17,000 and
a net loss of $54,000 for the three and nine months ended September 30, 2003.
The increase in net income for the three and nine month periods ending September
30, 2004 was primarily due to a decrease in operating expenses.
FUTURE RESULTS OF OPERATIONS
The Company's ability to be profitable will depend primarily on its ability
to continue reducing manufacturing costs and increasing net product sales by
increasing the availability of existing products, by the introduction of new
products and by expanding its customer base. The Company is also dependent on
the overall state of semiconductor industry and the demand for semiconductor
products by equipment manufacturers.
The Company is continuing its co-development program with Dongbu Anam
Semiconductor to develop a semiconductor process module that combines the
Company's nonvolatile technology with Anam's advanced 0.25 micron digital CMOS
fabrication line. The module incorporates silicon oxide nitride oxide silicon
("SONOS") technology, which will be used to manufacture both high density SONOS
flash and nonvolatile static random access memories, for stand alone and
embedded products. The Company began shipping samples of its new 1 megabit 3
volt nonvolatile semiconductor memory product in September 2003. During the
third quarter of 2004, the Company began receiving initial production orders.
The Company is currently shipping 1 megabit products tested to production
requirements on a provisional qualification and plan to have qualification
complete early in the fourth quarter of 2004. The Company cannot assure you that
the Company will not discover technical problems or manufacturing concerns with
this new product, that demand will develop for the new product or that we will
be able to sell this new product at a profit.
As of September 30, 2004, the Company had a backlog of unshipped customer
orders of approximately $3,238,000 expected to be filled by March 31, 2005.
Orders are cancelable without penalty at the option of the purchaser prior to 30
days before scheduled shipment and therefore are not necessarily a measure of
future product revenue.
Chartered closed its wafer fabrication facility #1 in March 2004. The
Company has purchased silicon wafers, the raw materials used to produce its
nonvolatile semiconductor memory products, from fabrication facility #1. The
Company has been working with Chartered to transfer the manufacturing process of
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SIMTEK CORPORATION
its memory wafers to Chartered's facility #2. Chartered's facility #2 is newer
and more modern than its facility #1, processing 8 inch wafers rather than the
older 6 inch wafers that were processed in facility #1. The Company qualified
and began shipping its 3 volt 256 kilobit nonvolatile semiconductor memory
product built on silicon wafers received from Chartered's facility #2 in the
third quarter of 2004. The Company began shipping its 5 volt 256 kilobit
nonvolatile semiconductor memory products, tested to production requirements on
a provisional qualification, built on silicon wafers received from Chartered's
facility #2 in the third quarter of 2004. The Company's research and development
activities related to the 3 volt 256 kilobit nonvolatile semiconductor memory
product have been redirected to yield improvement. As of September 30, 2004, the
Company had received production wafers for its 64 kilobit nonvolatile
semiconductor memory products from Chartered's facility #2 suitable for customer
shipments. The Company believes it 64 kilobit and 5 volt 256 kilobit nonvolatile
semiconductor memory products will be qualified early in the fourth quarter of
2004. If production yields or wafer availability from Chartered's facility #2 do
not meet the Company's production requirements, this may have a material
negative impact on the Company's future revenues and earnings.
The Company anticipates that qualification of the 0.25 micron nonvolatile
semiconductor memory products from Dongbu Anam Semiconductor will be qualified
early in the fourth quarter of 2004.
Through the middle of the third quarter of 2004, the Company was engaged
with X-FAB to install the Company's nonvolatile semiconductor memory process.
Due to a lack of the Company's and X-FAB's resources required to install the
Company's nonvolatile semiconductor memory process into X-FAB and the marginal
anticipated return-on-investment, the Company ceased the installation of its
nonvolatile semiconductor memory process into X-FAB's wafer fabrication
facility in August 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, the Company had net working capital of $2,114,099
as compared to a net working capital of $840,850 as of September 30, 2003.
On October 12, 2004, the Company closed a $2,500,000 equity financing with
three separate investment funds, SF Capital Partners, Ltd., Bluegrass Growth
Fund LP and Bluegrass Growth Fund LTD. In exchange for the $2,500,000, the
Company issued 4,127,967 shares of its common stock to SF Capital Partners, Ltd,
515,996 shares of its common stock to Bluegrass Growth Fund LP and 515,996
shares of its common stock to Bluegrass Growth Fund LTD. The purchase price was
based on a 15% discount to the closing price of the Company's common stock as
reported on the Over-the-Counter Bulletin Board on October 11, 2004, resulting
in a price of $0.4845 per share. In addition to the shares of common stock, SF
Capital Partners Ltd., Bluegrass Growth Fund LP, and Bluegrass Growth Fund LTD
received warrants to acquire 2,063,984, 257,998, and 257,998 shares of the
Company's common stock, respectively. The warrants have a 5-year term with an
exercise price of $0.627 per share. Merriman Curhan Ford & Co., the placement
agent for the $2,500,000 equity financing received a cash payment of $187,500
and warrants to acquire 386,997 shares of the Company's common stock.
On November 7, 2003, the Company closed a $1,500,000 equity financing with
RENN Capital. In exchange for the $1,500,000, the Company issued 550,661 shares
of its common stock to each of the three investment funds for a total of
1,651,982 shares of the Company's common stock. The purchase price was based on
the average closing price of the Company's common stock as reported on the
Over-the-Counter Bulletin Board over the five trading days before closing, which
average closing price was $0.908 per share. In addition to the shares of common
stock, each fund received warrants to acquire 250,000 shares of the Company's
common stock. The warrants have a 5-year term with 125,000 shares being
exercisable at $1.25 per share and 125,000 shares being exercisable at $1.50 per
share.
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SIMTEK CORPORATION
On July 1, 2002, the Company received $3,000,000 in a financing transaction
with RENN Capital pursuant to a Convertible Loan Agreement. One of the Company's
directors holds the position of Senior Vice President of RENN Capital Group.
Through September 30, 2004, the Company was not in compliance with two of the
covenants set forth in the loan agreement which covenants relate to the interest
coverage ratio and debt to equity ratio. On October 28, 2004, the Company
received a waiver for the two covenants through October 1, 2005. However,
significant variances in future actual operations from the Company's current
estimates could result in the reclassification of this note to current
liabilities.
The change in cash flows for the nine months ended September 30, 2004 used
in operating activities was primarily a result of a net loss of $3,378,897,
which is offset by $356,344 in depreciation and amortization, decreases in
accounts receivable, prepaid expenses and accrued expenses of $706,115, $21,994
and $40,151, respectively and increases in allowance accounts, loss on disposal
of assets, inventory and accounts payable of $33,124, $75,110, $103,754 and
$865,271, respectively. The decrease of $706,115 in accounts receivable was
directly related to the decrease in revenue for the third quarter of 2004. The
$865,271 increase in accounts payable was due to the receipt of raw materials at
the end of September 2004 that the Company is not obligated to pay until October
2004. The increase in inventory of $103,754 was primarily due to the timing of
receiving raw materials at the end of September 2004 that will be used to
support product shipments in the fourth quarter of 2004. The $75,100 loss on
disposal of assets, was primarily related to writing off the capital
expenditures purchased for the installation of the Company's process at X-FAB.
The change in cash flows used in investing activities of $370,831 was primarily
due to the purchase of equipment required to test the Company's nonvolatile
semiconductor memory products and reticles required to produce the Company's
wafers. The change in cash flows provided by financing activities of $96,936 was
primarily due to the net effect of payments on a line of credit and capital
leases offset by funds received from the exercise of stock options by employees
of the Company.
The change in cash flows for the nine months ended September 30, 2003
provided by operating activities was primarily a result of a net loss of
$1,966,530, which is offset by $361,271 in depreciation and amortization,
decreases in accounts receivable, prepaid expenses, accounts payable and
deferred revenue of $692,510, $113,320, $390,351 and $40,500, respectively and
increases in inventory and accrued expenses of $166,239 and $137,878,
respectively. The decrease of $692,510 in accounts receivable was directly
related to certain customers paying invoices within the Company's terms at the
end of third quarter 2003. The decrease in accounts payable of $390,351 was
primarily due to the timing of payments for standard operating expenses. The
increase in accrued expenses was due primarily to increased vacation payable and
accrued wages. These increases have occurred due to certain employees foregoing
their vacation time until later in 2003. The change in cash flows used in
investing activities of $402,795 was primarily due to the purchase of equipment
required to test the Company's nonvolatile semiconductor memory products and
software acquired for research and development activities. The cash flows
provided by financing activities of $289,469 was due to borrowings on a line of
credit of $250,000, proceeds of $150,703 for the exercise of stock options by
certain employees of the Company less payments on a capital lease obligation of
$111,187.
Short-term liquidity.
The Company's cash balance at September 30, 2004 was $1,705,387.
The Company's future liquidity will depend on its revenue growth and its
ability to sell its products at positive gross margins and control of its
operating expenses. Over the coming twelve months, the Company expects to spend
approximately $9,000,000 for operating expenses assuming revenue growth and no
significant change in marketing or product development strategies. The Company
expects to meet these capital needs from sales revenues and, to the extent it
does not have sufficient revenues, from its existing cash reserves.
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SIMTEK CORPORATION
Long-term liquidity.
The Company continues to evaluate its long-term liquidity. The Company's
growth plans may require additional funding from outside sources. The Company is
in ongoing discussions with investment banking organizations and potential
lenders to ensure access to funds as required.
The Company is a party to a lease agreement with Baja Properties, LLC as
landlord pursuant to which the Company leases approximately 16,000 square feet
of space in Colorado Springs, Colorado. The lease is scheduled to expire on
February 28, 2013. The Company's monthly rental payment obligation is
approximately $16,000.
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SIMTEK CORPORATION
Item 3: Controls and Procedures
--------------------------------
a) Evaluation of disclosure controls and procedures.
Douglas Mitchell, who serves as the Company's chief executive officer, president
and chief financial officer (acting), after evaluating the effectiveness of the
Company's disclosure controls and procedures as of the filing date of this
quarterly report (the "Evaluation Date") concluded that as of the Evaluation
Date, the Company's disclosure controls and procedures were adequate and
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported as specified in the SEC's rules and forms.
(b) Changes in internal control over financial reporting.
There were no changes in the Company's internal control over financial reporting
during the three and nine months ended September 30, 2004, that have materially
affected, or are reasonably likely to materially affect, internal control over
financial reporting.
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SIMTEK CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Matters Submitted to a Vote of Securities Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Form 8-K filed August 5, 2004 - Item 5: Other information: Press
Release of Simtek Corporation, dated August 5, 2004, Simtek Reports
Second Quarter Results.
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SIMTEK CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMTEK CORPORATION
(Registrant)
November 4, 2004 By /s/Douglas Mitchell
---------------------------------------
DOUGLAS MITCHELL
Chief Executive Officer, President
and Chief Financial Officer (Acting)
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