UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
----------------------------------
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter ended June 30, 2005
OR
[ ] Transition report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission file number 0-19027
SIMTEK CORPORATION
(Exact name of registrant as specified in its charter)
-------------------------------------------------
Colorado 84-1057605
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4250 Buckingham Drive, Suite 100,
Colorado Springs, Colorado 80907
(Address of principal executive offices) (Zip Code)
(719) 531-9444
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
The total number of shares of Common Stock issued and outstanding as of
August 10, 2005 was 70,499,973.
SIMTEK CORPORATION
INDEX
For the Quarter Ended June 30, 2005
PART 1. FINANCIAL INFORMATION
ITEM 1 Page
----
Condensed Consolidated Balance Sheets as of
June 30, 2005 (unaudited) and December 31, 2004 3
Unaudited Condensed Consolidated Statements of Operations
for the three months and six months ended June 30, 2005 and
2004 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the six monthsended June 30, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements 6-10
ITEM 2
Managements Discussion and Analysis of Financial Condition and
Results of Operations 11
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 17
ITEM 4
Controls and Procedures 18
PART 2. OTHER INFORMATION
ITEM 1 Legal Proceedings 19
ITEM 2 Unregistered Sales of Equity Securities
and Use of Proceeds 19
ITEM 3 Defaults Upon Senior Securities 19
ITEM 4 Submission of Matters to a Vote of Security
Holders 19
ITEM 5 Other Information 19
ITEM 6 Exhibits 19
SIGNATURES 20
2
SIMTEK CORPORATION
CONSDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30, 2005 December 31, 2004
------------- -----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,721,240 $ 2,146,791
Restricted investments 3,000,000 --
Accounts receivable - trade, net 972,674 2,439,135
Inventory, net 1,471,765 1,869,842
Prepaid expenses and other current assets 129,855 85,221
Assets held for sale-current 274,892 554,996
------------ ------------
Total current assets 7,570,426 7,095,985
EQUIPMENT AND FURNITURE, net 768,987 771,901
DEFERRED FINANCING COSTS 66,386 74,684
OTHER ASSETS 28,350 33,250
------------ ------------
TOTAL ASSETS $ 8,434,149 $ 7,975,820
============ ============
LIABILITES AND SHAREHOLDERS' EQUITY
-----------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,544,678 $ 2,054,337
Accrued expenses 999,620 357,033
Accrued vacation payable 149,234 159,690
Accrued wages 101,336 29,975
Obligation under capital leases 38,497 47,310
Liabilities of discontinued operations 152,975 325,524
------------ ------------
Total current liabilities 2,986,340 2,973,869
DEBENTURES, NET OF CURRENT 3,000,000 3,000,000
OBLIGATIONS UNDER CAPITAL LEASES, NET OF CURRENT PORTION -- 13,024
------------ ------------
Total liabilities 5,986,340 5,986,893
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 2,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value; 300,000,000 shares authorized,
70,699,973 and 70,689,973 shares issued and outstanding
at June 30, 2005 and 62,881,679 and 62,871,679 shares
issued and outstanding at December 31, 2005 707,000 628,817
Additional paid-in capital 46,076,436 41,778,120
Treasury stock, at cost; 10,000 shares (12,504) (12,504)
Accumulated deficit (44,323,123) (40,405,506)
------------ ------------
Total shareholders' equity 2,447,809 1,988,927
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,434,149 $ 7,975,820
============ ============
The accompanying notes are an integral part of these financial statements.
3
SIMTEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2005 2004 2005 2004
---- ---- ---- ----
NET SALES $ 2,203,898 $ 3,685,613 $ 5,179,793 $ 6,621,282
Cost of sales 1,674,769 2,378,029 3,682,599 4,491,210
------------ ------------ ------------ ------------
GROSS MARGIN 529,129 1,307,584 1,497,194 2,130,072
OPERATING EXPENSES:
Research and development costs 1,917,202 1,396,576 3,125,717 2,601,304
Sales and marketing 443,410 417,871 844,011 802,346
General and administrative 987,091 283,781 1,273,924 530,729
------------ ------------ ------------ ------------
Total operating expenses 3,347,703 2,098,228 5,243,652 3,934,379
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (2,818,574) (790,644) (3,746,458) (1,804,307)
OTHER INCOME (EXPENSE):
Interest income 6,654 5,719 11,860 13,523
Interest expense (57,301) (59,344) (114,209) (120,468)
Other expense -- (237) (800) (237)
------------ ------------ ------------ ------------
Total other income (expense) (50,647) (53,862) (103,149) (107,182)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (2,869,221) (844,506) (3,849,607) (1,911,489)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (2,869,221) (844,506) (3,849,607) (1,911,489)
LOSS FROM DISCONTINUED OPERATIONS (35,714) (85,760) (68,009) (55,897)
------------ ------------ ------------ ------------
NET LOSS $ (2,904,935) $ (930,266) $ (3,917,616) $ (1,967,386)
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
Basic and diluted
Loss from continuing operations $ (.05) $ (.02) $ (.06) $ (.03)
Loss from discontinued operations (.00) (.00) (.00) (.00)
------------ ------------ ------------ ------------
Total $ (.05) $ (.02) $ (.06) $ (.03)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic and diluted 63,226,984 57,395,172 65,299,377 57,209,142
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
SIMTEK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30,
-------------------------
2005 2004
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,917,616) $(1,967,386)
Adjustments to reconcile net loss to net cash used in operating
Activities:
Depreciation and amortization 259,586 237,511
Issuance of common stock per separation and employment
agreements 139,250 --
Expense related to issuance of warrants 1,288 --
Loss on disposal of assets -- 13,165
Net change in allowance accounts 170,113 81,218
Deferred financing fees 8,298 8,298
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,685,061 (310,350)
Inventory 388,227 115,502
Prepaid expenses and other (26,287) 68,672
Increase (decrease) in:
Accounts payable (547,210) 827,058
Accrued expenses 418,222 (18,718)
Deferred revenue 20,000 --
----------- -----------
Net cash used in operating activities (1,401,068) (945,030)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture, net (235,720) (338,433)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable and line of credit -- (150,000)
Payments on capital lease obligation (24,723) (72,534)
Equity financing, net 3,944,403 --
Transfer to restricted cash (3,000,000) --
Proceeds from sale of common stock 108,400 --
Exercise of stock options 183,157 355,960
----------- -----------
Net cash provided by financing activities 1,211,237 133,426
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (425,551) (1,150,037)
CASH AND CASH EQUIVALENTS, beginning of period 2,146,791 3,431,679
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,721,240 $ 2,281,642
=========== ===========
Cash paid for interest $ 114,209 $ 121,393
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial statements included herein are presented in accordance with
the requirements of Form 10-Q and consequently do not include all of the
disclosures normally made in the registrant's annual Form 10-K or 10-KSB filing.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Annual Report on Form
10-KSB and Form 10-KSB/A for Simtek Corporation ("Simtek" or the "Company")
filed on March 17, 2005 and May 11, 2005, respectively for fiscal year 2004.
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 the 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. Certain previously reported amounts have been reclassified to
conform to the current presentation.
Stock-Based Compensation
------------------------
As permitted under the SFAS No. 123, Accounting for Stock-Based
Compensation, the Company accounts for its stock-based compensation in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees. As such, compensation expense is
recorded on the date of grant if the current market price of the underlying
stock exceeds the exercise price. Certain pro forma net loss and EPS disclosures
for employee stock option grants are included below as if the fair value method
as defined in SFAS No. 123 had been applied. Transactions in equity instruments
with non-employees for goods or services are accounted for by the fair value
method.
Had compensation cost been determined based on the fair value at the grant
dates for awards under employee stock based compensation plans consistent with
the fair value method, the Company's net loss and EPS would have been increased
to the pro forma amounts indicated below:
Three Months Ended Six Months Ended
-------------------- --------------------
June 30, June 30,
-------------------- --------------------
2005 2004 2005 2004
---- ---- ---- ----
Net loss as reported $ (2,904,935) $ (930,266) $(3,917,616) $(1,967,386)
Add: Stock based compensation
included in reported
Net loss - - - -
Deduct: Fair value of stock based
compensation (373,196) (207,632) (746,391) (415,265)
------------ ----------- ----------- -----------
Proforma net loss $ (3,278,131) $(1,137,898) $(4,664,007) $(2,382,651)
============ =========== =========== ===========
Net loss as reported - basic and
diluted $ (.05) $ (.02) $ (.06) $ (.03)
Proforma net loss - basic and
diluted $ (.06) $ (.02) $ (.07) $ (.04)
6
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option granted in the three and six months periods
ending June 30, 2005 and 2004 were estimated on the date of grant using the
Black-Scholes option-pricing model with the following:
Six Months Ended June 30,
-------------------------
2005 2004
---- ----
Expected volatility 82.93% 122.2%
Risk-free interest rate 3.54% 2.0%
Expected dividends - -
Expected terms (in years) 4.0 4.0
In May 2005, the Company accelerated vesting of certain unvested and
out-of-the-money stock options previously awarded to employees and officers.
Because the price of the Company's common stock was $0.57 on the day of
acceleration, the options, which are exercisable at $0.62 and above, had no
economic value on the date of acceleration. As a result of the acceleration,
options to purchase approximately 1.7 million shares of Simtek common stock are
now exercisable. Options held by non-employee directors were excluded from the
vesting acceleration.
Under the recently revised Financial Accounting Standards Board Statement
No. 123, "Share-Based Payment," Simtek will apply the expense recognition
provisions relating to stock options beginning in the first quarter of 2006. As
a result of the acceleration, the Company expects to reduce the total stock
option expense it otherwise would be required to record by approximately
$506,000 in 2006, $215,000 in 2007, and $14,000 in 2008 on a pre-tax basis. This
effect of the future expense has been shown in the proforma stock based
compensation table above.
2. Liquidity
During the three and six months ended June 30, 2005 and the twelve months
ended December 31, 2004, the Company incurred net losses from continuing
operations of approximately $2,869,000, $3,850,000 and $3,731,000, respectively
and has an accumulated deficit of $44,323,000 as of June 30, 2005. The Company
was also not in compliance with its debentures throughout 2004 and the first six
months of 2005, but was successful in obtaining waivers through July 1, 2006
from the debenture holders. The Company has working capital of approximately
$4,584,086 as of June 30, 2005.
On May 5, 2005, the Company closed a Production and Development Agreement
with Cypress Semiconductor Corporation, or "Cypress", to jointly develop a
0.13-micron Silicon-Oxide-Nitride-Oxide-Silicon (SONOS) nonvolatile memory
process. The Company has agreed to work with Cypress to add the SONOS
nonvolatile capability to Cypress's baseline CMOS process, which is in
production at its Minnesota wafer fabrication plant. The Company intends to use
the technology to produce a family of 4-megabit nvSRAM and Value-Added-Memory
products. In connection with the Production and Development Agreement, the
Company closed a Share Purchase Agreement with Cypress on May 5, 2005, pursuant
to which Cypress purchased 6,740,816 shares of the Company's common stock for
$4,000,000 and acquired a warrant to purchase 5,055,612 shares of the Company's
common stock at an exercise price of $0.7772. The warrant has a ten-year term.
The Company also entered into an Escrow Agreement with Cypress pursuant to which
the Company deposited $3 million into an escrow account in order to support and
make certain payments for the 0.13-micron SONOS process and product
developments. This $3 million is restricted and is unavailable for other use
by the Company, unless distributed to the Company out of the escrow account
per the terms of the Escrow Agreement.
The Company operates in a volatile industry, whereby its average selling
prices and product costs are influenced by competitive factors. Furthermore, the
Company continues to incur significant research and development costs for
product development. These factors create pressures on sales, costs, earnings
and cash flows, which will impact liquidity.
7
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
If the Company is unable to achieve profitable operations in the near term,
it may result in increased liquidity pressure on the Company, whereby it might
be required to enter into debt or equity arrangements that may not be as
otherwise favorable to the Company.
3. Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123(R) is effective for public companies for annual periods beginning
after June 15, 2005, supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees, and amends SFAS No. 95, Statement of Cash Flows.
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. The new
standard will be effective for us beginning January 1, 2006. We have not yet
completed our evaluation but expect the adoption to have an effect on the
financial statements similar to the pro-forma effects reported above.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an
amendment of ARB No. 43, Chapter 4," which is effective for annual periods
beginning after June 15, 2005.
SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing,"
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). This statement requires
that such items be recognized as current period charges and not included as a
component of inventory costs. In addition, the statement requires that fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facility. The new standard will be effective for us beginning
January 1, 2006. We have not yet completed our evaluation of the effect on the
financial statements, but do not expect it to have a material effect.
4. Revenue Recognition
Revenue Recognition, Semiconductor Products - Product sales revenue is
recognized when a valid purchase order has been received with a fixed price and
the products are shipped to customers FOB origin (Colorado Springs, Colorado),
including distributors. Based on historic business with the majority of the
Company's customers and, in the case of new customers, the Company is reasonably
assured that collectibility on our shipments will occur. Customers receive a
one-year product warranty and sales to distributors are subject to a limited
product exchange program and a price protection in the event of changes in the
Company's product price. The Company provides a reserve for possible product
returns, product price protection and warranty costs at the time the sale is
recognized. The Company has a detailed procedure to ensure that its estimates
for reserves are reasonable and reliable. The reserve for product returns is
based on the actual inventory value of the Company's semiconductor products held
by its distributors. The Company's distributors are permitted to rotate up to 5%
of their stock every six months with the stipulation that they must submit a
replacement order of equal dollar value to the stock that they are returning.
The reserve for price protection is used when the Company authorizes special
pricing to one of its distributors for a specific customer. To date, the
estimates have not been materially different from the credits we have issued
under these reserves.
8
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Inventories
The Company records inventory using the lower of cost (first-in, first-out)
or market. Inventory at June 30, 2005 and December 31, 2004 included:
June 30, 2005 December 31, 2004
------------- -----------------
Raw Materials $ 45,369 $ 68,955
Work in progress 1,036,964 1,765,044
Finished Goods 567,862 204,423
---------- ----------
1,650,195 2,038,422
Less reserves for excess inventory (178,430) (168,580)
---------- ----------
$1,471,765 $1,869,842
========== ==========
6. Convertible Debentures
On July 1, 2002, the Company received funding of $3,000,000 in a financing
transaction with Renaissance Capital Growth and Income Fund III, Inc.,
Renaissance US Growth & Investment Trust PLC and BFSUS Special Opportunities
Trust PLC. RENN Capital Group, Inc. is the agent for these investment funds. One
of the Company's directors holds the position of Senior Vice President of RENN
Capital Group. The $3,000,000 funding consists of convertible debentures with a
7-year term at a 7.5% per annum interest rate. Each fund equally invested
$1,000,000. The holder of the debenture shall have the right, at any time, to
convert all, or in multiples of $100,000, any part of the debenture into fully
paid and nonassessable shares of Simtek common stock. The debentures are
convertible into Simtek 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 fund to 3,205,128 shares of Simtek
common stock. From March 1, 2003 through June 30, 2005, the Company was not in
compliance with two of the covenants set forth in the loan agreement. These
covenants relate to the interest coverage ratio and debt to equity ratio. On
August 5, 2005, the Company received a waiver for the two covenants through July
1, 2006. However, significant variances in future actual operations from the
Company's current estimates could result in the reclassification of this note to
current liabilities. If the Company is in default of the covenants for a period
of 30 days it is considered a default under the debenture agreement and the
lender may declare the unpaid principal amount and all accrued interest thereon
due and payable. In addition, if the Company defaults under the debenture
agreement the lender may, among other things, foreclose on our collateral on
which it has a security interest. The lender has a security interest in
substantially all of our assets.
On June 28, 2005, the Company received a waiver from the debenture holders
extending until July 1, 2006 the commencement date for principal payments of the
$3 million aggregate principal amount 7.5% convertible debentures issued by the
Company in 2002. The original terms of the debentures required the Company to
make monthly principal payments of $10 per $1,000 of the then remaining
principal amount, beginning on June 28, 2005. The Company will still be required
to make interest payments. Under the terms of the waiver, monthly principal
payments of $13.33 per $1,000 of the then remaining outstanding principal amount
will commence on July 1, 2006. The final maturity date remains as June 28, 2009.
As consideration for the extension, the Company has issued to the debenture
holders warrants to purchase 200,000 shares of Simtek common stock at $0.50 per
share, a premium to the market price on the date of the waiver. The Company
estimated the value of the warrants at the time of grant, using the Black
Scholes option-pricing model, to be approximately $62,000. The Company
recognized $1,300 as additional interest expense in the three and six months
ended June 30, 2005.
9
SIMTEK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Geographic Concentration
Sales of the Company's semiconductor products by location for the three
month and six month periods ended June 30, 2005 and 2004 were as follows:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2005 2004 2005 2004
---- ---- ---- ----
United States 24% 26% 26% 32%
Europe 21% 10% 19% 10%
Far East 42% 45% 44% 44%
All Others 13% 19% 11% 14%
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
8. Discontinued Operations
During the three months ended June 30, 2005, the Company committed to a
plan to sell all of the assets of its subsidiary, Q-DOT, as that business no
longer fits with the core operation of the Company's semiconductor business. The
Company anticipates selling the assets of its subsidiary, Q-DOT, within the next
twelve months. In accordance with SFAS No. 144, the consolidated financial
statements of the Company have been recast to present this business as a
discontinued operation. Accordingly, the revenues, the costs and expenses and
assets and liabilities of the discontinued operation have been excluded from the
respective captions in the Condensed Consolidated Statements of Operations and
Condensed Consolidated Balance Sheets and have been reported in the various
statements under the caption, "Assets held for sale-current" and "Liabilities of
discontinued operations" for all periods presented. In addition, certain of the
Notes to the Condensed Consolidated Financial Statements have been recast for
all periods to reflect the discontinuance of this operation.
Summary results for the discontinued operation are as follows (in thousands):
Three Months Ended Six Months Ended
Description ------------------ ----------------
June 30, June 30,
-------- --------
2005 2004 2005 2004
---- ---- ---- ----
Operating Results:
Revenue $537 $319 $1,036 $882
Costs and expenses 573 405 1,104 938
---- ---- ------ ----
Loss from discontinued
Operation $(36) $(86) $ (68) $(56)
===== ===== ======= =====
Amounts included in the June 30, 2005 and December 31, 2004 Condensed
Consolidated Balance Sheets for the discontinued operation are as follows (in
thousands):
June 30, December 31,
2005 2004
-------- ------------
Assets held for sale-current:
Accounts receivable $ 92 $ 338
Prepaid expenses and other 20 46
Equipment and furniture, net 163 171
------ ------
Total $ 275 $ 555
====== ======
Liabilities of discontinued operation:
Accounts payable $ 31 $ 69
Accrued expenses and other 122 257
------ ------
Total $ 153 $ 326
====== ======
10
SIMTEK CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis in this quarterly report on Form 10-Q
is intended to provide greater details of the results of operations and
financial condition of our Company. The following discussion should be read in
conjunction with our condensed consolidated financial statements and notes
thereto and other financial data included elsewhere herein as well as our Annual
Report and Form 10-KSB and Annual Report and Form 10-KSB/A filed on March 17,
2005 and May 11, 2005, respectively for fiscal year 2004. Certain statements
under this caption constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The reader should not place undue reliance on these forward looking
statements for many reasons including those risks discussed in this document and
in our Form 10-KSB and Form 10-KSB/A. In addition, when used in this quarterly
report, the words "believes," "anticipates," "expects," "plans," "intends" and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements and statements of expectations, plans and intent are
subject to a number of risks and uncertainties. Actual results in the future
could differ materially from those described in the forward-looking statements,
as a result, among other things, of changes in technology, customer requirements
and needs, among other factors. We undertake no obligation to release publicly
the results of any revisions to these forward-looking statements that may be
made to reflect any future events or circumstances.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
require us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and the related disclosures. Our
accounting policies are discussed in Note 1 of the Notes to Consolidated
Financial Statements included in our 2004 Form 10-KSB and Form 10-KSB/A. The
estimates used by us are based upon our historical experiences combined with our
understanding of current facts and circumstances. Certain of our accounting
polices are considered critical as they are both important to the portrayal of
our financial condition and the results of our operations and require
significant or complex judgments on our part. We believe that the following
represent the critical accounting policies of Simtek as described in Financial
Reporting Release No. 60, Cautionary Advice Regarding Disclosure About Critical
Accounting Policies, which was issued by the Securities and Exchange Commission:
inventories; deferred income taxes; allowance for doubtful accounts; and,
allowance for sales returns.
The valuation of inventories involves complex judgments on our part. Excess
finished goods inventories are a natural component of market demand of
semiconductor devices. We continually evaluate and balance the levels of
inventories based on sales projections, current orders scheduled for future
delivery and historical product demand. While certain finished goods items will
sell out, quantities of other finished goods items will remain. These finished
goods are reserved as excess inventory. We believe we have adequate controls
with respect to the amount of finished goods inventories that are anticipated to
become excess. While we believe this process produces a fair valuation of
inventories, changes in general economic conditions of the semiconductor
industry could materially affect valuation of our inventories.
The allowance for doubtful accounts reflects a reserve that reduces
customer accounts receivable to the net amount estimated to be collectible.
Estimating the credit worthiness of customers and the recoverability of customer
accounts requires us to exercise considerable judgment. In estimating
uncollectible amounts, we consider factors such as industry specific economic
conditions, historical customer performance and anticipated customer
performance. While we believe our processes to be adequate to effectively
11
quantify our exposure to doubtful accounts, changes in industry or specific
customer conditions may require us to adjust our allowance for doubtful
accounts.
The allowance for sales returns consists of two separate segments,
distributor stock rotation and distributor price reductions. When we record the
allowance, the net result reduces customer accounts receivables and gross sales.
Generally, we calculate the stock rotation portion of the allowance based upon
distributor inventory levels. The contracts we have with our distributors,
generally allows them to return to us up to 5% of their inventory in exchange
for inventory that better meets their demands. We believe that our processes to
adequately predict our allowance for sales returns are effective in quantifying
our exposures due to industry or specific customer conditions. At times, we are
required to allow our distributors to lower the selling price of a specific
device in order to meet competition. When this occurs, we record an allowance
for potential credit that our distributors will be requesting. This allowance is
based on approved pricing changes, inventory affected and historical data. We
believe that our processes to adequately predict our allowance for distributor
price reductions are effective in quantifying our exposures due to industry or
specific customer conditions.
We record an allowance that directly relates to the warranty of our
products for one year. The allowance for warranty return reduces our gross
sales. This allowance is calculated by looking at annual revenues and historical
rates of our products returned due to warranty issues. While we believe this
process adequately predicts our allowance for warranty returns, changes in the
manufacturing or design of our product could materially affect valuation of our
warranties.
We have recorded a valuation allowance on deferred tax assets. Future
operations may change our estimate in connection with potential utilization of
these assets.
Overview
Total unit shipments of our semiconductor memory products were down for the
three and six months ended June 30, 2005, approximately 30% and 17%,
respectively, as compared to the same periods in 2004. Our net revenue was
$2,204,000 and $5,180,000 for the three and six months ended June 30, 2005,
respectively, compared to the $3,686,000 and $6,621,000, respectively, for the
comparable periods of 2004. This decrease in net revenue for both periods was
due primarily to a decrease in revenue from the semiconductor portion of our
business. The primary reason for the decrease in revenue was due to our
competitors aggressively cutting prices to our key customers, which resulted in
lower average selling prices and lower unit volume for our legacy products. In
addition, shipments of our .25 micron product were depressed due to poor yields
which resulted in reduced product availability.
Increased operating expenses and decreased gross margins had an impact on
our profitability for the three and six months ended June 30, 2005 compared to
the three and six months ended June 30, 2004. Most significantly, the expenses
recognized for the abnormal yields and scrap related to the .25 micron product
line and expenses related to changes in management discussed below, contributed
to the higher operating expenses.
As discussed in Note 8 of the Notes to Condensed Consolidate Financial
statements, the Company has committed to a plan to sell all of the assets of its
subsidiary, Q-DOT and has included Q-DOT as a discontinued operation. As such,
all discussion of operating results relates to the semiconductor portion of our
business.
12
Results of Operations:
Revenues
The following table sets forth our net revenues for semiconductor devices
by product markets for the three and six months ended June 30, 2005 and 2004 (in
thousands):
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2005 2004 Variance 2005 2004 Variance
---- ---- -------- ---- ---- --------
Commercial $ 1,810 $ 2,908 $ (1,098) $ 4,217 $ 5,408 $ (1,191)
High-end industrial and
military 394 778 $ (384) $ 963 $ 1,213 $ (250)
------- ------- --------- ------- ------- ---------
Total Semiconductor
Revenue $ 2,204 $ 3,686 $ (1,482) $ 5,180 $ 6,621 $ (1,441)
======= ======= ========= ======= ======= =========
Commercial revenues include revenue generated from our legacy products
(products built on silicon wafers received from Chartered Semiconductor
Manufacturing Plc., or Chartered of Singapore, collectively "Chartered") and
from our .25 micron products (products built on silicon wafers received from
DongbuAnam Semiconductor or DongbuAnam, collectively "Dongbu"). Commercial
revenues decreased by $1,098,000 and $1,191,000 for the three and six months
ended June 30, 2005, respectively, as compared to the three months and six
months ended June 30, 2004. The decrease was primarily due to a decrease in unit
shipments and average selling prices, which was primarily due to increased price
competition at our largest, high-volume customers and their subcontractors.
High-end industrial and military product saw decreases of $384,000 and
$250,000 for the three and six months ended June 30, 2005, respectively, as
compared to the same periods in 2004. The decrease was due primarily to
decreased demand in the period for our nonvolatile semiconductor memory products
used in on-going military contracts.
Three distributors accounted for approximately 39% of our semiconductor
devices product sales for the quarter ended June 30, 2005. Products sold to
distributors are sold without material recourse. Distributors sell our products
to various end customers. If one of these distributors was to terminate its
relationship with us, we believe that there would not be a material impact on
our product sales, as other distributors would likely take their place.
We expect that revenue will increase in the next several quarters, as
shipments of our .25 micron product family ramp up. Customer acceptance of our
flagship .25 micron products has increased significantly in 2005. We have
received 21 new design wins for this new product line in 2005. Shipments are
expected to begin in the second half of 2005 and ramp up in 2006 on these new
products.
Cost of Sales and Gross Margin
We recorded cost of sales for semiconductor devices of $1,675,000 and
$3,683,000 for the three and six months ended June 30, 2005, respectively, as
compared with the $2,378,000 and $4,491,000 for the three and six months ended
June 30, 2004, respectively. These costs reflect an approximate 11% and 3%
decrease in gross margin percentages for the three and six months ended June 30,
2005, respectively, as compared to the same periods in 2004. Actual gross margin
percentages for the three and six months ended June 30, 2005 were 24% and 29%,
respectively, as compared to gross margins percentages for the three and six
months ended June 30, 2004 of 35% and 32%, respectively. The decreases were
primarily due to overall lower sales volume, particularly decreased sales of our
high-end industrial and military products. Production costs for our legacy
commercial products decreased during the period ended June 30, 2005 as compared
to the same periods in 2004, as yield improvements have finally been achieved
13
from the production transfer from Chartered's wafer fabrication facility # 1 to
Chartered's wafer fabrication facility # 2. We expect gross margins to improve
in the second half of 2005 as a result of these cost improvements.
During the three and six months ended June 30, 2005, we purchased all of
our silicon wafers to produce 0.8 micron nonvolatile static random access memory
products from a single supplier, Chartered, to support sales of our nonvolatile
semiconductor memory products. Sales of products built on these wafers accounted
for approximately 87% and 89% of our semiconductor product revenue for the three
and six months ended June 30, 2005, respectively. We purchased silicon wafers to
produce our family of 1-megabit and certain 256-kilobit nonvolatile static
random access memory products built on .25 micron technology from Dongbu. Sales
of our semiconductor products built on .25 micron technology accounted for
approximately 9% and 8% of our semiconductor product revenue for the three and
six months ended June 30, 2005, respectively. The remaining sales were for a
one-time sale of our discontinued logic products.
We expect gross margins on both our legacy and .25 micron products to
improve over the next several quarters. The net yields on the silicon wafers
received from Chartered over the last few months have resulted in yields
significantly better and more stable than in earlier production received during
the transition from Chartered's wafer fabrication facility # 1 to Chartered's
wafer fabrication facility # 2. The yields are better than the historical yields
from Chartered's wafer fabrication facility # 1. On the .25 micron products, the
preliminary yields from the new revision of the silicon wafers are now resulting
in a cost effective product.
Research and Development
We believe that continued investments into new product development are
required for us to remain competitive in the markets we serve. Currently, our
research and development department has been focusing on yield improvement and
qualification of our new.25 micron product family. We are currently shipping our
family of 1-megabit nonvolatile semiconductor memory products tested to
production requirements on a provisional qualification and expect to have
qualification complete in the third quarter of 2005.
Total research and development expenses were $1,917,000 and $3,126,000 for
the three and six months ended June 30, 2005, respectively, as compared to
$1,397,000 and $2,601,000 for the three and six months ended June 30, 2004,
respectively.
The $520,000 increase for the three month period was due to a one-time
charge of $827,000 related to the final development of our .25 micron product.
The one-time charge was partially offset by decreases in payroll and payroll
overhead costs of $91,000, consulting services of $116,000 and other product
development costs of $222,000, which were in turn offset by increases in
contract services of $28,000, equipment related costs of $41,000, cost related
to the co-development agreement with Cypress of $49,000 and other miscellaneous
expenses of $4,000. The one-time charge related to our .25 micron product was
due to abnormally low yields and high scrap due to design and process issues
with the silicon wafers. We have implemented a significant new revision for the
silicon wafers being produced at Dongbu and preliminary testing shows a
significant improvement in both the initial silicon wafer probe yield as well as
the final assembly and test yield. The improved yields result in a more cost
effective product. The $91,000 decrease in payroll and payroll overhead costs
was a direct result of reduced headcount. The $116,000 decrease in consulting
services was due to a decrease in engineering work performed by our subsidiary
Q-DOT for the development of our data-communication products. The $222,000
decrease in product development costs was related to the wind down of the final
development of the .25 micron product. Management expects that product
development costs will increase over the next several years as development with
Cypress on the new .13 micron technology accelerates.
14
The $525,000 increase for the six month period was primarily due to the
charges related to the development of our .25 micron product as discussed above.
That charge was partially offset by decreases in payroll and payroll overhead
costs of $40,000, consulting services of $213,000, product development costs of
$280,000 and other miscellaneous expenses of $11,000 which were in turn
partially offset by increases in contract services of $60,000, equipment related
costs of $70,000 and cost related to the co-development with Cypress
Semiconductor of $49,000. The $40,000 decrease in payroll and payroll overhead
costs was a direct result of reduced headcount. The $213,000 decrease in
consulting services was due to a decrease in engineering work performed by our
subsidiary Q-DOT for the development of our data-communication products. The
$280,000 decrease in product development costs was related to wind down of the
final development of the .25 micron product. Management expects that costs will
increase over the next several quarters as development work with Cypress on the
new .13 micron technology accelerates.
General and Administration
Total general and administration expenses were $987,000 and $1,274,000 for
the three and six months ended June 30, 2005, respectively, as compared to
$284,000 and $531,000, respectively, for the same periods in 2004.
The $703,000 increase for the three month period was primarily due to
increases in accounting and legal expenses of $72,000, $77,000 increase in
payroll and payroll overhead costs and $614,000 in one-time expenses related to
separation and employment agreements. These increases were partially offset by
decreases of $60,000 related to contract services, travel and bad debt. The
$743,000 increase for the six month period was due to increases in accounting
and legal expenses of $82,000, $77,000 increase in payroll and payroll overhead
costs, and $614,000 in one-time expenses related to separation and employment
agreements. These increases were partially offset by decreases of $30,000
related to travel, board of director costs and bad debt. The increases in
payroll and payroll overhead costs, in both periods, were related to increases
in headcount and increases in administrative services provided by our subsidiary
Q-DOT. The increases in accounting and legal expenses, in both periods, were
related to increased activity related to agreements with personnel and increased
securities work. The $614,000 in one-time expenses was related to costs
associated with the terms of the employment agreement for our current Chief
Executive Officer and the costs associated with the separation agreement entered
into with our previous Chief Executive Officer.
Marketing
Total marketing expenses were $443,000 and $844,000 for the three and six
months ended June 30, 2005, respectively, as compared to $418,000 and $802,000,
respectively, for the same periods in 2004.
The $25,000 increase for the three month period was primarily due to an
increase in payroll and payroll overhead costs of $29,000, relating to expanding
our sales team, advertising expenses of $21,000 and travel expenses of $21,000
and a decrease of $46,000 in sales commissions due to lower sales volume.
The $42,000 increase for the six month period was primarily due to an
increase in payroll and payroll overhead costs of $112,000, related to expanding
our sales team, advertising expenses of $17,000 and travel expenses of $14,000
and a decrease of $101,000 in sales commissions due to the lower sales volume.
Loss from Continuing Operations
We recorded a net loss, from continuing operations, of approximately
$2,869,000 and $3,850,000 for the three and six months ended June 30, 2005,
respectively, as compared to $845,000 and $1,911,000 for the three and six
months ended June 30, 2004, respectively. The increases in net loss were due
primarily to lower revenues, decreased gross margins and increases in operating
expenses, discussed previously.
15
Liquidity and Capital Resources
As of June 30, 2005, we had a net working capital of $4,584,086, including
restricted cash of $3,000,000, as compared to a net working capital of
$3,390,720 as of June 30, 2004.
On May 5, 2005, we closed a Production and Development Agreement with
Cypress to jointly develop a 0.13-micron Silicon-Oxide-Nitride-Oxide-Silicon
(SONOS) nonvolatile memory process. We have agreed to work with Cypress to add
the SONOS nonvolatile capability to Cypress's baseline CMOS process, which is in
production at its Minnesota wafer fabrication plant. We intend to use the
technology to produce a family of 4-megabit nvSRAM and Value-Added-Memory
products. In connection with the Production and Development Agreement, we closed
a Share Purchase Agreement with Cypress on May 5, 2005, pursuant to which
Cypress purchased 6,740,816 shares of our common stock for $4,000,000 and
acquired a warrant to purchase 5,055,612 shares of our common stock at an
exercise price of $0.7772. The warrant has a ten-year term. We also entered into
an Escrow Agreement with Cypress pursuant to which we deposited $3 million into
an escrow account in order to support and make certain payments for the
0.13-micron SONOS process and product developments. This $3 million is
restricted and is unavailable for other use by us, unless distributed to us
out of the escrow account per the terms of the Escrow Agreement.
Short-term liquidity.
Our unrestricted cash balance at June 30, 2005 was $1,721,000.
Our future liquidity will depend on our revenue growth and our ability to
sell our products at positive gross margins and to control our operating
expenses. Through December 31, 2005, we expect to spend approximately $5,000,000
for operating expenses assuming revenue growth. We expect to meet our capital
needs from: the sale of Q-DOT; sales revenues; and, to the extent we do not have
sufficient revenues, from our existing cash reserves. In addition, we believe
that we may need additional capital in the latter part of the year, to fund
anticipated revenue growth. We are evaluating several alternatives, including
disposing of non-core assets, but have no binding agreement with any potential
lender, investor or firm.
Long-term liquidity.
We believe that we will achieve a cash breakeven point in December 2005, as
projected revenues increase and production costs for both our legacy and 25
micron nonvolatile semiconductor memory products decrease. However, in order to
fund significant organic growth as well as take advantage of other potential
strategic opportunities in the future, we may require additional capital
resources. We are in ongoing discussions with investment banking organizations
to ensure access to such capital as required.
16
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States interest rates and changes in foreign
currency exchange rates as measured against the United States dollar. These
exposures are directly related to our normal operating activities. We currently
have no derivative financial instruments.
Interest payable on our convertible debentures is fixed at 7.5% over the
term of the debentures. As such, changes in interest rates will not affect
future expenses or cash flows.
We manage interest income by investing our excess cash in cash equivalents
bearing variable interest rates, which are tied to various market indices. We do
not believe that near-term changes in interest rates will result in a material
effect on future earnings, fair values or cash flows.
We do not speculate in the foreign exchange market and do not manage
exposures that arise in the normal course of business related to fluctuations in
foreign currency exchange rates by entering into offsetting positions through
the use of foreign exchange forward contracts.
Average selling prices of our products have not increased significantly as
a result of inflation during the past several years, primarily due to intense
competition within the semiconductor industry. The effect of inflation on our
costs of production has been minimized through improvements in production
efficiencies. We anticipate that these factors will continue to minimize the
effects of any foreseeable inflation and other price pressures within the
industry and markets in which we participate.
17
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Harold Blomquist, who serves as the Company's chief executive officer, and Brian
Alleman, who serves as the Company's chief financial officer, after evaluating
the effectiveness of the Company's disclosure controls and procedures as of the
end of the period covered by this quarterly report (the "Evaluation Date")
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were 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 and to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is accumulated and
communicated to our management to allow timely decisions regarding required
disclosure.
(b) Changes in internal control over financial reporting.
There were no changes in the Company's internal control over financial reporting
during the three months ended June 30, 2005, that have materially affected, or
are reasonably likely to materially affect, internal control over financial
reporting.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits
10.1 Share Purchase Agreement, dated May 4, 2005, between the
Company and Cypress Semiconductor Corporation (incorporated
by reference to the Company's Current Report on Form 8-K
filed by the Company with the SEC on May 10, 2005)
10.2 Development and Production Agreement, dated May 4, 2005,
between the Company and Cypress Semiconductor Corporation
(incorporated by reference to the Company's Current Report
on Form 8-K filed by the Company with the SEC on May 10,
2005)
10.3 Escrow Agreement, dated May 4, 2005, among the Company,
Cypress Semiconductor Corporation and U.S. Bank, National
Association (incorporated by reference to the Company's
Current Report on Form 8-K filed by the Company with the SEC
on May 10, 2005)
10.4 Stock Purchase Warrant, dated May 4, 2005, from the Company
to Cypress Semiconductor Corporation (incorporated by
reference to the Company's Current Report on Form 8-K filed
by the Company with the SEC on May 10, 2005)
10.5 Registration Rights Agreement, dated May 4, 2005, between
the Company and Cypress Semiconductor Corporation
(incorporated by reference to the Company's Current Report
on Form 8-K filed by the Company with the SEC on May 10,
2005)
10.6 Separation Agreement, dated May 9, 2005, between the Company
and Douglas M. Mitchell (incorporated by reference to the
Company's Current Report on Form 8-K filed by the Company
with the SEC on May 12, 2005)
10.7 Employment agreement between the Company and Harold
Blomquist (incorporated by reference to the Company's
Current Report on Form 8-K filed by the Company with the SEC
on May 12, 2005)
10.8 Waiver Letter, dated June 28, 2005, among the Company,
Q-DOT, Inc. Renaissance Capital Growth & Income Fund III,
Inc., Renaissance US Growth Investment Trust PLC and BFS US
Special Opportunities Trust PLC (incorporated by reference
to the Company's Current Report on Form 8-K filed by the
Company with the SEC on July 5, 2005)
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of Principal Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of Principal Financial Officer
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Principal Executive Officer
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Principal Financial Officer
19
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)
August 12, 2005 By: /s/Harold Blomquist
----------------------------------
HAROLD BLOMQUIST
Chief Executive Officer, President
August 12, 2005 By: /s/Brian Alleman
----------------------------------
BRIAN ALLEMAN
Chief Financial Officer
20