Attached files
As filed with the Securities and Exchange Commission on April 6 , 2010
Registration No. 333- 164873
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NEXX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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3559
(Primary Standard Industrial
Classification Code Number)
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30-0307916
(I.R.S. Employer
Identification Number)
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900 Middlesex Turnpike, Building # 6
Billerica, Massachusetts 01821
(978) 932-2000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Thomas M. Walsh
Chief Executive Officer
900 Middlesex Turnpike, Building # 6
Billerica, Massachusetts 01821
(978) 932-2000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
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Copies to:
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Neil H. Aronson
Matthew M. Graber
Gennari Aronson, LLP
First Needham Place
250 First Avenue
Needham, Massachusetts 02494
Telephone (781) 719-9900
Fax (781) 719-9850
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Andrea C. Johnson
Fraser Milner Casgrain LLP
99 Bank Street
Suite 1420
Ottawa, Ontario, Canada
K1P 1H4
Telephone (613) 783-9600
Fax (613) 783-9690
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Martin Langlois
Ian Putnam
Stikeman Elliott LLP
5300 Commerce Court West
199 Bay Street
Toronto, Ontario, Canada
M5L 1B9
Telephone (416) 869-5500
Fax (416) 947-0866
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Richard Raymer
Hodgson Russ LLP
150 King Street
Suite 2309
Toronto, Ontario, Canada
M5H 1J9
Telephone (416) 595-5100
Fax (416) 595-5021
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Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a
smaller reporting company)
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Smaller reporting company x
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of
Securities to be Registered
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Proposed Maximum
Aggregate Offering Price(1)
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Amount of
Registration Fee(2)
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Common Stock, $0.001 par value per share
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$42,000,000
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$2,994.60
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(1)
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Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act. Includes shares that the underwriters have the option to purchase to cover over-allotments, if any.
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(2)
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Previously paid. Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
Subject to Completion dated April 6 , 2010
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
shares
Nexx Systems, Inc.
Common Stock
This is the initial public offering of common stock by NEXX Systems, Inc. We are offering shares of common stock. The estimated initial public offering price is between $5.20 and $7.00 per share.
Currently, no public market exists for our common stock, and purchasers may not be able to resell common stock purchased under this prospectus. We have applied to list our shares of common stock on the Toronto Stock Exchange (the “TSX”) under the symbol “NXS.” Listing will be subject to fulfilling all of the requirements of the TSX, including distribution of our shares of common stock to a minimum number of public shareholders.
Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.
Neither the Securities and Exchange Commission nor any state or foreign securities commission nor any other regulatory body has approved or disapproved of these securities or passed on the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
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Per Share
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Total
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Public offering price
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$ | $ | ||||||
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Underwriting discount
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$ | $ | ||||||
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Proceeds, before expenses to Company
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$ | $ | ||||||
We have granted the underwriters an option for a period of 30 days to purchase up to additional shares of common stock (being 15% of the number of shares offered hereby) on the same terms and conditions set forth above. See “Underwriting.”
The underwriters expect to deliver the shares of common stock to purchasers on or about , 2010.
The date of this prospectus is , 2010
TABLE OF CONTENTS
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Page
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Page
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Prospectus Summary
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4 |
Management
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73 | |
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The Offering
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7 |
Executive Compensation
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84 | |
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Summary Consolidated Financial Data
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9 |
Related Person Transactions
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101 | |
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Risk Factors
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11 |
Principal Stockholders
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105 | |
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Special Note Regarding Forward-Looking Statements
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29 |
Description of Capital Stock
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108 | |
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Use of Proceeds
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30 |
Shares Eligible for Future Sale
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115 | |
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Dividend Policy
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30 |
Underwriting
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119 | |
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Capitalization
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31 |
Legal Matters
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123 | |
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Dilution
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32 |
Experts
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123 | |
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Selected Consolidated Financial Data
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34 | Change in Independent Registered Accounting Firm | 124 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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36 |
Where You Can Find Additional Information
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124 | |
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Business
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60 |
Glossary of Technical Terms
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A-1
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Index to Financial Statements
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F-1
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You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor the underwriters have authorized anyone to provide you with information that is different . We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, prospects, financial condition and results of operations may have changed since that date.
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GENERAL MATTERS
Until , 2010, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Unless otherwise specified, all reference to “dollars” or “$” in this prospectus are to United States dollars.
Unless otherwise indicated, all references to “GAAP” in this prospectus are to United States generally accepted accounting principles.
Unless the context indicates otherwise, as used in this prospectus, the terms “the company”, “NEXX”, “we”, “us”, “our” and “our company” refer to NEXX Systems, Inc. and its subsidiary. The NEXX Systems logo is a trademark of NEXX Systems, Inc. All other trademarks and service marks appearing in this prospectus are the property of their respective holders. All rights reserved.
Information contained in, and that can be accessed through, our web site www.nexxsystems.com shall not be deemed to be part of this prospectus or incorporated herein by reference and should not be relied upon by any prospective investors for the purposes of determining whether to purchase the shares offered hereunder.
This prospectus relates to the offering of securities in the United States only. Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus .
This prospectus includes market and industry data that has been obtained from third party sources, including industry publications, as well as industry data prepared by our management on the basis of its knowledge of and experience in the industries in which we operate (including our management’s estimates and assumptions relating to such industries based on that knowledge). Management’s knowledge of such industries has been developed through its experience and participation in these industries. While our management believes the third party sources referred to in this prospectus are reliable, neither we nor our management have independently verified any of the data from such sources referred to in this prospectus or ascertained the underlying economic assumptions relied upon by such sources. Internally prepared and third party market forecasts, in particular, are estimates only and may be inaccurate, especially over long periods of time. In addition, the underwriters have not independently verified any of the industry data prepared by management or ascertained the underlying estimates and assumptions relied upon by management. Furthermore, references in this prospectus to any publications, reports, surveys or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication, report, survey or article. The information in any such publication, report, survey or article is not incorporated by reference in this prospectus.
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PROSPECTUS SUMMARY
The following is a summary of the principal features of this offering and should be read together with the more detailed information and financial data and statements contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors” beginning on page 11 and the consolidated financial statements and notes to those consolidated financial statements, before making an investment decision.
BUSINESS
Our Company
Rapid change is occurring in the electronics industry. Smart phones and other portable devices will soon offer mobile television services, video calling and traditional broadband content delivered over wireless networks. Consumer purchases of smart phones and other new technologies are driving the demand for increased functionality within smaller product form factors, as well as higher speed and lower power consumption. The advanced semiconductor integrated circuits (“ICs”) providing these functions must be packaged before assembly in products. Typical package size for ICs has decreased ten times over packages of the 1990s, while product speed and capability has increased. This trend is expected to make advanced packaging one of the fastest growing sectors of the semiconductor industry.
We meet the demand for smaller, high performance packages by designing, manufacturing, selling, installing and servicing highly-engineered semiconductor process equipment that automates the packaging of semiconductor devices. Advanced packaging processes, examples of which include “flip chip,” package on package and emerging three dimensional through silicon vias (“3D TSV”) packaging, enable the packaging of integrated circuits that power this broad range of communications, computing and consumer electronic products. We estimate that the advanced packaging equipment market addressed by our current products was approximately $170 million in 2008 and we expect it to exceed $500 million by 2013.
Our mission is to become the leading equipment provider for wafer level packaging. Our solutions are designed specifically for wafer level packaging and we believe they offer a unique and more efficient process compared to competing technologies. Based on customer surveys, our solutions provide our customers with increased throughput, lower cost of ownership, greater ease of use, greater reliability and lower maintenance, resulting in higher operating profitability for our customers.
We currently offer two product platforms: Apollo, our second-generation sputter deposition system; and Stratus, an electrochemical plating system. Apollo and Stratus provide complementary solutions for a variety of metal deposition processes used in flip chip and other advanced semiconductor packaging applications. The Apollo advances metal deposition for wafer level packaging and is used for applications including the multiple metal layers under bump metallization (“UBM”), redistribution layers, backside metallization, integrated passive devices (which allow placing numerous components on a single chip) and light emitting diodes. Stratus is used for thicker metallization for through silicon vias, solder bumping, copper pillar, UBM and other advanced packaging applications. These systems enable our customers to produce semiconductor devices with greater functionality at a lower cost. This value proposition is particularly compelling for customers serving the price-sensitive consumer electronics market.
To date, our revenues have been derived from products serving deposition required for flip chips and emerging 3D advanced semiconductor packaging. We are currently focused on advancing our existing product portfolio and have not expanded into other process areas of the integrated circuit manufacturing process to date. Stratus accounted for a majority of our revenues for the years ended December 31, 2007 and 2008 and substantially all of our product revenues during the year ended December 31, 2009. During the year ended December 31, 2009, the Apollo system was redesigned, which caused customers to postpone purchases while they waited for the introduction of the next generation product.
We devote significant resources to programs directed at developing new and enhanced products, as well as new applications for existing products. As a result, we have developed a significant intellectual property portfolio with 11 U.S. patents issued and eight U.S. patents pending. In order to maintain technology leadership , which is evidenced by industry awards received during the past two years, and pursue customer driven opportunities for the application of our core technologies, we plan to continue to invest in research and development, expanding our product offerings in complementary areas where we can leverage our core competencies and technologies.
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Our customers include leading semiconductor manufacturers throughout the world, and consist of outsourced assembly and test providers and integrated device manufacturers. Since our inception in 2001, 107 of our systems have been installed with 34 different customers, including some of the leading semiconductor manufacturers, many of whom have purchased multiple systems during the past 24 months. We primarily serve customers through our direct sales force. We also have strategically placed sales offices throughout the United States and in Taiwan and Singapore. Over the last three years, we have expanded our sales presence in Asia, where many of the world’s semiconductor manufacturing facilities are based. We expect international markets, particularly the markets in Asia, to provide most of the opportunities for our products. In addition to direct sales, we have developed indirect sales channels in Europe and in countries such as China, Korea and Japan, where the semiconductor manufacturing industry contains smaller concentrations of customers.
We outsource all of our manufacturing operations, with the exception of completing the final integration and testing in-house for Stratus before shipment to our customers. Our outsourcing strategy is designed to enable us to minimize fixed costs and capital expenditures, gain labor efficiencies and provide us with the flexibility to increase product capacity based on customer demand. We leverage the strengths and skill sets of each of our suppliers to increase manufacturing efficiencies and minimize costs. This strategy also allows us to focus on product differentiation through system design and quality control.
Our Competitive Strengths
Our success is based on the following competitive strengths:
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Best-In-Class Products, Service and Support. Our industry leading solutions enable high throughput and yield, low cost of ownership, a smaller footprint, greater reliability, ease of use and low maintenance. Based on the use of multiple NEXX systems in outsourced semiconductor assembly and test providers (“OSATs”) throughout Asia where high output and low cost are critical, the effectiveness of our products has been proven in high-volume production environments globally, enabling us to win multiple industry awards.
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Technology Leadership. We have extensive experience building and supporting production-proven semiconductor manufacturing equipment. Additionally, we have a significant intellectual property portfolio consisting of 11 U.S. patents issued and eight U.S. patents pending.
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Scalable, Flexible Platform. Our systems are designed on standard platforms that allow us to configure flexible systems to meet our customers’ specific application and throughput requirements.
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Outsourced Manufacturing Expertise. We are able to leverage an outsourced manufacturing model that allows us to increase our capacity, minimize fixed costs, leverage our partner’s resources, and reduce manufacturing overhead.
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Our Strategy
We have identified specific strategic initiatives that are critical to achieving our objectives, including:
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Maintain and Expand Technology Leadership. Technology leadership is critical to increasing our competitive win rate, maintaining suitable pricing and building market acceptance.
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Strengthen our Global Presence. We continue to develop our global presence in order to provide the infrastructure necessary to support our geographically diverse customer base.
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Leverage Process Technologies across Markets and Applications. We believe our technology and design expertise enables us to offer solutions in other areas of the semiconductor manufacturing process.
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Broaden our Intellectual Property Portfolio. We intend to continue to broaden our patent portfolio through internal development, strategic relationships and participation in industry consortia.
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Risk Factors
Our ability to implement our business strategy is subject to numerous risks and uncertainties, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, among others, a history of significant fluctuations in our quarterly results, which could cause volatility in our stock price; our reliance on a small number of customers for a substantial portion of our revenues; reliance on our Stratus product line for a substantial portion of product revenues; cyclicality in the semiconductor industry; the rate of technological change in the semiconductor industry; and the risk that our patents may not adequately protect our present and future products. You should carefully consider all of the information set forth in this prospectus, particularly the “Risk Factors” section prior to deciding to invest in our common stock.
Corporate Information
We were formed as a limited liability company in Delaware in 2001 and converted to a Delaware corporation in 2003 in accordance with the requirements of the Delaware General Corporation Law. Our principal and registered office address is 900 Middlesex Turnpike, Building #6, Billerica, Massachusetts 01821. Our telephone number is 978-932-2000. We have one wholly-owned subsidiary, NEXX Systems Singapore Pte. Ltd., a limited exempt private company formed under the laws of Singapore. Our website address is www.nexxsystems.com. Information contained in, and that can be accessed through, our website is not incorporated into and does not form a part of this prospectus.
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THE OFFERING
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Common stock we are offering
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shares ( shares if the over-allotment is exercised in full)
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Common stock to be outstanding after this offering
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shares ( shares if the over-allotment is exercised in full) after giving effect to the Capital Reorganization described below
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Over-allotment option
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We have granted the underwriters an over-allotment option, exercisable for a period of 30 days from the date of the closing of this offering, to purchase up to an aggregate of additional shares of common stock (being 15% of the number of shares offered hereby) on the same terms as set forth above, solely to cover over-allotments, if any, and for market stabilization purposes. If the over-allotment option is exercised in full, the total price to the public will be $ million, the commissions payable to the underwriters will be $ million and the net proceeds to us will be $ million. For additional information see “Underwriting.”
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Use of proceeds after expenses
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Based on an assumed initial public offering price of $ 6.10 per share, we expect to use approximately $10.0 million of the net proceeds of this offering to fund demonstration units to be placed with potential customers, approximately $10.0 million of the net proceeds to fund the purchase of subassemblies and other inventory, and approximately $5.0 million of the net proceeds to repay outstanding indebtedness. We intend to use the balance of the net proceeds for general corporate purposes. See “Use of Proceeds.”
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Risk Factors
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You should read the “Risk Factors” section of this prospectus beginning on page 11 for a discussion of factors to consider carefully before deciding whether to purchase shares of our common stock.
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| Proposed TSX Symbol |
NXS. We have applied to list our shares of common stock on the TSX. Listing will be subject to fulfilling all of the requirements of the TSX, including distribution of our shares of common stock to a minimum number of public shareholders.
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The number of shares of our common stock to be outstanding after this offering is based on 13,783,201 shares of common stock outstanding as of March 23, 2010 , after giving effect, immediately prior to the completion of this offering, to the Capital Reorganization described below .
Pursuant to an agreement between us and the holders of our outstanding shares of preferred stock and our amended and restated certificate of incorporation that we plan to file immediately prior to the closing of this offering, pursuant to which a capital reorganization will occur, we will effect the following changes in our capital structure (the “Capital Reorganization”):
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prior to the reverse stock split described below, the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 88,498,510 shares of our common stock and the conversion of outstanding warrants to purchase shares of our convertible preferred stock into warrants to purchase an aggregate of 4,799,541 shares of our common stock upon the closing of this offering;
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prior to the reverse stock split described below, the issuance of 30,000,000 shares of our common stock to the holders of shares of our convertible preferred stock and warrants to purchase shares of our convertible preferred stock in exchange for the waiver of certain contractual rights regarding the conversion of all outstanding shares of our convertible preferred stock to shares of common stock upon an initial public offering of our common stock;and
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a 1 to 10 reverse stock split.
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The number of shares of our common stock outstanding immediately after this offering, after giving effect to the Capital Reorganization, excludes:
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1,081,886 shares of common stock issuable upon the exercise of options outstanding as of March 23, 2010 , with exercise prices ranging from $0.10 to $9.40 per share and a weighted average exercise price of $0.48 per share ;
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479,941 shares of common stock issuable upon the exercise of warrants to purchase shares of our series B convertible preferred stock and series D convertible preferred stock outstanding as of March 23, 2010 , with exercise prices ranging from $3.80 to $7.98 per share and a weighted average exercise price of $3.96 per share;
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132,299 additional shares of common stock reserved for future grants under our current stock plan as of March 23, 2010, none of which shares shall be available for grant following the effectiveness of this offering ; and
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Additional shares of common stock reserved for future grants under our 2010 Stock Incentive Plan, which will become effective upon the effectiveness of this offering; such number of additional shares to equal (a) 15% of the number of shares of our common stock outstanding after this offering, assuming the exercise of all warrants and options to purchase shares of our common stock and the vesting of all restricted stock units outstanding after this offering and including all shares to be reserved under this plan, (b) less 2,083,707 shares currently subject to outstanding options and restricted stock units, grants of shares of restricted common stock, and exercised options.
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527,500 restricted stock units, each of which entitles the holder to acquire one share of our common stock, issued to our employees and certain outside directors in January 2010.
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Unless otherwise indicated, all information in this prospectus:
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assumes an initial public offering price of $6.10 per share of common stock, the mid-point of the range set forth on the cover page of this prospectus;
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assumes completion of the Capital Reorganization;
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assumes no exercise by the underwriters of their option to purchase up to shares of our common stock in this offering to cover over-allotments; and
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assumes the filing of our amended and restated certificate of incorporation with the Secretary of State of the State of Delaware and the adoption of our amended and restated by-laws immediately prior to the closing of the offering.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables present a summary of certain historical consolidated financial information and pro forma net loss per common share. You should read the following summary financial data in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all included elsewhere in this prospectus. The summary consolidated financial data as of and for the years ended December 31, 2007, 2008 and 2009 has been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus.
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2009
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2008
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2007
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(all numbers in thousands except per share data)
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Consolidated Statements of Operations
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Net Sales
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$ | 38,192 | $ | 18,330 | $ | 25,702 | ||||||
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Cost of Sales
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20,579 | 10,959 | 14,080 | |||||||||
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Gross Profit
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17,613 | 7,371 | 11,622 | |||||||||
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Operating Expenses:
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Selling, general and administrative
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8,960 | 7,983 | 7,363 | |||||||||
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Research and development
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6,396 | 6,498 | 7,829 | |||||||||
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Total Operating Expenses
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15,356 | 14,481 | 15,192 | |||||||||
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Income/(Loss) from Operations
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2,257 | (7,111 | ) | (3,570 | ) | |||||||
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Other Income (Expense):
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Interest income
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5 | 22 | 42 | |||||||||
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Interest expense
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(1,219 | ) | (1,418 | ) | (1,289 | ) | ||||||
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Other income (expense)
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7 | 0 | 5 | |||||||||
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Unrealized gain (loss) on preferred stock warrant liability
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170 | (27 | ) | |||||||||
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Other income (expense) - net
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(1,037 | ) | (1,423 | ) | (1,242 | ) | ||||||
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Income (Loss) Before Income Taxes
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$ | 1,220 | $ | (8,534 | ) | $ | (4,812 | ) | ||||
| Provision for Income Taxes | 29 | — | — | |||||||||
| Net Income (Loss) | $ | 1,191 | $ | (8,534 | ) | $ | (4,812 | ) | ||||
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Net income (loss) per share attributable to common stockholders
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- basic
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$ | 0.08 | $ | (0.58 | ) | $ | (0.33 | ) | ||||
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- diluted
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$ | 0.01 | $ | (0.58 | ) | $ | (0.33 | ) | ||||
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Weighted average number of common shares outstanding
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- basic
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14,992 | 14,707 | 14,668 | |||||||||
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- diluted
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83,328 | 14,707 | 14,668 | |||||||||
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Shares used in computing pro forma basic and diluted net loss per common share (unaudited)1
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14,233 | N/A | N/A | |||||||||
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Pro forma net income per common share, diluted (unaudited) 1
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$ | 0.08 | N/A | N/A | ||||||||
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(1)
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Pro forma diluted income per share assumes the dilutive effect of the issuance of 30,000,000 shares of our common stock to holders of shares of our redeemable convertible preferred stock and warrants to purchase shares of our redeemable convertible preferred stock in exchange for the waiver of certain contractual rights regarding the conversion of all outstanding redeemable convertible preferred stock to common stock upon an initial public offering and a subsequent 1 to 10 reverse stock split.
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As of December 31, 2009
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Actual
(audited)
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Pro Forma(a)
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Pro Forma as Adjusted(b)
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(in thousands)
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Consolidated Balance Sheet Data
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Cash, cash equivalents and available-for-sale securities
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$ | 4,014 | $ | 7,197 | $ | 26,549 | ||||||
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Working capital
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4,383 | 4,383 | 4,383 | |||||||||
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Total assets
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24,046 | 24,046 | 46,581 | |||||||||
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Long-term debt, including current portion
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4,065 | 4,065 | 0 | |||||||||
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Redeemable convertible preferred stock
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35,897 | — | — | |||||||||
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Total stockholders’ equity (deficit)
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(30,581 | ) | 5,316 | 35,316 | ||||||||
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(a)
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The pro forma consolidated balance sheet data gives effect to the conversion of all outstanding shares of redeemable convertible preferred stock as of December 31, 2009 into 86,123,475 shares of our common stock upon the closing of this offering .
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(b)
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The pro forma as adjusted consolidated balance sheet data also gives effect to the sale of 4,918,033 shares of our common stock in this offering at an assumed initial public offering price of $6.10 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should consider carefully the risks described below, together with the other information in this prospectus (including our financial statements and the related notes) before investing in our common stock. If any of the events or developments described below actually occur, our business, operating results or financial condition could be materially adversely affected. This could cause the market price of our common stock to decline, and could cause you to lose all or part of your investment.
Our business, prospects, financial condition or operating results could be harmed by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial.
Risks Related to Our Business and Industry
Our quarterly operating results have varied in the past and will continue to vary significantly in the future, causing volatility in our stock price.
We have experienced and expect to continue to experience significant fluctuations in our quarterly operating results, which may adversely affect our stock price. Some of the factors that may influence our operating results and subject our common stock to price and volume fluctuations include:
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demand for products that use semiconductors;
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changing global economic conditions and worldwide political instability;
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technological developments in the semiconductor industry;
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market acceptance of our systems and changes in our product offerings;
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changes in average selling price and product mix;
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strategic initiatives by us or our competitors;
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the gain or loss of significant customers;
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size and timing of orders from customers;
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customer cancellations or delays in orders, shipments, and installations;
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failure to ship an anticipated number of systems in the quarter;
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product development costs, including research, development, engineering and marketing expenses associated with our introduction of new products and product enhancements;
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sudden changes in component prices or availability;
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manufacturing inefficiencies caused by uneven or unpredictable order patterns, reducing our gross margins;
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costs associated with protecting our intellectual property;
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the level of our fixed expenses relative to our net sales; and
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fluctuating costs associated with our international organization and international sales, including currency exchange rate fluctuations.
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Additionally, during any quarter, a significant portion of our net sales may be derived from the sale of a relatively small number of high priced systems. The selling prices of our systems range from approximately $2 million to in excess of $3 million. Accordingly, a small change in the number and/or mix of systems we sell may cause significant changes in our operating results.
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Moreover, variations in the amount of time it takes for our customers to accept our systems may also cause our operating results to fluctuate. The United States Securities and Exchange Commission, (the “SEC”), guidance on the recognition of revenue for sales that involve contractual customer acceptance provisions and product installation commitments provides that the timing of revenue recognition from such sales is subject to the length of time required to achieve customer acceptance after shipment, which could cause our operating results to vary from period to period.
Typically, we do not have long-term contracts with our customers. As a result, our agreements with our customers do not provide any assurance of future sales. In addition, due to possible customer changes in delivery schedules and cancellations of orders, our product order backlog at the beginning of each fiscal quarter may not accurately reflect future sales.
In light of these factors and the highly cyclical nature of the semiconductor industry, we expect to continue to experience significant fluctuations in quarterly and annual operating results. Moreover, many of our expenses are fixed in the short-term, which, together with the need for continued investment in research and development, marketing and customer support, limits our ability to reduce expenses quickly in response to declines in sales, which, in turn, could harm our results of operations and cash flows, causing our operating results to be below the public market analysts’ or investors’ expectations and the market price of our stock to significantly decline.
We have incurred significant net losses in the past, our future revenues are inherently unpredictable, and we may be unable to maintain profitability.
We have incurred significant net losses in the past. Our operating results for future periods are subject to numerous uncertainties, and there can be no assurance that we will be able to maintain the profitability that we achieved during the third quarter of the year ended December 31, 2009 . It is possible that in future quarters our operating results will decrease from the previous quarter or fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock could significantly decline.
We derive a substantial portion of our revenues from a small number of customers, and our business may be harmed by the loss of any one significant customer.
In the year ended December 31, 2009, two customers accounted for approximately 48% of our net sales, with customer A accounting for 33% and customer B accounting for 15% of such sales. In the year ended December 31, 2008, four customers accounted for approximately 66% of our net sales, with customer A accounting for 14%, customer C accounting for 19%, customer D accounting for 18% and customer E accounting for 16% of such sales. Because there are a limited number of large companies operating in the highly concentrated, capital intensive semiconductor industry, we expect that we will continue to depend on a relatively small number of large companies for a significant portion of our net sales. Although the composition of the group of largest customers may change from year to year, the loss of, or a significant curtailment of purchases by, one or more of our key customers or the delay or cancellation of a large order could cause our net sales to decline significantly, which would harm our business, financial condition, results of operations and cash flows. Similarly, delays in payments by large customers could have a significant impact on our cash flows.
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Cyclicality in the semiconductor industry has historically led to substantial variations in demand for our products and caused our operating results to vary.
The semiconductor industry historically has been highly cyclical in nature and has experienced significant downturns, often in connection with, or in anticipation of, declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Our business depends upon the capital spending of semiconductor manufacturers, which, in turn, depends upon the current and anticipated market demand for semiconductors and products using semiconductors. Our operating results are, therefore, subject to significant variation due to these business cycles, the timing, length and volatility of which are difficult to predict.
During downturns, the semiconductor equipment industry typically experiences a more pronounced percentage decrease in revenues than the semiconductor industry in general. A prolonged downturn can seriously affect our net sales, gross profit and results of operations. In addition, it is critical to appropriately align our cost structure with prevailing market conditions during a downturn to minimize its effect on our operations, and in particular, to continue to maintain our core research and development programs. If we are unable to align our cost structure in response to a downturn on a timely basis, or if such implementation has an adverse impact on our business, our financial condition, results of operations and cash flows may be more negatively affected than our competitors during such a period.
Conversely, during an upturn or periods of increasing demand for semiconductor manufacturing equipment, we may not have sufficient manufacturing capacity and inventory to meet customer demand. During an upturn we may be unable to predict the sustainability of a recovery, if any, and/or the industry’s rate of growth in such a recovery, both of which will be affected by many factors. If we are unable to effectively manage our resources and production capacity during an industry upturn, there could be a material adverse effect on our competitive position and market share, and on our business, financial condition, results of operations and cash flows.
Rapid technological change in the semiconductor industry could make our products obsolete and requires substantial research and development expenditures and responsiveness to customer needs.
We operate in an industry that is subject to evolving industry standards, rapid technological changes and changes in customer demands, and the rapid introduction of new, higher performance systems with shorter product life cycles. Our products and processes must address changing customer needs in a range of materials, such as copper and aluminum, and ever-smaller device features, while maintaining our focus on manufacturing efficiency and product reliability. Introductions of new products by us or our competitors could adversely affect sales of our existing products and may cause these existing products and related inventories to become obsolete or unmarketable, or otherwise cause our customers to defer or cancel orders for existing products. We therefore devote a significant portion of our personnel and financial resources to research and development (“R&D”) programs and we seek to maintain close relationships with our customers in order to remain responsive to their product and manufacturing process needs. For the year ended December 31 , 2009, 16.7% of our revenues were used to support research and development, including application engineering costs to demonstrate customer solutions.
Although, historically, we have had adequate funds from operations to devote to research and development, there can be no assurance that we will have funds available, and in sufficient quantities, in the future for such R&D activities. Moreover, there can be no assurance that we will be successful in selecting, developing, manufacturing and marketing new products, or in enhancing our existing products. If we do not continue to gain market acceptance for our new technologies and products, develop and introduce improvements in a timely manner in response to
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changing market conditions and customer requirements, or remain focused on R&D efforts that will translate into greater revenues, our competitive position and our business could be seriously harmed.
There can be no assurance that revenue from future products or product enhancements will be sufficient to recover our investments in R&D. To ensure the functionality and reliability of our future product introductions or product improvements, we incur substantial R&D costs early in development cycles, before we can confirm the technical feasibility or commercial viability of a product or product improvement. Our success depends in part on our ability to accurately predict evolving industry standards, to develop innovative solutions and improve existing technologies, to win market acceptance of our new and advanced technologies and to manufacture our products in a timely and cost-effective manner.
Any significant delay in releasing new systems could adversely affect our reputation, give a competitor a first-to-market advantage or allow a competitor to achieve greater market share. If new products have reliability or quality problems, we could experience reduced orders, higher manufacturing costs, delays in collecting accounts receivable or additional service obligations and warranty expenses could rise, all of which would affect our gross margins. Any of these events could materially and adversely affect our business, financial condition or results of operations.
We have experienced periods of rapid growth and decline in operating levels, and if we are not able to successfully manage these significant fluctuations, our business, financial condition and results of operations could be significantly harmed.
We have experienced periods of significant growth and decline in net sales. For example, our revenues dropped from $25.7 million in the year ended December 31, 2007 to $18.3 million in the year ended December 31, 2008, but have since increased to $ 38.2 million for the year ended December 31, 2009. If we are unable to effectively manage periods of rapid decline or sales growth, our business, financial condition, results of operations and cash flows could be significantly harmed.
Our deferred revenue and orders backlog might not result in future net sales.
Revenue recognition guidance from the SEC requires that revenue and the associated profit from the sale of newly introduced systems, systems sales into new customer environments and substantive installation obligations that are subject to contractual customer acceptance provisions are deferred until the customer has acknowledged its acceptance of the system. If the system does not meet the agreed specifications and the customer refuses to accept the system, the deferred revenue and associated deferred profit will not be realized and we may be required to refund any cash payments previously received from the customer, which may harm our business, financial condition, results of operations and cash flows.
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Order backlog does not necessarily include all sales needed to achieve net revenue expectations for a subsequent period. We schedule the production of our systems based in part upon order backlog. Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. In addition, while we evaluate each customer order to determine qualification for inclusion in backlog, there can be no assurance that amounts included in backlog will ultimately result in future sales. A reduction in backlog during any particular period, or the failure of our backlog to result in future sales, could harm our business, financial condition, results of operations and cash flows.
A general global economic downturn may negatively affect our customers and their ability to purchase our products.
Disruptions in the financial markets have had and may continue to have an adverse effect on the U.S. and world economies, which could negatively impact business spending patterns. The current limitations on credit in financial markets could adversely affect the ability of some of our customers and suppliers to obtain financing for significant purchases and operations and could result in a decrease in or cancellation of orders for our products, increased price competition and increased demand for customer financing. Although we generally have not experienced material cancellations of orders, significant customers could seek to cancel or delay orders in the future. While in some cases we have contractual protections against such cancellations or requests for delayed shipments, there is no assurance that we can collect amounts due under those provisions.
We face substantial competition from several competitors and if we do not compete effectively with these competitors our market share could decline.
We face substantial competition in the semiconductor equipment industry, from both potential new market entrants and established competitors. Many of our customers and potential customers are relatively large companies that require global support and service for their semiconductor manufacturing equipment. Many of our competitors and potential competitors have significantly greater financial, technical, marketing and/or service resources than us and/or have greater geographical reach to existing and prospective customers. Many of these companies also have a larger installed base of products, longer operating histories or greater name recognition than we do. On December 21, 2009, Applied Materials, Inc., the largest company in the semiconductor capital equipment industry, announced that it had completed the acquisition of Semitool, Inc., an established competitor, through a cash tender offer. Other competitors include Ebara Corporation, OC Oerlikon Corporation AG, Tegal Corp., ULVAC, Inc., Novellus Systems Inc. (“Novellus”) and Electroplating Engineers of Japan Ltd. Our larger competitors have more extensive infrastructures, which could place us at a disadvantage when competing for the business of global semiconductor device manufacturers. In addition, our competitors may be able to respond more quickly than us to changes in end-user requirements and devote greater resources to the enhancement, promotion and sale of their products.
To maintain or capture a position in the market, we must develop new and enhanced systems and introduce them at competitive prices on a timely basis, while managing our R&D, product and warranty costs. Semiconductor manufacturers incur substantial costs to install and integrate capital equipment into their production lines. This increases the likelihood of continuing relationships with chosen equipment vendors, including our competitors, and the difficulty of penetrating new customer accounts.
We expect our competitors to continue to improve the design and performance of their products. We cannot assure you that our competitors will not develop enhancements to, or future generations of, competitive products that will offer superior price, performance and/or cost of ownership features, or that new processes or technologies will not emerge that render our products less competitive or obsolete.
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Our Stratus product line accounts for a substantial portion of current and anticipated sales.
Our Stratus product accounted for a majority of our product revenues for the years ended December 31, 2007 and 2008 and substantially all of our product revenues for the year ended December 31, 2009 . We expect revenues from Stratus to continue to account for a majority of our revenues for the foreseeable future. Accordingly, if the Stratus product line was adversely affected by its own performance, price or total cost of ownership, or the availability, functionality and price of competing products and technologies, that could have a material adverse impact on our business, financial condition, results of operations and cash flows.
If we are required to change our pricing models to compete successfully, our margins and operating results may be adversely affected.
Due to intense competitive conditions in the semiconductor equipment industry, we may have to, from time to time, selectively reduce prices on our systems in order to protect our market share, and competitive pressures may necessitate further price reductions. Periodically, our competitors announce the introduction of new products or lower prices. These announcements could affect our customers’ decisions to purchase our systems, the prices we can charge for our systems and the level of discounts we may have to grant our customers. Any such changes would reduce our margins and could adversely affect our operating results.
We may be adversely affected by credit risk.
We are exposed to credit risk for accounts receivable in the event that counterparties do not meet their payment obligations. Although we believe our significant customers are financially sound, we attempt to mitigate our credit risk, to the extent possible, by performing credit reviews and seeking customer deposits and letters of credit in certain circumstances. Both economic and geopolitical uncertainty can influence the ultimate collectability of these receivable amounts. Failure to collect outstanding receivables could have a material adverse effect on our business, results of operations and financial condition.
We are exposed to risks associated with outsourcing activities, which could result in supply shortages that could affect our ability to meet customer needs.
We outsource the manufacture of our sputter deposition equipment and our Stratus sub-assemblies, which enables us to focus on development, quality assurance and sales while allowing us to control our fixed overhead and capital equipment expenditures by minimizing manufacturing costs. Although we make reasonable efforts to ensure that third party providers will perform to our standards, our reliance on suppliers and subcontractors limits our control over manufacturer defects, delivery schedules and the ability to meet customer demand when faced with product shortages. Defects in workmanship, unacceptable yields and manufacturing disruptions may impair our ability to manage inventory and cause delays in shipments and cancellation of orders that may adversely affect our relationships with current and prospective customers and enable competitors to penetrate our customer accounts. In addition, third party providers may prioritize capacity for larger competitors or increase prices to us, which may adversely affect our profitability and our ability to respond to pricing pressures from competitors and customers.
Our growth and ability to meet customer demands depend in part on our ability to obtain from our suppliers timely deliveries of equipment and subassemblies for the manufacture and support of our products. Although we make reasonable efforts to ensure that such equipment is available from multiple suppliers, certain key parts may be obtained only from a single source or from limited sources. For instance, we outsource the manufacture of our sputter deposition systems exclusively to one supplier; however, if this supplier is unable to honor any order we place with it, we have the right to use this provider or other suppliers as we choose for orders for products
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referenced in such orders going forward. As a result of limited sources of supply, our supply channels may be vulnerable to disruption. Any such disruption to or termination of our supplier relationships might result in a prolonged inability to secure adequate supplies at reasonable prices or of acceptable quality, and may adversely affect our ability to bring new products to market and deliver them to customers in a timely manner. As a result, our business, revenues and operations may be adversely affected.
We are subject to the risks of operating internationally and derive the vast majority of our revenues from outside North America.
Our net revenues attributable to customers outside North America as a percentage of our total net revenues were approximately 73% for the year ended December 31, 2007, 89% for the year ended December 31, 2008 and 69% for the year ended December 31 , 2009. We expect net sales outside the U.S. to continue to represent the vast majority of our future net sales. Because virtually all of our international sales are denominated in U.S. dollars, if the U.S. dollar rises in value in relation to foreign currencies, our systems will become more expensive to customers outside the U.S. and less competitive with systems produced by competitors outside the U.S., which could negatively impact our international sales. Our products are controlled goods for U.S. export control purposes. While we have implemented an export control compliance program, if the measures we have taken or will take in the future to comply with the U.S. export control regime are insufficient, we may be subject to significant penalties and/or restrictions on our ability to export our products. In addition, sales to customers outside the U.S. are subject to other risks, including:
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exposure to currency fluctuations;
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political and economic instability, public health crises, acts of war or terrorism;
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natural disasters, such as earthquakes, noting that many semiconductor foundries are located in geologically unstable areas of the world;
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unexpected changes in regulatory requirements;
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difficulties in collecting accounts receivables;
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tariffs and other market barriers;
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positions taken by United States governmental agencies regarding possible national commercial and/or security issues posed by international business operations;
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potentially adverse tax consequences;
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inadequate protection or enforcement of our intellectual property and other legal rights in foreign jurisdictions;
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difficulties in managing foreign sales representatives and distributors; and
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difficulties in staffing and managing foreign branch operations and providing prompt and effective field support to our customers outside the U.S.
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Any of these factors may have a material adverse effect on our business, financial condition or results of operations. Moreover, because we derive a substantial portion of our revenues from customers in Asia, any negative economic developments, legal or regulatory changes, terrorism or geo-political instability there, including the possible outbreak of hostilities or epidemics involving Singapore, China, Taiwan, Korea or Japan, could result in the cancellation or delay by certain significant customers of orders for our products. Any such occurrence could adversely affect our business, financial condition or results of operations, and our continuing expansion in Asia renders us increasingly vulnerable to such risks.
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Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could cause our stock price to decline.
Variations in the length of our sales cycles could cause our net sales, and thus our business, financial condition, results of operations and cash flows, to fluctuate widely from period to period and, in turn, cause our stock price to decline. Our customers generally take a long time to evaluate many of our products before committing to a purchase, during which time we may expend substantial funds and management effort educating them regarding the uses and benefits of our systems. The length of time it takes us to make a sale depends upon many factors, including:
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the efforts of our sales force and our independent sales representatives and distributors;
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the complexity of our customers’ fabrication processes;
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the internal technical capabilities and sophistication of the customer; and
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decisions on capital spending by our customers.
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Because of the number of factors influencing our sales cycle, the period between our initial contact with a potential customer and the time at which we recognize revenue from our customer, if ever, varies widely in length. Our sales cycle typically ranges from several months to 18 months or more. Occasionally our sales cycle can be even longer, particularly with our international customers and new technologies. The subsequent build cycle, or the time it takes us to build a product to customer specifications after receiving an order, typically ranges from nine to 16 weeks. During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenue, and we may never receive any revenue from a customer despite our sales efforts.
When a customer purchases one of our systems, that customer often evaluates the performance of the system for a lengthy period before considering the purchase of more systems. The number of additional products a customer may purchase from us, if any, depends on many factors, including the customer’s capacity requirements. The period between a customer’s initial purchase and subsequent purchases, if any, often varies, and variations in length of this period could cause further fluctuations in our business, financial condition, results of operations, cash flows, and possibly our stock price.
If we deliver systems with defects, our credibility may be harmed, sales and market acceptance of our systems may decrease and we may incur liabilities associated with those defects.
Our products are complex and, accordingly, they may contain defects or errors, particularly when first introduced, that we may not discover until after a product has been released and used by our end-customers. Defects and errors in our products could materially and adversely affect our reputation, result in significant costs to us, delay planned release dates and impair our ability to sell our products in the future. The costs we incur correcting any product defects or errors may be substantial and could adversely affect our operating margins.
Defects could also lead to commercial and/or product liability as a result of lawsuits against us or against our customers. In many of our customer contracts, we have agreed to product liability indemnities without limitation on our liability. Because our product and commercial liability insurance policies currently provide only limited coverage per claim, in the event of a successful product liability and/or commercial claim, we could be obligated to pay damages that may not be covered by insurance or that are significantly in excess of our insurance limits.
While we plan to continually test our products for defects and errors and work with customers through our post-sales support services to identify and correct defects and errors, defects or errors in our products may be found in the future.
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Failure of our products to gain market acceptance would adversely affect our financial condition and our ability to provide customer service and support.
Our growth prospects depend upon our ability to gain customer acceptance of our products and technology, which, in turn, depends upon numerous factors, including compatibility with existing manufacturing processes and products, perceived advantages over competing products and the level of customer service available to support such products. Moreover, manufacturers often rely on a limited number of equipment vendors to meet their manufacturing equipment needs. As a result, market acceptance of our products may be limited to the extent potential customers currently use a competitor’s manufacturing equipment. There can be no assurance that growth in sales of new products will continue or that we will be successful in obtaining broad market acceptance of our systems and technology.
We expect to spend a significant amount of time and resources to develop new products and refine existing products. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenue from the sale of any new systems. Our ability to commercially introduce and successfully market any new products is subject to a wide variety of challenges during this development cycle, including start up delays, design defects and other matters that could delay the introduction of these systems to the marketplace. The failure of any of our new products to achieve market acceptance would prevent us from recouping research and development expenditures and would harm our business, financial condition, results of operations and cash flows.
If we require additional capital in the future, it may not be available, or if available, may not be on terms acceptable to us.
We believe that our cash and cash equivalents, including the net proceeds of this offering, cash flows from operations and cash available from a revolving credit facility we entered into in December 2006, as subsequently amended, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional financing to fund our operations in the future. Although we expect existing debt financing arrangements and cash flows generated from operating activities to be sufficient to fund operations at the current and projected levels in the future, there is no assurance that our operating plan will be achieved. Therefore, we may need to take actions to reduce costs, seek alternative financing arrangements or pursue additional placements of our common stock.
A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital in the future, if and when it is required, especially if we are unable to maintain profitability. If adequate capital is not available to us as required, or is not available on favorable terms, our shareholders may be subject to significant dilution in their ownership if we raise additional funds through the issuance of equity securities, or we could be required to significantly reduce or restructure our business operations.
The above mentioned revolving credit facility currently provides for up to $6.0 million in borrowings. In addition, the credit facility contains financial covenants that must be met for the availability of funds and is secured by a lien on substantially all our assets . There is no assurance that this facility will be sufficient to meet our needs or that in the future we will be able to meet the requirements of these covenants so that the funds are available for borrowing. In the event that we default on the terms of this credit facility, the lender would have a claim on the assets or our business, including our intellectual property.
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Our ability to recruit and retain management and other qualified personnel is crucial to our ability to develop, market, sell and support our products and services.
Our ability to compete in the highly competitive semiconductor equipment industry depends in large part upon our ability to attract and retain highly qualified managerial, technical, sales and marketing personnel. Competition for such personnel can be intense, and we cannot provide assurance that we will be able to attract or retain highly qualified personnel in the future. Stock options and other equity compensation comprise a significant component of our compensation of key employees, and, if our share price declines, it may be difficult to recruit and retain such individuals. In addition, the number of stock options and other equity incentives available for grant is limited, which may limit our ability to use equity incentives as a means to recruit and retain key employees.
Despite our efforts to retain valuable employees, members of our management, technical, sales and marketing teams may terminate their employment with us on short notice. While we have employment agreements with certain of our employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. The loss of the services of any of our executive officers or other key employees or our inability to identify, hire, train and retain such persons could have a material adverse effect on our business, results of operations and financial condition.
Our ability to manage the integration of potential acquisitions and the potential disposition of product lines and technologies creates risks.
In the future, we may make acquisitions of complementary companies, products or technologies, or reduce or dispose of certain product lines or technologies that no longer fit our long-term strategies. Managing an acquired business, disposing of product technologies or reducing personnel entails numerous operational and financial risks, including:
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diversion of management’s attention;
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disruption to our ongoing business;
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failure to retain key acquired personnel;
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difficulties in integrating acquired operations, technologies, products or personnel or separating existing business or product groups;
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unanticipated expenses, events or circumstances;
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assumption of disclosed and undisclosed liabilities;
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amortization of acquired intangible assets; and
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difficulties in maintaining customer relations.
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If we do not successfully address these risks or any other problems encountered in connection with an acquisition or disposition, such a transaction could have a material adverse effect on our business, results of operations and financial condition. In addition, if we proceed with an acquisition, our available cash may be used to complete the transaction, diminishing our liquidity and capital resources, or shares may be issued, which could cause significant dilution to our existing shareholders.
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Risks Related to Legal Uncertainty
If the protection of our proprietary rights is inadequate, our business could be harmed.
We place a strong emphasis on the technically innovative features of our products and, where available, we generally seek patent protection for those features. We currently hold 11 U.S. patents, some with pending foreign counterparts, have eight U.S. patent applications pending, and intend to file additional patent applications as we deem appropriate. There can be no assurance that patents will issue from any of our pending applications or that existing or future patents will be sufficiently broad to protect our technology. There is also no guarantee that any patents we hold will not be challenged, invalidated or circumvented, or that the patent rights granted will provide competitive advantages to us, as our competitors may develop similar or superior technology based on inventions not covered by our patents or without infringing our patents. In addition, we rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties. These agreements could be breached and we may not have adequate remedies for any such breach. In any case, others may come to know about or determine our trade secrets through a variety of methods.
Now, and in the future, litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to defend ourselves against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. Any such litigation could cause us to accrue substantial cost or divert our management or resources, which by itself could have a material adverse effect on our financial condition, results of operations and cash flows. Further, adverse determinations in such litigation could result in our loss of proprietary rights, subject us to significant liabilities and damages to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could harm our business, financial condition, results of operations and cash flows.
In addition, the laws of certain foreign countries do not protect our intellectual property to the same extent as the laws of the United States and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries, some of which are countries in which we have sold and continue to sell systems. For example, in many countries other than the United States, the public disclosure of an invention prior to the filing of a patent application for the invention would invalidate the ability of a company to obtain a patent. Similarly, in contrast to the United States, where the contents of patent applications may remain confidential during the patent prosecution process in certain cases, the contents of a patent application may be published before a patent is granted, which provides competitors an advanced view of the contents of applications prior to the establishment of patent rights. For these and other reasons, we have not filed patent applications in these countries to the same extent that we file in the United States and, therefore, we are at risk that our competitors in these countries may independently develop similar technology or duplicate our systems. If we fail to adequately protect our intellectual property in these countries, it would be easier for our competitors to sell competing products in those countries.
If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.
Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our products and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications that are owned by third parties exist in the fields in which we and our collaborators are developing products. Some of these patents may grant very broad protections to their owners. As the semiconductor and semiconductor equipment industries expand and more
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patents are issued, the risk increases that our potential products may give rise to claims of infringement of the patent rights of others. There may be issued patents of third parties of which we are currently unaware that may be infringed by our products. Because patent applications can take many years to issue, there may be currently pending applications that may later result in issued patents that our products may infringe.
There is a substantial amount of litigation involving patent and other intellectual property rights in the semiconductor and semiconductor equipment industries generally and we may be exposed to, or threatened with, future litigation by third parties alleging that our products infringe their intellectual property rights. We may become subject to these claims either directly or through indemnities against these claims that we routinely provide to our customers and channel partners. In many of our customer agreements we do not have a limit on our liability for such claims and therefore a successful claim could result in significant liability to us. We have received a few claims from third parties asserting infringement and other claims, and may receive other such claims in the future. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including, but not limited to:
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infringement and other intellectual property claims that, regardless of merit, may be expensive and time-consuming to litigate and may divert our management’s attention from our core business;
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substantial damages for infringement, which we may have to pay if a court decides that the product at issue infringes on or violates the third party’s rights, and, if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner’s attorneys’ fees;
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a court prohibiting us from selling our product unless the third party licenses its rights to us, which it is not required to do;
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if a license is available from a third party, we may have to pay substantial royalties, fees or grant cross-licenses to our intellectual property rights; and
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redesigning our products so they do not infringe, which may not be possible or may require substantial monetary expenditures and time.
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If we lose our rights to use intellectual property that we currently license from third parties, we could be forced to seek alternative technology, which could increase our operating expenses and could adversely affect our ability to compete.
We license certain intellectual property used in our solutions from third parties. The termination of any of these licenses could delay our ability to ship our products while we seek to implement alternative technology offered by other sources and could require significant unplanned investments on our part if we are forced to develop alternative technology internally. In addition, alternative technology may not be available to us on commercially reasonable terms from other sources. In the future, it may be necessary or desirable to obtain other third party technology licenses relating to one or more of our products or relating to current or future technologies to enhance our product offerings. There is a risk that we will not be able to obtain licensing rights to the needed technology on commercially reasonable terms, or at all.
We may become involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and unsuccessful.
Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that one or more of our patents is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An
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adverse result in any litigation or defense proceedings in which one or more of our patents are used as a basis for such proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
Interference proceedings brought by the U.S. Patent and Trademark Office may be necessary to determine the priority of inventorship with respect to owner rights to our U.S. patents and patent applications or those of our collaborators. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if a prevailing party does not offer us a license on terms that are acceptable to us. Litigation or interference proceedings may fail and, even if successful, might result in substantial costs and distraction of our management and other employees. We may not be able to prevent, alone or with our collaborators, misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the United States.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, they could have a substantial adverse effect on the price of our common stock.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The U.S. Patent and Trademark Office and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which non-compliance with such provisions can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
We employ individuals who were previously employed at other semiconductor equipment companies, including our competitors or potential competitors, and as such, we may be subject to claims that these employees, or we, have used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
In the past, one of our senior executives received a letter from his former employer alleging that he breached the terms of his non-disclosure agreement with the former employer by disclosing confidential information to us. We responded to this correspondence in July 2009 with a letter denying the allegation and have had no further contact with the former employer since that time.
We are exposed to various risks related to the regulatory environment.
We are subject to various risks related to: (1) new, different, inconsistent or even conflicting laws, rules and regulations that may be enacted by legislative bodies and/or regulatory agencies in the countries in which we operate; (2) disagreements or disputes between national or regional regulatory agencies related to international trade; and (3) the interpretation and application of laws, rules and regulations. If we are found by a court or regulatory
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agency not to be in compliance with applicable laws, rules or regulations, our business, financial condition and results of operations could be materially and adversely affected.
Compliance with environmental and health and safety regulations may be very costly, and the failure to comply could result in liabilities, fines and cessation of our business.
We are subject to a variety of governmental regulations related to the environment and health and safety, including regulations related to the handling, discharge and disposal of toxic, volatile or otherwise hazardous chemicals. Current or future regulations could require us or our customers to purchase expensive equipment or to incur other substantial expenses to comply with environmental or health and safety regulations. Any failure by us to control the use of, or adequately restrict the discharge or disposal of, hazardous substances could subject us to future liabilities, result in fines being imposed on us, or result in the suspension of production or cessation of our manufacturing operations.
We may be subject to personal injury claims based on alleged links between the semiconductor manufacturing process and certain illnesses. In the last few years, there has been increased media scrutiny and associated reports focusing on an alleged link between working in semiconductor clean room environments and certain illnesses, primarily different types of cancers. Because our equipment is manufactured and used in these clean rooms, we may become subject to liability claims. A significant judgment against us could harm our business, financial condition and results of operations.
General Company-Related Risks
There has been no prior market for shares of our common stock and there is no guarantee that an active public trading market will develop.
Prior to this offering, there has been no public market for our common stock, and a regular trading market may not develop and continue after this offering. Furthermore, the market price of our common stock may decline below the initial public offering price. The initial public offering price will be determined through negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our common stock following this offering. Among the factors considered in such negotiations are prevailing market conditions, certain of our financial information, market valuations of other companies that we and the representatives of the underwriters believe are comparable to us, estimates of our business potential and the present state of our business. See “Underwriting” for additional information.
Our share price will fluctuate and a holder may not be able to sell shares above the initial public offering price.
The initial public offering price of shares of our common stock may not be representative of the price that will prevail in the open market. Further, the market price of such shares may be volatile and could be subject to wide fluctuations due to a number of factors, including:
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actual or anticipated fluctuations in our results of operations;
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changes in estimates of our future results of operations by us or securities analysts;
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announcements of technological innovations or new products or services by us or our competitors;
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changes affecting the semiconductor industry;
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announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
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additions or departures of key technical or management personnel;
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issuances of debt or equity securities;
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significant lawsuits, including patent or stockholder litigation;
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changes in the market valuations of similar companies;
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sales of our common stock by us or our stockholders in the future;
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dilution caused by the exercise of warrants or employee stock options or the issuance of shares on the vesting of restricted stock units;
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trading volume of our common stock; and
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other events or factors that may directly or indirectly affect the value or perceived value of our business and/or prospects, including the risk factors identified in this prospectus.
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In addition, the financial markets have experienced significant price and value fluctuations that have particularly affected the market prices of equity securities of many technology companies and that sometimes have been unrelated to the operating performance of these companies. Broad market fluctuations, as well as economic conditions generally and in the semiconductor industry specifically, may adversely affect the market price of shares of our common stock.
Securities class action litigation often has been brought against companies following periods of volatility in the market price of their securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and damages and divert management’s attention and resources, which could adversely affect our business. Any adverse determination in litigation against us could also subject us to significant liabilities.
If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.
The initial public offering price is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $ per share, based on an initial public offering price of $6.10 per share. Further, investors purchasing common stock in this offering will contribute approximately % of the total amount invested by stockholders since our inception, but will own approximately % of the shares of common stock outstanding.
This dilution is primarily due to the fact that some of our investors who purchased shares prior to this offering paid substantially less than the price offered to the public in this offering when they purchased their shares. In addition, as of March 23, 2010 , options to purchase 1,081,886 shares of our common stock at a weighted average exercise price of $0.48 per share and warrants exercisable for up to 510,336 shares of our common stock at a weighted average price of $3.73 per share were outstanding and, further, we had granted an aggregate of 527,500 restricted stock units to certain employees and directors. The exercise of any of these options or warrants or the vesting of any of those restricted stock units will result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of a liquidation of our company.
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As a public company, we will become subject to additional financial and other reporting and corporate governance requirements that may be difficult for us to comply with on a timely basis and will require significant resources and management’s attention.
Prior to this offering, we were not subject to the continuous and timely disclosure requirements of U.S. securities laws or the rules, regulations and policies of any exchange. We are working with our legal, accounting and financial advisors to identify those areas in which changes should be made to our financial management control systems to manage our obligations as a public company. These areas include corporate governance, corporate controls, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas, including our internal controls over financial reporting. However, we cannot assure purchasers of shares of our common stock that these and other measures we may take will be sufficient to allow us to satisfy our obligations as a public company on a timely basis. In addition, compliance with reporting and other requirements applicable to public companies will create additional costs for us and will require the time and attention of management. We cannot predict the amount of the additional costs we may incur, the timing of such costs or the impact that management’s attention to these matters will have on our business.
Rules, including the Sarbanes-Oxley Act of 2002, may make it difficult for us to attract or retain qualified officers and directors, which could adversely affect our business.
We may be unable to attract and retain qualified officers, directors and members of board committees necessary for our effective management as a result of the rules and regulations that govern publicly held companies, including certifications from executive officers and requirements regarding financial experts on boards of directors. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of a series of rules and regulations and the strengthening of existing rules and regulations by the SEC. The perceived increased personal risk associated with these rules may deter qualified individuals from accepting these roles.
Further, certain of these rules heighten the requirements for board or committee membership, particularly with respect to an individual’s independence from our company and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, our business and our ability to maintain the listing of our shares of common stock on a stock exchange could be adversely affected.
We are not currently permitted, nor do we currently intend, to pay any cash dividends on our common stock in the foreseeable future and therefore our shareholders may not be able to receive a return on their shares unless they sell them at an amount greater than the price at which shares are being sold in this offering.
We have never declared or paid any dividends on our shares. Further, our revolving line of credit currently prohibits our paying any cash dividends without the lender’s consent. We currently intend to retain any future earnings to fund the development and growth of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon many factors, including our results of operations, capital requirements and other factors as our board of directors deems relevant.
Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
We are unable to predict the effect that sales may have on the prevailing market price of our common stock. Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales
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might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities.
We expect that, prior to the effectiveness of this offering, existing stockholders holding substantially all of the outstanding shares of our common stock will be subject to lock-up agreements with the underwriters of this offering. The lock-up agreements will limit the number of shares of common stock that may be sold immediately following the public offering by restricting our stockholders’ rights to transfer shares of our common stock for at least 180 days from the date of this prospectus. Subject to certain limitations, approximately of our total outstanding shares will be eligible for sale upon expiration of the lock-up period. In addition, shares issuable upon exercise of options and warrants vested as of the expiration of the lock-up period will be eligible for sale at that time. Sales of stock by these stockholders could have a material adverse effect on the trading price of our common stock. See “Shares Eligible for Future Sale.”
Certain holders of shares of our common stock are entitled to rights with respect to the registration of shares under the Securities Act of 1933, as amended (the “Securities Act”), subject to the 180-day lock-up arrangement described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See “Shares Eligible for Future Sale.”
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our 2010 stock incentive plan, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
It is possible that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. Pursuant to our stock incentive plan, our management is also authorized to grant stock options and other equity incentives to our employees, directors and consultants. If we sell common stock, convertible securities or other equity securities in more than one transaction, or issue stock or options pursuant to our stock incentive plan, investors may be materially diluted by subsequent sales. Such sales or issuances may also result in material dilution to our existing stockholders, and new investors could gain rights superior to existing stockholders.
All of the shares of common stock sold in our initial public offering will be freely tradable without restrictions or further registration under the Securities Act, except for any shares purchased by our affiliates as defined in Rule 144 under the Securities Act. Rule 144 defines an affiliate as a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, us and would include persons such as our directors and executive officers.
U.S. broker-dealers may be discouraged from effecting transactions in shares of our common stock because they may be considered penny stocks and thus be subject to the penny stock rules.
Rules 15g-1 through 15g-9 promulgated under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), impose sales practice and disclosure requirements on certain United States broker-dealers who engage in certain transactions involving a “penny stock.” Subject to certain exceptions, a penny stock generally includes any unlisted equity security that has a market price of less than $5.00 per share. In the event that the price for the shares of our common stock falls below $5.00 per share, the additional sales practice and disclosure requirements imposed upon U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares or our common stock, which could severely limit the market liquidity of such shares and impede the their sale in the secondary market.
A U.S. broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally, an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse) must make a special suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the penny stock regulations require the U.S. broker-dealer to deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared in accordance with SEC standards relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt. A U.S. broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer and the registered representative and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit monthly statements disclosing recent price information with respect to the penny stock held in a customer’s account and information with respect to the limited market in penny stocks.
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the section entitled “Use of Proceeds.” The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders.
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Our officers and directors and other affiliates may be able to exert significant control over the company.
After this offering, our executive officers, directors, 5% stockholders and their affiliates will beneficially own or control, directly or indirectly, approximately shares of our common stock, which in the aggregate will represent approximately % of our outstanding common stock. Therefore, these stockholders will have the ability to influence the company through this ownership position.
These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. In addition, after this offering our two largest stockholders will beneficially own or control, directly or indirectly, approximately % of our outstanding common stock and, as such, could block any corporate action requiring the consent of the holders of 50% or more of our common stock. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that a stockholder may believe is in its best interest. See “Principal Stockholders.”
Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments is limited by provisions of the Internal Revenue Code, and may be subject to further limitation as a result of the transactions contemplated by this offering.
Section 382 and 383 of the Internal Revenue Code of 1986, as amended, (the “Code”), contain rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and certain built-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards and certain built-in losses is equal to the product of the applicable long term tax exempt rate and the value of the company’s stock immediately before the ownership change. We may be unable to offset our taxable income with losses, or our tax liability with credits, before such losses and credits expire and therefore would incur larger federal income tax liability.
In addition, it is possible that the transactions described in this offering, either on a standalone basis or when combined with future transactions (including issuances of new shares of our common stock or common stock and sales of shares of our common stock), will cause us to undergo one or more additional ownership changes. In that event, we generally would not be able to use our pre-change loss or credit carryovers or certain built-in losses prior to such ownership change to offset future taxable income in excess of the annual limitations imposed by Sections 382 and 383 of the Code and those attributes already subject to limitations (as a result of our prior ownership changes) may be subject to more stringent limitations.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” contains forward-looking statements. Forward-looking statements convey our current expectations or forecasts of future events. All statements contained in this prospectus other than statements of historical fact are forward-looking statements. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words “may,” “continue,” “estimate,” “intend,” “plan,” “will,” “believe,” “project,” “expect,” “seek,” “anticipate,” “could” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. These forward-looking statements include, among other things, statements about:
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our expectations related to the use of proceeds from this offering;
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the timing, conduct and success of our sales activities;
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the progress of, timing of and amount of expenses associated with our research, development and commercialization activities;
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the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products;
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our plans with respect to collaborations and licenses related to the development, manufacture or sale of our products;
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our expectations as to future financial performance, expense levels and liquidity sources;
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our ability to manage growth;
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our ability to compete with other companies that are or may be developing or selling products that are competitive with our products;
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anticipated trends and challenges in our current and potential markets;
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our ability to attract and motivate key personnel; and
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other factors discussed elsewhere in this prospectus.
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Any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They may be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including the risks, uncertainties and assumptions described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur as contemplated, and actual results could differ materially from those anticipated or implied by the forward-looking statements.
You should not unduly rely on these forward-looking statements, which speak only as of the date of this prospectus. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC and Canadian securities regulators after the date of this prospectus. See “Where You Can Find Additional Information.”
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USE OF PROCEEDS
We estimate that the net proceeds of the sale of the common stock that we are offering will be approximately $ million, or $ million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $6.10 per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to obtain additional working capital to fund anticipated operating expenses, reduce existing indebtedness, establish a public market for our common stock and facilitate future access to the public markets.
We estimate that we will use the proceeds of this offering, in combination with existing cash resources of approximately $2.6 million as of March 23, 2010 , as follows:
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approximately $10.0 million to fund demonstration units to be placed with potential customers;
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approximately $10.0 million to fund the purchase of subassemblies and other inventory;
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approximately $5.0 million to reduce borrowings under our line of credit with Hercules Technology Growth Capital, Inc., which currently carries an interest rate of 13.25% on revolving advances and 17.5% on non-formula advances. This line of credit used for working capital to support growth. As of March 23, 2010 , the balance on this line of credit was $5.5 million;
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approximately $ million for the expenses of this offering; and
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the remaining $ for general corporate purposes, such as general and administrative expenses, capital expenditures, working capital, prosecution and maintenance of our intellectual property and the potential investment in technologies or products that complement our business. See “Business – Our Growth Strategy.”
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The amounts and timing of our actual expenditures will depend upon numerous factors, including the progress of our systems sales, research, development and commercialization efforts of new products, our existing and future strategic collaborations and partnerships and our operating costs and expenditures. Accordingly, our management will have significant flexibility in the expenditure of the net proceeds of this offering.
As the costs and timing of product development and commercialization are subject to substantial risks and can often change, we may change the allocation of use of these proceeds as a result of contingencies such as the progress and results of our development activities, the continuation of our existing collaborations and the establishment of new arrangements, our manufacturing requirements and regulatory or competitive developments. We may also use a portion of the net proceeds to us to expand our business through acquisitions of other companies, assets or technologies and to fund joint ventures with development partners. At this time we do not have any commitment to any specific acquisitions or to fund joint ventures. Alternatively, we may acquire another company with payment through securities, including debt.
Pending use of the proceeds from this offering as described above or otherwise, we intend to invest the net proceeds in short-term interest-bearing, investment-grade securities, certificates of deposit or Treasury or other government agency securities that can be liquidated at any time without penalties, or are readily convertible to cash, at the discretion of NEXX.
DIVIDEND POLICY
The holders of common stock will be entitled to share equally in any dividends that our board of directors may determine to issue from time to time. We have never declared or paid any cash dividends on our capital stock and
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we do not currently anticipate declaring or paying cash dividends on our capital stock in the foreseeable future. We currently intend to retain all of our future earnings, if any, to finance operations. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that our board of directors may deem relevant. Our current loan agreement with our secured lender prohibits the payment of cash dividends without the lender’s prior written consent.
CAPITALIZATION
The following table sets forth our capitalization as of December 31 , 2009:
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on an actual basis;
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on a pro forma basis to give effect to (a) the conversion of all outstanding shares of redeemable convertible preferred stock as of December 31, 2009 into 86,123,475 shares of our common stock upon the closing of this offering and (b) the issuance of 30,000,000 shares of our common stock to the holders of our redeemable convertible preferred stock and warrants to purchase shares of our redeemable convertible preferred stock immediately prior to the completion of this offering;
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on a pro forma as adjusted basis to give further effect to the receipt by us of net proceeds of $ million from the sale of shares of our common stock that we are offering, assuming an initial public offering price of $ per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
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You should read the following table in conjunction with our financial statements and related notes, “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.
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As of December 31, 2009
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Actual
(audited)
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Pro Forma
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Pro Forma as Adjusted(1)
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(in thousands, except share and per share data)
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Long-term debt, including current portion
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$ | 4,065 | $ | 4,065 | $ |
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Preferred stock warrant liability
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1,785 |
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— | |||||||||
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Redeemable convertible preferred stock, par value $0.001 per share: 85,560,230 shares authorized, 71,072,304 shares issued and outstanding, actual; no shares authorized; no shares issued and outstanding, pro forma; no shares authorized, no shares issued and outstanding, pro forma as adjusted
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35,897 | — | — | |||||||||
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Common stock, $0.001 par value: 123,974,712 shares authorized, 19,198,059 shares issued and outstanding, actual; 160,301,747 shares authorized and 137,832,504 issued and outstanding pro forma; 30,000,000 shares authorized, 18,701,234 shares issued and outstanding, pro forma as adjusted
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19 | 135 | 19 | |||||||||
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Additional paid-in capital
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11,547 | 47,328 | 77,323 | |||||||||
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Accumulated deficit
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(42,125 | ) | (42,125 | ) | (45,525 | ) | ||||||
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Accumulated other comprehensive income
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(4 | ) | (4 | ) | (4 | ) | ||||||
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Total stockholders’ equity (deficit)
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$ | (30,581 | ) | $ | 5,316 | $ | 31,911 | |||||
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Total capitalization
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$ | 11,166 | $ | 9,399 | $ | 31,911 |
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(1)
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Each $1.00 increase (decrease) in the assumed initial public offering price of $6.10 per share would increase (decrease) the amount of pro forma as adjusted cash, cash equivalents and available-for-sale securities; additional paid-in capital; total stockholders’ equity (deficit) and total capitalization by approximately $26.6 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
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The table above does not include:
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932,859 shares of common stock issuable upon the exercise of options outstanding as of December 31 , 2009, with exercise prices ranging from $0.10 to $9.40 per share and a weighted average exercise price of $0.20 per share;
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747,893 shares of common stock issuable upon the exercise of warrants outstanding as of December 31 , 2009, with exercise prices ranging from $0.09 to $7.98 per share and a weighted average exercise price of $2.65 per share; and
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•
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132,299 additional shares of common stock reserved for future grants under our 2003 employee, director and consultant stock option plan as of December 31 , 2009, 153,551 shares of common stock issuable upon the exercise of options granted in January and February 2010 at an exercise price of $2.70 per share, the issuance of 527,500 restricted stock units issued to our employees and certain outside directors in January 2010, as well as up to shares of common stock reserved for future grants under our 2010 stock incentive plan.
|
DILUTION
Our pro forma net tangible book value as of December 31 , 2009 was $4.6 million, or $0.03 per share based on the aggregate number of shares of common stock outstanding. Net tangible book value per share represents the amount of our total tangible assets, less our total liabilities, divided by the number of shares of common stock outstanding as of December 31 , 2009, after giving effect to the conversion of all outstanding shares of our convertible preferred stock into our common stock, which will occur upon the completion of this offering.
After giving effect to the sale of shares of common stock that we are offering, assuming an initial public offering price of $6.10 per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31 , 2009 would have been approximately $ million, or approximately $ per share of common stock. This amount represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $ per share to new investors purchasing shares of common stock in this offering assuming an initial public offering price of $6.10 per share, which is the midpoint of the range listed on the cover page of this prospectus. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share from the amount of cash that a new investor paid for a share of common stock. The following table illustrates this dilution:
|
Assumed initial offering price per share of common stock
|
$ | 6.10 | ||||||
|
Pro forma net tangible book value per share as of December 31 , 2009
|
$ | 0.03 | ||||||
|
Increase in pro forma net tangible book value per share attributable to this offering
|
$ | |||||||
|
Pro forma as adjusted net tangible book value per share after this offering
|
$ | |||||||
|
Dilution per share to new investors
|
$ | |||||||
- 32 -
A $1.00 increase (decrease) in the assumed initial public offering price of $6.10 per share of common stock, which is the midpoint of the range listed on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share by $ and the dilution per share to new investors by $ , in each case assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise their over-allotment option in full in this offering, the pro forma as adjusted net tangible book value would be $ per share, the increase in pro forma net tangible book value per share to existing stockholders would be $ and the dilution per share to new investors would be $ per share, in each case assuming an initial public offering price of $6.10 per share, which is the midpoint of the range listed on the cover page of this prospectus.
The following table summarizes, as of December 31 , 2009, the differences between the number of shares of common stock purchased from us, the total consideration paid to us in cash and the average price per share that existing stockholders and new investors paid. The calculation below is based on an assumed initial public offering price of $6.10 per share, which is the midpoint of the range listed on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
|
Shares Purchased
|
Total Consideration
|
|||||||||||||||||||
|
Number
|
Percent
|
Amount
|
Percent
|
Average Price per Share
|
||||||||||||||||
|
Existing Stockholders
|
% | $ | % | $ | ||||||||||||||||
|
New Investors
|
% | $ | % | $ | ||||||||||||||||
|
Total
|
% | $ | % | $ | ||||||||||||||||
The foregoing tables and calculations are based on the number of shares of our common stock outstanding as of December 31 , 2009, after giving effect to the Capital Reorganization; and excludes:
|
•
|
932,859 shares of common stock issuable upon the exercise of options outstanding as of December 31 , 2009, with exercise prices ranging from $0.10 to $9.40 per share and a weighted average exercise price of $0.20 per share;
|
|
•
|
747,893 shares of common stock issuable upon the exercise of warrants outstanding as of December 31 , 2009, with exercise prices ranging from $0.09 to $7.98 per share and a weighted average exercise price of $2.65 per share; and
|
|
•
|
132,299 additional shares of common stock reserved for future grants under our 2003 employee, director and consultant stock option plan as of December 31 , 2009, 153,551 shares of common stock issuable upon the exercise of options granted in January and February 2010 at an exercise price of $2.70 per share, the issuance of 527,500 restricted stock units issued to our employees and certain outside directors in January 2010, as well as up to shares of common stock reserved for future grants under our 2010 stock incentive plan.
|
If all our outstanding stock options and warrants had been exercised and all outstanding restricted stock units had vested as of December 31, 2009, assuming the treasury stock method, our pro forma net tangible book value as of December 31, 2009 would have been approximately $ million or $ per share of our common stock, and the pro forma net tangible book value after giving effect to this offering would have been $ per share, representing dilution in our pro forma net tangible book value per share to new investors of $ .
- 33 -
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected financial data together with our consolidated financial statements and the related notes beginning at page F-4 of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus. We have derived the consolidated statements of operations data for the years ended December 31, 2007, 2008 and 2009 and the consolidated balance sheet data as of December 31, 2007, 2008 and 2009 from our audited financial statements included elsewhere in this prospectus. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.
| Year Ended December 31, | ||||||||||||
| 2009 |
2008
|
2007
|
||||||||||
|
(all numbers in thousands except per share data)
|
||||||||||||
|
Consolidated Statements of Operations
|
||||||||||||
|
Net Sales
|
$ | 38,192 | $ | 18,330 | $ | 25,702 | ||||||
|
Cost of Sales
|
20,579 | 10,959 | 14,080 | |||||||||
|
Gross Profit
|
17,613 | 7,371 | 11,622 | |||||||||
|
Operating Expenses:
|
||||||||||||
|
Selling, general and administrative
|
8,960 | 7,983 | 7,363 | |||||||||
|
Research and development
|
6,396 | 6,498 | 7,829 | |||||||||
|
Total Operating Expenses
|
15,356 | 14,481 | 15,192 | |||||||||
|
Income/(Loss) from Operations
|
2,257 | (7,111 | ) | (3,570 | ) | |||||||
|
Other Income (Expense):
|
||||||||||||
|
Interest income
|
5 | 22 | 42 | |||||||||
|
Interest expense
|
(1,219 | ) | (1,418 | ) | (1,289 | ) | ||||||
|
Other income (expense)
|
7 | 5 | ||||||||||
|
Unrealized gain (loss) on preferred stock warrant liability
|
170 | (27 | ) | |||||||||
|
Other income (expense) - net
|
(1,037 | ) | (1,423 | ) | (1,242 | ) | ||||||
|
Income (Loss) Before Income Taxes
|
$ | 1,220 | $ | (8,534 | ) | $ | (4,812 | ) | ||||
| Provision for Income Taxes | 29 | — | — | |||||||||
| Net Income (Loss) | $ | 1,191 | $ | (8,534 | ) | $ | (4,812 | ) | ||||
|
Net income (loss) per share attributable to common stockholders
|
||||||||||||
|
- basic
|
$
|
0.08
|
$
|
(0.58
|
)
|
$
|
(0.33
|
)
|
||||
|
- diluted
|
$
|
0.01
|
$
|
(0.58
|
)
|
$
|
(0.33
|
)
|
||||
|
Weighted average number of common shares outstanding
|
||||||||||||
|
- basic
|
14,992
|
14,707
|
14,668
|
|||||||||
|
- diluted
|
83,328
|
14,707
|
14,668
|
|
Shares used in computing pro forma basic and diluted net loss per common share (unaudited)
|
14,233 | N/A | N/A | |||||||||
|
Pro forma net income per common share, basic and diluted (unaudited)1
|
$ | 0.08 | N/A | N/A |
|
(1)
|
Pro forma diluted income per share assumes the dilutive effect of the issuance of 30,000,000 shares of our common stock to holders of shares of our redeemable convertible preferred stock and warrants to purchase shares of our redeemable convertible preferred stock in exchange for the waiver of certain contractual rights regarding the conversion of all outstanding redeemable convertible preferred stock to common stock upon an initial public offering and a subsequent 1 to 10 reverse stock split.
|
- 34 -
| As of December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
|
Consolidated Balance Sheet Data
|
||||||||||||
|
Cash and cash equivalents
|
$ | 4,014 | $ | 3,990 | $ | 1,623 | ||||||
|
Working capital (deficit)
|
4,383 | (2,644 | ) | 1,568 | ||||||||
|
Total assets
|
24,046 | 18,216 | 20,356 | |||||||||
|
Preferred stock warrant liability
|
1,785 | 3,465 | 317 | |||||||||
|
Long-term debt, including current portion
|
4,065 | 7,659 | 15,083 | |||||||||
|
Redeemable convertible preferred stock
|
35,897 | 28,913 | 21,659 | |||||||||
|
Total NEXX Systems, Inc. stockholders’ equity (deficit)
|
(30,581 | ) | (31,951 | ) | (23,612 | ) | ||||||
- 35 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S., or U.S. GAAP. The following discussion and analysis contains forward-looking statements that involve known and unknown risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the heading “Risk Factors.” See also the section entitled “Special Note Regarding Forward-Looking Statements” elsewhere in this prospectus. All historical information does not give effect to the Capital Reorganization.
Overview of our Business
NEXX Systems, Inc. is a Delaware corporation founded in 2001. We meet the demand for smaller, high performance packages by designing, manufacturing, installing and servicing highly-engineered semiconductor process equipment that automates the packaging of semiconductor devices. Advanced packaging processes, examples of which include “flip chip,” package on package and emerging 3D TSV packaging, enable the packaging of integrated circuits that power this broad range of communications, computing and consumer electronic products. We estimate that the advanced packaging equipment market addressed by our current products was approximately $170 million in 2008 and we expect to exceed $500 million by 2013.
Our business is historically subject to highly cyclical industry conditions and is affected by the spending patterns of our customers on semiconductor capital equipment. The amount that our customers devote to this spending depends on a number of factors, including global economic conditions, technological advances and end-user demand for personal computers, mobile phones and other consumer electronics that use semiconductors, as well as new technology developments anticipated to drive the next stage of semiconductor needs. In addition, the industry is characterized by intense competition and rapidly changing technology. We continue to work closely with our customers and make substantial investments in research and development in order to deliver innovative products that enhance productivity for our customers and utilize the latest technology. We believe these investments have positioned us for future growth.
We derive our revenues primarily from sales of our two equipment platforms, the Apollo and the Stratus, and related equipment spare parts and services. Our revenues have grown from approximately $18.3 million in the year ended December 31, 2008 to $38.2 million in the year ended December 31 , 2009. This growth is primarily attributable to an increase of sales of the Stratus to one of the semiconductor industry’s largest foundries.
We believe that our ability to increase revenues in the future will depend on:
|
•
|
expanding the number of customers purchasing our equipment solutions for applications in advanced wafer level packaging;
|
|
•
|
expanding the number of systems purchased by each of our customers;
|
|
•
|
generating greater revenues from spares and services as more tools are installed worldwide; and
|
|
•
|
introducing new product platforms to address complementary areas in wafer level packaging.
|
In order to successfully execute our growth strategy, we must increase awareness of our company and our product platforms to a broader group of semiconductor manufacturers and expand their understanding of emerging
- 36 -
trends in wafer level packaging. As an additional means of increasing revenues in the future, we will continue to seed existing and prospective customers with evaluation units and related support, invest heavily in our operations to augment existing product platforms, and introduce new solutions.
Background and Acquisitions
In 2001, we began operations with the acquisition of the Nimbus, our first-generation sputter deposition equipment technology, from MKS Instruments, Inc. (“MKS”). Members of our team initially developed the core technologies for our products at a prior company, Applied Science and Technology, Inc., which was acquired by MKS.
At the outset of our operations, we pursued sales of the Nimbus to certain segments of the advanced semiconductor packaging market, particularly wafer bumping applications. We believed the wafer level packaging market would grow in the future and therefore we also sought opportunities to expand our solutions through internal and external initiatives.
In 2003, we acquired All-Wet Technologies Inc. (“All Wet”) , whose technology represented the foundation of our Stratus electro-deposition systems. Initially, we targeted sales of the Stratus to volume applications in solder bumping. A fully automated, high throughput version of Stratus was introduced in July 2006 and one year later received two industry awards; the “Best Product 2007” by Semiconductor International and the “Advanced Packaging Award” in 2007.
In 2008, we introduced the Apollo, our second-generation sputtering deposition system, which represented enhancements in both throughput and cost of ownership.
In the past year, we have expanded customer joint development collaborations to three initiatives involving IBM’s packaging alliance, IMEC in Europe, and SEMATECH in North America. Much of our current development activities address emerging 3D chip stacking with through silicon vias (“TSV”) technology. We expect to continue to expend a significant portion of revenues in the future to meet customers’ specific technology requirements and future technology trends.
Key Performance Indicators
We focus on revenues, gross profit and profitability in managing our business as well as bookings and shipments. Bookings, which are current period orders net of current period cancellations, are firm orders for which we have received customer authorization with delivery dates no more than 12 months from the balance sheet date. Shipments are products sold and shipped to customers and research and development collaborators without regard for revenue deferral related to customer acceptance. Revenues are based upon revenue recognition for products as accepted by customers. In some instances, we have placed equipment with customers for product trial and acceptance and do not recognize revenue on these shipments until the customer accepts and pays for the product. We also derive revenues from extended warranty and service revenues, as well as payment for funded research and development.
- 37 -
| Year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
|
Bookings
|
$ | 39,844 | $ | 23,719 | $ | 28,561 | ||||||
|
Shipments
|
$ | 38,458 | $ | 24,653 | $ | 22,633 | ||||||
|
Revenues
|
$ | 38,192 | $ | 18,330 | $ | 25,702 | ||||||
|
Gross Profit
|
$ | 17,613 | $ | 7,371 | $ | 11,622 | ||||||
|
Gross Profit %
|
46.1 | % | 40.2 | % | 45. 2 | % | ||||||
|
Operating Income(Loss)
|
$ | 2,257 | $ | (7,111 | ) | $ | (3,570 | ) | ||||
|
Other Income (Expense), Net
|
$ | (1,037 | ) | $ | (1,423 | ) | $ | (1,242 | ) | |||
|
Net Income(Loss)
|
$ | 1,192 | $ | (8,534 | ) | $ | (4,812 | ) | ||||
Bookings and shipments are not recognized performance measures under GAAP and do not have any standardized meaning prescribed by GAAP. We believe that bookings and shipments are useful complementary measures of projected activity in future periods and are commonly used by our management to evaluate our projected activity in future periods. Any such projections are forward-looking in nature and there can be no assurance that backlog or bookings will accurately reflect future sales. See “Special Note Regarding Forward Looking Statements” and “Risk Factors.” There are no direct comparable measures to bookings or shipments in GAAP.
To date, our operations have been funded by equity financings, a term loan and revolving line of credit financing, and revenues from operations.
Sources of Revenue
Our product revenues result from sales of our physical vapor deposition (“PVD”) and electrochemical deposition (“ECD”) tools and spares and support services used by customers who have installed those tools.
Cost of Revenues
Cost of goods sold include materials, direct labor and production overhead costs incurred in manufacturing products or spares or labor incurred in delivering support services.
Operating Expenses
Research and Development
Research and development expenses consist of salary and other compensation costs, materials consumed on projects, supplies, travel, consultants and depreciation of lab equipment incurred as a result of our product development initiatives.
- 38 -
Selling, General and Administrative
Selling, general and administrative expenses consist of compensation costs for sales, customer support, and administrative personnel, commission, travel, trade shows and costs related to new customer evaluations of our tools and incurred to support sales to the global customer base.
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and judgments, including those related to revenue recognition, valuation of inventory and accounts receivable, valuation of investments and income taxes, stock-based compensation, costs eligible for capitalization, intangible assets and related amortization.
We base these estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from management’s estimates.
Warranty Obligations
Our obligations for warranty are accrued concurrently with the revenue recognized on the related equipment. We estimate average warranty cost per system and record the warranty provision as an element of cost of sales upon recognition of the related revenue. The overall warranty accrual is separately analyzed using the remaining warranty periods outstanding on systems under warranty and any resulting changes in estimates are recorded as cost of sales adjustments. If a significant change in warranty-related incidents occurs, the impact of the change in the warranty accrual could be material.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Our cash equivalents consist primarily of money market instruments. We maintain cash balances in a bank located in California, whose deposits are insured by the Federal Deposit Insurance Corporation, up to $250,000. Although at various times throughout the year our cash balances may exceed the insured limit, we do not believe that these balances are subject to any unusual risk beyond the normal risk associated with commercial banking relationships.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding receivable balances. We provide for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on our assessment of the current status of individual accounts. Receivable balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. As of each of December 31 , 2009 and December 31, 2008, we had not recorded any allowance for probable uncollectible amounts.
Inventories
Inventories consist of materials, components and subassemblies used in the assembly of our products for sale, for use as demonstration equipment or maintained to support maintenance and warranty obligations. Raw material inventories are stated at the lower of cost (first-in, first-out method) or market and work-in-process and finished goods inventories are stated based upon specific identification of items held. We include in finished goods inventory products that have been delivered to customers for which the related revenue has been deferred until customer
- 39 -
acceptance. We maintain a perpetual inventory system and continually record the quantity on-hand and cost for each product, including purchased components, subassemblies and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. We include in finished goods inventory products that have been delivered to customers for which the related revenue has been deferred until customer acceptance.
All inventory carrying value is reduced for estimated excess and obsolescence by the difference between cost and estimated market value. This estimate is based on assumptions regarding future demand and evaluation for potential obsolescence resulting from known and anticipated engineering change orders and new products. Based on this analysis, which also encompasses our purchase order commitments, we record an adjustment to reserves impacting cost of sales to reflect inventory at lower of cost or market. If actual demand is substantially lower than estimates, additional inventory adjustments for excess or obsolete inventory might be required, which could have a material adverse effect on our business, financial condition and results of operations.
Equipment and Improvements
Equipment and improvements are stated at cost, less accumulated depreciation and amortization. Machinery and equipment includes demonstration equipment which might be located at either NEXX or at the prospective customer’s location. We occasionally supply evaluation tools for new customer applications for a period that usually ranges between six and 18 months, during which time we collaborate with our customers to qualify the tool for that customer’s requirements. Costs associated with qualifying our tools, including depreciation on the tool’s valuation, are recorded as selling, general and administrative expenses in the period incurred. Once customer evaluations are successful and upon fulfillment of all revenue recognition criteria, we recognize the revenue from the evaluation tool and remaining tool cost through net sales revenue and cost of sales, respectively.
Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the respective assets as follows: demonstration equipment, five years; machinery and equipment, three to five years; furniture and fixtures, five years; computer equipment and software, three years; and leasehold improvements, the lesser of their economic life or the term of the underlying lease. Expenditures for repairs and maintenance are charged to expense as incurred, whereas major betterments are capitalized as additions to equipment and improvements.
Deferred Financing Costs
Deferred financing costs consist of professional fees and financing costs incurred in connection with the establishment or amendment of long-term debt. We amortize these costs into interest expense over the terms of the related borrowings. Deferred financing costs associated with debt extinguished prior to maturity are expensed.
Purchased Developed Technology
Purchased developed technology acquired in 2003 in connection with our acquisition of All Wet Technologies, Inc. is being amortized over seven years. Amortization expense amounted to $54,572 for each of the years ended December 31, 2009, 2008 and 2007. In accordance with Accounting Standards Codification (“ASC”) 805 (formerly Financial Accounting Standards Board (“FASB”) Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by Purchase Method), in-process research and development costs were charged to operations at the date of acquisition.
Long-Lived Assets
In accordance with the provisions of ASC Topic 360 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), we evaluate the realizability of our long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As of December 31 , 2009, we have determined that no material adjustment to the carrying value of our long-lived assets was required.
Revenue Recognition
We recognize revenue from sales based on guidance provided in ASC 605 (formerly SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition in Financial Statements and Emerging Issue Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.) We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or
- 40 -
services have been rendered, the seller’s price is fixed or determinable, and collectability is reasonably assured. We view delivery occurring upon acceptance by the customer, which is generally contingent on products meeting published performance specifications demonstrated by an initial acceptance test prior to shipment and a final acceptance test after installation.
Sales generally have two elements: (a) the equipment and (b) installation of that equipment. While installation services are not essential to the functionality of the delivered equipment, final payment is not billable until customer acceptance is received for many of our sales contracts. Provided that we have defined customer acceptance experience levels with both a customer and a specific type of equipment, revenue is recognized for the equipment element of a sale upon shipment, transfer of title and customer acceptance approval of the initial acceptance test. For new customers, new products for existing customers, or sales arrangements with customer specific acceptance specifications where performance cannot be assessed prior to meeting the specifications at the customer site, all of the revenue is recognized upon completion of the installation and final customer acceptance. The revenue for the installation element (which typically exceeds the fair value of the installation services) is recognized upon customer acceptance at the customer facility.
We also have revenue arrangements that involve the sale of multiple equipment under a single arrangement. In these situations, revenue is allocated among the separate elements based on their relative fair values, provided the elements have value on a standalone basis and there is objective and reliable evidence of fair value. All elements may not be delivered during the same period. In those cases, we defer the fair value of the undelivered equipment element until that element is delivered. As of December 31 , 2009, December 31, 2008 and December 31, 2007, there were no undelivered equipment elements under revenue arrangements with multiple deliverables. Our sales arrangements do not include a general right of return.
Revenue related to sales of spare parts is recognized upon shipment as our spares are sold on terms that transfer title and risk of ownership when it leaves our site. Revenue related to paid service is recorded when earned.
At December 31 , 2009, December 31, 2008 and December 31, 2007, deferred revenue primarily consisted of product sales to customers for which final acceptance had not yet been received. We generally provide our customers with a six-month or one-year warranty on all units sold. Warranty costs are estimated and recorded at the time of product revenue recognition.
Accounting for Customer Freight Costs
Systems and spares are typically shipped “freight collect” and, as a result, no shipping revenue or cost is associated with the sale. When freight is charged, the amount charged to customers is recorded as revenue and freight costs incurred are recorded to cost of sales pursuant to ASC Topic 605 (formerly FASB EITF 00-10).
Income Taxes
Income tax expense is the tax payable or refundable for a given period, plus or minus the change during such period in related deferred tax assets and liabilities. We account for income taxes in accordance with the FASB’s ASC Topic 740 (“ASC 740”) (formerly SFAS No. 109, Accounting for Income Taxes). Under ASC 740, we recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled. We establish
- 41 -
valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized. Pursuant to ASC 740, we must consider all positive and negative evidence regarding the realization of deferred tax assets, including past operating results and future sources of taxable income.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 (FIN 48), now encapsulated in ASC 740. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. If there are changes in net assets as a result of application of FIN 48, these will be accounted for as an adjustment to the opening balance of retained earnings. Additional disclosures about the amounts of such liabilities will be required also. In accordance with ASC 740, when the tax law requires interest to be paid and penalties to be calculated, interest and penalties will be recognized as part of our provision for income taxes. We have adopted the provisions of FIN 48 as of January 1, 2007.
We account for all tax credits by the “flow-through” method, which directly reduces the provision for income taxes in the year in which the tax credit is first allowed for tax purposes.
Under Section 382 of the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in the equity ownership of an entity by value over a three-year period. We may experience ownership changes under Section 382 of the Code as a result of this offering and subsequent shifts in our stock ownership. As of December 31 , 2009, we had net operating loss carryforwards of approximately $27.6 million and $2.0 million for federal and state income tax purposes, respectively. These amounts could be reduced as a result of ownership changes.
Stock-Based Compensation
Prior to 2006, we granted stock options at exercise prices equivalent to the fair value of our common stock as estimated by our board of directors, with input from management, as of the date of grant. Because there has been no public market for our common stock, our board of directors determined the fair value of our common stock by considering a number of objective and subjective factors, including:
|
•
|
our operating and financial performance;
|
|
•
|
the prices at which we issued shares of preferred stock in private placement transactions;
|
|
•
|
the superior rights and preferences of securities senior to our common stock at the time of each grant;
|
|
•
|
the non-liquid nature of our common stock;
|
|
•
|
business risks we faced and key company milestones; and
|
|
•
|
comparable company and industry analysis.
|
Subsequent to 2006, we utilized the valuation methodologies outlined in the AICPA’s Practice Aid Valuation of Privately-Held Company Equity Securities Issued as Compensation. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective estimates and assumptions, including the estimated fair value of common stock, expected life of the stock-based payment awards and stock price volatility.
Historically, we used the Black-Scholes option-pricing model to value our option grants and determine the related compensation expense. Option pricing models require judgment on inputs including fair value, volatility, and term. Fair value was determined using a probability-weighted expected return allocation methodology (“PWERM,” described below). We have historically been a private company and lack company-specific historical
- 42 -
and implied volatility information. Therefore, we estimate our expected volatility based on the historical volatility of our publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded stock price. The expected term of options was determined based on the PWERM scenario timelines and probability weightings. The risk-free interest rate used for each grant is based on a U.S. Treasury instrument with a term similar to the expected term of the option. ASC Topic 718 (formerly SFAS No. 123R) requires that we recognize compensation expense for only the portion of options that are expected to vest. We have estimated expected forfeitures of stock options with the adoption of ASC Topic 718 (formerly SFAS No. 123R) to be 3% for the year ended December 31 , 2009. In developing a forfeiture rate estimate, we have considered our historical experience. If there are additional forfeitures of unvested options, adjustments to compensation expense may be required in future periods.
The assumptions used in calculating the expense under the option pricing method for the year ended December 31 , 2009 were a risk-free interest rate of 3.0 %, expected term of 10 years, weighted average expected volatility of 21.0 %, and no expected dividends. These assumptions represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different. The most significant input into the Black-Scholes option-pricing model used to value our option grants is the fair value of common stock.
We historically have granted stock options at exercise prices equivalent to the fair value of the common stock as of the date of grant, as determined by the board of directors with input from management. Because there has been no public market for the common stock, the board determined the fair value of the common stock by considering a number of objective and subjective factors, including our financial performance and projections, the relative illiquidity of the common stock, the preferences of our outstanding convertible preferred stock as compared to the common stock, including the redemption, liquidation preferences and dividend rights, and peer group trading multiples.
In connection with our preparation of financial statements, the board instructed management to prepare a valuation analysis to determine the fair value of the common stock for purposes of the stock option grants during those years. These valuations were prepared using the PWERM. Under this methodology, the fair market value of the common stock was estimated based upon an analysis of future values assuming three possible outcomes: an initial public offering, a sale or merger, and continued operation as a private company. The probability-weighted present value of expected future investment returns was then determined, based on the future value, likelihood and timing of each of these possible outcomes. The anticipated likelihood and timing of each of the possible outcomes were based on the plans of the board and management. This method was deemed to be superior to an option pricing methodology given the anticipated time to liquidity and scenario weighting aspect of the analysis, rather than the logarithmic distributions contained in the option pricing model.
The initial public offering scenario analysis utilized the guideline public company method. Management and the board estimated our enterprise value under the guideline public company method by comparing our company to publicly traded companies in our industry group. The companies used for comparison under the guideline public company method were selected based on a number of factors, including the similarity of their industry, business model and financial risk to ours. In determining our enterprise value under this method, the board used current revenue multiples of the peer companies applied to our revenues for the corresponding period.
The sale or merger scenario analysis utilized a revenue multiple based on an analysis of similar transactions (similarity of the industry, businesses acquired, and related risks) and companies, applied to our corresponding revenue for the period in which the transaction is anticipated to occur.
- 43 -
The private company scenario enterprise value was based on an average of guideline public revenue and EBITDA multiples applied to the corresponding financial metrics and a discounted cash flow analysis using a similar guideline public company multiple for the terminal capital value.
Without giving effect to the Capital Reorganization, we granted stock options with a weighted average exercise price of $0.01 between January and November 2009. The board determined that the fair value of the common stock was $0.01 per share in July 2008 and increased to $0.27 as of November 2009. The following discussion describes the reasons for the difference between the fair value of the common stock on these grant dates.
During the year ended December 31, 2009, we reviewed several key considerations in determining the appropriate pricing for our stock options. We have traditionally relied on both debt and equity financing to provide necessary cash inflows to sustain operations. Our debt arrangements are comprised of both fixed and revolving facilities, and include certain financial and liquidity covenants that, if we are not in compliance with, can limit the availability of such funds or subject us to immediate repayment. The debt facilities are also secured by an all-asset lien (including intellectual property) held by the debt holders. Our equity financings have taken the form of preferred stock offerings with investment levels equaling liquidation preferences.
After a decline in new order bookings in early 2009, we became non-compliant with a financial covenant associated with our outstanding debt. In connection with curing this breach of the terms of our credit facility, we pursued additional equity financing with our lead investors and also engaged a financial advisor to help attract new investors. These investors declined to participate in a financing at that time and we were unable to identify alternate investors, which led to our breach of further financial covenants and triggering liquidity line capacity calculations of our credit facility. We subsequently agreed with our lender to modify the financial covenants of our credit facility in June 2009 and also committed to raise additional equity.
Following the modification of the terms of our credit facility, we began discussions with our lead investors for a preferred equity round of financing as an extension of our most recent offering of series D redeemable convertible stock, and extended the offering to all current investors through October 30, 2009. Expected liquidation preferences and senior debt exceeded $54 million at such time, more than twice the level of trailing revenues, and it was reasonable to assume that it was unlikely there would be any excess enterprise value to ascribe to the holders of our common stock. We re-affirmed our option pricing of $0.01 in August 2009 through the preparation of a current valuation supported by the analysis of a third party appraisal firm.
Our prospects improved significantly late in the third quarter of 2009 with increasing new orders. During November 2009, the semiconductor equipment industry began an economic turn-around, we became cash-flow positive and, since then, have remained compliant with all financial and liquidity covenants of our credit facility. Also during November 2009, our board of directors began discussions with, and approved the hiring of, investment bankers to investigate future alternative liquidity sources. Based on an improved economic outlook for both the semiconductor equipment industry and the Company, a new valuation was performed by a third party appraisal firm supporting a higher value of $0.27.
Although it is reasonable to expect that the completion of this offering may add value to shares of our common stock because they will have increased liquidity and marketability, we cannot determine the amount of the additional value with precision or certainty.
As of December 31 , 2009, there were options to purchase an aggregate of 9,328,593 shares of common stock outstanding, with exercise prices ranging from $0.01 to $0.94 per share, a weighted average exercise price of $0.02 per share and a fair value of $0.27 per share.
Based upon the midpoint of the price range as set forth in the cover of this prospectus, the aggregate intrinsic value of our outstanding stock options as of December 31, 2009 was $5.5 million.
We believe that we have used reasonable methodologies, approaches and assumptions consistent with the practice aid to determine the fair value of our common stock. For this reason, we have determined that all of our stock options have been granted at a price per share equal to or in excess of the fair market value of our common stock at the time of grant.
For employee stock options granted before January 1, 2006, we applied the intrinsic value recognition and measurement principles of Accounting Principles Board Opinion, (“APB”), Number 25, Accounting for Stock Issued to Employees, and related interpretations. Under APB 25, compensation expense is recorded for options issued to employees in fixed amounts and with fixed exercise prices only to the extent that the exercise prices are less than the fair market value at the date of grant. Prior to January 1, 2006, we followed the disclosure provisions of SFAS No. 123 , Accounting for Stock-Based Compensation, as amended. All stock-based awards to non-employees are accounted for at their fair value in accordance with EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and related interpretations.
- 44 -
ASC Topic 718 (formerly SFAS No. 123R) Share Based Payment required that we adopt the fair value method of accounting for stock based arrangements on a prospective basis beginning on January 1, 2006. Under this method, we will continue to account for employee stock-based awards outstanding as of December 31, 2005 under the provisions of APB 25, and we account for any stock-based awards granted or modified after this date under the provisions of SFAS No. 123R . We recognize the cost of options issued after January 1, 2006 in our consolidated financial statements over the requisite service period. We have used a Black-Scholes model to estimate the fair value of our stock-based compensation arrangements. This model requires that we make assumptions, including stock price volatility, forfeiture rates and expected life. We estimated volatility utilizing the historical volatility of peer companies, forfeiture rates based on expected levels of employee turnover and expected life using a “short cut” method. As a result of our adoption of SFAS No. 123R , we recorded additional compensation expense of $195,168, $194,891 and $155,835 for the years ended December 31, 2007, 2008 and 2009 , respectively. The effects in future periods of adopting SFAS No. 123R will depend on numerous factors, including the nature and amount of the stock-based awards we grant in the future, the valuation model we choose to value the stock-based awards, the assumed forfeiture rate, and the method we choose for recognizing stock-based compensation expense over the requisite service period. We expect a significant increase in stock-based compensation expense in future periods because of our adoption of SFAS No. 123R .
Research and Development Expenses
Research and development expenses are charged to operations as incurred.
At December 31 , 2009, we are a party to two joint development agreements. The original term of each agreement is for 36 months or less and expire through January 2012. As part of each of the agreements, we sold a Stratus plating tool to the respective counterparty. We record the net margin realized from such a sale as a reduction of research and devlopment costs evenly over the respective term of the joint development agreement.
Net profit (loss) per Share of Common Stock
Basic net profit (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and is computed by dividing net income (loss) by the assumed weighted average number of common shares outstanding. The following table sets forth our computation of dilutive EPS for the periods presented:
|
At December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Income available to common stockholders
|
$ | 1,191,880 | $ | (8,533,593 | ) | $ | (4,811,805 | ) | ||||
|
Weighted average shares
|
14,992,155 | 14,707,139 | 14,667,893 | |||||||||
|
Options to purchase common stock
|
6,226,540 | — | — | |||||||||
|
Common stock subject to vesting provisions
|
2,065,027 | — | — | |||||||||
|
Redeemable convertible preferred shares
|
56,955,417 | — | — | |||||||||
|
Warrants to purchase redeemable convertible preferred stock
|
3,089,075 | — | — | |||||||||
|
Dilutive common shares
|
83,328,214 | 14,707,139 | 14,667,893 | |||||||||
|
Dilutive EPS
|
$ | 0.01 | $ | (0.58 | ) | $ | (0.33 | ) | ||||
The following table presents the potentially dilutive securities outstanding that were excluded from the computation of diluted net income (loss) per common share for the periods presented because their inclusion would have had an anti-dilutive effect:
| At December 31, | ||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Options to purchase common stock
|
118,100 | 10,143,296 | 3,326,903 | |||||||||
|
Common stock subject to vesting provisions
|
— | 4,490,920 |
—
|
|||||||||
|
Redeemable convertible preferred stock
|
— | 42,260,065 | 17,435,891 | |||||||||
|
Warrants to purchase redeemable preferred stock
|
4,800,066 | 10,218,792 | 1,128,151 | |||||||||
| 4,918,166 | 67,113,073 | 21,890,945 | ||||||||||
In November 2009, our board of directors authorized us to proceed with an initial public offering of our common stock. Upon consummation of this offering, all of our outstanding shares of redeemable convertible preferred stock will convert to common stock, and outstanding warrants to purchase shares of our redeemable convertible preferred stock will convert into warrants to purchase shares of common stock after taking into effect conversion rates for the redeemable convertible preferred stock as well as 30,000,000 shares of common stock to be issued to the holders of both redeemable preferred stock and warrants to purchase such shares of redeemable convertible preferred stock to be allocated among the holders of these securities.
- 45 -
Pro forma diluted income per share assumes the dilutive effect of the issuance of 30,000,000 shares of our common stock to holders of shares of redeemable convertible preferred stock and warrants to purchase shares of redeemable convertible preferred stock in exchange for the waiver of certain contractual rights regarding the conversion of all outstanding redeemable convertible preferred stock to common stock upon an initial public offering; and a 1 to 10 reverse stock split, which our board of directors has approved contingent upon the effectiveness of our initial public offering and the approval of our shareholders.
Warranty Obligations
Our obligations for warranty are accrued concurrently with the revenue recognized on the related equipment. We estimate average warranty cost per system and record the warranty provision as an element of cost of sales upon recognition of the related revenue. The overall warranty accrual is separately analyzed using the remaining warranty periods outstanding on systems under warranty and any resulting changes in estimates are recorded as cost of sales adjustments. If a significant change in warranty-related incidents occurs, the impact of the change in the warranty accrual could be material.
Concentration of Credit Risk and Export Sales
Financial instruments that potentially expose us to concentration of credit risk include accounts receivable. We regularly monitor the creditworthiness of our customers, who are concentrated in the semiconductor industry, and believe that we have adequately reserved for any exposure to potential credit losses. Four customers accounted for approximately 63%, 64% and 58% of net sales for the years ended December 31, 2009, 2008 and 2007 respectively. Two customers accounted for approximately 80% of accounts receivable at December 31, 2009, four customers accounted for 74% of accounts receivable at December 31, 2008, and four customers accounted for 87% of accounts receivable at December 31, 2007. Export sales were 69%, 90% and 78% of net sales for the years ended 2009, 2008 and 2007 respectively.
Fair Value of Financial Instruments
The accounting standard for fair value measurements, ASC Topic 820 (formerly FASB Statement No. 157, Fair Value Measurements), establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurement. The framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
Fair Value Hierarchy
The accounting standard for fair value measurements specifies a hierarchy for disclosure of fair value measurement. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The three levels are defined as follows:
|
·
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities for the instrument or security to be valued.
|
|
·
|
Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data for substantially the full term of the asset or liability.
|
|
·
|
Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable and are significant to the fair value of the assets or liabilities.
|
This hierarchy requires the use of observable market data when available. We maintain policies and procedures to value instruments using the best and most relevant data available. Further, we used internal sources and considered external sources to assist us in valuing certain instruments.
The Standard also requires disclosure in the financial statements for items measured at fair value on a non-recurring basis. We did not have any items that are measured at fair value under this requirement for either of the two years ended December 31, 2009 or December 31, 2008.
- 46 -
Preferred Stock Warrant
We valued the preferred stock warrants using an option pricing model methodology and consider the results to be a Level 3 input under ASC Topic 820.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
As of
December 31,
2009
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
|
|
||||||||||||||||
|
Cash
|
$ | 548,525 | $ | 548,525 | $ | 0 | $ | 0 | ||||||||
|
Money market funds included in cash equivalents
|
$ | 3,465,948 | $ | 0 | $ | 3,465,948 | $ | 0 | ||||||||
|
Preferred stock warrant liability
|
$ | 1,784,763 | $ | 0 | $ | 0 | $ | 1,784,763 | ||||||||
|
As of
December 31,
2008
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
|
|
||||||||||||||||
|
Cash
|
$ | 678,495 | $ | 678,495 | $ | 0 | $ | 0 | ||||||||
|
Money market funds included in cash equivalents
|
$ | 3,311,738 | $ | 0 | $ | 3,311,738 | $ | 0 | ||||||||
|
Preferred stock warrant liability
|
$ | 3,465,072 | $ | 0 | $ | 0 | $ | 3,465,072 | ||||||||
Other Accounts
The carrying amount of accounts receivable, accounts payable and accrued expenses approximates fair value due to the short-term nature of these items. We believe that our debt obligations bear interest at rates that approximate prevailing market rates for instruments with similar characteristics and, accordingly, the carrying values for these instruments approximate fair value.
Money Market Funds
Money market funds are cash deposits earning varying rates of return, deposited in our financial institution. The funds are invested and redeemed on a daily basis and are extremely liquid in nature.
Preferred Stock Warrants Liability
We account for preferred stock warrants in accordance with ASC Topic 480 (“ASC 480”) (formerly FASB Staff Position 150-5 (FSP 150-5) Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that Redeemable). ASC 480 requires us to classify the warrants to purchase shares of our preferred stock that we have issued as liabilities and adjust the value of these warrants to fair value at the end of each reporting period.
Results of Operations
Years Ended December 31, 2009 and 2008
Net Sales
The following table sets forth net sales by category for the fiscal years ended December 31 , 2009 and 2008:
Net Sales
|
Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
Change
|
||||||||||
|
(in millions)
|
||||||||||||
|
Product
|
$ | 36.2 | $ | 16.9 | 113.3 | % | ||||||
|
Spares & Service
|
$ | 2.0 | $ | 1.4 | 48.0 | % | ||||||
|
Net sales
|
$ | 38.2 | $ | 18.3 | 108.4 | % | ||||||
- 47 -
A major foundry, or third party semiconductor wafer manufacturer and packager, and a leading North American integrated device maker together represented 4 8 % of our product revenues for the year ended December 31, 2009. Due to the nature of the semiconductor industry, we expect to continue to rely on a relatively small number of customers for the vast majority of our business.
Net Sales by Region
|
Year Ended December 31,
|
% of Total
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
(in millions)
|
||||||||||||||||
|
Asia
|
$ | 23.0 | $ | 11.2 | 60.2 | % | 61.2 | % | ||||||||
|
North America
|
$ | 11.7 | $ | 2.1 | 30.6 | % | 11.5 | % | ||||||||
|
Europe
|
$ | 3.5 | $ | 5.0 |
9.2
|
% | 27.3 | % | ||||||||
|
Net sales
|
$ | 38.2 | $ | 18.3 | 100 | % | 100 | % | ||||||||
Asia, which includes our customers in Taiwan, Singapore, Malaysia, China, and Korea, has historically accounted for a significant percentage of our net sales. A $11.8 million increase in net sales from Asia to $23 million in the year ended December 31, 2009, compared to $11.2 million for the prior year , was primarily a result of our largest customer adopting Stratus for their increased production of bumped wafer devices. A $9.6 million increase in North American sales to $11.7 million during the year ended December 31, 2009, compared to $2.1 million for the prior year , was attributable to customers purchasing ECD systems for 3D packaging development. A $1.5 million decrease in European sales to $3.5 million during the year ended December 31, 2009, compared to $5.0 million for the prior year , was attributable to a cyclical downturn in purchases by European customers.
Fluctuations in the timing and mix of product shipments, customer requirements for systems, and the completion of the installation of systems will continue to have a significant impact on the timing and amount of revenue in any given reporting period. See “Risk Factors.”
- 48 -
Gross Profit
|
Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
Change
|
||||||||||
|
(in millions)
|
||||||||||||
|
Gross Profit $
|
$ | 17.6 | $ | 7.4 | 139.0 | % | ||||||
|
Gross Profit (%)
|
46.1 | % | 40.2 | % | 5.9 | % points | ||||||
Gross profit increased $10.2 million for the year ended December 31, 2009 to $17.6 million, compared to $7.4 million for the prior year, growing faster than the increase in sales as gross profit percentage increased for 2009 to 46.1%, compared to 40.2% for 2008 . This increase in gross profit percentage was a result of favorable absorption of overhead , which added 7.2 margin percentage points and more than offset a decline in PVD system margins .
Operating Expenses
Research and Development
|
Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
Change
|
||||||||||
|
(in millions)
|
||||||||||||
|
Research and development expenses
|
$ | 6.4 | $ | 6.5 | (1.6 | )% | ||||||
|
Research and development % of revenues
|
16.7 | % | 35.5 | % | ||||||||
Research and development expenses decreased $0.1 million for the year ended December 31, 2009 to $6.4 million, or 16.7 % of revenues net of development funding received from customers for this period. This compared to $6.5 million for the prior year , or roughly 35.5 % of revenues net of development funding received from customers for such period. We expect to continue to invest a meaningful portion of our revenues in research and development and expect R&D as a percentage of net sales may increase near term by approximately 2.3% with investments in new products and features for advanced semiconductor packaging and new applications .
Selling, General and Administrative
|
Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
Change
|
||||||||||
|
(in millions)
|
||||||||||||
|
Selling, general and administrative expenses
|
$ | 9.0 | $ | 8.0 | 12.2 | % | ||||||
|
Selling, general and administrative % of revenues
|
23.5 | % | 43.6 | % | ||||||||
Selling, general and administrative expenses increased $1.0 million for the year ended December 31, 2009 to $9.0 million, compared to $8.0 million for the prior year . This increase was due primarily to an increase in commissions of $0.4 million and bonus expenses of $0.8 million . The decrease in selling, general and administrative expenses as a percentage of revenue for the year ended December 31, 2009 to 23.5 %, from 43.6 % during the prior year , was largely a result of significantly higher revenues for the year ended December 31, 2009 . To support increased sales to our customer base, we continue to invest a meaningful portion of our revenues in selling, general and administrative activities. Longer term, we expect our selling expenses to increase as we move to direct sales from distributor sales in other key markets of advanced packaging.
Other Expenses
Interest Expense
Our total net interest expense decreased to $1.2 million for the year ended December 31, 2009, compared to $1.4 million for the prior year . This decrease in net interest expense is primarily attributable to the reduction in the level of our borrowings , both for debt and shareholder loans. The interest on shareholder loans converted to equity in 2008.
- 49 -
Gain or Loss on Fair Value of Warrants
Upon exercise of our warrants and the issuance of the shares of our preferred stock underlying such warrants, the fair value of such warrants is recorded as an increase in the carrying value of the shares of preferred stock. The gain or loss is determined by comparing the fair value of warrants outstanding at the end of the period to the fair value of warrants at the end of the prior period. The fair value is determined using an option pricing model, significant components of which include our enterprise value for the period (determined using an income-based method), volatility, term, and interest rate assumptions. Changes to certain assumptions that caused the fair value to change were primarily attributable to changes to the discount rate used in determining our enterprise value as well as changes from period to period to the capital structure attributable to equity issuances and warrant exercises. All other assumptions remained relatively stable and did not have a material impact.
Years Ended December 31, 2008 and 2007
Net Sales
The following table sets forth net sales by category for the fiscal years ended December 31, 2008 and 2007:
Net Sales
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
(in millions)
|
||||||||||||
|
Product
|
$ | 16.9 | $ | 23.4 | (27.5 | %) | ||||||
|
Spares & Service
|
$ | 1.4 | $ | 2.3 | (40.8 | %) | ||||||
|
Net sales
|
$ | 18.3 | $ | 25.7 | (28.7 | %) | ||||||
During the year ended December 31, 2008, net sales were $18.3 million compared to $25.7 million for the prior year. This $7.4 million decrease in revenues was attributable to a $6.5 million decrease in product sales, primarily caused by delays between product shipments and customer acceptance, and a $0.9 million decrease in spares and service revenues that resulted from the global recession and a slowdown in semiconductor capital spending.
Net Sales by Region
|
Year Ended December 31,
|
% of Total
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
(in millions)
|
||||||||||||||||
|
Asia
|
$ | 11.2 | $ | 15.1 | 61.2 | % | 59.0 | % | ||||||||
|
North America
|
$ | 2.1 | $ | 7.0 | 11.5 | % | 27.3 | % | ||||||||
|
Europe
|
$ | 5.0 | $ | 3.5 | 27.3 | % | 13.7 | % | ||||||||
|
Net sales
|
$ | 18.3 | $ | 25.7 | 100 | % | 100 | % | ||||||||
A $3.9 million decrease in sales from Asia to $11.2 million for the year ended December 31, 2008, compared to $15.1 million for the year ended December 31, 2007, and a $4.9 million decrease in sales from North America to $2.1 million for the year ended December 31, 2008, compared to $7.0 million for the year
- 50 -
ended December 31, 2007, were primarily the result of a cyclical decline in the semiconductor capital equipment industry. A $1.5 million increase in sales from Europe to $5.0 million for the year ended December 31, 2008, compared to $3.5 million for the year ended December 31, 2007, was primarily a result of the addition of two new European integrated device makers as our customers, more than offsetting a $3.5 million cyclical decline in business at other European accounts.
Gross Profit
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
(in millions)
|
||||||||||||
|
Gross Profit $
|
$ | 7.4 | $ | 11.6 | (36.6 | %) | ||||||
|
Gross Profit (%)
|
40.2 | % | 45.2 | % | (5.0 | %) points | ||||||
Gross profit decreased $4.2 million for the year ended December 31, 2008 to $7.4 million, compared to $11.6 million for the prior year. In addition, gross profit percentage decreased for the year ended December 31, 2008 to 40.2%, compared to 45.2% for the prior year. This decrease in gross profit percentage was a result of unfavorable absorption of overhead accounting for a 3.4% point reduction on significantly lower revenues and a reduction in gross profit on PVD systems .
Operating Expenses
Research and Development
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
(in millions)
|
||||||||||||
|
Research and development expenses
|
$ | 6.5 | $ | 7.8 | (17.0 | %) | ||||||
|
Research and development % of revenues
|
35.5 | % | 30.5 | % | ||||||||
Research and development expenses decreased $1.3 million for the year ended December 31, 2008 to $6.5 million, compared to $7.8 million for the prior year. This decrease was primarily the result of curtailed spending and planned staff reductions associated with an overall industry downturn as well as a $1.5 million decrease in research and development expenses associated with our mature PVD technology, which was partially offset by a $0.2 million increase in research and development expenses associated with our ECD plating technology. As a percentage of revenue, research and development expenses increased to 35.5% for the year ended December 31, 2008, compared to 30.5% for the prior year.
- 51 -
Selling, General and Administrative
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
(in millions)
|
||||||||||||
|
Selling as a general and administrative expense
|
$ | 8.0 | $ | 7.4 | 8.4 | % | ||||||
|
Selling, general and administrative as a % of revenues
|
43.6 | % | 28.6 | % | ||||||||
Selling, general and administrative expenses increased $0.6 million for the year ended December 31, 2008 to $8.0 million, compared to $7.4 million for the prior year. This increase was attributable to the continued transition to a direct sales infrastructure in Southeast Asia, particularly in Taiwan, as well as new hires to our senior management team. For the year ended December 31, 2008, selling, general and administrative expenses as a percentage of revenue increased to 43.6%, compared to 28.6% for the prior year. Despite lower revenues in the year ended December 31, 2008 than the prior year, we maintained certain spending levels in order to avoid harming our long term business prospects and position ourselves to diversify our customer relationships on a global basis.
Other Expenses
Interest Expense
Our total net interest expense increased $0.1 million for the year ended December 31, 2008 to $1.4 million, compared to $1.3 million for the prior fiscal year. This increase in net interest expense is attributable to higher borrowing costs.
Gain or loss on Fair Value of Warrants
Upon exercise of our warrants and the issuance of shares of our preferred stock underlying such warrants, the fair value of such warrants is recorded as an increase in the carrying value of the shares of preferred stock.
Liquidity and Capital Resources
Cyclicality in the semiconductor industry has resulted in substantial variations in demand for our products, causing our operating results to vary, which has had a direct impact on our capital requirements. Our business depends upon the capital spending of semiconductor manufacturers, which, in turn, depends upon the current and anticipated market demand for semiconductors and products using semiconductors. Our operating results are, therefore, subject to significant variation due to these business cycles, the timing, length and volatility of which are difficult to predict.
Historically, we have funded our operations primarily through the proceeds of equity and secured debt financing activities. From April 18, 2003 through December 31 , 2009, we have raised gross proceeds of $38.4 million from the sale of preferred equity securities and converted debt securities. Our principal historical liquidity requirements have consisted of working capital, capital expenditures, and general corporate purposes. As of December 31 , 2009, we had $4.0 million of cash and cash equivalents and working capital of $4.4 million, which included a deferred revenue liability of $2.0 million.
Pursuant to the terms of our certificate of incorporation, we may not authorize, designate or increase the authorized shares of any additional class or series of our capital stock having rights with respect to dividends, liquidation and redemption that are equal or superior to the rights of our convertible preferred stock without the approval of the holders of a majority of each series of our convertible preferred stock. Moreover, pursuant to the terms of our certificate of incorporation, we way not authorize borrowings in excess of $300,000 without the approval of the holders of a majority of each series of our convertible preferred stock unless such borrowings are approved by our board of directors, including those directors appointed by the holders of our convertible preferred stock.
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Sources of Liquidity
Since April 18, 2003, we have funded a portion of our operations through the proceeds of sales of convertible preferred stock and the issuance of debt. All shares of our convertible preferred stock will convert into or be exchanged for shares of our common stock upon the consummation of this offering.
The table below summarizes our issuances of preferred stock from April 18, 2003 to December 31 , 2009:
|
Series
|
Dates of Issuance
|
Approximate Gross Cash Proceeds
|
||
|
A
|
April 2003
|
$2.48 million (1)
|
||
|
B
|
May & June 2004
|
$10.14 million (2)
|
||
|
C
|
September 2005
|
$9.98 million (3)
|
||
|
D
|
June, July, September & October 2008
|
$10.55 million (4)
|
||
| D | October & November 2009 | $5.25 million |
|
(1)
|
We also issued shares of common stock to the primary investor in the series A convertible preferred stock financing during the periods from April through September 2003. The cash proceeds listed in the table above do not reflect proceeds received upon issuance of the common shares.
|
|
(2)
|
Included in the aggregate proceeds of the series B convertible preferred stock are approximately $1.8 million of principal and interest from debt converted into shares of series B convertible preferred stock.
|
|
(3)
|
Included in the aggregate proceeds of the series C convertible preferred stock are approximately $3.6 million of principal and interest from debt converted into shares of series C convertible preferred stock.
|
|
(4)
|
Included in the aggregate proceeds of the series D convertible preferred stock are approximately $7.2 million of principal and interest from debt issued in late 2007 and during the first half of fiscal 2008, which was subsequently converted into shares of series D convertible preferred stock.
|
Debt Issuances
Promissory Note
On August 7, 2001, we issued to MKS a promissory note for $3.8 million in addition to other consideration to acquire certain assets constituting the initial intellectual property on which our business was founded. The note was paid in full by us in 2004 from corporate funds, including a portion of the proceeds from our series B convertible preferred stock financing.
Loan and Security Agreement
On December 19, 2006, we entered into a loan and security agreement with Hercules Technology Growth Capital, Inc. (“Hercules”) for borrowings of up to $10.0 million. The loan is secured by substantially all of our
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business assets and intellectual property. The credit facility is divided into two parts, revolving and term advances. Revolving advances originally permit borrowings of up to the lesser of the borrowing base plus nonformula advances, both as defined in the agreement, or $6.0 million. The credit facility also subjects us to certain financial covenants based on earnings before interest, taxes, depreciation and amortization on a rolling period basis; non-compliance with these financial conevants permits Hercules to demand repayment of all borrowed funds. We are also required to permit Hercules to inspect our collateral and review our books and records at reasonable times upon reasonable notice. Additionally, Hercules is entitled to certain management rights concerning significant business issues affecting us. Pursuant to the terms of the credit facility, we are prohibited from assuming certain indebtedness, making certain investments, transferring our assets and making certain distributions to our stockholders. In accordance with the amendments to the loan and security agreement discussed below, the maturity date for the revolving advances was June 30, 2009, but has subsequently been amended to June 30, 2010. The current interest rate on revolving advances is the greater of prime plus 8.0% or 13.25%. The current interest rate on the nonformula portion of the revolving advances is the greater of prime plus 8.00% or 17.5%. We pay interest on the revolving advances on the first day of each month.
On June 22, 2007, we entered into a first amendment to our existing loan and security agreement with Hercules. Pursuant to this amendment, the maximum amount of revolving advances we were permitted under the loan and security agreement was increased to $8.0 million through June 20, 2008, at which time the maximum amount of revolving advances permitted reverted back to $5.0 million.
On July 29, 2008, we entered into a second amendment to our existing loan and security agreement with Hercules. Pursuant to this amendment, we were required to repay the outstanding principal balance on the term advance that was outstanding as of July 31, 2008 in 20 equal monthly installments of principal and interest beginning August 1, 2008 and continuing on the first business day of each month thereafter. The entire principal balance and all accrued but unpaid interest on the term loan is due on March 1, 2010 and the current interest rate on the term advance is the greater of prime plus 3.5% or 11.25% . We are subject to certain prepayment penalties, except in the event of an initial public offering, in which case the lender requires prepayment, but for which no prepayment penalty would be payable. This second amendment to our loan and security agreement requires a $250,000 end-of-term financing fee which is payable upon the earlier of the maturity date of the revolving advance or a prepayment event, as defined in the agreement.
On July 17, 2009, we entered into a third amendment to our existing loan and security agreement with Hercules. Pursuant to this amendment, our loan and security agreement was amended to provide two $3.0 million tranches (total of $6.0 million) of revolver debt. The first tranche (revolving advances) was immediately available upon the effective date of the amendment. Availability under the second tranche (non formula advances) was limited to $2.0 million immediately at closing with the remaining $1.0 million available at January 1, 2010 based on certain financial tests being met. We paid an amendment fee of $125,000 in connection with this amendment. The loan and security agreement expires on June 30, 2010 and we intend to use a portion of the proceeds from this offering to pay all amounts due to Hercules under the loan and security agreement. See “Use of Proceeds.”
Bridge Notes
Pursuant to the warrant and bridge loan agreement dated October 31, 2007 between certain of our stockholders and us, we received $2.5 million from certain of our stockholders in exchange for subordinated convertible promissory notes. In June 2008, certain of our principal stockholders advanced an additional $4.5 million in loans. Interest on these notes accrued at the rate of 9% per annum. Under the terms of the warrant and bridge loan agreement, we gave stockholders in the October 31, 2007 bridge financing the right to purchase up to 1,176,471 shares of our series D convertible preferred stock at a price of $0.425 per share. During June 2008, the outstanding
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principal of these notes and all accrued interest thereon, amounting to $7.0 million and $0.2 million, respectively, were converted into shares of our series D convertible preferred stock at a price of $0.425 per share.
Cash Flows
The following table sets forth the components of our cash flows for the following periods, in thousands:
| Year Ended December 31, | ||||||||||||
| 2009 |
2008
|
2007
|
||||||||||
|
Net cash (used in) operating activities
|
$ | (1,778 | ) | $ | (1,768 | ) | $ | (13,765 | ) | |||
|
Net cash provided by investing activities
|
419 | 1,491 | 2,052 | |||||||||
|
Net cash provided by financing activities
|
1,382 | 2,644 | 10,178 | |||||||||
Operating activities
Cash used in operating activities for the year ended December 31, 2007 was $13.8 million, which was primarily attributable to a net loss of $4.8 million, an increase in accounts receivable of $6.3 million, and a decrease in deferred revenues of $4.0 million, offset by depreciation and amortization of $1.4 million and an increase in accrued expenses of $0.8 million.
Cash used in operating activities for the year ended December 31, 2008 was $1.8 million, which was primarily attributable to a net loss of $8.5 million coupled with an increase in inventories of $1.7 million, offset by favorable depreciation charges of $1.4 million, a decrease in inventory of $3.2 million and an increase in deferred revenue of $3.6 million. The $12.0 million decrease in cash used in operating activities for the year ended December 31, 2008 compared to the prior fiscal year was primarily due to an increase in net loss net of non-cash items of $3.7 million and a change in inventory of $1.0 million, offset favorably by changes in receivables of $9.3 million and deferred revenues of $7.6 million.
Cash used in operations for the year ended December 31 , 2009 was $1.8 million, which was primarily attributable to changes in receivables, inventory, and deferred revenue of $5.6 million, $1.3 million, and $3.2 million, respectively, offset by increases in accounts payable, accrued expenses, and depreciation of $3.9 million, $2.1 million, and $0.9 million, respectively. Significant differences compared to the year ended December 31, 2008 were reversals in accounts receivable and deferred revenues and increases to accounts payable and accrued expenses.
Investing activities
Cash provided by investing activities of $2.1 million for the year ended December 31, 2007, and cash provided by investing activities was $1.5 million for the year ended December 31, 2008. Cash provided by investing activities for 2007 consisted primarily of demonstration equipment sold of $2.4 million offset by purchases of equipment of $0.3 million. Cash provided by investing activities for the year ended December 31, 2008 consisted primarily of demonstration equipment sold of $2.4 million offset by equipment purchases of equipment of $0.8 million. Cash provided by investing activities for the year ended December 31 , 2009 consisted primarily of demonstration equipment sold of $0.5 million.
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Financing activities
Cash provided by financing activities for the year ended December 31, 2007 was $10.2 million, which was attributable to proceeds received from a revolver debt facility of $7.0 million, proceeds from a term debt facility of $0.6 million (net of payments on the term debt facility of approximately $0.4 million), and debt proceeds from shareholders of $2.5 million. Cash provided by financing activities for the year ended December 31, 2008 was $2.6 million, which was primarily attributable to the issuance and proceeds from our series D convertible preferred stock of $3.4 million offset by payments on a term debt facility of $1.9 million. Cash provided by financing activities for the year ended December 31 , 2009, was $1.4 million, which was primarily due to the payments on a term debt facility.
Funding Requirements
Short-term funding requirements
Given our cash and cash equivalents, including the net proceeds of this offering, and our expectation of annual positive cash flows from operations in future periods, we believe that we will have sufficient liquidity to fund our business and meet our contractual obligations for at least the next 12 months. We expect to use an aggregate of $5.0 million of the proceeds of this offering to repay outstanding indebtedness owed to Hercules. We intend to use the balance of the net proceeds of this offering for working capital, especially inventory to fund growth and for general corporate purposes, including investment in evaluation and demonstration equipment to support new product introduction. See “Use of Proceeds.”
Following the consummation of this offering, our principal short-term funding requirements will be as follows:
|
•
|
Debt service obligations of up to $6.0 million owed pursuant to a loan and security agreement we entered into with Hercules, which is due and payable in June, 2010; and
|
|
•
|
Payments relating to the contractual obligations described in the table below.
|
Long-term funding requirements
We expect to fund the growth of our business through cash flow from operations and through issuances of common stock, promissory notes or other securities. We expect to assess our financing alternatives periodically and access the capital markets from time to time when we believe it is in our stockholders’ best interests. If our existing resources are insufficient to satisfy our liquidity requirements, or if we enter into an acquisition or strategic arrangement with another company, we may need to sell additional equity or debt securities. Any sale of additional equity or debt securities may result in dilution to our stockholders, and debt financing may involve covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital expenditures. We cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to delay, reduce the scope of, or eliminate one or more aspects of our research and development activities, which could harm the growth of our business.
|
•
|
the extent to which our products gain increased market share and are commercially successful;
|
|
•
|
the level of profitability of our product solutions;
|
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|
•
|
the progress, level and timing of our product development and support activities related to products;
|
|
•
|
unforeseen costs, delays and problems;
|
|
•
|
the cost and effectiveness of our sales and marketing programs;
|
|
•
|
the status of competing products;
|
|
•
|
the establishment of additional strategic or licensing arrangements with other companies, or acquisitions; and
|
|
•
|
the level of costs associated with building and maintaining public company systems and infrastructure.
|
Other than our loan arrangement with Hercules, we do not currently have any arrangements or credit facilities in place as a source of funds for these additional requirements.
Contractual Obligations
The chart below summarizes our contractual obligations as of December 31 , 2009, in thousands.
| Payments due by Period | ||||||||||||||||||||||||
|
To be
automatically
converted
into common
stock on the
closing of
this offering
|
To be
settled in
cash on the
closing of
this offering
|
2010
and
2011
|
2012
and
2013
|
Thereafter
|
Total
|
|||||||||||||||||||
|
Operating lease obligations
|
$ | — | $ | — | $ | 829 | $ | 784 | $ | 457 | $ | 2,070 | ||||||||||||
|
Notes payable and capital lease obligations
|
$ | — | $ | — | $ | 4,065 | $ | — | $ | — | $ | 4,065 | ||||||||||||
The amounts listed for notes payable consist of the following amounts outstanding:
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements or situations subject to FASB Interpretation No. 46(R), (“FIN 46 (R) ”), Consolidation of Variable Interest Entities which clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support provided by any parties, including the equity holders. FIN 46R requires the consolidation of these entities, known as variable interest entities, by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.
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Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
We sell primarily in U.S. dollars to both domestic and international clients. We are subject to foreign exchange exposure regarding our non-U.S. business affiliates, however the exposure has been limited strictly to operating expenses within those jurisdictions and represents less than 10% of our total revenues as of December 31 , 2009. Therefore, our results could be negatively affected by such factors as changes in foreign currency exchange rates, trade protection measures and changes in regional or worldwide economic or political conditions. A 10% change in the value of the U.S. dollar relative to each of the foreign currencies in which our revenues are denominated would not have resulted in a material change to our results.
Historically, we have not tried to reduce our exposure to exchange rate fluctuations by engaging in hedging activities.
At December 31, 2008 and December 31, 2009 , we had unrestricted cash and cash equivalents totaling $4.0 million . These amounts were invested primarily in money market funds. The unrestricted cash and cash equivalents were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future investment income.
The interest rates on our $4.1 million of outstanding promissory notes at December 31 , 2009 are fixed. If market interest rates increase, the fair value of our promissory notes would decrease.
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance to establish the ASC as the source of authoritative accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This guidance is effective for us in the reporting period ended on December 31 , 2009 and only impacts references for accounting guidance.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R) (now encapsulated in ASC Topic 805). SFAS No. 141(R), among other things, establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. We are required to adopt SFAS No. 141(R) for all business combinations for which the acquisition date is on or after January 1, 2009. This standard will change our accounting treatment for business combinations on a prospective basis.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (SFAS No. 160), now encapsulated in ASC Topics 810, 323 and 325.
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SFAS No. 160 establishes accounting and reporting standards for non-controlling interests in a subsidiary and for the deconsolidation of a subsidiary. Minority interests will be re-characterized as non-controlling interests and classified as a component of equity. It also establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary and requires expanded disclosures. This statement is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited. We do not have any non-controlling or minority interests and, accordingly, do not expect the adoption of this statement to have any effect on our financial position or results of our operations.
In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3), now encapsulated in ASC Topic 350. FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008 and early adoption was prohibited. We adopted this topic during the year ended December 31 , 2009 but it had no effect on our consolidated financial position and results of operations.
In December 2008, the FASB issued guidance as to whether an instrument (or embedded feature) is indexed to an entity’s own stock in ASC Topic 815. The guidance relates to whether an instrument is linked to a company’s own stock and therefore meets the exception to not be accounted for as a derivative. We have adopted this topic during the year ended December 31, 2009 and there was no effect to our consolidated financial position and results of operations.
In April 2009, the FASB issued additional guidance for estimating fair value in accordance with ASC Topic 820 (ASC 820) when the volume and level of activity for the asset or liability have significantly decreased. ASC 820 also includes guidance on identifying circumstances that indicate a transaction is not orderly. In addition, ASC 820 requires disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques. We are evaluating the potential impact of the implementation of ASC 820 on our financial position and results of operations but do not expect the adoption to have a material effect on the financial statements.
In May 2009, the FASB issued ASC 855, Subsequent Events (ASC 855), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 distinguishes between subsequent events that should be recognized in the financial statements and those that should not and requires disclosure of the date through which subsequent events were evaluated. We adopted this topic during the year ended December 31 , 2009, the results of which are disclosed in Note 16 to the consolidated financial statements.
In October 2009, the EITF issued authoritative guidance addressing revenue arrangements with multiple deliverables. The authoritative guidance eliminates the criterion for objective and reliable evidence of fair value for the undelivered products or services. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting provided the deliverables meet certain criteria. This guidance also eliminates the use of the residual method of allocation and requires that the arrangement consideration be allocated at the inception of the arrangement to all deliverables based on their relative selling price. The guidance provides a hierarchy for estimating the selling price of each of the deliverables. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. Accordingly, we will adopt this guidance in our 2010 fiscal year. We are currently evaluating the impact of adoption of this guidance on our results of operations and financial condition.
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BUSINESS
Our Company
Rapid change is occurring in the electronics industry. Smart phones and other portable devices will soon offer mobile television services, video calling and traditional broadband content delivered over wireless networks. Consumer purchases of smart phones and other new technologies are driving the demand for increased functionality within smaller product form factors, as well as higher speed and lower power consumption. The advanced semiconductor integrated circuits providing these functions must be packaged before assembly in products. Typical package size for ICs has decreased ten times over packages of the 1990s, while product speed and capability has increased. This trend is expected to make advanced packaging one of the fastest growing sectors of the semiconductor industry.
We meet the demand for smaller, high performance packages by designing, manufacturing, selling, installing and servicing highly-engineered semiconductor process equipment that automates the packaging of semiconductor devices. Advanced packaging processes, examples of which include “flip chip,” package on package and emerging 3D TSV packaging, enable the packaging of integrated circuits that power this broad range of communications, computing and consumer electronic products. We estimate that the advanced packaging equipment market addressed by our current products was approximately $170 million in 2008, which we expect to exceed $500 million by 2013.
Our mission is to become the leading equipment provider for wafer level packaging. Our solutions were designed specifically for wafer level packaging and we believe they offer a unique and more efficient process compared to competing technologies. Our solutions have been engineered to provide our customers with increased throughput, lower cost of ownership, greater ease of use, greater reliability and lower maintenance, resulting in higher operating profitability.
We currently offer two product platforms: Apollo, our second-generation sputter deposition system; and Stratus, an electrochemical plating system. Apollo and Stratus provide complementary solutions for a variety of metal deposition processes used in flip chip and other advanced semiconductor packaging applications. The Apollo advances metal deposition for wafer level packaging and is used for applications including the multiple metal layers UBM, redistribution layers, backside metallization, integrated passive devices (which allow placing numerous components on a single chip) and light emitting diodes. Stratus is used for thicker metallization for through silicon vias, solder bumping, copper pillar, UBM and other advanced packaging applications. These systems enable our customers to produce semiconductor devices with greater functionality at a lower cost. This value proposition is particularly compelling for customers serving the price-sensitive consumer electronics market.
To date, our revenues have been derived from products serving deposition required for flip chips and emerging 3D advanced semiconductor packaging. We are currently focused on advancing our existing product portfolio and have not expanded into other process areas of the integrated circuit manufacturing process to date. Stratus accounted for a majority of our revenues for the years ended December 31, 2007 and 2008 and substantially all of our product revenues during the year ended December 31, 2009. During the year ended December 31, 2009, the Apollo system was redesigned, which caused customers to postpone purchases while they waited for the introduction of the next generation product. Since our inception in 2001, 107 systems have been installed with 34 different customers, including some of the leading semiconductor manufacturers, many of whom have purchased multiple systems during the past 24 months.
Wafer level packaging is one of the fastest growing segments of the semiconductor manufacturing industry. We estimate that the advanced packaging equipment market addressed by our current products was approximately $170 million in 2008 and we expect this market to exceed $500 million by 2013. Much of this growth is anticipated to occur in 2012 and 2013 as the semiconductor industry recovers from the recent economic downturn, and will, we expect, be driven by new technologies with more advanced packaging requirements. In addition, we intend to expand our product offerings in complementary areas where we can leverage our core competencies and technologies, which has the potential to increase the size of the markets served by our products.
We were founded in August 2001 with the acquisition of our first sputter deposition product line from MKS. Members of our team initially developed the core technology for our products at a prior company, Applied Science and Technology, Inc., which was acquired by MKS. In April 2003, we acquired All-Wet Technologies, Inc., the developer of the Stratus ECD system. We are headquartered in Billerica, Massachusetts. Our mailing address is 900 Middlesex Turnpike, Building 6, Billerica, MA 01821-3929 and our telephone number is (978) 932-2000. Additional information about us is available on our website at http://www.nexxsystems.com. Information contained in, and that can be accessed through, our web site is not incorporated into and does not form a part of this prospectus.
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Our Market / Industry Background
Semiconductor devices, which we refer to as chips or ICs, are essential components in a broad range of communications, computing and consumer electronic products, such as smart phones, gaming consoles, GPS, automotive displays and portable music players. These consumer electronics are driving the majority of the growth in demand for semiconductors within the broader electronic products industry.
Semiconductor devices have traditionally followed Moore’s Law, which states that the density of the circuitry on a single semiconductor doubles approximately every 18 months, enabling smaller, faster and cheaper ICs. As ICs become smaller, more powerful and complex, it is increasingly difficult for traditional manufacturing processes to keep pace with Moore’s Law. Therefore, in order to accommodate technological advances, improvements in manufacturing, and specifically packaging, are required. Our advanced wafer level packaging solutions enable IC manufacturers to continue to manufacture smaller, less costly and more powerful semiconductor devices.
ICs can consist of over a billion microscopic transistors and other components that electronically store information and allow the execution of instructions used to operate electronic devices. Fabrication of ICs includes hundreds of complex and repetitive process steps, involving an array of sophisticated manufacturing equipment, chemical media, and materials. The fabrication process includes, among other steps, the deposition of multiple layers of dielectric or insulating films and electrically conducting metal films on wafers, typically ranging between 200 millimeters and 300 millimeters in size. After the deposition of each film layer, repeated cleaning, stripping and etching processes prepare the surface for the next process. When completed, the wafer may contain several hundred ICs, which, traditionally, are then separated by a dicing process.
Each IC is then “packaged” in order to allow insertion into an electronic device, and encapsulated into a polymer package. Traditional packaging involves electrically connecting the IC to pins via metal wires. In contrast, wafer level packaging allows the ICs to be packaged prior to dicing. This plays an essential role in enabling ICs to fit on increasingly smaller footprints, which is required as electronic devices become smaller. These small footprints allow for greater functionality in increasingly smaller mobile and other devices. This trend has caused a number of new packaging innovations to emerge, including:
|
•
|
Flip chip process technology, a method for interconnecting semiconductor devices to external circuitry with solder bumps that have been deposited onto the chip pads or wafer (wafer level packaging), resulting in much smaller chip assemblies than those resulting from traditional wire bonding. Devices with flip chip assemblies can run more efficiently than those with traditional packaging because the shorter connection of the chip assembly reduces inductance, allowing higher-speed signals, and also carries heat better;
|
|
•
|
3D packaging, which involves stacking chips on top of one another so that together, they occupy less space, and connecting them vertically so that they behave as a single unit; 3D design has been shown to significantly increase IC speed with reduced power consumption;
|
|
•
|
Through-silicon vias, a vertical electrical connection that passes completely through a silicon wafer or die, replacing edge wiring of more traditional 3D packages. By using TSVs, multiple functionalities can be packed into a small footprint and electric paths can be shortened significantly, enabling faster communication, lower power consumption, and smaller form factors than traditional packages. Working together with chemical vendors, we are developing new processes to reduce the costs of TSVs, an integral part of 3-D processes;
|
|
•
|
Patterned, conductive redistribution layers over the surface of the wafer, whereby electroplated wires are isolated from the wafer except at the connection points, permitting higher density packaging and, in turn, higher performance and lower cost packages;
|
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|
•
|
Copper pillars technologies, which offer not only the advantages of improved electrical and thermal performance over traditional packages, but also the reduction or elimination of lead in wafer-level packages; and
|
|
•
|
Microbumping, a promising lead-free technique that enables connection of small input/output pitch devices.
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We are positioned to take advantage of several near term trends that represent growth opportunities in our markets. Prismark LLC (“Prismark”), an electronics industry consulting firm, estimates that ICs using flip chip packaging will increase from 17.3 billion units in 2008 to 29.1 billion units in 2013, representing a CAGR of 11.0%. This compares to a CAGR of only 6.3% for wire bonded ICs over the same period. Prismark also forecasts that bumped wafer production will grow from 6.5 million 300 millimeter wafers in 2008 to 11.9 million 300 millimeter wafers in 2013, representing a CAGR of 12.9%.
3D TSV, which is mainly in development at this point, is anticipated to become a leading packaging technique and represents a longer term growth opportunity. The packaging of 3D chips requires more wafer level processing equipment. It is estimated by Prismark that this packaging technique will be used for 2.8 million 300 millimeter equivalent wafers in 2013, and will be used for 17.3 million 300 millimeter equivalent wafers by 2018, representing a 44% CAGR, with much of this growth in the DRAM, among other semiconductor markets. Future growth is expected by Prismark to be driven by increasingly complex and small form factor semiconductor devices and packages to be used in computing, mobile communications and home networking.
Our Competitive Strengths
We are a leading semiconductor equipment provider focused on the wafer level packaging segment of the semiconductor equipment industry, including applications in flip chip and emerging 3D packaging. As the semiconductor manufacturing process increases in complexity and production parameters become more stringent, semiconductor manufacturers rely increasingly upon manufacturers of semiconductor equipment to achieve improved process control, provide a smaller equipment footprint and lower the cost of ownership for their equipment. Our solutions are optimized specifically for advanced semiconductor packaging and enable our customers to deliver semiconductor devices with greater functionality at a lower cost. Our position is based on the following competitive strengths:
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Best-In-Class Products, Service and Support. Our industry leading solutions are specifically designed for advanced packaging applications which enable high throughput and yield, low cost of ownership, smaller footprint, greater reliability, ease of use and low maintenance. The effectiveness of our products has been proven in high-volume production environments globally and has enabled us to win multiple industry awards; specifically, the Stratus was selected “Best Product 2007” by Semiconductor International and won the “Advanced Packaging Award” in 2007, and the Apollo, our second-generation PVD tool introduced at the SEMICON West industry convention in 2008, was voted “Best Cost of Ownership Product” by attendees at the show. In addition to our industry leading products, we provide our customers with a dedicated, global support and service network to ensure peak performance and availability of the tools. We focus on satisfying the needs of our customers and in some cases have assigned dedicated support staff at customer sites to service mission-critical applications.
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Technology Leadership. We have expertise in wafer level packaging and extensive experience building and supporting production-proven semiconductor manufacturing equipment. We also utilize advanced modeling techniques in the design of our process chambers to address an increasingly complex manufacturing process.
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Intellectual Property. We have a significant intellectual property portfolio consisting of 11 U.S. patents issued and eight U.S. patents pending. These patents protect essential components of our tools, including our wafer holder and ShearPlate technology.
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Scalable, Flexible Platform. Our systems are designed on standard platforms that allow us to configure flexible systems to meet our customers’ specific application and throughput requirements. This flexibility translates into a lower cost of ownership and allows customers to upgrade equipment in a simplified manner in order to respond to changes in process technologies, substrate sizes or materials.
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Outsourced Manufacturing Expertise. We are able to leverage an outsourced manufacturing model that allows us to increase our capacity, minimize fixed costs, leverage our partners’ resources, and reduce manufacturing overhead costs. Additionally, our outsourcing partners’ expertise and advanced equipment has enabled continual decreases in our manufacturing lead times, which is a trend we expect to continue. All of these benefits result in a scalable manufacturing process that allows us to provide leading semiconductor process equipment to customers with greater efficiency, at a lower cost, and with limited use of our capital.
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Our Growth Strategy
Our mission is to become the leading solutions provider for wafer level packaging worldwide. We have identified specific strategic initiatives that are critical to successfully achieving our objective:
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Maintain and Expand Technology Leadership. Through our technology leadership we deliver customer-driven product innovations focused on price, performance and flexibility that result in critical performance, quality, process control and cost benefits. Technology leadership is critical to increasing our competitive win rate, maintaining suitable pricing and building market acceptance. We believe the various proprietary technologies and processes we have developed, such as our vertical process with patented wafer holder and our ShearPlate technology, currently provide us with an advantage over competing wafer processing equipment suppliers. We plan to continue investing in research and development to maintain and expand our technology leadership position. We believe that the technical innovations in our equipment and the chemical processes, continued software development, and analysis tools we develop to assist our customers in meeting their specific requirements will continue to be leading drivers for market acceptance of our semiconductor processing equipment.
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Strengthen our Global Presence. We continue to develop our global presence in order to provide the infrastructure necessary to support our geographically diverse customer base. In September 2007, we established a direct sales and support function in Taiwan and, in September 2009, we established a customer service operation based in Singapore. We believe our direct presence in Southeast Asia and our relationships with large Taiwanese foundries will be a catalyst for expansion to other regions in Asia.
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Leverage Process Technologies Across Markets and Applications. We believe our technology and design expertise enables us to offer future solutions in other areas of the semiconductor manufacturing process. We believe considerable opportunities exist in these areas that would significantly expand our addressable market. In addition, we believe we can leverage our core competencies and technologies to access markets outside of semiconductor device manufacturing including solar, light emitting diodes (“LEDs”), and micro electro-mechanical systems (“MEMs”).
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Broaden our Intellectual Property Portfolio. We intend to continue to broaden our patent portfolio through internal development, strategic relationships and participation in industry consortia. Although we have no plans at this time to acquire any other businesses, we may in the future seek to broaden our intellectual property portfolio through acquisitions of businesses or exclusive license arrangements. We believe this will enhance the competitiveness and size of our current businesses and allow us to diversify into complementary markets and technologies.
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Our Technology and Products
Our current products include equipment used in the rapidly growing advanced packing segment of the semiconductor market. Our solutions address customer needs in “under bump metallization” (“UBM”),
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electroplating and backside metallization. We continue to evaluate opportunities to provide solutions that address customer needs in adjacent back-end processes. The following diagram illustrates the location of our product applications within the typical wafer level packaging process flow.
A brief overview of our products is as follows:
Sputter Deposition Systems
Sputtering is a physical vapor deposition (“PVD”) metallization technology, in which ions of an inert gas such as argon, are electrically accelerated in a high vacuum toward a target of pure metal, such as tantalum or copper. Upon impact, the ions of inert gas sputter off the target material, and the charged gas is then deposited as a thin film on the silicon wafer. PVD processes are used in front end, integrated circuit fabrication to create the precise barrier and seed layers required for interconnect applications, as well as conductive wires in an aluminum manufacturing process. PVD processes are also used in back-end applications primarily in wafer level packaging to deposit multiple metal layers under gold or solder bumps for an electrical connection to the IC pad or for backside metallization of ultra-thin wafers. Our PVD tools have been designed for back-end applications.
Our PVD tools, the Apollo and Nimbus, are high throughput, lower cost of ownership sputtering systems with the flexibility to run different wafer sizes. The advanced sputter deposition architectures found in our systems incorporate wafer processing commonly used in cluster tools designed for front-end IC fabrication with the low cost and simplicity of an in-line system. Our tools place wafers on a tray at atmospheric pressure, after which the wafers are processed in batches offering versatility in handling multiple wafer sizes and thin wafers before carrying out all subsequent vacuum process steps, beginning in a loadlock with no further movement, reducing the risk of damage to the wafer. Wafers are processed safely on these trays with up to five metals deposited in a single deposition chamber compared with a cluster tool requiring five chambers each dedicated to one of the five metals. This process not only results in higher yield, but lower capital cost as the deposition chambers are able to process nearly full time.
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The diagram above shows our tray-based wafer transfer system, including a proprietary elevator mechanism that moves the wafers in and out of three vacuum load and processing chambers, permitting three batches of wafers to be processed simultaneously, economically loading and unloading wafer cassettes by interfacing at one robot based station. Based on a competitive analysis, this unique system allows our PVD tools to achieve twice the throughput of competing systems within the same footprint.
Apollo
We launched our next-generation PVD system in July 2008. The Apollo builds upon the field-proven Nimbus architecture and provides higher throughput and productivity, lower consumables cost, enhanced vacuum performance and a roughly 50% smaller footprint compared to competing cluster tools.
Electrochemical Deposition System
Advanced packaging process solutions include electrochemical deposition (“ECD”) systems used to deposit metal layers to plate wafer bumps or copper pillars and redistribution layers as well as fill 3D TSVs. Two basic ECD architectures have been employed in wafer level packaging: horizontal (also known as “fountain cell”) and vertical plating. Horizontal bump plating tools evolved from front end IC fabrication incorporating complex process and contamination control required for thin film processing in the wafer fabrication. Vertical Plating tools have a capacity advantage particularly for larger 300 millimeter wafers because multiple process cells fit into the same space that a single horizontal cell would occupy.
Stratus
The Stratus is designed as a high throughput, high yield ECD system that integrates the wafer quality and process advantages of vertical wafer orientation with the economic advantages of parallel processing. The Stratus’ vertical architecture offers up to 20 metal plating positions and provides both system flexibility and higher throughput than traditional horizontal processing systems.
Our ECD system incorporates proprietary electroplating technology on a multi-cell platform. There are two basic Stratus models each providing the flexibility to handle different wafer sizes simultaneously. The S300 is available to accommodate wafer diameters from 200 millimeters to 300 millimeters and our S200, wafer diameters from 100 millimeters to 200 millimeters. There are currently 45 Stratus systems installed worldwide.
Stratus system architecture is built around a proprietary wafer-holding module that provides several advantages, including the reduction of wafer breakage, lower automation costs and higher throughput. Because wafer movement occurs while the wafers are securely held back-to-back in the fail-safe wafer-holder, there is no need for the expensive robotic precision necessary to move wafers between process chambers. The system’s wafer holder
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achieves precise alignment between the wafer and critical process elements, enabling small process cell size and more space-efficient system configurations. Additionally, the back-to-back wafer holder design significantly decreases repetitive wafer handling and doubles the effective throughput of each process cell.
The proprietary design of the Stratus (left) enables approximately twice the amount of wafer through-put per hour under standard wafer processing conditions than that of traditional fountain cell solutions (right), which occupy roughly the same footprint. This advantage increases manufacturing efficiency and provides a distinct cost advantage per wafer for our customers. The following graphics illustrate the process advantage of the Stratus compared to competitive fountain cell solutions:
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Stratus: 40 wafer processing, 20 wafer plating
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Competitor: 12 “Cups,” 10 wafer plating
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The Stratus also incorporates our proprietary ShearPlate technology to control the fluid boundary layer at the wafer surface, enable deposition uniformity and permit a wide chemical operating window. Because this technology separates wafer and anode fluid flow, the chemistry breakdown and chemistry costs are reduced without using expensive membrane separation hardware. Additionally, strong agitation at the wafer surface, combined with the vertical wafer orientation, avoids yield loss due to bubble entrapment.
Customers
Our customers include leading semiconductor manufacturers throughout the world and can be classified as outsourced semiconductor assembly and test providers (“OSATs”) or integrated device manufacturers (“IDMs”). We initially focused on developing relationships with OSATs and currently have three of the four largest OSATs , in terms of annual revenues, as customers. Between 2004 and 2007, we installed 18 Nimbus systems with Chipbond Technology Corporation, an OSAT, highlighting our success with OSATs. More recently, we have focused on sales to IDMs and have succeeded in penetrating this market over the last 18 months. During the past year, most of our revenues have been derived from the sale of our Stratus systems. In the year ended December 31, 2009, two customers accounted for approximately 48% of our net sales, with customer A accounting for 33% and customer B accounting for 15% of such sales. In the year ended December 31, 2008, four customers accounted for approximately 66% of our net sales, with customer A accounting for 14%, customer C accounting for 19%, customer D accounting for 18% and customer E accounting for 16% of such sales.
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Net revenues by geographic region were as follows:
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2009
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2008
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2007
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North America
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Europe
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A material reduction in orders from our customers in the semiconductor industry could adversely affect our results of operations and projected financial condition. Our business depends upon the expenditures of semiconductor manufacturers, whose businesses, in turn, depend on many factors, including their economic capability, the current and anticipated market demand for ICs and the availability of equipment capacity to support that demand. The market for the products we sell is highly competitive and in order to be successful, we need to continue to develop innovative products addressing customer technical requirements in a cost-efficient tool.
Sales, Marketing and Service
We market and sell our products primarily through a direct sales force, consisting of individuals who have backgrounds in semiconductor packaging and who generally have significant experience selling semiconductor capital equipment into the specific market segments and territories to which they are assigned. We have strategically placed offices throughout the United States and in Taiwan and Singapore. In the United States, our sales office is our principal location in Billerica, Massachusetts. Our international offices are located in Taiwan and Singapore. Over the last three years, we have expanded our sales presence in Asia as many of the world’s semiconductor manufacturing facilities are based in Taiwan, Singapore, Korea and China. We expect international markets, particularly the markets in Asia, to provide most of the opportunities for our products. In addition to direct sales, we leverage sales representatives in Europe and in countries such as China, Korea and Japan, where the semiconductor manufacturing industry contains smaller concentrations of customers.
We may enter into strategic relationships with business partners who have complementary technologies for, and experience in, semiconductor and other capital equipment markets that can utilize our technologies. We believe that forming such relationships could (i) help us achieve cost economies in product development and manufacturing, (ii) provide us with the ability to take advantage of any available local government stimulus funding and related incentives, (iii) result in optimized products and (iv) provide advantages in marketing and selling our products in the geographic markets where our partners are based.
Our sales cycles vary and typically follow a lengthy development and qualification period prior to commercial production. Our typical new customer sales cycle averages six to 18 months, from initial interaction and marketing to final acceptance and testing. In most cases, customers request a product demonstration once we have established an initial relationship. This is sometimes followed by an evaluation period of six to 12 months, after which the customer’s order is placed. We typically categorize customer purchases of our tools into (i) tools used to develop new packaging devices (development tools or technology buys), (ii) pilot production or pilot line tools (scaled up from development tools or technology buys), and, finally, (iii) capacity tools for high volume production. Our customers often work with their end customers for production approval during pilot production, which could take anywhere from three to six months. Following this approval, customers will request additional products for capacity
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production. In 2009, a majority of our sales were classified as capacity sales as opposed to development or pilot sales. This is important to note as capacity sales typically consist of multiple units and demonstrate the customer’s commitment to our products and technology.
We focus our marketing efforts on increasing brand awareness, communicating product advantages and generating qualified leads for our sales force and channel partners. We rely on a variety of marketing vehicles, including participation in industry conferences and trade shows, to share our technical message with customers, as well as public relations, industry research and our collaborative relationships with other companies involved in industry consortia.
We also provide our customers with direct worldwide support and service coverage with key personnel based throughout the United States, Belgium, Singapore and Taiwan. Our service and support staff are involved in a number of activities to ensure customer satisfaction, including services developed to maximize productivity of our customer’s tools and improving yield and tool availability through increased uptime. In addition to this direct support network, we have third party service and support arrangements in France, Germany, Italy, Switzerland, China, Korea, and Japan.
Backlog and Deferred Revenue
Our backlog was $8.6 million and $7.2 million as of December 31 , 2009 and December 31 , 2008, respectively. Our backlog includes accepted purchase orders that we expect to ship within 12 months or products which have shipped but have not yet been accepted by the customer, as well as contractual service revenue and maintenance fees to be earned within the next 12 months. Orders from our customers are subject to cancellation or delay by the customer with limited penalties. Historically, order cancellations and order rescheduling have not been significant; however, orders presently in the backlog could be cancelled or rescheduled. In addition, since only a portion of our revenues for any fiscal quarter represents systems that were in backlog as of the beginning of that quarter, we do not believe that backlog is necessarily an accurate indication of our future revenues or financial performance.
Our deferred revenue primarily relates to equipment shipped to customers that has not received final acceptance. Typically, 80% to 90% of revenue is recognized when the order is shipped, with the additional 10% to 20% upon final acceptance which typically takes about three months. As of December 31 , 2009, deferred revenue was $2.0 million.
Backlog is not a recognized performance measure under GAAP and does not have any standardized meaning prescribed by GAAP. We believe that backlog is a useful complementary measure of projected activity in future periods and is commonly used by our management to evaluate our projected activity in future periods. Any such projections are forward-looking in nature and there can be no assurance that backlog will accurately reflect future sales. See “Special Note Regarding Forward Looking Statements” and “Risk Factors.” There are no direct comparable measures to backlog in GAAP.
Research and Development
We believe that timely development of products and technologies is necessary to remain competitive in an equipment market characterized by rapid technological change and product innovation. We devote significant resources to programs directed at developing new and enhanced products, as well as new applications for existing products. Our research and development efforts focus predominantly on leveraging core technologies to provide solutions that increase throughput and efficiency, lower total cost of ownership, and enhance performance in the manufactured semiconductor industry. Our recent development efforts have resulted in several new product enhancements for our Apollo and Stratus product lines that allow for additional metallization capabilities, handling of diverse wafer sizes and types, and chemical monitoring and control. We maintain extensive demonstration and process development laboratories at our facilities in Billerica.
We are currently involved in industry consortia with SEMATECH and IBM in the United States and IMEC in Europe. We believe that our participation in these consortia provide us with better insight into technology trends
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and the capital equipment which will be required to produce innovative ICs. Generally, we contribute personnel and some level of funding in these consortia, which we expect to continue.
Research and development, which is expensed as incurred, was approximately $6.4 million, $6.5 million and $7.8 million for the years ended December 31, 2009, 2008 and 2007, respectively. As a percentage of our net sales, these expenses represented approximately 16.7% , 35.5% and 30.5% in each of these respective years , respectively. In order to maintain technology leadership and pursue customer driven opportunities for the application of our core technologies, we plan to continue to invest in research and development at the same or higher dollar levels than currently expended. However, we expect research and development expenses as a percentage of revenues to continue to decrease or remain constant.
Competition
The semiconductor equipment industry is an intensely competitive marketplace marked by constant technological change. Significant competitive factors in the semiconductor equipment market and other markets in which we compete include system performance and flexibility, cost of ownership, development of new technologies, the size of each manufacturer’s installed customer base, the ability to deliver products on a timely basis, pricing and payment terms, and customer service and support. We believe that we compete favorably with respect to these factors, but must continue to develop and design new and improved products and technologies in order to maintain our competitive position. We face substantial competition from established competitors, certain of which have greater financial, marketing, technical and other resources, broader product lines, more extensive customer support capabilities, larger sales organizations and greater customer bases. We may also face competition from new domestic and overseas market entrants. We expect revenues from our Stratus product line to account for a majority of our revenues for the foreseeable future, and, therefore, we are exposed to the risk that the Stratus could be adversely affected by its own performance, price or total cost of ownership, or the availability, functionality and price of competing products and technologies.
Although the Nimbus and the Apollo are the only high throughput sputtering systems designed specifically for advanced packaging, we compete in the advanced packaging market against single wafer cluster and batch tool providers such as OC Oerlikon Corporation AG (both cluster and batch tools), Tegal Corp., Applied Materials, Inc. and ULVAC, Inc. The Stratus competes against horizontal fountain plating equipment manufactured by Applied Materials, Inc. (through its acquisition of Semitool, Inc.), Electroplating Engineers of Japan Ltd. and others, and also with vertical deposition systems produced by Ebara Corp. and others and front end electroplating and plasma enhanced CVD equipment supplier Novellus.
To maintain or capture a position in the market, we must continue to develop new and enhanced systems and introduce them at competitive prices on a timely basis, while managing our R&D, product and warranty costs. Most of our competitors are focused on front-end wafer fabrication and apply those front-end tools to back-end applications. These retrofitted tools are complicated and expensive, having been designed for the stringent and costly feature size and cleanliness requirements of integrated device fabrication, and are not optimized for the economic and process flexibility requirements of wafer level packaging. However, installing and integrating capital equipment into a semiconductor production line represents a substantial investment. For this reason, once a manufacturer chooses a particular vendor’s capital equipment, our experience has shown that the manufacturer will generally rely upon that equipment for the useful life of the specific application. As a result, all of today’s semiconductor equipment manufacturers typically have difficulty selling a product to a particular customer to replace or substitute for a competitor’s product that has been previously qualified by that customer for a specific product line.
A number of our competitors also have a larger installed base of products, longer operating histories or greater name recognition than we do. On December 21, 2009, Applied Materials, Inc., the largest company in the semiconductor capital equipment industry, announced that it had completed the acquisition of Semitool, Inc., an established competitor, through a cash tender offer. In addition, Novellus recently announced a joint venture with IBM to develop TSV technologies for the front-end of the semiconductor manufacturing process. While we currently serve the back end market, Novellus could in the future seek to compete with us or alternatively compete with us in other TSV applications. Our larger competitors have more extensive infrastructures, which could place us at a disadvantage when competing for the business of global semiconductor device manufacturers. In addition, our competitors may be able to respond more quickly than us to changes in end-user requirements and devote greater resources to the enhancement, promotion and sale of their products.
We expect our competitors to continue to improve the design and performance of their products. We cannot assure you that our competitors will not develop enhancements to, or future generations of, competitive products that will offer superior price, performance and/or cost of ownership features, or that new processes or technologies will not emerge that render our products less competitive or obsolete.
Manufacturing
We outsource 100% of the Apollo manufacturing process. For our Stratus product, subassemblies are provided by several contract manufacturers with final product assembly and product testing completed in-house. Additionally, component and product prototyping is performed internally.
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Our outsourcing strategy enables us to minimize fixed costs and capital expenditures, gain labor efficiencies and provides us with the flexibility to increase product capacity based on customer demand. We leverage the strengths and skill sets of each of our high quality suppliers to increase manufacturing efficiencies and minimize costs. This strategy also allows us to focus on product differentiation through system design and quality control. Most of our semiconductor equipment is manufactured in clean-room environments similar to those used by semiconductor manufacturers for semiconductor device fabrication, which helps to minimize the amount of particulates and other contaminants in the final assembled system and to improve product yields for our customers.
Outsourced manufacturing operations include metals and plastics fabrication and finishing capabilities; component parts and final product assembly; and extensive product testing capabilities. Our outsourced manufacturing partners work closely with our operations and product development engineers to ensure that products are engineered for manufacturability, affording a smooth transition from prototype to full scale production. Certain raw materials and components we use in the manufacturing and assembly of our products are available from a limited number of suppliers. Shortages could occur due to an interruption of supply or solvency of our suppliers. We endeavor to minimize the risk of product interruption by selecting and qualifying alternative suppliers, monitoring the financial condition of key suppliers, and limiting the supplier’s dependence on our business by typically maintaining no more than 20% to 25% of any supplier’s total business. Additionally, we continue to work with our suppliers to significantly reduce lead times. Our principal outsourcing provider for our Apollo and Nimbus products is Dakota Systems, Inc. (“Dakota”), who assembles these products pursuant to the terms of an agreement that continues through February 2012. The terms of this agreement obligate us to order and purchase all our Apollo and Nimbus products exclusively from this provider unless the provider is unable to honor any order we place with it, in which case we have the right to manufacture such products ourselves or use this provider or other suppliers as we choose for any Apollo or Nimbus product referenced in such order going forward. During the term of this agreement and for two years following its termination, the provider agrees not to manufacture any products that compete with our products in the markets addressed by us. Either party may terminate the agreement in the event of an uncured breach or upon the sale of the other party. Under the terms of the agreement, pricing is based upon the acquisition cost of materials and direct labor charges.
Patents and Other Intellectual Property
The semiconductor industry in general is very active in pursuing patent applications for both equipment and processes used in the manufacture of semiconductors devices. Patents are considered important to the protection of intellectual property resulting from a company’s research and development programs and are viewed as a means of gaining market advantages over competitors because the industry often differentiates competitors on the basis of technological criteria.
We rely upon a combination of contract provisions and copyright, trademark, patent and trade secret laws to protect our proprietary know-how, ideas, inventions, goodwill and rights in our solutions and products. We currently hold 11 U.S. patents, one in each of China and Japan, and have eight patent applications pending in the U.S and nine pending abroad, and intend to file additional patent applications as we deem appropriate. Our U.S. patents, which cover material aspects of our past and present core products, have current durations ranging from approximately 2019 to 2024. We maintain certain exclusive, perpetual, royalty-free and royalty-bearing licenses in our field of use from MKS used in the Apollo and Nimbus products. Additionally, in connection with our acquisition of All-Wet Technologies, Inc. in 2003, we acquired an exclusive, perpetual licence to technology used in our Stratus product. We also, in connection with joint development agreements with each of Infineon Technologies AG (“Infineon”) and IBM, have entered into non-exclusive, perpetual, royalty-bearing licenses with both companies for the commercialization of any technology developed on the Stratus platform as a result of such collaborations. We believe that, although the patents we own and may obtain in the future will be of value, they alone will not determine our success, which is also dependent upon our engineering, marketing, support, and delivery skills.
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We rely, in some circumstances, on trade secrets to protect our technology. Trade secrets, however, are difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.
Commercial Agreements
Dakota Manufacturing Agreement
Pursuant to the terms of the Manufacturing Agreement we entered into in February 2003, we have engaged Dakota as our exclusive supplier for our Nimbus and Apollo products. In the event that Dakota is unable to fulfill an order by us for a particular item of machinery or equipment, we may manufacture such item ourselves or have another party manufacturer it and, thereafter, Dakota shall not have the exclusive right to supply such item of machinery or equipment. Any intellectual property relating to the products that is developed by us or by us and Dakota is owned by us and any intellectual property developed solely by Dakota relating to the products or the manufacturing process or jointly by us and Dakota relating to the manufacturing process is owned by Dakota. The initial term of the Manufacturing Agreement was three years and it has been renewed through February 2012.
Infineon Development Agreement and License Agreement
Pursuant to the terms of the Development Agreement we entered into with Infineon in September 2008 (the “Infineon Development Agreement”), we have agreed to carry out the development of customized tool features, based on our Stratus S200 tool platform, and to provide Infineon with the results of this development work for use in Infineon's manufacturing process for logic and semiconductors. Infineon will own the results of the development work other than any enhancements to the tool platform, which shall belong to us.
In connection with the Infineon Development Agreement, we entered into a License Agreement with Infineon in October 2009 pursuant to which Infineon granted us a non-exclusive license to incorporate the technology developed under the Development Agreement into our products based on the Stratus S200 tool platform. The license does not commence until January 1, 2014. This is a royalty bearing license that starts at four percent of the selling price of our applicable product and drops to three percent in 2016.
IBM Joint Development Agreement and Patent License Agreement
Pursuant to the terms of the Joint Development Agreement we entered into with IBM in February 2009 (the “IBM Development Agreement”), we have agreed to the joint development of semiconductor apparatus and processes relating to plating technology for advanced packaging and integration solutions in semiconductor processing and manufacturing. IBM has granted us a license under its intellectual property rights to develop, make, have made and sell certain of our products and we have agreed to pay IBM a royalty on the sale of such NEXX products equal to six percent of the selling price of the applicable product. The term of the agreement is three years.
In connection with the IBM Development Agreement, we entered into a Patent License Agreement with IBM in February 2009 pursuant to which IBM licenses to us, and we license to IBM, certain patent rights to support the obligations and rights under the IBM Development Agreement. The license granted by us to IBM is fully paid up. The license granted by IBM to us bears a royalty of two percent of the selling price of our licensed products developed under the IBM Development Agreement.
MKS Patent and Know-How License Agreement
In August 2001we entered into a Patent and Know-How License Agreement with MKS in connection with our acquisition of certain assets relating to the Nimbus and our now dormant Cirrus product lines owned by Applied Science and Technology, Inc. and ASTeX PlasmaQuest Inc. Pursuant to this agreement, we were granted a license under certain patents and related know-how to enable us to develop and manufacture an electronic cyclotron resonance plasma source and sell such products to customers in the defined field of semiconductor, optoelectronic and photonic businesses on an exclusive basis and for use in stand-alone systems sold into all other fields on a non-exclusive basis. This license is fully paid up with no royalty obligations other than royalty payments on the Cirrus product line, which we no longer develop.
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All Wet Exclusive License Agreement
In connection with our acquisition of All Wet in 2003, we succeeded in interest to the rights and obligations of All Wet under an Exclusive License Agreement it entered into with Arthur Keigler in December 1999. Pursuant to the terms of this agreement, Keigler granted an exclusive, perpetual license to All Wet for the use of Keigler’s patent relating to technology used in our Stratus product.
Customer Purchase Orders
Each customer order is negotiated by a separate purchase order rather than a blanket purchase agreement. As a result, no single purchase order is material to our business and the terms of purchase orders can and do vary significantly depending upon the type of system purchased by a customer and the specific components of a system. While in the future this arrangement may change, we have conducted business in this manner to date and do not have plans to alter these arrangements in the near future.
Effect of existing or probable governmental regulations on our business.
We are unaware of any existing or probable government regulations that would have a positive or negative impact on our business.
Legal Proceedings and Regulatory Actions
We are not currently a party to any material legal proceedings or regulatory actions.
Employees
As of March 23, 2010, we had 91 full-time employees, with 34 in research and development, 18 in manufacturing operations/supply chain, seven in sales and marketing, 23 in service, and nine in general and administration.
Of our full-time employees, 69 are located in the United States and 22 are abroad. We consider our current relationship with our employees to be good. None of our employees are represented by labor unions or have collective bargaining agreements.
Facilities
Our corporate headquarters are located in Billerica, Massachusetts, where we occupy approximately 39,000 square feet. We use these facilities for administration, sales and marketing, supply chain, and research and development activities. We also lease space in Hsinchu, Taiwan and Singapore that we use for sales and support activities. We believe that our current facilities are sufficient for our needs for the foreseeable future as we outsource most of our manufacturing operations. We may add new facilities and expand our existing facilities as we add employees and expand our markets. In that event, we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.
Environmental Matters
We are subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous waste. Our compliance with federal, state and local provisions regulating the discharge of materials into the environment, and the remedial actions we have taken with respect to environmental regulations, have not had, and are not expected to have, a material effect on our business, financial condition, results of operations, cash flows and competitive position.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth the name, age and position of each of our executive officers and directors as of March 23, 2010 :
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Name and
State of Residence
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Age
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Position with Our Company
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Principal Occupation
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Thomas M. Walsh, Ph.D.
Massachusetts, USA
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56
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President, Chief Executive Officer and Director
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President, Chief Executive Officer and Director of our company
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Stanley D. Piekos
New Hampshire, USA
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62
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Vice President, Finance and Chief Financial Officer
|
Vice President, Finance and Chief Financial Officer of our company
|
|||
|
Arthur L. Keigler
Massachusetts, USA
|
52
|
Vice President of Engineering and Technology
|
Vice President of Engineering and Technology of our company
|
|||
|
John M. Bowers
Massachusetts, USA
|
62
|
Vice President of Sales and Business Development
|
Vice President of Sales and Business Development of our company
|
|||
|
Phillip Villari
Massachusetts, USA
|
60
|
Vice President, Customer Satisfaction and Operations
|
Vice President, Customer Satisfaction and Operations of our company
|
|||
|
Richard Post, Ph.D
Massachusetts, USA
|
66
|
Director and Chairman of the Board
|
Chairman of our company
|
|||
|
Carlton J. Eibl(2)
California, USA
|
49
|
Director
|
Managing Director, Enterprise Partners Venture Capital
|
|||
|
Clifford L. Haas (2)(3)
California, USA
|
52
|
Director
|
Managing Director, Sigma Partners
|
|||
|
Bruce C. Rhine(1)(2)
Oregon, USA
|
52
|
Director
|
Retired
|
|||
|
Robert G. Deuster (1)(3)
California, USA
|
59
|
Director
|
Retired
|
|||
|
R. Douglas Norby (1)(3)
California, USA
|
74
|
Director
|
Retired
|
|||
|
(1)
|
Member of audit committee.
|
|
(2)
|
Member of compensation committee.
|
|
(3)
|
Members of nominating and corporate governance committee.
|
As a group, immediately prior to the offering, our directors and executive officers beneficially own or control or direct, directly or indirectly, a total of shares of our common stock, representing % of our issued and outstanding common stock. See “Principal Stockholders.”
Executive Officers
Thomas M. Walsh, Ph.D. has been our President, Chief Executive Officer and member of our board of directors since October 2008. From May 1996 to September 2008, Mr. Walsh served in various senior management
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positions with Novellus Systems Inc., a public semiconductor equipment manufacturer, most recently serving as general manager of the Electrofill Business Unit from February 2007 to October 2008. From 1981 to 1996, Mr. Walsh served in various technical and senior management positions at International Business Machines Corporation, a public technology and services provider. Mr. Walsh holds an A.B. degree in chemistry from Herbert Lehman College, a Ph.D. degree in analytical chemistry from Purdue University and an M.B.A. from New York University. We believe Mr. Walsh is qualified to serve on our board of directors based upon his expertise and knowledge regarding our business and operations and his executive experience in the semiconductor equipment industry as described above.
Stanley D. Piekos has been our Vice President, Finance and Chief Financial Officer since June 2006. From March 2003 to February 2006, Mr. Piekos was Chief Financial Officer at August Technology Corporation, a provider of automated inspection, metrology and data analysis software to microelectronic device manufacturers. From February 1998 to March 2003, Mr. Piekos was Chief Financial Officer of American Superconductor Corporation, a manufacturer of high temperature superconductor products and electrical systems. From June 1994 until February 1998, Mr. Piekos served as Vice President and Chief Financial Officer of Brooks Automation, Inc., a supplier of robotics and controls to the semiconductor production equipment industry. For the nine years prior to June 1994, Mr. Piekos was employed by Helix Technology Corporation, a manufacturer of cryogenic equipment, most recently as Vice President and Chief Financial Officer. During his first 15 years in business, Mr. Piekos held a variety of positions in financial management and marketing with W.R. Grace & Co., a global manufacturer of specialty chemicals and industrial equipment. Mr. Piekos holds a B.A. degree in finance from Northeastern University and an M.B.A. from Babson College.
Arthur L. Keigler has been our Vice President of Engineering and Technology since June 2003. From December 1999 to April 2003, Mr. Keigler was President and Chief Executive Officer of All Wet Technologies, Inc., a semiconductor equipment developer he founded that we acquired in April 2003. From June 1992 to December 1999, Mr. Keigler was a Manager of Engineering of Quantum Corp., a global storage company specializing in backup, recovery and archive solutions. Mr. Keigler holds a B.S. degree in applied physics from Cornell University and M.S. degrees in each of materials science, mechanical engineering and business management from the Massachusetts Institute of Technology.
John M. Bowers has been our Vice President of Sales and Business Development since April 2008. From January 1991 to March 2008, Mr. Bowers served in various senior management positions at Novellus Systems Inc., a public semiconductor equipment manufacturer, most recently serving as Managing Director, Global Account from November 2005 to March 2008, President, Southeast Asia Region from April 2002 to November 2005, General Manager, Greater China Region from November 1999 to April 2002, and Director of Western Region from September 1992 to October 1999. Mr. Bowers holds B.A. and B.S. degrees in mechanical engineering from Bucknell University and an M.B.A. from the University of Pittsburgh.
Phillip Villari has been our Vice President, Customer Satisfaction and Operations since September 2004. From October 2000 to September 2004, Mr. Villari was Chief Operating Officer of SemiTest, Inc., a supplier of monitoring tools for semiconductor fabrication. From 1992 to 2000, Mr. Villari held various senior management positions at each of Micro Technology Component, Inc., a supplier of test handlers for the semiconductor industry, Aseco, Inc., a supplier of test handlers for the semiconductor industry, Electro Scientific Industries, Inc., a manufacturer of equipment for microelectronics manufacturers, and XRL Inc., a semiconductor equipment manufacturer. Mr. Villari holds a B.S. degree in industrial technology from Clarkson College of Technology.
Directors
Richard Post, Ph.D., founder of NEXX, has served as chairman or our board of directors since our formation in August 2001. Dr. Post also served as our President and Chief Executive Officer from our formation in August
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2001 until October 2008. From April 2000 to August 2001, Dr. Post served as a Vice President of MKS Instruments, Inc. (NASDAQ: MKSI), a supplier of semiconductor equipment. From August 1987 to August 2001, Dr. Post served as President, Chief Executive Officer and Chairman of the Board of Applied Science and Technology, Inc. (NASDAQ: ASTX), a manufacturer of semiconductor equipment that he co-founded. In April 2000, Applied Science and Technology, Inc. was acquired by MKS Instruments, Inc. Dr. Post is a fellow in the American Physical Society, has completed the Owner/President Management Program at Harvard Business School and holds a Ph.D. degree in plasma physics from Columbia University and a B.S. degree in energy physics from the University of California, Berkeley. We believe Dr. Post is qualified to serve on our board of directors based upon his expertise and knowledge regarding our business and operations and his executive experience in the semiconductor equipment industry as described above.
Carlton J. Eibl has served as a member of our board of directors since January 2009. Mr. Eibl has been a Managing Director with Enterprise Partners Venture Capital (“Enterprise Partners”), a venture capital firm, since 2003. Prior to joining Enterprise Partners, Mr. Eibl was the Chief Executive Officer of several technology and life science companies in San Diego, including Maxwell Technologies, Inc. Before joining Maxwell Technologies, Inc., Mr. Eibl served as President of Stratagene Corporation, a manufacturer of life science research products. Mr. Eibl also served as Chief Executive Officer and President for Mycogen Corporation, a publicly held agricultural biotechnology company, which was sold to The Dow Chemical Company in 1998. Mr. Eibl serves on the board of directors of DragonWave Inc. (NASDAQ: DRWI), a manufacturer of wireless network equipment. Mr. Eibl holds a J.D. degree from the Boston University School of Law and a B.A. degree from Cornell University. We believe Mr. Eibl is qualified to serve on our board of directors based upon his experience in advising and managing technology companies as both an investor and an executive as described above.
Clifford L. Haas has served as a member of our board of directors since September 2005. Mr. Haas joined Sigma Partners, a venture capital firm, in 1985 and has served as a Managing Director there since 1988. From May 2000 to June 2003, Mr. Haas served as a director of privately-held Vicom Systems, Inc. (“Vicom”), a provider of storage management software and applicances. In May 2003, Vicom filed a voluntary petition for bankruptcy protections under the U.S. federal bankruptcy laws, and, in February 2004, its plan for reorganization was confirmed. Mr. Haas holds an M.B.A. degree from Stanford University Graduate School of Business and a B.S. degree in engineering from California Polytechnic State University. We believe Mr. Haas is qualified to serve on our board of directors based upon his experience in advising and managing technology companies in connection with his duties as a Managing Director of Sigma Partners.
Bruce C. Rhine has served as a member of our board of directors since September 2001. Mr. Rhine previously served as Chief Strategy Officer, from July 2006 to February 2008, and Chief Executive Officer, from March 2007 to August 2007, of Nanometrics Incorporated (NASDAQ: NANO), a supplier of advanced process control metrology systems, where he has also served as a director since July 2006. From August 2000 to July 2006, Mr. Rhine served as Chairman and Chief Executive Officer of Accent Optical Technologies, Inc., a supplier of advanced process control metrology systems, and as Accent Optical Technologies, Inc.’s President from January 2003 to April 2005 and from August 2000 to September 2001. Mr. Rhine holds a B.S. degree in chemical engineering and an M.B.A. in finance from The Pennsylvania State University. We believe Mr. Rhine is qualified to serve on our board of directors based upon his engineering background and his executive and director experience in the semiconductor equipment industry as described above.
Robert G. Deuster has served as a member of our board of directors since May 2004. Mr. Deuster previously served as Chief Executive Officer and as a member of the board of directors of Newport Corporation (NASDAQ: NEWP), a provider of laser and photonics components, from May 1996 until his retirement in October 2007, serving as Chairman of the board from June 1997 until his retirement. Mr. Deuster also served as President of Newport Corporation from May 1996 until July 2004. From 1985 to 1996, Mr. Deuster served in various senior management positions at Applied Power, Inc., an international manufacturer of electrical and hydraulic products, serving as Senior Vice President of the Distributed Products Group from 1994 to 1996, President of the Barry Controls Division from 1989 to 1994, and President of the APITECH Division from 1986 to 1989. Prior to joining Applied Power, Inc., Mr. Deuster held engineering and marketing management positions at General Electric Company’s Medical Systems Group. Mr. Deuster currently serves on the board of directors of Symmetry Medical Inc., a
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provider of implants, instruments and cases to medical device manufacturers. Mr. Deuster holds a B.S. degree in electrical engineering from Marquette University. We believe Mr. Deuster is qualified to serve on our board of directors based upon his engineering background and his executive and director experience with a publicly traded technology company described above.
R. Douglas Norby has served as a member of our board of directors since November 2006. From June 2006 until October 2008, Mr. Norby was a director of Magnachip Semiconductor, Inc. (“Magnachip”), a designer and manufacturer of semiconductor products for consumer electronics. In June 2009, Magnachip filed a petition under the U.S. federal bankruptcy laws, and, in September 2009, its plan for reorganization was confirmed. From July 2003 until January 2006, Mr. Norby was Senior Vice-President and Chief Financial Officer of Tessera, Inc., a provider of intellectual property for advanced semiconductor packaging. From March 2002 to February 2003, Mr. Norby served as Senior Vice President and Chief Financial Officer of Zambeel, Inc., a data storage systems company. From December 2000 to March 2002, Mr. Norby served as Senior Vice President and Chief Financial Officer of Novalux, Inc., a manufacturer of lasers for optical networks. From December 1995 until December 2000, Mr. Norby served as Executive Vice President and Chief Financial Officer of LSI Logic Corporation, a semiconductor company, and he has also served as a director of LSI Logic Corporation from May 1993 until March 2006. From July 1993 until November 1996, he served as Senior Vice President and Chief Financial Officer of Mentor Graphics Corporation, a software company. Mr. Norby served as President of Pharmetrix Corporation, a drug delivery company, from July 1992 to September 1993, and from 1985 to 1992, he was President and Chief Operating Officer of Lucasfilm, Ltd., an entertainment company. From 1979 to 1985, Mr. Norby was Senior Vice President and Chief Financial Officer of Syntex Corporation, a pharmaceutical company. Mr. Norby is a director of Alexion Pharmaceuticals, Inc., a pharmaceutical company, and STATS ChipPac Ltd., a semi-conductor company. Mr. Norby received a B.A. in economics from Harvard University and an M.B.A. from Harvard Business School. We believe Mr. Norby is qualified to serve on our board of directors based upon his executive and director experience in the semiconductor industry, including extensive experience in financial management and reporting, as described above.
There are no family relationships among any of our directors or executive officers.
Corporate Cease Trade Orders or Bankruptcies
Except as noted above with respect to Messrs. Haas and Norby involving their respective roles as members of the boards or directors of Vicom and Magnachip, who filed for bankruptcy protection in 2003 and 2008, respectively, none of our directors, officers, or stockholders holding a sufficient number of securities to affect materially the control of our company, is, or within the ten years prior to the date of this prospectus has been, a director or officer of any other issuer that, while that person was acting in the capacity of a director or officer of that issuer, was the subject of a cease trade order or similar order, or any order that denied the issuer access to any statutory exemptions under securities legislation for a period of more than 30 consecutive days, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangements or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of that issuer.
Penalties or Sanctions
To the best of our knowledge, none of our directors, officers, or stockholders holding a sufficient number of securities to affect materially the control of our company, has been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority or been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor making an investment decision.
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Personal Bankruptcies
To the best of our knowledge, none of our directors, officers, or stockholders holding a sufficient number of securities to affect materially the control of our company, nor any personal holding company of any such person has, within the ten years before the date of this prospectus, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or been subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of that person.
Conflicts of Interest
To the best of our knowledge, there are no known existing or potential conflicts of interest among our company, its directors, or officers as a result of their outside business interests except that certain of our non-executive directors serve as directors of other companies, and therefore it is possible that a conflict may arise between their duties to our company and their duties as directors of other such companies. In addition, certain of our non-executive directors serve as principals of entities that are significant stockholders of our company: Mr. Haas is a managing director of Sigma Management 6, LLC, the general partner of each of Sigma Partners 6, L.P., Sigma Investors 6, L.P. and Sigma Associates, 6, L.P.; Mr. Eibl is the managing director of each of Enterprise Management Partners V, LLC and Enterprise Management Partners VI, LLC, the general partners of Enterprise Ventures V, L.P. and Enterprise Ventures VI, L.P., respectively. See “Related Party Transactions” and “Principal Stockholders.”
Code of Ethics
We have adopted a code of business conduct and ethics (the “Code of Ethics”) applicable to our directors, executive officers and all other employees. The Code of Ethics constitutes written standards that are designed to deter wrongdoing and promote: honest and ethical conduct, including handling of actual or apparent conflicts of interest between personal and professional relationships; avoidance of conflicts of interest, including disclosure to a director or officer of any material transaction or relationship that reasonably could be expected to give rise to a conflict of interest; full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the securities regulatory authorities and in other public communications made by us; compliance with applicable governmental laws, rules and regulations; the prompt reporting to a director or officer of violations of the Code of Ethics; and accountability and responsibility by all directors, officers and employees for adherence to the Code of Ethics. A copy of the Code of Ethics will be available on our corporate website at http://www.nexxsystems.com upon completion of this offering. Any amendments to the Code of Ethics, and any waivers thereto involving our executive officers, also will be available on our corporate website. The content on our website is not incorporated by reference into this prospectus. See “Related Person Transactions – Related Person Transaction Policy.”
Indemnification of Directors and Officers
Section 102 of the Delaware General Corporation Law permits a corporation to eliminate the personal liability of its directors for monetary damages for a breach of fiduciary duty as a director, except where the director breached his or her duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit.
Our amended and restated certificate of incorporation that will be effective upon completion of this offering contains provisions that eliminate, to the maximum extent provided by the Delaware General Corporation Law, the personal liability of our directors for monetary damages for breach of their fiduciary duties as directors.
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Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by the person in connection with an action, suit or proceeding to which he or she is or is threatened to be made a party by reason of such position, if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery or such other court shall deem proper.
Our amended and restated certificate of incorporation and amended and restated by-laws to be in effect as of the closing of this offering provide that we shall indemnify our directors and executive officers and may indemnify our employees and other agents to the fullest extent permitted by the Delaware General Corporation Law.
We plan to enter into indemnification agreements with each of our current directors prior to the closing of this offering, and we intend to enter into similar agreements with any new directors. These agreements provide that we will indemnify these directors to the fullest extent permitted by law and our certificate of incorporation and by-laws, and advance expenses to each indemnitee in connection with any proceeding in which indemnification is available.
We maintain a general liability insurance policy which covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers. Prior to the completion of this offering, we plan to expand this insurance coverage to include matters arising under securities laws.
Certain of our non-employee directors may, through their relationships with their employers, be insured and/or indemnified against certain liabilities in their capacity as members of our board of directors.
Corporate Governance
Board Composition
Our board of directors currently consists of seven members, five of whom are non-employee members, and each of whom was elected under board composition provisions of our fourth amended and restated voting agreement, which will be terminated upon the closing of this offering. Upon the termination of these provisions, there will be no further contractual obligations regarding the election of our directors. Our directors hold office until their successors have been elected or qualified or until their earlier resignation or removal.
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We are currently considering adopting the following provisions in our amended and restated by-laws that will become effective upon the completion of this offering, which may have the effect of delaying or preventing changes in our control or management :
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•
|
that our board shall consist of at least one member, and the precise number of directors shall be fixed by a resolution of our board or stockholder;
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•
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any vacancy in the board, including a vacancy that results from an increase in the number of directors, will be filled by a vote of the majority of the directors then in office; and
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•
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that our directors may be removed only for cause by a majority of the stockholders entitled to vote on such removal.
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Director Independence
Based upon information requested from and provided by each director concerning their background, employment and affiliations, including family relationships, our board of directors has determined that none of Messrs. Deuster, Eibl, Haas, Norby or Rhine, representing five of our seven directors, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under Rule 4200(a)(15) of the Financial Industry Regulatory Authority, or FINRA. Neither Mr. Walsh nor Dr. Post is considered to be independent, as Mr. Walsh is an employee of the company and Dr. Post was an employee until the past year. We believe we are compliant with the independence criteria for boards of directors under applicable laws and regulations, including rule 4200(a)(15) of FINRA and applicable Canadian securities laws . We will continue to evaluate our compliance with these criteria over time. To the extent we determine necessary, we will seek to appoint additional independent directors.
There were nine meetings of our full board of directors in the 2009 calendar year, with Messrs. Deuster, Haas, Rhine and Walsh and Dr. Post attending each of these meetings, and Messrs. Eibl and Norby each attending seven meetings. The board may meet independently of management as required. Although they are permitted to do so, the independent directors have not held regularly scheduled meetings at which non-independent directors and members of management are not in attendance. Currently, our board of directors is satisfied that it exercises its responsibilities for independent oversight of management. The ability to establish ad hoc committees comprised solely of independent directors provides the board with the ability to meet independently of management whenever deemed necessary or appropriate and the chair of each such ad hoc committee provides the leadership for such committee.
The following directors of the Corporation are directors and officers of other reporting issuers:
|
Name
|
Reporting Issuer
|
Stock Exchange
|
|
Carlton J. Eibl
|
DragonWave Inc.
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TSX , Nasdaq Global Market
|
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R. Douglas Norby
|
Alexion Pharmaceuticals, Inc.
STATS ChipPac Ltd.
|
Nasdaq Global Select Market
Singapore Exchange Securities Trading Limited
|
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Board Mandate
While our board of directors has not yet adopted a written board mandate, our board is ultimately responsible for supervising the management of our business and affairs and, in doing so, is required to act in our best interests. Our board of directors meets regularly to review our business and financial condition. We anticipate that the board of directors will adopt a written mandate that sets out the role, composition and responsibilities of the board of directors. To date, the responsibilities of the board of directors have been delineated by the establishment of an audit committee, a governance and nominating committee and a compensation committee and through discussion among the directors.
Board Committees
Our board of directors has established an audit committee, a governance and nominating committee and a compensation committee. Each committee operates under a charter that has been approved by our board. Our committee charters will be available on our website following the consummation of this offering.
Audit Committee. The members of our audit committee are Messrs. Norby, Deuster and Rhine. Mr. Norby, who presently chairs the audit committee, has over 25 years experience serving as a chief financial officer, including serving in this capacity for five public companies. Messrs. Deuster and Rhine, who have each served as the chief executive officers of public companies, also have extensive experience reading financial statements and supervising principal financial officers. Our audit committee assists our board of directors in its oversight of the integrity of our financial statements and our independent registered public accounting firm’s qualifications, independence and performance.
Our audit committee’s responsibilities include:
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•
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reviewing and discussing with management and our independent registered public accounting firm our annual and quarterly financial statements, earnings releases and related disclosures;
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•
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reviewing and discussing with management and our independent registered public accounting firm our internal controls and internal auditing procedures, including any material weaknesses in either;
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•
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discussing our accounting policies and all material correcting adjustments with our management and our independent registered public accounting firm;
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•
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monitoring our control over financial reporting and disclosure controls and procedures;
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•
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appointing, overseeing, setting the compensation for and, when necessary, terminating our independent registered public accounting firm;
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•
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approving all audited services and all permitted non-audit, tax and other services to be performed by our independent registered public accounting firm;
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•
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discussing with the independent registered public accounting firm its independence and ensuring that it receives the written disclosures regarding these communications required by the Public Company Accounting Oversight Board;
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reviewing and approving all transactions or series of similar transactions to which we were or are a party in which the amount involved exceeded or exceeds $120,000 and in which any of our directors, executive officers, holders of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons, had or will have a direct or indirect material interest, other than compensation arrangements with directors and executive officers;
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•
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recommending whether the audited financial statements should be included in our annual report and preparing the audit committee report required by SEC rules;
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•
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reviewing all material communications between our management and our independent registered public accounting firm;
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•
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approving, reviewing and updating our code of business conduct and ethics; and
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•
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establishing procedures for the receipt, retention, investigation and treatment of accounting related complaints and concerns.
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Upon the closing of this offering, all of the members of the audit committee will be “independent” within the meaning of Rule Rule 10A-3 of the Exchange Act and applicable Canadian securities laws . Mr. Norby is our audit committee financial expert, as such term is currently defined in Item 407(d)(5) of Regulation S-K and within the meaning of applicable Canadian securities laws . Each member of the audit committee is financially literate (within the meaning of applicable Canadian securities laws) , as each has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by our financial statements.
External Auditor Service Fees
|
Description
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2008(1)
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2007(2)
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||||||
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Audit Fees(3)
|
$ | 62,732 | $ | 80,000 | |||||
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Audit-Related Fees(4)
|
0 | 0 | |||||||
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Tax Fees(5)
|
11,821 | 13,350 | |||||||
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All Other Fees(6)
|
2,174 | 1,440 | |||||||
Notes:
|
(1)
|
Fees were payable to Parent McLaughlin & Nangle, Certified Public Accountants, Inc.
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(2)
|
Fees were payable to McGladrey & Pullen, LLP.
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(3)
|
“Audit Fees” means the aggregate fees billed by our external auditor for the fiscal year for audit services.
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(4)
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“Audit-Related Fees” means the aggregate fees billed for the fiscal year for assurance and related services by our external auditor that are reasonably related to the performance of the audit or review of our financial statements and are not reported under clause (3) above.
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(5)
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“Tax Fees” means the aggregate fees billed in the last fiscal year for professional services rendered by our external auditor for tax compliance, tax advice and tax planning.
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(6)
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“All Other Fees” means the aggregate fees billed in the last fiscal year for products and services provided by our external auditor, other than the services reported under clauses (3), (4) and (5), above.
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Governance and Nominating Committee. The members of our governance and nominating committee are Messrs. Deuster, Norby and Haas. Mr. Deuster chairs the governance and nominating committee, each member of which satisfies the independence standards established by the SEC and applicable Canadian securities laws.
Our governance and nominating committee’s responsibilities include:
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identifying individuals qualified to become members of our board of directors;
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recommending to our board of directors the persons to be nominated for election as directors;
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assisting our board of directors in recruiting such nominees;
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recommending to our board of directors qualified individuals to serve as committee members;
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performing an annual evaluation of our board of directors;
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evaluating the need and, if necessary, creating a plan for the continuing education of our directors; and
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•
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assessing and reviewing our corporate governance guidelines and recommending any changes to our board of directors.
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Compensation Committee. The members of our compensation committee are Messrs. Rhine, Eibl and Haas. Mr. Rhine chairs the compensation committee, each member of which satisfies the independence standards established by the SEC and applicable Canadian securities laws . In addition, each member of our compensation committee qualifies as a “non-employee director” under Rule 16b-3 of the Exchange Act. Our compensation committee assists the board of directors in the discharge of its responsibilities relating to the compensation of the board of directors and our executive officers.
Our compensation committee’s responsibilities include:
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establishing a compensation policy for officers and key employees, including salary, bonus and incentive compensation, deferred compensation, perquisites, equity compensation, benefits provided upon retirement, severance or other termination of employment, and any other forms of executive compensation;
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reviewing and considering participation and eligibility in the various components of the total compensation package for officers and key employees;
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annually reviewing and approving corporate goals and objectives relevant to officer compensation, evaluating each officer’s performance in light of those goals and objectives, and recommending to the board of directors compensation levels for these officers based on this evaluation;
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approving and administering cash incentives and deferred compensation plans;
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making recommendations to our board of directors with respect to director compensation;
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overseeing and administering our incentive compensation plans and equity-based plans;
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reviewing and discussing with management the compensation discussion and analysis required to be included in our filings with the SEC and recommending whether the compensation discussion and analysis should be included in such filings;
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preparing the compensation committee report required by SEC; and
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making recommendations to our board of directors with respect to management succession planning, including planning with respect to our chief executive officer.
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Compensation Committee Interlocks and Insider Participation
During 2009, the members of our compensation committee were Messrs. Eibl, Haas and Rhine. None of the members of our compensation committee is or has at any time been an officer or employee of the company. None of our executive officers serve, or in the past fiscal year has served, as a member of the board of directors or compensation committee of any other entity that has one or more executive officers serving as a member of our board of directors or compensation committee. For a description of transactions between us and members of the compensation committee and entities affiliated with such members, please see “Certain Relationships and Related Party Transactions.”
We have issued shares of our convertible preferred stock and common stock to Mr. Rhine and affiliates of Sigma Partners and Enterprise Partners. Mr. Eibl is a managing director of Enterprise Partners and Mr. Haas is a managing director of Sigma Partners. See the “Related Person Transactions” section of this prospectus for more information.
Position Descriptions
We do not currently have written position descriptions for the chairman of the board, or for the chair of each of the proposed board committees. Following the closing of this offering, we intend to propose to the board the adoption of written position descriptions for the chairman of the board and the chair of each board committee.
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Orientation and Continuing Education
We intend to propose that the governance and nominating committee develop a comprehensive orientation program for our directors to assist new directors with understanding the role of the board and its committees, the contribution that directors are expected to make to the board and the nature and operation of our business. We also intend to propose that the governance and nominating committee develop a continuing education program for all directors to enable directors to maintain or enhance their skills and abilities as directors and ensure that their knowledge and understanding of our business remains current.
Assessments
The board of directors has not implemented a formal process for assessing its effectiveness. The directors as a whole periodically consider the mix of skills and experience that directors bring to NEXX to assess, on an ongoing basis, whether the directors of NEXX have the necessary skills to perform their overnight function effectively. The board of directors plans to continue evaluating its own effectiveness on an ad hoc basis.
Executive Officers
Each of our executive officers has been elected by our board of directors and serves until his or her successor is duly elected and qualified.
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EXECUTIVE COMPENSATION
The following discussion and analysis of compensation arrangements of our named executive officers for 2009 (as set forth in the Summary Compensation Table below) should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt may differ materially from the currently planned programs summarized in this discussion.
Compensation Discussion and Analysis
The compensation committee of our board of directors oversees our executive compensation program. In this role, the compensation committee reviews and approves annually all compensation decisions relating to our named executive officers (as identified below in the “Summary Compensation Table”). In making its decisions, the compensation committee considers the performance of the individual executive officers, as well as company performance, and reviews compensation data to assess the competitive market for comparable executives.
Objectives and Philosophy of our Executive Compensation Program
The primary objectives of the compensation committee with respect to executive compensation are to:
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•
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encourage executives to achieve and exceed our strategic and financial performance targets;
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•
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focus on long-term performance by providing a significant portion of executives’ compensation through programs linked to our long-term success;
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•
|
attract executive talent and retain those executives who have demonstrated superior talent and performance and whose continued employment is crucial to our success and growth; and
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|
•
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align executives’ incentives with the creation of stockholder value.
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Our compensation committee assesses the performance of NEXX and our named executive officers in part based on specific measures and targets established by the compensation committee and our board of directors. However, compensation decisions are not driven entirely by financial performance assessments. As a private company, our compensation committee has historically reviewed compensation data and/or surveys collected from other private, venture capital-backed companies with similar revenues, and from research of pay practices at similar companies informally conducted and supplied by committee members. The committee has also relied on its members’ business judgment and collective experience in the semiconductor capital equipment industry.
As a privately held company, we have not retained compensation consultants to review our policies and procedures relating to executive compensation. For executive officers other than our Chief Executive Officer, the compensation committee has historically sought and considered input from our Chief Executive Officer regarding such executive officers’ responsibilities, performance and compensation. Specifically, our Chief Executive Officer recommends base salary increases, bonus targets for the performance-based bonus, equity award levels and the short-term and long-term financial and non-financial performance goals that are used throughout our compensation plans, and advises the committee regarding the compensation program’s ability to attract, retain and motivate executive talent. Our compensation committee has and exercises the ability to materially increase or decrease the compensation amounts recommended by our Chief Executive Officer. Our Chief Financial Officer is also involved in our executive compensation process. Our Chief Financial Officer is responsible for providing input on the financial targets for our compensation plan and for presenting data regarding the impact of the executive compensation programs on our financial results.
Our compensation committee routinely meets in executive session, and our Chief Executive Officer is not permitted to attend during committee discussions, or board of directors determinations, regarding his compensation.
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Our compensation committee expects, on an annual basis, to set base salaries and bonus targets for the following year, as well as to determine equity incentive awards for our executive officers. In setting annual salaries, bonuses and equity incentive awards, the compensation committee reviews the individual contributions of each executive officer and the achievement of predetermined corporate performance goals.
To achieve the objectives of executive compensation, the compensation committee evaluates our executive compensation program with the following goals:
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•
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compensation should reflect our performance as well as individual performance over the prior fiscal year and over a longer period. In the short term, compensation should reflect the extent to which goals are missed, met or exceeded, taking into consideration individual ability to influence results. In the long-term, the value delivered under equity-based programs will be driven largely by the performance of our stock price and total stockholder return;
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•
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compensation programs should be aligned with business strategies focused on long-term growth and creating value for stockholders; and
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•
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overall target compensation, which is compensation received when achieving expected results, should be in line with that of individuals holding comparable positions and producing similar results at other corporations of similar size in the semiconductor capital equipment industry.
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To date, our compensation committee has not retained an independent compensation consultant but has instead relied on published data from venture capital and other published industry surveys, as well as information from publicly traded corporations.
Components of our Executive Compensation Program
The primary elements of our executive compensation program are:
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•
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base salary;
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•
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annual cash incentive bonuses;
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•
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stock option or other equity incentive awards;
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•
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insurance, retirement and other employee benefits; and
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•
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change-of-control benefits.
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We do not have any formal or informal policy or target for allocating compensation between long-term and short-term compensation, between cash and non-cash compensation or among the different forms of non-cash compensation. Instead, our compensation committee determines subjectively what it believes to be the appropriate level and mix of the various compensation components.
Base Salary. Base salary represents the payment for a satisfactory level of individual performance as long as the employee remains employed with us. Base salary is used to recognize the experience, skills, knowledge and responsibilities required of all our employees, including our executives. In establishing base salaries for our named executive officers for each of fiscal years 2007, 2008 and 2009, our compensation committee considered a number of factors, including our company’s overall performance against its stated goals, including growth in bookings and revenue growth, and each named executive’s position and functional role, seniority, the relative ease or difficulty of replacing the individual with a well-qualified person and the number of well-qualified candidates to assume the individual’s role, the named executive’s job performance and overall level of responsibility and the informal benchmarking data and information discussed above.
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The amounts in the “Stock Option Awards” column in the Summary Compensation Table below reflect the dollar amount of awards recognized for financial statement reporting purposes in each respective year for each named executive officer, in accordance with SFAS 123R, assuming no forfeitures. As we did not grant any options to our executive officers in 2009, the amounts include awards granted in and prior to 2008. Valuation of these options is based on the aggregate dollar amount of share based compensation recognized for financial statement reporting purposes computed in accordance with SFAS 123R over the term of these options, excluding the impact of estimated forfeitures related to service-based vesting conditions.
Adjustments to the base salary level may be made annually based on comparisons to survey data and evaluation of the executive’s level of responsibility and experience as well as company-wide performance. Each of our executives is currently a party to an employment agreement, none of which provides for automatic or scheduled increases in base salary. However, on an annual basis, base salaries for our executives, together with other components of compensation, are evaluated for adjustment by our compensation committee.
Annual Cash Incentive Bonus
We have an annual cash incentive bonus plan for our executives. The annual cash incentive bonuses are intended to compensate for the achievement of company strategic, operational, financial and individual goals. Amounts payable under the annual cash incentive bonus plan are calculated as a percentage of the applicable executive’s base salary. No bonus is paid if the aggregate attainment falls below certain minimums.
Due to the poor economic climate in the semiconductor industry during the second half of fiscal 2007, none of our officers received any bonus for fiscal 2007. The 2008 targets for cash incentive bonuses were a specific amount of total revenue, known as our “Sales Incentive Plan” and individual objectives. The weighting of each performance target was as follows: 50% for revenue, and 50% for individual goals. In 2008, Dr. Post’s individual objectives generally related to increasing market share, improving our gross profit and introducing new products. In 2009, Mr. Walsh’s objectives were based on increasing revenues and market share, improving gross margins and expanding product development efforts. Mr. Piekos’ individual objectives generally related to completing a private financing in 2008 and establishing the financial infrastructure for a public company in 2009. Mr. Bowers’ individual goals in both 2008 and 2009 generally related to helping to increase our revenue, enhancing existing customer relationships by building a global sales organization and implementing processes to manage a global sales organization. Mr. Keigler’s individual goals generally related to the successful commercial introduction for our Stratus product line in 2008 and continued product enhancements in 2009. Mr. Villari’s individual goals in both 2008 and 2009 generally consisted of improvement in manufacturing costs, improved reliability and improvements in cost of goods.
Our compensation committee designed the 2008 targets to require significant effort and operational success on the part of the executives and the company. In 2008, the maximum bonus a named executive officer could earn was 52.5% of such officer’s base salary. For 2008, after taking economic conditions and the executive’s overall performance into account, our compensation committee determined to pay our executive officers higher bonuses under the annual cash incentive bonus plan for performance in 2007 and 2008 than would have been paid on the basis of actual performance relative to a target bonus metrics. Due to Mr. Walsh’s joining us later in fiscal 2008, we agreed to provide him a $50,000 bonus in the first quarter of 2009 and a guaranteed pro-rated bonus of $25,000 payable for the last quarter of 2008.
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Name
|
2008 Bonus
|
2009 Bonus
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||||||
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Dr. Richard S. Post
|
$ | 40,000 | -0- | |||||
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Thomas M. Walsh
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$ | 75,000 | $ | 100,000 | ||||
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Stanley D. Piekos
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$ | 30,000 | $ | 60,000 | ||||
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Arthur Keigler
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$ | 45,000 | $ | 60,000 | ||||
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John Bowers
|
$ | 45,000 | $ | 70,725 | ||||
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Phillip Villari
|
$ | 30,000 | $ | 54,000 | ||||
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The principal elements of the fiscal 2010 executive officer incentive bonus plan are as follows:
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•
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executive officers other than our Chief Executive Officer have a target bonus of 30% of their annual base salary other than our Vice President of Sales and Business Development whose bonus plan target involves a higher incentive component of up to approximately 50% of annual base salary and related to the Sales Incentive Plan earnouts achieved by other members of the sales team.
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•
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our Chief Executive Officer has a target bonus of $100,000.
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•
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80% of executives’ target bonus is based upon our attainment of specified financial targets including revenues, gross margins and working capital management. Achieving the revenue target will allow the company to gain market share in several emerging markets, and achieving this target will require execution by the entire management team while gross profit is an important indicator of the strength of our customer value proposition. Effective working capital management is key to improving return on capital employed in the business.
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•
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20% of executives’ target bonus is based upon individual objectives, because the committee believed it was important to allocate a significant portion of the bonus for individual contribution. Mr. Walsh’s individual objectives generally relate to general oversight of the senior management team, adding critical new accounts and overseeing operating results. Mr. Piekos’ individual objectives generally relate to supporting our initial public offering. Mr. Kiegler’s individual goals generally relate to adding new features to our products. Mr. Bowers’ individual goals generally relate to helping to increase our revenue. Mr. Villari’s individual goals generally relate to completion of specific development projects in a timely fashion and adding the capabilities needed to support and deliver products. Our compensation committee designed the 2010 targets to require significant effort on the part of the executives and operational success on the part of the company.
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The revenue and individual targets used for purposes of the fiscal 2010 incentive bonus plan were established in January 2010. The contributions by each executive are aligned with the company’s short-term goals for their respective working groups, and, as with the targets for fiscal 2009, are set at levels that are designed to be challenging in that they require us to achieve strong revenue growth, but will be attainable if we have what we consider to be a successful year.
Equity Grants. Our equity award program is the primary vehicle for offering long-term incentives to our executives. We believe that equity grants provide our executives with a strong link to our long-term performance, create an ownership culture and help to align the interests of our executives and our stockholders. In addition, the vesting feature of our equity grants contributes to executive retention because this feature provides an incentive to our executives to remain in our employ during the vesting period. Prior to this offering, our executives were eligible to participate in our 2003 employee, director and consultant stock option plan, as amended (the “2003 Plan”). Following the closing of this offering, grants to our executives and other employees of stock-based awards will be made pursuant to our 2010 stock incentive plan (the “2010 Plan”). Under the 2010 Plan, executives will be eligible to receive grants of stock options or stock purchase rights at the discretion of the compensation committee. In determining the size of equity grants to our executives, our compensation committee has historically considered our corporate performance, the applicable executive’s performance and potential for enhancing the creation of value for our stockholders, the amount of equity previously awarded to the executive and the vesting of such awards, the executive’s position and, in the case of awards to executive officers other than our Chief Executive Officer, the recommendation of our Chief Executive Officer. In addition, going forward, our compensation committee will also consider information regarding comparative stock ownership and equity grants received by the executives in our compensation peer group.
We typically make an initial equity award of stock options to new executives and annual equity grants as part of our overall compensation program. All grants of options or other equity based awards to our executives are approved by the compensation committee.
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In October 2008, our board of directors granted Mr. Walsh the right to purchase 449,092 shares of our common stock in connection with his commencement of employment. The number of shares subject to this award was recommended by our compensation committee, which considered the experience and expected contributions of Mr. Walsh. Our compensation committee also determined that this grant was consistent with equity grants made to other executive officers, as adjusted for the timing and perceived risk associated with this executive’s hire. The purchase price of this stock was $0.10 per share, which was the fair market value of our common stock on the date of grant as determined by our board of directors with input from a third party retained to value our common stock.
In September 2008, our board of directors granted a stock option to Mr. Bowers to purchase 93,449 shares of our common stock in connection with his commencement of employment. The number of shares subject to this award was recommended by our compensation committee, which considered the experience and expected contributions of Mr. Bowers. Our compensation committee also determined that this grant was consistent with equity grants made to other executive officers, as adjusted for the timing and perceived risk associated with this executive’s hire. The exercise price of this option is $0.10 per share, which was the fair market value of our common stock on the date of grant as determined by our board of directors with input from a third party retained to value our common stock .
In 2008, our compensation committee undertook a review of the equity positions of our executive officers whose performance was notable and who were more than 50% vested in their existing equity grants. As a result, following the recommendation of our compensation committee, our board of directors approved new equity awards to reestablish or provide additional incentives to certain named executive officers. In determining the equity awards for each of these executives, our board of directors considered our overall performance as a company, the applicable executive’s overall performance and contribution to our overall performance as a company, the size of awards granted to other executives and senior employees, the size of the available option pool and the recommendations of management. Specifically, our compensation committee determined that Mr. Keigler’s performance was a significant factor in our company achieving revenue growth and increasing the company’s valuation. As a result, in September 2008, our board of directors granted Mr. Keigler a stock option for the purchase of 159,639 shares of our common stock. Our compensation committee further determined that Mr. Piekos was primarily responsible for completing significant equity financings in 2008. As a result, in September 2008, our board of directors granted Mr. Piekos a stock option for the purchase of 77,826 shares of our common stock. Additionally, the committee concluded that Mr. Villari had successfully reduced product costs and contributed to the expansion of our manufacturing capabilities. As a result, in September, 2008, our board of directors granted Mr. Villari a stock option for the purchase of 52,884 shares of our common stock. In September 2008, our board also determined that Dr. Post’s continuing with us as a consultant, assisting us in several industry consortia, and in assisting Mr. Walsh in other projects, was important to our future success, and awarded Dr. Post an option to purchase 70,993 shares of our common stock, which was subsequently cancelled following Dr. Post’s retirement as Chief Executive Officer. All of these options were priced at $0.10 per share, which was the fair market value of our common stock on the applicable date of grant as determined by our board of directors with input from a third party retained to value our common stock.
In January 2010, our compensation committee undertook a review of the equity positions of our executive officers. As a result, following the recommendation of our compensation committee, our board of directors approved new equity awards to reestablish or provide additional incentives to certain named executive officers. In determining the equity awards for each of these executives, our board of directors considered our overall performance as a company. As a result, in January 2010, our compensation committee granted the following restricted stock units to each of our officers pursuant to our 2003 Plan. These restricted stock units vest 25% on January 22, 2011 and 2.083% each month thereafter through December 2012. The fair market value of our common stock on the date of grant as determined by our board of directors with input from a third party valuation firm, was $2.70 per share. Until vested, these restricted stock units have no voting rights.
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|
Name
|
Title:
|
Restricted Stock Units:
|
|
Thomas M. Walsh
|
President and Chief Executive Officer
|
170,000
|
|
Stanley D. Piekos
|
Vice President, Finance and Chief Executive Officer
|
90,000
|
|
Arthur L. Keigler
|
Vice President of Technology
|
100,000
|
|
John M. Bowers
|
Vice President of Sales and Business Development
|
70,000
|
|
Phillip Villari
|
Vice President, Customer Satisfaction and Operations
|
75,000
|
At the discretion of our compensation committee, we intend to review on an annual basis new equity awards for certain of our employees and executives. In determining these awards, the compensation committee intends to consider a number of factors, including our overall performance as a company, the applicable executive’s overall performance and contribution to our overall performance as a company, the size of awards granted to other executives and senior employees, the size of the available option (or other equity award) pool and the recommendations of management.
Other than the recent grant of restricted stock units, our equity awards have typically taken the form of stock options. The compensation committee reviews all components of an executive’s compensation when determining annual equity awards to ensure that the executive’s total compensation conforms to our overall philosophy and objectives.
Typically, the stock options, stock awards and restricted stock units we grant to our executives vest at a rate of 25% at the end of the first year and in equal quarterly installments over the succeeding three years. Immediately upon termination of employment of an employee, the unvested portion of any stock option will terminate and the balance, to the extent exercisable, will remain exercisable for the lesser of (i) a period of three months or (ii) the period ending on the latest date on which such stock option could have been exercised without regard to this provision. The 2003 Plan provides exceptions for the vesting of options upon an individual’s death, disability or termination for cause. Prior to the exercise of an option or the vesting of a restricted stock unit, the holder has no rights as a stockholder with respect to the shares subject to such option or restricted stock unit, as the case may be, including voting rights or the right to receive dividends or dividend equivalents.
We do not have any equity ownership guidelines for our executives. However, each of our executive officers other than Mr. Villari have participated in all or some of the preferred stock financings offered to other stockholders.
We have historically granted stock options and other equity incentive awards at exercise prices equal to the fair market value of shares of our common stock on the date of grant as determined by our board of directors. After the closing of this offering, the exercise price of all stock options will be equal to the closing price of shares of our common stock on the TSX on the date prior to the date of the grant. After the closing of this offering, grant dates for equity incentive awards to our executive officers will comply with the rules and policies of our listing exchange.
Benefits and Other Compensation. We maintain broad-based benefits that are provided to all employees, including our 401(k), flexible spending accounts, medical, dental and vision care plans, and our life and accidental death and dismemberment insurance policies, long-term and short-term disability plans. Executive officers are eligible to participate in each of these programs on the same terms as non-executive employees. Although our 401(k) plan permits an employer match, we do not currently provide one. We do not provide any retirement benefits separate from the 401(k).
In particular circumstances, we sometimes award cash signing bonuses when executives first join us. Whether a signing bonus is paid and the amount of any such bonus is determined on a case-by-case basis under the specific hiring
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circumstances. For example, we will consider paying signing bonuses to compensate for amounts forfeited by an executive upon terminating prior employment, to assist with relocation expenses or to create additional incentive for an executive to join our company in a position where there is high market demand.
We do not offer any other perquisites to our executive officers.
Severance and Change-of-Control Benefits. The employment agreements we entered into with each of our named executive officers contain executive retention arrangements designed to take into account the particular requirements of each executive office as well as the credentials of the individuals occupying such office. These retention arrangements provide for a combination of “single trigger” and “double trigger” vesting in connection with a change of control of NEXX and/or termination of employment. In other words, the change of control itself only triggers partial accelerated vesting. The employment agreements of Messrs. Bowers, Piekos, and Villari provide for acceleration of vesting of an additional 25% of the original option grant upon a “change of control” (as defined in the applicable executive employment agreement). The employment agreements of Mr. Walsh and Dr. Post also provide for the full acceleration of vesting of stock options or restricted shares of common stock, as the case may be , if the employment of the executive is terminated after the change of control either by the executive officer for “good reason” or by us without “cause” (as those terms are defined in the applicable executive employment agreement). All of Dr. Post’s unvested options were cancelled upon his retirement. Pursuant to Mr. Walsh’s employment agreement, the full vesting of any stock options awarded to him or restricted shares of common stock purchased by him may occur if he is terminated, other than for “cause”, more than two years after the start of his employment with us . We believe a combination of “single trigger” and “double trigger” vesting along with severance payments maximizes stockholder value because it limits any unintended windfalls to executives in the event of a friendly change of control, while still providing executives appropriate incentives to cooperate in negotiating any change of control, including a change of control in which they believe they may lose their jobs. Pursuant to the terms of the employment agreements, if the employment of the named executive officer is terminated without cause by us or an acquiring entity, or with good reason by the executive, following a change of control of NEXX, the executive will be entitled to payment of his base salary for six to 12 months and payment of a proportionate amount of his bonus from the previous year based on the number of days he was employed in the year his employment is terminated. Certain of the named executives will continue to keep their benefits entitlements: in particular, Mr. Walsh will be eligible for the reimbursement of COBRA payments for a period of six months; Mr. Keigler will be entitled to health insurance coverage for a one year period following his date of termination. These severance arrangements cease if the executive receives similar income and/or benefits from another employer.
The employment agreements also provide that if we terminate the employment of the executive without cause prior to a change of control, the executive will be entitled to payment of his base salary for six to 12 months. Certain of the named executives will also continue to have their benefits for six to 60 months or become eligible for a lump sum payment in lieu of these benefits. In particular, Messrs. Bowers’, Villari’s, and Walsh’s employment agreements provide for a severance equal to six months of their base salary and the reimbursement for their COBRA payments for a period of six months. While Mr. Keigler’s employment agreement also provides for a severance in the amount of his base salary for a six month period, he will be eligible for a health insurance coverage for a period of six months. Should Mr. Piekos be terminated without cause and before a change of control, he will be eligible for a total amount equal to six months of his base salary plus an additional two months for each full 12-month period he has been employed by us up to 12 months of his base salary. Dr. Post’s retirement agreement provides for the continuation of certain payments to cover portions of his medical insurance premiums through December 2013 and payments of salary at the rate of approximately $200,000 per year through December 2010 . These severance arrangements cease if the executive receives similar income and/or benefits from another employer.
See below in “Executive Compensation—Potential Payments upon Termination or Change of Control” for a more detailed description of the executive retention agreements with our named executive officers.
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Tax Considerations
Section 162(m) of the Code, which will become applicable to us upon the closing of this offering, generally disallows a tax deduction for compensation in excess of $1.0 million paid to our Chief Executive Officer and our four other most highly paid executive officers. Qualifying performance-based compensation is not subject to the deduction limitation if specified requirements are met. We periodically review the potential consequences of Section 162(m) and we generally intend to structure the performance-based portion of our executive compensation, where feasible, to comply with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However, our compensation committee may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent.
Summary Compensation Table
The following table sets forth information regarding compensation earned by our Chief Executive Officer, our Chief Financial Officer and each of our three other most highly compensated executive officers during 2007, 2008 and 2009. We refer to these executive officers as our “named executive officers” elsewhere in this prospectus:
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Name and Principal Position
|
Year
|
Salary ($) | Non-Equity Incentive Plan Compensation ($)(1) |
Stock Option
Awards($)(2)
|
All other
Compensation($)(3)
|
Total ($) | ||||||||||||||||
|
Thomas M. Walsh(4)
|
2009 | $ | 265,000 | $ | 100,000 | — | $ | 42,806 | $ | 407,806 | ||||||||||||
|
Chief Executive Officer
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2008 | $ | 50,961 | $ | 75,000 | — | $ | 4,482 | $ | 130,443 | ||||||||||||
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Richard S. Post(5)
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2009 | $ | 168,350 | — | — | $ | 11,400 | $ | 179,750 | |||||||||||||
| Former Chief Executive | 2008 | $ | 221,183 | $ | 40,000 | — | — | $ | 261,183 | |||||||||||||
| Officer | 2007 | $ | 226,648 | — | $ | 31,575 | — | $ | 258,223 | |||||||||||||
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Stanley D. Piekos
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2009 | $ | 200,000 | $ | 60,000 | — | — | $ | 260,000 | |||||||||||||
| Vice President of | 2008 | $ | 197,600 | $ | 30,000 | $ | 1,557 | — | $ | 229,157 | ||||||||||||
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Finance
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2007 | $ | 201,723 | — | $ | 19,200 | — | $ | 220,923 | |||||||||||||
|
John Bowers(4)
|
2009 | $ | 176,548 | $ | 70,725 | — | — | $ | 247,273 | |||||||||||||
| Vice President of Sales | 2008 | $ | 111,058 | $ | 45,000 | $ | 1,869 | $ | 19,359 | $ | 157,927 | |||||||||||
| and Business | ||||||||||||||||||||||
| Development | ||||||||||||||||||||||
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Arthur Keigler
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2009 | $ | 200,000 | $ | 60,000 | — | — | $ | 260,000 | |||||||||||||
| Vice President of | 2008 | $ | 194,489 | $ | 45,000 | $ | 3,193 | — | $ | 242,682 | ||||||||||||
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Technology
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2007 | $ | 198,547 | — | $ | 19,200 | — | $ | 217,747 | |||||||||||||
|
Phillip Villari
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2009 | $ | 185,000 | $ | 54,000 | — | — | $ | 239,000 | |||||||||||||
| Vice President Customer | 2008 | $ | 177,659 | $ | 30,000 | $ | 1,058 | — | $ | 208,717 | ||||||||||||
|
Satisfaction/Operations
|
2007 | $ | 173,672 | — | $ | 19,200 | — | $ | 192,872 | |||||||||||||
|
(1)
|
For 2008, our compensation committee determined to pay our executive officers higher bonuses under the annual cash incentive bonus plan for performance in 2007 and 2008 than would
|
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have been paid on the basis of actual performance relative to target bonus metrics. The discretionary increases in the bonuses are being reported in this column as discretionary bonuses.
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|
(2)
|
The amounts in the “Stock Option Awards” column reflect the aggregate grant date fair value of the awards computed in accordance with FASB ASC Topic 718. The assumptions used by us with respect to the valuation of stock and option awards are set forth in Note 14 to our financial statements included elsewhere in this prospectus.
|
|
(3)
|
Includes (a) for Mr. Walsh, relocation expenses of $36,414 and a 401(k) company contribution of $6,392, in 2009, (b) for Dr. Post, a company contribution for Medicaid insurance of $5,280 and a 401(k) company contribution of $5,280 in 2009 and (c) for Mr. Bowers, relocation expenses of $19,359.
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|
(4)
|
Mr. Walsh joined us on October 6, 2008. Mr. Bowers joined us on April 9, 2008.
|
|
(5)
|
Dr. Post served as our Chief Executive Officer through October 6, 2008 and has served as our non-executive Chairman of the Board since that date.
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Outstanding Equity Awards at Fiscal Year End
The following table sets forth information regarding outstanding equity awards held as of December 31, 2009 by our named executive officers.
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Name
|
Vesting
Commencement
Date(1)
|
Number of
Securities
Underlying
Unexercised
Options/ Restricted Shares
(#)
Exercisable /Vested
|
Number of
Securities
Underlying
Unexercised
Options/ Restricted Shares
(#)
Unexercisable /Unvested
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
|
Thomas M. Walsh(2)
|
10/6/2008
|
130,985
|
318,107
|
$0.10
|
—
|
|
Richard S. Post(3)
|
11/17/2005
9/29/2006
5/31/2007
|
4,687
4,062
4,843
|
—
937
2,656
|
$0.11
$0.11
$0.11
|
11/16/2010
9/28/2011
5/29/2012
|
|
Stanley D. Piekos
|
9/29/2006
5/31/2007
9/26/2008
|
20,312
3,229
24,320
|
4,687
1,770
53,505
|
$0.10
$0.10
$0.10
|
9/29/2016
5/31/2017
9/24/2018
|
|
John Bowers
|
9/26/2008
9/26/2008
|
23,362
14,601
|
23,362
32,123
|
$0.10
$0.10
|
9/24/2018
9/24/2018
|
|
Arthur L. Keigler
|
5/1/2003
2/20/2004
11/17/2005
9/29/2006
9/29/2006
5/31/2007
9/26/2008
|
25,000
5,000
5,000
4,062
13,333
3,229
49,887
|
0
0
0
937
6,666
1,770
109,751
|
$0.10
$0.10
$0.10
$0.10
$0.10
$0.10
$0.10
|
5/1/2013
2/20/2014
11/17/2015
9/29/2016
9/29/2016
5/31/2017
9/24/2018
|
|
Philip Villari
|
11/8/2004
11/17/2005
9/29/2006
5/31/2007
9/26/2008
|
4,000
5,000
4,062
3,229
16,526
|
0
0
937
1,770
36,358
|
$0.10
$0.10
$0.10
$0.10
$0.10
|
11/8/2014
11/17/2015
9/29/2016
5/31/2017
9/24/2018
|
- 92 -
|
(1)
|
All options held by our named executive officers vest as to 25% of the original number of shares on the first anniversary of the vesting commencement date, which is a date fixed by our board of directors when granting options, and as to an additional 6.25% of the original number of shares at the end of each three-month period following the first anniversary of the vesting commencement date until the fourth anniversary of the vesting commencement date, subject to acceleration upon a change of control of our company and termination of employment following a change of control, as further described in the “Executive Compensation—Potential Payments upon Termination or Change of Control” section of this prospectus.
|
|
(2)
|
Consists of restricted shares of common stock purchased by Mr. Walsh that are subject to repurchase until the fourth anniversary of the grant date; except that the repurchase right terminates as to (a) 2.0833% of the shares for each month Mr. Walsh remains employed by us and (b) all of such shares upon termination of Mr. Walsh’s employment by the Company without “cause” following the second anniversary of the start of his employment or a lesser amount of shares, to be determined based on the termination date, if such termination occurs prior to such second anniversary . Mr. Walsh paid for the shares through both a cash payment and a promissory note, which promissory note plus interest was repaid prior to the closing of this offering.
|
|
(3)
|
Dr. Post’s vested options were subsequently exercised by him in January 2010.
|
Potential Payments upon Termination or Change of Control
We have entered into employment agreements with each of our named executive officers which are designed to take into account particular requirements of each executive office as well as the credentials of the individuals occupying such offices. The agreements entered into with Messrs. Bowers, Piekos, and Villari are one-year agreements automatically renewable for successive periods of one year unless either party gives written notice of the termination of the agreement at least 30 days prior to the end of the term or any extension of the term. We initially entered into a three-year employment agreement with Mr. Kiegler, which is also automatically renewable for additional one-year periods subject to at least 60 days written notice of termination or non-extension of the agreement. Mr. Walsh holds his office on an at-will-employment basis and therefore may resign from his office or be terminated at any time and for any or no reason. While Dr. Post currently serves as our chairman and as an Internal Consultant to the Chief Executive Officer, as of October 6, 2008 he has not occupied any executive position with us.
The employment agreements provide for a combination of “single trigger” and “double trigger” vesting in connection with a change of control of NEXX and/or termination of employment. In other words, the change of control itself only triggers partial accelerated vesting. The employment agreements of Messrs. Bowers, Piekos, and Villari provide for acceleration of vesting of an additional 25% of the original option grant upon a “change of control” (as defined in the applicable executive employment agreement). The employment agreements of Mr. Walsh and Dr. Post also provide for the full acceleration of vesting of stock options or restricted shares of common stock, as the case may be, if the employment of the executive is terminated after the change of control either by the executive officer for “good reason” or by us without “cause” (as those terms are defined in the applicable executive employment agreement). All of Dr. Post’s unvested options were cancelled upon his retirement. Pursuant to Mr. Walsh’s employment agreement, the full vesting of the stock options awarded to him or restricted shares of common stock purchased by him may occur if he is terminated, other than for “cause,” after two years.
Pursuant to the employment agreements, if the employment of the named executive officer is terminated without cause by us or an acquiring entity, or with good reason by the executive, following a change of control of NEXX, the executive will be entitled to payment of his base salary for six to 12 months, payment of a proportionate amount of his bonus from the previous year based on the number of days he was employed in the year his employment is terminated. Mr. Walsh will become eligible for these benefits if he is terminated in the above-noted manner within six months following a change of control. The employment agreements entered into with Messrs. Bowers, Piekos, and Villari provide for these benefits to accrue if the executives are terminated within 12 months after a change of control. Mr. Keigler’s employment agreement does not establish any deadline for the purpose of these benefits. Further, certain of the named executives will continue to keep their
- 93 -
benefits entitlements: in particular, Mr. Walsh will be eligible for the reimbursement of COBRA payments for a period of six months; Dr. Post is entitled to health insurance coverage through December 2013; Mr. Keigler will be entitled to health insurance coverage for a one year period following his date of termination. These severance arrangements cease if the executive receives similar income and/or benefits from another employer.
The term “change of control” is defined in each individual employment agreement and may, for example, include: (a) the closing of sale of all or substantially all of our assets; (b) the acquisition by third parties of 50% or more of either (i) our outstanding common shares, or (ii) the combined voting power of our voting securities entitled to vote generally in the election of directors, excluding (A) a reorganization of NEXX under the corporate laws of a state or province other than Delaware or (B) a liquidation due to our inability to continue as a going concern; (c) approval by our board and shareholders of (i) a tender offer to acquire any of the common shares or voting securities, (ii) reorganizations, (iii) a merger or (iv) a consolidation other than a reorganization, merger or consolidation that does not result in the change in the direct or indirect beneficial ownership of our common shares and voting securities. Mr. Keigler’s employment agreement also includes in the definition of a “change of control” any plan or proposal for the liquidation or dissolution of NEXX, as well as a merger or consolidation that results in the members of the board immediately prior to such merger or consolidation not, immediately after the consolidation or merger, constituting more than 50% of the board of the surviving entity. Mr. Piekos’ employment agreement also includes an approval of a complete or substantial liquidation or dissolution of NEXX into the definition of a “change of control.”
Each employment agreement also provides that if we terminate the employment of the executive without cause prior to a change of control, the executive will be entitled to payment of his base salary for six to 12 months. Certain of the named executives will also continue to have their benefits for six to 60 months or become eligible for a lump sum payment in lieu of these benefits. In particular, Mr. Bowers’, Mr. Villari’s, and Mr. Walsh’s employment agreements provide for a severance equal to six months of their base salary and the reimbursement for their COBRA payments for a period of six months. While Mr. Keigler’s employment agreement also provides for a severance in the amount of his base salary for a six month period, he will be eligible for health insurance coverage for a period of six months. Should Mr. Piekos be terminated without cause and before a change of control, he will be eligible for a total amount equal to six months of his base salary plus an additional two months for each full twelve-month period he has been employed by us up to 12 months of his base salary. Dr. Post’s retirement agreement provides for payments of salary at the rate of approximately $200,000 per year through December 2010. These severance arrangements cease if the executive receives similar income and/or benefits from another employer.
The table below sets forth the benefits potentially payable to each named executive officer in the event of (a) a change of control of our company and (b) the termination of the named executive officer’s employment without cause after the change of control.
- 94 -
|
Value of Additional Vested Option and
Restricted Stock Grants
|
||||||||||||
|
Name
|
Upon Change
of Control ($)(1)
|
Upon Employment
Termination After
Change of
Control ($)(2)
|
Total ($)(3)
|
|||||||||
|
Thomas M. Walsh(4)
|
$ | 0 | 805,372 | $ | 805,372 | |||||||
|
Stanley D. Piekos
|
$ | 56,820 | 0 | $ | 56,820 | |||||||
|
John Bowers
|
$ | 62,845 | 0 | $ | 62,845 | |||||||
|
Arthur Keigler
|
$ | 124,170 | 0 | $ | 124,170 | |||||||
|
Philip Villari
|
$ | 40,046 | 0 | $ | 40,046 | |||||||
|
(1)
|
This amount is equal to (a) the number of option shares that would vest as a direct result of the change of control, assuming a December 31, 2009 change of control, multiplied by (b) the excess of $2.70, which represents our board of directors’ determination of the fair market value of our common stock as of December 31, 2009, over the exercise price of the option.
|
|
(2)
|
This amount is equal to (a) the number of additional shares that would vest as a direct result of employment termination without cause following a change of control, assuming a December 31, 2009 change of control and employment termination without cause or by the executive for good reason, multiplied by (b) the excess of $2.70, which represents our board of directors’ determination of the fair market value of our common stock as of December 31, 2009, over the exercise price of the option.
|
|
(3)
|
This amount is equal to (a) the total number of option shares that would vest as a direct result of the change of control and employment termination without cause, assuming a December 31, 2009 change of control and employment termination, multiplied by (b) the excess of $2.70, which represents our board of directors’ determination of the fair market value of our common stock as of December 31, 2009, over the exercise price of the option or the purchase price of Mr. Walsh’s restricted stock, as the case may be.
|
|
(4)
|
Mr. Walsh purchased 449,092 shares of our common stock, which are subject to repurchase rights.
|
Agreements with Executives
We have formal employment agreements with each of our named executive officers. Each agreement provides for termination without cause, provided certain severance payments to the executive equal to six months of the executive’s base salary or 12 months of base salary following a termination of the executive without cause or by the executive for good reason following a change of control
As a condition to their employment, our named executive officers entered into non-competition, non-disclosure and inventions assignments agreements. Under these agreements, each named executive officer has agreed (i) not to compete with us or to solicit our employees during his employment and for a period of 12 months after the termination of his employment and (ii) to protect our confidential and proprietary information and to assign to us intellectual property developed during the course of his employment.
See above in “Executive Compensation—Potential Payments upon Termination or Change of Control” for a description of the executive retention arrangements with our named executive officers.
Director Compensation
We have paid cash compensation to Messrs. Deuster, Norby and Rhine for their services as directors and have reimbursed our non-employee directors for reasonable travel and other expenses incurred in connection with attending board of director and committee meetings. Messrs. Deuster, Norby and Rhine have received stock option grants that vest in eight equal quarterly installments and all unvested options vest in full upon a change of control.
- 95 -
All option grants were issued at exercise prices determined by our Board of Directors with input from a third party appraiser to be equal to the fair market value of our common stock at the grant date.
Our president and chief executive officer and our chairman of the board have not received any compensation in connection with their services as directors. The compensation that we pay to our president and chief executive officer and our chairman of the board is discussed in the “Executive Compensation” section of this prospectus. Messrs. Eibl and Haas have not received any compensation in connection with their services as directors.
During the year ended December 31, 2009, director fees were paid to each of Messrs. Deuster, Norby and Rhine as set forth in the following table. No directors received stock option or other equity awards in 2009.
|
Director
|
Cash Compensation
|
Share Based Compensation(1)
|
Total
|
|||||||||
|
Robert G. Deuster (2)
|
$ | 8,000 | — | $ | 8,000 | |||||||
|
R. Douglas Norby (3)
|
$ | 11,000 | — | $ | 11,000 | |||||||
|
Bruce C. Rhine (4)
|
$ | 13,000 | — | $ | 13,000 | |||||||
|
(1)
|
Represents the dollar amount of share-based compensation expense recognized for financial statement reporting purposes pursuant to SFAS 123R during 2009, except that such amounts do not reflect an estimate of forfeitures related to service-based vesting conditions. The assumptions used by us with respect to the valuation of option grants are set forth in Note 13 to our financial statements included elsewhere in this prospectus.
|
|
(2)
|
As of December 31, 2009, Mr. Deuster holds options to purchase 18,800 shares of our common stock, of which 14,100 are vested with an average exercise price of $0.10 per share.
|
|
(3)
|
As of December 31, 2009, Mr. Norby holds options to purchase 34,721 shares of our common stock, of which 28,210 are vested, with an average exercise price of $0.10 per share.
|
|
(4)
|
As of December 31, 2009, Mr. Rhine holds options to purchase 34,376 shares of our common stock, of which 27,930 are vested, with an average exercise price of $0.10 per share.
|
In January 2010, the board of directors awarded restricted stock unit awards to each of Messrs. Deuster, Norby and Rhine in the amount of 7,500 units. These units vest 12.5% each three months over a two-year period.
In January 2010, our compensation committee determined that it was advisable for us to implement new arrangements, effective upon completion of this offering, for the compensation of directors who are not employed by us or our subsidiary. In structuring compensation arrangements for non-employee directors, the compensation committee concluded that, in order for us to attract and retain high-quality directors, it was essential that we offer compensation packages competitive with those of companies of similar size, in similar industries or markets and at the same stage of maturity as our company.
The following summarizes the terms of the compensation arrangements with non-employee directors, which will become effective upon the completion of the offering. Each non-employee director is entitled to the following:
- 96 -
|
Annual retainer fees for service on the board of directors (for participation in up to five meetings per year):
|
||||
|
Each director
|
$ | 25,000 | ||
|
Additional annual retainer fees for board of director committee service:
|
||||
|
Chair of audit committee
|
$ | 10,000 | ||
|
Other members of audit committee (for participating in up to six meetings per year)
|
$ | 1,500 | ||
|
Chair of compensation committee
|
$ | 5,000 | ||
|
Other members of compensation committee (for participating in up to four meetings per year)
|
$ | 1,500 | ||
|
Chair of governance and nominating committee
|
$ | 5,000 | ||
|
Other members of governance and nominating committee (for participating in up to four meetings per year)
|
$ | 1,500 | ||
A director who participates in a board of director or committee meeting in addition to the number of meetings set forth above in a given year will receive an additional $1,000 per meeting attended in person and $500 per meeting attended by telephone.
Also, effective at our first annual meeting of stockholders and on the date of each annual meeting thereafter, each non-employee director shall receive a grant of restricted stock units equal to 6/100ths of 1% (0.06%) of our issued and outstanding common stock outstanding as of the record date for such annual meeting, with each such grant to vest in four equal quarterly installments commencing on the date of such annual meeting.
Limitation of Liability and Indemnification
As permitted by the Delaware General Corporation Law, we adopted provisions in our amended and restated certificate of incorporation and amended and restated by-laws to be in effect immediately prior to the closing of this offering that limit or eliminate the personal liability of our directors. Consequently, a director will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability for:
|
•
|
any breach of the director’s duty of loyalty to us or our stockholders;
|
|
•
|
any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
|
|
•
|
any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or
|
|
•
|
any transaction from which the director derived an improper personal benefit.
|
These limitations of liability do not alter director liability under the federal securities laws and do not affect the availability of equitable remedies such as an injunction or rescission.
In addition, our amended and restated by-laws provide that:
|
•
|
we will indemnify our directors, executive officers and, in the discretion of our board of directors, employees to the fullest extent permitted by the Delaware General Corporation Law; and
|
|
•
|
we will advance expenses, including attorneys’ fees, to our directors and, in the discretion of our board of directors, to executive officers and employees, in connection with legal proceedings, subject to limited exceptions.
|
We plan to enter into indemnification agreements with each of our directors prior to the closing of this offering. These agreements will provide that we will indemnify these directors to the fullest extent permitted by law and our amended and restated certificate of incorporation and by-laws, and advance expenses to each indemnitee in connection with any proceeding in which indemnification is available.
We have obtained director and officer liability insurance to cover liabilities our directors and officers may incur in connection with their services to us, and we also intend to obtain, contemporaneously with the closing of this offering, an expanded general liability insurance that covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors
- 97 -
or officers, including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors or officers of NEXX, or persons controlling NEXX pursuant to the provisions in our amended and restated certificate of incorporation and bylaws, the indemnification agreements and the general liability insurance, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that the provisions in our amended and restated certificate of incorporation and bylaws, the indemnification agreements and the insurance are necessary to attract and retain talented and experienced directors and officers.
At present, there is no pending litigation or proceeding involving any of our directors or officers where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.
Equity Incentive Plans
We currently have two stock option plans. The first plan, the 2003 Plan, was established in December 2002 and the second plan, the 2010 Plan, was established in January 2010. The purpose of our stock option plans is to attract, retain and motivate our employees, consultants, directors and officers by providing an opportunity to acquire an equity interest in our company.
2003 Employee, Director and Consultant Stock Option Plan
Our 2003 Plan was adopted by our board of directors and approved by our stockholders in December 2002 and our board of directors and stockholders approved amendments to our 2003 Plan in 2004, 2005, 2008 and 2010. Under this plan, we may grant incentive stock options, nonqualified options and restricted stock units to employees, officers, directors, consultants and advisors of the company. A maximum of 2,216,006 shares of common stock are currently authorized for issuance under our 2003 Plan.
Our 2003 Plan is administered by the compensation committee of our board of directors. The compensation committee selects the participants, establishes the price, terms and conditions of each option and restricted stock unit, including the vesting provisions, oversees the issuance of shares upon option exercises or restricted stock unit vesting and interprets option agreements and restricted stock unit agreements. The compensation committee may at any time modify or amend the 2003 Plan in any respect, except where stockholders’ approval is required by law or where such termination or modification or amendment affects the rights of an optionee under a previously granted option and such optionee’s consent has not been obtained.
Pursuant to agreements we have entered into with our shareholders and requirements of the Code, the exercise price of all options granted under our 2003 Plan must not be less than 100% of the fair market value of our common stock on the date of such grant or, in the case of an incentive stock option to a 10% stockholder, not less than 110% of the fair market value of our common stock on the date of such grant. Additionally, the term of any option granted under the 2003 Plan may not exceed ten years from the date of grant.
In the event of a change of control, the compensation committee may provide for (a) the substitution by the surviving corporation or its parent of options or restricted stock units with substantially the same terms for such outstanding options or restricted stock units, as applicable, (b) the acceleration of the vesting of such options or restricted stock units immediately prior to or as of the date of the transaction, and the expiration of such outstanding options to the extent not timely exercised by the date of the transaction or (c) the
- 98 -
cancellation of all or any portion of such outstanding options by a cash payment of the excess, if any, of the fair market value of the shares subject to such outstanding options or portions thereof being canceled over the option price.
Immediately upon termination of employment of an employee, the unvested portion of any stock option will terminate and the balance, to the extent exercisable, will remain exercisable for the lesser of (i) a period of three months or (ii) the period ending on the latest date on which such stock option could have been exercised without regard to this provision. The 2003 Plan provides exceptions for the vesting of options upon an individual’s death, disability or termination for cause.
We do not intend to grant additional options or restricted stock units under our 2003 Plan after this offering and the aggregate number of shares to be issued under our 2003 Plan will be reduced to 2,086,936 , which represents the total number of shares issuable upon the exercise of options and restricted stock units and the grant of shares of restricted common stock that are outstanding prior to the completion of this offering. After this offering, amendments to the 2003 Plan will be subject to approval by our stockholders in such a manner and to such a degree as applicable laws, rules and regulations require and to the rules and policies of the TSX .
2010 Stock Incentive Plan
Our 2010 stock incentive plan, or our 2010 Plan, was adopted by our board of directors and approved by our stockholders in January 2010 and will become effective upon the effectiveness of this registration statement. The 2010 Plan permits us to make grants of incentive stock options, non-qualified stock options , stock purchase rights and other stock-based awards . Under this plan, we may grant incentive stock options, nonqualified options , stock purchase rights and other stock-based awards to employees, officers, directors, consultants and advisors of the company. We reserved 15% of the number of shares of our common stock outstanding after this offering, assuming the exercise of all warrants and options to purchase shares of our common stock and the vesting of all restricted stock units outstanding after this offering and including all shares to be reserved under this plan, less 2,083,707 shares currently subject to outstanding options and restricted stock units, grants of shares of restricted common stock, and exercised options. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. Generally, shares that are forfeited or canceled from awards under the 2010 Plan also will be available for future awards. In addition, awards that are returned to our 2003 Plan as a result of their expiration, cancellation, termination or repurchase are automatically made available for issuance under our 2010 Plan. No awards have been granted under the 2010 Plan.
The 2010 Plan is administered by our compensation committee. The administrator of the 2010 Plan has full power and authority to select the participants to whom awards will be granted, to grant any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of the 2010 Plan. All full-time and part-time officers and other employees, non-employee directors and other key persons (including consultants and prospective employees) are eligible to participate in the 2010 plan, subject to the discretion of the administrator.
The exercise price of stock options awarded under the 2010 Plan may not be less than the fair market value of the common stock on the date of the option grant (which will be determined based on the closing price of our shares of common stock on our listing exchange on the day prior to the grant) and the term of each option may not exceed ten years from the date of grant. The administrator will determine at what time or times each option may be exercised and, subject to the provisions of the 2010 Plan, the period of time, if any, after retirement, death, disability or other termination of employment during which options may be exercised.
To qualify as incentive options, stock options must meet additional federal tax requirements, including a $100,000 limit on the value of shares subject to incentive options that first become exercisable in any one calendar year, and a shorter term and higher minimum exercise price in the case of certain large stockholders. No incentive stock option awards may be granted under the 2010 Plan after December 31, 2019.
- 99 -
Subject to applicable laws and the terms of the 2010 Plan, the administrator of the 2010 Plan determines the terms of the stock purchase rights, including the number of shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer; provided that the purchase price of shares subject to stock purchase rights shall not be less than 85% of the fair market value of the shares as of the date of the offer.
We may also grant other stock based awards under our 2010 Plan. Subject to applicable laws and the terms of the 2010 Plan, the administrator of the 2010 Plan determines the terms and conditions of such stock-based awards, including, without limitation, the grant of shares of common stock based upon certain conditions, the grant of securities convertible into shares of common stock and the grant of stock appreciation rights, phantom stock or restricted stock units.
Our board of directors may amend or discontinue the 2010 Plan at any time and the administrator of our 2010 Plan may amend or cancel any outstanding award for the purpose of satisfying changes in law or for any other lawful purpose. No such amendment may adversely affect the rights under any outstanding award without the holder’s consent. Other than in the event of a necessary adjustment in connection with a change in our stock or a change of control, the administrator may not “reprice” or otherwise reduce the exercise price of outstanding stock options. Further, amendments to the 2010 Plan will be subject to approval by our stockholders in such a manner and to such a degree as applicable laws, rules and regulations require and to the rules and policies of the TSX .
Prior Option Grants
As of March 23, 2010, options to purchase an aggregate of 1,609,386 shares of common stock are outstanding under our stock option plans. Before giving effect to the offering, this represents % of our outstanding common stock, and after giving effect to the offering, % of our common stock. Outstanding options are as described below:
|
Category
|
Year of
Grant
|
Common Shares
Outstanding under
Options Granted
|
Exercise
Price
|
|||||||
|
All of our executive officers and past executive officers
|
2010
|
505,000 | 1 | $ | 2.70 | |||||
|
( 5 individuals in total)
|
2009
|
0 | $ | |||||||
|
2008
|
383,800 | $ | 0.10 | |||||||
|
2007
|
15,000 | $ | 0.10 | |||||||
|
2006
|
55,000 | $ | 0.10 | |||||||
|
2005
|
10,000 | $ | 0.10 | |||||||
|
2004
|
9,000 | $ | 0.10 | |||||||
|
2003
|
25,000 | $ | 0.10 | |||||||
|
2002
|
0 | $ | ||||||||
|
2001
|
0 | $ | ||||||||
|
All of our directors and past directors who are not also executive officers
|
2010
|
22,500 | 1 | $ | 2.70 | |||||
|
( 3 individuals in total)
|
2009
|
0 | $ | |||||||
|
2008
|
53,348 | $ | 0.10 | |||||||
|
2007
|
9,400 | $ | 0.10 | |||||||
|
2006
|
17,360 | $ | 0.10 | |||||||
|
2005
|
4,500 | $ | 0.10 | |||||||
|
2004
|
3,288 | $ | 0.10 | |||||||
|
2003
|
0 | $ | ||||||||
|
2002
|
0 | $ | ||||||||
|
2001
|
0 | $ | ||||||||
|
All of our other employees or past employees
|
2010
|
159,911 | $ | 2.70 | ||||||
|
2009
|
12,100 | $ | 0.10 | |||||||
|
2008
|
194,689 | $ | 0.10 | |||||||
|
2007
|
30,300 | $ | 0.10 | |||||||
|
2006
|
25,600 | $ | 0.10 | |||||||
|
2005
|
17,300 | $ | 0.10 | |||||||
|
2004
|
16,138 | $ | 0.10 | |||||||
|
2003
|
4,191 | $ | 0.10 | |||||||
|
2002
|
2,300 | $ | 0.10 | |||||||
|
2002
|
50 | $ | 5.00 | |||||||
|
2001
|
7,000 | $ | 0.10 | |||||||
|
2001
|
2,200 | $ | 5.00 | |||||||
|
All of our consultants or past consultants
|
2010
|
2,709 | $ | 2.70 | ||||||
|
2009
|
0 | $ | ||||||||
|
2008
|
16,700 | $ | 0.10 | |||||||
|
2007
|
4,000 | $ | 0.10 | |||||||
|
2006
|
1,000 | $ | 0.10 | |||||||
|
2005
|
0 | $ | ||||||||
|
2004
|
0 | $ | ||||||||
|
2003
|
0 | $ | ||||||||
|
2002
|
0 | $ | ||||||||
|
2001
|
0 | $ | ||||||||
1 Grants of restricted stock units.
- 100 -
RELATED PERSON TRANSACTIONS
Since January 1, 2007, we have engaged (or, in the case of the conversion of our preferred stock, will engage) in the following transactions with our directors, executive officers and holders of more than 5% of our voting securities, or affiliates or immediate family members of our directors, executive officers and holders of more than 5% of our voting securities. We believe that all of these transactions were (or shall be) on terms as favorable as could have been obtained from unrelated third parties.
Stock Issuances
From October 2007 through June 2008, we sold convertible promissory notes in the aggregate principal amount of $7.0 million and warrants to purchase an aggregate of up to 117,647 shares of our series D convertible preferred stock at an exercise price of $4.25 per share to existing holders of preferred stock. These promissory notes carried interest at the rate of 9%. These notes (including accrued interest) converted into 1,803,177 shares of our series D convertible preferred stock on June 27, 2008 at a price of $4.25 per share. Upon the closing of this offering, these shares will convert into shares of common stock and the warrants will convert into warrants to acquire shares of common stock, with the warrants exercisable through December 2013. The table below sets forth the principal amount of these promissory notes, the number of shares of our series D convertible preferred stock the promissory notes were converted into and the number of shares of series D convertible preferred stock underlying the warrants sold to our directors, executive officers and 5% stockholders and their affiliates in connection with this series D convertible promissory note financing.
|
Name
|
Principal and
Interest Amount
Of Loan
|
Series D Convertible
Preferred Stock Shares
|
Series D Convertible
Preferred Stock
Warrants
|
|||||||||
|
Affiliates of Sigma Partners(1)
|
$ | 2,452,795.92 | 577,169 | 39,158 | ||||||||
|
Affiliates of Enterprise Partners(2)
|
2,683,952.68 | 631,400 | 42,848 | |||||||||
|
Richard S. Post
|
1,904,399.33 | 448,016 | 30,402 | |||||||||
|
Arthur L. Keigler
|
32,420.91 | 7,628 | 1,445 | |||||||||
|
Stanley D. Piekos
|
23,086.30 | 5,432 | 1,028 | |||||||||
|
Total
|
$ | 7,096,595.14 | 1,669,645 | 114,881 | ||||||||
|
(1)
|
Clifford L. Haas, a member of our board of directors, is a managing director of Sigma Management 6, LLC, the general partner of each of Sigma Partners 6, L.P., Sigma Investors 6, L.P. and Sigma Associates, 6, L.P.
|
|
(2)
|
Carlton J. Eibl, a member of our board of directors, is the managing director of each of Enterprise Management Partners V, LLC and Enterprise Management Partners VI, LLC, the general partners of Enterprise Ventures V, L.P. and Enterprise Ventures VI, L.P., respectively.
|
In July, September and October 2008, we issued an additional 679,239 shares of series D convertible preferred stock at a price of $4.25 per share as well as warrants to purchase an aggregate of up to 669,164 additional shares of series D convertible preferred stock at an exercise price of $0.10 per share. Upon the closing of this offering, these shares will convert into shares of common stock and all of these warrants not previously exercised will terminate. The table below sets forth the number of shares of our series D convertible preferred stock and shares of series D convertible preferred stock underlying the warrants sold to our directors, executive officers and 5% stockholders and their affiliates in connection with this 2008 series D convertible preferred stock financing:
- 101 -
|
Name
|
Aggregate
Purchase
Price
|
Series D Convertible
Preferred Stock
Shares
|
Series D Convertible
Preferred Stock
Warrants
|
|||||||||
|
Affiliates of Sigma Partners(1)
|
$ | 932,218.35 | 219,385 | 219,304 | ||||||||
|
Affiliates of Enterprise Partners(2)
|
$ | 1,019,497.58 | 239,999 | 239,999 | ||||||||
|
Richard S. Post
|
$ | 523,423.90 | 123,235 | 123,235 | ||||||||
|
Total
|
$ | 2,475,139.83 | 582,619 | 582,538 | ||||||||
|
(1)
|
Clifford L. Haas, a member of our board of directors, is a managing director of Sigma Management 6, LLC, the general partner of each of Sigma Partners 6, L.P., Sigma Investors 6, L.P. and Sigma Associates, 6, L.P.
|
|
(2)
|
Carlton J. Eibl, a member of our board of directors, is the managing director of each of Enterprise Management Partners V, LLC and Enterprise Management Partners VI, LLC, the general partners of Enterprise Ventures V, L.P. and Enterprise Ventures VI, L.P., respectively.
|
In October and November 2009, we issued an aggregate of 1,234,806 units, each unit consisting of one share of series D convertible preferred stock at a price of $4.25 per share and a warrant to purchase an additional share of series D convertible preferred stock at an exercise price of $0.10 per share. Upon the closing of this offering, these shares will convert into shares of common stock and any of these warrants not exercised will terminate. The table below sets forth the number of shares of our series D convertible preferred stock and shares of series D convertible preferred stock underlying the warrants sold to our directors, executive officers and 5% stockholders and their affiliates in connection with this 2009 series D convertible preferred stock financing. All of the warrants to purchase shares of our series D convertible preferred stock referenced below were subsequently exercised.
|
Name
|
Aggregate
Purchase
Price
|
Series D Convertible
Preferred Stock
Shares
|
Series D Convertible
Preferred Stock
Warrants
|
|||||||||
|
Affiliates of Sigma Partners(1)
|
$ | 1,858,770.65 | 437,358 | 437,357 | ||||||||
|
Affiliates of Enterprise Partners(2)
|
$ | 2,141,229.90 | 503,818 | 503,818 | ||||||||
|
Richard S. Post
|
$ | 500,000.00 | 117,647 | 117,647 | ||||||||
|
Thomas M. Walsh
|
$ | 50,000.00 | 11,764 | 11,764 | ||||||||
|
Bruce C. Rhine(3)
|
$ | 81,324.30 | 19,135 | 19,135 | ||||||||
|
Robert G. Deuster
|
$ | 17,296.22 | 4,069 | 4,069 | ||||||||
|
John M. Bowers
|
$ | 20,000.00 | 4,705 | 4,705 | ||||||||
|
Total
|
$ | 4,668,621.07 | 1,098,496 | 1,098,495 | ||||||||
|
|
(1)
|
Clifford L. Haas, a member of our board of directors, is a managing of Sigma Management 6, the general partner of Sigma Partners 6, L.P., Sigma Investors 6, L.P. and Sigma Associates, 6, L.P.
|
|
|
(2)
|
Carlton J. Eibl, a member of our board of directors is a manager of Enterprise Ventures V, L.P. and Enterprise Ventures VI, L.P.
|
|
|
(3)
|
Includes shares held in an irrevocable trust for the benefit of Mr. Rhine’s children, in which he disclaims any beneficial interest.
|
- 102 -
Conversion of Preferred Stock
Immediately prior to the closing of this offering, each outstanding share of our preferred stock of all classes will convert into shares of our common stock pursuant to an agreement between us and the holders of all our outstanding shares of preferred stock. The 30,000,000 shares of our common stock to be issued in consideration for this agreement, as approved by a sub-committee of the board that approved the transaction after obtaining an independent analysis from a third party appraisal firm , will be issued immediately prior to the closing of this offering to the holders of the outstanding shares of all of our preferred stock and warrants to purchase shares of our preferred stock, including certain of our executives, directors and principal stockholders.
Agreements with Our Stockholders
In connection with the 2008 and 2009 series D convertible preferred stock financings, we entered into a second amended and restated investor rights agreement and a third amended and restated investor rights agreement, respectively, with holders of our convertible preferred stock and warrants to purchase shares of our convertible preferred stock and certain holders of our common stock. The third amended and restated investor rights agreement amended, restated and replaced the rights provided for under the second amended and restated investor rights agreement. The third amended and restated investor rights agreement contains a right of first refusal provision that provides that we shall not make certain issuances of our securities unless we first offer such securities to certain holders of our convertible preferred stock, in accordance with the terms of the agreement. This right of first refusal provision does not apply to, and will terminate upon the closing of, this offering. The third amended and restated investor rights agreement also provides (i) that holders of our convertible preferred stock have the right to demand that we file a registration statement, subject to certain limitations, and (ii) that holders of our convertible preferred stock and warrants to purchase shares of our convertible preferred stock and certain holders of our common stock have the right to request that their shares be covered by a registration statement that we are otherwise filing. See the “Shares Eligible for Future Resale—Registration Rights” section of this prospectus for a further discussion of these registration rights.
In connection with the 2008 series D convertible preferred stock financing, we entered into a second amended and restated right of first refusal and co-sale agreement, a second amended and restated voting agreement and a third amended and restated voting agreement with holders. These agreements were amended, restated and replaced by a third amended and restated right of first refusal and co-sale agreement, as amended, and a fourth amended and restated voting agreement, as amended, entered into with holders of our convertible preferred stock and certain other of our stockholders in connection with the 2009 series D convertible preferred stock financing. These agreements provide the holders of our convertible preferred stock with a right of purchase and of co-sale in respect of sales of securities by certain holders of common stock and provide for agreements with respect to the election of our board of directors and other voting obligations. These agreements will terminate upon the closing of this offering.
Indemnification Arrangements
Please see “Executive Compensation—Limitation of Liability and Indemnification” for information on our indemnification arrangements with our directors.
Executive Compensation and Employment Arrangements
Please see “Executive Compensation,” including “Executive Compensation—Agreements with Executives” for information on compensation arrangements with our executive officers, including option grants and agreements with executive officers.
- 103 -
Related Person Transaction Policy
We have adopted a written policy providing that all “related person transactions” must be:
|
•
|
reported to our chief financial officer;
|
|
•
|
approved or ratified by our audit committee, which our audit committee will do only if it determines that the transaction is in, or not inconsistent with, the best interests of NEXX; and
|
|
•
|
if applicable, reviewed by our audit committee annually to ensure that such transaction, arrangement or relationship has been conducted in accordance with the previous approval, and that all required disclosures regarding such transaction arrangement or relationship have been made.
|
Our policy provides that a “related person transaction” is any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, involving an amount exceeding $120,000 in which we are a participant and in which any of our executive officers, directors or 5% stockholders, or any immediate family member of any of our executive officers, directors or 5% stockholders, has or will have a direct or indirect material interest.
- 104 -
PRINCIPAL STOCKHOLDERS
The table below provides certain information about beneficial ownership of our common stock (i) as of March 23, 2010 and (ii) as adjusted to reflect the sale of shares of common stock that we anticipate selling in connection with this offering assuming no exercise of the underwriters’ over-allotment option. The table shows information for:
|
•
|
each person, or group of affiliated persons, who is known to us to beneficially own more than 5% of our common stock;
|
|
•
|
each of our directors and named executive officers; and
|
|
•
|
all of our directors and executive officers as a group.
|
Beneficial ownership and percentage ownership are determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock (on an as-converted basis) underlying options or warrants held by that person that are currently exercisable or exercisable within 60 days of March 23, 2010 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to such securities. Except as otherwise indicated, to our knowledge, all of the shares reflected in the table are shares of our common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. Percentage of beneficial ownership calculations below are based on 13,783,201 shares of our common stock outstanding as of March 23, 2010 and shares of our common stock outstanding after the offering, which assumes the following items in connection with the Capital Reorganization:
|
•
|
the conversion of each outstanding share of our series A convertible preferred stock into 1.7990443 shares of our common stock immediately prior to the completion of this offering;
|
|
•
|
the conversion of each outstanding share of our series B convertible preferred stock into 1.6560764 shares of our common stock immediately prior to the completion of this offering;
|
|
•
|
the conversion of each outstanding share of our series C convertible preferred stock into 1.62359 shares of our common stock immediately prior to the completion of this offering;
|
|
•
|
the conversion of each outstanding share of our series D convertible preferred stock issued prior to October 27, 2009 , or issued pursiant to the exercise of warrants issued prior to October 27, 2009, into 1.119324 shares of our common stock immediately prior to the completion of this offering;
|
|
•
|
the conversion of each other outstanding share of our series D convertible preferred stock into one share of our common stock immediately prior to the completion of this offering;
|
|
•
|
the issuance of 30,000,000 shares of our common stock immediately prior to the completion of this offering to the holders of shares of our preferred stock and warrants to purchase shares of our preferred stock in exchange for the waiver of certain contractual rights regarding the conversion of all outstanding shares of our preferred stock to shares of common stock upon an initial public offering of our common stock; and
|
|
•
|
a 1 to 10 reverse stock split.
|
Unless otherwise indicated, the address for each of the stockholders in the table below is c/o NEXX Systems, Inc., 900 Middlesex Turnpike, Building #6, Billerica, Massachusetts 01821.
- 105 -
|
Shares Beneficially Owned Prior to
Offering
|
Shares Beneficially
Owned After
Offering
|
||||
|
Name and Address of Beneficial Owner
|
Number
|
Percentage
|
Percentage
|
||
|
5% Stockholders
|
|||||
|
Entities affiliated with Enterprise Partners
2223 Avenida de Playa
Suite 300
La Jolla, CA 92037
|
4,934,190(1)
|
35.67%
|
|||
|
Entities affiliated with Sigma Partners
1600 El Camino Real
Suite 280
Menlo Park, CA 94025
|
4,058,200(2)
|
29.35%
|
|||
|
Richard S. Post
|
2,127,591 (3)
|
15.40%
|
|||
|
Directors and Named Executive Officers
|
|||||
|
Thomas M. Walsh, Ph.D.
|
478,039(4)
|
3.47%
|
|||
|
Stanley D. Piekos
|
93,867 (5)
|
*
|
|||
|
Arthur L. Keigler
|
175,003 (6)
|
1.26%
|
|||
|
John M. Bowers
|
53,436 (7)
|
*
|
|||
|
Phillip Villari
|
38,058 (8)
|
*
|
|||
|
Bruce C. Rhine
|
110,965 (9)
|
*
|
|||
|
Robert G. Deuster
|
27,400 (10)
|
*
|
|||
|
R. Douglas Norby
|
31,318 (11)
|
*
|
|||
|
Clifford L. Haas
|
4,058,200 (12)
|
29.35%
|
|||
|
Carlton J. Eibl
|
4,934,190 (13)
|
35.67%
|
|||
|
Richard S. Post, Ph.D.
|
2,127,591 (3)
|
15.40%
|
|||
|
All of our directors and officers as a group (11 persons)
|
12,128,067 (14)
|
84.97%
|
|||
*Represents beneficial ownership of less than 1% of the shares of common stock.
|
1
|
Consists of (a) 2,443,115 shares of common stock held by Enterprise Partners V, LP, (b) warrants exercisable within 60 days to purchase 23,980 shares of common stock held by Enterprise Partners V, LP, (c) 2,443,115 shares of common stock held by Enterprise Partners VI, LP and (d) warrants exercisable within 60 days to purchase 23,980 shares of common stock held by Enterprise Partners VI, LP. Enterprise Management Partners V, LLC is the sole general partner of Enterprise Partners V, LP and has ultimate voting and investment power of the shares held of record by Enterprise Partners V, LP. Voting and investment power over such shares are vested in Mr. Eibl as the managing partner of Enterprise Management Partners V, L.P. Mr. Eibl disclaims beneficial interest over such shares except to the extent of his pecuniary interest, if any. Enterprise Management Partners VI, LLC is the sole general partner of Enterprise Partners VI, LP and has ultimate voting and investment power of the shares held of record by Enterprise Partners VI, LP. Voting and investment power over such shares are vested in Mr. Eibl as the managing partner of Enterprise Management Partners VI, LLC. Mr. Eibl disclaims beneficial interest over such shares except to the extent of his pecuniary interest, if any.
|
|
2
|
Consists of (a) 3,669,572 shares of common stock held by Sigma Partners 6, LP, (b) warrants exercisable within 60 days to purchase 40,087 shares of common stock held by Sigma Partners 6, LP, (c) 292,846 shares of common stock held by Sigma Associates 6, LP, (d) warrants exercisable within 60 days to purchase 3,170 shares of common stock held by Sigma Associates 6, LP, (e) 51,954 shares of common stock held by Sigma Investors 6, LP and (f) warrants exercisable within 60 days to purchase 571 shares of common stock held by Sigma Investors 6, LP. Sigma Management 6, LLC is the sole general partner of each of Sigma Partners 6, LP, Sigma Associates 6, LP and Sigma Investors 6, LP and has ultimate voting and investment power of the shares held of record by each of Sigma Partners 6, LP, Sigma Associates 6, LP and Sigma Investors 6, LP. Robert Davoli, Lawrence Finch, Gregory Gretsch, Clifford L. Haas, John Mandile, Peter Solvik, Robert Spinner and Wade Woodson are the Managing Members of Sigma Management 6, LLC, which is the general partner of each of Sigma Associates 6, LP, Sigma Investors 6, LP and Sigma Partners 6, LP, and as such Messrs. Davoli, Finch, Gretsch, Haas, Mandile, Solvik, Spinner and Woodson may be deemed to share voting and dispositive power with respect to shares of common stock held by Sigma Associates 6, LP, Sigma Investors 6, LP and Sigma Partners 6, LP. Each of Messrs. Davoli, Finch, Gretsch, Haas, Mandile, Solvik, Spinner and Woodson disclaims beneficial ownership of such shares except to the extent of his pecuniary interest, if any.
|
|
3
|
Consists of (a) 2,093,561 shares of common stock held by Dr. Post and (b) warrants exercisable within 60 days to purchase 34,030 shares of common stock held by Dr. Post . Dr. Post serves as the non-executive chairman of the board of directors and previously served as President and Chief Executive Officer.
|
- 106 -
|
4
|
Consists of 478,039 shares of common stock held by Mr. Walsh, of which 290,051 shares are subject to repurchase by us at a price of $0.10 per share as of March 23, 2010 . Excludes 170,000 restricted stock units vesting 25% at January 22, 2011 and 2.083% per month thereafter through January 21, 2014. Mr. Walsh is the President and a member of our Board of Directors.
|
|
5
|
Consists of (a) 35,869 shares of common stock held by Mr. Piekos, (b) warrants exercisable within 60 days to purchase 1,150 shares of common stock held by Mr. Piekos and (c) options exercisable within 60 days to purchase 56,848 shares of common stock held by Mr. Piekos. Excludes (a) 90,000 restricted stock units vesting 25% at January 22, 2011 and 2.083% per month thereafter through January 21, 2014 and (b) 50,978 shares of common stock issuable upon exercise of options that vest in more than 60 days. Mr. Piekos serves as our Vice President, Finance and Chief Financial Officer.
|
|
6
|
Consists of (a) 50,404 shares of common stock held by Mr. Keigler, (b) warrants exercisable within 60 days to purchase 1,617 shares of common stock held by Mr. Keigler and (c) options exercisable within 60 days to purchase 122,982 shares of common stock held by Mr. Keigler. Excludes (a) 100,000 restricted stock units vesting 25% at January 22, 2011 and 2.083% per month thereafter through January 21, 2014, and (b) 101,656 shares of common stock issuable upon exercise of options that vest in more than 60 days. Mr. Keigler serves as our Vice President of Technology.
|
|
7
|
Consists of (a) 11,579 shares of common stock held by Mr. Bowers and (b) options exercisable within 60 days to purchase 41,857 shares of common stock held by Mr. Bowers. Excludes (a) 70,000 restricted stock units vesting 25% at January 22, 2011 and 2.083% per month thereafter through January 21, 2014, and (b) 51,592 shares of common stock issuable upon the exercise of unvested options. Mr. Bowers serves as our Vice President of Sales and Business Development.
|
|
8
|
Consists of options exercisable within 60 days to purchase 38,058 shares of common stock held by Mr. Villari. Excludes (a) 75,000 restricted stock units vesting 25% at January 22, 2011 and 2.083% per month thereafter through January 21, 2014, and (b) 33,826 shares of common stock issuable upon exercise of options that vest in more than 60 days. Mr. Villari serves as our Vice President of Customer Satisfaction and Operations.
|
|
9
|
Consists of (a) 56,408 shares of common stock held by Mr. Rhine, (b) 23,541 shares of common stock held in trust, (c) options exercisable within 60 days to purchase 30,079 shares of common stock held by Mr. Rhine and (d) 937 restricted stock units that vest within 60 days . Excludes (a) 21,024 shares of common stock held in a trust in which Mr. Rhine has no voting or investment control and disclaims any beneficial interest, (b) warrants exercisable within 60 days to purchase 4,705 shares of common stock held in a trust in which Mr. Rhine has no voting or investment control and disclaims any beneficial interest, (c) 6,563 restricted stock units that vest in more than 60 days and (d) 8,594 shares of common stock issuable upon exercise of options that vest in more than 60 days. Mr. Rhine is a member of our board of directors.
|
|
10
|
Consists of (a) 10,013 shares of common stock held by Mr. Deuster, (b) options exercisable within 60 days to purchase 16,450 shares of common stock held by Mr. Deuster and (c) 937 restricted stock units that vest within 60 days . Excludes (a) 6,563 restricted stock units that vest in more than 60 days and (b) 2,350 shares of common stock issuable upon exercise of options that vest in more than 60 days. Mr. Deuster is a member of our board of directors.
|
|
11
|
Consists of options exercisable within 60 days to purchase 30,381 shares of common stock held by Mr. Norby and (b) 937 restricted stock units that vest within 60 days . Excludes (a) 6,563 restricted stock units and (b) 4,340 shares of common stock issuable upon exercise of options that vest in more than 60 days. Mr. Norby is a member of our board of directors.
|
|
12
|
Sigma Partners 6, LP, Sigma Associates 6, LP and Sigma Investors 6, LP are controlled by Sigma Management 6, LLC, of which Mr. Haas is a Managing Director. Mr. Haas and his associates beneficially own less than 5% of the limited partnership units of Sigma Partners 6, LP, and Sigma Investors 6, LP. Mr. Hass and his associates beneficially own more than 5% of the limited partnership interests of Sigma Associates 6, LP, which beneficially owns less than 3% of the Company. Mr. Haas and his associates do not independently exert control or direction over the common stock owned by of Sigma Partners 6, LP, Sigma Associates 6, LP, and Sigma Investors 6, LP.
|
|
13
|
Enterprise Partners V, L.P. and Enterprise Partners VI, L.P. are controlled by Enterprise Partners Venture Capital, of which Mr. Eibl is Managing Director. Mr. Eibl and his associates beneficially own less than 5% of the limited partnership units of Enterprise Partners V, L.P. and Enterprise Partners VI, L.P. Mr. Eibl does not independently exert control or direction over the common stock owned by Enterprise Partners V, L.P. and Enterprise Partners VI, L.P.
|
|
14
|
Consists of an aggregate of (a) 11,638,685 shares of common stock, (b) warrants exercisable within 60 days to purchase 149,916 shares of common stock, (c) options exercisable within 60 days to purchase 336,655 shares of common stock and (d) 2,811 restricted stock units that vest within 60 days .
|
- 107 -
DESCRIPTION OF CAPITAL STOCK
General
Without taking into account the Capital Reorganization, our authorized capital stock currently consists of 160,301,747 shares of common stock, par value $0.001 per share, and 85,560,230 shares of preferred stock, $0.001 par value per share. Upon completion of this offering our amended and restated certificate of incorporation will provide for total authorized capital consisting of 30,000,000 shares of common stock. All currently outstanding shares of series A, B, C and D convertible preferred stock will be converted upon completion of this offering into shares of our common stock. As a result, upon the consummation of this offering, no shares of preferred stock will be outstanding.
On March 23, 2010 , without taking into account the Capital Reorganization, the following numbers of shares of common and preferred stock were outstanding:
|
Common Stock
|
|
19,333,994
|
|
|
Series A Convertible Preferred Stock
|
|
1,550,000
|
|
|
Series B Convertible Preferred Stock
|
|
7,669,880
|
|
|
Series C Convertible Preferred Stock
|
8,216,011
|
||
|
Series D Convertible Preferred Stock
|
|
55,933,065
|
Capital Reorganization
Our certificate of incorporation currently in effect contains provisions describing our authorized capital, namely, the rights, privileges, restrictions and conditions of our common stock, our series A convertible preferred stock, our series B convertible preferred stock, our series C convertible preferred stock and our series D convertible preferred stock, including dividend, liquidation, voting, conversion, redemption and special voting entitlements. Pursuant to an agreement between us and the holders of our outstanding shares of preferred stock and our amended and restated certificate of incorporation to be in effect immediately prior to the effectiveness of this offering, the Capital Reorganization will occur immediately prior to this offering, pursuant to which the outstanding shares of our series A convertible preferred stock, series B convertible preferred stock, series C convertible preferred stock and series D convertible preferred stock will be converted into shares of our common stock and we will effect a reverse stock split of our outstanding shares of common stock on the following basis:
|
•
|
in consideration for the holders of our shares of preferred stock agreeing to convert all outstanding shares of our preferred stock into shares of our common stock, after obtaining an independent analysis from a third party appraisal firm and with the approval of a sub-committee of the board that approved the transaction, we will issue 30,000,000 shares of our common stock to holders of the outstanding shares of all of our preferred stock and warrants to purchase shares of our preferred stock;
|
|
•
|
the outstanding 1,550,000 shares of series A convertible preferred stock will be converted into shares of common stock, on the basis of 1.7990443 shares of common stock for each one share of series A convertible preferred stock, rounded down to the nearest whole number of common shares held by each holder; (ii) the outstanding 7,669,880 shares of series B convertible preferred stock will be converted into shares of common stock, on the basis of 1.6560764 shares of common stock for each one shares of series B convertible preferred stock, rounded down to the nearest whole number of common shares held by each holder; (iii) the outstanding 8,216,011 shares of series C convertible preferred stock will be converted into shares of common stock, on the basis of 1.62359 shares of common stock for each one share of series C convertible preferred stock, rounded down to the nearest whole number of common shares held by each holder; (iv) the
|
- 108 -
|
|
outstanding 31,306,505 shares of series D convertible preferred stock issued prior to October 27, 2009, or issued pursuant to the exercise of warrants issued prior to October 27, 2009, will be converted into shares of common stock, on the basis of 1.119324 shares of common stock for each one share of series D convertible preferred stock, rounded down to the nearest whole number of common shares held by each holder; and (v) the remaining outstanding 24,626,560 shares of series D convertible preferred stock will be converted into shares of common stock, on the basis of one share of common stock for each one share of series D convertible preferred stock;
|
|
•
|
warrants to purchase 115,384 shares of our series B convertible preferred stock and 4,117,190 shares of our series D convertible preferred stock that have not terminated will become exercisable for 4,799,541 shares of our common stock; and
|
|
•
|
we will effect a 1 to 10 reverse stock split.
|
Upon completion of this offering and the Capital Reorganization, we will be authorized to issue 30,000,000 shares of common stock. As of March 23, 2010 , assuming the completion of the Capital Reorganization, there were 13,783,201 shares of our common stock outstanding and held of record by 162 shareholders. Based on 13,783,201 shares of common stock outstanding as of March 23, 2010 , as of the date of this prospectus, assuming the Capital Reorganization had been completed and the issuance of approximately shares of common stock in this offering and without taking into account the exercise of the underwriters’ over-allotment option or the options and restricted stock units described under “Issuances Pursuant to our 2003 Employee, Director and Consultant Stock Option Plan”, there were shares of common stock outstanding. See “Description of Capital Stock – Issuances Pursuant to our 2003 Employee, Director and Consultant Stock Option Plan.”
The following summary of certain provisions of our common and preferred stock does not purport to be complete and is qualified in its entirety by reference to our amended and restated certificate of incorporation and amended and restated by-laws as will be in effect immediately prior to the closing of this offering. You should refer to our amended and restated certificate of incorporation and our amended and restated by-laws, both of which are included as exhibits to the registration statement we have filed with the SEC in connection with this offering. The summary below is also qualified by provisions of applicable law.
Common Stock
Holders of common stock are entitled to one vote per share on matters on which our stockholders vote. There are no cumulative voting rights. Holders of common stock are entitled to receive proportionally any dividends declared by our board of directors, out of funds that we may legally use to pay dividends and subject to any preferential dividend rights of any outstanding preferred stock.
In the event of our liquidation or dissolution, holders of our common stock are entitled to share ratably in all assets remaining after payment of all debts and other liabilities, subject to the prior rights of any outstanding preferred stock. Holders of our common stock have no preemptive, subscription, redemption or conversion rights. The shares to be issued by us in this offering will be, when issued and paid for, validly issued, fully paid and nonassessable.
There currently is no established public trading market for our common stock.
Preferred Stock
Without taking into account the Capital Reorganization, we are currently authorized to issue 85,560,230 shares of preferred stock. Upon completion of this offering, all issued and outstanding shares of preferred stock will convert into a total of 88,498,510 shares of common stock pursuant to an agreement between us and the holders of our outstanding shares of preferred stock. In consideration for this agreement, as approved by a sub-committee of the board that approved the transaction after obtaining an independent analysis from a third party appraisal firm , we will issue 30,000,000 shares of our
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common stock to the holders of the outstanding shares of all of our preferred stock warrants to purchase shares of our preferred stock immediately prior to the effectiveness of this offering.
Upon the completion of this offering, no shares of preferred stock will be outstanding.
Warrants
Lender Warrants
On June 14, 2004, we issued to Comerica Bank a warrant to purchase up to an aggregate of 115,384 shares of our series B convertible preferred stock at an exercise price of $1.322 per share (which, after the closing of this offering and after giving effect to the Capital Reorganization, will be exercisable for an aggregate of 19,108 shares of our common stock at an exercise price of $7.98 per share). The exercise price and number of shares issuable are subject to adjustment in the event of a reorganization, a consolidation or merger, a recapitalization, a reclassification of our securities, a stock split or combination. This warrant, which is currently fully exercisable, may be exercised on a cash or cashless basis. No part of this warrant has been exercised and it is exercisable for a period ending upon the third anniversary of the effective date of the initial public offering of our common stock.
Over the past four years, we have issued to Hercules Technology Growth Capital, Inc. warrants to purchase up to an aggregate of 2,941,176 shares of our series D convertible preferred stock at an exercise price of $0.425 per share (which, after the closing of this offering and giving effect to the Capital Reorganization, will be exercisable for an aggregate of 329,212 shares of our common stock at an exercise price of $3.80 per share) in connection with a loan and security agreement we are a party to. The exercise price and number of shares issuable are subject to adjustment in the event of a reorganization, a consolidation or merger, a recapitalization, a reclassification of our securities, a stock split or combination. These warrants, which are currently fully exercisable, may be exercised on a cash or cashless basis. No part of these warrants have been exercised and they are exercisable for a period ending upon the earlier to occur of (i) a date ranging from December 19, 2013 to July 16, 2016, (ii) the third anniversary of the effective date of the initial public offering of our common stock or (iii) immediately prior to a merger or consolidation involving us in which we are not the surviving entity.
2007 Bridge Warrants
In October 2007, we issued to certain shareholders, including certain of our principal stockholders and executive officers (see “Principal Stockholders” and “Related Person Transactions”), warrants to purchase an aggregate of up to 1,176,471 shares of our series D convertible preferred stock at an exercise price of $0.425 per share (which, after the closing of this offering and giving effect to the Capital Reorganization, will be exercisable for an aggregate of 131,621 shares of our common stock at an exercise price of $3.80 per share). The exercise price and number of shares issuable under these warrants are subject to adjustment in the event of a reorganization, a consolidation or merger, a recapitalization, a reclassification of our securities, a stock split or combination. These warrants, which are currently fully exercisable, may be exercised on a cash or cashless basis. As of March 23, 2010, w arrants to purchase an aggregate of 457 of our Series D convertible preferred stock have been exercised and the remaining warrants to purchase an aggregate of 1,176,014 shares of our Series D convertible preferred stock are exercisable for a period ending upon the earlier to occur of (i) the date that is six years from the date of issuance of such warrants, (ii) the sale of at least 51% of the voting power of the company in one transaction or related transactions to persons who were not holders of our capital stock prior to such transactions or (iii) the disposition of all or substantially all of our assets in one transaction or related transactions.
2008 and 2009 Series D Warrants
In July, September and October 2008, we issued to certain shareholders, including certain of our principal stockholders and executive officers (see “Principal Stockholders” and “Related Person Transactions”), warrants to purchase an aggregate of up to 6,691,643 shares of our series D convertible preferred stock at an exercise price of
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$0.01 per share. In October and November 2009, we issued additional warrants to purchase an aggregate of up to 12,348,061 shares of our series D convertible preferred stock at an exercise price of $0.01 per share. The exercise price and number of shares issuable under these warrants are subject to adjustment in the event of a reorganization, a consolidation or merger, a recapitalization, a reclassification of our securities, a stock split or combination. These warrants, which are currently fully exercisable, may be exercised on a cash or cashless basis. As of March 23, 2010, warrants to purchase an aggregate of 18,760,371 shares of our series D convertible preferred stock have been exercised and the remaining warrants to purchase an aggregate of 279,333 shares of our series D convertible preferred stock are exercisable for a period ending upon the earlier to occur of (i) the date that is six years from the date of issuance of such warrants or (ii) the initial public offering of our common stock.
Following the consummation of this offering, all outstanding warrants exercisable for shares of our preferred stock that have not terminated will be converted into warrants exercisable for the number of shares of our common stock into which such shares of preferred stock would have converted had such shares been outstanding at the time of this offering.
Restricted Common Stock and Restricted Stock Units
In June 2009, pursuant to the terms of the 2003 Plan, we sold to Mr. Walsh, our Chief Executive Officer, 4,490,920 shares of our common stock at a price per share of $0.01 in connection with the commencement of his employment with our company. These shares are restricted shares, as they are subject to the right of repurchase by the company until the fourth anniversary of the commencement of Mr. Walsh’s employment with us, provided that our right of repurchase terminates as to : (a) 2.0833% of the shares for each month Mr. Walsh remains employed by us ; and (b) all of such shares upon termination of Mr. Walsh’s employment by the Company without “cause” following the second anniversary of the start of his employment or a lesser amount of shares, to be determined based on the termination date, if such termination occurs prior to such second anniversary . All such shares have the same voting rights as all other shares of our common stock and Mr. Walsh holds voting power over all such shares, including those over which we retain a repurchase right. As of March 31, 2010 , without taking into account the Capital Reorganization, 1,590,401 of these shares had vested entirely with Mr. Walsh and 2,900,519 of these shares remained subject to our repurchase right. See “Executive Compensation.”
In January 2010, pursuant to the terms of the 2003 Plan, we issued an aggregate of 5,275,000 restricted stock units (“RSUs”) to certain of our executive officers and independent directors. Each RSU represents the right to receive one share of our common stock. No shares are issued pursuant to these grants prior to the date on which the RSUs vest and recipients of these grants do not have any voting rights with respect to RSUs unless and until certificates representing shares of our common stock (which may be in book entry form) have been issued and recorded on our records. Grants of RSUs generally vest 25% on the first anniversary of the date of grant and 2.083% on each monthly anniversary of such date , except that RSUs previously granted to our independent directors vest 12.5% every three months beginning on the date that is three months after the grant date .
Recent Sales of Unregistered Securities.
Set forth below under “Stock and Convertible Debt Issuances”, “Issuances Pursuant to our 2003 Employee, Director and Consultant Stock Option Plan” and “Prior Sales” is information regarding unregistered securities issued by us within the past three years. Also included is the consideration, if any, received by us for such securities and information relating to the section of the Securities Act, or rule of the SEC, under which exemption from registration was claimed. This information does not give effect to a 1 to 10 reverse stock split based upon our amended and restated certificate of incorporation that we will file with Delaware immediately prior to the closing of this offering
Since January 1, 2007, we have issued and sold unregistered securities in connection with private placements of our securities and option issuances. These securities were deemed to be exempt from registration either pursuant to (a) Section 4(2) of the Securities Act and Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering; or (b) Section 3(b) of the Securities Act and Rule 701promulgated thereunder, as transactions pursuant to a compensatory benefit plan approved by the registrant’s board of directors.
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The recipients of securities in each of the transactions summarized below represented their intention to acquire the securities for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof. All securities described under “Stock and Convertable Debt Issuances”, “Issuances Pursuant to our 2003 Employee, Director and Consultant Stock Option Plan” and “Prior Sales” are deemed restricted securities for purposes of the Securities Act. The instruments representing such issued securities included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer. All recipients either received adequate information about us or had adequate access, through their relationship with us, to information about us. There were no underwriters employed in connection with any of the transactions set forth in Item 15.
Stock and Convertible Debt Issuances
In June 2007, in connection with amending the terms of our outstanding debt, we issued a warrant that was exchanged in July 2008 for a warrant to purchase an aggregate of up to 1,176,471 shares of our series D convertible preferred stock at an exercise price of $0.425 per share to our principal lender in a private placement under Section 4(2) of the Securities Act. Upon the closing of this offering and after giving effect to the Capital Reorganization, this warrant, which is exercisable through December 19, 2013, will convert into a warrant to acquire 131,685 shares of common stock at an exercise price of $3.80 per share.
From October 2007 to June 2008, we sold convertible promissory notes in the aggregate principal amount of $7.0 million and simultaneously issued warrants to purchase an aggregate of up to 1,176,471 shares of our series D convertible preferred stock at an exercise price of $0.425 per share to accredited investors in a private placement under Section 4(2) of the Securities Act. These promissory notes carried interest at the rate of 9%. These notes (including accrued interest) converted into 18,031,777 shares of our series D convertible preferred stock on June 27, 2008. Upon the closing of this offering and after giving effect to the Capital Reorganization, these shares will convert into 2,018,340 shares of common stock and the warrants, which are exercisable through December 2013, will convert into warrants to acquire 131,621 shares of common stock at an exercise price of $3.80 per share.
In July, September and October 2008, we issued and sold an aggregate of 6,792,397 shares of series D convertible preferred stock and warrants to purchase an aggregate of up to 6,691,643 additional shares of series D convertible preferred stock at an exercise price of $0.01 per share to accredited investors in a private placement under Section 4(2) of the Securities Act for aggregate consideration of $2.9 million. Upon the closing of this offering and after giving effect to the Capital Reorganization, these shares will convert into 760,289 shares of common stock and all of these warrants not previously exercised will terminate.
In May 2009, pursuant to the exercise of previously issued warrants, we issued and sold an aggregate of 2,399,996 shares of our series D convertible preferred stock to accredited investors in a private placement under Section 4(2) of the Securities Act at a purchase price of $0.01 per share.
On July 9, 2009, in connection with amending the terms of our outstanding debt, we issued a warrant to purchase an aggregate of up to 705,882 shares of our series D convertible preferred stock at an exercise price of $0.425 per share to our principal lender in a private placement under Section 4(2) of the Securities Act. Upon the closing of this offering and after giving effect to the Capital Reorganization, this warrant, which is exercisable through July 17, 2016, will convert into a warrant to acquire 79,011 shares of common stock at an exercise price of $3.80 per share.
In October and November 2009, we issued and sold an aggregate of 12,348,061 units, each unit consisting of one share of series D convertible preferred stock and a warrant to purchase an additional share of series D preferred stock at an exercise price of $0.01 per share, to accredited investors in a private placement under Section 4(2) of the Securities Act for aggregate consideration of $5.2 million. Upon the closing of this offering and after giving effect to the Capital Reorganization, these shares will convert into 1,234,806 shares of common stock and any of these warrants not previously exercised will terminate.
From November 2009 through March 2010, pursuant to the exercise of previously issued warrants, we issued and sold an aggregate of 16,360,374 shares of our series D convertible preferred stock and 457 shares of our series D convertible preferred stock at purchase prices of $0.01 and $0.425 per share, respectively, to accredited investors in private placements under Section 4(2) of the Securities Act.
Issuances Pursuant to our 2003 Employee, Director and Consultant Stock Option Plan
Pursuant to our 2003 Plan, since January 1, 2007 we have issued an aggregate of 4,490,920 shares of our common stock, which were all issued at a price of $0.01 per share, granted options to purchase an aggregate of 9,909,418 shares of our common stock with exercise prices ranging from
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$0.01 to $0.94 per share, granted options to purchase an aggregate of 10,000 shares of our common stock in February 2010 with an exercise price equal to the price per share of this offering, and issued awards of 5,275,000 restricted stock units in January 2010, which were all issued at a valuation of $0.27 per share, to employees, directors and consultants. Since January 1, 2007, an aggregate of 236,293 shares have been issued upon the exercise of stock options for aggregate consideration of $92,288.61 . All of these shares, options and restricted stock units were issued pursuant to Rule 701 promulgated under Section 3(b) of the Securities Act as transactions pursuant to a compensatory benefit plan approved by the registrant’s board of directors. Some of these options have lapsed or otherwise expired and are no longer exercisable. See “Executive Compensation – Prior Option Grants.”
Prior Sales
The following table summarizes the shares of our common stock, or securities convertible into or exercisable for shares of our common stock, that we issued during the 12-month period prior to the date of this prospectus.
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Date
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Number of Securities
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Type of Securities
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Issue/Exercise Price per Security
|
Purpose of Issuance
|
|
May 14, 2009
|
2,399,996
|
Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
June 23, 2009
|
4,490,920
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Common Stock
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$0.01
|
Equity Incentive
|
|
October 27, 2009
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9,411,769
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Series D Convertible Preferred Stock
|
$0.425
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Corporate Financing
|
|
October 27, 2009
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9,411,766
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Warrants to Purchase Series D Convertible Preferred Stock
|
$0.01
|
Corporate Financing
|
|
November 23, 2009
|
5,038,188
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Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
November 30, 2009
|
2,936,295
|
Series D Convertible Preferred Stock
|
$0.425
|
Corporate Financing
|
|
November 30, 2009
|
2,936,295
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Warrants to Purchase Series D Convertible Preferred Stock
|
$0.01
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Corporate Financing
|
|
December 14, 2009
|
9,025,991
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Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
January 8, 2010
|
135,935
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Common Stock
|
$0.11
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Option Exercise
|
|
January 12, 2010
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75,427
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Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
January 14, 2010
|
40,697
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Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
January 15, 2010
|
56,009
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Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
January 22, 2010
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5,275,000
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Restricted Stock Units
|
—
|
Equity Incentives
|
|
January 22, 2010
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1,626,209
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Options to Purchase Common Stock
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$0.27
|
Equity Incentives
|
|
January 25, 2010
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472,667
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Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
February 18, 2010
|
29,731
|
Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
February 19, 2010
|
10,000 | Options to Purchase Common Stock | * | Equity Incentives |
|
February 22, 2010
|
15,820
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Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
February 22, 2010
|
457
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Series D Convertible Preferred Stock
|
$0.425
|
Warrant Exercise
|
|
March 10, 2010
|
30,563
|
Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
March 11, 2010
|
150,312
|
Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
March 12, 2010
|
708,975
|
Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
March 15, 2010
|
64,682
|
Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
March 16, 2010
|
81,182
|
Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
March 18, 2010
|
160,590
|
Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
March 19, 2010
|
193,241
|
Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
March 21, 2010
|
2,976
|
Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
|
March 23, 2010
|
213,323
|
Series D Convertible Preferred Stock
|
$0.01
|
Warrant Exercise
|
* Options to purchase shares of our common stock granted February 19, 2010 were granted with an exercise price equal to the price per share of this offering.
Registration Rights
The holders of approximately 9,076,057 shares of our common stock (after giving effect to the Capital Reorganization) to be outstanding following this offering are entitled to demand that we register those shares, known as registrable shares, under the Securities Act commencing six months after the closing of this offering. In addition, if we propose to register any more of our securities under the Securities Act after the closing of this offering, either for our own account or for the account of other security holders, the holders of these rights are entitled to notice of that further registration and are entitled to have their registrable shares included in it. These rights, however, are subject to conditions and limitations, including thresholds as to minimum values of shares required for demand registration, limitations on the number of registrations that may be demanded, blackout periods when shares may not be registered and the right of the underwriters of a registered offering of our common stock to limit the number of shares included in the offering. Holders of registrable shares can require us to register shares at our expense and, subject to some conditions and limitations, we are required to use our best efforts to effect requested registrations. Furthermore, holders of these rights may require us to file additional registration statements
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on Form S-3 for the sale of their registrable shares at any time after we qualify for the use of Form S-3. Holders of these rights do not have the right to have their registrable shares registered under the Securities Act as part of this offering. The holders of warrants to purchase up to 510,336 shares of our common stock, assuming the exercise in full of such warrants and the conversion to common stock of any preferred stock issuable thereto, also hold registration rights on such shares.
Section 203 of the Delaware General Corporate Law
In the event we are determined to have listed on a U.S. national exchange upon completion of this offering, or, if the TSX is not determined to be a national exchange and we elect in the future to list our securities on a U.S. national exchange, we will at such time be subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of a corporation’s voting stock. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:
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•
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before the stockholder became interested, the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;
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|
•
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upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances; or
|
|
•
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at or after the time the stockholder became interested, the business combination was approved by the board of directors of the corporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.
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Limitations on Liability and Indemnification of Officers and Directors
Our amended and restated certificate of incorporation and by-laws limit the liability of our directors and officers to the fullest extent permitted by the Delaware General Corporation Law and provide that we will indemnify our directors and officers to the fullest extent permitted by law. We plan to enter into indemnification agreements with all of our current directors and expect to enter into similar agreements with any new directors. We have obtained director and officer liability insurance to cover liabilities our directors and officers may incur in connection with their services to us, and plan to expand the insurance coverage to include matters arising under the securities laws prior to the completion of this offering.
Toronto Stock Exchange
We have applied to list our shares on the TSX under the symbol “NSX.” Listing will be subject to fulfilling all of the listing requirements of the TSX, including the distribution of shares of our common stock to a minimum number of public shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare Trust Company, N.A. at its principal offices in Canton, Massachusetts, and the co-agent is Computershare Investor Services of Canada at its offices in Toronto, Ontario .
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there was no public market for our common stock. We cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect the market price of our common stock. Further, since a large number of shares of our common stock will not be available for sale shortly after this offering because of the contractual and legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after these restrictions lapse, or the perception that such sales may occur, could adversely affect the prevailing market price and our ability to raise equity capital in the future. We cannot assure you that there will be an active public market for our common stock.
Upon completion of this offering, we will have outstanding an aggregate of shares of common stock, assuming the issuance of shares of common stock offered hereby (with no exercise by the underwriters of their over-allotment option) and no exercise of outstanding options or warrants after , 2010. Of these shares, the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, whose sales would be subject to certain limitations and restrictions described below.
The remaining shares of common stock held by existing stockholders are deemed “restricted securities” as that term is defined in Rule 144 and may not be resold except pursuant to an effective registration statement or an applicable exemption from registration, including Rule 144 and Rule 701. of these shares will be subject to “lock-up” agreements described below on the effective date of this offering. On the effective date of this offering and including the shares to be issued in this offering, there will be shares outstanding that are not subject to lock-up agreements and eligible for sale pursuant to Rule 144 or Rule 701. Upon expiration of the lock-up agreements 180 days after the effective date of this offering (unless extended in certain specified circumstances described below), outstanding shares will become eligible for sale, subject in most cases to the limitations of Rule 144. In addition, holders of stock options and warrants could exercise such options or warrants and sell certain of the shares issued upon exercise as described below. See “Underwriting.”
|
Days After Date of this Prospectus
|
Shares Eligible
for Sale
|
Comment
|
|
Upon Effectiveness
|
Shares sold in the offering.
|
|
|
Upon Effectiveness
|
Freely tradable shares saleable under Rule 144 that are not subject to the lock-up.
|
|
|
90 Days
|
Shares saleable under Rule 144 and Rule 701 that are not subject to a lock-up.
|
|
|
180 Days
|
Lock-up released; shares saleable under Rule 144 and Rule 701.
|
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Rule 144
In general, under Rule 144, beginning ninety days after the date of this prospectus, a person who is not our affiliate and has not been our affiliate at any time during the preceding three months will be entitled to sell any shares of our common stock that such person has held for at least six months, including the holding period of any prior owner other than one of our affiliates, without regard to volume limitations. Sales of our common stock by any such person would be subject to the availability of current public information about us if the shares to be sold were held by such person for less than one year.
In addition, under Rule 144, a person may sell shares of our common stock acquired from us immediately upon the completion of this offering, without regard to volume limitations or the availability of public information about us, if:
|
•
|
the person is not our affiliate and has not been our affiliate at any time during the preceding three months; and
|
|
•
|
the person has beneficially owned the shares to be sold for at least one year, including the holding period of any prior owner other than one of our affiliates.
|
Beginning ninety days after the date of this prospectus, our affiliates who have beneficially owned shares of our common stock for at least six months, including the holding period of any prior owner other than another of our affiliates, would be entitled to sell within any three-month period those shares and any other shares they have acquired that are not restricted securities, provided that the aggregate number of shares sold does not exceed the greater of:
|
•
|
1% of the number of shares of our common stock then outstanding, which will equal approximately shares immediately after this offering; or
|
|
•
|
the average weekly trading volume in our common stock on during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.
|
Sales under Rule 144 by our affiliates are generally subject to the availability of current public information about us, as well as certain “manner of sale” and notice requirements.
Rule 701
In general, subject to the lock-up agreements discussed below, under Rule 701, any employee, director, officer, consultant or advisor who purchases shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to sell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period of Rule 144 and, in the case of non-affiliates, without having to comply with the public information provisions of Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and subject to the contractual restrictions described below. Beginning 90 days after the date of this prospectus, these securities may be sold by persons other than affiliates without compliance with the public information and six months minimum holding period requirements, and by affiliates without compliance with the six months minimum holding period requirements, under Rule 144.
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Lock-up Agreements
Holders of over 90% of the shares of our common stock (assuming exercise and conversion of all outstanding options and warrants and calculated prior to consummating this offering), including all of our executive officers, directors and other senior management have agreed that, for a period of six months after the date of this prospectus, they will not, without the consent of the lead underwriters and subject to certain exceptions:
In the event that either (1) during the last 17 days of the “lock-up” period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the “lock-up” period, we announce that we will release earnings results during the 16-day period beginning on the last day of the “lock-up” period, then in either case the expiration of the “lock-up” will be extended until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless the lead underwriters waive, in writing, such an extension. To the extent shares of our common stock are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our common stock could decline.
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•
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issue, offer, sell (including, without limitation, any short sale), contract or agree to sell, hypothecate, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of or transfer, directly or indirectly, or establish or increase a “put equivalent position” or liquidate or decrease a “call equivalent position” within the meaning of Section 16 of the Exchange Act, with respect to, any shares of our common stock, or any securities convertible into or exchangeable or exercisable for, or warrants or other rights to purchase, the foregoing;
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•
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file or cause to become effective a registration statement under the Securities Act, or to file a prospectus in Canada, relating to the offer and sale of any shares of our common stock or securities convertible into or exercisable or exchangeable for shares or our common stock or other rights to purchase shares of our common stock or any other of our securities that are substantially similar to shares or our common stock, or any securities convertible into or exchangeable or exercisable for, or any warrants or other rights to purchase, the foregoing;
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•
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enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of our common stock or any other of our securities that are substantially similar to shares of our common stock, or any securities convertible into or exchangeable or exercisable for, or any warrants or other rights to purchase, the foregoing, whether any such transaction is to be settled by delivery of shares of our common stock or such other securities, in cash or otherwise; or
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|
•
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publicly announce an intention to do any of the foregoing.
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Securities Subject to Contractual Restriction on Transfer
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Designation of Class
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Number of securities held in escrow or that are subject to a contractual restriction on transfer
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Percentage of class
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In addition, we have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file any prospectus or registration statement relating to the offering of any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of the lead underwriters for a period of 180 days after the date of this prospectus, except for the issuance of (a) the shares of our common stock offered in this offering; (b) the shares of our common stock issuable upon the exercise, conversion or exchange of options, warrants, exchangeable shares or other securities outstanding as of the date of this prospectus and disclosed in this prospectus (provided that the grantee of any such options is subject to a similar lock-up provision); and (c) grants of options to purchase shares of our common stock that are reserved for issuance under our stock option plans. In the event that either (1) during the last 17 days of the “lock-up” period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the “lock-up” period, we announce that we will release earnings results during the 16-day period beginning on the last day of the “lock-up” period, then in either case the expiration of the “lock-up” will be extended until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless the lead underwriters waive, in writing, such an extension. To the extent shares of our common stock are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our common stock could decline.
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Registration Rights
Upon completion of this offering, based upon holdings as of March 23, 2010 , the holders of 9,076,057 shares of our common stock (assuming the conversion of all shares of our preferred stock) have rights to require or participate in the registration of those shares under the Securities Act. Please see “Description of Capital Stock—Registration Rights” for a detailed description of these registration rights.
Stock Options
As of March 23, 2010 , options to purchase 1,081,887 shares of our common stock with a weighted average exercise price of $0.50 per share were outstanding after giving effect to our Capital Reorganization. Many of these options are subject to vesting that generally occurs over a period of up to four years following the date of grant. We plan to file registration statements under the Securities Act to register approximately 2,083,707 shares of common stock issuable under our 2003 Plan and shares reserved for issuance under our 2010 Plan, such number to equal (a) 15% of the number of shares of our common stock outstanding after this offering, assuming the exercise of all warrants and options to purchase shares of our common stock and the vesting of all restricted stock units outstanding after this offering and including all shares to be reserved under this plan, (b) less 2,083,707 shares currently subject to outstanding options and restricted stock units, grants of shares of restricted common stock, and exercised options. Those registrations are expected to become effective upon filing with the SEC. Accordingly, common stock registered under those registration statements will, after expiration of any lock-up agreements, be eligible for immediate sale in the open market, except for shares acquired by affiliates, which will be subject to the requirements of Rule 144 described above. See “Shares Eligible for Future Sale – Rule 144.”
Warrants
As of March 23, 2010 , there were fully exercisable warrants to purchase up to 510,390 shares of our common stock (after giving effect to the Capital Reorganization), with a weighted average exercise price of $3.73 per share, of which, warrants to purchase up to 479,941 shares of our common stock will be outstanding upon completion of this offering, while the remaining warrants to purchase up to 30,449 shares of our common stock will terminate if not exercised prior to the completion of this offering. See “Description of Capital Stock – Warrants.”
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UNDERWRITING
Canaccord Financial Ltd. and CIBC World Markets Inc . are acting as co-lead managers and joint bookrunners of the offering and are acting as the representatives of the underwriters named below. Subject to the terms and conditions contained in the underwriting agreement dated , 2010, between us and the underwriters named below, each underwriter has severally agreed to purchase from us, on a firm commitment basis, and we have agreed to sell, the number of shares of common stock indicated opposite the underwriter’s name set forth below:
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Underwriter
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Number of Shares
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| Canaccord Financial Ltd. | |
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CIBC World Markets Inc.
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| Macquarie Capital Markets Canada Ltd. | |
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Total
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The offering is being made in the United States. The shares of common stock will be offered in the United States through those underwriters who are registered to offer the shares for sale in the United States, either directly or indirectly through their U.S. broker-dealer agent affiliates, or such other registered dealers as may be designated by the underwriters. Subject to applicable law, the underwriters may offer the shares of common stock outside of the United States. The underwriters do not intend to confirm sales of the shares to any accounts over which they have discretionary authority.
The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to certain conditions precedent, including the receipt of certain certificates, opinions and letters from us, our counsel and the independent auditors and certain other conditions. The obligations of the underwriters under the terms of the underwriting agreement are conditional and may be terminated at their discretion on the basis of their assessment of any material adverse change in our business or the state of the financial markets and may also be terminated on the occurrence of certain other stated events. The underwriters are, however, severally obligated to take up and pay for all of the shares of common stock that they have agreed to purchase, if any shares of common stock are purchased under the underwriting agreement. The underwriters are not required to take up or pay for the shares covered by the underwriting over-allotment option, as described below.
Over-allotment option
We have granted the underwriters an over-allotment option, exercisable in whole or in part at any time for a period of 30 days from the date of the closing of this offering, to purchase an aggregate number of additional shares of common stock up to the lesser of the underwriters’ over-allocation position determined as of the time of closing of the offering and shares of common stock (being 15% of the number of shares offered by us under this prospectus), solely to cover over-allotments, if any, and for market stabilization purposes. To the extent the underwriters exercise this option, each underwriter will be committed, so long as the conditions of the underwriting agreement are satisfied, to purchase a number of additional shares proportionate to that underwriter’s initial commitment as indicated in the preceding table.
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Commissions and Expenses
The following table shows the public offering price, underwriting commissions and proceeds before expenses to us. The underwriting commissions equal % of the public offering price.
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Total
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Per Share
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Without Exercise of
Over-Allotment
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With Exercise of
Over-Allotment
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Public offering price
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$ | $ | $ | |||||||||
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Underwriting commissions paid by us
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$ | $ | $ | |||||||||
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Proceeds before expenses to us
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$ | $ | $ | |||||||||
The underwriters initially propose to offer the common stock directly to the public at the public offering price presented on the cover page of this prospectus, and to selected dealers, who may include the underwriters, at the public offering price less a selling concession not in excess of $ per share. The underwriters may allow, and the selected dealers may re-allow, a discount from the concession not in excess of $ per share to brokers and dealers. After the underwriters have made a reasonable effort to sell all of the shares at the initial offering price, the offering price may be decreased, and further changed from time to time, to an amount not greater than the initial offering price disclosed in the prospectus, and the compensation realized by the underwriters will be decreased by the amount that the aggregate price paid by purchasers for the shares is less than the gross proceeds paid by the underwriters to us.
We estimate that the total expenses of the offering payable by us, excluding underwriting commissions, will be approximately $ and are payable by us. We will pay all these expenses from the proceeds of the offering.
Lock-Up Agreements
We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file any prospectus or registration statement relating to the offering of any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of the lead underwriters for a period of 180 days after the date of this prospectus.
Each director and officer and other stockholders holding in the aggregate more than 90% of our outstanding common stock (or securities exercisable, exchangeable or convertible for common stock) on a fully-diluted basis has agreed that, without the prior written consent of the lead underwriters on behalf of the underwriters, for a period of 180 days after the date of this prospectus they will not:
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•
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offer, sell, contract to sell, secure, pledge, grant or sell any option, right or warrant to purchase, or otherwise lend, transfer or dispose of, or announce any intention to do so, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock; or
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•
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make any short sale, engage in any hedging transaction, or enter into any swap or other arrangement that transfers to another any of the economic consequences of ownership of the shares of common stock.
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The 180 day restrictions described in the immediately preceding paragraphs do not apply to: (a) the sale of shares of common stock to the underwriters; (b) the issuance by us of the shares of our common stock issuable upon the exercise, conversion or exchange of options, warrants, exchangeable shares or other securities outstanding as of the date of this prospectus and disclosed in this prospectus (provided that the grantee of any such options is subject to a similar lock-up provision); (c) transactions by stockholders not deemed to be our affiliates relating to shares of common stock or other securities acquired in open market transactions after the completion of this offering; (d) grants by us of options to purchase shares of common stock pursuant to employee or management stock option, incentive or other plans or arrangements described in this prospectus; (e) transfers of shares of common stock or any security exercisable for shares of common stock as a bona fide gift or gifts; (f) distributions of shares of common stock or any security exercisable for shares of common stock to corporations, partnerships, limited liability companies or other entities to the extent that such entities are wholly-owned by the stockholder that agrees to be bound by the restrictions described in the preceding paragraphs; (g) tenders of shares of common stock made in response to a bona fide third party take-over bid made to all holders of shares of common stock or similar acquisition transaction; (h) any transfer to an immediate family member or an entity of which the transferor or an immediate family member of the transferor is the sole beneficiary; or (i) a pledge of shares of common stock or any security exercisable for shares of common stock to a bank or other financial institution for the purpose of giving collateral for a debt made in good faith; provided, that in the case of any transfer, distribution or pledge pursuant to clause (e), (f), (h) or (i), each donee, distributee, transferee or pledgee agrees in writing to be bound by the transfer restrictions described in the preceding paragraphs and no filing by any party under the Exchange Act shall be required or shall be voluntarily made in connection with subsequent sales of shares of common stock or other securities acquired in such transfer or distribution.
The 180 day restricted period beginning from the date of the final prospectus will be extended if:
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•
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during the last 17 days of the 180 day restricted period we issue an earnings release or material news or a material event relating to us occurs, or
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•
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prior to the expiration of the 180 day restricted period, we announce that we will release earnings results during the 16 day period beginning on the last day of the 180 day restricted period.
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In either such case, the restrictions described above will continue to apply until the expiration of the 18 day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
Registration Rights
In addition, upon completion of this offering, the holders of 9,076,057 shares of our common stock and warrants to purchase up to 479,941 shares of our common stock will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the 180-day lock-up arrangement described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of the registration. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See “Description of Capital Stock—Registration Rights” and “Shares Eligible for Future Sale—Registration Rights.”
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Prior to the offering, there has been no public market for our common stock. The initial public offering price was negotiated between us and the underwriters. In addition to prevailing market conditions, the factors considered in determining the initial public offering price are our financial information, our historical performance, our future prospects and the future prospects of our industry in general, our capital structure, estimates of our business potential and earnings prospects, the present state of our development and an assessment of our management and the consideration of the above factors in relation to market valuation of companies engaged in businesses and activities similar to ours.
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the underwriters’ representatives may engage in transactions that stabilize the price of our common stock, such as bids or purchases to peg, fix or maintain that price.
In connection with this offering, the underwriters may engage in stabilizing transactions, which involve making bids for, or purchasing and selling shares of, our common stock in the open market for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of the common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be “covered” shorts, which are short positions in an amount not greater than the underwriters’ over-allotment option referred to above, or may be “naked” shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the over-allotment option. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.
The underwriters’ representatives may also impose a penalty bid on underwriters and selling group members. This means that if the underwriters’ representatives purchase shares of common stock in the open market to reduce an underwriter’s short position or to stabilize the price of such shares of common stock, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares of common stock. The imposition of a penalty bid may also affect the price of the shares of common stock in that it discourages resales of those shares of common stock.
An active trading market for our common stock may not develop. It is also possible that after the offering, the shares of common stock will not trade in the public market at or above the initial public offering price. Any of the underwriting activities mentioned in this section may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exit in the open market. Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make any representation that the underwriters’ representatives or lead manager will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice. The underwriters
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may conduct these transactions on the exchange on which our common stock is listed or in the over-the-counter market, or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.
Indemnification
We have agreed to indemnify the underwriters against certain liabilities relating to the offering, including liabilities under the Securities Act, liabilities under the securities laws in the applicable provinces of Canada and liabilities arising from breaches of the representations and warranties contained in the underwriting agreement, and to contribute to payments that the underwriters may be required to make for these liabilities.
NOTICE TO INVESTORS
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the shares of our common stock offered by this prospectus in any jurisdiction where action for that purpose is required. The shares of our common stock offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares of our common stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of our common stock offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
LEGAL MATTERS
Certain matters regarding U.S. law and the validity of the shares of common stock being offered by this prospectus will be passed upon for us by our counsel, Gennari Aronson, LLP, Needham, Massachusetts. Certain matters regarding Canadian law will be passed upon for us by Fraser Milner Casgrain LLP, Ottawa, Ontario. Certain matters regarding intellectual property matters will be passed upon for us by Perman & Green, LLP of Fairfield, Connecticut. Matters regarding Canadian law will be passed upon for the underwriters by Stikeman Elliott LLP, Toronto, Ontario and by Hodgson Russ LLP, Toronto, Ontario with respect to certain U.S. legal matters.
The financial statements of NEXX Systems, Inc. as of and for the years ended December 31, 2009 and December 31, 2007, appearing in this prospectus and registration statement have been audited by McGladrey & Pullen, LLP, an independent registered public accounting firm, as stated in their report appearing elsewhere herein, and are included in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
The financial statements of NEXX Systems, Inc. at and for the year ended December 31, 2008 appearing in this prospectus and registration statement have been audited by Parent, McLaughlin & Nangle, Certified Public Accountants, Inc., an independent registered public accounting firm, as stated in their report appearing elsewhere herein, and are included in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
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As of the date hereof, the partners, counsel and associates of each of Gennari Aronson, LLP, Fraser Milner Casgrain LLP, Perman & Green, LLP, Stikeman Elliott LLP and Hodgson Russ LLP beneficially own directly or indirectly, respectively, less than 1% of our common stock or any common stock of any of our affiliates or associates.
CHANGE IN INDEPENDENT REGISTERED ACCOUNTING FIRM
On November 13, 2009, our board of directors approved the dismissal of Parent, McLaughlin & Nangle, Certified Public Accountants, Inc. (“PMN”) as our independent registered public accounting firm, which was immediately effective, and appointed McGladrey & Pullen, LLP (“McGladrey”) as our independent registered public accounting firm for the year ended December 31, 2009.
PMN’s report on our financial statements for the year ended December 31, 2008 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During our fiscal year ended December 31, 2008 and any subsequent interim period preceding the dismissal of PMN, there were no disagreements with PMN on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to PMN’s satisfaction, would have caused PMN to make reference to the matter in their report, and there have been no “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-k.
Prior to the engagement of McGladrey, we did not consult with such firm regarding the application of accounting principles to a specific completed or contemplated transaction, or any matter that was either the subject of a disagreement or a reportable event. We also did not consult with McGladrey regarding the type of audit opinion that might be rendered on our financial statements and no oral or written report was provided by McGladrey.
We have provided PMN with a copy of this disclosure prior to its filing with the SEC and have requested PMN to furnish us with a letter addressed to the SEC stating whether it agrees with the above statements regarding PMN and, if not, stating the respects in which it does not agree. A copy of this letter, dated April 6, 2010, which states that PMN agrees with these statements, is filed as Exhibit 16.1 to the registration statement of which this prospectus forms a part.
We have filed with the SEC a registration statement on Form S-1 (File Number 333- 164873 ) under the Securities Act that registers the shares of our common stock to be sold in this offering. This prospectus, which constitutes part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules filed as part thereof. For further information with respect to us and our common stock, we refer you to the registration statement and to its exhibits and. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit.
Upon the closing of the offering, we will be subject to the informational requirements of the Exchange Act and we intend to file annual, quarterly and current reports, proxy statements and other information with the SEC. The reports and other information we file with the SEC can be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Copies of these materials can be obtained at prescribed rates from the SEC’s Public Reference Room at such address. You may obtain information regarding the operation of the public reference room by calling 1-800-SEC-0330. The SEC also maintains a web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
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Glossary of Technical Terms
Chemical vapor deposition (CVD) is a chemical process used to produce high-purity, high-performance solid materials. The process is often used in the semiconductor industry to produce thin films. In a typical CVD process, the wafer (substrate) is exposed to one or more volatile precursors, which react and/or decompose on the substrate surface to produce the desired deposit.
Electrochemical deposition (ECD) is the technology used to deposit a dissolved or suspended substance on an electrode by electrolysis (the passage of a direct electric current through an ion-containing solution). Electrolysis produces chemical changes at the electrodes.
Electron Cyclotron Resonance (ECR) is a technology utilizing microwave technologies to create and heat plasma gases by microwaves with a frequency corresponding to the strength of a magnetic field applied from the outside. Inside the plasma, the heated electrons collide with the gas molecules and successively ionize them. Multiply charged ions are then extracted by means of an electrostatic extraction system.
Flip chip technology is a chip packaging technique in which the active area of the chip is “flipped over” facing downward. Instead of facing up and bonded to the package leads with wires from the outside edges of the chip, any surface area of the flip chip can be used for interconnection, which is typically done through metal bumps of solder, copper or nickel/gold. These “bumps” or “balls” are soldered onto the package substrate or the circuit board itself and underfilled with epoxy. The flip chip allows for a large number of interconnects with shorter distances than wire, which greatly reduces inductance (the property of an electric circuit or device whereby an electromotive force is created by a change of current in it or in a circuit near it.).
An integrated circuit (IC), sometimes called a chip or microchip, is a semiconductor wafer on which thousands or millions of tiny resistors, capacitors, and transistors are fabricated.
A microchip (sometimes just called a “chip”) is a unit of packaged computer circuitry (usually called an integrated circuit) that is manufactured from a material such as silicon at a very small scale. Microchips are made for program logic (logic or microprocessor chips) and for computer memory (memory or RAM chips). Microchips are also made that include both logic and memory and for special purposes such as analog-to-digital conversion, bit slicing, and gateways.
Packaging is the final stage of semiconductor device fabrication, followed by IC testing. In the integrated circuit industry it is called simply packaging and sometimes semiconductor device assembly, or simply assembly. The term packaging generally comprises the steps or the technology of mounting and interconnecting of devices.
Physical vapor deposition (PVD) is a variety of vacuum deposition and is a general term used to describe any of a variety of methods to deposit thin films by the condensation of a vaporized form of the material onto various surfaces (e.g., onto semiconductor wafers). The coating method involves purely physical processes such as high temperature vacuum evaporation or plasma sputter bombardment rather than involving a chemical reaction at the surface to be coated as in chemical vapor deposition.
A semiconductor is a substance, usually a solid chemical element or compound, that can conduct electricity under some conditions but not others, making it a good medium for the control of electrical current. Its conductance varies depending on the current or voltage applied to a control electrode, or on the intensity of irradiation. The specific properties of a semiconductor depend on the impurities, or dopants, added to it.
A-1
Solder bumping is a technique for attaching chips to a printed circuit board. Tiny globes of solder are attached to the bonding pads on the chip and then melted in place on the board.
Sputtering is a physical vapor deposition (PVD) metallization technology, in which ions of an inert gas such as argon, are electrically accelerated in a high vacuum toward a target of pure metal, such as tantalum or copper. Upon impact, the ions of inert gas sputter off the target material, and the charged gas is then deposited as a thin film on the silicon wafer. PVD processes are used in front end integrated circuit fabrication to create the precise barrier and seed layers required for interconnect applications, as well as conductive wires in an aluminum manufacturing process.
Through-silicon vias (TSV) allow different chip components to be packaged much closer together for faster, smaller, and lower-power systems. TSV enables the move from horizontal 2-D chip layouts to 3-D chip stacking, which takes chips and memory devices that traditionally sit side by side on a silicon wafer and stacks them together on top of one another. The result is a compact sandwich of components that dramatically reduces the size of the overall chip package and boosts the speed at which data flows among the functions on the chip. The new chip eliminates the need for long-metal wires that connect 2-D chips together, instead relying on through-silicon vias — essentially vertical connections etched through the silicon wafer and filled with metal. These vias allow multiple chips to be stacked together, so more information can be passed between the chips. The technique shortens the distance information on a chip needs to travel by 1000 times, and allows for the addition of many more pathways for that information to flow compared to 2-D chips.
Wire bonding is a method of making interconnections between an integrated circuit (IC) and a printed circuit board (PCB) during semiconductor device fabrication.
A-2
Index
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Page
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Reports of independent registered public accounting firms
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F-2
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Consolidated balance sheets as of December 31, 2009, December 31, 2008 and December 31, 2007
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F-4
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Consolidated statements of operations for the years ended December 30, 2009, 2008 and 2007
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F-5
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Consolidated statements of preferred stock, stockholders’ equity (deficit) and comprehensive income (loss) for the years ended December 31, 2009, 2008 and 2007
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F-6
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Consolidated statements of cash flows for the years ended December 31, 2009, 2008 and 2007
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F-8
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Notes to consolidated financial statements
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F-10
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F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
NEXX Systems, Inc.
Billerica, MA
We have audited the accompanying consolidated balance sheet of NEXX Systems, Inc. and Subsidiary (the “Company”) as of December 31, 2009, and the related consolidated statements of operations, preferred stock, stockholders' equity (deficit) and comprehensive income (loss), and cash flows for the year then ended. We have also audited the accompanying consolidated balance sheet of NEXX Systems, Inc. and subsidiary as of December 31, 2007, and the related consolidated statements of operations, preferred stock, stockholders' equity (deficit) and comprehensive loss, and cash flows for the year then ended . These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NEXX Systems, Inc. and subsidiary as of December 31, 2009 and December 31, 2007, and the results of their operations and their cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 16 to the financial statements, the 2007 financial statements have been restated to correct a misstatement.
/s/ McGladrey & Pullen, LLP
Burlington, MA
April 6, 2010
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of NEXX Systems, Inc.
We have audited the accompanying balance sheet of NEXX Systems, Inc. as of December 31, 2008, and the related statements of operations, preferred stock, stockholders’ equity (deficit) and comprehensive loss, and cash flows for the year then ended. NEXX Systems, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2008 financial statements referred to above present fairly, in all material respects, the financial position of NEXX Systems, Inc. as of December 31, 2008, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Parent, McLaughlin & Nangle
April 28, 2009, except for changes explained in Note 16, as to which the date is February 11, 2010.
Boston, Massachusetts
F-3
NEXX Systems, Inc. and Subsidiary
Consolidated Balance Sheets
|
December 31,
|
||||||||||||
|
Assets
|
2009
|
2008
(Restated)
|
2007
(Restated)
|
|||||||||
|
Current Assets:
|
||||||||||||
|
Cash and cash equivalents
|
$ | 4,014,473 | $ | 3,990,233 | $ | 1,623,107 | ||||||
|
Accounts receivable
|
10,265,568 | 4,627,203 | 7,784,585 | |||||||||
|
Inventories
|
6,754,405 | 5,786,538 | 5,783,856 | |||||||||
|
Prepaid expenses and other current assets
|
293,794 | 176,608 | 582,892 | |||||||||
|
Total Current Assets
|
21,328,240 | 14,580,582 | 15,774,440 | |||||||||
|
Equipment and Improvements, net
|
1,945,793 | 2,891,839 | 4,132,166 | |||||||||
|
Purchased Developed Technology, Net of Accumulated Amortization of $368,358 in 2009, $313,786 in 2008 and $259,214 in 2007
|
13,642 | 68,214 | 122,786 | |||||||||
|
Deferred Financing Costs, Net of Accumulated Amortization of $863,205 in 2009, $472,829 in 2008 and $167,588 in 2007
|
199,285 | 362,192 | 326,938 | |||||||||
|
Deferred Offering Costs
|
244,916 | — | — | |||||||||
|
Long Term Rent Deposit
|
313,660 | 313,660 | — | |||||||||
|
Total Assets
|
$ | 24,045,536 | $ | 18,216,487 | $ | 20,356,330 | ||||||
|
Liabilities, Redeemable Stock and Stockholders' Equity (Deficit)
|
||||||||||||
|
Current Liabilities:
|
||||||||||||
|
Accounts payable
|
$ | 6,586,373 | $ | 2,718,621 | $ | 3,244,304 | ||||||
|
Accrued expenses
|
4,307,884 | 2,251,356 | 2,059,641 | |||||||||
|
Income taxes payable
|
28,768 | — | — | |||||||||
|
Deferred revenue and customer deposits
|
1,957,044 | 5,108,420 | 1,464,899 | |||||||||
|
Current portion of long-term debt
|
4,064,865 | 7,093,852 | 7,348,374 | |||||||||
|
Current portion of obligations under capital leases
|
— | 52,441 | 89,058 | |||||||||
|
Total Current Liabilities
|
16,944,934 | 17,224,690 | 14,206,276 | |||||||||
|
Long-Term Debt, Net of Current Portion
|
— | 564,865 | 7,734,313 | |||||||||
|
Obligations under Capital Leases, Net of Current Portion
|
— | — | 52,441 | |||||||||
|
Preferred Stock Warrant Liability
|
1,784,763 | 3,465,072 | 317,000 | |||||||||
|
Total Liabilities
|
18,729,697 | 21,254,627 | 22,310,030 | |||||||||
|
Commitments and Contingencies
|
||||||||||||
|
Preferred stock:
|
||||||||||||
|
Series A redeemable convertible preferred stock, $0.001 par value;
|
||||||||||||
|
1,550,000 shares authorized, issued, and outstanding, net of issuance costs (liquidation and redemption value of $2,480,000)
|
2,451,036 | 2,451,036 | 2,451,036 | |||||||||
|
Series B redeemable convertible preferred stock, $0.001 par value;
|
||||||||||||
|
7,810,072 shares authorized and 7,669,880 shares issued and outstanding, net of issuance costs (liquidation and redemption value of $10,139,581)
|
9,678,961 | 9,678,961 | 9,678,961 | |||||||||
|
Series C redeemable convertible preferred stock, $0.001 par value;
|
||||||||||||
|
8,216,011 shares authorized issued and outstanding, net of issuance costs (liquidation and redemption value of $9,982,453)
|
9,528,575 | 9,528,575 | 9,528,575 | |||||||||
|
Series D redeemable convertible preferred stock, $0.001 par value;
|
||||||||||||
|
67,984,147 shares authorized and 53,636,413 and 24,824,174 shares issued and outstanding, net of issuance costs at December 31, 2009 and 2008 (liquidation and redemption value at December 31, 2009 and 2008 of $22,795,476 and $10,550,273)
|
14,238,234 | 7,254,196 | — | |||||||||
|
Stockholders' Equity (deficit):
|
||||||||||||
|
Common Stock:
|
||||||||||||
|
$.001 par value, 123,974,712 shares authorized, 19,198,059,14,707,139 and 14,707,139 shares issued and outstanding at December 31, 2009, 2008 and 2007
|
19,198 | 14,707 | 14,707 | |||||||||
|
Additional paid-in capital
|
11,546,794 | 11,350,541 | 11,155,650 | |||||||||
|
Accumulated other comprehensive income (loss)
|
(4,128 | ) | 581 | 515 | ||||||||
|
Accumulated deficit
|
(42,124,857 | ) | (43,316,737 | ) | (34,783,144 | ) | ||||||
| (30,562,993 | ) | (31,950,908 | ) | (23,612,272 | ) | |||||||
|
Less:
|
||||||||||||
|
Receivable from stockholder
|
(17,974 | ) | — | — | ||||||||
| (30,580,967 | ) | (31,950,908 | ) | (23,612,272 | ) | |||||||
|
Total Liabilities, Redeemable Stock and Stockholders' Equity (deficit)
|
$ | 24,045,536 | $ | 18,216,487 | $ | 20,356,330 | ||||||
See Notes to Consolidated Financial Statements
F-4
NEXX Systems, Inc. and Subsidiary
Consolidated Statements of Operations
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
(Restated)
|
2007
|
||||||||||
|
Net Sales
|
$ | 38,192,396 | $ | 18,329,850 | $ | 25,702,199 | ||||||
|
Cost of Sales
|
20,579,410 | 10,959,083 | 14,079,798 | |||||||||
|
Gross Profit
|
17,612,986 | 7,370,767 | 11,622,401 | |||||||||
|
Operating Expenses:
|
||||||||||||
|
Selling, general, and administrative
|
8,960,115 | 7,983,459 | 7,363,643 | |||||||||
|
Research and development
|
6,395,607 | 6,497,993 | 7,828,756 | |||||||||
|
Total operating expenses
|
15,355,722 | 14,481,452 | 15,192,399 | |||||||||
|
Income / (Loss) from Operations
|
2,257,264 | (7,110,685 | ) | (3,569,998 | ) | |||||||
|
Other Income (Expense):
|
||||||||||||
|
Interest income
|
5,338 | 22,427 | 42,276 | |||||||||
|
Interest expense
|
(1,218,688 | ) | (1,418,364 | ) | (1,289,094 | ) | ||||||
|
Other income (expense)
|
6,514 | (48 | ) | 5,011 | ||||||||
|
Unrealized gain (loss) on preferred stock warrant liability
|
170,220 | (26,923 | ) | — | ||||||||
|
Other income (expense), net
|
(1,036,616 | ) | (1,422,908 | ) | (1,241,807 | ) | ||||||
|
Income (Loss) before income taxes
|
1,220,648 | (8,533,593 | ) | (4,811,805 | ) | |||||||
|
Provision for income taxes
|
28,768 | — | — | |||||||||
|
Net Income (Loss)
|
$ | 1,191,880 | $ | (8,533,593 | ) | $ | (4,811,805 | ) | ||||
|
Net income (loss) per share attributable to common stockholders
|
||||||||||||
|
- basic
|
$ | 0.08 | $ | (0.58 | ) | $ | (0.33 | ) | ||||
|
- diluted
|
$ | 0.01 | $ | (0.58 | ) | $ | (0.33 | ) | ||||
|
Weighted average number of common shares outstanding
|
||||||||||||
|
- basic
|
14,992,155 | 14,707,139 | 14,667,893 | |||||||||
|
- diluted
|
83,328,214 | 14,707,139 | 14,667,893 | |||||||||
|
Shares used in computing pro forma basic and diluted net income per common share (unaudited)
|
14,233,275 | |||||||||||
|
Pro forma net income per common share, diluted (unaudited)
|
$ | 0.08 | ||||||||||
See Notes to Consolidated Financial Statements
F-5
NEXX Systems, Inc. and Subsidiary
Consolidated Statement of Preferred Stock, Stockholders' Equity (Deficit) and Comprehensive Income (Loss)
|
Redeemable Convertible Preferred Stock
|
||||||||||||||||||||||||||||||||
|
Series A
|
Series B
|
Series C
|
Series D
|
|||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||
|
BALANCES, January 1, 2007
|
1,550,000 | $ | 2,451,036 | 7,669,880 | $ | 9,678,961 | 8,216,011 | $ | 9,528,575 |
—
|
$ |
—
|
||||||||||||||||||||
|
Exercise of stock options
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Principal payments on notes receivable from stockholder
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Share-based payment compensation
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Accumulated Other Comprehensive Income/(Loss)
|
||||||||||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
BALANCES, December 31, 2007
|
1,550,000 | 2,451,036 | 7,669,880 | 9,678,961 | 8,216,011 | 9,528,575 | — | — | ||||||||||||||||||||||||
|
Issuance of preferred stock net of issuance costs of $262,290
|
— | — | — | — | — | — | 24,824,174 | 7,254,196 | ||||||||||||||||||||||||
|
Accumulated Other Comprehensive Income/(Loss)
|
||||||||||||||||||||||||||||||||
|
Share-based payment compensation
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
BALANCES, December 31, 2008
|
1,550,000 | 2,451,036 | 7,669,880 | 9,678,961 | 8,216,011 | 9,528,575 | 24,824,174 | 7,254,196 | ||||||||||||||||||||||||
|
Exercise of Restricted Stock
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Received on Receivable from Stockholder
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Issuance of preferred stock net of issuance costs of $37,372
|
— | — | — | — | — | — | 28,812,239 | 6,984,038 | ||||||||||||||||||||||||
|
Accumulated Other Comprehensive Income/(Loss)
|
||||||||||||||||||||||||||||||||
|
Share-based payment compensation
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
BALANCES, December 31, 2009
|
1,550,000 | $ | 2,451,036 | 7,669,880 | $ | 9,678,961 | 8,216,011 | $ | 9,528,575 | 53,636,413 | $ | 14,238,234 | ||||||||||||||||||||
See Notes to Consolidated Financial Statements
F-6
NEXX Systems, Inc. and Subsidiary
Consolidated Statement of Preferred Stock, Stockholders' Equity (Deficit) and Comprehensive Income (Loss) (continued)
|
Stockholders' Equity
|
||||||||||||||||||||||||||||||||
|
Common Stock
|
||||||||||||||||||||||||||||||||
| Years Ended December 31, 2009, 2008 and 2007 | ||||||||||||||||||||||||||||||||
|
Shares
|
Par Value
|
Additional Paid-In Capital
|
Accumulated Other Comprehensive Income/(Loss)
|
Accumulated Deficit
|
Receivable From Stockholder
|
Total Stockholders' Equity (Deficiency)
|
Total
Comprehensive Income (Loss) |
|||||||||||||||||||||||||
|
BALANCES, January 1, 2007
|
14,606,783 | $ | 14,607 | $ | 10,869,789 | $ | — | $ | (29,971,339 | ) | $ | (168,833 | ) | $ | (19,255,776 | ) | $ | (1,470,832 | ) | |||||||||||||
|
Exercise of stock options
|
100,356 | 100 | 90,693 | — | — | — | 90,793 | — | ||||||||||||||||||||||||
|
Principal payments on notes receivable from stockholder
|
— | — | — | — | — | 168,833 | 168,833 | — | ||||||||||||||||||||||||
|
Share-based payment compensation
|
— | — | 195,168 | — | — | — | 195,168 | — | ||||||||||||||||||||||||
|
Accumulated Other Comprehensive Income/(Loss)
|
515 | 515 | 515 | |||||||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | (4,811,805 | ) | — | (4,811,805 | ) | (4,811,805 | ) | |||||||||||||||||||||
|
BALANCES, December 31, 2007
|
14,707,139 | 14,707 | 11,155,650 | 515 | (34,783,144 | ) | — | (23,612,272 | ) | (4,811,290 | ) | |||||||||||||||||||||
|
Issuance of preferred stock net of issuance costs of $262,290
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Accumulated Other Comprehensive Income/(Loss)
|
66 | 66 | 66 | |||||||||||||||||||||||||||||
|
Share-based payment compensation
|
— | — | 194,891 | — | — | — | 194,891 | — | ||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | (8,533,593 | ) | — | (8,533,593 | ) | (8,533,593 | ) | |||||||||||||||||||||
|
BALANCES, December 31, 2008
|
14,707,139 | 14,707 | 11,350,541 | 581 | (43,316,737 | ) | — | (31,950,908 | ) | (8,533,527 | ) | |||||||||||||||||||||
|
Exercise of Restricted Stock
|
4,490,920 | 4,491 | 40,418 | — | — | (44,909 | ) | — | — | |||||||||||||||||||||||
|
Received on Receivable from Stockholder
|
— | — | — | — | — | 26,935 | 26,935 | — | ||||||||||||||||||||||||
|
Issuance of preferred stock net of issuance costs of $37,372
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Accumulated Other Comprehensive Income/(Loss)
|
(4,709 | ) | (4,709 | ) | (4,709 | ) | ||||||||||||||||||||||||||
|
Share-based payment compensation
|
— | — | 155,835 | — | — | — | 155,835 | — | ||||||||||||||||||||||||
|
Net income
|
— | — | — | — | 1,191,880 | — | 1,191,880 | 1,191,880 | ||||||||||||||||||||||||
|
BALANCES, December 31, 2009
|
19,198,059 | $ | 19,198 | $ | 11,546,794 | $ | (4,128 | ) | $ | (42,124,857 | ) | $ | (17,974 | ) | $ | (30,580,967 | ) | $ | 1,187,171 | |||||||||||||
See Notes to Consolidated Financial Statements
F-7
NEXX Systems, Inc. and Subsidiary
Consolidated Statements of Cash Flows
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
(Restated)
|
2007
(Restated)
|
||||||||||
|
Cash Flows from Operating Activities:
|
||||||||||||
|
Net income (loss)
|
$ | 1,191,880 | $ | (8,533,593 | ) | $ | (4,811,805 | ) | ||||
|
Adjustments to reconcile net profit (loss) to net cash used in operating activities:
|
||||||||||||
|
Depreciation and amortization of fixed assets
|
900,300 | 1,424,772 | 1,438,729 | |||||||||
|
Loss on disposal of equipment and improvements
|
— | 4,048 | — | |||||||||
|
Amortization on intangibles
|
444,949 | 359,813 | 214,052 | |||||||||
|
Share-based payment compensation
|
155,835 | 194,891 | 195,168 | |||||||||
|
Unrealized (gain) loss on preferred stock warrant liability
|
(170,220 | ) | 26,923 | — | ||||||||
|
Noncash interest increasing notes payable to stockholders
|
— | 127,644 | — | |||||||||
|
(Increase) decrease in:
|
||||||||||||
|
Accounts receivable
|
(5,638,365 | ) | 3,157,382 | (6,278,886 | ) | |||||||
|
Inventories
|
(1,341,145 | ) | (1,682,507 | ) | (769,882 | ) | ||||||
|
Prepaid expenses and other current assets
|
(117,186 | ) | 406,284 | (436,619 | ) | |||||||
|
Long-term rent deposit
|
— | (313,660 | ) | — | ||||||||
|
Increase (decrease) in:
|
||||||||||||
|
Accounts payable
|
3,867,752 | (525,683 | ) | (99,760 | ) | |||||||
|
Accrued expenses
|
2,050,576 | (58,285 | ) | 765,396 | ||||||||
|
Accrued taxes payable
|
28,768 | — | — | |||||||||
|
Deferred revenue and customer deposits
|
(3,151,376 | ) | 3,643,521 | (3,981,573 | ) | |||||||
|
Total adjustments
|
(2,970,112 | ) | 6,765,143 | (8,953,375 | ) | |||||||
|
Net cash used in operating activities
|
(1,778,232 | ) | (1,768,450 | ) | (13,765,180 | ) | ||||||
|
Cash Flows from Investing Activities:
|
||||||||||||
|
Purchases of equipment and improvements
|
(99,940 | ) | (867,283 | ) | (344,576 | ) | ||||||
|
Net book value of demo equipment sold
|
518,963 | 2,358,615 | 2,396,765 | |||||||||
|
Net cash provided by investing activities
|
419,023 | 1,491,332 | 2,052,189 | |||||||||
|
Cash Flows from Financing Activities:
|
||||||||||||
|
Proceeds from exercise of common stock options
|
— | — | 90,793 | |||||||||
|
Proceeds from issuance of Series D preferred stock and related warrants
|
5,412,498 | 3,391,845 | — | |||||||||
|
Payments of stock issuance costs
|
(37,372 | ) | (262,290 | ) | — | |||||||
|
Payments received on notes receivable from stockholder
|
— | — | 168,833 | |||||||||
|
Payments on capital leases
|
(52,441 | ) | (89,058 | ) | (82,718 | ) | ||||||
|
Proceeds from term debt facility
|
— | — | 1,000,000 | |||||||||
|
Proceeds (payments) on revolver debt facility, net
|
(1,500,000 | ) | (3,000,000 | ) | 7,000,000 | |||||||
|
Payments on term debt facility
|
(2,093,852 | ) | (1,898,472 | ) | (442,811 | ) | ||||||
|
Payment received on receivable from stockholder
|
26,935 | — | — | |||||||||
|
Proceeds from notes payable to shareholders
|
— | 4,505,518 | 2,500,000 | |||||||||
|
Deferred financing costs
|
(128,645 | ) | (3,365 | ) | (56,453 | ) | ||||||
|
Deferred offering costs
|
(244,916 | ) | — | — | ||||||||
|
Net cash provided byfinancing activities
|
1,382,207 | 2,644,178 | 10,177,644 | |||||||||
|
Effects of exchange rates on cash
|
1,242 | 66 | 515 | |||||||||
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
24,240 | 2,367,126 | (1,534,832 | ) | ||||||||
|
Cash and Cash Equivalents, beginning of year
|
3,990,233 | 1,623,107 | 3,157,939 | |||||||||
|
Cash and Cash Equivalents, end of year
|
$ | 4,014,473 | $ | 3,990,233 | $ | 1,623,107 | ||||||
See Notes to Consolidated Financial Statements
F-8
NEXX Systems, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Supplemental Disclosures:
|
||||||||||||
|
Interest paid
|
$ | 834,330 | $ | 1,226,345 | $ | 1,007,441 | ||||||
|
Value of warrants issued
|
$ | 98,823 | $ | 87,130 | $ | 126,436 | ||||||
|
Inventory transferred to Demo Equipment
|
$ | 373,278 | $ | 1,679,825 | $ | 2,240,876 | ||||||
|
Capital lease obligations incurred
|
$ | — | $ | — | $ | 169,386 | ||||||
|
Accrued interest included in note payable stockholder
|
$ | — | $ | 127,644 | $ | 25,498 | ||||||
|
Deferred financing costs included in accrued expenses
|
$ | — | $ | 250,000 | $ | — | ||||||
|
Conversion of notes payable and accrued interest to stockholders to Series D preferred stock and related warrants
|
$ | — | $ | 7,158,660 | $ | — | ||||||
|
Issuance of 4,490,920 shares of common stock in exchange for a receivable from stockholder
|
$ | 44,909 | $ | — | $ | — | ||||||
See Notes to Consolidated Financial Statements
F-9
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1. Description of the Company
Operations
NEXX Systems, Inc. (“NEXX” or “we” or the “Company”) was formed under Delaware law as a limited liability company on August 7, 2001 and converted to a “C” Corporation in 2002. The Company provides process solutions designed for semiconductor wafer level packaging customers located both in the United States and in international markets. NEXX designs, develops, manufactures, and markets two product lines (Apollo and Stratus) of process equipment focused on the needs of semiconductor advanced packaging customers. Apollo is a high throughput, low cost of ownership, sputter deposition product line (PVD) introduced in 2008 based on our first generation, Nimbus system architecture. Stratus electro-deposition systems (ECD) offers unique vertical orientation wafer processing, providing low cost of ownership and product performance advantages.
The Company is based in Billerica Massachusetts. We rely on an outsourced manufacturing facility near our Billerica, Massachusetts headquarters to build our PVD products. We also outsource non critical ECD assemblies. This outsourced function allows us to increase capacity based on customer demand, gain labor efficiencies, and minimize capital expenditure requirements. Our operations team works directly with this supplier to reduce the time required to build systems, increase reliability, and manage the cost of goods.
In September 2007, the Company opened a branch office in Taiwan for local customer sales and support. In September 2009, the Company established a wholly owned subsidiary NEXX Systems Singapore Pte Ltd to provide customer support for customers in Singapore and elsewhere in Southeast Asia.
The Company is subject to a number of risks associated with emerging technology oriented companies and the highly cyclical nature of the semiconductor equipment industry. Principal among these are risks associated with marketing the Company’s products; development of new technology; dependence upon key individuals; reliance on sole sources of supply; competition from larger, more financially independent competitors; and the need to obtain adequate financing to fund future operations. The Company has a limited operating history, and has incurred significant operating losses since inception.
Note 2. Summary of Significant Accounting Policies
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and judgments, including those related to revenue recognition, valuation of inventory and accounts receivable, valuation of investments and income taxes, stock-based compensation, valuation of warrants, costs eligible for capitalization, intangible assets and related amortization.
The Company bases these estimates on historical and anticipated results and trends and on various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from management’s estimates.
Principles of Consolidation: The consolidated financial statements include our accounts and those of our wholly owned subsidiary (collectively referred to as the Company). All intercompany and intracompany accounts and transactions are eliminated in consolidation.
F-10
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist primarily of money market instruments. The Company maintains cash balances in a bank located in California. At various times throughout the year, the Company’s balance may have exceeded the insured limit. The Company does not believe that it is subject to any unusual risk beyond the normal risk associated with commercial banking relationships.
Accounts Receivable: Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
Inventories: Inventories consist of materials, components, and subassemblies used in the assembly of the Company’s products for sale or use as demonstration equipment or maintained to support maintenance and warranty obligations. Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis and includes material costs, labor and applicable overhead. Work-in-process and finished goods inventories are stated based upon specific identification of items held. The Company maintains a perpetual inventory system and continuously records the quantity on-hand and cost for each product including purchased components, subassemblies and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. The Company includes in finished goods inventory products that have been delivered to customers for which the related revenue has been deferred until customer acceptance.
Inventory carrying value is reduced for estimated excess and obsolescence by the difference between cost and estimated market value based on assumptions about future demand and evaluation for potential obsolescence resulting from known and anticipated engineering change orders and new products. Based on this analysis which also encompasses our purchase order commitments, we record an adjustment to reserves impacting Cost of Sales to reflect inventory at lower of cost or market. If actual demand were to be substantially lower than estimates, additional inventory adjustments for excess or obsolete inventory might be required which could have a material adverse effect on our business, financial condition and results of operations.
Equipment and Improvements: Equipment and improvements are stated at cost, less accumulated depreciation and amortization. Machinery and equipment includes demonstration equipment which might be located at either NEXX or at the prospective customer’s location. We occasionally supply evaluation equipment for new customer applications usually for a period ranging between 6 and 18 months during which time the Company and customer collaborate on qualifying the equipment for that customer’s requirements. These qualification costs including depreciation on the evaluation equipment are recorded as selling, general and administrative expenses in the period incurred. Once customer evaluations are successful and upon fulfillment of all criteria in accordance with current authoritative accounting guidance, we recognize revenue from evaluation equipment and remaining equipment costs through net sales revenue and cost of sales, respectively.
Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the respective assets as follows: demonstration equipment, 5 years; machinery and equipment, 3-5 years; furniture and fixtures, 5 years; computer equipment and software, 3 years; and leasehold improvements, the lesser of their economic life or the term of the underlying lease. Expenditures for repairs and maintenance are charged to expense as incurred, whereas major betterments are capitalized as additions to equipment and improvements.
Deferred Financing Costs: Deferred financing costs consist of professional fees and financing costs incurred in connection with the establishment or amendment of long-term debt. These costs are being amortized into interest
F-11
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies (continued)
Deferred Financing Costs (continued)
expense over the terms of the related borrowings. Deferred financing costs associated with debt extinguished prior to maturity are expensed.
Purchased Developed Technology: Purchased developed technology acquired in 2003, when the Company acquired All Wet Technologies, Inc., is being amortized over seven years. Amortization expense was $54,572 for each of the years ended December 31, 2009, 2008 and 2007. In accordance with Accounting Standards Codification (ASC) 805 (formerly FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by Purchase Method), in-process research and development costs were charged to operations at the date of acquisition.
Deferred Offering Costs: The Company has deferred $244,916 of costs related to its filing of the registration statement associated with its initial public offering. Upon completion of the Company’s proposed initial public offering, such costs will be recorded as a reduction of the proceeds received in arriving at the amount to be recorded in Stockholder’s Equity (Deficit). If the offering is not completed, these deferred offering costs will be expensed in the Consolidated Statement of Operations.
Long-Lived Assets: In accordance with the provisions of ASC 360 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), the Company evaluates the realizability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of December 31, 2009, the Company has determined that no material adjustment to the carrying value of its long-lived assets was required.
Revenue Recognition: Our policy is to have a cross-functional team of senior management review each system sales contract considering the customer purchase order terms and conditions, Company contractual obligations, complexity of the customer acceptance provisions and customer creditworthiness. These factors and circumstances involving previous customer installations are evaluated in determining when to recognize revenue.
The Company recognizes revenue from sales based on guidance provided in ASC 605 (formerly SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements and EITF 00-21 Revenue Arrangements with Multiple Deliverables). The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectability is reasonably assured including no uncertainties regarding customer acceptance. The Company believes that delivery occurs upon acceptance by the customer. Customer acceptance is generally based on products meeting published performance specifications demonstrated by an initial customer acceptance test and a final acceptance test after installation. The initial acceptance test is designed to ensure the performance specifications are satisfied before shipment and installation at the customer facility.
Sales generally have two elements: (a) the equipment and (b) installation of that equipment. While installation services are not essential to the functionality of the delivered equipment, final payment is not typically billable until customer acceptance is received. Provided that the Company has defined customer acceptance experience levels with both the customer and the specific type of equipment, then revenue is recognized for the equipment element upon shipment, transfer of title and customer approval of the initial acceptance test. For new customers, new products for existing customers, or sales arrangements with customer specific acceptance specifications where performance cannot be assessed prior to meeting the specifications at the customer site, all of the revenue is recognized upon completion of the installation and final customer acceptance. The revenue for the installation
F-12
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
element (which typically exceeds the fair value of the installation services) is recognized upon customer acceptance at the customer facility.
We also have revenue arrangements that involve the sale of multiple items of equipment under a single arrangement. In these situations, revenue is allocated among the separate elements based on their relative fair values, provided the elements have value on a stand alone basis and there is objective and reliable evidence of fair value. All elements may not be delivered during the same period. In those cases, we defer the fair value of the undelivered equipment element until that element is delivered. As of December 31, 2009, 2008 and 2007, there were no undelivered equipment elements under revenue arrangements with multiple deliverables. Our sales arrangements do not include a general right of return.
Revenue related to sales of spare parts is recognized upon shipment as our spares are sold on terms that transfer title and risk of ownership when it leaves our site. Revenue related to paid service is recorded when earned as the services are delivered.
At December 31, 2009, 2008 and 2007, deferred revenue primarily consisted of product sales to customers for which final acceptance had not yet been received.
Accounting for Customer Freight Costs: Systems and spares are typically shipped "freight collect." and as a result, no shipping revenue or cost is associated with the sale. When freight is charged, the amount charged to customers is recorded to revenue and freight costs incurred are recorded to cost of sales pursuant to ASC Topic 605 (formerly FASB EITF 00-10).
Income Taxes: The Company accounts for income taxes in accordance with ASC 740 (formerly SFAS No. 109, Accounting for Income Taxes). Under ASC 740, deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable or refundable for the period, plus or minus the change during the period in related deferred tax assets and liabilities.
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 (FIN 48), now encapsulated in ASC 740. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. If there are changes in net assets as a result of application of FIN 48, these will be accounted for as an adjustment to the opening balance of retained earnings. Additional disclosures about the amounts of such liabilities are also required. The Company has adopted the provisions of FIN 48 effective as of January 1, 2007.
The Company accounts for all tax credits by the “flow-through” method, which directly reduces the tax provision in the year in which the credit is allowed for tax purposes.
F-13
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies (continued)
Research and Development Expenses: Research and development expenses are charged to operations as incurred.
At December 31, 2009 NEXX is a party to two joint development agreements. The original term of the agreements are for 36 months or less and expire through January 2012. As part of each of the agreements, NEXX sold a Stratus plating tool to the respective counter party. The Company records the net margin realized from such a sale as a reduction of research and development costs evenly over the respective term of the joint development agreement.
Net income (loss) per Share of Common Stock: Basic net income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and is computed by dividing net income (loss) by the assumed weighted average number of common shares outstanding. The following table sets forth our computation of dilutive EPS for the periods presented:
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At December 31,
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2009
|
2008
|
2007
|
||||||||||
|
Income available to common stockholders
|
$ | 1,191,880 | $ | (8,533,593 | ) | $ | (4,811,805 | ) | ||||
|
Weighted average shares
|
14,992,155 | 14,707,139 | 14,667,893 | |||||||||
|
Options to purchase common stock
|
6,226,540 | — | — | |||||||||
|
Common stock subject to vesting provisions
|
2,065,027 | — | — | |||||||||
|
Redeemable convertible preferred shares
|
56,955,417 | — | — | |||||||||
|
Warrants to purchase redeemable convertible preferred stock
|
3,089,075 | — | — | |||||||||
|
Dilutive common shares
|
83,328,214 | 14,707,139 | 14,667,893 | |||||||||
|
Dilutive EPS
|
$ | 0.01 | $ | (0.58 | ) | $ | (0.33 | ) | ||||
The following table presents the potentially dilutive securities outstanding that were excluded from the computation of diluted net income (loss) per common share for the periods presented because their inclusion would have had an anti-dilutive effect:
|
At December 31,
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2009
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2008
|
2007
|
||||||||||
|
Options to purchase common stock
|
118,100 | 10,143,296 | 3,326,903 | |||||||||
|
Common stock subject to vesting provisions
|
— | 4,490,920 |
—
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|||||||||
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Redeemable convertible preferred stock
|
— | 42,260,065 | 17,435,891 | |||||||||
|
Warrants to purchase redeemable preferred stock
|
4,800,066 | 10,218,792 | 1,128,151 | |||||||||
| 4,918,166 | 67,113,073 | 21,890,945 | ||||||||||
In November 2009, the Company’s board of directors authorized the Company to proceed with an initial public offering of its common stock, and upon consummation of that offering all of the Company’s outstanding shares of redeemable convertible preferred stock will convert to common stock, and warrants to purchase shares of the Company’s redeemable convertible preferred stock will convert into warrants to purchase shares of common stock after taking into effect conversion rates for the redeemable convertible preferred stock, as well as 30,000,000 shares of common stock to be issued to the holders of both redeemable convertible preferred common stock and warrants to purchase such shares of redeemable convertible preferred stock to be allocated among the holders of these securities.
Pro forma diluted income per share has been computed assuming the dilutive effect of the issuance of 30 million common shares to holders of shares of redeemable convertible preferred stock and warrants in exchange for the waiver of certain contractual rights regarding the conversion of all outstanding redeemable convertible preferred stock to common stock upon an initial public offering and a 1 to 10 reverse stock split. Contingent upon the effectiveness of the Company’s initial public offering, and subject to shareholder approval, the board of directors approved a 1 to 10 reverse stock split.
Concentration of Credit Risk and Export Sales: Financial instruments which potentially expose the Company to concentration of credit risk consist principally of accounts receivable. Management regularly monitors the
F-14
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk and Export Sales (continued)
creditworthiness of its customers and believes that it has adequately reserved for any exposure to potential credit losses. As of December 31, 2009, two customers accounted for 15% and 65% of the accounts receivable balance. As of December 31, 2008, four customers accounted for 11%, 22%, 22%, and 11% of the accounts receivable balance. As of December 31, 2007, four customers accounted for 32%, 10%, 26% and 19% of the accounts receivable balance.
The Company’s customers are concentrated in the semiconductor industry. In 2009, two customers accounted for approximately 48% of net sales. Of these two, customer A accounted for 33% of net sales and customer B accounted for 15% of net sales. In 2008, four customers accounted for approximately 66% of net sales. Of these four customers, customer A accounted for 14%, customer C accounted for 19%, customer D accounted for 18% and customer E accounted for 16% of net sales. In 2007, five customers accounted for approximately 70% of revenue. Of these five customers, customer F accounted for 16%, customer G accounted for 15%, and customers H, I and J each accounted for 13% of net sales. Export sales were 69%, 90%, and 78% of net sales for the years ended December 31, 2009, 2008 and 2007, respectively.
Fair Value of Financial Instruments: The accounting standard for fair value measurements, ASC 820 (formerly FASB Statement No. 157 Fair Value Measurements), establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurement. The framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
Fair Value Hierarchy
The accounting standard for fair value measurements specifies a hierarchy for disclosure of fair value measurement. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The three levels are defined as follows:
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•
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities for the instrument
or security to be valued.
|
|
•
|
Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or
indirectly through corroboration with observable market data for substantially the full term of the asset or liability.
|
|
•
|
Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable and are significant to the fair value of the assets or liabilities.
|
This hierarchy requires the use of observable market data when available. We maintain policies and procedures to value instruments using the best and most relevant data available. Further, we used internal sources and considered external sources to assist us in valuing certain instruments.
The standard also requires disclosure in the financial statements for items measured at fair value on a non-recurring basis. The Company did not have any items that are measured at fair value on a non-recurring basis for the years ended December 31, 2009 or 2008.
F-15
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments (continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
As of December 31, 2009
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
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|
Cash
|
$ | 548,525 | $ | 548,525 | $ | — | $ | — | ||||||||
|
Money Market Funds included in cash equivalents
|
$ | 3,465,948 | $ | — | $ | 3,465,948 | $ | — | ||||||||
|
Preferred Stock Warrant Liability
|
$ | 1,784,763 | $ | — | $ | — | $ | 1,784,763 | ||||||||
|
As of December 31, 2008
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
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|
Cash
|
$ | 678,495 | $ | 678,495 | $ | — | $ | — | ||||||||
|
Money Market Funds included in cash equivalents
|
$ | 3,311,738 | $ | — | $ | 3,311,738 | $ | — | ||||||||
|
Preferred Stock Warrant Liability
|
$ | 3,465,072 | $ | — | $ | — | $ | 3,465,072 | ||||||||
Other Accounts: The carrying amount of accounts receivable, accounts payable and accrued expenses approximates fair value due to the short-term nature of these items. Management believes that the Company's debt obligations bear interest at rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, the carrying values for these instruments approximate fair value.
Money Market Funds: Money market funds are cash deposits carrying varying rates of return, deposited in our financial institution. The funds are invested on and redeemed on a daily basis and are extremely liquid in nature.
Preferred Stock Warrant Liability: The Company accounts for preferred stock warrants in accordance with ASC 480 (formerly FASB Staff Position 150-5 (FSP 150-5) Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable). ASC 480 requires us to
F-16
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments (continued)
classify these as liabilities and adjust the value of these warrants to fair value at the end of each reporting period. The value of the preferred stock warrants was determined using an option pricing methodology. Changes to the value of the preferred stock warrant liability is determined by comparing the warrants outstanding at the end of the period multiplied by the fair value of the warrants at the end of the period to the same calculation for the prior period. Significant components of the option pricing model include the enterprise value of the Company for the period (determined using an income-based method), volatility, term, and interest rate assumptions. Changes to certain assumptions which caused the fair value to change were primarily attributable to changes to the discount rate used in determining our enterprise value as well as projected changes to the capital structure attributable to equity issuances and warrant exercises. All other assumptions remained relatively stable and did not have as material an impact.
The following table provides a roll forward of the fair value of the preferred stock liability:
|
As of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Beginning of year
|
$ | 3,465,072 | $ | 317,000 | ||||
|
Issuance of warrants
|
5,408,490 | 3,174,995 | ||||||
|
Exercise of warrants
|
(6,918,579 | ) | — | |||||
|
Increase (decrease) in fair value
|
(170,220 | ) | (26,923 | ) | ||||
|
End of year
|
$ | 1,784,763 | $ | 3,465,072 | ||||
Fair Value of Common Stock
Prior to 2006, we granted stock options at exercise prices equivalent to the fair value of our common stock as estimated by our board of directors, with input from management, as of the date of grant. Because there has been no public market for our common stock, our board of directors determined the fair value of our common stock by considering a number of objective and subjective factors, including:
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·
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our operating and financial performance;
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|
·
|
the prices at which we issued shares of preferred stock in private placement transactions;
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|
·
|
the superior rights and preferences of securities senior to our common stock at the time of each grant;
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|
·
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the non-liquid nature of our common stock;
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|
·
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business risks we faced and key company milestones; and
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|
·
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comparable company and industry analysis.
|
Subsequent to 2006, we utilized the valuation methodologies outlined in the AICPA’s Practice Aid Valuation of Privately-Held Company Equity Securities Issued as Compensation. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective estimates and assumptions, including the estimated fair value of common stock, expected life of the stock-based payment awards
F-17
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies (continued)
Fair Value of Common Stock (continued)
and stock price volatility.
Historically, we used the Black-Scholes option-pricing model to value our option grants and determine the related compensation expense. Option pricing models require judgment on inputs including fair value, volatility, and term. Fair value was determined using a probability-weighted expected return allocation methodology (“PWERM,” described below). We felt the PWERM model more accurately reflected stock prices considering possible future outcomes through our estimate of probabilities and timing compared to a lognormal distribution inherent in an option pricing model. We have historically been a private company and lack company-specific historical and implied volatility information. Therefore, we estimate our expected volatility based on the historical volatility of our publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded stock price. The expected term of options was determined based on the PWERM scenario timelines and probability weightings. The risk-free interest rate used for each grant is based on a U.S. Treasury instrument with a term similar to the expected term of the option. ASC 718 (formerly known as SFAS No. 123R Accounting for Stock-Based Compensation) requires that we recognize compensation expense for only the portion of options that are expected to vest. We have estimated expected forfeitures of stock options with the adoption of ASC 718 to be 3.0% for the year ended December 31, 2009. In developing a forfeiture rate estimate, we have considered our historical experience. If there are additional forfeitures of unvested options, adjustments to compensation expense may be required in future periods.
The assumptions used in calculating the fair value for the year ended December 31, 2009 were a risk-free interest rate of 3.0%, expected term of 10 years, weighted average expected volatility of 21%, and no expected dividends. These assumptions represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different. The most significant input into the Black-Scholes option-pricing model used to value our option grants is the fair value of common stock.
In connection with our preparation of financial statements, the board instructed management to prepare a valuation analysis to determine the fair value of the common stock for purposes of the stock option grants during those years. These valuations were prepared using the PWERM. Under this methodology, the fair market value of the common stock was estimated based upon an analysis of future values assuming three possible outcomes: an initial public offering, a sale or merger, and continued operation as a private company. The probability-weighted present value of expected future investment returns was then determined, based on the future value, likelihood and timing of each of these possible outcomes. The anticipated likelihood and timing of each of the possible outcomes were based on the plans of the board and management.
The initial public offering scenario analysis utilized the guideline public company method. Management and the board estimated our enterprise value under the guideline public company method by comparing our company to publicly traded companies in our industry group. The companies used for comparison under the guideline public company method were selected based on a number of factors, including the similarity of their industry, business model and financial risk to ours. In determining our enterprise value under this method, the board used current revenue multiples of the peer companies applied to our revenues for the corresponding period.
The sale or merger scenario analysis utilized a revenue multiple based on an analysis of similar transactions (similarity of the industry, businesses acquired, and related risks) and companies, applied to our corresponding revenue for the period in which the transaction is anticipated to occur.
F-18
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies (continued)
Fair Value of Preferred Stock (continued)
The private company scenario enterprise value was based on an average of guideline public revenue and EBITDA multiples applied to the corresponding financial metrics and a discounted cash flow analysis using a similar guideline public company multiple for the terminal capital value.
Warranty Obligations
The Company’s obligations for warranty are accrued concurrently with the revenue recognized on the related equipment. The Company estimates average warranty cost per system and records the warranty provision as an element of cost of sales upon recognition of the related revenue. The overall warranty accrual is separately analyzed using the remaining warranty periods outstanding on systems under warranty and any resulting changes in estimates are recorded as cost of sales adjustments. If a significant change in warranty-related incidents occurs, the impact of the change in the warranty accrual could be material.
Reclassifications: Certain reclassifications have been made to the prior years’ consolidated financial statements in order to conform to the presentation used in the 2009 consolidated financial statements.
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance to establish the FASB ASC as the source of authoritative accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. The Company adopted this guidance for the period ended December 31, 2009 and only impacts references for accounting guidance.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (SFAS No. 141R) (now encapsulated in ASC 805). SFAS No. 141(R), among other things, establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The Company is required to adopt SFAS No. 141(R) for all business combinations for which the acquisition date is on or after January 1, 2009. This standard will change our accounting treatment for business combinations on a prospective basis.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (SFAS No. 160), now encapsulated in ASC 810, 323 and 325. SFAS No. 160 establishes accounting and reporting standards for non-controlling interests in a subsidiary and for the deconsolidation of a subsidiary. Minority interests will be re-characterized as non-controlling interests and classified as a component of equity. It also establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary and requires expanded disclosures. This statement is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited. The Company does not have any non-controlling or minority interests and, accordingly, does not expect the adoption of this statement to have any effect on its financial position or results of operations.
F-19
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3), now encapsulated in ASC 350. FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company adopted this topic during the year ended December 31, 2009, but it had no effect on its consolidated financial position and results of operations.
In December 2008, the FASB issued guidance as to whether an instrument (or embedded feature) is indexed to an entity’s own stock in ASC 815. The guidance relates to whether an instrument is linked to a company’s own stock and therefore meets the exception to not be accounted for as a derivative. The Company has adopted this topic during the year ended December 31, 2009, and there was no effect on the consolidated financial position and results of operations.
In April 2009, the FASB issued additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased. ASC 820 also includes guidance on identifying circumstances that indicate a transaction is not orderly. In addition, ASC 820 requires disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques. The Company is evaluating the potential impact of the implementation of ASC 820 on its financial position and results of operations but does not expect the adoption to have a material effect on the financial statement.
In May 2009, the FASB issued ASC 855, Subsequent Events (ASC 855), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 distinguishes between subsequent events that should be recognized in the financial statements and those that should not. It requires disclosure of the date through which subsequent events were evaluated. We adopted this topic during the year ended December 31, 2009, the results of which are disclosed in Note 16 to the consolidated financial statements.
In October 2009, the FASB’s Emerging Issues Task Force (EITF) issued authoritative guidance addressing revenue arrangements with multiple deliverables. The authoritative guidance eliminates the criterion for objective and reliable evidence of fair value for the undelivered products or services. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting provided the deliverables meet certain criteria. This guidance also eliminates the use of the residual method of allocation and requires that the arrangement consideration be allocated at the inception of the arrangement to all deliverables based on their relative selling price. The guidance provides a hierarchy for estimating the selling price of each of the deliverables. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. Accordingly, the Company will adopt this guidance in fiscal 2010. The Company is currently evaluating the impact of adoption of this guidance on its results of operations and balance sheet.
F-20
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 3. Accumulated Other Comprehensive Loss
The components of Accumulated Other Comprehensive Loss are as follows:
|
Effect of
Foreign
Currency
Translation
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|||||||
|
Balance December 31, 2006
|
$ | — | $ | — | ||||
|
Change in period
|
515 | 515 | ||||||
|
Tax effect of change in period
|
— | — | ||||||
|
Balance December 31, 2007
|
$ | 515 | $ | 515 | ||||
|
Change in period
|
66 | 66 | ||||||
|
Tax effect of change in period
|
— | — | ||||||
|
Balance December 31, 2008
|
$ | 581 | $ | 581 | ||||
|
Change in period
|
(4,709 | ) | (4,709 | ) | ||||
|
Tax effect of change in period
|
— | — | ||||||
|
Balance December 31, 2009
|
$ | (4,128 | ) | $ | (4,128 | ) | ||
Note 4. Receivable from Stockholder
On June 23, 2009 the Company entered into a secured promissory note agreement with one of its senior executives in the amount of $19,909 in connection with the issuance of 4,490,920 shares of restricted common stock at $0.01 per share. The proceeds from the issuance of restricted common stock totaled $44,909, of which $25,000 was paid in October 2009. The note is secured by the executive’s restricted common stock and bears an interest rate of 0.75% which is the federal rate for short-term maturities as published by the Internal Revenue Service in June 2009. Interest is payable in arrears on the last day of each month commencing on July 31, 2009. The loan is being repaid in 72 equal bi-weekly installments which began in October 2009 and ends in June 2012 or the earlier of thirty days after termination of the Borrower’s employment with the Company for any reason and the date of the effectiveness of the Company’s first underwritten public offering of its Common Stock under the Securities Act of 1933. The officer repaid this note in full in March 2010.
Note 5. Inventories
Inventories consisted of the following at December 31:
|
As of December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Raw materials
|
$ | 3,425,064 | $ | 2,705,007 | $ | 2,809,090 | ||||||
|
Work-in-process
|
1,328,770 | 1,042,411 | 2,102,324 | |||||||||
|
Finished goods
|
2,000,571 | 2,039,120 | 872,442 | |||||||||
| $ | 6,754,405 | $ | 5,786,538 | $ | 5,783,856 | |||||||
F-21
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 6. Equipment and Improvements
Equipment and improvements consisted of the following at December 31:
|
As of December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Demonstration equipment
|
$ | 2,496,477 | $ | 2,483,124 | $ | 4,540,950 | ||||||
|
Machinery and equipment
|
1,194,605 | 1,702,188 | 1,141,463 | |||||||||
|
Furniture and fixtures
|
190,548 | 190,548 | 192,458 | |||||||||
|
Leasehold improvements
|
740,783 | 733,266 | 619,601 | |||||||||
|
Computer equipment and software
|
357,722 | 307,715 | 173,665 | |||||||||
| 4,980,135 | 5,416,841 | 6,668,137 | ||||||||||
|
Less accumulated depreciation
|
||||||||||||
|
and amortization
|
3,034,342 | 2,525,002 | 2,535,971 | |||||||||
| $ | 1,945,793 | $ | 2,891,839 | $ | 4,132,166 | |||||||
The Company leases various property, machinery and equipment. Leased property is accounted for under ASC 840 (formerly SFAS No. 13 Accounting for Leases). Accordingly, leased property that meets certain criteria is capitalized and the present value of the related lease payments is recorded as a liability. All other leases are accounted for as operating leases and the related payments are expensed ratably over the rental period. Amortization of the assets under capital leases is computed utilizing the straight line method over the shorter of the remaining lease term or the estimated useful life. Proceeds from the sale of demo equipment were $550,000, $7,574,969 and $6,909,000 in 2009, 2008 and 2007, respectively.
Assets securing capital leases included in machinery and equipment have an amortized cost of approximately $0, $248,830 and $361,975 as of December 31, 2009, 2008 and 2007 respectively, as shown in the following table.
|
As of December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cost
|
$ | — | $ | 347,205 | $ | 574,681 | ||||||
|
Less Accumulated depreciation
|
— | 98,375 | 212,706 | |||||||||
| $ | — | $ | 248,830 | $ | 361,975 | |||||||
Depreciation and amortization expense for the years ended December 31, 2009, 2008 and 2007 was $900,300. $1,424,772, and $1,438,729, respectively.
F-22
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 7. Notes Payable
Notes payable consisted of the following at December 31, 2009, 2008 and 2007:
|
As of December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Note Payable to Shareholders, including accrued interest
|
$ | — | $ | — | $ | 2,525,498 | ||||||
|
Term advance payable to Hercules Technology
|
||||||||||||
|
Growth Capital, Inc.
|
564,865 | 2,658,717 | 4,557,189 | |||||||||
|
Revolving advance payable to Hercules Technology
|
||||||||||||
|
Growth Capital, Inc.
|
3,500,000 | 5,000,000 | 8,000,000 | |||||||||
| 4,064,865 | 7,658,717 | 15,082,687 | ||||||||||
|
Less current portion
|
(4,064,865 | ) | (7,093,852 | ) | (7,348,374 | ) | ||||||
| $ | — | $ | 564,865 | $ | 7,734,313 | |||||||
On December 21, 2006, the Company entered into a loan agreement with Hercules Technology Growth Capital, Inc. (“HTGC”) for borrowings of up to $10,000,000. The loan is secured by substantially all business assets and intellectual property of the Company. The credit facility is divided into two parts, revolving and term advances. Revolving advances permit borrowings up to the lesser of the borrowing base plus nonformula advances, both as defined in the agreement, or $5,000,000. On July 17, 2009, the Company and HTGC entered into a third amendment to the existing loan agreements. This amendment provides two nonformula advances of $3 million tranches (total of $6 million) of revolver debt. The first tranche was immediately available at closing and carries an interest rate of the greater of prime plus 8% or 13.25% (13.25% at December 31, 2009). The second tranche carries an interest rate of the greater of prime plus 8% or 17.5% (17.5% at December 31, 2009). Availability under the second tranche was limited to $2 million immediately at closing with the remaining $1 million available at January 1, 2010. The Company pays interest on the revolving advances on the first day of each month. The second amendment to the existing loan agreement (dated July 29, 2008) requires a $250,000 end-of-term financing fee which is payable upon the earlier of the maturity date of the revolving advance or a prepayment event, as defined in the agreement. The loan agreement expires on June 30, 2010. As part of the amendment, the Company paid an upfront fee of $125,000. In addition, the Company issued warrants to Hercules to purchase 705,882 shares of Series D preferred stock at a purchase price of $0.425 per share.
Term advances permitted borrowings up to $5,000,000 through March 31, 2007. On July 29, 2008 the Company entered into a second amendment to the existing loan agreement with HTGC. Based upon this amendment the Company was required to repay the principal balance outstanding on the term advance that was outstanding as of July 31, 2008, in 21 equal monthly installments of principal and interest beginning August 1, 2008 and continuing on the first business day of each month thereafter through March 1, 2010, which amounts have been repaid in full. The interest rate on the term advance was the greater of prime plus 3.5% or 11.25% (11.25% at December 31, 2009).
Note 8. Redeemable Convertible Preferred Stock
The Company accounts for redeemable convertible preferred stock at fair value at the issuance date less the cost of capital. The Company does not adjust the preferred stock to redemption value as the instruments are not currently redeemable and management has concluded that redemption is not deemed probable. Redemption was not deemed probable as it is expected that such shares will be converted in connection with the IPO.
The rights, preferences and privileges of the Series A, Series B, Series C, Series C-1, and Series D Convertible Preferred Stock are as follows:
F-23
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 8. Redeemable Convertible Preferred Stock (continued)
Voting: Series A, Series B, Series C, Series C-1 and Series D Convertible Preferred Stock vote together with all other classes and series of stock as a single class on an as-converted basis. Each share of Series A, Series B, Series C, Series C-1, and Series D Convertible Preferred Stock entitles the holder to such number of votes per share as shall equal the number of shares of common stock into which the share is then convertible.
Dividends: Dividends may be declared and paid on Series A, Series B, Series C, Series C-1 and Series D Convertible Preferred Stock from the funds lawfully available as and when determined by the Company’s Board of Directors. As of the record date, the holders of Series A, Series B, Series C, Series C-1 and Series D Convertible Preferred Stock shall be entitled to a proportionate share of any distribution. No dividend may be declared or paid upon any shares of common stock during any calendar year unless dividends shall have first been paid or declared and reserved for payment to the holders of Preferred Stock. No dividends have been declared or paid on these shares.
Liquidation: Upon any liquidation, dissolution, or winding up the Company, whether voluntary or involuntary, before any payment is made to the holders of any other class or series of the Corporation’s capital stock designated to be junior to the Series D Preferred, including the Series A, Series B, Series C, Series C-1 and Common Stock, the holders of the Series D shall be entitled to be paid out of the assets available for distribution an amount equal to $0.425 (subject to certain adjustments) per share plus all declared but unpaid dividends thereon.
After payment in full to the Series D Preferred holders, the holders of Series A, Series B, Series C, and Series C-1 Convertible Preferred Stock shall be entitled to be paid, pari passu and on a par with each other, out of the assets available for distribution, prior and in preference to any distribution to the holders of the Company’s common stock, an amount equal to $1.60 per share of Series A Convertible Preferred, $1.322 per share of Series B Convertible Preferred, and $1.215 and $1.58 per share of Series C and Series C-1 Convertible Preferred respectively, plus declared but unpaid dividends. If upon such liquidation, distribution or winding up the Company, the assets available to be distributed are insufficient to permit the payment in full to the holders of Series D of all amounts distributable to them then such distribution shall be distributed ratably among the holders of the Series D in proportion to the full preferential amount each holder is otherwise entitled.
If the holders of a majority of the Series A Convertible Preferred Stock elect (the “Series A Participation Election”), the holders of Series A Convertible Preferred Stock shall receive $0.681 per share. Unless a Series A Participation Election has been made, after payment of all preferential payments described above, the holders of common stock and Series B, Series C, Series C-1 and Series D Convertible Preferred Stock shall share ratably in all remaining assets available for distribution. If a Series A Participation Election has been timely made, after payment of all preferential payments described above, all remaining assets available for distribution shall be distributed ratably among the holders of common stock and the holders of Series A, Series B, Series C, Series C-1 and Series D Convertible Preferred Stock.
Conversion: The Series A, Series B, Series C, Series C-1 and Series D Convertible Preferred Stock may be converted at any time, at the option of the holder into common stock at the conversion ratio in effect at the time of the conversion determined as provided in the Company’s Amended and Restated Certificate of Incorporation. As of the initial date of filing of each series of Convertible Preferred Stock, the conversion prices per share for the Series A, Series B, Series C, Series C-1 and Series D preferred stock were $1.60, $1.322, $1.215, $1.58 and $0.425, respectively. These conversion prices are subject to adjustment for certain dilutive issuances based on a weighted average antidilution protection provision contained in the Company’s Charter. The Preferred Stock automatically converts to common stock upon the first to occur of (i) the closing of an underwritten, firm commitment public offering of shares of the capital stock of the Company having proceeds to the Company of at least $25,000,000 or (ii) the
F-24
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 8. Redeemable Convertible Preferred Stock (continued)
written consent of holders of at least 60% of the Series B, Series C and Series D Convertible Preferred Stock, each voting as a separate class. The current conversion prices for the preferred stock, based on the most recent anti-dilutive issuances for Series A, Series B, Series C, and Series D are $0.889361, $0.798272, $0.748342, and $0.379694, respectively. The conversion rates reflect anti-dilution protection triggered by the sale of our Series D Convertible Preferred Stock.
Redemption: The Series A, Series B, Series C, Series C-1 and Series D Convertible Preferred Stock shall at the election of the holders of at least 66 2/3% of the Preferred Shares be redeemed by the Company at a price equal to $1.60, $1.322, $1.215, a price per share for the Series C- equal to the Series C-1 Preferred Conversion Price, and $0.425, respectively, per share, subject to equitable adjustment in the event of certain dilutive events, plus all accrued, but unpaid or declared dividends on the Series A, Series B, Series C, Series C-1 and Series D Convertible Preferred Stock in three annual installments, commencing after receipt by the Company at any time on or after June 27, 2011, from the holders of then outstanding share of Series A, Series B, Series C, Series C-1 and Series D Convertible Preferred Stock, of written notice requesting redemption of share of Series A, B, C, C-1 and D Convertible Preferred Stock. No such election has been made by the Preferred shareholders. The maximum number of shares of Series A, B, C, C-1 and D Convertible Preferred Stock that may be redeemed at each date is as follows:
|
Mandatory
Redemption
Date
|
Maximum Portion
Of Shares to be
Redeemed
|
|
|
June 2011
|
33%
|
|
|
June, 2012
|
50%
|
|
|
June, 2013
|
All remaining shares
|
Registration Rights: The preferred shareholders and related warrant-holders, pursuant to a qualified public offering, carry certain registration rights on converted common stock. The preferred shareholders are entitled to demand that we register those shares, known as registrable shares, under the Securities Act commencing six months after the closing of a public offering. In addition, if we propose to register any more of our securities under the Securities Act after the closing of this offering, either for our own account or for the account of other security holders, the holders of these rights are entitled to notice of that further registration and are entitled to have their registrable shares included in it. These rights, however, are subject to conditions and limitations, including thresholds as to minimum values of shares required for demand registration, limitations on the number of registrations that may be demanded, blackout periods when shares may not be registered and the right of the underwriters of a registered offering of our common stock to limit the number of shares included in the offering. Holders of registrable shares can require us to register shares at our expense and, subject to some conditions and limitations, we are required to use our best efforts to affect requested registrations. Furthermore, holders of these rights may require us to file additional registration statements on Form S-3 for the sale of their registrable shares at any time after we qualify for the use of Form S-3.
Series D Extension Financing: On November 30, 2009, the Company completed the 2009 Series D extension financing. The two largest existing investors (the “Lead Investors”) invested an aggregate of $4 million. The Company offered all existing share holders and holders of options and warrants who were accredited investors the opportunity to participate pro rata in a Rights Offering based on the same terms and conditions as the Lead Investors received. Eligible investors were given the opportunity to purchase their pro-rata share of the offering in the form of units. Each unit was sold at a price of $0.425 per unit. A unit was defined as one share of Series D Preferred stock and a warrant to purchase one share of Series D Preferred stock at an exercise price of $0.01 per share. A total of
F-25
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 8. Redeemable Convertible Preferred Stock (continued)
12,348,064 Series D shares and 12,348,061 Series D warrants to purchase Series D shares were issued in conjunction with the 2009 Series D Extension, which provided total cash proceeds of approximately $5,250,000.
During the fourth quarter of 2009, several investors exercised a total of 14,064,179 Series D warrants, which generated proceeds of approximately $141,000.
On November 13, 2009, the Board of Directors approved a proposal from the holders of a majority of the preferred shares outstanding (the “Waiver Agreement”) to convert preferred shares to common shares to enable a planned public stock offering (“IPO”). The Waiver Agreement involves consideration of an additional 30 million common shares to be issued to holders of preferred shares and warrants immediately prior to the effectiveness of an IPO.
Note 9. Stockholders’ Equity
At December 31, 2009 the Company has reserved common stock for the following:
|
Conversion of preferred stock
|
86,123,475 | |||||||||||
|
Stock options
|
15,765,113 | |||||||||||
|
Stock warrants
|
6,808,560 | |||||||||||
| 108,697,148 |
On February 12, 2010, the Certificate of Incorporation was amended to increase the total number of all classes of authorized stock to 245,861,977 shares, of which 160,301,747 is Common Stock and 85,560,230 is Preferred Stock. The stock option pool was also increased to 22,160,063 shares.
Warrants: The Company accounts for warrants to acquire the Company’s redeemable convertible preferred stock and warrants issued in connection with debt as liabilities recorded at fair value. The value ascribed to the warrants issued is considered a cost of capital. The cost of capital associated with debt offerings is amortized to interest expense over the term of the debt. Upon exercise and issuance of the Preferred Series shares, the fair value of the warrant is recorded as an increase in the carrying value of the Preferred Series.
On June 14, 2004, the Company issued to Comerica Bank warrants to purchase 115,384 shares of Series B Redeemable Convertible Preferred Stock at $1.322 per share. The warrants are immediately exercisable and expire in June, 2011. The fair value of these warrants at issuance was determined using the Black-Scholes option-pricing model to be approximately $14,000, and was included as an issuance cost related to the Series B Convertible Preferred Stock.
On December 19, 2006, the Company issued to HTGC warrants to purchase 411,523 shares of Series C Redeemable Convertible Preferred Stock at $1.215 per share. The warrants are immediately exercisable and expire on the earlier of December 19, 2013 or three years after an initial public offering. The fair value of these warrants at issuance was determined using the Black-Scholes option-pricing model to be approximately $176,000. The value of these warrants was included in deferred financing costs and is being amortized over the term of the loan.
On June 21, 2007, in conjunction with an amendment to its loan agreement with HTGC the Company issued warrants to purchase 284,810 shares of Series C-1 Redeemable Convertible Preferred Stock at an adjusted $1.215
F-26
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 9. Stockholder Equity (continued)
Warrants (continued)
per share. The warrants are immediately exercisable and expire on the earlier of December 19, 2013 or three years after an initial public offering. The fair value of these warrants at issuance was determined using the Black-Scholes option-pricing model to be approximately $77,000.
On October 31, 2007, the Company issued to stockholders investing in the Subordinated Convertible Note and Warrant Financing (“Note Agreement”) warrants to purchase up to 20% of the principal amount of the notes payable. The warrants are exercisable until the earlier of October 31, 2013 or a company sale as an exercise price equal to the lower of the Series C-1 Redeemable Convertible Preferred Stock price per share or the price per share of securities issued in a Qualified Financing (as defined in the Note Agreement). As of December 31, 2007, warrants to purchase 316,434 shares of C-1 Redeemable Convertible Preferred Stock were exercisable assuming an exercise price of $1.58 per share. The fair value of these warrants at issuance was determined using the Black-Scholes option-pricing model to be approximately $50,000. Under the terms of the warrants the Company exchanged the Series C-1 warrants for Series D warrants. As a result, the Company issued warrants to purchase 1,176,471 shares of Series D Redeemable Convertible Preferred Stock at $0.425 per share. The fair value of the Series D warrants was determined using the Black-Scholes option-pricing model; the excess of the fair value of the warrants granted over the fair value of the warrants exchanged was determined not to be material.
On July 29, 2008, in conjunction with an amendment to its loan agreement with HTGC the Company issued warrants to purchase 1,176,471 shares of Series D Redeemable Convertible Preferred Stock (“Series D warrants”) at $0.425 per share, in exchange for the warrant issued on December 19, 2006 for 411,523 shares of Series C Convertible Preferred Stock at $1.215 per share. Additionally on this date, the Company issued to HTGC warrants to purchase 1,058,823 shares of Series D Convertible Preferred Stock at $0.425 per share, in exchange for the warrant issued on June 21, 2007 for 284,810 shares of Series C-1 Convertible Preferred Stock at $1.215 per share. The fair value of the Series D warrants at issuance was determined using the Black-Scholes option-pricing model; the excess of the fair value of the warrants granted over the fair value of the warrants exchanged was recorded as an additional deferred financing cost and approximated $87,000.
During the period from July 31 through October 15, 2008 the Company held a second closing (“second closing”) for existing shareholders participating to their full pro-rata in the first closing and any potential new investors purchasing additional Series D shares. Existing shareholders participating in the second closing were granted warrants to purchase one share of Series D preferred stock at a $0.01 exercise price for each share purchased in the second closing. A total of 6,691,642 Series D warrants were issued as a result of the Second Closing. The warrants are immediately exercisable and expire in October 2014 or earlier upon an IPO. The fair value of these warrants at issuance was approximately $2,810,490. In 2009, 5,825,400 Series D warrants were exercised and total proceeds were approximately $58,000.
On July 25, 2009 in conjunction with its amendment to its loan agreement with HTGC the Company issued warrants to purchase 705,882 shares of Series D Convertible Preferred Stock at $0.425 per share. The warrants are immediately exercisable until the earlier of seven years from issuance date, three years after an initial public offering or immediately prior to the closing of a merger. The fair value of these warrants at issuance was determined using the Black-Scholes option-pricing model to be approximately $99,000. The value of these warrants was included in deferred financing costs and is being amortized over the term of the loan.
On November 30, 2009, in conjunction with its 2009 Series D extension financing the Company issued 12,348,061 warrants to purchase Series D shares at a price of $0.01 per warrant. The warrants were granted along with the
F-27
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 9. Stockholder Equity (continued)
Warrants (continued)
purchase of Series D preferred shares (one warrant granted with each share purchased). At December 31, 2009 10,638,775 of the warrants have been exercised and total proceeds were approximately $106,000.
Note 10. Income Taxes
The Company accounts for federal and state income taxes in accordance with ASC 740 (formerly SFAS No. 109), Accounting for Income Taxes.
The Company has recorded a Federal and State tax provision for the year ended December 31, 2009 primarily consisting of alternative minimum tax as it utilizes net operating loss carry-forwards. For the years ended December 31, 2008 and 2007, no tax provision was recorded as the Company was not subject to taxation due to operating losses. Additionally, there have been no penalties or interest accruals as a result of the historical and current operating losses. Significant components of the Company’s tax provision at December 31, 2009 and December 31, 2008 and 2007 are as follows:
|
December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 28,202 | $ | — | $ | — | ||||||
|
State
|
566 | — | — | |||||||||
|
Foreign
|
— | — | — | |||||||||
|
Total current provision
|
28,768 | — | — | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
— | — | — | |||||||||
|
State
|
— | — | — | |||||||||
|
Foreign
|
— | — | — | |||||||||
|
Total deferred provision / (benefit)
|
— | — | — | |||||||||
|
Total provision for income taxes
|
$ | 28,768 | $ | — | $ | — | ||||||
The provision for income taxes for year ended December 31, 2009, differs from the amount computed by applying the statutory U.S. Federal income tax rate to income before taxes as a result of the following:
|
2009
|
||
|
Federal Income Tax provision at Statutory Rate
|
34.0%
|
|
|
Non-deductible Expenses
|
5.3%
|
|
|
State Taxes
|
0.0%
|
|
|
Valuation Allowance and Deferred Items
|
-36.9%
|
|
|
Efffective Tax Rate
|
2.4%
|
F-28
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 10. Income Taxes (continued)
At December 31, 2009, 2008 and 2007, respectively, the components of our deferred tax assets and deferred tax liabilities were as follows:
|
December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Deferred Tax Assets:
|
||||||||||||
|
Other Accruals
|
$ | 1,149,000 | $ | 1,359,000 | $ | 1,057,000 | ||||||
|
Net Operating Losses (NOLs)
|
9,526,000 | 10,002,000 | 9,329,000 | |||||||||
|
Research and Development Credits
|
1,570,000 | 1,442,000 | 1,157,000 | |||||||||
|
Deferred Tax Assets
|
12,245,000 | 12,803,000 | 11,543,000 | |||||||||
|
Deferred Tax Asset Valuation Allowance
|
(12,245,000 | ) | (12,803,000 | ) | (11,543,000 | ) | ||||||
|
Net Deferred Tax Asset
|
$ | — | $ | — | $ | — | ||||||
The Company has incurred federal net operating losses of approximately $27.6 million which can be carried back 2 years or forward 20 years. On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was signed into law and includes provisions for the potential carryback of NOL’s of up to 5 years. The Company does not anticipate any benefits of this potential increased carryback period based on the cumulative operating losses sustained. We have net operating loss carryforwards totaling approximately $2.0 million in various states. The losses expire in fiscal years 2010 through 2014. NEXX has a Federal Research Credit carryforward of approximately $0.9 million which will begin to expire in fiscal year 2023. NEXX has a Research Credit carryforward in the State of Massachusetts of approximately $0.8 million ($0.1 million with no expiration), which will begin to expire in fiscal year 2023.
We are subject to U.S. federal tax as well as income tax in multiple states, local jurisdictions, and foreign jurisdictions. The Company’s 2003 through 2009 tax years are open and may be subject to examination by these taxing authorities. Such examinations, if any, could result in challenges to tax positions taken and, accordingly, we may record adjustments to our tax provision based on the outcome of such matters. However, we believe that the resolution of any future income tax examination will not have a material effect on our financial position or results of operations.
The IRS Code Section 382 and similar state regulations, contain provisions that limit the net operating loss carryforwards and research and experimentation credit carryforwards available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% by a 5% shareholder, as defined by Section 382, the amount of the carryforwards that the Company may utilize in any one year may be limited. The Company has completed several financings since its inception resulting in a change in control in excess of 50% by a 5% shareholder, as defined by Section 382 in September 2005. The amount of benefits the Company may receive from the operating loss carryforwards for income tax purposes is further dependent, in part, upon the tax laws in effect, future earnings of the Company, future financings and other future events, the effects of which cannot be determined.
As required by ASC 740 (formerly FASB No. 109), management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss and research and experimentation credit carryforwards. Management has determined that it is not more likely than not that the Company will recognize the benefits of these deferred tax assets and, as a result, a full
F-29
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 10. Income Taxes (continued)
valuation allowance has been established at December 31, 2009, 2008 and 2007. However, the amount of deferred tax asset valuation allowance could be reduced in the near term if estimates of future taxable income are achieved.
The Company adopted ASC 740 (formerly FIN 48) as of the beginning of fiscal 2007. This interpretation clarifies the criteria for recognizing income tax benefits under ASC 740 (formerly SFAS No. 109) and requires additional disclosures for uncertain tax positions. The Company recognizes and measures its uncertain income tax positions following the two-step approach defined in authoritative accounting literature. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The adoption of FIN 48 did not have a material impact on the Company’s current financial position. The Company anticipates that the amount of unrecognized tax benefits could change in the next twelve months but does not expect those changes to have a significant impact on the results of operations or the financial position of the Company. In accordance with ASC 740, when the tax law requires interest to be paid and penalties to be calculated, interest and penalties will be recognized as part of our provision for income taxes.
Tax and Penalty Policy
|
Tax Reserve
|
||||
|
Balance, December 31, 2007
|
$ | 290,000 | ||
|
Additions: Current Year Operations
|
58,200 | |||
|
Balance, December 31, 2008
|
348,200 | |||
|
Additions: Current Year Operations
|
27,700 | |||
|
Ending Balance, December 31, 2009
|
$ | 375,900 | ||
Note 11. Commitments
Capital Lease: The Company fulfilled its obligations under a capital lease for equipment through July 2009, and has no other capital lease commitments.
Operating lease: In September 2007, the Company entered into an agreement to lease office space with Middlesex Technology Center Associates III Trust, for the lease of the Company’s laboratory, operations, office, and storage space, which it began to occupy on January 1, 2008. The lease contains escalation clauses for operating and real estate taxes and expires in February 2015.
Rent expense under this operating lease charged to operations totaled $560,076, $632,253, and $283,308 for the years ended December 31, 2009, 2008 and 2007, respectively.
The following is a schedule by years of future minimum rental payments required under operating leases as of December 31, 2009:
F-30
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 11. Commitments (continued)
Operating Lease (continued)
|
Operating Lease Minimum rental payments:
|
||||
|
Year ending December 31:
|
||||
|
2010
|
$ | 437,023 | ||
|
2011
|
392,016 | |||
|
2012
|
392,016 | |||
|
2013
|
392,016 | |||
|
2014
|
392,016 | |||
|
Thereafter
|
65,336 | |||
| $ | 2,070,423 | |||
Employment Contracts: The Company has entered into employment agreements with certain executive officers. The agreements provide for certain severance benefits to be paid following a change in employment status during a 12 month period following a “change in control”, as defined in the agreements.
Manufacturing Contracts: The Company has a three year manufacturing agreement which was renewed on February 11, 2009 with an outsource manufacturer located near our Billerica headquarters that is the exclusive supplier and manufacturer of the PVD product line subject to certain terms and conditions. In connection with this agreement, the Company may be required to purchase from that outsource company certain custom inventory purchased in anticipation of fulfilling purchase orders placed by the Company. The Company has outsource agreements with two other companies who supply subassemblies for our ECD product that may require the Company to purchase inventory bought in anticipation of fulfilling our ECD orders.
Note 12. Product Warranties
The Company’s new products generally carry a standard one-year warranty. The Company sets aside a reserve based on anticipated warranty claims at the time product revenue is recognized. All actual warranty claims are charged to the warranty accrual. Factors that affect the Company’s product warranty liability include the number of installed units, the anticipated cost of warranty repairs, and historical and anticipated rates of warranty claims. Should actual warranty costs differ from the estimates, revisions to the estimated warranty liability would be required.
The following table provides the detail of the change in the Company’s product warranty accrual, which is a component of accrued expenses on the consolidated balance sheets at December 31, 2009, 2008 and 2007:
|
As of December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Warranty accrual at beginning of year
|
$ | 506,197 | $ | 622,051 | $ | 592,627 | ||||||
|
Accrual for new sales
|
360,200 | 396,500 | 428,400 | |||||||||
|
Expirations and changes
|
209,409 | 173,964 | (16,824 | ) | ||||||||
|
Warranty payments made in cash or in kind
|
(368,472 | ) | (686,318 | ) | (382,152 | ) | ||||||
|
Warranty accrual at end of year
|
$ | 707,334 | $ | 506,197 | $ | 622,051 | ||||||
F-31
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 13. Employee Benefit Plan
The Company has adopted a salary reduction profit-sharing plan under the provision of Section 401(k) of the Internal Revenue Code. The Plan entitles employees, meeting certain eligibility requirements, to make voluntary contributions to the Plan. Contributions cannot exceed the maximum amount under applicable provisions of the Internal Revenue Code. The Company, at its discretion, may contribute to the Plan. For the years ended December 31, 2009, 2008 and 2007, the Company recorded matching contributions of $199,678, $153,214 and $142,596, respectively, relating to the Plan.
Note 14. Stock Option Plan
The Company’s 2003 Stock Plan, as amended, is shareholder approved and permits awards to employees, directors and consultants of approximately 15.9 million shares.
All option grants and grant terms are approved by the Board of Directors including exercise price, vesting schedule and life of each grant. There are 2,061,956 shares available for future awards at December 31, 2009. In March 2009, the Company granted 4,490,920 shares of restricted common stock at $0.01 per share to one of its senior executives, which was funded through a note receivable agreement (see Note 4). The shares vest through October 2012 and the Company retains the right to repurchase any unvested shares in the event that the executive is no longer an employee or consultant of the Company prior to October 2011.
F-32
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 14. Stock Option Plan (continued)
The following table summarizes the stock option activity under the Plan:
|
Option Price Per Share
|
Number of Shares
|
Weighted Average Option Price
|
Aggregate Intrinsic Value
|
|||||||||||||
|
Balance at December 31, 2006
|
$ | 0.50 - 1.00 | 2,656,448 | $ | 0.78 | $ | 156,300 | |||||||||
|
Options Granted
|
0.80 - 0.94 | 904,000 | 0.85 | |||||||||||||
|
Options Exercised
|
0.50 - 1.00 | (100,356 | ) | 0.90 | ||||||||||||
|
Options Cancelled
|
0.50 - 1.10 | (133,189 | ) | 0.78 | ||||||||||||
|
Balance at December 31, 2007
|
$ | 0.50 - 1.10 | 3,326,903 | $ | 0.79 | $ | 499,277 | |||||||||
|
Options Granted
|
0.01 - 0.94 | 7,210,209 | 0.02 | |||||||||||||
|
Options Exercised
|
— | — | — | |||||||||||||
|
Options Cancelled
|
0.01 - 1.00 | (393,817 | ) | 0.71 | ||||||||||||
|
Balance at December 31, 2008
|
$ | 0.01 - 1.00 | 10,143,295 | $ | 0.02 | $ | — | |||||||||
|
Options Granted
|
0.01 | 169,000 | 0.01 | |||||||||||||
|
Options Exercised
|
— | — | — | |||||||||||||
|
Options Cancelled
|
0.01 - 1.00 | (983,702 | ) | 0.15 | ||||||||||||
|
Balance at December 31, 2009
|
$ | 0.01 - 0.94 | 9,328,593 | $ | 0.02 | $ | 2,394,592 | |||||||||
|
Options vested and expected to
vest at December 31, 2009
|
$ | 2,358,786 | ||||||||||||||
|
Options exercisable at
December 31, 2009
|
$ | 1,201,040 | ||||||||||||||
There were no options exercised in either 2009 or 2008. The total intrinsic value of options exercised during the year 2007 was $8,044, with intrinsic value defined as the difference between the estimated fair market value on the date of exercise and the grant date strike price. The total amount of cash received from the exercise of these options was $90,793. The actual tax benefit realized for the tax deductions from option exercises in 2007 was $0.
The Company estimates the fair value of stock option awards using the Black-Scholes valuation model. Compensation expense is recognized on a straight-line basis over the awards’ vesting periods for those awards which contain only a service vesting feature. For awards with a performance condition vesting feature, compensation expense is recognized on a graded-vesting basis over the awards’ vesting periods. The estimation of stock-based awards that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures and actual results and future changes in estimates may differ substantially from year to year.
Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective estimates and assumptions, including the estimated fair value of common stock, expected life of the stock-based payment awards and stock price volatility. Historically, we used the Black-Scholes option-pricing model to value our option grants and determine the related compensation expense. Option pricing
F-33
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 14. Stock Option Plan (continued)
models require judgment on inputs including fair value, volatility, and term. Fair value was determined using a Probability-Weighted Expected Return allocation methodology (or “PWERM”, described below). We have historically been a private company and lack company-specific historical and implied volatility information. Therefore, we estimate our expected volatility based on the historical volatility of our publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded stock price. The expected term of options was determined based on the PWERM scenario timelines and probability weightings. The risk-free interest rate used for each grant is based on a U.S. Treasury instrument with a term similar to the expected term of the option. ASC 718 (formerly known as SFAS No. 123R Accounting for Stock-Based Compensation) requires that we recognize compensation expense for only the portion of options that are expected to vest. We have estimated expected forfeitures of stock options with the adoption of ASC 718 to be 3% for the year ended December 31, 2009. In developing a forfeiture rate estimate, we have considered our historical experience. If there are additional forfeitures of unvested options, adjustments to compensation expense may be required in future periods.
The assumptions used in calculating the fair value for the year ended December 31, 2009 were a risk-free interest rate of 3.0%, expected term of 10 years, weighted average expected volatility of 21%, and no expected dividends. These assumptions represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different. The most significant input into the Black-Scholes option-pricing model used to value our option grants is the fair value of common stock.
We historically have granted stock options at exercise prices equivalent to the fair value of the common stock as of the date of grant, as determined by the board of directors with input from management. Because there has been no public market for the common stock, the board determined the fair value of the common stock by considering a number of objective and subjective factors, including our financial performance and projections, the relative illiquidity of the common stock, the preferences of our outstanding convertible preferred stock as compared to the common stock, including the redemption, liquidation preferences and dividend rights, and peer group trading multiples.
In connection with our preparation of consolidated financial statements, the board instructed management to prepare a valuation analysis to determine the fair value of the common stock for purposes of the stock option grants during those years. Independent valuation firms have been utilized in the past as an input to the Board of Directors in their determination of value process.
These valuations were prepared using the probability-weighted expected return method (“PWERM”). Under this methodology, the fair market value of the common stock was estimated based upon an analysis of future values assuming three possible outcomes: an initial public offering, a sale or merger, and continued operation as a private company. The probability-weighted present value of expected future investment returns was then determined, based on the future value, likelihood and timing of each of these possible outcomes. The anticipated likelihood and timing of each of the possible outcomes were based on the plans of the board and management.
The initial public offering scenario analyses utilized the guideline public company method. Management and the board estimated our enterprise value under the guideline public company method by comparing our company to publicly traded companies in our industry group. The companies used for comparison under the guideline public company method were selected based on a number of factors, including the similarity of their industry, business model and financial risk to ours. In determining our enterprise value under this method, the board used current revenue multiples of the peer companies applied to our revenues for the corresponding period.
F-34
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 14. Stock Option Plan (continued)
The sale or merger scenario analyses utilized a revenue multiple based on an analysis of similar transactions (similarity of the industry, businesses acquired, and related risks) and companies, applied to our corresponding revenue for the period in which the transaction is anticipated to occur. The private company scenario enterprise value was based on an average of guideline public revenue and EBITDA multiples applied to the corresponding financial metrics and a discounted cash flow analysis using a similar guideline public company multiple for the terminal capital value.
We granted 169,000 stock options with a weighted average exercise price of $0.01 in 2009. The board determined that the fair value of the common stock was $0.01 per share in July 2008 and increased the value to $0.27 as of November 2009. The following discussion describes the reasons for the difference between the fair value of the common stock on these grant dates.
Leading up to the third quarter ended September 30, 2009, we continued to operate our business in the ordinary course. Our customer revenue continued to grow. We continued, however, to operate at a loss, primarily due to increases in operating expenses to support the growth of our business, including the funding of working capital. We raised additional financing equity, with corresponding liquidation preferences and additional warrants, in the succeeding quarters to sustain growth. The result of the financings was the majority of distributable enterprise value to shareholders was primarily consumed by obligations related to liquidation preferences, leaving little value for common shareholders. A valuation completed in August 2009 by an independent valuation firm supported the $0.01 valuation.
In the third quarter of 2009, based on new orders and public market opportunities, the board of directors updated the valuation to reflect a near-term liquidity event. During this time, we selected investment banks to serve as the managing underwriters of a possible initial public offering. We held an organizational meeting for this offering in December 2009 and filed the registration statement for this offering with the SEC in February 2010. Additionally, during the fourth quarter of 2009, we operated on a cash-flow positive basis and posted net profits for the year for the first time, while increasing operating expenses to support the growth of our business, including the funding of working capital. This significant turn in operational results, coupled with a near-term anticipated liquidity event, higher valuations for publicly-traded comparable companies, and a continuing reduction in our term debt due to HTGC supported a higher pricing for our common stock as indicated.
Total stock-based compensation expense for the years ended December 31, 2009, 2008 and 2007, respectively, totaled $155,835, $194,891, and $195,168. During 2008 the Company modified 2,848,986 issued and outstanding stock options to existing employees, directors and consultants, which had an exercise price ranging from $1.10 to $0.50. The modification decreased the exercise price to $0.01 and resulted in $5,700 of stock-based compensation expense which will be recognized as expense through November 2011. The weighted average fair value per share of options granted during 2009, 2008 and 2007, was approximately $0.004, $0.01 and $0.40 respectively.
Since July 2006, Board practice has been to require updates (typically semi-annual) of the analysis of the fair market value of the Company’s Common Stock based on a valuation performed by an Independent appraiser qualified to perform studies compliant with Internal Revenue Code Section 409A regulations. The fair value of each option granted during 2009, 2008 and 2007 is estimated on the date of grant using the Black-Scholes valuation model with the following average assumptions:
F-35
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 14. Stock Option Plan (continued)
|
2009
|
2008
|
2007
|
|||||
|
Expected life in years
|
10 years
|
10 years
|
10 years
|
||||
|
Expected volatility
|
21%
|
19%
|
23%
|
||||
|
Risk-free interest rate
|
3.0%
|
2.1%
|
4.55%
|
||||
|
Expected dividend yield
|
0%
|
0%
|
0%
|
||||
|
Service period in years
|
4 years
|
4 years
|
4 years
|
The expected volatility is based upon historical volatilities of a similar industry sector since it is not practicable to estimate the expected volatility of the Company’s common stock due to the limited number of equity transactions. Comparable companies relied upon in our fair value determination were based on industry and competitor comparability, and further refined based on market capitalization and debt. All comparable companies manufacture equipment used in a type of semiconductor application, and their customers, revenues, and expenses would be similar to ours. Additionally, the comparables all have mature products and revenues. We noted our closest public competitors (market capitalization amounts averaging approximately $140 million) did not have significant debt amounts, however our closest competitor with a much higher market capitalization amount did have significant debt and was included on that basis. Cyclicality was not factored separately as an adjustment as all comparable companies are subject to the same industry cyclicality.
The following tables summarize the information about stock options outstanding and exercisable as of December 31, 2009, 2008 and 2007:
| 2009 | ||||||||||||||||||||||||||
|
Options Outstanding
|
Options Vested and Currently Exercisable
|
|||||||||||||||||||||||||
|
Exercise Price
|
Number Outstanding
|
Weighted Average Remaining Contractual Life (Years)
|
Weighted Average Exercise Price (Per Share)
|
Number Vested and Outstanding
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life (Years)
|
||||||||||||||||||||
| $ | 0.01 | 9,210,493 | 7.88 | $ | 0.01 | 4,619,906 | $ | 0.01 | 7.13 | |||||||||||||||||
| 0.50 | 22,500 | 1.69 | 0.50 | 22,500 | 0.50 | 1.69 | ||||||||||||||||||||
| 0.94 | 95,600 | 3.04 | 0.94 | 95,600 | 0.94 | 3.04 | ||||||||||||||||||||
| 9,328,593 | 7.81 | $ | 0.02 | 4,738,006 | $ | 0.03 | 7.02 | |||||||||||||||||||
F-36
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 14. Stock Option Plan (continued)
| 2008 | ||||||||||||||||||||||||||
|
Options Outstanding
|
Options Vested and Currently Exercisable
|
|||||||||||||||||||||||||
|
Exercise Price
|
Number Outstanding
|
Weighted Average Remaining Contractual Life (Years)
|
Weighted Average Exercise Price (Per Share)
|
Number Vested and Outstanding
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life (Years)
|
||||||||||||||||||||
| $ | 0.01 | 9,854,695 | 8.97 | $ | 0.01 | 1,975,711 | $ | 0.01 | 6.68 | |||||||||||||||||
| 0.50 | 22,500 | 2.69 | 0.50 | 22,500 | 0.50 | 2.69 | ||||||||||||||||||||
| 0.60 | 16,146 | 7.39 | 0.60 | 16,146 | 0.60 | 7.39 | ||||||||||||||||||||
| 0.80 | 64,062 | 7.75 | 0.80 | 64,062 | 0.80 | 7.75 | ||||||||||||||||||||
| 0.82 | 40,292 | 8.42 | 0.82 | 40,292 | 0.82 | 8.42 | ||||||||||||||||||||
| 0.94 | 95,600 | 4.04 | 0.94 | 95,600 | 0.94 | 4.04 | ||||||||||||||||||||
| 1.00 | 50,000 | 5.86 | 1.00 | 50,000 | 1.00 | 5.86 | ||||||||||||||||||||
| 10,143,295 | 8.88 | $ | 0.02 | 2,264,311 | $ | 0.12 | 6.57 | |||||||||||||||||||
| 2007 | ||||||||||||||||||||||||||
|
Options Outstanding
|
Options Vested and Currently Exercisable
|
|||||||||||||||||||||||||
|
Exercise Price
|
Number Outstanding
|
Weighted Average Remaining Contractual Life (Years)
|
Weighted Average Exercise Price (Per Share)
|
Number Vested and Outstanding
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life (Years)
|
||||||||||||||||||||
| $ | 0.50 | 115,500 | 3.92 | $ | 0.50 | 115,500 | 0.50 | 3.92 | ||||||||||||||||||
| 0.60 | 521,375 | 7.98 | 0.60 | 275,583 | 0.60 | 7.96 | ||||||||||||||||||||
| 0.80 | 1,466,518 | 8.09 | 0.80 | 644,791 | 0.80 | 7.22 | ||||||||||||||||||||
| 0.82 | 657,000 | 9.42 | 0.82 | - | 0.82 | - | ||||||||||||||||||||
| 0.94 | 190,000 | 9.55 | 0.94 | 11,750 | 0.94 | 9.42 | ||||||||||||||||||||
| 1.00 | 376,510 | 6.23 | 1.00 | 290,800 | 1.00 | 6.52 | ||||||||||||||||||||
| 3,326,903 | 8.06 | $ | 0.79 | 1,338,424 | $ | 0.78 | 6.96 | |||||||||||||||||||
At December 31, 2009, 2008, and 2007, there was $100,304, $265,930, and $528,201 respectively, of total unrecognized compensation cost related to non-vested compensation grants. This unrecognized compensation is expected to be recognized over a weighted average period of 3 years.
F-37
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 15 Business Segments
In making a determination of business segments, we gave consideration to the Chief Executive Officer’s review of financial information and the organizational structure of our management team. Based on this review, we concluded that, at the present time, resources are allocated and other decisions are made based on consolidated financial information. Therefore, we have determined that we operate in one business segment, where we develop, manufacture, sell and support deposition equipment used primarily in the packaging of semi conductors in final product form. Most of the Company’s long lived assets are located in North America. The following chart presents net revenue based on customer location for the years 2009, 2008 and 2007.
|
Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
North America
|
$ | 11,674,397 | $ | 2,077,512 | $ | 7,049,495 | ||||||
|
Europe
|
3,464,138 | 5,005,103 | 3,537,889 | |||||||||
|
Asia
|
23,053,861 | 11,247,235 | 15,114,815 | |||||||||
|
Total Revenue
|
$ | 38,192,396 | $ | 18,329,850 | $ | 25,702,199 | ||||||
Note 16 Financial Statement Restatements
In connection with the Company’s anticipated filing of a registration statement the previously issued 2007 and 2008 financial statements have been restated to reflect the adoption of the following: (1) Securities Exchange Commission’s Accounting Series Release (ASR) No. 268 which required the reclassification of the carrying value of the Series A, B, C and D redeemable convertible preferred stock to temporary equity utilizing the mezzanine presentation and (2) ASC 480, formerly FASB Staff Position 150-5, Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable, which required the reclassification of the fair value of preferred stock warrants to a long-term liability.
The effect of the restatement on the consolidated financial statements is as follows:
|
Preferred
|
Total
|
Preferred
|
Net
|
|||||||||||||
|
Stock Warrant
|
Stockholders'
|
Stock
|
Income
|
|||||||||||||
|
Liability
|
Equity
|
(Loss)
|
||||||||||||||
|
As previously reported at December 31, 2007
|
$ | - | $ | (1,636,700 | ) | $ | — | $ | (4,811,805 | ) | ||||||
|
Effect of adoption of ASR No. 268 and FSP 150-5
|
317,000 | (21,975,572 | ) | 21,658,572 | — | |||||||||||
|
As restated at December 31, 2007
|
$ | 317,000 | $ | (23,612,272 | ) | $ | 21,658,572 | $ | (4,811,805 | ) | ||||||
|
As previously reported at December 31, 2008
|
$ | — | $ | 426,932 | $ | — | $ | (8,506,670 | ) | |||||||
|
Effect of adoption of ASR No. 268 and FSP 150-5
|
3,465,072 | (32,377,840 | ) | 28,912,768 | (26,923 | ) | ||||||||||
|
As restated at December 31, 2008
|
$ | 3,465,072 | $ | (31,950,908 | ) | $ | 28,912,768 | $ | (8,533,593 | ) | ||||||
F-38
NEXX Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 17 Subsequent Events
The Company evaluated subsequent events when the consolidated financial statements were issued.
On January 22, 2010, the Board of Directors, in conjunction with the 2009 Series D extension financing, granted 1.6 million common stock options to employees and consultants and 5.3 million restricted stock units to executive management and independent directors, at fair market value, determined to be $0.27 per share.
F-39
shares
Nexx Systems, Inc.
Common Stock
PROSPECTUS
Canaccord Adams
CIBC
Macquarie Capital Markets Canada Ltd.
April , 2010
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
The expenses (other than underwriting discounts and commissions) payable by us in connection with this offering are as follows:
|
Amount
|
||||
|
SEC registration fee
|
$ | 2,994.60 | ||
|
FINRA fee
|
4,700 | |||
| Canadian Securities Administrators filing fee | 13,083 | |||
|
TSX listing fee
|
10,500 | |||
|
Printing and mailing expenses
|
* | |||
|
Accounting fees and expenses
|
* | |||
|
Legal fees and expenses
|
* | |||
|
Transfer agent fees and expenses
|
21,000 | |||
|
Miscellaneous
|
* | |||
|
Total expenses
|
$ | * | ||
* To be filed by amendment.
Set forth below is information regarding unregistered securities issued by us within the past three years. Also included is the consideration, if any, received by us for such securities and information relating to the section of the Securities Act, or rule of the SEC, under which exemption from registration was claimed. The information below does not give effect to a 1 to 10 reverse stock split based upon our amended and restated certificate of incorporation that we will file with Delaware immediately prior to the closing of this offering
Since January 1, 2007, we have issued and sold unregistered securities in connection with private placements of our securities and option issuances. These securities were deemed to be exempt from registration either pursuant to (a) Section 4(2) of the Securities Act and Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering; or (b) Section 3(b) of the Securities Act and Rule 701promulgated thereunder, as transactions pursuant to a compensatory benefit plan approved by the registrant’s board of directors.
The recipients of securities in each of the transactions summarized below represented their intention to acquire the securities for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof. All securities described in this Item 15 are deemed restricted securities for purposes of the Securities Act. The instruments representing such issued securities included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer. All recipients either received adequate information about us or had adequate access, through their relationship with us, to information about us. There were no underwriters employed in connection with any of the transactions set forth in Item 15.
II-1
Stock and Convertible Debt Issuances
On June 22, 2007, in connection with amending the terms of our outstanding debt, we issued a warrant to purchase an aggregate of up to 1,176,471 shares of our series D convertible preferred stock at an exercise price of $0.425 per share to our principal lender in a private placement under Section 4(2) of the Securities Act.
From October 2007 to June 2008, we sold convertible promissory notes in the aggregate principal amount of $7.0 million and simultaneously issued warrants to purchase an aggregate of up to 1,176,471 shares of our series D preferred stock at an exercise price of $0.425 per share to accredited investors in a private placement under Section 4(2) of the Securities Act. These promissory notes carried interest at the rate of 9%. These notes (including accrued interest) converted into 18,031,777 shares of our series D convertible preferred stock on June 27, 2008.
In July, September and October 2008, we issued and sold an aggregate of 6,792,397 shares of series D convertible preferred stock and warrants to purchase an aggregate of up to 6,691,643 additional shares of series D convertible preferred stock at an exercise price of $0.01 per share to accredited investors in a private placement under Section 4(2) of the Securities Act for aggregate consideration of $2.9 million.
In May 2009, pursuant to the exercise of previously issued warrants, we issued and sold an aggregate of 2,399,996 shares of our series D convertible preferred stock to accredited investors in a private placement under Section 4(2) of the Securities Act at a purchase price of $0.01 per share.
On July 9, 2009, in connection with amending the terms of our outstanding debt, we issued a warrant to purchase an aggregate of up to 705,882 shares of our series D preferred stock at an exercise price of $0.425 per share to an accredited investor in a private placement under Section 4(2) of the Securities Act.
In October and November 2009, we issued and sold an aggregate of 12,348,061 units, each unit consisting of one share of series D convertible preferred stock and a warrant to purchase an additional share of series D preferred stock at an exercise price of $0.01 per share, to accredited investors in a private placement under Section 4(2) of the Securities Act for aggregate consideration of $5.2 million.
From November 2009 through March 2010, pursuant to the exercise of previously issued warrants, we issued and sold an aggregate of 16,360,374 shares of our series D convertible preferred stock and 457 shares of our series D convertible preferred stock at purchase prices of $0.01 and $0.425 per share, respectively, to accredited investors in private placements under Section 4(2) of the Securities Act.
Issuances Pursuant to our 2003 Employee, Director and Consultant Stock Option Plan
Pursuant to our 2003 Employee, Director and Consultant Stock Option Plan, since January 1, 2007 we have issued an aggregate of 4,490,920 shares of our common stock, which were all issued at a price of $0.01 per share, granted options to purchase an aggregate of 9,909,418 shares of our common stock with exercise prices ranging from $0.01 to $0.94 per share, granted options to purchase an aggregate of 10,000 shares of our common stock in February 2010 with an exercise price equal to the price per share of this offering , and issued awards of 5,275,000 restricted stock units in January 2010, which were all issued at a valuation of $0.27 per share, to employees, directors and consultants. Since January 1, 2007, an aggregate of 236,293 shares have been issued upon the exercise of stock options for aggregate consideration of $ 92,288.61 . All of these shares, options and restricted stock units were issued pursuant to Rule 701 promulgated under Section 3(b) of the Securities Act as transactions pursuant to a compensatory benefit plan approved by the registrant’s board of directors. Some of these options have lapsed or otherwise expired and are no longer exercisable.
II-2
Item 16. Exhibits and Financial Statement Schedules.
|
(a)
|
The exhibits to this registration statement are listed in the Exhibit Index attached hereto and incorporated by reference herein.
|
|
(b)
|
All Financial Statement Schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto .
|
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denomination and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
|
(1)
|
For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
|
|
(2)
|
For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
|
|
(3)
|
For the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
|
|
(4)
|
For the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities, in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
|
|
(i)
|
Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
|
|
(ii)
|
Any free writing prospectus relating to the offering prepared by or on behalf of theundersigned registrant or used or referred to by the undersigned registrant;
|
|
(iii)
|
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
|
|
(iv)
|
Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
|
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Billerica, Commonwealth of Massachusetts, on this 6th day of April , 2010.
|
NEXX Systems, Inc.
|
|||
|
|
By:
|
/s/ Thomas M. Walsh | |
|
Thomas M. Walsh, Chief Executive Officer
|
|||
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities held on the dates indicated.
|
Signature
|
Title
|
Date
|
||||||||||||
|
/s/ Thomas M. Walsh
Thomas M. Walsh
|
Chief Executive Officer and Director
(principal executive officer)
|
April 6, 2010
|
||||||||||||
|
/s/ Stanley D. Piekos
Stanley D. Piekos
|
Chief Financial Officer
(principal financial and accounting officer)
|
April 6, 2010
|
||||||||||||
|
*
Richard S. Post
|
Director
|
April 6, 2010
|
||||||||||||
|
*
Carlton J. Eibl
|
Director
|
April 6, 2010
|
||||||||||||
|
*
Clifford L. Haas
|
Director
|
April 6, 2010
|
||||||||||||
|
*
Bruce C. Rhine
|
Director
|
April 6, 2010
|
||||||||||||
|
*
Robert G. Deuster
|
Director
|
April 6, 2010
|
||||||||||||
|
*
R. Douglas Norby
|
Director |
April 6, 2010
|
||||||||||||
|
* By: /s/ Stanley D. Piekos
Attorney-in-fact |
April 6, 2010
|
|||||||||||||
II-4
EXHIBIT INDEX
|
Number
|
Description
|
|
|
*
|
1.1
|
Form of Underwriting Agreement
|
|
%
|
3.1
|
Certificate of Incorporation of the Registrant
|
|
%
|
3.1.1
|
Certificate of Amendment of Certificate of Incorporation of the Registrant, dated October 26, 2009
|
|
%
|
3.1.2
|
Certificate of Amendment of Certificate of Incorporation of the Registrant, dated February 10, 2010
|
|
*
|
3.2
|
Form of Amended and Restated Certificate of Incorporation of the Registrant (to be effective upon completion of this offering)
|
|
%
|
3.3
|
By-laws of Registrant
|
|
*
|
3.4
|
Form of Amended and Restated By-laws of the Registrant (to be effective upon completion of this offering)
|
|
*
|
4.1
|
Specimen Stock Certificate
|
|
%
|
4.2
|
Third Amended and Restated Investor Rights Agreement, dated October 27, 2009, by and among the Registrant and certain stockholders of the Registrant
|
|
▲
|
4.3
|
Waiver Agreement, dated January 20, 2010, by and among the Registrant and certain stockholders of the Registrant |
|
*
|
5.1
|
Opinion of Gennari Aronson, LLP
|
|
%†
|
10.1
|
2003 Stock Option Plan
|
|
%†
|
10.1.1
|
Form of Incentive Stock Option Agreement under 2003 Stock Option Plan
|
|
%†
|
10.1.2
|
Form of Employee Non-Qualified Stock Option Agreement under 2003 Stock Option Plan
|
|
%†
|
10.1.3
|
Form of Director Non-Qualified Stock Option Agreement under 2003 Stock Option Plan
|
|
%†
|
10.1.4
|
Form of Consultant Non-Qualified Stock Option Agreement under 2003 Stock Option Plan
|
|
%†
|
10.1.5
|
Form of Restricted Unit Agreement under 2003 Stock Option Plan
|
|
*†
|
10.2
|
2010 Stock Incentive Plan
|
|
*†
|
10.2.1
|
Form of Incentive Stock Option Agreement under 2010 Stock Incentive Plan
|
|
*†
|
10.2.2
|
Form of Non-Qualified Stock Option Agreement under 2010 Stock Incentive Plan
|
|
*†
|
10.2.3
|
Form of Stock Purchase Rights Agreement under 2010 Stock Incentive Plan
|
|
%†
|
10.3
|
Restricted Stock Agreement, dated June 23, 2009, by and between the Registrant and Thomas Walsh
|
|
%†
|
10.4
|
Employment Agreement, dated September 13, 2008, by and between the Registrant and Thomas Walsh
|
|
▲†
|
10.4.1 | First Amendment to Employment Agreement, dated February 22, 2010 by and between the registrant and Thomas Walsh |
|
%†
|
10.5
|
Employment Agreement, dated June 29, 2006, by and between the Registrant and Stanley Piekos
|
|
▲†
|
10.5.1 | First Amendment to Employment Agreement, dated February 22, 2010 by and between the registrant and Stanley Piekos |
|
%†
|
10.6
|
Employment Agreement, dated May 13, 2002, by and between the Registrant and Arthur Keigler
|
|
▲†
|
10.6.1 | First Amendment to Employment Agreement, dated February 22, 2010 by and between the registrant and Arthur Keigler |
|
%†
|
10.7
|
Employment Agreement, dated July 29, 2009, by and between the Registrant and John Bowers
|
| ▲† | 10.7.1 | First Amendment to Employment Agreement, dated February 22, 2010 by and between the registrant and John Bowers |
|
%†
|
10.8
|
Employment Agreement, dated August 11, 2009, by and between the Registrant and Phillip Villari
|
| ▲† | 10.8.1 | First Amendment to Employment Agreement, dated February 22, 2010 by and between the registrant and Phillip Villari |
|
%†
|
10.9
|
Employment Agreement, dated August 7, 2001, by and between the Registrant and Richard Post
|
|
%†
|
10.9.1
|
First Amendment to Employment Agreement, dated January 1, 2009, by and between the Registrant and Richard Post
|
|
%†
|
10.10
|
Form of Proprietary Information and Inventions and Non-Competition Agreement
|
|
*
|
10.11
|
Form of Indemnification Agreement, by and between the Registrant and its directors
|
|
%
|
10.12
|
Lease, dated August 31, 2007, by and between the Registrant and the Trustees of the Middlesex Technology Center Associates III Trust
|
II-5
|
▲#
|
10.13
|
Manufacturing Agreement, dated February 11, 2003, by and between the Registrant and Dakota Systems, Inc.
|
|
%
|
10.14
|
Loan and Security Agreement, dated December 19, 2006, by and between the Registrant and Hercules Technology Growth Capital, Inc.
|
|
%
|
10.14.1
|
First Amendment to Loan and Security Agreement, dated June 22, 2007, by and between the Registrant and Hercules Technology Growth Capital, Inc.
|
|
%
|
10.14.2
|
Second Amendment to Loan and Security Agreement, dated July 29, 2008, by and between the Registrant and Hercules Technology Growth Capital, Inc.
|
|
%
|
10.14.3
|
Third Amendment to Loan and Security Agreement, dated July 17, 2009, by and between the Registrant and Hercules Technology Growth Capital, Inc.
|
|
%
|
10.15
|
Warrant Agreement, dated December 19, 2006, issued by the Registrant to Hercules Technology Group
|
|
%
|
10.15.1
|
First Amendment to Warrant, dated July 29, 2008, issued by the Registrant to Hercules Technology Group
|
|
%
|
10.16
|
Warrant Agreement, dated June 22, 2007, issued by the Registrant to Hercules Technology Group
|
|
%
|
10.16.1
|
First Amendment to Warrant, dated July 29, 2008, issued by the Registrant to Hercules Technology Group
|
|
%
|
10.17
|
Warrant Agreement, dated July 17, 2009, issued by the Registrant to Hercules Technology Group
|
|
%
|
10.18
|
Warrant to Purchase Stock, dated June 14, 2004, issued by the Registrant to Comerica Bank
|
|
▲
|
10.19
|
Form of Warrant to Purchase Capital Stock of the Registrant (Bridge Warrant)
|
|
%
|
10.20
|
Form of Warrant for the Purchase of Shares of Series D Convertible Preferred Stock of the Registrant
|
|
▲#
|
10.21
|
Joint Development Agreement, dated February 11, 2009, by and between the Registrant and International Business Machines Corporation
|
|
▲
|
10.21.1 | Patent License Agreement, dated February 11, 2009, by and between the Registrant and International Business Machines Corporation |
|
▲#
|
10.22
|
Development Agreement, dated September 23, 2008, by and between the Registrant and Infineon Technologies Austria AG
|
|
▲#
|
10.22.1 | License Agreement, dated October 16, 2009, by and between the Registrant and Infineon Technologies Austria AG |
|
▲#
|
10.23
|
Patent and Know-How License Agreement, dated August 7, 2001, by and among the Registrant, MKS Instruments, Inc. (as successor-in-interest to Applied Science and Technology, Inc.) and ASTeX PlasmaQuest, Inc.
|
|
▲#
|
10.24 | Exclusive License Agreement, dated December 21, 1999, by and between the registrant (as successor-in-interest to All Wet Technologies, Inc.) and Arthur Keigler |
|
▲
|
16.1
|
Letter from Independent Registered Accounting Firm |
|
%
|
21.1
|
Subsidiaries of the Registrant
|
|
*
|
23.1
|
Consent of Gennari Aronson, LLP (included in Exhibit 5.1)
|
|
▲
|
23.2
|
Consent of McGladrey Pullen, LLP
|
|
▲
|
23.3
|
Consent of Parent, McLaughlin & Nangle, Certified Public Accountants, Inc.
|
|
%
|
24.1
|
Power of Attorney
|
|
▲
|
24.2 | Power of Attorney for R. Douglas Norby |
|
†
|
Indicates a management contract or any compensatory plan, contract or arrangement.
|
|
|
*
|
To be filed by amendment.
|
|
|
▲
|
Filed herewith.
|
|
|
%
|
Previously Filed. | |
|
#
|
Confidential treatment requested for portions of this document. | |
II-6