When we license software
separately, we recognize software revenue upon shipment, provided that only
inconsequential obligations remain on our part and substantive acceptance
conditions, if any, have been met.
We establish a
reserve for sales returns based on historical trends in product returns and
estimates for new items.
We transfer certain
products out of service from their internal use and make them available for
sale. The products transferred are our standard products and typically are
service loaners, rental or test systems, engineering test systems or sales
demonstration systems. Once transferred, the systems are sold by our regular
sales channels as used inventory. These systems often involve refurbishing and
an equipment warranty, and are conducted as sales in our normal and ordinary
course of business. The transfer amount is the system’s net book value and the
sale transaction is accounted for as revenue and cost of goods sold.
Deferred revenue
relates to contracted amounts that have been invoiced to customers for which
remaining performance obligations must be completed before we can recognize
revenue. These amounts primarily relate to unamortized software and service
contracts and other items invoiced but not recognized due to incomplete
performance obligations, such as installation and acceptance requirements for
systems.
As of September 30,
2018 deferred revenue was $1.9 million, of which $1.8 million will be
recognized over the next twelve months, with the remaining balance to be recognized
beyond that.
Stock-Based
Compensation Expense
All stock-based
compensation awards are measured based on estimated fair values on the date of
grant and recognized as compensation expense on the straight-line single-option
method. Our share-based compensation is reduced for estimated forfeitures at
the time of grant and revised as necessary in subsequent periods if actual
forfeitures differ from those estimates.
Income
Tax
Penalties
associated with tax matters are classified as general and administrative
expense when incurred and amounts related to interest associated with tax
matters are classified as interest income or interest expense. We did not
incur any interest or penalties associated with tax matters during the three
months ended
September
30, 2018.
Tax
Reform impact was included in our 2017 financial statements, which primarily
reflected the deemed repatriation (IRC 965 transition tax), the AMT credit
receivable as a result of AMT repeal, and the revaluation of net deferred tax
assets and valuation allowance as a result of the income tax rate reduction.
We have
incurred net operating losses in certain past years.
Given the uncertainty created by our loss history, as
well as the volatile and uncertain economic outlook for our industry and cyclical
capital spending, we have limited the recognition of net deferred tax assets
associated with our net operating losses and credit carryforwards and continue
to maintain a valuation allowance for the full amount of the net deferred tax
asset balance. We will continue to
analyze the level of valuation allowance in future periods.
There were
$298,000 and $272,000
of
unrecognized tax benefits related to uncertain tax positions and a
corresponding valuation allowance as of
September 30, 2018,
and December 31, 2017, respectively.
During the third quarter of 2017, we amended our lease
agreement for the Redmond, Washington headquarters facility effective September
12, 2017, extending the lease to July 31, 2022, waiving a potential space give
back provision and receiving lease inducement incentives. Previously on June
8, 2015, the lease had been amended to relocate our headquarters to a nearby
building and lower the square footage to approximately 20,460.
In
addition to the Redmond facility, approximately 24,000 square feet is leased at
two foreign locations, including our sales, service, operations and engineering
office located in Shanghai, China, and our German sales, service and
engineering office located near Munich, Germany.
We signed a lease
agreement effective November 1, 2015, that extends through October 31, 2021,
for a facility located in Shanghai, China which we moved into during the first
quarter of 2016. This lease is for approximately 19,400 square feet.
During
the fourth quarter of 2016, we signed a
lease agreement for a new facility located near Munich, Germany which was
effective March 1, 2017, and extends through February 28, 2022. This lease is
for approximately 4,895 square feet.
NOTE 6 – OTHER
COMMITMENTS
We have purchase
obligations for inventory and production costs as well as other obligations
such as capital expenditures, service contracts, marketing, and development
agreements. Arrangements are considered purchase obligations if a contract
specifies all significant terms, including fixed or minimum quantities to be
purchased, a pricing structure and approximate timing of the transaction. Most
arrangements are cancelable without a significant penalty, and with short
notice, typically less than 90 days. At September
30, 2018, the purchase commitments and other obligations totaled $1,486,000 of
which all but $5,000 are expected to be paid over the next twelve months.
NOTE 7 – CONTINGENCIES
As of September 30, 2018, we were not a party to any legal
proceedings or aware of any indemnification agreement claims, the adverse
outcome of which in management’s opinion, individually or in the aggregate,
would have a material adverse effect on our results of operations or financial
position.
NOTE 8 –
EARNINGS PER SHARE
Basic
earnings per share is calculated based on the weighted average number of common
shares outstanding during each period. Diluted earnings per share is
calculated based on these same weighted average shares outstanding plus the
effect of potential shares issuable upon assumed exercise of stock options
based on the treasury stock method. Potential shares issuable upon the
exercise of stock options are excluded from the calculation of diluted earnings
per share to the extent their effect would be anti-dilutive.
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Forward-Looking Statements
This Quarterly
Report on Form 10-Q includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. This Act provides a
“safe harbor” for forward-looking statements to encourage companies to provide
prospective information about themselves as long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from
the projected results. All statements other than statements of historical fact
made in this Quarterly Report on Form 10-Q are forward-looking. In particular,
statements herein regarding economic outlook, industry prospects and trends;
industry partnerships; future results of operations or financial position; future
spending; breakeven revenue point; expected market growth; market acceptance of
our newly introduced or upgraded products or services; the sufficiency of our
cash to fund future operations and capital requirements; development,
introduction and shipment of new products or services; changing foreign
operations; and any other guidance on future periods are forward-looking
statements. Forward-looking statements reflect management’s current
expectations and are inherently uncertain. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance, achievements, or
other future events. Moreover, neither Data I/O nor anyone else assumes
responsibility for the accuracy and completeness of these forward-looking
statements. We are under no duty to update any of these forward-looking
statements after the date of this report. The reader should not place undue
reliance on these forward-looking statements. The discussions above and in the
section in Item 1A., Risk Factors “Cautionary Factors That May Affect Future
Results” in our Annual report on Form 10-K for the year ended December 31,
2017, describe some, but not all, of the factors that could cause these
differences.
OVERVIEW
We continued our
focus on managing the core programming business for growth and profitability,
while developing and enhancing products to drive future revenue and earnings
growth. Our challenge continues to be operating in a cyclical and rapidly
evolving industry environment. We are continuing our efforts to balance
industry changes, trade and tariff issues, industry partnerships, business
geography shifts, exchange rate volatility, increasing costs and strategic
investments in our business with the level of demand and mix of business we
expect. We continue to manage our costs carefully and execute strategies for
cost reduction.
Our research and
development efforts focus on strategic high growth markets, namely automotive
electronics and Internet of Things (“IoT”) related new programming
technologies, secure provisioning solutions, automated programming systems and
their enhancements for the manufacturing environment and software. We are
developing technology to securely provision new categories of semiconductors,
including Secure Elements, Authentication Chips, and Secure Microcontrollers.
We continue to extend the capabilities and support for our product lines and
add additional support for the latest semiconductor devices, including NAND
Flash, e-MMC, UFS and microcontrollers on our newer products.
cRITICAL aCCOUNTING pOLICY jUDGMENTS AND eSTIMATES
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires that we make
estimates and judgments, which affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to sales returns, bad debts, inventories, intangible
assets, income taxes, warranty obligations, restructuring charges,
contingencies such as litigation and contract terms that have multiple elements
and other complexities typical in the capital equipment industry. We base our
estimates
on historical experience and other
assumptions that we believe are reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions.
We believe the
following critical accounting policies affect the more significant judgments
and estimates used in the preparation of our financial statements:
Revenue
Recognition:
Effective January 1,
2018, the Company adopted ASU 2014-09, Revenue (“Topic 606”): Revenue from
Contracts with Customers, using the modified retrospective method. Topic
606 provides a single, principles-based five-step model to be applied to all
contracts with customers. It generally provides for the recognition of revenue
in an amount that reflects the consideration to which the Company expects to be
entitled, net of allowances for estimated returns, discounts or sales
incentives, as well as taxes collected from customers when control over the
promised goods or services are transferred to the customer. For incremental
contract acquisition costs, the Company has elected the practical expedient to
capitalize and amortize incremental costs for obtaining contracts, primarily
sales commissions, with terms that exceed one year.
Our basic revenue
recognition remains essentially the same as it was in 2017, but we have
modified our policies and processes to be able to identify and properly defer
contract acquisition costs. The adoption of Topic 606 did not have a material
impact on our financial results.
We generally
recognize revenue at the time the product is shipped or when the service is
delivered. The revenue related to products requiring installation that is
perfunctory is generally recognized at the time of shipment. Installation that
is considered perfunctory includes any installation that can be performed by
other parties, such as distributors, other vendors, or the customers
themselves. This takes into account the complexity, skill and training needed
as well as customer expectations regarding installation. Contracts requiring
acceptance are recognized when acceptance is received.
We have determined
that our programming equipment has reached a point of maturity and stability
such that product acceptance can be assured by testing at the factory prior to
shipment and that the installation meets the criteria to be considered a
separate element. These systems are standard products with published
product specifications and are configurable with standard options. The
evidence that these systems could be deemed as accepted was based upon having
standardized factory production of the units, results from batteries of tests
of product performance to our published specifications, quality inspections and
installation standardization, as well as past product operation validation with
the customer and the history provided by our installed base of products upon
which the current versions were based.
We enter into
multiple deliverable arrangements that arise during the sale of a system that may
include consumables (adapters), an installation component, a service and
support component and a software maintenance component. We allocate the value
of each element based on relative selling prices. Relative selling price is
based on the selling price of the standalone system. For the installation and
service and support components, we use the standard compensation provided as a
discount to distributors or as additional commission to our representative channel
which performs these components. For software maintenance components, we use
what we charge for annual software maintenance renewals after the initial year
the system is sold. Revenue is generally recognized on the system sale based
on shipping terms, installation revenue is recognized after the installation is
performed, and hardware service and support and software maintenance revenue is
recognized ratably over the term of the agreement, typically one year.
When we license
software separately, we recognize software revenue upon shipment, provided that
only inconsequential obligations remain on our part and substantive acceptance
conditions, if any, have been met.
We establish a
reserve for sales returns based on historical trends in product returns and
estimates for new items.
We transfer certain
products out of service from their internal use and make them available for
sale. The products transferred are our standard products and typically are
service loaners, rental or test systems, engineering test systems or sales
demonstration systems. Once transferred, the systems are sold by our regular
sales channels as
used inventory. These systems often
involve refurbishing and an equipment warranty, and are conducted as sales in
our normal and ordinary course of business. The transfer amount is the system’s
net book value and the sale transaction is accounted for as revenue and cost of
goods sold.
Deferred revenue
relates to contracted amounts that have been invoiced to customers for which
remaining performance obligations must be completed before we can recognize
revenue. These amounts primarily relate to unamortized software and service
contracts and other items invoiced but not recognized due to incomplete
performance obligations, such as installation and acceptance requirements for
systems.
As of September 30,
2018, deferred revenue was $1.9 million which consisted of $1.8 million which
will be recognized over the next twelve months, and the remaining balance to be
recognized beyond that.
Allowance for
Doubtful Accounts:
We base the
allowance for doubtful accounts receivable on our assessment of the
collectability of specific customer accounts and the aging of accounts receivable.
If there is deterioration of a major customer’s credit worthiness or actual
defaults are higher than historical experience, our estimates of the
recoverability of amounts due to us could be adversely affected.
Inventory
: Inventories are stated at the lower of cost or net
realizable value. Adjustments are made to standard cost, which approximates
actual cost on a first-in, first-out basis. We estimate reductions to
inventory for obsolete, slow-moving, excess and non-salable inventory by reviewing
current transactions and forecasted product demand. We evaluate our
inventories on an item by item basis and record inventory adjustments
accordingly. If there is a significant decrease in demand for our products,
uncertainty during product line transitions, or a higher risk of inventory
obsolescence because of rapidly changing technology and customer requirements,
we may be required to increase our inventory adjustments and our gross margin
could be adversely affected.
Warranty
Accruals:
We accrue for warranty
costs based on the expected material and labor costs to fulfill our warranty
obligations. If we experience an increase in warranty claims, which are higher
than our historical experience, our gross margin could be adversely affected.
Tax Valuation
Allowances:
Given the uncertainty
created by our loss history, as well as the ongoing cyclical uncertain economic
outlook for our industry and capital and geographic spending, we expect to
continue to limit the recognition of net deferred tax assets and accounting for
uncertain tax positions and maintain the tax valuation allowances. Tax reform
related adjustments were recorded in 2017, which impacted the tax valuation
allowance. At the current time, we expect, therefore, that reversals of the
tax valuation allowance will take place only as we are able to take advantage
of the underlying tax loss or other attributes in carry forward. The transfer
pricing and expense or cost sharing arrangements are complex areas where
judgments, such as the determination of arms-length arrangements, can be
subject to challenges by different tax jurisdictions.
Share-based
Compensation:
We account for
share-based awards made to our employees and directors, including employee
stock option awards and restricted stock unit awards, using the estimated grant
date fair value method of accounting. For options, we estimate the fair value
using the Black-Scholes valuation model and an estimated forfeiture rate, which
requires the input of highly subjective assumptions, including the option’s
expected life and the price volatility of the underlying stock. The expected
stock price volatility assumption was determined using the historical
volatility of our common stock. Changes in the subjective assumptions required
in the valuation model may significantly affect the estimated value of the
awards, the related stock-based compensation expense and, consequently, our
results of operations. Restricted stock unit awards are valued based on the
average of the high and low price on the date of the grant. For both options
and restricted awards, expense is recognized as compensation expense on the
straight-line basis. Employee Stock Purchase Plan (“ESPP”) shares were issued
under provisions that do not require us to record any equity compensation
expense.
Results of Operations
Net Sales
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Net sales by product line
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Automated programming systems
|
|
$5,195
|
|
(33.1%)
|
|
$7,766
|
|
$16,849
|
|
(20.5%)
|
|
$21,193
|
Non-automated programming systems
|
|
1,338
|
|
(26.9%)
|
|
1,830
|
|
4,518
|
|
(5.1%)
|
|
4,762
|
Total programming systems
|
|
$6,533
|
|
(31.9%)
|
|
$9,596
|
|
$21,367
|
|
(17.7%)
|
|
$25,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Net sales by location
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$809
|
|
32.6%
|
|
$610
|
|
$2,168
|
|
(3.9%)
|
|
$2,256
|
|
% of total
|
|
12.4%
|
|
|
|
6.4%
|
|
10.1%
|
|
|
|
8.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$5,724
|
|
(36.3%)
|
|
$8,986
|
|
$19,199
|
|
(19.0%)
|
|
$23,699
|
|
% of total
|
|
87.6%
|
|
|
|
93.6%
|
|
89.9%
|
|
|
|
91.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in the third quarter of 2018 were $6.5 million, compared with $9.6 million in the third quarter of 2017. Automotive Electronics demand from both OEMs and Programming Centers continues to drive revenues and are primarily related to our PSV family of automated programming systems. The unusually strong demand in 2017 make the 2018 figures look comparatively weak. International sales represented 87.6% of total sales for the third quarter, compared to 93.6% during the same period in 2017. Unfavorable currency exchange rate changes reduced the third quarter of 2018 revenue by approximately $89,000, compared to the same period in 2017.
Revenue breakdown for the quarter was approximately 62% equipment, 25% consumables and 13% software and services.
Order bookings were $7.0 million in the third quarter of 2018, down from the prior year period of $8.2 million. Automotive Electronics OEM business was 62% of orders in the third quarter of 2018 compared to 51% in the prior year period. Programming Centers related business was 12% of orders in the third quarter of 2018 compared to 27% in the prior year period. The variation in revenue percentages versus order bookings percentages relates to the change in backlog, deferred revenues and currency translation. Total deferred revenue at the end of the third quarter of 2018 was $1.9 million ($1.8 million current and $82,000 long term) compared to $2.5 million at the end of the second quarter of 2018, $1.6 million at the end of the third quarter of 2017 and $1.9 million at December 31, 2017. Backlog at the end of the third quarter of 2018 was $3.1 million compared to $1.9 million at the end of the second quarter of 2018, $4.6 million at the end of the third quarter of 2017 and $4.0 million at December 31, 2017.
For the nine months ending September 30, 2018, compared to the same period in 2017, the change in net sales were generally due to the same factors discussed above for the third quarter, except for the first nine months currency exchange rate changes were net favorable and increased revenue by $463,000. On a regional basis, all regions were lower compared to the same periods in 2017 which had unusually strong sales.
Gross Margin
|
Three Months Ended
|
|
Nine Months Ended
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
$4,118
|
|
(30.9%)
|
|
$5,957
|
|
$12,783
|
|
(16.6%)
|
|
$15,326
|
Percentage of net sales
|
63.0%
|
|
|
|
62.1%
|
|
59.8%
|
|
|
|
59.0%
|
For the third quarter of 2018, gross margin in dollars was down primarily as a result of the lower sales volume. Gross margin as a percentage of sales was 63.0%, compared to 62.1% in the third quarter of 2017 and 59.0% in the second quarter of 2018. The increase in gross margin as a percentage of revenues when compared to both periods was due to a favorable product mix as well as comparatively favorable factory variances during the quarter. Unfavorable currency exchange rate changes reduced the third quarter of 2018 gross margin by approximately $51,000, compared to the same period in 2017.
For the first nine months of 2018 compared to the same period in 2017, gross margin as a percentage of sales increased generally due to the same factors discussed above for the third quarter except for the first nine months currency exchange rate changes were net favorable and increased gross margin by $166,000. Based on past experience, we expect variations in our gross margin as a percentage of sales due to changes in key factors for future periods including: sales volume, product mix, channel mix, pricing, inventory fluctuations, warranty, factory variances and currency exchange rates.
Research and Development
|
Three Months Ended
|
|
Nine Months Ended
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
$1,826
|
|
0.7%
|
|
$1,814
|
|
$5,550
|
|
8.2%
|
|
$5,130
|
Percentage of net sales
|
28.0%
|
|
|
|
18.9%
|
|
26.0%
|
|
|
|
19.8%
|
Research
and development (“R&D”) were
relatively flat in the third quarter of 2018 compared to the same period in 2017,
however expenses included additional and higher personnel costs, stock based
compensation and SentriX NRE charges, which mostly supported our Managed and
Secure Programming initiative, offset in part by lower incentive compensation
cost.
For
the first nine months of 2018 compared to the same period in 2017, the increase
in R&D expense was generally due to the higher costs in the first two
quarters of 2018 which declined slightly in the third quarter but were related
to the same factors discussed above for the third quarter.
Selling, General and Administrative
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general &
|
|
|
|
|
|
|
|
|
|
|
|
administrative
|
$1,888
|
|
(18.6%)
|
|
$2,319
|
|
$6,239
|
|
(1.0%)
|
|
$6,300
|
Percentage of net sales
|
28.9%
|
|
|
|
24.2%
|
|
29.2%
|
|
|
|
24.3%
|
Selling, General and
Administrative (“SG&A”) expenses for the third quarter of 2018 were lower
than the third quarter of 2017, with lower incentive compensation and
commissions, offset by higher stock based compensation, marketing related
activity and depreciation.
For the first nine
months of 2018 compared to the same period in 2017, the decrease in SG&A
expense was generally due to the same factors discussed above for the third
quarter.
Interest
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
$10
|
|
66.7%
|
|
$6
|
|
$26
|
|
36.8%
|
|
$19
|
Interest income increased
in the third quarter and for the first nine months of 2018 compared to the same
periods in 2017, due to higher cash balances and minor increases in interest
rates.
Income Taxes
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
|
Sep. 30,
2018
|
|
Change
|
|
Sep. 30,
2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense)
|
($180)
|
|
66.7%
|
|
($108)
|
|
($267)
|
|
29.0%
|
|
($207)
|
Income
tax (expense) for the third quarter of 2018 and for the first nine months of 2018
was higher when compared to same periods in 2017, and primarily related to foreign
subsidiary income.
The effective tax
rate differed from the statutory tax rate primarily due to the effect of
valuation allowances, as well as foreign taxes. We have a valuation allowance
of $7 million as of September 30, 2018. Our deferred tax assets and valuation
allowance have been reduced by approximately $298,000 and $272,000 associated
with the requirements of accounting for uncertain tax positions as of September
30, 2018, and December 31, 2017, respectively. Given the uncertainty created by our loss history, as well as the
volatile and uncertain economic outlook for our industry and capital spending,
we have limited the recognition of net deferred tax assets associated with our
net operating losses and credit carryforwards and continue to maintain a
valuation allowance for the full amount of the net deferred tax asset balance. We expect to further analyze the level of valuation
allowance during the remainder of 2018.
Financial Condition
Liquidity and Capital Resources
|
Sep. 30,
2018
|
|
Change
|
|
Dec. 31,
2017
|
(in thousands)
|
|
|
|
|
|
Working capital
|
$20,598
|
|
$1,112
|
|
$19,486
|
At September 30, 2018,
our cash position was $18.9 million, with $12.0 million in the United States
and the balance in foreign subsidiaries. We expect our receivables collections
to return to more normal levels during the fourth quarter, which should result
in an offset to the higher cash position achieved during the third quarter.
Although we have no
significant external capital expenditure plans currently, we expect that we will
continue to make capital expenditures to support our business. We plan to
increase our internally developed rental, sales demonstration and test
equipment as we develop and release new products. Capital expenditures are
currently expected to be funded by existing and internally generated funds.
As a result of our
significant product development, customer support, selling and marketing
efforts, we have required substantial working capital to fund our operations.
We have tried to balance our level of development spending with the goal of
profitable operations. We have implemented or have initiatives to implement
geographic shifts in our operations, optimized real estate usage, reduced
exposure to the impact of currency volatility, and additional product
development differentiation and cost reductions.
We
believe that we have sufficient cash or working capital available under our
operating plan to fund our operations and capital requirements through at least
the next one-year period. We may require
additional cash at the U.S. headquarters, which could cause potential
repatriation of cash that is held in our foreign subsidiaries. Although we have no current repatriation plans,
there may be tax and other impediments to any repatriation actions. Our
working capital may be used to fund possible losses, business growth, project
initiatives, share repurchases and business development initiatives including
acquisitions, which could reduce our liquidity and result in a requirement for additional cash before that time. Any substantial inability to achieve our current
business plan could have a material adverse impact on our financial position,
liquidity, or results of operations and may require us to reduce expenditures
and/or seek possible additional financing.
SHARE REPURCHASE PROGRAM
No stock repurchase
programs were in effect during the quarter ending September 30, 2018, and 2017.
On October 31, 2018,
our Board of Directors approved a share repurchase program with provisions to
buy back up to $2 million dollars of our stock during the next one year period.
OFF-Balance sheet arrangements
Except as noted in
the accompanying consolidated financial
statements in Note 5, “Operating Lease Commitments” and Note 6, “Other
Commitments”, we have no off-balance sheet arrangements.
Non-Generally accepted accounting principles (GAAP) FINANCIAL
MeasureS
Earnings Before
Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $742,000 in the third
quarter of 2018 compared to $2.1 million in the third quarter of 2017.
Adjusted EBITDA, excluding equity compensation (a non-cash item) was $1.0
million in the third quarter of 2018, compared to $2.3 million in the third
quarter of 2017.
EBITDA was $1.9
million for the first nine months of 2018 compared to $4.7 million in the first
nine months of 2017. Adjusted EBITDA, excluding equity compensation, was $2.9
million for the first nine months of 2018, compared to $5.3 million for the
first nine months of 2017.
Non-GAAP financial
measures, such as EBITDA and adjusted EBITDA, should not be considered a
substitute for, or superior to, measures of financial performance prepared in
accordance with GAAP. We believe that these non-GAAP financial measures
provide meaningful supplemental information regarding the Company’s results and
facilitate the comparison of results. A reconciliation of net income to EBITDA
and adjusted EBITDA follows:
Non-Generally accepted accounting principles (GAAP) FINANCIAL
Measure RECONCILIATION
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
Sep. 30,
2018
|
|
Sep. 30,
2017
|
|
Sep. 30,
2018
|
|
Sep. 30,
2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
Net Income
|
|
$342
|
|
$1,728
|
|
$958
|
|
$3,913
|
Interest (income)
|
|
(10)
|
|
(6)
|
|
(26)
|
|
(19)
|
Taxes
|
|
180
|
|
108
|
|
267
|
|
207
|
Depreciation & amortization
|
|
230
|
|
306
|
|
736
|
|
634
|
EBITDA
earnings
|
|
$742
|
|
$2,136
|
|
$1,935
|
|
$4,735
|
|
|
|
|
|
|
|
|
|
Equity compensation
|
|
282
|
|
173
|
|
932
|
|
540
|
Adjusted EBITDA earnings,
|
|
|
|
|
|
|
|
|
excluding equity compensation
|
|
$1,024
|
|
$2,309
|
|
$2,867
|
|
$5,275
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In 2018,
the FASB issued ASU 2018-15, “Intangibles” (ASU 2018-15). ASU 2018-15 applies
in accounting for implementation costs incurred in a cloud computing
arrangement that is a service contract where the guidance in ASC 350-40 for
internal-use software shall apply to determine capitalization or expensing of
implementation, training or data conversion costs. The standard becomes
effective beginning January 1, 2020.
We
are in the process of evaluating the impact of adoption on our consolidated
financial statements.
In February 2016, the FASB issued ASU 2016-02, “
Leases
”
(ASU 2016-02). ASU 2016-02 requires lessees to recognize almost all
leases on the balance sheet as a right-of-use asset and a lease liability and
requires leases to be classified as either an operating or a financing lease.
The standard excludes leases of intangible assets or inventory. ASU 2018-11
provides lessors with a limited practical expedient. The standard becomes
effective beginning January 1, 2019.
We
are in the process of evaluating the impact of adoption on our consolidated
financial statements and have not determined the effect yet, which will include
recording of right of use assets and liabilities for our leases and recognize a
cumulative effect adjustment to the opening balance of retained earnings. Our
leases include facilities in Redmond, Washington, and in the Shanghai and
Munich areas, as well as a small amount of office equipment and automobiles.
Item 3
.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4.
Controls and Procedures
Evaluation
of disclosure controls and procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the
end of the period covered by this report (the “Evaluation Date”). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective at the reasonable level of assurance. Disclosure
Controls are controls and procedures designed to reasonably assure that
information required to be disclosed in our reports filed under the Exchange
Act is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms. Disclosure Controls are also designed
to reasonably assure that such information is accumulated and communicated to our
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure.
Changes in
internal controls
There were no
changes made in our internal controls during the period covered by this report
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting which is still under the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control – Integrated Framework (2013).