We
transfer certain products out of service from their internal use and make them
available for sale. The products transferred are our standard products in one
of the following areas: service loaners, rental or test units; engineering test
units; or sales demonstration equipment. Once transferred, the equipment is
sold by our regular sales channels as used equipment inventory. These product
units 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 product unit’s net book value and the sale transaction is accounted for as
revenue and cost of goods sold.
Stock-Based
Compensation Expense
We measure and recognize
compensation expense as required for all share-based payment awards, including
employee stock options and restricted stock unit awards, based on estimated fair
values and estimated forfeiture rate on the grant dates.
Income
Tax
Historically,
when accounting for uncertainty in income taxes, we have not incurred any
interest or penalties associated with tax matters and no interest or penalties
were recognized during the three and six months ended
June 30, 2017
. However, we
have adopted a policy whereby amounts related to 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 have
incurred net operating losses in certain past years. We continue to
maintain a valuation allowance for the full amount of the net deferred tax
asset balance associated with our net operating losses and credit
carryforwards, as sufficient uncertainty exists regarding our ability to
realize such tax assets in the future. There were
$234,000 and $226,000
of unrecognized
tax benefits related to uncertain tax positions and related valuation allowance
as of
June 30, 2017
and December 31, 2016,
respectively.
Tax
years that remain open for
examination
include 2013, 2014, 2015 and 2016
in the United States of America. In addition,
tax
years from 2000 to 2012 may be subject to examination in the event that we
utilize the net operating losses and credit carryforwards from those years in our
current
or future year tax returns.
Recent Accounting Pronouncements
In March
2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (ASU
2016-09), “Improvements to Employee Share-Based Payment Accounting”. ASU
2016-09 requires excess tax benefits to be recognized in the statement of
operations as an income tax expense and is applied prospectively by means of a
cumulative-effect adjustment of excess tax benefits from equity in the period
of adoption. The standard establishes an alternative practical expedient for
estimating the expected term of an award by recognizing the effects of
forfeitures in compensation cost when the forfeitures occur. Adoption of the
alternative practical expedient is applied prospectively on an entity-wide
basis. The standard requires that amounts paid to a taxing authority on the
employee’s behalf as a result of directly withholding shares for
tax-withholding purposes are to be presented on a retrospective basis as a
financing activity on the statement of cash flows. The standard became
effective beginning January 1, 2017. The adoption of ASU 2016-09 was not
material to 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 finance type lease. The standard
excludes leases of intangible assets or inventory. Early adoption of the
standard is allowed. The standard becomes effective beginning January 1, 2019.
We are in the process of evaluating the
impact of adoption on our consolidated financial statements.
During the second quarter of 2015, we amended our
lease agreement for the Redmond, Washington headquarters facility effective
July 8, 2015. The amended lease resulted in our headquarters relocating to a
nearby building, extending the term through April 2021, lowering the square
footage to approximately 20,460, providing lease inducement incentives and
lowering the rental rate. The lease commitment of approximately $1.7 million
will be paid over the term of the lease. As a result of this lease amendment,
the remaining balance of the restructure liability relating to the lease of
approximately $120,000 was incorporated into our deferred rent liability in
July 2015.
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 in Munich, Germany.
We signed a lease
agreement effective November 1, 2015 that extends through October 31, 2021 for
a new facility located in Shanghai, China which we moved into during the first
quarter of 2016. The new lease approximately doubled our space to 19,400
square feet at approximately 54% of the prior lease rental rate.
During
the fourth quarter of 2016, we signed a
lease agreement for a new facility located in Munich, Germany which was
effective March 1, 2017 and extends through February 28, 2022. The new lease slightly
increased our space to 4,895 square feet at approximately the same cost per
square foot as the prior lease.
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 June
30, 2017, the purchase commitments and other obligations totaled $2,117,000 of
which all but $23,000 are expected to be paid over the next twelve months.
NOTE 7 – CONTINGENCIES
As of June 30, 2017, 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 industry prospects or trends; expected revenues;
expected level of expense; expected savings; future results of operations;
reversals of tax valuation allowances; breakeven point, or financial position;
changes in gross margin; economic conditions and capital spending outlook;
market acceptance of our newly introduced or upgraded products; development,
introduction and shipment of new products; building lease arrangements; sales
channels 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 we 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, 2016
describe some, but not all, of the factors that could cause these differences.
OVERVIEW
We are managing the
core programming business for growth and profitability, while developing and
enhancing both our core products and our managed and secure programming
platform to drive future revenue and earnings growth. We continue to be in a
cyclical and rapidly evolving industry environment. We attempt to balance
industry changes, business geography shifts, exchange rate volatility, increasing
costs and strategic investments in our business with the level of demand and
mix of current business opportunities.
We are concentrating
our research and development efforts in our strategic growth markets, namely automotive
electronics and Internet of Things (IoT), focusing on new programming technologies,
secure supply chain solutions, automated programming systems and their
enhancements for the manufacturing environment and software. We are developing
technology to securely program new categories of semiconductors, including secure
elements, authentication chips, and secure microcontrollers. We plan to deliver
new programming technology and automated handling systems for managed and
secure programming in the manufacturing environment. We continue to focus on
extending the capabilities and support for our product lines and supporting the
latest semiconductor devices, including NAND Flash, e-MMC, UFS and
microcontrollers on our newer products.
Our customer focus remains
on strategic high volume manufacturers in key market segments like automotive
electronics, IoT, industrial controls, consumer electronics and wireless as
well as programming centers.
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
revenue recognition, estimating the percentage-of-
completion
on fixed-price professional engineering service contracts, sales returns, bad
debts, inventories, investments, 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:
We recognize revenue at the time the product is shipped. 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.
The revenue related
to products requiring installation that is perfunctory is 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 in most cases the customers themselves. This takes into
account the complexity, skill and training needed as well as customer
expectations regarding installation.
We enter into
multiple deliverable arrangements that arise during the sale of a system that
includes 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 value of the discount given to distributors who perform
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 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. Other service
revenue is recognized as it is delivered.
When
we sell 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 recognize revenue
when persuasive evidence of an arrangement exists, shipment has occurred, the
price is fixed or determinable, the buyer has paid or is obligated to pay,
collectability is reasonably assured, substantive
acceptance conditions, if any, have been met, the obligation is not contingent
on resale of the product, the buyer’s obligation would not be changed in the
event of theft, physical destruction or damage to the product, the buyer
acquiring the product for resale has economic substance apart from us and we do
not have significant obligations for future performance to directly bring about
the resale of the product by the buyer. 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 in one of the
following areas: service loaners, rental or test units; engineering test units;
or sales demonstration equipment. Once transferred, the equipment is sold by
our regular sales channels as used equipment inventory. These product units
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 product unit’s net book value and the sale transaction is accounted for as
revenue and cost of goods sold.
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 market. 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
current uncertain economic outlook for our industry and capital 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. 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
|
|
Six
Months Ended
|
Net sales by product line
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Automated programming systems
|
|
$7,502
|
|
61.1%
|
|
$4,657
|
|
$13,427
|
|
68.9%
|
|
$7,949
|
Non-automated programming systems
|
|
1,633
|
|
42.7%
|
|
1,144
|
|
2,932
|
|
18.9%
|
|
2,465
|
Total programming systems
|
|
$9,135
|
|
57.5%
|
|
$5,801
|
|
$16,359
|
|
57.1%
|
|
$10,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
Net sales by location
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$899
|
|
50.1%
|
|
$599
|
|
$1,646
|
|
1.5%
|
|
$1,622
|
% of total
|
|
9.8%
|
|
|
|
10.3%
|
|
10.1%
|
|
|
|
15.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$8,236
|
|
58.3%
|
|
$5,202
|
|
$14,713
|
|
67.3%
|
|
$8,792
|
% of total
|
|
90.2%
|
|
|
|
89.7%
|
|
89.9%
|
|
|
|
84.4%
|
Net
sales in the second quarter of 2017 were $9.1 million, compared with $5.8
million in the second quarter of 2016,
which primarily resulted from higher Automotive
Electronics and Internet of Things (IoT) demand from both OEMs and Programming
Centers. During the second quarter, we shipped and recorded revenue for the 100
th
PSV7000 system and 150
th
PSV family system. International sales represented 90% of total sales for
the second quarter of both 2017 and 2016. Of the international sales, the
Americas region (excluding the United States) experienced the strongest growth.
On
a product basis, our PSV product line, LumenX™ and consumables were higher
while our legacy equipment business continued its decline. Revenue for the
quarter was approximately 71% equipment, 23% consumables and 6% software and
services.
Order
bookings were $10.1 million in the second quarter of 2017, a 17-year high,
compared to $5.7 million in the second quarter of last year for year-over-year
growth of 75%. The variation in revenue percentages versus order percentages
relates to the change in backlog, deferred revenues and currency translation.
Backlog at June 30, 2017 was $4.7 million, compared to $3.2 million at June 30,
2016 and $4.9 million at March 31, 2017. Deferred revenue at June 30, 2017 was
$2.8 million compared to $1.1 million at June 30, 2016 and $1.4 million at
March 31, 2017.
For
the six months ending June 30, 2017, compared to the same period in 2016, net sales
growth is generally due to the same
factors discussed above for the second quarter, with a continued trend of higher automated and lower non-automated
system sales. On a regional basis, net sales increased 87% in Europe, 80% in the
Americas and 14% in Asia compared to the same period in 2016.
Gross Margin
|
Three
Months Ended
|
|
Six
Months Ended
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
$5,202
|
|
68.5%
|
|
$3,088
|
|
$9,369
|
|
66.8%
|
|
$5,616
|
Percentage of net sales
|
56.9%
|
|
|
|
53.2%
|
|
57.3%
|
|
|
|
53.9%
|
Gross
margin for the second quarter of 2017 compared to the same period in 2016, increased
in dollars due to higher sales volume. Gross margin as a percentage of sales
was 56.9%, compared to 53.2% in the second quarter of 2016, with the improvement
primarily due to the leverage of relatively fixed factory costs with higher
sales volume.
For
the first six months of 2017 compared to the same period in 2016, gross margin as
a percentage of sales increased generally due to the same factors discussed
above for the second quarter. 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
|
|
Six
Months Ended
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
$1,771
|
|
51.1%
|
|
$1,172
|
|
$3,316
|
|
44.4%
|
|
$2,297
|
Percentage of net sales
|
19.4%
|
|
|
|
20.2%
|
|
20.3%
|
|
|
|
22.1%
|
Research
and development (“R&D”) increased $599,000
in the second quarter of 2017 compared to the same period in 2016, primarily
due to higher personnel costs, incentive and stock based compensation as well
as SentriX NRE charges, which mostly relates to our Managed and Secure
Programming initiative.
For
the first six months of 2017 compared to the same period in 2016, the increase in
R&D expense was generally due to the same factors discussed above for the second
quarter.
Selling, General and Administrative
|
Three
Months Ended
|
|
Six
Months Ended
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general &
|
|
|
|
|
|
|
|
|
|
|
|
administrative
|
$2,163
|
|
41.8%
|
|
$1,525
|
|
$3,981
|
|
28.3%
|
|
$3,103
|
Percentage of net sales
|
23.7%
|
|
|
|
26.3%
|
|
24.3%
|
|
|
|
29.8%
|
Selling, General and
Administrative (“SG&A”) expenses increased $638,000 in the second quarter
of 2017 compared to the same period in 2016, primarily due to higher incentive, commission and stock based
compensation and travel, offset in part by lower depreciation charges and legal fees.
For the first six
months of 2017 compared to the same period in 2016, the increase in SG&A
expense was generally due to the same factors discussed above for the second
quarter as well as lower rent in 2017.
Interest
|
Three
Months Ended
|
|
Six
Months Ended
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
$6
|
|
(45.5%)
|
|
$11
|
|
$13
|
|
(43.5%)
|
|
$23
|
Interest income decreased
in the second quarter of 2017 compared to the same period in 2016, due to both lower
invested cash balances and lower interest rates.
For the first six months
of 2017 compared to the same period in 2016, the decrease in interest income
was generally due to the same factors discussed above for the second quarter.
Income Taxes
|
Three
Months Ended
|
|
Six
Months Ended
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
|
Jun. 30,
2017
|
|
Change
|
|
Jun. 30,
2016
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense)
|
($86)
|
|
*
|
|
($7)
|
|
($99)
|
|
*
|
|
($8)
|
* not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (expense) for the second quarter of 2017 compared to same period in 2016, primarily
resulted from foreign subsidiary income tax.
For
the first six months of 2017 compared to the same period in 2016, the change in
income tax expense was generally due to the same factors discussed above for
the second quarter.
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 $10.7 million as of June 30, 2017. Our deferred tax assets and valuation
allowance have been reduced by approximately $234,000 and $226,000 associated
with the requirements of accounting for uncertain tax positions as of June 30,
2017 and December 31, 2016, respectively. Given the uncertainty created by our
past loss history and the cyclical nature of the industry in which we operate,
we have limited the recognition of net deferred tax assets and maintain the tax
valuation allowances. We expect to further analyze the level of valuation
allowance during the second half of 2017 as we get better forecast visibility.
Financial Condition
Liquidity and Capital Resources
|
Jun. 30,
2017
|
|
Change
|
|
Dec. 31,
2016
|
(in thousands)
|
|
|
|
|
|
Working capital
|
$16,862
|
|
$2,289
|
|
$14,573
|
At June 30, 2017 our
cash position was $12.0 million, with $7.9 million in the USA and the balance
in foreign subsidiaries. The change in cash during the quarter resulted
primarily from earnings for the period.
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
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 for U.S. operations, 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.
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 $1.5 million in
the second quarter of 2017 compared to $584,000 in the second quarter of 2016.
Adjusted EBITDA, excluding equity compensation (a non-cash item) was $1.7
million in the second quarter of 2017, compared to $789,000 in the second
quarter of 2016.
EBITDA was $2.6
million for the first six months of 2017 compared to $533,000 in the first six
months of 2016. Adjusted EBITDA, excluding equity compensation was $3.0
million for the first six months of 2017, compared to $833,000 for the first six
months of 2016.
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
|
|
Six
Months Ended
|
|
|
Jun. 30,
2017
|
|
Jun. 30,
2016
|
|
Jun. 30,
2017
|
|
Jun. 30,
2016
|
(in thousands)
|
|
|
|
|
|
|
|
|
Net Income
|
|
$1,206
|
|
$444
|
|
$2,185
|
|
$276
|
Interest (income) expense
|
|
(6)
|
|
(11)
|
|
(13)
|
|
(23)
|
Taxes
|
|
86
|
|
7
|
|
99
|
|
8
|
Depreciation & amortization
|
|
165
|
|
144
|
|
328
|
|
272
|
EBITDA earnings
|
|
$1,451
|
|
$584
|
|
$2,599
|
|
$533
|
|
|
|
|
|
|
|
|
|
Equity compensation
|
|
270
|
|
205
|
|
367
|
|
300
|
Adjusted EBITDA earnings,
|
|
|
|
|
|
|
|
|
excluding equity compensation
|
|
$1,721
|
|
$789
|
|
$2,966
|
|
$833
|
|
|
|
|
|
|
|
|
|
RECENT ACCOUNTING ANNOUNCEMENTS
In March
2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (ASU
2016-09), “Improvements to Employee Share-Based Payment Accounting”. ASU
2016-09 requires excess tax benefits to be recognized in the statement of
operations as an income tax expense and is applied prospectively by means of a
cumulative-effect adjustment of excess tax benefits from equity in the period
of adoption. The standard establishes an alternative practical expedient for
estimating the expected term of an award by recognizing the effects of
forfeitures in compensation cost when the forfeitures occur. Adoption of the
alternative practical expedient is applied prospectively on an entity-wide
basis. The standard requires that amounts paid to a taxing authority on the
employee’s behalf as a result of directly withholding shares for
tax-withholding purposes are to be presented on a retrospective basis as a
financing activity on the statement of cash flows. The standard became
effective beginning January 1, 2017. The adoption of ASU 2016-09 was not
material to 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 finance type lease. The standard
excludes leases of intangible assets or inventory. Early adoption of the
standard is allowed. The standard becomes effective beginning January 1, 2019.
We are in the process of evaluating the
impact of adoption on our consolidated financial statements.
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with
Customers” (ASU 2014-09). ASU 2014-09 provides companies with a
single model for accounting for revenue arising from contracts with customers
and supersedes current revenue recognition guidance, including industry-specific
revenue guidance. The core principle of the model is to recognize revenue when
control of the goods or services transfers to the customer, as opposed to
recognizing revenue when the risks and rewards transfer to the customer under
the existing revenue guidance.
In
August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with
Customers” (ASU 2015-14), deferring the effective date of the new revenue
recognition standard by one year and it now takes effect for public entities in
fiscal years beginning after December 15, 2017. We plan to adopt the
revenue standards as of January 1, 2018, utilizing the modified retrospective
transition method. The Company is currently evaluating the potential impact of
the adoption on our consolidated financial statements. As part of this process,
the Company has identified its revenue streams and a preliminary analysis of
how we currently account for revenue transactions compared to the revenue
accounting required under the new standard. We intend to complete our adoption
plan in fiscal year
2017. Because of the nature
of the work that remains, at this time, we are unable to reasonably estimate
the impact of adoption on our consolidated financial statements. We will
continue our evaluation of revenue from our contracts with customers, and we
will update our expectations of the impact of adoption of the new revenue
standards on our consolidated financial statements in future filings.