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ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Cautionary Statement Regarding Forward-Looking Information
Statements made in this Annual Report on Form 10-K, in the Company’s
other SEC filings, in press releases and in oral statements, that are not statements of historical fact are “forward-looking
statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause
the actual results or performance of the Company to be materially different from the results or performance expressed or implied
by such forward-looking statements. The words “believes,” “expects,” “anticipates,” “seeks”
and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date the statement was made. The risks and uncertainties that could cause actual results
to differ materially and adversely from those expressed or implied by the forward-looking statements include those risks described
in Part I, Item 1A “Risk Factors.”
Overview of Business:
The Company sells highly configurable
fiber management and connectivity products to broadband service providers serving the Fiber-to-the-Premises (“FTTP”),
Fiber-to-the-Business (“FTTB”), and Fiber-to-the-Cell site markets in the U.S. and in certain limited markets outside
the U.S., including countries in the Caribbean, Canada, Central and South America. The Company’s sales channels include direct
to customer, through distribution partners, and to original equipment suppliers who private label its products. The Company’s
products are sold by its sales employees and independent sales representatives.
Critical Accounting Policies:
In
preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our sales,
income or loss from operations and net income or loss, as well as on the value of certain assets and liabilities on our balance
sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future
performance, as these policies affect the reported amounts of sales, expenses and significant estimates and judgments applied by
management. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that
are particularly significant include:
·
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Accounting for income taxes;
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·
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Valuation and evaluating impairment of long-lived assets and goodwill; and
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·
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Valuation of inventory.
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Revenue Recognition
Revenue is recognized when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is fixed, acceptance by the customer is reasonably certain
and collection is reasonably assured. This generally occurs upon shipment of product to the customer. Sales of the Company’s
products are subject to limited warranty obligations that are included in the Company’s terms and conditions. Also, the Company
offers limited discounts and rebates to customers which are recorded in net sales on an estimated basis as the sales are recognized.
The Company records freight revenues billed to customers as sales and the related shipping and handling cost in cost of sales.
Taxes collected from customers and remitted to governmental authorities are presented on a net basis.
Income Taxes
We account for income taxes in accordance
with Accounting Standards Codification (“ASC”) 740,
Income Taxes
, under which deferred income taxes are recognized
based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities
given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities
from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates
of future taxable income, and available tax planning strategies. If tax regulations, operating results, or the ability to implement
tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. A valuation
allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. The recorded valuation allowance
is based on significant estimates and judgments and if the facts and circumstances change, the valuation allowance could materially
change.
In accounting for uncertainty in income taxes, we recognize the
financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not
sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in
the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement
with the relevant tax authority. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component
of income tax expense.
As of September 30, 2017, the Company had no U.S. federal net operating
loss (“NOL”) carry-forwards and approximately $6,437,000 state NOLs. The U.S. federal NOL carry forward amounts were
fully utilized in fiscal year 2016. The state NOL carry forward amounts expire in fiscal years 2018 through 2022 if not utilized.
In fiscal year 2009, the Company completed an Internal Revenue Code Section 382 analysis of the loss carry-forwards and determined
that all of the Company’s loss carry-forwards were utilizable and not restricted under Section 382. The Company has not updated
its Section 382 analysis subsequent to 2009 and does not believe there have been any events subsequent to 2009 that would impact
the analysis.
As part of the process of preparing our financial statements, we
are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating
our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax
and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that
these deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not more
likely than not or unknown, we must establish a valuation allowance. If the valuation allowance is reduced, the Company would record
an income tax benefit in the period in which that determination is made. If the valuation allowance is increased, the Company would
record additional income tax expense.
As of September 30, 2016, the Company’s remaining valuation
allowance of approximately $322,000 related to state net operating loss carry forwards. During the fourth quarter of 2017, the
Company reversed approximately $163,000 of its remaining valuation allowance. Approximately $131,000 of the reversal related to
the expiration and utilization of state net operating losses in 2017. The remaining decrease of $32,000 is related to higher future
year expected NOL utilization based on updated profitability estimates. The remaining valuation allowance balance as of September
30, 2017 of $159,000 relates entirely to state net operating loss carry forwards we do not expect to utilize. The Company will
continue to assess the assumptions used to determine the amount of our valuation allowance and may adjust the valuation allowance
in future periods based on changes in assumptions of estimated future income and other factors.
The Company files income tax returns
in the U.S. Federal jurisdiction, and various state jurisdictions. Based on its evaluation, the Company has concluded that it has
no significant unrecognized tax benefits. With limited exceptions, the Company is no longer subject to U.S. federal and state income
tax examinations for fiscal years ending prior to 2002.
We are generally subject to U.S. federal and state tax examinations
for all tax years since 2002 due to our net operating loss carryforwards and the utilization of the carryforwards in years still
open under statute.
In 2007, the Company changed its fiscal year end from March 31 to September 30.
During the quarter ended December 31, 2015, the Company early adopted
Accounting Standards Update (“ASU”) 2015-17 to present balance sheet classification of deferred income taxes as noncurrent.
This adoption was applied prospectively and therefore, prior periods were not retrospectively adjusted.
During the quarter ended September 30, 2016, the Company early adopted
ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The standard is intended to simplify various aspects
of the accounting and presentation of share-based payments. During the quarter ended September 30, 2016, the Company elected to
early adopt this standard as of October 1, 2015. The impact of this early adoption is more fully described in Footnote D.
Impairment of Long-Lived Assets and Goodwill
The Company’s
long-lived assets at September 30, 2017 consisted primarily of property, plant and equipment, patents and goodwill. The Company
reviews the carrying amount of its property, plant and equipment and patents if events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. When this review indicates the carrying amount of an asset or asset group
exceeds the sum of the future undiscounted cash flows expected to be generated by the assets, the Company recognizes an asset impairment
charge against operations for the amount by which the carrying amount of the impaired asset exceeds its fair value.
Determining fair values of property, plant and equipment and patents
using a discounted cash flow method involves significant judgment and requires the Company to make significant estimates and assumptions,
including long-term projections of cash flows, market conditions and appropriate discount rates. Judgments are based on historical
experience, current market trends, consultations with external valuation specialists and other information. If facts and circumstances
change, the use of different estimates and assumptions could result in a materially different outcome. The Company generally develops
these forecasts based on recent sales data for existing products, planned timing of new product launches, and estimated expansion
of the FTTP market.
The Company operates as one reporting unit and reviews the carrying
amount of goodwill annually in the fourth quarter of each fiscal year and more frequently if events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. The Company determines its fair value for goodwill impairment
testing purposes by calculating its market capitalization and comparing that to the Company’s carrying value. The Company’s
goodwill impairment test for the years ended September 30, 2017, 2016, and 2015 resulted in excess fair value over carrying value
and therefore, no adjustments were made to goodwill. During the year ended September 30, 2017, there were no triggering events
that indicated goodwill could be impaired.
A significant reduction in our market capitalization or in the carrying
amount of net assets of a reporting unit could result in an impairment charge. If the carrying amount of a reporting unit exceeds
its fair value, the Company would measure the possible goodwill impairment loss based on an allocation of the estimate of fair
value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including any previously unrecognized
intangible assets. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is
the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit's recorded goodwill exceeds
the implied fair value of goodwill. An impairment loss would be based on significant estimates and judgments, and if the facts
and circumstances change, a potential impairment could have a material impact on the Company’s financial statements.
During the year ended September 30, 2017, the Company incurred an
impairment charge on long-lived assets of $643,604. This impairment was related to the cancellation of an enterprise resource planning
software implementation. No impairment of long-lived assets or goodwill has occurred during the years ended September 30, 2016
or 2015, respectively.
Valuation of Inventory
The Company maintains a material
amount of inventory to support its manufacturing operations and customer demand. This inventory is stated at the lower of cost
or market. On a regular basis, the Company reviews its inventory and identifies that which is excess, slow moving and obsolete
by considering factors such as inventory levels, expected product life and forecasted sales demand. Any identified excess, slow
moving and obsolete inventory is written down to its market value through a charge to cost of sales. It is possible that additional
inventory write-down charges may be required in the future if there is a significant decline in demand for the Company’s
products and the Company does not adjust its manufacturing production accordingly.
Results of Operations
Year ended September 30, 2017 compared to year
ended September 30, 2016
Net sales for fiscal year 2017 decreased 2%, or $1,340,000, to $73,948,000
from net sales of $75,288,000 in 2016.
Sales in fiscal year 2017 to commercial data networks and broadband
service providers were 95% of net sales, or $69,921,000, compared to $69,850,000, or 93%, of net sales in fiscal 2016. Among this
group, the Company recorded $6,047,000 in international sales in fiscal year 2017 versus $4,024,000 in fiscal year 2016. Sales
associated with build-to-print manufacturing for original equipment manufacturers outside of the telecommunications market in 2017
were 5% of net sales, or $4,027,000, compared to $5,438,000, or 7%, of net sales in fiscal year 2016. The Company allocates sales
from external customers to geographic areas based on the location to which the product is transported. Accordingly, international
sales represented 8% and 5% of net sales for the years ended September 30, 2017 and 2016, respectively.
The decrease in net sales for the fiscal year 2017 as compared to
fiscal year 2016 is primarily attributable to a decrease in fiscal year 2017 of the ongoing builds of an Alternative Carrier customer
by $4,733,000 as compared to the fiscal year 2016. International sales increased $2,023,000 during the same period due to an increase
in demand in fiber deployments. In addition, the Company had an increase of $1,370,000 in fiscal year 2017 net sales to our customer
base of commercial data network providers, build-to-print and OEM manufacturers, and broadband service providers, outside of the
Alternative Carrier group and international sales noted above when compared to fiscal 2016. The improvement was due to increased
deployments by the Company’s Traditional Carrier and Tier 1 customers. Revenue from all customers is obtained from purchase
orders submitted from time to time. Accordingly, the Company’s ability to predict orders in future periods or trends affecting
orders in future periods is limited.
Cost of sales for fiscal year 2017 was
$43,683,000, an increase of $1,266,000, or 3%, from the $42,417,000 in fiscal year 2016. Gross profit decreased 8%, or $2,606,000,
from $32,870,000 for fiscal year 2016 to $30,264,000 for fiscal year 2017. Gross profit percent was 40.9% in fiscal year 2017,
as compared to 43.7% for fiscal year 2016. The year-over-year
decrease in gross profit was primarily due to decreased volume.
The decrease in gross profit percent was primarily due to a higher percentage of sales to the Tier 1 customer group, which typically
have lower margins, along with a lower percentage of sales associated with the integration of optical components within our product
line, which typically have higher margins.
Selling, general and administrative expense for fiscal year 2017
was $24,952,000, an increase of $2,813,000, or 13%, compared to $22,139,000 for fiscal year 2016.
This
increase is primarily composed of an increase of $1,793,000 in compensation costs due primarily to additional sales and marketing
personnel, an increase of $831,000 in stock compensation expense, an increase of $702,000 in product development costs, an increase
of $928,000 in legal expenses, and an impairment of long-lived assets of $644,000, somewhat offset by a decrease of $2,444,000
in performance compensation accruals when compared to fiscal year 2016.
Income from operations for fiscal year 2017 was $5,312,000 compared
to $10,732,000 for fiscal year 2016. This decrease is attributable to decreased gross profit and the increased selling, general
and administrative expenses described above.
Interest income in fiscal year 2017 was
$274,000 compared to $157,000 for fiscal year 2016. The increase is due mainly to higher interest rates earned on its investments
in fiscal 2017 as well as higher cash invested balances. The Company invests its excess cash primarily in
FDIC-backed bank
certificates of deposit and money market accounts
.
Income tax expense for fiscal year 2017 was $1,738,000 compared
to $2,876,000 for fiscal year 2016. Due to net operating loss utilization, income tax expense primarily had a non-cash effect on
the operating cash flow for the year ended September 30, 2016. The decrease in tax expense of $1,138,000 from the year ended September
30, 2016 is primarily due to decreased profitability in fiscal year 2017. The increase in the income tax expense rate to 31.1%
for fiscal year 2017 from 26.4% for fiscal year 2016 is primarily the result of
the Company having fewer
positive discrete items in fiscal year 2017 compared to fiscal year 2016 as a result of the Company early adopting ASU 2016-09
in the fourth quarter ended September 30, 2016.
The accounting standard update required that the tax effects of stock-based
compensation be recognized in the income tax provision of the Company’s statement of earnings. For prior quarters of fiscal
2016, the amounts relating to the tax effects of stock-based compensation were recasted to conform to the current year’s
presentation. Previously, these amounts were recognized in additional paid-in capital on the Company’s balance sheet. As
a result, the Company recognized net tax benefits related to stock-based compensation awards which lowered income tax expense by
$675,000 for fiscal year 2016. Our provisions for income taxes include current federal tax expense, state income tax expense, and
deferred tax expense.
Net income for fiscal year 2017 was $3,848,000
or $0.28 per basic and diluted share, compared to $8,013,000 or $0.60 per basic share and $0.59 per diluted share for the year
2016.
Year ended September 30, 2016 compared to year
ended September 30, 2015
Net sales for fiscal year 2016 increased 25% to $75,288,000 from
net sales of $60,324,000 in 2015. Sales growth was experienced from existing clients as well as from the development of new accounts
within the telecommunications industry. The growth in sales includes increased sales from within the wireless market and cable
provider’s customer group and increased sales to our Alternative Carrier customer group, offset slightly by decreased international
sales.
As a result of the above factors, sales in fiscal year 2016 to commercial
data networks and broadband service providers were 93% of net sales, or $69,850,000, compared to $54,822,000, or 91%, of net sales
in fiscal 2015. Among this group, the Company recorded $4,024,000 in international sales in fiscal year 2016 versus $5,000,000
in fiscal year 2015. Sales associated with build-to-print manufacturing for original equipment manufacturers outside of the telecommunications
market in 2016 were 7% of net sales, or $5,438,000, compared to $5,502,000, or 9%, of net sales in fiscal year 2015. The Company
allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly,
international sales represented 5% and 8% of net sales for the years ended September 30, 2016 and 2015, respectively.
The increase in net sales for the year ended September 30, 2016
of $14,964,000 compared to fiscal year 2015 is primarily attributable to an increase of $13,506,000 in net sales to our customer
base of commercial data network providers, build-to-print and OEM manufacturers, and broadband service providers, outside of the
Alternative Carrier group and international sales noted below, when compared to fiscal 2015. The improvement was due to increased
deployments by the Company’s Traditional Carrier customers, as well as expanded sales channels. Ongoing builds of an Alternative
Carrier customer also increased net sales by $2,434,000 for the year ended September 30, 2016. Net sales for fiscal year 2016 were
negatively affected by a decrease in international sales of $976,000 from the prior fiscal year due to sluggish demand.
Cost of sales for fiscal year 2016 was $42,417,000, an increase
of $6,961,000, or 20% from the $35,456,000 in fiscal year 2015. Gross margin was 43.7% in fiscal year 2016, as compared to 41.2%
for fiscal year 2015. Gross profit increased 32%, or $8,002,000, from $24,868,000 for fiscal year 2015 to $32,870,000 for fiscal
year 2016. The year-over-year increase in cost of sales is primarily a result of increased sales volume. The increase in gross
profit percentage is the result of a higher percentage of sales associated with the integration of optical components within our
product line, which generally have higher margins.
Selling, general and administrative expense for fiscal year 2016
was $22,139,000, up 24% compared to $17,817,000 for fiscal year 2015.
This increase is primarily composed
of higher compensation expenses in the amount of $3,376,000 mainly due to additional personnel, wage increases, higher performance
compensation accruals, increased stock compensation expense of $198,000, and increased depreciation expense of $121,000.
Income from operations for fiscal year 2016 was $10,732,000 compared
to $7,051,000 for fiscal year 2015. This increase is attributable to increased net sales and higher gross profit.
Interest income in fiscal year 2016 was
$157,000 compared to $106,000 for fiscal year 2015. The increase is due mainly to higher interest rates earned on its investments
in fiscal 2016. The Company invests its excess cash primarily in
FDIC-backed bank certificates of deposit and money market
accounts
.
Income tax expense for fiscal year 2016 was $2,876,000 compared
to $2,475,000 for fiscal year 2015. Due to net operating loss utilization, income tax expense primarily had a non-cash effect on
the operating cash flow for the years ended September 30, 2016 and 2015. The increase in tax expense of $401,000 from the year
ended September 30, 2015 is primarily due to increased profitability in fiscal year 2016. The decrease in the income tax expense
rate to 26.4% for fiscal year 2016 from 34.6% for fiscal year 2015 is primarily the result of
the Company
early adopting ASU 2016-09 effective with the fourth quarter ended September 30, 2016.
The new accounting standard requires
that the tax effects of stock-based compensation be recognized in the income tax provision of the Company’s statement of
earnings. For prior quarters of fiscal 2016, the amounts relating to the tax effects of stock-based compensation were recasted
to conform to the current year’s presentation. Previously, these amounts were recognized in additional paid-in capital on
the Company’s balance sheet. As a result, the Company recognized net tax benefits related to stock-based compensation awards
which lowered income tax expense by $675,000 for fiscal year 2016. Our provisions for income taxes include current federal tax
expense, state income tax expense, and deferred tax expense.
Net income for fiscal year 2016 was $8,013,000
or $0.60 per basic share and $0.59 per diluted share, compared to $4,682,000 or $0.35 per basic share and $0.34 per diluted share
for the year 2015.
Liquidity and Capital Resources
At September 30, 2017, the Company had combined balances of short-term
cash and investments and long-term investments of $44,289,000 as compared to $44,244,000 at September 30, 2016. As of September
30, 2017, our principal source of liquidity was our cash and cash equivalents and short-term investments. Those sources total $24,473,000
at September 30, 2017, compared to $33,541,000, at September 30, 2016. Investments considered long-term are $19,816,000 at September
30, 2017, compared to $10,703,000 at September 30, 2016. Our excess cash is invested mainly in certificates of deposit and money
market accounts. Substantially all of our funds are insured by the FDIC. We believe the combined balances of short-term cash and
investments along with long-term investments provide a more accurate indication of our available liquidity. We had no long-term
debt obligations at September 30, 2017 or 2016, respectively.
We believe our existing cash equivalents and short-term investments,
along with cash flow from operations, will be sufficient to meet our working capital and investment requirements for beyond the
next 12 months.
The Company intends on utilizing its available cash and assets
primarily for its continued organic growth and potential future strategic transactions, as well as execution of the share repurchase
program adopted by our Board of Directors. The share repurchase program was originally adopted on November 13, 2014 with $8,000,000
authorized for common stock repurchases. On April 25, 2017, our Board of Directors increased the authorization
to $12,000,000
of common stock.
Operating Activities
Net cash generated from operations for the fiscal year ended September
30, 2017 totaled $6,298,000. Cash provided by operations included net income of $3,848,000 for the fiscal year ended September
30, 2017, which included non-cash expenses for depreciation and amortization of $1,622,000, stock-based compensation of $2,320,000,
and impairment of long-lived assets of $644,000 offset by changes in operating assets and liabilities using cash. Changes between
fiscal year 2017 and fiscal year 2016 in working capital items using cash consisted primarily of a decrease in accounts payable
and accrued expenses of $3,065,000 offset slightly by a decrease in accounts receivable of $762,000. The decrease in accounts payable
and accrued expenses is primarily due to decreased
performance compensation accruals
. The decrease
in accounts receivable is primarily attributable to decreased sales in the quarter ended September 30, 2017 compared to the same
quarter of fiscal 2016. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment
terms. Days sales outstanding, which measures how quickly receivables are collected, was 36 days for September 30, 2017 and 35
days for September 30, 2016.
Net cash generated from operations for the fiscal year ended September
30, 2016 totaled $11,553,000. Cash provided by operations included net income of $8,013,000 for the fiscal year ended September
30, 2016, which included non-cash expenses for depreciation and amortization of $1,449,000 and stock-based compensation of $1,405,000,
along with a non-cash benefit from deferred taxes of $2,341,000. The Company has historically been utilizing its net operating
losses (“NOLs”) for taxes due and made cash payments related to taxes of $1,131,000, $51,000 and $361,000 in the fiscal
periods 2016, 2015 and 2014, respectively. Since the federal NOLs are now fully consumed as of September 30, 2016, the Company
will no longer have this non-cash tax benefit, which will result in the Company having to use cash for its tax expense. Changes
between fiscal year 2016 and fiscal year 2015 in working capital items using cash included increases in accounts receivable, inventory,
and other current assets of $1,988,000, $1,190,000, and $813,000, respectively. The increase in accounts receivable is primarily
attributable to increased sales in the quarter ended September 30, 2016. Accounts receivable balances can be influenced by the
timing of shipments for customer projects and payment terms. Days sales outstanding was 35 days for both September 30, 2016 and
September 30, 2015. The increase in inventory represents an adjustment for seasonal demand along with changes in stocking levels
for new product development. The increase in other current assets is primarily due to an increase in income taxes receivable at
September 30, 2016. Changes in working capital items providing cash between fiscal year 2016 and fiscal year 2015 included an increase
in accounts payable and accrued expenses of $2,324,000, primarily due to increased
performance compensation
accruals
.
Net cash generated from operations for the fiscal year ended September
30, 2015 totaled $6,848,000. Cash provided by operations included net income of $4,682,000 for the fiscal year ended September
30, 2015, which included non-cash expenses for depreciation and amortization of $1,216,000 and stock-based compensation of $1,075,000,
along with a non-cash benefit from deferred taxes of $2,342,000. The Company has historically been utilizing its net operating
losses (“NOLs”) for taxes due and made cash payments related to taxes of $51,000, $361,000 and $154,000 in the fiscal
periods 2015, 2014 and 2013, respectively. When the NOLs are fully consumed, the Company will no longer have this non-cash tax
benefit which will result in the Company having to use cash for its tax expense. Changes between fiscal year 2015 and fiscal year
2014 in working capital items using cash included increases in inventory and accounts receivable of $1,793,000 and $983,000, respectively.
The increase in inventory represents an adjustment for seasonal demand along with changes in stocking levels for new product development.
The increase in accounts receivable is primarily attributable to increased sales in the quarter ended September 30, 2015. Accounts
receivable balances can be influenced by the timing of shipments for customer projects and payment terms. Days sales outstanding
was 35 days for September 30, 2015 and 32 days for September 30, 2014. Changes in working capital items providing cash between
fiscal year 2015 and fiscal year 2014 included an increase in accounts payable and accrued expenses of $164,000 and a decrease
in other current assets of $121,000.
Investing Activities
For the fiscal year ended September 30, 2017,
we used $2,022,000 in cash for the purchase of capital equipment and patents. These purchases were
mainly
related to information technology and manufacturing equipment
. During fiscal year 2017, we purchased $17,630,000 of FDIC-backed
certificates of deposit and sold $8,107,000 of FDIC-backed certificates of deposit. The result is cash used in investing activities
of $11,540,000 in fiscal year 2017 as compared to $1,642,000 in fiscal year 2016. In fiscal year 2018, the Company intends to continue
investing in the necessary computer hardware and software required to optimize its business, along with appropriate manufacturing
equipment to continue to maintain a competitive position in manufacturing capability.
For the fiscal year ended September 30, 2016,
we used $1,627,000 in cash for the purchase of capital equipment and patents. These purchases were
mainly
related to information technology and manufacturing equipment
. During fiscal year 2016, we purchased $8,138,000 of FDIC-backed
certificates of deposit and sold $8,123,000 of FDIC-backed certificates of deposit. The result is cash used in investing activities
of $1,642,000 in fiscal year 2016 as compared to $5,744,000 in fiscal year 2015.
For the fiscal year ended September 30, 2015,
we used $4,543,000 in cash for the purchase of capital equipment and patents. Included in this amount were purchases of $3,027,000
in leasehold improvements and office equipment for the build out of our new Minnesota facility which was completed in the fiscal
2015 second quarter and purchases of manufacturing and warehouse equipment of $1,079,000. During fiscal year 2015, we purchased
$10,374,000 of FDIC-backed certificates of deposit and sold $9,093,000 of FDIC-backed certificates of deposit. The result is cash
used in investing activities of $5,744,000 in fiscal year 2015 as compared to $3,586,000 in fiscal year 2014.
Financing Activities
For the fiscal year ended September 30, 2017, the Company used $3,647,000
for the repurchase of common stock. Also, the Company received $335,000 during the fiscal year ended September 30, 2017 from employees’
purchase of stock through our Employee Stock Purchase Plan (“ESPP”). The Company used $953,000 to pay for taxes as
a result of employees’ exercises of stock options and vesting of restricted shares using share withholding. As a result,
the net cash used in financing activities during fiscal year 2017 was $4,237,000.
For the fiscal year ended September 30, 2016, the Company used $334,000
for the repurchase of common stock. Also, the Company received $254,000 and $549,000 during the fiscal year ended September 30,
2016 from employees’ purchase of stock through the ESPP and the exercise of stock options, respectively. The Company used
$438,000 to pay for taxes as a result of employees’ exercises of stock options and vesting of restricted shares using share
withholding. As a result, the net cash provided by financing activities during fiscal year 2016 was $32,000.
For the fiscal year ended September 30, 2015, the Company used $849,000
for the repurchase of common stock. Also, the Company received $211,000 and $43,000 during the fiscal year ended September 30,
2015 from employees’ purchase of stock through the ESPP and the exercise of stock options, respectively. The Company used
$639,000 to pay for taxes as a result of employees’ exercises of stock options and vesting of restricted shares using share
withholding. As a result, the net cash used by financing activities during fiscal year 2015 was $1,224,000.
Contractual Obligations as of September 30, 2017
|
|
Payments due by period
|
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
Operating lease obligations
|
|
$
|
3,597,970
|
|
|
$
|
584,249
|
|
|
$
|
1,161,604
|
|
|
$
|
814,300
|
|
|
$
|
1,037,817
|
|
Total
|
|
$
|
3,597,970
|
|
|
$
|
584,249
|
|
|
$
|
1,161,604
|
|
|
$
|
814,300
|
|
|
$
|
1,037,817
|
|
Operating Leases
We have entered into various non-cancelable operating lease agreements
for office equipment and our office and manufacturing spaces in Minnesota and Mexico expiring at various dates through February
2024. Certain of these leases have escalating rent payment provisions. We recognize rent expense under such leases on a straight-line
basis over the term of the lease.
Quarterly Financial Data
(Unaudited)
Quarterly data for the years ended September 30, 2017 and 2016 was
as follows:
|
|
Quarter Ended
|
Statement of Earnings Data
|
|
December 31,
2016
|
|
March 31,
2017
|
|
June 30,
2017
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
18,266,162
|
|
|
$
|
17,651,771
|
|
|
$
|
19,611,297
|
|
|
$
|
18,418,389
|
|
Gross profit
|
|
|
7,208,720
|
|
|
|
7,442,814
|
|
|
|
7,937,250
|
|
|
|
7,675,475
|
|
Income from operations
|
|
|
1,191,196
|
|
|
|
1,280,636
|
|
|
|
1,322,557
|
|
|
|
1,517,494
|
|
Net income
|
|
|
876,930
|
|
|
|
907,521
|
|
|
|
803,316
|
|
|
|
1,260,072
|
|
Net income per share Basic
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
Net income per share Diluted
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
|
Quarter Ended
|
Statement of Earnings Data
|
|
December 31,
2015
|
|
March 31,
2016
|
|
June 30,
2016
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
15,689,715
|
|
|
$
|
16,947,187
|
|
|
$
|
21,598,720
|
|
|
$
|
21,052,104
|
|
Gross profit
|
|
|
6,676,796
|
|
|
|
7,280,449
|
|
|
|
9,340,197
|
|
|
|
9,572,806
|
|
Income from operations
|
|
|
1,979,781
|
|
|
|
2,143,497
|
|
|
|
3,461,845
|
|
|
|
3,146,569
|
|
Net income
|
|
|
1,487,454
|
*
|
|
|
1,492,979
|
*
|
|
|
2,362,061
|
*
|
|
|
2,670,568
|
*
|
Net income per share Basic
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
Net income per share Diluted
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.17
|
|
|
$
|
0.20
|
|
*In March 2016, the Financial Accounting Standards Board (“FASB”)
issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The standard is required to be adopted
by all companies in their first fiscal year beginning after December 15, 2016 but allows companies to early adopt prior to this
date. The standard is intended to simplify various aspects of the accounting and presentation of share-based payments. During the
quarter ended September 30, 2016, the Company elected to early adopt this standard as of October 1, 2015. Adoption of this standard
impacted the previously filed 10-Qs for fiscal 2016 as follows:
Statements of earnings
– The new accounting standard
requires that the tax effects of stock-based compensation be recognized in the income tax provision of the Company’s Statements
of Earnings. Previously, these amounts were recognized in additional paid-in capital on the Company’s Balance Sheets. The
new standard requires these amounts to be recasted within these quarters due to the prospective adoption of this standard in the
fourth quarter of fiscal 2016. Accordingly, net tax benefits related to stock-based compensation awards of $104,134, $54,313, and
$79,640 for the quarters ended December 31, 2015, March 31, 2016, and June 30, 2016, respectively, were recognized as reductions
of income tax expense in the statements of earnings. These tax benefits reduced our effective income tax rate 5.2%, 2.5%, and 2.3%
for the quarters ended December 31, 2015, March 31, 2016, and June 30, 2016, respectively. The changes were applied on a prospective
basis and resulted in an increase in basic and diluted earnings per share of $0.01 and $0.01 for the quarters ended December 31,
2015 and June 30, 2016, respectively. The change had no effect on basic and diluted earnings per share for the quarter ended March
31, 2016. The net tax benefit recognized during the quarter ended September 30, 2016 was $437,096, which reduced our effective
tax rate 13.7% to 16.3% for the quarter and resulted in an increase in basic and diluted earnings per share of $0.03 and $0.04,
respectively. The net tax benefit recognized during the year ended September 30, 2016 was $675,183, which reduced our effective
tax rate 6.2% to 26.4% for the year and resulted in an increase in basic and diluted earnings per share of $0.05.
Recent Accounting Pronouncements:
In May 2014, the FASB issued guidance creating Accounting Standards
Codification (“ASC”) Section 606,
Revenue from Contracts with Customers
. The new section will replace Section
605, “Revenue Recognition” and creates modifications to various other revenue accounting standards for specialized
transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International
Financial Reporting Standards with previously differing treatment between United States practice and those of much of the rest
of the world, as well as to enhance disclosures related to disaggregated revenue information. The updated guidance is effective
for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Early application
is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting
period.
The Company is planning to complete an assessment of its revenue streams during the second and
third quarters of fiscal 2018 to determine the impact that this standard will have on its business practices, financial condition,
results of operations and disclosures.
In July 2015, the FASB issued ASU 2015-11,
Inventory
(Topic 330) Related to Simplifying the Measurement of Inventory
which applies to all inventory except inventory that is measured
using last-in, first-out (“LIFO”) or the retail inventory method. Inventory measured using first-in, first-out (“FIFO”)
or average cost is covered by the new amendments. Inventory within the scope of the new guidance should be measured at the lower
of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured
using LIFO or the retail inventory method. The amendments will take effect for public business entities for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. The new guidance should be applied prospectively,
and earlier application is permitted as of the beginning of an interim or annual reporting period. We do not expect adoption to
have a material impact on our financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which
requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than
12 months. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period
in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. Early adoption is permitted. The Company is evaluating the impact the adoption of this ASU will have on our
financial statements.
In January 2017, the FASB issued ASU 2017-04 which offers amended
guidance to simplify the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. A goodwill impairment
will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount
of goodwill allocated to that reporting unit. This guidance is to be applied on a prospective basis effective for the Company’s
interim and annual periods beginning after January 1, 2020, with early adoption permitted for any impairment tests performed after
January 1, 2017. The Company is evaluating the impact the adoption of this ASU will have on our financial statements.