NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION
1. INTERIM REPORTING:
The interim condensed consolidated financial statements of CyberOptics Corporation ("we", "us" or "our") presented herein as of
September 30, 2018
,
and for the
three and nine
month periods ended
September 30, 2018
and
2017
, are unaudited, but in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented.
The results of operations for the
three and nine
month periods ended
September 30, 2018
do not necessarily indicate the results to be expected for the full year. The
December 31, 2017
consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended
December 31, 2017
.
2. REVENUE RECOGNITION:
Change in Revenue Accounting
Effective January 1, 2018, we adopted ASU No.
2014
-
9
, “
Revenue from Contracts with Customers
” and the related amendments (“Topic
606
”) using the modified retrospective method.
Topic
606
was applied to all uncompleted contracts by recognizing the cumulative effect of initially applying Topic
606
as an adjustment to the opening balance of retained earnings at January 1, 2018.
Therefore, the comparative financial information for the
three and nine
months ended
September 30, 2017
has not been adjusted and continues to be reported under Topic
605
, “
Revenue Recognition
”.
Accounting for contracts recognized over time involves the use of various techniques to estimate total contract revenue and costs. Contract estimates are based on various assumptions to project the outcome of future events that may span multiple years. We review and update our contract-related estimates regularly, and record adjustments as needed.
The adoption of Topic
606
caused changes for (
1
) the impact of volume discounts that represent a material right which will now be estimated and recognized over the contract life rather than on a prospective basis, and (
2
) revenue will be recognized over time as the products are manufactured under certain contracts where our product is customized rather than at shipment. These changes increased our revenues in the
three and nine
months ended
September 30, 2018
by $123,000 and $232,000, respectively, when compared to revenue recognition under Topic 605 (see Note
16
).
Performance Obligations
Under Topic
606
, revenue is measured based on consideration specified in the contract with a customer.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic
606
. Revenue from all customers, including distributors, is recognized when a performance obligation is satisfied by transferring control of a product or service to a customer. Amounts billed to customers for shipping and handling are included in revenue. Taxes collected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting. Accounts receivable are due under normal trade terms, typically 90 days or less.
Sales involving multiple performance obligations typically include the sale of an inspection system or metrology product, installation and training, and in some cases, an extended warranty. When a sale involves multiple performance obligations, we account for individual products and services separately if the customer can benefit from the product or service on its own or with other resources that are readily available to the customer and the product or service are separately identifiable from other promises in the arrangement.
The consideration is allocated between separate performance obligations in proportion to their estimated stand-alone selling price.
If the stand-alone selling price is not directly observable, we use the cost plus margin approach to estimate stand-alone selling price. Costs related to products delivered are recognized in the period revenue is recognized, including product warranties for periods ranging from
1
to
3
years (see Note
7
).
Our performance obligations are satisfied at a point in time or over time as work progresses. Revenue from products and services transferred to customers at a point in time in the
three and nine
months ended
September 30, 2018
totaled
$
15.4
million
and $
43.4
million, respectively, which represe
nted
93
% of our total revenue in both periods. Revenue from these contracts is recognized when obligations under the terms of the contract with our customer are satisfied; generally with the transfer of control upon shipment. Sales of some products may require customer acceptance due to performance or other acceptance criteria that is considered more than a formality. For these product sales, revenue is recognized upon notification of customer acceptance.
Revenue from products and services transferred to customers over time in the
three and nine
months ended
September 30, 2018
totaled $
1.2
million and $
3.3
million, respectively, which represented
7
% of
our total revenue in both periods. Periodically, sensor product arrangements with our original equipment manufacturers (OEMs) will create an asset with no alternative use and include an enforceable right to payment for cost plus margin.
For these arrangements, control is transferred over the manufacturing process; therefore, revenue is recognized over time utilizing an input method based on actual costs incurred in the manufacturing process to date relative to total expected production costs. For certain longer duration
3
D scanning service projects, we progress bill as the services are performed.
These arrangements create an asset with no alternative use and include an enforceable right to payment.
For these arrangements, control is transferred over the hours incurred to complete the scanning project; therefore, revenue is recognized over time utilizing an input method based on actual hours incurred relative to total projected project hours.
For maintenance and extended warranty contracts, revenue is recognized over time on a straight-line basis over the term of the contract as the customer simultaneously receives and consumes the benefits of the coverage.
Contract Balances
Contract assets consist of unbilled amounts from sales where we recognize the revenue over time and the revenue recognized exceeds the amount billed to the customer at a point in time. Accounts receivable are recorded when the right to payment becomes unconditional. Contract liabilities consist of payments received in advance of performance under the contract. Contract liabilities are recognized as revenue when we perform under the contract. The following summarizes our contract assets and contract liabilities:
(In thousands)
|
|
September 30,
2018
|
|
January 1,
2018
|
Contract assets, included in other current assets
|
|
$
|
170
|
|
|
$
|
—
|
|
Contract liabilities, included in advance customer payments/other liabilities
|
|
$
|
918
|
|
|
$
|
443
|
|
Changes in contract assets in the
nine months ended September 30, 2018
resulted from unbilled amounts under sensor product arrangements in which revenue is recognized over time. Changes in contract liabilities primarily resulted from reclassification of beginning contract liabilities to revenue as performance obligations were satisfied or for cash received in advance and not recognized as revenue. Amounts reclassified from beginning contract liabilities to revenue in the
three and nine
months ended
September 30, 2018
totaled $39,000 and $262,000, respectively. See Note
7
for changes in contractual obligations related to deferred warranty revenue.
Unsatisfied performance obligations are generally expected to be recognized as revenue over the next
one
to three years. There were no impairment losses for contract assets in the
nine months ended September 30, 2018
.
Practical Expedients
We generally expense the incremental costs of obtaining a contract when incurred because the amortization period for these costs would be less than
one year
. These costs primarily relate to sales commissions and are recorded in selling, general and administrative expense in our consolidated statements of operations.
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. We do not adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
3.
MARKETABLE SECURITIES:
Our investments in marketable securities are classified as available-for-sale and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
(In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value
|
Short-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
3,611
|
|
|
$
|
—
|
|
|
$
|
(20
|
)
|
|
$
|
3,591
|
|
Corporate debt securities and certificates of deposit
|
|
2,163
|
|
|
—
|
|
|
(8
|
)
|
|
2,155
|
|
Asset backed securities
|
|
654
|
|
|
—
|
|
|
(4
|
)
|
|
650
|
|
Marketable securities – short-term
|
|
$
|
6,428
|
|
|
$
|
—
|
|
|
$
|
(32
|
)
|
|
$
|
6,396
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
6,399
|
|
|
$
|
—
|
|
|
$
|
(55
|
)
|
|
$
|
6,344
|
|
Corporate debt securities and certificates of deposit
|
|
230
|
|
|
—
|
|
|
(3
|
)
|
|
227
|
|
Asset backed securities
|
|
3,184
|
|
|
—
|
|
|
(22
|
)
|
|
3,162
|
|
Equity security
|
|
42
|
|
|
31
|
|
|
—
|
|
|
73
|
|
Marketable securities – long-term
|
|
$
|
9,855
|
|
|
$
|
31
|
|
|
$
|
(80
|
)
|
|
$
|
9,806
|
|
|
|
December 31, 2017
|
(In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value
|
Short-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
4,381
|
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
|
$
|
4,368
|
|
Corporate debt securities and certificates of deposit
|
|
1,792
|
|
|
—
|
|
|
(4
|
)
|
|
1,788
|
|
Asset backed securities
|
|
515
|
|
|
—
|
|
|
(1
|
)
|
|
514
|
|
Marketable securities – short-term
|
|
$
|
6,688
|
|
|
$
|
—
|
|
|
$
|
(18
|
)
|
|
$
|
6,670
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
4,801
|
|
|
$
|
—
|
|
|
$
|
(33
|
)
|
|
$
|
4,768
|
|
Corporate debt securities and certificates of deposit
|
|
1,189
|
|
|
—
|
|
|
(10
|
)
|
|
1,179
|
|
Asset backed securities
|
|
3,045
|
|
|
—
|
|
|
(16
|
)
|
|
3,029
|
|
Equity security
|
|
42
|
|
|
55
|
|
|
—
|
|
|
97
|
|
Marketable securities – long-term
|
|
$
|
9,077
|
|
|
$
|
55
|
|
|
$
|
(59
|
)
|
|
$
|
9,073
|
|
|
|
|
|
|
|
|
In Unrealized Loss Position For
Less Than 12 Months
|
|
In Unrealized Loss Position For
Greater Than 12 Months
|
(In thousands)
|
|
Fair Value
|
|
Gross Unrealized
Losses
|
|
Fair Value
|
|
Gross Unrealized
Losses
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
5,185
|
|
|
$
|
(36
|
)
|
|
$
|
4,327
|
|
|
$
|
(39
|
)
|
Corporate debt securities and certificates of deposit
|
|
628
|
|
|
(3
|
)
|
|
1,324
|
|
|
(8
|
)
|
Asset backed securities
|
|
2,343
|
|
|
(14
|
)
|
|
1,469
|
|
|
(12
|
)
|
Marketable securities
|
|
$
|
8,156
|
|
|
$
|
(53
|
)
|
|
$
|
7,120
|
|
|
$
|
(59
|
)
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
5,593
|
|
|
$
|
(
29
|
)
|
|
$
|
3,543
|
|
|
$
|
(17
|
)
|
Corporate debt securities and certificates of deposit
|
|
478
|
|
|
(
2
|
)
|
|
1,991
|
|
|
(12
|
)
|
Asset backed securities
|
|
2,312
|
|
|
(
9
|
)
|
|
1,232
|
|
|
(8
|
)
|
Marketable securities
|
|
$
|
8,383
|
|
|
$
|
(
40
|
)
|
|
$
|
6,766
|
|
|
$
|
(37
|
)
|
Effective January 1, 2018, we adopted ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Liabilities,
which impacted the accounting for our marketable equity security (see Note 16)
.
Our investments in marketable debt securities all have maturities of less than
five years
.
Net pre-tax unrealized losses for marketable securities
of
$
112,000 at
September 30, 2018
and
$22,000 at
December 31, 2017
have been recorded as a component of accumulated other comprehensive loss in stockholders’
equity.
We have determined that the net pre-tax unrealized losses for marketable debt securities at
September 30, 2018
and
December 31, 2017
were caused by fluctuations in interest rates and are temporary in nature. We review our marketable securities to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which the fair value of the investment has been less than the cost basis, the credit quality of the investment and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. We received proceeds from sales of marketable securities o
f $480,000
, and recognized a $3,000 gain on the sales, in the three and nine months ended September 30, 2018
.
No
marketable securities
were sold in the
nine
months ended
September 30, 2017
.
Investments in marketable securities classified as cash equivalents of
$2.3
million at
September 30, 2018
and
$
1.6 million
at
December 31, 2017
consist of corporate debt securities and certificates of deposit. There were no unrealized gains or losses associated with any of these securities at
September 30, 2018
or
December 31, 2017
.
Cash and marketable securities held by foreign subsidiaries totaled
$532,000 at
September 30, 2018
and
$187,000 at
December 31, 2017
.
4
. FAIR VALUE ME
ASUREMENTS:
We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (i.e., the exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with
three
levels of inputs to measure fair value, of which the first
two
are considered observable and the last is considered unobservable. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level
1
). The next highest priority is based on quoted prices for similar assets or liabilities in
active
markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level
2
). The lowest priority is given to unobservable inputs (Level
3
).
The following table provides information regarding fair value measurements for our marketable securities as of
September 30, 2018
and
December 31, 2017
according to the
three
-level fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
September 30, 2018
Using
|
(In thousands)
|
|
Balance
September 30,
2018
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level
1
)
|
|
Significant
Other
Observable
Inputs
(Level
2
)
|
|
Significant
Unobservable
Inputs
(Level
3
)
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
9,935
|
|
|
$
|
—
|
|
|
$
|
9,935
|
|
|
$
|
—
|
|
Corporate debt securities and certificates of deposit
|
|
2,382
|
|
|
—
|
|
|
2,382
|
|
|
—
|
|
Asset backed securities
|
|
3,812
|
|
|
—
|
|
|
3,812
|
|
|
—
|
|
Equity security
|
|
73
|
|
|
73
|
|
|
—
|
|
|
—
|
|
Total marketable securities
|
|
$
|
16,202
|
|
|
$
|
73
|
|
|
$
|
16,129
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2017
Using
|
(In thousands)
|
|
Balance
December 31,
2017
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level
1
)
|
|
Significant
Other
Observable
Inputs
(Level
2
)
|
|
Significant
Unobservable
Inputs
(Level
3
)
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
9,136
|
|
|
$
|
—
|
|
|
$
|
9,136
|
|
|
$
|
—
|
|
Corporate debt securities and certificates of deposit
|
|
2,967
|
|
|
—
|
|
|
2,967
|
|
|
—
|
|
Asset backed securities
|
|
3,543
|
|
|
—
|
|
|
3,543
|
|
|
—
|
|
Equity security
|
|
97
|
|
|
97
|
|
|
—
|
|
|
—
|
|
Total marketable securities
|
|
$
|
15,743
|
|
|
$
|
97
|
|
|
$
|
15,646
|
|
|
$
|
—
|
|
During the
nine months ended September 30, 2018
and the year ended
December 31, 2017
, there were no transfers of assets between the different levels of the
three-
level hierarchy. A significant transfer is recognized when the inputs used to value a security have been changed sufficiently to merit a transfer between the levels of the valuation hierarchy.
The fair value for our U.S. government and agency obligations, corporate debt securities and certificates of deposit and asset backed securities are determined based on valuations provided by external investment managers, which obtain the valuations from a variety of industry standard data providers. The fair value for our equity security is based on a quoted market price obtained from an active market.
The carrying amounts of financial instruments such as cash equivalents, accounts receivable, other assets, accounts payable, advance customer payments, accrued expenses and other liabilities are approximately equal to their related fair values due to their short-term maturities. Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets are subject to non-recurring fair value measurements if they are deemed impaired. We had
no re-measurements of non-financial assets to fair value in the
nine months ended September 30, 2018
or the
nine months ended September 30, 2017
.
5
. ACCOUNTING FOR STOCK-BASED COMPENSATION:
We have
three
stock-based compensation plans that are administered by the Compensation Committee of the Board of Directors. We have (
1
) an Employee Stock Incentive Plan for officers, other employees, consultants and independent contractors under which we have granted options and restricted stock units to officers and other employees, (
2
) an Employee Stock Purchase Plan under which shares of our common stock may be acquired by employees at discounted prices, and (
3
) a Non-Employee Director Stock Plan that provides for automatic grants of restricted shares of our common stock to non-employee directors. New shares of our common stock are issued upon stock option exercises, vesting of restricted stock units, issuances of shares to board members and issuances of shares under the Employee Stock Purchase Plan.
Employee Stock Incentive Plan
As of
September 30, 2018
, there were
336,489
shares
of common stock reserved in the aggregate for issuance pursuant to future awards under our Employee Stock Incentive Plan and 534,087 shares of common stock reserved in the aggregate for issuance pursuant to outstanding awards under our Employee Stock Incentive Plan. Although our Compensation Committee has authority to issue options, restricted stock, restricted stock units, share grants and other share-based benefits under our Employee Stock Incentive Plan, to date only restricted stock units and stock options have been granted under the plan. Options have been granted at an option price per share equal to the market value of our common stock on the date of grant, vest over a
four year
period and expire
seven years
after the date of grant. Restricted stock units vest over a
four year
period and entitle the holders to
one share of our common stock for each restricted stock unit. Shares reserved for issuance under outstanding awards, including options and restricted stock units, that are forfeited become available under the Employee Stock Incentive Plan for future grants.
Non-Employee Director Stock Plan
As of
September 30, 2018
, there were
60,000
shares of common stock reserved in the aggregate for issuance pursuant to future restricted share awards under our Non-Employee Director Stock Plan and 16,000 shares of common stock reserved in the aggregate for issuance pursuant to outstanding stock option awards under our Non-Employee Director Stock Plan. Under the terms of the plan, each non-employee director will automatically be granted 2,000 shares of our common stock on the date of each annual meeting at which such director is elected to serve on the board
. At our May 11, 2017 annual meeting, our shareholders, upon recommendation of the Board of Directors, approved amendments to the Non-Employee Director Stock Plan that eliminated annual stock option grants for non-employee directors and provided for annual restricted share grants of
2,000
shares of common stock which vest in
four
equal quarterly installments during the year after the grant date, provided the non-employee director is still serving as a director on the applicable vesting date.
On the date of our
2018
annual meeting, we issued a total of
8,000
shares of our common stock to our non-employee directors. The shares had an aggregate fair market value on the date of grant equal to $
130,000
(grant date fair value of $16.25 per share). As of
September 30, 2018
, 2,000 of these shares were vested. The aggregate fair value of the outstanding unvested shares based on the closing price of our common stock on
September 30, 2018
was $121,000.
On the date of our
2017
annual meeting, we issued a total of
8,000
shares of our common stock to our non-employee directors. The shares had an aggregate fair market value on the date of grant equal to $167,000
(grant date fair value of $20.90
per share).
Stock Option Activity
The following is a summary of stock option activity in the
nine months ended September 30, 2018
:
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Weighted Average Exercise
Price Per Share
|
Outstanding,
December 31, 2017
|
568,525
|
|
|
$
|
10.24
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
(55,000
|
)
|
|
8.20
|
|
Expired
|
—
|
|
|
—
|
|
Forfeited
|
(8,650
|
)
|
|
14.10
|
|
Outstanding,
September 30, 2018
|
504,875
|
|
|
$
|
10.39
|
|
|
|
|
|
Exercisable,
September 30, 2018
|
311,813
|
|
|
$
|
8.61
|
|
The intrinsic value of an option is the amount by which the market price of the underlying common stock exceeds the option's exercise price. For options outstanding at
September 30, 2018
, the weighted average remaining contractual term of all outstanding options was
3.8 years and their aggregate intrinsic value was
$5.2 million. At
September 30, 2018
, the weighted average remaining contractual term of options that were exercisable was
3.0 years and their aggregate intrinsic value was $3.7 million. The
aggregate intrinsic value of stock options exercised in the
nine months ended September 30, 2018
was
$
572,000
.
We received proceeds from stock option exercises of $452,000 in the
nine months ended September 30, 2018
and $330,000 in the
nine months ended September 30, 2017
. The aggregate fair value of options that vested in the
nine months ended September 30, 2018
was $204,000.
Restricted Shares and Restricted Stock Units
Restricted shares are granted under our Non-Employee Director Stock Plan. There were
8,000
restricted shares granted in the
nine months ended September 30, 2018
(weighted average grant date fair value of $16.25 per share).
Restricted stock units are granted under our Employee Stock Incentive Plan.
No
restricted stock units were granted in the
nine months ended September 30, 2018
. The aggregate fair value of outstanding restricted shares and restricted stock units based on the closing share price of our common stock on
September 30, 2018
was
$1.0 million. The aggregate fair value of restricted shares and restricted stock units that vested
in the
nine months ended September 30, 2018
was $
177,000, based on the closing price of our common stock on the vesting date.
A summary of activity for non-vested restricted shares and restricted stock units in the
nine months ended September 30, 2018
is as follows
:
|
|
|
|
|
|
|
|
Non-vested restricted stock units and restricted shares
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
Non-vested at
December 31, 2017
|
|
54,212
|
|
|
$
|
14.86
|
|
Granted
|
|
8,000
|
|
|
16.25
|
|
Vested
|
|
(11,000
|
)
|
|
13.72
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Non-vested at
September 30, 2018
|
|
51,212
|
|
|
$
|
15.32
|
|
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan available to eligible U.S. employees. Under terms of the plan, eligible employees may designate from
1% to
10% of their compensation to be withheld through payroll deductions, up to a maximum of
$6,500 in each plan year, for the purchase of common stock at
85% of the lower of the market price on the first or last day of the offering period. There were
16,403
shares issued under this plan in the nine months ended September 30, 2018. At
our
2018
annual meeting, our shareholders adopted amendments to the plan increasing the number of shares authorized for issuance under the plan by
150,000 and extending the expiration date of the plan to August 1, 2028.
As o
f
September 30, 2018
,
174,469
s
hares remain available for future issuance under the Employee Stock Purchase Plan.
Stock Based Compensation Information
All stock based compensation awarded to our employees and non-employee directors, representing grants of restricted shares, stock options and restricted stock units, are recognized as an expense in our consolidated statement of operations based on the grant date fair value of the award. We utilize the straight-line method of expense recognition over the vesting period for our options subject to time-based vesting restrictions. The fair value of stock options granted has been determined using the Black-Scholes model. We have classified equity-based compensation expenses within our statement of operations in the same manner as our cash-based compensation costs.
Stock-based compensation expense in the
three months ended September 30, 2018
totaled $217,000, and included $94,000 for stock options,
$31,000 for our Employee
Stock Purchase Plan, $59,000 for unvested restricted stock units and $
33,000
for unvested restricted shares.
Stock-based compensation expense in the
nine months ended September 30, 2018
totaled $
701,000
, and included $
328,000
for stock options, $
86,000
for our Employee
Stock Purchase Plan, $
176,000
for unvested restricted stock units and $
111,000
for unvested restricted shares.
Stock-based compensation expense in the
three months ended September 30, 2017
totaled $240,000, and included $116,000 for stock options, $33,000 for our Employee Stock Purchase Plan, $49,000 for unvested restricted stock units and $42,000 for unvested restricted shares.
Stock-based compensation expense in the
nine months ended September 30, 2017
totaled $
640,000
, and included $
345,000
for stock options, $
85,000
for our Employee Stock Purchase Plan, $
145,000
for unvested restricted stock units and $65,000 for unvested restricted shares.
At
September 30, 2018
, the total unrecognized compensation cost related to outstanding non-vested stock-based compensation arrangements was
$
1.5
million, and the related weighted average period over which this cost is expected to be recognized was
2.36
years.
6
.
CHANGES IN STOCKHOLDERS’ EQUITY:
A reconciliation of the changes in our stockholders' equity is as follows:
|
|
Common Stock
|
|
Accumulated
Other Comprehensive
Loss
|
|
Retained
Earnings
|
|
Total Stockholders’
Equity
|
(In thousands)
|
|
Shares
|
|
Amount
|
|
|
|
Balance,
December 31, 2017
|
|
6,980
|
|
|
$
|
34,080
|
|
|
$
|
(1,409
|
)
|
|
$
|
19,611
|
|
|
$
|
52,282
|
|
Increase related to adoption of ASU
2016
-
01
|
|
—
|
|
|
|
—
|
|
|
|
(44
|
)
|
|
|
44
|
|
|
|
—
|
|
Decrease related to adoption of ASU 2014-09
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(218
|
)
|
|
|
(218
|
)
|
Exercise of stock options, vesting of restricted stock units and grants of restricted shares, net of shares exchanged as payment
|
|
68
|
|
|
|
452
|
|
|
|
—
|
|
|
|
—
|
|
|
|
452
|
|
Stock-based compensation
|
|
—
|
|
|
|
701
|
|
|
|
—
|
|
|
|
—
|
|
|
|
701
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
16
|
|
|
|
219
|
|
|
|
—
|
|
|
|
—
|
|
|
|
219
|
|
Other comprehensive income, net of tax
|
|
—
|
|
|
|
—
|
|
|
|
(280
|
)
|
|
|
—
|
|
|
|
(280
|
)
|
Net income
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,634
|
|
|
|
1,634
|
|
Balance,
September 30, 2018
|
|
7,064
|
|
|
$
|
35,452
|
|
|
$
|
(1,733
|
)
|
|
$
|
21,071
|
|
|
$
|
54,790
|
|
See Note 16 for further discussion regarding the impact of our adoption of ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities,
on our consolidated financial statements. See Note 2 and Note 16 for further discussion regarding the impact of our adoption of ASU No. 2014-09,
Revenue from Contracts with Customers,
on our consolidated financial statements.
7. OTHER FINANCIAL STATEMENT DATA:
The components of our inventories were as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2018
|
|
December 31, 2017
|
Raw materials and purchased parts
|
|
$
|
7,383
|
|
|
$
|
7,383
|
|
Work in process
|
|
1,633
|
|
|
1,666
|
|
Finished goods
|
|
4,919
|
|
|
5,344
|
|
Total inventories
|
|
$
|
13,935
|
|
|
$
|
14,393
|
|
The components of our accrued expenses were as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2018
|
|
December 31, 2017
|
Wages and benefits
|
|
$
|
1,607
|
|
|
$
|
1,328
|
|
Warranty liability
|
|
713
|
|
|
713
|
|
Other
|
|
336
|
|
|
244
|
|
|
|
$
|
2,656
|
|
|
$
|
2,285
|
|
Warranty costs:
We provide for the estimated cost of product warranties, which cover products for periods ranging from
1
to
3 years, at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of components provided by suppliers, warranty obligations do arise. These obligations are affected by product failure rates, the costs of materials used and service delivery expenses incurred in correcting a product failure. If actual product failure rates and material or service delivery costs differ from our estimates, revisions to the estimated warranty liability are required and could be material. At the end of each reporting period, we revise our estimated warranty liability based on these factors. The current portion of our warranty liability is included as a component of accrued expenses. The long-term portion of our warranty liability is included as a component of other liabilities.
A reconciliation of the changes in our estimated warranty liability is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Balance at beginning of period
|
|
$
|
767
|
|
|
$
|
790
|
|
Accrual for warranties
|
|
399
|
|
|
362
|
|
Warranty revision
|
|
(30
|
)
|
|
(23
|
)
|
Settlements made during the period
|
|
(368
|
)
|
|
(413
|
)
|
Balance at end of period
|
|
768
|
|
|
716
|
|
Current portion of estimated warranty liability
|
|
(713
|
)
|
|
(691
|
)
|
Long-term estimated warranty liability
|
|
$
|
55
|
|
|
$
|
25
|
|
Deferred warranty revenue:
The current portion of our deferred warranty revenue is included as a component of advance customer payments. The long-term portion of our deferred warranty revenue is included as a component of other liabilities.
A reconciliation of the changes in our deferred warranty revenue is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Balance at beginning of period
|
|
$
|
259
|
|
|
$
|
346
|
|
Revenue deferrals
|
|
289
|
|
|
321
|
|
Amortization of deferred revenue
|
|
(310
|
)
|
|
(325
|
)
|
Total deferred warranty revenue
|
|
238
|
|
|
342
|
|
Current portion of deferred warranty revenue
|
|
(228
|
)
|
|
(301
|
)
|
Long-term deferred warranty revenue
|
|
$
|
10
|
|
|
$
|
41
|
|
8. INTANGIBLE ASSETS:
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
(In thousands)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Patents
|
|
$
|
2,727
|
|
|
$
|
(2,515
|
)
|
|
$
|
212
|
|
|
$
|
2,687
|
|
|
$
|
(2,463
|
)
|
|
$
|
224
|
|
Software
|
|
206
|
|
|
(134
|
)
|
|
72
|
|
|
206
|
|
|
(111
|
)
|
|
95
|
|
Marketing assets and customer relationships
|
|
101
|
|
|
(52
|
)
|
|
49
|
|
|
101
|
|
|
(45
|
)
|
|
56
|
|
Non-compete agreements
|
|
101
|
|
|
(101
|
)
|
|
—
|
|
|
101
|
|
|
(96
|
)
|
|
5
|
|
|
|
$
|
3,135
|
|
|
$
|
(2,802
|
)
|
|
$
|
333
|
|
|
$
|
3,095
|
|
|
$
|
(2,715
|
)
|
|
$
|
380
|
|
Amortization expense for our intangible assets in the
three and nine
months ended
September 30, 2018
and
2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Patents
|
|
$
|
28
|
|
|
$
|
31
|
|
|
$
|
84
|
|
|
$
|
82
|
|
Software
|
|
|
8
|
|
|
|
6
|
|
|
|
23
|
|
|
|
22
|
|
Marketing assets and customer relationships
|
|
|
2
|
|
|
|
3
|
|
|
|
7
|
|
|
|
9
|
|
Non-compete agreements
|
|
|
—
|
|
|
|
5
|
|
|
|
5
|
|
|
|
18
|
|
|
|
$
|
38
|
|
|
$
|
45
|
|
|
$
|
119
|
|
|
$
|
131
|
|
Amortization of patents has been classified as research and development expense in our statements of operations. Estimated aggregate amortization expense based on current intangible assets for the next
five
years is expected to be as follows:
$38,000 for the remainder of
2018
;
$137,000 in
2019
;
$106,000 in
2020
;
$32,000 in
2021
;
$9,000 in
2022
; and
$9,000 in
2023
.
Intangible and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when future undiscounted cash flows expected to result from use of the asset and its eventual disposition are less than the carrying amount.
9. REVENUE CONCENTRATIONS, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC AREAS:
The following table summarizes our revenue by product line:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
High Precision
3
D and
2
D Sensors
|
|
$
|
5,388
|
|
|
$
|
4,030
|
|
|
$
|
15,696
|
|
|
$
|
13,569
|
|
Semiconductor Sensors
|
|
|
3,463
|
|
|
|
2,228
|
|
|
|
10,564
|
|
|
|
7,698
|
|
Inspection and Metrology Systems
|
|
|
7,832
|
|
|
|
5,570
|
|
|
|
20,397
|
|
|
|
18,890
|
|
Total
|
|
$
|
16,683
|
|
|
$
|
11,828
|
|
|
$
|
46,657
|
|
|
$
|
40,157
|
|
Export sales as a percentage of total sales in the
three and nine
months ended
September 30, 2018
were 71% and 72%,
respectively
. Export sales as a percentage of total sales in the
three and nine
months ended
September 30, 2017
were 66% and 73%,
respectively
. Virtually all of our export sales are negotiated, invoiced and paid in U.S. dollars.
Export sales by geographic area are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Americas
|
|
$
|
355
|
|
|
$
|
159
|
|
|
$
|
568
|
|
|
$
|
976
|
|
Europe
|
|
|
4,093
|
|
|
|
2,543
|
|
|
|
9,360
|
|
|
|
9,114
|
|
Asia
|
|
|
7,090
|
|
|
|
4,959
|
|
|
|
22,948
|
|
|
|
18,933
|
|
Other
|
|
|
348
|
|
|
|
103
|
|
|
|
548
|
|
|
|
247
|
|
Total export sales
|
|
$
|
11,886
|
|
|
$
|
7,764
|
|
|
$
|
33,424
|
|
|
$
|
29,270
|
|
In the
nine months ended September 30, 2018
, sales to significant customer A accounted for 11% of our total revenue and sales to significant customer B accounted for 10% of our total revenue. As of
September 30, 2018
, accounts receivable from significant customer A were $677,000 and accounts receivable from significant customer B were $1.2 million.
10. NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Net income per diluted share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of common shares to be issued upon exercise of stock options, upon vesting of restricted stock units, upon vesting of restricted shares and from purchases of shares under our Employee Stock Purchase Plan, as calculated using the treasury stock method. All common equivalent shares were excluded from the calculation of net loss per diluted share due to their anti-dilutive effect.
The components of net income (loss) per basic and diluted share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts)
|
|
Net Income
|
|
Weighted Average
Shares Outstanding
|
|
Per Share Amount
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1,067
|
|
|
7,041
|
|
|
$
|
0.15
|
|
Dilutive effect of common equivalent shares
|
|
—
|
|
|
258
|
|
|
—
|
|
Dilutive
|
|
$
|
1,067
|
|
|
7,299
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts)
|
|
Net Loss
|
|
Weighted Average
Shares Outstanding
|
|
Per Share Amount
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(72
|
)
|
|
6,959
|
|
|
$
|
(0.01
|
)
|
Dilutive effect of common equivalent shares
|
|
—
|
|
|
—
|
|
|
—
|
|
Dilutive
|
|
$
|
(72
|
)
|
|
6,959
|
|
|
$
|
(0.01
|
)
|
(In thousands except per share amounts)
|
|
Net Income
|
|
Weighted Average
Shares Outstanding
|
|
Per Share Amount
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1,634
|
|
|
7,012
|
|
|
$
|
0.23
|
|
Dilutive effect of common equivalent shares
|
|
—
|
|
|
164
|
|
|
—
|
|
Dilutive
|
|
$
|
1,634
|
|
|
7,176
|
|
|
$
|
0.23
|
|
(In thousands except per share amounts)
|
|
Net Income
|
|
Weighted Average
Shares Outstanding
|
|
Per Share Amount
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
809
|
|
|
6,939
|
|
|
$
|
0.12
|
|
Dilutive effect of common equivalent shares
|
|
—
|
|
|
102
|
|
|
(0.01
|
)
|
Dilutive
|
|
$
|
809
|
|
|
7,041
|
|
|
$
|
0.11
|
|
Potentially dilutive shares excluded from the calculations of net income (loss) per diluted share due to their anti-dilutive effect were as follows:
118,000
shares in the
three months ended September 30, 2018
; 285,000 shares in the
nine months ended September 30, 2018
;
575,000
shares in the
three months ended September 30, 2017
; and
411,000 shares in the
nine months ended September 30, 2017
.
11
. OTHER
COMPREHENSIVE INCOME (LOSS)
:
Reclassification adjustments are made to avoid double counting for items included in other comprehensive income (loss) that are also recorded as part of net income.
Other comprehensive income (loss) consisted of the following:
|
|
Three Months Ended September 30, 2018
|
|
|
Three Months Ended September 30, 2017
|
(In thousands)
|
|
|
Before Tax
|
|
|
|
Tax Effect
|
|
|
|
Net of Tax
Amount
|
|
|
|
Before Tax
|
|
|
|
Tax Effect
|
|
|
|
Net of Tax
Amount
|
|
Foreign currency translation adjustments
|
|
$
|
(50
|
)
|
|
$
|
—
|
|
|
$
|
(50
|
)
|
|
$
|
157
|
|
|
$
|
(35
|
)
|
|
$
|
122
|
|
Net changes related to available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Reclassification adjustments for gain
included in interest income and other
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net changes related to available-for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other comprehensive income (loss)
|
|
$
|
(50
|
)
|
|
$
|
—
|
|
|
$
|
(50
|
)
|
|
$
|
157
|
|
|
$
|
(35
|
)
|
|
$
|
122
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Nine Months Ended September 30, 2017
|
(In thousands)
|
|
|
Before Tax
|
|
|
|
Tax Effect
|
|
|
|
Net of Tax
Amount
|
|
|
|
Before Tax
|
|
|
|
Tax Effect
|
|
|
|
Net of Tax
Amount
|
|
Foreign currency translation adjustments
|
|
$
|
(252
|
)
|
|
$
|
—
|
|
|
$
|
(252
|
)
|
|
$
|
587
|
|
|
$
|
(173
|
)
|
|
$
|
414
|
|
Net changes related to available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses)
|
|
|
(33
|
)
|
|
|
8
|
|
|
|
(25
|
)
|
|
|
31
|
|
|
|
(11
|
)
|
|
|
20
|
|
Reclassification adjustments for gain
included in interest income and other
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net changes related to available-for-sale securities
|
|
|
(36
|
)
|
|
|
8
|
|
|
|
(28
|
)
|
|
|
31
|
|
|
|
(11
|
)
|
|
|
20
|
|
Other comprehensive income (loss)
|
|
$
|
(288
|
)
|
|
$
|
8
|
|
|
$
|
(280
|
)
|
|
$
|
618
|
|
|
$
|
(184
|
)
|
|
$
|
434
|
|
At
September 30, 2018
and
September 30, 2017
, components of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Available- for-Sale
Securities
|
|
Accumulated
Other
Comprehensive
Loss
|
Balances at
December 31, 2017
|
|
$
|
(1,394
|
)
|
|
$
|
(15
|
)
|
|
$
|
(1,409
|
)
|
Decrease related to adoption of ASU
2016
-
01
(See Note
16
)
|
|
—
|
|
|
(44
|
)
|
|
(44
|
)
|
Other comprehensive income before reclassifications
|
|
(252
|
)
|
|
(25
|
)
|
|
(277
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
Total change for the period
|
|
(252
|
)
|
|
(72
|
)
|
|
(324
|
)
|
Balances at
September 30, 2018
|
|
$
|
(1,646
|
)
|
|
$
|
(87
|
)
|
|
$
|
(1,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Available- for-Sale
Securities
|
|
Accumulated
Other
Comprehensive
Loss
|
Balances at
December 31, 2016
|
|
$
|
(1,928
|
)
|
|
$
|
(12
|
)
|
|
$
|
(1,940
|
)
|
Other comprehensive income before reclassifications
|
|
414
|
|
|
20
|
|
|
434
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
Total change for the period
|
|
414
|
|
|
20
|
|
|
434
|
|
Balances at
September 30, 2017
|
|
$
|
(1,514
|
)
|
|
$
|
8
|
|
|
$
|
(1,506
|
)
|
12
. INCOME TAXES:
We recorded income tax expense of $
297,000
in the
three months ended September 30, 2018
, compared to an income tax benefit of
$
116,000
in
the
three months ended September 30, 2017
.
We recorded income tax expense of $
444,000
in the
nine months ended September 30, 2018
,
compared to income tax expense of $
10,000
in the
nine months ended September 30, 2017
.
Our income tax provision in the
nine months ended September 30, 2018
reflected
an effective
income tax rate of approximately 21%. Our effective tax rate in the nine months ended September 30, 2018 was impacted by Global Intangible Low Tax Income (GILTI), U.S federal R&D tax credits and $
70,000
of excess tax benefits from employee share-based payments. Our income tax provision in the
nine months ended September 30, 2017
reflected an
effective income tax rate of approximately 1%. Our effective tax rate in the nine months ended September 30, 2017 differed from the U.S. statutory tax rate of
34%
, primarily due to $
207,000
of excess tax benefits from employee share-based payments.
We recognized $37,000 of excess tax benefits in the
three months ended September 30, 2018
.
Excess tax benefits recognized in the
three months ended September 30, 2017
were inconsequential.
We have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and federal, state and foreign net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, when net operating loss carry forwards could be applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the
realizability
of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.
Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for valuation allowances, we considered our history of cumulative operating results for income tax purposes over the past three years in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutory carry forward periods and tax planning alternatives. In addition, we considered both our near-term and long-term financial outlook. After considering all available evidence (both positive and negative), we concluded that recognition of valuation allowances for substantially all of our U.S. and Singapore deferred tax assets was not required at
September 30, 2018
.
The Inland Revenue Authority of Singapore is reviewing our
2016
and
2015
income tax returns. We do not presently anticipate that the outcome of these audits will have a significant impact on our financial position or results of operations.
13
. SHARE REPURCHASE:
In October 2017, our Board of Directors adopted a program authorizing the purchase of up to $3.0 million of shares of our common stock. The program expired on September 30, 2018. During the
nine
months ended
September 30, 2018
, no shares were repurchased under this program.
14
. NEW LEASE OBLIGATION:
We lease a
50,724
square foot mixed office and warehouse facility built to our specifications in Golden Valley, Minnesota, which functions as our corporate headquarters and primary manufacturing facility for our sensor and semiconductor products. We also lease a
10,165
square foot facility in Bloomington, Minnesota, the term of which expires on December 31, 2018. In May 2018, we finalized an amendment to the lease for our current Golden Valley, Minnesota facility that will become effective on January 1, 2019. The amendment provides that we will lease
61,208
square feet of space in our current facility in Golden Valley, Minnesota through July 31, 2026 (prior to the amendment, the lease provided for an expiration date of December 31, 2018). The increase in the size of the facility will allow us to conduct the operations currently carried out at our Bloomington, Minnesota facility in our current Golden Valley, Minnesota location. Future lease payments due under the amended lease for the period from January 1, 2019 through July 31, 2026, are approximately $
7.9
million. We anticipate that our annual rental payments will increase by approximately
$
200,000
when the lease amendment becomes effective in January 2019.
15
. CONTINGENCIES:
We are periodically a defendant in miscellaneous claims and disputes in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, management presently believes the disposition of these matters will not have a material effect on our financial position, results of operations or cash flows.
In the normal course of business to facilitate sales of our products and services, we at times indemnify other parties, including customers, with respect to certain matters. In these instances, we have agreed to hold the other parties harmless against losses arising out of intellectual property infringement or other types of claims. These agreements may limit the time within which an indemnification claim can be made, and almost always limit the amount of the claim. It is not possible to determine the maximum potential liability under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made, if any, under these agreements have not had a material impact on our operating results, financial position or cash flows.
16. RECENT ACCOUNTING DEVELOPMENTS:
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Topic 606, which provided guidance on the recognition of revenue from contracts with customers
. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We performed a review of the requirements of the new guidance and identified which of our revenue streams are within the scope of Topic 606. We applied the
five
-step model of the new standard to a selection of contracts within each of our revenue streams, and compared the results to our current accounting practices. We also performed detailed contract reviews to complete necessary adjustments to our existing accounting policies, and implemented changes to our processes and internal controls to capture new data and address changes in financial reporting. We expanded our consolidated financial statement disclosures to comply with the requirements of Topic
606
. We adopted the new standard using the modified retrospective method, with the cumulative effect of initially applying the guidance recognized at the date of initial application.
Our adoption of Topic
606
on January 1, 2018 resulted in
a $218,000 decrease in retained earnings to record the cumulative effect adjustment. Adoption of Topic
606
increased our revenues in the
three and nine
months ended
September 30, 2018
by $123,000 and $232,000 respectively, when compared to revenue recognition under Topic 605. Adoption of Topic 606 increased our net income in the
three and nine
months ended
September 30, 2018
by $35,000 and $85,000, respectively, or approximately $0.01
per share in both periods.
In January 2016, the FASB issued ASU No.
2016
-
01
,
Recognition and Measurement of Financial Assets and Liabilities,
which revised the accounting related to (
1
) the classification and measurement of investments in equity securities and (
2
) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU No. 2016-01 also amended certain disclosure requirements associated with the fair value of financial instruments. The new guidance requires the fair value measurement of investments in equity securities and other ownership interests in an entity that do not result in consolidation and are not accounted for under the equity method. Entities will need to measure these investments and recognize changes in fair value in net income. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities they classify under current guidance as available-for-sale in other comprehensive income. ASU No. 2016-01 was effective beginning January 1, 2018 and resulted in a cumulative-effect adjustment to beginning retained earnings, except for guidance relative to equity securities without readily determinable fair values which is applied prospectively. Our adoption of ASU
2016
-
01
on January 1, 2018 resulted in a
$44,000
increase in retained earnings and accumulated other comprehensive loss.
In February 2016, the FASB issued new lease accounting guidance, ASU No.
2016
-
02
,
Leases
.
Under the new guidance, at the commencement date, lessees will be required (a) to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and (b) to record a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term of
12
months or less. Lessor accounting is largely unchanged. U.S. public companies are required to apply the amendments in ASU No.
2016
-
02
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. As issued, ASU No. 2016-02 requires reporting companies to adopt the new standard using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842), Targeted Improvements
, which gives companies the option of applying the standard at the adoption date, rather than retrospectively to the earliest period presented in the financial statements, and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under the new option afforded by ASU 2018-11, companies will not be required to restate the financial statements of prior periods, nor will they be required to provide the disclosures required by ASC 842 for those prior periods. We anticipate that we will adopt ASU 2016-02 by utilizing the new option afforded by ASU 2018-11.
We are currently evaluating the impact of the new standard on our consolidated financial statements. When implemented, the standard is expected to have a material impact as operating leases will be recognized on our consolidated balance sheet, with an increase to both assets and liabilities. We presently do not believe the standard will have a material impact on our results of operations. The impact of this ASU is non-cash in nature and will not affect our cash flows.
In January 2017, the FASB issued guidance on simplifying the test for goodwill impairment, ASU No.
2017
-
04
,
Simplifying the Test for Goodwill Impairment
. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit's carrying value exceeds its fair value, but not in an amount in excess of the carrying value of goodwill. The new guidance eliminates the requirement to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The new guidance is to be applied prospectively to impairment tests beginning January 1, 2020, with early adoption permitted. We are currently evaluating when we will adopt the new guidance.
In February 2018, the FASB issued ASU
2018
-
02
,
Reclassification of Tax Effects from Accumulated Other Comprehensive Income,
which allows entities to elect an option to reclassify the stranded tax effects related to the application of the Tax Cuts and Jobs Act from accumulated other comprehensive loss to retained earnings. The guidance is effective January 1, 2019 with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. We are currently evaluating the impact of the new guidance on our consolidated financial statements.