PERCEPTRON, INC. AND SUBSIDIARIES
The notes to the consolidated financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.Accounting Policies
Perceptron, Inc. (the “Company”) develops, produces and sells a comprehensive range of automated industrial metrology products and solutions to manufacturers for dimensional gauging, dimensional inspection and 3D scanning. The Company’s products provide solutions for manufacturing process control as well as sensor and software technologies for non-contact measurement, scanning and inspection applications. The Company also offers value added services such as training and customer support.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and within the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In the Company’s opinion, these statements include all normal recurring adjustments necessary for a fair presentation of the financial statements for the periods presented. The results of operations for any interim period are not necessarily indicative of the results of operations for a full fiscal year. The accompanying unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements in the Company’s 2019 Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
Use of Estimates
Management is required to make certain estimates and assumptions under U.S. GAAP during the preparation of these Consolidated Financial Statements. These estimates and assumptions may affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
8
Revision of Previously Issued Financial Statements
During the fourth quarter of fiscal 2019, an error was identified related to the accounting for the Company’s deferred tax liabilities associated with certain amortizable intangible assets acquired in 2015. The error related to not appropriately reducing the associated deferred tax liabilities for the tax effect of amortization on the intangible assets since 2016. The error was immaterial to the Company’s previously issued financial statements, but the cumulative correction would have had a material effect on the 2019 financial statements. Accordingly, the results for the three and six months ended December 31, 2018 and three and six months ended December 31, 2017 have been adjusted to incorporate the revised amounts, where applicable. See Note 1, of the Notes to the Consolidated Financial Statements, “Summary of Significant Accounting Policies - Revision of Previously Issued Financial Statements” contained in Item 8 of the Company’s Annual Report on Form 10-K for further discussion
.
|
|
Three Months Ended December 31, 2018
|
|
|
Three Months Ended December 31, 2017
|
|
|
|
(In Thousands Except Per Share Amounts)
|
|
|
(In Thousands Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
As
|
|
|
As Previously
|
|
|
|
|
As
|
|
|
|
Reported
|
|
Adjustment
|
|
|
Revised
|
|
|
Reported
|
|
Adjustment
|
|
Revised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
21,553
|
|
$
|
-
|
|
|
$
|
21,553
|
|
|
$
|
20,433
|
|
$
|
-
|
|
$
|
20,433
|
|
Cost of Sales
|
|
|
13,703
|
|
|
-
|
|
|
|
13,703
|
|
|
|
13,026
|
|
|
-
|
|
|
13,026
|
|
Gross Profit
|
|
|
7,850
|
|
|
-
|
|
|
|
7,850
|
|
|
|
7,407
|
|
|
-
|
|
|
7,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
6,413
|
|
|
-
|
|
|
|
6,413
|
|
|
|
6,952
|
|
|
-
|
|
|
6,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
1,437
|
|
|
-
|
|
|
|
1,437
|
|
|
|
455
|
|
|
-
|
|
|
455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and (Expense)
|
|
|
127
|
|
|
-
|
|
|
|
127
|
|
|
|
(104
|
)
|
|
-
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
1,564
|
|
|
-
|
|
|
|
1,564
|
|
|
|
351
|
|
|
-
|
|
|
351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit (Expense)
|
|
|
(17
|
)
|
|
62
|
|
|
|
45
|
|
|
|
15
|
|
|
62
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,547
|
|
$
|
62
|
|
|
$
|
1,609
|
|
|
$
|
366
|
|
$
|
62
|
|
$
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
$
|
0.01
|
|
|
$
|
0.17
|
|
|
$
|
0.04
|
|
$
|
0.01
|
|
$
|
0.05
|
|
Diluted
|
|
$
|
0.16
|
|
$
|
-
|
|
|
$
|
0.16
|
|
|
$
|
0.04
|
|
|
-
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,615
|
|
|
-
|
|
|
|
9,615
|
|
|
|
9,491
|
|
|
-
|
|
|
9,491
|
|
Dilutive effect of stock options
|
|
|
76
|
|
|
-
|
|
|
|
76
|
|
|
|
106
|
|
|
-
|
|
|
106
|
|
Diluted
|
|
|
9,691
|
|
|
-
|
|
|
|
9,691
|
|
|
|
9,597
|
|
|
-
|
|
|
9,597
|
|
As a result of the above revision, Total Comprehensive Income was increased from $1,178 to $1,240 for the three months ended December 31, 2018.
The consolidated statements of cash flow are not presented because there is no impact on total cash flows from operating activities, investing activities, and financing activities. Certain components of net cash provided by operating activities changed, as caused by the revision, but the net change amounted to zero for the three months ended December 31, 2018.
9
As a result of the above revision, in the consolidated statement of shareholder’s equity, net income was increased from $1,547 to $1,609 for the three months ended December 31, 2018; accumulated other comprehensive loss was decreased from $2,864 to $2,862 at December 31, 2018 and retained earnings was increased from $3,978 to $5,179 at December 31, 2018.
|
|
Six Months Ended December 31, 2018
|
|
|
Six Months Ended December 31, 2017
|
|
|
|
(In Thousands Except Per Share Amounts)
|
|
|
(In Thousands Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
As
|
|
|
As Previously
|
|
|
|
|
As
|
|
|
|
Reported
|
|
Adjustment
|
|
|
Revised
|
|
|
Reported
|
|
Adjustment
|
|
Revised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
42,995
|
|
$
|
-
|
|
|
$
|
42,995
|
|
|
$
|
39,702
|
|
$
|
-
|
|
$
|
39,702
|
|
Cost of Sales
|
|
|
26,853
|
|
|
-
|
|
|
|
26,853
|
|
|
|
24,645
|
|
|
-
|
|
|
24,645
|
|
Gross Profit
|
|
|
16,142
|
|
|
-
|
|
|
|
16,142
|
|
|
|
15,057
|
|
|
-
|
|
|
15,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
13,246
|
|
|
-
|
|
|
|
13,246
|
|
|
|
13,057
|
|
|
-
|
|
|
13,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
2,896
|
|
|
-
|
|
|
|
2,896
|
|
|
|
2,000
|
|
|
-
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and (Expense)
|
|
|
(102
|
)
|
|
-
|
|
|
|
(102
|
)
|
|
|
(138
|
)
|
|
-
|
|
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
2,794
|
|
|
-
|
|
|
|
2,794
|
|
|
|
1,862
|
|
|
-
|
|
|
1,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit (Expense)
|
|
|
(355
|
)
|
|
124
|
|
|
|
(231
|
)
|
|
|
62
|
|
|
124
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
2,439
|
|
$
|
124
|
|
|
$
|
2,563
|
|
|
$
|
1,924
|
|
$
|
124
|
|
$
|
2,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
$
|
0.02
|
|
|
$
|
0.27
|
|
|
$
|
0.20
|
|
$
|
0.02
|
|
$
|
0.22
|
|
Diluted
|
|
$
|
0.25
|
|
$
|
0.01
|
|
|
$
|
0.26
|
|
|
$
|
0.20
|
|
$
|
0.01
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,588
|
|
|
-
|
|
|
|
9,588
|
|
|
|
9,455
|
|
|
-
|
|
|
9,455
|
|
Dilutive effect of stock options
|
|
|
143
|
|
|
-
|
|
|
|
143
|
|
|
|
72
|
|
|
-
|
|
|
72
|
|
Diluted
|
|
|
9,731
|
|
|
-
|
|
|
|
9,731
|
|
|
|
9,527
|
|
|
-
|
|
|
9,527
|
|
As a result of the above revision, Total Comprehensive Income was increased from $1,673 to $1,797 for the six months ended December 31, 2018.
The consolidated statements of cash flow are not presented because there is no impact on total cash flows from operating activities, investing activities, and financing activities. Certain components of net cash provided by operating activities changed, as caused by the revision, but the net change amounted to zero for the six months ended December 31, 2018.
As a result of the above revision, in the consolidated statement of shareholder’s equity, net income was increased from $2,439 to $2,563 for the six months ended December 31, 2018; accumulated other comprehensive loss was decreased from $2,864 to $2,862 at December 31, 2018 and retained earnings was increased from $3,978 to $5,179 at December 31, 2018.
10
2.New Accounting Pronouncements
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (ASU 2016-13), which requires the measurement of all expected credit losses for financial assets held at the reporting date to be based on historical experience, current conditions as well as reasonable and supportable forecasts. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses (ASU 2018-19). ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of ASU 2016-13. ASU 2016-13, as amended, is effective for the Company on July 1, 2020, with early adoption permitted. The Company does not expect the impact of the adoption of ASU 2016-13 to be material on its consolidated financial statements.
In July 2018, the FASB issued Accounting Standards Update No. 2018-09 — Codification Improvements (ASU 2018-09), which clarifies, corrects and makes minor improvements on a wide variety of Topics in the Codification. The amendments make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. The transition and effective dates are based on the facts and circumstances of each amendment, including some amendments that will be effective upon issuance of the update and many of them will be effective for annual periods beginning after December 31, 2018. For the amendments that were effective upon issuance of the Update, there was no material impact to the Company’s consolidated financial statements or disclosures.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13 – Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirement for Fair Value Measurement (ASU 2018-13), which changes the disclosures related to, among other aspects of fair value, unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurement and the narrative description of measurement uncertainty. ASU 2018-13 is effective for the Company on July 1, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements or disclosures.
In August 2018, the FASB issued Accounting Standards Update No. 2018-15 – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (ASU 2018-15), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing costs incurred to develop or obtain inter-use software. ASU 2018-15 is effective for the Company on July 1, 2020. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
In November 2019, the FASB issued Accounting Standards Update No. 2019-11—Codification Improvements to Topic 326, Financial Instruments—Credit Losses (ASU 2019-11). The amendments in this Update represent changes to clarify, correct errors in, or improve the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The effective dates and transition requirements for ASU 2019-11 are the same as ASU 2016-13. ASU 2019-11 is effective for the Company on July 1, 2020. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for the Company on July 1, 2021. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
In January 2020, the FASB issued Accounting Standards Update No. 2020-01—Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force) (ASU 2020-01). The amendments in this ASU clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. ASU 2020-01 is effective for the Company on July 1, 2021. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
11
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 Leases (ASU 2016-2), which establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The Company adopted this guidance on July 1, 2019, using the modified retrospective approach.
The adoption of the standard resulted in the recognition of net operating lease right-of-use assets of $4.0 million and operating lease liabilities of $3.9 million on the condensed consolidated balance sheet as of July 1, 2019 primarily related to the Company’s real estate operating leases. The operating lease right-of-use asset includes the impact of deferred rent. The Company does not have any finance leases.
The Company elected to apply the package of practical expedients upon transition, which includes no reassessment of whether existing contracts are or contain leases and allowed for the lease classification for existing leases to be retained. The Company did not elect the practical expedient to use hindsight, and accordingly the initial lease term did not differ under the new standard versus prior accounting practice. After transition, in certain instances, the cost of renewal options will be recognized earlier in the term of the lease than under the previous lease accounting rules. The Company has selected as its accounting policy to keep leases with a term of twelve months or less off the balance sheet and recognize these lease payments on a straight-line basis over the lease term.
See Note 10 of the Notes to the Consolidated Financial Statements, “Leases” contained in this Quarterly Report on Form 10-Q for further information on the impact of the new standard.
In February 2018, the FASB issued Accounting Standards Update 2018-02—Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), which allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 was adopted on July 1, 2019 and did not have a significant impact on the Company’s consolidated financial statements or disclosures.
3.Goodwill
Goodwill is not subject to amortization and is reviewed at least annually in the fourth quarter of each year using data as of March 31 of that year, or earlier if an event occurs or circumstances change and there is an indicator of impairment. The impairment test consists of comparing a reporting unit’s fair value to its carrying value. A reporting unit is defined as an operating segment or one level below an operating segment. Goodwill is recorded in the Company’s CMM reporting unit. A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and the testing for recoverability of a significant asset group. The Company’s goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of all reporting units to the total market capitalization. Therefore, the Company’s stock may trade below its book value and a significant and sustained decline in the Company’s stock price and market capitalization could result in goodwill impairment charges.
The quantitative goodwill impairment test contains estimates regarding future revenue growth and expense levels. To the extent that actual results do not meet projected results, it could result in a material impairment to goodwill which could negatively impact the Company’s results of operations.
In the fourth quarter of fiscal 2019, the Company completed its annual goodwill impairment testing. The impairment test consisted of a quantitative assessment due to a decrease in the Company’s stock price in the fourth quarter of fiscal 2019 and uncertainty with future revenue growth primarily due to companies postponing decisions about purchasing new capital goods such as CMMs. Based on the results of the fiscal 2019 annual impairment test, the fair value of the Company’s CMM reporting unit was less than its carrying value. As a result, the Company recorded a non-cash goodwill impairment charge of $6.0 million due to the lack of projected growth in the sales of its Off-Line Measurement Solutions. This impairment is not deductible for income tax purposes.
Goodwill is recorded on the local books of the Company’s CMM reporting unit. Foreign currency effects will impact the balance of goodwill in future periods. The Company’s goodwill balance was $1,715,000 and $1,741,000 as of December 31, 2019 and June 30, 2019, respectively, with the decrease due to the differences in foreign currency rates at December 31, 2019 compared to June 30, 2019.
At December 31, 2019, there are no indications of potential impairment of goodwill.
12
4.Intangible Assets
The Company acquired intangible assets consisting of a Trade Name and Customer/Distributor Relationships in addition to goodwill in connection with the acquisitions of Coord3 and NMS in the third quarter of fiscal 2015 which is considered the Company’s CMM reporting unit. Furthermore, the Company continues to develop intangibles, primarily software. These assets are susceptible to shortened estimated useful lives and changes in fair value due to changes in their use, market or economic changes, or other events or circumstances. The amortization periods for customer/distributor relationships, trade name and software are five years, ten years and five years, respectively.
During the fourth quarter of fiscal 2019, due to the impairment indicators discussed in Note 3, the Company assessed whether the carrying amounts of its long-lived assets in the CMM reporting unit (the asset group) may not be recoverable and therefore may be impaired. To assess the recoverability, the undiscounted cash flows of the asset group were analyzed over a range of potential remaining useful lives with the customer relationships as the primary asset. The result was that the asset group carrying value exceeded the sum of the undiscounted cash flows. After a fair value analysis, the Company determined that the trade name and customer relationships were impaired. The Company recorded a non-cash impairment loss related to these definite-lived intangible assets of $1.4 million. There were no impairment indicators for other long-lived assets subject to amortization.
At December 31, 2019, there are no indications of potential impairment of these intangible assets.
The Company’s intangible assets are as follows (in thousands):
|
|
December 31,
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
|
2019
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Amortization
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
/ Impairments
|
|
|
Amount
|
|
Customer/Distributor Relationships
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,249
|
|
|
$
|
(3,249
|
)
|
|
$
|
-
|
|
Trade Name
|
|
|
1,695
|
|
|
|
(1,101
|
)
|
|
|
594
|
|
|
|
2,523
|
|
|
|
(1,862
|
)
|
|
|
661
|
|
Software
|
|
|
2,104
|
|
|
|
(889
|
)
|
|
|
1,215
|
|
|
|
1,902
|
|
|
|
(747
|
)
|
|
|
1,155
|
|
Total
|
|
$
|
3,799
|
|
|
$
|
(1,990
|
)
|
|
$
|
1,809
|
|
|
$
|
7,674
|
|
|
$
|
(5,858
|
)
|
|
$
|
1,816
|
|
Amortization expense was $95,000 and $280,000 for the three months ended December 31, 2019 and 2018, respectively. Amortization expense was $199,000 and $571,000 for the six months ended December 31, 2019 and 2018, respectively.
The estimated amortization of the remaining intangible assets by year is as follows (in thousands):
Years Ending June 30,
|
|
Amount
|
|
2020 (excluding the six months ended December 31, 2019)
|
|
|
170
|
|
2021
|
|
|
393
|
|
2022
|
|
|
431
|
|
2023
|
|
|
396
|
|
2024
|
|
|
343
|
|
after 2024
|
|
|
76
|
|
|
|
$
|
1,809
|
|
13
5.Revenue from Contracts with Customers
Disaggregated Revenue
The following tables summarizes the Company’s disaggregated revenue, based on its shipping location (in thousands):
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
Geographic Region:
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
2018
|
|
Americas Sales
|
|
$
|
6,875
|
|
|
$
|
6,992
|
|
|
$
|
13,042
|
|
$
|
15,371
|
|
Europe Sales
|
|
|
8,455
|
|
|
|
8,871
|
|
|
|
15,575
|
|
|
17,653
|
|
Asia Sales
|
|
|
3,802
|
|
|
|
5,690
|
|
|
|
8,365
|
|
|
9,971
|
|
Total Net Sales
|
|
$
|
19,132
|
|
|
$
|
21,553
|
|
|
$
|
36,982
|
|
$
|
42,995
|
|
Sales by product lines are as follows (in thousands):
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
Product Lines
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
2018
|
|
Measurement Solutions
|
|
$
|
17,592
|
|
|
$
|
19,500
|
|
|
$
|
33,760
|
|
$
|
39,408
|
|
3D Scanning Solutions
|
|
|
514
|
|
|
|
982
|
|
|
|
1,459
|
|
|
1,712
|
|
Value Added Service
|
|
|
1,026
|
|
|
|
1,071
|
|
|
|
1,763
|
|
|
1,875
|
|
Total Net Sales
|
|
$
|
19,132
|
|
|
$
|
21,553
|
|
|
$
|
36,982
|
|
$
|
42,995
|
|
The following table summarizes the Company’s revenue categories for the three and six months ended December 31, 2019 (in thousands):
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
Timing of Revenue Recognition
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
Goods transferred at a point of time
|
|
$
|
13,542
|
|
$
|
16,581
|
|
|
$
|
26,718
|
|
$
|
31,781
|
|
Services transferred over time
|
|
|
5,590
|
|
|
4,972
|
|
|
|
10,264
|
|
|
11,214
|
|
Total Net Sales
|
|
$
|
19,132
|
|
$
|
21,553
|
|
|
$
|
36,982
|
|
$
|
42,995
|
|
Remaining Performance Obligations
The estimated recognition of the remaining unsatisfied performance obligations beyond one year is as follows (in thousands):
Years Ending June 30,
|
|
Amount
|
|
2020 (excluding the six months ended December 31, 2019)
|
|
$
|
10,771
|
|
2021
|
|
|
3,508
|
|
2022
|
|
|
378
|
|
2023
|
|
|
-
|
|
2024
|
|
|
-
|
|
after 2024
|
|
|
-
|
|
Total
|
|
$
|
14,657
|
|
Contract Balances
Deferred commissions – The Company’s incremental direct costs of obtaining a contract, which consist primarily of sales commissions, are deferred and amortized based on the timing of revenue recognition over the period of contract performance. As of December 31, 2019, capitalized commissions of $249,000 were included in “Other current assets” on the Consolidated Balance Sheet. Commission expense recognized during the three and six months ended December 31, 2019 was $227,000 and $417,000, respectively, is included in “Selling, general and administrative expense” in the Consolidated Statement of Operations. Commission expense recognized during the three and six months ended December 31, 2018 was $304,000 and $558,000, respectively, is included in “Selling, general and administrative expense” in the Consolidated Statement of Operations.
14
The change in the Company’s net Unbilled receivables / (Deferred revenue) from July 1, 2019 to December 31, 2019 was primarily due to the amount of revenue recognized as the Company satisfied performance obligations during the six months ended December 31, 2019, partially offset by the amount and timing of invoicing during that same timeframe related to the Company’s Measurement Solutions and 3D Scanning Solutions. During the six months ended December 31, 2019, the Company recognized revenue of $4,371,000 that was included in “Deferred revenue” at July 1, 2019. During the six months ended December 31, 2018, the Company recognized revenue of $4,164,000 that was included in “Deferred revenue” at July 1, 2018.
6.Short-Term and Long-Term Investments
As of December 31, 2019 and June 30, 2019, the Company held restricted cash in short-term bank guarantees. The restricted cash provides financial assurance that the Company will fulfill certain customer obligations in China. The cash is restricted as to withdrawal or use while the related bank guarantee is outstanding. Interest is earned on the restricted cash and recorded as interest income. As of December 31, 2019 and June 30, 2019, the Company had short-term bank guarantees of $232,000 and $258,000, respectively.
At December 31, 2019, the Company held a long-term investment in preferred stock that is not registered under the Securities Act of 1933, as amended and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The preferred stock investment is currently recorded at $725,000 after consideration of impairment charges recorded in fiscal years 2008 and 2009. At December 31, 2019 there were no changes to the carrying value of the investment resulting from observable price changes in orderly transactions for an identical or similar investment in the issuer.
The following table presents the Company’s Short-Term and Long-Term Investments by category at December 31, 2019 and June 30, 2019 (in thousands):
|
|
December 31, 2019
|
|
|
|
Cost
|
|
|
Fair Value or
Carrying Value
|
|
Short-Term Investments
|
|
|
|
|
|
|
|
|
Bank Guarantees
|
|
$
|
232
|
|
|
$
|
232
|
|
Time/Fixed Deposits
|
|
|
216
|
|
|
|
216
|
|
Total Short-Term Investments
|
|
$
|
448
|
|
|
$
|
448
|
|
|
|
|
|
|
|
|
|
|
Long-Term Investments
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
$
|
3,700
|
|
|
$
|
725
|
|
Total Long-Term Investments
|
|
$
|
3,700
|
|
|
$
|
725
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
4,148
|
|
|
$
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
|
Cost
|
|
|
Fair Value or
Carrying Value
|
|
Short-Term Investments
|
|
|
|
|
|
|
|
|
Bank Guarantees
|
|
$
|
258
|
|
|
$
|
258
|
|
Time/Fixed Deposits
|
|
|
1,173
|
|
|
|
1,173
|
|
Total Short-Term Investments
|
|
$
|
1,431
|
|
|
$
|
1,431
|
|
|
|
|
|
|
|
|
|
|
Long-Term Investments
|
|
|
|
|
|
|
Preferred Stock
|
|
$
|
3,700
|
|
|
$
|
725
|
|
Total Long-Term Investments
|
|
$
|
3,700
|
|
|
$
|
725
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
5,131
|
|
|
$
|
2,156
|
|
15
7.Fair Value Measurements
ASC 820, “Fair Value Measurements and Disclosures” is applicable for all financial assets and liabilities as well as nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. ASC 820 defines fair value, establishes a framework for measuring fair value and requires specific disclosures about fair value measurements. The Company’s financial instruments include investments classified as available for sale, mutual funds, fixed deposits and certificate of deposits at December 31, 2019.
ASC 820 establishes a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s assumptions of market participant valuation (unobservable inputs). These two types of inputs create the following fair value hierarchy:
|
(1)
|
Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
(2)
|
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly.
|
|
(3)
|
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable and reflect management’s estimates and assumptions.
|
ASC 820 requires the use of observable market data if such data is available without undue cost and effort.
The following table presents the Company’s investments at December 31, 2019 and June 30, 2019 that are measured and recorded at fair value on a recurring basis consistent with the fair value hierarchy provisions of ASC 820 (in thousands). The fair value of the Company’s short-term investments approximates their cost basis.
Description
|
|
December 31, 2019
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Time/Fixed Deposits and Bank Guarantees
|
|
$
|
448
|
|
|
$
|
-
|
|
|
$
|
448
|
|
|
$
|
-
|
|
Total
|
|
$
|
448
|
|
|
$
|
-
|
|
|
$
|
448
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
June 30, 2019
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Time/Fixed Deposits and Bank Guarantees
|
|
$
|
1,431
|
|
|
$
|
-
|
|
|
$
|
1,431
|
|
|
$
|
-
|
|
Total
|
|
$
|
1,431
|
|
|
$
|
-
|
|
|
$
|
1,431
|
|
|
$
|
-
|
|
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. At December 31, 2019, the Company did not record any other-than-temporary impairments on its financial assets required to be measured on a recurring basis.
The Company also measures certain assets and liabilities at fair value on a nonrecurring basis. These assets are tested for impairment when events or circumstances occur which may indicate that the derived fair value is below carrying cost or on an annual basis in accordance with applicable GAAP. For these assets, the Company does not periodically adjust carrying value fair value except in the event of an impairment.
There were no assets or liabilities measured at fair value on a non-recurring basis at December 31, 2019.
16
8.Inventory
Inventory is stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. The Company provides a reserve for obsolescence to recognize inventory impairment for the effects of engineering change orders, and for age and use of inventory that affect the value of the inventory. The reserve for obsolescence creates a new cost basis for the impaired inventory. When inventory that has previously been impaired is sold or disposed of, the related obsolescence reserve is reduced resulting in the reduced cost basis being reflected in cost of goods sold. A detailed review of the inventory is performed annually with quarterly updates for known changes that have occurred since the annual review. Inventory, net of reserves of $2,048,000 and $1,778,000 at December 31, 2019 and June 30, 2019, respectively, is comprised of the following (in thousands):
|
|
At December 31,
|
|
|
At June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Component Parts
|
|
$
|
5,323
|
|
|
$
|
5,229
|
|
Work in Process
|
|
|
1,483
|
|
|
|
1,383
|
|
Finished Goods
|
|
|
2,611
|
|
|
|
4,198
|
|
Total
|
|
$
|
9,417
|
|
|
$
|
10,810
|
|
9.Property and Equipment
The Company’s property and equipment consisted of the following as of December 31, 2019 and June 30, 2019 (in thousands):
|
|
At December 31,
|
|
|
At June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Building and Land
|
|
$
|
7,653
|
|
|
$
|
7,647
|
|
Machinery and Equipment
|
|
|
11,798
|
|
|
|
11,616
|
|
Furniture and Fixtures
|
|
|
1,290
|
|
|
|
1,286
|
|
|
|
|
20,741
|
|
|
|
20,549
|
|
Less: Accumulated Depreciation
|
|
|
(14,342
|
)
|
|
|
(14,011
|
)
|
|
|
$
|
6,399
|
|
|
$
|
6,538
|
|
Depreciation expense was $240,000 and $287,000 for the three months ended December 31, 2019 and 2018, respectively. Depreciation expense was $500,000 and $563,000 for the six months ended December 31, 2019 and 2018, respectively.
10. Leases
The Company leases office space for its manufacturing, sales and service operations, vehicles and office equipment under operating leases.
All of the Company’s leases are operating leases.
In accordance with Accounting Standard Codification Topic 842 (“ASC 842”), the Company has elected not to apply ASC 842 to arrangements with lease terms less than 12 months.
Operating lease right-of-use assets and liabilities are reflected within the captions “Right-of-use assets”, “Short-term operating lease liability” and “Long-term operating lease liability”, respectively, on the Consolidated Balance Sheet. Right-of-use assets, Short-term operating lease liability and Long-term operating lease liability were $3,853,000, $501,000 and $3,404,000 as of December 31, 2019, respectively.
When readily determinable, the discount rate used to calculate the lease liability is the rate implicit in the lease. Otherwise the Company applied judgement and used its incremental borrowing rate based on the information available at lease commencement.
Some of the leases include one or more renewal or termination options at the Company’s discretion, which are included in the determination of the lease term if the Company is reasonably certain to exercise the option.
17
There were no Right-of-use leased assets obtained in exchange for new operating lease liabilities for the three and six months ended December 31, 2019.
Lease expense, recorded in the cost of sales and selling, general & administrative expense categories in the Consolidated Statement of Operations total $184,000 and $368,000 for the three and six months ended December 31, 2019, respectively.
Cash paid for operating leases was $183,000 and $365,000 during the three and six months ended December 31, 2019, respectively, and is included in operating cash flows.
Maturities of lease liabilities are as follows:
|
|
December 31, 2019
|
|
Years Ending June 30,
|
|
Lease Payments
|
|
2020 (excluding the six months ended December 31, 2019)
|
|
$
|
369
|
|
2021
|
|
|
634
|
|
2022
|
|
|
446
|
|
2023
|
|
|
376
|
|
2024
|
|
|
356
|
|
After 2024
|
|
|
3,064
|
|
Future value of operating lease liabilities
|
|
$
|
5,245
|
|
Less: Imputed interest
|
|
|
(1,340
|
)
|
Present value of operating lease liabilities
|
|
$
|
3,905
|
|
The weighted average remaining lease term for operating leases was 7 years and the weighted average discount rate was 5.3% as of December 31, 2019.
11.Warranties
In-Line and Near-Line Measurement Solutions generally carry a one to three-year warranty for parts and a one-year warranty for labor and travel related to warranty. Product sales to the forest products industry carry a three-year warranty for TriCam® sensors. Sales of ScanWorks® have a one-year warranty for parts. Sales of WheelWorks® products have a two-year warranty for parts. Off-Line Measurement Solutions generally carry a 12-month warranty after the machine passes the acceptance test or a 15-month warranty from the date of shipment, whichever date comes first, on parts only. The Company provides reserves for warranties based on its experience and knowledge.
Factors affecting the Company’s warranty reserve include the number of units sold or in service as well as historical and anticipated rates of claims and cost per claim. The Company periodically assess the adequacy of its warranty reserve based on changes in these factors. If a special circumstance arises which requires a higher level of warranty, the Company makes a special warranty provision commensurate with the facts. Changes to the Company’s warranty reserve are as follows (in thousands):
|
|
Six Months Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Beginning Balance at July 1,
|
|
$
|
341
|
|
|
$
|
391
|
|
Accruals - Current Year
|
|
|
158
|
|
|
|
331
|
|
Settlements/Claims (in cash or in kind)
|
|
|
(179
|
)
|
|
|
(460
|
)
|
Effects of Foreign Currency
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Ending Balance at December 31,
|
|
$
|
319
|
|
|
$
|
261
|
|
12.Credit Facilities
The Company had no borrowings outstanding under its lines of credit and short-term notes payable at December 31, 2019 and June 30, 2019, respectively.
18
On December 4, 2017, the Company entered into a Loan Agreement (the “Loan Agreement”) with Chemical Bank (“Chemical”), and related documents, including a Promissory Note. The Loan Agreement is an on-demand line of credit and is cancelable at any time by either the Company or Chemical and any amounts outstanding would be immediately due and payable. The Loan Agreement is guaranteed by the Company’s U.S. subsidiaries. The Loan Agreement allows for maximum permitted borrowings of $8.0 million. The borrowing base is calculated at the lesser of (i) $8.0 million or (ii) the sum of 80% of eligible accounts receivable balances of U.S. customers and subject to limitations, certain foreign customers, plus the lesser of 50% of eligible inventory or $3.0 million. At December 31, 2019, the Company’s available borrowing under this facility was approximately $5.3 million. Security for the Loan Agreement is substantially all of the Company’s assets in the U.S. Interest is calculated at 2.65% above the 30 day LIBOR rate. The Company is not allowed to pay cash dividends under the Loan Agreement. The Company had no borrowings outstanding under the Loan Agreement at December 31, 2019 or June 30, 2019.
The Company’s Brazilian subsidiary (“Brazil”) has a credit line and overdraft facility with its current local bank. Brazil can borrow a total of B$300,000 (equivalent to approximately $74,000). The Brazil facility is cancelable at any time by either Brazil or the bank and any amounts then outstanding would become immediately due and payable. The monthly interest rate for the facility is 13.94% for the first B$200,000 (equivalent to approximately $50,000) utilized and 3.49% for utilization between B$200,000 and B$300,000. The Company had no borrowings under these facilities at December 31, 2019 and June 30, 2019, respectively.
13.Severance, Impairment and Other Charges
In January 2018, a judge in a trade secrets case brought by the Company granted the defendants’ motions for recovery of their attorney fees (see Note 18, “Commitments and Contingencies” for further discussion relating to this matter). A charge in the amount of $675,000 was recorded as a liability in the second quarter of fiscal 2018. The Company appealed this court decision. In January 2019, the Company settled with the defendants and ended its appeal in return for a net payment due to them in the amount of $66,000. As a result, in the second quarter of fiscal 2019, the Company adjusted the accrual.
In the second quarter of fiscal 2020, our President and Chief Executive Officer resigned and the Company had a reduction in force in the U.S. The resignation and the action resulted in an accrual of $471,000 of severance expense in the second quarter ended December 31, 2019. The remaining balance of the accrual was $404,000 at December 31, 2019.
These charges recorded as Severance, Impairment and Other Charges are as follows (in thousands):
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
2019
|
|
|
|
2018
|
|
|
2019
|
|
|
|
2018
|
|
Severance and Related Costs
|
|
$
|
471
|
|
|
|
$
|
-
|
|
|
$
|
471
|
|
|
|
$
|
-
|
|
Court Award
|
|
|
-
|
|
|
|
|
(609
|
)
|
|
|
-
|
|
|
|
|
(609
|
)
|
Total
|
|
$
|
471
|
|
|
|
$
|
(609
|
)
|
|
$
|
471
|
|
|
|
$
|
(609
|
)
|
The following table reconciles the activity for the reserves for severance and other charges (in thousands):
|
|
Six Months Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Beginning Balance at July 1,
|
|
$
|
44
|
|
|
$
|
675
|
|
Accruals - Severance Related
|
|
|
471
|
|
|
|
-
|
|
Accruals / Adjustments - Court Award
|
|
|
-
|
|
|
|
(609
|
)
|
Payments
|
|
|
(111
|
)
|
|
|
-
|
|
Ending Balance at December 31,
|
|
$
|
404
|
|
|
$
|
66
|
|
14.Current and Long-Term Taxes Payable
The Company acquired current and long-term taxes payable as part of the purchase of Coord3. The tax liabilities represent income and payroll related taxes that are payable in accordance with government authorized installment payment plans. These installment plans require varying monthly payments through January 2021.
19
15.Other Long-Term Liabilities
Other long-term liabilities at December 31, 2019 and June 30, 2019 include $548,000 and $556,000, respectively, for long-term contractual and statutory severance liabilities acquired as part of the purchase of Coord3 that represent amounts that will be payable to employees upon termination of employment.
16.Stock-Based Compensation
The Company maintains a 2004 Stock Incentive Plan (“2004 Plan”) covering substantially all company employees, non-employee directors and certain other key persons. The 2004 Plan is administered by a committee of the Company’s Board of Directors: The Management Development, Compensation and Stock Option Committee (“MDCSOC”).
Awards under the 2004 Plan may be in the form of stock options, stock appreciation rights, restricted stock or restricted stock units, performance share awards, director stock purchase rights and deferred stock units, or any combination thereof. The terms of the awards are determined by the MDCSOC, except as otherwise specified in the 2004 Plan.
Stock Options
Options outstanding under the 2004 Plan generally become exercisable at 33.3% per year beginning one year after the date of grant and expire ten years after the date of grant. Option prices from options granted under these plans must not be less than the fair market value of the Company’s stock on the date of grant. The Company uses the Black-Scholes model for determining stock option valuations. The Black-Scholes model requires subjective assumptions, including future stock price volatility and expected time to exercise, which affect the calculated values. The expected term of option exercises is derived from historical data regarding employee exercises and post-vesting employment termination behavior. The risk-free rate of return is based on published U.S. Treasury rates in effect for the corresponding expected term. The expected volatility is based on historical volatility of the Company’s stock price. These factors could change in the future, which would affect the stock-based compensation expense in future periods.
The Company recognized operating expense for non-cash stock-based compensation costs related to stock options in the amount of $49,000 and $105,000 in the three and six months ended December 31, 2019 respectively. The Company recognized operating expense for non-cash stock-based compensation costs related to stock options in the amount of $192,000 and $283,000 in the three and six months ended December 31, 2018 respectively. As of December 31, 2019, the total remaining unrecognized compensation cost related to non-vested stock options amounted to approximately $93,000. The Company expects to recognize this cost over a weighted average vesting period of 1.7 years.
The Company granted 33,000 stock options in the three and six months ended December 31, 2019, respectively. The Company granted no stock options in the three and six months ended December 31, 2018, respectively. The Company received no cash from option exercises under its share-based payment arrangements for the three and six months ended December 31, 2019, respectively. The Company received approximately $3,000 and $194,000 in cash from option exercises under its share-based payment arrangements for the three and six months ended December 31, 2018, respectively.
The estimated fair value as of the date options were granted during the periods presented, using the Black-Scholes option-pricing model, is shown in the table below.
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
|
2019
|
|
|
2018
|
|
2019
|
|
|
|
2018
|
Weighted average estimated fair value per
share of options granted during the period
|
|
$
|
2.19
|
|
|
NA
|
|
$
|
2.19
|
|
|
|
NA
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Yield
|
|
|
-
|
|
|
NA
|
|
|
-
|
|
|
|
NA
|
Common Stock Price Volatility
|
|
|
43.50
|
%
|
|
NA
|
|
|
43.50
|
%
|
|
|
NA
|
Risk Free Rate of Return
|
|
|
2.56
|
%
|
|
NA
|
|
|
2.56
|
%
|
|
|
NA
|
Expected Option Term (In Years)
|
|
6.6
|
|
|
NA
|
|
6.6
|
|
|
|
NA
|
20
Restricted Stock and Restricted Stock Units
The Company’s restricted stock and restricted stock units under the 2004 Plan generally have been awarded by four methods, as follows:
(1)
|
Awards that are earned based on achieving certain individual and financial performance goals during the initial fiscal year with either a subsequent one-year service vesting period or with a one-third vesting requirement on the first, second and third anniversaries of the issuance, provided the individual’s employment has not terminated prior to the vesting date and are freely transferable after vesting;
|
(2)
|
Awards that are earned based on achieving certain revenue and operating income results with a subsequent one-third vesting requirement on the first, second and third anniversaries of the issuance provided the individual’s employment has not terminated prior to the vesting date and are freely transferable after vesting;
|
(3)
|
Awards to non-management members of the Company’s Board of Directors with a subsequent one-third vesting requirement on the first, second and third anniversaries of the issuance provided the service of the non-management member of the Board of Directors has not terminated prior to the vesting date and are freely transferable after vesting, and
|
(4)
|
Awards that are granted with a one-third vesting requirement on the first, second and third anniversaries of the issuance provided the individual’s employment has not terminated prior to the vesting date and are freely transferable after vesting, including restricted stock units granted as part of the Fiscal Year 2018 and Fiscal Year 2019 Long-Term Incentive Compensation Plan.
|
The grant date fair value associated with granted restricted stock is calculated in accordance with ASC 718 “Compensation – Stock Compensation”. Compensation expense related to restricted stock awards is based on the closing price of the Company’s Common Stock on the grant date authorized by the Company’s MDCSOC, multiplied by the number of restricted stock and restricted stock unit awards expected to be issued and vested and is amortized over the combined performance and service periods. The non-cash stock-based compensation expense recorded for restricted stock and restricted stock unit awards for the three and six months ended December 31, 2019, was $123,000 and $188,000, respectively. The non-cash stock-based compensation expense recorded for restricted stock and restricted stock unit awards for the three and six month periods ended December 31, 2018 was $89,000 and $144,000, respectively. As of December 31, 2019, the total remaining unrecognized compensation cost related to the restricted stock and restricted stock unit awards is approximately $153,000. The Company expects to recognize this cost over a weighted average vesting period of 1.2 years.
A summary of the status of restricted stock and restricted stock unit awards outstanding at December 31, 2019 is presented in the table below.
|
|
|
|
|
|
Weighted Average
|
|
|
|
Nonvested
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested at June 30, 2019
|
|
|
93,420
|
|
|
$
|
7.49
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(36,103
|
)
|
|
|
7.51
|
|
Forfeited or Expired
|
|
|
(19,206
|
)
|
|
|
7.61
|
|
Non-vested at December 31, 2019
|
|
|
38,111
|
|
|
$
|
7.44
|
|
Performance Stock Units
During the second quarter of fiscal 2020, the Company’s MDCSOC granted certain employees Performance Share Units (“PSUs”) as part of the Fiscal Year 2020 Long-Term Incentive Compensation Plan. The Performance Measures were defined by the Committee as a specific target level of Revenue and Operating Income Before Incentive Compensation for each of the following: fiscal year 2020, fiscal year 2021 and fiscal year 2022. Up to one-third of the PSUs can be earned each year, determined based upon actual performance levels achieved in that year. One half of the award earned each year is based upon the achievement of the two Performance Targets in that year, provided that a minimum level of Operating Income Before Incentive Compensation is achieved for that year. The actual award level for each year can range from 50% to 150% (for Revenue Target) or 75% to 200% (for Operating Income Target) of the target awards depending on actual performance levels achieved in each year compared to that year’s target. If Operating Income Before Incentive Compensation is less than 75% of the targeted Operating Income Before Incentive Compensation for the year, then no PSU’s will vest for that year and the PSU’s vesting that year will expire.
21
During the second quarter of fiscal 2019, the Company’s MDCSOC granted certain employees PSUs as part of the Fiscal Year 2019 Long-Term Incentive Compensation Plan, up to one-third of which could be earned in plan year 2019 (October 1, 2018 to September 30, 2019), fiscal year 2020 and fiscal year 2021 upon the achievement of a specific target level of Revenue and a threshold and specific target level of Operating Income Before Incentive Compensation. For plan year 2019, actual Revenue and Operating Income Before Incentive Compensation did not meet the plan year 2019 targets, resulting in the forfeiture of PSU’s vesting in plan year 2019.
During the second quarter of fiscal 2018, the Company’s MDCSOC granted certain employees PSUs as part of the Fiscal Year 2018 Long-Term Incentive Compensation Plan, up to one-third of which could be earned in fiscal 2018, fiscal year 2019 and fiscal year 2020 upon the achievement of a specific target level of Revenue and a threshold and specific target level of Operating Income Before Incentive Compensation. For fiscal year 2019, actual Revenue and Operating Income Before Incentive Compensation did not meet the fiscal 2019 targets, resulting in the forfeiture of PSU’s vesting in fiscal 2019.
The non-cash stock-based compensation expense recorded for PSU’s issued under the Company’s Fiscal 2020, 2019 and 2018 Long-Term Incentive Compensation Plans during the first quarter of fiscal 2020 was fully reversed in the second quarter of fiscal 2020, because, at this time, the Company estimates that the level of actual performance, as measured against the Operating Income Before Incentive Compensation target levels for fiscal year 2020, will be less than 75%, of the threshold performance level required for the vesting of these awards in fiscal 2020. The non-cash stock-based compensation expense recorded for these PSU awards for the three and six months ended December 31, 2018 was $2,000 and $67,000, respectively. As of December 31, 2019, the total remaining unrecognized compensation cost related to these PSU awards is approximately $144,000. The Company expects to recognize this cost over a weighted average vesting period of 1.7 years.
During the second quarter of fiscal 2019, the MDCSOC granted PSUs to the Company’s interim President and Chief Executive Officer in lieu of a portion of his cash compensation. During the three months ended December 31, 2019, the Company recorded expense related to these PSU’s of $7,000.
A summary of the status of the PSUs outstanding at December 31, 2019 is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Nonvested
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested at June 30, 2019
|
|
|
69,701
|
|
|
$
|
7.46
|
|
Granted
|
|
|
43,603
|
|
|
|
4.64
|
|
Vested
|
|
|
(1,590
|
)
|
|
|
4.50
|
|
Forfeited or Expired
|
|
|
(39,302
|
)
|
|
|
7.50
|
|
Non-vested at December 31, 2019
|
|
|
72,412
|
|
|
$
|
5.81
|
|
Board of Directors Fees
The Company’s Board of Directors’ fees are typically payable in cash on September 1, December 1, March 1, and June 1 of each fiscal year; however, under the Company’s 2004 Plan each director can elect to receive stock in lieu of cash on a calendar year election. Each of the Company’s Directors elected a combination of cash and stock for calendar year of 2019. During the first half of fiscal year 2020, the Company issued 19,225 shares to its directors and recorded expense of $86,000.
17.Earnings Per Share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Other obligations, such as stock options and restricted stock awards, are considered to be potentially dilutive common shares. Diluted EPS assumes the issuance of potential dilutive common shares outstanding during the period and adjusts for any changes in income and the repurchase of common shares that would have occurred from the assumed issuance, unless such effect is anti-dilutive. The calculation of diluted shares also takes into account the average unrecognized non-cash stock-based compensation expense and additional adjustments for tax benefits related to non-cash stock-based compensation expense. Furthermore, the Company excludes all outstanding options to purchase common stock from the computation of diluted EPS in periods of net losses because the effect is anti-dilutive.
22
Options to purchase 42,000 and 106,467 shares of common stock outstanding in the three months ended December 31, 2019 and 2018, respectively, were not included in the computation of diluted EPS because the effect would have been anti-dilutive. Options to purchase 31,000 and 86,790 shares of common stock outstanding in the six months ended December 31, 2019 and 2018, respectively, were not included in the computation of diluted EPS because the effect would have been anti-dilutive.
18.Commitments and Contingencies
The Company may, from time to time, be subject to litigation and other claims in the ordinary course of its business. The Company accrues for estimated losses arising from such litigation or claims if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. To estimate whether a loss contingency should be accrued by a charge to income, the Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. Since the outcome of litigation and claims is subject to significant uncertainty, changes in the factors used in the Company’s evaluation could materially impact the Company’s financial position or results of operations.
The Company is currently unaware of any significant pending litigation other than the matters set forth below.
In May 2017, a judge in a trade secrets case brought by the Company, granted the defendants’ motions for summary disposition. In January 2018, the judge granted defendants’ motions for recovery of their attorney fees in the amount of $675,000, plus interest. In the second quarter of fiscal 2018, the Company recorded a charge in the amount of $675,000 relating to this matter. The Company appealed this court’s decision to grant summary disposition and the award of the attorney fees. In January 2019, the Company settled with the defendants and ended its appeal in return for a net payment due to them in the amount of $66,000. As a result, in the second quarter of fiscal 2019, the Company adjusted its accrual and paid the settlement amount in the third quarter of fiscal 2019 (see Note 13 “Severance, Impairment and Other Charges” for further discussion).
In the third quarter of fiscal 2018, the Canadian Revenue Agency (“CRA”) completed a Goods and Services Tax/Harmonized Sales Tax Returns (GST/HST) audit. Based on this audit, the CRA preliminarily proposed to assess the Company approximately CAD $1,218,000 (equivalent to approximately $923,000) in taxes plus interests and penalties related to sales from 2013 through 2018. CRA has indicated that the Company is entitled to invoice its customers to recover this amount and its customers are required to remit payment. The Company’s response to the CRA preliminary assessment was delivered in April 2018. In June 2018, the Company received the final assessment, which confirmed the preliminary assessment. In August 2018, the Company filed a formal appeal request and posted a surety bond as security for this claim. The Company has not recorded an accrual related to this preliminary audit finding because the Company is disputing several of the CRA’s conclusions and because, the Company expects to ultimately receive the funds from its customers (excluding any interest or penalties), although there may be a timing difference between when the Company must pay the CRA and when the Company collects the funds from its customers.
In the fourth quarter of fiscal 2019, the Company identified a potential concern regarding the residency status of certain U.S. employees as it relates to payroll taxes and withholdings in their country of residency. The Company estimated the range of correcting this issue, including interest and penalties to range from $0.2 million to $0.3 million. The Company is not able to reasonably estimate the amount within this range that the Company would be required to pay for this matter. As a result, a reserve of $0.2 million was recorded in the fourth quarter of fiscal 2019 representing the minimum amount the Company estimated would be paid.
23