CYBE_2014.09.30 - 10Q


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
 
 
(Check One)
 
 
 
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended September 30, 2014
 
 
 
o TRANSITION PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT
 
 
 
For the transition period from ______ to ______
 
 
 
COMMISSION FILE NO. (0-16577)
 
 
 
 
 
 
CYBEROPTICS CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota
 
41-1472057
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
5900 Golden Hills Drive
 
 
MINNEAPOLIS, MINNESOTA
 
55416
(Address of principal executive offices)
 
(Zip Code)
 
(763) 542-5000
 
(Registrant’s telephone number, including area code)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer” or “large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
 
 
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller Reporting Company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. At October 31, 2014, there were 6,635,805 shares of the registrant’s Common Stock, no par value, issued and outstanding.




PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
CYBEROPTICS CORPORATION
(Unaudited)
(In thousands, except share information)
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 

 
 

Cash and cash equivalents
 
$
2,384

 
$
3,101

Marketable securities
 
6,047

 
9,402

Accounts receivable, less allowance for doubtful accounts of $622 at
September 30, 2014 and $705 at December 31, 2013
 
9,953

 
6,562

Inventories
 
12,956

 
11,331

Other current assets
 
1,566

 
1,104

Deferred tax assets
 
77

 
77

Total current assets
 
32,983

 
31,577

 
 
 
 
 
Marketable securities, long-term
 
9,499

 
10,742

Equipment and leasehold improvements, net
 
2,937

 
1,272

Intangible and other assets, net
 
655

 
136

Goodwill
 
1,366

 
569

Other assets
 
193

 
194

Deferred tax assets
 
55

 
85

Total assets
 
$
47,688

 
$
44,575

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Accounts payable
 
$
5,808

 
$
2,630

Advance customer payments
 
590

 
552

Accrued expenses
 
2,855

 
2,241

Total current liabilities
 
9,253

 
5,423

 
 
 
 
 
Deferred rent
 
318

 
352

Deferred warranty revenue
 
45

 
165

Deferred tax liability
 
16

 
6

Reserve for income taxes
 
150

 
150

Total liabilities
 
9,782

 
6,096

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Stockholders’ equity:
 
 

 
 

Preferred stock, no par value, 5,000,000 shares authorized, none outstanding
 

 

Common stock, no par value, 25,000,000 shares authorized, 6,635,805 shares issued and outstanding at September 30, 2014 and 6,496,805 shares issued and outstanding at December 31, 2013
 
30,087

 
28,968

Accumulated other comprehensive loss
 
(660
)
 
(540
)
Retained earnings
 
8,479

 
10,051

Total stockholders’ equity
 
37,906

 
38,479

Total liabilities and stockholders’ equity
 
$
47,688

 
$
44,575

SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

1




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CYBEROPTICS CORPORATION
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except per share amounts)
 
2014

2013
 
2014
 
2013
Revenues
 
$
11,657


$
8,726

 
$
34,755

 
$
24,756

Cost of revenues
 
6,361


4,720

 
19,024

 
13,737

 
 
 
 
 
 
 
 
 
Gross margin
 
5,296


4,006

 
15,731

 
11,019

 
 
 
 
 
 
 
 
 
Research and development expenses
 
2,266


1,978

 
6,669

 
5,835

Selling, general and administrative expenses
 
3,527


2,989

 
10,536

 
9,340

Amortization of intangibles
 
17



 
37

 

 
 
 
 
 
 
 
 
 
Loss from operations
 
(514
)

(961
)
 
(1,511
)
 
(4,156
)
 
 
 
 
 
 
 
 
 
Interest income and other
 
75


(107
)
 
2

 
(184
)
 
 
 
 
 
 
 
 
 
Loss before income taxes
 
(439
)

(1,068
)
 
(1,509
)
 
(4,340
)
 
 
 
 
 
 
 
 
 
Income tax provision (benefit)
 
9


(294
)
 
63

 
(220
)
 
 
 
 
 
 
 
 
 
Net loss
 
$
(448
)

$
(774
)
 
$
(1,572
)
 
$
(4,120
)
 
 
 
 
 
 
 
 
 
Net loss per share – Basic
 
$
(0.07
)

$
(0.11
)
 
$
(0.24
)
 
$
(0.60
)
Net loss per share – Diluted
 
$
(0.07
)

$
(0.11
)
 
$
(0.24
)
 
$
(0.60
)
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding – Basic
 
6,609


6,784

 
6,555

 
6,883

Weighted average shares outstanding – Diluted
 
6,609


6,784

 
6,555

 
6,883

SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

2




CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
CYBEROPTICS CORPORATION
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2014
 
2013
 
2014
 
2013
Net loss
 
$
(448
)
 
$
(774
)
 
$
(1,572
)
 
$
(4,120
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), before tax:
 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
(233
)
 
115

 
(64
)
 
(140
)
 
 
 
 
 
 
 
 
 
Unrealized gains on available-for-sale securities:
 
 

 
 

 
 

 
 

Unrealized gains
 
24

 
24

 
36

 
30

Reclassification adjustment for losses included in net loss
 

 

 

 
21

Total unrealized gains on available-for-sale securities
 
24

 
24

 
36

 
51

 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on foreign exchange forward contracts:
 
 

 
 

 
 

 
 

Unrealized gains (losses)
 
(190
)
 
61

 
(121
)
 
(231
)
Reclassification adjustment for (gains) losses included in net loss
 
(3
)
 
71

 
29

 
24

Total unrealized gains (losses) on foreign exchange forward contracts
 
(193
)
 
132

 
(92
)
 
(207
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), before tax
 
(402
)
 
271

 
(120
)
 
(296
)
Income tax provision related to items of other comprehensive income (loss)
 

 

 

 

Other comprehensive income (loss), net of tax
 
(402
)
 
271

 
(120
)
 
(296
)
Total comprehensive loss
 
$
(850
)
 
$
(503
)
 
$
(1,692
)
 
$
(4,416
)
SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

3




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CYBEROPTICS CORPORATION
(Unaudited)
 
 
Nine Months Ended September 30,
(In thousands)
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net loss
 
$
(1,572
)
 
$
(4,120
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
 

Depreciation and amortization
 
1,386

 
1,292

Provision for doubtful accounts
 
(14
)
 
(22
)
Deferred taxes
 
40

 
43

Foreign currency transaction (gains) losses
 
(96
)
 
151

Realized losses on available-for-sale securities
 

 
21

Stock compensation costs
 
378

 
330

Changes in operating assets and liabilities, net of acquisition:
 
 

 
 

Accounts receivable
 
(2,715
)
 
(1,397
)
Inventories
 
(1,566
)
 
(399
)
Income tax refunds receivable
 

 
536

Other assets
 
(366
)
 
(271
)
Accounts payable
 
2,559

 
1,671

Advance customer payments
 
(415
)
 
(229
)
Accrued expenses
 
393

 
(339
)
Net cash used in operating activities
 
(1,988
)
 
(2,733
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Proceeds from maturities of available-for-sale marketable securities
 
4,391

 
6,294

Proceeds from sales of available-for-sale marketable securities
 
5,047

 
4,340

Purchases of available-for-sale marketable securities
 
(4,816
)
 
(7,996
)
Acquisition of Laser Design, Inc. (LDI)
 
(3,108
)
 

Additions to equipment and leasehold improvements
 
(975
)
 
(610
)
Additions to patents
 
(66
)
 
(39
)
Net cash provided by investing activities
 
473

 
1,989

 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Proceeds from exercise of stock options
 
628

 
25

Proceeds from issuance of common stock under employee stock purchase plan
 
113

 
64

Common stock repurchases
 

 
(2,014
)
Net cash provided by (used in) financing activities
 
741

 
(1,925
)
 
 
 
 
 
Effects of exchange rate changes on cash and cash equivalents
 
57

 
(147
)
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(717
)
 
(2,816
)
 
 
 
 
 
Cash and cash equivalents – beginning of period
 
3,101

 
7,340

Cash and cash equivalents – end of period
 
$
2,384

 
$
4,524

SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

4




NOTES TO THE (UNAUDITED) INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CYBEROPTICS CORPORATION
1. INTERIM REPORTING:
The interim condensed consolidated financial statements presented herein as of September 30, 2014, and for the three and nine month periods ended September 30, 2014 and 2013, 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, 2014 do not necessarily indicate the results to be expected for the full year. The December 31, 2013 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. These 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, 2013.
2. ACQUISITION:
On March 14, 2014 we acquired substantially all of the assets of Laser Design, Inc. (LDI), a privately held company based in Minneapolis, Minnesota for aggregate consideration of $2,633,000 in cash plus the assumption of certain current liabilities of $1,073,000. We also paid aggregate signing bonuses of $475,000 to key executives of LDI which have been accounted for as acquisition consideration. LDI provides scanning systems and services to the global 3D scanner and services metrology market and enables us to enter the growing market for general purpose 3D metrology. We also intend to leverage our proprietary 3D sensor technology in LDI’s products to enable differentiated offerings.
Under the acquisition method of accounting, the total purchase price is allocated to the net tangible and intangible assets acquired, based upon their estimated fair values as of March 14, 2014. During the three months ended June 30, 2014, we completed our valuation work and management review of the assets acquired and liabilities assumed and finalized the purchase price adjustment for the net working capital acquired. Adjustments to provisional amounts reflected in our preliminary purchase price allocation as of March 31, 2014 included a $24,000 decrease in intangible assets and a $46,000 increase in goodwill, among other adjustments. These measurement period adjustments require the revision of comparative financial information for the quarter ended March 31, 2014. The adjustment to intangible assets decreased amortization expense in the three months ended March 31, 2014 by less than $300. None of the other adjustments to the provisional amounts had any impact on our results of operations for the first quarter of 2014.
The purchase price allocation for our acquisition of LDI is as follows:
(In thousands)
 
 

Accounts receivable
 
$
662

Inventories
 
551

Equipment and leasehold improvements
 
1,507

Other assets
 
91

Intangible assets
 
573

Identifiable assets acquired
 
3,384

Accounts payable
 
640

Accrued expenses and advance customer payments
 
433

Liabilities assumed
 
1,073

Net identifiable assets acquired
 
2,311

Goodwill
 
797

Purchase price
 
$
3,108


5




The allocation of the purchase price resulted in recognition of the following identified intangible assets:

(In thousands)

Weighted Average
Life-Years
Software
$
206


7
Patent
165


7
Marketing assets and customer relationships
101


9
Non-compete agreements
101


4
 
$
573


 

The fair value of the above identified intangible assets was estimated using an income approach. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. The software, patent and marketing intangible assets have been appraised using a relief from royalty income methodology; the non-competes using a “with and without” income methodology; and, customer relationships using a multi period excess earnings methodology. The goodwill recognized as a result of the LDI acquisition is primarily attributable to the value of the workforce, as well as unidentifiable intangible assets. We paid a premium over the net tangible and identifiable intangible assets acquired (i.e. goodwill) because owning LDI enables us to have initial access to the general purpose 3D metrology market and allows us to leverage our proprietary 3D sensor technology in LDI’s products.
All of the goodwill is expected to be deductible for income tax purposes over a 15 year period. The useful life of the intangible assets was determined based on management’s best estimate of the expected cash flows used to measure the fair value of the intangible assets, adjusted as appropriate for entity-specific factors, including competitive, economic or other factors that may limit the useful life of the intangible assets.
Since the date of acquisition, LDI contributed approximately $3,500,000 to our revenue in the nine months ended September 30, 2014, including approximately $1,300,000 of revenue in the three months ended September 30, 2014. Since the date of acquisition, LDI contributed $432,000 to our net loss in the nine months ended September 30, 2014, including $206,000 of net loss in the three months ended September 30, 2014.
The following unaudited pro forma consolidated financial information presents our revenue and net loss as if the acquisition of LDI occurred on January 1, 2013. The unaudited pro forma consolidated financial information has been prepared for illustrative purposes only and does not purport to be indicative of the results that would have been achieved had the acquisition occurred on January 1, 2013, or of future results. The unaudited pro forma consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from integration of LDI.
(In thousands, except per share amounts)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
11,657

 
$
9,998

 
$
36,135

 
$
28,934

Net loss
(448
)
 
(1,217
)
 
(1,377
)
 
(4,761
)
Basic and diluted loss per share
$
(0.07
)
 
$
(0.18
)
 
$
(0.21
)
 
$
(0.69
)

We incurred approximately $117,000 in LDI related acquisition costs. Approximately $47,000 of these costs are recorded as selling, general and administrative expenses in the first quarter of 2014, with the remaining balance recorded as selling, general and administrative expense in the third and fourth quarters of 2013. The pro forma consolidated net loss for 2014 reflected in the table above was adjusted to exclude all acquisition related costs and the impact of the fair value adjustment to acquisition date inventories of $222,000. The pro forma net loss for 2013 has been adjusted to reflect these items as if the acquisition occurred on January 1, 2013.


6




3. MARKETABLE SECURITIES:
Our investments in marketable securities are classified as available-for-sale and consist of the following:
 
 
September 30, 2014
(In thousands)
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Short-Term
 
 

 
 

 
 

 
 

U.S. government and agency obligations
 
$
4,103

 
$
4

 
$

 
$
4,107

Corporate debt securities and certificates of deposit
 
1,915

 
2

 

 
1,917

Asset backed securities
 
23

 

 

 
23

Marketable securities – short-term
 
$
6,041

 
$
6

 
$

 
$
6,047

Long-Term
 
 

 
 

 
 

 
 

U.S. government and agency obligations
 
$
4,787

 
$
5

 
$
(2
)
 
$
4,790

Corporate debt securities and certificates of deposit
 
2,145

 
3

 
(1
)
 
2,147

Asset backed securities
 
2,457

 
1

 
(1
)
 
2,457

Equity security
 
42

 
63

 

 
105

Marketable securities – long-term
 
$
9,431

 
$
72

 
$
(4
)
 
$
9,499


 
 
December 31, 2013
(In thousands)
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Short-Term
 
 

 
 

 
 

 
 

U.S. government and agency obligations
 
$
6,299

 
$
10

 
$

 
$
6,309

Corporate debt securities and certificates of deposit
 
3,091

 
2

 

 
3,093

Marketable securities – short-term
 
$
9,390

 
$
12

 
$

 
$
9,402

Long-Term
 
 

 
 

 
 

 
 

U.S. government and agency obligations
 
$
4,783

 
$
7

 
$

 
$
4,790

Corporate debt securities and certificates of deposit
 
3,417

 
1

 
(5
)
 
3,413

Asset backed securities
 
2,474

 
2

 
(1
)
 
2,475

Equity security
 
42

 
22

 

 
64

Marketable securities – long-term
 
$
10,716

 
$
32

 
$
(6
)
 
$
10,742

Our investments in marketable debt securities all have maturities of less than five years. At September 30, 2014, marketable debt securities valued at $11,895,000 were in an unrealized gain position totaling $15,000 and marketable debt securities valued at $3,546,000 were in an unrealized loss position totaling $4,000 (all had been in an unrealized loss position for less than twelve months). At December 31, 2013, marketable debt securities valued at $15,587,000 were in an unrealized gain position totaling $22,000 and marketable debt securities valued at $4,493,000 were in an unrealized loss position totaling $6,000 (all had been in an unrealized loss position for less than twelve months).
Net pre-tax unrealized gains for marketable securities of $74,000 at September 30, 2014 and $38,000 at December 31, 2013 were recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. We received proceeds from the sale of marketable securities of $1,893,000 in the three months ended September 30, 2014, $818,000 in the three months ended September 30, 2013, $5,047,000 in the nine months ended September 30, 2014 and $4,340,000 in the nine months ended September 30, 2013. No gain or loss was recognized on any of the sales during the three or nine months ended September 30, 2014 or the three months ended September 30, 2013. We recognized a $21,000 loss from the sale of marketable securities in the nine months ended September 30, 2013.
Investments in marketable securities classified as cash equivalents of $30,000 at September 30, 2014 and $327,000 at December 31, 2013 consist of the following:
 
 
September 30, 2014
(In thousands)
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Recorded
Basis
Corporate debt securities and certificates of deposit
 
$
30

 
$

 
$

 
$
30

 
 
$
30

 
$

 
$

 
$
30


7





 
 
December 31, 2013
(In thousands)
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Recorded
Basis
Corporate debt securities and certificates of deposit
 
$
327

 
$

 
$

 
$
327

 
 
$
327

 
$

 
$

 
$
327

Cash and marketable securities held by foreign subsidiaries totaled $970,000 at September 30, 2014 and $903,000 at December 31, 2013.
4. DERIVATIVES:
We enter into foreign exchange forward contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies associated with our subsidiary in Singapore. These transactions are designated as cash flow hedges and are recorded in the accompanying balance sheet at fair value. The effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Hedge ineffectiveness and the amounts excluded from effectiveness testing recognized in earnings on cash flow hedges were not material for the three and nine month periods ended September 30, 2014 and September 30, 2013.
The maximum length of time over which we hedge our exposure to the variability in future cash flows is 12 months. Accordingly, at September 30, 2014 and September 30, 2013, all of our open foreign exchange forward contracts had maturities of one year or less. The dollar equivalent gross notional amount of our foreign exchange forward contracts designated as cash flow hedges was approximately $7.3 million at September 30, 2014 and $6.2 million at September 30, 2013.
Reclassifications of amounts from accumulated other comprehensive loss into earnings include accumulated gains (losses) at the time earnings are impacted by the forecasted transaction. The location in the consolidated statements of operations and consolidated statements of comprehensive loss and amounts of gains and losses related to derivative instruments designated as cash flow hedges are as follows:
 
 
Three Months Ended September 30, 2014
(In thousands)
 
Pretax Loss Recognized
in Other Comprehensive
Income (Loss) on
Effective
Portion of Derivative
 
Pretax Gain Recognized
in Earnings on Effective
Portion of Derivative as a Result of Reclassification
from Accumulated Other
Comprehensive Loss
 
Ineffective Portion of
Gain (Loss) on Derivative
and Amount Excluded
from Effectiveness
Testing Recognized in
Earnings
Cost of revenues
 
$
(119
)
 
$
3

 
$

Research and development
 
(36
)
 

 

Selling, general and administrative
 
(35
)
 

 

Total
 
$
(190
)
 
$
3

 
$


 

Three Months Ended September 30, 2013
(In thousands)

Pretax Gain Recognized
in Other Comprehensive
Income (Loss) on
Effective
Portion of Derivative

Pretax Loss Recognized
in Earnings on Effective
Portion of Derivative as a
Result of Reclassification
from Accumulated Other
Comprehensive Loss

Ineffective Portion of
Gain (Loss) on Derivative
and Amount Excluded
from Effectiveness
Testing Recognized in
Earnings
Cost of revenues
 
$
31

 
$
(41
)
 
$

Research and development
 
16

 
(17
)
 

Selling, general and administrative
 
14

 
(13
)
 

Total
 
$
61

 
$
(71
)
 
$


8




 
 
Nine Months Ended September 30, 2014
(In thousands)
 
Pretax Loss Recognized
in Other Comprehensive
Income (Loss) on
Effective
Portion of Derivative
 
Pretax Loss Recognized
in Earnings on Effective
Portion of Derivative as a
Result of Reclassification
from Accumulated Other
Comprehensive Loss
 
Ineffective Portion of
Gain (Loss) on Derivative
and Amount Excluded
from Effectiveness
Testing Recognized in
Earnings
Cost of revenues
 
$
(75
)
 
$
(15
)
 
$

Research and development
 
(22
)
 
(7
)
 

Selling, general and administrative
 
(24
)
 
(7
)
 

Total
 
$
(121
)
 
$
(29
)
 
$

 
 
Nine Months Ended September 30, 2013
(In thousands)
 
Pretax Loss Recognized
in Other Comprehensive
Income (Loss) on
Effective
Portion of Derivative
 
Pretax Loss Recognized
in Earnings on Effective
Portion of Derivative as a
Result of Reclassification
from Accumulated Other
Comprehensive Loss
 
Ineffective Portion of
Gain (Loss) on Derivative
and Amount Excluded
from Effectiveness
Testing Recognized in
Earnings
Cost of revenues
 
$
(139
)
 
$
(2
)
 
$

Research and development
 
(53
)
 
(12
)
 

Selling, general and administrative
 
(39
)
 
(10
)
 

Total
 
$
(231
)
 
$
(24
)
 
$

Amounts recorded in accumulated other comprehensive loss for the after tax net unrealized loss associated with cash flow hedging instruments was $208,000 at September 30, 2014 and $116,000 at December 31, 2013. We expect to reclassify the September 30, 2014 pretax unrealized loss of $150,000 recorded in accumulated other comprehensive loss to earnings over the next 12 months with the impact offset by cash flows from underlying hedged items. The fair value of our foreign exchange forward contracts representing losses in the amount of $149,000 at September 30, 2014 and $58,000 at December 31, 2013 has been recorded in accrued expenses.
Additional information with respect to the impact of derivative instruments on other comprehensive income (loss) is included in Note 13. Additional information with respect to the fair value of derivative instruments is included in Note 5.
Our foreign exchange forward contracts contain credit risk to the extent that our bank counter-parties may be unable to meet the terms of the agreements. We minimize such risk by limiting our counter-parties to major financial institutions. We do not expect material losses as a result of defaults by other parties.

9




5. FAIR VALUE MEASUREMENTS:
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 (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, of which the first two are considered observable and the last unobservable, to measure fair value. 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 provides information regarding fair value measurements for our marketable securities and foreign exchange forward contracts as of September 30, 2014 and December 31, 2013 according to the three-level fair value hierarchy:
 
 
Fair Value Measurements at
 September 30, 2014 Using
(In thousands)
 
Balance
September 30,
2014
 
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
 
$
8,897

 
$

 
$
8,897

 
$

Corporate debt securities and certificates of deposit
 
4,064

 

 
4,064

 

Asset backed securities
 
2,480

 

 
2,480

 

Equity security
 
105

 
105

 

 

Total marketable securities
 
$
15,546

 
$
105

 
$
15,441

 
$

 
 
 
 
 
 
 
 
 
Derivative instruments-liabilities:
 
 

 
 

 
 

 
 

Foreign exchange forward contracts
 
$
149

 
$

 
$
149

 
$


 
 
Fair Value Measurements at
 December 31, 2013 Using
(In thousands)
 
Balance
December 31,
2013
 
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
 
$
11,099

 
$

 
$
11,099

 
$

Corporate debt securities and certificates of deposit
 
6,506

 

 
6,506

 

Asset backed securities
 
2,475

 

 
2,475

 

Equity security
 
64

 
64

 

 

Total marketable securities
 
$
20,144

 
$
64

 
$
20,080

 
$

 
 
 
 
 
 
 
 
 
Derivative instruments-liabilities:
 
 

 
 

 
 

 
 

Foreign exchange forward contracts
 
$
58

 
$

 
$
58

 
$

During the nine months ended September 30, 2014 and the year ended December 31, 2013 there were no transfers within the three level hierarchy. A significant transfer is recognized when the inputs used to value a security have been changed which merit a transfer between the disclosed 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 who obtain them 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.

10




The fair value for our foreign exchange forward contracts is based on foreign currency spot and forward rates obtained from reputable financial institutions with resulting valuations periodically validated by obtaining foreign currency spot rate and forward quotes from other industry standard sources, third party or counterparty quotes. The fair value of our foreign exchange forward contracts representing losses in the amount of $149,000 at September 30, 2014 and $58,000 at December 31, 2013 has been recorded in accrued expenses.
The carrying amounts of financial instruments such as cash equivalents, accounts receivable, other assets, accounts payable, and all current liabilities approximate their related fair values due to the short-term maturities of these instruments. 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 during the nine months ended September 30, 2014 or September 30, 2013.
6. ACCOUNTING FOR STOCK-BASED COMPENSATION:
All equity-based payments to employees, including grants of employee 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 award’s service period for our graded vesting options. The fair value of stock options granted has been determined using the Black-Scholes model. The compensation expense recognized for all equity based awards is net of estimated forfeitures, which are based on historical data. We have classified equity based compensation within our statement of operations in the same manner as our cash based employee compensation costs.
Equity based compensation expense in the three months ended September 30, 2014 totaled $117,000 and includes $74,000 for stock option awards, $15,000 for our employee stock purchase plan and $28,000 for unvested restricted stock units. Equity based compensation expense in the nine months ended September 30, 2014 totaled $378,000 and includes $224,000 for stock option awards, $33,000 for our employee stock purchase plan, $89,000 for unvested restricted stock units and $32,000 for shares issued to our non-employee directors upon their re-election to our board in May 2014.
Equity based compensation expense in the three months ended September 30, 2013 totaled $97,000 and includes $62,000 for stock option awards, $10,000 for our employee stock purchase plan, and $25,000 for unvested restricted stock units. Equity based compensation in the nine months ended September 30, 2013 totaled $330,000 and includes $192,000 for stock option awards, $34,000 for our employee stock purchase plan, $74,000 for unvested restricted stock units and $30,000 for shares issued to our non-employee directors upon their re-election to our board.
At September 30, 2014 the total unrecognized compensation cost related to non-vested equity based compensation arrangements was $1,105,000 and the related weighted average period over which it is expected to be recognized is 2.44 years.
For stock options granted during the nine months ended September 30, 2014, we utilized the fair value of our common stock on the date of grant and employed the following key assumptions in computing fair value using the Black-Scholes option-pricing model:
 
2014
Risk-free interest rates
1.55% - 1.65%
Expected life in years
5.30 - 5.48
Expected volatility
46.57% - 46.90%
Dividend yield
—%
Weighted average fair value on grant date
$3.39
Stock Options
We have two stock incentive plans that are administered under the supervision of the Compensation Committee of the Board of Directors. As of September 30, 2014, there are 892,123 shares of common stock reserved in the aggregate for issuance of options and other stock based benefits under these plans, including restricted stock units and share grants to employees, officers and others. Reserved shares underlying canceled options are available for future grant under our active plan. Options are granted at an option price per share equal to or greater than the market value of our common stock on the date of grant. Generally, options granted to employees vest over a four-year period and expire seven years after the date of grant. The plans allow for option holders to tender shares of our common stock as consideration for the option price, provided that the tendered shares have been held by the option holder at least six months. As of September 30, 2014, there were 297,555 shares of common stock available under our active plan for future issuance to employees, officers and others.

11




The following is a summary of stock option activity for the nine months ended September 30, 2014:
 
Options Outstanding
 
Weighted Average Exercise
Price Per Share
Outstanding, December 31, 2013
586,483

 
$
8.07

Granted
170,000

 
7.73

Exercised
(107,243
)
 
5.85

Expired
(43,851
)
 
14.80

Forfeited
(63,123
)
 
7.18

Outstanding, September 30, 2014
542,266

 
$
7.96

 
 
 
 
Exercisable, September 30, 2014
225,311

 
$
9.13

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. At September 30, 2014, the weighted average remaining contractual term of all outstanding options was 4.46 years and their aggregate intrinsic value was $1,862,788. At September 30, 2014, the weighted average remaining contractual term of options that were exercisable was 2.39 years and their aggregate intrinsic value was $564,253. We received proceeds of $628,000 from the exercise of stock options in the nine months ended September 30, 2014. We received proceeds of $25,000 from the exercise of stock options in the nine months ended September 30, 2013.
Restricted Stock Units
Our 1998 Stock Incentive Plan also permits our Compensation Committee to grant other stock-based benefits, including restricted stock units. Restricted stock units are valued at a price equal to the fair market value of our common stock on the date of grant, vest over a four year period provided the employee is still working for the company and entitle the holders to one share of our common stock for each restricted stock unit. The aggregate fair value of outstanding restricted stock units based on the closing share price of our common stock on September 30, 2014 was $587,000. The aggregate fair value of restricted stock units that vested in the nine months ended September 30, 2014, based on the closing share price of our common stock on the vesting date, was $34,796.
A summary of activity in non-vested restricted stock units for the nine months ended September 30, 2014 is as follows:
Non-vested restricted stock units
 
Shares
 
Weighted Average Grant Date
Fair Value
Non-vested at December 31, 2013
 
46,943

 
$
6.82

Granted
 
20,000

 
6.97

Vested
 
(5,433
)
 
7.31

Forfeited
 
(9,208
)
 
7.56

Non-vested at September 30, 2014
 
52,302

 
$
6.69

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 22,324 shares issued under this plan in the nine months ended September 30, 2014 and 12,656 shares issued under this plan in the nine months ended September 30, 2013. As of September 30, 2014, 131,602 shares remain available for future issuance under this plan.
Stock Grant Plan for Non-Employee Directors
Our stock grant plan for non-employee directors provides for automatic grants of 1,000 shares of our common stock to each of our non-employee directors upon their re-election to the Board of Directors. The plan allows for the issuance of up to 60,000 shares of our common stock, including an additional 30,000 shares authorized in May 2014, and will expire on May 19, 2018. We issued a total of 4,000 shares of common stock under this plan in connection with our annual meeting in May 2014, resulting in $32,000 of stock compensation expense in the nine months ended September 30, 2014. As of September 30, 2014, 32,000 shares of common stock are reserved in the aggregate for future issuance under this plan.

12




7. INVENTORIES AND WARRANTIES:
Inventories consist of the following:
(In thousands)
 
September 30, 2014
 
December 31, 2013
Raw materials and purchased parts
 
$
7,248

 
$
6,690

Work in process
 
977

 
1,135

Finished goods
 
4,731

 
3,506

Total inventories
 
$
12,956

 
$
11,331

Warranty costs:
We provide for the estimated cost of product warranties, which extend for periods from one to three years after purchase, at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required and could be material. Our warranty liability is included as a component of accrued expenses. At the end of each reporting period we revise our estimated warranty liability based on these factors.
A reconciliation of the changes in our estimated warranty liability is as follows:
 
 
Nine Months Ended September 30,
(In thousands)
 
2014
 
2013
Balance at beginning of period
 
$
513

 
$
694

Accrual for warranties
 
896

 
418

Assumed in acquisition
 
5

 

Warranty revision
 
2

 
4

Settlements made during the period
 
(640
)
 
(619
)
Balance at end of period
 
$
776

 
$
497

Deferred warranty revenue:
The current portion of our deferred warranty revenue is included as a component of advance customer payments. A reconciliation of the changes in our deferred warranty revenue is as follows:
 
 
Nine Months Ended September 30,
(In thousands)
 
2014
 
2013
Balance at beginning of period
 
$
444

 
$
582

Revenue deferrals
 
369

 
253

Assumed in acquisition
 
89

 

Amortization of deferred revenue
 
(338
)
 
(355
)
Total deferred warranty revenue
 
564

 
480

Current portion of deferred warranty revenue
 
(519
)
 
(283
)
Long-term deferred warranty revenue
 
$
45

 
$
197



13




8. INTANGIBLE ASSETS:
Intangible assets consist of the following:
 
 
September 30, 2014
 
December 31, 2013
(In thousands)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Patents
 
$
3,146

 
$
(2,863
)
 
$
283

 
$
2,915

 
$
(2,779
)
 
$
136

Software
 
206

 
(16
)
 
190

 

 

 

Marketing assets and customer relationships
 
101

 
(6
)
 
95

 

 

 

Non-compete agreements
 
101

 
(14
)
 
87

 

 

 

 
 
$
3,554

 
$
(2,899
)
 
$
655

 
$
2,915

 
$
(2,779
)
 
$
136

The weighted average amortization period for our intangible assets is as follows: patents five years, software seven years, marketing assets and customer relationships nine years, and non-compete agreements four years. Amortization expense for the three and nine month periods ended September 30, 2014 and 2013 is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2014
 
2013
 
2014
 
2013
Patents
 
$
30

 
$
30

 
$
84

 
$
95

Software
 
7

 

 
16

 

Marketing assets and customer relationships
 
2

 

 
6

 

Non-compete agreements
 
7

 

 
14

 

 
 
$
46

 
$
30

 
$
120

 
$
95

Amortization of patents has been classified as research and development expense in the accompanying statements of operations. Estimated aggregate amortization expense based on current intangibles for the next five years is expected to be as follows: $43,000 for the remainder of 2014, $154,000 in 2015, $126,000 in 2016, $101,000 in 2017, $68,000 in 2018 and $62,000 in 2019.
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 would be recognized when future undiscounted cash flows expected to result from use of the asset and eventual disposition are less than the carrying amount.
9. GOODWILL:
Goodwill increased by $797,000 in the nine months ended September 30, 2014 due to our acquisition of LDI. There was no change in our goodwill balance in the nine months ended September 30, 2013. Adjustments to provisional amounts reflected in our March 31, 2014 balance sheet for the LDI acquisition resulted in a $46,000 increase to goodwill in the three months ended June 30, 2014.
10. SIGNIFICANT CUSTOMERS:
Export sales were 70% of revenue in the three months ended September 30, 2014 and 74% of revenue in the nine months ended September 30, 2014. Export sales were 73% of revenue in the three months ended September 30, 2013 and 78% of revenue in the nine months ended September 30, 2013. Virtually all of our export sales are negotiated, invoiced and paid in U.S. dollars. Export sales by geographic area are summarized as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2014
 
2013
 
2014
 
2013
Americas
 
$
424

 
$
85

 
$
1,118

 
$
582

Europe
 
3,172

 
1,820

 
8,328

 
6,495

Asia
 
4,440

 
4,412

 
15,841

 
11,804

Other
 
165

 
75

 
538

 
338

Total export sales
 
$
8,201

 
$
6,392

 
$
25,825

 
$
19,219


14




Our LaserAlign sensor family has historically accounted for a significant portion of our revenues and profitability. Our revenue, results of operations and cash flows would be negatively impacted if our LaserAlign customers are unsuccessful selling the products into which our sensors are incorporated, design their products to function without our sensors, purchase sensors from other suppliers, or otherwise terminate their relationships with us.
We are dependent upon two customers, Juki and Assembleon, for a significant portion of our total revenue. For the nine months ended September 30, 2014, sales to Juki accounted for 18% of our total revenue and sales to Assembleon accounted for 9% of our total revenue.
11. RESTRUCTURING AND SEVERANCE COSTS:
Severance costs of $952,000 were incurred in the fourth quarter of 2013 when we reduced our global workforce by approximately 30 employees. Expenses for contract workers were also reduced. The workforce reduction was undertaken to strengthen our commitment to cost control, minimize losses and to improve focus on market support for our products. No restructuring or severance costs were incurred in the three or nine months ended September 30, 2014 or September 30, 2013.
A summary of our restructuring accrual relating to this action is as follows:
(In thousands)
Fourth Quarter 2013 Workforce
Reduction
Balance, December 31, 2013
$
511

Cost incurred

Payments made
511

Balance, September 30, 2014
$


12. NET LOSS PER SHARE:
Net loss per basic and diluted share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Common equivalent shares consist of common shares to be issued upon exercise of stock options, restricted stock units and from participation in our employee stock purchase plan, as calculated using the treasury stock method. All potentially dilutive common equivalent shares are excluded from the calculations of net loss per diluted share due to their anti-dilutive effect. As a result, no common equivalent shares were included in the calculations of net loss per diluted share for the three and nine month periods ended September 30, 2014 or September 30, 2013. The components of net loss per basic and diluted share are as follows:
(In thousands except per share amounts)
 
Net Loss
 
Weighted Average
Shares Outstanding
 
Per Share Amount
Three Months Ended September 30, 2014:
 
 

 
 

 
 

Basic
 
$
(448
)
 
6,609

 
$
(0.07
)
Dilutive effect of common equivalent shares
 

 

 

Dilutive
 
$
(448
)
 
6,609

 
$
(0.07
)

(In thousands except per share amounts)
 
Net Loss
 
Weighted Average
Shares Outstanding
 
Per Share Amount
Three Months Ended September 30, 2013:
 
 

 
 

 
 

Basic
 
$
(774
)
 
6,784

 
$
(0.11
)
Dilutive effect of common equivalent shares
 

 

 

Dilutive
 
$
(774
)
 
6,784

 
$
(0.11
)


15




(In thousands except per share amounts)
 
Net Loss
 
Weighted Average
Shares Outstanding
 
Per Share Amount
Nine Months Ended September 30, 2014:
 
 

 
 

 
 

Basic
 
$
(1,572
)
 
6,555

 
$
(0.24
)
Dilutive effect of common equivalent shares
 

 

 

Dilutive
 
$
(1,572
)
 
6,555

 
$
(0.24
)

(In thousands except per share amounts)
 
Net Loss
 
Weighted Average
Shares Outstanding
 
Per Share Amount
Nine Months Ended September 30, 2013:
 
 

 
 

 
 

Basic
 
$
(4,120
)
 
6,883

 
$
(0.60
)
Dilutive effect of common equivalent shares
 

 

 

Dilutive
 
$
(4,120
)
 
6,883

 
$
(0.60
)
The calculation of diluted net loss per common share excludes 636,000 and 589,000 potentially dilutive shares for the three months ended September 30, 2014 and 2013, and 694,000 and 598,000 potentially dilutive shares for the nine months ended September 30, 2014 and 2013 because their effect would be anti-dilutive.
13. COMPREHENSIVE INCOME (LOSS):
Taxes related to items of other comprehensive income (loss) are as follows:
 
 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Amount
 
Before Tax
 
Tax Effect
 
Net of Tax
Amount
Foreign currency translation adjustments
 
$
(233
)
 
$

 
$
(233
)
 
$
115

 
$

 
$
115

Net changes related to available-for-sale securities:
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized gains
 
24

 

 
24

 
24

 

 
24

Reclassification adjustment for gains included in net loss
 

 

 

 

 

 

Total net changes related to available-for-sale securities
 
24

 

 
24

 
24

 

 
24

Net changes related to foreign exchange forward contracts:
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized gains (losses)
 
(190
)
 

 
(190
)
 
61

 

 
61

Reclassification adjustment for (gains) losses included in net loss
 
(3
)
 

 
(3
)
 
71

 

 
71

Total net changes related to foreign exchange forward contracts
 
(193
)
 

 
(193
)
 
132

 

 
132

Other comprehensive income (loss)
 
$
(402
)
 
$

 
$
(402
)
 
$
271

 
$

 
$
271



16




 
 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
(In thousands)
 
Before Tax
 
Tax Effect
 
Net of Tax
Amount
 
Before Tax
 
Tax Effect
 
Net of Tax
Amount
Foreign currency translation adjustments
 
$
(64
)
 
$

 
$
(64
)
 
$
(140
)
 
$

 
$
(140
)
Net changes related to available-for-sale securities:
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized gains
 
36

 

 
36

 
30

 

 
30

Reclassification adjustment for losses included in net loss
 

 

 

 
21

 

 
21

Total net changes related to available-for-sale securities
 
36

 

 
36

 
51

 

 
51

Net changes related to foreign exchange forward contracts:
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized losses
 
(121
)
 

 
(121
)
 
(231
)
 

 
(231
)
Reclassification adjustment for losses included in net loss
 
29

 

 
29

 
24

 

 
24

Total net changes related to foreign exchange forward contracts
 
(92
)
 

 
(92
)
 
(207
)
 

 
(207
)
Other comprehensive income (loss)
 
$
(120
)
 
$

 
$
(120
)
 
$
(296
)
 
$

 
$
(296
)
Reclassification adjustments are made to avoid double counting for items included in comprehensive income (loss) that are also recorded as part of net loss. Reclassifications to earnings related to cash flow hedging instruments are discussed in Note 4. Income taxes are not provided for foreign currency translation adjustments relating to permanent investments in international subsidiaries. We have recorded a valuation allowance against all of our United States and Singapore based deferred tax assets. Accordingly, we do not expect to record a tax provision for items of other comprehensive income (loss) until such time as the valuation allowance is substantially reduced. The effect of the reclassifications from comprehensive income (loss) to earnings by line item is as follows:
Details about Components
of Accumulated Other
Comprehensive Loss
 
Amount Reclassified from
Accumulated Other
Comprehensive Loss
 
Affected Line Item in the Statements of Operations
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
(In thousands)
 
2014
 
2013
 
2014
 
2013
 
 
Unrealized losses on available-for-sale securities
 
$

 
$

 
$

 
$
(21
)
 
Interest income and other
 
 

 

 

 

 
Income tax provision (benefit)
 
 
$

 
$

 
$

 
$
(21
)
 
Net of tax
Unrealized gains (losses) on foreign exchange forward contracts
 
$
3

 
$
(41
)
 
$
(15
)
 
$
(2
)
 
Cost of revenues
 
 

 
(17
)
 
(7
)
 
(12
)
 
Research and development expenses
 
 

 
(13
)
 
(7
)
 
(10
)
 
Selling, general and administrative expenses
 
 
3

 
(71
)
 
(29
)
 
(24
)
 
Total before tax
 
 

 

 

 

 
Income tax provision (benefit)
 
 
$
3

 
$
(71
)
 
$
(29
)
 
$
(24
)
 
Net of tax

17




At September 30, 2014 and September 30, 2013, components of accumulated other comprehensive loss is as follows:
(In thousands)
 
Foreign
Currency
Translation
Adjustments
 
Available-
for-Sale
Securities
 
Foreign
Exchange
Forward
Contracts
 
Accumulated
Other
Comprehensive
Loss
Balances at December 31, 2013
 
$
(456
)
 
$
32

 
$
(116
)
 
$
(540
)
Other comprehensive income before reclassifications
 
(64
)
 
36

 
(121
)
 
(149
)
Amounts reclassified from accumulated other comprehensive loss
 

 

 
29

 
29

Total change for the period
 
(64
)
 
36

 
(92
)
 
(120
)
Balances at September 30, 2014
 
$
(520
)
 
$
68

 
$
(208
)
 
$
(660
)

(In thousands)
 
Foreign
Currency
Translation
Adjustments
 
Available-
for-Sale
Securities
 
Foreign
Exchange
Forward
Contracts
 
Accumulated
Other
Comprehensive
Loss
Balances at December 31, 2012
 
$
(245
)
 
$
(23
)
 
$
111

 
$
(157
)
Other comprehensive income (loss) before reclassifications
 
(140
)
 
30

 
(231
)
 
(341
)
Amounts reclassified from accumulated other comprehensive loss
 

 
21

 
24

 
45

Total change for the period
 
(140
)
 
51

 
(207
)
 
(296
)
Balances at September 30, 2013
 
$
(385
)
 
$
28

 
$
(96
)
 
$
(453
)

14. INCOME TAXES:
We recorded income tax expense of $63,000 in the nine months ended September 30, 2014, compared to a benefit of $220,000 in the nine months ended September 30, 2013. Our income tax benefit for the three and nine months ended September 30, 2013 included a $318,000 benefit resulting from the expiration of the statute of limitations for various tax exposures related to the income tax returns of prior periods. At September 30, 2014, we continue to have a valuation allowance recorded against all of our United States and Singapore based deferred tax assets. Income taxes in both the three and nine months ended September 30, 2014 and the three and nine months ended September 30, 2013, reflects minimal state income tax expense and foreign income tax expense associated with our subsidiaries in the United Kingdom and China.
We currently 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 financial statements become deductible for income tax purposes, when net operating loss carry forwards are 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.
We have concluded that a valuation allowance is needed for all of our United States and Singapore based deferred tax assets due to the losses we have sustained since 2011 and our near term financial outlook. In analyzing the need for a valuation allowance, we considered our history of operating results for income tax purposes over the past three years in each of the tax jurisdictions where we operate, statutory carry forward periods and tax planning alternatives. Finally, we considered both our near and long-term financial outlook and timing regarding when we might return to profitability. After considering all available evidence both positive and negative, we concluded that a valuation allowance is needed for all of our U.S. and Singapore based deferred tax assets at September 30, 2014 and December 31, 2013.
Deferred tax assets at September 30, 2014 include net operating loss carry forwards incurred in the UK by CyberOptics Ltd., which was acquired in 1999. A valuation allowance has not been recorded against these deferred tax assets. The utilization of these net operating loss carry forwards is dependent on CyberOptics Ltd.’s ability to generate sufficient UK taxable income during the carry forward period.
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 amount 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 (FASB) issued guidance on the recognition of revenue from contracts with customers (ASU No. 2014-09, Revenue from Contracts with Customers). Revenue recognition will depict 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. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The guidance is effective January 1, 2017 and early adoption is not permitted. The Company is currently evaluating the method of adoption and the impact of the new guidance on the consolidated financial statements.
In April 2014, the FASB issued guidance that changes the criteria for reporting a discontinued operation (ASU No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity). According to the new guidance, only disposals of a component that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results are a discontinued operation. The new guidance also requires expanded disclosures about discontinued operations and disposals of a significant part of an entity that does not qualify for discontinued operations reporting. The guidance is effective beginning January 1, 2015 with early adoption permitted, but only for disposals (or classifications as held for sale) that have not been reported in previously-issued financial statements. The impact on our consolidated financial statements will be dependent on any transaction that is within the scope of the new guidance.
In July 2013, the FASB issued guidance regarding the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists (ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists). Under certain circumstances, unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance was effective January 1, 2014, and was adopted by us in the first quarter. The guidance is a change in financial statement presentation only and had no impact on our consolidated financial results or financial position.



18




ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

The preparation of the financial information contained in this Form 10-Q requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an ongoing basis, including those related to allowances for doubtful accounts and returns, warranty obligations, inventory valuation, the carrying value and any impairment of intangible assets, income taxes and derivatives and hedging activities. These critical accounting policies are discussed in more detail in the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the year ended December 31, 2013.

FORWARD LOOKING STATEMENTS:

The following management’s discussion and analysis contains a number of estimates and predictions that are forward looking rather than based on historical fact. Among other matters, we discuss (i) our level of anticipated revenues, gross margins, expenses, and net loss for the fourth quarter of 2014; (ii) the timing of initial revenue and margin improvements from new products that we have under development, that have been recently introduced or we anticipate introducing in the future; (iii) the anticipated impact of Laser Design, Inc. (LDI) on our revenue, expenses and net loss; (iv) our beliefs regarding trends in the general economy and its impact on markets for our products and (v) the impact of currency fluctuations on our operations. Although we have made these statements based on our experience and best estimate of future events, there may be events or factors that we have not anticipated, and the accuracy of our statements and estimates are subject to a number of risks, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2013.

RESULTS OF OPERATIONS
General
Our products are sold primarily into the electronics assembly, DRAM and flash memory, and semiconductor fabrication capital equipment markets. We sell products in these markets both to original equipment manufacturers of production equipment and to end-user customers that assemble circuit boards and semiconductor wafers and devices. On March 14, 2014, we completed our acquisition of LDI for aggregate consideration of approximately $3.1 million in cash plus the assumption of certain current liabilities. LDI provides scanning systems and services to the global 3D scanner and services metrology market and enables us to enter the growing market for general purpose 3D metrology.

Recent and planned product introductions are designed to strengthen our competitive position in our current markets. We believe 3D inspection represents the high-growth segment of the electronic assembly, semiconductor and industrial inspection markets. For this reason we are strategically repositioning ourselves as a developer and manufacturer of high-precision 3D sensors. In the third quarter we continued to develop our new Multi-Reflection Suppression (MRS) 3D technology. This sensor technology will be deployed in our new 3D automated optical inspection (AOI) system, which is designed to expand our presence in markets requiring high precision inspection. In these markets identifying defects has become highly challenging and critical due to smaller electronics packaging and increasing component density on circuit boards. Beta testing and customer demonstrations of our new 3D AOI system have started, and we expect to formally launch our new 3D AOI system during the first quarter of 2015. Although the first commercial application of our MRS technology is expected to be in our own 3D AOI inspection system, we also intend to expand sales of this technology into adjacent targeted markets that require high precision optical 3D inspection, including pursuing new original equipment manufacturer (OEM) opportunities with our MRS technology.

Our acquisition of LDI represents another aspect of our 3D strategy. We intend to further leverage our new MRS technology by incorporating it into LDI's Auto Gage scanning system that will serve a wide range of inspection applications in the general purpose 3D metrology market. We expect to introduce an MRS-equipped product for the general metrology market in early 2015.
We also have committed funds to develop new products for inspection of the conformal coating on circuit boards and memory modules. In the third quarter we delivered our first system for memory module inspection and anticipate customer acceptance in late 2014 or early 2015. We believe inspection of memory modules represents a promising opportunity that could generate at least $3.0 million in sales during 2015, depending upon the continued strength of the memory market. We anticipate initial sales of our system for conformal coating inspection in the fourth quarter. A portion of the savings from the workforce reduction we implemented in the fourth quarter of 2013 is being used to support our investment in these key growth initiatives.

19




We are forecasting organic year over year double-digit sales growth and a reduced loss for the fourth quarter of 2014. We believe that we have the resources required to attain our growth objectives, given our available cash and marketable securities balances totaling $17.9 million at September 30, 2014.
Revenues
Our revenues increased by 34% to $11.7 million in the three months ended September 30, 2014, from $8.7 million in the three months ended September 30, 2013, and increased by 40% to $34.8 million in the nine months ended September 30, 2014, from $24.8 million in the nine months ended September 30, 2013. The following table sets forth revenues by product line for the three and nine month periods ended September 30, 2014 and 2013:

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2014
 
2013
 
2014
 
2013
SMT Sensors
 
$
4,569

 
$
3,214

 
$
11,553