cybe-20170930.htm
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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, 2017

 

 

 

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

 Large Accelerated Filer

 

Accelerated Filer

 Non-Accelerated Filer

☐ (Do not check if a smaller reporting company)

  Smaller Reporting Company

 

 

  Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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, 2017, there were 6,977,515 shares of the registrant’s Common Stock, no par value, issued and outstanding. 

1


PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS

CYBEROPTICS CORPORATION

(Unaudited)

 

 

 

 

 

 

 

 

 

(In thousands, except share information)

 

September 30,
2017

 

December 31,
2016

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,593

 

 

$

10,640

 

Marketable securities

 

6,701

 

 

6,493

 

Accounts receivable, less allowance for doubtful accounts of $514 at
September 30, 2017 and $547 at December 31, 2016

 

11,932

 

 

10,895

 

Inventories

 

16,634

 

 

11,531

 

Other current assets

 

1,739

 

 

1,535

 

Total current assets

 

42,599

 

 

41,094

 

 

 

 

 

 

Marketable securities, long-term

 

8,949

 

 

8,728

 

Equipment and leasehold improvements, net

 

2,303

 

 

2,438

 

Intangible assets, net

 

413

 

 

438

 

Goodwill

 

1,366

 

 

1,366

 

Other assets

 

202

 

 

193

 

Deferred tax assets

 

5,484

 

 

5,323

 

Total assets

 

$

61,316



$

59,580

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Accounts payable

 

$

7,083

 

 

$

6,217

 

Advance customer payments

 

325

 

 

328

 

Accrued expenses

 

2,014

 

 

3,756

 

Total current liabilities

 

9,422

 

 

10,301

 

 

 

 

 

 

Other liabilities

 

109

 

 

250

 

Reserve for income taxes

 

131

 

 

131

 

Total liabilities

 

9,662

 

 

10,682

 

 

 

 

 

 

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, 6,972,515 shares issued and outstanding at September 30, 2017 and 6,901,887 shares issued and outstanding at December 31, 2016

 

34,052

 

 

32,801

 

Accumulated other comprehensive loss

 

(1,506

)

 

(1,940

)

Retained earnings

 

19,108

 

 

18,037

 

Total stockholders’ equity

 

51,654

 

 

48,898

 

Total liabilities and stockholders’ equity

 

$

61,316

 

 

$

59,580

 

 

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

 

2


 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

CYBEROPTICS CORPORATION

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands, except per share amounts)

 

2017

 

2016

 

2017

 

2016

Revenues

 

$

11,828

 

 

$

15,040

 

 

$

40,157


 

$

52,785

 

Cost of revenues

 

 

6,236

 

 

 

8,399

 

 

21,434

 

 

30,055

 

 

 

 

 

 

 

 


 

 

 

 

 

Gross margin

 

 

5,592

 

 

 

6,641

 

 

18,723

 

 

22,730

 

 

 

 


 

 

 


 

 

 

 

 

Research and development expenses

 

 

1,947

 

 

 

1,997

 

 

5,892

 

 

6,137

 

Selling, general and administrative expenses

 

 

3,793

 

 

 

3,491

 

 

11,821

 

 

11,028

 

Amortization of intangibles

 

 

15

 

 

 

16

 

 

50

 

 

50

 

 

 

 


 

 

 


 

 

 

 

 

Income (loss) from operations

 

 

(163

)

 

 

1,137

 

 

960

 

5,515


 

 

 


 

 

 


 

 

 

 

 

Interest income and other

 

 

(25

)

 

 

56

 

 

(141

)

 

69

 

 

 


 

 

 


 

 

 

 

 

Income (loss) before income taxes

 

 

(188

)  

 

 

1,193

 

 

819

 

5,584


 

 

 


 

 

 


 

 

 

 

 

Income tax provision (benefit)

 

 

(116

)  

 

 

21

 

 

10

 

108

 

 

 

 


 

 

 


 

 

 

 

 

Net income (loss)

 

$

(72

)  

 

$

1,172

 

 

$

809

 

$

5,476


 

 

 


 

 

 


 

 

 

 

 

Net income (loss) per share – Basic

 

$

(0.01

)  

 

$

0.17

 

 

$

0.12

 

$

0.80


Net income (loss) per share – Diluted

 

$

(0.01

)  

 

$

0.16

 

 

$

0.11

 

$

0.78


 

 

 


 

 

 


 

 

 

 

 

Weighted average shares outstanding – Basic

 

 

6,959

 

 

 

6,859

 

 

6,939

 

 

6,813

 

Weighted average shares outstanding – Diluted

 

 

6,959

 

 

 

7,154

 

 

7,041

 

 

7,013

 

 

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

 

3


 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

CYBEROPTICS CORPORATION

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands)

 

2017

 

2016

 

2017

 

2016

Net income (loss)

 

$

(72

)  

 

$

1,172

 

 

$

809

 

$

5,476


 

 

 


 

 

 


 

 

 

 

 

Other comprehensive income, before tax:

 

 


 

 

 


 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

157

 

 

 

(116

)

 

587


 

78


 

 

 


 

 

 


 

 

 

 

 

Unrealized gains on available-for-sale securities:

 

 


 

 

 


 

 

 

 

 

 

 

Unrealized gains (losses)

 

 

 

 

 

(36

 

31


 

32


Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

Total unrealized gains (losses) on available-for-sale securities

 

 

 

 

 

(36

 

31


 

32


 

 

 


 

 

 


 

 

 

 

 

Unrealized gains on foreign exchange forward contracts:

 

 


 

 

 


 

 

 

 

 

 

 

Unrealized gains

 

 

 

 

 


 

 

53


Reclassification adjustments for losses included in net income (loss)

 

 

 

 

 

 

 

 

 

36

 

Total unrealized gains on foreign exchange forward contracts

 

 

 

 

 

 

 

 

89


 

 

 


 

 

 


 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

157

 

 

 

(152

)

 

618


 

199


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

 

(35

)

 

 

 

 

(184

)

 

 

Other comprehensive income (loss), net of tax

 

 

122

 

 

 

(152

)

 

434


 

199


Total comprehensive income 

$

50

 

 

$

1,020

 

 

$

1,243

 

$

5,675


 

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

 

4


 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

CYBEROPTICS CORPORATION

(Unaudited)

 


 

 



 

 

 

 


Nine Months Ended September 30,

(In thousands)


2017



2016


CASH FLOWS FROM OPERATING ACTIVITIES:


 



 

 

Net income


$

809


$

5,476


Adjustments to reconcile net income to net cash provided by (used in) operating activities:


 



 


Depreciation and amortization


1,659



1,520

 

Provision for doubtful accounts


(15

)


10

 

Deferred taxes


(27

)

15

Foreign currency transaction losses (gains)


139



(66

)

Stock based compensation


640



694

 

Changes in operating assets and liabilities:


 



 


Accounts receivable


(1,022

)


(4,022

)

Inventories


(5,260

)

 

1,169


Other assets


(133

)

 

(303

)

Accounts payable


866


 

(304

Advance customer payments


(3

)

 

(26

Accrued expenses


(1,906

)

 

1,467


Net cash provided by (used in) operating activities


(4,253

)

 

5,630


 


 


 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:


 


 

 

 

Proceeds from maturities of available-for-sale marketable securities


5,187


 

3,571

 

Proceeds from sales of available-for-sale marketable securities




 

1,402

 

Purchases of available-for-sale marketable securities


(5,604

)

 

(6,923

)

Additions to equipment and leasehold improvements


(851

)

 

(994

)

Additions to patents


(107

)

 

(59

)

Net cash used in investing activities


(1,375

)

 

(3,003

 


 


 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:


 


 

 

 

Proceeds from exercise of stock options


330


 

425

 

Proceeds from issuance of common stock under Employee Stock Purchase Plan

 

258

   

181

 

Net cash provided by financing activities


588


 

606

 

 

 

 


 

 

 

 

Effects of exchange rate changes on cash and cash equivalents


(7

)

 

9


 


 


 

 

 

 

Net increase (decrease) in cash and cash equivalents


(5,047

)

 

3,242


 


 


 

 

 

 

Cash and cash equivalents – beginning of period


10,640


 

4,274

 

Cash and cash equivalents – end of period


$

5,593


 

$

7,516

 

 

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

 

5


 

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, 2017, and for the three and nine month periods ended September 30, 2017 and 2016, 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, 2017 do not necessarily indicate the results to be expected for the full year. The December 31, 2016 consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2016.


2. MARKETABLE SECURITIES:


Our investments in marketable securities are classified as available-for-sale and consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

(In thousands)

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

Short-Term

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

4,693

 

 

$

 

 

$

(6

)

 

$

4,687

 

Corporate debt securities and certificates of deposit

 

1,665

 

 

 

 

(1

)

 

1,664

 

Asset backed securities

 

350

 

 

 

 

 

 

350

 

Marketable securities – short-term

 

$

6,708

 

 

$

 

 

$

(7

)

 

$

6,701

 

Long-Term

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

4,525

 

 

$

 

 

$

(13

)

 

$

4,512

 

Corporate debt securities and certificates of deposit

 

1,566

 

 

1

 

 

(6

)

 

1,561

 

Asset backed securities

 

2,797

 

 


 

 

(5

)

 

2,792

 

Equity security

 

42

 

 

42

 

 

 

 

84

 

Marketable securities – long-term

 

$

8,930

 

 

$

43

 

 

$

(24

)

 

$

8,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

(In thousands)

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

Short-Term

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

5,005

 

 

$

4

 

 

$

(1

)

 

$

5,008

 

Corporate debt securities and certificates of deposit

 

1,476

 

 

1

 

 

(1

)

 

1,476

 

Asset backed securities

 

9

 

 

 

 

 

 

9

 

  Marketable securities – short-term

 

$

6,490

 

 

$

5

 

 

$

(2

)

 

$

6,493

 

Long-Term

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

4,815

 

 

$

1

 

 

$

(12

)

 

$

4,804

 

Corporate debt securities and certificates of deposit

 

2,161

 

 

 

 

(17

)

 

2,144

 

Asset backed securities

 

1,732

 

 

 

 

(5

)

 

1,727

 

Equity security

 

42

 

 

11

 

 

 

 

53

 

Marketable securities – long-term

 

$

8,750

 

 

$

12

 

 

$

(34

)

 

$

8,728

 


6


 

Net pre-tax unrealized gains for marketable securities of $12,000 at September 30, 2017 and net pre-tax unrealized losses for marketable securities of $19,000 at December 31, 2016 were recorded as a component of accumulated other comprehensive loss in stockholders’ equity. No marketable securities were sold in the nine months ended September 30, 2017 or the three months ended September 30, 2016. We received proceeds from the sale of marketable securities in the nine months ended September 30, 2016 of $1.4 million. No gain or loss was recognized from the sale of marketable securities during the 2016 period.

 

Our investments in marketable debt securities all have maturities of less than five years. At September 30, 2017, marketable debt securities valued at $2.0 million were in an unrealized gain position totaling $1,000, and marketable debt securities valued at $13.6 million were in an unrealized loss position totaling $31,000 (all of these securities had been in an unrealized loss position for less than 12 months). At December 31, 2016, marketable debt securities valued at $6.4 million were in an unrealized gain position totaling $6,000, and marketable debt securities valued at $8.8 million were in an unrealized loss position totaling $36,000 (all of these securities had been in an unrealized loss position for less than 12 months).


Investments in marketable securities classified as cash equivalents of $3.2 million at September 30, 2017 and $5.2 million at December 31, 2016 consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

(In thousands)

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Recorded
Basis

Money market and certificates of deposit

 

$

3,164

 

 

$

 

 

$

 

 

$

3,164

 

 

 

$

3,164

 

 

$

 

 

$

 

 

$

3,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

(In thousands)

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Recorded
Basis

Money market and certificates of deposit

 

$

5,195

 

 

$

 

 

$

 

 

$

5,195

 

 

 

$

5,195

 

 

$

 

 

$

 

 

$

5,195

 


Cash and marketable securities held by foreign subsidiaries totaled $197,000 at September 30, 2017 and $614,000 at December 31, 2016.

 

3. DERIVATIVES:


We may 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 consolidated balance sheets at fair value. The effective portion of the gain or loss on these derivatives 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 derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. The maximum length of time over which we hedge our exposure to the variability in future cash flows is 12 months.


There were no open cash flow hedges at December 31, 2016 or at any time during the nine months ended September 30, 2017. In the nine months ended September 30, 2016, hedge ineffectiveness and the amounts excluded from effectiveness testing recognized in earnings on cash flow hedges were not material.


7



Reclassifications of amounts from accumulated other comprehensive income (loss) into earnings for cash flow hedges include accumulated gains (losses) at the time earnings were impacted by the hedged transaction. The location in the consolidated statements of operations and consolidated statements of comprehensive income and amounts of gains and losses related to derivative instruments designated as cash flow hedges are as follows:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

(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

Cost of revenues

 

$

32


 

$

(27

)

Research and development

 

14


 

(6

)

Selling, general and administrative

 

7


 

(3

)

Total

 

$

53


 

$

(36

)


At September 30, 2017 and December 31, 2016, there were no amounts recorded in accumulated other comprehensive loss for cash flow hedging instruments. Additional information with respect to the impact of derivative instruments on other comprehensive income (loss) is included in Note 11.

 

8


 

 

4. 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 (i.e., the exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last is considered 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 as of September 30, 2017 and December 31, 2016 according to the three-level fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at
September 30, 2017 Using

(In thousands)

 

Balance

September 30, 
2017

 

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

9,199

 

 

$

 

 

$

9,199

 

 

$

 

Corporate debt securities and certificates of deposit

 

3,225

 

 

 

 

3,225

 

 

 

Asset backed securities

 

3,142

 

 

 

 

3,142

 

 

 

Equity security

 

84

 

 

84

 

 

 

 

 

Total marketable securities

 

$

15,650

 

 

$

84

 

 

$

15,566

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at
December 31, 2016 Using

(In thousands)

 

Balance

December 31,

2016

 

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

9,812

 

 

$

 

 

$

9,812

 

 

$

 

Corporate debt securities and certificates of deposit

 

3,620

 

 

 

 

3,620

 

 

 

Asset backed securities

 

1,736

 

 

 

 

1,736

 

 

 

Equity security

 

53

 

 

53

 

 

 

 

 

Total marketable securities

 

$

15,221

 

 

$

53

 

 

$

15,168

 

 

$

 


During the nine months ended September 30, 2017 and the year ended December 31, 2016, 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 sufficiently to 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 which 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.


The carrying amounts of financial instruments such as cash equivalents, accounts receivable, other assets, accounts payable, advance customer payments, accrued expenses and other liabilities are approximately equal to their related fair values due to their short-term maturities. Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets are subject to non-recurring fair value measurements if they are deemed impaired. We had no re-measurements of non-financial assets to fair value in the nine months ended September 30, 2017 or the nine months ended September 30, 2016.

 

9


 

 

5. ACCOUNTING FOR STOCK-BASED COMPENSATION:

 

We have three stock-based compensation plans that are administered by the Compensation Committee of the Board of Directors. We have an Employee Stock Incentive Plan for officers, other employees, consultants and independent contractors under which we have granted options and restricted stock units to officers and other employees, an Employee Stock Purchase Plan under which shares of our common stock may be acquired by employees at discounted prices, and a Non-Employee Director Stock Plan that provides for automatic grants of shares of our common stock to non-employee directors. New shares of our common stock are issued upon stock option exercises, vesting of restricted stock units, issuances of shares to board members and issuances of shares under the Employee Stock Purchase Plan.

 

Employee Stock Incentive Plan

 

As of September 30, 2017, there were 429,939 shares of common stock reserved in the aggregate for issuance pursuant to future awards under our Employee Stock Incentive Plan and 530,174 shares of common stock reserved in the aggregate for issuance pursuant to outstanding awards under our Employee Stock Incentive Plan. Although our Compensation Committee has authority to issue options, restricted stock, restricted stock units, share grants and other share based benefits under our Employee Stock Incentive Plan, to date only restricted stock units and stock options have been granted under the plan. Options have been granted at an option price per share equal to the market value of our common stock on the date of grant, vest over a four year period and expire seven years after the date of grant. Restricted stock units vest over a four year period and entitle the holders to one share of our common stock for each restricted stock unit. Reserved shares underlying outstanding awards, including options and restricted shares, that are forfeited are available under the Employee Stock Incentive Plan for future grants. 


Non-Employee Director Stock Plan

 

As of September 30, 2017, there were 68,000 shares of common stock reserved in the aggregate for issuance pursuant to future awards under our Non-Employee Director Stock Plan and 16,000 shares of common stock reserved in the aggregate for issuance pursuant to outstanding stock option awards under our Non-Employee Director Stock Plan. Under the terms of the plan, each non-employee director will automatically be granted 2,000 shares of our common stock on the date of each annual meeting at which such director is elected to serve on the board. At our May 11, 2017 annual meeting, our shareholders, upon recommendation of the Board of Directors, approved amendments to the Non-Employee Director Stock Plan that eliminated annual stock option grants for non-employee directors and provide for share grants under the Non-Employee Director Stock Plan which will vest in four equal quarterly installments during the year after the grant date provided the non-employee director is still serving as a director on the applicable vesting date. 


Pursuant to the plan, on the date of our 2017 annual meeting, we issued a total of 8,000 shares of our common stock to our non-employee directors. The shares had an aggregate fair market value on the date of grant equal to $167,000 (grant date fair value of $20.90 per share). As of September 30, 2017, 2,000 of these shares were vested. The aggregate fair value of the vested shares, based on the closing share price of our common stock on the vesting date, was $31,000. The aggregate fair value of the outstanding unvested shares based on the closing share price of our common stock on September 30, 2017 was $98,000


Pursuant to the original plan, on the date of our 2016 annual meeting, we issued a total of 8,000 shares of our common stock and stock options to acquire 16,000 shares of our common stock to our non-employee directors. Both the shares and the options were fully vested on the date of grant. The shares had an aggregate fair market value on the date of grant equal to $136,000 (grant date fair value of $16.97 per share) and the options had an aggregate fair market value on the date of grant using the Black-Scholes model equal to $139,000 (grant date fair value of $8.71 per option to acquire one share of our common stock).


Stock Option Activity


The following is a summary of stock option activity in the nine months ended September 30, 2017:

 

 

 

 

 

 

 

 

Options Outstanding

 

Weighted Average Exercise
Price Per Share

Outstanding, December 31, 2016

547,625

 

 

$

9.39

 

Granted

 

 

 

Exercised

(42,000

)

 

9.24

 

Expired

 

 

 

Forfeited

 

 

 

Outstanding, September 30, 2017

505,625

 

 

$

9.41

 


 

 

 

Exercisable, September 30, 2017

229,063

 

 

$

7.67

 

 

10


 

The intrinsic value of an option is the amount by which the market price of the underlying stock exceeds the option's exercise price. For options outstanding at September 30, 2017, the weighted average remaining contractual term of all outstanding options was 4.2 years and their aggregate intrinsic value was $3.8 million. At September 30, 2017, the weighted average remaining contractual term of options that were exercisable was 3.7 years and their aggregate intrinsic value was $2.0 million. The aggregate intrinsic value of stock options exercised in the nine months ended September 30, 2017 was $679,000. We received proceeds from stock option exercises of $330,000 in the nine months ended September 30, 2017 and $425,000 in the nine months ended September 30, 2016. The total fair value of options that vested in the nine months ended September 30, 2017 was $130,000.


Restricted Stock Units

 

Restricted stock units are granted under our Employee Stock Incentive Plan. There were no restricted stock units granted in the nine months ended September 30, 2017. The aggregate fair value of outstanding restricted stock units based on the closing share price of our common stock on September 30, 2017 was $659,000. The aggregate fair value of restricted stock units that vested, based on the closing share price of our common stock on the vesting date, in the nine months ended September 30, 2017 was $170,000.

 

A summary of activity for non-vested restricted stock units in the nine months ended September 30, 2017 is as follows:

 

 

 

 

 

 

 

 

Non-vested restricted stock units

 

Shares

 

Weighted Average  Grant Date Fair Value

Non-vested at December 31, 2016

 

45,549

 

 

$

11.93

 

Granted

 

 

 

 

Vested

 

(5,000

)

 

6.97

 

Forfeited

 

 

 

 

Non-vested at September 30, 2017

 

40,549

 

 

$

12.54

 

 

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. Shares issued under this plan totaled 18,404 shares in the nine months ended September 30, 2017 and 36,481 shares in the nine months ended September 30, 2016As of September 30, 2017, 40,872 shares remain available for future issuance under the Employee Stock Purchase Plan.

 

Stock Based Compensation Information

 

All stock based compensation awarded to our employees and non-employee directors, representing grants of shares, stock options and restricted stock units are recognized as an expense in our consolidated statement of operations based on the grant date fair value of the award. We utilize the straight-line method of expense recognition over the vesting period for our options subject to time-based vesting restrictions. The fair value of stock options granted has been determined using the Black-Scholes model. Prior to January 1, 2017, stock compensation expense for all equity based awards was recognized based on the number of awards that were expected to vest. On January 1, 2017, we adopted the provisions of Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which permits accounting for the impact of stock option forfeitures on stock compensation expense when the forfeitures occur. In the nine months ended September 30, 2017, the impact of the change in accounting for stock option forfeitures was inconsequential. We have classified equity-based compensation expenses within our statement of operations in the same manner as our cash based compensation costs.

 

Stock based compensation expense in the three months ended September 30, 2017 totaled $240,000, and included $116,000 for stock options, $33,000 for our Employee Stock Purchase Plan, $49,000 for unvested restricted stock units and $42,000 for unvested restricted shares. Stock based compensation expense in the nine months ended September 30, 2017 totaled $640,000, and included $345,000 for stock options, $85,000 for our Employee Stock Purchase Plan, $145,000 for unvested restricted stock units and $65,000 for unvested restricted shares.

 

Stock based compensation expense in the three months ended September 30, 2016 totaled $142,000, and included $88,000 for stock options, $22,000 for our Employee Stock Purchase Plan and $32,000 for unvested restricted stock units. Stock based compensation expense in the nine months ended September 30, 2016 totaled $694,000, and included $409,000 for stock options, $54,000 for our Employee Stock Purchase Plan, $95,000 for unvested restricted stock units and $136,000 for shares issued without restriction.

 

At September 30, 2017, the total unrecognized compensation cost related to outstanding non-vested stock based compensation arrangements was $1.3 million, and the related weighted average period over which this cost is expected to be recognized is 1.25 years.

 

11


 

6CHANGES IN STOCKHOLDERS’ EQUITY:

 

A reconciliation of the changes in our stockholders' equity is as follows:

 

  Common Stock

Accumulated

Other Comprehensive

Income (Loss)

 

Retained

Earnings

Total Stockholders’

Equity

(In thousands) Shares    Amount   
Balance, December 31, 2016  6,902   $  32,801   $  (1,940 )   $ 18,037   $ 48,898  
Increase related to adoption of ASU 2016-09       23           262      285  

Exercise of stock options, vesting of restricted stock units and grants of restricted shares, net of shares exchanged as payment

 53     330                330  
Stock-based compensation       640                640  

Issuance of common stock under Employee Stock Purchase Plan

  18       258                   258  
Other comprehensive income, net of tax             434          434  
Net income                   809    809
Balance, September 30, 2017  6,973   $ 34,052   $ (1,506 )   $ 19,108   $ 51,654  

 

See Note 15 for further discussion regarding the impact of our adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting on our consolidated financial statements.


7. OTHER FINANCIAL STATEMENT DATA:


The components of our inventories are as follows:

 

 

 

 

 

 

 

 

 

(In thousands)

 

September 30, 2017

 

December 31, 2016

Raw materials and purchased parts

 

$

8,022

 

 

$

6,475

 

Work in process

 

1,640

 

 

826

 

Finished goods

 

6,972

 

 

4,230

 

Total inventories

 

$

16,634

 

 

$

11,531

 


The components of our accrued expenses are as follows:

 

 

 

 

 

 

 

 

 

(In thousands)

 

September 30, 2017

 

December 31, 2016

Wages and benefits

 

$

959

 

 

$

2,673

 

Warranty liability

 

691

 

 

717

 

Other

 

364

 

 

366

 

 

 

$

2,014

 

 

$

3,756

 


Warranty costs:


We provide for the estimated cost of product warranties, which cover products for periods ranging from 1 to 3 years, at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. If 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. At the end of each reporting period, we revise our estimated warranty liability based on these factors. The current portion of our warranty liability is included as a component of accrued expenses. The long-term portion of our warranty liability is included as a component of other liabilities. 


12


 

A reconciliation of the changes in our estimated warranty liability is as follows:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

(In thousands)

 

2017

 

2016

Balance at beginning of period

 

$

790

 

 

$

645

 

Accrual for warranties

 

362

 

 

615

 

Warranty revision

 

(23

)

 

(27

)

Settlements made during the period

 

(413

)

 

(415

)

Balance at end of period

 

716

 

 

818

 

Current portion of estimated warranty liability

 

(691

)

 

(736

)

Long-term estimated warranty liability

 

$

25

 

 

$

82

 


Deferred warranty revenue:


The current portion of our deferred warranty revenue is included as a component of advance customer payments. The long-term portion of our deferred warranty revenue is included as a component of other liabilities. A reconciliation of the changes in our deferred warranty revenue is as follows:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

(In thousands)

 

2017

 

2016

Balance at beginning of period

 

$

346

 

 

$

199

 

Revenue deferrals

 

321

 

 

490

 

Amortization of deferred revenue

 

(325

)

 

(330

)

Total deferred warranty revenue

 

342

 

 

359

 

Current portion of deferred warranty revenue

 

(301

)

 

(278

)

Long-term deferred warranty revenue

 

$

41

 

 

$

81

 


8. INTANGIBLE ASSETS:


Intangible assets consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

(In thousands)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

Patents

 

$

2,673

 

 

$

(2,433

)

 

$

240

 

 

$

2,567

 

 

$

(2,351

)

 

$

216

 

Software

 

206

 

 

(104

)

 

102

 

 

206

 

 

(82

)

 

124

 

Marketing assets and customer relationships

 

101

 

 

(42

)

 

59

 

 

101

 

 

(33

)

 

68

 

Non-compete agreements

 

101

 

 

(89

)

 

12

 

 

101

 

 

(71

)

 

30

 

 

 

$

3,081

 

 

$

(2,668

)

 

$

413

 

 

$

2,975

 

 

$

(2,537

)

 

$

438

 

 

13


 

Amortization expense in the three and nine months ended September 30, 2017 and 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands)

 

2017

 

2016

 

2017

 

2016

Patents

 

 $

31

 

 

$

27

 

 

$

82

 

 

$

79

 

Software

 

 

6

 

 

 

7

 

 

22

 

 

22

 

Marketing assets and customer relationships

 

 

3

 

 

 

3

 

 

9

 

 

9

 

Non-compete agreements

 

 

5

 

 

 

6

 

 

18

 

 

19

 

 

 

$

45

 

 

$

43

 

 

$

131

 

 

$

129

 


Amortization of patents has been classified as research and development expense in our statements of operations. Estimated aggregate amortization expense based on current intangibles for the next five years is expected to be as follows: $46,000 for the remainder of 2017; $142,000 in 2018; $109,000 in 2019; $76,000 in 2020; $20,000 in 2021; and $20,000 in 2022.


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 its eventual disposition are less than the carrying amount.


9. REVENUE CONCENTRATIONS, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC AREAS:


Export sales as a percentage of total sales in the three and nine months ended September 30, 2017 were 66% and 73%, respectively. Export sales as a percentage of total sales in the three and nine months ended September 30, 2016 were 84% and 83%, respectively. 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)

 

2017

 

2016

 

2017

 

2016

Americas

 

$

159

 

 

$

344

 

 

$

976

 

 

$

1,114

 

Europe

 

 

2,543

 

 

 

3,592

 

 

9,114

 

 

13,463

 

Asia

 

 

4,959

 

 

 

8,675

 

 

18,933

 

 

29,322

 

Other

 

 

103

 

 

 

10

 

 

247

 

 

44

 

Total export sales

 

$

7,764

 

 

$

12,621

 

 

$

29,270

 

 

$

43,943

  


In the nine months ended September 30, 2017, sales to one significant customer accounted for 13% of our total revenue. As of September 30, 2017, accounts receivable from this customer were $1.4 million.


10. NET INCOME (LOSS) PER SHARE: 


Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Net income per diluted share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of shares of common stock to be issued upon exercise of stock options, the vesting of restricted shares and restricted stock units and the purchase of shares under our Employee Stock Purchase Plan, as calculated using the treasury stock method. All common equivalent shares were excluded from the calculation of net loss per diluted share in the three months ended September 30, 2017 due to their anti-dilutive effect.  The components of net income (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, 2017

 

 

 

 

 

 

 

 

 

Basic

 

$

(72

)

 

6,959

 

 

$

(0.01

)

Dilutive effect of common equivalent shares

 

 

 


 

 

Dilutive

 

$

(72

)

 

6,959

 

 

$

(0.01

)


14

 


(In thousands except per share amounts)

 

Net Income

 

Weighted Average
Shares Outstanding

 

Per Share Amount

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Basic

 

$

1,172