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Minnesota |
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41-1472057 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
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5900 Golden Hills Drive |
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MINNEAPOLIS, MINNESOTA |
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55416 |
(Address of principal executive offices) |
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(Zip Code) |
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(763) 542-5000 |
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(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 |
☐ |
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Accelerated Filer |
☑ |
Non-Accelerated Filer |
☐ (Do not check if a smaller reporting company) |
Smaller Reporting Company | ☐ | |
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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 July 31, 2018, there were 7,041,589 shares of the registrant’s Common Stock, no par value, issued and outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
CYBEROPTICS CORPORATION
(Unaudited)
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(In thousands, except share information) |
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June 30,
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December 31,
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||||
ASSETS |
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Cash and cash equivalents |
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$ |
8,086
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$ |
6,944
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Marketable securities |
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6,083
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6,670
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Accounts receivable, less allowance for doubtful accounts of $493 at June 30, 2018 and $473 at December 31, 2017 |
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12,781
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10,772
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Inventories |
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14,652
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14,393
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Other current assets |
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1,996
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1,593 |
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Total current assets |
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43,598
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40,372
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Marketable securities, long-term |
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10,029
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9,073 |
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Equipment and leasehold improvements, net |
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2,230
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2,307
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Intangible assets, net |
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330 |
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380
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Goodwill |
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1,366
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1,366
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Other assets |
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202 |
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261
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Deferred tax assets |
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5,779 |
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5,742
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Total assets |
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$ |
63,534 |
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$ |
59,501
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Accounts payable |
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$ |
6,329
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$ |
4,294
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Advance customer payments |
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908
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393
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Accrued expenses |
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2,831
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2,285
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Total current liabilities |
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10,068
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6,972
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Other liabilities |
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171
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88
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Reserve for income taxes |
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159 |
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159
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Total liabilities |
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10,398
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7,219 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, no par value, 5,000,000 shares authorized, none outstanding |
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— |
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— |
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Common stock, no par value, 25,000,000 shares authorized, 7,023,936 shares issued and outstanding at June 30, 2018 and 6,979,686 shares issued and outstanding at December 31, 2017 |
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34,815
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34,080 |
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Accumulated other comprehensive loss |
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(1,683 |
) |
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(1,409 |
) | ||
Retained earnings |
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20,004
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19,611
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Total stockholders’ equity |
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53,136
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52,282
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Total liabilities and stockholders’ equity |
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$ |
63,534
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$ |
59,501
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SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CYBEROPTICS CORPORATION
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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(In thousands, except per share amounts) |
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2018 |
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2017 |
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2018 |
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2017 |
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Revenues |
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$ |
15,854 |
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$
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16,409 |
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$ |
29,974 |
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$ |
28,329
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Cost of revenues |
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8,590 |
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8,676 |
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16,491 |
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15,198
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Gross margin |
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7,264 |
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7,733 |
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13,483 |
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13,131 |
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Research and development expenses |
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2,243 |
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1,995 |
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4,423 |
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3,945 |
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Selling, general and administrative expenses |
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4,138 |
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4,058 |
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8,478 |
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8,028 |
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Amortization of intangibles |
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8 |
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18 |
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25 |
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35 |
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Income from operations |
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875 |
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1,662 |
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557 |
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1,123 |
||
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Interest income and other |
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95 |
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(28 |
) |
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|
157 |
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(116 |
) |
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Income before income taxes |
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970 |
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1,634 |
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|
714 |
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1,007 |
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Income tax expense |
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|
230 |
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|
539 |
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|
147 |
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|
126 |
||
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Net income |
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$
|
740 |
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$
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1,095 |
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$ |
567 |
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$ |
881 |
||
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Net income per share – Basic |
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$ |
0.11 |
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$
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0.16 |
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$ |
0.08 |
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$ |
0.13 |
||
Net income per share – Diluted |
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$
|
0.10 |
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$
|
0.15 |
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$ |
0.08 |
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$ |
0.12 |
||
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Weighted average shares outstanding – Basic |
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7,010 |
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6,944 |
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6,998 |
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6,928 |
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Weighted average shares outstanding – Diluted |
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7,242 |
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|
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7,253 |
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|
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7,114 |
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|
7,083 |
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SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CYBEROPTICS CORPORATION
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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(In thousands) |
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2018
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2017
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2018 |
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2017 |
||||||||
Net income |
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$ |
740 |
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$ |
1,095 |
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$ |
567 |
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|
$ |
881 |
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Other comprehensive income, before tax: |
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|
|
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Foreign currency translation adjustments |
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|
(422 |
) |
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|
161 |
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|
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(202 |
) |
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|
430 |
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Unrealized gains (losses) on available-for-sale securities: |
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|
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Unrealized gains (losses) |
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4 |
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11 |
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(36 |
) |
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31 |
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Total unrealized gains (losses) on available-for-sale securities |
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4 |
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11 |
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(36 |
) |
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31 |
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Other comprehensive income (loss), before tax |
|
|
(418 |
) |
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|
172 |
|
|
|
(238 |
) |
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|
461 |
|
Income tax provision (benefit), other comprehensive income |
(1 | ) | (63 |
) |
|
8 |
|
|
(149 |
) |
||||||
Other comprehensive income (loss), net of tax |
|
|
(419 |
) |
|
|
109 |
|
|
|
(230 |
) |
|
|
312 |
|
Total comprehensive income |
$ | 321 |
$
|
1,204 |
$ |
337 |
|
|
$ |
1,193 |
|
SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CYBEROPTICS CORPORATION
(Unaudited)
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Six Months Ended June 30, |
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(In thousands) |
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2018 |
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2017 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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|
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|
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Net income |
|
$ |
567
|
|
$ |
881 |
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
1,224
|
|
|
1,086
|
|
||
Provision for doubtful accounts |
|
25
|
|
—
|
|
|||
Deferred taxes |
|
29
|
|
95 |
||||
Foreign currency transaction (gains) losses |
|
(113 |
) |
|
198 |
|||
Stock based compensation |
|
484
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|
|
400
|
|
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Unrealized loss on available-for-sale equity security |
37 |
— |
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|||||
Changes in operating assets and liabilities: |
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|
|
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|
||
Accounts receivable |
|
(2,034 |
) |
|
(2,864 |
) |
||
Inventories |
|
(821
|
) |
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(4,751
|
) |
||
Other assets |
|
(363 |
) |
|
(56 |
) |
||
Accounts payable |
|
2,088 |
|
3,215
|
||||
Advance customer payments |
|
321 |
240
|
|||||
Accrued expenses |
|
556
|
|
(1,403
|
) |
|||
Net cash provided by (used in) operating activities |
|
2,000
|
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(2,959 |
) |
|||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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|
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|
|||
Proceeds from maturities of available-for-sale marketable securities |
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3,969
|
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3,531 |
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|||
Proceeds from sales of available-for-sale marketable securities |
|
70
|
|
— |
|
|||
Purchases of available-for-sale marketable securities |
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(4,479 |
) |
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(3,746 |
) |
||
Additions to equipment and leasehold improvements |
|
(642 |
) |
|
(523 |
) |
||
Additions to patents |
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(36 |
) |
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(72 |
) |
||
Net cash used in investing activities |
|
(1,118 |
) |
|
(810 |
) |
||
|
|
|
|
|
|
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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|
|
|
|
|||
Proceeds from exercise of stock options |
|
251
|
|
321 |
|
|||
Net cash provided by financing activities |
|
251
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|
321
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|||
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Effects of exchange rate changes on cash and cash equivalents |
|
9
|
41 |
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||||
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|
|
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Net increase (decrease) in cash and cash equivalents |
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1,142
|
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(3,407 |
) |
|||
|
|
|
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Cash and cash equivalents – beginning of period |
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6,944
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|
10,640 |
|
|||
Cash and cash equivalents – end of period |
|
$ |
8,086
|
|
$ |
7,233 |
|
SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION
1. INTERIM REPORTING:
The interim condensed consolidated financial statements of CyberOptics Corporation ("we", "us" or "our") presented herein as of June 30, 2018, and for the three and six month periods ended June 30, 2018 and 2017, are unaudited, but in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented.
The results of operations for the three and six month periods ended June 30, 2018 do not necessarily indicate the results to be expected for the full year. The December 31, 2017 consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2017.
2. REVENUE RECOGNITION:
Change in Revenue Accounting
Effective January 1, 2018, we adopted ASU No. 2014-9, “Revenue from Contracts with Customers” and the related amendments (“Topic 606”) using the modified retrospective method. Topic 606 was applied to all uncompleted contracts by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of retained earnings at January 1, 2018. Therefore, the comparative financial information for the three and six months ended June 30, 2017 has not been adjusted and continues to be reported under Topic 605, “Revenue Recognition”.
Accounting for contracts recognized over time involves the use of various techniques to estimate total contract revenue and costs. Contract estimates are based on various assumptions to project the outcome of future events that may span multiple years. We review and update our contract-related estimates regularly, and record adjustments as needed.
The adoption of Topic 606 caused changes for 1) the impact of volume discounts that represent a material right which will now be estimated and recognized over the contract life rather than on a prospective basis, and 2) revenue will be recognized over time as the products are manufactured under certain contracts where our product is customized rather than at shipment. These changes increased our revenues in the three and six months ended June 30, 2018 by $84,000 and $109,000, respectively, when compared to revenue recognition under Topic 605 (see Note 16).
Performance Obligations
Under Topic 606, revenue is measured based on consideration specified in the contract with a customer. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. Revenue from all customers, including distributors, is recognized when a performance obligation is satisfied by transferring control of a product or service to a customer. Amounts billed to customers for shipping and handling are included in revenue. Taxes collected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting. Accounts receivable are due under normal trade terms, typically 90 days or less.
Sales involving multiple performance obligations typically include the sale of an inspection system or metrology product, installation and training, and in some cases, an extended warranty. When a sale involves multiple performance obligations, we account for individual products and services separately if the customer can benefit from the product or service on its own or with other resources that are readily available to the customer and the product or service are separately identifiable from other promises in the arrangement. The consideration is allocated between separate performance obligations in proportion to their estimated stand-alone selling price. If the stand-alone selling price is not directly observable, we use the cost plus margin approach to estimate stand-alone selling price. Costs related to products delivered are recognized in the period revenue is recognized, including product warranties for periods ranging from 1 to 3 years (see Note 7).
Our performance obligations are satisfied at a point in time or over time as work progresses. Revenue from products and services transferred to customers at a point in time in the three and six months ended June 30, 2018 totaled $14.7 million and $28.0 million, respectively, which represented 93% of our total revenue in both periods. Revenue from these contracts is recognized when obligations under the terms of the contract with our customer are satisfied; generally with the transfer of control upon shipment. Sales of some products may require customer acceptance due to performance or other acceptance criteria that is considered more than a formality. For these product sales, revenue is recognized upon notification of customer acceptance.
Revenue from products and services transferred to customers over time in the three and six months ended June 30, 2018 totaled $1.1 million and $2.0 million, respectively, which represented 7% of our total revenue in both periods. Periodically sensor product arrangements with our original equipment manufacturers (OEMs) will create an asset with no alternative use and include an enforceable right to payment for cost plus margin. For these arrangements control is transferred over the manufacturing process; therefore, revenue is recognized over time utilizing an input method based on actual costs incurred in the manufacturing process to date relative to total expected production costs. For certain longer duration 3D scanning service projects, we progress bill as the services are performed. These arrangements create an asset with no alternative use and include an enforceable right to payment. For these arrangements, control is transferred over the hours incurred to complete the scanning project; therefore, revenue is recognized over time utilizing an input method based on actual hours incurred relative to total projected project hours. For maintenance and extended warranty contracts, revenue is recognized over time on a straight-line basis over the term of the contract as the customer simultaneously receives and consumes the benefits of the coverage.
Contract Balances
Contract assets consist of unbilled amounts from sales where we recognize the revenue over time and the revenue recognized exceeds the amount billed to the customer at a point in time. Accounts receivable are recorded when the right to payment becomes unconditional. Contract liabilities consist of payments received in advance of performance under the contract. Contract liabilities are recognized as revenue when we perform under the contract. The following summarizes our contract assets and contract liabilities:
(In thousands) |
|
June 30, 2018 |
|
January 1, 2018 |
||||
Contract assets, included in other current assets |
|
$ |
62 |
|
|
$ |
— |
|
Contract liabilities, included in advance customer payments/other liabilities |
|
$ |
646
|
|
|
$ |
443
|
|
Changes in contract assets in the six months ended June 30, 2018 were inconsequential. Changes in contract liabilities primarily resulted from reclassification of beginning contract liabilities to revenue as performance obligations were satisfied, or for cash received in advance and not recognized as revenue. Amounts reclassified from beginning contract liabilities to revenue in the three and six months ended June 30, 2018 totaled $166,000 and $223,000, respectively. See Note 7 for changes in contractual obligations related to deferred warranty revenue. Unsatisfied performance obligations are generally expected to be recognized as revenue over the next one to three years. There were no impairment losses for contract assets in the six months ended June 30, 2018.
Practical Expedients
We generally expense incremental costs of obtaining a contract when incurred because the amortization period for these costs would be less than one year. These costs primarily relate to sales commissions and are recorded in selling, general and administrative expense in our consolidated statements of operations.
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. We do not adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
3. MARKETABLE SECURITIES:
Our investments in marketable securities are classified as available-for-sale and consist of the following:
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|
June 30, 2018 |
||||||||||||||
(In thousands) |
|
Cost |
|
Unrealized
|
|
Unrealized
|
|
Fair Value |
||||||||
Short-Term |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government and agency obligations |
|
$ |
3,496 |
|
|
$ |
1 |
|
|
$ |
(15 |
) |
|
$ |
3,482 |
|
Corporate debt securities and certificates of deposit |
|
2,255 |
|
|
2 |
|
|
(9 |
) |
|
2,248 |
|
||||
Asset backed securities |
|
355 |
|
|
— |
|
|
(2 |
) |
|
353 |
|
||||
Marketable securities – short-term |
|
$ |
6,106 |
|
|
$ |
3 |
|
|
$ |
(26 |
) |
|
$ |
6,083 |
|
Long-Term |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government and agency obligations |
|
$ |
5,984 |
|
|
$ |
1 |
|
|
$ |
(55 |
) |
|
$ |
5,930 |
|
Corporate debt securities and certificates of deposit |
|
535 |
|
|
— |
|
|
(7 |
) |
|
528 |
|
||||
Asset backed securities |
|
3,540 |
|
|
—
|
|
|
(29 |
) |
|
3,511 |
|
||||
Equity security |
|
42 |
|
|
18 |
|
|
— |
|
|
60 |
|
||||
Marketable securities – long-term |
|
$ |
10,101 |
|
|
$ |
19 |
|
|
$ |
(91 |
) |
|
$ |
10,029 |
|
7 |
|
|
December 31, 2017 |
||||||||||||||
(In thousands) |
|
Cost |
|
Unrealized
|
|
Unrealized
|
|
Fair Value |
||||||||
Short-Term |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government and agency obligations |
|
$ |
4,381 |
|
|
$ |
— |
|
|
$ |
(13 |
) |
|
$ |
4,368 |
|
Corporate debt securities and certificates of deposit |
|
1,792 |
|
|
— |
|
|
(4 |
) |
|
1,788 |
|
||||
Asset backed securities |
|
515 |
|
|
— |
|
|
(1 |
) |
|
514 |
|
||||
Marketable securities – short-term |
|
$ |
6,688 |
|
|
$ |
— |
|
|
$ |
(18 |
) |
|
$ |
6,670 |
|
Long-Term |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government and agency obligations |
|
$ |
4,801 |
|
|
$ |
— |
|
|
$ |
(33 |
) |
|
$ |
4,768 |
|
Corporate debt securities and certificates of deposit |
|
1,189 |
|
|
— |
|
|
(10 |
) |
|
1,179 |
|
||||
Asset backed securities |
|
3,045 |
|
|
— |
|
|
(16 |
) |
|
3,029 |
|
||||
Equity security |
|
42 |
|
|
55 |
|
|
— |
|
|
97 |
|
||||
Marketable securities – long-term |
|
$ |
9,077 |
|
|
$ |
55 |
|
|
$ |
(59 |
) |
|
$ |
9,073 |
|
|
|
|
||||||||||||||
|
In Unrealized Loss Position For
Less Than 12 Months
|
|
In Unrealized Loss Position For
Greater Than 12 Months
|
|||||||||||||
(In thousands)
|
|
Fair Value
|
|
Gross Unrealized
Losses |
|
Fair Value
|
|
Gross Unrealized
Losses |
||||||||
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government and agency obligations
|
|
$
|
5,190
|
|
|
$
|
(49
|
) |
|
$
|
3,488
|
|
$
|
(21
|
) | |
Corporate debt securities and certificates of deposit
|
|
227
|
|
|
(3
|
) |
|
1,721
|
|
(13
|
) | |||||
Asset backed securities
|
|
2,494
|
|
|
(18
|
) |
|
1,370
|
|
|
(13
|
) | ||||
Marketable securities – short-term
|
|
$
|
7,911
|
|
|
$
|
(70
|
) |
|
$
|
6,579
|
|
$
|
(47
|
) | |
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government and agency obligations
|
|
$
|
5,593
|
|
|
$
|
(29
|
) |
|
$
|
3,543
|
|
$
|
(17
|
) | |
Corporate debt securities and certificates of deposit
|
|
478
|
|
|
(2
|
) |
|
1,991
|
|
(12
|
) | |||||
Asset backed securities
|
|
2,312
|
|
|
(9
|
) |
|
1,232
|
|
(8
|
) | |||||
Marketable securities – long-term
|
|
$
|
8,383
|
|
|
$
|
(40
|
) |
|
$
|
6,766
|
|
$
|
(37
|
) |
Effective January 1, 2018, we adopted ASU No. 2016-01, Recognition and Measurement of Financial Assets and Liabilities, which impacted the accounting for our marketable equity security (see Note 16). Our investments in marketable debt securities all have maturities of less than five years. Net pre-tax unrealized losses for marketable securities of $95,000 at June 30, 2018 and $22,000 at December 31, 2017 have been recorded as a component of accumulated other comprehensive loss in stockholders’ equity. We have determined that the net pre-tax unrealized losses for marketable debt securities at June 30, 2018 and December 31, 2017 were caused by fluctuations in interest rates and are temporary in nature. We review our marketable securities to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value of the investment has been less than the cost basis, the credit quality of the investment and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. We received proceeds from the sale of marketable securities of $70,000 in the six months ended June 30, 2018, and no gains or losses were recognized on the sale. No marketable securities were sold in the three months ended June 30, 2018 or six months ended June 30, 2017.
Investments in marketable securities classified as cash equivalents of $2.3 million at June 30, 2018 and $1.6 million at December 31, 2017 consist of corporate debt securities and certificates of deposit. There were no unrealized gains or losses associated with any of these securities at June 30, 2018 or December 31, 2017.
Cash and marketable securities held by foreign subsidiaries totaled $342,000 at June 30, 2018 and $187,000 at December 31, 2017.
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 to measure fair value, of which the first two are considered observable and the last is considered unobservable. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1). The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2). The lowest priority is given to unobservable inputs (Level 3). The following table provides information regarding fair value measurements for our marketable securities as of June 30, 2018 and December 31, 2017 according to the three-level fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
||||||||||||||
(In thousands) |
|
Balance
June 30,
|
|
Quoted Prices
|
|
Significant
|
|
Significant
|
||||||||
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government and agency obligations |
|
$ |
9,412 |
|
|
$ |
— |
|
|
$ |
9,412 |
|
|
$ |
— |
|
Corporate debt securities and certificates of deposit |
|
2,776 |
|
|
— |
|
|
2,776 |
|
|
— |
|
||||
Asset backed securities |
|
3,864 |
|
|
— |
|
|
3,864 |
|
|
— |
|
||||
Equity security |
|
60 |
|
|
60 |
|
|
— |
|
|
— |
|
||||
Total marketable securities |
|
$ |
16,112 |
|
|
$ |
60 |
|
|
$ |
16,052 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
||||||||||||||
(In thousands) |
|
Balance December 31, 2017 |
|
Quoted Prices
|
|
Significant
|
|
Significant
|
||||||||
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government and agency obligations |
|
$ |
9,136 |
|
|
$ |
— |
|
|
$ |
9,136 |
|
|
$ |
— |
|
Corporate debt securities and certificates of deposit |
|
2,967 |
|
|
— |
|
|
2,967 |
|
|
— |
|
||||
Asset backed securities |
|
3,543 |
|
|
— |
|
|
3,543 |
|
|
— |
|
||||
Equity security |
|
97 |
|
|
97 |
|
|
— |
|
|
— |
|
||||
Total marketable securities |
|
$ |
15,743 |
|
|
$ |
97 |
|
|
$ |
15,646 |
|
|
$ |
— |
|
During the six months ended June 30, 2018 and the year ended December 31, 2017, there were no transfers of assets between the different levels of the three-level hierarchy. A significant transfer is recognized when the inputs used to value a security have been changed sufficiently to merit a transfer between the levels of the valuation hierarchy.
The fair value for our U.S. government and agency obligations, corporate debt securities and certificates of deposit and asset backed securities are determined based on valuations provided by external investment managers, which obtain the valuations from a variety of industry standard data providers. The fair value for our equity security is based on a quoted market price obtained from an active market.
The carrying amounts of financial instruments such as cash equivalents, accounts receivable, other assets, accounts payable, advance customer payments, accrued expenses and other liabilities are approximately equal to their related fair values due to their short-term maturities. Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets are subject to non-recurring fair value measurements if they are deemed impaired. We had no re-measurements of non-financial assets to fair value in the six months ended June 30, 2018 or the six months ended June 30, 2017.
5. ACCOUNTING FOR STOCK-BASED COMPENSATION:
We have three stock-based compensation plans that are administered by the Compensation Committee of the Board of Directors. We have (1) an Employee Stock Incentive Plan for officers, other employees, consultants and independent contractors under which we have granted options and restricted stock units to officers and other employees, (2) an Employee Stock Purchase Plan under which shares of our common stock may be acquired by employees at discounted prices, and (3) a Non-Employee Director Stock Plan that provides for automatic grants of 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 June 30, 2018, there were 327,839 shares of common stock reserved in the aggregate for issuance pursuant to future awards under our Employee Stock Incentive Plan and 566,487 shares of common stock reserved in the aggregate for issuance pursuant to outstanding awards under our Employee Stock Incentive Plan. Although our Compensation Committee has authority to issue options, restricted stock, restricted stock units, share grants and other share-based benefits under our Employee Stock Incentive Plan, to date only restricted stock units and stock options have been granted under the plan. Options have been granted at an option price per share equal to the market value of our common stock on the date of grant, vest over a four year period and expire seven years after the date of grant. Restricted stock units vest over a four year period and entitle the holders to one share of our common stock for each restricted stock unit. Shares reserved for outstanding awards, including options and restricted stock units, that are forfeited become available under the Employee Stock Incentive Plan for future grants.
Non-Employee Director Stock Plan
As of June 30, 2018, there were 60,000 shares of common stock reserved in the aggregate for issuance pursuant to future restricted share awards under our Non-Employee Director Stock Plan and 16,000 shares of common stock reserved in the aggregate for issuance pursuant to outstanding stock option awards under our Non-Employee Director Stock Plan. Under the terms of the plan, each non-employee director will automatically be granted 2,000 shares of our common stock on the date of each annual meeting at which such director is elected to serve on the board. At our May 11, 2017 annual meeting, our shareholders, upon recommendation of the Board of Directors, approved amendments to the Non-Employee Director Stock Plan that eliminated annual stock option grants for non-employee directors and provided for annual restricted share grants of 2,000 shares of common stock which vest in four equal quarterly installments during the year after the grant date, provided the non-employee director is still serving as a director on the applicable vesting date.
On the date of our 2018 annual meeting, we issued a total of 8,000 shares of our common stock to our non-employee directors. The shares had an aggregate fair market value on the date of grant equal to $130,000 (grant date fair value of $16.25 per share). As of June 30, 2018, none of these shares were vested. The aggregate fair value of the outstanding unvested shares based on the closing price of our common stock on June 30, 2018 was $139,000.
On the date of our 2017 annual meeting, we issued a total of 8,000 shares of our common stock to our non-employee directors. The shares had an aggregate fair market value on the date of grant equal to $167,000 (grant date fair value of $20.90 per share).
Stock Option Activity
The following is a summary of stock option activity in the six months ended June 30, 2018:
|
|
|
|
|
|
|
|
Options Outstanding |
|
Weighted Average Exercise
|
|||
Outstanding, December 31, 2017 |
568,525 |
|
|
$ |
10.24 |
|
Granted |
— |
|
|
— |
|
|
Exercised |
(31,250 |
) |
|
8.02 |
|
|
Expired |
— |
|
|
— |
|
|
Forfeited |
— |
|
|
— |
|
|
Outstanding, June 30, 2018 |
537,275 |
|
|
$ |
10.37 |
|
|
|
|
|
|||
Exercisable, June 30, 2018 |
335,563 |
|
|
$ |
8.60 |
|
The intrinsic value of an option is the amount by which the market price of the underlying common stock exceeds the option's exercise price. For options outstanding at June 30, 2018, the weighted average remaining contractual term of all outstanding options was 3.9 years and their aggregate intrinsic value was $4.1 million. At June 30, 2018, the weighted average remaining contractual term of options that were exercisable was 3.2 years and their aggregate intrinsic value was $3.0 million. The aggregate intrinsic value of stock options exercised in the six months ended June 30, 2018 was $315,000. We received proceeds from stock option exercises of $251,000 in the six months ended June 30, 2018 and $321,000 in the six months ended June 30, 2017. The aggregate fair value of options that vested in the six months ended June 30, 2018 was $204,000.
10 |
Restricted Shares and Restricted Stock Units
Restricted shares are granted under our Non-Employee Director Stock Plan. There were 8,000 restricted shares granted in the six months ended June 30, 2018 (weighted average grant date fair value of $16.25 per share). Restricted stock units are granted under our Employee Stock Incentive Plan. No restricted stock united were granted in the six months ended June 30, 2018. The aggregate fair value of outstanding restricted shares and restricted stock units based on the closing share price of our common stock on June 30, 2018 was $926,000. The aggregate fair value of restricted shares and restricted stock units that vested in the six months ended June 30, 2018 was $139,000, based on the closing price of our common stock on the vesting date.
A summary of activity for non-vested restricted shares and restricted stock units in the six months ended June 30, 2018 is as follows:
|
|
|
|
|
|
|
|
Non-vested restricted stock units and restricted shares |
|
Shares |
|
Weighted Average Grant Date Fair Value |
|||
Non-vested at December 31, 2017 |
|
54,212 |
|
|
$ |
14.86 |
|
Granted |
|
8,000 |
|
|
16.25 |
|
|
Vested |
|
(9,000 |
) |
|
13.16 |
|
|
Forfeited |
|
— |
|
|
— |
|
|
Non-vested at June 30, 2018 |
|
53,212 |
|
|
$ |
15.36 |
|
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 no shares issued under this plan in the six months ended June 30, 2018 or the six months ended June 30, 2017. At our 2018 annual meeting, our shareholders adopted amendments to the plan increasing the number of shares authorized for issuance under the plan by 150,000 and extending the expiration date of the plan to August 1, 2028. As of June 30, 2018, 190,872 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 restricted shares, stock options and restricted stock units, are recognized as an expense in our consolidated statement of operations based on the grant date fair value of the award. We utilize the straight-line method of expense recognition over the vesting period for our options subject to time-based vesting restrictions. The fair value of stock options granted has been determined using the Black-Scholes model. We have classified equity-based compensation expenses within our statement of operations in the same manner as our cash based compensation costs.
Stock based compensation expense in the three months ended June 30, 2018 totaled $225,000, and included $109,000 for stock options, $21,000 for our Employee Stock Purchase Plan, $58,000 for unvested restricted stock units and $37,000 for unvested restricted shares. Stock based compensation expense in the six months ended June 30, 2018 totaled $484,000, and included $234,000 for stock options, $55,000 for our Employee Stock Purchase Plan, $117,000 for unvested restricted stock units and $78,000 for unvested restricted shares.
Stock based compensation expense in the three months ended June 30, 2017 totaled $212,000, and included $115,000 for stock options, $26,000 for our Employee Stock Purchase Plan, $48,000 for unvested restricted stock units and $23,000 for unvested restricted shares. Stock based compensation expense in the six months ended June 30, 2017 totaled $400,000, and included $229,000 for stock options, $52,000 for our Employee Stock Purchase Plan, $96,000 for unvested restricted stock units and $23,000 for unvested restricted shares.
At June 30, 2018, the total unrecognized compensation cost related to outstanding non-vested stock based compensation arrangements was $1.6 million, and the related weighted average period over which this cost is expected to be recognized was 1.7 years.
11 |
6. CHANGES IN STOCKHOLDERS’ EQUITY:
A reconciliation of the changes in our stockholders' equity is as follows:
Common Stock |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Total Stockholders’ Equity |
||||||||||||||||
(In thousands) | Shares | Amount | |||||||||||||||||
Balance, December 31, 2017 | 6,980 | $ | 34,080 | $ | (1,409 | ) | $ | 19,611 | $ | 52,282 | |||||||||
Increase related to adoption of ASU 2016-01 | — | — | (44 | ) | 44 | — | |||||||||||||
Decrease related to adoption of ASU 2014-09 |
— |
—
|
— | (218 | ) | (218 | ) | ||||||||||||
Exercise of stock options, vesting of restricted stock units and grants of restricted shares, net of shares exchanged as payment
|
44 | 251 | — | — | 251 | ||||||||||||||
Stock-based compensation | — | 484 | — | — | 484 | ||||||||||||||
Other comprehensive income, net of tax | — | — | (230 | ) | — | (230 | ) | ||||||||||||
Net income | — | — | — | 567 | 567 | ||||||||||||||
Balance, June 30, 2018 | 7,024 | $ | 34,815 | $ | (1,683 | ) | $ | 20,004 | $ | 53,136 |
See Note 16 for further discussion regarding the impact of our adoption of ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, on our consolidated financial statements. See Note 2 and Note 16 for further discussion regarding the impact of our adoption of ASU No. 2014-09, Revenue from Contracts with Customers, on our consolidated financial statements.
7. OTHER FINANCIAL STATEMENT DATA:
The components of our inventories are as follows:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2018 |
|
December 31, 2017 |
||||
Raw materials and purchased parts |
|
$ |
8,408 |
|
|
$ |
7,383 |
|
Work in process |
|
1,433 |
|
|
1,666 |
|
||
Finished goods |
|
4,811 |
|
|
5,344 |
|
||
Total inventories |
|
$ |
14,652 |
|
|
$ |
14,393 |
|
The components of our accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2018 |
|
December 31, 2017 |
||||
Wages and benefits |
|
$ |
1,813 |
|
|
$ |
1,328 |
|
Warranty liability |
|
680 |
|
|
713 |
|
||
Other |
|
338 |
|
|
244 |
|
||
|
|
$ |
2,831 |
|
|
$ |
2,285 |
|
Warranty costs:
We provide for the estimated cost of product warranties, which cover products for periods ranging from 1 to 3 years, at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of components provided by suppliers, warranty obligations do arise. These obligations are affected by product failure rates, the costs of materials used and service delivery expenses incurred, in correcting a product failure. If actual product failure rates and material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability are required and could be material. At the end of each reporting period, we revise our estimated warranty liability based on these factors. The current portion of our warranty liability is included as a component of accrued expenses. The long-term portion of our warranty liability is included as a component of other liabilities.
12 |
A reconciliation of the changes in our estimated warranty liability is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
||||||
(In thousands) |
|
2018 |
|
2017 |
||||
Balance at beginning of period |
|
$ |
767 |
|
|
$ |
790 |
|
Accrual for warranties |
|
218 |
|
|
250 |
|
||
Warranty revision |
|
20 |
|
(24 |
) |
|||
Settlements made during the period |
|
(270 |
) |
|
(260 |
) |
||
Balance at end of period |
|
735 |
|
|
756 |
|
||
Current portion of estimated warranty liability |
|
(680 |
) |
|
(709 |
) |
||
Long-term estimated warranty liability |
|
$ |
55 |
|
|
$ |
47 |
|
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:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
||||||
(In thousands) |
|
2018 |
|
2017 |
||||
Balance at beginning of period |
|
$ |
259 |
|
|
$ |
346 |
|
Revenue deferrals |
|
235 |
|
|
204 |
|
||
Amortization of deferred revenue |
|
(211 |
) |
|
(209 |
) |
||
Total deferred warranty revenue |
|
283 |
|
|
341 |
|
||
Current portion of deferred warranty revenue |
|
(273 |
) |
|
(300 |
) |
||
Long-term deferred warranty revenue |
|
$ |
10 |
|
|
$ |
41 |
|
8. INTANGIBLE ASSETS:
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018 |
|
December 31, 2017 |
||||||||||||||||||||
(In thousands) |
|
Gross
|
|
Accumulated
|
|
Net |
|
Gross
|
|
Accumulated
|
|
Net |
||||||||||||
Patents |
|
$ |
2,686 |
|
|
$ |
(2,487 |
) |
|
$ |
199 |
|
|
$ |
2,687 |
|
|
$ |
(2,463 |
) |
|
$ |
224 |
|
Software |
|
206 |
|
|
(126 |
) |
|
80 |
|
|
206 |
|
|
(111 |
) |
|
95 |
|
||||||
Marketing assets and customer relationships |
|
101 |
|
|
(50 |
) |
|
51 |
|
|
101 |
|
|
(45 |
) |
|
56 |
|
||||||
Non-compete agreements |
|
101 |
|
|
(101 |
) |
|
— |
|
|
101 |
|
|
(96 |
) |
|
5 |
|
||||||
|
|
$ |
3,094 |
|
|
$ |
(2,764 |
) |
|
$ |
330 |
|
|
$ |
3,095 |
|
|
$ |
(2,715 |
) |
|
$ |
380 |
|
Amortization expense for our intangible assets in the three and six months ended June 30, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30,
|
||||||||||||
(In thousands) |
|
2018 |
|
2017 |
|
2018
|
|
2017
|
||||||||
Patents |
|
$ |
28 |
|
|
$ |
26 |
|
|
$ |
56
|
|
|
$ |
51 |
|
Software |
|
|
7 |
|
|
|
8 |
|
|
|
15
|
|
|
|
16 |
|
Marketing assets and customer relationships |
|
|
1 |
|
|
|
3 |
|
|
|
5
|
|
|
|
6 |
|
Non-compete agreements |
|
|
— |
|
|
|
7 |
|
|
|
5
|
|
|
|
13 |
|
|
|
$ |
36 |
|
|
$ |
44 |
|
|
$ |
81
|
|
|
$ |
86 |
|
Amortization of patents has been classified as research and development expense in our statements of operations. Estimated aggregate amortization expense based on current intangible assets for the next five years is expected to be as follows: $71,000 for the remainder of 2018; $124,000 in 2019; $92,000 in 2020; $23,000 in 2021; $9,000 in 2022; and $11,000 in 2023.
Intangible and other long lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when future undiscounted cash flows expected to result from use of the asset and its eventual disposition are less than the carrying amount.
9. REVENUE CONCENTRATIONS, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC AREAS:
The following summarizes our revenue by product line:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
High Precision 3D and 2D Sensors |
$ | 5,253 | $ | 5,635 | $ | 10,308 | $ | 9,539 | ||||||||
Semiconductor Sensors |
3,940 | 3,153 | 7,101 | 5,470 | ||||||||||||
SMT Inspection Systems, Metrology Products and Services |
6,661 | 7,621 | 12,565 | 13,320 | ||||||||||||
Total |
$
|
15,854 | $ | 16,409 | $ | 29,974 |
$
|
28,329 |
Export sales as a percentage of total sales in the three and six months ended June 30, 2018 were 71% and 72%, respectively. Export sales as a percentage of total sales in the three and six months ended June 30, 2017 were 74% and 76%, 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 June 30, |
|
Six Months Ended June 30, |
|||||||||||||
(In thousands) |
|
2018 |
|
2017 |
|
2018
|
|
2017
|
||||||||
Americas |
|
$ |
142 |
|
|
$
|
397 |
|
|
$ |
213
|
|
|
$ |
817
|
|
Europe |
|
|
2,686 |
|
|
|
3,756 |
|
|
|
5,266
|
|
|
|
6,571
|
|
Asia |
|
|
8,397 |
|
|
|
7,813 |
|
|
|
15,858
|
|
|
|
13,974
|
|
Other |
|
|
95 |
|
|
|
105 |
|
|
|
200
|
|
|
|
144
|
|
Total export sales |
|
$
|
11,320 |
|
|
$
|
12,071 |
|
|
$ |
21,537
|
|
|
$ |
21,506
|
|
In the six months ended June 30, 2018, sales to significant customer A accounted for 11% of our total revenue and sales to significant customer B accounted for 10% of our total revenue. As of June 30, 2018, accounts receivable from significant customer A were $1.3 million and accounts receivable from significant customer B were $1.2 million.
10. NET INCOME PER SHARE:
Net income per basic share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Net income per diluted share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of common shares to be issued upon exercise of stock options, vesting of restricted stock units, vesting of restricted shares and from purchases of shares under our Employee Stock Purchase Plan, as calculated using the treasury stock method. The components of net income per basic and diluted share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts) |
|
Net Income |
|
Weighted Average
|
|
Per Share Amount |
|||||
Three Months Ended June 30, 2018 |
|
|
|
|
|
|
|
|
|
||
Basic |
|
$ |
740
|
|
7,010
|
|
|
$ |
0.11 |
||
Dilutive effect of common equivalent shares |
|
— |
|
|
232
|
|
|
(0.01 |
) | ||
Dilutive |
|
$ |
740
|
|
7,242
|
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts) |
|
Net Income |
|
Weighted Average
|
|
Per Share Amount |
|||||
Three Months Ended June 30, 2017 |
|
|
|
|
|
|
|
|
|
||
Basic |
|
$ |
1,095
|
|
6,944
|
|
|
$ |
0.16 |
||
Dilutive effect of common equivalent shares |
|
— |
|
|
309
|
|
|
(0.01 |
) | ||
Dilutive |
|
$ |
1,095
|
|
7,253
|
|
|
$ |
0.15 |
(In thousands except per share amounts) |
|
Net Income |
|
Weighted Average
|
|
Per Share Amount |
|||||
Six Months Ended June 30, 2018 |
|
|
|
|
|
|
|
|
|
||
Basic |
|
$ |
567 |
|
|
6,998 |
|
|
$ |
0.08 |
|
Dilutive effect of common equivalent shares |
|
— |
|
|
116 |
|
|
— |
|||
Dilutive |
|
$ |
567 |
|
|
7,114 |
|
|
$ |
0.08 |
(In thousands except per share amounts) |
|
Net Income |
|
Weighted Average
|
|
Per Share Amount |
|||||
Six Months Ended June 30, 2017 |
|
|
|
|
|
|
|
|
|
||
Basic |
|
$ |
881 |
|
|
6,928 |
|
|
$ |
0.13 |
|
Dilutive effect of common equivalent shares |
|
— |
|
|
155 |
|
|
(0.01 |
) | ||
Dilutive |
|
$ |
881 |
|
|
7,083 |
|
|
$ |
0.12 |
|
Potentially dilutive shares excluded from the calculations of net income per diluted share due to their anti-dilutive effect were as follows: 123,000 shares in the three months ended June 30, 2018; 369,000 shares in the six months ended June 30, 2018; 48,000 shares in the three months ended June 30, 2017; and 329,000 shares in the six months ended June 30, 2017.
11. OTHER COMPREHENSIVE INCOME (LOSS):
Reclassification adjustments are made to avoid double counting for items included in other comprehensive income (loss) that are also recorded as part of net income. Other comprehensive income (loss) consists of the following:
Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | |||||||||||||||||||||||
(In thousands) | Before Tax | Tax Effect |
|
Net of Tax
Amount |
Before Tax | Tax Effect |
Net of Tax
Amount |
|||||||||||||||||
Foreign currency translation adjustments | $ | (422 | ) | $ | — | $ | (422 | ) | $ | 161 | $ | (59 | ) | $ | 102 | |||||||||
Net changes related to available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|||||||||||||||
Unrealized losses |
4 | (1 | ) | 3 | 11 | (4 | ) | 7 | ||||||||||||||||
Reclassification adjustments | — |
|
— |
|
— |
|
— |
|
— |
|
— | |||||||||||||
Total net changes related to available-for-sale securities | 4 | (1 | ) | 3 | 11 | (4 | ) | 7 | ||||||||||||||||
Other comprehensive income (loss) | $ | (418 | ) | $ | (1 | ) | $ | (419 | ) | $ | 172 | $ | (63 | ) | $ | 109 |
15 |
Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 | |||||||||||||||||||||||
(In thousands) | Before Tax | Tax Effect |
|
Net of Tax
Amount |
Before Tax | Tax Effect |
Net of Tax
Amount |
|||||||||||||||||
Foreign currency translation adjustments | $ | (202 | ) | $ | — | $ | (202 | ) | $ | 430 | $ | (138 | ) | $ |
292
|
|||||||||
Net changes related to available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|||||||||||||||
Unrealized gains (losses) |
(36 | ) | 8 | (28 | ) | 31 | (11 | ) |
20
|
|||||||||||||||
Reclassification adjustments | — |
|
— |
|
— |
|
— |
|
— |
—
|
||||||||||||||
Total net changes related to available-for-sale securities |
(36
|
) |
8
|
(28
|
) |
31
|
(11 | ) |
20
|
|||||||||||||||
Other comprehensive income (loss) | $ | (238 | ) | $ | 8 | $ |
(230
|
) | $ |
461
|
$ | (149 | ) | $ | 312 |
At June 30, 2018 and June 30, 2017, components of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Foreign
|
|
Available- for-Sale
|
|
Accumulated
|
||||||
Balances at December 31, 2017 |
|
$ |
(1,394 |
) |
|
$ |
(15 |
) |
|
$ |
(1,409 |
) |
Decrease related to adoption of ASU 2016-01 (See Note 16) |
|
— |
|
|
(44 |
)
|
(44 |
) |
||||
Other comprehensive income before reclassifications |
|
(202
|
)
|
|
(28
|
) |
(230
|
)
|
||||
Amounts reclassified from accumulated other comprehensive loss |
|
— |
|
|
— |
|
|
—
|
|
|||
Total change for the period |
|
(202
|
) |
|
(72
|
) |
|
(274
|
) |
|||
Balances at June 30, 2018 |
|
$ |
(1,596 |
) |
|
$ |
(87 |
) |
|
$ |
(1,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Foreign
|
|
Available- for-Sale
|
|
Accumulated
|
||||||
Balances at December 31, 2016 |
|
$ |
(1,928 |
) |
|
$ |
(12 |
) |
|
$ |
(1,940 |
) |
Other comprehensive income before reclassifications |
|
292 |
|
|
20 |
|
|
312 |
|
|||
Amounts reclassified from accumulated other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|||
Total change for the period |
|
292 |
|
|
20 |
|
|
312 |
|
|||
Balances at June 30, 2017 |
|
$ |
(1,636 |
) |
|
$ |
8 |
|
|
$ |
(1,628 |
) |
12. INCOME TAXES:
We recorded income tax expense of $230,000 in the three months ended June 30, 2018, compared to income tax expense of $539,000 in the three months ended June 30, 2017. We recorded income tax expense of $147,000 in the six months ended June 30, 2018, compared to income tax expense of $126,000 in the six months ended June 30, 2017. Our income tax provision in the six months ended June 30, 2018, reflected an effective income tax rate of approximately 25%, and included $33,000 of excess tax benefits from employee share-based payments. Our income tax provision in the six months ended June 30, 2017, reflected an effective income tax rate of approximately 33%, and included $208,000 of excess tax benefits from employee share-based payments. Excess tax benefits recognized in the three months ended June 30, 2018 and the three months ended June 30, 2017 were inconsequential. The decrease in our effective income tax rate in the six months ended June 30, 2018 was primarily due to the new lower tax rates provided for in the Tax Cuts and Jobs Act passed by the U.S. Congress in December 2017.
We have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and federal, state and foreign net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, when net operating loss carry forwards could be applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.
Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for valuation allowances, we considered our history of cumulative operating results for income tax purposes over the past three years in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutory carry forward periods and tax planning alternatives. In addition, we considered both our near-term and long-term financial outlook. After considering all available evidence (both positive and negative), we concluded that recognition of valuation allowances for substantially all of our U.S. and Singapore deferred tax assets was not required at June 30, 2018.
The Inland Revenue Authority of Singapore is reviewing our 2016 and 2015 income tax returns. We do not presently anticipate that the outcome of these audits will have a significant impact on our financial position or results of operations.
13. SHARE REPURCHASE:
Our Board of Directors has authorized a $3.0 million share repurchase program. Under this program, $2.8 million remains available for future repurchases of shares of common stock. The common stock may be acquired from time to time in open market transactions, block purchases and other transactions complying with the Securities and Exchange Commission’s Rule 10b-18. The share repurchase program will terminate on September 30, 2018. During the six months ended June 30, 2018, no shares were repurchased under this program.
14. NEW LEASE OBLIGATION:
We lease a 50,724 square foot mixed office and warehouse facility built to our specifications in Golden Valley, Minnesota, which functions as our corporate headquarters and primary manufacturing facility for our sensor and semiconductor products. We also lease a 10,165 square foot facility in Bloomington, Minnesota. The leases for both spaces expire on December 31, 2018. In May 2018, we finalized an amendment to the lease for our current Golden Valley, Minnesota facility that will become effective on January 1, 2019. The amendment provides that we will lease 61,208 square feet of space in our current location through July 31, 2026. The increase in the size of the facility will allow us to conduct the operations currently carried out at our Bloomington, Minnesota facility in our current Golden Valley, Minnesota location. Future lease payments due under the lease amendment for the period from January 1, 2019 through July 31, 2026 are approximately $7.9 million. We anticipate that our annual rental payments will increase by approximately $200,000 when the lease amendment becomes effective in January 2019.
15. CONTINGENCIES:
We are periodically a defendant in miscellaneous claims and disputes in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, management presently believes the disposition of these matters will not have a material effect on our financial position, results of operations or cash flows.
In the normal course of business to facilitate sales of our products and services, we at times indemnify other parties, including customers, with respect to certain matters. In these instances, we have agreed to hold the other parties harmless against losses arising out of intellectual property infringement or other types of claims. These agreements may limit the time within which an indemnification claim can be made, and almost always limit the amount of the claim. It is not possible to determine the maximum potential liability under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made, if any, under these agreements have not had a material impact on our operating results, financial position or cash flows.
16. RECENT ACCOUNTING DEVELOPMENTS:
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Topic 606, which provided guidance on the recognition of revenue from contracts with customers. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We performed a review of the requirements of the new guidance and identified which of our revenue streams are within the scope of Topic 606. We applied the five-step model of the new standard to a selection of contracts within each of our revenue streams, and compared the results to our current accounting practices. We also performed detailed contract reviews to complete necessary adjustments to our existing accounting policies, and implemented changes to our processes and internal controls to capture new data and address changes in financial reporting. We expanded our consolidated financial statement disclosures to comply with the requirements of Topic 606. We adopted the new standard using the modified retrospective method, with the cumulative effect of initially applying the guidance recognized at the date of initial application. Our adoption of Topic 606 on January 1, 2018 resulted in a $218,000 decrease in retained earnings to record the cumulative effect adjustment. Adoption of Topic 606 increased our revenues in the three and six months ended June 30, 2018 by $84,000 and $109,000, respectively, when compared to revenue recognition under Topic 605. Adoption of Topic 606 increased our net income in the three and six months ended June 30, 2018 by $37,000 and $50,000, respectively.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Liabilities, which revised the accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU No. 2016-01 also amended certain disclosure requirements associated with the fair value of financial instruments. The new guidance requires the fair value measurement of investments in equity securities and other ownership interests in an entity that do not result in consolidation and are not accounted for under the equity method. Entities will need to measure these investments and recognize changes in fair value in net income. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities they classify under current guidance as available-for-sale in other comprehensive income. ASU No. 2016-01 was effective beginning January 1, 2018 and resulted in a cumulative-effect adjustment to beginning retained earnings, except for guidance relative to equity securities without readily determinable fair values which is applied prospectively. Our adoption of ASU 2016-01 on January 1, 2018 resulted in a $44,000 increase in retained earnings and accumulated other comprehensive loss.
In February 2016, the FASB issued new lease accounting guidance, ASU No. 2016-02, Leases. Under the new guidance, at the commencement date, lessees will be required (a) to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and (b) to record a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term of 12 months or less. Lessor accounting is largely unchanged. U.S. public companies are required to apply the amendments in ASU No. 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are currently evaluating the impact of the new guidance on our consolidated financial statements. We are monitoring the FASB's recent deliberations surrounding a simplified transition approach and are evaluating the practical expedients provided by that approach as well as those already included in the standard. When implemented, the standard is expected to have a material impact as operating leases will be recognized on our consolidated balance sheet, with an increase to both assets and liabilities. The impact on our results of operations is being evaluated. The impact of this ASU is non-cash in nature and will not affect our cash flows.
In January 2017, the FASB issued guidance on simplifying the test for goodwill impairment, ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit's carrying value exceeds its fair value, but not in an amount in excess of the carrying value of goodwill. The new guidance eliminates the requirement to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The new guidance is to be applied prospectively to impairment tests beginning January 1, 2020, with early adoption permitted. We are currently evaluating when we will adopt the new guidance.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Tax Effects from Accumulated Other Comprehensive Income, which allows entities to elect an option to reclassify the stranded tax effects related to the application of the Tax Cuts and Jobs Act from accumulated other comprehensive loss to retained earnings. The guidance is effective January 1, 2019 with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
18 |
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS:
The following management’s discussion and analysis of the financial condition and results of operations of CyberOptics Corporation ("we", "us" and "our") contains a number of estimates and predictions that are forward looking statements rather than statements based on historical fact. Among other matters, we discuss (i) our level of anticipated revenues, gross margins, and expenses; (ii) the timing of orders and shipments of our existing products, particularly the SQ3000, our 3D automated optical inspection ("AOI") system; (iii) the timing of initial revenue and projected improvements in gross margins from sales of new products that have been recently introduced, that we have under development or that we anticipate introducing in the future; (iv) the amount of anticipated revenue and potential revenue opportunity from recently introduced new products or potential new products we may launch in the future; (v) our assessment of trends in the general economy and their impact on the markets for our products; and (vi) the impact of currency fluctuations on our operations. Although we have made these statements based on our experience and expectations regarding future events, there may be events or factors that we have not anticipated, and the accuracy of our forward-looking statements and estimates are subject to a number of risks, including those risks identified in our Annual Report on Form 10-K for the year ended December 31, 2017.
RESULTS OF OPERATIONS
General
As a leading global developer and manufacturer of high precision 3D sensors, our strategy is to leverage our 3D sensor technologies in our key vertical markets that consist of the surface mount technology ("SMT"), semiconductor and metrology markets. A key element in our strategy is the continued development and sale of new high precision 3D sensors based on our proprietary multi-reflection suppression ("MRS") technology. We believe that MRS is a break-through optical technology for high precision inspection and metrology, with the potential to expand our markets in the future. Unlike competing technologies, our MRS technology has the ability to inhibit reflections and provide microscopic quality images at production line speeds.
Manufacturing yield challenges as electronics and semiconductors become more complex are driving the need for more precise inspection and metrology. For these reasons, we believe 3D inspection and metrology represents a high-growth segment for both the SMT and semiconductor capital equipment markets. We expect a growing number of opportunities in the markets for SMT and semiconductor inspection, because our 3D MRS technology platform is well suited for many of these applications, particularly with respect to complex mobile devices. We also anticipate significant opportunities for increased sales of our 3D measurement and inspection products in the emerging market for advanced packaging applications. We are taking advantage of these market trends by deploying our 3D MRS sensor technology in the following products:
|
|
• |
High-precision 3D sensor subsystems. We have entered into a mutually exclusive agreement to supply KLA-Tencor with high-precision 3D sensor subsystems for its back-end semiconductor packaging inspection systems. We also have entered into an agreement to supply Nordson-YESTECH with high precision 3D sensor subsystems for its inspection systems serving the SMT market. |
|
|
• |
SQ3000. Our 3D AOI system, the SQ3000, is designed to expand our presence in SMT and semiconductor markets requiring high precision measurement and inspection. In these markets, identifying defects in products has become highly challenging and critical due to smaller and more complex electronics packaging and increasing component density on circuit boards. |
|
|
• |
SQ3000™ 3D CMM. The SQ3000™ 3D CMM, which was launched in the second half of 2017, combines automated optical inspection and metrology functionality in a single product. Manufacturers in a variety of industries, including SMT, semiconductor and consumer electronics, can use this product as an in-line or off-line metrology tool to help solve complex manufacturing and product quality challenges. |
Revenue from MRS based products increased to $8.6 million in the six months ended June 30, 2018, an increase of approximately $1.6 million or 24% from $7.0 million in the six months ended June 30, 2017. We believe we will be able to increase sales of products based on our MRS technology in the SMT, semiconductor and metrology markets, including the market that requires inspection and metrology for advanced packaging applications. We intend to increase sales of these products by utilizing new original equipment manufacturer ("OEM") partners and system integrators and by expanding direct sales to end-user customers. Revenue from MRS based products is forecasted to grow significantly on a year-over-year basis in the third quarter of 2018, given our favorable order backlog of SQ3000 3D AOI systems at June 30, 2018.
We have significantly advanced our MRS-enabled 3D sensor technology as part of a research initiative aimed at applying our 3D MRS technology to mid-end and front-end semiconductor inspection and the emerging semiconductor advanced packaging market. Multiple semiconductor manufacturers are evaluating working prototypes of MRS-enabled mid-end semiconductor inspection sensors. With three micron pixel resolution, these prototypes can measure feature sizes down to 30 microns accurately and at high speeds. We are targeting one micron resolution (three sigma accuracy) at speeds that would inspect more than 20 300 mm wafers per hour. We believe nominal, initial sales of mid-end semiconductor inspection sensors will be realized later this year, marking an important strategic milestone in the development of what is believed to be a significant long-term opportunity. Sales of mid-end inspection sensors are expected to ramp up in 2019 and beyond.
A $1.6 million order for MX600 memory module inspection systems was received in the second quarter of 2018, with revenues from this order expected to be recognized in the first quarter of 2019. We are pursuing other MX600 opportunities, but revenues from any orders received this year most likely will not be realized until 2019.
We have continued to invest in our WaferSense® family of products because fabricators of semiconductors and other customers view these products as valuable tools for improving quality, tool uptime and yields. A new sensor for manufacturers of flat panel displays has recently been launched and additional WaferSense applications are currently under development. Strong future sales growth is anticipated for the WaferSense® family of products.
Our backlog was $13.8 million at June 30, 2018, including the $1.6 million order for the MX600 systems, an increase from $12.1 million at March 31, 2018 and $7.3 million at June 30, 2017. Over the longer term, we believe that anticipated sales growth of our 3D MRS-enabled products and WaferSense products should increase our revenues and net income. We believe that we have the resources required to attain our growth objectives, given our available cash and marketable securities balances totaling $24.2 million at June 30, 2018.
Revenues
Our revenues decreased by 3% to $15.9 million in the three months ended June 30, 2018, from $16.4 million in the three months ended June 30, 2017. Our revenues increased by 6% to $30.0 million in the six months ended June 30, 2018, from $28.3 million in the six months ended June 30, 2017. The following table sets forth revenues by product line for the three and six months ended June 30, 2018 and 2017:
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
||||||||||||
(In thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
||||||||
High Precision 3D and 2D Sensors
|
|
$
|
5,253
|
|
|
$
|
5,635
|
|
|
$
|
10,308
|
|
|
$
|
9,539
|
|
Semiconductor Sensors
|
|
|
3,940
|
|
|
|
3,153
|
|
|
7,101
|
|
|
5,470
|
|
||
Inspection Systems, Metrology Products and Services
|
|
|
6,661
|
|
|
|
7,621
|
|
|
12,565
|
|
|
13,320
|
|
||
Total
|
|
$
|
15,854
|
|
|
$
|
16,409
|
|
|
$
|
29,974
|
|
|
$
|
28,329
|
|
Revenue from sales of high precision 3D and 2D sensors decreased by $382,000 or 7% to $5.3 million in the three months ended June 30, 2018, from $5.6 million in the three months ended June 30, 2017. Revenue from sales of high precision 3D and 2D sensors increased by $769,000 or 8% to $10.3 million in the six months ended June 30, 2018, from $9.5 million in the six months ended June 30, 2017. The revenue decrease in the three months ended June 30, 2018, primarily resulted from lower sales of legacy 2D LaserAlign sensors. Revenue from sales of 3D MRS-enabled sensors were down slightly in the three months ended June 30, 2018, when compared to the three months ended June 30, 2017, reflecting normal variability in quarterly sales. The revenue increase in the six months ended June 30, 2018 resulted from a 59% increase in sales of 3D MRS-enabled sensors, offset in part by a reduction in sales of legacy 2D LaserAlign sensors. Sales of high precision 3D and 2D sensors are dependent on the success of our OEM partners selling products that incorporate our sensors. We believe sales of our new 3D MRS enabled sensors will represent an increasing percentage of our total high precision 3D and 2D sensor sales in the future. Quarterly sales of high precision 3D and 2D sensors are prone to significant fluctuations, both sequentially and on a year-over-year basis.
Revenue from sales of semiconductor sensors, principally our WaferSense product line, increased by $787,000 or 25% to $3.9 million in the three months ended June 30, 2018, from $3.2 million in the three months ended June 30, 2017. Revenue from sales of semiconductor sensors, principally our WaferSense product line, increased by $1.6 million or 30% to $7.1 million in the six months ended June 30, 2018, from $5.5 million in the six months ended June 30, 2017. The sales increase reflects favorable conditions in the market for semiconductor equipment and manufacturing, the growing acceptance of our WaferSense products as important productivity enhancement tools by semiconductor manufacturers and improved account penetration at major semiconductor manufacturers and capital equipment suppliers. We anticipate that the benefits from growing market awareness and new product introductions will lead to additional WaferSense sales in future periods.
Revenue from sales of inspection systems, metrology products and services decreased by $960,000 or 13% to $6.7 million in the three months ended June 30, 2018, from $7.6 million in the three months ended June 30, 2017. Revenue from sales of inspection systems, metrology products and services decreased by $755,000 or 6% to $12.6 million in the six months ended June 30, 2018, from $13.3 million in the six months ended June 30, 2017. The sales decrease in the three months ended June 30, 2018 resulted from a 6% decrease in sales of 3D AOI products, reflecting normal variability in quarterly sales and lower sales of legacy products. The sales decrease in the six months ended June 30, 2018 primarily resulted from lower sales of legacy products. Sales of 3D AOI products were up modestly in the six months ended June 30, 2018, when compared to the six months ended June 30, 2017. Revenue from sales of inspection and metrology products in the three and six months ended June 30, 2018 included approximately $1.0 million of metrology-related X-ray scanning systems. Revenue from sales of 3D AOI products are forecasted to increase significantly in the third quarter of 2018 on a year-over-year basis, given the strong order backlog of SQ3000 3D AOI systems at June 30, 2018.
We believe a growing number of companies are transitioning from 2D AOI to 3D AOI systems to meet the increasingly demanding product inspection requirements in the semiconductor, electronics and industrial markets. We believe sales of our new 3D MRS enabled AOI and metrology products, including the SQ3000 and SQ3000™ 3D CMM, will represent an increasing percentage of our total inspection system and metrology product sales in the future. We expect that the competitive advantages of our unique 3D MRS technology will provide us with an opportunity to capture significant market share in the 3D AOI inspection systems market.
Export revenue totaled $11.3 million or 71% of total revenue in the three months ended June 30, 2018, compared to $12.1 million or 74% of total revenue in the three months ended June 30, 2017. Export revenue totaled $21.5 million or 72% of total revenue in the six months ended June 30, 2018, compared to $21.5 million or 76% of total revenue in the six months ended June 30, 2017. Export revenue as a percentage of total revenue was lower in the three and six months ended June 30, 2018, when compared to the three and six months ended June 30, 2017. The lower percentage of export revenue was due to a decrease in sales of legacy 2D AOI and SPI inspection system products, a higher proportion of which are generally sold outside the United States as compared to our other products, and an increase in sales of X-ray systems, a higher proportion of which are generally sold in the United States.
Cost of Revenues and Gross Margin
Cost of revenues decreased by $86,000 or 1% to $8.6 million in the three months ended June 30, 2018, from $8.7 million in the three months ended June 30, 2017. Cost of revenues increased by $1.3 million or 9% to $16.5 million in the six months ended June 30, 2018, from $15.2 million in the six months ended June 30, 2017. The decrease in cost of revenues in the three months ended June 30, 2018, was mainly due to the corresponding 3% decrease in revenues in the three months ended June 30, 2018. The increase in cost of revenues in the six months ended June 30, 2018, was mainly due to a 6% increase in revenues in the six months ended June 30, 2018. Revenue mix in the three and six months ended June 30, 2018 also contributed to the changes in cost of revenues. Items included in cost of revenues that fluctuate with the level of sales include raw materials, direct labor and factory overhead costs.
Total gross margin as a percentage of revenue was 46% in the three months ended June 30, 2018, compared to 47% in the three months ended June 30, 2017. Total gross margin as a percentage of revenue was 45% in the six months ended June 30, 2018, compared to 46% in the six months ended June 30, 2017. The reduction in gross margin percentage was mainly due to pricing pressures on 2D and 3D inspection systems in the broader SMT market, offset in part by a change in mix of products sold. Sales of higher margin WaferSense products represented a larger percentage of our total revenue in the three and six months ended June 30, 2018, compared to the three and six months ended June 30, 2017.
Our markets are highly price competitive, particularly the electronic assembly market. As a result, we have experienced continual pressure on our gross margins. We compensate for pressure to reduce the price of our products by introducing new products with more features and improved performance and through manufacturing cost reduction programs. Sales of many products that we have recently introduced or are about to introduce, including our current and future SQ3000 3D AOI products and SQ3000™ 3D CMM products, 3D MRS sensors and WaferSense sensor products, have, or are expected to have, more favorable gross margins than many of our existing products.
Operating Expenses
Research and development expenses were $2.2 million or 14% of revenue in the three months ended June 30, 2018, compared to $2.0 million or 12% of revenue in the three months ended June 30, 2017. Research and development expenses were $4.4 million or 15% of revenue in the six months ended June 30, 2018, compared to $3.9 million or 14% of revenue in the six months ended June 30, 2017. The increase in research and development expenses was the result of higher wages due to hiring of additional employees, pay increases for existing employees and bonus accruals for employees who work in research and development. Current research and development expenditures are primarily focused on continued development of our MRS technology, including 3D sensor subsystems, commercialization of a sensor for mid-end semiconductor inspection, and continued development of new applications for our WaferSense product line.
Selling, general and administrative expenses were $4.1 million or 26% of revenue in the three months ended June 30, 2018, compared to $4.1 million or 25% of revenue in the three months ended June 30, 2017. Selling, general and administrative expenses were $8.5 million or 28% of revenue in the six months ended June 30, 2018, compared to $8.0 million or 28% of revenue in the six months ended June 30, 2017. In the three months ended June 30, 2018, higher bonus accruals were offset in part by lower commissions paid to outside sales representatives, reflecting the 3% decrease in revenues when compared to the three months ended June 30, 2017. The increase in selling, general and administrative expenses in the six months ended June 30, 2018, was due to additional spending to strengthen our global sales and marketing efforts, and higher bonus accruals.
Interest Income and Other
Interest income and other includes interest earned on investments and gains and losses from foreign currency transactions, including intercompany financing transactions associated with our subsidiaries in the United Kingdom, Singapore and China. We recognized gains from foreign currency transactions, primarily intercompany financing transactions, of $96,000 in the three months ended June 30, 2018, compared to losses of $50,000 in the three months ended June 30, 2017. We recognized gains from foreign currency transactions, primarily intercompany financing transactions, of $139,000 in the six months ended June 30, 2018, compared to losses of $155,000 in the six months ended June 30, 2017.
Income Taxes
We recorded income tax expense of $230,000 in the three months ended June 30, 2018, compared to income tax expense of $539,000 in the three months ended June 30, 2017. We recorded income tax expense of $147,000 in the six months ended June 30, 2018, compared to income tax expense of $126,000 in the six months ended June 30, 2017. Our income tax provision in the six months ended June 30, 2018, reflected an effective income tax rate of approximately 25%, and included $33,000 of excess tax benefits from employee share-based payments. Our income tax provision in the six months ended June 30, 2017, reflected an effective income tax rate of approximately 33%, and included $208,000 of excess tax benefits from employee share-based payments. Excess tax benefits recognized in the three months ended June 30, 2018 and the three months ended June 30, 2017 were inconsequential. The decrease in our effective income tax rate in the six months ended June 30, 2018 was primarily due to the new lower tax rates provided for in the Tax Cuts and Jobs Act passed by the U.S. Congress in December 2017.
We have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and federal, state and foreign net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, when net operating loss carry forwards could be applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.
Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for valuation allowances, we considered our history of cumulative operating results for income tax purposes over the past three years in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutory carry forward periods and tax planning alternatives. In addition, we considered both our near-term and long-term financial outlook. After considering all available evidence (both positive and negative), we concluded that recognition of valuation allowances for substantially all of our U.S. and Singapore deferred tax assets was not required at June 30, 2018.
The Inland Revenue Authority of Singapore is reviewing of our 2016 and 2015 income tax returns. We do not presently anticipate that the outcome of these audits will have a significant impact on our financial position or results of operations.
Backlog
Backlog totaled $13.8 million at June 30, 2018, including the $1.6 million order for MX600 systems, $12.1 million at March 31, 2018 and $7.3 million at June 30, 2017. Our products are typically shipped two weeks to two months after receipt of an order. Sales of some inspection system products may require customer acceptance due to performance or other acceptance criteria included in the terms of sale. For these product sales, revenue is recognized at the time of customer acceptance. Our backlog at any time may vary significantly based on the timing of orders from OEM customers. In some instances, our OEM customers may place orders for shipment of products covering periods of nine months or longer. Accordingly, backlog may not be an accurate indicator of performance in the future.
Liquidity and Capital Resources
Our cash and cash equivalents increased by $1.1 million in the six months ended June 30, 2018. Cash provided by operating activities of $2.0 million, proceeds from sales and maturities of marketable securities totaling $4.0 million and proceeds from the exercise of stock options of $251,000, were offset in part by purchases of marketable securities of $4.5 million and purchases of fixed assets and capitalized patent costs totaling $678,000. Our cash and cash equivalents fluctuate in part because of sales and maturities of marketable securities and investment of cash balances in marketable securities. Accordingly, we believe the combined balances of cash and marketable securities provide a more reliable indication of our available liquidity than cash balances alone. Combined balances of cash and marketable securities increased by approximately $1.5 million to $24.2 million as of June 30, 2018 from $22.7 million as of December 31, 2017.
22 |
Operating activities provided $2.0 million of cash in the six months ended June 30, 2018. The amount of cash provided by operations was favorably impacted by our net income of $567,000. Included in net income were non-cash expenses totaling $1.7 million for depreciation and amortization, provision for doubtful accounts, deferred income taxes, non-cash gains from foreign currency transactions, stock-based compensation costs and a small unrealized loss on our available-for-sale equity security. Changes in operating assets and liabilities providing cash in the six months ended June 30, 2018 included an increase in accounts payable of $2.1 million, an increase in advance customer payments of $321,000 and an increase in accrued expenses of $556,000. Changes in operating assets and liabilities using cash in the six months ended June 30, 2018 included an increase in accounts receivable of $2.0 million, an increase in inventories of $821,000 and an increase in other assets of $363,000. Accounts payable increased due to the timing of inventory purchases, with more materials being acquired in the later part of the quarter. The timing of these purchases resulted in a higher accounts payable balance at June 30, 2018. Advance customer payments increased due to receipt of deposits from customers for metrology products we expect to ship in the second half of 2018. Accrued expenses were up due to 2018 bonus accruals. Accounts receivable increased due to the higher sales level in the second quarter of 2018, when compared to the fourth quarter of 2017. Inventory increased slightly due to changes in anticipated product sales mix. Other assets were up due to payments for supplier deposits, insurance and services that will be charged to expense in the future.
Investing activities used $1.1 million of cash in the six months ended June 30, 2018. Changes in the level of investment in marketable securities, resulting from the purchases, sales and maturities of those securities, used $440,000 of cash in the six months ended June 30, 2018. We also used $678,000 of cash in the six months ended June 30, 2018 to purchase fixed assets and to fund capitalized patent costs.
Financing activities from the exercise of stock options provided $251,000 of cash in the six months ended June 30, 2018.
At June 30, 2018, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (which are used to establish off-balance sheet arrangements).
There have been no significant changes to our contractual commitments in the six months ended June 30, 2018 other than purchase commitments for inventory, which can vary based on the volume of product sales and resulting inventory requirements.
We lease a 50,724 square foot mixed office and warehouse facility built to our specifications in Golden Valley, Minnesota, which functions as our corporate headquarters and primary manufacturing facility for our sensor and semiconductor products. We also lease a 10,165 square foot facility in Bloomington, Minnesota. The leases for both spaces expire on December 31, 2018. In May 2018, we finalized an amendment to the lease for our current Golden Valley, Minnesota facility that will become effective on January 1, 2019. The amendment provides that we will lease 61,208 square feet of space in our current location through July 31, 2026. The increase in the size of the facility will allow us to conduct the operations currently carried out at our Bloomington, Minnesota facility in our current Golden Valley, Minnesota location. Future lease payments due under the lease amendment for the period from January 1, 2019 through July 31, 2026 are approximately $7.9 million. We anticipate that our annual rental payments will increase by approximately $200,000 when the lease amendment becomes effective in January 2019.
Our Board of Directors has authorized a $3.0 million share repurchase program. Under this program, $2.8 million remains available for future repurchases of shares of common stock. The common stock may be acquired from time to time in open market transactions, block purchases and other transactions complying with the Securities and Exchange Commission's Rule 10b-18. The share repurchase program will expire on September 30, 2018. During the six months ended June 30, 2018, no shares were repurchased under this program.
Our cash, cash equivalents and marketable securities totaled $24.2 million at June 30, 2018. We believe that our cash, cash equivalents and marketable securities, coupled with anticipated cash flow from operations, will be adequate to fund our cash flow needs for the foreseeable future.
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 the related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those estimates related to revenue recognition, bad debts, warranty obligations, inventory valuation, intangible assets and income taxes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. 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 Annual Report on Form 10-K for the year ended December 31, 2017.
Change in Revenue Accounting
Effective January 1, 2018, we adopted ASU No. 2014-9, “Revenue from Contracts with Customers” and the related amendments (“Topic 606”) using the modified retrospective method. Topic 606 was applied to all uncompleted contracts by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative financial information for the three and six months ended June 30, 2017 has not been adjusted and continues to be reported under Topic 605, “Revenue Recognition”.
Accounting for contracts recognized over time involves the use of various techniques to estimate total contract revenue and costs. Contract estimates are based on various assumptions to project the outcome of future events that may span multiple years. We review and update our contract-related estimates regularly, and record adjustments as needed.
The adoption of Topic 606 caused changes for 1) the impact of volume discounts that represent a material right which will now be estimated and recognized over the contract life rather than on a prospective basis, and 2) revenue will be recognized over time as the products are manufactured under certain contracts where our product is customized rather than at shipment. These changes increased our revenues in the three and six months ended June 30, 2018 by $84,000 and $109,000, respectively, when compared to revenue recognition under Topic 605 (see Note 16).
Performance Obligations
Under Topic 606, revenue is measured based on consideration specified in the contract with a customer. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. Revenue from all customers, including distributors, is recognized when a performance obligation is satisfied by transferring control of a product or service to a customer. Amounts billed to customers for shipping and handling are included in revenue. Taxes collected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting. Accounts receivable are due under normal trade terms, typically 90 days or less.
Sales involving multiple performance obligations typically include the sale of an inspection system or metrology product, installation and training, and in some cases, an extended warranty. When a sale involves multiple performance obligations, we account for individual products and services separately if the customer can benefit from the product or service on its own or with other resources that are readily available to the customer and the product or service are separately identifiable from other promises in the arrangement. The consideration is allocated between separate performance obligations in proportion to their estimated stand-alone selling price. If the stand-alone selling price is not directly observable, we use the cost plus margin approach to estimate stand-alone selling price. Costs related to products delivered are recognized in the period revenue is recognized, including product warranties for periods ranging from 1 to 3 years (see Note 7).
Our performance obligations are satisfied at a point in time or over time as work progresses. Revenue from products and services transferred to customers at a point in time in the three and six months ended June 30, 2018 totaled $14.7 million and $28.0 million, respectively, which represented 93% of our total revenue in both periods. Revenue from these contracts is recognized when obligations under the terms of the contract with our customer are satisfied; generally with the transfer of control upon shipment. Sales of some products may require customer acceptance due to performance or other acceptance criteria that is considered more than a formality. For these product sales, revenue is recognized upon notification of customer acceptance.
Revenue from products and services transferred to customers over time in the three and six months ended June 30, 2018 totaled $1.1 million and $2.0 million, respectively, which represented 7% of our total revenue in both periods. Periodically sensor product arrangements with our original equipment manufacturers (OEM's) will create an asset with no alternative use and include an enforceable right to payment. For these arrangements control is transferred over the manufacturing process; therefore, revenue is recognized over time utilizing an input method based on actual costs incurred in the manufacturing process to date relative to total expected production costs. For certain longer duration 3D scanning service projects, we progress bill as the services are performed. These arrangements create an asset with no alternative use and include an enforceable right to payment. For these arrangements, control is transferred over the hours incurred to complete the scanning project; therefore, revenue is recognized over time utilizing an input method based on actual hours incurred relative to total projected project hours. For maintenance and extended warranty contracts, revenue is recognized over time on a straight-line basis over the term of the contract as the customer simultaneously receives and consumes the benefits of the coverage.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
Most of our international export sales are negotiated, invoiced and paid in U.S. dollars. We manufacture our inspection system products in Singapore and a portion of our raw material purchases are denominated in Singapore dollars. We also have research and development and sales personnel located in Singapore and sales offices located in other parts of the world. Although currency fluctuations do not significantly affect our revenue, they can impact our costs and influence the price competitiveness of our products and the willingness of existing and potential customers to purchase these products. A hypothetical 5% appreciation or depreciation in the U.S. dollar relative to the reporting currencies of our foreign subsidiaries in 2017 would have affected the foreign-currency denominated operating expenses of these subsidiaries by approximately $500,000. We cannot accurately predict future exchange rates or the overall impact of future exchange rate fluctuations on our business, results of operations and financial condition.
As of June 30, 2018, we did not have any open foreign exchange forward contracts to hedge our exposure to fluctuations in foreign currency exchange rates. We recognized gains from foreign currency transactions (which were primarily intercompany financing transactions) of $139,000 in the six months ended June 30, 2018. Balance sheet related foreign currency translation adjustments are recorded in accumulated other comprehensive loss, which is a component of shareholders’ equity. Accordingly, these adjustments do not impact our net income.
Interest Rate Risk
We invest excess funds not required for current operations in marketable securities. Our investments in marketable securities consist of U.S. Government or U.S. Government agency securities, various tax exempt securities or certain approved corporate instruments with maturities of five years or less. The average maturity of securities in our investment portfolio does not exceed 18 months. We also hold an investment in a certain marketable equity security issued by a public company. As of June 30, 2018, our portfolio of marketable securities had a weighted average effective maturity of approximately 1.1 years. All marketable securities are classified as available for sale and carried at fair value. We estimate that a hypothetical 1% increase in market interest rates would result in an approximate $180,000 decrease in the market value of our portfolio of marketable securities. If such a rate increase occurred, our net income would only be impacted if securities were sold prior to maturity.
ITEM 4 – CONTROLS AND PROCEDURES
a. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
b. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
None.
ITEM 1A – RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition or future results.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
None.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
None.
ITEM 5 – OTHER INFORMATION
None.
ITEM 6 – EXHIBITS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CYBEROPTICS CORPORATION |
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|
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/s/ Subodh Kulkarni |
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By Subodh Kulkarni, President and Chief Executive Officer |
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(Principal Executive Officer and Duly Authorized Officer) |
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|
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/s/ Jeffrey A. Bertelsen |
|
By Jeffrey A. Bertelsen, Vice President, Chief Financial Officer and Chief Operating Officer |
|
(Principal Accounting Officer and Duly Authorized Officer) |
Dated: August 7, 2018
27 |
THIRD AMENDMENT TO LEASE
This Third Amendment to Lease (“Amendment”) is made effective as of May 17, 2018, by and between GOLDEN HILLS PARK I PROPERTY OWNER, LLC, a Delaware limited liability company (“Landlord”) and CYBEROPTICS CORPORATION, a Minnesota corporation (“Tenant”) with reference to the following facts and circumstances.
A. Landlord is the owner of that certain building located at 5900 Golden Hills Drive, Golden Valley, Minnesota (the “Building”).
B. FirstCal Industrial 2 Acquisitions, LLC, predecessor in interest to Landlord, and Tenant entered into that certain Industrial Building Lease dated March 27, 2006 (the “Original Lease”), as amended by that certain First Amendment to Lease dated March 14, 2011 (the “First Amendment”) and by that certain Second Amendment to Lease dated October 22, 2012 (the “Second Amendment”) for certain premises containing approximately 50,724 rentable square feet (the “Existing Premises”) located in the Building. The Original Lease, First Amendment and Second Amendment shall be known collectively as the “Lease”.
C. Landlord and Tenant desire to amend the Lease upon terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing facts and circumstances, the mutual covenants and promises contained herein and after good and valuable consideration, the receipt and sufficiency of which is acknowledged by each of the parties, the parties do hereby agree to the following:
1. Definitions. Each capitalized term used in this Amendment shall have the same meaning as is ascribed to such capitalized term in the Lease, unless otherwise provided for herein.
2. Premises. Effective as of the later of (i) January 1, 2019 and (ii) the date which is seventy (70) days following the date upon which the existing tenant (the “Existing Tenant”) of the Expansion Premises (as such term is defined below) vacates the Expansion Premises (the “Expansion Date”), the Premises shall be expanded to include an additional 10,484 rentable square feet as marked “Expansion Areas” on Exhibit B, attached (the “Expansion Premises”) for a total of 61,208 rentable square feet. From and after the Expansion Date, the term Premises shall include the Expansion Premises, unless the context requires otherwise. Landlord agrees to use commercially reasonable efforts to cause the Existing Tenant to vacate the Expansion Premises upon the expiration of the term of its lease.
3. Term. The term of the Lease is hereby extended for a term commencing on January 1, 2019 and ending on July 31, 2026 (the “Second Extended Term”). Except as set forth in Section 8 below, Tenant shall have no option to renew the Lease following the Second Extended Term and as of the full execution of this Amendment, the renewal options set forth in Section 11 (as further detailed on Exhibit H) of the First Amendment are hereby deleted and of no further force and effect.
4. Base Rent. During the Second Extended Term Base Rent shall be as follows:
Months |
Monthly Installment |
Annual |
||
January 1, 2019- December 31, 2019 January 1, 2020-December 31, 2020 January 1, 2021-December 31, 2021 January 1, 2022-December 31, 2022 January 1, 2023-December 31, 2023 January 1, 2024-December 31, 2024 January 1, 2025-December 31, 2025 January 1, 2026-July 31, 2026 |
$48,456.33* $49,667.74 $50,909.44 $52,182.17 $53,486.73 $54,823.89 $56,194.49 $57,599.35 |
$581,476.00** $596,012.90 $610,913.22 $626,186.05 $641,840.70 $657,886.72 $674,333.89 $403,195.47*** |
* If the Expansion Date occurs after January 1, 2019 then Tenant’s monthly Base Rent for the period between January 1, 2019 and the Expansion Date shall be $40,156.50 per month.
**Provided that Tenant has faithfully performed all of the terms and conditions of this Amendment and the Lease, Landlord agrees to abate Tenant’s obligation to pay Base Rent and Tenant’s Proportionate Share of Operating Expenses for the first seven months following the Expansion Date (the “Conditional Rent”). Upon the occurrence of an Event of a Default at any time during the Second Extended Term, in addition to any other remedies to which Landlord may be entitled, Landlord shall be entitled to recover the unamortized portion of the Conditional Rent amortized on a straight line basis over the final eighty four (84) months of the Second Extended Term (i.e., the Conditional Rent shall not be deemed to have been abated, but the unamortized portion thereof shall become immediately due and payable as unpaid Rent earned, but due at the time of such Event of Default). By way of example, if an Event of Default occurs with twelve months remaining in the Second Extended Term, Landlord shall be entitled to recover 14.29% (12/84) of the Conditional Rent.
***Represents seven (7) months of Base Rent.
5. Tenant’s Proportionate Share. Effective as of the Expansion Date, Tenant’s Proportionate Share, as such term is defined in Section 1.11 of the Lease, as amended, shall be 66.26%.
6. Operating Expenses. During the Second Extended Term, Tenant shall continue to pay Tenant’s Proportionate Share of Operating Expenses, in accordance with the terms of the Lease as amended by this Amendment, except that the parties agree that the first two sentences in Section 3.4, “Review of Operating Expenses” were intended to be one sentence and should and shall be modified to read as follows:
“As soon as is reasonably practical after each Operating Year, but no more than five (5) months after each Operating Year, Landlord shall provide Tenant with a statement (a “Statement”) setting forth Tenant’s actual ultimate liability for its Proportionate Share of Operating Expenses for the subject Operating Year, including the reasonable details regarding the date, amount and payee, and purpose of each such payment made and attributed by Landlord as an Operating Expense.”
7. Parking. Effective as of the Expansion Date, and only as it relates to periods from and after such date, Tenant shall have the right to use one hundred sixty (160) parking spaces in the parking lot serving the Building on an non-exclusive and unreserved basis. Effective as of the Expansion Date, the parking rights set forth in this Section 7 shall be in lieu of and not in addition to all other parking rights set forth in the Lease.
8. Renewal Option. Tenant shall have a personal and non-transferable option to renew the term of the Lease for one (1) term of five (5) years. Such renewal term shall begin the first day following the expiration of the Second Extended Term. Tenant shall have the right to exercise the renewal option conferred herein by giving Landlord notice at least two hundred seventy (270) days prior to the expiration of the Second Extended Term; provided that, at the time of exercise and as of the commencement of the renewal term (a) no Event of Default has occurred; and (b) Tenant has not sublet or assigned any portion of the Premises.
The renewal option shall be subject to all of the terms and conditions contained in the Lease, except that Base Rent during the renewal term shall be at Market Rent. “Market Rent” shall be the anticipated rate in effect for the Premises as of the commencement of the renewal term, together with any market rate increases during the renewal term, based upon the rents generally in effect for renewed leases of space in the area in which the Building is located of equivalent quality, size, utility and location, and taking into account the length of the renewal term, leasehold improvements, concessions then offered in the market and the credit standing of Tenant. Landlord shall lease the Premises to Tenant in their then-current condition, subject to negotiated leasehold improvements taken into account in the determination of Market Rent. In the event that Tenant shall exercise an option to renew the Lease, then the Market Rent shall be agreed upon in a meeting of the parties hereto held at least ninety (90) days prior to the expiration of the Second Extended Term. If the parties are able to agree on an amount of Market Rent that is mutually satisfactory, then such agreements shall be placed in writing and shall be signed by the parties hereto and shall thereupon become a part of the Lease.
If the parties hereto are unable to agree upon the Market Rent at least thirty (30) days prior to the commencement of the renewal term, then the disagreement shall be promptly submitted to arbitration. In such event, each party shall select an arbitrator having not less than ten (10) years’ actual experience in the commercial real estate brokerage business, and the arbitrators so selected shall select a third arbitrator with qualifications similar to their own. If the arbitrators cannot agree on the third arbitrator, they shall petition the Minnesota Commercial Association of Realtors Mediation Committee. At the time of appointment both Landlord and Tenant shall submit to such arbitrators their determination of Market Rent. Within ten (10) days following appointment the arbitrators shall meet for the purpose selecting either Landlord’s or Tenant’s determination of Market Rent. The decision of the arbitrators shall be binding on both parties. Landlord and Tenant shall each be responsible to pay their respective arbitrators and will share equally the cost of the third arbitrator.
Failure of Tenant to properly exercise the option herein granted shall be construed as a waiver of such option herein granted, and the Lease shall then terminate at the expiration of the Second Extended Term.
9. Right of First Refusal.
(a) Effective as of the date of the full execution of this Amendment, the Right of Offer set forth in Section 12 of the First Amendment shall be deleted and of no further force and effect.
(b) Effective as of January 1, 2020 (the “ROFR Effective Date”), provided no Event of Default has occurred, Tenant shall have a right of first refusal with respect to any space contiguous to the Premises in the Building that may become available (the “Refusal Space”), subject to the terms and conditions set forth below, before such space is leased to any third party, and provided at least three (3) years remain under the Second Extended Term of the Lease. Following the ROFR Effective Date and so long as this right of first refusal remains in effect, Landlord shall not lease all or any portion of the Refusal Space without first complying with the provisions of this Section 9.
The foregoing right shall be subject to the tenants’ who lease the Refusal Space as of the ROFR Effective Date renewing their existing leases, whether pursuant to an option to extend previously granted or otherwise, and in all events is subject and subordinate to any existing rights of any other parties to lease the Refusal Space, if such existing rights have already been granted prior to the date of this Amendment (collectively “Prior Optionees”).
In the event any bona fide third party (a “Potential Tenant”) enters into a letter of intent to lease all or any portion of the Refusal Space during the Second Extended Term (“Third Party Interest”), and no Prior Optionee exercises its right of refusal, Landlord shall offer the applicable portion of the Refusal Space to Tenant upon the same terms, covenants and conditions as provided in the Lease (as amended) for the then current Premises, except that (a) the Base Rent, Tenant’s payment of expenses, and the tenant improvement allowance (subject to adjustment as provided herein) and other economic terms shall be the same as the terms included in the offer for the Refusal Space from the Potential Tenant that was acceptable to Landlord and Potential Tenant as evidenced by a letter of intent to lease signed by the Potential Tenant (the “Offer”); and (b) the parties shall negotiate a work letter addressing the procedure for preparation and approval of the plans for any tenant improvements in the Refusal Space, as well as the construction thereof. If the Offer is for a longer period than remaining under the Lease, the term of the lease of the Refusal Space shall be co-terminous with the term of the Lease, and the Base Rent rates shall be adjusted, as Landlord shall determine, to reflect any lesser term remaining under the term of the Lease and any tenant improvement allowances and other concessions set forth in the Offer shall be prorated to reflect the shorter term. Except for the tenant allowance contained in the Offer, Tenant shall accept the Refusal Space “As-Is.” If Tenant does not exercise its Right of First Refusal in accordance with this Section 9, Tenant shall have no further rights with respect to the Refusal Space. For avoidance of doubt, if Tenant exercises this Right of First Refusal, Tenant shall be required to lease the entire space referred to in the Offer, not just the portion thereof which is part of the Refusal Space, unless Landlord elects, in its sole and absolute discretion, to only lease Tenant the portion thereof located within the Refusal Space.
If Tenant notifies Landlord in writing of the acceptance of such offer within ten (10) business days after Landlord has delivered the Offer to Tenant, Landlord and Tenant shall enter into a written agreement modifying and supplementing the Lease and specifying that such Refusal Space accepted by Tenant is a part of the Premises, and containing other appropriate terms and conditions relating to the addition of the Refusal Space to the Lease (including specifically any increase or adjustment of the Rent as a result of such addition). If Tenant exercises the right to lease the Refusal Space, said lease and the rent on the Refusal Space shall commence the later of thirty (30) days after Tenant’s notice exercising the right, or the date the Refusal Space is available for occupancy with any work to be performed by Landlord substantially complete, and shall continue for the duration of the term of the Lease. Notwithstanding the foregoing, a failure or refusal of Tenant to timely execute such amendment shall not serve to relieve Tenant from its obligations under this Section 9 and Tenant’s exercise of its rights under this Section 9 are and shall be deemed binding on Tenant at the time of such exercise.
If Tenant does not notify Landlord in writing of its acceptance of such offer in such ten (10) business day period, Landlord shall thereafter be able to lease the applicable portion of the Refusal Space to the Potential Tenant upon substantially the same terms as set forth in the Offer. If Landlord leases the applicable portion of the Refusal Space to the Potential Tenant within one hundred fifty (150) days following the expiration of Tenant’s ten (10) business day period to exercise the Offer, Tenant’s rights under this Section 9 shall thereupon terminate with respect to the applicable portion of the Refusal Space. If Landlord does not lease the applicable portion of the Refusal Space to the Potential Tenant within such one hundred fifty (150) day period, Landlord must once again offer the applicable portion of the Refusal Space to Tenant, as provided above.
Any termination of the Lease shall terminate all rights of Tenant with respect to the Refusal Space. The rights of Tenant with respect to the Refusal Space shall not be severable from the Lease, nor may such rights be assigned or otherwise conveyed in connection with any permitted assignment of the Lease. Landlord's consent to any assignment of the Lease shall not be construed as allowing an assignment or a conveyance of such rights to any assignee. Nothing herein contained should be construed so as to limit or abridge Landlord's ability to deal with the Refusal Space or to lease the Refusal Space to other tenants, Landlord's sole obligation being to offer, and if such offer is accepted, to deliver the Refusal Space to Tenant in accordance with this provision.
The Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting from any delay in delivering possession of the Refusal Space to Tenant, but abatement of the Base Rent attributable to the Refusal Space from the date of Tenant's acceptance of the Offer with respect to the Refusal Space to the date of actual delivery of the Refusal Space, shall constitute full settlement of all claims that Tenant might have against Landlord by reason of the Refusal Space not being delivered upon the date of Tenant's acceptance of Landlord's offer.
If the Lease or Tenant’s right to possession of the Premises shall terminate in any manner whatsoever before Tenant shall exercise the right herein provided, or if Tenant shall have subleased the Premises or assigned the Lease (other than to a Tenant Affiliate) with respect to all or any portion of the Premises, then immediately upon such termination, sublease, or assignment, the right herein granted shall simultaneously terminate and become null and void. Such right is personal to Tenant and non-transferable (other than to a Tenant Affiliate). UNDER NO CIRCUMSTANCES WHATSOEVER SHALL THE ASSIGNEE UNDER A COMPLETE OR PARTIAL ASSIGNMENT OF THIS LEASE (OTHER THANA TENANT AFFILIATE), OR A SUBTENANT UNDER A SUBLEASE OF THE PREMISES, HAVE ANY RIGHT TO EXERCISE THE RIGHT GRANTED HEREIN.
10. HVAC.
a. Landlord shall, as its sole cost and expense, replace the HVAC (as such term is defined in Section 2 of the Second Amendment) units marked as “Being Replaced “on Exhibit C, attached hereto. Landlord shall make commercially reasonable efforts to substantially complete such work on or before March 31, 2019. Tenant hereby acknowledges that such work may be performed while Tenant is occupying the Premises. Tenant hereby acknowledges and agrees that Landlord shall not be liable for any inconvenience to Tenant or for interference with Tenant’s business or use of the Premises during the performance of such work, provided that Landlord shall utilize commercially reasonable efforts not to disrupt the operation of Tenant’s business. Tenant and its employees, invitees, agents and contractors may use the Premises during the performance of such work at their own risk, and Landlord shall not be responsible for injury or damage to property occasioned by the performance of such work unless same is due to Landlord’s negligence or willful misconduct.
b. Effective as of the date full execution of this Amendment, the 5th sentence of Section 2 of the Second Amendment is hereby deleted and of no further force and effect.
c. Notwithstanding anything contained in the Lease to the contrary any replacement of an HVAC unit (other than those replaced by Landlord pursuant to Section 10(a) above) shall be performed by Landlord, the cost thereof shall be amortized over fifteen (15) years at an interest rate equal to Landlord’s actual cost of borrowing at the time of such replacement and Tenant shall then reimburse Landlord for such amortized cost monthly for each month during the term of the Lease (as the same may be extended). By way of example only and assuming no interest (such assumption being made only for the purpose of simplifying this example), if the cost of replacement is $50,000, Tenant shall pay to Landlord, as Additional Rent, the sum of $277.78 each month throughout the term of the Lease at the same time as Rent is due.
d. Trigger for the replacement of HVAC units. During any twelve (12) month period of time during the term of the Lease, if the cost to maintain or repair any HVAC unit serving the Premises costs at least 90% of the annual amortized replacement cost, then Landlord shall replace the unit as soon as reasonably possible after the determination of replacement is made. Landlord recognizes that time is of the essence in the replacement.
11. Roof Replacement. If Landlord replaces the roof of the Building during the term of the Lease or any extension thereof, Landlord will be responsible for 100% of the replacement cost and will not recover that cost by assessing Tenant either directly, or through inclusion in Operating Expenses.
12. Tenant Improvements. Tenant shall construct in the Premises the Tenant Improvements in accordance with and as such term is defined in the Work Letter attached hereto as Exhibit A.
13. No Defenses. Tenant affirms that, as of the date of execution of this Amendment: (a) it is not aware of any default or breach by Landlord under the Lease; (b) all tenant improvements to be constructed by Landlord prior to the date of this Amendment, if any, are complete and, subject to any warranties, representations and/or obligations undertaken by Landlord under the Original Lease that would be applicable to such tenant improvements and the Premises, Tenant has accepted the Premises in “as is, where is” condition as of the date of this Amendment; and (c) Landlord has fully funded or Tenant has waived any unfunded tenant improvement allowances payable under the Lease (except as set forth in this Amendment). On May 1, 2018 Landlord applied $126,810 then remaining from the First Amendment Allowance and Supplemental Allowance (as such terms are defined in the First Amendment) to Tenant’s account ($65,941.20 for May rent and $60,868.80 remaining balance). The application of this credit rendered a net credit on account to Tenant of $56,736.11 on May 1, 2018. On May 2, 2018, Tenant prepaid rent in the amount of $28,860.64 resulting in a total current credit on account to Tenant of $85,596.75 as of May 2, 2018. This credit will be applied to Tenant’s rent obligations under the Lease until exhausted.
14. Broker. Tenant represents to Landlord that except for CBRE, Inc., representing Landlord, and Winthrop Commercial, Inc., representing Tenant, (collectively, the “Brokers”), Tenant has not dealt with any real estate broker, salesperson or finder in connection with this Amendment, and no other such person initiated or participated in the negotiation of this Amendment or is entitled to any commission in connection herewith. Landlord shall pay all commissions owed to the Brokers relating to this Amendment. Tenant hereby agrees to indemnify, defend and hold Landlord, its property manager and their respective employees harmless from and against any and all liabilities, claims, demands, actions, damages, costs and expenses (including attorneys fees) arising from either (a) a claim for a fee or commission made by any broker, other than the Brokers, claiming to have acted by or on behalf of Tenant in connection with this Amendment, or (b) a claim of, or right to lien under the statutes of the state in which the Premises are located relating to real estate broker liens with respect to any such broker retained by Tenant.
15. Submission. Submission of this Amendment by Landlord to Tenant for examination and/or execution shall not in any manner bind Landlord and no obligations on Landlord shall arise under this Amendment unless and until this Amendment is fully signed and delivered by Landlord and Tenant; provided, however, the execution and delivery by Tenant of this Amendment to Landlord shall constitute an irrevocable offer by Tenant of the terms and conditions herein contained, which offer may not be revoked for ten (10) days after such delivery.
16. OFAC Compliance.
a. As used herein “Blocked Party” shall mean any party or nation that (a) is listed on the Specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Asset Control, Department of the U.S. Treasury ("OFAC") pursuant to Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) or other similar requirements contained in the rules and regulations of OFAC (the "Order") or in any enabling legislation or other Executive Orders in respect thereof (the Order and such other rules, regulations, legislation, or orders are collectively called the "Orders") or on any other list of terrorists or terrorist organizations maintained pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Orders; or (b) has been determined by competent authority to be subject to the prohibitions contained in the Orders.
b. As a material inducement for Landlord entering into this Amendment, Tenant warrants and represents that Tenant is not (a) a Blocked Party; (b) owned or controlled by, or is acting, directly or indirectly, for or on behalf of, any Blocked Party; or (c) has instigated, negotiated, facilitated, executed or otherwise engaged in this Amendment, directly or indirectly, on behalf of any Blocked Party. Tenant shall immediately notify Landlord if any of the foregoing warranties and representations becomes untrue during the Second Extended Term.
c. Tenant shall not: (a) transfer or permit the transfer of any interest in Tenant to any Blocked Party or any party who Tenant actually knows is engaged in illegal activities.
d. If at any time during the Second Extended Term (a) Tenant becomes a Blocked Party or is convicted, pleads nolo contendere, or is indicted, arraigned, or custodially detained on charges involving money laundering or predicate crimes to money laundering; (b) any of the representations or warranties set forth in this Section become untrue; or (c) Tenant breaches any of the covenants set forth in this Section, the same shall constitute an Event of Default. In addition to any other remedies to which Landlord may be entitled on account of such Event of Default, Landlord may immediately terminate the Lease and refuse to pay any Allowance or other disbursements due to Tenant under the Lease.
17. Miscellaneous.
a. Time of Essence. Time is of the essence of this Amendment and each and every term and provision hereof.
b. Modification. A modification of any provision herein contained, or any other amendment to this Amendment, shall be effective only if the modification or amendment is in writing and signed by both Landlord and Tenant.
c. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.
d. Number and Gender. As used in this Amendment, the neuter includes masculine and feminine, and the singular includes the plural.
e. Construction. Headings at the beginning of each Section and subsection are solely for the convenience of the parties and are not a part of this Amendment. Except as otherwise provided in this Amendment, all exhibits referred to herein are attached hereto and are incorporated herein by this reference. Unless otherwise indicated, all references herein to Articles, Section, subsections, paragraphs, subparagraphs or provisions are to those in this Amendment. Any reference to a paragraph or Section herein includes all subparagraphs or subsections thereof. This Amendment shall not be construed as if it had been prepared by only Landlord or Tenant, but rather as if both Landlord and Tenant had prepared the same. In the event any portion of this Amendment shall be declared by any court of competent jurisdiction to be invalid, illegal or unenforceable, such portion shall be deemed severed from this Amendment, and the remaining parts hereof shall remain in full force and effect, as fully as though such invalid, illegal or unenforceable portion had never been part of this Amendment.
f. Integration of Other Agreements. This Amendment, the Lease and prior amendments set forth the entire agreement and understanding of the parties with respect to the matters set forth herein and supersedes all previous written or oral understandings, agreements, contracts, correspondence and documentation with respect thereto. Any oral representation or modifications concerning this Amendment shall be of no force or effect.
g. Duplicate Originals; Counterparts. This Amendment may be executed in any number of duplicate originals, all of which shall be of equal legal force and effect. Additionally, this Amendment may be executed in counterparts, but shall become effective only after a counterpart hereof has been executed by each party; all said counterparts shall, when taken together, constitute the entire single agreement between parties.
h. No Waiver. No failure or delay of either party in the exercise of any right given to such party hereunder shall constitute a waiver thereof unless the time specified herein for exercise of such right has expired, nor shall any single or partial exercise of any right preclude other or further exercise thereof or of any other right. No waiver by any party hereto of any breach or default shall be considered to be a waiver of any other breach or default. The waiver of any condition shall not constitute a waiver of any breach or default with respect to any covenant, representation or warranty.
i. Further Assurances. Landlord and Tenant each agree to execute any and all other documents and to take any further actions reasonably necessary to consummate the transactions contemplated hereby.
j. No Third Party Beneficiaries. Except as otherwise provided herein, no person or entity shall be deemed to be a third party beneficiary hereof, and nothing in this Amendment, (either expressed or implied) is intended to confer upon any person or entity, other than Landlord and/or Tenant (and their respective nominees, successors and assigns), any rights, remedies, obligations or liabilities under or by reason of this Amendment.
k. Full Force and Effect. The Lease, as amended hereby, shall continue in full force and effect, subject to the terms and provisions thereof and hereof. In the event of any conflict between the terms of the Lease and the terms of this Amendment, the terms of this Amendment shall control.
IN WITNESS WHEREOF, this Amendment is executed as of the day and year aforesaid.
LANDLORD:
GOLDEN HILLS PARK I PROPERTY OWNER,
LLC
By:
Barry P. Marcus, Senior Vice President
Date:
TENANT:
CYBEROPTICS CORPORATION
By:
Printed Name: Jeff Bertelsen
Title: Executive Vice President & CFO/COO
Date:
EXHIBIT A
WORK LETTER
This Work Letter (this “Work Letter”) is attached to and made a part of that certain Third Amendment to Lease (the “Amendment”), between GOLDEN HILLS PARK I PROPERTY OWNER, LLC, a Delaware limited liability company (“Landlord”) and CYBEROPTICS CORPORATION (“Tenant”). The terms used in this Work Letter that are defined in the Amendment shall have the same meanings as provided in the Amendment.
1. Definitions.
(a) “Allowance” shall mean a one-time tenant improvement allowance in an amount not to exceed $1,530,200.00.
(b) “Approved Working Drawings” shall have the meaning set forth in Section 5(c) below.
(c) “Excess Costs” shall mean Total Construction Costs in excess of the Allowance.
(d) “Substantial Completion” of the Premises shall occur upon the completion of construction of the Tenant Improvements in the Premises pursuant to the Approved Working Drawings, with the exception of any punchlist items and any tenant fixtures, work-stations, built-in furniture, or equipment to be installed by Tenant. Substantial Completion shall have occurred even though (a) minor details of construction, decoration, landscaping or mechanical adjustments remain to be completed and/or b) there is a delay in the Substantial Completion of the Premises due to a “Tenant Delay” as defined below.
(e) “Tenant Delay” shall mean each day of delay in the performance of the work that occurs because of (i) Tenant’s failure to timely deliver or approve any required documentation; (ii) any change by Tenant to the Approved Working Drawings; (iii) Tenant’s requirement for materials, components, finishes or improvements that are not available in a commercially reasonable time; (iv) postponement of any work at the request of Tenant; (v) the failure by Tenant’s architect, space planner or other agent or contractor, to timely prepare plans, pull permits, provide approvals or perform any other act required hereunder; (vi) the failure of Tenant to pay, when due, any amounts required to be paid by Tenant; (vii) Tenant’s failure to attend any meeting with Landlord, any architect, design professional, or any contractor, or their respective employees or representatives, as may be required or scheduled hereunder or otherwise necessary in connection with the preparation or completion of any construction documents, such as the Approved Working Drawings, or in connection with the performance of any work; (viii) a breach by Tenant of this Exhibit or the Amendment; (ix) changes in any of the Approved Working Drawings because the same do not comply with Laws (if the same were prepared by Tenant); and (x) any other acts or omissions of Tenant.
(f) “Tenant Improvements” shall mean the improvements to the Expansion Premises set forth in this Exhibit A.
(g) “Tenant’s Representative” shall mean Jeff Bertelsen, who Tenant has appointed as its representative with full power and authority to bind Tenant for all actions taken with regard to the Tenant Improvements. Tenant hereby ratifies all actions and decisions with regard to the Tenant Improvements that the Tenant’s Representative may have taken or made prior to the execution of this Work Letter. Landlord shall not be obligated to respond to or act upon any plan, drawing, change order or approval or other matter relating to the Tenant Improvements until it has been executed by Tenant’s Representative or a senior officer of Tenant.
(h) “Total Construction Costs” shall mean the entire cost of constructing the Tenant Improvements, including space planning and preparation of the Approved Working Drawings, labor and materials, electrical and other utility usage during construction, low voltage cabling, relocation of Tenant’s furniture, fixtures and equipment, additional janitorial services, trash removal, general tenant signage, related taxes and insurance costs, all Water Availability Charges and Sewer Availability Charges related to the Premises or the Tenant Improvements, the fees of the general contractor and an administrative fee to Landlord in the amount 1.5% of the hard construction costs. No fee shall be charged on: architectural or engineering plans, permits or other governmental fees, SAC/WAC charges, or any other “soft” cost.
2. Allowance and Excess Costs Deposit.
(a) Provided no Event of Default has occurred, Landlord shall provide an amount up to the Allowance to be applied toward Total Construction Costs. The Allowance must be used by September 30, 2019, unless delayed by forces beyond Tenant’s reasonable control or shall be deemed forfeited with no further obligation by Landlord with respect thereto. All Tenant Improvements for which the Allowance has been made available shall be deemed Landlord’s property. Tenant shall not be entitled to use any portion of the Allowance for anything other than Tenant Improvements, except that Tenant shall be entitled to use up to $78,510.00 of unused Allowance towards payments of Base Rent as they become due.
(b) In no event shall Landlord be obligated to make disbursements with respect to the Tenant Improvements in an amount that exceeds the Allowance. The Allowance shall not be disbursed to Tenant, but shall be paid by Landlord pursuant to the terms of the construction contract toward the payment of the Total Construction Costs, if, as, and when the cost of the Tenant Improvements is actually incurred.
(c) Upon the later to occur of Tenant’s execution of this Amendment or the date the Excess Costs have been determined and approved, Tenant shall deliver to Landlord cash in the amount equal the Excess Costs (the “Excess Costs Deposit”). In the event that after such deposit by Tenant, any revisions, changes, or substitutions shall be made to the Approved Working Drawings or the Tenant Improvements, Tenant shall pay any additional costs that arise in connection with such revisions, changes or substitutions to Landlord immediately upon Landlord’s request as an addition to the Excess Costs Deposit.
(d) Landlord shall disburse the Excess Costs Deposit prior to the disbursement of the Allowance. So long as this Amendment has been fully executed and the other conditions for draws have been made Landlord will begin funding the Allowance not later than July 1, 2018.
3. Punchlist. Landlord and Tenant will confer and agree on when Substantial Completion has occurred. Within three (3) business days thereafter, Landlord’s representative and Tenant’s representative shall conduct a walk-through of the Expansion Premises and identify any necessary touch-up work, repairs and minor completion items that are necessary for final completion of the Tenant Improvements (the “Punchlist Items”). Neither Landlord’s representative nor Tenant’s representative shall unreasonably withhold his or her agreement on Punchlist Items. Tenant shall use reasonable efforts to complete all Punchlist Items within thirty (30) days after agreement thereon; however, Tenant shall not be obligated to engage overtime labor in order to complete such items.
4. Miscellaneous.
(a) Unless otherwise indicated, all references herein to a “number of days” shall mean and refer to calendar days. If any item requiring approval is timely disapproved by Landlord, the procedure for preparation of the document and approval thereof shall be repeated until Landlord approves the document.
(b) Notwithstanding any provision to the contrary contained in this Amendment, if an Event of Default has occurred at any time prior to Substantial Completion, then (i) in addition to all other rights and remedies granted to Landlord pursuant to the Lease, Landlord shall have the right to cause the contractor to cease the construction of the Expansion Premises (in which case, Tenant shall be responsible for any delay in Substantial Completion caused by such work stoppage); and (ii) all other obligations of Landlord under the terms of this Exhibit shall be forgiven until such time, if any, as such Event of Default may be cured.
5. Preparation of Working Drawings.
(a) Tenant has retained an architect/space planner (“Architect”) to prepare the construction drawings for the Tenant Improvements. Landlord has agreed to provide an allowance of $.15 per square foot for the initial plans, which shall be in addition to and not deducted from the Allowance.
(b) Within a reasonable time following full execution of this Amendment, Tenant’s Architect shall prepare a space plan for the Tenant Improvements (the “Space Plans”), and shall deliver the Space Plans to Landlord for Landlord’s approval (which approval shall not be unreasonably withheld, delayed or conditioned). Landlord shall notify Tenant whether it approves the Space Plans within five (5) business days after Tenant’s submission thereof. If Landlord disapproves of such Space Plans, then Landlord shall notify Tenant thereof specifying in reasonable detail the reasons for such disapproval. Tenant’s Architect shall revise such Space Plans in accordance with Landlord’s reasonable objections and submit the revised Space Plans to Landlord for its review and approval. Landlord shall notify Tenant in writing whether it approves of the revised Space Plans within three (3) business days after its receipt thereof. If Landlord fails to notify Tenant that it disapproves of the initial Space Plans within five (5) business days (or, in the case of revised Space Plans, within three (3) business days) after the submission thereof, then Landlord shall be deemed to have approved the Space Plans in question.
(c) Tenant shall cause the Architect to prepare final working drawings of the Tenant Improvements and deliver the same to Landlord for its review and approval (which approval shall not be unreasonably withheld, delayed or conditioned). Landlord shall notify Tenant whether it approves of the submitted working drawings within five (5) business days after Tenant’s submission thereof. If Landlord disapproves of such working drawings, then Landlord shall notify Tenant thereof specifying in reasonable detail the reasons for such disapproval. Tenant’s architect shall revise such working drawings in accordance with Landlord’s objections and submit the revised working drawings to Landlord for its review and approval. Landlord shall notify Tenant in writing whether it approves of the revised working drawings within three (3) business days after its receipt thereof. If Landlord fails to notify Tenant that it disapproves of the initial working drawings within three (3) business days (or, in the case of resubmitted working drawings, within three (3) business days) after the submission thereof, then Landlord shall be deemed to have approved the working drawings in question. The approved working drawings are hereinafter referred to as the “Approved Working Drawings.”
6. Cost Proposal. Tenant shall provide Landlord with a cost proposal in accordance with the Approved Working Drawings, which cost proposal shall include, as nearly as possible, the cost of the Total Construction Costs to be incurred in connection with the Tenant Improvements (“Cost Proposal”). Tenant’s approval of the Cost Proposal shall be deemed approval of the Excess Costs resulting therefrom.
7. Construction. Following approval of the Cost Proposal Tenant shall construct the Tenant Improvements in substantial accordance with the Approved Working Drawings. Tenant shall be responsible for the selection of the general contractor to construct the improvements in accordance with the Approved Working Drawings. Landlord shall reasonably approve Tenant’s selected general contractor within five (5) business days after Tenant’s submission of the general contractor’s name to Landlord. Tenant shall require the selected general contractor to sign Landlord’s standard construction contract. All construction draw requests will be submitted to and approved by Tenant prior to submission to Landlord. Landlord shall be responsible to pay all Tenant approved draw requests on a timely basis as provided in Landlord’s standard construction contract.
EXHIBIT B
EXPANSION PREMISES
EXHIBIT C
HVAC UNITS TO BE REPLACED
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/s/ Subodh Kulkarni
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Signature
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Name: Subodh Kulkarni
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Title: President and Chief Executive Officer
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/s/ Jeffrey A. Bertelsen
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Signature
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Name: Jeffrey A. Bertelsen
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Title: Vice President, Chief Financial Officer and Chief
Operating Officer
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/s/ Subodh Kulkarni
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Subodh Kulkarni
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President and Chief Executive Officer
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August 7, 2018 |
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/s/ Jeffrey A. Bertelsen
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Jeffrey A. Bertelsen
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Vice President, Chief Financial Officer and Chief Operating Officer
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August 7, 2018
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