DATA I/O CORP - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)
Washington	91-0864123
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
6645 185th Ave NE, Suite 100, Redmond, Washington, 98052 (Address of principal executive offices, including zip 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 for 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

 

Accelerated filer ☐	Smaller reporting company ☒
Large accelerated filer ☐	Emerging growth company ☐
Non-accelerated filer ☐

 

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 Exchange Act).  Yes ☐ No ☒

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTY PROCEEDINGS DURING THE PREVIOUS FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12,13or 15(d) of the Security Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes ☐ No ☐

 

Shares of Common Stock, no par value, outstanding as of October 31, 2019: 8,210,884

 

 

DATA I/O CORPORATION

FORM 10-Q

For the Quarter Ended September 30, 2019

INDEX
Part I.			Page
	Item 1.	Financial Statements	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
	Item 4.	Controls and Procedures	22
Part II		Other Information
	Item 1.	Legal Proceedings	23
	Item 1A.	Risk Factors	23
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
	Item 3.	Defaults Upon Senior Securities	23
	Item 4.	Mine Safety Disclosures	23
	Item 5.	Other Information	23
	Item 6.	Exhibits	23
Signatures			23

 

 

PART I - FINANCIAL INFORMATION

 

DATA I/O CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(UNAUDITED)

	September 30, 2019	December 31, 2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$15,178	$18,343
Trade accounts receivable, net of allowance for
doubtful accounts of $48 and $75, respectively	2,406	3,771
Inventories	5,432	5,185
Other current assets	582	621
TOTAL CURRENT ASSETS	23,598	27,920
Property, plant and equipment – net	1,733	1,985
Income tax receivable	640	598
Other assets	2,108	220
TOTAL ASSETS	$28,079	$30,723
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$869	$1,755
Accrued compensation	1,373	2,872
Deferred revenue	1,586	1,392
Other accrued liabilities	1,308	789
Income taxes payable	49	47
TOTAL CURRENT LIABILITIES	5,185	6,855
Operating lease liabilities	1,334	-
Long-term other payables	126	511
COMMITMENTS	-	-
STOCKHOLDERS’ EQUITY
Preferred stock -
Authorized, 5,000,000 shares, including
200,000 shares of Series A Junior Participating
Issued and outstanding, none	-	-
Common stock, at stated value -
Authorized, 30,000,000 shares
Issued and outstanding, 8,210,884 shares as of September 30,
2019 and 8,338,628 shares as of December 31, 2018	18,490	19,254
Accumulated earnings	3,004	3,695
Accumulated other comprehensive income (loss)	(60)	408
TOTAL STOCKHOLDERS’ EQUITY	21,434	23,357
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$28,079	$30,723
See notes to consolidated financial statements

 

DATA I/O CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(UNAUDITED)

	Three Months EndedSeptember 30,		Nine Months EndedSeptember 30,
	2019	2018	2019	2018
Net sales	$3,808	$6,533	$15,700	$21,367
Cost of goods sold	1,806	2,415	6,430	8,584
Gross margin	2,002	4,118	9,270	12,783
Operating expenses:
Research and development	1,507	1,826	4,868	5,550
Selling, general and administrative	1,535	1,888	5,338	6,239
Total operating expenses	3,042	3,714	10,206	11,789
Operating income(loss)	(1,040)	404	(936)	994
Non-operating income:
Interest income	25	10	47	26
Gain on sale of assets	-	-	60	4
Foreign currency transaction gain (loss)	226	108	190	201
Total non-operating income	251	118	297	231
Income(loss) before income taxes	(789)	522	(639)	1,225
Income tax (expense) benefit	(55)	(180)	(52)	(267)
Net income(loss)	$(844)	$342	$(691)	$958
Basic earnings(loss) per share	$(0.10)	$0.04	$(0.08)	$0.11
Diluted earnings(loss) per share	$(0.10)	$0.04	$(0.08)	$0.11
Weighted-average basic shares	8,217	8,439	8,259	8,361
Weighted-average diluted shares	8,242	8,507	8,259	8,516
See notes to consolidated financial statements

 

DATA I/O CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(UNAUDITED)

	Three Months EndedSeptember 30,		Nine Months EndedSeptember 30,
	2019	2018	2019	2018
Net income (loss)	$(844)	$342	$(691)	$958
Other comprehensive income (loss):
Foreign currency translation gain (loss)	(478)	(264)	(468)	(497)
Comprehensive income (loss)	$(1,322)	$78	$(1,159)	$461
See notes to consolidated financial statements

 

DATA I/O CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

				Accumulated
	Common Stock		Retained	and Other	Total
			Earnings	Comprehensive	Stockholders'
	Shares	Amount	(Deficit)	Income (Loss)	Equity
Balance at December 31, 2017	8,276,813	$18,989	$2,089	$982	22,060
Stock options exercised	15,000	-			-
Repurchased shares	(4,948)	-			-
Stock awards issued, net of tax withheld	7,531	(12)	-	-	(12)
Issuance of stock through: ESPP	630	7	-	-	7
Share-based compensation	-	177	-	-	177
Net income	-	-	130	-	130
Other comprehensive income gain	-	-	-	301	301
Balance at March 31, 2018	8,295,026	$19,161	$2,219	$1,283	$22,663
Stock awards issued, net of tax withheld	132,858	(415)	-	-	(415)
Share-based compensation	-	473	-	-	473
Net income	-	-	486	-	486
Other comprehensive income (loss)	-	-	-	(534)	(534)
Balance at June 30, 2018	8,427,884	$19,219	$2,705	$749	$22,673
Stock awards issued, net of tax withheld	9,809	(20)	-	-	(20)
Issuance of stock through: ESPP	2,382	12	-	-	12
Share-based compensation	-	282	-	-	282
Net income	-	-	342	-	342
Other comprehensive income (loss)	-	-	-	(264)	(264)
Balance at September 30, 2018	8,440,075	$19,493	$3,047	$485	$23,025
Balance at December 31, 2018	8,338,628	$19,254	$3,695	$408	$23,357
Repurchased shares	(57,612)	(313)			(313)
Stock awards issued, net of tax withheld	4,046	(8)	-	-	(8)
Issuance of stock through: ESPP	2,763	15	-	-	15
Share-based compensation	-	287	-	-	287
Net income	-	-	26	-	26
Other comprehensive income gain	-	-	-	128	128
Balance at March 31, 2019	8,287,825	$19,235	$3,721	$536	$23,492
Repurchased shares	(188,194)	(908)			(908)
Stock awards issued, net of tax withheld	162,071	(228)	-	-	(228)
Share-based compensation	-	364	-	-	364
Net income	-	-	127	-	127
Other comprehensive income (loss)	-	-	-	(118)	(118)
Balance at June 30, 2019	8,261,702	$18,463	$3,848	$418	$22,729
Repurchased shares	(55,904)	(244)			(244)
Stock awards issued, net of tax withheld	1,672	(3)	-	-	(3)
Issuance of stock through: ESPP	3,414	14	-	-	14
Share-based compensation	-	260	-	-	260
Net income	-	-	(844)	-	(844)
Other comprehensive income (loss)	-	-	-	(478)	(478)
Balance at September 30, 2019	8,210,884	$18,490	$3,004	$(60)	$21,434
See notes to consolidated financial statements

 

 

DATA I/O CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(UNAUDITED)

	For the Nine Months EndedSeptember 30,
	2019	2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss)	$(691)	$958
Adjustments to reconcile net income(loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization	672	736
Gain on sale of assets	(60)	(4)
Equipment transferred to cost of goods sold	37	365
Share-based compensation	911	932
Net change in:
Trade accounts receivable	1,295	905
Inventories	(311)	(521)
Other current assets	27	(54)
Accounts payable and accrued liabilities	(2,484)	(1,211)
Deferred revenue	163	(36)
Other long-term liabilities	(311)	(55)
Deposits and other long-term assets	33	(175)
Net cash provided by (used in) operating activities	(719)	1,840
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(456)	(668)
Net proceeds from sale of assets	60	4
Cash provided by (used in) investing activities	(396)	(664)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, less payments
for shares withheld to cover tax	(211)	(429)
Repurchase of common stock	(1,465)	-
Cash provided by (used in) financing activities	(1,676)	(429)
Increase (decrease) in cash and cash equivalents	(2,791)	747
Effects of exchange rate changes on cash	(374)	(386)
Cash and cash equivalents at beginning of period	18,343	18,541
Cash and cash equivalents at end of period	$15,178	$18,902
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$178	$118
See notes to consolidated financial statements

 

 

DATA I/O CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - FINANCIAL STATEMENT PREPARATION

Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) prepared the financial statements as of September 30, 2019 and September 30, 2018 according to the rules and regulations of the Securities and Exchange Commission ("SEC"). These statements are unaudited but, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented. The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America according to such SEC rules and regulations. Operating results for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. These financial statements should be read in conjunction with the annual audited financial statements and the accompanying notes included in our Form 10-K for the year ended December 31, 2018.

 

Revenue Recognition

 

The adoption of Topic 606, “Revenue from contracts with customers”, did not have a material impact on our 2018 financial statement line items, either individually or in the aggregate. We have elected the practical expedient to expense contract acquisition costs, primarily sales commissions, for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year. During the nine months ended September 30, 2019 and 2018, there were no contract acquisition costs capitalized. In 2018, we made a sales tax policy election to exclude sales, use, value added, some excise taxes and other similar taxes from the measurement of the transaction price.

 

We recognize revenue upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We have determined that our programming equipment has reached a point of maturity and stability such that product acceptance can be assured by testing at the factory prior to shipment and that the installation meets the criteria to be a separate performance obligation. These systems are standard products with published product specifications and are configurable with standard options. The evidence that these systems could be deemed as accepted was based upon having standardized factory production of the units, results from batteries of tests of product performance to our published specifications, quality inspections and installation standardization, as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based.

 

The revenue related to products requiring installation that is perfunctory is recognized upon transfer of control of the product to customers, which generally is at the time of shipment. Installation that is considered perfunctory includes any installation that is expected to be performed by other parties, such as distributors, other vendors, or the customers themselves where we are not responsible for the installation. This takes into account the complexity, skill and training needed as well as customer expectations regarding installation.

 

We enter into arrangements with multiple performance obligations that arise during the sale of a system that includes an installation component, a service and support component and a software maintenance component. The transaction price is allocated to the separate performance obligations on relative standalone sales price. We allocate the transaction price of each element based on relative selling prices. Relative selling price is based on the selling price of the standalone system. For the installation and service and support performance obligations, we use the value of the discount given to distributors who perform these components. For software maintenance performance obligations, we use what we charge for annual software maintenance renewals after the initial year the system is sold. Revenue is recognized on the system sale based on shipping terms or acceptance provisions, installation revenue is recognized after the installation is performed, and hardware service and support and software maintenance revenue is recognized ratably over the term of the agreement, typically one year. Deferred revenue includes unaccepted delivered systems, service, support and maintenance contracts and represents the undelivered performance obligation of agreements that are typically recognized ratably over one year.

 

When we sell software separately, we recognize revenue upon the transfer of control of the software, which is generally upon shipment, provided that only inconsequential performance obligations remain on our part and substantive acceptance conditions, if any, have been met.

 

We recognize revenue when there is an approved contract that both parties are committed to perform, both parties rights have been identified, the contract has substance, collection of substantially all the consideration is probable, the transaction price has been determined and allocated over the performance obligations, the performance obligations including substantive acceptance conditions, if any, in the contract have been met, the obligation is not contingent on resale of the product, the buyer’s obligation would not be changed in the event of theft, physical destruction or damage to the product, the buyer acquiring the product for resale has economic substance apart from us and we do not have significant obligations for future performance to directly bring about the resale of the product by the buyer. We establish a reserve for sales returns based on historical trends in product returns and estimates for new items. Payment terms are generally 30 days from shipment.

 

We transfer certain products out of service from their internal use and make them available for sale. The products transferred are typically our standard products in one of the following areas: service loaners, rental, metered or test units; engineering test units; or sales demonstration equipment. Once transferred, the equipment is sold by our regular sales channels as used equipment inventory. These product units often involve refurbishing and an equipment warranty, and are conducted as sales in our normal and ordinary course of business. The transfer amount is the product unit’s net book value and the sale transaction is accounted for as revenue and cost of goods sold.

 

 

The following table represents our revenues by major categories:

 

	Three Months Ended			Nine Months Ended
Net sales by type	September 30,2019	Change	September 30,2018	September 30,2019	Change	September 30,2018
(in thousands)
Equipment sales	$1,567	(61.3%)	$4,047	$8,815	(36.4%)	$13,861
Adapter sales	1,342	(17.8%)	1,632	4,223	(16.7%)	5,072
Software and maintenance	899	5.3%	854	2,662	9.4%	2,434
Total programming systems	$3,808	(41.7%)	$6,533	$15,700	(26.5%)	$21,367

 

Leases - Accounting Standards Codification 842

 

Leases arise from contracts which convey the right to control the use of identified property or equipment for a period of time in exchange for consideration. Our leasing arrangements are primarily for office space we use to conduct our operations. In addition, there are automobiles and a small amount of office equipment leased. We determine whether contracts include a lease at the inception date, which is generally upon contract signing, considering factors such as whether the contract includes an asset which is physically distinct, which party obtains substantially all of the capacity and economic benefit of the asset, and which party directs how, and for what purpose, the asset is used during the contractual period of use. Our leases commence when the lessor makes the asset available for our use. At commencement we record a lease liability at the present value of future lease payments, net of any future lease incentives to be received. Some of our lease agreements include cancellable future periods subject to termination or extension options. We include cancellable lease periods in our future lease payments when we are reasonably certain to continue to utilize the asset for those periods. We calculate the present value of future lease payments at commencement using a discount rate which we estimate as the collateralized borrowing rate we believe that would be incurred on our future lease payments over a similar term. At commencement we also record a corresponding right-of-use asset, which is calculated based on the amount of the lease liability, adjusted for any advance lease payments paid, initial direct costs incurred or lease incentives received prior to commencement. Right-of-use assets are subject to evaluation for impairment or disposal on a basis consistent with other long-lived assets.

 

Leases are classified at commencement as either operating or finance leases. As of September 30, 2019, all of our leases are classified as operating leases. Rent expense for operating leases is recognized on the straight-line method over the term of the agreement beginning on the lease commencement date.

 

In accounting for leases, we utilize certain practical expedients and policy elections available under the lease accounting standard. For example, we do not record right-of-use assets or lease liabilities for leases with terms of 12 months or less. For contracts containing real estate leases, we do not combine lease and non-lease components. The primary impact of this policy election is that we do not include in our calculation of lease liabilities any fixed and noncancelable future payments due under the contract for items such as common area maintenance, utilities and other costs. Lease-related costs which are variable rather than fixed are expensed in the period incurred.

 

Assumptions, judgments and estimates impacting the carrying value of our right-of-use assets and liabilities include evaluating whether an arrangement contains a lease, determining whether the lease term should include any cancellable future periods, estimating the discount rate used to calculate our lease liabilities, estimating the fair value and useful life of the leased asset for the purpose of classifying the lease as an operating or finance lease, evaluating whether a lease contract amendment represents a new lease agreement or a modification to the existing lease and evaluating our right-of-use assets for impairment.

 

Share-Based Compensation

 

All stock-based compensation awards are measured based on estimated fair values on the date of grant and recognized as compensation expense on the straight-line single-option method. Our share-based compensation is reduced for estimated forfeitures at the time of grant and revised as necessary in subsequent periods if actual forfeitures differ from those estimates.

 

Income Tax

 

Income taxes are computed at current enacted tax rates, less tax credits using the asset and liability method. Deferred taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the timing of when items of income and expense are recognized for financial reporting and income tax purposes, and any changes in the valuation allowance caused by a change in judgment about the realization of the related deferred tax assets. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. Tax reform changes effective January 1, 2018, including Global Intangible Low Tax Income (GILTI), have been included in our 2018 and 2019 financial statements.

 

 

Recently Adopted Accounting Pronouncements

 

We adopted the new lease accounting standard, ASC 842, on January 1, 2019 using the modified retrospective transition method, and recorded a balance sheet adjustment on the date of adoption. In 2018, we accounted for leases under ASC 840. The new lease standard requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases, and also requires additional quantitative and qualitative disclosures to enable users of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. In adopting ASC 842, we utilized certain practical expedients available under the standard. These practical expedients include waiving reassessment of conclusions reached under the previous lease standard as to whether contracts contain leases, not recording right-of-use assets or lease liabilities for leases with terms of 12 months or less, how to classify leases identified and how to account for initial direct costs incurred. We also utilized the practical expedient to use hindsight as of the date of adoption to determine the terms of our leases and to evaluate our right-of-use assets for impairment. 

 

We recorded the following adjusted balances in our consolidated balance sheet on the date of adoption:

 

	As Reported December 31, 2018	Adjustment Recorded January 1, 2019
(in thousands)
Right-of-use assets (Long-term other assets)	$0	$2,176
Lease liability-short term (Other accrued liabilities)	-	654
Lease liability-long term (Long-term other payables)	-	1,904

 

See Note 6 of the accompanying notes to the condensed consolidated financial statements for additional information regarding our operating leases.

 

NOTE 2 – INVENTORIES

Inventories consisted of the following components:

	September 30, 2019	December 31, 2018
(in thousands)
Raw material	$2,734	$2,925
Work-in-process	2,222	1,584
Finished goods	476	676
Inventories	$5,432	$5,185

 

NOTE 3 – PROPERTY, PLANT AND EQUIPMENT, NET

Property and equipment consisted of the following components:

 

	September 30, 2019	December 31, 2018
(in thousands)
Leasehold improvements	$387	$399
Equipment	5,513	5,378
Sales demonstration equipment	929	942
	6,829	6,719
Less accumulated depreciation	5,096	4,734
Property and equipment, net	$1,733	$1,985

 

 

NOTE 4 – OTHER ASSETS

Other assets consisted of the following components:

 

	September 30, 2019	December 31, 2018
(in thousands)
Lease right-of-use assets	$1,688	-
Prepaid security royalties	375	175
Other	45	45
Other assets	$2,108	$220

 

NOTE 5 – OTHER ACCRUED LIABILITIES

 

Other accrued liabilities consisted of the following components:

 

	September 30, 2019	December 31, 2018
(in thousands)
Lease liability - short term	$661	$0
Product warranty	377	471
Sales return reserve	78	87
Other taxes	100	102
Other	92	129
Other accrued liabilities	$1,308	$789

 

The changes in our product warranty liability for the nine months ending September 30, 2019 are as follows:

 

	September 30, 2019
(in thousands)
Liability, beginning balance	$471
Net expenses	567
Warranty claims	(567)
Accrual revisions	(94)
Liability, ending balance	$377

 

 

NOTE 6 – LEASES

Our leasing arrangements are primarily for facility leases we use to conduct our operations. The following table presents our future lease payments for long-term operating leases as of September 30, 2019:

For the years ending December 31:

	Operating Lease Commitments
(in thousands)
2019 (remaining)	$187
2020	745
2021	674
2022	307
2023	87
Thereafter	217
Total	$2,217
Less Imputed interest	(222)
Total operating lease liabilities	$1,995

 

Cash paid for operating lease liabilities for the three and nine months ended September 30, 2019 was $188,000 and $569,000, respectively. There were no new or modified leases during the nine months ended September 30, 2019.

The following table presents supplemental balance sheet information related to leases as of September 30, 2019:

	Balance at September 30, 2019
(in thousands)
Right-of-use assets (Long-term other assets)	$1,688
Lease liability-short term (Other accrued liabilities)	661
Lease liability-long term (Long-term other payables)	1,334

 

At September 30, 2019, the weighted average remaining lease term is 3.58 years and the weighted average discount rate used is 5%.

 

The components of our lease expense for the three and nine months ended September 30, 2019 include operating lease costs of $213,000 and $486,000, respectively, and short-term lease costs of $5,000 and $15,000, respectively.

 

Our real estate facility leases are described below:

 

During the third quarter of 2017, we amended our lease agreement, extending the lease for the Redmond, Washington headquarters facility through July 31, 2022. This lease is for approximately 20,460 square feet.

 

We signed a lease agreement effective November 1, 2015 that extends the lease for a facility located in Shanghai, China through October 31, 2021. This lease is for approximately 19,400 square feet.

 

During the fourth quarter of 2016, we signed a lease agreement for a new facility located near Munich, Germany which was effective March 1, 2017 and extends the lease through February 28, 2022. This lease is for approximately 4,895 square feet.

 

 

NOTE 7 – OTHER COMMITMENTS

We have purchase obligations for inventory and production costs as well as other obligations such as capital expenditures, service contracts, marketing, and development agreements. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty, and with short notice, typically less than 90 days. At September 30, 2019, the purchase commitments and other obligations totaled $1.3 million of which all but $406,000 are expected to be paid over the next twelve months.

 

NOTE 8 – CONTINGENCIES

As of September 30, 2019, we were not a party to any legal proceedings or aware of any indemnification agreement claims, the adverse outcome of which in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position.

 

NOTE 9 – EARNINGS PER SHARE

Basic earnings per share is calculated based on the weighted average number of common shares outstanding during each period. Diluted earnings per share is calculated based on these same weighted average shares outstanding plus the effect of potential shares issuable upon assumed exercise of stock options based on the treasury stock method.

Potential shares issuable upon the exercise of stock options are excluded from the calculation of diluted earnings per share to the extent their effect would be anti-dilutive.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

	Three Months Ended		Nine Months Ended
	September 30,2019	September 30,2018	September 30,2019	September 30,2018
(in thousands except per share data)
Numerator for basic and diluted
earnings(loss) per share:
Net income(loss)	$(844)	$342	$(691)	$958
Denominator for basic
earnings(loss) per share:
Weighted-average shares	8,217	8,439	8,259	8,361
Employee stock options and awards	25	68	71	155
Denominator for diluted
earnings(loss) per share:
Adjusted weighted-average shares &
assumed conversions of stock options	8,242	8,507	8,330	8,516
Basic and diluted
earnings(loss) per share:
Total basic earnings(loss) per share	$(0.10)	$0.04	$(0.08)	$0.11
Total diluted earnings(loss) per share	$(0.10)	$0.04	$(0.08)	$0.11

 

Weighted average options to purchase 31,063 and 30,518 shares for the three and nine month periods ending September 30, 2019 and weighted average options to purchase 25,000 shares for both the three and nine months ending September 30, 2018 were excluded from the computation of diluted earnings per share for the periods then ended because the options were anti-dilutive.

 

 

NOTE 10 – SHARE-BASED COMPENSATION

For share-based awards granted, we have recognized compensation expense based on the estimated grant date fair value method. For these awards we have recognized compensation expense using a straight-line amortization method reduced for estimated forfeitures.

 

The impact on our results of operations of recording share-based compensation, net of forfeitures, for the three and nine months ended September 30, 2019 and 2018, respectively, was as follows:

	Three Months Ended		Nine Months Ended
	September 30,2019	September 30,2018	September 30,2019	September 30,2018
(in thousands)
Cost of goods sold	$6	$4	$22	$19
Research and development	61	56	227	205
Selling, general and administrative	193	222	662	708
Total share-based compensation	$260	$282	$911	$932

 

Equity awards granted during the three and nine months ended September 30, 2019 and 2018 were as follows:

 

	Three Months Ended		Nine Months Ended
	September 30,2019	September 30,2018	September 30,2019	September 30,2018
Restricted Stock Units	-	1,000	276,700	206,856
Stock Options	-	-	25,000	-

 

Non-employee directors Restricted Stock Units (“RSU’s”) vest over one year and options vest over three years and have a six-year exercise period. Employee RSU’s typically vest over four years and employee Non-Qualified stock options typically vest quarterly over 4 years and have a six-year exercise period.

 

The remaining unamortized expected future equity compensation expense and remaining amortization period associated with unvested option grants, restricted stock awards and restricted stock unit awards at September 30, 2019 are:

 

	September 30, 2019
Unamortized future equity compensation expense (in thousands)	$2,612
Remaining weighted average amortization period (in years)	2.58

 

 

NOTE 11– SHARE REPURCHASE PROGRAM

On October 31, 2018, our Board of Directors approved a share repurchase program with provisions to buy back up to $2.0 million of our stock during the period from November 1, 2018 through October 31, 2019.  The program was established with a 10b5-1 plan under the Exchange Act to provide flexibility to make purchases throughout the period. For the quarter ended September 30, 2019, 55,904 shares of stock were repurchased at an average price of $4.37 for a total of $244,197 including $1,176 in commissions and charges. The $2.0 million buyback program was completed during the third quarter of 2019. The following is a summary of the stock repurchase program from November 1, 2018 through September 30, 2019:

 

Repurchases by Month	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Repurchase Program	Approximate Dollar Value of Shares that May Yet Be Purchased under the Program
December 2018	101,975	$5.25	101,975	$1,464,470
January 2019	43,701	$5.39	43,701	$1,229,115
March 2019	13,911	$5.49	13,911	$1,152,793
April 2019	69,141	$5.34	69,141	$783,687
May 2019	69,798	$4.63	69,798	$461,417
June 2019	49,255	$4.44	49,255	$244,197
July 2019	55,280	$4.37	55,280	$2,798
August 2019	624	$4.32	624	$3
Total	403,685	$4.95	403,685