UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2006
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number: 0-16454
CIMETRIX INCORPORATED
(Exact name of registrant as specified in its charter)
Nevada | | 87-0439107 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
| | |
6979 South High Tech Drive, Salt Lake City, Utah | | 84047-3757 |
(Address of principal executive office) | | (Zip Code) |
Registrant’s telephone number, including area code: (801) 256-6500
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 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 x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer o | | Accelerated Filer o | | Non-accelerated Filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the registrant’s common stock as of November 14, 2006:
Common stock, par value $.0001 — 31,927,432 shares
CIMETRIX INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
INDEX
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIMETRIX INCORPORATED AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
| | September 30,
2006 | | December 31,
2005 | |
| | (Unaudited) | | | |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 476,000 | | $ | 778,000 | |
Accounts receivable, net | | 1,147,000 | | 1,289,000 | |
Inventories | | 13,000 | | — | |
Prepaid expenses and other current assets | | 46,000 | | 61,000 | |
| | | | | |
Total current assets | | 1,682,000 | | 2,128,000 | |
| | | | | |
Property and equipment, net | | 149,000 | | 189,000 | |
Intangible assets, net | | 646,000 | | 894,000 | |
Goodwill | | 64,000 | | 64,000 | |
Other assets | | 28,000 | | 20,000 | |
| | | | | |
| | $ | 2,569,000 | | $ | 3,295,000 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 150,000 | | $ | 162,000 | |
Accrued expenses | | 219,000 | | 269,000 | |
Deferred revenue | | 479,000 | | 405,000 | |
Notes payable — related parties | | 173,000 | | 199,000 | |
Notes payable | | 426,000 | | 502,000 | |
| | | | | |
Total current liabilities | | 1,447,000 | | 1,537,000 | |
| | | | | |
Commitments and contingencies | | | | | |
| | | | | |
Stockholders’ equity: | | | | | |
Common stock; $.0001 par value, 100,000,000 shares authorized, 31,952,432 shares issued | | 3,000 | | 3,000 | |
Additional paid-in capital | | 31,682,000 | | 31,440,000 | |
Treasury stock, at cost | | (49,000 | ) | (49,000 | ) |
Accumulated deficit | | (30,514,000 | ) | (29,636,000 | ) |
| | | | | |
Total stockholders’ equity | | 1,122,000 | | 1,758,000 | |
| | | | | |
| | $ | 2,569,000 | | $ | 3,295,000 | |
See accompanying notes to consolidated condensed financial statements
3
CIMETRIX INCORPORATED AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Unaudited)
| | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Revenues: | | | | | | | | | |
New software licenses | | $ | 684,000 | | $ | 523,000 | | $ | 1,954,000 | | $ | 1,967,000 | |
Software license updates and product support | | 272,000 | | 273,000 | | 813,000 | | 785,000 | |
Total software revenues | | 956,000 | | 796,000 | | 2,767,000 | | 2,752,000 | |
Professional services | | 287,000 | | 247,000 | | 1,278,000 | | 589,000 | |
| | | | | | | | | |
Total revenues | | 1,243,000 | | 1,043,000 | | 4,045,000 | | 3,341,000 | |
| | | | | | | | | |
Operating costs and expenses: | | | | | | | | | |
Cost of revenues | | 545,000 | | 454,000 | | 1,669,000 | | 968,000 | |
Sales and marketing | | 287,000 | | 211,000 | | 870,000 | | 786,000 | |
Research and development | | 256,000 | | 273,000 | | 809,000 | | 859,000 | |
General and administrative | | 365,000 | | 289,000 | | 1,227,000 | | 914,000 | |
Depreciation and amortization | | 107,000 | | 31,000 | | 322,000 | | 93,000 | |
| | | | | | | | | |
Total operating costs and expenses | | 1,560,000 | | 1,258,000 | | 4,897,000 | | 3,620,000 | |
| | | | | | | | | |
Loss from operations | | (317,000 | ) | (215,000 | ) | (852,000 | ) | (279,000 | ) |
| | | | | | | | | |
Other income (expense): | | | | | | | | | |
Interest and other income | | 10,000 | | 18,000 | | 28,000 | | 45,000 | |
Interest expense | | (18,000 | ) | (49,000 | ) | (54,000 | ) | (147,000 | ) |
| | | | | | | | | |
Total other expense | | (8,000 | ) | (31,000 | ) | (26,000 | ) | (102,000 | ) |
| | | | | | | | | |
Loss before income taxes | | (325,000 | ) | (246,000 | ) | (878,000 | ) | (381,000 | ) |
| | | | | | | | | |
Provision for income taxes | | — | | — | | — | | — | |
| | | | | | | | | |
Net loss | | $ | (325,000 | ) | $ | (246,000 | ) | $ | (878,000 | ) | $ | (381,000 | ) |
| | | | | | | | | |
Loss per common share: | | | | | | | | | |
Basic | | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.01 | ) |
Diluted | | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.01 | ) |
| | | | | | | | | |
Weighted average number of shares outstanding: | | | | | | | | | |
Basic | | 31,927,000 | | 30,329,000 | | 31,927,000 | | 29,984,000 | |
Diluted | | 31,927,000 | | 30,329,000 | | 31,927,000 | | 29,984,000 | |
See accompanying notes to consolidated condensed financial statements
4
CIMETRIX INCORPORATED AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
| | Nine Months Ended
September 30, | |
| | 2006 | | 2005 | |
Cash flows from operating activities: | | | | | |
Net loss | | $ | (878,000 | ) | $ | (381,000 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
Depreciation and amortization | | 322,000 | | 82,000 | |
Stock-based compensation | | 243,000 | | - | |
Interest expense from bond discount | | 12,000 | | 20,000 | |
Gain on extinguishment of debt | | — | | (8,000 | ) |
Decrease in allowance for doubtful accounts | | (7,000 | ) | (4,000 | ) |
(Increase) decrease in: | | | | | |
Accounts receivable | | 149,000 | | 104,000 | |
Inventories | | (13,000 | ) | - | |
Prepaid expenses and other current assets | | 15,000 | | (19,000 | ) |
Other assets | | (8,000 | ) | (17,000 | ) |
Increase (decrease) in: | | | | | |
Accounts payable | | (24,000 | ) | 109,000 | |
Accrued expenses | | (84,000 | ) | (165,000 | ) |
Deferred revenue | | 74,000 | | (79,000 | ) |
| | | | | |
Net cash used in operating activities | | (199,000 | ) | (358,000 | ) |
| | | | | |
Cash flows from investing activities — purchase of property and equipment | | (22,000 | ) | (100,000 | ) |
| | | | | |
Cash flows from financing activities: | | | | | |
Proceeds from the sale of common stock | | — | | 2,000,000 | |
Proceeds from the exercise of warrants | | — | | 31,000 | |
Payments of debt | | (81,000 | ) | (858,000 | ) |
| | | | | |
Net cash provided by (used in) financing activities | | (81,000 | ) | 1,173,000 | |
| | | | | |
Net increase (decrease) in cash and cash equivalents | | (302,000 | ) | 715,000 | |
Cash and cash equivalents, beginning of period | | 778,000 | | 868,000 | |
| | | | | |
Cash and cash equivalents, end of period | | $ | 476,000 | | $ | 1,583,000 | |
See accompanying notes to consolidated condensed financial statements
5
CIMETRIX INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization — Cimetrix Incorporated, a Nevada corporation, and its subsidiaries (“Cimetrix” or the “Company”) are primarily engaged in the development and sale of open architecture, standards-based, computer software for controlling machine tools, robots, electronic equipment, and communication products that allow communication between equipment on the factory floor and host systems, and semiconductor connectivity products that connect new semiconductor tools to each other and to host systems.
Basis of Presentation — The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Cimetrix Europe, Inc. and Cimetrix Data Management Solutions, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation. The interim financial information of the Company for the three-month and nine-month periods ended September 30, 2006 and September 30, 2005 is unaudited, and the balance sheet as of December 31, 2005 is derived from audited financial statements. The accompanying consolidated condensed financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial statements. Accordingly, they omit or condense footnotes and certain other information normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles. The accounting policies followed for quarterly financial reporting conform with the accounting policies disclosed in Note 1 to the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. In the opinion of management, all adjustments that are necessary for a fair presentation of the financial information for the interim periods reported have been made. All such adjustments are of a normal recurring nature. The results of operations for the three months and nine months ended September 30, 2006 are not necessarily indicative of the results that can be expected for the entire year ending December 31, 2006. The unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
Reclassifications — Certain amounts in the condensed consolidated financial statements for the three-month and nine-month periods ended September 30, 2005 have been reclassified to conform to the presentation used in the three-month and nine-month periods ended September 30, 2006. In particular, in the current fiscal year, the Company has reclassified certain of its revenues and operating costs from categories previously used in its condensed consolidated statements of operations to new categories that the Company believes are more consistent with industry practice.
6
The following tables summarize the amounts in the condensed consolidated statements of operations as previously reported and as reclassified:
| | Three Months
Ended
September 30, 2005 | | Nine Months
Ended
September 30, 2005 | |
As Previously Reported: | | | | | |
Sales: | | | | | |
Software | | $ | 523,000 | | $ | 1,967,000 | |
Services and support | | 520,000 | | 1,374,000 | |
| | | | | |
Total net sales | | 1,043,000 | | 3,341,000 | |
| | | | | |
Costs and expenses: | | | | | |
Cost of sales | | 259,000 | | 498,000 | |
General and administrative | | 320,000 | | 1,006,000 | |
Selling, marketing and customer support | | 406,000 | | 1,256,000 | |
Research and development | | 273,000 | | 860,000 | |
| | | | | |
Total costs and expenses | | 1,258,000 | | 3,620,000 | |
| | | | | |
Loss from operations | | $ | (215,000 | ) | $ | (279,000 | ) |
| | Three Months
Ended
September 30, 2005 | | Nine Months
Ended
September 30, 2005 | |
As Reclassified: | | | | | |
Revenues: | | | | | |
New software licenses | | $ | 523,000 | | $ | 1,967,000 | |
Software license updates and product support | | 273,000 | | 785,000 | |
Total software revenues | | 796,000 | | 2,752,000 | |
Professional services | | 247,000 | | 589,000 | |
| | | | | |
Total revenues | | 1,043,000 | | 3,341,000 | |
| | | | | |
Operating costs and expenses: | | | | | |
Cost of revenues | | 454,000 | | 968,000 | |
Sales and marketing | | 211,000 | | 786,000 | |
Research and development | | 273,000 | | 859,000 | |
General and administrative | | 289,000 | | 914,000 | |
Depreciation and amortization | | 31,000 | | 93,000 | |
| | | | | |
Total operating costs and expenses | | 1,258,000 | | 3,620,000 | |
| | | | | |
Loss from operations | | $ | (215,000 | ) | $ | (279,000 | ) |
The reclassifications did not change total revenues or total operating costs and expenses, but only individual categories within these sections of the condensed consolidated statements of operations. The reclassifications did not have an impact on net loss or loss per common share.
NOTE 2 — STOCK-BASED COMPENSATION
In May 2006, the Company’s shareholders approved the combined amendment and restatement of the Cimetrix Incorporated 1998 Incentive Stock Option Plan and the Cimetrix Incorporated Director Stock Option Plan as the Cimetrix 2006 Long-Term Incentive Plan (the “Plan”). In addition to stock
7
options, the Plan authorizes the grant of stock appreciation rights, restricted stock awards, and other stock unit and equity-based performance awards.
Prior to January 1, 2006, as permitted under Statement of Financial Accounting Standards (“SFAS”) No. 123, the Company accounted for its stock option awards following the recognition and measurement principles of Accounting Principles Board (“APB”) No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based compensation expense was reflected in the Company’s consolidated statements of operations as all options granted had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant and the related number of shares granted was fixed at that time.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), Share Based Payments. This statement revised SFAS No. 123 by eliminating the option to account for employee stock options under APB No. 25 and requires companies to measure the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards and to recognize the compensation expense over the requisite service period during which the awards are expected to vest.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective application method. Under this transition method, the Company recorded compensation expense on a straight-line basis for the three months and nine months ended September 30, 2006, for: (a) the vesting of options granted prior to January 1, 2006 (based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and previously presented in the pro-forma footnote disclosures), and (b) stock-based awards granted subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R)). In accordance with the modified prospective application method, results for the three months and nine months ended September 30, 2005 have not been restated.
The stock-based compensation expense for the three months and nine months ended September 30, 2006 has been allocated to the various categories of operating costs and expenses in a manner similar to the allocation of payroll expense as follows:
| | Three Months
Ended
September 30, 2006 | | Nine Months
Ended
September 30, 2006 | |
| | | | | |
Cost of revenues | | $ | 5,000 | | $ | 12,000 | |
Sales and marketing | | 9,000 | | 29,000 | |
Research and development | | 15,000 | | 42,000 | |
General and administrative | | 64,000 | | 160,000 | |
| | | | | |
Total stock-based compensation expense realized and increase in net loss | | $ | 93,000 | | $ | 243,000 | |
| | | | | |
Impact on basic loss per common share | | $ | (0.00 | ) | $ | (0.01 | ) |
| | | | | |
Impact on diluted loss per common share | | $ | (0.00 | ) | $ | (0.01 | ) |
There was no stock compensation expense capitalized during the three months and nine months ended September 30, 2006.
8
During the nine months ended September 30, 2006, options to purchase 635,500 shares of the Company’s common stock were issued to the Company’s employees and directors, with exercise prices ranging from $0.37 to $0.57 per share. The following table summarizes the stock option activity during the nine months ended September 30, 2006:
| |
Options
| | Weighted Average
Exercise Price | | Weighted Average
Remaining
Contract Term | |
Aggregate
Intrinsic Value
| |
| | | | | | | | | |
Outstanding at December 31, 2005 | | 5,551,500 | | $ | 0.77 | | | | | |
Granted | | 635,500 | | 0.47 | | | | | |
Exercised | | — | | — | | | | | |
Forfeited | | (446,500 | ) | 1.59 | | | | | |
| | | | | | | | | |
Outstanding at September 30, 2006 | | 5,740,500 | | 0.65 | | 2.09 | | $ | 1,000 | |
| | | | | | | | | |
Options vested and exercisable at September 30, 2006 | | 3,834,000 | | 0.76 | | 1.374 | | $ | — | |
| | | | | | | | | | | |
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $0.35 as of September 30, 2006, which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.
During the nine months ended September 30, 2006, restricted stock awards for a total of 390,000 shares of the Company’s common stock were approved, with vesting periods ranging from one to four years.
As of September 30, 2006, the total future compensation cost related to non-vested stock-based awards not yet recognized in the condensed consolidated statements of operations was $566,000, and the weighted average period over which these awards are expected to be recognized was 2.13 years.
Under the modified prospective method, results for prior periods have not been restated to reflect the effects of implementing SFAS No. 123 (R). The following pro-forma information is presented for comparative purposes and illustrates the effect on net loss and net loss per common share for the three months and nine months ended September 30, 2005, as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation prior to January 1, 2006:
| | Three Months
Ended
September 30, 2005 | | Nine Months
Ended
September 30, 2005 | |
| | | | | |
Net loss as reported | | $ | (246,000 | ) | $ | (381,000 | ) |
Deduct: | | | | | |
Total stock-based employee compensation expense determined under fair value based method for all awards | | (19,000 | ) | (109,000 | ) |
| | | | | |
Pro forma net loss | | $ | (265,000 | ) | $ | (490,000 | ) |
| | | | | |
Loss per share: | | | | | |
Basic — as reported | | $ | (0.01 | ) | $ | (0.01 | ) |
Basic — pro forma | | $ | (0.01 | ) | $ | (0.02 | ) |
| | | | | |
Diluted — as reported | | $ | (0.01 | ) | $ | (0.01 | ) |
Diluted — pro forma | | $ | (0.01 | ) | $ | (0.02 | ) |
9
NOTE 3 — EARNINGS (LOSS) PER SHARE
The computation of basic earnings per common share is based on the weighted average number of shares outstanding during the period. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the weighted average common stock equivalents which would arise from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the period.
A reconciliation of the number of shares used in the computation of the Company’s basic and diluted earnings per common share is as follows:
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | |
Weighted average number of common shares outstanding | | 31,927,000 | | 30,329,000 | | 31,927,000 | | 29,984,000 | |
Dilutive effect of: | | | | | | | | | |
Stock options | | — | | — | | — | | — | |
Warrants | | — | | — | | — | | — | |
Weighted average number of common shares outstanding, assuming dilution | | 31,927,000 | | 30,329,000 | | 31,927,000 | | 29,984,000 | |
No stock options and warrants are included in the computation of weighted average number of shares because the effect would be antidilutive. At September 30, 2006, the Company had outstanding options, warrants and restricted stock awards to purchase a total of 6,596,750 common shares of the Company that could have a future dilutive effect on the calculation of earnings per share.
NOTE 4 — DEBT
The Company’s short-term debt consisted of the following:
Related Party:
| | September 30,
2006 | | December 31,
2005 | |
| | | | | |
2004 Senior Notes, unsecured, with interest at 12% payable semiannually on April 1 and October 1, 2005 and 8% payable semiannually on April 1, and October 1, 2006, maturing September 30, 2006, payable to officers, employees, or their affiliates | | $ | 20,000 | | $ | 203,000 | |
| | | | | |
2004 Senior Notes, unsecured, with interest at 8% payable semiannually on April 1 and October 1, 2007, maturing September 30, 2007, payable to officers, employees, or their affiliates | | 163,000 | | — | |
| | | | | |
Less discount | | (10,000 | ) | (4,000 | ) |
| | | | | |
Total | | $ | 173,000 | | $ | 199,000 | |
10
Other:
| | September 30,
2006 | | December 31,
2005 | |
| | | | | |
2002 Senior Notes, unsecured, with interest at 12% payable semiannually on April 1 and October 1 of each year, matured September 30, 2005 | | $ | — | | $ | 10,000 | |
| | | | | |
2004 Senior Notes, unsecured, with interest at 12% payable semiannually on April 1 and October 1, 2005 and 8% payable semiannually on April 1, and October 1, 2006, maturing September 30, 2006 | | 141,000 | | 500,000 | |
| | | | | |
2004 Senior Notes, unsecured, with interest at 8% payable semiannually on April 1 and October 1, 2007, maturing September 30, 2007 | | 308,000 | | — | |
| | | | | |
Less discount | | (23,000 | ) | (8,000 | ) |
| | | | | |
Total | | $ | 426,000 | | $ | 502,000 | |
During the quarter ended September 30, 2006 the Company closed an offer to extend the maturity date of the Senior Notes due September 30, 2006 (the “Senior Notes”). The Company offered to extend the maturity date to September 30, 2007 of either 50% or 100% of the outstanding principal amount of the Senior Notes and extend the expiration date to September 30, 2007 of all warrants to purchase shares of the Company’s common stock that were issued in connection with the Senior Notes of those holders electing to extend the maturity date of the Senior Notes. The holders of Senior Notes totaling $471,000 (including $163,000 of related party debt) elected to extend the maturity date, and holders of Senior Notes totaling $161,000 (including $20,000 of related party debt) elected to continue with the existing maturity date of September 30, 2006.
The Senior Notes maturing and shown as outstanding as of September 30, 2006 have been or will be paid subsequent to September 30, 2006 as the required documentation is received from the holders.
In connection with the extension of maturity date of the Senior Notes, there are now warrants to purchase 266,250 shares expiring September 30, 2007. All of these warrants are exercisable at $0.35 per share. The fair value of these warrants was estimated by the Company at $33,000, using the Black-Scholes pricing model. The value of the warrants was recorded as a reduction of the principal amount of the Senior Notes maturing September 30, 2007 and an increase to additional paid-in capital. This additional discount will be accreted and recognized as interest expense over the remaining life of these Senior Notes.
NOTE 5 — STOCKHOLDERS’ EQUITY
In January 2005, the Company sold 2,500,000 shares of its common stock in a private placement to two entities at a price of $0.80 per share, for total proceeds of $2,000,000. No commissions or payments were made to underwriters or agents out of the proceeds.
11
NOTE 6 — RELATED PARTY TRANSACTIONS
During the three months and nine months ended September 30, 2006 and 2005, the Company had the following revenues to two customers that are also shareholders of the Company:
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | |
New software licenses | | $ | 77,000 | | $ | 95,000 | | $ | 165,000 | | $ | 269,000 | |
Software license updates and product support | | 27,000 | | 6,000 | | 70,000 | | 16,000 | |
| | | | | | | | | |
Total software revenues | | 104,000 | | 101,000 | | 235,000 | | 285,000 | |
| | | | | | | | | |
Professional services | | — | | — | | 33,000 | | 10,000 | |
| | | | | | | | | |
Total revenues | | $ | 104,000 | | $ | 101,000 | | $ | 268,000 | | $ | 295,000 | |
NOTE 7 — MAJOR CUSTOMERS
During the three months ended September 30, 2006, two customers accounted for 11% and 10% of the Company’s total revenues. During the three months ended September 30, 2005, two customers accounted for 16% and 11% of the Company’s total revenues. During the nine months ended September 30, 2006 and 2005, no customer accounted for 10% or more of the Company’s total revenues.
NOTE 8 — RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 will be effective for the Company on January 1, 2007. Earlier application by the Company is not permitted because the Company previously issued interim financial statements during 2006. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) for the fiscal year of adoption. The Company has not yet determined the potential financial statement impact of adopting FIN 48.
The FASB has issued SFAS Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. This new standard will require employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements. The new standard is effective as of the end of fiscal years ending after December 15, 2006 for companies with publicly traded securities. The Company anticipates adopting SFAS No. 158 on December 31, 2006, and does not believe the adoption of the new accounting standard will result in a material impact on the consolidated financial statements of the
12
Company since the Company currently does not sponsor defined benefit pension or postretirement plans within the scope of the standard.
The FASB has issued SFAS Statement No. 157, Fair Value Measurements. This new standard provides enhanced guidance for using fair value to measure assets and liabilities, and requires expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. Under the new standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. The new standard is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. The Company anticipates adopting SFAS No. 157 on January 1, 2008, but is currently unable to determine the impact of the adoption of the standard on its consolidated financial statements.
The FASB has issued SFAS No. 154, Accounting Changes and Error Corrections. This new standard replaces APB Opinion No. 20, Accounting Changes, and SFAS Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented in accordance with the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 on January 1, 2006, and the adoption of this new accounting pronouncement did not result in a material impact on the Company’s financial position or results of operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following is a brief discussion and explanation of significant financial data, which is presented to help the reader understand the results of the Company’s financial performance for the three-month and nine-month periods ended September 30, 2006 and 2005, and the Company’s financial position at September 30, 2006. The information includes discussions of sales, expenses, capital resources and other significant financial items.
This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The ensuing discussion and analysis contains both statements of historical fact and forward-looking statements. Forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, generally are identified by the words “expects,” “believes” and “anticipates” or words of similar import. Examples of forward-looking statements include: (a) projections regarding sales, revenue, liquidity, capital expenditures and other financial items; (b) statements of the plans, beliefs and objectives of the Company or its management; (c) statements of future economic performance; and (d) assumptions underlying statements regarding the Company or its business. Forward-looking statements are subject to factors and uncertainties that could cause actual results to differ materially from the
13
forward-looking statements, including, but not limited to, those factors and uncertainties described below under “Liquidity and Capital Resources” and “Factors Affecting Future Results.”
Cimetrix is a software company that designs, develops, markets and supports factory automation solutions worldwide. The Company offers software products and professional services tailored to meet the needs of original equipment manufacturers (“OEMs”) in the areas of advanced motion control, general purpose equipment connectivity, and specialized connectivity for 300mm semiconductor wafer fabrication facilities. Revenues are derived from the initial sale of software development tools, the ongoing runtime licenses that OEMs purchase for each machine shipped with Cimetrix software, annual software support contracts and professional services that provide solutions typically incorporating Cimetrix software products. While Cimetrix products are installed in a wide range of industries, the Company has focused over the past several years on the global semiconductor and electronics industries. During 2005, Cimetrix took steps to expand its software products and professional services to meet the needs of integrated device makers, which is a natural extension of the Company’s available market. For a detailed discussion of the Company’s products, markets, notable achievements during 2005 and other Company information, please see Item 1, “Business” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
Reclassifications
The Company has reclassified certain of its revenues and operating expenses during the current year to present consolidated statements of operations that the Company believes are more consistent with industry practice. The reclassifications did not change total revenues or total operating costs and expenses, but only individual categories within these sections of the statements of operations. The reclassifications did not have an impact on net loss or loss per common share. Amounts for the comparative periods presented for 2005 have also been reclassified to conform to the current year presentation. See Note 1 to Notes to Consolidated Condensed Financial Statements.
Critical Accounting Policies
Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon financial statements which have been prepared in accordance with U. S. generally accepted accounting principles. The following accounting policies significantly affect the way the financial statements are prepared.
Revenue Recognition
The Company derives revenues from two primary sources, software and professional services. Software revenues are reported in two categories, the sale of new software licenses and software license updates and product support. The Company has “off-the-shelf” software packages in the machine control and communications product lines. Machine control products include items such as CODE 6.0, CIMControl, and CIMulation. Communications products include items such as CIM300, CIMConnect and CIMPortal. New software licenses include the sale of Software Development Kits (“SDKs”) as well as the runtime license fees associated with deployment of the Company’s software products. Software license updates and product support are typically annual contracts with customers that are paid in advance, which provides the customer access to new software releases, maintenance releases, patches and technical support personnel. Professional service sales are derived from the sale of services to design, develop and implement custom software applications.
Before the Company recognizes revenue, the following criteria must be met:
1) Evidence of a financial arrangement or agreement must exist between the Company and its customer. Purchase orders and signed OEM contracts are two examples of items accepted by the Company to meet this criterion.
14
2) Delivery of the products or services must have occurred. The Company treats either physical or electronic delivery as having met this requirement. It is the policy of the Company to provide its customers a 30-day right to return. However, because the amount of returns has been insignificant, the Company recognizes revenue immediately upon the shipment of the product. If the number of returns were to increase, the Company would establish a reserve based on a percentage of sales to account for any such returns.
3) The price of the products or services is fixed and measurable.
4) Collectibility of the sale is reasonably assured and receipt is probable. Collectibility of a sale is determined on a customer-by-customer basis. Typically the Company sells to large corporations which have demonstrated an ability to pay. If it is determined that a customer may not have the ability to pay, revenue is deferred until the payment is collected.
If a sale involves a bundled package of new software licenses, software license updates and product support, and professional services, then revenue is first allocated to software license updates and product support and professional service obligations at fair market value, and the remaining amount is applied to new software license revenue. Assuming all of the above criteria have been met, revenue from the new software license portion of the package is recognized upon shipment. Revenue from material software license updates and product support contracts is recognized ratably over the term of the contract, which is generally 12 months. Revenue from professional services is recognized as services are performed. Standard payment terms for sales are net 30 days for sales in the United States and net 45 to 60 days for foreign customers. On occasion, extended payment terms will be offered. If the Company provides payment terms greater than 90 days and collection is not reasonably assured, then revenues are generally recognized as payments are received.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective application method. Under this transition method, the Company recorded compensation expense of $93,000 and $243,000 on a straight-line basis for the three months and nine months ended September 30, 2006, respectively, for: (a) the vesting of options granted prior to January 1, 2006 (based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and previously presented in the pro-forma footnote disclosures), and (b) stock-based awards granted subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R)). In accordance with the modified prospective application method, results for the three months and nine months ended September 30, 2005 have not been restated.
The stock-based compensation expense for the three months and nine months ended September 30, 2006 has been allocated to the various categories of costs and expenses in a manner similar to the allocation of payroll expense. There was no stock compensation expense capitalized during the three months and nine months ended September 30, 2006. On the date of adoption of SFAS No. 123(R), there were 5,551,500 stock options issued to employees and directors of which, 3,564,875 options were fully vested. During the nine months ended September 30, 2006, options to purchase 635,500 shares of the Company’s common stock were issued to employees and directors, with a weighted average exercise price of $0.47 per share. During the nine months ended September 30, 2006, restricted stock awards to employees for a total of 390,000 shares of the Company’s common stock were approved, with vesting periods ranging from one to four years.
The fair value of stock options is computed using the Black-Scholes valuation model, which model utilizes inputs that are subject to change over time, and includes assumptions made by the Company with respect to the volatility of the market price of the Company’s common stock, risk-free
15
interest rates, requisite service periods, and the assumed life and vesting of stock options and stock-based awards. As new options or stock-based awards are granted and vest, additional non-cash compensation expense will be recorded by the Company.
Allowance for Doubtful Accounts
The Company offers credit terms on the sale of its products to a majority of its customers and requires no collateral from these customers. The Company performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for doubtful accounts based upon historical collection experience and expected collectibility of all accounts receivable. The Company’s allowance for doubtful accounts, which is determined based on historical experience and a specific review of customer balances, was $107,000 as of September 30, 2006.
Impairment of Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment annually or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets and is recorded in the period in which the determination is made.
Deferred Income Taxes
As part of the process of preparing consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company’s actual current income tax exposure together with assessing temporary differences resulting from differing treatment of items for income tax and financial accounting purposes. These temporary differences result in deferred tax assets and liabilities, the net amount of which is included in the Company’s consolidated balance sheet. When appropriate, the Company records a valuation allowance to reduce its deferred tax assets to the amount that the Company believes is more likely than not to be realized. Key assumptions used in estimating a valuation allowance include potential future taxable income, projected income tax rates, expiration dates of net operating loss and tax credit carryforwards, and ongoing prudent and feasible tax planning strategies. At September 30, 2006, the Company had fully reduced its net deferred tax assets by recording a valuation allowance of $11,397,000. If the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of the net recorded amount, an adjustment to reduce the valuation allowance would increase income in the period such determination was made.
16
Operations Review
The following table sets forth the percentage of costs and expenses to total revenues derived from the Company’s Consolidated Condensed Statements of Operations.
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | |
Net sales | | 100 | % | 100 | % | 100 | % | 100 | % |
| | | | | | | | | |
Operating costs and expenses: | | | | | | | | | |
Cost of revenues | | 44 | | 44 | | 41 | | 29 | |
Sales and marketing | | 23 | | 20 | | 22 | | 23 | |
Research and development | | 21 | | 26 | | 20 | | 26 | |
General and administrative | | 29 | | 28 | | 30 | | 27 | |
Depreciation and amortization | | 9 | | 3 | | 8 | | 3 | |
| | | | | | | | | |
Total operating costs and expenses | | 126 | | 121 | | 121 | | 108 | |
| | | | | | | | | |
Loss from operations | | (26 | ) | (21 | ) | (21 | ) | (8 | ) |
Other expense, net | | — | | (3 | ) | (1 | ) | (3 | ) |
| | | | | | | | | |
Net loss | | (26 | )% | (24 | )% | (22 | )% | (11 | )% |
The Company reported a net loss of $325,000 for the three months ended September 30, 2006, compared to a net loss of $246,000 for the three months ended September 30, 2005. The net loss for the three months ended September 30, 2006 includes non-cash expense of $93,000 related to the implementation of SFAS 123(R) at January 1, 2006. This standard required the Company to expense the fair value of stock options issued to employees. The net loss for the three months ended September 30, 2006 includes non-cash expense of $106,000 for depreciation and amortization, which significantly increased over the prior year period as a result of the acquisition of EFS Solutions, Inc. in October 2005.
For the nine months ended September 30, 2006, the Company reported a net loss of $878,000, compared to a net loss of $381,000 for the nine months ended September 30, 2005. The net loss for the nine months ended September 30, 2006 includes non-cash expense of $243,000 related to the implementation of SFAS 123(R) at January 1, 2006. The net loss for the nine months ended September 30, 2006 also includes non-cash expense of $322,000 for depreciation and amortization, which significantly increased over the prior year period as a result of the acquisition of EFS Solutions, Inc. in October 2005.
In addition, fees paid by the Company to outside professionals increased during the three months and nine months ended September 30, 2006, compared to the corresponding periods in the prior year.
During 2005, the Company made important changes to its organization to foster continued growth. The Company formed a new Global Services group and added additional personnel to focus on providing complementary professional services to its OEM customer base through a new OEM Solutions Center, while continuing to provide customer support. Salary and other expenses of the Global Services group directly related to client professional services, including customer service projects, are allocated to
17
cost of sales. In addition, in October 2005, the Company completed the acquisition of EFS Solutions, Inc., a company providing specialty engineering services to semiconductor companies, and formed a new Data Management Solutions Center. Through this acquisition, the Company added additional employees to the Global Services group. Professional services revenues, as a percentage of total revenues, have increased significantly in the first nine months of 2006, as compared to the first nine months of 2005, due to a moderate increase in revenue from customer support contracts, a more significant increase in professional services revenue from the OEM Solutions Center and the incremental increase in professional services revenue from the new Data Management Solutions Center.
Results of Operations
Revenues
The following table summarizes revenues (including related party revenues) by category and as a percent of total revenues:
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | | | | | | | | | |
New software licenses | | $ | 684,000 | | 55 | % | $ | 523,000 | | 50 | % | $ | 1,954,000 | | 48 | % | $ | 1,967,000 | | 59 | % |
Software license updates and product support | | 272,000 | | 22 | % | 273,000 | | 26 | % | 813,000 | | 20 | % | 785,000 | | 23 | % |
| | | | | | | | | | | | | | | | | |
Total software revenues | | 956,000 | | 77 | % | 796,000 | | 76 | % | 2,767,000 | | 68 | % | 2,752,000 | | 82 | % |
| | | | | | | | | | | | | | | | | |
Professional services | | 287,000 | | 23 | % | 247,000 | | 24 | % | 1,278,000 | | 32 | % | 589,000 | | 18 | % |
| | | | | | | | | | | | | | | | | |
Total revenues | | $ | 1,243,000 | | 100 | % | $ | 1,043,000 | | 100 | % | $ | 4,045,000 | | 100 | % | $ | 3,341,000 | | 100 | % |
Total revenues increased by $200,000, or 19%, to $1,243,000, for the three months ended September 30, 2006, from $1,043,000 for the three months ended September 30, 2005. For the nine months ended September 30, 2006, total revenues increased by $704,000, or 21%, to $4,045,000 from $3,341,000 for the nine months ended September 30, 2005. As the table above indicates, the increase in total revenues for the three months ended September 30, 2006 was attributed to an increase in new software license revenues and professional services revenues, partially offset by a slight decrease in software license updates and product support revenues. The increase in total revenues for the nine months ended September 30, 2006 was attributed to an increase in software license updates and product support revenues and professional services revenues, partially offset by a slight decrease in new software license revenues. The mix of revenue categories is subject to change on a quarter-to-quarter basis. The increase in professional services revenue in the current year compared to last year can be attributed to the positive results realized from the investment in the Global Services group and the additional revenues generated by the new Data Management Solution Center. The slight decrease in software license revenues on a year-to-date basis in the current year compared to last year can be attributed to lower revenues from the sale of SDK’s to new customers. There is increased competitive price pressure for the Company’s 300mm OEM Connectivity SDK and the potential market is limited. The Company’s runtime revenue associated with machine shipments from its OEM customers increased significantly on a year-over-year basis, which management believes has a correlation to the increase in the global semiconductor and electronics capital equipment markets as compared to last year.
For the past several years, the Company’s sales strategy has been focused on winning new major OEM customers. The Company has generally reported increases in software sales over this period,
18
reflecting the success of the Company in achieving new major OEM design wins, combined with the modest recovery of the capital equipment markets in the semiconductor and SMT industries. Each new OEM customer results in another equipment manufacturer integrating the Company’s software into the tools that it sells to factories around the world. This yields additional revenues for the Company in several ways, including software revenues from the initial software license purchase and recurring “runtime” revenue associated with the shipment of each piece of equipment by the OEM to its customers, as well as ongoing support and maintenance contracts.
The Company experienced limited sales growth in 2005 compared to 2004, but this was achieved in spite of an estimated decrease of 11% in semiconductor capital equipment spending during 2005 as reported by a third-party industry research firm. The Company counteracted this reported downturn in capital equipment spending by seeking increased revenue from three key initiatives, (i) CIMPortal product sales resulting from industry adoption of the new SEMI Interface A standard, (ii) complementary professional services for OEM and end-user customers, and (iii) growing the worldwide customer base with initiatives in the Japanese and Asian markets .The sales growth in 2006 discussed above can be attributed to the success of these initiatives.
New SEMI standards were approved in late 2004, including the new Interface A standard, which enables semiconductor companies to have a second network connection to semiconductor manufacturing equipment offering access to additional data generated during the manufacturing process. This new standard opens up new market opportunities for the Company with its CIMPortal product line. The Company believes that the critical need for data will result in the new Interface A standard becoming a requirement on all 300mm equipment over the next several years. While the Company cannot control the rate of industry adoption of this new standard, the Company has invested heavily in its CIMPortal product line in order to be ready for the “early adopter” customers that want to be leaders in offering Interface A. However, integrated device makers have been slower to demand Interface A from their OEM customers than previously forecast.. This has resulted in less opportunities for the Company and lower than anticipated software sales. However, the Company made the most of the available opportunities and several new top-tier OEM customers selected CIMPortal after rigorous competitive evaluations. The Company believes that it has a technically superior CIMPortal product and received purchase orders from five new “top-tier” semiconductor OEM customers during the first nine months of 2006, as well as a leading IDM.
While the Company’s focus over the past several years has been on the sale of software products, as previously mentioned, the Company began an initiative in 2005 to provide more comprehensive professional services to its OEM customers that want a full, single-source solution provider capable of being their worldwide “outsource partner” for factory automation (“FA”) connectivity. As a result of this initiative, the Company did experience continued growth in services and support revenues during 2005 and during the first nine months of 2006. As previously discussed, the Company formed a new Global Services group and established an OEM Solution Center focused on meeting the professional services needs of its OEM customers and a Data Management Solution Center, with the intention of proactively marketing its capabilities to provide data management solutions to integrated device maker end user customers. The Company is beginning to see the results of these initiatives with a significant increase in professional services revenue in the three months and nine months ended September 30, 2006, as compared to the same periods in 2005, and believes there are more opportunities for growth.
While the Company cannot predict market or economic conditions for subsequent years, it believes that it has added significant new customers in its goal to achieve critical operational mass and, with the expansion of its Global Services group, is positioned for future worldwide sales growth.
Cost of Revenues
The Company’s cost of revenues as a percentage of total revenues for the three months ended September 30, 2006 and 2005 was 44%. Cost of revenues increased $91,000, or 20%, to $545,000 for
19
2006, from $454,000 for 2005. By comparison, cost of revenues as a percentage of total revenues for the nine months ended September 30, 2006 and 2005 was 41% and 29%, respectively. Cost of revenues increased $701,000, or 72%, to $1,669,000 for 2006, from $968,000 for 2005. This increase was due to the increased percentage of total revenues attributed to professional services in the current year, which revenue has higher labor and other costs of revenues than software revenues. In addition, the expansion of the Global Services group resulted in more costs charged to cost of revenues during 2006, as compared to 2005. Cost of revenues as a percentage of total revenues will vary from year to year depending on the mix of software and service sales, the type of service projects completed, the pricing strategy for the projects, the extent of utilization of outside resources, and other factors.
Sales and Marketing
Sales and marketing expenses increased $76,000, or 36%, to $287,000 in the three months ended September 30, 2006, from $211,000 in the same period of 2005. For the nine months ended September 30, 2006, sales and marketing expenses increased $84,000, or 11%, to $870,000 from $786,000 in the same period of 2005. Sales and marketing expenses reflect the direct payroll and related travel expenses of the Company’s sales and marketing staff, the development of product brochures and marketing materials, press releases, and the costs related to the Company’s representation at industry trade shows. The increase in sales and marketing expenses is primarily related to an increase in staff to better support our new Japanese OEM customers.
Research and Development
Research and development expenses decreased $17,000, or 6%, to $256,000 during the three months ended September 30, 2006, from $273,000 in the same period of 2005. For the nine months ended September 30, 2006, research and development expenses decreased $50,000, or 6%, to $809,000 from $859,000 in the same period of 2005. The Company has committed to invest significant research and development resources for its new CIMPortal product family, as well as pursue other new product opportunities. Research and development expenses include only direct costs for wages, benefits, materials, and education of technical personnel. All indirect costs such as rents, utilities, depreciation and amortization are included in general and administrative expenses, as discussed above. Because the Company released its CIMPortal version 1.0 software product in early 2006, the costs associated with CIMPortal research and development have decreased during the three months and nine months ended September 30, 2006, as compared to the same periods in 2005.
General and Administrative
General and administrative expenses increased $76,000, or 26%, to $365,000 in the three months ended September 30, 2006, from $289,000 in the same period of 2005. For the nine months ended September 30, 2006, general and administrative expenses increased $313,000 or 34%, to $1,227,000, from $914,000 in the same period of 2005. These increases resulted from an increase in professional fees, additional accounting personnel, and stock-based compensation expense reported for the first time by the Company in 2006. In addition, the Company has experienced higher legal fees at it has entered into contracts with top tier OEM customers around the world. General and administrative expenses include all direct costs for administrative and accounting personnel, and all rents and utilities for maintaining Company offices.
Depreciation and Amortization
Depreciation and amortization expense increased $76,000, or 245%, to $107,000 in the three months ended September 30, 2006, from $31,000 in the same period of 2005. For the nine months ended September 30, 2006, depreciation and amortization increased $229,000 or 246%, to $322,000, from $93,000 in the same period of 2005. The increase in depreciation and amortization expense in the current year is due to the amortization of the intangible assets acquired from EFS Solutions in October 2005.
20
Other Income (Expenses)
Interest and other income for the three months ended September 30, 2006 decreased by $8,000 to $10,000, from $18,000 for the three months ended September 30, 2005. For the nine months ended September 30, 2006, interest and other income decreased by $17,000 to $28,000, from $45,000 for the nine months ended September 30, 2005. The decrease resulted from lower levels of cash reserves in the current year, offset by the Company earning a higher rate of return on its cash reserves in the current year.
Interest expense decreased $31,000, or 63%, to $18,000 for the three months ended September 30, 2006, compared to $49,000 for the comparable period in 2005. For the nine months ended September 30, 2006, interest expense decreased $93,000, or 63%, to $54,000 from $147,000 for the comparable period in 2005. This decrease was attributable to a reduction in the outstanding principal balance of the Company’s Senior Notes.
Liquidity and Capital Resources
At September 30, 2006, the Company had current assets of $1,682,000, including cash and cash equivalents of $476,000, and current liabilities of $1,447,000, resulting in working capital of $235,000. Excluding deferred revenue of $479,000 at September 30, 2006, which requires the Company to provide services and support but does not represent a scheduled obligation requiring the outlay of Company funds, the Company had current assets exceeding current liabilities in excess of $700,000.
As of September 30, 2006, the Company had $632,000 of Senior Notes outstanding due to related parties and others, $599,000 net of discount, comprised of the following:
8% Senior Notes due September 30, 2006 | | $ | 161,000 | |
8% Senior Notes due September 30, 2007 | | 471,000 | |
Senior Note discount | | (33,000 | ) |
Total | | $ | 599,000 | |
During the quarter ended September 30, 2006 the Company closed an offer to extend the maturity date of the Senior Notes due September 30, 2006 (the “Senior Notes”). The Company offered to extend the maturity date to September 30, 2007 of either 50% or 100% of the outstanding principal amount of the Senior Notes held by each holder and extend the expiration date to September 30, 2007 of all warrants to purchase shares of the Company’s common stock that were issued in connection with the Senior Notes of those holders electing to extend the maturity date of the Senior Notes. The holders of Senior Notes totaling $471,000 (including $163,000 of related party debt) elected to extend the maturity date, and holders of Senior Notes totaling $161,000 (including $20,000 of related party debt) elected to continue with the existing maturity date of September 30, 2006.
The Senior Notes maturing and shown as outstanding as of September 30, 2006 have been or will be paid subsequent to September 30, 2006 as the required documentation is received from the holders.
In connection with the extension of maturity date of the Senior Notes, there are now warrants to purchase 266,250 shares expiring September 30, 2007. All of these warrants are exercisable at $0.35 per share. The fair value of these warrants was estimated by the Company at $33,000, using the Black-Scholes pricing model. The value of the warrants was recorded as a reduction of the principal amount of the Senior Notes maturing September 30, 2007 and an increase to additional paid-in capital. This additional discount will be accreted and recognized as interest expense over the remaining life of these Senior Notes.
21
Historically, the Company has incurred net losses and negative cash flows from operations. As of September 30, 2006, the Company had an accumulated deficit of $30,514,000, but had total stockholders’ equity of $1,122,000. During the first nine months of 2006, the Company reported a net loss of $878,000 and used cash of $199,000 in operating activities. Results of operations in the current year have been negatively impacted by significant non-cash expenses, including $322,000 of depreciation and amortization, much of which resulted from the amortization of intangible assets recorded in the EFS Solutions acquisition, and $243,000 of stock-based compensation as a result of adopting SFAS 123(R) on January 1, 2006. Management believes that continued increases in sales and improvements in operations, together with the working capital position of the Company, will be sufficient to fund planned operations for the next twelve months. However, there can be no assurance that operations and operating cash flows will improve in the near future. If the Company is unable to obtain profitable operations and maintain positive operating cash flows sufficient to meet scheduled debt obligations, it may need to seek additional funding or be forced to scale back its development plans or to curtail operations.
Net cash used in operating activities for the nine months ended September 30, 2006 was $199,000, compared to net cash used in operating activities of $358,000 for the same period in 2005. The decrease in net cash used in operating activities in the current period resulted primarily from the increase in revenues, as discussed above, and collections of accounts receivable, offset by increases in operating expenses and payments of accounts payable and accrued expenses.
Net cash used in investing activities for the nine months ended September 30, 2006 and September 30, 2005 was $22,000 and $100,000, respectively, to purchase property and equipment.
Net cash used in financing activities for the nine months ended September 30, 2006 was $81,000, consisting of payments of debt. Net cash provided by financing activities for the nine months ended September 30, 2005 was $1,173,000 consisting of $2,000,000 from the sale of common stock and $31,000 from the exercise of warrants, net of debt payments of $858,000.
The Company has not been adversely affected by inflation. However, there are potential economic risks inherent in foreign trade. Revenues from foreign customers were $1,626,000 during the nine months ended September 30, 2006, representing 40% of the Company’s net sales, compared to $1,421,000, or 42%, of total revenues in 2005. To minimize the risk from changes in foreign currency exchange rates, the Company’s export sales are transacted in United States dollars.
The Company considers its cash resources and projected cash from operations to be sufficient to meet the operating needs of its current level of business for the next twelve months, including payment of the portion of the Senior Notes maturing in September 2007.
Factors Affecting Future Results
Total revenues for the first nine months of 2006 increased 21% compared to the first nine months of 2005. However, new software license revenues decreased during this period compared to the same period last year. Revenues from new software licenses included sales of Software Development Kits (SDK’s) and runtime revenue associated with OEM customer machine shipments. Runtime revenue increased significantly year-over-year in accordance with the growth in capital expenditures in the semiconductor and electronics industries, and as the Company’s new customers gained over the past several years started to ship equipment with the Company’s software. However, SDK sales were lower during the nine months ended September 30, 2006, as compared to the same period in 2005. The Company believes SDK sales declined year-over-year for several reasons, including (i) many OEM customers are focused on fulfilling current customer orders and have postponed new software development projects, and (ii) fewer companies are entering the market for semiconductor 300mm capital equipment, which has presented fewer opportunities for the Company.
22
The Company continues to focus on incrementally expanding its customer base and product line in order to increase revenues. In addition, management believes the formation of its new Data Management Solution Center will add significant services revenue if the Company is able to continue to serve the prior EFS Systems customers and leverage the Company’s expertise in Interface A to sell products and services directly to end user customers. Management believes that its expanded customer base will enable the Company to increase its revenues year-over-year for fiscal 2006, while industry analysts predict a flat to slightly up market in capital equipment spending for the industries served by the Company. As discussed below, the Company is also investing in a number of initiatives that management expects to contribute to future growth.
The Company has been investing in its new CIMPortal product line, which meets the new Interface A SEMI standard. While this new standard has been promulgated by SEMI, it is not yet required by end users in the marketplace. The timing of the introduction of this standard by the semiconductor industry will directly affect the adoption and market opportunities for the Company’s CIMPortal product line.
The Company has also been investing in pursuing the Japanese market for its products with its new distributor CIM, Inc. While these efforts have led to some increased sales in Japan, it is not clear if CIM and the Company will be successful in winning sufficient new business in Japan, and if so, when the Company will see an increase in revenues sufficient to offset the additional costs incurred by the Company.
The Company has also been investing in its new Global Services group, which is available to assist customers in providing professional services and complete turnkey solutions. It is not clear if customers will accept the Company’s new service offerings, and if so, when the Company will obtain an increase in revenue from new customer service projects sold by this group sufficient to offset the increased costs incurred by the Company.
The Company’s future operating results and financial condition are difficult to predict and will be affected by a number of factors. The markets for the Company’s products are emerging and specialized, and the Company’s technology has been commercially available for a relatively short time. Accordingly, the Company has limited experience with the use and acceptance of its products and the extent of the modifications, adaptations and custom applications that are required to integrate its products and satisfy customer performance requirements. There can be no assurance that the emerging markets for industrial motion control that are served by the Company will continue to grow, or that the Company’s existing and new products will satisfy the requirements of those markets and achieve a successful level of customer acceptance.
Because of these and other factors, past financial performance is not necessarily indicative of future performance, and historical trends should not be used to anticipate future operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A significant portion of the Company’s cash equivalents and short-term investments bear variable interest rates that are adjusted to market conditions. Changes in market rates will affect interest earned and potentially the market value of the principal of these instruments. The Company does not utilize derivative instruments to offset the exposure to interest rate fluctuations. Significant changes in interest rates may have a material impact on the Company’s investment income, but likely will not have a material impact on the Company’s consolidated results of operations.
The Company has significant sales to foreign customers and is therefore subject to the effects of changes in foreign currency exchange rates. The Company does not utilize derivative instruments to
23
offset the exposure to changes in foreign currency exchange rates. To minimize this risk, the Company’s export sales are transacted in United States dollars.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Based on their evaluations as of September 30, 2006, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules of the SEC. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have also concluded that, as of the end of such period, the Company’s disclosure controls and procedures are also effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting
There have not been any changes in the Company’s internal control over financial reporting identified in connection with the evaluation of disclosure controls and procedures discussed above that occurred during the quarter ended September 30, 2006 or since that date that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved with any pending litigation.
ITEM 1A. RISK FACTORS
During the quarter ended September 30, 2006, there were no material changes to the risk factors previously reported by the Company in its Annual Report on Form 10-K for the year ended December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended September 30, 2006.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit No. | | Description |
31.1 | | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | | Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | | Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
99.1 | | Press Release dated November 14, 2006 |
25
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| REGISTRANT |
| | |
| CIMETRIX INCORPORATED |
| | |
Dated: November 14, 2006 | | |
| | |
| By: | /S/ Robert H. Reback |
| | Robert H. Reback |
| | President and Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| By: | /S/ Dennis P. Gauger |
| | Dennis P. Gauger |
| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
26
