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CIMETRIX INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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 six-month periods ended June 30, 2011 and June 30, 2010 and the Company's financial position at June 30, 2011. 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, 2010. 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," "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 forward-looking statements, including, but not limited to, those factors and uncertainties described below under "Liquidity and Capital Resources," "Factors Affecting Future Results" and "Risk Factors," and those factors set forth under "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2010. 9-------------------------------------------------------------------------------- Table of Contents Cimetrix is a software company that designs, develops, markets and supports factory automation and tool control products for today's smart, connected factories. The Company's primary customers are original equipment manufacturers (OEM's) that supply precision electronics equipment for semiconductor wafer fabrication, solar/photovoltaic (PV) and other electronics manufacturing. Revenues are derived from the sales of software and services. Software includes the initial sale of software development kits (SDK's), the ongoing runtime licenses for each machine shipped with Cimetrix software and annual contracts for software license updates and product support. Services include the sale of professional services that provide customers with software 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, which includes the growing solar photovoltaic (PV) and light emitting diode ("LED") markets. Critical Accounting Policies The Company prepares its condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles. The Company's condensed consolidated financial statements are based on the application of certain accounting policies, the most significant of which are described in Note 1-Summary of Significant Accounting Policies included in the Company's 2010 Annual Report filed on Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations and may significantly affect the Company's reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the Company's future financial condition and results of operations. 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. Revenues The following table summarizes revenues by category and as a percent of total revenues: Three Months Ended Six Months Ended June 30, June 30, 2011 2010 2011 2010 New software licenses $ 1,483,000 65% $ 1,107,000 75% $ 2,931,000 68% $ 1,858,000 72% Software license updates and product support 215,000 10% 207,000 14% 437,000 10% 379,000 15% Total software revenues 1,698,000 75% 1,314,000 89% 3,368,000 78% 2,237,000 87% Professional services 571,000 25% 170,000 11% 954,000 22% 346,000 13% Total revenues $ 2,269,000 100% $ 1,484,000 100% $ 4,322,000 100% $ 2,583,000 100% 10-------------------------------------------------------------------------------- Table of Contents Total revenues increased by $785,000, or 53%, to $2,269,000 for the three months ended June 30, 2011, from $1,484,000 for the three months ended June 30, 2010. For the six months ended June 30, 2011, total revenues increased $1,739,000 or 67% to $4,322,000 from $2,583,000 for the six months ended June 30, 2010. The increase in revenues was primarily attributable to the increase in new software licenses, which increased from $1,858,000 in the first half of 2010 to $2,931,000 in the first half of 2011. New software license revenues include the initial sale of software development kits and the ongoing runtime licenses that equipment suppliers purchase for each machine shipped with Cimetrix software. The primary markets served by Cimetrix customers are the semiconductor, PV, LED, and other electronics markets, all of which are experiencing growth in 2011. Revenue associated with software license updates and product support increased 4% for the three months ended June 30, 2011 as compared to the prior year period. For the six months ended June 30, 2011, revenues associated with software license updates and product support increased 15% over the six months ended June 30, 2010. The increase in revenues from software license updates and product support was a result of new customers added since June 30, 2010. Total software revenues increased to $1,698,000 for the three months ended June 30, 2011, as compared to $1,314,000 for the three months ended June 30, 2010. For the six months ended June 30, 2010, software revenues increased to $3,368,000 as compared to $2,237,000 for the six months ended June 30, 2010. Again, this increase in revenues is primarily attributable to the increase in new software license revenues as discussed above. Professional services revenues increased 176% year-over-year for the six months ended June 30, 2011. In the third quarter of 2010, the Company modified its business model with regards to professional services. The Company formed relationships with services partners capable of providing qualified Microsoft developers and/or industry knowledgeable engineers to augment Cimetrix project teams. Cimetrix will continue to maintain a cadre of staff to perform some professional services engagements directly. When increased business opportunities for professional services projects present themselves, as they did in the first half of 2011, Cimetrix can quickly arrange project teams using one or more of its services partners. This approach increases Cimetrix's costs of services for these projects, but these costs are variable costs that are only incurred if and when Cimetrix secures these additional projects. Results of Operations 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 Six Months Ended June 30, June 30, 2011 2010 2011 2010 Net sales 100 % 100 % 100 % 100 % Operating costs and expense: Cost of revenues 42 21 41 23 Sales and marketing 12 14 13 16 Research and development 20 9 17 9 General and administrative 15 21 16 24 Depreciation and amortization 1 0 1 1 Total operating costs and expenses 90 65 88 73 Income from operations 10 35 12 27 Other expense, net 0 (2 ) 0 (2 ) Net income 10 % 33 % 12 % 25 % 11-------------------------------------------------------------------------------- Table of Contents The Company's operating results for the three-month and six-month periods ended June 30, 2011 reflect the effects of the recovery in the economy as well as changes made to our business model to be more efficient and concentrate on our core strengths of developing leading software products. The Company reported net income of $225,000 for the three months ended June 30, 2011, compared to $481,000 for the three months ended June 30, 2010. The net results for all periods include non-cash stock-based compensation expense and non-cash depreciation and amortization expense. For the three-month periods ended June 30, 2011 and June 30, 2010, stock-based compensation expense was $16,000 and $15,000, respectively, and depreciation and amortization expense was $12,000 and $6,000, respectively. The Company reported net income of $515,000 for the six months ended June 30, 2011 as compared to the net income of $636,000 for the six months ended June 30, 2010. For the six-month periods ended June 30, 2011 and June 20, 2010, the Company did not have any bad debt expense. For the six-month periods ended June 30, 2011 and June 30, 2010, stock-based compensation expense was $27,000 and $41,000 respectively and depreciation and amortization expense was $23,000 and $13,000, respectively. The Company used net cash in operating activities totaling $194,000 for the six months ended June 30, 2011, compared to net cash generated from operating activities of $542,000 for the six months ended June 30, 2010. The net difference between 2011 and 2010 is attributable mostly to the increase in accounts receivable from $719,000 on June 30, 2010 to $1,325,000 at June 30, 2011. Cost of Revenues The Company's cost of revenues as a percentage of total revenues for the three months ended June 30, 2011 was 42%, compared to 21% for the three months ended June 30, 2010. Cost of revenues as a percentage of total revenues for the six months ended June 30, 2011 and 2010 was 41% and 23%, respectively. This increase was a combination of investment in our current products, payroll costs related to increased staff and the use of service partners to augment our engineering team to deliver Professional Services. Cost of revenues as a percentage of total revenues will vary from period to period depending on the mix of software and professional service revenues, 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 $73,000, or 35%, to $279,000 during the three months ended June 30, 2011, from $206,000 during the three months ended June 30, 2010. During the six months ended June 30, 2011, sales and marketing expenses increased $144,000 or 35% to $552,000 from $408,000 for the six months ended June 30, 2010. The increase was primarily a result of increased sales and marketing activities for the Company's products and commissions on higher revenues. Although sales and marketing expenses increased over 2010, the percentage of revenue for sales and marketing expenses decreased from 16% of total revenues for the six months ended June 30, 2010 to 13% of total revenues for the six months ended June 30, 2011 due to increased revenues. 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, costs associated with press releases, branding, search engine optimization, website design improvements and costs related to the Company's representation at industry trade shows. Research and Development Research and development expenses increased $307,000, or 226%, to $443,000 during the three months ended June 30, 2011, from $136,000 during the three months ended June 30, 2010. During the six months ended June 30, 2011, research and development expenses increased $477,000 or 196% to $720,000 from $243,000 for the six months ended June 30, 2010. The increase is primarily due to a resurgence of investment in our current products as well as our new CIMControlFramework™ software product. Research and development expenses include only direct costs for wages, benefits, materials, and education of technical personnel involved in new product development activities. All indirect costs such as rents, utilities, depreciation and amortization are included in general and administrative expenses, as discussed below. 12-------------------------------------------------------------------------------- Table of Contents General and Administrative General and administrative expenses increased $20,000 or 6%, to $337,000 in the three months ended June 30, 2011, from $317,000 in the three months ended June 30, 2010. During the six months ended June 30, 2011, general and administrative expenses increased $76,000 or 12% to $702,000 from $626,000 for the six months ended June 30, 2010. The increase in general and administrative expenses is mostly attributable to professional and legal fees related to improvements made to customer contracts to protect Company intellectual property and recruiting practices as well as investments in improving internal systems. Although general and administrative expenses increased over 2010, the percentage of revenue for general and administrative expenses decreased from 24% of total revenues for the six months ended June 30, 2010 to 16% of total revenues for the six months ended June 30, 2011 due to increased revenues. 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 $6,000 or 100% to $12,000 in the three months ended June 30, 2011, from $6,000 in the three months ended June 30, 2010. During the six months ended June 30, 2011, depreciation and amortization increased $10,000 or 77%, to $23,000 from $13,000 in the six months ended June 30, 2010. The increase is attributable to the Company's investment in equipment upgrades and new financial software. Other Income (Expense) Interest expense for the three months ended June 30, 2011 decreased by $9,000, to $17,000, from $26,000 for the three months ended June 30, 2010. During the six months ended June 30, 2011, interest expense decreased $23,000 or 43%, to $31,000 from $54,000 in the six months ended June 30, 2010. The decrease in interest expense for the three and six month periods ended June 30, 2011, compared to the same periods in 2010 was due, primarily, to the termination of the Company's bank loan with Silicon Valley Bank in July 2010. Interest income for the three months ended June 30, 2011 was $1,000 compared to $0 for the same period in 2010. During the six months ended June 30, 2011, interest income was $2,000 compared to $0 for the same period in 2010. The increase in interest income is a result of higher cash balances, year over year. Liquidity and Capital Resources At June 30, 2011, the Company had current assets of $2,627,000, including cash and cash equivalents of $1,260,000, and current liabilities of $1,025,000, resulting in a working capital of $1,602,000 compared to $405,000 for the same period in 2010. Excluding deferred revenue of $236,000, which requires the Company to provide services and support, but does not represent a scheduled obligation requiring the outlay of Company, the Company's current assets exceeded current liabilities by $1,838,000 at June 30, 2011. Related Party and Senior Notes - At June 30, 2011, the Company had a total of $697,000 in outstanding Senior Notes, of which $321,000 were held by related parties. The Senior Notes are unsecured, with interest at 10%, payable semiannually on April 1 and October 1 and mature September 30, 2012. 13-------------------------------------------------------------------------------- Table of Contents In July, 2011 the Company notified the holders of the Senior Notes that it intends to pay these notes in full during the third quarter 2011. The Company paid in full all outstanding interest on the Senior Notes on August 1, 2011 and is working with individual note holders to collect the notes and make final principal payments. These repayments of the Company's Senior Notes, including those held by related parties, total $697,000 and will reduce the Company's long-term debt to $0. The Company is using the cash generated from operations over the past two years to pay off this debt, which will reduce the remaining interest expense due on these notes through September 30, 2012 by $80,000. As of June 30, 2011, there were warrants issued to Senior Note holders to purchase a total of 166,000 common shares of the Company at an exercise price of $0.05 per share. The warrants expire on September 30, 2012. In February, 2011, The Company paid $75,000 to a related party for repayment of a Senior Note. Results of Operations and Cash Flows - While the Company has posted eight consecutive quarters of positive net income beginning in mid-2009, the Company has a prior history of net losses and negative cash flows from operations. As of June 30, 2011, the Company had an accumulated deficit of $32,396,000 and total stockholders' equity of $1,111,000. During the six months ended June 30, 2011, the Company reported net income of $515,000 compared to $636,000 for the same period in 2010. The Company used net cash in operating activities of $194,000 for the six months ended June 30, 2011 as compared to net cash provided by operating activities of $542,000 for the same period in 2010. The decrease in net cash from operating activities in the current year over the same period in 2010 was primarily due to the increase in accounts receivable from June 30, 2010 which was $719,000 compared to $1,325,000 at June 30, 2011. Net cash used in investing activities during the six months ended June 30, 2011, was $41,000 and consisted of software and hardware upgrades. Net cash used in investing activities during the six months ended June 30, 2010, was $18,000 and consisted of hardware upgrades. Net cash used in financing activities for the six months ended June 30, 2011 was $64,000, comprised of $11,000 in proceeds from the issuance of common stock related to the exercise of Senior Note warrants, and payments of debt to related parties of $75,000. The Company has not been adversely affected by inflation. Revenues from foreign customers were $1,904,000 during the six months ended June 30, 2011, representing 44% of the Company's total revenues, compared to $1,243,000 or 48%, of total revenues during the same period in 2010. There are potential economic risks inherent in foreign trade. To minimize the risk from changes in foreign currency exchange rates, the Company's export sales are transacted in United States dollars. Factors Affecting Future Results Total revenues for the first six months of 2011 increased 67% compared to the first six months of 2010, reflecting increased purchases of Cimetrix new software licenses as our customers shipped more capital equipment, generating revenues from new software licenses including sales of software development kits and runtime revenue associated with OEM customer machine shipments. Runtime revenue increased year-over-year as new customer shipments were increased due to the overall growth in capital equipment shipments by the Company's customers. Sales of software development kits are difficult for the Company to forecast, as the Company is highly dependent on the timing of the equipment suppliers' decision to initiate a new machine development program and utilize the Company's products. 14-------------------------------------------------------------------------------- Table of Contents The Company continues to focus on incrementally expanding its customer base and product line in order to increase revenues. In 2008, the Company announced its new CIMControlFramework software for tool control, which should enable the Company to provide equipment makers with a complete software solution that will reduce their time-to-market for new tool developments. As equipment makers reduce their costs and internal resources, Cimetrix believes the market for CIMControlFramework will grow as equipment makers begin to invest in new machine development programs. Ultimately, the Company's business is driven by the global demand for electronic devices by consumers and businesses. Even though the outlook for 2011 appears to suggest a continued recovery, any changes in the global economic conditions could adversely affect Cimetrix's business and the results of operations. In the current environment, the Company's ability to accurately predict future operating results associated with our customer shipments of machines is particularly low. The Company continues to pursue customers through its professional services group, which is available to assist customers by providing professional services and complete turnkey solutions. The ability of the Company to provide both products and services to its customer base is becoming a more important factor as customers seek to limit the number of suppliers, reduce their internal staff, and prefer single source responsibility. The experience gained delivering professional services also provides valuable inputs to new product development roadmaps. 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. There can be no assurance that the markets for industrial motion control, connectivity, and tool 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. |