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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 nine-month periods ended September 30, 2012 and September 30, 2011 and the Company's financial position at September 30, 2012. 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, 2011. 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, 2011. Cimetrix is a software company that designs, develops, markets and supports factory automation and equipment control solutions worldwide. The Company offers software products and professional services tailored to meet the needs of equipment suppliers in the areas of advanced equipment control, general purpose equipment connectivity, and specialized connectivity for 300mm semiconductor wafer fabrication facilities. Revenues are derived from the sales of software and services. Software includes the initial sale of software development kits, the ongoing runtime licenses that equipment suppliers purchase 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 equipment in a wide range of industries, the Company has focused on the global semiconductor, photovoltaic (PV) and high brightness light emitting diode (HB-LED) industries. 9 -------------------------------------------------------------------------------- Table of Contents 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 to the Company's audited financial statements included in the Company's 2011 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 Revenues The following table summarizes revenues by category and as a percent of total revenues: Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 New software licenses $ 890,000 68% $ 922,000 52% $ 2,964,000 69% $ 3,853,000 63% Software license updates and product support 278,000 21% 249,000 14% 736,000 17% 686,000 12% Total software revenues 1,168,000 89% 1,171,000 66% 3,700,000 86% 4,539,000 75% Professional services 146,000 11% 598,000 34% 619,000 14% 1,552,000 25% Total revenues $ 1,314,000 100% $ 1,769,000 100% $ 4,319,000 100% $ 6,091,000 100% Total revenue decreased by $455,000, or 26%, to $1,314,000 for the three months ended September 30, 2012, compared to total revenue of $1,769,000 for the three months ended September 30, 2011. For the nine months ended September 30, 2012, total revenue decreased by $1,772,000 or 29% to $4,319,000 from $6,091,000 for the nine months ended September 30, 2011. On a sequential basis, total revenue decreased by $103,000, or 7%, compared to the three months ended June 30, 2012. The decrease in revenue for the first half of the year was aligned with industry analysts' 2012 forecasts for the overall semiconductor capital equipment market to decline 10-20% year-over-year, along with declines in the PV and HB-LED capital markets of 60% and 40%, respectively. At the start of 2012, industry analysts predicted that the semiconductor capital equipment market would experience solid growth in the second half of 2012. While we hoped this consensus would be correct, the Company maintained a conservative operating plan, since Cimetrix's experience is that the semiconductor manufacturing market is highly efficient and can change quickly in response to global economic conditions, which is what happened. Data from trade organizations and leading equipment makers indicates that the semiconductor capital equipment industry slowed around 15-20% from the second to the third quarter of 2012. New software license revenue includes the initial sale of software development kits and the ongoing runtime licenses that equipment suppliers purchase for each machine shipped with Cimetrix software. New software license revenue decreased by $32,000, or 3%, to $890,000 for the three months ended September 30, 2012, compared to new software license revenue of $922,000 for the three months ended September 30, 2011. For the nine months ended September 30, 2012, new software license revenue decreased $889,000 or 23% to $2,964,000 from $3,853,000 for the nine months ended September 30, 2011. On a sequential basis, new software license revenue decreased by $216,000, or 20%, compared to the three months ended June 30, 2012, which was in line with the general industry trends. As expected, new software license revenue decreased significantly year-over-year, and was aligned with industry analysts' 2012 forecasts for the overall semiconductor capital equipment market to decline 10-20% year over-year, along with declines in the PV and HB-LED capital markets of 60% and 40%, respectively. 10 -------------------------------------------------------------------------------- Table of Contents Revenue associated with software license updates and product support increased by $29,000, or 12%, to $278,000 for the three months ended September 30, 2012 as compared to $249,000 for the same period in 2011. For the nine months ended September 30, 2012, revenue associated with software license updates and product support increased 7% over the nine months ended September 30, 2011. The increase in revenue from software license updates and product support was a result of new customers added since September 30, 2011. Total software revenue decreased to $1,168,000 for the three months ended September 30, 2012, as compared to $1,171,000 for the three months ended September 30, 2011. For the nine months ended September 30, 2012, software revenue decreased to $3,700,000 as compared to $4,539,000 for the nine months ended September 30, 2011. Again, this decrease in revenue is attributable to the overall decline in the semiconductor, PV and HB-LED capital equipment markets since the second half of 2011. Similarly, professional services revenue decreased, year-over-year for the nine months ended September 30, 2012. The decrease in professional services contracts is partially due to the overall decline in the semiconductor, PV and HB-LED industry as equipment makers look to save costs. While Cimetrix is a software products company, professional services is a complementary service we offer to assist customers in using Cimetrix products. Some customers purchase Cimetrix software development kits and perform the integration work themselves. Other customers will only purchase Cimetrix products if Cimetrix is also able to provide professional services assistance. Professional service projects are difficult to forecast and are subject to wide fluctuations in revenue. Results of Operations The following table sets forth the percentage of costs and expenses to total revenues derived from the Company's Condensed Consolidated Statements of Income: Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Total Revenues 100 % 100 % 100 % 100 % Operating costs and expense: Cost of revenues 38 49 42 44 Sales and marketing 17 15 17 13 Research and development 23 19 17 17 General and administrative 21 16 21 16 Depreciation and amortization 1 1 1 1 Total operating costs and expenses 100 100 98 91 Income from operations - - 2 9 Other expense, net - - - - Total other expenses, net - - - - Income before income taxes - - 2 9 Provision for income taxes - - - - Net income - % - % 2 % 9 % The Company reported net income of $4,000 for the three months ended September 30, 2012, compared to $3,000 for the three months ended September 30, 2011.As stated earlier, a recent pull-back in the semiconductor, PV and HB-LED capital markets that began in the middle of 2011 impacted our 2012's revenues and operating results. 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 September 30, 2012 and September 30, 2011, stock-based compensation expense was $18,000 for both periods, and depreciation and amortization expense was $17,000 and $13,000, respectively. The Company reported net income of $48,000 for the nine months ended September 30, 2012 as compared to the net income of $518,000 for the nine months ended September 30, 2011. For the nine-month periods ended September 30, 2012 and September 30, 2011, the stock-based compensation expense was $62,000 and $45,000, respectively and depreciation and amortization expense was $48,000 and $36,000 respectively. 11 -------------------------------------------------------------------------------- Table of Contents The Company generated net cash from operating activities totaling $272,000 for the nine months ended September 30, 2012, compared to net cash from operating activities of $93,000 for the nine months ended September 30, 2011. Cost of Revenues The Company's cost of revenue for the three months ended September 30, 2012 decreased by $368,000, or 42% to $504,000 from $872,000 for three months ended September 30, 2011. For the nine-month periods ended September 30, 2012 and September 30, 2011, the Company's cost of revenues decreased by $836,000, or 32 % to $1,817,000 from $2,653,000. This decrease was primarily a result of the decrease in revenues over the same periods, but was also impacted by investments in our current products and the reduction of the use of service partners to augment our engineering team to deliver Professional Services netted against the increased head-count and related payroll and benefit costs. Cost of revenue 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 decreased $31,000, or 12%, to $226,000 during the three months ended September 30, 2012, from $257,000 during the three months ended September 30, 2011. During the nine months ended September 30, 2012, sales and marketing expenses decreased $73,000 or 9% to $736,000 from $809,000. The decrease was primarily a result of reduced commissions on lower revenues offset by increased costs for our Japan operations. 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 decreased $35,000 or 11%, to $296,000 during the three months ended September 30, 2012, from $331,000 during the three months ended September 30, 2011. During the nine months ended September 30, 2012, research and development expenses decreased $305,000 or 29% to $746,000 from $1,051,000 for the nine months ended September 30, 2011. The decrease was primarily due to the reduction of use of service partners to augment our engineering team. Because Cimetrix was able to significantly strengthen its balance sheet during the last up cycle, the Company has been able to maintain its highly experienced staff of research and development engineers and has been using this down cycle to continue investing in new technologies and new products to better position the Company for future growth. 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 decreased $20,000 or 7%, to $268,000 in the three months ended September 30, 2012, from $288,000 in the three months ended September 30, 2011. During the nine months ended September 30, 2012, general and administrative expenses decreased $71,000 or 7% to $919,000 from $990,000 for the nine months ended September 30, 2011. The decrease was primarily due to lower profit sharing costs related to net income. 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 $4,000 or 31% to $17,000 in the three months ended September 30, 2012, from $13,000 in the three months ended September 30, 2011. During the nine months ended September 30, 2012, depreciation and amortization increased $12,000 or 33% to $48,000 from $36,000 in the nine months ended September 30, 2011. The increase is a result the Company's investment in equipment upgrades and new financial software. Other Income (Expense) The Company had no interest expense for the three and nine months ended September 30, 2012. Interest expense for the three and nine months ended September 30, 2011 was $6,000 and $37,000, respectively. The decrease in interest expense for the three months and nine months ended September 30, 2012, compared to the same periods in 2011 was due to the repayment of the Company's Senior Notes in July 2011. Interest income for the three months ended September 30, 2012 and 2011 was $1,000. During the nine months ended September 30, 2012, interest income was $1,000 compared to $3,000 for the same period in 2011. The 2012 decrease in interest income was a result of lower cash reserves. Liquidity and Capital Resources At September 30, 2012, the Company had current assets of $1,775,000, including cash of $1,119,000, and current liabilities of $662,000, resulting in a working capital of $1,113,000. Excluding deferred revenue of $408,000, which requires the Company to provide services and support, but does not represent a scheduled obligation requiring the outlay of Company funds, the Company's current assets exceeded current liabilities by $1,521,000 at September 30, 2012. Revolving Bank Line of Credit - The Company and Silicon Valley Bank (the "Bank") entered into a Loan and Security Agreement, effective as of September 27, 2011. On September 26, 2012, the Company and the Bank entered into a First Amendment to Loan and Security Agreement. The First Amendment extended the maturity date of the Agreement to September 25, 2013. Line of credit advances are available to the Company in accordance with a defined "Availability Amount", based in part on qualifying accounts receivable, up to a maximum of $1 million. The line of credit bears interest at the prime rate plus 1.75%, payable monthly. The line of credit is collateralized by substantially all operating assets of the Company. Interest payments are payable on the first day of each month with all principal advances payable on the maturity date of the line of credit. As of September 30, 2012, the Company had no borrowings against the line of credit. Under the line of credit agreement, the Company is required to comply with the following financial covenants: · Maintain a ratio of quick assets to current liabilities minus deferred revenue of at least: 1.50 to 1.00 13-------------------------------------------------------------------------------- Table of Contents · Maintain a tangible net worth equal to or greater than the sum of (i) $500,000, plus (ii) for each successive quarter, commencing as of the quarter ending December 31, 2011, 50% of net proceeds received by Company in the preceding quarter from bona-fide issuances of new equity or bridge financing which constitutes "subordinated debt". The line of credit agreement also contains numerous negative covenants restricting certain actions by the Company without the bank's consent, such as are typically included in similar loan agreements, including restrictions on the payment of dividends, restrictions on incurring additional debt, prohibitions restricting major corporation transactions, including a sale of the business, and a requirement that the Company retain certain key employees. At September 30, 2012, the Company was in compliance with all covenants. Results of Operations and Cash Flows - The Company has been profitable on a quarterly basis for over three years, beginning in mid-2009. As of September 30, 2012, the Company had total stockholders' equity of $1,295,000. During the three months ended September 30, 2012, the Company reported net income of $4,000 compared to $3,000 for the same period in 2011. During the nine months ended September 30, 2012, the Company reported net income of $48,000 compared to $518,000 for the same period in 2011. The Company generated net cash from operating activities of $272,000 for the nine months ended September 30, 2012 as compared to $93,000 for the same period in 2011. Net cash used in investing activities during the nine months ended September 30, 2012, was $24,000. Net cash used in investing activities during the nine months ended September 30, 2011, was $56,000 and consisted of hardware and software upgrades. Net cash used in financing activities for the nine months ended September 30, 2012 was $0, compared to $753,000 for the nine months ended September 30, 2011, which was comprised of $19,000 in proceeds from the issuance of common stock related to the exercise of Senior Note warrants, payments of debt to related parties of $396,000 and payments of debt of $376,000. The Company has not been adversely affected by inflation. Revenues from foreign customers were $1,839,000 during the nine months ended September 30, 2012, representing 43% of the Company's total revenues, compared to $2,667,000 or 44%, of total revenues during the same period in 2011. Most of Cimetrix's PV and HB-LED sales came from customers outside the United States and the decrease in foreign customer sales year over year is mainly attributable to the significant downturn in the PV and HB-LED markets as described in the Operations Review section above. 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 primarily transacted in United States dollars. Factors Affecting Future Results Total revenues for the first nine months of 2012 decreased 29% compared to the first nine months of 2011, reflecting the significant decline in the semiconductor, PV and HB-LED capital equipment markets beginning in the second half of 2011. Revenues from software license updates and product support increased on a quarterly and annual basis over 2011 as Cimetrix continues to expand its customer base. 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. The Company continues to focus on incrementally expanding its customer base and product line in order to increase revenues. In 2008, the Company introduced its CIMControlFramework product for equipment control, which enables the Company to provide equipment makers with a complete software solution that reduces their time-to-market for new equipment developments. As equipment makers reduce costs and internal resources, Cimetrix believes the market for CIMControlFramework will continue to grow as equipment makers invest in new machine development programs. 14 -------------------------------------------------------------------------------- Table of Contents Ultimately, the Company's business is driven by the global demand for electronic devices by consumers and businesses. Any changes in the global economic conditions could adversely affect Cimetrix's business and results of operations. 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 evolving and specialized. There can be no assurance that the markets for industrial motion control, factory connectivity, and equipment 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. |