News Column

ELECSYS CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 14, 2014

Overview

Elecsys Corporation provides innovative machine to machine (M2M) communication technology solutions, data acquisition and management systems, and custom electronic equipment for critical industrial applications worldwide. Our primary markets include energy production and distribution, agriculture, water management, transportation, and safety systems. Our products and services encompass remote monitoring, industrial data communication, mobile data acquisition, and wireless communication technologies that are deployed wherever high quality and reliability are essential. We develop, manufacture, and support proprietary M2M technology and products for multiple markets under several premium brand names. In addition to our proprietary products, we design and manufacture rugged and reliable custom solutions for multiple original equipment manufacturers (OEMs) in a variety of industries. On December 17, 2012, we announced a share repurchase program by which we planned to repurchase up to 10% of the Company's outstanding common shares, or approximately 400,000 shares, from time to time at prevailing market prices through the open market or privately negotiated transactions. The program has no expiration date and purchases are funded from available cash resources. For the fiscal year ended April 30, 2014, we had repurchased 98,767 shares at a cost of approximately $703,000 (average cost of $7.12 per share). On October 16, 2013, we amended the expiration date of our operating line of credit to October 30, 2015. The $6,000,000 line of credit provides us with short-term financing for working capital requirements and is secured by accounts receivable and inventory. Our borrowing capacity under this line is calculated as a specified percentage of accounts receivable and inventory and totaled approximately $5,542,000 as of April 30, 2014. The line of credit accrues interest at a performance-based rate that is based on the prime rate (3.25% at April 30, 2014) plus/minus 0.5%. The interest rate is determined by the Company's debt-to-tangible net worth ratio and was 2.75% on April 30, 2014 which was the lowest rate allowed under the terms of the operating line of credit. The loan agreement has various covenants, including a financial covenant pertaining to the maintenance of total tangible net worth and a required debt service coverage ratio. There were no outstanding borrowings on the line of credit as of April 30, 2014. 14

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Results of Operations

The following table sets forth for the periods presented, certain statement of operations data (in thousands, except per share data):

Years Ended April 30, 2014 April 30, 2013 Sales $ 30,484 100.0 % $ 25,365 100.0 % Cost of products sold 18,626 61.1 % 15,991 63.0 % Gross margin 11,858 38.9 % 9,374 37.0 % Selling, general and administrative expenses 7,831 25.7 % 6,613 26.1 % Operating income 4,027 13.2 % 2,761 10.9 % Interest expense (56 ) (0.2 %) (65 ) (0.3 %) Other expense, net (4 ) (0.0 %) (3 ) (0.0 %) Net income before taxes 3,967 13.0 % 2,693 10.6 % Income tax expense 1,500 4.9 % 1,010 4.0 % Net income $ 2,467 8.1 % $ 1,683 6.6 % Net income per share - basic $ 0.64$ 0.43 Net income per share - diluted $ 0.62



$ 0.43

Revenues for the year ended April 30, 2014 were $30,484,000, an increase of $5,119,000, or 20.2%, from $25,365,000 for the comparable period of fiscal 2013. Year Ended (In thousands) April 30, 2014 April 30, 2013 OEM revenues $ 14,924 49.0 % $ 14,741 58.1 % Proprietary product revenues 15,560 51.0 % 10,624 41.9 % Total Sales $ 30,484 100.0 % $ 25,365 100.0 %



Proprietary products. Revenues from sales of our proprietary products and services were $15,560,000 for the year ended April 30, 2014, which was a $4,936,000, or 46.5%, increase from revenues of $10,624,000 in the prior year.

Sales of our wireless remote monitoring solutions were $11,847,000 for the year ended April 30, 2014, which was an increase of $5,771,000, or 95.0%, from $6,076,000 during the year ended April 30, 2013. The increase in revenues for the fiscal year was the result of a number of factors including the shipment of the $1.25 million order for the Al Rushaid Group in Saudi Arabia, an overall increase in customer orders received and shipments of our established M2M remote monitoring products, and the successful development and introduction of additional remote monitoring products for the railroad industry. Data management services revenue continues to grow as a function of the growing population of monitoring units deployed in the field. Overall, recurring data management services revenue totaled $1,191,000, an increase of $190,000, or 19.0%, from data management services revenue of $1,001,000 reported in the prior fiscal year. We foresee that revenues from our wireless remote monitoring solutions will grow over the next few quarters as a result of continued new product introductions and our expansion into new industrial markets with both new and existing products. Our continued investments in both sales and marketing as well as new product development is expected to produce additional revenues over the next few fiscal quarters as compared to the comparable periods of the prior year. 15 -------------------------------------------------------------------------------- Sales of our industrial data communication solutions were $1,019,000 for the year ended April 30, 2014, which was an $187,000, or 22.5%, increase over the total sales of $832,000 for the year ended April 30, 2013. The increase in revenues for the fiscal year was a consequence of targeting new customers and new applications for the Director series products as well as the development of new business relationships that have expanded our sales and marketing efforts. We invested in new products to continue this expansion path and to penetrate new markets with innovative applications of our industrial data communication products in future periods. As a result of these ongoing efforts, we expect revenues from our industrial communication product line to expand over the next few quarters. Sales of our mobile data acquisition solutions, including our Radix handheld computer hardware, peripherals, and maintenance contract revenues were $2,257,000 for the year ended April 30, 2014. Total sales decreased $1,095,000, or 32.7%, as compared to the prior year reported revenues of $3,352,000. Revenues decreased relative to last fiscal year when a large shipment and deployment of Radix FW960 handheld computers and peripherals was completed. Recurring maintenance contract revenues posted a slight decrease for the year ended April 30, 2014 of approximately $24,000, or 3.0%, as a result of reduced maintenance activity due to increased reliability of our newer products. We believe that sales of Radix products and services over the next few quarters will be consistent with revenues reported over the past fiscal year. OEM solutions. Revenues for the OEM business segment were $14,924,000, an increase of $183,000, or 1.2%, from $14,741,000 in the prior year. The stability of OEM revenues was the result of continued orders from existing customers, modest growth in their businesses, as well as the addition of new OEM customers. We plan to continue our investment in OEM sales and marketing to pursue potential customers who will benefit from and use our M2M technology and solutions. This continued investment should generate moderate growth in OEM revenues and margins over the longer term. On April 30, 2014, total backlog scheduled for delivery over the subsequent twelve months was $8,752,000, an increase of $259,000, or 3.1%, from a total twelve-month backlog of $8,493,000 on April 30, 2013 and a decrease of $1,885,000, or 17.7%, from a total twelve-month backlog of $10,637,000 on January 31, 2014. Orders received from OEMs typically specify multiple production deliveries scheduled over a defined and extended period of time. Typically, orders for our proprietary M2M products are completed and shipped to the customer soon after orders are received. Certain larger proprietary product orders may have specific deliveries scheduled over a longer period of time. We anticipate that the amount of our total backlog relative to our revenues will fluctuate as our mix of proprietary products and OEM sales varies.



The following table presents the backlog by business segment for the periods ended April 30, 2014, January 31, 2014, and April 30, 2013 (in thousands).

April 30, 2014 January 31, 2014 April 30, 2013 OEM $ 8,445 $ 9,145 $ 7,963 Proprietary products 307 1,492 530 Total backlog $ 8,752 $ 10,637 $ 8,493 Gross margin for the year ended April 30, 2014 was 38.9% of sales, or $11,858,000, compared to 37.0% of sales, or $9,374,000, for the year ended April 30, 2013. The increase of both gross margin percentage and gross margin dollars was the direct result of higher overall sales volumes and a favorable product mix of proprietary product revenues during the period. 16 --------------------------------------------------------------------------------

Year Ended (In thousands) April 30, 2014 April 30, 2013 Gross margin - OEM $ 3,944 26.4 % $ 4,057 27.5 % Gross margin - Proprietary products 7,914 50.9 % 5,317 50.1 % Total gross margin $ 11,858 38.9 % $ 9,374 37.0 % Gross margin for the proprietary products business segment was 50.9% of sales, or $7,914,000, for the year ended April 30, 2014 as compared to 50.1% of sales, or $5,317,000, for the year ended April 30, 2013. The increase in gross margin dollars and percentage for the proprietary products was mainly due to the increase in sales of established proprietary M2M products, the fulfillment of the Saudi Arabia order, and revenues from new products during the period.



The gross margin for the OEM business segment was $3,944,000, or 26.4% of sales, compared to $4,057,000, or 27.5% of sales, for the prior year. The slight decrease of OEM gross margin dollars and percentage resulted from increased sales to our higher volume OEM customers that have lower gross margins, but contribute higher operating profit.

We expect that consolidated gross margins over the next few quarters will likely remain in the range of 36% to 41%. This expectation is based on our forecasted sales volume and the mix of proprietary and OEM products and services which impacts our manufacturing efficiency and gross margins. Selling, general and administrative ("SG&A") expenses totaled $7,831,000 for the year ended April 30, 2014. This was an increase of $1,218,000, or 18.4%, from the total SG&A expenses of $6,613,000 for the year ended April 30, 2013. Both selling and marketing expenses, up by $592,000, and general and administrative expenses, an increase of $502,000, were the primary drivers of the increase in total SG&A for the current fiscal year. SG&A expenses were 25.7% and 26.1% of sales for the years ended April 30, 2014 and 2013, respectively. Year Ended (In thousands) April 30, 2014 April 30, 2013 Research and development expenses $ 1,840 6.0 % $ 1,716 6.8 % Selling and marketing expenses 2,784 9.1 % 2,192 8.6 % General and administrative expenses 3,207 10.5



% 2,705 10.7 %

Total selling, general and administrative expenses $ 7,831 25.7 % $ 6,613 26.1 %

Research and development expenses reported an increase of $124,000, to $1,840,000, during the current fiscal year as compared to the prior year. This increase was chiefly driven by higher engineering personnel expenses of approximately $180,000 from increased investment in new product and software design personnel slightly offset by a decrease of $78,000 in other product support costs due to the efficiency and reliability of existing products. Selling and marketing expenses were $2,784,000 for the year ended April 30, 2014 and $2,192,000 for the year ended April 30, 2013. The increase of $592,000 was the product of an increase of approximately $500,000 in internal and external sales commissions from increased revenues and an increase of $104,000 due to additional sales and marketing personnel. These increases were offset by the sales office we established in the United Arab Emirates to lead our ongoing sales and marketing efforts in the Middle East helped to contribute to an overall reduction in travel expenses of approximately $68,000 from the previous period. 17

-------------------------------------------------------------------------------- General and administrative expenses increased by $502,000 from the prior year. The increase was due to growth of personnel related expenses, including equity-based compensation, of approximately $310,000, increases in professional fees for risk management, legal, accounting, information technology, and consulting services of approximately $72,000, and the absence of a gain on sale of assets which was recognized in the previous fiscal year of $100,000. Total SG&A expenses over the next few quarters are likely to increase over the previous periods as a result of our continued investments in business development and sales personnel, new product development, systems and capabilities. As a percentage of total revenues, we expect our SG&A expenses to decline relative to prior periods.



Operating income for the year ended April 30, 2014 was $4,027,000, an increase of $1,266,000, an increase of 45.9%, from operating income of $2,761,000 reported for the year ended April 30, 2013.

Financial expense, including interest, was $60,000 and $68,000 for the years ended April 30, 2014 and 2013, respectively. The decrease of $8,000 resulted from lower total outstanding borrowings compared to the previous fiscal year period. During the year ended April 30, 2014, there were no net borrowings on the operating line of credit and the Company made total debt payments of $185,000. As of April 30, 2014, there was also $2,619,000 outstanding in current and long-term borrowings (Industrial Revenue Bonds), secured by real estate, compared to $2,804,000 at April 30, 2013. We may utilize the operating line of credit in the near term to fund increases in production activity when necessary, but will also seek to minimize our interest expense when possible. Income tax expense for the year ended April 30, 2014 was $1,500,000. For the year ended April 30, 2013, income tax expense was $1,010,000. The increase in income tax expense of $490,000 was the result of higher income during the current year. The effective income tax rate was 37.8% and 37.5% for the years ended April 30, 2014 and 2013, respectively. The minor change in the effective tax rate was due to the recognition of certain income tax adjustments and the increased benefit derived from the domestic manufacturing deduction. As a combined result of the above factors, our net income was $2,467,000, or $0.62 per diluted share, for the year ended April 30, 2014 as compared to net income of $1,683,000, or $0.43 per diluted share, reported for the year ended April 30, 2013, an increase of $784,000, or 46.6%.



Impact of Inflation and Changing Prices

Inflation and the effect of changing prices over the past two fiscal years have had minimal impact on our financial position and our results of operations.

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Liquidity and Capital Resources

Comparison of cash flows results for the years ended April 30, 2014 and 2013 are summarized as follows: Year ended (In thousands) April 30, 2014April 30, 2013



Net cash provided by operating activities $ 1,188 $ 2,731 Net cash (used in) investing activities

(442 ) (343 ) Net cash (used in) financing activities (812 ) (1,060 ) Net increase (decrease) in cash (66 ) 1,328 Cash at beginning of year 1,464 136 Cash at end of year $ 1,398 $ 1,464 Cash and cash equivalents decreased $66,000 to $1,398,000 as of April 30, 2014 compared to $1,464,000 at April 30, 2013. This slight decrease was primarily the result of the cash used in investing and financing activities for purchases of equipment, reduction in debt, and the purchase of common stock through our stock repurchase program that overall was larger than the cash generated from operating activities. Operating Activities. Cash provided by operating activities was $1,188,000 during the year ended April 30, 2014, which resulted primarily from $2,467,000 of net income for the period and $1,279,000 of non-cash earnings adjustment items such as depreciation, amortization, stock compensation expense, and increases in accounts receivable and inventory. Our consolidated working capital increased $2,118,000 from $8,112,000 at the end of the 2013 fiscal year to $10,230,000 at the end of the 2014 fiscal year. The increase in working capital was primarily due to the increase in current assets, including accounts receivable and inventory which were only slightly offset by an increase in accrued expenses. Operating cash receipts during the fiscal year totaled $29,240,000 while cash disbursements for operations, which includes purchases of inventory and operating expenses, were $28,052,000. We will utilize our line of credit, if necessary, in order to pay suppliers and meet operating cash requirements. Investing Activities. Cash used in investing activities totaled $442,000 during the year ended April 30, 2014 due to purchases of equipment. During the year ended April 30, 2013, cash used in investing activities totaled $343,000 which also resulted from purchases of equipment in addition to proceeds received from the sale of assets. Anticipated future purchases of equipment and cash used in investing activities is expected to increase slightly from the amounts expended in fiscal 2014 to enhance productivity, upgrade equipment, and increase capacity. Financing Activities. As of April 30, 2014, we had a $6,000,000 operating line of credit that provided us and our wholly-owned subsidiary with short-term financing for our working capital requirements. The line of credit was amended on October 16, 2013 to extend the expiration date to October 30, 2015 and as of April 30, 2014 there were no borrowings outstanding on the operating line of credit. The line of credit's borrowing capacity is calculated as a specified percentage of accounts receivable and inventory on a monthly basis and the total amount of borrowing base for the line of credit as of April 30, 2014 was approximately $5,542,000. It is secured by accounts receivable and inventory and accrues interest at a performance-based rate that is based on the prime rate (3.25% at April 30, 2014) plus/minus 0.5%. The interest rate actually assessed is determined by our debt-to-tangible net worth ratio. The rate as of April 30, 2014 of 2.75% was the lowest rate allowed under the amended terms of the operating line of credit. The loan agreement has various covenants, including a financial covenant pertaining to the maintenance of total tangible net worth and a required debt service coverage ratio. As of April 30, 2014 we were in compliance will all covenants. During the year ended April 30, 2014 there were no additional net borrowings on the operating line of credit. Total payments of long-term debt totaled $185,000. The 5-year adjustable interest rate on our Industrial Revenue Bonds is 1.89% and will reset on September 1, 2016. Cash used in purchases of common stock during the period for the stock repurchase program totaled $703,000 while there were proceeds of $76,000 from the exercise of stock options. For the prior year ended April 30, 2013, financing activities included $750,000 of cash used in payments on the line of credit, $181,000 in payments on long-term debt, $282,000 in cash used for purchases of common stock, and $153,000 of proceeds from the exercise of stock options. 19 -------------------------------------------------------------------------------- Although there can be no assurances, we believe that existing cash, the cash expected to be generated from our operations, amounts available under our line of credit, and amounts available from trade credit, will be sufficient to finance our anticipated working capital needs, our capital expenditures, and our scheduled debt repayments for the foreseeable future.



Off-balance Sheet Arrangements

We do not utilize off-balance sheet arrangements in our operations.

Contractual Obligations

We have a $6,000,000 line of credit that expires on October 30, 2015. The line of credit provides us with short-term financing for working capital requirements and is secured by accounts receivable and inventory. Our borrowing capacity under this line is calculated as a specified percentage of accounts receivable and inventory which totaled $5,542,000 as of April 30, 2014. The line of credit accrues interest at a performance-based rate that is based on the prime rate (3.25% at April 30, 2014) plus/minus 0.5%. The interest rate actually assessed is determined by our debt-to-tangible net worth ratio and was 2.75% on April 30, 2014. The loan agreement has various covenants, including a financial covenant pertaining to the maintenance of total tangible net worth and a required debt service coverage ratio. As of April 30, 2014 we were in compliance with all covenants. Our long-term financing also includes Industrial Revenue Bonds that are secured by our production and headquarters facility and the bonds are paid in monthly principal and interest payments. The bonds' 5-year adjustable interest rate is based on 5-year United States Treasury Notes, plus 0.45% (1.89% as of April 30, 2014). This rate was reset on September 1, 2011 in accordance with the terms of the bonds and will be in force until September 1, 2016, at which time the rate will reset again.



Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We cannot ensure that actual results will not differ from those estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition. We derive revenue from the manufacture of production units of electronic assemblies, liquid crystal displays, and our proprietary products including our remote monitoring equipment, industrial data communication equipment, and our mobile computing products. We also derive revenue from repairs and non-warranty services, engineering design services, remote monitoring services and maintenance contracts. Production and repaired units are billed to the customer after they are shipped. Remote monitoring services and maintenance contracts are billed and the revenue recognized at the end of the month the services or maintenance periods are completed. For customers that utilize our engineering design services, we bill the customer and recognize revenue after the design services or tooling have been completed. We require our customers to provide a binding purchase order to verify the manufacturing services to be provided and to ensure payment. Typically, we do not have any post-shipment obligations, including customer acceptance requirements. We do provide training and installation services to our customers and those services are billed and the revenue recognized at the end of the month the services are completed, which is typically in the same period that the equipment is delivered. Revenue recognized is net of sales taxes, tariffs, or duties remitted to any governmental authority. Inventory Valuation. Our inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or fair value. Our industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand, as well as other market considerations. We make provisions for estimated excess and obsolete inventory based on our quarterly reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from our customers. We review our inventory in detail on a quarterly basis utilizing multiple annual time horizons ranging from 24-months to 60-months. Individual part numbers that have not been used within each of the time horizons are examined by manufacturing personnel for obsolescence, excess and fair value. Parts that are not identified for common use or are unique to a former customer or application are categorized as obsolete and are allowed for as part of our quarterly inventory write-down. If actual market conditions or our customers' product demands are less favorable than those projected, additional inventory write-downs may be required. 20 -------------------------------------------------------------------------------- Allowance for Doubtful Accounts. Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. We determine the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer's financial condition and credit history, and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. The majority of the customer accounts are considered past due after the invoice becomes older than the customer's credit terms (30 days for the majority of customers). Interest is not charged on past due accounts for the majority of our customers. Warranty Reserve. We have established a warranty reserve for rework, product warranties and customer refunds. We provide a limited warranty for a period of one year from the date of a customer's receipt of our products, or one year from installation for some of our products. Some of our customers may also elect to purchase an extended warranty. Our standard warranties require us to repair or replace defective products at no cost to the customer or refund the customer's purchase price. The warranty reserve is based on historical experience and analysis of specific known and potential warranty issues. The product warranty liability reflects management's best estimate of probable liability under our product warranties. Goodwill. Goodwill is initially measured as the excess of the cost of an acquired business over the fair value of the identifiable net assets acquired. We do not amortize goodwill, but rather review our carrying value for impairment annually (January 31), and whenever an impairment indicator is identified. The goodwill impairment test involves a two-step approach. The first step is to identify whether potential impairment of goodwill exists by comparing the carrying value of each reporting unit with its fair value, as determined by its estimated cash flows. If impairment of goodwill is determined to exist, the second step of the goodwill impairment test measures the amount of the impairment using a fair value-based approach. Intangible Assets. Intangible assets consist of patents, trademarks, copyrights, customer relationships, and capitalized software. Intangible assets are amortized over their estimated useful lives using the straight-line method. The useful lives of the intangible assets range from 5 - 15 years. Impairment of Long-Lived Intangible Assets. Long-lived assets, including amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, we evaluate recoverability by a comparison of the carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets. If the sum of the expected future undiscounted cash flows is less than the carrying amount, we would recognize an impairment loss. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the long-lived assets and intangibles.



Selected Quarterly Financial Data (Unaudited)

The following table sets forth selected unaudited financial information for us for the four fiscal quarters of the years ended April 30, 2014 and 2013. This unaudited information has been prepared on the same basis as the annual financial statements contained elsewhere herein, and in the opinion of management, reflects all adjustments for a fair presentation thereof. The following table is qualified by reference to and should be read in conjunction with the consolidated financial statements, related notes thereto and other financial data included elsewhere herein. 21 --------------------------------------------------------------------------------



Three Months Ended

July 31, 2013



October 31, 2013January 31, 2014April 30, 2014

(In thousands, except per share data) Sales $ 6,774 $ 7,330 $ 7,683 $ 8,697 Gross margin 2,208 3,029 2,922 3,699 Operating income 453 1,116 891 1,567 Income before taxes 438 1,099 876 1,554 Net income $ 264 $ 653 $ 569 $ 981 Net income per share - basic $ 0.07 $ 0.17 $ 0.15 $ 0.26 Net income per share - diluted $ 0.07 $ 0.17 $ 0.14 $ 0.25 Net cash (used in) provided by operating activities $ 252 $ (423 ) $ 163 $ 1,196 July 31, 2012 October 31, 2012 January 31, 2013 April 30, 2013 (In thousands, except per share data) Sales $ 4,257 $ 6,138 $ 7,458 $ 7,512 Gross margin 1,389 2,410 2,803 2,772 Operating (loss) income (228 ) 700 1,146 1,143 (Loss) income before taxes (249 ) 683 1,129 1,130 Net (loss) income $ (161 ) $ 413 $ 716 $ 715 Net (loss) income per share - basic $ (0.04 ) $ 0.11 $ 0.18 $ 0.18 Net (loss) income per share - diluted $ (0.04 ) $ 0.11 $ 0.18 $ 0.18 Net cash (used in) provided by operating activities $ 781 $ 531 $ (243 ) $ 1,662 22

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New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board ("FASB") revised the authoritative guidance on reporting discontinued operations. The revised guidance specifies that a disposal of a component of an entity or a group of components of an entity is required to be reported in a discontinued operation if the disposal represents a strategic shift that has, or will have a major effect on an entity's operations and financial results. The guidance also changes the requirements for reporting discontinued operations which requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The guidance is effective for us beginning in the first quarter of fiscal 2016. We are currently evaluating the impact this guidance may have on our financial position, results of operations and cash flows. In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers." This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, we will adopt this ASU on May 1, 2017. Companies may use either a full retrospective or modified retrospective approach to adopt this ASU and we are currently evaluating which transition approach to use and the full impact this ASU will have on our future financial statements Forward-Looking Statements This annual report on Form 10-K contains 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, including, but not limited to, our statements on strategy, operating forecasts, and our working capital requirements and availability. In addition, from time to time, the Company or our representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Company with the Securities and Exchange Commission, press releases or oral statements made by or with the approval of an authorized executive officer of the Company. Forward-looking statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate," or "continue" or the negative thereof or other variations thereon or comparable terminology. Actual results could differ materially from those projected or suggested in any forward-looking statements as a result of a wide variety of factors and conditions, including, but not limited to, an inability on the part of the Company to successfully market and grow our products and services, the Company's dependence on our top customers, reliance on certain key management personnel, an inability to grow the Company's customer base, an inability to integrate, manage and grow any acquired business or underlying technology, potential growth in costs and expenses, an inability to refinance the Company's existing debt on terms comparable to those now in existence, potential deterioration of business or economic conditions for the Company's customers' products, price competition from larger and better financed competitors, and the factors and conditions described in the discussion of "Results of Operations" and "Liquidity and Capital Resources" as contained in Management's Discussion and Analysis of Financial Condition and Results of Operation and "Risk Factors" of this annual report, as well as those included in other documents the Company files from time to time with the Securities and Exchange Commission, including the Company's quarterly reports on Form 10-Q and current reports on Form 8-K. Holders of the Company's securities are specifically referred to these documents with regard to the factors and conditions that may affect future results. The reader is cautioned that the Company does not have a policy of updating or revising forward-looking statements and thus he or she should not assume that silence by management of the Company over time means that actual events are bearing out as estimated in such forward-looking statements.


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