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, 2014and June 30, 2013and the Company's financial position at June 30, 2014. 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, 2013. 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, 2013. Cimetrixis a software engineering company that designs, develops, markets and supports factory connectivity and equipment control products for today's smart, connected factories. The Company's primary customers are original equipment manufacturers (OEMs) that supply precision electronics manufacturing equipment for semiconductor wafer fabrication, solar/photovoltaic (PV), high-brightness light-emitting diode (HB-LED) and other electronics manufacturing. 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 Cimetrixsoftware 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 Cimetrixsoftware products. While Cimetrixproducts 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
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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 2013 Annual Report filed on Form 10-
K. Certainof 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.
New Accounting Pronouncements
See discussion under Note 1, Organization and Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, for information on new accounting pronouncements. Results 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, 2014 2013 2014 2013 New software licenses
$ 1,204,00076 % $ 962,00073 % $ 2,309,00075 % $ 2,077,00076 % Software license updates and product support 265,000 17 % 271,000 21 % 579,000 19 % 505,000 19 % Total software revenues 1,469,000 93 % 1,233,000 94 % 2,888,000 94 % 2,582,000 95 % Professional services 119,000 7 % 85,000 6 % 173,000 6 % 135,000 5 % Total revenues $ 1,588,000100 % $ 1,318,000100 % $ 3,061,000100 % $ 2,717,000100 % Total revenue increased by $270,000, or 20%, to $1,588,000for the three months ended June 30, 2014, compared to total revenue of $1,318,000for the three months ended June 30, 2013. For the six months ended June 30, 2014, total revenue increased by $344,000, or 13%, to $3,061,000from $2,717,000for the six months ended June 30, 2013. The increase in revenue year-over-year was attributable primarily to the increase in new software licenses as described below. New software license revenues include the sale of software development kits and the ongoing runtime licenses equipment suppliers purchase for each machine shipped with Cimetrixsoftware. New software license revenue for the three months ended June 30, 2014increased by $242,000, or 25% to $1,204,000, compared to $962,000for the three months ended June 30, 2013. For the six months ended June 30, 2014, new software license revenues increased by $232,000, or 11% to $2,309,000compared to new software license revenue of $2,077,000for the six months ended June 30, 2013. The year-over-year increase was due to several factors. First, the Company reported eleven design wins for the three month period, and sixteen design wins for the six month period that ended on June 30, 2014. The Company defines a design win as the sale of a software development kit (SDK) to a customer. The customer uses the SDK to integrate the respective Cimetrixsoftware product into its machines. Design wins are important as they build a long term revenue stream for runtime licenses once the customer begins shipping the equipment. Secondly, increased sales of runtime licenses from our existing customer base contributed to the overall increase in new software license revenue. 10
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Revenue associated with software license updates and product support remained relatively flat, decreasing 2% to
$265,000for the three months ended June 30, 2014, as compared to $271,000for the three months ended June 30, 2013. For the six months ended June 30, 2014, software license updates and product support increased to $579,000, or 15%, compared to software license updates and product support of $505,000for the six months ended June 30, 2013. The year over year increase was due to a growing customer base as a result of design wins gained over the past year, as well as one customer renewing back support for three years to become current on the most recent versions of Cimetrixsoftware. Total software revenue increased by $236,000, or 19%, to $1,469,000for the three months ended June 30, 2014, as compared to $1,233,000for the three months ended June 30, 2013. For the six months ended June 30, 2014, total software revenue increased 12% to $2,888,000as compared to $2,582,000for the six months ended June 30, 2013. This increase in total software revenues is primarily attributable to an increase in new software license revenues as discussed earlier. Professional services revenue was up by 40% to $119,000for the three months ended June 30, 2014, as compared to $85,000for the three months ended June 30, 2013. For the six months ended June 30, 2014, professional services revenue was up by 28% to $173,000as compared to $135,000for the six months ended June 30, 2013. The increase in professional services revenue is attributable to the increase in new software license revenues. Professional services revenue involves delivering training and coaching services for software development kits associated with new design wins. In 2012, the Company revised its professional services strategy. The strategy focuses on training and coaching our OEM customers in the use of Cimetrixproducts, instead of implementing turnkey solutions. Cimetrixhas an established global network of service providers trained in Cimetrixproducts that are able to provide services to assist customers with software development activities. While this strategy reduces Cimetrixprofessional services revenue, it enables us to focus on sustaining and enhancing current product lines, as well as Research and Development for new products that should fuel long term growth.
Costs and Expenses
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 Six Months Ended June 30, June 30, 2014 2013 2014 2013 Total Revenues 100 % 100 % 100 % 100 % Operating costs and expense: Cost of revenues 35 42 34 42 Sales and marketing 17 18 17 18 Research and development 17 16 18 15 General and administrative 23 22 24 22 Depreciation and amortization 1 1 1 1 Total operating costs and expenses 93 99 94 98 Income from operations 7 1 6 2 Other income (expense), net - - - - Total other income, net - - - - Income before income taxes 7 1 6 2 Provision (benefit) for income taxes 5 (104 ) 3 (50 ) Net income 2 % 105 % 3 % 52 % 11
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June 30, 2014, the Company reported income before taxes of $116,000compared to $18,000for the same period in 2013 and net income of $39,000compared to $1,389,000for the same period in 2013. The Company reported income before taxes of $169,000for the six months ended June 30, 2014compared to $48,000for the same period in 2013 and net income of $86,000compared to $1,418,000for the same period in 2013. Net income and net income before taxes in 2013 included the recording of the deferred tax benefit associated with the Company's net operating loss carry forward as discussed below. The net results for all periods include non-cash bad debt expense, non-cash stock-based compensation expense and non-cash depreciation and amortization expense. For the three-month periods ended June 30, 2014and June 30, 2013, stock-based compensation expense was $32,000and $22,000, respectively, and depreciation and amortization expense was $9,000and $17,000, respectively. For the six-month periods ended June 30, 2014and June 30, 2013, bad debt expense was $20,000and $0, respectively, stock-based compensation expense was $63,000and $44,000, respectively, and depreciation and amortization expense was $19,000and $34,000, respectively. In June, 2013, the Company recorded a deferred tax benefit of $1,366,000after evaluating its net operating loss carry forward of approximately $16,695,000and corresponding deferred tax asset valuation of $7,686,000. At that time, the Company determined that there was a more than 50% likelihood of the Company utilizing a portion of its net operating loss carry forward so the deferred tax asset valuation allowance was reduced accordingly on the June 30, 2013Condensed Consolidated Balance Sheets. The value of the deferred tax asset is based on the expiration dates of the Company's net operating loss carry forward amounts and historic and estimated future taxable income and is subject to ongoing review and, potentially, future changes. Accounting guidance requires this amount to also be reflected on the income statement at the same time as the asset is recorded on the balance sheet. The $1,366,000income tax benefit was included in the Company's net income for the three and six months ended June 30, 2013and does not reflect ongoing earnings expectations from the Company. As of June 30, 2014, the calculated value of the deferred tax asset was $1,255,000, compared to $1,338,000as of December 31, 2013. This decrease of $83,000for the six months ended June 30, 2014represents the use of a portion of the deferred tax asset to offset current income tax expense on income from operations of $169,000for the same period.
Cost of Revenues
The Company's cost of revenues for the three months ended
June 30, 2014decreased by $9,000, or 2% to $549,000from $558,000for three months ended June 30, 2013. For the six-month periods ended June 30, 2014and June 30, 2013, the Company's cost of revenues decreased by $90,000, or 8% from $1,141,000to $1,051,000. This decrease in cost of revenues is a reflection of our success in increasing our efficiencies to maintain our current software products. The Company invested significantly over the past several years in the technology, tools and quality assurance of our current products, which allows us to more quickly respond to customers and implement new features at lower costs. The Company continues to provide a very high level of customer support and issue new releases for its current products in a more cost effective manner. As part of our corporate strategy and as a result of those reduced costs, we were able to redeploy our engineering efforts to research and development activities as discussed in the Research and Development section below. 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
$36,000, or 16%, to $268,000during the three months ended June 30, 2014, from $232,000during the three months ended June 30, 2013. For the six-month 12
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June 30, 2014and June 30, 2013, the Company's sales and marketing expenses increased by $27,000, or 5% from $498,000to $525,000. The increase was primarily a result of increased commissions and payroll costs. 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
$62,000or 30%, to $268,000during the three months ended June 30, 2014, from $206,000during the three months ended June 30, 2013. For the six-month periods ended June 30, 2014and June 30, 2013, the Company's research and development expenses increased by $154,000, or 39% from $397,000to $551,000. As discussed above, our efforts to increase efficiencies in maintaining and supporting our current products, combined with our professional services strategy, has allowed us to devote more engineering efforts towards research and development activities for new products to expand our markets. 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.
General and Administrative
General and administrative expenses increased
$86,000or 29%, to $378,000in the three months ended June 30, 2014, from $292,000in the three months ended June 30, 2013. For the six-month periods ended June 30, 2014and June 30, 2013, the Company's general and administrative expenses increased by $139,000, or 23% from $607,000to $746,000. The increase was primarily due to higher net income and related profit sharing costs. General and administrative expenses include all direct costs for administrative and accounting personnel, and all rents and utilities for maintaining Company offices.
Liquidity and Capital Resources
Bank Lineof Credit - The Company and Silicon Valley Bank (the "Bank") entered into a Loan and Security Agreement which expires in September 2014. 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 terms of this credit facility are summarized in Note 4 to the Condensed Consolidated Financial Statements included in this report.
Net cash generated by operating activities for the six months ended
June 30, 2014was $333,000compared to $50,000net cash used in operating activities for the six months ended June 30, 2013. The increase in cash generated by operating activities is primarily attributable to the increased revenues, year over year. Net cash used in investing activities during the six months ended June 30, 2014, was $20,000and consisted of the purchase of hardware and software upgrades. Net cash used in investing activities during the six months ended June 30, 2013, was $6,000and consisted of hardware and software upgrades and the refund of a security deposit related to a capital lease. Net cash used in financing activities for the six months ended June 30, 2014was $0compared to $47,000for the six months ended June 30, 2013. The payment of $47,000during the six months ended June 30, 2013, represented the use of Company funds to repurchase 525,000 shares of the Company's common stock from two shareholders. 13
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The Company has not been adversely affected by inflation. Revenues from foreign customers were
$1,835,000during the six months ended June 30, 2014, representing 60% of the Company's total revenues, compared to $1,274,000or 47%, of total revenues during the same period in 2013. The increase in foreign customer sales year-over-year is primarily attributable to new customer design wins for software development kits (SDKs) combined with strong performances from top-tier European OEM customers as well as increased sales in our Japansubsidiary. 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 Statesdollars.
Factors Affecting Future Results
Total revenues for the first six months of 2014 increased 13% compared to the six months of 2013, reflecting the anticipated 2014 up-cycle in the semiconductor equipment industry.
The Company continues to focus on incrementally expanding its customer base and product line in order to increase revenues. In the last two years, the Company invested significant research and development resources into 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,
Cimetrixbelieves the market for CIMControlFramework will continue to grow as equipment makers invest in new machine development programs. In mid-October 2013, the Company introduced CIMPortal Plus software for equipment manufacturers and integrated device manufacturers (IDMs). CIMPortal Plus, combined with new SEMI standards, provides the capability to chip makers to determine when and how much data to collect. CIMPortal Plus makes the equipment data collection more efficient leading to increased productivity, quality improvements and reduced costs in the fabs. Cimetrixbelieves the market for CIMPortal Plus will grow as adoption of the new SEMI standards increases.
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
The Company continues to pursue customers through its professional services group, which is now focused on training and coaching our OEM customers in the use of
Cimetrixproducts instead of implementing turnkey solutions. This approach prepares the OEM customer to quickly address changing needs from its customers. We established a set of worldwide integration partners for those customers that require a turnkey solution. This change in strategy allows us to focus on delivering great products. 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 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.