Attached files

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EX-10.6 - EX-10.6 - Fuel Systems Solutions, Inc.fsys-ex106_544.htm
EX-10.4 - EX-10.4 - Fuel Systems Solutions, Inc.fsys-ex104_542.htm
EX-10.5 - EX-10.5 - Fuel Systems Solutions, Inc.fsys-ex105_543.htm
EX-10.2 - EX-10.2 - Fuel Systems Solutions, Inc.fsys-ex102_540.htm
EX-10.12 - EX-10.12 - Fuel Systems Solutions, Inc.fsys-ex1012_1066.htm
EX-10.13 - EX-10.13 - Fuel Systems Solutions, Inc.fsys-ex1013_1067.htm
EX-31.1 - EX-31.1 - Fuel Systems Solutions, Inc.fsys-ex311_201506306.htm
EX-32.1 - EX-32.1 - Fuel Systems Solutions, Inc.fsys-ex321_201506308.htm
EX-31.2 - EX-31.2 - Fuel Systems Solutions, Inc.fsys-ex312_201506307.htm
EX-10.3 - EX-10.3 - Fuel Systems Solutions, Inc.fsys-ex103_541.htm
EX-32.2 - EX-32.2 - Fuel Systems Solutions, Inc.fsys-ex322_201506309.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to              

Commission File No. 001-32999

 

FUEL SYSTEMS SOLUTIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

20-3960974

(State of Incorporation)

 

(IRS Employer I.D. No.)

780 Third Avenue 25th Floor New York, NY 10017

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (646) 502-7170

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

o

Accelerated filer

x

Non-accelerated filer

o

Smaller reporting company

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

Number of shares outstanding of each of the issuer’s classes of common stock as of July 31, 2015:

18,093,562 shares of Common Stock, $0.001 par value per share.

 

 

 


FUEL SYSTEMS SOLUTIONS, INC.

INDEX

 

 

 

 

Page

Part I. Financial Information

 

Item 1.

 

Financial Statements (unaudited)

3

 

 

Condensed Consolidated Balance Sheets—June 30, 2015 and December 31, 2014

3

 

 

Condensed Consolidated Statements of Operations—Three and six months ended June 30, 2015 and 2014

4

 

 

Condensed Consolidated Statements of Comprehensive Loss—Three and six months ended June 30, 2015 and 2014

5

 

 

Condensed Consolidated Statements of Cash Flows—Six months ended June 30, 2015 and 2014

6

 

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.

 

Controls and Procedures

36

Part II. Other Information

 

Item 1.

 

Legal Proceedings

37

Item 1A.

 

Risk Factors

37

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 3.

 

Defaults Upon Senior Securities

37

Item 4.

 

Mine Safety Disclosure

37

Item 5.

 

Other Information

38

Item 6.

 

Exhibits

39

Signature

40

Exhibits

 

 

 

 

 

2


PART I—FINANCIAL INFORMATION

Item 1.       Financial Statements

FUEL SYSTEMS SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

  

June 30,

2015

 

  

December 31,
2014

 

ASSETS

  

 

 

 

  

 

 

 

Current assets:

  

 

 

 

  

 

 

 

Cash and cash equivalents

  

$

48,583

  

  

$

85,180

  

Accounts receivable, less allowance for doubtful accounts of $3,024 and $3,129 at June 30, 2015 and December 31, 2014, respectively

  

 

46,875

  

  

 

46,952

  

Inventories

  

 

72,782

  

  

 

80,001

  

Deferred tax assets, net

  

 

1,861

  

  

 

9,547

  

Other current assets

  

 

19,468

  

  

 

21,271

  

Short-term investments

 

 

7,615

 

 

 

6,614

 

Related party receivables

  

 

4,062

  

  

 

5,094

  

Total current assets

  

 

201,246

  

  

 

254,659

  

Equipment and leasehold improvements, net

  

 

43,588

  

  

 

48,937

  

Goodwill, net

  

 

7,116

  

  

 

7,363

  

Deferred tax assets, net

  

 

3,626

  

  

 

5,253

  

Intangible assets, net

  

 

5,691

  

  

 

6,964

  

Other assets

  

 

1,393

  

  

 

1,065

  

Total Assets

  

$

262,660

 

 

$

324,241

  

LIABILITIES AND EQUITY

  

 

 

 

  

 

 

 

Current liabilities:

  

 

 

 

  

 

 

 

Accounts payable

  

$

27,800

  

  

$

39,918

  

Accrued expenses

  

 

33,284

 

 

 

33,446

  

Income taxes payable

  

 

642

 

  

 

445

  

Deferred tax liabilities, net

 

 

44

 

 

 

0

 

Term loans and debt

  

 

97

  

  

 

207

  

Related party payables

  

 

1,509

  

  

 

2,744

  

Total current liabilities

  

 

63,376

  

  

 

76,760

  

Other liabilities

  

 

9,732

  

  

 

9,745

  

Deferred tax liabilities, net

  

 

783

  

  

 

1,001

  

Total Liabilities

  

 

73,891

  

  

 

87,506

  

Equity:

  

 

 

 

  

 

 

 

Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued and outstanding at June 30, 2015 and December 31, 2014

  

 

0

  

  

 

0

  

Common stock, $0.001 par value, authorized 200,000,000 shares; 20,142,627 issued and 18,093,562 outstanding at June 30, 2015; and 20,114,427 issued and 19,769,617 outstanding at December 31, 2014

  

 

20

  

  

 

20

  

Additional paid-in capital

  

 

321,286

  

  

 

320,820

  

Shares held in treasury, 2,049,065 shares and 344,810 shares at June 30, 2015 and December 31, 2014, respectively

  

 

(20,801

)

  

 

(3,692)

 

Accumulated Deficit

  

 

(72,020

)

  

 

(54,151)

 

Accumulated other comprehensive loss

  

 

(39,843

)

  

 

(26,403)

 

Total Fuel Systems Solutions, Inc. Equity

 

 

188,642

 

 

 

236,594

 

Non-controlling interest

 

 

127

 

 

 

141

 

Total Equity

  

 

188,769

  

  

 

236,735

  

Total Liabilities and Equity

  

$

262,660

  

  

$

324,241

  

See accompanying notes to condensed consolidated financial statements.

 

3


FUEL SYSTEMS SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenue

$

67,185

 

 

$

87,391

 

 

$

130,478

 

 

$

168,687

 

Cost of revenue

 

52,232

 

 

 

69,539

 

 

 

101,001

 

 

 

133,434

 

Gross profit

 

14,953

 

 

 

17,852

 

 

 

29,477

 

 

 

35,253

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense

 

5,552

 

 

 

7,118

 

 

 

10,815

 

 

 

13,505

 

Selling, general and administrative expense

 

14,668

 

 

 

14,300

 

 

 

28,381

 

 

 

27,597

 

Impairments

 

0

 

 

 

44,341

 

 

 

0

 

 

 

44,341

 

Total operating expenses

 

20,220

 

 

 

65,759

 

 

 

39,196

 

 

 

85,443

 

Operating loss

 

(5,267

)

 

 

(47,907)

 

 

 

(9,719

)

 

 

(50,190

)

Other (expense) income, net

 

(109

)

 

 

894

 

 

 

874

 

 

 

1,419

 

Interest income (expense), net

 

36

 

 

 

(27)

 

 

 

28

 

 

 

(14

)

Loss from operations before income taxes and non-controlling interest

 

(5,340

)

 

 

(47,040)

 

 

 

(8,817

)

 

 

(48,785

)

Income tax (expense) benefit

 

(695

)

 

 

2,844

 

 

 

(9,046

)

 

 

2,585

 

Net loss

 

(6,035

)

 

 

(44,196)

 

 

 

(17,863

)

 

 

(46,200

)

Less: Net loss (income) attributable to non-controlling interest

 

37

 

 

 

6

 

 

 

(6

)

 

 

4

 

Net loss attributable to Fuel Systems Solutions, Inc..

 

(5,998

)

 

 

(44,190)

 

 

 

(17,869

)

 

 

(46,196

)

Net loss per share attributable to Fuel Systems Solutions, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.32

)

 

$

(2.20)

 

 

$

(0.95

)

 

$

(2.30

)

Diluted

$

(0.32

)

 

$

(2.20)

 

 

$

(0.95

)

 

$

(2.30

)

Number of shares used in per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

18,482,951

 

 

 

20,101,026

 

 

 

18,885,109

 

 

 

20,098,532

 

Diluted

 

18,482,951

 

 

 

20,101,026

 

 

 

18,885,109

 

 

 

20,098,532

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


FUEL SYSTEMS SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands); (Unaudited)

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

2015

 

  

2014

 

 

2015

 

  

2014

 

Net loss

$

(6,035

)

 

$

(44,196

)

 

$

(17,863

)

 

$

(46,200

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

2,126

 

 

 

(1,522

)

 

 

(13,460

)

 

 

(5,238

)

Unrealized gain (loss) on investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain arising during period

 

0

 

 

 

10

 

 

 

0

 

 

 

25

 

Foreign currency unrealized loss on investments during period

 

0

 

 

 

(97

)

 

 

0

 

 

 

(110

)

Other comprehensive income (loss), net of tax except for foreign currency items

 

2,126

 

 

 

(1,609

)

 

 

(13,460

)

 

 

(5,323

)

Comprehensive loss

 

(3,909

)

 

 

(45,805

)

 

 

(31,323

)

 

 

(51,523

)

Less: net comprehensive loss (income) attributable to the non-controlling interest

 

22

 

 

 

4

 

 

 

14

 

 

 

(2

)

Comprehensive loss attributable to Fuel Systems Solutions, Inc.

$

(3,887

)

 

$

(45,801

)

 

$

(31,309

)

 

$

(51,525

)

See accompanying notes to condensed consolidated financial statements.

 

 

5


FUEL SYSTEMS SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands); (Unaudited)

 

 

  

Six  Months Ended
June 30,

 

 

  

2015

 

  

2014

 

Cash flows from operating activities:

  

 

 

 

  

 

 

 

Net loss

  

$

(17,863)

  

  

$

(46,200)

 

Less: Net (income) loss attributable to the non-controlling interest

 

  

(6)

  

 

 

4

 

Net loss attributable to Fuel Systems Solutions, Inc.

 

 

(17,869)

  

 

 

(46,196)

 

Adjustments to reconcile net loss to net cash used in operating activities:

  

 

 

 

  

 

 

 

Depreciation and other amortization

  

 

4,662

  

  

 

5,501

 

Amortization of intangibles arising from acquisitions

  

 

911

  

  

 

1,252

 

Impairments

 

 

0

 

 

 

44,341

 

Provision for doubtful accounts

 

 

229

  

 

 

77

 

Write down of inventory

  

 

925

  

  

 

1,891

 

Other non-cash items

  

 

0

  

  

 

14

 

Deferred income taxes

 

 

8,170

  

 

 

(3,356)

 

Unrealized (gain) on foreign exchange transactions

 

 

(321)

  

 

 

(825)

 

Compensation expense related to equity awards

  

 

466

  

  

 

196

 

Loss on disposal of equipment and other assets

  

 

432

  

  

 

564

 

Changes in assets and liabilities, net of acquisitions:

  

 

 

 

  

 

 

 

(Increase) decrease in accounts receivable

  

 

(3,110)

  

  

 

4,044

 

Decrease (increase) in inventories

  

 

428

  

  

 

(2,978)

 

Decrease (increase) in other current assets

  

 

70

  

  

 

(5,764)

 

(Increase) decrease in other assets

  

 

(404)

  

  

 

724

 

Decrease in accounts payable

  

 

(9,093)

  

  

 

(261)

 

Increase in income taxes payable

  

 

204

  

  

 

84

 

Increase (decrease) in accrued expenses and long-term liabilities

  

 

2,805

  

  

 

(694)

 

Receivables from/payables to related party, net

  

 

(344

)  

  

 

(1,107)

 

Net cash used in operating activities

  

 

(11,839)

  

  

 

(2,493)

 

Cash flows from investing activities:

  

 

 

  

  

 

 

 

Purchase of equipment and leasehold improvements

  

 

(4,159)

  

  

 

(6,041)

 

Redemption of investments at maturity

  

 

5,000

  

  

 

0

 

Purchase of investments

  

 

(6,000)

  

  

 

(3,000)

 

Other

 

 

387

  

 

 

121

 

Net cash used in investing activities

  

 

(4,772)

  

  

 

(8,920)

 

Cash flows from financing activities:

  

 

 

 

  

 

 

 

Payments on term loans and other loans

  

 

(92)

  

  

 

(107)

 

Increase in treasury shares (share repurchase program)

  

 

(17,109)

  

  

 

0

 

Other

 

 

0

  

 

 

19

 

Net cash used in financing activities

  

 

(17,201)

  

  

 

(88)

 

Net decrease in cash and cash equivalents

  

 

(33,812)

  

  

 

(11,501)

 

Effect of exchange rate changes on cash

  

 

(2,785)

  

  

 

189

 

Net decrease in cash and cash equivalents

  

 

(36,597)

  

  

 

(11,312)

 

Cash and cash equivalents at beginning of period

  

 

85,180

  

  

 

80,961

 

Cash and cash equivalents at end of period

  

$

48,583

  

  

$

69,649

 

Supplemental disclosures of cash flow information:

  

 

 

 

  

 

 

 

Non-cash investing and financing activities:

  

 

 

 

  

 

 

 

Acquisition of equipment in accounts payable

  

$

111

  

  

$

347

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


FUEL SYSTEMS SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

(Unaudited)

 

1. Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2014 has been derived from the audited consolidated financial statements included in the Fuel Systems Solutions, Inc. (“Fuel Systems” or “the Company”) 2014 Annual Report on Form 10-K. The accompanying condensed consolidated financial statements as of and for the periods ended June 30, 2015 and 2014 are unaudited and reflect all adjustments (including normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial position and operating results for the interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in Fuel Systems’ Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

The Company designs, manufactures and supplies alternative fuel components and systems for use in the transportation, industrial and power generation industries on a global basis. The Company’s components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines.

The condensed consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries. All intercompany transactions, including intercompany profits and losses and intercompany balances, have been eliminated in consolidation. Investments in unconsolidated joint ventures or affiliates (“joint ventures”) are accounted for under the equity method of accounting, whereby the investment is initially recorded at the cost of acquisition and adjusted to recognize the Company’s share in undistributed earnings or losses since acquisition.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2015, or for any future period. Certain prior period amounts have been reclassified to conform to the current period presentation.

In connection with the preparation of the financial statements for the six months ended June 30, 2015, the Company determined there was an error in the balance sheet classification of the Company's accrued warranty obligation and deferred revenue in its previously reported balance sheets.  The Company has revised the December 31, 2014 balance sheet to correct for the classification of $1.9 million of accrued warranty obligation and $1.7 million of deferred revenue, respectively, within current liabilities to other liabilities.  The revision resulted in a decrease in current liabilities and an increase in non-current liabilities.  This revision is not considered material to the previously issued financial statements and does not impact previously reported consolidated results of operations or statements of cash flows. 

 

 

2. Recent Accounting Standards

In April 2014, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update that improves the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity’s operations and financial results.  The amendments in this update are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014.  Early adoption is permitted.  The adoption of this standard did not have a material impact on the Company’s financial statements.

In May 2014, the FASB issued a new accounting standard update providing additional guidance for revenue recognition in relation to contractual arrangements with customers.  The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  In July 2015, the FASB finalized a deferral of this standard resulting in the standard being effective beginning in 2018, with early adoption permitted in the beginning of 2017.  This standard can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption.  The Company is currently evaluating the effect that adopting this new accounting guidance will have on our consolidated financial statements.

7


In June 2014, the FASB issued a new accounting standard update providing additional guidance on how to account for share-based payments where the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period.  The amendments require that a performance target that affects vesting and that could be achieved after the requisite period is treated as a performance condition.  The amendments in this update are effective for fiscal years, and interim periods within those years beginning after December 15, 2015, and may be applied (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. Earlier adoption is permitted.  The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

In August 2014, the FASB issued a new accounting standard update intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. The amendments in this update apply to all companies and not-for-profit organizations. They become effective in the annual period ending after December 15, 2016, with early application permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

In February 2015, the FASB issued a new accounting standard update providing amendments to the consolidation guidance. Among other aspects, the amendments in this update affect the consolidation analysis of reporting entities that are involved with Variable Interest Entities (“VIEs”), and the effect of related parties on the primary beneficiary determination. The amendments in this update reduce the application of the related party guidance for VIEs on the basis of the following three changes: (i) for single decision makers, related party relationships must be considered indirectly on a proportionate basis, rather than in their entirety, (ii) related party relationships should be considered in their entirety for entities that are under common control, only if that common control group has the characteristics of a primary beneficiary, and (iii) if the assessment in clause (ii) is not applicable, but substantially all of the activities of the VIE are conducted on behalf of a single variable interest holder (excluding the decision maker) in a related party group that has the characteristics of a primary beneficiary, that single variable interest holder must consolidate the VIE as the primary beneficiary. The standard is effective for calendar year-end public business entities in 2016, and early adoption is allowed, including in any interim period. The Company is currently evaluating this standard, which presently is not expected to have a material impact of the Company’s financial statements.

 

 

3. Cash and Investments

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company’s marketable securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the designations at each balance sheet date. The Company classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable securities with maturities of 12 months or less are classified as short-term and marketable securities with maturities greater than 12 months are classified as long-term. The Company’s marketable securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component of shareholders’ equity. The Company determines realized gains and losses on the sale of marketable securities on a specific identification method, and reflects such gains and losses as a component of interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations.

The Company maintained investments in trading securities in connection with its non-qualified Deferred Compensation Plan, whereby selected key employees and directors elected to defer a portion of their compensation each year. The Company’s investments associated with its Deferred Compensation Plan consisted of mutual funds that are publicly traded and for which inputs are directly or indirectly observable in the marketplace. These trading securities are reported at fair value, with unrealized gains and losses included in earnings. In addition, the Deferred Compensation liability includes the value of deferred shares of the Company’s common stock, which is publicly traded and for which current market prices are readily available. The fair market value of the investments in the Deferred Compensation Plan is included in short-term investments starting from the second quarter of 2014 (following termination of the plan, as discussed below), with the corresponding deferred compensation obligation included in accrued expenses on the Condensed Consolidated Balance Sheets. Changes in the fair value of the benefits payable to participants and investments are both recognized as components of compensation expense. The net impact of changes in fair value was not material. The Deferred Compensation Plan was terminated during the second quarter of 2014 with the funds distributed in July 2015.

8


Cash, cash equivalents, and marketable securities consist of the following (in thousands):

 

 

  

As of

 

 

  

June 30, 2015

 

  

December 31, 2014

 

Cash and cash equivalents:

  

 

 

 

  

 

 

 

Cash

  

$

36,771

  

  

$

56,038

  

Money market funds

  

 

11,812

  

  

 

29,142

  

Total cash and cash equivalents

  

$

48,583

  

  

$

85,180

  

Investments:

  

 

 

 

  

 

 

 

Trading securities:

  

 

 

 

  

 

 

 

Deferred Compensation Plan assets

  

 

615

  

  

 

614

  

Other investments, held to maturity:

  

 

 

 

  

 

 

 

Time deposits (1) (2)

  

 

7,000

  

  

 

6,000

  

Total investments

  

$

7,615

  

  

$

6,614

  

Short term investments

  

$

7,615

  

  

$

6,614

  

 

Note (1): At June 30, 2015, this amount represents four Bank of America certificates of deposit (no interest if withdrawn before maturity): a $1 million certificate of deposit with a maturity date of September 25, 2015 and 0.34% interest rate; a $2 million certificate of deposit with a maturity date of October 13, 2015 and 0.34% interest rate; a $3 million certificate of deposit with a maturity date of October 19, 2015 and 0.34% interest rate; and a $1 million certificate of deposit with a maturity date of December 7, 2015 and 0.38% interest rate.

Note (2): At December 31, 2014, this amount represents three Bank of America certificates of deposit (no interest if withdrawn before maturity): a $2 million certificate of deposit with a maturity date of January 16, 2015 and 0.26% interest rate; a $3 million certificate of deposit with a maturity date of January 22, 2015 and 0.26% interest rate; and a $1 million certificate of deposit with a maturity date of September 25, 2015 and 0.34% interest rate.

Unrealized gains and losses on trading securities pertaining to the Company’s Deferred Compensation Plan included in earnings for the three and six months ended June 30, 2015 and 2014 were less than $0.1 million in all periods.

At June 30, 2015, restricted cash included in other current assets was approximately $0.2 million. At June 30, 2015 and December 31, 2014, restricted cash included in other assets was approximately $0.4 million and $0.4 million, respectively.

 

 

4. Fair Value Measurements

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

Level 1

 

 

Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2

 

 

 

Include other inputs that are directly or indirectly observable in the marketplace.

Level 3

 

 

 

Unobservable inputs that are supported by little or no market activities.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

9


The Company classifies its cash equivalents and marketable securities within Level 1 or Level 2. This is because the Company values its cash equivalents, available for sale and trading securities using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

 

 

  

As of
June 30
2015

 

  

Fair value measurement at
reporting date using

 

 

  

  

Level 1

 

  

Level 2

 

  

Level 3

 

Assets (in thousands):

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Cash equivalents:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Money market funds

  

$

11,812

  

  

$

11,812

 

  

$

0

 

  

$

0

  

Trading securities:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Deferred Compensation Plan assets

  

 

615

  

  

 

0

  

  

 

615

  

  

 

0

  

Other investments, held to maturity:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

  

 

7,000

 

 

 

0

 

 

 

7,000

 

 

 

0

  

Total

  

$

19,427

  

  

$

11,812

  

  

$

7,615

  

  

$

0

  

 

 

  

As of
December 31,
2014

 

  

Fair value measurement at
reporting date using

 

 

  

  

Level 1

 

  

Level 2

 

  

Level 3

 

Assets (in thousands):

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Cash equivalents:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Money market funds

  

$

29,142

  

  

$

29,142

 

  

$

0

 

  

$

0

  

Trading securities:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Deferred Compensation Plan assets

  

 

614

  

  

 

0

  

  

 

614

  

  

 

0

  

Other investments, held to maturity:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

  

 

6,000

 

 

 

0

 

 

 

6,000

 

 

 

0

  

Total

  

$

35,756

  

  

$

29,142

  

  

$

6,614

  

  

$

0

  

 

 

5. Inventories

Inventories, consisting of raw materials and parts, work-in-process, and finished goods are stated at the lower of cost or market value. Cost is determined by the first-in, first-out, or the FIFO method, while market value is determined by replacement cost for raw materials and parts and net realizable value for work-in-process and finished goods.

Inventories are comprised of the following (in thousands):

 

 

  

As of

 

 

  

June 30, 2015

 

 

December 31, 2014

 

Raw materials and parts

  

$

47,830

  

  

$

48,221

  

Work-in-process

  

 

2,295

  

  

 

2,214

  

Finished goods

  

 

21,406

  

  

 

28,169

  

Inventory on consignment

 

 

1,251

  

  

 

1,397

 

Total inventories

  

$

72,782

  

  

$

80,001

  

 

 

10


6. Equipment and Leasehold Improvements, Net

Equipment and leasehold improvements, net, consist of the following (in thousands):

 

 

  

As of

 

 

  

June 30, 2015

 

 

December 31, 2014

 

Dies, molds, and patterns

  

$

5,859

  

 

$

5,703

  

Machinery and equipment

  

 

59,774

  

 

 

62,635

  

Office furnishings and equipment

  

 

21,028

  

 

 

21,760

  

Automobiles and trucks

  

 

4,556

  

 

 

4,915

  

Leasehold improvements

  

 

18,671

  

 

 

19,925

  

Total equipment and leasehold improvements

  

 

109,888

  

 

 

114,938

  

Less: accumulated depreciation

  

 

(66,300

 

 

(66,001)

 

Equipment and leasehold improvements, net of accumulated depreciation

  

$

43,588

  

 

$

48,937

  

Depreciation expense related to equipment and leasehold improvements was approximately $2.3 million and $2.8 million for the three months ended June 30, 2015 and 2014, respectively. Depreciation expense related to equipment and leasehold improvements was $4.7 million and $5.5 million for the six months ended June 30, 2015 and 2014, respectively.

 

 

7. Goodwill and Intangibles

The changes in the carrying amount of goodwill by business segment for the six months ended June 30, 2015 are as follows (in thousands):

 

 

  

FSS Automotive

 

 

FSS Industrial

 

 

Total

 

Goodwill, gross

  

$

48,089

  

 

$

15,911

  

 

$

64,000

  

Accumulated impairment losses

  

 

(44,384)

 

 

 

(12,253)

 

 

 

(56,637)

 

Net balance as of December 31, 2014

  

$

3,705

  

 

$

3,658

  

 

$

7,363

  

Currency translation

  

 

(247)

 

 

 

0

 

 

 

(247)

 

Goodwill, gross

  

$

47,553

 

 

$

16,121

 

 

$

63,674

 

Accumulated impairment losses

  

 

(44,095)

 

 

 

(12,463)

 

 

 

(56,558)

 

Net balance as of June 30, 2015

  

$

3,458

 

 

$

3,658

 

 

$

7,116

 

 

At June 30, 2015 and December 31, 2014, intangible assets consisted of the following (in thousands):

 

 

  

WT Average
Remaining
Amortization
period (in years)

 

  

As of June 30, 2015

 

  

As of December 31, 2014

 

  

  

Gross
Book Value

 

  

Accumulated
Amortization

 

 

Net
Book Value

 

  

Gross
Book Value

 

  

Accumulated
Amortization

 

 

Net
Book Value

 

Existing technology

  

 

4.5

  

  

$

24,204

  

  

$

(21,089

)

 

$

3,115

  

  

$

25,534

  

  

$

(21,836

)

 

$

3,698

  

Customer relationships

  

 

10.8

  

  

 

18,658

  

  

 

(17,020

)

 

 

1,638

  

  

 

19,385

  

  

 

(17,330

)

 

 

2,055

  

Trade name

  

 

4.2

  

  

 

4,097

  

  

 

(3,159

)

 

 

938

  

  

 

4,432

  

  

 

(3,221

)

 

 

1,211

  

Total

 

 

 

 

 

$

46,959

 

 

$

(41,268

)

 

$

5,691

 

 

$

49,351

 

 

$

(42,387

)

 

$

6,964

 

 

Amortization expense related to existing technology and customer relationships of $0.3 million and $0.5 million for the three months ended June 30, 2015 and 2014, respectively, and of $0.7 million and $1.0 million for the six months ended June 30, 2015 and 2014, respectively, is reported as a component of cost of revenue. Amortization expense related to trade name and non-compete agreements of $0.1 million and $0.1 million for three months ended June 30, 2015 and 2014, respectively, and of $0.2 million and $0.3 million for the six months ended June 30, 2015 and 2014, respectively, is reported as a component of operating expenses.

11


Amortization expense for the remaining lives of the intangible assets is estimated to be as follows (in thousands):

 

 

  

Amortization
Expense

 

Six months ending December 31, 2015

  

$

863

  

2016

  

 

1,419

  

2017

  

 

1,023

  

2018

  

 

864

  

2019

  

 

591

  

2020

  

 

434

  

Thereafter

  

 

497

  

 

  

$

5,691

  

 

 

8. Warranties

Estimated future warranty obligations related to certain products are provided by charges to operations in the period in which the related revenue is recognized. Estimates are based, in part, on historical experience.

Changes in the Company’s product warranty liability during the three and six months ended June 30, 2015 and 2014 are as follows (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Balance at beginning of period

 

$

5,363

 

 

$

8,212

 

 

$

6,424

 

 

$

8,695

 

Provisions charged to costs and expenses

 

 

1,281

 

 

 

699

 

 

 

1,984

 

 

 

1,697

 

Settlements

 

 

(1,606

)

 

 

(1,238

)

 

 

(2,547

)

 

 

(2,254

)

Adjustments to pre-existing warranties

 

 

13

 

 

 

(251

)

 

 

(369

)

 

 

(567

)

Effect of foreign currency translation

 

 

88

 

 

 

94

 

 

(353

)

 

 

(55

)

Balance at end of period

 

$

5,139

 

 

$

7,516

 

 

$

5,139

 

 

$

7,516

 

 

 

9. Income Taxes

The Company’s effective tax rate for the three months ended June 30, 2015 was (13.0)% compared to an effective tax rate of 6.0% for the three months ended June 30, 2014. The Company’s effective tax rate for the six months ended June 30, 2015 was (102.6)% compared to an effective tax rate of 5.3% for the six months ended June 30, 2014.

The Company operates in an international environment with significant operations in various locations outside of the United States, which have statutory tax rates that are different from the United States tax rate. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates. The change in the effective tax rate is primarily a result of the fluctuation of earnings in the various jurisdictions and losses incurred in the United States and certain foreign jurisdictions (“loss jurisdictions”) for which no tax benefit has been recorded.

For the three months ended June 30, 2015 and 2014 the Company incurred a pre-tax loss of approximately $8.0 million and $0.9 million, respectively, in the loss jurisdictions. For the six months ended June 30, 2015 and 2014, the Company incurred a pre-tax loss of approximately $13.0 million and $3.2 million, respectively, in the loss jurisdictions.

For the six months ended June 30, 2015, our effective tax rate was impacted by a tax expense of $7.8 million related to an increase in valuation allowance on deferred tax assets that existed as of the beginning of the year in Italy, as the Company has determined that it is more likely than not that these assets will not be realized in the foreseeable future. This conclusion was based on the weight of the available positive and negative evidence, including our expectation that the Company will reach the three year cumulative loss threshold in Italy (after adjustments required for tax purposes) in the current year.

The Company believes that the likelihood of recoverability of the net deferred tax assets in the loss jurisdictions is less than the “more likely than not” threshold, therefore, in addition to the valuation allowance recorded in connection with the deferred tax assets in Italy in the current year, a valuation allowance is maintained on the entire domestic and certain foreign jurisdictions deferred tax assets.

12


As of June 30, 2015, the Company had approximately $13.9 million of unrecognized tax benefits. There was no significant change in unrecognized tax benefits for the three and six months ended June 30, 2015. Although it is reasonably possible that our unrecognized tax benefits will change over the next 12 months, the Company does not anticipate such changes to have a significant impact on our income tax expense due to the valuation allowance position maintained in certain jurisdictions.

 

 

10. Debt Payable

The Company’s outstanding debt is summarized as follows (in thousands):

 

 

  

Available as of
June 30,
2015

 

  

June 30, 2015

 

  

December 31,
2014

 

(a) Revolving lines of credit—Italy and Argentina

  

$

8,088

  

  

$

0

  

  

$

0

  

(b) Revolving line of credit—USA

  

 

30,000

  

  

 

0

  

  

 

0

  

(c) Other indebtedness

  

 

0

  

  

 

97

  

  

 

207

  

 

  

$

38,088

  

  

 

97

  

  

 

207

  

Less: current portion

  

 

 

 

  

 

97

  

  

 

207

  

Non-current portion

  

 

 

 

  

$

0

  

  

$

0

  

 

At June 30, 2015, the Company’s weighted average interest rate on outstanding debt was 1.1%. The Company is party to numerous credit agreements and other borrowings. All foreign currency denominated revolving lines of credit have been translated at the closing currency rate as of June 30, 2015. The fair value of the debt obligations approximated the recorded value as of June 30, 2015 and December 31, 2014 and represents a Level 3 measurement within the fair value hierarchy (see Note 4 – Fair Value Measurements).

(a) Revolving Lines of Credit – Italy and Argentina

The Company maintains various revolving lines of credit in Italy and Argentina. The revolving lines of credit in Italy include $2.3 million which is unsecured and $3.3 million which is collateralized by accounts receivable. The interest rates on these revolving lines of credit are fixed and variable and range from 1.0% to 4.0% as of June 30, 2015. At June 30, 2015 and December 31, 2014, there were no balances outstanding.

The revolving lines of credit in Argentina consist of two lines for a total amount of availability of approximately $2.5 million. These lines are unsecured with no balance outstanding at June 30, 2015 and December 31, 2014. At June 30, 2015, the interest rates for the lines of credit in Argentina ranged from 4.5% to 30.0%.

All lines are callable on demand.

(b) Revolving Line of Credit – USA

As of June 30, 2015, the Company and IMPCO Technologies, Inc. (“IMPCO”) maintain an unsecured, revolving short term credit facility with Intesa SanPaolo S.p.A. (“Intesa”) amounting to $30.0 million. IMPCO intends to use the borrowings for its general corporate purposes and Fuel Systems guarantees IMPCO’s payments. At June 30, 2015 and December 31, 2014, there were no balances outstanding. The maximum aggregate principal amount of loans available at any time was $20.0 million with a maturity date of April 30, 2015, which on April 30, 2015 was renewed to April 29, 2016 with a new aggregate principal amount of loans available at any time increased to $30.0 million. At the Company’s option, the loans will bear interest on either the applicable LIBOR rate plus 2.0%, the bank’s prime rate plus 1.0% or the bank’s cost of funds rate plus 2.0%. The bank’s prime rate is a floating interest rate that may change as often as once a day. If any amounts under a loan remain outstanding after the loan’s maturity date, such amounts will bear interest at the bank’s prime rate plus 2.0%. In addition, this revolving credit facility carries a commitment fee of 0.5% of the average daily unused amount. The line of credit contains quarterly covenants, which require the Company to maintain (1) a ratio of Net Debt/EBITDA for the then most recently concluded period of four consecutive fiscal quarters of the Company to be less than 2, (2) a consolidated net worth of at least $135.0 million, and (3) the Company shall not, and shall not permit any of its subsidiaries to create, incur, assume or permit to exist any Debt other than (i) debt of any such subsidiary owing to any other subsidiary or to the Company or (ii) debt for borrowed money in a total aggregate principal amount, the U.S. Dollar equivalent of which does not exceed $75.0 million. At June 30, 2015, the Company was in compliance with these covenants.

13


(c) Other indebtedness

Other indebtedness includes capital leases and various term loans and lines of credits involving the Company’s foreign subsidiaries. These term loans and lines of credit are used primarily to fund the operations of these subsidiaries and bear interest ranging from 0.5% to 6.95%.

 

 

11. Equity

The following table summarizes the changes in equity for the six month period ended June 30, 2015 (in thousands, except for share amounts):

 

 

Fuel Systems Stockholders’ Equity

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional
Paid-In
Capital

 

 

Shares Held
in
Treasury

 

 

Retained
Earnings/
(Accumulated
Deficit)

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Non-
controlling
Interest

 

 

Total
Equity

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

19,769,617

 

 

$

20

 

 

$

320,820

 

 

$

(3,692

)

 

$

(54,151

)

 

$

(26,403

)

 

$

141

 

 

$

236,735

 

Net loss

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(17,869

)

 

 

0

 

 

 

6

 

 

 

(17,863

)

Foreign currency translation adjustment

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(13,440

)

 

 

(20

)

 

 

(13,460

)

Issuance and vesting of stock options

 

0

 

 

 

0

 

 

 

102

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

102

 

Issuance and vesting of restricted stock, net of shares withheld for employee tax

 

28,200

 

 

 

0

 

 

 

364

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

364

 

Repurchase of common stock

 

(1,704,255

)

 

 

 

 

 

 

 

 

 

 

(17,109

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,109

)

Balance, June 30, 2015

 

18,093,562

 

 

$

20

 

 

$

321,286

 

 

$

(20,801

)

 

$

(72,020

)

 

$

(39,843

)

 

$

127

 

 

$

188,769

 

 

Shares Held in Treasury

As of June 30, 2015 and December 31, 2014, the Company had 2,049,065 shares and 344,810 shares, respectively, held in treasury with a value of approximately $20.8 million, and $3.7 million, respectively.

On November 3, 2014, the Company’s Board of Directors approved a share repurchase program for up to $25.0 million of the Company’s common stock.  As of June 30, 2015, the total number of shares repurchased under this program in the open market was 2,041,066, for a value of approximately $20.5 million, of which approximately $6.2 million and $17.1 were purchased in the three months and six months ended June 30, 2015, respectively.

The remainder of the treasury shares held by the Company at June 30, 2015 was equal to 7,999 shares, and includes 1,419 shares from the surrender of shares tendered in lieu of cash for the exercise of warrants, and 6,580 shares from the surrender of shares for U.S. payroll tax withholding obligations associated with vesting of restricted stock, with a value of approximately $0.2 million.

The Company matched employee contributions to its non-qualified deferred compensation plan up to an annual maximum of $12,500 per employee by purchasing shares of the Company’s common stock in the open market, with such match discontinued in 2009. These shares are carried at cost and classified as a deduction of equity. As of June 30, 2015 and December 31, 2014, the Company included in treasury shares approximately $0.1 million for the deferred compensation plan.  The Deferred Compensation Plan was terminated during the second quarter of 2014 with the funds distributed in July 2015.

 

 

14


12. Changes and Reclassifications in Accumulated Other Comprehensive Loss by Component

(a) Changes in Accumulated Other Comprehensive Loss by Component (all amounts are net of tax, except foreign currency items)

 

 

 

 

Three Months Ended June 30, 2015

(in thousands)

 

 

 

Unrealized Gains and

(Losses) on Available

-for-Sale Securities

 

 

Foreign

Currency

Items

 

 

Total

 

Beginning balance, March 31, 2015

 

 

  0

 

 

 

(41,954

)

 

 

(41,954

)

Current period Other Comprehensive Income activity before reclassifications

 

 

0

 

 

 

2,126

 

 

 

2,126

 

Net current-period Other Comprehensive Income

 

 

 

 

 

 

2,126

 

 

 

2,126

 

Net current-period Other Comprehensive Income attributable to the non-controlling interest

 

 

0

 

 

 

(15

)

 

 

(15)

 

Ending balance, June 30, 2015

 

 

0

 

 

 

(39,843

)

 

 

(39,843

)

 

 

 

Six Months Ended June 30, 2015

(in thousands)

 

 

 

Unrealized Gains and

(Losses) on Available

-for-Sale Securities

 

 

Foreign

Currency

Items

 

 

Total

 

Beginning balance, December 31, 2014

 

 

  0

 

 

 

(26,403

)

 

 

(26,403

)

Current period Other Comprehensive Loss activity before reclassifications

 

 

0

 

 

 

(13,460

)

 

 

(13,460

)

Net current-period Other Comprehensive Loss

 

 

 

 

 

 

(13,460

)

 

 

(13,460

)

Net current-period Other Comprehensive Income attributable to the non-controlling interest

 

 

0

 

 

 

20

 

 

 

20

 

Ending balance, June 30, 2015

 

 

0

 

 

 

(39,843

)

 

 

(39,843

)

 

 

 

Three Months Ended June 30, 2014

(in thousands)

 

 

 

Unrealized Gains and

(Losses) on Available

-for-Sale Securities

 

 

Foreign

Currency

Items

 

 

Total

 

Beginning balance, March 31, 2014

 

 

70

 

 

 

(4,215

)

 

 

(4,145

)

Current period Other Comprehensive Income (Loss) activity before reclassifications

 

 

10

 

 

 

(1,619

)

 

 

(1,609

)

Net current-period Other Comprehensive Income (Loss)

 

 

10

 

 

 

(1,619

)

 

 

(1,609

)

Net current-period Other Comprehensive Income attributable to noncontrolling interest

 

 

0

 

 

 

(14

)

 

 

(14

)

Ending balance, June 30, 2014

 

 

80

 

 

 

(5,848

)

 

 

(5,768

)

 

 

 

Six Months Ended June 30, 2014

(in thousands)

 

 

 

Unrealized Gains and

(Losses) on Available

-for-Sale Securities

 

 

Foreign

Currency

Items

 

 

Total

 

Beginning balance, December 31, 2013

 

 

55

 

 

 

(494

)

 

 

(439

)

Current period Other Comprehensive Income (Loss) activity before reclassifications

 

 

25

 

 

 

(5,348

)

 

 

(5,323

)

Net current-period Other Comprehensive Income (Loss)

 

 

25

 

 

 

(5,348

)

 

 

(5,323

)

Net current-period Other Comprehensive Income attributable to noncontrolling interest

 

 

0

 

 

 

(6

)

 

 

(6

)

Ending balance, June 30, 2014

 

 

80

 

 

 

(5,848

)

 

 

(5,768

)

15


 

(b) Reclassifications out of Accumulated Other Comprehensive Loss

For the three and six months ended June 30, 2015 and 2014, there were no reclassifications out of Accumulated Other Comprehensive Loss.

 

 

13. Stock-Based Compensation

The Company has one stock option plan and one phantom stock option plan that provide for the issuance of options and phantom stock options respectively, to key employees and directors of the Company at the fair market value at the time of grant. Options and phantom stock options granted under these plans generally vest in four or five years and are generally exercisable while the individual is an employee or a non-employee director, or ordinarily within one month following termination of employment. In no event may options or phantom stock options be exercised more than ten years after date of grant.  Phantom stock options convey the right to the grantee to receive a cash payment once exercisable, equal to the positive difference between the exercise price on the date of the grant less the fair market value of the stock on the date of the exercise.

Under the Company’s 2009 Restricted Stock Plan, the Company’s Board of Directors may grant restricted stock and restricted stock units to officers, employees and non-employee directors. Restricted stock that is awarded to non-employee directors and normally vests in one year. In the current year, certain key employee personnel were awarded restricted stock units vesting on each anniversary of the grant date, over a period of three years.  When the restricted stock units vest, at the discretion of the Board of Directors, employees will receive either stock or cash equal to the closing price of the stock on the vesting date times the number of units.

In estimating the fair value of stock-based compensation, the Company uses the historical volatility of its shares based on seven year averages.

Stock-based compensation expense for the three and six months ended June 30, 2015 and 2014 was allocated as follows (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cost of revenue

 

$

12

 

 

$

12

 

 

$

24

 

 

$

21

 

Research and development expense

 

 

1

 

 

 

9

 

 

 

10

 

 

 

16

 

Selling, general and administrative expense