UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended June 30, 2017

OR

For the transition period from                      to                     

Commission File No. 001-35806

 

The ExOne Company

(Exact name of registrant as specified in its charter)

 

 

127 Industry Boulevard

North Huntingdon, Pennsylvania 15642

(Address of principal executive offices) (Zip Code)

(724) 863-9663

(Registrant’s telephone number, including area code)

 

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  ☒    No  ☐

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  ☒    No  ☐

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

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of August 9, 2017, 16,129,619 shares of common stock, par value $0.01, were outstanding.

 

 

 

 

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IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

Since our initial public offering, we have continued to qualify as an “emerging growth company” (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An EGC may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies.

As an EGC:

We will continue to operate under these provisions until December 31, 2018, or such earlier time that we are no longer an EGC. We would cease to be an EGC if we have more than $1.07 billion in annual revenues, qualify as a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which requires us to have more than $700 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of these reduced burdens.

 

 

 

 

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PART I – FINANCIAL INFORMATION

The ExOne Company and Subsidiaries

Condensed Statement of Consolidated Operations and Comprehensive Loss (Unaudited)

(in thousands, except per-share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

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The ExOne Company and Subsidiaries

Condensed Consolidated Balance Sheet (Unaudited)

(in thousands, except per-share and share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

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The ExOne Company and Subsidiaries

Condensed Statement of Consolidated Cash Flows (Unaudited)

(in thousands)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

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The ExOne Company and Subsidiaries

Condensed Statement of Changes in Consolidated Stockholders’ Equity (Unaudited)

(in thousands)

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

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The ExOne Company and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per-share and share amounts)

Note 1. Basis of Presentation

Organization

The ExOne Company (“ExOne”) is a corporation organized under the laws of the state of Delaware. ExOne was formed on January 1, 2013, when The Ex One Company, LLC, a Delaware limited liability company, merged with and into a Delaware corporation, which survived and changed its name to The ExOne Company (the “Reorganization”). As a result of the Reorganization, The Ex One Company, LLC became ExOne, the common and preferred interest holders of The Ex One Company, LLC became holders of common stock and preferred stock, respectively, of ExOne, and the subsidiaries of The Ex One Company, LLC became the subsidiaries of ExOne. The condensed consolidated financial statements include the accounts of ExOne, its wholly-owned subsidiaries, ExOne Americas LLC (United States), ExOne GmbH (Germany), ExOne Property GmbH (Germany); ExOne KK (Japan); ExOne Italy S.r.l (Italy); ExOne Sweden AB (Sweden); and through September 2016, MWT—Gesellschaft für Industrielle Mikrowellentechnik mbH (Germany). Collectively, the consolidated group is referred to as the “Company”.

On September 15, 2016, the Company completed a transaction merging its MWT—Gesellschaft für Industrielle Mikrowellentechnik mbH (Germany) subsidiary with and into its ExOne GmbH (Germany) subsidiary. The purpose of this transaction was to further simplify the Company’s legal structure. There were no significant accounting or tax related impacts associated with the merger of these wholly owned subsidiaries.

The Company filed a registration statement on Form S-3 (No. 333-203353) with the Securities and Exchange Commission (“SEC”) on April 10, 2015.  The purpose of the Form S-3 was to register, among other securities, debt securities. Certain subsidiaries of the Company (other than any minor subsidiary) are co-registrants with the Company (“Subsidiary Guarantors”), and the registration statement registered guarantees of debt securities by one or more of the Subsidiary Guarantors. The Subsidiary Guarantors are 100% owned by the Company and any guarantees by the Subsidiary Guarantors will be full and unconditional.

Basis of Presentation

The condensed consolidated financial statements of the Company are unaudited. The condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary by management to fairly state the results of operations, financial position and cash flows of the Company. All material intercompany transactions and balances have been eliminated in consolidation. The results reported in these condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. The December 31, 2016 condensed consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). This Quarterly Report on Form 10-Q should be read in connection with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which includes all disclosures required by GAAP.

The preparation of these condensed consolidated financial statements requires the Company to make certain judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. Areas that require significant judgments, estimates and assumptions include accounting for accounts receivable (including the allowance for doubtful accounts); inventories (including the allowance for slow-moving and obsolete inventories); product warranty reserves; contingencies; income taxes (including the valuation allowance on certain deferred tax assets and liabilities for uncertain tax positions); equity-based compensation (including the valuation of certain equity-based compensation awards issued by the Company); and testing for impairment of long-lived assets (including the identification of asset groups by management, estimates of future cash flows of identified asset groups and fair value estimates used in connection with assessing the valuation of identified asset groups). The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Certain amounts relating to restricted cash ($330) and intangible assets – net ($668) in the accompanying condensed consolidated balance sheet at December 31, 2016, have been reclassified from prepaid expenses and other current assets and other noncurrent assets, respectively, to conform to current period presentation. Certain amounts relating to provision (recoveries) for slow-moving, obsolete and lower of cost or market inventories – net ($403) and amortization of debt issuance costs ($3) in the accompanying condensed statement of consolidated cash flows for the six months ended June 30, 2016, have been reclassified from increase in inventories and decrease in prepaid expenses and other assets, respectively, to conform to current period presentation.

Recently Adopted Accounting Guidance

On January 1, 2017, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory.” This ASU modifies existing guidance and is intended to reduce diversity in practice with respect to the accounting for the income tax consequences of intra-entity transfers of assets. The ASU indicates that the former exception to income tax accounting that requires companies to defer the income tax effects of certain intercompany transactions would apply only to intercompany inventory transactions. That is, the exception no longer applies

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to intercompany sales and transfers of other assets (e.g., property and equipment or intangible assets). Under the former exception, income tax expense associated with intra-entity profits in an intercompany sale or transfer of assets was eliminated from earnings. Instead, that cost was deferred and recorded on the balance sheet (e.g., as a prepaid asset) until the assets left the consolidated group. Similarly, the entity was prohibited from recognizing deferred tax assets for the increases in tax bases due to the intercompany sale or transfer. A modified retrospective basis of adoption was required for this ASU. As a result, a cumulative-effect adjustment of approximately $408 has been recorded to accumulated deficit on January 1, 2017, in connection with this adoption. This cumulative-effect adjustment relates to the prepaid expense associated with intra-entity transfers of property and equipment included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet at December 31, 2016.

On January 1, 2017, the Company adopted FASB ASU 2016-17, “Consolidation: Interests Held through Related Parties That Are under Common Control.” This ASU modifies former guidance with respect to how a decision maker that holds an indirect interest in a variable interest entity (“VIE”) through a common control party determines whether it is the primary beneficiary of the VIE as part of the analysis of whether the VIE would need to be consolidated. Under the ASU, a decision maker needs to consider only its proportionate indirect interest in the VIE held through a common control party. Previous guidance had required the decision maker to treat the common control party’s interest in the VIE as if the decision maker held the interest itself. The Company does not have significant involvement with entities subject to consolidation considerations impacted by VIE model factors addressed by this ASU. Management has determined that the adoption of this ASU did not have an impact on the condensed consolidated financial statements of the Company.

On January 1, 2017, the Company adopted FASB ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory.” This ASU requires inventories to be measured at the lower of cost and net realizable value, with net realizable value defined as the estimated selling price in the normal course of business, less reasonably predictable costs of completion, disposal and transportation. Management has determined that the adoption of this ASU did not have an impact on the condensed consolidated financial statements of the Company.

Recently Issued Accounting Guidance

The Company considers the applicability and impact of all ASUs issued by the FASB. Recently issued ASUs not listed below were assessed and determined to be either not applicable or are currently expected to have no impact on the consolidated financial statements of the Company.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments.” This ASU is intended to reduce diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provides guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The ASU also provides guidance for classifying cash receipts and payments that have aspects of more than one class of cash flows. This ASU becomes effective for the Company on January 1, 2019. Early adoption is permitted. Management is currently evaluating the potential impact of this ASU on the consolidated financial statements of the Company.

In February 2016, the FASB issued ASU 2016-02, “Leases.” As a result of this ASU, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. As a result of this ASU, lessor accounting is largely unchanged and lessees will no longer be provided with a source of off-balance sheet financing. This ASU becomes effective for the Company on January 1, 2019. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Management is currently evaluating the potential impact of this ASU on the consolidated financial statements of the Company.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This ASU created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersedes virtually all existing revenue recognition requirements and guidance. This framework is expected to provide a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity 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 or services. To achieve this principle, an entity should apply the following steps: identify the contract(s) with a customer, identify the performance obligations in the contract(s), determine the transaction price, allocate the transaction price to the performance obligations in the contract(s), and recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date,” which deferred the effective date of this guidance for the Company until January 1, 2019, or January 1, 2018, in the event that the Company no longer qualifies as an EGC.  Early adoption is permitted, but the Company may adopt the changes no earlier than January 1, 2017 (regardless of EGC status). In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts

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with Customers: Principal versus Agent Considerations”, which serves to clarify the implementation guidance issued in ASU 2014-09 with respect to principal versus agent considerations in an arrangement. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing”, which serves to clarify the implementation guidance issued in ASU 2014-09 with respect to identifying performance obligations in an arrangement and accounting for licensing arrangements. In May 2016, the FASB issued ASU 2016-11, “Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting”, which serves to rescind certain previously issued SEC Staff Observer comments upon adoption of ASU 2014-09. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients”, which serves to clarify certain technical aspects and transition guidance associated with ASU 2014-09. Management is currently evaluating the potential impact of these collective changes on the consolidated financial statements of the Company.

Note 2. Liquidity

On February 6, 2013, the Company commenced an initial public offering of 6,095,000 shares of its common stock at a price to the public of $18.00 per share, of which 5,483,333 shares of common stock were sold by the Company and 611,667 shares of common stock were sold by a selling stockholder (including consideration of the exercise of the underwriters’ over-allotment option). The Company received approximately $90,371 in unrestricted net proceeds in connection with this offering (net of underwriting commissions and offering costs).

On September 9, 2013, the Company commenced a secondary public offering of 3,054,400 shares of its common stock at a price to the public of $62.00 per share, of which 1,106,000 shares of common stock were sold by the Company and 1,948,400 shares of common stock were sold by selling stockholders (including consideration of the exercise of the underwriters’ over-allotment option). The Company received approximately $64,948 in unrestricted net proceeds in connection with this offering (net of underwriting commissions and offering costs).

On January 8, 2016, the Company announced that it had entered into an At Market Issuance Sales Agreement (“ATM”) with FBR Capital Markets & Co. (“FBR”) and MLV & Co. LLC (“MLV”) pursuant to which FBR and MLV agreed to act as distribution agents in the sale of up to $50,000 in the aggregate of ExOne common stock in “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). Both FBR and MLV have been identified as related parties to the Company on the basis of significant influence in that a member of the Board of Directors of the Company also serves as a member of the Board of Directors of FBR (which controls MLV). The terms of the ATM were reviewed and approved by a sub-committee of the Board of Directors of the Company (which included each of the members of the Audit Committee of the Board of Directors except for the identified director who also holds a position on the Board of Directors of FBR). Terms of the ATM require a 3.0% commission on the sale of common stock under the ATM and a reimbursement of certain legal expenses of $25. During the quarter ended March 31, 2016, the Company sold 91,940 shares of common stock under the ATM at a weighted average selling price of approximately $9.17 per share resulting in gross proceeds to the Company of approximately $843. Unrestricted net proceeds to the Company from the sale of common stock under the ATM during the quarter ended March 31, 2016 were approximately $595 (after deducting offering costs of approximately $248, including certain legal, accounting and administrative costs associated with the ATM, of which approximately $50 was paid to FBR or MLV relating to the aforementioned reimbursement of certain legal expenses and commissions on the sale of common stock under the ATM). There have been no sales of shares of common stock under the ATM during any periods subsequent to the quarter ended March 31, 2016.

On January 11, 2016, the Company announced that it had entered into a subscription agreement with Rockwell Forest Products, Inc. and S. Kent Rockwell for the registered direct offering and sale of 1,423,877 shares of ExOne common stock at a per share price of $9.13 (a $0.50 premium from the closing price on the close of business on January 8, 2016). The terms of this transaction were reviewed and approved by a sub-committee of independent members of the Board of Directors of the Company (which included each of the members of the Audit Committee of the Board of Directors). The sub-committee of independent members of the Board of Directors of the Company were advised on the transaction by an independent financial advisor and independent legal counsel. Concurrent with the approval of this sale of common stock under the terms identified, a separate sub-committee of independent members of the Board of Directors of the Company approved the termination of the Company’s revolving credit facility with RHI Investments, LLC.  Following completion of the registered direct offering on January 13, 2016, the Company received gross proceeds of approximately $13,000. Unrestricted net proceeds to the Company from the sale of common stock in the registered direct offering were approximately $12,447 (after deducting offering costs of approximately $553).

The Company has incurred a net loss in each of its annual periods since its inception. As shown in the accompanying condensed statement of consolidated operations and comprehensive loss, the Company incurred a net loss of approximately $6,403 and $13,194 for the quarter and six months ended June 30, 2017, respectively. As noted above, the Company has received cumulative unrestricted net proceeds from the sale of its common stock of approximately $168,361 to fund its operations. At June 30, 2017, the Company had approximately $24,051 in unrestricted cash and cash equivalents.

Management believes that the Company’s existing capital resources will be sufficient to support the Company’s operating plan. If management anticipates that the Company’s actual results will differ from its operating plan, management believes it has sufficient capabilities to enact cost savings measures to preserve capital. Further, the Company may seek to raise additional capital to support its growth through additional debt, equity or other alternatives (including asset sales) or a combination thereof.

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Note 3. Accumulated Other Comprehensive Loss

The following table summarizes changes in the components of accumulated other comprehensive loss:

 

Foreign currency translation adjustments consist of the effect of translation of functional currency financial statements (denominated in the Euro and Japanese Yen) to the reporting currency of the Company (United States dollar) and certain long-term intercompany transactions between subsidiaries for which settlement is not planned or anticipated in the foreseeable future.

There were no tax impacts related to income tax rate changes and no amounts were reclassified to earnings for either of the periods presented.

Note 4. Loss Per Share

The Company presents basic and diluted loss per common share amounts. Basic loss per share is calculated by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the applicable period. Diluted loss per share is calculated by dividing net loss available to common stockholders by the weighted average number of common shares and common equivalent shares outstanding during the applicable period.

As the Company incurred a net loss during each of the quarters and six months ended June 30, 2017 and 2016, basic average shares outstanding and diluted average shares outstanding were the same because the effect of potential shares of common stock, including incentive stock options (351,137  – 2017 and 182,637 – 2016) and unvested restricted stock issued (83,670  – 2017 and 72,338 – 2016), was anti-dilutive.

The information used to compute basic and diluted loss per common share was as follows:

 

 

Note 5. Restructuring

On January 26, 2017, the Company committed to a plan to consolidate certain of its three-dimensional (“3D”) printing operations from its North Las Vegas, Nevada facility into its Troy, Michigan and Houston, Texas facilities and exit its non-core specialty machining operations in its Chesterfield, Michigan facility. These actions were taken as a result of the accelerating adoption rate of the Company’s sand printing technology in North America which has resulted in a refocus of the Company’s operational strategy.

As a result of these actions, during the quarter ended March 31, 2017, the Company recorded charges of approximately $984, including approximately $110 associated with involuntary employee terminations, approximately $7 associated with other exit costs and approximately $867 associated with asset impairments. Charges associated with involuntary employee terminations and other exit costs were recorded to cost of sales in the accompanying condensed statement of operations and comprehensive loss. Charges associated with asset impairments were split between cost of sales ($598), as a component of depreciation expense, and selling, general and administrative expenses ($269), as a component of amortization expense, in the accompanying condensed statement of operations and comprehensive loss. During the quarter ended June 30, 2017, the Company recorded a charge of approximately $32 associated with an additional involuntary employee termination which required a service commitment through April 2017. This charge was recorded to cost of sales in the accompanying condensed statement of operations and comprehensive loss. There are no additional charges expected to be incurred associated with this plan in future periods. At June 30, 2017, the Company has settled all amounts associated with involuntary employee terminations and other exit costs.

Charges associated with asset impairments relate principally to the Company’s plan to exit its non-core specialty machining operations in its Chesterfield, Michigan facility. On April 21, 2017, the Company sold to a third party certain assets associated with these operations including inventories (approximately $79), property and equipment (approximately $2,475) and other contractual rights (approximately $269). Total gross proceeds from the sale of these assets were approximately $2,050. After deducting costs

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directly attributable to the sale of these assets (approximately $128), the Company recorded an impairment loss during the quarter ended March 31, 2017, of approximately $859 split between property and equipment ($590) and intangible assets ($269) based on the excess of the carrying value over the estimated fair value of the related assets at March 31, 2017, and a loss on disposal (recorded to cost of sales in the accompanying condensed statement of operations and comprehensive loss) during the quarter ended June 30, 2017, of approximately $42. Additionally, the Company recorded an impairment loss during the quarter ended March 31, 2017, of approximately $8 associated with certain property and equipment which was abandoned in connection with the Company’s exit of its North Las Vegas, Nevada facility.

Separate from the transaction described above, on May 9, 2017, the Company sold to a third party certain property and equipment (principally land and building) associated with its North Las Vegas, Nevada facility. Total gross proceeds from the sale of these assets were approximately $1,950. After deducting costs directly attributable to the sale of these assets (approximately $137), the Company recorded a gain on disposal (recorded to cost of sales in the accompanying condensed statement of operations and comprehensive loss) during the quarter ended June 30, 2017, of approximately $347.

In April 2016, the Company committed to a plan to consolidate certain of its 3D printing operations in its Auburn, Washington facility into its North Las Vegas, Nevada facility and reorganize certain of its corporate departments as part of its 2016 operating plan. As a result of these actions, during the quarter ended June 30, 2016, the Company incurred a net charge of approximately $170 including, $57 associated with involuntary employee terminations and $113 associated with the disposal of certain property and equipment related to the Auburn, Washington facility which was either sold or abandoned. This net charge was split between cost of sales ($129), research and development ($2) and selling, general and administrative expenses ($39) in the accompanying statement of consolidated operations and comprehensive loss. In addition to the net charge incurred by the Company in connection with this plan, the Company also has an operating lease commitment for the Auburn, Washington facility with a lease term through December 2018. At the time of closure of this facility, the Company was able to secure a firmly committed sublease arrangement with a third party which fully offsets its remaining contractual operating lease liability. There are no additional charges expected to be incurred associated with this plan in future periods. The Company has settled all amounts associated with involuntary employee terminations.

Note 6. Impairment

During the quarter ended June 30, 2017, as a result of continued operating losses and cash flow deficiencies, the Company identified a triggering event requiring a test for the recoverability of long-lived assets held for use at the asset group level. Assessing the recoverability of long-lived assets held for use requires significant judgments and estimates by management.

For purposes of testing long-lived assets for recoverability, the Company operates as three separate asset groups: United States, Europe and Japan. In assessing the recoverability of long-lived assets held for use, the Company determined the carrying amount of long-lived assets held for use to be in excess of the estimated future undiscounted net cash flows of the related assets. The Company proceeded to determine the fair value of its long-lived assets held for use, principally through use of the market approach. The Company’s use of the market approach included consideration of market transactions for comparable assets. Management concluded that the fair value of long-lived assets held for use exceeded their carrying value and as such no impairment loss was recorded.   

A significant decrease in the market price of a long-lived asset, adverse change in the use or condition of a long-lived asset, adverse change in the business climate or legal or regulatory factors impacting a long-lived asset and continued operating losses and cash flow deficiencies associated with a long-lived asset, among other indicators, could cause a future assessment to be performed which may result in an impairment of long-lived assets held for use, resulting in a material adverse effect on the financial position and results of operations of the Company.

Note 7. Cash, Cash Equivalents, and Restricted Cash

The following provides a reconciliation of cash, cash equivalents, and restricted cash as reported in the accompanying condensed consolidated balance sheet to the same such amounts shown in the accompanying condensed statement of consolidated cash flows:

 

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Restricted cash at June 30, 2017 includes approximately $782 associated with cash collateral required by a German bank for financial guarantees issued by ExOne GmbH in connection with certain commercial transactions requiring security. Restricted cash at both June 30, 2017 and December 31, 2016 includes approximately $330 associated with cash collateral required by a United States bank to offset certain short-term, unsecured lending commitments associated with the Company’s corporate credit card program. Each of the balances described are considered legally restricted by the Company.

Note 8. Inventories

Inventories consist of the following:

 

 

Raw materials and components consist of consumable materials and component parts and subassemblies associated with 3D printing machine manufacturing and support activities. Work in process consists of 3D printing machines and other products in varying stages of completion. Finished goods consist of 3D printing machines and other products prepared for sale in accordance with customer specifications.

At June 30, 2017 and December 31, 2016, the allowance for slow-moving and obsolete inventories was approximately $3,228 and $1,517, respectively, and has been reflected as a reduction to inventories (principally raw materials and components). During the quarter ended June 30, 2017, the Company recorded a charge of approximately $1,460 to cost of sales in the accompanying condensed statement of consolidated operations and comprehensive loss attributable to certain raw material and component inventories (principally machine frames and other fabricated components) associated with the Company’s Exerial^TM 3D printing machine platform based on decisions made by the Company during the period related to certain design changes and improvements to the underlying platform (rendering certain elements of the previous design obsolete). During the quarter ended June 30, 2016, the Company recorded a credit of approximately $507 to cost of sales in the accompanying condensed statement of consolidated operations and comprehensive loss attributable to the reversal of a previously recorded reserve for certain inventories associated with the Company’s laser micromachining product line which was discontinued at the end of 2014, based on the sale of such laser micromachining inventories during the period.  

During the quarter and six months ended June 30, 2017, the Company recorded a (credit) charge of approximately ($79) and $127 to cost of sales in the accompanying statement of consolidated operations and comprehensive loss associated with certain work in process inventories for which cost was determined to exceed net realizable value. There were no such credits or charges recorded by the Company during the quarter or six months ended June 30, 2016.

Note 9. Product Warranty Reserves

Substantially all of the Company’s 3D printing machines are covered by a standard twelve month warranty. Generally, at the time of sale, a liability is recorded (with an offset to cost of sales) based upon the expected cost of replacement parts and labor to be incurred over the life of the standard warranty. Expected cost is estimated using historical experience for similar products. The Company periodically assesses the adequacy of the product warranty reserves based on changes in these factors and records any necessary adjustments if actual experience indicates that adjustments are necessary. Future claims experience could be materially different from prior results because of the introduction of new, more complex products, a change in the Company’s warranty policy in response to industry trends, competition or other external forces, or manufacturing changes that could impact product quality. In the event that the Company determines that its current or future product repair and replacement costs exceed estimates, an adjustment to these reserves would be charged to cost of sales in the period such a determination is made.

The following table summarizes changes in product warranty reserves (such amounts reflected in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet for each respective period):

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Note 10. Contingencies and Commitments

Contingencies

On July 1, 2017, the Company (through its ExOne GmbH subsidiary) entered into a Settlement Agreement with Kocel Foundry Limited (also known as Kocel CSR Casting Company, Limited) and Kocel Group (Hong Kong) Limited (collectively, “Kocel”) relating to settlement of the arbitration case (no. 100019-2017) administered by the Swiss Chambers’ Arbitration Institution Notice of Arbitration, as filed by the Company on January 25, 2017. Among other things, the Settlement Agreement provides for a cash payment from ExOne GmbH to Kocel of approximately $811 and a settlement and release of claims related to a sales agreement between the parties for certain 3D printing machines and related equipment (the “Sales Agreement”).

The total value of the Sales Agreement is approximately $3,560 (€3,116) with all associated proceeds having been previously received by ExOne GmbH from Kocel, such amounts reflected in deferred revenue and customer prepayments at June 30, 2017, in the accompanying condensed consolidated balance sheet. Based on the terms of the Settlement Agreement, including the final acceptance by Kocel of the 3D printing machines and related equipment, and relief from further obligation, liability or warranty for both parties (excluding certain intellectual property considerations), the Company has recorded revenue of approximately $2,779 associated with the Sales Agreement (net of the cash payment made by ExOne GmbH to Kocel, such payment made on July 5, 2017) and the related cost of sales, during the quarter ending September 30, 2017.

The Company and its subsidiaries are subject to various litigation, claims, and proceedings which have been or may be instituted or asserted from time to time in the ordinary course of business. Other than the matter further described above, management does not believe that the outcome of any pending or threatened matters will have a material adverse effect, individually or in the aggregate, on the financial position, results of operations or cash flows of the Company.

Commitments

In the normal course of its operations, ExOne GmbH issues financial guarantees and letters of credit to third parties in connection with certain commercial transactions requiring security. ExOne GmbH maintains a credit facility agreement with a German bank which provides for various short-term financings in the form of overdraft credit, financial guarantees, letters of credit and collateral security for commercial transactions for approximately $1,500 (€1,300). In addition, ExOne GmbH may use the credit facility agreement for short-term, fixed-rate loans in minimum increments of approximately $100 (€100) with minimum terms of at least thirty days. The overdraft credit interest rate is fixed at 10.2% while the interest rate associated with commercial transactions requiring security (financial guarantees, letters of credit or collateral security) is fixed at 1.75%. The credit facility agreement has an indefinite term and is subject to cancellation by either party at any time upon repayment of amounts outstanding or expiration of commercial transactions requiring security. There is no commitment fee associated with the credit facility agreement. There are no negative covenants associated with the credit facility agreement. The credit facility agreement has been guaranteed by the Company. At June 30, 2017 and December 31, 2016, there were no outstanding borrowings in the form of overdraft credit or short-term loans under the credit facility agreement. At June 30, 2017, total outstanding financial guarantees and letters of credit issued by ExOne GmbH under the credit facility agreement were approximately $1,043 (€903) with expiration dates ranging from July 2017 through July 2018. At December 31, 2016, total outstanding guarantees and letters of credit issued by ExOne GmbH under the credit facility agreement were approximately $400 (€380).

In addition to amounts issued by ExOne GmbH under the credit facility agreement, during the quarter ended March 31, 2017, ExOne GmbH entered into separate agreements with the same German bank for additional capacity for financial guarantees and letters of credit associated with certain commercial transactions requiring security. Terms of the separate agreements are substantially similar to those of the existing credit security agreement except that the German bank required cash collateral to be posted by ExOne GmbH in connection with any related issuance. At June 30, 2017, total outstanding financial guarantees and letters of credit issued by ExOne GmbH under these separate agreements were approximately $782 (€684) with expiration dates ranging from August 2017 through October 2017.

 

Note 11. Income Taxes

The provision for income taxes for the quarters ended June 30, 2017 and 2016 was $9 and $22, respectively. The provision for income taxes for the six months ended June 30, 2017 and 2016 was $9 and $18, respectively. The Company has completed a discrete period computation of its provision for income taxes for each of the periods presented. Discrete period computation is as a result of

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jurisdictions with losses before income taxes for which no tax benefit can be recognized and an inability to generate reliable estimates for results in certain jurisdictions as a result of inconsistencies in generating net operating profits (losses) in those jurisdictions.

The effective tax rate for the quarters ended June 30, 2017 and 2016 was 0.1% (provision on a loss) and 0.8% (provision on a loss), respectively. The effective tax rate for the six months ended June 30, 2017 and 2016 was 0.1% (provision on a loss) and 0.2% (provision on a loss), respectively. The effective tax rate differs from the United States federal statutory rate of 34.0% for each of the periods presented primarily due to net changes in valuation allowances for the periods.

The Company has provided a valuation allowance for its net deferred tax assets as a result of the Company not generating consistent net operating profits in jurisdictions in which it operates. As such, any benefit from deferred taxes in any of the periods presented has been fully offset by changes in the valuation allowance for net deferred tax assets. The Company continues to assess its future taxable income by jurisdiction based on recent historical operating results, the expected timing of reversal of temporary differences, various tax planning strategies that the Company may be able to enact in future periods, the impact of potential operating changes on the business and forecast results from operations in future periods based on available information at the end of each reporting period. To the extent that the Company is able to reach the conclusion that its net deferred tax assets are realizable based on any combination of the above factors in a single, or in multiple, taxing jurisdictions, a reversal of the related portion of the Company’s existing valuation allowances may occur.

The Company has a liability for uncertain tax positions related to certain capitalized expenses and intercompany transactions. At June 30, 2017 and December 31, 2016, the liability for uncertain tax positions was approximately $818 and $754, respectively, and is included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet. At June 30, 2017 and December 31, 2016, the Company had an additional liability for uncertain tax positions related to its ExOne GmbH (Germany) subsidiary of approximately $279 and $232, respectively, which were fully offset against net operating loss carryforwards. At June 30, 2017 and December 31, 2016, the Company had an additional liability for uncertain tax positions related to its ExOne KK (Japan) subsidiary of approximately $515 and $416, respectively, which were fully offset against net operating loss carryforwards.

At June 30, 2017, the Company’s ExOne GmbH (2010-2013) and ExOne Property GmbH (2013) subsidiaries were under examination by local taxing authorities. The Company is unable to reasonably predict an outcome related to this examination. In July 2017, local taxing authorities in Japan completed their examination of the Company’s ExOne KK (2014-2016) subsidiary, resulting in an income tax obligation of approximately $5, which has been reflected in the provision for income taxes in the accompanying condensed statement of consolidated operations during the quarter ended June 30, 2017.

Note 12. Equity-Based Compensation

On January 24, 2013, the Board of Directors of the Company adopted the 2013 Equity Incentive Plan (the “Plan”). In connection with the adoption of the Plan, 500,000 shares of common stock were reserved for issuance pursuant to the Plan, with automatic increases in such reserve available each year annually on January 1 from 2014 through 2023 equal to the lesser of 3.0% of the total outstanding shares of common stock as of December 31 of the immediately preceding year or, a number of shares of common stock determined by the Board of Directors, provided that the maximum number of shares authorized under the Plan will not exceed 1,992,241 shares, subject to certain adjustments.

Incentive stock options (“ISOs”) and restricted stock issued by the Company are generally subject to service conditions resulting in annual vesting on the anniversary of the date of grant over a period typically ranging between one and three years. Certain ISOs and stock bonus awards issued by the Company vest immediately upon issuance. ISOs issued by the Company have a contractual life which expires ten years from the date of grant subject to continued service to the Company by the participant.

The following table summarizes the total equity-based compensation expense recognized for awards issued under the Plan:

 

At June 30, 2017, total future compensation expense related to unvested awards yet to be recognized by the Company was approximately $609 for ISOs and $651 for restricted stock. Total future compensation expense related to unvested awards yet to be recognized by the Company is expected to be recognized over a weighted-average remaining vesting period of approximately 1.4 years.

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During the six months ended June 30, 2017, the fair value of ISOs granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

During the six months ended June 30, 2016, there were no ISOs issued by the Company.

Volatility has been estimated based on historical volatilities of certain peer group companies over the expected term of the awards, due to a lack of historical stock prices for a period at least equal to the expected term of issued awards. The average risk-free rate is based on a weighted average yield curve of risk-free interest rates consistent with the expected term of the awards. Expected dividend yield is based on historical dividend data as well as future expectations. Expected term has been calculated using the simplified method as the Company does not have sufficient historical exercise experience upon which to base an estimate.

The activity for ISOs was as follows:

 

At June 30, 2017, intrinsic value associated with ISOs exercisable was approximately $52. At June 30, 2017, intrinsic value associated with ISOs expected to vest was approximately $7. The weighted average remaining contractual term of ISOs exercisable and expected to vest at June 30, 2017, was approximately 7.2 years and 8.9 years, respectively. There were no ISO exercises during the six months ended June 30, 2017 or 2016.

The activity for restricted stock was as follows:

 

Restricted stock vested during the six months ended June 30, 2017 and 2016, had a fair value of approximately $299 and $304, respectively.

 

Note 13. Fair Value Measurements

Fair value is defined as the price that would be received to sell 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 inherent risk, transfer restrictions and credit risk.

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The Company applies the following fair value 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:

The Company is required to disclose its estimate of the fair value of material financial instruments, including those recorded as assets or liabilities in its consolidated financial statements, in accordance with GAAP.

During the quarter ended March 31, 2017, the Company entered into two separate foreign exchange forward contracts with a German bank in an effort to hedge the variability of certain foreign exchange risks between the Euro (the functional currency of the Company’s ExOne GmbH subsidiary) and British Pound Sterling (the currency basis for cash flows resulting from a commercial sales contract with a customer). The first of the two foreign exchange forward contracts was both entered into and settled (in connection with cash received from the customer) during the quarter ended March 31, 2017, resulting in a realized gain on settlement of approximately $16 (€15). The second of the two foreign exchange forward contracts remained outstanding at June 30, 2017. For both the quarter and six months ended June 30, 2017, the second of the two foreign exchange forward contracts generated an unrealized gain of approximately $5 (€4). Neither of the contracts has been designated as a hedging instrument and accordingly, realized and unrealized gains (losses) for all periods have been recorded to other expense (income) – net in the accompanying condensed statement of consolidated operations and comprehensive loss. The Company has classified both contracts as Level 2 fair value measurements.  

The carrying values and fair values of other financial instruments (assets and liabilities) not required to be recorded at fair value were as follows:

 * Carrying values at June 30, 2017 and December 31, 2016 are net of unamortized debt issuance costs of approximately $33 and $36, respectively.

The carrying amounts of cash and cash equivalents, restricted cash, current portion of long-term debt and current portion of capital leases approximate fair value due to their short-term maturities. The fair value of long-term debt – net of current portion and capital leases – net of current portion have been estimated by management based on the consideration of applicable interest rates (including certain instruments at variable or floating rates) and other available information (including quoted prices of similar instruments available to the Company). Cash and cash equivalents and restricted cash are classified in Level 1; current portion of long-term debt, current portion of capital leases, long-term debt – net of current portion and capital leases – net of current portion are classified in Level 2.

Note 14. Concentration of Credit Risk

During the quarters and six months ended June 30, 2017 and 2016, the Company conducted a significant portion of its business with a limited number of customers, though not necessarily the same customers for each respective period. For the quarters ended June 30, 2017 and 2016, the Company’s five most significant customers represented approximately 37.4% and 35.4% of total revenue, respectively. For the six months ended June 30, 2017 and 2016, the Company’s five most significant customers represented approximately 25.7% and 28.7% of total revenue, respectively. At June 30, 2017 and December 31, 2016, accounts receivable from the Company’s five most significant customers were approximately $2,514 and $1,867, respectively.

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Note 15. Related Party Transactions

Revenues

Sales of products and/or services to related parties for the quarters ended June 30, 2017 and 2016 were approximately $9 and $37, respectively. Sales of products and/or services to related parties for the six months ended June 30, 2017 and 2016 were approximately $17 and $72, respectively. None of the transactions met a threshold requiring review and approval by the Audit Committee of the Board of Directors of the Company.  

Amounts due from related parties at June 30, 2017 and December 31, 2016, were approximately less than $1 and $1, respectively and are reflected in accounts receivable – net in the accompanying condensed consolidated balance sheet. In addition, the Company received prepayments for certain undelivered services to a related party of approximately $17 at June 30, 2017, which are reflected in deferred revenue and customer prepayments in the accompanying condensed consolidated balance sheet. There were no prepayments received from related parties at December 31, 2016.

Expenses

During the quarters ended June 30, 2017 and 2016, purchases from related parties were approximately $5 and $6, respectively. During the six months ended June 30, 2017 and 2016, purchases from related parties were approximately $8 and $10, respectively. Purchases by the Company during the quarters and six months ended June 30, 2017 and 2016 included website design services and leased office space from related parties under common control by the Executive Chairman of the Company (formerly the Chairman and CEO of the Company through August 19, 2016). None of the transactions met a threshold requiring review and approval by the Audit Committee of the Board of Directors of the Company.  

The Company also receives the benefit of the corporate use of an airplane from a related party under common control by the Executive Chairman of the Company (formerly the Chairman and CEO of the Company through August 19, 2016) for no consideration. The Company estimates the fair market value of the benefits received during the quarter and six months ended June 30, 2016 were approximately $2 and $4, respectively. There were no such benefits received during the quarter or six months ended June 30, 2017.

Amounts due to related parties at June 30, 2017 and December 31, 2016, were approximately $3 and $1, respectively. Amounts due to related parties at June 30, 2017, are reflected in accounts payable ($2) and accrued expenses and other current liabilities ($1) in the accompanying condensed consolidated balance sheet. Amounts due to related parties at December 31, 2016, are reflected in accounts payable in the accompanying condensed consolidated balance sheet.

Revolving Credit Facility with a Related Party

On October 23, 2015, ExOne and its ExOne Americas LLC and ExOne GmbH subsidiaries, as guarantors, entered into a Credit Agreement (the “Credit Agreement”) with RHI Investments, LLC (“RHI”), a related party, on a $15,000 revolving credit facility to (i) assist the Company in its efforts to finance customer acquisition of its 3D printing machines and 3D printed and other products and services and (ii) provide additional funding for working capital and general corporate purposes.  RHI was determined to be a related party based on common control by the former Chairman and CEO of the Company (the Executive Chairman of the Company effective August 19, 2016). Prior to execution, the Credit Agreement was subject to review and approval by a sub-committee of independent members of the Board of Directors of the Company (which included each of the members of the Audit Committee of the Board of Directors).  The Company incurred approximately $215 in debt issuance costs associated with the Credit Agreement.

On January 10, 2016, the Company delivered notice to RHI of its intent to terminate the Credit Agreement in connection with the closing of a registered direct offering of common stock to an entity under common control by the former Chairman and CEO of the Company (the Executive Chairman of the Company effective August 19, 2016). There were no borrowings under the Credit Agreement from January 1, 2016 through the effective date of its termination, January 13, 2016.  In connection with the termination, the Company settled its remaining accrued interest under the Credit Agreement of approximately $5 relating to the commitment fee on the unused portion of the revolving credit facility (100 basis points, or 1.0% on the unused portion of the revolving credit facility). In addition, during the quarter ended March 31, 2016, the Company recorded approximately $204 to interest expense related to the accelerated amortization of debt issuance costs. Upon termination of the Credit Agreement, all liens and guaranties in respect thereof were released.

Other

Refer to Note 2 for further discussion relating to two separate equity offerings during the quarter ended March 31, 2016, certain elements of which qualify as related party transactions. 

 

Note 16. Subsequent Events

The Company has evaluated all of its activities and concluded that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes to the condensed consolidated financial statements, other than the matters further discussed in Note 10 relating to the settlement of a contractual arrangement with a customer and Note 11 relating to the completion of a foreign tax examination.

 

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(dollars in thousands, except per-share amounts)

The following discussion and analysis should be read together with our unaudited condensed consolidated financial statements and related notes thereto set forth in this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2016.

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act with respect to our future financial or business performance, strategies, or expectations. Forward-looking statements typically are identified by words or phrases such as “trend,” “potential,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” as well as similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could” and “may.”

We caution that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made and we assume no duty to and do not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

In addition to items described under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, the following factors, among others, could cause results to differ materially from forward-looking statements or historical performance: our ability to enhance our current 3D printing machines and technology and develop new 3D printing machines; our ability to qualify more industrial materials in which we can print; timing and length of sales of 3D printing machines; demand for our products; our ability to achieve cost savings through consolidation or exiting of certain North American operations; the impact of increases in operating expenses and expenses relating to proposed investments and alliances; the availability of skilled personnel; the impact of market conditions and other factors on the carrying value of long-lived assets; our competitive environment and our competitive position; our ability to continue as a going concern; individual customer contractual requirements; the impact of customer specific terms in machine sale agreements on the period in which we recognize revenue; the impact of loss of key management; risks related to global operations including effects of foreign currency and risks related to the situation in the Ukraine and the United Kingdom’s referendum to withdraw from the European Union; demand for aerospace, automotive, heavy equipment, energy/oil/gas and other industrial products; our plans regarding increased international operations in additional international locations; the scope, nature or impact of alliances and strategic investments and our ability to integrate strategic investments; sufficiency of funds for required capital expenditures, working capital, and debt service; the adequacy of sources of liquidity; the effect of litigation, contingencies and warranty claims; liabilities under laws and regulations protecting the environment; the impact of governmental laws and regulations; operating hazards, war, terrorism and cancellation or unavailability of insurance coverage; the impact of disruption of our manufacturing facilities, production service centers (“PSCs”) or ExOne adoption centers (“EACs”); the adequacy of our protection of our intellectual property; expectations regarding demand for our industrial products, operating revenues, operating and maintenance expenses, insurance expenses and deductibles, interest expenses, debt levels, and other matters with regard to outlook; and material weaknesses in our internal control over financial reporting.

Overview

Our Business

We are a global provider of 3D printing machines and 3D printed and other products, materials and services to industrial customers. Our business primarily consists of manufacturing and selling 3D printing machines and printing products to specification for our customers using our installed base of 3D printing machines. Our machines serve direct and indirect applications.  Direct printing produces a component; indirect printing makes a tool to produce a component. We offer pre-production collaboration and print products for customers through our network of PSCs and EACs. We also supply the associated materials, including consumables and replacement parts, and other services, including training and technical support that is necessary for purchasers of our 3D printing machines to print products. We believe that our ability to print in a variety of industrial materials, as well as our industry-leading volumetric output (as measured by build box size and printing speed) uniquely position us to serve the needs of industrial customers.

Recent Developments

On January 26, 2017, we committed to a plan to consolidate certain of our 3D printing operations from our North Las Vegas, Nevada facility into our Troy, Michigan and Houston, Texas facilities and exit our non-core specialty machining operations in our Chesterfield, Michigan facility. These actions were taken as a result of the accelerating adoption rate of our sand printing technology in North America which has resulted in a refocus of our operational strategy.

As a result of these actions, during the quarter ended March 31, 2017, we recorded charges of approximately $984, including approximately $110 associated with involuntary employee terminations, approximately $7 associated with other exit costs and approximately $867 associated with asset impairments. Charges associated with involuntary employee terminations and other exit

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costs were recorded to cost of sales in the accompanying condensed statement of operations and comprehensive loss. Charges associated with asset impairments were split between cost of sales ($598), as a component of depreciation expense, and selling, general and administrative expenses ($269), as a component of amortization expense, in the accompanying condensed statement of operations and comprehensive loss. During the quarter ended June 30, 2017, we recorded a charge of approximately $32 associated with an additional involuntary employee termination which required a service commitment through April 2017. This charge was recorded to cost of sales in the accompanying condensed statement of operations and comprehensive loss. At June 30, 2017, we have settled all amounts associated with involuntary employee terminations and other exit costs.

Charges associated with asset impairments relate principally to our plan to exit our non-core specialty machining operations in our Chesterfield, Michigan facility. On April 21, 2017, we sold to a third party certain assets associated with these operations including inventories (approximately $79), property and equipment (approximately $2,475) and other contractual rights (approximately $269). Total gross proceeds from the sale of these assets were approximately $2,050. After deducting costs directly attributable to the sale of these assets (approximately $128), we recorded an impairment loss during the quarter ended March 31, 2017, of approximately $859 split between property and equipment ($590) and intangible assets ($269) based on the excess of the carrying value over the estimated fair value of the related assets at March 31, 2017, and a loss on disposal (recorded to cost of sales in the accompanying condensed statement of operations and comprehensive loss) during the quarter ended June 30, 2017, of approximately $42. Additionally, we recorded an impairment loss during the quarter ended March 31, 2017, of approximately $8 associated with certain property and equipment which was abandoned in connection with our plan to exit our North Las Vegas, Nevada facility.

Separate from the transaction described above, on May 9, 2017, we sold to a third party certain property and equipment (principally land and building) associated with our North Las Vegas, Nevada facility. Total gross proceeds from the sale of these assets were approximately $1,950. After deducting costs directly attributable to the sale of these assets (approximately $137), we recorded a gain on disposal (recorded to cost of sales in the accompanying condensed statement of operations and comprehensive loss) during the quarter ended June 30, 2017, of approximately $347.

The consolidation of our 3D printing operations from our North Las Vegas, Nevada facility into our Troy, Michigan and Houston, Texas facilities is not expected to have a significant impact on our revenues in future periods. We expect annualized cost savings related to this consolidation of approximately $600, with approximately $570 in the form of cash cost savings (principally employee and facility maintenance costs) and approximately $30 in the form of reduced depreciation expense. All cost savings associated with this consolidation are expected to benefit cost of sales. We expect to invest these cost savings into technological or process advancements that support either long-term cost benefits or revenue growth.

We expect annualized reductions in revenue related to our exit of our non-core specialty machining operations in our Chesterfield, Michigan facility of approximately $1,400. Revenues associated with our non-core specialty machining operations in our Chesterfield, Michigan facility were approximately $39 and $346 for the quarter and six months ended June 30, 2017, respectively, and approximately $315 and $648 for the quarter and six months ended June 30, 2016, respectively. We expect annualized cost savings related to this exit of approximately $500, with approximately $200 in the form of cash cost savings (principally employee-related and other operating costs), approximately $200 in the form of reduced depreciation expense and approximately $100 in the form of reduced amortization expense. Cost savings associated with the exit of this facility are expected to benefit cost of sales by approximately $400 and selling, general and administrative expenses by approximately $100. We expect to invest these cost savings into technological or process advancements that support either long-term cost benefits or revenue growth.

On March 22, 2017, we terminated our Cooperation Agreement with Swerea SWECAST AB (“Swerea”), resulting in an exit of our PSC operations in Jönköping, Sweden, effective April 1, 2017. Also on March 22, 2017, we agreed to a leasing agreement with Beijer Industri AB, effective April 1, 2017, related to our 3D printing machine and related equipment located on the Swerea premises, previously covered under our Cooperation Agreement with Swerea. Both of these actions were taken in connection with our continuing evaluation of our business model in an effort to both streamline our existing European operations, and to take strategic advantage of our existing relationship with Beijer Industri AB in promoting indirect binder jet technologies in Scandinavia. There were no penalties or other adverse effects associated with our termination of our Cooperation Agreement with Swerea. There were no significant effects on our results of operations or financial position associated with these actions.  

Impairment

During the quarter ended June 30, 2017, as a result of continued operating losses and cash flow deficiencies, we identified a triggering event requiring a test for the recoverability of long-lived assets held for use at the asset group level. Assessing the recoverability of long-lived assets held for use requires significant judgments and estimates by management.

For purposes of testing long-lived assets for recoverability, we operate as three separate asset groups: United States, Europe and Japan. In assessing the recoverability of long-lived assets held for use, we determined the carrying amount of long-lived assets held for use to be in excess of the estimated future undiscounted net cash flows of the related assets. We proceeded to determine the fair value of our long-lived assets held for use, principally through use of the market approach. Our use of the market approach included consideration of market transactions for comparable assets. Management concluded that the fair value of long-lived assets held for use exceeded their carrying value and as such no impairment loss was recorded.   

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A significant decrease in the market price of a long-lived asset, adverse change in the use or condition of a long-lived asset, adverse change in the business climate or legal or regulatory factors impacting a long-lived asset and continued operating losses and cash flow deficiencies associated with a long-lived asset, among other indicators, could cause a future assessment to be performed which may result in an impairment of long-lived assets held for use, resulting in a material adverse effect on our financial position and results of operations.

Outlook

Our 2017 priorities include the following:

Backlog

At June 30, 2017, our backlog was approximately $26,300 of which approximately $22,900 is expected to be fulfilled during the next twelve months. At December 31, 2016, our backlog was approximately $19,700.

Results of Operations

Net Loss

Net loss for the quarter ended June 30, 2017, was $6,403, or $0.40 per basic and diluted share, compared with a net loss of $2,942 or $0.18 per basic and diluted share, for the quarter ended June 30, 2016. Net loss for the six months ended June 30, 2017, was $13,194, or $0.82 per basic and diluted share, compared with a net loss of $8,419 or $0.53 per basic and diluted share, for the six months ended June 30, 2016. The increase in our net loss for both periods was principally due to a net decrease in our gross profit along with increases in research and development and selling, general and administrative expenses (all changes further described below).

Revenue

The following table summarizes revenue by product line:

 

Revenue for the quarter ended June 30, 2017, was $10,799 compared with revenue of $11,755 for the quarter ended June 30, 2016, a decrease of $956, or 8.1%. The decrease in revenue was as a result of decreases in revenue attributable to both of our product lines (3D printing machines and 3D printed and other products, materials and services). The decrease in revenues from 3D printing machines resulted from a lower volume of units sold (eight 3D printing machines sold during the quarter ended June 30, 2017, as compared to nine 3D printing machines sold during the quarter ended June 30, 2016). The decrease in revenues from 3D printed and other products, materials and services principally resulted from the absence of the sale of remaining inventories associated with our former laser micromachining production line (approximately $475) during the quarter ended June 30, 2016, a decrease in product sales associated with our former specialty machining operation located in our Chesterfield, Michigan facility (approximately $276) following the sale of certain assets associated with this operation in April 2017, and a reduction in sales of consumable materials

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principally due to lower realized pricing. These decreases were offset by a net increase in sales from our PSC and EAC direct and indirect printing operations as a result of increased customer acceptance of our binder jet technologies.

Revenue for the six months ended June 30, 2017, was $21,668 compared with revenue of $20,169 for the six months ended June 30, 2016, an increase of $1,499, or 7.4%. The increase in revenue was primarily a result of an increase in sales from 3D printing machines offset by a slight decrease in revenues from 3D printed and other products, materials and services. The increase in revenues from 3D printing machines resulted primarily from an increase in volume of 3D printing machines sold (thirteen 3D printing machines sold during the six months ended June 30, 2017, as compared to ten 3D printing machines sold during the six months ended June 30, 2016) which was offset by slightly lower realized pricing from sales of 3D printing machines. An offsetting decrease in revenues from 3D printed and other products, materials and services resulted from the absence of the aforementioned sale of laser micromachining inventories and a decrease in product sales associated with our former specialty machining operation (approximately $302), both of which were net of an increase in sales from our PSC and EAC direct and indirect printing operations as a result of increased customer acceptance of our binder jet technologies.

The following table summarizes 3D printing machines sold by type (refer to the “Our Machines and Machine Platforms” section of Part I, Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2016, for a description of 3D printing machines by type):

 

Cost of Sales and Gross Profit

Cost of sales for the quarter ended June 30, 2017, was $8,773 compared with cost of sales of $8,249 for the quarter ended June 30, 2016, an increase of $524, or 6.4%. The increase in cost of sales was primarily due to a net charge associated with slow-moving, obsolete and lower of cost or market inventories of approximately $1,378 during the quarter ended June 30, 2017, compared to a net recovery of approximately $381 during the quarter ended June 30, 2016. The net charge recorded during the quarter ended June 30, 2017, is primarily attributable to certain raw material and component inventories (principally machine frames and other fabricated components) of approximately $1,460 associated with our Exerial^TM 3D printing machine platform based on decisions made by us during the period related to certain design changes and improvements to the underlying platform (rendering certain elements of the previous design obsolete). The net recovery recorded during the quarter ended June 30, 2016, principally relates to the aforementioned sale of certain inventories associated with our former laser micromachining product line (approximately $507). This increase was offset by decreases in variable cost of sales associated with lower revenues between the periods and net gains on disposal of property and equipment recorded during the quarter ended June 30, 2017 (approximately $306), compared to net losses on disposal of property and equipment recorded during the quarter ended June 30, 2016 (approximately $198). Net gains on disposal of property and equipment recorded during the quarter ended June 30, 2017, primarily relate to our sale of certain property and equipment (principally land and building) associated with our consolidation and exit of our North Las Vegas, Nevada PSC. Net losses on disposal of property and equipment recorded during the quarter ended June 30, 2016, primarily relate to our sale and abandonment of certain property and equipment associated with our consolidation and exit of our Auburn, Washington PSC.

Gross profit for the quarter ended June 30, 2017, was $2,026 compared with gross profit of $3,506 for the quarter ended June 30, 2016. Gross profit percentage was 18.8% for the quarter ended June 30, 2017, compared with 29.8% for the quarter ended June 30, 2016. The decrease in gross profit was the result of the decrease in revenues and increase in cost of sales as further cited above.

Cost of sales for the six months ended June 30, 2017, was $18,039 compared with cost of sales of $14,787 for the six months ended June 30, 2016, an increase of $3,252, or 22.0%. The increase in cost of sales was primarily due to a net charge associated with slow-moving, obsolete and lower of cost or market inventories of approximately $1,835 during the six months ended June 30, 2017 (further discussed above), compared to a net recovery of approximately $403 during the six months ended June 30, 2016 (further discussed above), and increases in our variable cost of sales associated with our increased revenues. In addition, during the six months ended June 30, 2017, we incurred costs of approximately $747 (approximately $142 in employee termination costs, $7 in other exit costs and $598 in asset impairments) associated with our consolidation of our 3D printing operations from our facility in North Las Vegas, Nevada into our Troy, Michigan and Houston, Texas facilities and our plan to exit our non-core specialty machining operations in Chesterfield, Michigan. These increases were offset by the aforementioned net gain (compared to net losses) associated with the disposal of certain property and equipment related to certain facility consolidations and exits between the periods.

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Gross profit for the six months ended June 30, 2017, was $3,629 compared with gross profit of $5,382 for the six months ended June 30, 2016. Gross profit percentage was 16.7% for the six months ended June 30, 2017, compared with 26.7% for the six months ended June 30, 2016. The decrease in gross profit was the result of the increase in revenues offset by the increase in cost of sales as further cited above.

Research and Development

Research and development expenses for the quarter ended June 30, 2017, were $2,349 compared with research and development expenses of $1,946 for the quarter ended June 30, 2016, an increase of $403, or 20.7%. The increase in research and development expenses was primarily due to an increase in employee-related costs (principally salaries and benefits) and consulting and professional fees associated with certain machine development and other organizational development activities.

Research and development expenses for the six months ended June 30, 2017, were $4,348 compared with research and development expenses of $3,839 for the six months ended June 30, 2016, an increase of $509, or 13.3%. The increase in research and development expenses was primarily due to an increase in employee-related costs (salaries and related benefits), material costs and consulting and professional fees associated with certain machine development and other organizational development activities.

Selling, General and Administrative

Selling, general and administrative expenses for the quarter ended June 30, 2017, were $6,013 compared with selling, general and administrative expenses of $4,663 for the quarter ended June 30, 2016, an increase of $1,350, or 29.0%. The increase in selling, general and administrative expenses was principally due to an increase in consulting and professional fees (principally executive consulting, legal and other administrative arrangements) of approximately $619, an increase in our provision for bad debts from customers (a net provision of approximately $9 during the quarter ended June 30, 2017, compared to net recoveries of approximately $276 during the quarter ended June 30, 2016), an increase in employee-related costs (salaries and related benefits) associated with our investment in our commercial leadership team, and an increase in information technology-related costs targeted at operational improvements within the organization.

Selling, general and administrative expenses for the six months ended June 30, 2017, were $12,276 compared with selling, general and administrative expenses of $9,988 for the six months ended June 30, 2016, an increase of $2,288, or 22.9%. The increase in selling, general and administrative expenses was principally due to an increase in consulting and professional fees (principally executive consulting, legal and other administrative arrangements) of approximately $495, an increase in our provision for bad debts from customers (a net provision of approximately $132 during the six months ended June 30, 2017, compared to net recoveries of approximately $271 during the six months ended June 30, 2016), an impairment of intangible assets of approximately $269 during the quarter ended March 31, 2017, in connection with our plan to exit our non-core specialty machining operations at our Chesterfield, Michigan facility, an increase in employee-related costs (salaries, equity-based compensation and related benefits) associated with our investment in our commercial leadership team, and an increase in selling costs (promotional expenses, trade show activities and sales commissions on 3D printing machine sales).  

Interest Expense

Interest expense for the quarter ended June 30, 2017, was $23 compared with interest expense of $22 for the quarter ended June 30, 2016, an increase of $1, or 4.5%.

Interest expense for the six months ended June 30, 2017, was $45 compared with interest expense of $254 for the six months ended June 30, 2016, a decrease of $209, or 82.3%. The decrease in interest expense was principally due to the effect of the termination of the revolving credit facility with a related party during the quarter ended March 31, 2016, which resulted in an acceleration of amortization of debt issuance costs of approximately $204.

Other Expense (Income) – Net

Other expense (income) – net for the quarter ended June 30, 2017, was $35 compared with other expense (income) – net of ($205) for the quarter ended June 30, 2016. The change of $240 was principally due to net currency exchange losses on certain intercompany transactions between subsidiaries either settled or planned for settlement in the foreseeable future, for the quarter ended June 30, 2017, as compared to net currency exchange gains during the quarter ended June 30, 2016.

Other (income) expense – net for the six months ended June 30, 2017, was $145 compared with other (income) expense – net of ($298) for the six months ended June 30, 2016. The change of $443 was principally due to net currency exchange losses on certain intercompany transactions between subsidiaries either settled or planned for settlement in the foreseeable future, for the six months ended June 30, 2017, as compared to net currency exchange gains during the six months ended June 30, 2016.

Provision for Income Taxes

The provision for income taxes for the quarters ended June 30, 2017 and 2016, was $9 and $22, respectively. The effective tax rate for the quarters ended June 30, 2017 and 2016, was 0.1% (provision on a loss) and 0.8% (provision on a loss), respectively. The provision for income taxes for the six months ended June 30, 2017 and 2016, was $9 and $18, respectively. The effective tax rate for the six months ended June 30, 2017 and 2016, was 0.1% (provision on a loss) and 0.2% (provision on a loss), respectively. For each of

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the quarters and six months ended June 30, 2017 and 2016, the effective tax rate differs from the U.S. federal statutory rate of 34.0% primarily due to net changes in valuation allowances for the period.

We have provided a valuation allowance for our net deferred tax assets as a result of our inability to generate consistent net operating profits in jurisdictions in which we operate. As such, any benefit from deferred taxes in any of the periods presented in our condensed consolidated financial statements has been fully offset by changes in the valuation allowance for net deferred tax assets. We continue to assess our future taxable income by jurisdiction based on our recent historical operating results, the expected timing of reversal of temporary differences, various tax planning strategies that we may be able to enact in future periods, the impact of potential operating changes on our business and our forecast results from operations in future periods based on available information at the end of each reporting period. To the extent that we are able to reach the conclusion that net deferred tax assets are realizable based on any combination of the above factors in a single, or multiple, taxing jurisdictions, a reversal of the related portion of our existing valuation allowances may occur.

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition are not significant.

Liquidity and Capital Resources

Liquidity

We have incurred a net loss in each of our annual periods since our inception. In addition, we incurred a net loss of approximately $6,403 and $13,194 for the quarter and six months ended June 30, 2017, respectively. In connection with the completion of our initial public offering and subsequent secondary offerings (including our ATM), we have received cumulative unrestricted net proceeds from the sale of our common stock of approximately $168,361 to fund our operations. At June 30, 2017, we had approximately $24,051 in unrestricted cash and cash equivalents.  

We believe that our existing capital resources will be sufficient to support our operating plan. If we anticipate that our actual results will differ from our operating plan, we believe we have sufficient capabilities to enact cost savings measures to preserve capital. Further, we may seek to raise additional capital to support our growth through additional debt, equity or other alternatives (including asset sales) or a combination thereof.

Cash Flows

The following table summarizes the significant components of cash flows for each of the six months ended June 30 and our cash, cash equivalents, and restricted cash balances at June 30, 2017 and December 31, 2016:

 

Operating Activities

Net cash used for operating activities for the six months ended June 30, 2017, was $6,924 compared with net cash used for operating activities of $167 for the six months ended June 30, 2016. The change of $6,757 was due to an increase in our net loss combined with a decrease in net cash inflows from changes in assets and liabilities, including a decrease in cash inflows from customers (principally due to the implementation of more favorable liquidity terms with customers during the six months ended June 30, 2016) and an increase in cash outflows related to inventories (based on our operating plans for delivery of 3D printing machines to customers). These changes were partially offset by a reduction in cash outflows to vendors (based on the timing of payment).

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Investing Activities

Net cash provided by investing activities for the six months ended June 30, 2017, was $3,285 compared with net cash used for investing activities of $287 for the six months ended June 30, 2016.

Net cash provided by investing activities for the six months ended June 30, 2017, included cash inflows of approximately $3,677 in proceeds from the sale of property and equipment, mostly attributable to our sale of assets associated with our non-core specialty machining operation in Chesterfield, Michigan and our PSC in North Las Vegas, Nevada during the quarter ended June 30, 2017. Remaining activity for both periods included cash outflows for capital expenditures consistent with our operating plans.

We expect our remaining 2017 capital expenditures to be limited to spending associated with sustaining our existing operations and strategic asset acquisition and deployment (estimated spending of approximately $500 to $1,500).

Financing Activities

Net cash used for financing activities for the six months ended June 30, 2017, was $113 compared with net cash provided by financing activities of $12,933 for the six months ended June 30, 2016.

Uses of cash for the six months ended June 30, 2017, included principal payments on outstanding debt and capital leases.

Sources of cash for the six months ended June 30, 2016, included net proceeds from the issuance of common stock of approximately $12,447 in connection with our registered direct offering to a related party and approximately $595 in connection with our ATM. Uses of cash for the six months ended June 30, 2016, included principal payments on outstanding debt and capital leases.

Off Balance Sheet Arrangements

In the normal course of our operations, our ExOne GmbH subsidiary issues financial guarantees and letters of credit to third parties in connection with certain commercial transactions requiring security. At June 30, 2017, total outstanding financial guarantees and letters of credit issued by us were approximately $1,825 (€1,587) with expiration dates ranging from July 2017 through July 2018. At December 31, 2016, total outstanding financial guarantees and letters of credit issued by us were approximately $400 (€380). For further discussion related to financial guarantees and letters of credit issued by us, refer to Note 10 to the condensed consolidated financial statements in Part I Item 1 of this Quarterly Report on Form 10-Q.

Recently Issued and Adopted Accounting Guidance

Refer to Note 1 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

Refer to Note 1 of the consolidated financial statements in Part I, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016.

We are exposed to market risk from fluctuations in foreign currency exchange rates which may adversely affect our results of operations and financial condition. We seek to minimize these risks through regular operating and financing activities and, when we consider it to be appropriate, through the use of derivative financial instruments. We do not purchase, hold or sell derivative financial instruments for trading or speculative purposes.

The local currency is the functional currency for significant operations outside of the United States. The determination of the functional currency of an operation is made based on the appropriate economic and management indicators.

Foreign currency assets and liabilities are translated into their United States dollar equivalents based on period end spot exchange rates, and are included in stockholders’ equity as a component of other comprehensive income (loss). Revenues and expenses are translated at average exchange rates. Transaction gains and losses that arise from exchange rate fluctuations are charged to operations as incurred, except for gains and losses associated with certain long-term intercompany transactions for which settlement is not planned or anticipated in the foreseeable future, which are included in accumulated other comprehensive loss in the condensed consolidated balance sheet.

We transact business globally and are subject to risks associated with fluctuating foreign exchange rates. Approximately 45.1% and 46.5% of our consolidated revenue was derived from transactions outside the United States for the quarters ended June 30, 2017 and 2016, respectively. Approximately 56.1% and 50.7% of our consolidated revenue was derived from transactions outside the United States for the six months ended June 30, 2017 and 2016, respectively. This revenue is generated primarily from wholly-owned subsidiaries operating in their respective countries and surrounding geographic areas. This revenue is primarily denominated in each subsidiary’s local functional currency, including the Euro and Japanese Yen. A hypothetical change in foreign exchange rates of +/- 10.0% for the quarter and six months ended June 30, 2017, would result in an increase (decrease) in revenue of approximately $500

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and $1,200, respectively. These subsidiaries incur most of their expenses (other than intercompany expenses) in their local functional currencies.

At June 30, 2017, we held approximately $25,163 in cash, cash equivalents, and restricted cash, of which approximately $20,565 was held by certain of our subsidiaries in United States dollars.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on this evaluation, management concluded as of June 30, 2017, that our disclosure controls and procedures were not effective at the reasonable assurance level due to a material weakness in our internal control over financial reporting as discussed in the Company’s Annual Report on Form 10-K filed on March 16, 2017.

As a result of the material weakness described in our Annual Report on Form 10-K, we performed additional analysis and other post-closing procedures to ensure our condensed consolidated financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements and related notes thereto included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

Changes in Internal Control over Financial Reporting

With oversight from our executive management and Audit Committee of our Board of Directors, we continue to address the identified material weakness in our information technology system platform specific to our ExOne GmbH subsidiary, in particular, how this information technology system platform impacts our accounting for inventories specific to ExOne GmbH. Our approach includes the identification and remediation of known errors in the original implementation of, and subsequent changes to, this information technology system platform in an effort to reduce certain manual processes and controls necessary to ensure accurate and timely reporting of operating results associated with this subsidiary. We expect this process to be completed by December 31, 2017.

We can provide no assurance at this time that management will be able to report that our internal control over financial reporting will be effective as of December 31, 2017. As an EGC, we are exempt from the requirement to obtain an attestation report from our independent registered public accounting firm on the assessment of our internal controls pursuant to the Sarbanes-Oxley Act of 2002 until such time that we no longer qualify as an EGC.

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PART II – OTHER INFORMATION

On July 1, 2017, the Company (through its ExOne GmbH subsidiary) entered into a Settlement Agreement with Kocel Foundry Limited (also known as Kocel CSR Casting Company, Limited) and Kocel Group (Hong Kong) Limited (collectively, “Kocel”) relating to settlement of the arbitration case (no. 100019-2017) administered by the Swiss Chambers’ Arbitration Institution Notice of Arbitration, as filed by the Company on January 25, 2017. Among other things, the Settlement Agreement provides for a cash payment from ExOne GmbH to Kocel of approximately $811,335 and a settlement and release of claims related to a sales agreement between the parties for certain 3D printing machines and related equipment.

We are subject to various litigation, claims, and proceedings which have been or may be instituted or asserted from time to time in the ordinary course of business. Other than the matter further described above, management does not believe that the outcome of any pending or threatened matters will have a material adverse effect, individually or in the aggregate, on our financial position, results of operations or cash flows.

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 5.Other Information.

Arrangements with JoEllen Lyons Dillon

On August 4, 2017, the Company entered into an Executive At-Will Employment Agreement with JoEllen Lyons Dillon (the “Employment Agreement”), to become effective immediately following the expiration of the seven-day revocation period set forth in a waiver and release agreement which Ms. Dillon and the Company entered into concurrently with the Employment Agreement.  Pursuant to the Employment Agreement, Ms. Dillon will continue her employment with the Company in a new role as Vice President – Strategic Development and Capital Markets, Chief Legal Officer and Corporate Secretary and will be entitled to receive an annual base salary of $300,000 per year, which may be increased from time to time in the discretion of the Company’s Board of Directors.  Pursuant to the Employment Agreement, Ms. Dillon will also be eligible to participate in any annual bonus plan established by the Company’s Board of Directors or the Compensation Committee of the Board, any awards under The ExOne Company 2013 Equity Incentive Plan or other long-term incentive plan maintained by the Company, and all employee benefit and fringe benefit plans and arrangements made available to the Company’s executives and key management employees.

The Employment Agreement terminates and replaces Ms. Dillon’s prior employment agreement with the Company dated March 7, 2013 (the “Prior Agreement”).  The Prior Agreement is described in the Company’s definitive proxy statement filed with the SEC on April 5, 2017, which description is incorporated herein by reference.  In connection with the termination of the Prior Agreement, the Employment Agreement provides that the Company will (i) make a one-time cash payment to Ms. Dillon in the amount of $240,000 (the “Company Payment”), (ii) grant to Ms. Dillon 15,000 fully-vested shares of the Company’s common stock representing all bonus and long-term incentive plan compensation payable to Ms. Dillon for 2017 under the Prior Agreement, and (iii) make a one-time cash payment to Ms. Dillon in the amount of $36,923 (less applicable withholdings) for all accrued but unpaid vacation as of June 30, 2017, and all other remaining benefits due and owing to Ms. Dillon under the Prior Agreement.

Ms. Dillon’s employment under the Employment Agreement will be at-will and may be terminated by the Company or Ms. Dillon at any time and for any reason.  Following any termination of Ms. Dillon’s employment, provided that she delivers to the Company a signed waiver and release of claims agreement acceptable to the Company within 30 days of such termination, Ms. Dillon will be entitled to the following: (i) if Ms. Dillon’s employment is terminated by the Company prior to December 31, 2017, salary continuation from the date of termination through December 31, 2017, (ii) if Ms. Dillon’s employment is terminated by the Company after December 31, 2017, severance in an amount equal to two weeks of salary for each full year of employment with the Company as of the termination date, based on a calculation of service beginning on the effective date of the Employment Agreement, (iii) cash payment for all accrued but unused vacation pay through the termination date, (iv) COBRA healthcare continuation for a period of up to 18 months following the termination date or such earlier date that Ms. Dillon is covered under another health plan, (v) immediate acceleration of vesting of all outstanding shares of the Company’s restricted stock awarded to Ms. Dillon under The ExOne Company 2013 Equity Incentive Plan, (vi) reimbursement of certain expenses pursuant to Company policy, and (vii) survival of Ms. Dillon’s change of control benefits described below.  The confidentiality provisions of the Employment Agreement survive the termination of Ms. Dillon’s employment with the Company and the non-competition and non-solicitation provisions survive for a period of one year following the termination of her employment.

The Employment Agreement allows Ms. Dillon to participate in any change of control severance plan adopted by the Company at a participation level equal to the highest participation level of the Company’s executive management team (excluding the Company’s Chief Executive Officer).  If a change of control of the Company occurs on or before December 31, 2018, and Ms. Dillon does not

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qualify for benefits under any such change of control severance plan, then Ms. Dillon may be entitled to receive a payment equal to two times her annual base salary less the amount of the Company Payment, provided that she delivers to the Company a signed waiver and release of claims agreement acceptable to the Company within 30 days of the termination of her employment, and certain other conditions relating to the change of control and Ms. Dillon’s termination are met, as described in the Employment Agreement.

A copy of the Employment Agreement is expected to be filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017.

 

Adoption of Change of Control Severance Plan

On August 8, 2017, the Compensation Committee of the Company’s Board of Directors adopted The ExOne Company Change of Control Severance Plan (the “Severance Plan”). The terms of the Severance Plan provide certain benefits to participants in the event of a change of control of the Company.  If a change of control occurs during the protection period (described below), and any of the participants either (i) has a voluntary termination of employment for good reason, or (ii) has an involuntary termination of employment, other than for death, disability or cause, then the participant is entitled to receive the following:

 

 

The protection period begins on the date on which a definitive agreement that, if consummated, would result in a change of control (or if no agreement, the date of the change of control itself), and ends on the earlier of (i) the date which is 18 months following the occurrence of the change of control or (ii) the public announcement that the transaction contemplated by the definitive agreement will not take place.

If any participant designated as a Tier I employee under the Severance Plan has a voluntary termination of employment (with or without good reason) within 30 days following the date of a change of control, then the participant is entitled to receive a one-time cash payment equal to two times the participant’s annual base salary.

If any participant designated as a Tier II or Tier III employee under the Severance Plan has a voluntary termination of employment (with or without good reason) within 30 days following the 18-month anniversary of a change of control, then the participant is entitled to receive the following:

 

In addition to the cash payments described above, upon the occurrence of a change in control, 50% of any unvested stock options, restricted stock, restricted stock units or other equity based awards of the Company held by a participant will immediately vest and become exercisable.  The remaining 50% of such unvested awards held by the participant will vest and become exercisable pursuant to the terms of the awards, or immediately upon (i) voluntary termination of the participant’s employment for good reason, or (ii) involuntary termination of the participant’s employment, other than for death, disability or cause of the participant, if such termination occurs within 18 months following a change in control.

No Section 280G excise tax gross-up or other tax gross-up is provided under the Severance Plan. A copy of the Severance Plan is expected to be filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017.

(a)(3) Exhibits

The Exhibits listed on the accompanying Index to Exhibits are filed as part of this Quarterly Report on Form 10-Q.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

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EXHIBIT INDEX

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

 

 

 

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