8. Compute M-scores from the Beneish model Beta Ratios DSR GMI AQI SGI DEPI SGAI Accruals LEVI Intercept M-score Does it indicate earning manipulation? Why? Company 2 Dec. 31, 2016 12 Months Ended Dec. 31, 2015 Dec. 31, 2014 $ 245,015 32,407 212,608 $ 187,296 20,202 167,094 $ 118,223 12,665 105,558 8,413 133,384 7,050 90,480 12,038 179,997 2,127 18,446 933 CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands Income Statement (Abstract] Net sales Cost of sales Gross margin- Operating expenses: Research and development expenses Selling, general and administrative expenses Amortization of intangible assets Operating income Other expense, net Interest expense, net Income before income tax provision Income tax provision (expense) benefit Net income Net income per common share - basic Net income per common share - diluted Weighted average shares outstanding - basic Weighted average shares outstanding - diluted 9281 24,364 7,100 (86) (339) 18,107 (6,133)|| $ 11,974 $ 0.11 $ 0.11 105,928,348 112,441,709 | 24,278 5,168 $ 29,446 $ 0.28 $ 0.26 105,929,205 113,628,482 | (48) 7,052 (832) $ 6,220 $ 0.06 $ 0.05 105,793,008 113,295,504 TOP , - CONSOLIDATED STATEMENTS OF CASH FLOWS- USD ($) $ in Thousands cash flows from operating activities: Dec 31, 2016 12 Months Ended Dec 31, 2015 Dec 31, 2014 $ 11,974 29.446 1,799 1.197 3,333 2.127 11.453 17.818 (594) 16,896 7,081) (10.579) (1,252) (203) 0 (27,083) 12,327) (1,854) (240) 3,1361 3,511 2,140 (519) 1.287 (11,396) (2.837) (2,400) (384) (3,665) (2,669) 6,297 5,835 723 25,828 5.935 1,098 Net income Adjustments to reconcile net income to net Depreciation Amortization of intangible assets Amortization of inventory fair value step-up Amortization of deferred financing costs Share-based compensation Change in deferred Income taxes Increase (decrease) In cash, net of effects of Accounts receivable Inventory Prepaid expenses Other current assets Accounts payable Accrued compensation Accrued expenses Income taxes Other liabilities Net cash flows from operating activities Cash flows from investing activities: Purchases of equipment Purchase of Stability Inc., net of cash acquired Fixed maturity securities redemption Patent application costs Net cash flows from investing activities Cash flows from financing activities: Proceeds from exercise of stock options Proceeds from exercise of warrants Stock repurchase under repurchase plan Stock repurchase for tax withholdings on vesting Deferred financing costs Payments under capital lease obligations Net cash flows from financing activities Net change in cash Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 266 18,807 16.802 (6,269) (7,631)! 3,000 (842) (11,742) (5,827) 0 6,000 1. (851) (678) (2,558) 0 19,000) (594) (12,152) 3,494 4,629 378) (40.279) 165) (30) (102) (8,181) 5,905 (504): (117) (36,225) (18,096) 46,582 $28,486 (117) (2,146) 2,504 44,078 $ 46,582 28,486 $ 34,391 Dec. 31, 2016 Dec. 31, 2015 $ 34,391 $ 28,486 3,000 53,755 7,460 3,394 2151 96,310 67,151 17,814 5,894 1,288 126,538 13,786 20,203 23,268 9,114 354 193,263 9,475 4,040 10,763 14,838 487 135,913 6,633 15,034 1 CONSOLIDATED BALANCE SHEETS - USD ($) $ In Current assets: Cash and cash equivalents Short term investments Accounts receivable, net Inventory, net Prepaid expenses Other current assets Total current assets Property and equipment, net of accumulated Goodwill Intangible assets, net of accumulated amortization Deferred tax asset, net Deferred financing costs and other assets Total assets Current liabilities: Accounts payable Accrued compensation Accrued expenses Current portion of earn out liability Income taxes Other current liabilities Total current liabilities Earn out liability Other liabilities Total liabilities Commitments and contingencies Stockholders' equity: Preferred stock; $.001 par value; 5,000,000 shares aut Common stock; $0.001 par value; Additional paid-in capital Treasury stock at cost: Accumulated deficit Total stockholders' equity Total liabilities and stockholders' equity 4,644 | 11,436 12,365 10,941 8,740 5,768 1,482 50,732 8,710 (67) 533 26,777 02 1,148 27,925 110 161,261 (2,216) (26,155) 133,000 $ 193,263 109 163,133 (17,125) (38,129) 107,988 $ 135,913 8. Compute M-scores from the Beneish model Beta Ratios DSR GMI AQI SGI DEPI SGAI Accruals LEVI Intercept M-score Does it indicate earning manipulation? Why? Company 2 Dec. 31, 2016 12 Months Ended Dec. 31, 2015 Dec. 31, 2014 $ 245,015 32,407 212,608 $ 187,296 20,202 167,094 $ 118,223 12,665 105,558 8,413 133,384 7,050 90,480 12,038 179,997 2,127 18,446 933 CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands Income Statement (Abstract] Net sales Cost of sales Gross margin- Operating expenses: Research and development expenses Selling, general and administrative expenses Amortization of intangible assets Operating income Other expense, net Interest expense, net Income before income tax provision Income tax provision (expense) benefit Net income Net income per common share - basic Net income per common share - diluted Weighted average shares outstanding - basic Weighted average shares outstanding - diluted 9281 24,364 7,100 (86) (339) 18,107 (6,133)|| $ 11,974 $ 0.11 $ 0.11 105,928,348 112,441,709 | 24,278 5,168 $ 29,446 $ 0.28 $ 0.26 105,929,205 113,628,482 | (48) 7,052 (832) $ 6,220 $ 0.06 $ 0.05 105,793,008 113,295,504 TOP , - CONSOLIDATED STATEMENTS OF CASH FLOWS- USD ($) $ in Thousands cash flows from operating activities: Dec 31, 2016 12 Months Ended Dec 31, 2015 Dec 31, 2014 $ 11,974 29.446 1,799 1.197 3,333 2.127 11.453 17.818 (594) 16,896 7,081) (10.579) (1,252) (203) 0 (27,083) 12,327) (1,854) (240) 3,1361 3,511 2,140 (519) 1.287 (11,396) (2.837) (2,400) (384) (3,665) (2,669) 6,297 5,835 723 25,828 5.935 1,098 Net income Adjustments to reconcile net income to net Depreciation Amortization of intangible assets Amortization of inventory fair value step-up Amortization of deferred financing costs Share-based compensation Change in deferred Income taxes Increase (decrease) In cash, net of effects of Accounts receivable Inventory Prepaid expenses Other current assets Accounts payable Accrued compensation Accrued expenses Income taxes Other liabilities Net cash flows from operating activities Cash flows from investing activities: Purchases of equipment Purchase of Stability Inc., net of cash acquired Fixed maturity securities redemption Patent application costs Net cash flows from investing activities Cash flows from financing activities: Proceeds from exercise of stock options Proceeds from exercise of warrants Stock repurchase under repurchase plan Stock repurchase for tax withholdings on vesting Deferred financing costs Payments under capital lease obligations Net cash flows from financing activities Net change in cash Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 266 18,807 16.802 (6,269) (7,631)! 3,000 (842) (11,742) (5,827) 0 6,000 1. (851) (678) (2,558) 0 19,000) (594) (12,152) 3,494 4,629 378) (40.279) 165) (30) (102) (8,181) 5,905 (504): (117) (36,225) (18,096) 46,582 $28,486 (117) (2,146) 2,504 44,078 $ 46,582 28,486 $ 34,391 Dec. 31, 2016 Dec. 31, 2015 $ 34,391 $ 28,486 3,000 53,755 7,460 3,394 2151 96,310 67,151 17,814 5,894 1,288 126,538 13,786 20,203 23,268 9,114 354 193,263 9,475 4,040 10,763 14,838 487 135,913 6,633 15,034 1 CONSOLIDATED BALANCE SHEETS - USD ($) $ In Current assets: Cash and cash equivalents Short term investments Accounts receivable, net Inventory, net Prepaid expenses Other current assets Total current assets Property and equipment, net of accumulated Goodwill Intangible assets, net of accumulated amortization Deferred tax asset, net Deferred financing costs and other assets Total assets Current liabilities: Accounts payable Accrued compensation Accrued expenses Current portion of earn out liability Income taxes Other current liabilities Total current liabilities Earn out liability Other liabilities Total liabilities Commitments and contingencies Stockholders' equity: Preferred stock; $.001 par value; 5,000,000 shares aut Common stock; $0.001 par value; Additional paid-in capital Treasury stock at cost: Accumulated deficit Total stockholders' equity Total liabilities and stockholders' equity 4,644 | 11,436 12,365 10,941 8,740 5,768 1,482 50,732 8,710 (67) 533 26,777 02 1,148 27,925 110 161,261 (2,216) (26,155) 133,000 $ 193,263 109 163,133 (17,125) (38,129) 107,988 $ 135,913