NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of BSQUARE Corporation (“BSQUARE”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting and include the accounts of BSQUARE and our wholly owned subsidiaries. In the Condensed Consolidated Statements of Operations and Comprehensive Loss, prior period software revenue has been separately presented as third-party software and proprietary software to conform to current period presentation. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In our opinion, the unaudited condensed consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly our financial position as of September 30, 2018, our operating results for the three and nine months ended September 30, 2018 and 2017 and our cash flows for the nine months ended September 30, 2018 and 2017. The accompanying financial information as of December 31, 2017 is derived from audited financial statements as of that date. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include provisions for bad debts and income taxes, estimates of progress on professional engineering service arrangements and bonus accruals. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 22, 2018. All intercompany balances have been eliminated.
Recently Issued Accounting Standard
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASU 2016-02”), to make leasing activities more transparent and comparable, requiring most leases to be recognized by lessees on their balance sheets as right-of-use assets, along with corresponding lease liabilities. ASU 2016-02 is effective for annual periods beginning after December 31, 2018 and interim periods within that year, with early adoption permitted.
We expect to adopt ASU 2016-02 effective January 1, 2019 and elect an optional transition method, recording a cumulative-effect adjustment as of that date and presenting comparative prior year periods in accordance with Accounting Standards Codification Topic 840. In addition, we expect to apply a package of practical expedients to forego reassessing:
|
•
|
whether any expired or existing contracts are or contain leases,
|
|
•
|
lease classification for any expired or existing leases, and
|
|
•
|
initial direct costs for any existing leases.
|
We are continuing to evaluate the full impact of adoption and expect this ASU will have a material impact on our consolidated balance sheets and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”
(“ASU 2017-04”),
simplifying how an entity is required to test goodwill for impairment by eliminating step two from the goodwill impairment test. ASU 2017-04 is effective for fiscal years and interim periods within those years beginning after December 15, 2019, with early adoption permitted on testing dates after January 1, 2017. We plan to early adopt this ASU as of January 1, 2019 on a prospective basis and do not expect that the adoption will have a material impact on consolidated financial statements and related disclosures.
Loss Per Share
We compute basic loss per share using the weighted average number of common shares outstanding during the period. We consider restricted stock units as outstanding common shares and include them in the computation of basic loss per share only when vested. We compute diluted loss per share using the weighted average number of common shares outstanding and common stock equivalent shares outstanding during the period using the treasury stock method. We exclude common stock equivalent shares from the computation if their effect is anti-dilutive.
6
The following potentially dilutive
shares were excluded from the calculation of diluted net loss per share bec
ause their effect would have been anti-dilutive for the periods presented:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
1,679,969
|
|
|
|
1,455,713
|
|
|
|
1,584,046
|
|
|
|
1,429,883
|
|
Restricted stock units
|
|
|
51,679
|
|
|
|
63,709
|
|
|
|
64,043
|
|
|
|
52,579
|
|
2. Revenue Recognition
On January 1, 2017, we adopted ASU 2014-09, “Revenue from Contracts with Customers” (“Topic 606”), applying the modified retrospective method to all contracts that were not completed as of that date. Results for reporting periods beginning after January 1, 2017 are presented under Topic 606, while prior period results are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded an increase to opening equity of $404,000 as of January 1, 2017 due to the cumulative impact of adopting Topic 606.
Disaggregation of revenue
The following table provides information about disaggregated revenue by primary geographical market and includes a reconciliation of the disaggregated revenue with reportable segments (in thousands):
|
|
Three Months Ended September 30, 2018
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
Third-Party Software
|
|
|
Proprietary Software
|
|
|
Professional Engineering Service
|
|
|
Total
|
|
|
Third-Party Software
|
|
|
Proprietary Software
|
|
|
Professional Engineering Service
|
|
|
Total
|
|
Primary geographical markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
13,715
|
|
|
$
|
288
|
|
|
$
|
1,438
|
|
|
$
|
15,441
|
|
|
$
|
15,615
|
|
|
$
|
532
|
|
|
$
|
1,835
|
|
|
$
|
17,982
|
|
Europe
|
|
|
526
|
|
|
|
2
|
|
|
|
146
|
|
|
|
674
|
|
|
|
520
|
|
|
|
—
|
|
|
|
276
|
|
|
|
796
|
|
Asia
|
|
|
—
|
|
|
|
506
|
|
|
|
73
|
|
|
|
579
|
|
|
|
105
|
|
|
|
668
|
|
|
|
102
|
|
|
|
875
|
|
Total
|
|
$
|
14,241
|
|
|
$
|
796
|
|
|
$
|
1,657
|
|
|
$
|
16,694
|
|
|
$
|
16,240
|
|
|
$
|
1,200
|
|
|
$
|
2,213
|
|
|
$
|
19,653
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
Third-Party Software
|
|
|
Proprietary Software
|
|
|
Professional Engineering Service
|
|
|
Total
|
|
|
Third-Party Software
|
|
|
Proprietary Software
|
|
|
Professional Engineering Service
|
|
|
Total
|
|
Primary geographical markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
45,115
|
|
|
$
|
2,236
|
|
|
$
|
5,558
|
|
|
$
|
52,909
|
|
|
$
|
46,867
|
|
|
$
|
3,650
|
|
|
$
|
6,963
|
|
|
$
|
57,480
|
|
Europe
|
|
|
1,821
|
|
|
|
107
|
|
|
|
574
|
|
|
|
2,502
|
|
|
|
1,380
|
|
|
|
—
|
|
|
|
1,053
|
|
|
|
2,433
|
|
Asia
|
|
|
361
|
|
|
|
529
|
|
|
|
274
|
|
|
|
1,164
|
|
|
|
295
|
|
|
|
685
|
|
|
|
449
|
|
|
|
1,429
|
|
Total
|
|
$
|
47,297
|
|
|
$
|
2,872
|
|
|
$
|
6,406
|
|
|
$
|
56,575
|
|
|
$
|
48,542
|
|
|
$
|
4,335
|
|
|
$
|
8,465
|
|
|
$
|
61,342
|
|
Contract balances
We receive payments from customers based upon contractual billing schedules; accounts receivable is recorded when the right to consideration becomes unconditional. Contract assets include amounts related to our contractual right to consideration for completed performance obligations not yet invoiced and deferred contract acquisition costs, which are amortized over time as the associated revenue is recognized. Contract liabilities, presented as deferred revenue on our condensed consolidated balance sheets, include payments received in advance of performance under the contract and are realized when the associated revenue is recognized. We had no asset impairment charges related to contract assets for each of the three and nine months ended September 30, 2018 and 2017.
Significant changes in the contract assets and the deferred revenue balances during the
nine months ended September 30, 2018
were as follows (in thousands):
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
Contract Assets
|
|
|
Deferred Revenue
|
|
Revenue recognized that was included in deferred revenue at December 31, 2017
|
$
|
—
|
|
|
$
|
2,847
|
|
Transferred to receivables from contract assets recognized at December 31, 2017
|
|
263
|
|
|
|
—
|
|
7
Contract acquisition costs
We capitalize contract acquisition costs for contracts with a term exceeding one year, as is more common with our DataV software bookings. A
mortization of contract acquisition costs was $7,000 and $12,000 for the three months ended September 30, 2018 and 2017, respectively, and was $93,000 and $160,000 for the nine months ended September 30, 2018 and 2017, respectively. There were no asset impairment charges for contract acquisitions costs for any of the periods noted above.
For contracts that have a duration of less than one year, we apply a practical expedient and fully expense these costs as incurred.
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands). The estimated revenue does not include contracts with original durations of one year or less, amounts of variable consideration attributable to royalties, or contract renewals that are unexercised as of September 30, 2018:
|
|
|
|
Remainder of
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
Third-party software
|
|
|
|
$
|
24
|
|
|
$
|
50
|
|
|
$
|
14
|
|
|
$
|
—
|
|
Proprietary software
|
|
|
|
|
853
|
|
|
|
1,827
|
|
|
|
1,802
|
|
|
|
687
|
|
Professional engineering service
|
|
|
|
|
230
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Practical expedients and exemptions
We generally expense sales commissions when incurred because the amortization period is less than one year. We record these costs within selling, general and administrative expenses.
3. Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments consisted of the following (in thousands):
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Cash
|
$
|
7,665
|
|
|
$
|
6,340
|
|
Cash equivalents (see Note 4)
|
|
3,727
|
|
|
|
6,519
|
|
Total cash and cash equivalents
|
|
11,392
|
|
|
|
12,859
|
|
|
|
|
|
|
|
|
|
Short-term investments (see Note 4)
|
|
5,879
|
|
|
|
11,895
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short-term investments
|
$
|
17,271
|
|
|
$
|
24,754
|
|
8
4. Fair Value Measurements
We measure our cash equivalents and short-term investments at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
|
Level 1:
|
Quoted prices in active markets for identical assets or liabilities.
|
|
Level 2:
|
Directly or indirectly observable market-based inputs or unobservable inputs used in models or other valuation methodologies.
|
|
Level 3:
|
Unobservable inputs that are not corroborated by market data. The inputs require significant management judgment or estimation.
|
We classify our cash equivalents and short-term investments within Level 1 or Level 2 because our cash equivalents and short-term investments are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
Assets measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 are summarized below (in thousands):
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Direct or Indirect
Observable
Inputs (Level 2)
|
|
|
Total
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Direct or Indirect
Observable
Inputs (Level 2)
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
1,981
|
|
|
$
|
—
|
|
|
$
|
1,981
|
|
|
$
|
2,274
|
|
|
$
|
—
|
|
|
$
|
2,274
|
|
Corporate commercial paper
|
|
|
—
|
|
|
|
1,746
|
|
|
|
1,746
|
|
|
|
—
|
|
|
|
3,245
|
|
|
|
3,245
|
|
Corporate debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Total cash equivalents
|
|
|
1,981
|
|
|
|
1,746
|
|
|
|
3,727
|
|
|
|
2,274
|
|
|
|
4,245
|
|
|
|
6,519
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate commercial paper
|
|
|
—
|
|
|
|
3,231
|
|
|
|
3,231
|
|
|
|
—
|
|
|
|
5,480
|
|
|
|
5,480
|
|
Corporate debt
|
|
|
—
|
|
|
|
2,648
|
|
|
|
2,648
|
|
|
|
—
|
|
|
|
6,415
|
|
|
|
6,415
|
|
Total short-term investments
|
|
|
—
|
|
|
|
5,879
|
|
|
|
5,879
|
|
|
|
—
|
|
|
|
11,895
|
|
|
|
11,895
|
|
Total assets measured at fair value
|
|
$
|
1,981
|
|
|
$
|
7,625
|
|
|
$
|
9,606
|
|
|
$
|
2,274
|
|
|
$
|
16,140
|
|
|
$
|
18,414
|
|
As of September 30, 2018, and December 31, 2017, contractual maturities of our short-term investments were less than one year, and gross unrealized gains and losses on those investments were not material.
5. Goodwill and Intangible Assets
Goodwill was originally recorded in September 2011 in connection with the acquisition of MPC Data, Ltd. (renamed BSQUARE EMEA, Ltd. in 2015), a United Kingdom based provider of software engineering services. The excess of the acquisition consideration over the fair value of net assets acquired was recorded as goodwill. There were no changes in the carrying amount of goodwill during the three and nine months ended September 30, 2018.
Intangible assets are related to customer relationships that we acquired from TestQuest, Inc. in November 2008 and from the acquisition of BSQUARE EMEA, Ltd. in September 2011.
Information regarding our intangible assets is as follows (in thousands):
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
Customer relationships:
|
|
$
|
1,275
|
|
|
$
|
(984
|
)
|
|
$
|
291
|
|
|
$
|
1,275
|
|
|
$
|
(910
|
)
|
|
$
|
365
|
|
9
Amortization expense was $25,000 for each of the three months ended Sept
ember 30, 2018 and 2017, and $74,000 for each of the nine months ended September 30, 2018 and 2017. Amortization in future periods is expected to be as follows (in thousands):
Remainder of 2018
|
|
$
|
24
|
|
2019
|
|
|
98
|
|
2020
|
|
|
98
|
|
2021
|
|
|
71
|
|
Total
|
|
$
|
291
|
|
6. Credit Agreement
Line of Credit
On September 22, 2015, we entered into a two-year unsecured line of credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (the “Bank”) in the principal amount of up to $12.0 million. On September 29, 2016, the Credit Agreement was modified to extend the final due date for an additional year to September 22, 2018. At our election, advances under the Credit Agreement bore interest at either (1) a rate per annum equal to 1.5% below the Bank’s applicable prime rate or (2) 1.5% above the Bank’s applicable LIBOR rate, in each case as defined in the Credit Agreement. The Credit Agreement contained customary affirmative and negative covenants, including compliance with financial ratios and metrics, as well as limitations on our ability to pay distributions or dividends while there was an ongoing event of default or to the extent such distribution caused an event of default. We were required to maintain certain minimum interest coverage ratios, liquidity levels and asset coverage ratios as defined in the Credit Agreement. In September 2016, we entered into a letter of credit agreement for $250,000, secured by the Credit Agreement in connection with the lease of our corporate headquarters. Accordingly, the maximum principal amount available, if we were eligible to borrow under the Credit Agreement, was reduced to $11.75 million while the Credit Agreement was in effect.
The Credit Agreement expired on September 22, 2018 in accordance with its terms with no amounts outstanding. There were no amounts outstanding under the Credit Agreement at December 31, 2017.
7. Shareholders’ Equity
Equity Compensation Plans
We have a stock plan (the “Stock Plan”) and an inducement stock plan for newly hired employees (together with the Stock Plan, the “Plans”). Under the Plans, stock options to purchase shares of our common stock may be granted with a fixed exercise price that is equal to the fair market value of our common stock on the date of grant. These options have a term of up to 10 years and vest over a predetermined period, generally four years. Incentive stock options granted under the Stock Plan may only be granted to our employees. The Plans also allow for awards of non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, and restricted stock units (“RSUs”).
Stock-Based Compensation
The estimated fair value of stock-based awards is recognized as compensation expense over the vesting period of the award, net of estimated forfeitures. We estimate forfeitures based on historical experience and expected future activities. The fair value of RSUs is determined based on the number of shares granted and the quoted price of our common stock on the date of grant. The fair value of stock option awards is estimated at the grant date based on the fair value of each vesting tranche as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The fair values of our stock option grants were estimated with the following weighted average assumptions:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life
|
|
4.4 years
|
|
|
3.3 years
|
|
|
5.3 years
|
|
|
3.3 years
|
|
Expected volatility
|
|
|
56
|
%
|
|
|
52
|
%
|
|
|
55
|
%
|
|
|
52
|
%
|
Risk-free interest rate
|
|
|
2.7
|
%
|
|
|
1.7
|
%
|
|
|
2.5
|
%
|
|
|
1.7
|
%
|
10
The impact on our results of operations from stock-based compensation expense was as follows (in thousands, except per share amounts
):
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost of revenue — professional engineering service
|
$
|
11
|
|
|
$
|
13
|
|
|
$
|
30
|
|
|
$
|
98
|
|
Selling, general and administrative
|
|
237
|
|
|
|
457
|
|
|
|
421
|
|
|
|
1,061
|
|
Research and development
|
|
57
|
|
|
|
70
|
|
|
|
169
|
|
|
|
191
|
|
Total stock-based compensation expense
|
$
|
305
|
|
|
$
|
540
|
|
|
$
|
620
|
|
|
$
|
1,350
|
|
Per diluted share
|
$
|
0.02
|
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.11
|
|
Stock Option Activity
The following table summarizes stock option activity under the Plans:
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Contractual Life
|
|
|
Aggregate
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
Intrinsic Value
|
|
Balance at December 31, 2017
|
|
|
1,912,161
|
|
|
$
|
4.88
|
|
|
|
7.61
|
|
|
$
|
781,735
|
|
Granted
|
|
|
283,893
|
|
|
|
3.78
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,422
|
)
|
|
|
3.59
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(385,736
|
)
|
|
|
4.94
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(332,036
|
)
|
|
|
4.17
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2018
|
|
|
1,475,860
|
|
|
$
|
4.81
|
|
|
|
6.88
|
|
|
$
|
3,950
|
|
Vested and expected to vest at September 30, 2018
|
|
|
1,366,764
|
|
|
$
|
4.82
|
|
|
|
6.73
|
|
|
$
|
3,259
|
|
Exercisable at September 30, 2018
|
|
|
954,862
|
|
|
$
|
4.84
|
|
|
|
5.97
|
|
|
$
|
—
|
|
At September 30, 2018, total compensation cost related to stock options granted but not yet recognized, net of estimated forfeitures, was $489,000. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.3 years. The following table summarizes certain information about stock options:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted average grant-date fair value of options granted during the period
|
|
$
|
1.02
|
|
|
$
|
2.45
|
|
|
$
|
1.89
|
|
|
$
|
2.62
|
|
Options in-the-money (in shares)
|
|
|
26,000
|
|
|
|
1,261,705
|
|
|
|
26,000
|
|
|
|
1,261,705
|
|
Aggregate intrinsic value of options exercised during the period
|
|
$
|
-
|
|
|
$
|
31,338
|
|
|
$
|
1,853
|
|
|
$
|
89,171
|
|
The aggregate intrinsic value represents the difference between the exercise price of the underlying options and the quoted price of our common stock for the number of options exercised during the period. We issue new shares of common stock upon exercise of stock options.
Restricted Stock Unit Activity
The following table summarizes RSU activity under the Plans:
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Award Price
|
|
Unvested at December 31, 2017
|
|
|
116,968
|
|
|
$
|
5.33
|
|
Granted
|
|
|
159,760
|
|
|
|
3.06
|
|
Vested
|
|
|
(82,868
|
)
|
|
|
4.55
|
|
Forfeited
|
|
|
(52,441
|
)
|
|
|
4.53
|
|
Unvested at September 30, 2018
|
|
|
141,419
|
|
|
$
|
3.51
|
|
Expected to vest after September 30, 2018
|
|
|
125,050
|
|
|
$
|
3.46
|
|
11
At September 30, 2018, total compensation cost related to RSUs granted but not yet recognized, net of estimated forfeitures, was $232,000. This cost will be amortized on the straight-line method over a weighted-average period of approximately 0.7 years.
Common Stock Reserved for Future Issuance
The following table summarizes our shares of common stock reserved for future issuance under the Plans as of September 30, 2018:
|
|
September 30, 2018
|
|
Stock options outstanding
|
|
|
1,475,860
|
|
Restricted stock units outstanding
|
|
|
141,419
|
|
Stock options and restricted stock units available for future grant
|
|
|
1,515,816
|
|
Common stock reserved for future issuance
|
|
|
3,133,095
|
|
8. Commitments and Contingencies
Lease and rent obligations
Our commitments include obligations outstanding under operating leases, which expire through 2021. We have lease commitments for office space in Bellevue, Washington; Boston, Massachusetts; Taipei, Taiwan; and Trowbridge, UK.
In August 2013, we amended the lease agreement for our Bellevue, Washington headquarters, and extended the term of the original lease that was scheduled to expire in August 2014 to May 2020.
Rent expense was $211,000 and $253,000 for the three months ended September 30, 2018 and 2017, respectively, and $695,000 and $786,000 for the nine months ended September 30, 2018 and 2017, respectively.
Future operating lease commitments are as follows by calendar year (in thousands):
|
|
September 30, 2018
|
|
Remainder of 2018
|
|
$
|
312
|
|
2019
|
|
|
1,246
|
|
2020
|
|
|
646
|
|
2021
|
|
|
48
|
|
Total commitments
|
|
$
|
2,252
|
|
Loss Contingencies
From time to time, we are subject to legal proceedings, claims, and litigation arising in the ordinary course of business including tax assessments. We defend ourselves vigorously against any such claims. When (i) it is probable that an asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, we record the estimated loss. We provide disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. We base accruals on the best information available at the time, which can be highly subjective. The final outcome of these matters could vary significantly from the amounts included in the accompanying consolidated financial statements.
9. Information about Geographic Areas and Operating Segments
Our chief operating decision-makers (i.e. our Chief Executive Officer and certain direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable by our chief operating decision-makers, or anyone else, for operations, operating results, or planning for levels or components below the consolidated unit level. We operate within a single industry segment of computer software and services. We have three major product lines – third-party software, proprietary software and professional engineering service – each of which we consider to be operating and reportable segments. We do not allocate costs other than direct cost of goods sold to the segments or produce segment income statements, and we do not produce asset information by reportable segment. The following table sets forth profit and loss information about our segments (in thousands):
12
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Third-party software:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
14,241
|
|
|
$
|
16,240
|
|
|
$
|
47,297
|
|
|
$
|
48,542
|
|
Cost of revenue
|
|
|
12,003
|
|
|
|
13,619
|
|
|
|
39,837
|
|
|
|
40,804
|
|
Gross profit
|
|
|
2,238
|
|
|
|
2,621
|
|
|
|
7,460
|
|
|
|
7,738
|
|
Proprietary software:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
796
|
|
|
|
1,200
|
|
|
|
2,872
|
|
|
|
4,335
|
|
Cost of revenue
|
|
|
111
|
|
|
|
34
|
|
|
|
252
|
|
|
|
105
|
|
Gross profit
|
|
|
685
|
|
|
|
1,166
|
|
|
|
2,620
|
|
|
|
4,230
|
|
Professional Engineering Service:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
1,657
|
|
|
|
2,213
|
|
|
|
6,406
|
|
|
|
8,465
|
|
Cost of revenue
|
|
|
1,221
|
|
|
|
1,620
|
|
|
|
4,666
|
|
|
|
5,927
|
|
Gross profit
|
|
|
436
|
|
|
|
593
|
|
|
|
1,740
|
|
|
|
2,538
|
|
Total gross profit
|
|
|
3,359
|
|
|
|
4,380
|
|
|
|
11,820
|
|
|
|
14,506
|
|
Operating expenses
|
|
|
5,491
|
|
|
|
6,926
|
|
|
|
20,148
|
|
|
|
19,630
|
|
Other income, net
|
|
|
65
|
|
|
|
34
|
|
|
|
156
|
|
|
|
148
|
|
Income tax benefit (expense)
|
|
|
(20
|
)
|
|
|
44
|
|
|
|
(32
|
)
|
|
|
150
|
|
Net loss
|
|
$
|
(2,087
|
)
|
|
$
|
(2,468
|
)
|
|
$
|
(8,204
|
)
|
|
$
|
(4,826
|
)
|
Revenue by geography is based on the sales region of the customer. The following tables set forth total revenue and long-lived assets by geographic area (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
15,441
|
|
|
$
|
17,982
|
|
|
$
|
52,909
|
|
|
$
|
57,480
|
|
Asia
|
|
|
579
|
|
|
|
875
|
|
|
|
1,164
|
|
|
|
1,429
|
|
Europe
|
|
|
674
|
|
|
|
796
|
|
|
|
2,502
|
|
|
|
2,433
|
|
Total revenue
|
|
$
|
16,694
|
|
|
$
|
19,653
|
|
|
$
|
56,575
|
|
|
$
|
61,342
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,388
|
|
|
$
|
991
|
|
Asia
|
|
|
100
|
|
|
|
76
|
|
Europe
|
|
|
4,051
|
|
|
|
4,114
|
|
Total long-lived assets
|
|
$
|
5,539
|
|
|
$
|
5,181
|
|
10. Significant Risk Concentrations
Significant Customer
Honeywell International, Inc. and affiliated entities (“Honeywell”) accounted for $2.9 million or 15% of total revenue for the three months ended September 30, 2017 and $9.1 million or 15% of total revenue for the nine months ended September 30, 2017.
No
other customers accounted for 10% or more of total revenue for the 2017 periods noted above.
No customers accounted for 10% or more of total revenue for the three and nine months ended September 30, 2018.
Honeywell had accounts receivable balances of $5.1 million or approximately 39% of total accounts receivable at September 30, 2018 and $8.7 million or approximately 48% of total accounts receivable at December 31, 2017. No other customer accounted for 10% or more of total accounts receivable at September 30, 2018 or December 31, 2017.
13
Significant Supplier
We have OEM Distribution Agreements (“ODAs”) with Microsoft Corporation (“Microsoft”) which enable us to sell Microsoft Windows Embedded operating systems on a non-exclusive basis to our customers in the United States, Canada, Argentina, Brazil, Chile, Columbia, Mexico, Peru, Puerto Rico, the Caribbean (excluding Cuba), the European Union, the European Free Trade Association, Turkey and Africa, which have been extended through February 28, 2019. We also have ODAs with Microsoft which allow us to sell Microsoft Windows Mobile operating systems in the Americas (excluding Cuba), Japan, Taiwan, Europe, the Middle East, and Africa, which expire on April 30, 2022.
Software sales under these agreements constitute a significant portion of our total revenue. These agreements are typically renewed bi-annually, annually or semi-annually; however, there is no automatic renewal provision in any of these agreements. Further, these agreements can be terminated unilaterally by Microsoft at any time. Microsoft currently offers a rebate program to sell Microsoft Windows Embedded operating systems, pursuant to which we earn money for achieving certain predefined objectives. In accordance with Microsoft rebate program rules, we allocate 30% of rebate values to reduce cost of sales and the remaining 70% to offset qualified marketing expenses in the period the expenditures are incurred.
Under this rebate program, we recorded rebate credits as follows (in thousands):
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Reductions to cost of revenue
|
|
|
$
|
159
|
|
|
$
|
126
|
|
|
$
|
577
|
|
|
$
|
323
|
|
Reductions to marketing expense
|
|
|
$
|
294
|
|
|
$
|
185
|
|
|
$
|
673
|
|
|
$
|
558
|
|
There was a balance of approximately $371,000 in qualified outstanding rebate credits at September 30, 2018, which will be accounted for as a reduction in marketing expense in the period in which qualified program expenditures are made.
14