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 March 31, 2019, our operating results for the three months ended March 31, 2019 and 2018 and our cash flows for the three months ended March 31, 2019 and 2018. The accompanying financial information as of December 31, 2018 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, 2018, as filed with the SEC on March 4, 2019.
Basis of consolidation
The consolidated financial statements include the accounts of BSQUARE and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
Recently Adopted Accounting Standard
We adopted Accounting Standard Update (“ASU”) No. 2016-02, “Leases” (“ASU 2016-02”) on January 1, 2019. See Note 6, “Leases.”
Use of estimates
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include provisions for bad debts and income taxes, estimates of progress on professional engineering service arrangements, bonus accruals, fair value of intangible assets and property and equipment, fair values of stock-based awards, assumptions used to determine the net present value of operating lease liabilities, and the fair values of acquired assets and liabilities, among other estimates. Actual results may differ from these estimates.
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.
The following potentially dilutive shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
1,485,981
|
|
|
|
1,528,907
|
|
Restricted stock units
|
|
|
77,532
|
|
|
|
64,192
|
|
7
2. Revenue Recognition
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 March 31, 2019
|
|
|
Three Months Ended March 31, 2018
|
|
|
|
Third-Party
Software
|
|
|
Proprietary
Software
|
|
|
Professional
Engineering
Service
|
|
|
Total
|
|
|
Third-Party
Software
|
|
|
Proprietary
Software
|
|
|
Professional
Engineering
Service
|
|
|
Total
|
|
Primary geographical markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
12,727
|
|
|
$
|
244
|
|
|
$
|
1,557
|
|
|
$
|
14,528
|
|
|
$
|
15,119
|
|
|
$
|
1,683
|
|
|
$
|
2,487
|
|
|
$
|
19,289
|
|
Europe
|
|
|
320
|
|
|
|
6
|
|
|
|
135
|
|
|
|
461
|
|
|
|
593
|
|
|
|
100
|
|
|
|
246
|
|
|
|
939
|
|
Asia
|
|
|
54
|
|
|
|
1
|
|
|
|
52
|
|
|
|
107
|
|
|
|
352
|
|
|
|
12
|
|
|
|
86
|
|
|
|
450
|
|
Total
|
|
$
|
13,101
|
|
|
$
|
251
|
|
|
$
|
1,744
|
|
|
$
|
15,096
|
|
|
$
|
16,064
|
|
|
$
|
1,795
|
|
|
$
|
2,819
|
|
|
$
|
20,678
|
|
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 asset impairment charges related to contract assets for each of the three months ended March 31, 2019 and 2018.
Significant changes in the contract assets and the deferred revenue balances during the
three months ended March 31, 2019
were as follows (in thousands):
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
Contract Assets
|
|
|
Deferred Revenue
|
|
Revenue recognized that was included in deferred revenue at December 31, 2018
|
|
$
|
—
|
|
|
$
|
369
|
|
Transferred to receivables from contract assets recognized at December 31, 2018
|
|
|
302
|
|
|
|
—
|
|
Contract acquisition costs
We capitalize contract acquisition costs for contracts with a life exceeding one year, as is more common with our DataV software bookings. A
mortization of contract acquisition costs was $7,000 and $80,000 for the three months ended March 31, 2019 and 2018, respectively. There were no asset impairment charges for contract acquisition costs for any of the periods noted above.
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 March 31, 2019:
|
|
Remainder of
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
Third-party software
|
|
$
|
37
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Proprietary software
|
|
|
2,179
|
|
|
|
1,755
|
|
|
|
1,936
|
|
|
|
196
|
|
Professional engineering services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
8
Practical expedients and exemptions
We apply a practical expedient and fully expense contract acquisition costs, such as sales commissions, as 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):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Cash
|
|
$
|
5,976
|
|
|
$
|
6,780
|
|
Cash equivalents (see detail in Note 4)
|
|
|
1,513
|
|
|
|
3,225
|
|
Restricted cash
|
|
|
338
|
|
|
|
263
|
|
Restricted cash, long-term
|
|
|
263
|
|
|
|
263
|
|
Total cash and cash equivalents
|
|
|
8,090
|
|
|
|
10,531
|
|
Short-term investments (see detail in Note 4)
|
|
|
7,173
|
|
|
|
6,409
|
|
Total cash, cash equivalents and short-term investments
|
|
$
|
15,263
|
|
|
$
|
16,940
|
|
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 March 31, 2019 and December 31, 2018 are summarized below (in thousands):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
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
|
|
$
|
264
|
|
|
$
|
—
|
|
|
$
|
264
|
|
|
$
|
1,277
|
|
|
$
|
—
|
|
|
$
|
1,277
|
|
Government and agencies
|
|
|
—
|
|
|
|
500
|
|
|
$
|
500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Corporate commercial paper
|
|
|
—
|
|
|
|
749
|
|
|
|
749
|
|
|
|
—
|
|
|
|
1,198
|
|
|
|
1,198
|
|
Corporate debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
750
|
|
|
|
750
|
|
Total cash equivalents
|
|
|
264
|
|
|
|
1,249
|
|
|
|
1,513
|
|
|
|
1,277
|
|
|
|
1,948
|
|
|
|
3,225
|
|
Restricted cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
601
|
|
|
|
—
|
|
|
|
601
|
|
|
|
526
|
|
|
|
—
|
|
|
|
526
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate commercial paper
|
|
|
—
|
|
|
|
5,276
|
|
|
|
5,276
|
|
|
|
—
|
|
|
|
3,874
|
|
|
|
3,874
|
|
Corporate debt
|
|
|
—
|
|
|
|
1,897
|
|
|
|
1,897
|
|
|
|
—
|
|
|
|
2,535
|
|
|
|
2,535
|
|
Total short-term investments
|
|
|
—
|
|
|
|
7,173
|
|
|
|
7,173
|
|
|
|
—
|
|
|
|
6,409
|
|
|
|
6,409
|
|
Total assets measured at fair value
|
|
$
|
865
|
|
|
$
|
8,422
|
|
|
$
|
9,287
|
|
|
$
|
1,803
|
|
|
$
|
8,357
|
|
|
$
|
10,160
|
|
9
As of
March 31, 2019
and
December 31, 2018
, 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. Intangible Assets
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):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
Customer relationships:
|
|
$
|
1,275
|
|
|
$
|
(1,033
|
)
|
|
$
|
242
|
|
|
$
|
1,275
|
|
|
$
|
(1,008
|
)
|
|
$
|
267
|
|
Amortization expense was $25,000 for each of the three months ended March 31, 2019 and 2018. Amortization in future periods is expected to be as follows (in thousands):
2019
|
|
|
73
|
|
2020
|
|
|
98
|
|
2021
|
|
|
71
|
|
Total
|
|
$
|
242
|
|
6. Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, requiring most leases to be recognized by lessees on their balance sheets as right-of-use (“ROU”) 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 adopted ASU 2016-02 effective January 1, 2019 and elected the modified retrospective 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. On the date of adoption, we recorded a cumulative adjustment to recognize new net lease liabilities of $1.7 million and new ROU assets of $1.2 million, for operating leases on our consolidated balance sheets, based on the present value of remaining rental payments for existing operating leases. As part of adoption, we also de-recognized $0.5 million in deferred rent. Adoption of the standard did not have a material impact on our statement of operations or statement of cash flows. As part of adoption, we elected the short-term lease recognition exemption for our facility rental and equipment leases (all leases that qualified), which means that we did not recognize ROU assets or lease liabilities for existing short-term leases (leases of 12-months or less) as of the January 1, 2019 adoption date. In addition, when adopting ASU 2016-02 we applied the following practical expedients to forego assessing:
|
•
|
whether any expired or existing contracts are or contain a lease,
|
|
•
|
lease classification for any expired or existing leases, and
|
|
•
|
initial direct costs for any existing leases.
|
We determine if an arrangement is a lease at inception. On our balance sheet, our office leases are included in ROU assets and related lease liabilities are included in the Operating lease, current portion and Operating lease statement line items. We determined that we do not currently have any leases that we are required to classify as finance leases.
ROU assets represent our right to use the underlying assets for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease agreements. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the term of the lease. For leases that do not provide an implicit rate, we use an incremental borrowing rate based on information available at the commencement date to determine the present value of lease payments. We will use the implicit rate in the lease when readily determinable. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
10
Our leases have remaining terms of one to
four
years.
The only leases that contain renewal options are for office space leases at our
Bellevue and Taiwan
locations
. However,
because of changes in our business, we are not a
ble to determine with reasonable certainty whether either or both of these leases will be renewed. As a result, we have not considered renewal options when recording ROU assets, lease liabilities or lease expense
.
|
|
Three months ended
|
|
Total component lease expense was as follows (in thousands):
|
|
March 31, 2019
|
|
Operating leases
|
|
$
|
348
|
|
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
429
|
|
Supplemental balance sheet information related to leases was as follows (dollars in thousands):
|
|
March 31, 2019
|
|
Operating leases:
|
|
|
|
|
Right of use
|
|
$
|
1,089
|
|
Current portion of operating lease liability
|
|
$
|
1,131
|
|
Operating lease liability, net of current portion
|
|
|
374
|
|
Total operating lease liabilities
|
|
$
|
1,505
|
|
Weighted Average Remaining Lease Term
|
|
1.4 years
|
|
Weighted Average Discount Rate
|
|
|
7.0
|
%
|
As of March 31, 2019, maturities of lease liabilities were as follows:
|
|
Operating leases
|
|
Years Ended December 31,
|
|
|
|
|
Remainder of 2019
|
|
$
|
900
|
|
2020
|
|
|
624
|
|
2021
|
|
|
61
|
|
Total minimum lease payments
|
|
|
1,585
|
|
Less: amount representing interest
|
|
|
(80
|
)
|
Present value of lease liabilities
|
|
$
|
1,505
|
|
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 March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life
|
|
6.0 years
|
|
|
5.4 years
|
|
Expected volatility
|
|
|
64
|
%
|
|
|
54
|
%
|
Risk-free interest rate
|
|
|
2.2
|
%
|
|
|
2.4
|
%
|
11
The impact on our results of operations from stock-based compensation expense was as follows (in thousands, except per share amounts
):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost of revenue — professional engineering service
|
|
$
|
6
|
|
|
$
|
11
|
|
Selling, general and administrative
|
|
|
188
|
|
|
|
264
|
|
Research and development
|
|
|
(26
|
)
|
|
|
56
|
|
Total stock-based compensation expense
|
|
$
|
168
|
|
|
$
|
331
|
|
Per diluted share
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
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, 2018
|
|
|
1,390,012
|
|
|
$
|
4.77
|
|
|
|
6.83
|
|
|
$
|
—
|
|
Granted
|
|
|
575,625
|
|
|
|
1.97
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(54,194
|
)
|
|
|
4.90
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(20,296
|
)
|
|
|
5.17
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019
|
|
|
1,891,147
|
|
|
$
|
3.90
|
|
|
|
6.96
|
|
|
$
|
180
|
|
Vested and expected to vest at March 31, 2019
|
|
|
1,638,226
|
|
|
$
|
4.13
|
|
|
|
6.55
|
|
|
$
|
117
|
|
Exercisable at March 31, 2019
|
|
|
979,630
|
|
|
$
|
4.85
|
|
|
|
4.00
|
|
|
$
|
—
|
|
At March 31, 2019, total compensation cost related to stock options granted but not yet recognized, net of estimated forfeitures, was $159,524. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.9 years. The following table summarizes certain information about stock options:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Weighted average grant-date fair value of options granted during the period
|
|
$
|
1.97
|
|
|
$
|
2.09
|
|
Options in-the-money (in shares)
|
|
|
6,000
|
|
|
|
737,632
|
|
Aggregate intrinsic value of options exercised during the period
|
|
$
|
—
|
|
|
$
|
275
|
|
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, 2018
|
|
|
186,516
|
|
|
$
|
2.88
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(45,725
|
)
|
|
|
2.82
|
|
Forfeited
|
|
|
(18,876
|
)
|
|
|
4.23
|
|
Unvested at March 31, 2019
|
|
|
121,915
|
|
|
$
|
2.69
|
|
Expected to vest after March 31, 2019
|
|
|
114,770
|
|
|
$
|
2.65
|
|
12
At
March 31, 2019
, total compensation cost related to RSUs granted but not yet recognized, net of estimated forfeitures,
was
$161,747
. This cost will be amortized on the straight-line method over a weighted-average period of approximately
0.3
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 March 31, 2019:
|
|
March 31, 2019
|
|
Stock options outstanding
|
|
|
1,891,147
|
|
Restricted stock units outstanding
|
|
|
121,915
|
|
Stock options and restricted stock units available for future grant
|
|
|
1,593,641
|
|
Common stock reserved for future issuance
|
|
|
3,606,703
|
|
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. See Note 6, “Leases.”
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.
13
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):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Third-party software:
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
13,101
|
|
|
$
|
16,064
|
|
Cost of revenue
|
|
|
11,149
|
|
|
|
13,354
|
|
Gross profit
|
|
|
1,952
|
|
|
|
2,710
|
|
Proprietary software:
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
251
|
|
|
|
1,795
|
|
Cost of revenue
|
|
|
213
|
|
|
|
41
|
|
Gross profit
|
|
|
38
|
|
|
|
1,754
|
|
Professional Engineering Service:
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
1,744
|
|
|
|
2,819
|
|
Cost of revenue
|
|
|
1,343
|
|
|
|
2,083
|
|
Gross profit
|
|
|
401
|
|
|
|
736
|
|
Total gross profit
|
|
|
2,391
|
|
|
|
5,200
|
|
Operating expenses
|
|
|
5,270
|
|
|
|
7,678
|
|
Other income, net
|
|
|
33
|
|
|
|
44
|
|
Income tax (expense) benefit
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(2,846
|
)
|
|
$
|
(2,434
|
)
|
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 March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Total revenue:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
14,528
|
|
|
$
|
19,289
|
|
Asia
|
|
|
107
|
|
|
|
450
|
|
Europe
|
|
|
461
|
|
|
|
939
|
|
Total revenue
|
|
$
|
15,096
|
|
|
$
|
20,678
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,545
|
|
|
$
|
1,578
|
|
Asia
|
|
|
83
|
|
|
|
91
|
|
Europe
|
|
|
258
|
|
|
|
4,023
|
|
Total long-lived assets
|
|
$
|
1,886
|
|
|
$
|
5,692
|
|
14
10. Significant Risk Concentrations
Significant Customer
No customers accounted for 10% or more of total revenue for three months ended March 31, 2019. Honeywell International, Inc. and affiliated entities (“Honeywell”) accounted for $2.7 million or 13% of total revenue for the three months ended March 31, 2018.
No
other customers accounted for 10% or more of total revenue for the 2018 period noted above.
Honeywell had accounts receivable balances of $2.3 million or approximately 24% of total accounts receivable at March 31, 2019 and $2.8 million or approximately 24% of total accounts receivable at December 31, 2018. No other customer accounted for 10% or more of total accounts receivable at March 31, 2019 or December 31, 2018.
Significant Supplier
Effective March 1, 2019, pursuant to a new Global Partnership Agreement with Microsoft Corporation (“Microsoft”), we are authorized to sell Windows Embedded operating systems in Canada, the United States, Argentina, Brazil, Chile, Mexico, Peru, Venezuela, Puerto Rico, Cuba, Haiti, Dominican Republic, Jamaica, Trinidad and Tobago, Guadeloupe, Martinique, Bahamas, Barbados, Saint Lucia, Curacao, Aruba, Saint Vincent and the Grenadines, U.S. Virgin Islands, Grenada, Dominica, Cayman Islands, Saint Kitts and Nevis, Sint Maarten, Turks and Caicos Islands, Saint Martin, British Virgin Islands, Sint Eustatius, Saba, Anguilla, Montserrat, Colombia, Saint Barthelemy, Antigua and Barbuda. Our existing distribution agreement for sales of Windows Embedded operating systems in the E.U., the European Free Trade Association, Turkey and Africa, from which we generated approximately 3.7% of our third-party software sales in 2018, expires on June 30, 2019 and will not be renewed thereafter. We have also entered into ODAs with Microsoft pursuant to which we are licensed to sell Microsoft Windows Mobile operating systems to customers in North America, South America, Central America (excluding Cuba), Japan, Taiwan, Europe, the Middle East, and Africa. The ODAs to sell Windows Mobile operating systems are effective through April 30, 2022.
Software sales under these agreements constitute a significant portion of our software revenue and total revenue. There is no automatic renewal provision in any of these agreements, and 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:
|
•
|
For the three months ended March 31, 2019, we allocated 20% of rebates to reduce cost of sales, with the remaining 80% potentially available to offset qualified marketing expenses related to Microsoft Azure products in the period that expenditures are claimed and approved.
|
|
•
|
For the three months ended March 31, 2018, we allocated 30% of rebates to reduce cost of sales, with the remaining 70% available to offset qualified marketing expenses in the period the expenditures are claimed and approved.
|
Under this rebate program, we recorded rebate credits as follows (in thousands):
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
Reductions to cost of revenue
|
|
|
$
|
82
|
|
|
$
|
260
|
|
Reductions to marketing expense
|
|
|
$
|
413
|
|
|
$
|
267
|
|
There was a balance of approximately $328,000 in qualified outstanding rebate credits at March 31, 2019, which will be accounted for as a reduction in marketing expense in the period in which qualified program expenditures are made.
15
11. Credit Agreement
Line of Credit
In September 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. In September 2016, the Credit Agreement was modified to extend the final due date to September 2018, at which point it expired. No borrowings were ever outstanding under the Credit Agreement.
12. Subsequent Event
On May 9, 2019, our Board of Directors approved a severance plan that includes a workforce elimination of 38 positions, comprised of 32 employees and 6 consultants. This one-time involuntary termination benefit plan reduced our workforce by approximately 25% and was done in order to reduce go-forward operating costs and re-align our go-forward business model to support future business initiatives.
We currently anticipate incurring pre-tax severance charges under this severance plan of approximately $1.1 million, representing one-time cash employee termination benefits including severance and other employment obligations, which will be paid out beginning in the second quarter of 2019 through early 2020. We expect the workforce reductions will be substantially completed by the end of the third quarter of 2019 and anticipate that cost savings will be realized beginning in the third quarter of 2019.
16