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. 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, 2019, our operating results for nine months ended September 30, 2019 and 2018 and our cash flows for the nine months ended September 30, 2019 and 2018. The accompanying financial information as of December 31, 2018 is derived from audited financial statements as of that date.
Effective July 1, 2019, we have made the following changes to our operating segments:
|
•
|
Our Third-Party Software operating segment has been renamed to Partner Solutions;
|
|
•
|
Our Professional Engineering Service operating segment has been renamed to Edge to Cloud, consistent with the suite of software and services we offer; and
|
|
•
|
We combined our Proprietary Software operating segment into our Edge to Cloud operating segment as a result of management’s decision to stop marketing of DataVtm as an IoT platform in the second quarter of 2019. Prior period segment amounts have been recast to reflect our reporting segments on a comparable basis.
|
See Note 9. “Information about Geographic Areas and Operating Segments,” for additional information on our segments.
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.
7
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
1,534,817
|
|
|
|
1,679,969
|
|
|
|
1,560,546
|
|
|
|
1,584,046
|
|
Restricted stock units
|
|
|
59,130
|
|
|
|
51,679
|
|
|
|
78,430
|
|
|
|
64,043
|
|
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 September 30, 2019
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
Partner Solutions
|
|
|
Edge to
Cloud
|
|
|
Total
|
|
|
Partner Solutions
|
|
|
Edge to
Cloud
|
|
|
Total
|
|
Primary geographical markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
10,851
|
|
|
$
|
1,863
|
|
|
$
|
12,714
|
|
|
$
|
13,715
|
|
|
$
|
1,726
|
|
|
$
|
15,441
|
|
Europe
|
|
|
164
|
|
|
|
177
|
|
|
|
341
|
|
|
|
526
|
|
|
|
148
|
|
|
|
674
|
|
Asia
|
|
|
1,541
|
|
|
|
45
|
|
|
|
1,586
|
|
|
|
—
|
|
|
|
579
|
|
|
|
579
|
|
Total
|
|
$
|
12,556
|
|
|
$
|
2,085
|
|
|
$
|
14,641
|
|
|
$
|
14,241
|
|
|
$
|
2,453
|
|
|
$
|
16,694
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Partner Solutions
|
|
|
Edge to
Cloud
|
|
|
Total
|
|
|
Partner Solutions
|
|
|
Edge to
Cloud
|
|
|
Total
|
|
Primary geographical markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
33,363
|
|
|
$
|
5,918
|
|
|
$
|
39,281
|
|
|
$
|
45,115
|
|
|
$
|
7,794
|
|
|
$
|
52,909
|
|
Europe
|
|
|
1,004
|
|
|
|
496
|
|
|
|
1,500
|
|
|
|
1,821
|
|
|
|
681
|
|
|
|
2,502
|
|
Asia
|
|
|
2,974
|
|
|
|
162
|
|
|
|
3,136
|
|
|
|
361
|
|
|
|
803
|
|
|
|
1,164
|
|
Total
|
|
$
|
37,341
|
|
|
$
|
6,576
|
|
|
$
|
43,917
|
|
|
$
|
47,297
|
|
|
$
|
9,278
|
|
|
$
|
56,575
|
|
8
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, 2019 and 2018.
Significant changes in the contract assets and the deferred revenue balances during the three and nine months ended September 30, 2019 were as follows (in thousands):
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
Contract
Assets
|
|
|
Contract
Liabilities
|
|
|
Contract
Assets
|
|
|
Deferred
Revenue
|
|
Revenue recognized that was included in deferred revenue at December 31, 2018
|
$
|
204
|
|
|
$
|
—
|
|
|
$
|
1,189
|
|
|
$
|
984
|
|
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 was common with our DataVTM software bookings. Amortization of contract acquisition costs was $35,000 and $7,000 for the three months ended September 30, 2019 and 2018, respectively, and was $42,000 and $93,000 for the nine months ended September 30, 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 September 30, 2019:
|
|
|
|
Remainder of
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
Partner Solutions
|
|
|
|
$
|
11
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Edge to Cloud
|
|
|
|
|
1,315
|
|
|
|
2,049
|
|
|
|
2,115
|
|
|
|
274
|
|
9
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):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Cash
|
|
$
|
5,147
|
|
|
$
|
6,780
|
|
Cash equivalents (see detail in Note 4)
|
|
|
1,616
|
|
|
|
3,225
|
|
Restricted cash
|
|
|
600
|
|
|
|
263
|
|
Restricted cash, long-term
|
|
|
—
|
|
|
|
263
|
|
Total cash and cash equivalents
|
|
|
7,363
|
|
|
|
10,531
|
|
Short-term investments (see detail in Note 4)
|
|
|
4,247
|
|
|
|
6,409
|
|
Total cash, cash equivalents and short-term investments
|
|
$
|
11,610
|
|
|
$
|
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.
10
Assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 are summarized below (in thousands):
|
|
September 30, 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
|
|
$
|
1,616
|
|
|
$
|
—
|
|
|
$
|
1,616
|
|
|
$
|
1,277
|
|
|
$
|
—
|
|
|
$
|
1,277
|
|
Government and agencies
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Corporate commercial paper
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,198
|
|
|
|
1,198
|
|
Corporate debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
750
|
|
|
|
750
|
|
Total cash equivalents
|
|
|
1,616
|
|
|
|
—
|
|
|
|
1,616
|
|
|
|
1,277
|
|
|
|
1,948
|
|
|
|
3,225
|
|
Restricted cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
600
|
|
|
|
—
|
|
|
|
600
|
|
|
|
526
|
|
|
|
—
|
|
|
|
526
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate commercial paper
|
|
|
—
|
|
|
|
2,244
|
|
|
|
2,244
|
|
|
|
—
|
|
|
|
3,874
|
|
|
|
3,874
|
|
Corporate debt
|
|
|
—
|
|
|
|
2,003
|
|
|
|
2,003
|
|
|
|
—
|
|
|
|
2,535
|
|
|
|
2,535
|
|
Total short-term investments
|
|
|
—
|
|
|
|
4,247
|
|
|
|
4,247
|
|
|
|
—
|
|
|
|
6,409
|
|
|
|
6,409
|
|
Total assets measured at fair value
|
|
$
|
2,216
|
|
|
$
|
4,247
|
|
|
$
|
6,463
|
|
|
$
|
1,803
|
|
|
$
|
8,357
|
|
|
$
|
10,160
|
|
As of September 30, 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):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
Customer relationships:
|
|
$
|
1,275
|
|
|
$
|
(1,082
|
)
|
|
$
|
193
|
|
|
$
|
1,275
|
|
|
$
|
(1,008
|
)
|
|
$
|
267
|
|
Amortization expense was $25,000 for each of the three months ended September 30, 2019 and 2018, and $74,000 for each of the nine months ended September 30, 2019 and 2018. Amortization in future periods is expected to be as follows (in thousands):
Remainder of 2019
|
|
$
|
24
|
|
2020
|
|
|
98
|
|
2021
|
|
|
71
|
|
Total
|
|
$
|
193
|
|
11
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 fiscal years beginning after December 31, 2018 and interim periods within those years, 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.
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 able to determine with reasonable certainty whether we will renew our Bellevue lease, and we do not intend to renew our Taiwan lease (see Note 12, “Restructuring Costs”). As a result, we have not considered renewal options when recording ROU assets, lease liabilities or lease expense.
|
|
Nine months ended
|
|
Total component lease expense was as follows (in thousands):
|
|
September 30, 2019
|
|
Operating leases
|
|
$
|
767
|
|
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
1,024
|
|
Supplemental balance sheet information related to leases was as follows (dollars in thousands):
|
|
September 30, 2019
|
|
Operating leases:
|
|
|
|
|
Right of use
|
|
$
|
702
|
|
Current portion of operating lease liability
|
|
$
|
835
|
|
Operating lease liability, net of current portion
|
|
|
107
|
|
Total operating lease liabilities
|
|
$
|
942
|
|
Weighted Average Remaining Lease Term
|
|
1.1 years
|
|
Weighted Average Discount Rate
|
|
|
7.0
|
%
|
12
As of September 30, 2019, maturities of lease liabilities were as follows:
|
|
Operating leases
|
|
Years Ended December 31,
|
|
|
|
|
2019, remainder of year
|
|
$
|
300
|
|
2020
|
|
|
617
|
|
2021
|
|
|
53
|
|
Total minimum lease payments
|
|
|
970
|
|
Less: amount representing interest
|
|
|
(28
|
)
|
Present value of lease liabilities
|
|
$
|
942
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life
|
|
5.6 years
|
|
|
4.4 years
|
|
|
5.8 years
|
|
|
5.3 years
|
|
Expected volatility
|
|
|
64
|
%
|
|
|
56
|
%
|
|
|
64
|
%
|
|
|
55
|
%
|
Risk-free interest rate
|
|
|
1.6
|
%
|
|
|
2.7
|
%
|
|
|
2.1
|
%
|
|
|
2.5
|
%
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Cost of revenue — Edge to Cloud
|
|
$
|
1
|
|
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
30
|
|
Selling, general and administrative
|
|
|
175
|
|
|
|
237
|
|
|
|
373
|
|
|
|
421
|
|
Research and development
|
|
|
12
|
|
|
|
57
|
|
|
|
(12
|
)
|
|
|
169
|
|
Total stock-based compensation expense
|
|
$
|
188
|
|
|
$
|
305
|
|
|
$
|
371
|
|
|
$
|
620
|
|
Per diluted share
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
13
Stock Option Activity
The following table summarizes stock option activity under the Plans:
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted
Average
|
|
|
Contractual
Life
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
Intrinsic Value
|
|
Balance at December 31, 2018
|
|
|
1,390,012
|
|
|
$
|
4.77
|
|
|
|
6.83
|
|
|
$
|
—
|
|
Granted
|
|
|
933,423
|
|
|
|
1.70
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(218,889
|
)
|
|
|
4.98
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(467,490
|
)
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
|
|
1,637,056
|
|
|
$
|
2.93
|
|
|
|
7.67
|
|
|
$
|
505
|
|
Vested and expected to vest at September 30, 2019
|
|
|
1,349,818
|
|
|
$
|
3.17
|
|
|
|
7.28
|
|
|
$
|
343
|
|
Exercisable at September 30, 2019
|
|
|
596,324
|
|
|
$
|
4.69
|
|
|
|
4.67
|
|
|
$
|
—
|
|
At September 30, 2019, total compensation cost related to stock options granted but not yet recognized, net of estimated forfeitures, was $141,634. This cost will be amortized on the straight-line method over a weighted-average period of approximately 2.5 years. The following table summarizes certain information about stock options:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Weighted average grant-date fair value of options granted during the period
|
|
$
|
1.23
|
|
|
$
|
1.02
|
|
|
$
|
1.70
|
|
|
$
|
1.89
|
|
Options in-the-money (in shares)
|
|
|
—
|
|
|
|
26,000
|
|
|
|
—
|
|
|
|
26,000
|
|
Aggregate intrinsic value of options exercised during the period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,853
|
|
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
|
|
|
225,693
|
|
|
|
1.44
|
|
Vested
|
|
|
(204,679
|
)
|
|
|
2.19
|
|
Forfeited
|
|
|
(34,643
|
)
|
|
|
4.68
|
|
Unvested at September 30, 2019
|
|
|
172,887
|
|
|
$
|
1.46
|
|
Expected to vest after September 30, 2019
|
|
|
159,795
|
|
|
$
|
1.46
|
|
14
At September 30, 2019, total compensation cost related to RSUs granted but not yet recognized, net of estimated forfeitures, was $157,583. This cost will be amortized on the straight-line method over a weighted-average period of approximately 0.4 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, 2019:
|
|
September 30, 2019
|
|
Stock options outstanding
|
|
|
1,637,056
|
|
Restricted stock units outstanding
|
|
|
172,887
|
|
Stock options and restricted stock units available for future grant
|
|
|
1,637,806
|
|
Common stock reserved for future issuance
|
|
|
3,447,749
|
|
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; 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.
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.
Effective as of July 1, 2019, we made the following changes to our operating segments:
|
•
|
Our Third-Party Software operating segment has been renamed to Partner Solutions;
|
|
•
|
Our Professional Engineering Service operating segment has been renamed to Edge to Cloud; and
|
|
•
|
We no longer present separate information for the Proprietary Software operating segment. Results are no longer quantifiably significant, nor does management view the segment as of continuing significance after deciding to stop marketing of DataVTM as an IoT platform in the second quarter of 2019. Results for the Proprietary Software segment will be combined with the Edge to Cloud segment as part of continuing operations, with prior period segment results recast to reflect our reporting segments on a comparable basis.
|
15
As of July 1, 2019, we have two major product lines – Partner Solutions and Edge to Cloud– 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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Partner Solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
12,556
|
|
|
$
|
14,241
|
|
|
$
|
37,341
|
|
|
$
|
47,297
|
|
Cost of revenue
|
|
|
10,762
|
|
|
|
12,003
|
|
|
|
31,834
|
|
|
|
39,837
|
|
Gross profit
|
|
|
1,794
|
|
|
|
2,238
|
|
|
|
5,507
|
|
|
|
7,460
|
|
Edge to Cloud:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
2,085
|
|
|
|
2,453
|
|
|
|
6,576
|
|
|
|
9,278
|
|
Cost of revenue
|
|
|
1,247
|
|
|
|
1,332
|
|
|
|
4,637
|
|
|
|
4,918
|
|
Gross profit
|
|
|
838
|
|
|
|
1,121
|
|
|
|
1,939
|
|
|
|
4,360
|
|
Total gross profit
|
|
|
2,632
|
|
|
|
3,359
|
|
|
|
7,446
|
|
|
|
11,820
|
|
Operating expenses
|
|
|
3,761
|
|
|
|
5,491
|
|
|
|
15,383
|
|
|
|
20,148
|
|
Other income, net
|
|
|
22
|
|
|
|
65
|
|
|
|
116
|
|
|
|
156
|
|
Income tax (expense) benefit
|
|
|
—
|
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(32
|
)
|
Net loss
|
|
$
|
(1,107
|
)
|
|
$
|
(2,087
|
)
|
|
$
|
(7,821
|
)
|
|
$
|
(8,204
|
)
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
12,714
|
|
|
$
|
15,441
|
|
|
$
|
39,281
|
|
|
$
|
52,909
|
|
Asia
|
|
|
1,586
|
|
|
|
579
|
|
|
|
3,136
|
|
|
|
1,164
|
|
Europe
|
|
|
341
|
|
|
|
674
|
|
|
|
1,500
|
|
|
|
2,502
|
|
Total revenue
|
|
$
|
14,641
|
|
|
$
|
16,694
|
|
|
$
|
43,917
|
|
|
$
|
56,575
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,027
|
|
|
$
|
1,578
|
|
Asia
|
|
|
200
|
|
|
|
91
|
|
Europe
|
|
|
380
|
|
|
|
4,023
|
|
Total long-lived assets
|
|
$
|
1,607
|
|
|
$
|
5,692
|
|
10. Significant Risk Concentrations
Significant Customer
No customers accounted for 10% or more of total revenue for each of the three and nine months ended September 30, 2019 and 2018.
Honeywell International, Inc. and affiliated entities (“Honeywell”) had accounts receivable balances of $1.4 million or approximately 16% of total accounts receivable at September 30, 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 September 30, 2019 or December 31, 2018.
16
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 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, expired on June 30, 2019 and was not renewed. We have also entered into OEM Distribution Agreements (“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 and nine months ended September 30, 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 and nine months ended September 30, 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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Reductions to cost of revenue
|
|
$
|
87
|
|
|
$
|
159
|
|
|
$
|
240
|
|
|
$
|
577
|
|
Reductions to marketing expense
|
|
$
|
597
|
|
|
$
|
294
|
|
|
$
|
1,027
|
|
|
$
|
673
|
|
There was a balance of approximately $821,000 in qualified outstanding rebate credits at September 30, 2019, which will be accounted for as a reduction in marketing expense in the period in which qualified program expenditures are made.
11. Impairment of Software Development Costs
As a result of an impairment analysis associated with our long-lived equipment, furniture and leasehold improvement assets, the Company recorded a charge of $0.4 million related to certain software development cost assets during the three months ended June 30, 2019. For the third quarter and first nine months of 2019, we incurred charges of none and $0.4 million, respectively, for impairment of software development costs. The charges are reflected in the “Restructuring costs” line item on the Company’s consolidated statement of operations and comprehensive loss.
17
12. Restructuring costs
In May 2019, we approved a severance plan that included a workforce elimination of approximately 38 positions in the U.S. and internationally. In October 2019, we determined to close our Taiwan branch office by December 31, 2019, which will result in elimination of approximately 17 additional positions. Of these 55 total positions, 34 positions had been eliminated as of September 30, 2019. This involuntary termination benefit plan was done in order to reduce go-forward operating costs and re-align our go-forward business model to support future business initiatives. The costs associated with these actions consist primarily of charges for restructuring costs related to severance and benefits, and a non-cash impairment charge related to certain software development cost assets. We expect to incur aggregate restructuring charges of approximately $2.1 million associated with these actions. During the third quarter and the first nine months of 2019, we incurred $0.3 million and $1.6 million, respectively, in charges for restructuring costs under this plan. For the nine months ended September 30, 2019, $0.8 million in restructuring costs were paid. The ending balance for accrued restructuring charges is $0.5 million as of September 30, 2019 and is included as part of accrued compensation on the consolidated balance sheets.
Summary of Restructuring Costs
The types of charges for restructuring costs for the three and nine months ended September 30, 2019 and September 30, 2018 were (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Severance and benefits
|
|
$
|
253
|
|
|
$
|
—
|
|
|
$
|
1,254
|
|
|
$
|
—
|
|
Asset impairment charge (see Note 11)
|
|
|
—
|
|
|
|
—
|
|
|
|
375
|
|
|
|
—
|
|
Total
|
|
$
|
253
|
|
|
$
|
—
|
|
|
$
|
1,629
|
|
|
$
|
—
|
|
Accrued Restructuring Costs
The following tables show the activity and estimated timing of future payouts for accrued restructuring costs (in thousand):
|
|
Three Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Balance as of June 30, 2019
|
|
$
|
661
|
|
|
$
|
—
|
|
Restructuring costs
|
|
|
253
|
|
|
|
—
|
|
Adjustments of prior estimates
|
|
|
—
|
|
|
|
—
|
|
Non-cash asset impairment charge
|
|
|
—
|
|
|
|
—
|
|
Cash payments
|
|
|
(442
|
)
|
|
|
—
|
|
Balance as of September 30, 2019
|
|
$
|
472
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Balance as of December 31, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
Restructuring costs
|
|
|
1,629
|
|
|
|
—
|
|
Adjustments of prior estimates
|
|
|
—
|
|
|
|
—
|
|
Non-cash asset impairment charge
|
|
|
(375
|
)
|
|
|
—
|
|
Cash payments
|
|
|
(782
|
)
|
|
|
—
|
|
Balance as of September 30, 2019
|
|
$
|
472
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
Estimated timing of future payments:
|
|
2019
|
|
|
2018
|
|
Remainder of 2019
|
|
$
|
310
|
|
|
$
|
—
|
|
2020
|
|
|
162
|
|
|
|
—
|
|
Total stock-based compensation expense
|
|
$
|
472
|
|
|
$
|
—
|
|
18