The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
1. Organization and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Identiv, Inc. (“Identiv” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s unaudited condensed consolidated financial statements have been included. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or any future period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” and the audited Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The preparation of unaudited condensed consolidated financial statements necessarily requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the condensed consolidated balance sheet dates and the reported amounts of revenues and expenses for the periods presented. The Company may experience significant variations in demand for its products quarter to quarter and typically experiences a stronger demand cycle in the second half of its fiscal year. As a result, the quarterly results may not be indicative of the full year results. The December 31, 2017 balance sheet was derived from the audited financial statements as of that date.
Reclassifications
—
Certain reclassifications have been made to the fiscal year 2017 financial statements to conform to the fiscal year 2018 presentation. The reclassifications had no impact on net loss, total assets, or stockholders’ equity.
Concentration of Credit Risk
— No customer represented more than 10% of net revenue for either of the three or nine months ended September 30, 2018 or 2017.
No customer represented 10% or more
of the Company’s accounts receivable balance at September 30, 2018 or December 31, 2017.
Business Combinations
—
Business combinations are accounted for at fair value under the purchase method of accounting. Acquisition costs are expensed as incurred and recorded in general and administrative expenses and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date affect income tax expense. The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the condensed consolidated financial statements could result in a possible impairment of the intangible assets and goodwill, or require acceleration of the amortization expense of finite-lived intangible assets.
In circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 480,
Distinguishing Liabilities from Equity
, the Company recognizes a liability equal to the fair value of the contingent payments the Company expects to make as of the acquisition date. The Company remeasures this liability each reporting period and records changes in the fair value as a component of operating expenses.
Results of operations and cash flows of acquired companies are included in the Company’s operating results from the date of acquisition.
Intangible Assets
—
Amortizable intangible assets include trademarks, developed technology and customer relationships acquired as part of business combinations. Intangible assets subject to amortization are amortized using the straight-line method over their estimated useful lives ranging from
four
to twelve years and are reviewed for impairment in accordance with ASC 360,
Property, Plant and Equipment.
8
Goodwill
—
In accordance with ASC 350,
Intangibles-Goodwill and Other
(“ASC 350”), the Company’s goodwill is not
amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In testing for goodwill impairment, the Company compares the fair value of it
s reporting unit to its carrying value including the goodwill of that unit. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, the Company will recognize an impairment loss for the amount by which the carrying amount exceed
s the reporting unit’s fair value. The loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit.
Research and Development
— Costs to research, design, and develop the Company’s products are expensed as incurred and consist primarily of employee compensation and fees for the development of prototype products. Software development costs are capitalized beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. Generally, the Company’s products are released soon after technological feasibility has been established. Costs incurred subsequent to achieving technological feasibility have not been significant and generally have been expensed as incurred. At September 30, 2018, the amount of capitalized software development costs totaled $386,000 and is included in other assets in the accompanying condensed consolidated balance sheet. Software development costs capitalized in 2017 totaled $401,000. No software development costs were capitalized in 2018.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed, the Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on its financial position or results of operations upon adoption.
In March 2016, the FASB issued
Accounting Standards Update (“ASU”) 2016-09,
Compensation – Stock Compensation
, which provides
guidance to simplify several aspects of accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2016.
The Company adopted this guidance effective January 1, 2017. The Company's adoption of this standard did not have a significant impact on its condensed consolidated financial statements. No excess income tax benefit or tax deficiencies were recorded as a result of the adoption and there was no change to accumulated deficit with respect to previously unrecognized excess tax benefits. The Company elected to continue to account for forfeitures on an estimated basis. The Company has elected to present the condensed consolidated statements of cash flows on a prospective transition method and no prior periods have been adjusted.
In February 2016, the FASB issued
ASU 2016-02,
Leases
(“ASU 2016-02”), which
amends accounting for leases. Under the new guidance, a lessee will recognize assets and liabilities but will recognize expenses similar to current lease accounting. The guidance is effective for reporting periods beginning after December 15, 2018; however early adoption is permitted. The new guidance must be adopted using a modified retrospective approach to each prior reporting period presented with various optional practical expedients.
In January 2018, the FASB issued an exposure draft of the proposed ASU,
Leases (Topic 842): Targeted Improvements
. The proposed ASU provides an alternative transition method of adoption, permitting the recognition of a cumulative-effect adjustment to retained earnings on the date of adoption. The Company will adopt the standard on the effective date, but has not yet selected a transition method. The Company is reviewing its leased assets to determine the potential impact on its consolidated financial statements. Though its evaluation is ongoing, the Company expects changes to its balance sheet due to the recognition of right-of-use assets and lease liabilities related to its real estate leases, but it does not anticipate a material impact to its results of operations or liquidity.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”), which eliminates the performance of Step 2 from the goodwill impairment test. In performing its annual or interim impairment testing, an entity will instead compare the fair value of the reporting unit with its carrying amount and recognize any impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The standard is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual impairment tests performed on testing dates after January 1, 2017. The Company is currently in the process of evaluating when it will adopt ASU 2017-04 and its impact on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(“Topic 606”), which supersedes the revenue recognition requirements in
Revenue Recognition
(Topic 605)” and Subtopic 985-605 “Software - Revenue Recognition.” Topic 605 and Subtopic 985-605 are collectively referred to as “Topic 605” or “prior GAAP.” Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic 606 requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
9
The Company adopted Topic 606 on January 1, 2018 using the modified retrospective transition method. Under this method, the Company evaluated contracts that were in effect at the beginning of fiscal 2018 as if those contracts had been accounted for under Topic 606. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with historical, pre-Topic 606 accounting.
On the adoption date, a cumulative catch up adjustment was recorded to beginning retained earnings to reflect the impact of all existing arrangements under Topic 606. T
he Company increased retained earnings and decreased deferred revenue by approximately $2,000 for an uncompleted software development and technical support services contract with a customer. Under Topic 605 accounting, since the Company
was unable to establish vendor-specific objective evidence (“VSOE”) of fair value for the product development and technical support services components in the contract, the Company was required to defer the revenue and recognize it over the term of the contract. Under Topic 606, the Company would have been required to establish the standalone selling price of each of the performance obligations in the contract and recognize the product development services revenue upon delivery, and recognize the technical support services revenue ratably over the term of the contract.
The Company does not expect the impact of the adoption of Topic 606 to be material to its annual revenue and net income on an ongoing basis.
Revenue generated under Topic 606 is expected to be materially comparable to revenue recognized under Topic 605 in fiscal 2018 primarily due to the elimination of deferred revenue associated with the product development services discussed above that, under Topic 605, would have continued to be recognized into revenue in 2018 and 2019, offset by an increase in the revenue recognized related to the amount and timing of technical support services provided in the contract discussed above. The actual effects on revenue recognized for the nine months ended September 30, 2018 are reported in the table below.
No incremental sales commission costs or other costs related to obtaining customer contracts were capitalized at the adoption date as they were immaterial.
The timing of revenue recognition for hardware and professional services is expected to remain substantially unchanged. The Company’s overall mix of revenue recognized at a point in time versus over time is expected to increase in the future due to the intended growth and expansion of its services offerings. For the three and nine months ended September 30, 2018, approximately 94% and 95%, respectively, of the Company’s revenue was recognizable on delivery and 6% and 5%, respectively, over time
.
The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated balance sheet as of September 30, 2018 (in thousands):
|
Balance at
December 31, 2017
|
|
|
Adjustments
|
|
|
Balance at
January 1, 2018
|
|
Deferred revenue
|
$
|
1,090
|
|
|
$
|
(2
|
)
|
|
$
|
1,088
|
|
Accumulated deficit
|
|
(399,647
|
)
|
|
|
2
|
|
|
|
(399,645
|
)
|
The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated statement of operations for the nine months ended September 30, 2018 (in thousands, except per share amounts):
|
As Reported Under
Topic 606
|
|
|
Adjustments
|
|
|
Balance Under Prior
GAAP
|
|
Net revenue
|
$
|
56,844
|
|
|
$
|
1
|
|
|
$
|
56,845
|
|
Cost of revenue
|
|
33,699
|
|
|
|
—
|
|
|
|
33,699
|
|
Operating expenses
|
|
26,103
|
|
|
|
—
|
|
|
|
26,103
|
|
Provision for income taxes
|
|
(121
|
)
|
|
|
—
|
|
|
|
(121
|
)
|
Net loss
|
|
(5,338
|
)
|
|
|
1
|
|
|
|
(5,337
|
)
|
Basic and diluted net loss per share
|
|
(0.34
|
)
|
|
|
—
|
|
|
|
(0.34
|
)
|
The adoption of Topic 606 had no impact on the Company’s net cash provided by operating activities, net cash used in investing activities or net cash used in financing activities.
10
2. Revenue
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of its products, software licenses, and services, which are generally capable of being distinct and accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation, generally on a relative basis using its standalone selling price. The stated contract value is generally the transaction price to be allocated to the separate performance obligations. Revenue is recognized net of any taxes collected from customers that are subsequently remitted to governmental authorities.
Nature of Products and Services
The Company derives revenues primarily from sales of hardware products, software licenses, professional services, software maintenance and support, and extended hardware warranties.
Hardware Product Revenues
—
The Company generally has two performance obligations in arrangements involving the sale of hardware products. The first performance obligation is to transfer the hardware product (which includes software integral to the functionality of the hardware product). The second performance obligation is to provide assurance that the product complies with its agreed-upon specifications and is free from defects in material and workmanship for a period of one to three years (i.e. assurance warranty). The entire transaction price is allocated to the hardware product and is generally recognized as revenue at the time of delivery because the customer obtains control of the product at that point in time. The Company has concluded that control generally transfers at that point in time because the customer has title to the hardware, physical possession, and a present obligation to pay for the hardware. None of the transaction price is allocated to the assurance warranty component, as the Company accounts for these product warranty costs in accordance with ASC 460,
Guarantees
. Payments for hardware contracts are generally due 30 to 60 days after shipment of the hardware product.
Software License Revenues
—
The Company’s license arrangements grant customers the perpetual right to access and use the licensed software products at the outset of an arrangement. Technical support and software updates are generally made available throughout the term of the support agreement, which is generally one to three years. The Company accounts for these arrangements as two performance obligations (1) the software licenses, and (2) the related updates and technical support. The software license revenue is recognized upon delivery of the license to the customer, while the software updates and technical support is recognized over the term of the support contract. Payments are generally due 30 to 60 days after delivery of the software licenses.
Professional Services Revenues
—
Professional services revenues consist primarily of programming customization services performed relating to the integration of the Company’s software products with the customers other systems, such as HR systems. Professional services contracts are generally billed on a time and materials basis and revenue is recognized as the services are performed. For contracts billed on a fixed price basis, revenue is recognized once the contract is complete. Payments for services are generally due when services are performed.
Software Maintenance and Support Revenues
—
Support and maintenance contract revenues consist of the services provided to support the specialized programming applications performed by our professional services group. Support and maintenance contracts are typically billed at inception of the contract and recognized as revenue over the contract period, typically over a one to three year period.
11
Extended Hardware Warranties Revenues
—
Sales of our hardware products may also include optional extended
hardware warranties, which typically provide assurance that the product will continue function as initially intended. Extended hardware warranty
contracts are typically billed at inception of the contract and recognized as revenue over the respective cont
ract period, typically over one to
two
year periods
after the expiration of the original assurance warranty
.
Performance
Obligation
|
|
When Performance Obligation is
Typically Satisfied
|
|
When Payment is
Typically Due
|
|
How Standalone Selling Price is
Typically Estimated
|
Hardware products
|
|
When customer obtains control of the product (point-in-time)
|
|
Within 30-60 days of shipment
|
|
Observable in transactions without multiple performance obligations
|
Software licenses
|
|
When license is delivered to customer or made available for download, and the applicable license period has begun (point-in-time)
|
|
Within 30-60 days of the beginning of license period
|
|
Established pricing practices for software licenses bundled with software maintenance, which are separately observable in renewal transactions
|
Professional services
|
|
As services are performed and/or when contract is fulfilled (point-in-time)
|
|
Within 30-60 days of delivery
|
|
Observable in transactions without multiple performance obligations
|
Software maintenance
and support services
|
|
Ratably over the course of the support contract (over time)
|
|
Within 30-60 days of the beginning of the contract period
|
|
Observable in renewal transactions
|
Extended hardware
warranties
|
|
Ratably over the course of the support contract (over time)
|
|
Within 30-60 days of the beginning of the contract period
|
|
Observable in renewal transactions
|
Significant Judgments
The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. For such arrangements, the Company allocates revenues to each performance obligation based on its relative standalone selling price (“SSP”).
Judgment is required to determine the SSP for each distinct performance obligation in a contract. For the majority of items, the Company estimates SSP using historical transaction data. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately and needs to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when the product or service is not sold separately, the Company determines the SSP using information that may include market conditions and other observable inputs.
The determination of SSP is an ongoing process and information is reviewed regularly in order to ensure SSPs reflect the most current information or trends.
Disaggregation of Revenues
The Company disaggregates revenue from contracts with customers based on the timing of transfer of goods or services to customers (point-in-time or over time) and geographic region based on the shipping location of the customer. The geographic regions that are tracked are the Americas, Europe and the Middle East, and Asia-Pacific regions. The Company operates as four operating segments.
12
Total net sales based on the disaggregation criteria described above are as follows (in thousands):
|
Three Months Ended September 30,
|
|
|
2018
|
|
|
2017
(1)
|
|
|
Point-in-
Time
|
|
|
Over Time
|
|
|
Total
|
|
|
Point-in-
Time
|
|
|
Over Time
|
|
|
Total
|
|
Americas
|
$
|
13,930
|
|
|
$
|
1,105
|
|
|
$
|
15,035
|
|
|
$
|
9,960
|
|
|
$
|
331
|
|
|
$
|
10,291
|
|
Europe and the Middle East
|
|
2,117
|
|
|
|
44
|
|
|
|
2,161
|
|
|
|
1,771
|
|
|
|
—
|
|
|
|
1,771
|
|
Asia-Pacific
|
|
2,803
|
|
|
|
23
|
|
|
|
2,826
|
|
|
|
3,370
|
|
|
|
—
|
|
|
|
3,370
|
|
Total
|
$
|
18,850
|
|
|
$
|
1,172
|
|
|
$
|
20,022
|
|
|
$
|
15,101
|
|
|
$
|
331
|
|
|
$
|
15,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
|
2017
(1)
|
|
|
Point-in-
Time
|
|
|
Over Time
|
|
|
Total
|
|
|
Point-in-
Time
|
|
|
Over Time
|
|
|
Total
|
|
Americas
|
$
|
41,150
|
|
|
$
|
3,022
|
|
|
$
|
44,172
|
|
|
$
|
27,893
|
|
|
$
|
1,001
|
|
|
$
|
28,894
|
|
Europe and the Middle East
|
|
6,921
|
|
|
|
71
|
|
|
|
6,992
|
|
|
|
5,741
|
|
|
|
26
|
|
|
|
5,767
|
|
Asia-Pacific
|
|
5,657
|
|
|
|
23
|
|
|
|
5,680
|
|
|
|
9,003
|
|
|
|
—
|
|
|
|
9,003
|
|
Total
|
$
|
53,728
|
|
|
$
|
3,116
|
|
|
$
|
56,844
|
|
|
$
|
42,637
|
|
|
$
|
1,027
|
|
|
$
|
43,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
As discussed in Note 1, prior periods have not been adjusted for the adoption of Topic 606.
|
|
Information about Contract Balances
Amounts invoiced in advance of services being provided are accounted for as deferred revenue. Nearly all of the Company’s deferred revenue balance is related software maintenance contracts. Payment terms and conditions vary by contract type, although payment is typically due within 30 to 90 days of contract inception. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts generally do not include a significant financing component. The primary purpose of the Company’s invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, not to receive financing from its customers.
Changes in deferred revenue during the nine months ended September 30, 2018 were as follows (in thousands):
|
|
Amount
|
|
Deferred revenue at December 31, 2017
|
|
$
|
1,090
|
|
Impact of adoption of Topic 606
|
|
|
(2
|
)
|
Deferred revenue at January 1, 2018
|
|
|
1,088
|
|
Fair value of deferred revenue acquired in acquisition, net of recognition
|
|
|
1,693
|
|
Deferral of revenue billed in current period, net of recognition
|
|
|
1,557
|
|
Recognition of revenue deferred in prior periods
|
|
|
(847
|
)
|
Balance as of September 30, 2018
|
|
$
|
3,491
|
|
Unsatisfied Performance Obligations
Revenue expected to be recognized in future periods related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, and contracts where revenue is recognized as invoiced, was approximately $2.1 million as of September 30, 2018. Since the Company typically invoices customers at contract inception, this amount is included in deferred revenue balance. As of September 30, 2018, the Company expects to recognize approximately 19% of the revenue related to these unsatisfied performance obligations during the remainder of 2018, 56% during 2019, and 25% thereafter.
Assets Recognized from the Costs to Obtain a Contract with a Customer
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that certain sales incentive programs (i.e. commissions) meet the requirements to be capitalized. Capitalized incremental costs related to contracts are amortized over the respective contract periods. For the three and nine months ended September 30, 2018, total capitalized costs to obtain contracts were immaterial.
13
Practical Expedients
As discussed in Note 1,
Organization and Summary of Significant Accounting Policies,
and Note 2,
Revenue
, the Company has elected the following practical expedients in accordance with Topic 606:
|
•
|
The Company expenses costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs include internal sales force compensation programs and certain partner sales incentive programs as the Company has determined annual compensation is commensurate with annual sales activities.
|
|
•
|
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expense.
|
|
•
|
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
|
|
•
|
The Company does not consider the time value of money for contracts with original durations of one year or less.
|
3. Business Combinations
On February 14, 2018, the Company acquired 3VR Security, Inc. (“3VR”), a video technology and analytics company, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Eagle Acquisition, Inc., a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), 3VR, and Fortis Advisors LLC, a Delaware limited liability company, acting as Security Holder Representative. Pursuant to the Merger Agreement, at the effective time, Merger Sub merged with and into 3VR and 3VR became a wholly-owned subsidiary of the Company (the “Acquisition”).
Under the terms of the Merger Agreement, at the closing of the Acquisition, the Company acquired all of the outstanding shares of 3VR for total purchase consideration of $6.2 million, consisting of:
|
(i)
|
payment in cash of approximately $1.6 million;
|
|
(ii)
|
issuance of subordinated unsecured promissory notes in an aggregate principal amount of $2.0 million;
|
|
(iii)
|
issuance of 609,830 shares of the Company’s common stock with a value of approximately $2.3 million.
|
An aggregate of up to $1.0 million, or 294,927 shares, of the Company’s common stock issuable at the closing of the transaction were held back for a period of up to 12 months following the closing for the satisfaction of certain indemnification claims. On May 9, 2018, the Company and the Security Holder Representative reached agreement as to the satisfaction of certain of the indemnification claims asserted by the Company at the closing of the Acquisition. As a result, the purchase consideration, and the amount of goodwill recorded, were reduced by $660,000. Of the 294,927 shares that were held back at closing, 181,319 shares were canceled. The remaining 93,406 shares, with a value of approximately $0.3 million, continue to be subject to the terms of the Merger Agreement.
Additionally, in the event that the Company’s subsidiary, 3VR, achieves $24.1 million in product shipments in 2018, the Company will be obligated to issue further earn-out consideration of $3.5 million payable in shares of the Company’s common stock (subject to certain conditions) with a potential maximum earn-out value of $7.0 million in the event that such shipments exceed $48.2 million. Further, in calendar year 2019, the Company may also be obligated to pay, in cash, and subject to certain conditions, contingent consideration equal to the lesser of (a) 35% of the gross margin of certain products sold and services rendered by 3VR in 2018 pursuant to a supply arrangement and (b) $25.0 million, each subject to adjustments. Management has assessed the probability of the issuance of shares related to the earn-out consideration, and the payment of the contingent consideration noted above, and determined it as remote. Accordingly, no value was ascribed to the earn-out as of September 30, 2018.
14
Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. Such estimates and assumptions are subject to change within the measurement period (u
p to one year from the Acquisition). The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):
Cash
|
|
$
|
195
|
|
Accounts receivable
|
|
|
2,029
|
|
Inventory
|
|
|
257
|
|
Prepaid expenses and other current assets
|
|
|
169
|
|
Property and equipment
|
|
|
334
|
|
Trademarks
|
|
|
400
|
|
Customer relationships
|
|
|
2,900
|
|
Developed technology
|
|
|
3,000
|
|
Total identifiable assets acquired
|
|
|
9,284
|
|
Accounts payable
|
|
|
(1,590
|
)
|
Accrued expenses and liabilities
|
|
|
(711
|
)
|
Deferred revenue
|
|
|
(2,928
|
)
|
Debt
|
|
|
(3,622
|
)
|
Total liabilities assumed
|
|
|
(8,851
|
)
|
Net identifiable assets acquired
|
|
|
433
|
|
Goodwill
|
|
|
5,781
|
|
Purchase price
|
|
$
|
6,214
|
|
In June 2018, the Company recorded an adjustment to its accounting for the amount recorded as accounts receivable at acquisition. Accordingly, the fair value of accounts receivable was decreased by $561,000, with a corresponding increase to goodwill and reflected in the Company’s purchase price allocation.
Acquisition related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):
|
Gross Purchased Intangible
Assets
|
|
|
Estimated Useful Life
(in Years)
|
|
Trademarks
|
$
|
400
|
|
|
|
5
|
|
Customer relationships
|
|
2,900
|
|
|
|
10
|
|
Developed technology
|
|
3,000
|
|
|
|
10
|
|
|
$
|
6,300
|
|
|
|
|
|
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of 3VR resulted in $5.8 million of goodwill. With the addition of the 3VR video security and analytics platform, the Company believes this goodwill largely reflects the expansion of its Hirsch product and service offerings through the complementary offerings of 3VR. In accordance with ASC 350, goodwill will not be amortized but will be tested for impairment at least annually in the fourth quarter.
The results of operations of 3VR for the period from the acquisition date through September 30, 2018 are included in the accompanying condensed consolidated statements of operations. Pursuant to ASC 805,
Business Combinations
, the Company incurred and expensed approximately $212,000 and $548,000 in acquisition and transitional costs associated with the acquisition of 3VR during the year ended December 31, 2017 and the nine months ended September 30, 2018, respectively which were primarily general and administrative expenses.
15
4. Fair Value Measurements
The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. Under ASC 820,
Fair Value Measurement and Disclosures
(“ASC 820”), the fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:
|
•
|
Level 1 – Quoted prices (unadjusted) for identical assets and liabilities in active markets;
|
|
•
|
Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly; and
|
|
•
|
Level 3 – Unobservable inputs.
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of September 30, 2018 and December 31, 2017, there were no assets that are measured and recognized at fair value on a recurring basis. There were no cash equivalents as of September 30, 2018 and December 31, 2017.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
Certain of the Company's assets, including intangible assets, and privately-held investments, are measured at fair value on a nonrecurring basis if impairment is indicated. Purchased intangible assets are measured at fair value primarily using discounted cash flow projections. For additional discussion of measurement criteria used in evaluating potential impairment involving goodwill and intangible assets, refer to Note 5,
Goodwill and Intangible Assets
.
Privately-held investments, which are normally carried at cost, are measured at fair value due to events and circumstances that the Company identified as significantly impacting the fair value of investments. The Company estimates the fair value of its privately-held investments using an analysis of the financial condition and near-term prospects of the investee, including recent financing activities and the investee's capital structure.
As of September 30, 2018 and December 31, 2017, the Company had $0.3 million of privately-held investments measured at fair value on a nonrecurring basis which were classified as Level 3 assets due to the absence of quoted market prices and inherent lack of liquidity. The Company reviews its investments to identify and evaluate investments that have an indication of possible impairment. The Company adjusts the carrying value for its privately-held investments for any impairment if the fair value is less than the carrying value of the respective assets on an other-than-temporary basis. The amount of privately-held investments is included in other assets in the accompanying condensed consolidated balance sheets.
Assets and Liabilities Not Measured at Fair Value
The carrying amounts of the Company's accounts receivable, prepaid expenses and other current assets, accounts payable, financial liabilities and other accrued liabilities approximate fair value due to their short maturities.
5. Stockholders’ Equity
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, 40,000 of which have been designated as Series A Participating Preferred Stock, par value $0.001 per share, and 5,000,000 of which have been designated as Series B Non-Voting Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”). No shares of the Company’s Series A Participating Preferred Stock were outstanding as of September 30, 2018 and December 31, 2017. During 2017, the Company’s board of directors (the “Board”) authorized the issuance of up to 5,000,000 shares of the Series B Preferred Stock, 5,000,000 of which were outstanding as of September 30, 2018.
The Board may from time to time, without further action by the Company’s stockholders, direct the issuance of shares of preferred stock in other series and may, at the time of issuance, determine the rights, preferences and limitations of each series, including voting rights, dividend rights and redemption and liquidation preferences. Satisfaction of any dividend preferences of outstanding shares of preferred stock would reduce the amount of funds available for the payment of dividends on shares of the Company’s common stock. Holders of shares of preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of shares of the Company’s common stock. Upon the affirmative vote of the Board, without stockholder approval, the Company may issue shares of preferred stock with voting and conversion rights which could adversely affect the holders of shares of its common stock.
16
Series B Preferred Stock and Private Placement
On December 20, 2017, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of 21 April Fund, Ltd. and 21 April Fund, LP (collectively, the “Purchasers”), pursuant to which the Company, in a private placement, agreed to issue and sell to the Purchasers an aggregate of up to 5,000,000 shares of the Series B Preferred Stock, $0.001 par value per share (collectively referred to as the “Shares”). The Purchasers agreed to purchase an aggregate of 3,000,000 Shares at a price of $4.00 per share in cash at the initial closing of the transaction, and at the sole option of the Company, an additional 2,000,000 Shares at a price of $4.00 per share in cash at a second closing, if any (the “Private Placement”). The total purchase price payable to the Company is $20,000,000, of which $12,000,000 was paid at the initial closing.
On May 30, 2018, the Company issued 2,000,000 Shares,
at a price of $4.00 per share in the second closing of the Private Placement.
Gross proceeds to the Company from
the second closing
were approximately $8.0 million, before deducting fees and certain expenses payable by the Company.
The proceeds from the issuance of the Shares are required to be used to pay off existing debt obligations of the Company and to fund future acquisitions of technology, business and other assets by the Company.
Each Share shall be convertible into the Company’s common stock (i) following the sixth (6th) anniversary of the initial closing of the Private Placement or (ii) if earlier, during the thirty (30) day period following the last trading day of any period of three (3) or more consecutive trading days that the closing market price of the Company’s common stock exceeds $10.00. Each Share is convertible at the option of the holder of shares of Series B Preferred Stock into such number of shares of the Company’s common stock determined by taking the accreted value of such Share (purchase price plus accrued but unpaid dividends) and dividing such value by the stated value of such Share ($4.00 per share, subject to adjustment for dilutive issuances, stock splits, stock dividends and the like); provided, however, that the Company shall not convert any Shares if doing so would cause the holder thereof, along with its affiliates, to beneficially own in excess of 19.9% of the outstanding common stock immediately after giving effect to the applicable conversion (the “Ownership Limitation”), unless waiver of this restriction has been effected by the holder requesting conversion of Shares.
Based on the current conversion price, the outstanding shares of Series B Preferred Stock as of September 30, 2018 would be convertible into 5,000,000 shares of the Company’s common stock. However, the conversion rate will be subject to adjustment in the event of certain instances, such as if the Company issues shares of its common stock at a price less than $4.00 per common share, subject to a minimum conversion price of $3.27 per share. As of September 30, 2018, none of the contingent conditions to adjust the total common shares to convert the Shares had been met.
Each Share is entitled to an annual dividend of 5% for the first six (6) years following the issuance of such Share and 3% for each year thereafter, with the Company retaining the option to settle each year’s dividend after the tenth (10
th
) year in cash. The dividends accrue and are payable in kind upon such time as the Shares convert into the Company’s common stock. In general, the Shares are not entitled to vote except in certain limited cases, including in change of control transactions where the price per share distributable to the Company’s stockholders is expected to be less than $4.00 per share. The Certificate of Designation with respect to the Series B Preferred Stock further provides that in the event of, among other things, any change of control, liquidation or dissolution of the Company, the holders of the Series B Preferred Stock will be entitled to receive, on a pari passu basis with the holders of the common stock, the same amount and form of consideration that the holders of the Company’s common stock receive (on an as-if-converted-to-common-stock basis and without regard to the Ownership Limitation).
Sale of Common Stock
In May 2017, the Company sold an aggregate of 2,845,360 shares of its common stock at a public offering price of $4.85 per share in an underwritten public offering. The Company received net proceeds of approximately $12.6 million from the sale of the common stock in the public offering, after deducting the underwriting discount and other offering related expenses of $1.2 million.
Common Stock Warrants
On August 13, 2014, in connection with the Company’s entry into a consulting agreement, the Company issued a consultant a warrant to purchase up to 85,000 shares of the Company’s common stock at a per share exercise price of $10.70 (the “2014 Consultant Warrant”). One fourth of the shares under the warrant are exercisable for cash three months from the date the 2014 Consultant Warrant was issued and quarterly thereafter. The 2014 Consultant Warrant expires on August 13, 2019. In the event of an acquisition of the Company, the 2014 Consultant Warrant shall terminate and no longer be exercisable as of the closing of the acquisition. As of September 30, 2018, the 2014 Consultant Warrant had not been exercised.
17
On February 8, 2017, the Company entered into Loan and Security Agreements (each, a “Loan and Security Agreement”) with each of East West Bank ("EWB") and Venture Lending & Leasing VII, Inc. and Venture Lending &
Leasing VIII, Inc. (collectively referred to as “VLL7 and VLL8”) as discussed in Note 7,
Financial Liabilities
. The Loan and Security Agreement with EWB, as amended, provides for a $16.0 million revolving loan facility (the “Revolving Loan Facility”), and
the Loan and Security Agreement with VLL7 and VLL8 provides for a term loan (the “Term Loan”) in an aggregate principal amount of $10.0 million (the “Term Loan Facility”). In connection with the Revolving Loan Facility, the Company issued to EWB a warrant
(the "EWB Warrant") to purchase up to 40,000 shares of the Company's common stock at a per share exercise price of $3.64, and in connection with the Company’s Term Loan Facility, issued to each of VLL7 and VLL8 a warrant to purchase 290,000 shares of the
Company's common stock at a per share exercise price of $2.00 (the “VLL7 Warrant” and the “VLL8 Warrant,” respectively). The Company calculated the fair value of the EWB Warrant, the VLL7 Warrant and the VLL8 Warrant using the Black-Scholes pricing model u
sing the following assumptions: estimated volatility of 78.8%, risk-free interest rate of 1.94%, no dividend yield, and an expected life of five years. The fair values of the EWB Warrant, the VLL7 Warrant and the VLL8 Warrant of $125,000, $1,037,500 and $1
,037,500, respectively, were classified as equity as the settlement of the warrants will be in shares and is within the control of the Company. Each of the EWB Warrant, the VLL7 Warrant and the VLL8 Warrant is immediately exercisable for cash or by net exe
rcise and will expire five years after its issuance, or on February 8, 2022. In connection with entering into the Loan and Security Agreements with EWB and VLL7 and VLL8, warrants to purchase an aggregate of 400,000 shares of common stock issued to the Com
pany’s previous lender were cancelled.
In connection with securing of the new credit facilities and cancelling of all the warrants previously issued to the previous lender, the Company issued a warrant to a consultant to purchase 60,000 shares of its common stock at an exercise price of $4.60 per share (the “2017 Consultant Warrant”). The Company calculated the fair value of the 2017 Consultant Warrant using the Black Scholes pricing model using the following assumptions: estimated volatility of 78.8%, risk-free interest rate of 1.22%, no dividend yield, and an expected life of two years. The fair value of the 2017 Consultant Warrant of $119,000 was classified as equity as the settlement of the warrant will be in shares and is within the control of the Company. The 2017 Consultant Warrant is immediately exercisable for cash or by net exercise and will expire two years after its issuance, or on February 8, 2019.
Below is the summary of outstanding warrants issued by the Company as of September 30, 2018:
Warrant Type
|
|
Number of Shares
Issuable Upon
Exercise
|
|
|
Weighted
Average
Exercise Price
|
|
|
Issue Date
|
|
Expiration Date
|
2014 Consultant Warrant
|
|
|
85,000
|
|
|
$
|
10.70
|
|
|
August 13, 2014
|
|
August 13, 2019
|
East West Bank Warrant
|
|
|
40,000
|
|
|
|
3.64
|
|
|
February 8, 2017
|
|
February 8, 2022
|
VLL7 and VLL8 Warrants
|
|
|
580,000
|
|
|
|
2.00
|
|
|
February 8, 2017
|
|
February 8, 2022
|
2017 Consultant Warrant
|
|
|
60,000
|
|
|
|
4.60
|
|
|
February 8, 2017
|
|
February 8, 2019
|
Total
|
|
|
765,000
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Plans
The Company has a stock-based compensation plan to attract, motivate, retain and reward employees, directors and consultants by providing its Board or a committee of the Board the discretion to award equity incentives to these persons. The Company’s stock-based compensation plan consists of the 2011 Incentive Compensation Plan (the “2011 Plan”), as amended. Shares are no longer available for issuance under the Company’s 2010 Bonus and Incentive Plan (the “2010 Plan”) and the 2007 Stock Option Plan (the “2007 Plan”).
Stock Incentive Plans
On June 6, 2011, the Company’s stockholders approved the 2011 Plan, which is administered by the Compensation Committee of the Board. The 2011 Plan provides that stock options, stock units, restricted shares, and stock appreciation rights may be granted to executive officers, directors, consultants, and other key employees. The Company reserved 400,000 shares of common stock under the 2011 Plan, plus 459,956 shares of common stock that remained available for delivery under the 2007 Plan and the 2010 Plan as of June 6, 2011. In aggregate, as of June 6, 2011, 859,956 shares were available for future grants under the 2011 Plan, including shares rolled over from 2007 Plan and 2010 Plan. Subsequent to June 6, 2011 through December 31, 2017,
the number of shares of common stock authorized for issuance under the 2011 Plan has been increased by an aggregate of 3,000,000 shares. On May 31, 2018, the Company’s stockholders approved an amendment to the 2011 Plan to increase the number of shares of common stock authorized for issuance by 500,000 shares.
18
Stock Option Plans
A summary of activity for the Company’s stock option plans for the nine months ended September 30, 2018 follows:
|
|
Number
Outstanding
|
|
|
Average Exercise
Price per Share
|
|
|
Weighted Average
Remaining
Contractual Term
(Years)
|
|
|
Average
Intrinsic
Value
|
|
Balance at December 31, 2017
|
|
|
672,441
|
|
|
$
|
6.28
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cancelled or Expired
|
|
|
(47,970
|
)
|
|
|
11.56
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,500
|
)
|
|
|
5.20
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2018
|
|
|
621,971
|
|
|
$
|
5.87
|
|
|
|
6.93
|
|
|
$
|
721,856
|
|
Vested or expected to vest at
September 30, 2018
|
|
|
618,324
|
|
|
$
|
5.88
|
|
|
|
6.93
|
|
|
$
|
716,020
|
|
Exercisable at September 30, 2018
|
|
|
510,856
|
|
|
$
|
6.20
|
|
|
|
6.77
|
|
|
$
|
544,072
|
|
The following table summarizes information about options outstanding as of September 30, 2018:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted
Average Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average Exercise
Price
|
|
$4.36 - $7.20
|
|
|
472,810
|
|
|
|
7.50
|
|
|
$
|
4.47
|
|
|
|
361,695
|
|
|
$
|
4.50
|
|
$7.50 - $11.30
|
|
|
127,415
|
|
|
|
5.39
|
|
|
|
9.42
|
|
|
|
127,415
|
|
|
|
9.42
|
|
$12.00 - $19.70
|
|
|
17,396
|
|
|
|
3.73
|
|
|
|
13.66
|
|
|
|
17,396
|
|
|
|
13.66
|
|
$21.70 - $24.20
|
|
|
4,350
|
|
|
|
2.93
|
|
|
|
23.27
|
|
|
|
4,350
|
|
|
|
23.27
|
|
$4.36 - $24.20
|
|
|
621,971
|
|
|
|
6.93
|
|
|
$
|
5.87
|
|
|
|
510,856
|
|
|
$
|
6.20
|
|
At September 30, 2018, there was $0.3 million of unrecognized stock-based compensation expense, net of estimated forfeitures related to unvested options, that is expected to be recognized over a weighted-average period of 0.9 years.
Restricted Stock Units
The following is a summary of restricted stock unit (“RSU”) activity for the nine months ended September 30, 2018:
|
|
Number
of RSUs
|
|
|
Weighted Average
Fair Value
|
|
Unvested at December 31, 2017
|
|
|
1,460,044
|
|
|
$
|
3.08
|
|
Granted
|
|
|
710,763
|
|
|
|
4.02
|
|
Vested
|
|
|
(457,345
|
)
|
|
|
3.60
|
|
Forfeited
|
|
|
(258,417
|
)
|
|
|
2.67
|
|
Unvested at September 30, 2018
|
|
|
1,455,045
|
|
|
$
|
3.45
|
|
Shares vested but not released
|
|
|
372,018
|
|
|
$
|
3.07
|
|
The fair value of the Company’s RSUs is calculated based upon the fair market value of the Company’s stock on the date of grant. As of September 30, 2018, there was $4.6 million of unrecognized compensation expense related to unvested RSUs granted, which is expected to be recognized over a weighted average period of 2.6 years.
19
Stock-Based Compensation Expense
The following table illustrates all employee stock-based compensation expense related to stock options and RSUs included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017 (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost of revenue
|
|
$
|
22
|
|
|
$
|
24
|
|
|
$
|
63
|
|
|
$
|
71
|
|
Research and development
|
|
|
125
|
|
|
|
130
|
|
|
|
397
|
|
|
|
361
|
|
Selling and marketing
|
|
|
171
|
|
|
|
193
|
|
|
|
519
|
|
|
|
463
|
|
General and administrative
|
|
|
385
|
|
|
|
317
|
|
|
|
1,008
|
|
|
|
1,021
|
|
Total
|
|
$
|
703
|
|
|
$
|
664
|
|
|
$
|
1,987
|
|
|
$
|
1,916
|
|
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance as of September 30, 2018 was as follows:
Exercise of outstanding stock options, vesting of RSUs, and issuance of RSUs vested but not released
|
|
|
2,449,034
|
|
ESPP
|
|
|
293,888
|
|
Shares of common stock available for grant under the 2011 Plan
|
|
|
672,223
|
|
Noncontrolling interest in Bluehill ID AG
|
|
|
10,355
|
|
Warrants to purchase common stock
|
|
|
765,000
|
|
Shares of common stock issuable on conversion of Series B Preferred Stock
|
|
|
5,000,000
|
|
Total
|
|
|
9,190,500
|
|
Net Loss per Common Share Attributable to Identiv Stockholders’ Equity
Basic and diluted net loss per share is based upon the weighted average number of common shares outstanding during the period. The following common stock equivalents have been excluded from diluted net loss per share for the nine months ended September 30, 2018 and 2017 because their inclusion would be anti-dilutive:
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Shares of common stock subject to outstanding RSUs
|
|
|
1,455,045
|
|
|
|
1,698,900
|
|
Shares of common stock subject to outstanding options
|
|
|
621,971
|
|
|
|
675,485
|
|
Shares of common stock subject to outstanding warrants
|
|
|
765,000
|
|
|
|
765,000
|
|
Shares of common stock reserved to acquire remaining share of noncontrolling interest
|
|
|
10,355
|
|
|
|
10,355
|
|
Shares of common stock issuable upon conversion of Series B Preferred Stock
|
|
|
5,000,000
|
|
|
|
—
|
|
Total
|
|
|
7,852,371
|
|
|
|
3,149,740
|
|
Accumulated Other Comprehensive Income
Accumulated other comprehensive income at September 30, 2018 and December 31, 2017 consists of foreign currency translation adjustments totaling $2.1 million and $2.7 million, respectively.
Restricted Stock Unit Net Share Settlements
During the nine months ended September 30, 2018 and 2017, the Company repurchased 109,666 and 121,384 shares, respectively of common stock surrendered to the Company to satisfy tax withholding obligations in connection with the vesting of RSUs issued to employees.
20
6
. Balance Sheet Components
The Company’s inventories are stated at the lower of cost or net realizable value. Inventories consist of (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
4,530
|
|
|
$
|
3,700
|
|
Work-in-progress
|
|
|
7
|
|
|
|
22
|
|
Finished goods
|
|
|
7,436
|
|
|
|
7,404
|
|
Total
|
|
$
|
11,973
|
|
|
$
|
11,126
|
|
Property and equipment, net consists of (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Building and leasehold improvements
|
|
$
|
2,050
|
|
|
$
|
1,917
|
|
Furniture, fixtures and office equipment
|
|
|
1,852
|
|
|
|
1,771
|
|
Plant and machinery
|
|
|
9,026
|
|
|
|
9,411
|
|
Purchased software
|
|
|
2,163
|
|
|
|
2,050
|
|
Construction-in-progress
|
|
|
217
|
|
|
|
-
|
|
Total
|
|
|
15,308
|
|
|
|
15,149
|
|
Accumulated depreciation
|
|
|
(13,173
|
)
|
|
|
(13,106
|
)
|
Property and equipment, net
|
|
$
|
2,135
|
|
|
$
|
2,043
|
|
The Company recorded depreciation expense of $0.3 million during each of the three months ended September 30, 2018 and 2017, and $0.9 million and $1.0 million during the nine months ended September 30, 2018 and 2017, respectively.
Other accrued expenses and liabilities consist of (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accrued professional fees
|
|
$
|
1,205
|
|
|
$
|
1,065
|
|
Accrued warranties
|
|
|
319
|
|
|
|
75
|
|
Income taxes payable
|
|
|
47
|
|
|
|
19
|
|
Other accrued expenses
|
|
|
1,426
|
|
|
|
861
|
|
Total
|
|
$
|
2,997
|
|
|
$
|
2,020
|
|
7. Goodwill and Intangible Assets
Goodwill
The following table summarizes the carrying amount of goodwill resulting from the acquisition of 3VR (in thousands):
|
|
Premises
|
|
|
Credentials
|
|
|
Identity
|
|
|
All Other
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Acquisition of business
|
|
|
5,781
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,781
|
|
Balance at September 30, 2018
|
|
$
|
5,781
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,781
|
|
In accordance with ASC 350, the Company tests goodwill with indefinite lives annually for impairment and assesses whether there are any indicators of impairment on an interim basis. The Company performs interim goodwill impairment reviews between its annual reviews if certain events and circumstances have occurred, including a deterioration in general economic conditions, an increased competitive environment, a change in management, key personnel, strategy or customers, negative or declining cash flows, or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods. The Company believes the methodology that it uses to review impairment of goodwill, which includes a significant amount of judgment and estimates, provides it with a reasonable basis to determine whether impairment has occurred. However, many of the factors employed in determining whether its goodwill is impaired are outside of its control and it is reasonably likely that assumptions and estimates will change in future periods. These changes in assumptions and estimates could result in future impairments. During the quarter ended September 30, 2018, the Company noted no indicators of goodwill impairment and concluded no further testing necessary.
21
Intangible Assets
The following table summarizes the gross carrying amount and accumulated amortization for intangible assets resulting from acquisitions (in thousands):
|
|
|
|
|
|
Developed
|
|
|
Customer
|
|
|
|
|
|
|
|
Trademarks
|
|
|
Technology
|
|
|
Relationships
|
|
|
Total
|
|
Amortization period (in years)
|
|
5
|
|
|
10 – 12
|
|
|
4 – 12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount at December 31, 2017
|
|
$
|
—
|
|
|
$
|
4,600
|
|
|
$
|
10,639
|
|
|
$
|
15,239
|
|
Accumulated amortization
|
|
|
—
|
|
|
|
(3,257
|
)
|
|
|
(7,617
|
)
|
|
|
(10,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net at December 31, 2017
|
|
$
|
—
|
|
|
$
|
1,343
|
|
|
$
|
3,022
|
|
|
$
|
4,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount at September 30, 2018
|
|
$
|
400
|
|
|
$
|
7,600
|
|
|
$
|
13,539
|
|
|
$
|
21,539
|
|
Accumulated amortization
|
|
|
(50
|
)
|
|
|
(3,779
|
)
|
|
|
(8,555
|
)
|
|
|
(12,384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net at September 30, 2018
|
|
$
|
350
|
|
|
$
|
3,821
|
|
|
$
|
4,984
|
|
|
$
|
9,155
|
|
Each period, the Company evaluates the estimated remaining useful lives of its intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. If a revision to the remaining period of amortization is warranted, amortization is prospectively adjusted over the remaining useful life of the intangible asset. Intangible assets subject to amortization are amortized over their useful lives as shown in the table above. The Company evaluates its amortizable intangible assets for impairment at the end of each reporting period. The Company did not identify any impairment indicators during the three or nine months ended September 30, 2018.
The following table illustrates the amortization expense included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017, respectively (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost of revenue
|
|
$
|
186
|
|
|
$
|
112
|
|
|
$
|
522
|
|
|
$
|
336
|
|
Selling and marketing
|
|
|
345
|
|
|
|
252
|
|
|
|
988
|
|
|
|
756
|
|
Total
|
|
$
|
531
|
|
|
$
|
364
|
|
|
$
|
1,510
|
|
|
$
|
1,092
|
|
The estimated annual future amortization expense for purchased intangible assets with definite lives as of September 30, 2018 is as follows (in thousands):
2018 (remaining three months)
|
|
$
|
532
|
|
2019
|
|
|
2,125
|
|
2020
|
|
|
2,125
|
|
2021
|
|
|
670
|
|
2022
|
|
|
670
|
|
Thereafter
|
|
|
3,033
|
|
Total
|
|
$
|
9,155
|
|
8. Long-Term Payment Obligation
Hirsch Acquisition – Secure Keyboards and Secure Networks
. Prior to the 2009 acquisition of Hirsch by the Company, effective November 1994, Hirsch had entered into a settlement agreement (the “1994 Settlement Agreement”) with two limited partnerships, Secure Keyboards, Ltd. (“Secure Keyboards”) and Secure Networks, Ltd. (“Secure Networks”). At the time, Secure Keyboards and Secure Networks were related to Hirsch through certain common shareholders and limited partners, including Hirsch’s then President Lawrence Midland, who resigned as President of the Company effective July 31, 2014. Immediately following the acquisition, Mr. Midland owned 30% of Secure Keyboards and 9% of Secure Networks. Secure Networks was dissolved in 2012 and Mr. Midland owned 24.5% of Secure Keyboards upon his resignation effective July 31, 2014.
22
On April 8, 2009, Secure Keyboards, Secure Networks and Hirsch amended and restated the 1994 Settlement Agreement to replace the royalty-based payment arrangement under the 1994 Settlement Agreement with a new, definitive installment payment schedu
le with contractual payments to be made in future periods through 2020 (the “2009 Settlement Agreement”). The Company was not an original party to the 2009 Settlement Agreement as the acquisition of Hirsch occurred subsequent to the 2009 Settlement Agreeme
nt being entered into. The Company has, however, provided Secure Keyboards and Secure Networks with a limited guarantee of Hirsch’s payment obligations under the 2009 Settlement Agreement (the “Guarantee”). The 2009 Settlement Agreement and the Guarantee b
ecame effective upon the acquisition of Hirsch on April 30, 2009. The Company’s annual payment to Secure Keyboards and Secure Networks in any given year under the 2009 Settlement Agreement is subject to an increase based on the percentage increase in the C
onsumer Price Index during the previous calendar year.
The final payment to Secure Networks was made on January 30, 2012 and the final payment to Secure Keyboards is due on January 30, 2021. The Company’s payment obligations under the 2009 Settlement Agreement will continue through January 30, 2021, unless the Company elects at any time on or after January 1, 2012 to earlier satisfy its obligations by making a lump-sum payment to Secure Keyboards. The Company does not intend to make a lump-sum payment and therefore a portion of the payment obligation amount is classified as a long-term liability.
The Company included $0.1 million and $0.2 million of interest expense during each of the three and nine months ended September 30, 2018, respectively, and $0.1 million and $0.3 million of interest expense during the three and nine months ended September 30, 2017, respectively, in its condensed consolidated statements of operations for interest accreted on the long-term payment obligation.
The ongoing payment obligation in connection with the Hirsch acquisition as of September 30, 2018 is as follows (in thousands):
2018 (remaining three months)
|
|
$
|
310
|
|
2019
|
|
|
1,277
|
|
2020
|
|
|
1,422
|
|
2021
|
|
|
367
|
|
Present value discount factor
|
|
|
(230
|
)
|
Total
|
|
|
3,146
|
|
Less: Current portion - payment obligation
|
|
|
(989
|
)
|
Long-term payment obligation
|
|
$
|
2,157
|
|
9. Financial Liabilities
Financial liabilities consist of (in thousands):
|
September 30,
|
|
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
Notes payable
|
$
|
2,000
|
|
|
$
|
—
|
|
Term loan
|
|
—
|
|
|
|
5,000
|
|
Revolving loan facility
|
|
11,321
|
|
|
|
8,736
|
|
Total before discount and debt issuance costs
|
|
13,321
|
|
|
|
13,736
|
|
Less: Current portion of notes payable
|
|
(2,000
|
)
|
|
|
—
|
|
Less: Current portion of financial liabilities
|
|
(11,245
|
)
|
|
|
(9,829
|
)
|
Less: Current portion of unamortized discount and debt issuance costs
|
|
(76
|
)
|
|
|
(404
|
)
|
Less: Long-term portion of unamortized discount and debt issuance costs
|
|
—
|
|
|
|
(582
|
)
|
Long-term financial liabilities
|
$
|
—
|
|
|
$
|
2,921
|
|
Bank Term Loan and Revolving Loan Facility
On February 8, 2017, the Company entered into Loan and Security Agreements with EWB and VLL7 and VLL8, which provide for a $16.0 million Revolving Loan Facility and a $10.0 million Term Loan Facility, respectively. In connection with the closing of such agreements, the Company repaid all outstanding amounts under its credit agreement with its previous lender.
23
The Revolving Loan Facility, as amended, bears interest at prime r
ate plus 1.0%, matures and becomes due and payable on February 8, 2019 and includes a non-formula line of credit sublimit of up to $3.0 million. Interest is payable monthly beginning on March 1, 2017. The Company may voluntarily prepay amounts outstanding
under the Revolving Loan Facility, without prepayment charges. In the event the Revolving Loan Facility is terminated prior to its maturity, the Company would be required to pay an early termination fee in the amount of 1.0% of the revolving line. Addition
al borrowing requests under the Revolving Loan Facility are subject to various customary conditions precedent, including satisfaction of a borrowing base test as more fully described in the Revolving Loan Facility.
The Term Loan matures on August 8, 2020. Payments under the Term Loan Facility are interest-only for the first twelve months at a per annum rate of 12.5%, followed by principal and interest payments amortized over the remaining term of the Term Loan. If the Company elects to prepay the Term Loan before its maturity, all accrued and unpaid interest outstanding at the prepayment date will be due and payable, together with all the scheduled interest that would have accrued and been payable through the stated maturity of the Term Loan, provided that at any time after the Company has made at least twelve scheduled amortization payments of principal and interest on the Term Loan, the Company shall only be required to pay 80% of the scheduled interest that would have accrued and been payable through the stated maturity of the Term Loan. On December 28, 2017, the Company paid down an aggregate principal amount of $5.0 million of the $10.0 million outstanding principal balance of its Term Loan Facility. The Company paid to VLL7 and VLL8 approximately $5.9 million, consisting of $5.0 million in outstanding principal, and $0.9 million of accrued and unpaid interest outstanding at the prepayment date, together with all scheduled interest that would have accrued and been payable through the stated maturity of the Term Loan. As a result, the Company recorded a loss on extinguishment of debt totaling $1.8 million, representing the difference between the reacquisition price of the repaid portion of the Term Loan and the its net carrying amount.
On May 31, 2018, the Company paid off the remaining amounts payable under its $10.0 million principal amount term loan under the Loan and Security Agreement with VLL7 and VLL8.
The Company paid to VLL7 and VLL8 approximately $5.2 million, consisting of $4.6 million in outstanding principal, and $0.6 million of accrued and unpaid interest outstanding at the prepayment date together with all the scheduled interest that would have accrued and been payable through the stated maturity of the term loan. As a result, the Company recorded a loss on extinguishment of debt totaling $1.4 million, representing the difference between the reacquisition price of the repaid portion of the Term Loan and its carrying amount.
The Company was obligated to pay customary fees and expenses, including customary facility fees for credit facilities of this size and type, in the aggregate amount of approximately $120,000, in connection with the closing of the two facilities. An additional facility fee of $40,000 was paid in connection with the Revolving Loan Facility on February 8, 2018.
Each of the Revolving Loan Facility and the Term Loan Facility contain customary representations and warranties and customary affirmative and negative covenants, including, limits or restrictions on the Company's ability to incur liens, incur indebtedness, make certain restricted payments, merge or consolidate and dispose of assets. The Revolving Loan Facility also contains various financial covenants, including but not limited to a liquidity covenant requiring the Company to maintain at least $4.0 million of cash. In addition, each of the Revolving Loan Facility and the Term Loan Facility contains customary events of default that entitle EWB or VLL7 and VLL8, as appropriate, to cause any or all of the Company's indebtedness under the Revolving Loan Facility or the Term Loan Facility, respectively, to become immediately due and payable. The events of default (some of which are subject to applicable grace or cure periods), include, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults. Upon the occurrence and during the continuance of an event of default, EWB and VLL7 and VLL8 may terminate their lending commitments and/or declare all or any part of the unpaid principal of all loans, all interest accrued and unpaid thereon and all other amounts payable under the Loan and Security Agreements to be immediately due and payable.
As of September 30, 2018, the Company was in compliance with all financial covenants under the Revolving Loan Facility.
The proceeds of the Term Loan and the initial draw under the Revolving Loan Facility, after payment of fees and expenses, were used to repay all outstanding amounts under the credit agreement with the Company’s previous lender. In connection with the repayment, warrants to purchase an aggregate of 400,000 shares of common stock issued to the Company’s previous lender were cancelled. The proceeds of any additional draws under the Revolving Loan Facility will be used for working capital and other general corporate purposes.
On February 14, 2018, the Company completed the acquisition of 3VR. As part of the purchase price consideration paid in the acquisition of 3VR, the Company issued subordinated unsecured promissory notes (“notes payable”) in the aggregate principal amount of $2.0 million, with an annual interest rate of 3.0%, payable on the one year anniversary of the closing date. On February 21, 2018, the Company paid 3VR’s lender $3.6 million in full repayment of all indebtedness outstanding of 3VR.
24
10. Income Taxes
The Company conducts business globally and, as a result, files federal, state and foreign tax returns. The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for amounts it believes are the probable outcomes, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the condensed consolidated financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal.
In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings, as of December 31, 2017.
As the Company’s previously unremitted earnings have now been subjected to U.S. federal income tax, any repatriation of these earnings to the U.S. would not be expected to incur significant additional taxes related to such amounts. The Company continues to assert that its foreign earnings are indefinitely reinvested in its overseas operations, but in light of the Act, the Company continues to evaluate its position on that assertion.
The Company applies the provisions of, and accounted for uncertain tax positions in accordance with ASC 740,
Income Taxes
(“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The Company generally is no longer subject to tax examinations for years prior to 2013. However, if loss carryforwards of tax years prior to 2013 are utilized in the U.S., these tax years may become subject to investigation by the tax authorities. While timing of the resolution and/or finalization of tax audits is uncertain, the Company does not believe that its unrecognized tax benefits would materially change in the next 12 months.
11. Segment Reporting and Geographic Information
ASC 280,
Segment Reporting
(“ASC 280”) establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses and about which separate financial information is available to its chief operating decision makers (“CODM”). The Company’s CODM is its CEO.
The Company is organized into four reportable operating segments: Premises, Identity, Credentials and All Other.
The CODM reviews financial information and business performance for each operating segment. The Company evaluates the performance of its operating segments at the revenue and gross profit levels. The Company does not report total assets, capital expenditures or operating expenses by operating segment as such information is not used by the CODM for purposes of assessing performance or allocating resources.
25
Net revenue and gross profit information by segment for the three and nine
months ended September 30, 2018 and 2017 is as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Premises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
9,364
|
|
|
$
|
5,916
|
|
|
$
|
25,691
|
|
|
$
|
17,058
|
|
Gross profit
|
|
|
5,363
|
|
|
|
3,399
|
|
|
|
14,336
|
|
|
|
9,543
|
|
Gross profit margin
|
|
|
57
|
%
|
|
|
57
|
%
|
|
|
56
|
%
|
|
|
56
|
%
|
Identity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
3,826
|
|
|
|
3,421
|
|
|
|
9,760
|
|
|
|
10,568
|
|
Gross profit
|
|
|
1,337
|
|
|
|
1,229
|
|
|
|
3,369
|
|
|
|
3,667
|
|
Gross profit margin
|
|
|
35
|
%
|
|
|
36
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Credentials:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
6,832
|
|
|
|
6,095
|
|
|
|
21,393
|
|
|
|
16,035
|
|
Gross profit
|
|
|
1,784
|
|
|
|
1,233
|
|
|
|
5,440
|
|
|
|
4,026
|
|
Gross profit margin
|
|
|
26
|
%
|
|
|
20
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
All Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
Gross profit margin
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
167
|
%
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
20,022
|
|
|
|
15,432
|
|
|
|
56,844
|
|
|
|
43,664
|
|
Gross profit
|
|
|
8,484
|
|
|
|
5,861
|
|
|
|
23,145
|
|
|
|
17,241
|
|
Gross profit margin
|
|
|
42
|
%
|
|
|
38
|
%
|
|
|
41
|
%
|
|
|
39
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,860
|
|
|
|
1,597
|
|
|
|
5,384
|
|
|
|
4,584
|
|
Selling and marketing
|
|
|
3,915
|
|
|
|
3,448
|
|
|
|
12,176
|
|
|
|
10,142
|
|
General and administrative
|
|
|
2,641
|
|
|
|
1,247
|
|
|
|
7,952
|
|
|
|
5,119
|
|
Restructuring and severance
|
|
|
223
|
|
|
|
(49
|
)
|
|
|
591
|
|
|
|
(49
|
)
|
Total operating expenses:
|
|
|
8,639
|
|
|
|
6,243
|
|
|
|
26,103
|
|
|
|
19,796
|
|
Loss from operations
|
|
|
(155
|
)
|
|
|
(382
|
)
|
|
|
(2,958
|
)
|
|
|
(2,555
|
)
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(291
|
)
|
|
|
(643
|
)
|
|
|
(1,239
|
)
|
|
|
(1,995
|
)
|
(Loss) gain on extinguishment of debt, net
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,369
|
)
|
|
|
977
|
|
Foreign currency gains (losses), net
|
|
|
200
|
|
|
|
(51
|
)
|
|
|
354
|
|
|
|
(202
|
)
|
Loss before income taxes and noncontrolling
interest
|
|
$
|
(246
|
)
|
|
$
|
(1,076
|
)
|
|
$
|
(5,212
|
)
|
|
$
|
(3,775
|
)
|
Geographic net revenue is based on the customer’s ship-to location. Information regarding net revenue by geographic region for the three and nine months ended September 30, 2018 and 2017 is as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Americas
|
|
$
|
15,035
|
|
|
$
|
10,291
|
|
|
$
|
44,172
|
|
|
$
|
28,894
|
|
Europe and the Middle East
|
|
|
2,161
|
|
|
|
1,771
|
|
|
|
6,992
|
|
|
|
5,767
|
|
Asia-Pacific
|
|
|
2,826
|
|
|
|
3,370
|
|
|
|
5,680
|
|
|
|
9,003
|
|
Total
|
|
$
|
20,022
|
|
|
$
|
15,432
|
|
|
$
|
56,844
|
|
|
$
|
43,664
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
75
|
%
|
|
|
67
|
%
|
|
|
78
|
%
|
|
|
66
|
%
|
Europe and the Middle East
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
12
|
%
|
|
|
13
|
%
|
Asia-Pacific
|
|
|
14
|
%
|
|
|
22
|
%
|
|
|
10
|
%
|
|
|
21
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
26
Long-lived assets by geographic location as of September 30, 2018 and December 31, 2017 are as follows (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
1,106
|
|
|
$
|
868
|
|
Europe and the Middle East
|
|
|
50
|
|
|
|
89
|
|
Asia-Pacific
|
|
|
979
|
|
|
|
1,086
|
|
Total property and equipment, net
|
|
$
|
2,135
|
|
|
$
|
2,043
|
|
12. Restructuring and Severance
On February 14, 2018, the Company acquired 3VR. As a result of the acquisition, in the three and nine months ended September 30, 2018, the Company incurred restructuring and severance expenses of $0.2 million and $0.6 million, respectively, consisting of facility rental related costs of $0.1 million and $0.3 million, respectively, and severance related costs of $0.1 million and $0.3 million, respectively. In the first quarter of 2018, the Company engaged a property management firm to actively market and search for a tenant to sublease the newly acquired 3VR office facility in San Francisco, California. In the third quarter of 2018, the Company entered into an agreement with a tenant to sublease the entire facility over the remaining term of the original lease.
In the three and nine months ended September 30, 2017, the Company recorded a credit resulting from actual expenditures being less than originally accrued associated with the worldwide restructuring plan implemented in the first quarter of 2016.
Restructuring and severance activities during the nine months ended September 30, 2018 and 2017 were as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
237
|
|
Restructuring expense incurred for the period
|
|
|
223
|
|
|
|
(49
|
)
|
|
|
591
|
|
|
|
(49
|
)
|
Payments and non-cash item adjustment during
the period
|
|
|
(223
|
)
|
|
|
49
|
|
|
|
(591
|
)
|
|
|
(188
|
)
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
13. Commitments and Contingencies
The following table summarizes the Company’s principal contractual commitments as of September 30, 2018 (in thousands):
|
|
Operating
Leases (a)
|
|
|
Purchase
Commitments
|
|
|
Other
Contractual
Commitments
|
|
|
Total
|
|
2018 (remaining three months)
|
|
$
|
498
|
|
|
$
|
10,535
|
|
|
$
|
91
|
|
|
$
|
11,124
|
|
2019
|
|
|
1,979
|
|
|
|
4,035
|
|
|
|
33
|
|
|
|
6,047
|
|
2020
|
|
|
1,782
|
|
|
|
450
|
|
|
|
—
|
|
|
|
2,232
|
|
2021
|
|
|
1,357
|
|
|
|
450
|
|
|
|
—
|
|
|
|
1,807
|
|
2022
|
|
|
1,133
|
|
|
|
450
|
|
|
|
—
|
|
|
|
1,583
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
6,749
|
|
|
$
|
15,920
|
|
|
$
|
124
|
|
|
$
|
22,793
|
|
|
(a)
|
Operating lease payments have not been reduced by sublease rentals of $2.8 million due in the future under noncancelable subleases.
|
Purchase commitments for inventories are highly dependent upon forecasts of customer demand. Due to the uncertainty in demand from its customers, the Company may have to change, reschedule, or cancel purchases or purchase orders from its suppliers. These changes may lead to vendor cancellation charges on these purchases or contractual commitments.
27
The Company provides warranties on certain
product sales for periods ranging from 12 to 24 months, and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product return rates and expected cos
ts to repair or to replace the products under warranty. The Company currently establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior 12 months’ sales activities. If actual
return rates and/or repair and replacement costs differ significantly from the Company’s estimates, adjustments to recognize additional cost of sales may be required in future periods.
14. Subsequent Event
On November 1, 2018, the Company completed the acquisition of Thursby Software Systems, Inc.(“TSS”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”). Under the terms of the Merger Agreement, at the closing of the acquisition, the Company was obligated to pay aggregate consideration of approximately $3.1 million, consisting of (i) approximately $0.6 million in cash, net of cash acquired, and (ii) the issuance of shares of the Company’s common stock with a value of approximately $2.5 million. An aggregate of $0.5 million of the Company’s common stock issuable at the closing of the transaction will be held back for 12 months following the closing for the satisfaction of certain indemnification claims.
Additionally, in the event that revenue from TSS products is greater than $8.0 million, $11.0 million, or $15.0 million in product shipments in 2019, the Company will be obligated to issue earn-out consideration of up to a maximum of $7.5 million payable in shares of the Company’s common stock, subject to certain conditions. In the event that such revenue is less than $15.0 million in 2019, but 2020 revenue from TSS products exceeds $15.0 million, the Company will be obligated to issue an additional $2.5 million in earn-out consideration payable in shares of the Company’s common stock. The maximum total earn-out consideration payable for all periods is $7.5 million in the aggregate, payable in shares of the Company’s common stock.
28