|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
Net loss |
|
$ |
(36,489 |
) |
|
$ |
(23,566 |
) |
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,085 |
|
|
|
760 |
|
Loss on disposal of fixed assets |
|
|
— |
|
|
|
12 |
|
Change in fair value of warrants |
|
|
3,990 |
|
|
|
(7,183 |
) |
Foreign currency transactions |
|
|
(11 |
) |
|
|
33 |
|
Stock-based compensation |
|
|
5,482 |
|
|
|
(1,838 |
) |
FedEx warrant provision |
|
|
1,710 |
|
|
|
— |
|
Change in operating assets and liabilities |
|
|
|
|
|
|
Accounts receivable |
|
|
(7,129 |
) |
|
|
(1,962 |
) |
Inventories |
|
|
(3,393 |
) |
|
|
(1,249 |
) |
Deferred fulfillment costs |
|
|
(5,946 |
) |
|
|
(13,552 |
) |
Contract assets |
|
|
(521 |
) |
|
|
1,598 |
|
Prepaid expenses and other assets |
|
|
940 |
|
|
|
(1,469 |
) |
Accounts payable |
|
|
2,308 |
|
|
|
348 |
|
Accrued expenses |
|
|
354 |
|
|
|
(553 |
) |
Contract liabilities |
|
|
11,945 |
|
|
|
16,417 |
|
Other liabilities |
|
|
(256 |
) |
|
|
(34 |
) |
Net cash used in operating activities |
|
|
(25,931 |
) |
|
|
(32,238 |
) |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
Capital expenditures |
|
|
(140 |
) |
|
|
(46 |
) |
Net cash used in investing activities |
|
|
(140 |
) |
|
|
(46 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
480 |
|
|
|
822 |
|
Net cash provided by financing activities |
|
|
480 |
|
|
|
822 |
|
Effect of exchange rate on cash |
|
|
8 |
|
|
|
(46 |
) |
Net (decrease) in cash, cash equivalents, and restricted cash |
|
|
(25,583 |
) |
|
|
(31,508 |
) |
Cash, cash equivalents, and restricted cash at beginning of period |
|
|
65,576 |
|
|
|
171,951 |
|
Cash, cash equivalents, and restricted cash at end of period |
|
$ |
39,993 |
|
|
$ |
140,443 |
|
NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
Right of use asset |
|
|
— |
|
|
|
(8,154 |
) |
Lease liability |
|
|
— |
|
|
|
10,287 |
|
Net investment in lease |
|
|
— |
|
|
|
884 |
|
Purchase of property and equipment included in accounts payable and accrued expenses |
|
|
20 |
|
|
|
147 |
|
RECONCILIATION OF CASH AND RESTRICTED CASH WITHIN THE CONSOLIDATED BALANCE SHEETS TO THE AMOUNTS SHOWN IN THE CONSOLIDATED STATEMENTS OF CASH FLOWS ABOVE |
|
|
|
|
|
|
Cash (inclusive of money market funds and cash equivalents of $30,047 and $129,172 at March 31, 2023 and 2022, respectively) |
|
|
38,739 |
|
|
|
139,581 |
|
Restricted cash |
|
|
1,254 |
|
|
|
862 |
|
Total cash, cash equivalents, and restricted cash |
|
|
39,993 |
|
|
|
140,443 |
|
|
|
|
|
|
|
|
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Nature of Business
Berkshire Grey, Inc. (“Berkshire Grey,” “we,” “us,” “our,” or the “Company”) is an Intelligent Enterprise Robotics (“IER”) company pioneering and delivering transformative AI-enabled robotic solutions that automate filling ecommerce orders for consumers and businesses, filling orders to resupply retail and grocery stores, and handling packages shipped to fill those orders. The Company was incorporated in 2013 and is based in Bedford, MA. The Company has approximately 280 employees. The Company's IER capabilities are grounded in patented and proprietary technologies for robotic picking (each picking or unit handling), robotic movement and mobility (movement and storage of orders and goods), and system orchestration (which enables various intelligent subsystems to work together so that the right work is being done at the right time to meet our customer’s needs).
On July, 21, 2021, (the “Closing Date”) the Company consummated the transactions contemplated by the Agreement and Plan of Merger (the “RAAC Merger Agreement”), dated February 23, 2021, by and among Berkshire Grey Operating Company, Inc. (f/k/a Berkshire Grey, Inc.) (“Legacy Berkshire Grey"), the Company, (f/k/a Revolution Acceleration Acquisition Corp. (“RAAC”)), and Pickup Merger Corp, a Delaware corporation and a direct, wholly owned subsidiary of RAAC (“RAAC Merger Sub”). On the Closing Date, pursuant to the terms of the RAAC Merger Agreement, a business combination (the "Business Combination") between RAAC and Legacy Berkshire Grey was effected through the merger of RAAC Merger Sub with and into Legacy Berkshire Grey, with Legacy Berkshire Grey surviving the merger as a wholly owned subsidiary of RAAC (the "RAAC Merger"). RAAC amended and restated its second amended and restated certificate of incorporation and its bylaws such that RAAC changed its name to “Berkshire Grey, Inc.”. Unless the context otherwise requires, references to “Legacy Berkshire Grey” refer to Berkshire Grey, Inc. (currently known as Berkshire Grey Operating Company, Inc.), a Delaware corporation, prior to the effective time of the RAAC Merger Agreement.
The Business Combination is accounted for as a reverse recapitalization with Legacy Berkshire Grey, Inc. being the accounting acquirer and RAAC as the acquired company for accounting purposes. Accordingly, all historical financial information presented in the unaudited condensed consolidated financial statements represent the accounts of Legacy Berkshire Grey and its wholly owned subsidiaries. The shares and net loss per common share prior to the RAAC Merger have been retroactively restated as shares reflecting the exchange ratio established in the RAAC Merger (each outstanding share of Legacy Berkshire Grey, Inc. Class A common stock and Legacy Berkshire Grey preferred stock was exchanged for 5.87585 shares (the “Exchange Ratio”) of the Company’s Class A common stock).
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include those of Berkshire Grey and its subsidiaries, after elimination of all intercompany balances and transactions. The Company prepared the accompanying unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The information included in these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the Company's financial position, results of operations and cash flows for the periods and dates presented. Interim results are not necessarily indicative of results for the full fiscal year or any future periods.
For the Company’s subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated into U.S. dollars at period-end foreign exchange rates. Revenues and expenses are translated into U.S. dollars at the average foreign exchange rates for the period. Translation adjustments are excluded from the determination of net income and are recorded in accumulated other comprehensive (loss), a separate component of stockholders’ equity.
5
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION (cont.)
Going Concern and Liquidity
The Company has incurred net losses and negative cash flows from operations since inception and relied upon financing activities to fund operations through the issuance of common and preferred stock. As of March 31, 2023, the Company had an accumulated deficit of $444.4 million and has generated net losses in each year.
As of March 31, 2023, the Company's liquidity sources included cash and cash equivalents of $38.7 million. Based on our current operating plan, the Company believes that its current cash and cash equivalents will need to be supplemented to allow it to meet its liquidity requirements beyond the fourth quarter of 2023.
As described more fully in Footnote 3, “Merger,” on March 24, 2023, the Company entered into an Agreement and Plan of Merger (the “SoftBank Merger Agreement”), with SoftBank Group Corp. (“SoftBank”), and Backgammon Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of SoftBank (“SoftBank Merger Sub”), pursuant to which SoftBank Merger Sub will merge with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of SoftBank (the “SoftBank Acquisition”). The SoftBank Acquisition is subject to certain customary closing conditions and is expected to be consummated in the third quarter of 2023. If the SoftBank Acquisition fails to be completed, then to meet its future funding requirements, the Company would need to evaluate other alternatives to secure additional capital sufficient to fund its operating plan, in addition to any potential use of the Company’s facility with Lincoln Park Capital.
If the Company is unable to raise additional capital as and when needed, or upon acceptable terms, such failure would have a significant negative impact on its financial condition. As a result of these conditions, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern.
The Company’s financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The unaudited condensed consolidated financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of recorded assets or the amounts of liabilities that might be necessary should the Company be unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates and judgments include, but are not limited to, revenue recognition (including performance obligations, provisions for contract losses, variable consideration, impact of the FedEx warrant, and other obligations such as product returns), realizability of deferred fulfillment costs, inventory, warranty cost, accounting for stock-based compensation (including performance-based assessments), and accounting for income taxes and related valuation allowances. Actual results may differ from estimates.
Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company’s cash equivalents consist of money market funds. Restricted cash represents cash on deposit with a financial institution as collateral for the Company’s corporate credit cards and an irrevocable standby letter of credit as security for the Company’s obligations under the lease for its headquarters in Massachusetts. The Company has included restricted cash as a non-current asset as of March 31, 2023 and December 31, 2022.
See Note 7, "Revenue", for our revenue recognition policy.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to concentrations of credit risk consist of accounts receivable and cash and cash equivalents.
6
2. SIGNIFICANT ACCOUNTING POLICIES (cont.)
Sales of the Company’s products are concentrated among specific customers. At March 31, 2023, and December 31, 2022, three and four customers accounted for approximately 96% and 92% of the Company’s accounts receivable balance, respectively. For the three months ended March 31, 2023, the Company generated 44%, 32% and 14% of revenues from three respective customers. For the three months ended March 31, 2022, the Company generated approximately 38%, 14%, 12%, 12% and 12% of revenues from five respective customers. The Company believes that credit risks associated with these contracts are not significant due to the customers’ financial strength.
The Company places cash and cash equivalents with high-quality financial institutions. The Company is exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the condensed consolidated balance sheets exceeds federally insured limits.
The Company classifies Private Placement Warrants and Public Warrants (both defined and discussed in Note 16, “Common Stock and Warrants” as liabilities. At the end of each reporting period, changes in fair value during the period are recognized as change in fair value of warrants liabilities within other (expense) income, net within the condensed consolidated statements of operations and comprehensive loss. The Company will continue to adjust the warrant liability for changes in the fair value until the earlier of a) the exercise or expiration of the warrants or b) redemption of the warrants, at which time the warrants will be reclassified to additional paid-in capital.
FedEx Warrant
The FedEx Warrant (defined in Note 16, "Common Stock and Warrants") is accounted for as an equity instrument and measured in accordance with Accounting Standards Codification (“ASC”) 718, Compensation – Stock Compensation. This instrument is classified in the consolidated statements of operations in accordance with ASC 606, Revenue from Contracts with Customers. For awards granted to a customer, which are not in exchange for distinct goods or services, the fair value of the awards earned based on service or performance conditions is recorded as a reduction of the transaction price. To determine the fair value of the FedEx Warrant in accordance with ASC 718, the Company used the Black-Scholes option pricing model which is based in part on assumptions that require management to use judgment. Based on the fair value of the award, the Company determined the amount of non-cash stock-based sales incentive charges on the customer’s pro-rata achievement of vesting conditions, which is recorded as a reduction of revenue in the condensed consolidated statements of operations. See Note 16 for additional information.
Net Loss Per Common Share
Basic earnings per share is computed by dividing the loss available to common shareholders (numerator) by the weighted average number of shares of Class A common stock and Class C common stock outstanding (denominator) during the period. Diluted income per share is calculated using the Company's weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method and warrants using the if-converted method. Diluted earnings per share excludes all dilutive potential shares if their effect is antidilutive. See Note 13, “Net Loss Per Share Attributable to Common Shareholders” for further details.
Leases
Leases are accounted for in accordance with ASU No. 2016-02 ("ASU 2016-02") and its related amendments ("ASC 842"). The Company adopted ASC 842 on January 1, 2022, using the modified retrospective method, whereby the new guidance is applied prospectively as of the date of adoption and prior periods are not to be restated. The Company elected the package of practical expedients which permits the Company to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. Additionally, the Company elected the following practical expedients: the Company has elected to not separate lease components from non-lease components in its lease contract; the Company will not apply the recognition requirements of ASC 842 to its leases with lease terms of 12 months or less but rather recognize the lease expense on a straight-line basis over the lease term. The adoption of the lease standard did not change the Company's previously reported consolidated statements of operations and did not result in a cumulative catch-up adjustment to opening equity. Adoption of the lease standard had a material impact on the Company's consolidated balance sheet (Note 15, "Commitments and Contingencies").
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments. This may result in the earlier recognition of allowances for losses. The guidance is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The adoption of this ASU did not have a significant impact on our unaudited condensed consolidated financial statements.
7
3. Merger
SOFTBANK AGREEMENT AND PLAN OF MERGER
On March 24, 2023, the Company entered into the SoftBank Merger Agreement, with SoftBank and SoftBank Merger Sub, pursuant to which SoftBank Merger Sub will merge with and into the Company with the Company surviving the merger as a wholly-owned subsidiary of SoftBank. At the effective time of the merger (the “Effective Time”), each share of the Company’s Class A Common Stock and each share of the Company’s Class C Common Stock (together, the “Company Common Stock”) (other than (i) shares held in the treasury of the Company or owned by SoftBank Merger Sub, (ii) shares held by stockholders who have perfected their statutory rights of appraisal under Section 262 of the Delaware General Corporation Law, and (iii) restricted shares that have not vested as of the Effective Time) will be converted automatically into and shall thereafter represent only the right to receive $1.40 in cash, without interest, subject to applicable withholding taxes.
The SoftBank Acquisition is conditioned upon, among other things, the approval of the SoftBank Merger Agreement by the affirmative vote of holders of at least a majority of all outstanding shares of Company Common Stock, voting together as a single class, at a meeting of the Company’s stockholders held for such purpose, the expiration of the applicable waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, certain other approvals, clearances or expirations of waiting periods under other antitrust laws and foreign investment screening laws, and other customary closing conditions. The SoftBank Acquisition closing is not subject to a financing condition and is expected to close in the third quarter of 2023.
Voting and Support Agreement
In connection with the execution of the SoftBank Merger Agreement, the Company and SoftBank entered into voting and support agreements with Thomas Wagner, the Company's Chief Executive Officer, and three of the Company’s largest stockholders (certain entities related to Vinod Khosla (Khosla Ventures Seed B LP, Khosla Ventures Seed B (CF), LP, Khosla Ventures V, LP), New Enterprise Associates 15, L.P., and Canaan X, L.P.) (the “Supporting Stockholders”) under which such stockholders agreed, among other things, to vote, or cause to be voted, all of the shares of Company Common Stock beneficially owned by such stockholders in favor of (i) the approval of the SoftBank Acquisition and certain other related matters and (ii) the adoption of an amendment to the certificate of incorporation of the Company to increase the number of authorized shares of Class A Common Stock to 700,000,000 (the “Charter Amendment Approval”).
Convertible Note Purchase Agreement
Additionally, in connection with the execution of the SoftBank Merger Agreement, the Company entered into a convertible note purchase agreement (the “Note Purchase Agreement”) with Backgammon Investment Corp, a Delaware corporation and wholly owned subsidiary of SoftBank (“BIC”) under which the Company may issue to BIC up to $60 million of convertible senior unsecured notes (the “Notes”) in exchange for up to $60 million of cash, prior to the Closing and subject to certain conditions. The Note Purchase Agreement permits the Company to draw up to $12 million in any 30-day period, if the Company’s cash balance is below $30 million. The Notes will mature on the earlier of (i) six months following the termination of the SoftBank Merger Agreement and (ii) June 30, 2024, unless earlier repurchased or converted. The conversion rate for the Notes will initially be 714.2857 shares of Class A Common Stock for each $1,000 principal amount of Notes (the “Conversion Rate”), which is equivalent to an initial conversion price of approximately $1.40 per share of Class A Common Stock. The Conversion Rate is subject to adjustment under certain circumstances in accordance with the terms of the Note Purchase Agreement. The Notes will bear interest at a rate of 20.00% per year compounded semi-annually and will be payable in-kind semi-annually by increasing the principal amount of the Notes. In the event of payment defaults on interest or principal when due, the interest rate will be increased to 25.00%.
8
4. INVENTORIES, NET
At March 31, 2023, and December 31, 2022, inventories, net consist of $11.5 million and $8.1 million of finished goods, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Leasehold improvements |
|
$ |
6,414 |
|
|
$ |
6,402 |
|
Machinery and equipment |
|
|
898 |
|
|
|
898 |
|
Furniture and fixtures |
|
|
983 |
|
|
|
983 |
|
Research and development equipment |
|
|
7,157 |
|
|
|
6,126 |
|
Computer hardware and software |
|
|
1,983 |
|
|
|
1,983 |
|
Construction in progress |
|
|
3 |
|
|
|
1,157 |
|
Subtotal |
|
|
17,438 |
|
|
|
17,549 |
|
Less: Accumulated depreciation |
|
|
7,553 |
|
|
|
6,739 |
|
Property and equipment, net |
|
$ |
9,885 |
|
|
$ |
10,810 |
|
Depreciation expense for the three months ended March 31, 2023 and 2022, was approximately $1.1 million and $0.8 million, respectively.
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Accrued compensation |
|
$ |
1,697 |
|
|
$ |
5,146 |
|
Accrued sales taxes payable |
|
|
663 |
|
|
|
192 |
|
Accrued professional services |
|
|
2,673 |
|
|
|
813 |
|
Accrued materials |
|
|
3,743 |
|
|
|
2,950 |
|
Accrued other |
|
|
1,600 |
|
|
|
777 |
|
Accrued warranty |
|
|
680 |
|
|
|
820 |
|
Accrued expenses |
|
$ |
11,056 |
|
|
$ |
10,698 |
|
Accrued Compensation
Accrued compensation included estimated year-end employee bonuses and related employee costs of approximately $1.2 million and $4.0 million at March 31, 2023 and December 31, 2022, respectively.
Accrued Warranty
The Company provides a limited warranty generally for one year. Estimated warranty obligations are recorded as an expense upon customer acceptance of related products. Factors that affect the estimated warranty liability include number of products accepted, historical and anticipated rates of warranty claims, cost per claim, and vendor-supported warranty programs. The Company periodically assesses the adequacy of our recorded warranty liabilities and adjusts the amounts as necessary. The amount of liability recorded is equal to the estimated costs to repair or otherwise satisfy claims made by customers.
Changes in our product warranty consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Beginning balance |
|
$ |
820 |
|
|
$ |
452 |
|
Accrual (reversal) for warranty expense |
|
|
(216 |
) |
|
|
(427 |
) |
Warranty costs incurred during period |
|
|
76 |
|
|
|
795 |
|
Ending balance |
|
$ |
680 |
|
|
$ |
820 |
|
9
7. REVENUE
The Company primarily derives its revenue from selling robotic fulfillment systems, which consist of a network of automated machinery installed at the customer location and configured to meet specified performance requirements, such as accuracy, throughput, and up-time. Revenue is recognized when control of the promised products is transferred to the customer, or when services are satisfied under the contract, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services (the transaction price). Revenue is recognized only to the extent that it is probable that a significant reversal of revenue will not occur. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue.
The Company’s contracts typically have multiple promises that may include system delivery, installation, testing, and training. Judgment is required to determine whether the promises specified in these contracts are distinct and should be accounted for as separate revenue transactions for recognition purposes. The Company also provides assurance-based warranties that are not considered a distinct performance obligation. The Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The Company uses a cost-plus margin approach to determine the stand-alone selling price for separate performance obligations.
Each customer contract is evaluated individually to determine the appropriate pattern of revenue recognition. Contracts that are recognized over time meet the criteria that the Company is creating or enhancing an asset that the customer controls. The system is delivered to the customer and control is transferred, after which point the Company performs installation and implementation services to fully integrate the system at the customer’s location. As such, revenue recognition generally begins upon delivery, continues throughout the installation and implementation period, and concludes upon customer acceptance. Revenue from customer contracts is generally expected to be recognized over a period of three to six months. There historically have been, and potentially will be in the future, customer contracts that contain obligations and timelines that result in revenue being recognized over extended periods, which may include periods greater than 12 months. For those performance obligations where revenue is recognized over time, the Company recognizes revenue as costs are incurred or as labor hours are incurred, depending on the type of contract (i.e., an input method). Installation and training services are evaluated together with the delivery of robotic fulfillment or material handling systems as a singular performance obligation. Provisions for losses on uncompleted contracts are made in the period in which such losses are determined to be probable and the amount can be reasonably estimated. The loss is computed on the basis of the total estimated costs to complete the contract, including the contract costs incurred to date plus the estimated cost to complete. A provision for the remaining losses on contracts of $0.6 million and $2.7 million is included within contract liabilities as of March 31, 2023 and December 31, 2022, respectively.
Other performance obligations recognized at a point in time include the sale and delivery of spare parts and pilot agreements. Pilot agreements are typically short-term contracts designed to demonstrate the Company’s technology and ability to serve the customer. Due to the exploratory nature of pilot agreements, revenue is recognized at a point in time once the evaluation activities are complete.
Other performance obligations recognized over time include, but are not limited to, maintenance, extended support, and research services. Maintenance and extended support services are recognized ratably on a straight-line-basis as the Company assumes an even distribution of performance over the service period. Research services are recognized based on the ratio of cost to date and the total estimated cost at the completion of the performance obligation.
Shipping and handling activities that occur after control of a product has transferred to the customer are accounted for as fulfillment activities rather than performance obligations, as allowed under a practical expedient provided by ASC 606. Shipping and handling fees charged to customers are recognized as revenue and the related costs are included in cost of revenue at the point in time when ownership of the product is transferred to the customer.
Incremental costs of obtaining a contract with a customer and other costs to fulfill a contract are required to be capitalized unless the Company elects to expense contract costs with periods less than a year. The Company has elected to expense these costs of obtaining a contract as incurred when the related contract period is less than one year. The Company does not pay upfront sales commissions on contracts when the related contract period is greater than one year, thus has not capitalized any amounts as of March 31, 2023.
Non-cash stock-based sales incentive contra-revenue charges (“FedEx Warrant Charges”) associated with the FedEx Warrant are recognized as the customer makes qualified payments and vesting conditions become probable of being achieved, based on the grant date fair value of the FedEx Warrant. See note 16, "Common Stock and Warrants" for more information.
The following table disaggregates revenue by timing of transfer of goods or services:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Transferred over time |
|
$ |
5,257 |
|
|
$ |
5,317 |
|
Transferred at a point in time |
|
|
1,052 |
|
|
|
175 |
|
Total revenue |
|
$ |
6,309 |
|
|
$ |
5,492 |
|
10
7. REVENUE (cont.)
Payment terms offered to customers are defined in contracts and do not include a significant financing component. Payment milestones typically exist throughout the course of a contract and generally occur upon signing of an agreement, delivery of a system, start and completion of installation and testing, and upon acceptance of the system. The nature of the Company’s contracts may give rise to variable consideration, typically related to fees charged for shipping and handling. The Company generally estimates such variable consideration at the most likely amount. In addition, the Company includes the estimated variable consideration in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the related uncertainty is resolved. Provisions for contract losses are recorded as liabilities when it becomes evident that a liability has occurred and the amount of the loss is reasonably estimable. These estimates are based on historical experience and the Company’s best judgment at the time. To the extent there is certainty in estimating these amounts, they are included in the transaction price of the Company’s contracts and the associated remaining performance obligations. Contract losses are reported as cost of revenue during the period in which the loss becomes evident. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
Contracts may be modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of the Company’s contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effects of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, are recognized as an adjustment to revenue on a cumulative catch-up basis.
Measure of Progress
The Company periodically reviews the measure of progress used to faithfully depict the transfer of control of goods and services to customers. This review indicated the circumstances of the Company's systems delivery and installation for certain sales have changed over time and that the transfer of control to customers would be more faithfully depicted over time as cost is incurred, beginning upon delivery, and continuing through the installation process (“cost-to-cost method”) rather than based on the ratio of labor hours incurred to total estimated labor hours at the completion of the performance obligation. The Company’s assessment of control transfer considered when legal title to machinery passes to the customer, when the customer first gains beneficial use, and other indicators control has transferred. As a result, effective January 1, 2022, the Company began using a cost-to-cost methodology for some projects that commenced during the prior fiscal year. Under both the cost-to-cost and labor hours input methods the Company expects revenue to be recognized over a period of three to six months.
Deferred Fulfillment Costs and Contract Liability Balances
As of March 31, 2023 and December 31, 2022, the Company incurred $9.9 million and $4.0 million of net deferred fulfillment costs, respectively.
Changes in the contract liability balance during the three months ended March 31, 2023