UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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☑ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
OR
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission File Number: 000-29440
IDENTIV, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE |
77-0444317 |
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( State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
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2201 Walnut Avenue, Suite 100 Fremont, California |
94538 |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (949) 250-8888
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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☐ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☐ (Do not check if a smaller reporting company) |
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Smaller reporting company |
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☑ |
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Emerging growth company |
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☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of August 1, 2018, the registrant had 15,353,391 shares of common stock, $0.001 par value per share, outstanding.
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Page |
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Item 1. |
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3 |
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Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 |
3 |
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4 |
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5 |
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Condensed Consolidated Statement of Equity for the Six Months Ended June 30, 2018 |
6 |
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Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 |
7 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
8 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
27 |
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Item 4. |
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37 |
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Item 1. |
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38 |
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Item 1A. |
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38 |
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Item 2. |
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39 |
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Item 6. |
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39 |
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40 |
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2
IDENTIV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except par value)
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June 30, |
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December 31, |
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2018 |
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2017 |
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ASSETS |
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Current assets: |
|
|
|
|
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|
|
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Cash |
|
$ |
17,922 |
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$ |
19,052 |
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Accounts receivable, net of allowances of $358 and $306 as of June 30, 2018 and December 31, 2017, respectively |
|
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13,974 |
|
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12,282 |
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Inventories |
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12,751 |
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11,126 |
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Prepaid expenses and other current assets |
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1,884 |
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1,779 |
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Total current assets |
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46,531 |
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44,239 |
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Property and equipment, net |
|
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2,012 |
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2,043 |
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Intangible assets, net |
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9,686 |
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4,365 |
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Goodwill |
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5,781 |
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— |
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Other assets |
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1,039 |
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|
715 |
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Total assets |
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$ |
65,049 |
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$ |
51,362 |
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LIABILITIES AND STOCKHOLDERS´ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
7,181 |
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$ |
5,863 |
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Current portion - payment obligation |
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953 |
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|
888 |
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Current portion - financial liabilities, net of discount and debt issuance costs of $133 and $404, respectively |
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13,586 |
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9,829 |
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Notes payable |
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2,000 |
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— |
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Deferred revenue |
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2,943 |
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|
900 |
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Accrued compensation and related benefits |
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1,804 |
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|
1,515 |
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Other accrued expenses and liabilities |
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2,686 |
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2,020 |
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Total current liabilities |
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31,153 |
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21,015 |
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Long-term payment obligation |
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2,447 |
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2,998 |
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Long-term financial liabilities, net of discount and debt issuance costs of $0 and $582, respectively |
|
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— |
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2,921 |
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Long-term deferred revenue |
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958 |
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190 |
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Other long-term liabilities |
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438 |
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385 |
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Total liabilities |
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34,996 |
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27,509 |
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Commitments and contingencies (see Note 13) |
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Stockholders´ equity: |
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Identiv, Inc. stockholders' equity: |
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Series B Preferred stock, $0.001 par value: 5,000 shares authorized; 5,000 and 3,000 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively |
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5 |
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3 |
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Common stock, $0.001 par value: 50,000 shares authorized; 16,316 and 15,341 shares issued and 15,339 and 14,436 shares outstanding as of June 30, 2018 and December 31, 2017, respectively |
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16 |
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15 |
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Additional paid-in capital |
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440,289 |
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428,470 |
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Treasury stock, 977 and 905 shares as of June 30, 2018 and December 31, 2017, respectively |
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(7,763 |
) |
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(7,485 |
) |
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Accumulated deficit |
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(404,696 |
) |
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(399,647 |
) |
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Accumulated other comprehensive income |
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2,372 |
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2,675 |
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Total Identiv, Inc. stockholders' equity |
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30,223 |
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24,031 |
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Noncontrolling interest |
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(170 |
) |
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(178 |
) |
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Total stockholders´ equity |
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30,053 |
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23,853 |
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Total liabilities and stockholders' equity |
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$ |
65,049 |
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$ |
51,362 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
IDENTIV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2018 |
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2017 |
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2018 |
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2017 |
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Net revenue |
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$ |
20,294 |
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$ |
14,840 |
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$ |
36,822 |
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$ |
28,232 |
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Cost of revenue |
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12,141 |
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9,157 |
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22,161 |
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16,852 |
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Gross profit |
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8,153 |
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5,683 |
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14,661 |
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11,380 |
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Operating expenses: |
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Research and development |
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1,837 |
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1,511 |
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3,524 |
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2,988 |
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Selling and marketing |
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4,358 |
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3,315 |
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8,261 |
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6,694 |
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General and administrative |
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2,756 |
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2,085 |
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5,311 |
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3,872 |
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Restructuring and severance |
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258 |
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— |
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368 |
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— |
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Total operating expenses |
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9,209 |
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6,911 |
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17,464 |
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13,554 |
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Loss from operations |
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(1,056 |
) |
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(1,228 |
) |
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(2,803 |
) |
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(2,174 |
) |
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Non-operating income (expense): |
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Interest expense, net |
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(472 |
) |
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(678 |
) |
|
|
(948 |
) |
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(1,352 |
) |
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(Loss) gain on extinguishment of debt, net |
|
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(1,369 |
) |
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— |
|
|
|
(1,369 |
) |
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|
977 |
|
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Foreign currency gains (losses), net |
|
|
192 |
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1 |
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154 |
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(151 |
) |
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Loss before income taxes and noncontrolling interest |
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(2,705 |
) |
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(1,905 |
) |
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(4,966 |
) |
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(2,700 |
) |
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Income tax (provision) benefit |
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(40 |
) |
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1 |
|
|
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(80 |
) |
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119 |
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Loss before noncontrolling interest |
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(2,745 |
) |
|
|
(1,904 |
) |
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(5,046 |
) |
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(2,581 |
) |
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Less: Income attributable to noncontrolling interest |
|
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— |
|
|
|
— |
|
|
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(5 |
) |
|
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(10 |
) |
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Net loss attributable to Identiv, Inc. |
|
$ |
(2,745 |
) |
|
$ |
(1,904 |
) |
|
$ |
(5,051 |
) |
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$ |
(2,591 |
) |
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Basic and diluted net loss per share attributable to Identiv, Inc. |
|
$ |
(0.18 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.22 |
) |
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Weighted average shares used to compute basic and diluted loss per share |
|
|
15,584 |
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12,657 |
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|
|
15,349 |
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|
|
12,008 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
IDENTIV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
|
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2018 |
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2017 |
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2018 |
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2017 |
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Net loss |
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$ |
(2,745 |
) |
|
$ |
(1,904 |
) |
|
$ |
(5,046 |
) |
|
$ |
(2,581 |
) |
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Other comprehensive income (loss), net of income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Foreign currency translation adjustment |
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(412 |
) |
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(43 |
) |
|
|
(300 |
) |
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140 |
|
|
Total other comprehensive (loss) income, net of income taxes |
|
|
(412 |
) |
|
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(43 |
) |
|
|
(300 |
) |
|
|
140 |
|
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Comprehensive loss |
|
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(3,157 |
) |
|
|
(1,947 |
) |
|
|
(5,346 |
) |
|
|
(2,441 |
) |
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Less: Comprehensive income attributable to noncontrolling interest |
|
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— |
|
|
|
(1 |
) |
|
|
(8 |
) |
|
|
(7 |
) |
|
Comprehensive loss attributable to Identiv, Inc. common stockholders |
|
$ |
(3,157 |
) |
|
$ |
(1,948 |
) |
|
$ |
(5,354 |
) |
|
$ |
(2,448 |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
IDENTIV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited, in thousands)
|
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Series B Convertible Preferred Stock |
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Common Stock |
|
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Additional Paid-in |
|
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Treasury |
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Accumulated |
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Accumulated Other Comprehensive |
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Noncontrolling |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Stock |
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Deficit |
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Income |
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Interest |
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Equity |
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Balances, December 31, 2017 |
|
|
3,000 |
|
|
$ |
3 |
|
|
|
14,436 |
|
|
$ |
15 |
|
|
$ |
428,470 |
|
|
$ |
(7,485 |
) |
|
$ |
(399,647 |
) |
|
$ |
2,675 |
|
|
$ |
(178 |
) |
|
$ |
23,853 |
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,051 |
) |
|
|
— |
|
|
|
5 |
|
|
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(5,046 |
) |
|
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(303 |
) |
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|
3 |
|
|
|
(300 |
) |
|
Impact of adoption of Topic 606 (Note 2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
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2 |
|
|
|
|
|
|
|
|
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|
2 |
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Issuance of Series B preferred stock, net of issuance costs |
|
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2,000 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
7,893 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,895 |
|
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Issuance of common stock in connection with acquisition of business |
|
|
|
|
|
|
|
|
|
|
723 |
|
|
|
1 |
|
|
|
2,634 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,635 |
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Issuance of common stock in connection with vesting of stock awards |
|
|
— |
|
|
|
— |
|
|
|
249 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,284 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,284 |
|
|
Shares withheld in payment of taxes in connection with net share settlement of restricted stock units |
|
|
— |
|
|
|
— |
|
|
|
(72 |
) |
|
|
— |
|
|
|
— |
|
|
|
(278 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(278 |
) |
|
Issuance of shares to non- employees |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8 |
|
|
Balances, June 30, 2018 |
|
|
5,000 |
|
|
$ |
5 |
|
|
|
15,339 |
|
|
$ |
16 |
|
|
$ |
440,289 |
|
|
$ |
(7,763 |
) |
|
$ |
(404,696 |
) |
|
$ |
2,372 |
|
|
$ |
(170 |
) |
|
$ |
30,053 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
IDENTIV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
|
|
|
Six Months Ended |
|
|||||
|
|
|
June 30, |
|
|||||
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|
|
2018 |
|
|
2017 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,046 |
) |
|
$ |
(2,581 |
) |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,561 |
|
|
|
1,376 |
|
|
Loss (gain) on extinguishment of debt, net |
|
|
1,369 |
|
|
|
(977 |
) |
|
Accretion of interest on long-term payment obligation |
|
|
124 |
|
|
|
195 |
|
|
Amortization of debt issuance costs |
|
|
223 |
|
|
|
421 |
|
|
Stock-based compensation expense |
|
|
1,284 |
|
|
|
1,252 |
|
|
Changes in operating assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
323 |
|
|
|
(1,182 |
) |
|
Inventories |
|
|
(1,361 |
) |
|
|
(911 |
) |
|
Prepaid expenses and other assets |
|
|
(260 |
) |
|
|
(401 |
) |
|
Accounts payable |
|
|
(272 |
) |
|
|
2,491 |
|
|
Payment obligation liability |
|
|
(610 |
) |
|
|
(591 |
) |
|
Deferred revenue |
|
|
(115 |
) |
|
|
52 |
|
|
Accrued expenses and other liabilities |
|
|
202 |
|
|
|
(1,829 |
) |
|
Net cash used in operating activities |
|
|
(2,578 |
) |
|
|
(2,685 |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(217 |
) |
|
|
(264 |
) |
|
Acquisition of business, net of acquired cash |
|
|
(1,384 |
) |
|
|
— |
|
|
Net cash used in investing activities |
|
|
(1,601 |
) |
|
|
(264 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt, net of issuance costs |
|
|
12,339 |
|
|
|
31,430 |
|
|
Repayment of debt |
|
|
(16,612 |
) |
|
|
(32,118 |
) |
|
Proceeds from issuance of common stock, net of issuance costs |
|
|
— |
|
|
|
12,553 |
|
|
Taxes paid related to net share settlement of restricted stock units |
|
|
(278 |
) |
|
|
(154 |
) |
|
Proceeds from issuance of Series B preferred stock, net of issuance costs |
|
|
7,895 |
|
|
|
— |
|
|
Net cash provided by financing activities |
|
|
3,344 |
|
|
|
11,711 |
|
|
Effect of exchange rates on cash |
|
|
(295 |
) |
|
|
90 |
|
|
Net (decrease) increase in cash |
|
|
(1,130 |
) |
|
|
8,852 |
|
|
Cash at beginning of period |
|
|
19,052 |
|
|
|
9,116 |
|
|
Cash at end of period |
|
$ |
17,922 |
|
|
$ |
17,968 |
|
|
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
1,320 |
|
|
$ |
930 |
|
|
Taxes paid, net |
|
$ |
91 |
|
|
$ |
65 |
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
Warrants issued as debt issuance costs in connection with debt agreements |
|
$ |
— |
|
|
$ |
2,319 |
|
|
Common stock issued for acquisition of business, net |
|
$ |
2,635 |
|
|
$ |
— |
|
|
Promissory notes issued in acquisition of business |
|
$ |
2,000 |
|
|
$ |
— |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
IDENTIV, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 six months ended June 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,” “Quantitative and Qualitative Disclosures About Market Risk,” 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 six months ended June 30, 2018 or 2017. No customer represented 10% or more of the Company’s accounts receivable balance at June 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, the Company compares the fair value of its 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 exceeds 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 June 30, 2018, the amount of capitalized software development costs totaled $0.4 million and is included primarily in other assets in the accompanying condensed consolidated balance sheet. Software development costs capitalized in 2017 totaled $0.4 million. 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 have been recorded as a result of the adoption and there will be no change to accumulated deficit with respect to previously unrecognized excess tax benefits. The Company is electing 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. The Company is currently evaluating the impact of the adoption of this guidance will have on its condensed 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.
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. The 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.
9
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 first quarter of fiscal 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 six months ended June 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 June 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 six months ended June 30, 2018 (in thousands, except per share amounts):
|
|
As Reported Under Topic 606 |
|
|
Adjustments |
|
|
Balance Under Prior GAAP |
|
|||
|
Net revenue |
$ |
36,822 |
|
|
$ |
— |
|
|
$ |
36,822 |
|
|
Cost of revenue |
|
22,161 |
|
|
|
— |
|
|
|
22,161 |
|
|
Operating expenses |
|
17,464 |
|
|
|
— |
|
|
|
17,464 |
|
|
Provision for income taxes |
|
(80 |
) |
|
|
— |
|
|
|
(80 |
) |
|
Net loss |
|
(5,051 |
) |
|
|
— |
|
|
|
(5,051 |
) |
|
Basic and diluted net loss per share |
|
(0.33 |
) |
|
|
|
|
|
|
(0.33 |
) |
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.
2. Revenue
Revenue Recognition
Revenue is recognized upon transfer of control of the 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, 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 licensing, professional services, software maintenance and support, and extended hardware warranties.
10
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 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 Licensing 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 1 to 3 year period.
Extended Hardware Warranties Revenues — Sales of some 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 contract period, typically over 1 to 2 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”).
11
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.
Total net sales based on the disaggregation criteria described above are as follows (in thousands):
|
|
Three Months Ended June 30, |
|
|||||||||||||||||||||
|
|
2018 |
|
|
2017 (1) |
|
||||||||||||||||||
|
|
Point-in- Time |
|
|
Over Time |
|
|
Total |
|
|
Point-in- Time |
|
|
Over Time |
|
|
Total |
|
||||||
|
Americas |
$ |
14,732 |
|
|
$ |
1,173 |
|
|
$ |
15,905 |
|
|
$ |
9,148 |
|
|
$ |
347 |
|
|
$ |
9,495 |
|
|
Europe and the Middle East |
|
2,510 |
|
|
|
13 |
|
|
|
2,523 |
|
|
|
2,103 |
|
|
|
14 |
|
|
|
2,117 |
|
|
Asia-Pacific |
|
1,866 |
|
|
|
— |
|
|
|
1,866 |
|
|
|
3,228 |
|
|
|
— |
|
|
|
3,228 |
|
|
Total |
$ |
19,108 |
|
|
$ |
1,186 |
|
|
$ |
20,294 |
|
|
$ |
14,479 |
|
|
$ |
361 |
|
|
$ |
14,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|||||||||||||||||||||
|
|
2018 |
|
|
2017 (1) |
|
||||||||||||||||||
|
|
Point-in- Time |
|
|
Over Time |
|
|
Total |
|
|
Point-in- Time |
|
|
Over Time |
|
|
Total |
|
||||||
|
Americas |
$ |
27,220 |
|
|
$ |
1,917 |
|
|
$ |
29,137 |
|
|
$ |
17,933 |
|
|
$ |
670 |
|
|
$ |
18,603 |
|
|
Europe and the Middle East |
|
4,804 |
|
|
|
27 |
|
|
|
4,831 |
|
|
|
3,970 |
|
|
|
26 |
|
|
|
3,996 |
|
|
Asia-Pacific |
|
2,854 |
|
|
|
— |
|
|
|
2,854 |
|
|
|
5,633 |
|
|
|
— |
|
|
|
5,633 |
|
|
Total |
$ |
34,878 |
|
|
$ |
1,944 |
|
|
$ |
36,822 |
|
|
$ |
27,536 |
|
|
$ |
696 |
|
|
$ |
28,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 primarily 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 six months ended June 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 |
|
2,085 |
|
|
Deferral of revenue billed in current period, net of recognition |
|
1,361 |
|
|
Recognition of revenue deferred in prior periods |
|
(633 |
) |
|
Balance as of June 30, 2018 |
$ |
3,901 |
|
12
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 $2.5 million as of June 30, 2018. Since the Company typically invoices customers at contract inception, this amount is included in deferred revenue balance. As of June 30, 2018, the Company expects to recognize approximately 35% of the revenue related to these unsatisfied performance obligations during the remainder of 2018, 46% during 2019, and 19% 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 six months ended June 30, 2018, total capitalized costs to obtain a contract were immaterial.
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 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 a 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 June 30, 2018.
13
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 (up 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 |
|||||