10-Q 1 inve-10q_20180930.htm 10-Q inve-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

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)

 

 

DELAWARE

77-0444317

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

2201 Walnut Avenue, Suite 100

Fremont, California

94538

(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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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 November 2, 2018, the registrant had 15,453,916 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements (Unaudited)

3

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

3

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017

5

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2018

6

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

7

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 4.

 

Controls and Procedures

39

 

 

PART II. OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

40

Item 1A.

 

Risk Factors

41

Item 2.    

 

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 6.

 

Exhibits

41

 

 

 

 

SIGNATURES

42

 

 

 

2


PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

IDENTIV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except par value)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

14,240

 

 

$

19,052

 

Accounts receivable, net of allowances of $386 and $306 as of September 30, 2018

   and December 31, 2017, respectively

 

 

14,129

 

 

 

12,282

 

Inventories

 

 

11,973

 

 

 

11,126

 

Prepaid expenses and other current assets

 

 

2,383

 

 

 

1,779

 

Total current assets

 

 

42,725

 

 

 

44,239

 

Property and equipment, net

 

 

2,135

 

 

 

2,043

 

Intangible assets, net

 

 

9,155

 

 

 

4,365

 

Goodwill

 

 

5,781

 

 

 

 

Other assets

 

 

1,146

 

 

 

715

 

Total assets

 

$

60,942

 

 

$

51,362

 

LIABILITIES AND STOCKHOLDERS´ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,584

 

 

$

5,863

 

Current portion - payment obligation

 

 

989

 

 

 

888

 

Current portion - financial liabilities, net of discount and debt issuance costs of $76

   and $404, respectively

 

 

11,245

 

 

 

9,829

 

Notes payable

 

 

2,000

 

 

 

 

Deferred revenue

 

 

2,265

 

 

 

900

 

Accrued compensation and related benefits

 

 

1,819

 

 

 

1,515

 

Other accrued expenses and liabilities

 

 

2,997

 

 

 

2,020

 

Total current liabilities

 

 

26,899

 

 

 

21,015

 

Long-term payment obligation

 

 

2,157

 

 

 

2,998

 

Long-term financial liabilities, net of discount and debt issuance costs of $0 and $582, respectively

 

 

 

 

 

2,921

 

Long-term deferred revenue

 

 

1,226

 

 

 

190

 

Other long-term liabilities

 

 

625

 

 

 

385

 

Total liabilities

 

 

30,907

 

 

 

27,509

 

Commitments and contingencies (see Note 13)

 

 

 

 

 

 

 

 

Stockholders´ equity:

 

 

 

 

 

 

 

 

Identiv, Inc. stockholders' equity:

 

 

 

 

 

 

 

 

Series B Preferred stock, $0.001 par value: 5,000 shares authorized; 5,000 and 3,000 shares

   issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

5

 

 

 

3

 

Common stock, $0.001 par value: 50,000 shares authorized; 16,464 and 15,341 shares

   issued and 15,449 and 14,436 shares outstanding as of September 30, 2018 and

   December 31, 2017, respectively

 

 

16

 

 

 

15

 

Additional paid-in capital

 

 

441,008

 

 

 

428,470

 

Treasury stock, 1,015 and 905 shares as of September 30, 2018 and December 31, 2017,

   respectively

 

 

(7,987

)

 

 

(7,485

)

Accumulated deficit

 

 

(404,983

)

 

 

(399,647

)

Accumulated other comprehensive income

 

 

2,146

 

 

 

2,675

 

Total Identiv, Inc. stockholders' equity

 

 

30,205

 

 

 

24,031

 

Noncontrolling interest

 

 

(170

)

 

 

(178

)

Total stockholders´ equity

 

 

30,035

 

 

 

23,853

 

Total liabilities and stockholders' equity

 

$

60,942

 

 

$

51,362

 

 

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)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net revenue

 

$

20,022

 

 

$

15,432

 

 

$

56,844

 

 

$

43,664

 

Cost of revenue

 

 

11,538

 

 

 

9,571

 

 

 

33,699

 

 

 

26,423

 

Gross profit

 

 

8,484

 

 

 

5,861

 

 

 

23,145

 

 

 

17,241

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,860

 

 

 

1,597

 

 

 

5,384

 

 

 

4,584

 

Selling and marketing

 

 

3,915

 

 

 

3,448

 

 

 

12,176

 

 

 

10,142

 

General and administrative

 

 

2,641

 

 

 

1,247

 

 

 

7,952

 

 

 

5,119

 

Restructuring and severance

 

 

223

 

 

 

(49

)

 

 

591

 

 

 

(49

)

Total operating expenses

 

 

8,639

 

 

 

6,243

 

 

 

26,103

 

 

 

19,796

 

Loss from operations

 

 

(155

)

 

 

(382

)

 

 

(2,958

)

 

 

(2,555

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(291

)

 

 

(643

)

 

 

(1,239

)

 

 

(1,995

)

(Loss) gain on extinguishment of debt, net

 

 

 

 

 

 

 

 

(1,369

)

 

 

977

 

Foreign currency gains (losses), net

 

 

200

 

 

 

(51

)

 

 

354

 

 

 

(202

)

Loss before income taxes and noncontrolling interest

 

 

(246

)

 

 

(1,076

)

 

 

(5,212

)

 

 

(3,775

)

Income tax (provision) benefit

 

 

(41

)

 

 

42

 

 

 

(121

)

 

 

161

 

Loss before noncontrolling interest

 

 

(287

)

 

 

(1,034

)

 

 

(5,333

)

 

 

(3,614

)

Less: Income (loss) attributable to noncontrolling

   interest

 

 

 

 

 

2

 

 

 

(5

)

 

 

(8

)

Net loss attributable to Identiv, Inc.

 

$

(287

)

 

$

(1,032

)

 

$

(5,338

)

 

$

(3,622

)

Basic and diluted net loss per share attributable to

   Identiv, Inc.

 

$

(0.02

)

 

$

(0.07

)

 

$

(0.34

)

 

$

(0.28

)

Weighted average shares used to compute basic and

   diluted net loss per share

 

 

15,750

 

 

 

14,409

 

 

 

15,484

 

 

 

12,806

 

 

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)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(287

)

 

$

(1,034

)

 

$

(5,333

)

 

$

(3,614

)

Other comprehensive income (loss), net of

   income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(226

)

 

 

378

 

 

 

(526

)

 

 

518

 

Total other comprehensive (loss) income, net of

   income taxes

 

 

(226

)

 

 

378

 

 

 

(526

)

 

 

518

 

Comprehensive loss

 

 

(513

)

 

 

(656

)

 

 

(5,859

)

 

 

(3,096

)

Less: Comprehensive income attributable to

   noncontrolling interest

 

 

 

 

 

(16

)

 

 

(8

)

 

 

(23

)

Comprehensive loss attributable to Identiv, Inc.

   common stockholders

 

$

(513

)

 

$

(672

)

 

$

(5,867

)

 

$

(3,119

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

5


IDENTIV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands)

 

 

 

Series B

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Treasury

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Deficit

 

 

Income

 

 

Interest

 

 

Equity

 

Balances, December 31, 2017

 

 

3,000

 

 

$

3

 

 

 

14,436

 

 

$

15

 

 

$

428,470

 

 

$

(7,485

)

 

$

(399,647

)

 

$

2,675

 

 

$

(178

)

 

$

23,853

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,338

)

 

 

 

 

 

5

 

 

 

(5,333

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(529

)

 

 

3

 

 

 

(526

)

Impact of adoption of Topic

   606 (Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

2

 

Issuance of Series B

   preferred stock, net

   of issuance costs

 

 

2,000

 

 

 

2

 

 

 

 

 

 

 

 

 

7,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,895

 

Issuance of common stock in

   connection with acquisition

   of business

 

 

 

 

 

 

 

 

723

 

 

 

1

 

 

 

2,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,635

 

Issuance of common stock

   in connection with

   vesting of stock awards

 

 

 

 

 

 

 

 

394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of

   stock options

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,987

 

Shares withheld in payment

   of taxes in connection with

   net share settlement of

   restricted stock units

 

 

 

 

 

 

 

 

(110

)

 

 

 

 

 

 

 

 

(502

)

 

 

 

 

 

 

 

 

 

 

 

(502

)

Issuance of shares to non-

   employees

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

Balances, September 30,

   2018

 

 

5,000

 

 

$

5

 

 

 

15,449

 

 

$

16

 

 

$

441,008

 

 

$

(7,987

)

 

$

(404,983

)

 

$

2,146

 

 

$

(170

)

 

$

30,035

 

 

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)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,333

)

 

$

(3,614

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,362

 

 

 

2,081

 

Loss (gain) on extinguishment of debt, net

 

 

1,369

 

 

 

(977

)

Accretion of interest on long-term payment obligation

 

 

180

 

 

 

277

 

Amortization of debt issuance costs

 

 

280

 

 

 

617

 

Stock-based compensation expense

 

 

1,987

 

 

 

1,916

 

Changes in operating assets and liabilities, net of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

202

 

 

 

(1,197

)

Inventories

 

 

(614

)

 

 

(1,785

)

Prepaid expenses and other assets

 

 

(866

)

 

 

(992

)

Accounts payable

 

 

(1,871

)

 

 

1,531

 

Payment obligation liability

 

 

(920

)

 

 

(892

)

Deferred revenue

 

 

(525

)

 

 

58

 

Accrued expenses and other liabilities

 

 

738

 

 

 

(2,087

)

Net cash used in operating activities

 

 

(3,011

)

 

 

(5,064

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(634

)

 

 

(686

)

Acquisition of business, net of cash acquired

 

 

(1,384

)

 

 

 

Net cash used in investing activities

 

 

(2,018

)

 

 

(686

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt, net of issuance costs

 

 

16,941

 

 

 

42,735

 

Repayments of debt

 

 

(23,612

)

 

 

(42,805

)

Proceeds from issuance of common stock, net of issuance costs

 

 

 

 

 

12,560

 

Taxes paid related to net share settlement of restricted stock units

 

 

(502

)

 

 

(594

)

Proceeds from issuance of Series B preferred stock, net of issuance costs

 

 

7,895

 

 

 

 

Proceeds from exercise of stock options

 

 

13

 

 

 

 

Net cash provided by financing activities

 

 

735

 

 

 

11,896

 

Effect of exchange rates on cash

 

 

(518

)

 

 

479

 

Net (decrease) increase in cash

 

 

(4,812

)

 

 

6,625

 

Cash at beginning of period

 

 

19,052

 

 

 

9,116

 

Cash at end of period

 

$

14,240

 

 

$

15,741

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

1,571

 

 

$

1,379

 

Taxes paid, net

 

$

109

 

 

$

96

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Warrants issued as debt issuance costs in connection with debt agreements

 

$

 

 

$

2,319

 

Liability to be settled in common stock

 

$

 

 

$

250

 

Issuance of shares to non-employees

 

$

11

 

 

$

 

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

September 30, 2018

 

1. Organization and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of Identiv, Inc. (“Identiv” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s unaudited condensed consolidated financial statements have been included. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or any future period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” and the audited Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The preparation of unaudited condensed consolidated financial statements necessarily requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the condensed consolidated balance sheet dates and the reported amounts of revenues and expenses for the periods presented. The Company may experience significant variations in demand for its products quarter to quarter and typically experiences a stronger demand cycle in the second half of its fiscal year. As a result, the quarterly results may not be indicative of the full year results. The December 31, 2017 balance sheet was derived from the audited financial statements as of that date.

Reclassifications — Certain reclassifications have been made to the fiscal year 2017 financial statements to conform to the fiscal year 2018 presentation. The reclassifications had no impact on net loss, total assets, or stockholders’ equity.

Concentration of Credit Risk — No customer represented more than 10% of net revenue for either of the three or nine months ended September 30, 2018 or 2017. No customer represented 10% or more of the Company’s accounts receivable balance at September 30, 2018 or December 31, 2017.

 

Business Combinations Business combinations are accounted for at fair value under the purchase method of accounting. Acquisition costs are expensed as incurred and recorded in general and administrative expenses and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date affect income tax expense. The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the condensed consolidated financial statements could result in a possible impairment of the intangible assets and goodwill, or require acceleration of the amortization expense of finite-lived intangible assets.

In circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity, the Company recognizes a liability equal to the fair value of the contingent payments the Company expects to make as of the acquisition date. The Company remeasures this liability each reporting period and records changes in the fair value as a component of operating expenses.

Results of operations and cash flows of acquired companies are included in the Company’s operating results from the date of acquisition.

 

Intangible Assets Amortizable intangible assets include trademarks, developed technology and customer relationships acquired as part of business combinations. Intangible assets subject to amortization are amortized using the straight-line method over their estimated useful lives ranging from four to twelve years and are reviewed for impairment in accordance with ASC 360, Property, Plant and Equipment.

 

8


Goodwill In accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”), the Company’s goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In testing for goodwill impairment, the Company compares the fair value of 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 September 30, 2018, the amount of capitalized software development costs totaled $386,000 and is included in other assets in the accompanying condensed consolidated balance sheet. Software development costs capitalized in 2017 totaled $401,000. No software development costs were capitalized in 2018.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed, the Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on its financial position or results of operations upon adoption.

In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation, which provides guidance to simplify several aspects of accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2016. The Company adopted this guidance effective January 1, 2017. The Company's adoption of this standard did not have a significant impact on its condensed consolidated financial statements. No excess income tax benefit or tax deficiencies were recorded as a result of the adoption and there was no change to accumulated deficit with respect to previously unrecognized excess tax benefits. The Company elected to continue to account for forfeitures on an estimated basis. The Company has elected to present the condensed consolidated statements of cash flows on a prospective transition method and no prior periods have been adjusted.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which amends accounting for leases. Under the new guidance, a lessee will recognize assets and liabilities but will recognize expenses similar to current lease accounting. The guidance is effective for reporting periods beginning after December 15, 2018; however early adoption is permitted. The new guidance must be adopted using a modified retrospective approach to each prior reporting period presented with various optional practical expedients. In January 2018, the FASB issued an exposure draft of the proposed ASU, Leases (Topic 842): Targeted Improvements. The proposed ASU provides an alternative transition method of adoption, permitting the recognition of a cumulative-effect adjustment to retained earnings on the date of adoption. The Company will adopt the standard on the effective date, but has not yet selected a transition method. The Company is reviewing its leased assets to determine the potential impact on its consolidated financial statements. Though its evaluation is ongoing, the Company expects changes to its balance sheet due to the recognition of right-of-use assets and lease liabilities related to its real estate leases, but it does not anticipate a material impact to its results of operations or liquidity.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates the performance of Step 2 from the goodwill impairment test. In performing its annual or interim impairment testing, an entity will instead compare the fair value of the reporting unit with its carrying amount and recognize any impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The standard is effective for fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual impairment tests performed on testing dates after January 1, 2017. The Company is currently in the process of evaluating when it will adopt ASU 2017-04 and its impact on its consolidated financial statements.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605)” and Subtopic 985-605 “Software - Revenue Recognition.” Topic 605 and Subtopic 985-605 are collectively referred to as “Topic 605” or “prior GAAP.” Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic 606 requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

9


 

The Company adopted Topic 606 on January 1, 2018 using the modified retrospective transition method. Under this method, the Company evaluated contracts that were in effect at the beginning of fiscal 2018 as if those contracts had been accounted for under Topic 606. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with historical, pre-Topic 606 accounting.

 

On the adoption date, a cumulative catch up adjustment was recorded to beginning retained earnings to reflect the impact of all existing arrangements under Topic 606. 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.

 

The Company does not expect the impact of the adoption of Topic 606 to be material to its annual revenue and net income on an ongoing basis. Revenue generated under Topic 606 is expected to be materially comparable to revenue recognized under Topic 605 in fiscal 2018 primarily due to the elimination of deferred revenue associated with the product development services discussed above that, under Topic 605, would have continued to be recognized into revenue in 2018 and 2019, offset by an increase in the revenue recognized related to the amount and timing of technical support services provided in the contract discussed above. The actual effects on revenue recognized for the nine months ended September 30, 2018 are reported in the table below.

 

No incremental sales commission costs or other costs related to obtaining customer contracts were capitalized at the adoption date as they were immaterial.

 

The timing of revenue recognition for hardware and professional services is expected to remain substantially unchanged. The Company’s overall mix of revenue recognized at a point in time versus over time is expected to increase in the future due to the intended growth and expansion of its services offerings. For the three and nine months ended September 30, 2018, approximately 94% and 95%, respectively, of the Company’s revenue was recognizable on delivery and 6% and 5%, respectively, over time.

 

The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated balance sheet as of September 30, 2018 (in thousands):

 

 

Balance at

December 31, 2017

 

 

Adjustments

 

 

Balance at

January 1, 2018

 

Deferred revenue

$

1,090

 

 

$

(2

)

 

$

1,088

 

Accumulated deficit

 

(399,647

)

 

 

2

 

 

 

(399,645

)

 

The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated statement of operations for the nine months ended September 30, 2018 (in thousands, except per share amounts):

 

 

As Reported Under

Topic 606

 

 

Adjustments

 

 

Balance Under Prior

GAAP

 

Net revenue

$

56,844

 

 

$

1

 

 

$

56,845

 

Cost of revenue

 

33,699

 

 

 

 

 

 

33,699

 

Operating expenses

 

26,103

 

 

 

 

 

 

26,103

 

Provision for income taxes

 

(121

)

 

 

 

 

 

(121

)

Net loss

 

(5,338

)

 

 

1

 

 

 

(5,337

)

Basic and diluted net loss per share

 

(0.34

)

 

 

 

 

 

(0.34

)

 

The adoption of Topic 606 had no impact on the Company’s net cash provided by operating activities, net cash used in investing activities or net cash used in financing activities.

 

10


2. Revenue

Revenue Recognition

 

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of its products, software licenses, and services, which are generally capable of being distinct and accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation, generally on a relative basis using its standalone selling price. The stated contract value is generally the transaction price to be allocated to the separate performance obligations. Revenue is recognized net of any taxes collected from customers that are subsequently remitted to governmental authorities.

 

Nature of Products and Services

The Company derives revenues primarily from sales of hardware products, software licenses, professional services, software maintenance and support, and extended hardware warranties.

 

Hardware Product Revenues The Company generally has two performance obligations in arrangements involving the sale of hardware products. The first performance obligation is to transfer the hardware product (which includes software integral to the functionality of the hardware product). The second performance obligation is to provide assurance that the product complies with its agreed-upon specifications and is free from defects in material and workmanship for a period of one to three years (i.e. assurance warranty). The entire transaction price is allocated to the hardware product and is generally recognized as revenue at the time of delivery because the customer obtains control of the product at that point in time. The Company has concluded that control generally transfers at that point in time because the customer has title to the hardware, physical possession, and a present obligation to pay for the hardware. None of the transaction price is allocated to the assurance warranty component, as the Company accounts for these product warranty costs in accordance with ASC 460, Guarantees. Payments for hardware contracts are generally due 30 to 60 days after shipment of the hardware product.

Software License Revenues The Company’s license arrangements grant customers the perpetual right to access and use the licensed software products at the outset of an arrangement. Technical support and software updates are generally made available throughout the term of the support agreement, which is generally one to three years. The Company accounts for these arrangements as two performance obligations (1) the software licenses, and (2) the related updates and technical support. The software license revenue is recognized upon delivery of the license to the customer, while the software updates and technical support is recognized over the term of the support contract. Payments are generally due 30 to 60 days after delivery of the software licenses.

 

Professional Services Revenues Professional services revenues consist primarily of programming customization services performed relating to the integration of the Company’s software products with the customers other systems, such as HR systems. Professional services contracts are generally billed on a time and materials basis and revenue is recognized as the services are performed. For contracts billed on a fixed price basis, revenue is recognized once the contract is complete. Payments for services are generally due when services are performed.

 

Software Maintenance and Support Revenues Support and maintenance contract revenues consist of the services provided to support the specialized programming applications performed by our professional services group. Support and maintenance contracts are typically billed at inception of the contract and recognized as revenue over the contract period, typically over a one to three year period.

 

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Extended Hardware Warranties Revenues Sales of our hardware products may also include optional extended hardware warranties, which typically provide assurance that the product will continue function as initially intended. Extended hardware warranty contracts are typically billed at inception of the contract and recognized as revenue over the respective contract period, typically over one to two year periods after the expiration of the original assurance warranty.

 

 

Performance

Obligation

 

When Performance Obligation is

Typically Satisfied

 

When Payment is

Typically Due

 

How Standalone Selling Price is

Typically Estimated

Hardware products

 

When customer obtains control of the product (point-in-time)

 

Within 30-60 days of shipment

 

Observable in transactions without multiple performance obligations

Software licenses

 

When license is delivered to customer or made available for download, and the applicable license period has begun (point-in-time)

 

Within 30-60 days of the beginning of license period

 

Established pricing practices for software licenses bundled with software maintenance, which are separately observable in renewal transactions

Professional services

 

As services are performed and/or when contract is fulfilled (point-in-time)

 

Within 30-60 days of delivery

 

Observable in transactions without multiple performance obligations

Software maintenance

   and support services

 

Ratably over the course of the support contract (over time)

 

Within 30-60 days of the beginning of the contract period

 

Observable in renewal transactions

Extended hardware

   warranties

 

Ratably over the course of the support contract (over time)

 

Within 30-60 days of the beginning of the contract period

 

Observable in renewal transactions

 

Significant Judgments

The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. For such arrangements, the Company allocates revenues to each performance obligation based on its relative standalone selling price (“SSP”).

Judgment is required to determine the SSP for each distinct performance obligation in a contract. For the majority of items, the Company estimates SSP using historical transaction data. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately and needs to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when the product or service is not sold separately, the Company determines the SSP using information that may include market conditions and other observable inputs.

The determination of SSP is an ongoing process and information is reviewed regularly in order to ensure SSPs reflect the most current information or trends.

 

Disaggregation of Revenues

 

The Company disaggregates revenue from contracts with customers based on the timing of transfer of goods or services to customers (point-in-time or over time) and geographic region based on the shipping location of the customer. The geographic regions that are tracked are the Americas, Europe and the Middle East, and Asia-Pacific regions. The Company operates as four operating segments.

 

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Total net sales based on the disaggregation criteria described above are as follows (in thousands):

 

 

Three Months Ended September 30,

 

 

2018

 

 

2017 (1)

 

 

Point-in-

Time

 

 

Over Time

 

 

Total

 

 

Point-in-

Time

 

 

Over Time

 

 

Total

 

Americas

$

13,930

 

 

$

1,105

 

 

$

15,035

 

 

$

9,960

 

 

$

331

 

 

$

10,291

 

Europe and the Middle East

 

2,117

 

 

 

44

 

 

 

2,161

 

 

 

1,771

 

 

 

 

 

 

1,771

 

Asia-Pacific

 

2,803

 

 

 

23

 

 

 

2,826

 

 

 

3,370

 

 

 

 

 

 

3,370

 

Total

$

18,850

 

 

$

1,172

 

 

$

20,022

 

 

$

15,101

 

 

$

331

 

 

$

15,432

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017 (1)

 

 

Point-in-

Time

 

 

Over Time

 

 

Total

 

 

Point-in-

Time

 

 

Over Time

 

 

Total

 

Americas

$

41,150

 

 

$

3,022

 

 

$

44,172

 

 

$

27,893

 

 

$

1,001

 

 

$

28,894

 

Europe and the Middle East

 

6,921

 

 

 

71

 

 

 

6,992

 

 

 

5,741

 

 

 

26

 

 

 

5,767

 

Asia-Pacific

 

5,657

 

 

 

23

 

 

 

5,680

 

 

 

9,003

 

 

 

 

 

 

9,003

 

Total

$

53,728

 

 

$

3,116

 

 

$

56,844

 

 

$

42,637

 

 

$

1,027

 

 

$

43,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  As discussed in Note 1, prior periods have not been adjusted for the adoption of Topic 606.

 

 

Information about Contract Balances

Amounts invoiced in advance of services being provided are accounted for as deferred revenue. Nearly all of the Company’s deferred revenue balance is related software maintenance contracts. Payment terms and conditions vary by contract type, although payment is typically due within 30 to 90 days of contract inception. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts generally do not include a significant financing component. The primary purpose of the Company’s invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, not to receive financing from its customers.

Changes in deferred revenue during the nine months ended September 30, 2018 were as follows (in thousands):

 

 

 

Amount

 

Deferred revenue at December 31, 2017

 

$

1,090

 

Impact of adoption of Topic 606

 

 

(2

)

Deferred revenue at January 1, 2018

 

 

1,088

 

Fair value of deferred revenue acquired in acquisition, net of recognition

 

 

1,693

 

Deferral of revenue billed in current period, net of recognition

 

 

1,557

 

Recognition of revenue deferred in prior periods

 

 

(847

)

Balance as of September 30, 2018

 

$

3,491

 

 

Unsatisfied Performance Obligations

Revenue expected to be recognized in future periods related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, and contracts where revenue is recognized as invoiced, was approximately $2.1 million as of September 30, 2018. Since the Company typically invoices customers at contract inception, this amount is included in deferred revenue balance. As of September 30, 2018, the Company expects to recognize approximately 19% of the revenue related to these unsatisfied performance obligations during the remainder of 2018, 56% during 2019, and 25% thereafter.

Assets Recognized from the Costs to Obtain a Contract with a Customer

 

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that certain sales incentive programs (i.e. commissions) meet the requirements to be capitalized. Capitalized incremental costs related to contracts are amortized over the respective contract periods. For the three and nine months ended September 30, 2018, total capitalized costs to obtain contracts were immaterial.

13


Practical Expedients

 

As discussed in Note 1, Organization and Summary of Significant Accounting Policies, and Note 2, Revenue, the Company has elected the following practical expedients in accordance with Topic 606:

 

The Company expenses costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs include internal sales force compensation programs and certain partner sales incentive programs as the Company has determined annual compensation is commensurate with annual sales activities.

 

The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expense.

 

The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

 

The Company does not consider the time value of money for contracts with original durations of one year or less.

 

3. Business Combinations

 

On February 14, 2018, the Company acquired 3VR Security, Inc. (“3VR”), a video technology and analytics company, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Eagle Acquisition, Inc., a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), 3VR, and Fortis Advisors LLC, a Delaware limited liability company, acting as Security Holder Representative. Pursuant to the Merger Agreement, at the effective time, Merger Sub merged with and into 3VR and 3VR became a wholly-owned subsidiary of the Company (the “Acquisition”).

 

Under the terms of the Merger Agreement, at the closing of the Acquisition, the Company acquired all of the outstanding shares of 3VR for total purchase consideration of $6.2 million, consisting of:

 

 

(i)

payment in cash of approximately $1.6 million;  

 

(ii)

issuance of subordinated unsecured promissory notes in an aggregate principal amount of $2.0 million;

 

(iii)

issuance of 609,830 shares of the Company’s common stock with a value of approximately $2.3 million.  

 

An aggregate of up to $1.0 million, or 294,927 shares, of the Company’s common stock issuable at the closing of the transaction were held back for a period of up to 12 months following the closing for the satisfaction of certain indemnification claims. On May 9, 2018, the Company and the Security Holder Representative reached agreement as to the satisfaction of certain of the indemnification claims asserted by the Company at the closing of the Acquisition. As a result, the purchase consideration, and the amount of goodwill recorded, were reduced by $660,000. Of the 294,927 shares that were held back at closing, 181,319 shares were canceled. The remaining 93,406 shares, with a value of approximately $0.3 million, continue to be subject to the terms of the Merger Agreement.

Additionally, in the event that the Company’s subsidiary, 3VR, achieves $24.1 million in product shipments in 2018, the Company will be obligated to issue further earn-out consideration of $3.5 million payable in shares of the Company’s common stock (subject to certain conditions) with a potential maximum earn-out value of $7.0 million in the event that such shipments exceed $48.2 million.  Further, in calendar year 2019, the Company may also be obligated to pay, in cash, and subject to certain conditions, contingent consideration equal to the lesser of (a) 35% of the gross margin of certain products sold and services rendered by 3VR in 2018 pursuant to a supply arrangement and (b) $25.0 million, each subject to adjustments. Management has assessed the probability of the issuance of shares related to the earn-out consideration, and the payment of the contingent consideration noted above, and determined it as remote. Accordingly, no value was ascribed to the earn-out as of September 30, 2018.

 

14


Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value as