0001564590-18-029080.txt : 20181113 0001564590-18-029080.hdr.sgml : 20181113 20181113063121 ACCESSION NUMBER: 0001564590-18-029080 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 66 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181113 DATE AS OF CHANGE: 20181113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BSQUARE CORP /WA CENTRAL INDEX KEY: 0001054721 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 911650880 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27687 FILM NUMBER: 181174885 BUSINESS ADDRESS: STREET 1: 110 110TH AVENUE NE, SUITE 300 CITY: BELLEVUE STATE: WA ZIP: 98004 BUSINESS PHONE: 4255195900 MAIL ADDRESS: STREET 1: 110 110TH AVENUE NE, SUITE 300 CITY: BELLEVUE STATE: WA ZIP: 98004 10-Q 1 bsqr-10q_20180930.htm 10-Q bsqr-10q_20180930.htm

250\‘I 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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: 000-27687

 

BSQUARE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Washington

 

91-1650880

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

110 110th Avenue NE, Suite 300,

Bellevue WA

 

98004

(Address of principal executive offices)

 

(Zip Code)

(425) 519-5900

(Registrant’s telephone number, including area code)

 

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  

The number of shares of common stock outstanding as of October 31, 2018: 12,747,225

 

 

 

 


BSQUARE CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2018

TABLE OF CONTENTS

 

 

 

 

 

 

Page

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1

 

Financial Statements

 

 

3

Item 2

 

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

 

 

15

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

19

Item 4

 

Controls and Procedures

 

 

19

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1A

 

Risk Factors

 

 

20

Item 5

 

Other Information

 

 

20

Item 6

 

Exhibits

 

 

21

 

 

Signatures

 

 

22

 

 

 

2


PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

BSQUARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,392

 

 

$

12,859

 

Short-term investments

 

 

5,879

 

 

 

11,895

 

Accounts receivable, net of allowance for doubtful accounts of $49 and $50 at September 30, 2018 and December 31, 2017, respectively

 

 

13,124

 

 

 

18,014

 

Contract assets

 

 

1,030

 

 

 

937

 

Prepaid expenses and other current assets

 

 

677

 

 

 

548

 

Total current assets

 

 

32,102

 

 

 

44,253

 

Equipment, furniture and leasehold improvements, less accumulated depreciation

 

 

1,306

 

 

 

989

 

Intangible assets, less accumulated amortization

 

 

291

 

 

 

365

 

Goodwill

 

 

3,738

 

 

 

3,738

 

Other non-current assets

 

 

211

 

 

 

89

 

Total assets

 

$

37,648

 

 

$

49,434

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Third-party software fees payable

 

$

7,882

 

 

$

10,547

 

Accounts payable

 

 

329

 

 

 

375

 

Accrued compensation

 

 

2,016

 

 

 

2,266

 

Other accrued expenses

 

 

535

 

 

 

681

 

Deferred rent

 

 

355

 

 

 

339

 

Deferred revenue

 

 

1,627

 

 

 

3,219

 

Total current liabilities

 

 

12,744

 

 

 

17,427

 

Deferred rent, long-term

 

 

247

 

 

 

516

 

Deferred revenue, long-term

 

 

799

 

 

 

61

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, no par: 10,000,000 shares authorized; no shares issued and outstanding

 

 

 

 

 

 

Common stock, no par: 37,500,000 shares authorized; 12,747,225 and 12,664,489 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

138,223

 

 

 

137,622

 

Accumulated other comprehensive loss

 

 

(885

)

 

 

(916

)

Accumulated deficit

 

 

(113,480

)

 

 

(105,276

)

Total shareholders' equity

 

 

23,858

 

 

 

31,430

 

Total liabilities and shareholders' equity

 

$

37,648

 

 

$

49,434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

3


BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-party software

 

$

14,241

 

 

$

16,240

 

 

$

47,297

 

 

$

48,542

 

Proprietary software

 

 

796

 

 

 

1,200

 

 

 

2,872

 

 

 

4,335

 

Professional engineering service

 

 

1,657

 

 

 

2,213

 

 

 

6,406

 

 

 

8,465

 

Total revenue

 

 

16,694

 

 

 

19,653

 

 

 

56,575

 

 

 

61,342

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-party software

 

 

12,003

 

 

 

13,619

 

 

 

39,837

 

 

 

40,804

 

Proprietary software

 

 

111

 

 

 

34

 

 

 

252

 

 

 

105

 

Professional engineering service

 

 

1,221

 

 

 

1,620

 

 

 

4,666

 

 

 

5,927

 

Total cost of revenue

 

 

13,335

 

 

 

15,273

 

 

 

44,755

 

 

 

46,836

 

Gross profit

 

 

3,359

 

 

 

4,380

 

 

 

11,820

 

 

 

14,506

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

3,199

 

 

 

5,338

 

 

 

13,548

 

 

 

15,249

 

Research and development

 

 

2,292

 

 

 

1,588

 

 

 

6,600

 

 

 

4,381

 

Total operating expenses

 

 

5,491

 

 

 

6,926

 

 

 

20,148

 

 

 

19,630

 

Loss from operations

 

 

(2,132

)

 

 

(2,546

)

 

 

(8,328

)

 

 

(5,124

)

Other income, net

 

 

65

 

 

 

34

 

 

 

156

 

 

 

148

 

Loss before income taxes

 

 

(2,067

)

 

 

(2,512

)

 

 

(8,172

)

 

 

(4,976

)

Income tax benefit (expense)

 

 

(20

)

 

 

44

 

 

 

(32

)

 

 

150

 

Net loss

 

$

(2,087

)

 

$

(2,468

)

 

$

(8,204

)

 

$

(4,826

)

Basic loss per share

 

$

(0.16

)

 

$

(0.20

)

 

$

(0.65

)

 

$

(0.38

)

Diluted loss per share

 

$

(0.16

)

 

$

(0.20

)

 

$

(0.65

)

 

$

(0.38

)

Shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

12,721

 

 

 

12,607

 

 

 

12,697

 

 

 

12,578

 

Diluted

 

 

12,721

 

 

 

12,607

 

 

 

12,697

 

 

 

12,578

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,087

)

 

$

(2,468

)

 

$

(8,204

)

 

$

(4,826

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation, net of tax

 

 

15

 

 

 

14

 

 

 

25

 

 

 

36

 

Unrealized gain (loss) on investments, net of tax

 

 

4

 

 

 

(3

)

 

 

6

 

 

 

 

Total other comprehensive income

 

 

19

 

 

 

11

 

 

 

31

 

 

 

36

 

Comprehensive loss

 

$

(2,068

)

 

$

(2,457

)

 

$

(8,173

)

 

$

(4,790

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

4


BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(8,204

)

 

$

(4,826

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

466

 

 

 

483

 

Stock-based compensation

 

 

620

 

 

 

1,350

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

4,890

 

 

 

4,219

 

Contract assets

 

 

(244

)

 

 

389

 

Prepaid expenses and other assets

 

 

(112

)

 

 

(84

)

Third-party software fees payable

 

 

(2,665

)

 

 

(6,869

)

Accounts payable and accrued expenses

 

 

(442

)

 

 

427

 

Deferred revenue

 

 

(854

)

 

 

(1,149

)

Deferred rent

 

 

(253

)

 

 

(238

)

Net cash used in operating activities

 

 

(6,798

)

 

 

(6,298

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of equipment and furniture

 

 

(709

)

 

 

(344

)

Proceeds from maturities of short-term investments

 

 

14,125

 

 

 

25,702

 

Purchases of short-term investments

 

 

(8,092

)

 

 

(20,440

)

Net cash provided by investing activities

 

 

5,324

 

 

 

4,918

 

Cash flows from financing activities—proceeds from exercise of stock options

 

 

9

 

 

 

174

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(2

)

 

 

25

 

Net decrease in cash and cash equivalents

 

 

(1,467

)

 

 

(1,181

)

Cash and cash equivalents, beginning of period

 

 

12,859

 

 

 

14,312

 

Cash and cash equivalents, end of period

 

$

11,392

 

 

$

13,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

5


BSQUARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of BSQUARE Corporation (“BSQUARE”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting and include the accounts of BSQUARE and our wholly owned subsidiaries. In the Condensed Consolidated Statements of Operations and Comprehensive Loss, prior period software revenue has been separately presented as third-party software and proprietary software to conform to current period presentation. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In our opinion, the unaudited condensed consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly our financial position as of September 30, 2018, our operating results for the three and nine months ended September 30, 2018 and 2017 and our cash flows for the nine months ended September 30, 2018 and 2017. The accompanying financial information as of December 31, 2017 is derived from audited financial statements as of that date. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include provisions for bad debts and income taxes, estimates of progress on professional engineering service arrangements and bonus accruals. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 22, 2018. All intercompany balances have been eliminated.

Recently Issued Accounting Standard

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASU 2016-02”), to make leasing activities more transparent and comparable, requiring most leases to be recognized by lessees on their balance sheets as right-of-use assets, along with corresponding lease liabilities. ASU 2016-02 is effective for annual periods beginning after December 31, 2018 and interim periods within that year, with early adoption permitted. We expect to adopt ASU 2016-02 effective January 1, 2019 and elect an optional transition method, recording a cumulative-effect adjustment as of that date and presenting comparative prior year periods in accordance with Accounting Standards Codification Topic 840. In addition, we expect to apply a package of practical expedients to forego reassessing:

 

whether any expired or existing contracts are or contain leases,

 

lease classification for any expired or existing leases, and

 

initial direct costs for any existing leases.

We are continuing to evaluate the full impact of adoption and expect this ASU will have a material impact on our consolidated balance sheets and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), simplifying how an entity is required to test goodwill for impairment by eliminating step two from the goodwill impairment test. ASU 2017-04 is effective for fiscal years and interim periods within those years beginning after December 15, 2019, with early adoption permitted on testing dates after January 1, 2017. We plan to early adopt this ASU as of January 1, 2019 on a prospective basis and do not expect that the adoption will have a material impact on consolidated financial statements and related disclosures.

Loss Per Share

We compute basic loss per share using the weighted average number of common shares outstanding during the period. We consider restricted stock units as outstanding common shares and include them in the computation of basic loss per share only when vested. We compute diluted loss per share using the weighted average number of common shares outstanding and common stock equivalent shares outstanding during the period using the treasury stock method. We exclude common stock equivalent shares from the computation if their effect is anti-dilutive.

 

 

 

6


The following potentially dilutive shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Stock options

 

 

1,679,969

 

 

 

1,455,713

 

 

 

1,584,046

 

 

 

1,429,883

 

Restricted stock units

 

 

51,679

 

 

 

63,709

 

 

 

64,043

 

 

 

52,579

 

 

2. Revenue Recognition

On January 1, 2017, we adopted ASU 2014-09, “Revenue from Contracts with Customers” (“Topic 606”), applying the modified retrospective method to all contracts that were not completed as of that date. Results for reporting periods beginning after January 1, 2017 are presented under Topic 606, while prior period results are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded an increase to opening equity of $404,000 as of January 1, 2017 due to the cumulative impact of adopting Topic 606.

Disaggregation of revenue

The following table provides information about disaggregated revenue by primary geographical market and includes a reconciliation of the disaggregated revenue with reportable segments (in thousands):

 

 

 

Three Months Ended September 30, 2018

 

 

Three Months Ended September 30, 2017

 

 

 

Third-Party Software

 

 

Proprietary Software

 

 

Professional Engineering Service

 

 

Total

 

 

Third-Party Software

 

 

Proprietary Software

 

 

Professional Engineering Service

 

 

Total

 

Primary geographical markets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

13,715

 

 

$

288

 

 

$

1,438

 

 

$

15,441

 

 

$

15,615

 

 

$

532

 

 

$

1,835

 

 

$

17,982

 

Europe

 

 

526

 

 

 

2

 

 

 

146

 

 

 

674

 

 

 

520

 

 

 

 

 

 

276

 

 

 

796

 

Asia

 

 

 

 

 

506

 

 

 

73

 

 

 

579

 

 

 

105

 

 

 

668

 

 

 

102

 

 

 

875

 

Total

 

$

14,241

 

 

$

796

 

 

$

1,657

 

 

$

16,694

 

 

$

16,240

 

 

$

1,200

 

 

$

2,213

 

 

$

19,653

 

 

 

 

Nine Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2017

 

 

 

Third-Party Software

 

 

Proprietary Software

 

 

Professional Engineering Service

 

 

Total

 

 

Third-Party Software

 

 

Proprietary Software

 

 

Professional Engineering Service

 

 

Total

 

Primary geographical markets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

45,115

 

 

$

2,236

 

 

$

5,558

 

 

$

52,909

 

 

$

46,867

 

 

$

3,650

 

 

$

6,963

 

 

$

57,480

 

Europe

 

 

1,821

 

 

 

107

 

 

 

574

 

 

 

2,502

 

 

 

1,380

 

 

 

 

 

 

1,053

 

 

 

2,433

 

Asia

 

 

361

 

 

 

529

 

 

 

274

 

 

 

1,164

 

 

 

295

 

 

 

685

 

 

 

449

 

 

 

1,429

 

Total

 

$

47,297

 

 

$

2,872

 

 

$

6,406

 

 

$

56,575

 

 

$

48,542

 

 

$

4,335

 

 

$

8,465

 

 

$

61,342

 

 

Contract balances

We receive payments from customers based upon contractual billing schedules; accounts receivable is recorded when the right to consideration becomes unconditional. Contract assets include amounts related to our contractual right to consideration for completed performance obligations not yet invoiced and deferred contract acquisition costs, which are amortized over time as the associated revenue is recognized. Contract liabilities, presented as deferred revenue on our condensed consolidated balance sheets, include payments received in advance of performance under the contract and are realized when the associated revenue is recognized. We had no asset impairment charges related to contract assets for each of the three and nine months ended September 30, 2018 and 2017. 

Significant changes in the contract assets and the deferred revenue balances during the nine months ended September 30, 2018 were as follows (in thousands):

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

Contract Assets

 

 

Deferred Revenue

 

Revenue recognized that was included in deferred revenue at December 31, 2017

$

 

 

$

2,847

 

Transferred to receivables from contract assets recognized at December 31, 2017

 

263

 

 

 

 

7


 

Contract acquisition costs

We capitalize contract acquisition costs for contracts with a term exceeding one year, as is more common with our DataV software bookings. Amortization of contract acquisition costs was $7,000 and $12,000 for the three months ended September 30, 2018 and 2017, respectively, and was $93,000 and $160,000 for the nine months ended September 30, 2018 and 2017, respectively. There were no asset impairment charges for contract acquisitions costs for any of the periods noted above.  

For contracts that have a duration of less than one year, we apply a practical expedient and fully expense these costs as incurred.

 Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands). The estimated revenue does not include contracts with original durations of one year or less, amounts of variable consideration attributable to royalties, or contract renewals that are unexercised as of September 30, 2018:

 

 

 

 

 

Remainder of

2018

 

 

2019

 

 

2020

 

 

2021

 

Third-party software

 

 

 

$

24

 

 

$

50

 

 

$

14

 

 

$

 

Proprietary software

 

 

 

 

853

 

 

 

1,827

 

 

 

1,802

 

 

 

687

 

Professional engineering service

 

 

 

 

230

 

 

 

 

 

 

 

 

 

 

 

Practical expedients and exemptions

We generally expense sales commissions when incurred because the amortization period is less than one year. We record these costs within selling, general and administrative expenses.

 

3. Cash, Cash Equivalents and Short-Term Investments

Cash, cash equivalents and short-term investments consisted of the following (in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

Cash

$

7,665

 

 

$

6,340

 

Cash equivalents (see Note 4)

 

3,727

 

 

 

6,519

 

Total cash and cash equivalents

 

11,392

 

 

 

12,859

 

 

 

 

 

 

 

 

 

Short-term investments (see Note 4)

 

5,879

 

 

 

11,895

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents and short-term investments

$

17,271

 

 

$

24,754

 

 

8


4. Fair Value Measurements

We measure our cash equivalents and short-term investments at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

 

Level 1:

Quoted prices in active markets for identical assets or liabilities.

 

Level 2:

Directly or indirectly observable market-based inputs or unobservable inputs used in models or other valuation methodologies.

 

Level 3:

Unobservable inputs that are not corroborated by market data. The inputs require significant management judgment or estimation.

We classify our cash equivalents and short-term investments within Level 1 or Level 2 because our cash equivalents and short-term investments are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

Assets measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 are summarized below (in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

 

 

Direct or Indirect

Observable

Inputs (Level 2)

 

 

Total

 

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

 

 

Direct or Indirect

Observable

Inputs (Level 2)

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,981

 

 

$

 

 

$

1,981

 

 

$

2,274

 

 

$

 

 

$

2,274

 

Corporate commercial paper

 

 

 

 

 

1,746

 

 

 

1,746

 

 

 

 

 

 

3,245

 

 

 

3,245

 

Corporate debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,000

 

 

 

1,000

 

Total cash equivalents

 

 

1,981

 

 

 

1,746

 

 

 

3,727

 

 

 

2,274

 

 

 

4,245

 

 

 

6,519

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate commercial paper

 

 

 

 

 

3,231

 

 

 

3,231

 

 

 

 

 

 

5,480

 

 

 

5,480

 

Corporate debt

 

 

 

 

 

2,648

 

 

 

2,648

 

 

 

 

 

 

6,415

 

 

 

6,415

 

Total short-term investments

 

 

 

 

 

5,879

 

 

 

5,879

 

 

 

 

 

 

11,895

 

 

 

11,895

 

Total assets measured at fair value

 

$

1,981

 

 

$

7,625

 

 

$

9,606

 

 

$

2,274

 

 

$

16,140

 

 

$

18,414

 

 

As of September 30, 2018, and December 31, 2017, contractual maturities of our short-term investments were less than one year, and gross unrealized gains and losses on those investments were not material.

 

5. Goodwill and Intangible Assets

Goodwill was originally recorded in September 2011 in connection with the acquisition of MPC Data, Ltd. (renamed BSQUARE EMEA, Ltd. in 2015), a United Kingdom based provider of software engineering services. The excess of the acquisition consideration over the fair value of net assets acquired was recorded as goodwill. There were no changes in the carrying amount of goodwill during the three and nine months ended September 30, 2018.

Intangible assets are related to customer relationships that we acquired from TestQuest, Inc. in November 2008 and from the acquisition of BSQUARE EMEA, Ltd. in September 2011.

Information regarding our intangible assets is as follows (in thousands):

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Book

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Customer relationships:

 

$

1,275

 

 

$

(984

)

 

$

291

 

 

$

1,275

 

 

$

(910

)

 

$

365

 

 

9


Amortization expense was $25,000 for each of the three months ended September 30, 2018 and 2017, and $74,000 for each of the nine months ended September 30, 2018 and 2017. Amortization in future periods is expected to be as follows (in thousands):

 

Remainder of 2018

 

$

24

 

2019

 

 

98

 

2020

 

 

98

 

2021

 

 

71

 

Total

 

$

291

 

 

6. Credit Agreement

Line of Credit

On September 22, 2015, we entered into a two-year unsecured line of credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (the “Bank”) in the principal amount of up to $12.0 million. On September 29, 2016, the Credit Agreement was modified to extend the final due date for an additional year to September 22, 2018. At our election, advances under the Credit Agreement bore interest at either (1) a rate per annum equal to 1.5% below the Bank’s applicable prime rate or (2) 1.5% above the Bank’s applicable LIBOR rate, in each case as defined in the Credit Agreement. The Credit Agreement contained customary affirmative and negative covenants, including compliance with financial ratios and metrics, as well as limitations on our ability to pay distributions or dividends while there was an ongoing event of default or to the extent such distribution caused an event of default. We were required to maintain certain minimum interest coverage ratios, liquidity levels and asset coverage ratios as defined in the Credit Agreement. In September 2016, we entered into a letter of credit agreement for $250,000, secured by the Credit Agreement in connection with the lease of our corporate headquarters. Accordingly, the maximum principal amount available, if we were eligible to borrow under the Credit Agreement, was reduced to $11.75 million while the Credit Agreement was in effect.

The Credit Agreement expired on September 22, 2018 in accordance with its terms with no amounts outstanding. There were no amounts outstanding under the Credit Agreement at December 31, 2017.

7. Shareholders’ Equity

Equity Compensation Plans

We have a stock plan (the “Stock Plan”) and an inducement stock plan for newly hired employees (together with the Stock Plan, the “Plans”). Under the Plans, stock options to purchase shares of our common stock may be granted with a fixed exercise price that is equal to the fair market value of our common stock on the date of grant. These options have a term of up to 10 years and vest over a predetermined period, generally four years. Incentive stock options granted under the Stock Plan may only be granted to our employees. The Plans also allow for awards of non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, and restricted stock units (“RSUs”).

Stock-Based Compensation

The estimated fair value of stock-based awards is recognized as compensation expense over the vesting period of the award, net of estimated forfeitures. We estimate forfeitures based on historical experience and expected future activities. The fair value of RSUs is determined based on the number of shares granted and the quoted price of our common stock on the date of grant. The fair value of stock option awards is estimated at the grant date based on the fair value of each vesting tranche as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The fair values of our stock option grants were estimated with the following weighted average assumptions:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Dividend yield

 

 

0

%

 

 

0

%

 

 

0

%

 

 

0

%

Expected life

 

4.4 years

 

 

3.3 years

 

 

5.3 years

 

 

3.3 years

 

Expected volatility

 

 

56

%

 

 

52

%

 

 

55

%

 

 

52

%

Risk-free interest rate

 

 

2.7

%

 

 

1.7

%

 

 

2.5

%

 

 

1.7

%

 

10


The impact on our results of operations from stock-based compensation expense was as follows (in thousands, except per share amounts):  

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of revenue — professional engineering service

$

11

 

 

$

13

 

 

$

30

 

 

$

98

 

Selling, general and administrative

 

237

 

 

 

457

 

 

 

421

 

 

 

1,061

 

Research and development

 

57

 

 

 

70

 

 

 

169

 

 

 

191

 

Total stock-based compensation expense

$

305

 

 

$

540

 

 

$

620

 

 

$

1,350

 

Per diluted share

$

0.02

 

 

$

0.04

 

 

$

0.05

 

 

$

0.11

 

 

Stock Option Activity

The following table summarizes stock option activity under the Plans:

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

Contractual Life

 

 

Aggregate

 

 

 

Number of Shares

 

 

Exercise Price

 

 

(in years)

 

 

Intrinsic Value

 

Balance at December 31, 2017

 

 

1,912,161

 

 

$

4.88

 

 

 

7.61

 

 

$

781,735

 

Granted

 

 

283,893

 

 

 

3.78

 

 

 

 

 

 

 

 

 

Exercised

 

 

(2,422

)

 

 

3.59

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(385,736

)

 

 

4.94

 

 

 

 

 

 

 

 

 

Expired

 

 

(332,036

)

 

 

4.17

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018

 

 

1,475,860

 

 

$

4.81

 

 

 

6.88

 

 

$

3,950

 

Vested and expected to vest at September 30, 2018

 

 

1,366,764

 

 

$

4.82

 

 

 

6.73

 

 

$

3,259