10. Segment Disclosure:

ASC Topic 280, Segment Reporting, establishes standards for reporting information about operating segments, products and services, geographic areas of operations and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing business performance. The Company’s chief operating decision-making group is the Executive Staff, which is comprised of the Chief Executive Officer and his direct reports (CODM).

Prior to the fourth quarter of 2013, the Company operated as one operating segment. Effective in the fourth quarter of 2013, the Company changed the way it managed the business to focus the business on two operating segments based on homogeneity of products and technology- Industrial Internet of Things (IIoT) and Grid Modernization (Grid). As a result of the change, product families and services were organized and evaluated within the above mentioned operating segments.

The Company’s IIoT segment sells products and services aimed at Horizontal Embedded Control Platforms, such as LONWORKS and IzoT, which include components, control nodes, and development software, and which are sold typically to Original Equipment Manufacturers (OEMs) to build into their industrial application solutions. These platforms allow a single device to be brought to market as a LONWORKS®, BACnet®, or other protocol-supporting device; and it can be used with any underlying wired or wireless communications link, such as Ethernet, RS-485, Wi-Fi, 15.4, or Echelon’s free topology (FT) standard. The IzoT platform provides a smooth migration path for legacy devices to the IIoT. The product portfolio includes Smart Transceivers, SmartServer Controllers, LNS and OpenLNS Operating Systems, Outdoor Lighting Controllers, SmartServer Segment Controllers and PL/RF Bridges.

The Company’s Grid segment primarily offers vertical solutions and platform components that connect homes to the grid and allow utilities to accurately collect billing data and vital health statistics with a high degree of field-proven reliability. In addition to usage data required for billing the consumer, this segment's products collect a large number of power quality metrics at the smart meter and from other devices such as distribution transformers. This data can be used in applications such as transformer monitoring, theft detection, and fault detection to guide preventive maintenance and to reduce energy loss. The product portfolio includes Smart Meters, Distributed Control Nodes (DCNs) or Data Concentrators, NES System Software, Element Manager and Control Point Modules.

The Company operates in three main geographic areas: the Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific / Japan (“APJ”). Each geographic area provides products and services to the Company’s customers located in the respective region. The Company’s long-lived assets include property and equipment, goodwill, purchased technology, and deposits on its leased facilities. Long-lived assets are attributed to geographic areas based on the country where the assets are located. As of June 30, 2014 and December 31, 2013, long-lived assets of approximately $19.5 million and $24.6 million, respectively, were domiciled in the United States. Long-lived assets for all other locations are not material to the condensed consolidated financial statements.

The CODM allocates resources and assesses performance of operating segments based on a non-GAAP measure of segment contribution margin comprising revenue, direct costs and operating expenses, such as standard cost of goods sold, research and development, and sales and marketing expenses; indirect costs, such as manufacturing overhead and other cost of revenues allocated based on factors including headcount, usage, and revenue, as well as the benefit from allocation of loss to noncontrolling interest (this impact is solely noted in the Grid segment). The CODM does not allocate to the Company's business segments certain operating expenses managed separately at the corporate level. Corporate unallocated expenses include general and administrative costs, stock-based compensation expenses, restructuring charges and other one-time, non-routine charges such as litigation charges and impairment charges. Operating segments do not generate inter-segment revenue. We do not allocate gains and losses from interest and other income, or taxes to operating segments. The accounting policies for each segment are the same as those disclosed by the Company for its condensed consolidated financial statements.

The following table summarizes financial information for each segment used by the CODM for the three months ended June 30, 2014 (in thousands):



	Grid			IIoT		Shared/ Corporate			Stock Compensation expenses			Adjustments to reconcile to GAAP reported amounts			Company-wide total
Revenues	$	6,058		$	8,981	$	—		$	—		$	—		$	15,039
Segment gross profit ¹	2,060			5,497		—			(37		)				7,520
Segment contribution	(1,840		)	1,231		(3,160		)	(423		)	—			(4,192		)
Corporate unallocated expenses
Goodwill impairment charges												$	(3,388	)	$	(3,388	)
Loss on write down of property, equipment and other ²												(577		)	(577		)
Interest and other income, net												(70		)	(70		)
Interest expense on lease financing obligations												(280		)	(280		)
Income tax expense												$	106		$	106
Net loss attributable to Echelon Corporation Stockholders															$	(8,613	)

The following table summarizes financial information for each segment used by the CODM for the six months ended June 30, 2014 (in thousands):



	Grid			IIoT		Shared/ Corporate			Stock Compensation expenses			Adjustments to reconcile to GAAP reported amounts			Company-wide total
Revenues	$	12,925		$	19,905	$	—		$	—		$	—		$	32,830
Segment gross profit ¹	3,969			12,370		—			(172		)				16,167
Segment contribution	(3,944		)	3,951		(6,614		)	(1,306		)	—			(7,913		)
Corporate unallocated expenses
Goodwill impairment charges												(3,388		)	(3,388		)
Loss on write down of property, equipment and other ²												(577		)	(577		)
Interest and other income, net												(59		)	(59		)
Interest expense on lease financing obligations												(568		)	(568		)
Income tax expense												$	81		$	81
Net loss attributable to Echelon Corporation Stockholders															$	(12,586	)

¹ Represents unallocated share based compensation expenses considered in GAAP results as part of cost of revenues, but excluded from segment gross profit calculation as presented to the CODM. This amount has been presented to reconcile the segment gross profit to total gross profit presented in the Condensed Consolidated Statement of Operations.

²Represents loss on write down of assets, excluding the portion attributable to non-controlling interests.

The following table summarizes financial information for each segment used by the CODM for the three months ended June 30, 2013 (in thousands):



	Grid			IIoT		Shared/ Corporate			Stock Compensation expenses		Adjustments to reconcile to GAAP reported amounts			Company-wide total
Revenues	$	13,439		$	11,397	$	—		$	—	$	—		$	24,836
Segment gross profit ¹	4,693			7,186		—			76					11,955
Segment contribution	(209		)	3,000		(3,197		)	161		—			(245		)
Corporate unallocated expenses
Litigation charges											—			—
Restructuring charges											—			—
Interest and other income, net											(164		)	(164		)
Interest expense on lease financing obligations											(312		)	(312		)
Income tax expense											$	106		$	106
Net loss attributable to Echelon Corporation Stockholders														$	(827	)

The following table summarizes financial information for each segment used by the CODM for the six months ended June 30, 2013 (in thousands):



	Grid			IIoT		Shared/ Corporate			Stock Compensation expenses			Adjustments to reconcile to GAAP reported amounts			Company-wide total
Revenues	$	26,857		$	23,161	$	—		$	—		$	—		$	50,018
Segment gross profit ¹	9,163			14,650		—			(82		)				23,731
Segment contribution	(1,578		)	6,064		(6,708		)	(1,222		)	—			(3,444		)
Corporate unallocated expenses
Litigation charges												(3,452		)	(3,452		)
Restructuring charges												(2,522		)	(2,522		)
Interest and other income, net												120			120
Interest expense on lease financing obligations												(633		)	(633		)
Income tax expense												$	143		$	143
Net loss attributable to Echelon Corporation Stockholders															$	(10,074	)

In North America, the Company sells its products primarily through a direct sales organization and select third-party electronics representatives. Outside North America, the Company sells its products through direct sales organizations, value-added resellers, and local distributors, primarily in EMEA and APJ. Revenues are attributed to geographic areas based on the country where the products are shipped to or the services are delivered. Summary revenue information by geography for the three and six months ended June 30, 2014 and 2013 is as follows (in thousands):



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Americas	$	3,496	$	4,736	$	8,641	$	10,805
EMEA	9,180		17,343		18,060		33,923
APJ	2,363		2,757		6,129		5,290
Total	$	15,039	$	24,836	$	32,830	$	50,018

For information regarding the Company’s major customers, please refer to Note 5, Significant Customers.