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EX-10.5 - EX-10.5 - Identiv, Inc.inve-ex105_225.htm
EX-10.4 - EX-10.4 - Identiv, Inc.inve-ex104_224.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 March 31, 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 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.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

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 May 4, 2018, the registrant had  15,172,425 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 March 31, 2018 and December 31, 2017

3

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017

5

 

 

Condensed Consolidated Statement of Equity for the Three Months Ended March 31, 2018

6

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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

27

Item 4.

 

Controls and Procedures

37

 

 

PART II. OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

38

Item 1A.

 

Risk Factors

39

Item 2.    

 

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 5.

 

Other Information

39

Item 6.

 

Exhibits

40

 

 

SIGNATURES

41

 

 

 

2


PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

IDENTIV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except par value)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

16,685

 

 

$

19,052

 

Accounts receivable, net of allowances of $270 and $306 as of March 31, 2018

   and December 31, 2017, respectively

 

 

12,518

 

 

 

12,282

 

Inventories

 

 

11,556

 

 

 

11,126

 

Prepaid expenses and other current assets

 

 

1,853

 

 

 

1,779

 

Total current assets

 

 

42,612

 

 

 

44,239

 

Property and equipment, net

 

 

2,151

 

 

 

2,043

 

Intangible assets, net

 

 

10,217

 

 

 

4,365

 

Goodwill

 

 

5,880

 

 

 

 

Other assets

 

 

1,072

 

 

 

715

 

Total assets

 

$

61,932

 

 

$

51,362

 

LIABILITIES AND STOCKHOLDERS´ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,028

 

 

$

5,863

 

Current portion -  payment obligation

 

 

919

 

 

 

888

 

Current portion -  financial liabilities, net of discount and debt issuance costs of $557

   and $404, respectively

 

 

12,401

 

 

 

9,829

 

Notes payable

 

 

2,000

 

 

 

 

Deferred revenue

 

 

4,327

 

 

 

1,090

 

Accrued compensation and related benefits

 

 

1,897

 

 

 

1,515

 

Other accrued expenses and liabilities

 

 

3,202

 

 

 

2,020

 

Total current liabilities

 

 

31,774

 

 

 

21,205

 

Long-term payment obligation

 

 

2,731

 

 

 

2,998

 

Long-term financial liabilities, net of discount and debt issuance costs of $424 and

   $582, respectively

 

 

2,622

 

 

 

2,921

 

Other long-term liabilities

 

 

387

 

 

 

385

 

Total liabilities

 

 

37,514

 

 

 

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; 0

   and 3,000 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively

 

 

3

 

 

 

3

 

Common stock, $0.001 par value: 50,000 shares authorized; 16,088 and 15,341 shares

   issued and 15,143 and 14,436 shares outstanding as of March 31, 2018 and

   December 31, 2017, respectively

 

 

16

 

 

 

15

 

Additional paid-in capital

 

 

431,383

 

 

 

428,470

 

Treasury stock, 947 and 905 shares as of March 31, 2018 and December 31, 2017,

   respectively

 

 

(7,647

)

 

 

(7,485

)

Accumulated deficit

 

 

(401,951

)

 

 

(399,647

)

Accumulated other comprehensive income

 

 

2,784

 

 

 

2,675

 

Total Identiv, Inc. stockholders' equity

 

 

24,588

 

 

 

24,031

 

Noncontrolling interest

 

 

(170

)

 

 

(178

)

Total stockholders´ equity

 

 

24,418

 

 

 

23,853

 

Total liabilities and stockholders' equity

 

$

61,932

 

 

$

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 March 31,

 

 

 

2018

 

 

2017

 

Net revenue

 

$

16,528

 

 

$

13,392

 

Cost of revenue

 

 

10,020

 

 

 

7,695

 

Gross profit

 

 

6,508

 

 

 

5,697

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

1,687

 

 

 

1,477

 

Selling and marketing

 

 

3,903

 

 

 

3,379

 

General and administrative

 

 

2,555

 

 

 

1,787

 

Restructuring and severance

 

 

110

 

 

 

 

Total operating expenses

 

 

8,255

 

 

 

6,643

 

Loss from operations

 

 

(1,747

)

 

 

(946

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(476

)

 

 

(674

)

Gain on extinguishment of debt

 

 

 

 

 

977

 

Foreign currency (losses) gains, net

 

 

(38

)

 

 

(152

)

Loss before income taxes and noncontrolling interest

 

 

(2,261

)

 

 

(795

)

Income tax (provision) benefit

 

 

(40

)

 

 

118

 

Loss before noncontrolling interest

 

 

(2,301

)

 

 

(677

)

Less: Income attributable to noncontrolling interest

 

 

(5

)

 

 

(10

)

Net loss attributable to Identiv, Inc.

 

$

(2,306

)

 

$

(687

)

Basic and diluted net loss per share attributable to Identiv, Inc.

 

$

(0.15

)

 

$

(0.06

)

Weighted average shares used to compute basic and diluted

   loss per share

 

 

15,111

 

 

 

11,127

 

 

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 March 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(2,301

)

 

$

(677

)

Other comprehensive income (loss), net of income taxes:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

112

 

 

 

183

 

Total other comprehensive income (loss), net of income

   taxes

 

 

112

 

 

 

183

 

Comprehensive loss

 

 

(2,189

)

 

 

(494

)

Less: Comprehensive income attributable to

   noncontrolling interest

 

 

(8

)

 

 

(6

)

Comprehensive loss attributable to Identiv, Inc. common

   stockholders

 

$

(2,197

)

 

$

(500

)

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series B Convertible Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Addional Paid-in Capital

 

 

Treasury

Stock

 

 

Accumulated

Deficit

 

 

Accumulated Other Comprehensive Income

 

 

Noncontrolling Interest

 

 

Total

Equity

 

Balances, December 31, 2017

 

 

3,000

 

 

$

3

 

 

 

14,436

 

 

$

15

 

 

$

428,470

 

 

$

(7,485

)

 

$

(399,647

)

 

$

2,675

 

 

$

(178

)

 

$

23,853

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,306

)

 

 

 

 

 

5

 

 

 

(2,301

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

109

 

 

 

3

 

 

 

112

 

Impact of adoption of Topic

   606 (Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

2

 

Issuance of common stock in

   connection with acquisition

   of business

 

 

 

 

 

 

 

 

 

 

610

 

 

 

1

 

 

 

2,293

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,294

 

Issuance of common stock

   in connection with

   vesting of stock awards

 

 

 

 

 

 

 

 

139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

635

 

Shares withheld in payment

   of taxes in connection with

   net share settlement of

   restricted stock units

 

 

 

 

 

 

 

 

(42

)

 

 

 

 

 

 

 

 

(162

)

 

 

 

 

 

 

 

 

 

 

 

(162

)

Issuance costs associated

   with issuance of Series B

   preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20

)

Issuance of shares to non-

   employees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

Balances, March 31, 2018

 

 

3,000

 

 

$

3

 

 

 

15,143

 

 

$

16

 

 

$

431,383

 

 

$

(7,647

)

 

$

(401,951

)

 

$

2,784

 

 

$

(170

)

 

$

24,418

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(2,301

)

 

$

(677

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

740

 

 

 

630

 

Gain on extinguishment of debt

 

 

 

 

 

(977

)

Accretion of interest on long-term payment obligation

 

 

64

 

 

 

87

 

Amortization of debt issuance costs

 

 

109

 

 

 

223

 

Stock-based compensation expense

 

 

635

 

 

 

591

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,327

 

 

 

625

 

Inventories

 

 

(167

)

 

 

(995

)

Prepaid expenses and other assets

 

 

(262

)

 

 

(359

)

Accounts payable

 

 

(429

)

 

 

1,431

 

Payment obligation liability

 

 

(300

)

 

 

(291

)

Deferred revenue

 

 

311

 

 

 

(159

)

Accrued expenses and other liabilities

 

 

(262

)

 

 

(910

)

Net cash provided by (used in) operating activities

 

 

465

 

 

 

(781

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(67

)

 

 

(50

)

Acquisition of business, net of acquired cash

 

 

(1,384

)

 

 

 

Net cash used in investing activities

 

 

(1,451

)

 

 

(50

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt, net of issuance costs

 

 

9,599

 

 

 

21,484

 

Repayment of debt

 

 

(10,952

)

 

 

(22,014

)

Taxes paid related to net share settlement of restricted stock units

 

 

(162

)

 

 

(68

)

Net cash used in financing activities

 

 

(1,515

)

 

 

(598

)

Effect of exchange rates on cash

 

 

134

 

 

 

195

 

Net decrease in cash

 

 

(2,367

)

 

 

(1,234

)

Cash at beginning of period

 

 

19,052

 

 

 

9,116

 

Cash at end of period

 

$

16,685

 

 

$

7,882

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

353

 

 

$

415

 

Taxes paid, net

 

$

44

 

 

$

46

 

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

 

$

2,294

 

 

$

 

Promissory notes issued for acquisition of business

 

$

2,000

 

 

$

 

Share-settled liability associated with acquisition of business

 

$

1,000

 

 

$

 

 

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

March 31, 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 months ended March 31, 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 months ended March 31, 2018 or 2017. No customer represented 10% or more of the Company’s accounts receivable balance at March 31, 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 trade names, non-compete agreements, 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 three to twelve years and are reviewed for impairment in accordance with ASC 360, Property, Plant and Equipment.

 

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

8


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 March 31, 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.

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.

 

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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 months ended March 31, 2018, approximately 95% of the Company’s revenue was recognizable on delivery and 5% over time.

 

The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated balance sheet as of March 31, 2018 (in thousands):

 

 

Balance at

December 31, 2017

 

 

Adjustments

 

 

Balance at

January 1, 2018

 

Deferred revenue - current

$

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 three months ended March 31, 2018 (in thousands, except per share amounts):

 

 

As Reported Under Topic 606

 

 

Adjustments

 

 

Balance Under Prior GAAP

 

Net revenue

$

16,528

 

 

$

 

 

$

16,528

 

Cost of revenue

 

10,020

 

 

 

 

 

 

10,020

 

Operating expenses

 

8,255

 

 

 

 

 

 

8,255

 

Provision for income taxes

 

(40

)

 

 

 

 

 

(40

)

Net loss

 

(2,306

)

 

 

 

 

 

(2,306

)

Basic and diluted net loss per share

 

(0.15

)

 

 

 

 

 

 

(0.15

)

 

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.

 

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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

 

Judgment is required to determine the standalone selling price ("SSP") for each distinct performance obligation. The Company uses a single amount to estimate SSP for items that are not sold separately, including perpetual licenses sold with technical support and software maintenance. The Company uses the SSP when each of the products and services are sold separately and needs to determine whether there is a discount that needs to be allocated based on the relative SSP of the various products and services.

 

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The Company’s products are generally sold with a right of return which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur.

 

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 March 31,

 

 

2018

 

 

2017 (1)

 

 

Point-in-

Time

 

 

Over Time

 

 

Total

 

 

Point-in-

Time

 

 

Over Time

 

 

Total

 

Americas

$

12,484

 

 

$

748

 

 

$

13,232

 

 

$

8,859

 

 

$

249

 

 

$

9,108

 

Europe and the Middle East

 

2,294

 

 

 

14

 

 

 

2,308

 

 

 

1,867

 

 

 

12

 

 

 

1,879

 

Asia-Pacific

 

985

 

 

 

3

 

 

 

988

 

 

 

2,403

 

 

 

2

 

 

 

2,405

 

Total

$

15,763

 

 

$

765

 

 

$

16,528

 

 

$

13,129

 

 

$

263

 

 

$

13,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 three months ended March 31, 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

 

2,637

 

Deferral of revenue billed in current period, net of recognition

 

895

 

Recognition of revenue deferred in prior periods

 

(293

)

Balance as of March  31, 2018

$

4,327

 

 

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Unsatisfied Performance Obligations

 

Revenue expected to be recognized in any future period 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 $3.5 million as of March 31, 2018. Since the Company typically invoices customers at contract inception, this amount is included in deferred revenue balance. As of March 31, 2018, the Company expects to recognize approximately 54% of the revenue related to these unsatisfied performance obligations during the remainder of 2018, 34% during 2019, and 12% 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 months ended March 31, 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 $6.9 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 609,880 shares of the Company’s common stock with a value of approximately $2.3 million.  An aggregate of up to $1.0 million, or an additional 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.

 

Additionally, in the event that the surviving corporation 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 March 31, 2018.

 

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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

 

2,589

 

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

 

9,844

 

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

 

993

 

Goodwill

 

5,880

 

Purchase price

$

6,873

 

 

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

 

 

 

5

 

Customer relationships

 

2,900

 

 

 

10

 

Developed technology

 

3,000

 

 

 

10

 

 

$

6,300

 

 

 

 

 

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of 3VR resulted in $5.9 million of goodwill. With the addition of the 3VR video security and analytics platform, the Company believes this goodwill largely reflects the expansion of its Hirsch product and service offerings through the complementary offerings of 3VR. In accordance with ASC 350, goodwill will not be amortized but will be tested for impairment at least annually.

 

The results of operations of 3VR for the period from the acquisition date through March 31, 2018 are included in the accompanying condensed consolidated statements of operations. Pursuant to ASC 805, Business Combinations, the Company incurred and expensed approximately$212,000 and $485,000 in acquisition and transitional costs associated with the acquisition of 3VR during the year ended December 31, 2017 and the three months ended March 31, 2018, respectively which were primarily general and administrative related.

 

 

4. Fair Value Measurements

The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. Under ASC 820, Fair Value Measurement and Disclosures (“ASC 820”), the fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:

 

Level 1 – Quoted prices (unadjusted) for identical assets and liabilities in active markets;

 

Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly; and

 

Level 3 – Unobservable inputs.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of March 31, 2018 and December 31, 2017, there were no assets that are measured and recognized at fair value on a recurring basis. There were no cash equivalents as of March 31, 2018 and December 31, 2017.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

Certain of the Company's assets, including intangible assets, and privately-held investments, are measured at fair value on a nonrecurring basis if impairment is indicated. Purchased intangible assets are measured at fair value primarily using discounted cash flow projections. For additional discussion of measurement criteria used in evaluating potential impairment involving goodwill and intangible assets, refer to Note 5, Goodwill and Intangible Assets.  

Privately-held investments, which are normally carried at cost, are measured at fair value due to events and circumstances that the Company identified as significantly impacting the fair value of investments. The Company estimates the fair value of its privately-held investments using an analysis of the financial condition and near-term prospects of the investee, including recent financing activities and the investee's capital structure.

As of March 31, 2018 and December 31, 2017, the Company had $0.3 million of privately-held investments measured at fair value on a nonrecurring basis which were classified as Level 3 assets due to the absence of quoted market prices and inherent lack of liquidity. The Company reviews its investments to identify and evaluate investments that have an indication of possible impairment. The Company adjusts the carrying value for its privately-held investments for any impairment if the fair value is less than the carrying value of the respective assets on an other-than-temporary basis. The amount of privately-held investments is included in other assets in the accompanying condensed consolidated balance sheets.

As of March 31, 2018, the Company had $1.0 million of liabilities measured at fair value on a nonrecurring basis which were classified as Level 1 liabilities due to the settlement provisions being a set amount of shares of the Company’s common stock. There were no share settled liabilities as of March 31, 2018. The share settled liabilities is included in accrued expenses in the accompanying condensed consolidated balance sheet.

Assets and Liabilities Not Measured at Fair Value

The carrying amounts of the Company's accounts receivable, prepaid expenses and other current assets, accounts payable, financial liabilities and other accrued liabilities approximate fair value due to their short maturities.

 

 

5. Stockholders’ Equity

 

Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock, 40,000 of which have been designated as Series A Participating Preferred Stock, par value $0.001 per share, and 5,000,000 of which have been designated as Series B Non-Voting Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”). No shares of the Company’s Series A Participating Preferred Stock were outstanding as of December 31, 2017 and 2016. During 2017, the Company’s board of directors (the “Board”) authorized the issuance of up to 5,000,000 shares of the Series B Preferred Stock, 3,000,000 of which were outstanding as of March 31, 2018.

The Board may from time to time, without further action by the Company’s stockholders, direct the issuance of shares of preferred stock in other series and may, at the time of issuance, determine the rights, preferences and limitations of each series, including voting rights, dividend rights and redemption and liquidation preferences. Satisfaction of any dividend preferences of outstanding shares of preferred stock would reduce the amount of funds available for the payment of dividends on shares of the Company’s common stock. Holders of shares of preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of shares of the Company’s common stock. Upon the affirmative vote of the Board, without stockholder approval, the Company may issue shares of preferred stock with voting and conversion rights which could adversely affect the holders of shares of its common stock.

Private Placement of Series B Preferred Stock

On December 20, 2017, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of 21 April Fund, Ltd. and 21 April Fund, LP (collectively, the “Purchasers”), pursuant to which the Company, in a private placement, agreed to issue and sell to the Purchasers an aggregate of up to 5,000,000 shares of the Series B Preferred Stock, $0.001 par value per share (collectively referred to as the “Shares”). The Purchasers agreed to purchase an aggregate of 3,000,000 Shares at a price of $4.00

15


per share in cash at the initial closing of the transaction, and at the sole option of the Company, an additional 2,000,000 Shares at a price of $4.00 per share in cash at a second closing, if any (the “Private Placement”). The total purchase price payable to the Company is $20,000,000, of which $12,000,000 was paid at the initial closing and $8,000,000 will be paid, if at all, at the second closing. The Company is required to use the proceeds from the issuance of the Shares to pay off existing debt obligations and to fund future acquisitions of technology, business and other assets.

 

Each Share shall be convertible into the Company’s common stock (i) following the sixth (6th) anniversary of the initial closing of the Private Placement or (ii) if earlier, during the thirty (30) day period following the last trading day of any period of three (3) or more consecutive trading days that the closing market price of the Company’s common stock exceeds $10.00. Each Share is convertible at the option of the holder of shares of Series B Preferred Stock into such number of shares of the Company’s common stock determined by taking the accreted value of such Share (purchase price plus accrued but unpaid dividends) and dividing such value by the stated value of such Share ($4.00 per share, subject to adjustment for dilutive issuances, stock splits, stock dividends and the like); provided, however, that the Company shall not convert any Shares if doing so would cause the holder thereof, along with its affiliates, to beneficially own in excess of 19.9% of the outstanding common stock immediately after giving effect to the applicable conversion (the “Ownership Limitation”), unless waiver of this restriction has been effected by the holder requesting conversion of Shares.

 

Based on the current conversion price, the outstanding shares of the Series B Preferred Stock as of March 31, 2018 would be convertible into 3,000,000 shares of the Company’s common stock.  However, the conversion rate will be subject to adjustment in the event of certain instances, such as if the Company issues shares of its common stock at a price less than $4.00 per common share, subject to a minimum conversion price of $3.27 per share.  As of March 31, 2018, none of the contingent conditions to adjust the total common shares to convert the Shares had been met.

 

Each Share is entitled to an annual dividend of 5% for the first six (6) years following the issuance of such Share and 3% for each year thereafter, with the Company retaining the option to settle each year’s dividend after the tenth (10th) year in cash. The dividends accrue and are payable in kind upon such time as the Shares convert into the Company’s common stock. In general, the Shares are not entitled to vote except in certain limited cases, including in change of control transactions where the expected price per share distributable to the Company’s stockholders is expected to be less than $4.00 per share. The Certificate of Designation with respect to the Series B Preferred Stock further provides that in the event of, among other things, any change of control, liquidation or dissolution of the Company, the holders of the Series B Preferred Stock will be entitled to receive, on a pari passu basis with the holders of the common stock, the same amount and form of consideration that the holders of the Company’s common stock receive (on an as-if-converted-to-common-stock basis and without regard to the Ownership Limitation).

Common Stock Warrants

On August 13, 2014, in connection with the Company’s entry into a consulting agreement, the Company issued a consultant a warrant to purchase up to 85,000 shares of the Company’s common stock at a per share exercise price of $10.70 (the “2014 Consultant Warrant”). One fourth of the shares under the warrant are exercisable for cash three months from the date the 2014 Consultant Warrant was issued and quarterly thereafter. The 2014 Consultant Warrant expires on August 13, 2019. In the event of an acquisition of the Company, the 2014 Consultant Warrant shall terminate and no longer be exercisable as of the closing of the acquisition. As of March 31, 2018, none of the shares under the 2014 Consultant Warrant had been exercised.

On February 8, 2017, the Company entered into Loan and Security Agreements (each, a “Loan and Security Agreement”) with each of East West Bank ("EWB") and Venture Lending & Leasing VII, Inc. and Venture Lending & Leasing VIII, Inc. (collectively referred to as “VLL7 and VLL8”) as discussed in Note 7, Financial Liabilities. The Loan and Security Agreement with EWB, as amended, provides for a $16.0 million revolving loan facility (the “Revolving Loan Facility”), and the Loan and Security Agreement with VLL7 and VLL8 provides for a term loan (the “Term Loan”) in an aggregate principal amount of $10.0 million (the “Term Loan Facility”). In connection with the Company's Revolving Loan Facility, the Company issued to EWB a warrant (the "EWB Warrant") to purchase up to 40,000 shares of the Company's common stock at a per share exercise price of $3.64, and in connection with the Company’s Term Loan Facility, issued to each of VLL7 and VLL8 a warrant to purchase 290,000 shares of the Company's common stock at a per share exercise price of $2.00 (the “VLL7 Warrant” and the “VLL8 Warrant,” respectively). The Company calculated the fair value of the EWB Warrant, the VLL7 Warrant and the VLL8 Warrant using the Black-Scholes pricing model using the following assumptions: estimated volatility of 78.8%, risk-free interest rate of 1.94%, no dividend yield, and an expected life of five years. The fair values of the EWB Warrant, the VLL7 Warrant and the VLL8 Warrant of $125,000, $1,037,500 and $1,037,500, respectively, were classified as equity as the settlement of the warrants will be in shares and is within the control of the Company. Each of the EWB Warrant, the VLL7 Warrant and the VLL8 Warrant is immediately exercisable for cash or by net exercise and will expire five years after its issuance, or on February 8, 2022. In connection with entering into the Loan and Security Agreements with EWB and VLL7 and VLL8, warrants to purchase an aggregate of 400,000 shares of common stock issued to the Company’s previous lender were cancelled.

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In connection with securing of the new credit facilities and cancelling of all the warrants previously issued to the previous lender, the Company issued a warrant to a consultant to purchase 60,000 shares of its common stock at an exercise price of $4.60 per share (the “2017 Consultant Warrant”).  The Company calculated the fair value of the 2017 Consultant Warrant using the Black Scholes pricing model using the following assumptions: estimated volatility of 78.8%, risk-free interest rate of 1.22%, no dividend yield, and an expected life of two years. The fair value of the 2017 Consultant Warrant of $119,000 was classified as equity as the settlement of the warrant will be in shares and is within the control of the Company.  The 2017 Consultant Warrant is immediately exercisable for cash or by net exercise and will expire two years after its issuance, or on February 8, 2019.       

Below is the summary of outstanding warrants issued by the Company as of March 31, 2018:

 

Warrant Type

 

Number of Shares

Issuable Upon

Exercise

 

 

Weighted

Average

Exercise Price

 

 

Issue Date

 

Expiration Date

2014 Consultant Warrant

 

 

85,000

 

 

$

10.70

 

 

August 13, 2014

 

August 13, 2019

East West Bank Warrant

 

 

40,000

 

 

 

3.64

 

 

February 8, 2017

 

February 8, 2022

VLL7 and VLL8 Warrants

 

 

580,000

 

 

 

2.00

 

 

February 8, 2017

 

February 8, 2022

2017 Consultant Warrant

 

 

60,000

 

 

 

4.60

 

 

February 8, 2017

 

February 8, 2019

Total

 

 

765,000

 

 

 

 

 

 

 

 

 

Stock-Based Compensation Plans

The Company has stock-based compensation plans to attract, motivate, retain and reward employees, directors and consultants by providing its Board or a committee of the Board the discretion to award equity incentives to these persons. The Company’s stock-based compensation plans consist of the 2007 Stock Option Plan (the “2007 Plan”) and the 2011 Incentive Compensation Plan (the “2011 Plan”), as amended. Shares are no longer available for issuance under the Company’s 2010 Bonus and Incentive Plan (the “2010 Plan”).

 

Stock Bonus and Incentive Plans   

On June 6, 2011, the Company’s stockholders approved the 2011 Plan, which is administered by the Compensation Committee of the Board. The 2011 Plan provides that stock options, stock units, restricted shares, and stock appreciation rights may be granted to executive officers, directors, consultants, and other key employees. The Company reserved 400,000 shares of common stock under the 2011 Plan, plus 459,956 shares of common stock that remained available for delivery under the 2007 Plan and the 2010 Plan as of June 6, 2011. In aggregate, as of June 6, 2011, 859,956 shares were available for future grants under the 2011 Plan, including shares rolled over from 2007 Plan and 2010 Plan. Subsequent to June 6, 2011 through December 31, 2015, the number of shares of common stock authorized for issuance under the 2011 Plan had been increased by 1.0 million shares. On May 12, 2016, the Company’s stockholders approved an amendment and restatement of the 2011 Plan to, among other things, increase the number of shares of common stock authorized for issuance by 2.0 million shares and extend the term of the 2011 Plan.  

Stock Option Plans

A summary of activity for the Company’s stock option plans for the three months ended March 31, 2018 follows:

 

 

 

Number

Outstanding

 

 

Average Exercise

Price per Share

 

 

Weighted Average

Remaining

Contractual Term

(Years)

 

 

Average Intrinsic

Value

 

Balance at December 31, 2017

 

 

672,441

 

 

$

6.28

 

 

 

 

 

$

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled or Expired

 

 

(10,589

)

 

 

17.85

 

 

 

 

 

 

 

 

 

Exercised