e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-27687
BSQUARE CORPORATION
(Exact name of registrant as specified in its charter)
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Washington
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91-1650880 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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110 110th Avenue NE, Suite 200,
Bellevue WA
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98004 |
(Address of principal executive offices)
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(Zip Code) |
(425) 519-5900
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of common stock outstanding as of July 31, 2008: 10,032,449
BSQUARE CORPORATION
FORM 10-Q
For the Quarterly Period Ended June 30, 2008
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BSQUARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
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June 30, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
8,958 |
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$ |
4,377 |
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Short-term investments |
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9,575 |
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Accounts receivable, net of allowance for doubtful
accounts of $198 at June 30, 2008 and $199 at
December 31, 2007 |
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9,068 |
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8,273 |
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Prepaid expenses and other current assets |
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630 |
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377 |
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Total current assets |
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18,656 |
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22,602 |
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Long-term investments |
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6,525 |
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Equipment, furniture and leasehold improvements, net |
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977 |
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824 |
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Intangible assets, net |
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186 |
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230 |
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Restricted cash |
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900 |
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1,050 |
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Other non-current assets |
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71 |
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56 |
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Total assets |
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$ |
27,315 |
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$ |
24,762 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
3,103 |
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$ |
2,619 |
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Other accrued expenses |
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2,442 |
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2,877 |
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Accrued compensation |
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1,555 |
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1,393 |
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Accrued legal fees |
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534 |
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534 |
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Deferred revenue |
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575 |
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493 |
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Total current liabilities |
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8,209 |
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7,916 |
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Deferred rent |
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317 |
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331 |
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Commitments and contingencies (Note 6) |
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Shareholders equity: |
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Preferred stock, no par value: 10,000,000 shares
authorized; no shares issued and outstanding |
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Common stock, no par value: 37,500,000 shares
authorized; 10,030,699 shares issued and
outstanding at June 30, 2008 and 9,967,618 shares
issued and outstanding at December 31, 2007 |
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121,941 |
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121,118 |
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Accumulated other comprehensive loss |
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(308 |
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(409 |
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Accumulated deficit |
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(102,844 |
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(104,194 |
) |
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Total shareholders equity |
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18,789 |
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16,515 |
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Total liabilities and shareholders equity |
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$ |
27,315 |
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$ |
24,762 |
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See notes to condensed consolidated financial statements.
3
BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
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Three Months |
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Six Months |
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Ended June 30, |
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Ended June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue: |
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Software |
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$ |
9,680 |
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$ |
10,182 |
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$ |
20,676 |
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$ |
19,377 |
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Service |
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5,746 |
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4,912 |
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11,808 |
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10,813 |
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Total revenue |
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15,426 |
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15,094 |
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32,484 |
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30,190 |
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Cost of revenue: |
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Software |
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7,675 |
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7,937 |
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16,072 |
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14,759 |
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Service (1) |
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3,975 |
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3,650 |
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7,986 |
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7,927 |
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Total cost of revenue |
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11,650 |
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11,587 |
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24,058 |
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22,686 |
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Gross profit |
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3,776 |
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3,507 |
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8,426 |
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7,504 |
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Operating expenses: |
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Selling, general and administrative (1) |
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2,983 |
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2,703 |
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5,992 |
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5,600 |
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Research and development (1) |
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561 |
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598 |
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1,205 |
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1,143 |
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Total operating expenses |
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3,544 |
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3,301 |
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7,197 |
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6,743 |
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Income from operations |
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232 |
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206 |
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1,229 |
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761 |
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Interest and other income |
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88 |
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444 |
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248 |
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567 |
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Income before income taxes |
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320 |
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650 |
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1,477 |
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1,328 |
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Income tax expense |
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(10 |
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(108 |
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(127 |
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(148 |
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Net income |
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$ |
310 |
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$ |
542 |
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$ |
1,350 |
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$ |
1,180 |
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Basic income per share |
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$ |
0.03 |
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$ |
0.06 |
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$ |
0.14 |
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$ |
0.12 |
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Diluted income per share |
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$ |
0.03 |
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$ |
0.05 |
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$ |
0.13 |
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$ |
0.12 |
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Shares used in the calculation of income per share: |
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Basic |
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10,011 |
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9,823 |
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9,994 |
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9,750 |
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Diluted |
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10,253 |
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10,190 |
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10,284 |
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10,010 |
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(1) |
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Includes the following amounts related to non-cash stock-based compensation expense: |
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Cost of revenue service |
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$ |
102 |
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$ |
60 |
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$ |
227 |
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$ |
108 |
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Selling, general and administrative |
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227 |
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170 |
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467 |
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290 |
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Research and development |
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26 |
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12 |
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45 |
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33 |
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Total stock-based compensation expense |
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$ |
355 |
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$ |
242 |
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$ |
739 |
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$ |
431 |
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See notes to condensed consolidated financial statements.
4
BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Six Months Ended |
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June 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net income |
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$ |
1,350 |
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$ |
1,180 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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265 |
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294 |
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Stock-based compensation |
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739 |
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431 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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(738 |
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(2,323 |
) |
Prepaid expenses and other assets |
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(263 |
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65 |
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Accounts payable and accrued expenses |
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204 |
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1,419 |
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Deferred revenue |
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74 |
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54 |
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Deferred rent |
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(14 |
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(12 |
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Net cash provided by operating activities |
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1,617 |
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1,108 |
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Cash flows from investing activities: |
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Purchases of equipment and furniture |
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(367 |
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(267 |
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Proceeds from reduction of restricted cash |
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150 |
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150 |
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Purchases of investments |
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(3,144 |
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Maturities of investments |
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3,050 |
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Net cash provided by (used in) investing activities |
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2,833 |
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(3,261 |
) |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options |
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84 |
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685 |
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Net cash provided by financing activities |
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84 |
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685 |
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Effect of exchange rate changes on cash |
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47 |
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(4 |
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Net increase (decrease) in cash and cash equivalents |
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4,581 |
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(1,472 |
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Cash and cash equivalents, beginning of period |
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4,377 |
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2,483 |
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Cash and cash equivalents, end of period |
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$ |
8,958 |
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$ |
1,011 |
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See notes to condensed consolidated financial statements.
5
BSQUARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by
BSQUARE Corporation (the Company or BSQUARE) pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) for interim financial reporting and include the accounts
of the Company and its subsidiaries. Certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with U.S. generally accepted accounting
principles, or GAAP, have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the unaudited financial statements reflect all material adjustments, which
consist solely of normal recurring adjustments, necessary to present fairly the Companys financial
position as of June 30, 2008 and its operating results and cash flows for the three and six months
ended June 30, 2008 and 2007. The accompanying financial information as of December 31, 2007 is
derived from audited financial statements. Preparing financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Examples include provision for bad debts and income taxes and estimates of progress on
professional service arrangements. 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 the financial statements and notes
thereto contained in the Companys annual report on Form 10-K for the year ended December 31, 2007
filed with the SEC. All intercompany balances have been eliminated.
Earnings Per Share
Basic earnings per share is computed using the weighted average number of common shares
outstanding during the period, and excludes any dilutive effects of common stock equivalent shares
such as stock options. Diluted earnings per share is computed using the weighted average number of
common shares outstanding and common stock equivalent shares outstanding during the period using
the treasury stock method. Common stock equivalent shares are excluded from the computation if
their effect is antidilutive. Common stock equivalent shares were 2,096,663 at June 30, 2008 and
1,084,735 at June 30, 2007.
The following table presents a reconciliation of the number of shares used in the calculation
of basic and diluted earnings per share (in thousands):
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
Weighted average
shares outstanding
for basic earnings
per share |
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10,011 |
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9,823 |
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9,994 |
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|
9,750 |
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Dilutive effect of
common stock
equivalent shares |
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242 |
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367 |
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290 |
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260 |
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Weighted average
shares outstanding
for
diluted
earnings per share |
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10,253 |
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|
10,190 |
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|
10,284 |
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10,010 |
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6
2. Investments
The Companys investments consist of auction rate securities, or ARS. ARS are securities
whose interest or dividend rate is reset periodically through a Dutch Auction process, usually
every 7, 28 or 35 days. ARS trade at par and are callable at par on any interest payment date at
the option of the issuer. Although ARS are issued and rated as long term, they were generally
priced, traded and classified as short-term instruments because of the interest rate reset
mechanism and the ability of the holder to sell their position at a reset date. During February
2008, the ARS auction process began to fail broadly throughout the market (i.e. there were more
sellers than bidders and since the interest or dividend rate could not be reset through a normally
functioning Dutch Auction process, the auctions failed.) The Company had investments in ARS valued
at $6,525,000 as of June 30, 2008 which have failed at auction. These investments are illiquid and
the Company is unable to determine with any certainty when these investments will become liquid.
Liquidity of these investments is contingent on redeeming the investments by the issuers or sales
of the securities in a secondary market. ARS are currently being sold on the secondary market at
discounts that range from 5% to 25% depending on the type of security. The failed ARS carry AAA
ratings and continue to pay interest according to the stated terms. There has been no reduction in
fair value of the underlying collateral of the Companys ARS portfolio. Although we are uncertain
as to when the liquidity issues relating to these investments will improve, we consider these
issues to be only temporary. It is possible that declines in fair value may occur in the future.
If the credit ratings of the issuer, the bond insurers or the collateral deteriorate, the Company
may adjust the carrying value of these investments. If the current market conditions deteriorate
further, the Company may be required to record unrealized losses in other comprehensive income or
impairment charges. As of June 30, 2008, the Company has reclassified the balance
of ARS on its balance sheet from short-term investments to long-term investments due to the
uncertainty in timing of liquidating these investments.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements (SFAS No. 157) as of January 1, 2008 to measure the fair value of its ARS. Under
SFAS No. 157, based on the observability of the inputs used in the valuation techniques, the
Company is required to provide the following information according to the fair value hierarchy. The
fair value hierarchy ranks the quality and reliability of the information used to determine fair
values. Financial assets and liabilities carried at fair value will be classified and disclosed in
one of the following three categories:
Level 1: Quoted prices (unadjusted) 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.
7
Fair value measurements of the Companys ARS as of June 30, 2008 were as follows:
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Fair Value Measurements as of June 30, 2008 Using: |
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Quoted Prices in |
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Significant |
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Active Markets for |
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Direct or Indirect |
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Unobservable |
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Identical Assets |
|
|
Observable |
|
|
Inputs |
|
|
|
|
|
|
(Level 1) |
|
|
Inputs (Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Auction rate securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan backed |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,050 |
|
|
$ |
4,050 |
|
Closed-end funds |
|
|
|
|
|
|
|
|
|
|
1,975 |
|
|
|
1,975 |
|
Corporate collateral |
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total auction rate securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
6,525 |
|
|
$ |
6,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-term investments |
|
|
|
|
|
|
|
|
|
|
6,525 |
|
|
|
6,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
6,525 |
|
|
$ |
6,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market conditions, the Company changed its valuation methodology for auction rate
securities to a valuation method that includes market and income approaches during the second
quarter of fiscal 2008. The following table reconciles the beginning and ending balances for
auction rate securities using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3): |
|
|
|
Student Loan |
|
|
Closed-end |
|
|
Corporate |
|
|
|
|
|
|
Backed |
|
|
Funds |
|
|
Collateral |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Balance at March 31, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Transfers in to Level 3 |
|
|
4,050 |
|
|
|
1,975 |
|
|
|
500 |
|
|
|
6,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008 |
|
$ |
4,050 |
|
|
$ |
1,975 |
|
|
$ |
500 |
|
|
$ |
6,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended June 30, 2008, ARS valued at $1,750,000 were redeemed by their
issuers at par. During the six months ended June 30, 2008, ARS valued at $2,250,000 were redeemed
by their issuers at par.
3. Intangible Assets
Intangible assets relate to technology and other assets acquired from NEC Corporation of
America in December 2007.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Gross carrying value of the acquired intangible assets
subject to amortization |
|
$ |
230 |
|
|
$ |
230 |
|
Accumulated amortization |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
$ |
186 |
|
|
$ |
230 |
|
|
|
|
|
|
|
|
8
Amortization expense was $22,000 for the three months ended June 30, 2008 and $51,000 for the
three months ended June 30, 2007. Amortization expense was $44,000 for the six months ended June
30, 2008 and $101,000 for six months ended June 30, 2007. Amortization expense in 2007 related to
technology acquired from Vibren Technologies, Inc. in June 2005. These assets were fully amortized
as of June 30, 2007. Amortization expense is expected to be $44,000 for the remainder of 2008.
4. Stock-Based Compensation
Stock Options
In May 1997, the Company adopted a Stock Option Plan, which has subsequently been amended and
restated (the Amended Plan). Under the Amended Plan, the Board of Directors may grant
non-qualified stock options at prices determined by the Board, not to be less than 85% of the fair
market value of the common stock. These options have a term of up to 10 years and vest over a
schedule determined by the Board of Directors, generally four years. Incentive stock options
granted under the Amended Plan may only be granted to employees of the Company, have a term of up
to 10 years, and shall be granted at a price equal to the fair market value of the Companys stock.
The Amended Plan also allows for awards of stock appreciation rights, restricted and unrestricted
stock and restricted stock units.
The Company also has a Non-Qualified Stock Option Plan, under which the Board of Directors may
grant non-qualified stock options at prices determined by the Board. These stock options have a
term of up to 10 years and vest over a schedule determined by the Board of Directors, generally
over four years.
Restricted Stock Awards
In August 2007, the Company began issuing restricted stock awards to its Board of Directors.
These awards are subject to forfeiture until the twelve-month anniversary of the grant date. In
December 2007, the Company began issuing restricted stock units to employees. These awards are
subject to forfeiture for a period of four years. In January 2008, the Company began issuing
restricted stock awards to its officers. These awards are subject to forfeiture for a period of 23
months.
9
Stock-Based Compensation
The Company records compensation expense associated with stock options and other forms of
equity compensation in accordance with SFAS No. 123R, Share-Based Payment, as interpreted by SEC
Staff Accounting Bulletin No. 107. The Company records expense over the vesting period using the
straight-line method. The calculation of compensation expense for awards under SFAS 123R includes
the impact of an estimate for forfeitures.
Stock-based compensation expense is recorded in the statements of income in the same line
items as cash compensation for the Companys employees as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Cost of revenue service |
|
$ |
102 |
|
|
$ |
60 |
|
|
$ |
227 |
|
|
$ |
108 |
|
Selling, general and administrative |
|
|
227 |
|
|
|
170 |
|
|
|
467 |
|
|
|
290 |
|
Research and development |
|
|
26 |
|
|
|
12 |
|
|
|
45 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-compensation expense |
|
$ |
355 |
|
|
$ |
242 |
|
|
$ |
739 |
|
|
$ |
431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense under SFAS123R reduced net income by $355,000 and diluted
earnings per share by $0.03 for the three months ended June 30, 2008 and reduced net income by
$739,000 and diluted earnings per share by $0.07 for the six months ended June 30, 2008.
Stock-based compensation expense under SFAS123R reduced net income by $242,000 and diluted earnings
per share by $0.02 for the three months ended June 30, 2007 and reduced net income by $431,000 and
diluted earnings per share by $0.04 for the six months ended June 30, 2007.
At June 30, 2008, compensation expense related to stock options granted under the Companys
Stock Option Plan, but not yet recognized, was $591,000, net of estimated forfeitures. This cost
will be amortized on the straight-line method over a period of approximately 1.4 years and will be
adjusted for subsequent changes in estimated forfeitures.
At June 30, 2008, compensation expense related to restricted stock awards granted under the
Companys Stock Option Plan, but not yet recognized, was $90,000. This cost will be amortized on
the straight-line method over a period of approximately six months.
At June 30, 2008, compensation expense related to restricted stock units granted under the
Companys Stock Option Plan, but not yet recognized, was $263,000. This cost will be amortized on
the straight-line method over a period of approximately 1.7 years.
10
Key Assumptions
The fair value of the Companys options was estimated on the date of grant using the
Black-Scholes-Merton option pricing model, with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected life |
|
4 years |
|
4 years |
|
4 years |
|
4 years |
Expected volatility |
|
|
79 |
% |
|
|
86 |
% |
|
|
80 |
% |
|
|
86 |
% |
Risk-free interest rate |
|
|
3.0 |
% |
|
|
4.7 |
% |
|
|
2.7 |
% |
|
|
4.7 |
% |
Estimated forfeitures |
|
|
22 |
% |
|
|
34 |
% |
|
|
22 |
% |
|
|
34 |
% |
Expected Dividend The Black-Scholes-Merton valuation model calls for a single expected
dividend yield as an input. The dividend yield is determined by dividing the expected per share
dividend during the coming year by the grant date stock price. The expected dividend assumption is
based on the Companys current expectations about its anticipated dividend policy.
Expected Life: The Companys expected term represents the period that the Companys
stock-based awards are expected to be outstanding and was determined based on historical experience
and vesting schedules of similar awards.
Expected Volatility: The Companys expected volatility represents the weighted average
historical volatility of the Companys common stock for the most recent four-year period.
Risk-Free Interest Rate: The Company bases the risk-free interest rate used in the
Black-Scholes-Merton valuation method on the implied yield currently available on U.S. Treasury
zero-coupon issues with an equivalent remaining term. Where the expected term of the Companys
stock-based awards do not correspond with the terms for which interest rates are quoted, the
Company performed a straight-line interpolation to determine the rate from the available term
maturities.
Estimated Forfeitures: Estimated forfeitures represents the Companys historical forfeitures
for the most recent two-year period and considers voluntary termination behavior as well as
analysis of actual option forfeitures.
11
Stock Option Activity
The following table summarizes stock option activity under the Companys Stock Option Plan for
the six months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number |
|
|
Average Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
Stock Options |
|
of Shares |
|
|
Price |
|
|
Life (in years) |
|
|
Value |
|
Outstanding at January 1, 2008 |
|
|
1,886,717 |
|
|
$ |
4.36 |
|
|
|
|
|
|
|
|
|
Granted at fair value |
|
|
190,200 |
|
|
|
4.23 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(32,845 |
) |
|
|
2.58 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(22,820 |
) |
|
|
2.95 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(12,397 |
) |
|
|
18.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008 |
|
|
2,008,855 |
|
|
$ |
4.31 |
|
|
|
7.02 |
|
|
$ |
2,847,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2008 |
|
|
1,685,279 |
|
|
$ |
4.43 |
|
|
|
6.76 |
|
|
$ |
2,417,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2008 |
|
|
1,309,663 |
|
|
$ |
4.62 |
|
|
|
6.28 |
|
|
$ |
1,955,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value represents the difference between the exercise price of the
underlying options and the quoted price of the Companys common stock for the number of options
that were in-the-money at June 30, 2008. The Company issues new shares of common stock upon
exercise of stock options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Weighted-average grant-date fair value |
|
$ |
3.30 |
|
|
$ |
3.65 |
|
|
$ |
2.95 |
|
|
$ |
3.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of options
exercised |
|
$ |
57,000 |
|
|
$ |
264,000 |
|
|
$ |
80,000 |
|
|
$ |
627,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 1,012,052 options in-the-money as of June 30, 2008 and 834,928 options in-the-money
as of June 30, 2007.
Restricted Stock Activity
The following table summarizes restricted stock award activity under the Companys Stock
Option Plan for the three months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
Average Grant |
|
|
|
of Shares |
|
|
Date Fair Value |
|
Outstanding at January 1, 2008 |
|
|
21,000 |
|
|
$ |
6.32 |
|
Awarded |
|
|
21,000 |
|
|
$ |
5.11 |
|
Released |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008 |
|
|
42,000 |
|
|
$ |
5.72 |
|
|
|
|
|
|
|
|
12
The following table summarizes restricted stock unit activity under the Companys Stock Option
Plan for the three months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
Number |
|
|
Contractual |
|
|
Aggregate |
|
|
|
of Shares |
|
|
Life (in years) |
|
|
Intrinsic Value |
|
Outstanding at January 1, 2008 |
|
|
94,728 |
|
|
|
|
|
|
|
|
|
Awarded |
|
|
22,817 |
|
|
|
|
|
|
|
|
|
Released |
|
|
(11,396 |
) |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(5,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008 |
|
|
100,571 |
|
|
|
1.66 |
|
|
$ |
486,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2008 |
|
|
60,532 |
|
|
|
1.43 |
|
|
$ |
292,000 |
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of restricted stock units granted was $5.79 for the
six months ended June 30, 2008.
Warrants
In June 2003, as a result of a lease restructuring agreement, the Company issued warrants to
purchase up to 100,000 shares of the Companys common stock at an exercise price of $4.56 per
share. The warrants expired in June 2008.
5. Comprehensive Income (Loss)
Comprehensive income (loss) consists of two components, net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains
and losses that are recorded as an element of shareholders equity under generally accepted
accounting principles but are excluded from net income (loss). The Companys other comprehensive
income (loss) is comprised of foreign currency translation adjustments from its subsidiaries not
using the U.S. dollar as their functional currency. The components of other comprehensive income
(loss) consisted of a foreign currency translation gain of $53,000 for the three months ended June
30, 2008 and a foreign currency translation loss of $1,000 for the three months ended June 30,
2007. The components of other comprehensive income (loss) consisted of a foreign currency
translation gain of $101,000 for the six months ended June 30, 2008 and a foreign currency
translation loss of $13,000 for the six months ended June 30, 2007.
6. Commitments and Contingencies
Contractual Commitments
The Companys principal commitments consist of obligations outstanding under operating leases,
which expire through 2014. The Company has lease commitments for office space in Bellevue,
Washington; San Diego, California; Longmont, Colorado; Boston, Massachusetts; Vancouver, Canada;
Taipei, Taiwan; and Tokyo, Japan. The Company leases office space in Akron, Ohio on a
month-to-month basis.
In February 2004, the Company amended the lease of its former corporate headquarters and
simultaneously entered into a ten-year lease for a new corporate headquarters. If the Company
defaults under its corporate headquarters lease, the landlord has the ability to demand repayment
for certain cash payments forgiven in 2004 under the former headquarters lease. The amount of the
forgiven payments for which the landlord can demand repayment was $1.5 million at June 30, 2008,
which decreases on the straight-line basis over the length of its ten-year headquarters lease.
Rent expense was $299,000 for the three months ended June 30, 2008 and $270,000 for the three
months ended
13
June 30, 2007. Rent expense was $578,000 for the six months ended June 30, 2008 and $542,000
for the six months ended June 30, 2007.
As of June 30, 2008, the Company had $900,000 pledged as collateral for a bank letter of
credit under the terms of its headquarters facility lease. The pledged cash supporting the
outstanding letter of credit is classified as restricted cash.
Contractual commitments at June 30, 2008 were as follows (in thousands):
|
|
|
|
|
Operating leases: |
|
|
|
|
Remainder of 2008 |
|
$ |
636 |
|
2009 |
|
|
1,164 |
|
2010 |
|
|
1,127 |
|
2011 |
|
|
1,039 |
|
2012 |
|
|
1,030 |
|
Thereafter |
|
|
1,860 |
|
|
|
|
|
Total commitments |
|
$ |
6,856 |
|
|
|
|
|
Legal Proceedings
IPO Litigation
In Summer and early Fall 2001, four purported shareholder class action lawsuits were filed in
the United States District Court for the Southern District of New York against the Company, certain
of the Companys current and former officers and directors (the Individual Defendants), and the
underwriters of the Companys initial public offering (the Underwriter Defendants). The
complaints were consolidated into a single action and a Consolidated Amended Complaint, which was
filed on April 19, 2002, is now the operative complaint. The operative complaint alleges
violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. The suit
purports to be a class action filed on behalf of purchasers of the Companys common stock during
the period from October 19, 1999 to December 6, 2000.
The plaintiffs allege that the Underwriter Defendants agreed to allocate stock in the
Companys initial public offering to certain investors in exchange for excessive and undisclosed
commissions and agreements by those investors to make additional purchases of stock in the
aftermarket at pre-determined prices. The plaintiffs allege that the prospectus for the Companys
initial public offering was false and misleading in violation of the securities laws because the
Company did not disclose these arrangements. The action seeks damages in an unspecified amount.
The action is being coordinated with approximately 300 other nearly identical actions filed
against other companies. On October 9, 2002, the district court dismissed the Individual Defendants
from the case without prejudice based upon stipulations of dismissal filed by the plaintiffs and
the Individual Defendants. On December 5, 2006, the Second Circuit vacated a decision by the
district court granting class certification in six of the coordinated cases, which are intended to
serve as test, or focus, cases. The plaintiffs selected these six cases, which do not include the
Company. On April 6, 2007, the Second Circuit denied a petition for rehearing filed by the
plaintiffs, but noted that the plaintiffs could ask the district court to certify more narrow
classes than those that were rejected.
On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. The
amended complaints include a number of changes, such as changes to the definition of the purported
class of investors, and the elimination of the individual defendants as defendants. On September
27, 2007, the plaintiffs moved to certify a class in the six focus cases. On November 14, 2007,
the issuers and the underwriters named as defendants in the six focus cases filed motions to
dismiss the amended complaints. On March 26, 2008, the district court dismissed the Securities Act
claims of those members of the putative classes in the focus cases who sold their securities for a
price
14
in excess of the initial offering price and those who purchased outside the previously certified
class period. With respect to all other claims, the motions to dismiss were denied. The Company
is awaiting a decision from the Court on the class certification motion. Due to the inherent
uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of this
matter. If the Company is found liable, the Company is unable to estimate or predict the potential
damages that might be awarded, whether such damages would be greater than the Companys insurance
coverage, and whether such damages would have a material impact on the Companys results of
operations or financial condition in any future period.
7. Segment Information
The Company follows the requirements of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. The Company has one operating segment software and services
delivered to smart device makers.
The following table summarizes information about the Companys revenue and long-lived asset
information by geographic areas (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Total revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
14,315 |
|
|
$ |
14,137 |
|
|
$ |
29,701 |
|
|
$ |
28,452 |
|
Asia |
|
|
1,001 |
|
|
|
944 |
|
|
|
2,435 |
|
|
|
1,713 |
|
Other foreign |
|
|
110 |
|
|
|
13 |
|
|
|
348 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue (1) |
|
$ |
15,426 |
|
|
$ |
15,094 |
|
|
$ |
32,484 |
|
|
$ |
30,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Long-lived assets: |
|
|
|
|
|
|
|
|
North America |
|
$ |
990 |
|
|
$ |
1,017 |
|
Asia |
|
|
173 |
|
|
|
37 |
|
|
|
|
|
|
|
|
Total long-lived assets |
|
$ |
1,163 |
|
|
$ |
1,054 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Revenue is attributed to countries based on the location of the customer invoiced. |
Significant Customers
No customers accounted for 10% or more of total revenue for the three or six months ended June
30, 2008. One customer had an accounts receivable balance of approximately $1.2 million, or 13% of
total accounts receivable as of June 30, 2008. Approximately $245,000 of this balance was past due
as of June 30, 2008 and the remaining balance was current. As of July 31, 2008, the Company had
collected $163,000 of the June 30, 2008 balance from this customer.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
From time to time, information provided by us, statements made by our employees or information
included in our filings with the Securities and Exchange Commission (SEC) may contain statements
that are forward-looking statements involving risks and uncertainties. In particular, statements
in Managements Discussion and Analysis of Financial Condition and Results of Operations relating
to our revenue, profitability, growth initiatives and sufficiency of capital may be forward-looking
statements. The words expect, anticipate, plan, believe, seek, estimate and similar
expressions are intended to identify such forward-looking statements. Such statements are not
guarantees of future performance and involve certain risks, uncertainties and assumptions that
could cause our future results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, us. Many such factors are beyond our ability to control or
predict. Readers are accordingly cautioned not to place undue reliance on forward-looking
statements. We disclaim any intent or obligation to update any forward-looking statements, whether
in response to new information or future events or otherwise. Important factors that may cause our
actual results to differ from such forward-looking statements include, but are not limited to, the
factors discussed in Item 1A of Part II of this quarterly report, our quarterly report for the
quarterly period ended March 31, 2008 and of Part I of our annual report on Form 10-K for the year
ended December 31, 2007 entitled Risk Factors.
Overview
We provide software and engineering services to the smart device marketplace. A smart device
is a dedicated purpose computing device that typically has the ability to display information, runs
an operating system (e.g., Microsoft® Windows® CE 6.0) and may be connected to a network via a
wired or wireless connection. Examples of smart devices include set-top boxes, home gateways,
point-of-sale terminals, kiosks, voting machines, gaming platforms, PDAs, handheld data collection
devices, personal media players and smartphones. We primarily focus the sale of our software and
engineering services to customers developing smart devices that utilize embedded versions of the
Microsoft Windows family of operating systems, specifically Windows CE, Windows XP Embedded and
Windows Mobile. However, with our recent acquisition of customers and rights to license Adobe
Flash Lite technology from NEC Corporation of America, we expect to support customers who are using
Adobe Flash Lite technology in other operating systems such as Linux and Symbian.
We have been providing software and engineering services to the smart device marketplace since
our inception. Our customers include world class original equipment manufacturers (OEMs), original
design manufacturers (ODMs), silicon vendors (SVs), peripheral vendors, and enterprises with
customized device needs such as retailers and wireless operators that market and distribute
connected smart devices. The software and engineering services we provide our customers are
delivered, utilized and deployed throughout various phases of our customers device life cycle,
including design, development, customization, quality assurance and deployment.
Critical Accounting Judgments
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires estimates and assumptions that affect the reported amounts
of assets and liabilities, revenue and expenses and related disclosures of contingent assets and
liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a
companys critical accounting policies as those that are most important to the portrayal of its
financial condition and results of operations, and those that require a company to make its most
difficult and subjective judgments, often as a result of the need to make estimates related to
matters that are inherently uncertain. Based on this definition, we have identified the critical
accounting policies and judgments addressed below. We also have other key accounting policies,
which involve the use of estimates, judgments and assumptions that are relevant to understanding
our results. For additional information see Item 1 of Part I, Financial Statements Note 1
Summary of Significant Accounting Policies. Although we believe that our estimates, assumptions
and judgments are reasonable, they are necessarily based upon presently available information.
Actual results may differ significantly from these estimates under different assumptions, judgments
or conditions.
16
Revenue Recognition
We recognize revenue from software and engineering service sales when the following four
revenue recognition criteria are met: persuasive evidence of an arrangement exists; delivery has
occurred or services have been rendered; the selling price is fixed or determinable; and
collectability is reasonably assured. Contracts and customer purchase orders are generally used to
determine the existence of an arrangement. Shipping documents, time records and customer
acceptance, as and when applicable, are used to verify delivery. We assess whether the selling
price is fixed or determinable based on the contract and/or customer purchase order and payment
terms associated with the transaction and whether the sales price is subject to refund or
adjustment. We assess collectability based primarily on the creditworthiness of the customer as
determined by credit checks and analysis, as well as the customers payment history.
We recognize software revenue upon shipment provided that no significant obligations remain on
our part and substantive acceptance conditions, if any, have been met. Service revenue from time
and materials contracts and training services is recognized as services are performed. For certain
fixed-price professional engineering service contracts that require significant production,
modification, or customization of software, we account for these arrangements using the
percentage-of-completion method under Statement Of Position (SOP) 81-1, as contemplated by
paragraph 7 of SOP 97-2. We use the percentage-of-completion method of accounting specified within
SOP 81-1, as contrasted to alternative approaches outlined in SOP 81-1, because it is the most
preferable method to recognize revenue based on the nature and scope of our fixed-price
professional engineering service contracts; it is a better measure of periodic income results than
other methods in our case and it better matches revenue recognized with the costs incurred in our
instance. Percentage of completion is measured based primarily on input measures such as hours
incurred to date compared to total estimated hours to complete, with consideration given to output
measures, such as contract milestones, when applicable. We rely on estimates of total expected
hours as a measure of performance in order to determine the amount of revenue to be recognized.
Revisions to hour and cost estimates are recorded in the period the facts that give rise to the
revision become known.
We also enter into arrangements in which a customer purchases a combination of software
licenses, engineering services and post-contract customer support or maintenance (PCS). As a
result, significant contract interpretation is sometimes required to determine the appropriate
accounting, including how the price should be allocated among the deliverable elements if there are
multiple elements, whether undelivered elements are essential to the functionality of delivered
elements, and when to recognize revenue. PCS includes rights to upgrades, when and if available,
telephone support, updates, and enhancements. When vendor specific objective evidence (VSOE) of
fair value exists for all elements in a multiple element arrangement, revenue is allocated to each
element based on the relative fair value of each of the elements. VSOE of fair value is established
by the price charged when the same element is sold separately. Accordingly, the judgments involved
in assessing VSOE have an impact on the recognition of revenue in each period. Changes in the
allocation of the sales price between deliverables might impact the timing of revenue recognition
but would not change the total revenue recognized on the contract.
When elements such as software and engineering services are contained in a single arrangement,
or in related arrangements with the same customer, we allocate revenue to each element based on its
relative fair value, provided that such element meets the criteria for treatment as a separate unit
of accounting. In the absence of fair value for a delivered element, we allocate revenue first to
the fair value of the undelivered elements and allocate the residual revenue to the delivered
elements. In the absence of fair value for an undelivered element, the arrangement is accounted for
as a single unit of accounting, resulting in a delay of revenue recognition for the delivered
elements until the undelivered elements are fulfilled. As a result, contract interpretations and
assessments of fair value are sometimes required to determine the appropriate accounting.
When elements such as engineering services and royalties are contained in a single
arrangement, we recognize revenue from engineering services as earned in accordance with the
criteria above even though the effective rate per hour may be lower than typical because the
customer is contractually obligated to pay royalties on their device shipments, some of which may
be guaranteed. We recognize royalty revenue when we receive the royalty report from the customer
or when such royalties are contractually guaranteed and the revenue recognition criteria are met,
particularly that collectability is reasonably assured.
17
Deferred revenue includes deposits received from customers for service contracts, customer
advances under OEM licensing agreements and unamortized maintenance and support contract revenue.
Allowance for Doubtful Accounts
Our accounts receivable balances are net of an estimated allowance for doubtful accounts. We
perform ongoing credit evaluations of our customers financial condition and generally do not
require collateral. We estimate the collectability of our accounts receivable and record an
allowance for doubtful accounts. We consider many factors when making this estimate, including
analyzing accounts receivable and historical bad debts, customer concentrations, customer
creditworthiness, current economic trends and changes in customer payment history, when evaluating
the adequacy of the allowance for doubtful accounts. Because the allowance for doubtful accounts
is an estimate, it may be necessary to adjust it if actual bad debt expense exceeds the estimated
reserve.
Investments
We account for investments in accordance with Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS
No. 115). We adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157) as of January 1,
2008 to measure the fair value of certain of our financial assets required to be measured on a
recurring basis, including available-for-sale securities. Under SFAS No. 157, based on the
observability of the inputs used in the valuation techniques, the Company is required to provide
the following information according to the fair value hierarchy. The fair value hierarchy ranks the
quality and reliability of the information used to determine fair values. Financial assets and
liabilities carried at fair value will be classified and disclosed in one of the following three
categories:
Level 1: Quoted prices (unadjusted) 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.
As of June 30, 2008, we had investments in auction rate securities (ARS) valued $6.5
million. These investments are illiquid and we are unable to determine with any certainty when
these investments will become liquid. Liquidity of these investments is contingent on redeeming
the investments by the issuers or sales of the securities in a secondary market. ARS are currently
being sold on the secondary market at discounts that range from 5% to 25% depending on the type of
security. The failed ARS carry AAA ratings and continue to pay interest according to the stated
terms. There has been no reduction in fair value of the underlying collateral of our ARS portfolio.
Although we are uncertain as to when the liquidity issues relating to these investments will
improve, we consider these issues to be only temporary. It is possible that declines in fair value
may occur in the future. If the credit ratings of the issuer, the bond insurers or the collateral
deteriorate, we may adjust the carrying value of these investments. If the current market
conditions deteriorate further, we may be required to record unrealized losses in other
comprehensive income or impairment charges. As of June 30, 2008, we have reclassified the
balance of ARS on our balance sheet from short-term investments to long-term investments due to the
uncertainty in timing of liquidating these investments.
Stock-Based Compensation
We record compensation expense associated with stock options and other forms of equity
compensation in accordance with SFAS No. 123R, Share-Based Payment, as interpreted by SEC Staff
Accounting Bulletin No. 107. We record expense over the vesting period using the straight-line
method. Compensation expense for awards under SFAS 123R includes an estimate for forfeitures.
18
At June 30, 2008, total compensation cost related to stock options granted under our Stock
Option Plan but not yet recognized was $591,000, net of estimated forfeitures. This cost will be
amortized on the straight-line method over a period of approximately 1.4 years and will be adjusted
for subsequent changes in estimated forfeitures.
At June 30, 2008, total compensation cost related to restricted stock awards granted under our
Stock Option Plan but not yet recognized was $90,000. This cost will be amortized on the
straight-line method over a period of approximately 5 months.
At June 30, 2008, total compensation cost related to restricted stock units granted under our
Stock Option Plan but not yet recognized was $263,000. This cost will be amortized on the
straight-line method over a period of approximately 1.7 years.
Taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate income taxes in each of the countries in which we operate. This process involves
estimating our current tax exposure together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income, and, to the extent we believe that recovery is not likely, we
must establish a valuation allowance. To the extent we establish a valuation allowance, or increase
this allowance in a period, it may result in an expense within the tax provision in the statements
of operations. Significant management judgment is required in determining our provision for income
taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. We have provided a full valuation allowance on deferred tax assets because of
our uncertainty regarding their realizability. If we determine that it is more likely than not that
the deferred tax assets would be realized, the valuation allowance would be reversed. In order to
realize our deferred tax assets, we must be able to generate sufficient taxable income.
Because we do business in foreign tax jurisdictions, our sales may be subject to other taxes,
particularly withholding and earnings distribution taxes. The tax regulations governing these
other taxes are complex, causing us to have to make assumptions about the appropriate tax treatment
and estimates of such taxes.
19
Results of Operations
The following table presents certain financial data as a percentage of total revenue for the
periods indicated. Our historical operating results are not necessarily indicative of future
results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(unaudited) |
|
(unaudited) |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software |
|
|
63 |
% |
|
|
67 |
% |
|
|
64 |
% |
|
|
64 |
% |
Service |
|
|
37 |
|
|
|
33 |
|
|
|
36 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software |
|
|
50 |
|
|
|
53 |
|
|
|
49 |
|
|
|
49 |
|
Service |
|
|
26 |
|
|
|
24 |
|
|
|
25 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
76 |
|
|
|
77 |
|
|
|
74 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
24 |
|
|
|
23 |
|
|
|
26 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
19 |
|
|
|
18 |
|
|
|
18 |
|
|
|
19 |
|
Research and development |
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
23 |
|
|
|
22 |
|
|
|
22 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
1 |
|
|
|
1 |
|
|
|
4 |
|
|
|
2 |
|
Interest and other income |
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Income tax expense |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue consists of sales of software and engineering services to smart device makers.
Software revenue consists of sales of third-party software and sales of our own proprietary
software products which include software licenses, software development kits and smart device
reference designs as well as royalties from our software products and royalties from certain
engineering service contracts. Engineering service revenue is derived from hardware and software
development activities, support contracts, fees for customer training, and rebillable expenses.
Total revenue was $15.4 million for the three months ended June 30, 2008 and $15.1 million for
the three months ended June 30, 2007, representing an increase of $300,000, or 2%. This increase
was due to higher sales of professional engineering services, partially offset by lower software
sales. Total revenue was $32.5 million for the six months ended June 30, 2008 and $30.2 million
for the six months ended June 30, 2007, representing an increase of $2.3 million, or 8%. This
increase was due to higher sales of both software and professional engineering services.
Revenue from customers located outside of North America includes revenue attributable to our
foreign operations, as well as software and engineering services billed to foreign customers from
our operations located in North America. We currently have operations outside North America in
Taipei, Taiwan and Tokyo, Japan. Revenue from customers located outside of North America was $1.1
million for the three months ended June 30, 2008 and $944,000 for the three months ended June 30,
2007, representing an increase of $156,000, or 17%. Revenue from customers located outside of
North America was $2.8 million for the six months ended June 30, 2008 and $1.7 million for the six
months ended June 30, 2007, representing an increase of $1.1 million, or 65%. This increase was
primarily due to a 200% increase in Asia Pacific service revenue as well as international sales of
Flash Lite, of which there was none for the six months ended June 30, 2007.
20
Software revenue
Software revenue for the three and six months ended June 30, 2008 and 2007 is presented below
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
Software revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party software |
|
$ |
9,004 |
|
|
$ |
9,148 |
|
|
$ |
19,137 |
|
|
$ |
17,373 |
|
Proprietary software |
|
|
676 |
|
|
|
1,034 |
|
|
|
1,539 |
|
|
|
2,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total software revenue |
|
$ |
9,680 |
|
|
$ |
10,182 |
|
|
$ |
20,676 |
|
|
$ |
19,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software revenue as a percentage of total revenue |
|
|
63 |
% |
|
|
67 |
% |
|
|
64 |
% |
|
|
64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party software revenue as a percentage of
total software revenue |
|
|
93 |
% |
|
|
90 |
% |
|
|
93 |
% |
|
|
90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The vast majority of our third-party software revenue is comprised of the resale of Microsoft
Embedded operating systems. The biggest portion of our proprietary software revenue is
attributable to royalty revenue from service contracts.
Third-party software revenue was $9.0 million for the three months ended June 30, 2008 and
$9.1 million for the three months ended June 30, 2007, representing a decrease of $100,000, or 1%.
This decrease in third-party software revenue was due primarily to the effect of one large sale of
approximately $1.5 million that benefitted the three months ended June 30, 2007, partially offset
by sales of Flash Lite software, which began in December 2007 and sales of Solidcore S3 Control
licensing, which began in March 2008. We generated $237,000 in Flash Lite licensing revenue for
the three months ended June 30, 2008 compared to none for the three months ended June 30, 2007. We
generated $345,000 in Solidcore S3 Control licensing revenue for the three months ended June 30,
2008 compared to none for the three months ended June 30, 2007.
Third-party software revenue was $19.1 million for the six months ended June 30, 2008 and
$17.4 million for the six months ended June 30, 2007, representing an increase of $1.7 million, or
10%. This increase was due to $1.1 million in revenue from the licensing of Flash Lite and
Solidcore S3 Control that were not present in the same period in 2007 coupled with slightly higher
sales of Microsoft embedded operating systems.
We currently expect third-party software revenue to increase approximately 15% in fiscal year
2008, as compared to fiscal 2007, based on overall growth in the general embedded market, and in
Microsofts share of that market, as well increased revenue contribution from additional
third-party software product offerings such as Adobe Flash Lite and Solidcores S3 Control
product.
Proprietary software revenue was $676,000 for the three months ended June 30, 2008 and $1.0
million for the three months ended June 30, 2007, representing a decrease of $324,000, or 32%.
Proprietary software revenue was $1.5 million for the six months ended June 30, 2008 and $2.0
million for the six months ended June 30, 2007, representing a decrease of $500,000, or 25%. These
decreases were due to lower SDIO revenue and lower service contract royalties as certain guaranteed
minimum royalties expired. Royalty revenue from service contracts was $303,000 for the three
months ended June 30, 2008 and $403,000 for the three months ended June 30, 2007. Royalty revenue
was $675,000 for the six months ended June 30, 2008 and $759,000 for the six months ended June 30,
2007.
We currently expect proprietary software revenue to decrease 30% to 35% in fiscal 2008
primarily due to lower SDIO revenue, lower royalty revenue from Asia Pacific region service
contracts as the royalty periods expire, partially offset by increased reference design and related
product revenue.
21
Service revenue
Service revenue was $5.7 million for the three months ended June 30, 2008 and $4.9 million for
the three months ended June 30, 2007, representing an increase of $800,000, or 16%. Service
revenue represented 37% of total revenue for the three months ended June 30, 2008 and 33% of total
revenue for the three months ended June 30, 2007. This increase was primarily due to growth in
North America driven by an increase in overall customer and project count partially offset by lower
average project revenue and a decline in rebillable service revenue of $202,000. Billable hours
increased by 27% for the three months ended June 30, 2008, driven by higher activity levels in both
the North American and Asia Pacific regions, whereas the realized rate per hour decreased by 5% due
to a drop in the Asia Pacific region driven by revenue recognition delays.
Service revenue was $11.8 million for the six months ended June 30, 2008 and $10.8 million for
the six months ended June 30, 2007, representing an increase of $1.0 million, or 9%. Service
revenue represented 36% of total revenue for the six months ended June 30, 2008 and 36% of total
revenue for the six months ended June 30, 2007. Growth in core engineering services revenue in both
North America and Asia Pacific drove the increase due to reasons mentioned earlier plus incremental
contribution from Japan in the first six months of 2008, partially offset by a decrease in
rebillable revenue of $789,000. Billable hours increased by 16% for the six months ended June 30,
2008, driven by higher activity levels in both the North American and Asia Pacific regions, whereas
the realized rate per hour increased by 1% for the six months ended June 30, 2008.
We currently expect service revenue to increase approximately 30% to 35% in fiscal 2008, as
compared to fiscal 2007, based on our expectation that the summer slowdown that has affected us for
the last two years will do so to a lesser extent in 2008, as well as growth in our sales capacity
and increased revenue from the Asia Pacific region resulting from our expansion there. Further, we
expect that several contracts, which either have been signed or are expected to be signed this
quarter, will add significantly to service revenue in the second half of fiscal 2008.
Gross profit and gross margin
Cost of revenue related to software revenue consists primarily of license fees and royalties
for third-party software products, the costs of components for our hardware reference designs,
product media, product duplication and manuals. Amortization of intangible assets, acquired from
Vibren Technologies Inc. in June 2005 and from NEC of America in December 2007, is also included in
cost of software revenue and was $22,000 for the three months ended June 30, 2008 and $48,000 for
the three months ended June 30, 2007. Amortization of intangible assets included in cost of
software revenue was $44,000 for the six months ended June 30, 2008 and $96,000 for the six months
ended June 30, 2007. Cost of revenue related to service revenue consists primarily of salaries and
benefits for our engineers, contractor costs, related facilities and depreciation costs. Gross
profit on the sales of third-party software products is also positively affected by rebates and
volume discounts we receive from Microsoft which we earn through the achievement of defined
objectives.
Rebates comprised $90,000 of our third-party software gross profit for the three months ended
June 30, 2008 and $190,000 of our gross profit for the three months ended June 30, 2007. Rebates
comprised $151,000 of our gross profit for the six months ended June 30, 2008 and $348,000 of our
gross profit for the six months ended June 30, 2007. These decreases were the result of changes to
the rebate program, which became effective October 1, 2007. Microsoft has frequently modified its
rebate program, and future modifications could have the effect of reducing, or even eliminating,
the rebate credit or volume discounts we receive.
22
The following table outlines software, engineering services and total gross profit (dollars in
thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(unaudited) |
|
(unaudited) |
Software gross profit |
|
$ |
2,005 |
|
|
$ |
2,245 |
|
|
$ |
4,604 |
|
|
$ |
4,618 |
|
As a percentage of total software revenue |
|
|
21 |
% |
|
|
22 |
% |
|
|
22 |
% |
|
|
24 |
% |
Service gross profit |
|
$ |
1,771 |
|
|
$ |
1,262 |
|
|
$ |
3,822 |
|
|
$ |
2,886 |
|
As a percentage of service revenue |
|
|
31 |
% |
|
|
26 |
% |
|
|
32 |
% |
|
|
27 |
% |
Total gross profit |
|
$ |
3,776 |
|
|
$ |
3,507 |
|
|
$ |
8,426 |
|
|
$ |
7,504 |
|
As a percentage of total revenue |
|
|
24 |
% |
|
|
23 |
% |
|
|
26 |
% |
|
|
25 |
% |
Software gross profit and gross margin
Software gross profit was $2.0 million for the three months ended June 30, 2008 and $2.2
million for the three months ended June 30, 2007, representing a decrease of $200,000, or 9%.
Software gross profit as a percentage of software revenue was 21% for the three months ended June
30, 2008 and 22% for the three months ended June 30, 2007. The decrease in gross profit was due to
lower, high-margin proprietary software revenue, partially offset by higher gross margin from sales
of Flash Lite and Solidcore S3 Control that were not present in the comparable period in 2007.
Software gross profit was $4.6 million for the six months ended June 30, 2008 and 2007. Software
gross profit as a percentage of software revenue was 22% for the six months ended June 30, 2008 and
24% for the six months ended June 30, 2007 with the decrease driven by the relative mix of
high-margin proprietary software revenue to our total software revenue. Our proprietary software
sales have traditionally generated high gross margins (91% this quarter), while third-party
software sales typically generate much lower gross margins. Third-party software margin was 16%
for the three months ended June 30, 2008, compared to 14% for the same period in the prior year
with the increase driven by higher margins resulting from sales of Flash Lite licensing and
Solidcore S3 Control licensing.
We expect third-party software sales to continue to be a significant percentage of our
software revenue, and, therefore our software gross margin will likely remain relatively low in the
foreseeable future. We currently expect our proprietary software gross margin to remain at
relatively high levels. We currently expect our third-party software margin to approximate our
fiscal 2007 margin of 17%, with the increase driven by gross profit contribution from higher margin
third-party software products such as Flash Lite and S3 Control.
Service gross profit and gross margin
Service gross profit was $1.8 million for the three months ended June 30, 2008 and $1.3
million for the three months ended June 30, 2007, representing an increase of $500,000, or 38%.
Service gross profit as a percentage of service revenue was 31% for the three months ended June 30,
2008 and 26% for the three months ended June 30, 2007. Service gross profit was $3.8 million for
the six months ended June 30, 2008 and $2.9 million for the six months ended June 30, 2007,
representing an increase of $900,000, or 31%. Service gross profit as a percentage of service
revenue was 32% for the six months ended June 30, 2008 and 27% for the six months ended June 30,
2007. The overall improvement in service gross profit is attributable to improvement in our
utilization and a decline in lower margin rebillable service revenue. Our utilization declined in
the second quarter of 2007 due to a slow down in North America service revenue which did not
reoccur in the second quarter of 2008. Additionally, our facilities and depreciation costs, a
portion of which is included in service cost of revenue, are relatively fixed and are being spread
over a larger revenue base, which has the effect of increasing service gross profit as service
revenue increases.
We expect service gross margin to improve in fiscal 2008, as compared to fiscal 2007, as a
result of higher revenue and improved utilization. We currently expect fiscal 2008 service margin
to be in the mid-30% range, compared to 29% in fiscal 2007.
23
Operating expenses
Selling, general and administrative
Selling, general and administrative expenses consist primarily of salaries and benefits for
our sales, marketing and administrative personnel and related facilities and depreciation costs as
well as professional services fees (e.g., consulting, legal and audit).
Selling, general and administrative expenses were $3.0 million for the three months ended June
30, 2008 and $2.7 million for the three months ended June 30, 2007, representing an increase of
approximately $300,000, or 11%. These increases were due to higher sales expenses both in North
America and the Asia Pacific region, higher marketing program costs and higher stock compensation
expense. Selling, general and administrative expenses represented 19% of total revenue for the
three months ended June 30, 2008 and 17% of total revenue for the three months ended June 30, 2007.
Selling, general and administrative expenses were $6.0 million for the six months ended June 30,
2008 and $5.6 million for the six months ended June 30, 2007, representing an increase of
approximately $400,000, or 7% driven by the factors mentioned previously. Selling, general and
administrative expenses represented 18% of total revenue for the six months ended June 30, 2008 and
19% of total revenue for the six months ended June 30, 2007.
Research and development
Research and development expenses consist primarily of salaries and benefits for software
development and quality assurance personnel, contractor and consultant costs, component costs and
related facilities and depreciation costs.
Research and development expenses were $561,000 for the three months ended June 30, 2008 and
$598,000 for the three months ended June 30, 2007, representing a decrease of $37,000, or 6%.
Research and development expenses represented 4% of total revenue for the three months ended June
30, 2008 and 2007. Research and development expenses were $1.2 million for the six months ended
June 30, 2008 and $1.1 million for the six months ended June 30, 2007, representing an increase of
$100,000, or 9%. Research and development expenses represented 4% of total revenue for all periods
presented. We continue to execute and evolve our product strategy and invest in new product
development initiatives; however, the timing and magnitude of our investments are difficult to
predict.
Interest and other income
Interest and other income consists of interest earnings on our cash, cash equivalents and
investments. Interest and other income was $88,000 for the three months ended June 30, 2008 and
$444,000 for the three months ended June 30, 2007, representing a decrease of $356,000, or 80%.
Interest and other income was $248,000 for the six months ended June 30, 2008 and $567,000 for the
six months ended June 30, 2007, representing a decrease of $319,000, or 56%. These decreases were
due to a realized gain on the sale of marketable securities of $287,000, which benefited the three
months ended June 30, 2007, coupled with lower interest rates as compared to the prior year.
Income Tax Expense
Income tax expense was $10,000 for the three months ended June 30, 2008 and $108,000 for the
three months ended June 30, 2007, representing a decrease of $98,000, or 91%. Income tax expense
was $127,000 for the six months ended June 30, 2008 and $148,000 for the six months ended June 30,
2007, representing a decrease of $21,000, or 14%. This expense primarily related to corporate
income taxes, primarily from our Taiwan branch.
24
Liquidity and Capital Resources
As of June 30, 2008, we had $16.4 million of cash, cash equivalents and investments compared
to $15.0 million at December 31, 2007. These totals include $900,000 of restricted cash at June
30, 2008 and $1,050,000 at December 31, 2007. This restricted cash secures our current corporate
headquarters lease obligation, the majority of which will continue to secure that obligation
through its expiration in 2014. Our working capital at June 30, 2008 was $10.4 million compared to
$14.7 million at December 31, 2007. The decrease in working capital was primarily due to the
reclassification of our auction rate securities, or ARS, from short-term investments to long-term
investments on our balance sheet at June 30, 2008 compared to December 31, 2007.
Our investments consist of ARS, which are securities whose interest or dividend rate is reset
periodically through a Dutch Auction process, usually every 7, 28 or 35 days. ARS trade at par and
are callable at par on any interest payment date at the option of the issuer. Although ARS are
issued and rated as long term they are generally priced, traded and classified as short-term
instruments because of the interest rate reset mechanism and the ability of the holder to sell
their position at a reset date. During February 2008, the ARS auction process began to fail
broadly throughout the market (i.e. there were more sellers than bidders and since the interest or
dividend rate could not be reset through a normally functioning Dutch Auction process, the auctions
failed). As of June 30, 2008, we had investments in auction rate securities valued $6.5 million.
These investments are illiquid and we are unable to determine with any certainty when these
investments will become liquid. Liquidity of these investments is contingent on redeeming the
investments by the issuers or sales of the securities in a secondary market. ARS are currently
being sold on the secondary market at discounts that range from 5% to 25% depending on the type of
security. The failed ARS carry AAA ratings and continue to pay interest according to the stated
terms. There has been no reduction in fair value of the underlying collateral of our ARS portfolio.
Although we are uncertain as to when the liquidity issues relating to these investments will
improve, we consider these issues to be only temporary. It is possible that declines in fair value
may occur in the future. If the credit ratings of the issuer, the bond insurers or the collateral
deteriorate, we may adjust the carrying value of these investments. If the current market
conditions deteriorate further, we may be required to record unrealized losses in other
comprehensive income or impairment charges. As of June 30, 2008, we have reclassified the
balance of ARS on our balance sheet from short-term investments to long-term investments due to the
uncertainty in timing of liquidating these investments.
During the six months ended June 30, 2008, operating activities provided cash of $1.6 million
attributable to our net income of $1.4 million and non-cash expenses of $1.0 million, offset by
certain working capital items. During the six months ended June 30, 2007, operating activities
provided cash of $1.1 million attributable to our net income of $1.2 million and non-cash expenses
of $725,000, offset by certain working capital items.
During the six months ended June 30, 2008, investing activities provided cash of $2.8 million
of cash attributable to $3.1 million in maturities of short-term investments, , partially offset by
$367,000 used to purchase capital equipment. During the six months ended June 30, 2007, investing
activities utilized approximately $3.3 million of cash attributable to $3.1 million invested in
short-term investments and $267,000 used to purchase capital equipment.
Financing activities generated $84,000 in cash during the six months ended June 30, 2008 and
$685,000 in cash during the six months ended June 30, 2007 as a result of employees exercise of
stock options.
We believe that our existing cash, cash equivalents and investments will be sufficient to meet
our needs for working capital and capital expenditures for at least the next twelve months.
25
Potential Cash Commitments
We have the following future or potential cash commitments:
|
|
|
In February 2004, we signed an amendment to the lease for our former corporate
headquarters and simultaneously entered into a ten-year lease for a new corporate
headquarters. The amendment of the former headquarters lease, which was scheduled to
terminate on December 31, 2004, provided that no cash lease payments were to be made for
the remainder of 2004. Similarly, our corporate headquarters lease also provided that no
cash lease payments were to be made during 2004. However, if we default under our new
corporate headquarters lease, the landlord has the ability to demand payment for cash
payments forgiven in 2004 under the former headquarters lease. The amount of the forgiven
payments for which the landlord can demand repayment was $1.5 million at June 30, 2008. The
amount of the forgiven payments for which the landlord has the ability to demand repayment
decreases on the straight-line basis over the length of our ten-year headquarters lease. |
|
|
|
|
In December 2007, we entered into an agreement with Solidcore Systems, Inc.
(Solidcore) to be the exclusive distributor of Solidcores S3 Control Embedded software
to OEMs in North America. This agreement commits us to pay minimum license fees of
$800,000 to Solidcore by December 31, 2008, regardless of our sales of that software
provided that any prepaid licensing fees outstanding at December 31, 2008 can be used to
offset future license fees owed to Solidcore through the termination of the agreement
between the parties. As of June 30, 2008, we have $310,000 remaining toward this
commitment. We expect licensing sales of Solidcore S3 Control to meet the minimum required
threshold to cover the contractual license fee. |
Recently Issued Accounting Standards
In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) No. Emerging Issues Task Force (EITF) 03-6-1 (FSP 03-6-1), Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This FSP
provides that unvested share-based payment awards that contain nonforfeitable rights to dividends
or dividend equivalents (whether paid or unpaid) are participating securities and shall be included
in the computation of earnings per share under the two-class method described in SFAS No. 128,
Earnings Per Share. FSP 03-6-1 is effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008, and will require all earnings per share data
presented for prior-periods to be restated retrospectively. We currently do not anticipate that FSP
03-6-1 will have a material impact on our earnings per share data for fiscal year 2009 or on
earnings per share data for any prior periods presented.
26
Item 4. Controls and Procedures
We carried out an evaluation required by the Securities Exchange Act of 1934, under the
supervision and with the participation of our senior management, including our principal executive
officer and principal financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this report. Based on
this evaluation, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, are effective in timely alerting them to material information
required to be included in our periodic SEC reports.
There has been no change in our internal control over financial reporting during the six
months ended June 30, 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
IPO Litigation
In Summer and early Fall 2001, four purported shareholder class action lawsuits were filed in
the United States District Court for the Southern District of New York against us, certain of our
current and former officers and directors (the Individual Defendants), and the underwriters of
our initial public offering (the Underwriter Defendants). The complaints were consolidated into a
single action and a Consolidated Amended Complaint, which was filed on April 19, 2002, is now the
operative complaint. The operative complaint alleges violations of the Securities Act of 1933 and
the Securities Exchange Act of 1934. The suit purports to be a class action filed on behalf of
purchasers of our common stock during the period from October 19, 1999 to December 6, 2000.
The plaintiffs allege that the Underwriter Defendants agreed to allocate stock in our initial
public offering to certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases of stock in the aftermarket at
pre-determined prices. The plaintiffs allege that the prospectus for our initial public offering
was false and misleading in violation of the securities laws because we did not disclose these
arrangements. The action seeks damages in an unspecified amount.
The action is being coordinated with approximately 300 other nearly identical actions filed
against other companies. On October 9, 2002, the district court dismissed the Individual Defendants
from the case without prejudice based upon stipulations of dismissal filed by the plaintiffs and
the Individual Defendants. On December 5, 2006, the Second Circuit vacated a decision by the
district court granting class certification in six of the coordinated cases, which are intended to
serve as test, or focus cases. The plaintiffs selected these six cases, which do not include us.
On April 6, 2007, the Second Circuit denied a petition for rehearing filed by the plaintiffs, but
noted that the plaintiffs could ask the district court to certify more narrow classes than those
that were rejected.
On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. The
amended complaints include a number of changes, such as changes to the definition of the purported
class of investors, and the elimination of the individual defendants as defendants. On September
27, 2007, the plaintiffs moved to certify a class in the six focus cases. On November 14, 2007,
the issuers and the underwriters named as defendants in the six focus cases filed motions to
dismiss the amended complaints. On March 26, 2008, the district court dismissed the Securities Act
claims of those members of the putative classes in the focus cases who sold their securities for a
price in excess of the initial offering price and those who purchased outside the previously
certified class period. With respect to all other claims, the motions to dismiss were denied. We
are awaiting a decision from the Court on the class certification motion. Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome of this matter. If
we are found liable, we are unable to estimate or predict the potential damages that might be
awarded, whether such damages would be greater than our insurance coverage, and whether such
damages would have a material impact on our results of operations or financial condition in any
future period.
28
Item 1A. Risk Factors
The following risk factors and other information in this quarterly report on Form 10-Q and
also those discussed in our annual report on Form 10-K for the year-ended December 31, 2007 and in
our quarterly report on Form 10-Q for the three months ended March 31, 2008 should be carefully
considered. The risks and uncertainties described below and discussed in the aforementioned reports
are not the only ones we face. Additional risks and uncertainties not presently known to us, or
that we currently deem immaterial, may also impair our business operations. If any of the following
risks occur, our business, financial condition, operating results and cash flows could be
materially adversely affected. We do not repeat risk factors that were disclosed in our most
recent annual report on Form 10-K and in our quarterly report on Form 10Q for the three months
ended March 31, 2008, which have not changed substantially, including financial/numerical
information where such information has not changed materially or where the relationship of such
information to other financial information has not changed materially. Instead, we will update
risk factors where changes or updates are deemed significant and will add new risk factors not
previously disclosed as they become pertinent to our business. To the extent a risk factor is no
longer considered relevant that was described in our most recent annual report on Form 10-K, it
will be deleted in the annual report on Form 10-K to be filed for the year ending December 31,
2008.
Microsoft-Related Risk Factors
If we do not maintain our OEM Distribution Agreement with Microsoft, our revenue would decrease and
our business would be adversely affected.
We have an OEM Distribution Agreement (ODA) with Microsoft, which enables us to resell
Microsoft Windows Embedded operating systems to our customers in the United States, Canada, the
Caribbean (excluding Cuba) and Mexico. Software sales under this agreement constitute a significant
portion of our revenue. If the ODA was terminated, our software revenue and resulting gross profit
would decrease significantly and our operating results would be negatively impacted. The ODA is
renewable annually, and there is no automatic renewal provision in the agreement. The ODA was
renewed effective July 1, 2008 and will expire on June 30, 2009, unless terminated earlier under
the provisions of the ODA. There were no material changes to the provisions of the ODA as a result
of the renewal. Future renewals, if any, could be on less favorable terms, which could negatively
impact our business and operating results.
Significant changes to the Microsofts pricing structure and rebate programs could have a negative
impact on our business and operating results.
Microsoft
recently communicated to its distribution partners that it will
change its pricing structure and rebate programs, effective
September 1, 2008 whereby Microsoft will generally increase the cost
of software licenses we pay to Microsoft.
While the effect of these changes is difficult to predict at this time, these
changes could potentially reduce the amount of rebate we earn and reduce our software margins if we
are unable to pass on the price increase to our customers. The affect of these items could
negatively affect our gross profit, gross margins and profitability.
General Business-Related Risk Factors
All of our investment portfolio is invested in auction rate securities (ARS) which have faced
recent market failures.
We have investments in ARS valued at $6,525,000 as of June 30, 2008 which have failed at
auction. As a result, these investments are illiquid and we are unable to determine with any
certainty when, or if, these investments will become liquid. Liquidity of these investments is
subject to redemption of the investments by the issuers, or sales of the securities in a secondary
market. The lack of liquidity in our ARS investments has adversely affected our liquidity and
working capital and could affect our future ability to fund our strategic and other initiatives.
It is possible that declines in fair value may occur in the future.
Liquidity of these investments is contingent on redeeming the
investments by the issuers or sales of the securities in a secondary
market. ARS are currently being sold on the secondary market at
discounts that range from 5% to 25% depending on the type of sucurity.
A decline in the value of
these ARS or continued lack of liquidity could result in losses and have a material negative impact
on our operating results and financial condition. If the credit ratings of the issuer, the bond
insurers or the collateral deteriorate, we may adjust the carrying value of
29
these investments. If the current market conditions deteriorate further, we may be required
to record unrealized losses in other comprehensive income or impairment charges.
30
Item 4. Submission of Matters to a Vote of Security Holders
On June 4, 2008, the following matter was submitted to a vote at the Annual Meeting of
Shareholders:
Proposal 1: Election of Directors. Two Class II directors were elected at our 2008 Annual Meeting
for three-year terms ending in 2011 by the vote set forth below:
|
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Shares |
|
Shares |
Nominee |
|
For |
|
Withheld |
Donald B. Bibeault |
|
|
5,671,811 |
|
|
|
3,585,270 |
|
Brian T. Crowley |
|
|
7,208,788 |
|
|
|
2,048,343 |
|
31
Item 6. Exhibits
|
|
|
Exhibit No. |
|
Exhibit Description |
|
3.1
|
|
Amended and Restated Articles of Incorporation (incorporated by reference to
our registration statement on Form S-1 (File No. 333-85351) filed with the
Securities and Exchange Commission on October 19, 1999) |
|
|
|
3.1(a)
|
|
Articles of Amendment to Amended and Restated Articles of Incorporation
(incorporated by reference to our quarterly report on Form 10-Q filed with the
Securities and Exchange Commission on August 7, 2000) |
|
|
|
3.1(b)
|
|
Articles of Amendment to Amended and Restated Articles of Incorporation
(incorporated by reference to our current report on Form 8-K filed with the
Securities and Exchange Commission on October 11, 2005) |
|
|
|
3.2
|
|
Bylaws and all amendments thereto (incorporated by reference to our annual
report on Form 10-K filed with the Securities and Exchange Commission on March
19, 2003) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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|
|
BSQUARE CORPORATION
(Registrant) |
|
|
Date: August 7, 2008 |
|
|
|
|
|
|
|
|
By:
|
|
/s/ Brian T. Crowley
Brian T. Crowley
|
|
|
|
|
|
|
President and Chief Executive Officer |
|
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|
|
Date: August 7, 2008 |
|
|
|
|
|
|
|
|
By:
|
|
/s/ Scott C. Mahan |
|
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|
Scott C. Mahan |
|
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|
Vice President, Finance and |
|
|
|
|
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Chief Financial Officer |
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|
32
BSQUARE CORPORATION
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
|
(Referenced to |
|
|
Item 601 of |
|
Exhibit |
Regulation S-K) |
|
Description |
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation (incorporated by reference to
our registration statement on Form S-1 (File No. 333-85351) filed with the
Securities and Exchange Commission on October 19, 1999) |
|
|
|
3.1(a)
|
|
Articles of Amendment to Amended and Restated Articles of Incorporation
(incorporated by reference to our quarterly report on Form 10-Q filed with the
Securities and Exchange Commission on August 7, 2000) |
|
|
|
3.1(b)
|
|
Articles of Amendment to Amended and Restated Articles of Incorporation
(incorporated by reference to our current report on Form 8-K filed with the
Securities and Exchange Commission on October 11, 2005) |
|
|
|
3.2
|
|
Bylaws and all amendments thereto (incorporated by reference to our annual
report on Form 10-K filed with the Securities and Exchange Commission on March
19, 2003) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
33