ctrl_Current Folio_10Q

Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark one)

 

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

 

For the quarterly period ended June 30, 2018

 

OR

 

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

 

For the transition period from       to       .

 

Commission file number 001-36017

 


 

Control4 Corporation

(Exact name of registrant as specified in its charter)

 


 

Delaware
(State or other jurisdiction of incorporation or organization)

    

42-1583209
(I.R.S. Employer Identification No.)

 

 

 

11734 S. Election Road
Salt Lake City, Utah
(Address of principal executive offices)

 

84020
(Zip Code)

 

(801) 523-3100
(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non‑accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☒

 

 

(Do not check if a smaller reporting company)

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒

 

On July 27, 2018, 26,095,635 shares of the registrant’s Common Stock, $0.0001 par value, were outstanding.

 

 

 


 

Table of Contents

Control4 Corporation

 

Index

 

 

 

 

 

 

 

 

 

 

 

Part I — Financial Information 

    

 

 

 

 

 

 

Item 1. 

 

Condensed Consolidated Financial Statements:

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2018 and December 31, 2017

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2018 and 2017

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2018 and 2017

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6

 

 

 

 

 

Item 2. 

 

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

 

23

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

39

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

40

 

 

 

 

 

Part II — Other Information 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

41

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

41

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

63

 

 

 

 

 

Item 6. 

 

Exhibits

 

65

 

 

 

 

 

Signatures 

 

66

 

 

 

 

 

 

 

 

 

 

 


 

Table of Contents

Control4 Corporation

 

PART I — Financial Information

 

ITEM 1. Condensed Consolidated Financial Statements

 

CONTROL4 CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2018

 

2017

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,229

 

$

29,761

 

Restricted cash

 

 

267

 

 

273

 

Short-term investments

 

 

53,317

 

 

44,057

 

Accounts receivable, net

 

 

29,806

 

 

29,925

 

Inventories

 

 

41,713

 

 

37,171

 

Prepaid expenses and other current assets

 

 

5,445

 

 

4,369

 

Total current assets

 

 

157,777

 

 

145,556

 

Property and equipment, net

 

 

7,872

 

 

7,337

 

Long-term investments

 

 

2,557

 

 

12,038

 

Intangible assets, net

 

 

23,315

 

 

26,081

 

Goodwill

 

 

21,672

 

 

21,867

 

Other assets

 

 

1,491

 

 

1,618

 

Total assets

 

$

214,684

 

$

214,497

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

26,141

 

$

25,654

 

Accrued liabilities

 

 

8,296

 

 

10,835

 

Current portion of deferred revenue

 

 

4,990

 

 

4,538

 

Total current liabilities

 

 

39,427

 

 

41,027

 

Other long-term liabilities

 

 

4,164

 

 

3,942

 

Total liabilities

 

 

43,591

 

 

44,969

 

Commitments and contingencies (Note 11)

 

 

 —

 

 

 —

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 500,000,000 shares authorized; 26,086,642 and 25,832,895 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

 3

 

 

 3

 

Additional paid-in capital

 

 

236,434

 

 

242,281

 

Accumulated deficit

 

 

(64,620)

 

 

(72,225)

 

Accumulated other comprehensive loss

 

 

(724)

 

 

(531)

 

Total stockholders’ equity

 

 

171,093

 

 

169,528

 

Total liabilities and stockholders’ equity

 

$

214,684

 

$

214,497

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

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CONTROL4 CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(unaudited)

 

(unaudited)

 

Revenue

 

$

69,228

 

$

61,252

 

$

128,377

 

$

111,460

 

Cost of revenue

 

 

32,866

 

 

29,993

 

 

61,276

 

 

55,052

 

Gross margin

 

 

36,362

 

 

31,259

 

 

67,101

 

 

56,408

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,511

 

 

10,055

 

 

21,451

 

 

19,899

 

Sales and marketing

 

 

12,553

 

 

11,943

 

 

25,088

 

 

23,390

 

General and administrative

 

 

6,328

 

 

5,587

 

 

12,621

 

 

11,304

 

Total operating expenses

 

 

29,392

 

 

27,585

 

 

59,160

 

 

54,593

 

Income from operations

 

 

6,970

 

 

3,674

 

 

7,941

 

 

1,815

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

256

 

 

61

 

 

492

 

 

99

 

Other income (expense), net

 

 

(425)

 

 

248

 

 

(782)

 

 

104

 

Total other income (expense), net

 

 

(169)

 

 

309

 

 

(290)

 

 

203

 

Income before income taxes

 

 

6,801

 

 

3,983

 

 

7,651

 

 

2,018

 

Income tax expense (benefit)

 

 

161

 

 

242

 

 

45

 

 

(2,544)

 

Net income

 

$

6,640

 

$

3,741

 

$

7,606

 

$

4,562

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.25

 

$

0.15

 

$

0.29

 

$

0.19

 

Diluted

 

$

0.24

 

$

0.14

 

$

0.28

 

$

0.18

 

Weighted-average number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

26,041

 

 

24,587

 

 

25,973

 

 

24,298

 

Diluted

 

 

27,267

 

 

26,388

 

 

27,396

 

 

26,024

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

 

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CONTROL4 CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(unaudited)

 

(unaudited)

 

Net income

 

$

6,640

 

$

3,741

 

$

7,606

 

$

4,562

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax

 

 

(107)

 

 

(87)

 

 

(158)

 

 

362

 

Net unrealized gain (losses) on available-for-sale investments, net of tax

 

 

29

 

 

 1

 

 

(35)

 

 

(3)

 

Total other comprehensive income (loss)

 

 

(78)

 

 

(86)

 

 

(193)

 

 

359

 

Comprehensive income

 

$

6,562

 

$

3,655

 

$

7,413

 

$

4,921

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

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CONTROL4 CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

    

2018

    

2017

 

 

 

(unaudited)

 

Operating activities

 

 

 

 

 

 

 

Net income

 

$

7,606

 

$

4,562

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation expense

 

 

1,853

 

 

1,762

 

Amortization of intangible assets

 

 

2,885

 

 

2,551

 

Loss on disposal of fixed assets

 

 

10

 

 

 —

 

Provision for doubtful accounts

 

 

286

 

 

264

 

Investment discount and premium amortization

 

 

(192)

 

 

(23)

 

Stock-based compensation

 

 

6,656

 

 

6,163

 

Tax benefit from business acquisition

 

 

 —

 

 

(2,415)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(374)

 

 

(1,186)

 

Inventories

 

 

(4,942)

 

 

(3,369)

 

Prepaid expenses and other current assets

 

 

(1,081)

 

 

1,198

 

Other assets

 

 

161

 

 

(601)

 

Accounts payable

 

 

550

 

 

875

 

Accrued liabilities

 

 

(2,090)

 

 

(1,653)

 

Deferred revenue

 

 

421

 

 

412

 

Other long-term liabilities

 

 

295

 

 

252

 

Net cash provided by operating activities

 

 

12,044

 

 

8,792

 

Investing activities

 

 

 

 

 

 

 

Purchases of available-for-sale investments

 

 

(32,372)

 

 

(28,933)

 

Proceeds from sales of available-for-sale investments

 

 

1,000

 

 

950

 

Proceeds from maturities of available-for-sale investments

 

 

31,750

 

 

20,268

 

Purchases of property and equipment

 

 

(1,851)

 

 

(1,618)

 

Business acquisitions, net of cash acquired

 

 

(343)

 

 

(7,881)

 

Net cash used in investing activities

 

 

(1,816)

 

 

(17,214)

 

Financing activities

 

 

 

 

 

 

 

Proceeds from exercise of options for common stock

 

 

3,155

 

 

7,775

 

Payments for taxes related to net share settlement of equity awards

 

 

(4,608)

 

 

(2,596)

 

Repurchase of common stock

 

 

(11,050)

 

 

(1,821)

 

Payment of debt issuance costs

 

 

(113)

 

 

 —

 

Net cash (used in) provided by financing activities

 

 

(12,616)

 

 

3,358

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(150)

 

 

330

 

Net change in cash and cash equivalents

 

 

(2,538)

 

 

(4,734)

 

Unrestricted and restricted cash and cash equivalents at beginning of period

 

 

30,034

 

 

35,060

 

Unrestricted and restricted cash and cash equivalents at end of period

 

$

27,496

 

$

30,326

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

66

 

$

63

 

Cash paid for taxes

 

 

685

 

 

834

 

Supplemental schedule of non-cash investing and financing activities

 

 

 

 

 

 

 

Business acquisitions holdback liability

 

 

 —

 

 

1,068

 

Purchases of property and equipment financed by accounts payable

 

 

584

 

 

178

 

Net unrealized losses on available-for-sale investments

 

 

(35)

 

 

(3)

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

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Control4 Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1. Description of Business and Summary of Significant Accounting Policies

 

Control4 Corporation (‘‘Control4’’ or the ‘‘Company’’) is a leading provider of smart home and business solutions that are designed to personalize and enhance how consumers engage with an ever-changing connected world. Our entertainment, smart lighting, comfort and convenience, safety and security, and networking solutions unlock the potential of connected devices, making entertainment systems easier to use and more accessible, homes and businesses more comfortable and energy efficient, and individuals more secure. The Company was incorporated in the state of Delaware on March 27, 2003.

 

Unaudited Interim Financial Statements

 

The accompanying condensed consolidated financial statements are unaudited. These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to present fairly the Company’s financial position, results of operations and cash flows. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, or any other future interim or annual period.

 

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K filed with the SEC on February 15, 2018. The December 31, 2017 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date.

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in the unaudited condensed consolidated financial statements.

 

Segment Reporting

 

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as one operating segment.

 

Concentrations of Risk

 

The Company’s accounts receivable are derived from revenue earned from its worldwide network of independent dealers and distributors. The Company’s sales to dealers and distributors located outside the United States are generally denominated in U.S. dollars, except for sales to dealers and distributors located in the United Kingdom, Canada, Australia, and the European Union, which are generally denominated in pounds sterling, Canadian dollars, Australian dollars, and euros, respectively. There were no individual account balances greater than 10% of total accounts receivable as of June 30, 2018 and December 31, 2017.

 

No dealer or distributor accounted for more than 10% of total revenue for the three and six months ended June 30, 2018 and 2017.

 

While the Company partners with many manufacturers, generally one manufacturer is our sole source for a particular product or product family. A significant disruption in the operations of one of these manufacturers would

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impact the production of the Company’s products for a substantial period of time, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Use of Accounting Estimates

 

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, sales returns, provisions for doubtful accounts, product warranty, inventory obsolescence, litigation, determination of fair value of stock options, deferred tax asset valuation allowances and income taxes. Actual results may differ from those estimates.

 

Limited Product Warranties

 

The Company provides its customers a limited product warranty of two,  three, or ten years depending on product type and brand. The limited product warranties require the Company, at its option, to repair or replace defective products during the warranty period at no cost to the customer or refund the purchase price. The Company estimates the costs that may be incurred to replace, repair or issue a refund for defective products and records a reserve at the time revenue is recognized. Factors that affect the Company’s warranty liability include the cost of the products sold, the Company’s historical experience, and management’s judgment regarding anticipated rates of product warranty returns, net of refurbished products. The Company assesses the adequacy of its recorded warranty liability each period and makes adjustments to the liability as necessary. Warranty costs accrued include amounts accrued for products at the time of shipment, adjustments for changes in estimated costs for warranties on products shipped in the period, and changes in estimated costs for warranties on products shipped in prior periods. It is not practicable for the Company to determine the amounts applicable to each of these components.

 

The following table presents the changes in the product warranty liability for the six months ended June 30, 2018 (in thousands):

 

 

 

 

 

 

 

    

Warranty Liability

 

Balance at December 31, 2017

 

$

2,032

 

Warranty costs accrued

 

 

1,110

 

Warranty claims

 

 

(937)

 

Balance at June 30, 2018

 

$

2,205

 

 

Net Income Per Share

 

Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares outstanding and potentially dilutive common shares outstanding during the period that have a dilutive effect on net income per share. Potentially dilutive common shares result from the assumed exercise of outstanding stock options and settlement of restricted stock units.

 

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The following table presents the reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,640

 

$

3,741

 

$

7,606

 

$

4,562

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common stock outstanding for basic net income per common share

 

 

26,041

 

 

24,587

 

 

25,973

 

 

24,298

 

Effect of dilutive securities—stock options and restricted stock units

 

 

1,226

 

 

1,801

 

 

1,423

 

 

1,726

 

Weighted average common shares and dilutive securities outstanding

 

 

27,267

 

 

26,388

 

 

27,396

 

 

26,024

 

 

Potentially dilutive securities, including common equivalent shares, in which the assumed proceeds exceed the average market price of common stock for the applicable period, were not included in the calculation of diluted net income per share as their impact would be anti-dilutive. The following weighted-average common stock equivalents were anti-dilutive and therefore were excluded from the calculation of diluted net income per share (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2018

 

2017

    

2018

 

2017

 

Options to purchase common stock

 

 —

 

1,096

 

 -

 

1,310

 

Restricted stock units

 

192

 

15

 

179

 

 9

 

Total

 

192

 

1,111

 

179

 

1,319

 

 

Restricted Cash

 

Restricted cash as of June 30, 2018 and December 31, 2017 is composed of a guarantee made by the Company’s subsidiary in the United Kingdom to HM Revenue & Customs related to a customs duty deferment account.

Recent Accounting Pronouncements

 

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from non-employees. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company elected to early-adopt this standard in the current period; the adoption of this standard did not impact the consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which provides amendments to current guidance to address the classifications and presentation of changes in restricted cash in the statement of cash flows. The effective date for the standard is for fiscal years beginning after December 15, 2017. The Company adopted the standard effective January 1, 2018; the adoption of this standard did not have a material impact on the consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The amendments in this update will require recognition of current and deferred income taxes resulting from an intra-entity transfer of an asset other than inventory when the transfer occurs. This update is effective for annual and interim periods beginning after December 15, 2017. The Company adopted the standard effective January 1, 2018; the adoption of this standard did not have a material impact on the consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)” which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance

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introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. For trade receivables, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The guidance is effective for fiscal years beginning after December 31, 2019, including interim periods within those years. Early application of the guidance is permitted for all entities for fiscal years beginning after December 15, 2018, including the interim periods within those fiscal years. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of this update on the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which supersedes the guidance in ASC 840, “Leases.” The purpose of the new standard is to improve transparency and comparability related to the accounting and reporting of leasing arrangements. The guidance will require balance sheet recognition for assets and liabilities associated with rights and obligations created by leases with terms greater than twelve months. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Modified retrospective application is required. Early adoption is permitted. The Company expects the standard will have a material impact on the Company’s consolidated balance sheets but will not have a material impact on the consolidated statements of operations. The most significant impact will be the recognition of right of use assets and lease liabilities for operating leases. The Company is in the process of calculating the right of use assets and lease liabilities and implementing internal controls to enable the preparation of financial statements upon adoption of this standard. 

 

 

2. Balance Sheet Components

 

Inventories consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2018

 

2017

 

Finished goods

 

$

37,105

 

$

33,050

 

Component parts

 

 

4,531

 

 

4,025

 

Work-in-process

 

 

77

 

 

96

 

 

 

$

41,713

 

$

37,171

 

 

Property and equipment, net consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2018

 

2017

 

Computer equipment and software

 

$

4,885

 

$

5,030

 

Manufacturing tooling and test equipment

 

 

4,226

 

 

4,894

 

Lab and warehouse equipment

 

 

5,259

 

 

4,869

 

Leasehold improvements

 

 

4,105

 

 

3,960

 

Furniture and fixtures

 

 

4,481

 

 

3,698

 

Other

 

 

1,086

 

 

1,086

 

 

 

 

24,042

 

 

23,537

 

Less: accumulated depreciation

 

 

(16,170)

 

 

(16,200)

 

 

 

$

7,872

 

$

7,337

 

 

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Accrued liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2018

 

2017

 

Sales returns and current portion of warranty liability

 

$

2,382

 

$

2,872

 

Compensation accruals

 

 

4,131

 

 

5,241

 

Other accrued liabilities

 

 

1,783

 

 

2,722

 

 

 

$

8,296

 

$

10,835

 

 

Other long-term liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

2018

 

2017

Deferred revenue

 

$

3,087

 

$

3,143

Warranty

 

 

720

 

 

600

Other

 

 

357

 

 

199

 

 

$

4,164

 

$

3,942

 

 

 

 

3. Financial Instruments

 

Fair Value Measurements

 

The Company’s financial assets that are measured at fair value on a recurring basis consist of money market funds and available-for-sale investments. The following three levels of inputs are used to measure the fair value of financial instruments:

 

Level 1: Quoted prices in active markets for identical assets or liabilities;

 

Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3: Unobservable inputs are used when little or no market data is available.

 

The fair values for substantially all of the Company’s financial assets are based on quoted prices in active markets or observable inputs. For Level 2 securities, the Company uses a third-party pricing service which provides documentation on an ongoing basis that includes, among other things, pricing information with respect to reference data, methodology, inputs summarized by asset class, pricing application and corroborative information.

 

Cash, Cash Equivalents and Marketable Securities

 

The Company determines realized gains or losses on the sale of marketable securities on a specific identification method. During the three and six months ended June 30,  2018 and 2017, the Company did not record significant realized gains or losses on the sales of available-for-sale investments.

 

The following tables show the Company’s cash and available-for-sale investments’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category, recorded as cash and cash equivalents or short- or long-term investments as of June 30,  2018 and December 31, 2017 (in thousands):

 

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June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and

 

 

 

 

 

 

 

 

 

Adjusted

 

Unrealized

 

Unrealized

 

 

 

 

Cash

 

Short-term

 

Long-term

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

    

Equivalents

    

Investments

    

Investments

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash 

 

$

21,145

 

$

 —

 

$

 —

 

$

21,145

 

$

21,145

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds 

 

 

5,085

 

 

 —

 

 

 —

 

 

5,085

 

 

5,085

 

 

 —

 

 

 —

 

U.S. government notes

 

 

8,937

 

 

 —

 

 

(32)

 

 

8,905

 

 

 —

 

 

7,430

 

 

1,475

 

Subtotal 

 

 

14,022

 

 

 —

 

 

(32)

 

 

13,990

 

 

5,085

 

 

7,430

 

 

1,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds 

 

 

26,951

 

 

 1

 

 

(65)

 

 

26,887

 

 

 —

 

 

25,805

 

 

1,082

 

Commercial paper 

 

 

21,081

 

 

 —

 

 

 —

 

 

21,081

 

 

999

 

 

20,082

 

 

 —

 

Subtotal 

 

 

48,032

 

 

 1

 

 

(65)

 

 

47,968

 

 

999

 

 

45,887

 

 

1,082

 

Total 

 

$

83,199

 

$

 1

 

$

(97)

 

$

83,103

 

$

27,229

 

$

53,317

 

$

2,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and

 

 

 

 

 

 

 

 

 

Adjusted

 

Unrealized

 

Unrealized

 

 

 

 

Cash

 

Short-term

 

Long-term

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

    

Equivalents

    

Investments

    

Investments

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash 

 

$

24,367

 

$

 —

 

$

 —

 

$

24,367

 

$

24,367

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

5,394

 

 

 —

 

 

 —

 

 

5,394

 

 

5,394

 

 

 —

 

 

 —

 

U.S. government notes

 

 

9,060

 

 

 —

 

 

(13)

 

 

9,047

 

 

 —

 

 

4,098

 

 

4,949

 

Subtotal

 

 

14,454

 

 

 —

 

 

(13)

 

 

14,441

 

 

5,394

 

 

4,098

 

 

4,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds 

 

 

24,943

 

 

 —

 

 

(49)

 

 

24,894

 

 

 —

 

 

17,805

 

 

7,089

 

Commercial paper 

 

 

22,154

 

 

 —

 

 

 —

 

 

22,154

 

 

 —

 

 

22,154

 

 

 —

 

Subtotal 

 

 

47,097

 

 

 —

 

 

(49)

 

 

47,048

 

 

 —

 

 

39,959

 

 

7,089

 

Total

 

$

85,918

 

$

 —

 

$

(62)

 

$

85,856

 

$

29,761

 

$

44,057

 

$

12,038

 

 

As of June 30,  2018, the Company considers the declines in market value of its investment portfolio to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. During the three and six months ended June 30,  2018 and 2017, the Company did not recognize any significant impairment charges. The Company invests in highly-rated securities, and its investment policy limits the amount of credit exposure to any one issuer. The policy requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. The maturities of the Company’s long-term investments range from one to two years. When evaluating an investment for other-than-temporary impairment the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates, and the Company’s intent to sell, as well as the fact it is not more likely than not that the Company will be required to sell the investment before recovery of the investment’s cost basis, which may be maturity.

 

Fair Value of Other Financial Instruments

 

The carrying amounts reported in the accompanying condensed consolidated financial statements for restricted cash, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of the accounts.

 

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Derivative Financial Instruments

 

The Company has foreign currency exposure related to the operations in the United Kingdom, Canada, Australia, the European Union, as well as other foreign locations. The Company has entered into forward contracts to help offset the exposure to movements in foreign currency exchange rates in relation to certain U.S. dollar denominated balance sheet accounts of its subsidiaries in the United Kingdom and Australia. The foreign currency derivatives are not designated as accounting hedges. The Company recognizes these derivative instruments as either assets or liabilities in the accompanying Condensed Consolidated Balance Sheets at fair value. The Company records changes in the fair value (i.e. gains or losses) of these derivative instruments in the accompanying Condensed Consolidated Statements of Operations as Other income (expense), net.

 

The Company settles its foreign exchange contracts on the last day of every month and enters into a new forward contract for the next month. As a result, there are no assets or liabilities recorded in the accompanying Condensed Consolidated Balance Sheets related to derivative instruments as of June 30,  2018. However, the notional principal of foreign exchange contracts for July 2018 was $10.5 million as of June 30, 2018.

 

The following table shows the pre-tax income (losses) of the Company’s derivative instruments not designated as hedging instruments (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

June 30,

 

June 30,

 

 

 

Income Statement Location

    

2018