Control4 Corporation
CONTROL4 CORP (Form: 10-Q, Received: 11/04/2016 12:50:53)

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 September 30, 2016

 

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 or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(do not check if a smaller reporting company)

 

 

 

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

 

On October 28, 2016, 23,639,120 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 Balance Sheets (unaudited) as of September 30, 2016 and December 31, 2015

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2016 and 2015

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

Item 2.  

 

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

 

23 

 

 

 

 

 

Item 3.  

 

Quantitative and Qualitative Disclosures about Market Risk

 

43 

 

 

 

 

 

Item 4.  

 

Controls and Procedures

 

43 

 

 

 

 

 

Part II — Other Information  

 

 

 

 

 

 

 

Item 1.  

 

Legal Proceedings

 

45 

 

 

 

 

 

Item 1A.  

 

Risk Factors

 

45 

 

 

 

 

 

Item 2.  

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

69 

 

 

 

 

 

Item 4.  

 

Mine Safety Disclosures

 

69 

 

 

 

 

 

Item 6.  

 

Exhibits

 

70 

 

 

 

 

 

Signatures  

 

71 

 

 

 

 

 

 

 

 

 

 

 

 


 

Table of Contents

Control4 Corporation

 

PART I — Financial Informatio n

 

ITEM 1. Condensed Consolidated Financial Statement s

 

CONTROL4 CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEET S

 

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,671

 

$

29,530

 

Restricted cash

 

 

259

 

 

296

 

Short-term investments

 

 

21,293

 

 

37,761

 

Accounts receivable, net

 

 

24,667

 

 

21,322

 

Inventories

 

 

31,714

 

 

19,855

 

Prepaid expenses and other current assets

 

 

3,166

 

 

3,842

 

Total current assets

 

 

106,770

 

 

112,606

 

Property and equipment, net

 

 

6,355

 

 

6,584

 

Long-term investments

 

 

5,008

 

 

13,716

 

Intangible assets, net

 

 

24,498

 

 

4,547

 

Goodwill

 

 

17,016

 

 

2,760

 

Other assets

 

 

2,110

 

 

1,650

 

Total assets

 

$

161,757

 

$

141,863

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

20,028

 

$

17,588

 

Accrued liabilities

 

 

7,407

 

 

5,880

 

Deferred revenue

 

 

1,378

 

 

1,099

 

Current portion of notes payable

 

 

298

 

 

727

 

Total current liabilities

 

 

29,111

 

 

25,294

 

Revolving credit line

 

 

1,500

 

 

 —

 

Notes payable

 

 

34

 

 

186

 

Other long-term liabilities

 

 

805

 

 

938

 

Total liabilities

 

 

31,450

 

 

26,418

 

Commitments and contingencies (Note 11)

 

 

 —

 

 

 —

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 500,000,000 shares authorized; 25,221,246 and 24,590,768 shares issued; 23,639,120 and 23,436,288 shares outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

3

 

 

2

 

Treasury stock, at cost; 1,582,126 and 1,154,480 shares at September 30, 2016 and December 31, 2015, respectively

 

 

(12,262)

 

 

(9,020)

 

Additional paid-in capital

 

 

229,688

 

 

220,782

 

Accumulated deficit

 

 

(86,640)

 

 

(95,580)

 

Accumulated other comprehensive loss

 

 

(482)

 

 

(739)

 

Total stockholders’ equity

 

 

130,307

 

 

115,445

 

Total liabilities and stockholders’ equity

 

$

161,757

 

$

141,863

 

 

 

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

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Table of Contents

CONTROL4 CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATION S

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

(unaudited)

 

(unaudited)

 

Revenue

 

$

55,185

 

$

43,558

 

$

151,435

 

$

120,282

 

Cost of revenue

 

 

27,566

 

 

21,748

 

 

77,303

 

 

60,532

 

Gross margin

 

 

27,619

 

 

21,810

 

 

74,132

 

 

59,750

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,190

 

 

8,191

 

 

26,708

 

 

24,308

 

Sales and marketing

 

 

10,852

 

 

8,489

 

 

32,101

 

 

23,668

 

General and administrative

 

 

5,407

 

 

4,220

 

 

15,279

 

 

13,129

 

Litigation settlement

 

 

 —

 

 

 —

 

 

400

 

 

 —

 

Total operating expenses

 

 

25,449

 

 

20,900

 

 

74,488

 

 

61,105

 

Income (loss) from operations

 

 

2,170

 

 

910

 

 

(356)

 

 

(1,355)

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

12

 

 

79

 

 

17

 

 

142

 

Other income (expense), net:

 

 

(89)

 

 

(112)

 

 

(306)

 

 

(452)

 

Total other income (expense), net

 

 

(77)

 

 

(33)

 

 

(289)

 

 

(310)

 

Income (loss) before income taxes

 

 

2,093

 

 

877

 

 

(645)

 

 

(1,665)

 

Income tax expense (benefit)

 

 

316

 

 

(314)

 

 

(9,585)

 

 

(666)

 

Net income (loss)

 

$

1,777

 

$

1,191

 

$

8,940

 

$

(999)

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.08

 

$

0.05

 

$

0.38

 

$

(0.04)

 

Diluted

 

$

0.07

 

$

0.05

 

$

0.37

 

$

(0.04)

 

Weighted-average number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,424

 

 

24,129

 

 

23,307

 

 

24,260

 

Diluted

 

 

24,530

 

 

24,856

 

 

24,149

 

 

24,260

 

 

 

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

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Table of Contents

CONTROL4 CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOS S)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

(unaudited)

 

(unaudited)

 

Net income (loss)

 

$

1,777

 

$

1,191

 

$

8,940

 

$

(999)

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax

 

 

172

 

 

(547)

 

 

197

 

 

(793)

 

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

 

 

(10)

 

 

37

 

 

60

 

 

65

 

Total other comprehensive income (loss)

 

 

162

 

 

(510)

 

 

257

 

 

(728)

 

Comprehensive income (loss)

 

$

1,939

 

$

681

 

$

9,197

 

$

(1,727)

 

 

 

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

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Table of Contents

CONTROL4 CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW S

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2016

    

2015

 

 

 

(unaudited)

 

Operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

8,940

 

$

(999)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation expense

 

 

2,402

 

 

2,146

 

Amortization of intangible assets

 

 

3,393

 

 

1,113

 

Loss on disposal of fixed assets

 

 

13

 

 

 —

 

Provision for doubtful accounts

 

 

313

 

 

281

 

Investment premium amortization

 

 

293

 

 

 —

 

Stock-based compensation

 

 

5,933

 

 

5,336

 

Tax benefit from business acquisition

 

 

(9,402)

 

 

 —

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,469)

 

 

(2,097)

 

Inventories

 

 

(6,776)

 

 

(1,779)

 

Prepaid expenses and other current assets

 

 

1,740

 

 

(566)

 

Other assets

 

 

(341)

 

 

(247)

 

Accounts payable

 

 

2,333

 

 

342

 

Accrued liabilities

 

 

421

 

 

(622)

 

Deferred revenue

 

 

291

 

 

347

 

Other long-term liabilities

 

 

(451)

 

 

(298)

 

Net cash provided by operating activities

 

 

5,633

 

 

2,957

 

Investing activities

 

 

 

 

 

 

 

Purchases of available-for-sale investments

 

 

(10,147)

 

 

(49,095)

 

Proceeds from sales of available-for-sale investments

 

 

900

 

 

2,018

 

Proceeds from maturities of available-for-sale investments

 

 

33,858

 

 

49,535

 

Purchases of property and equipment

 

 

(1,780)

 

 

(2,917)

 

Business acquisitions, net of cash acquired

 

 

(32,891)

 

 

(8,380)

 

Net cash used in investing activities

 

 

(10,060)

 

 

(8,839)

 

Financing activities

 

 

 

 

 

 

 

Proceeds from exercise of options for common stock

 

 

3,021

 

 

1,127

 

Repurchase of common stock

 

 

(3,242)

 

 

(4,942)

 

Repayment of notes payable

 

 

(581)

 

 

(722)

 

Proceeds from revolving credit facility

 

 

5,000

 

 

 —

 

Repayment of revolving credit facility

 

 

(3,500)

 

 

 —

 

Payment of debt issuance costs

 

 

(89)

 

 

 —

 

Net cash provided by (used in) financing activities

 

 

609

 

 

(4,537)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(41)

 

 

(31)

 

Net decrease in cash and cash equivalents

 

 

(3,859)

 

 

(10,450)

 

Cash and cash equivalents at beginning of period

 

 

29,530

 

 

29,187

 

Cash and cash equivalents at end of period

 

$

25,671

 

$

18,737

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

164

 

$

85

 

Cash paid for taxes

 

 

858

 

 

431

 

Supplemental schedule of non-cash investing and financing activities

 

 

 

 

 

 

 

Net unrealized losses on available-for-sale investments

 

 

60

 

 

65

 

 

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

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Table of Contents

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 personalized, smart home and business solutions that are designed to enhance the daily lives of our customers. The Company’s solutions unlock the potential of connected devices throughout a home or business, making entertainment systems easier to use and more accessible, spaces 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 balance sheets, condensed consolidated statements of operations, condensed consolidated statements of comprehensive income (loss), and condensed consolidated statements of cash flows are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (‘‘GAAP’’) on the same basis as the audited consolidated financial statements 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 nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016, 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 Securities and Exchange Commission (the “SEC”) on February 16, 2016. The December 31, 2015 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 the euro, respectively. There were no individual account balances greater than 10% of total accounts receivable as of September 30, 2016 and December 31, 2015.

 

No dealer or distributor accounted for more than 10% of total revenue for the three and nine months ended September 30, 2016 and 2015.

 

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The Company relies on a limited number of suppliers for its contract manufacturing. A significant disruption in the operations of certain of these manufacturers would 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.

 

Geographic Information

 

The Company’s revenue includes amounts earned through sales to dealers and distributors located outside of the United States. There was no single foreign country that accounted for more than 10% of total revenue for the three and nine months ended September 30, 2016 and 2015. The following table sets forth revenue from U.S., Canadian and all other international dealers and distributors combined (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

Revenue-United States

 

$

39,670

 

$

29,300

 

$

108,506

 

$

80,571

 

 

Revenue-Canada

 

 

4,246

 

 

3,702

 

 

11,355

 

 

10,910

 

 

Revenue-all other international sources

 

 

11,269

 

 

10,556

 

 

31,574

 

 

28,801

 

 

Total revenue

 

$

55,185

 

$

43,558

 

$

151,435

 

$

120,282

 

 

International revenue (excluding Canada) as a percent of total revenue

 

 

20

%  

 

24

%  

 

21

%  

 

24

%  

 

 

 

Use of Accounting Estimates

 

The preparation of financial statements in conformity with 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 years for all Control4 branded products and three years for all Pakedge branded products. 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.

 

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The following table presents the changes in the product warranty liability for the nine months ended September 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

    

Warranty Liability

 

Balance at December 31, 2015

 

$

1,415

 

Warranty costs accrued

 

 

1,145

 

Warranty claims

 

 

(863)

 

Balance at September 30, 2016

 

$

1,697

 

 

 

Net Income (Loss) Per Share

 

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) 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.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,777

 

$

1,191

 

$

8,940

 

$

(999)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common stock outstanding for basic net income (loss) per common share

 

 

23,424

 

 

24,129

 

 

23,307

 

 

24,260

 

Effect of dilutive securities—stock options and restricted stock units

 

 

1,106

 

 

727

 

 

842

 

 

 —

 

Weighted average common shares and dilutive securities outstanding

 

 

24,530

 

 

24,856

 

 

24,149

 

 

24,260

 

 

In a net loss position, diluted net loss per share is computed using only the weighted-average number of common shares outstanding during the period, as any additional common shares would be anti-dilutive as they would decrease the loss per share.  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 (loss) per share (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2016

 

2015

    

2016

 

2015

 

Options to purchase common stock

 

2,221

 

2,687

 

2,490

 

4,796

 

Restricted stock units

 

 —

 

 —

 

23

 

87

 

Total

 

2,221

 

2,687

 

2,513

 

4,883

 

 

Recent Accounting Pronouncements

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15, “ Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ,” which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. This standard is effective for fiscal periods beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted and the guidance must be applied using a retrospective transition method. The Company is currently evaluating the impact of adopting this guidance.

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In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . ”   The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 will be effective for the Company in fiscal year 2017. Any adjustments resulting from the adoption of this standard will be reflected as of the beginning of the fiscal year of adoption. In accordance with the provisions of this standard, the Company will start recognizing excess tax benefits in our provision for income taxes rather than paid-in capital beginning January 1, 2017. The Company doesn’t anticipate that additional amendments to the accounting for income taxes and minimum statutory withholding requirements will have a material impact to retained earnings as of January 1, 2017, where the cumulative effect of these amendments are required to be recorded. The Company is still evaluating the accounting policy election to estimate forfeitures, as currently required, or to recognize forfeitures as they occur. If the Company elects to change this accounting policy and recognize forfeitures as they occur, there will be a cumulative effect adjustment recorded to opening retained earnings to reflect the impact of this change. In addition, the Company is still evaluating if the presentation for cash flows related to excess tax benefits will be adopted prospectively or retrospectively.

 

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 is evaluating the impact of adopting this guidance.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Subtopic 330) – Simplifying the Measurement of Inventory.” This update requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. The guidance is effective in fiscal years beginning after December 15, 2016, including interim periods within those years. Prospective application is required. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company early adopted this guidance this quarter, and the adoption of this guidance did not have an impact on the Company’s results of operations, financial position, or cash flows.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which amends the guidance in ASC 605, “Revenue Recognition.” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, deferring the effective date of this standard for one year, and is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The deferred standard allows early adoption of the standard on the original effective date which would be effective for annual reporting periods beginning after December 15, 2016. The Company is still evaluating the impact of adopting this guidance, as well as whether the Company will apply the amendments retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of applying this update at the date of initial application. 

 

 

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2. Balance Sheet Components

 

Inventories consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2016

 

2015

 

Finished goods

 

$

28,963

 

$

16,982

 

Component parts

 

 

2,443

 

 

2,575

 

Work-in-process

 

 

308

 

 

298

 

 

 

$

31,714

 

$

19,855

 

 

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

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2016

 

2015

 

Computer equipment and software

 

$

3,672

 

$

4,799

 

Manufacturing tooling and test equipment

 

 

4,222

 

 

4,267

 

Lab and warehouse equipment

 

 

3,546

 

 

3,376

 

Leasehold improvements

 

 

3,120

 

 

2,949

 

Furniture and fixtures

 

 

2,934

 

 

2,881

 

Other

 

 

753

 

 

752

 

 

 

 

18,247

 

 

19,024

 

Less: accumulated depreciation

 

 

(11,892)

 

 

(12,440)

 

 

 

$

6,355

 

$

6,584

 

 

Other assets consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2016

 

2015

 

Deposits

 

$

665

 

$

933

 

Prepaid licensing

 

 

552

 

 

664

 

Deferred tax asset

 

 

882

 

 

 —

 

Other

 

 

11

 

 

53

 

 

 

$

2,110

 

$

1,650

 

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2016

 

2015

 

Sales returns and warranty accruals

 

$

3,016

 

$

2,508

 

Compensation accruals

 

 

3,249

 

 

2,331

 

Other accrued liabilities

 

 

1,142

 

 

1,041

 

 

 

$

7,407

 

$

5,880

 

 

 

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;

 

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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 nine months ended September 30, 2016 and 2015, 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 September 30, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and

 

 

 

 

 

 

 

 

 

Adjusted

 

Unrealized

 

Unrealized

 

 

 

 

Cash

 

Short-term

 

Long-term

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

    

Equivalents

    

Investments

    

Investments

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash 

 

$

14,939

 

$

 —

 

$

 —

 

$

14,939

 

$

14,939

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds 

 

 

10,732

 

 

 —

 

 

 —

 

 

10,732

 

 

10,732

 

 

 —

 

 

 —

 

U.S. government notes

 

 

999

 

 

1

 

 

 —

 

 

1,000

 

 

 —

 

 

1,000

 

 

 —

 

Subtotal 

 

 

11,731

 

 

1

 

 

 —

 

 

11,732

 

 

10,732

 

 

1,000

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities 

 

 

5,005

 

 

3

 

 

 —

 

 

5,008

 

 

 —

 

 

 —

 

 

5,008

 

Corporate bonds 

 

 

17,302

 

 

1

 

 

(6)

 

 

17,297

 

 

 —

 

 

17,297

 

 

 —

 

Commercial paper 

 

 

1,996

 

 

 —

 

 

 —

 

 

1,996

 

 

 —

 

 

1,996

 

 

 —

 

U.S. agency securities 

 

 

1,000

 

 

 —

 

 

 —

 

 

1,000

 

 

 —

 

 

1,000

 

 

 —

 

Subtotal 

 

 

25,303

 

 

4

 

 

(6)

 

 

25,301

 

 

 —

 

 

20,293

 

 

5,008

 

Total 

 

$

51,973

 

$

5

 

$

(6)

 

$

51,972

 

$

25,671

 

$

21,293

 

$

5,008

 

 

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December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and

 

 

 

 

 

 

 

 

 

Adjusted

 

Unrealized

 

Unrealized

 

 

 

 

Cash

 

Short-term

 

Long-term

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

    

Equivalents

    

Investments

    

Investments

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash 

 

$

7,593

 

$

 —

 

$

 —

 

$

7,593

 

$

7,593

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

21,937

 

 

 —

 

 

 —

 

 

21,937

 

 

21,937

 

 

 —

 

 

 —

 

U.S. government notes

 

 

998

 

 

 —

 

 

(2)

 

 

996

 

 

 —

 

 

 —

 

 

996

 

Subtotal

 

 

22,935

 

 

 —

 

 

(2)

 

 

22,933

 

 

21,937

 

 

 —

 

 

996

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities 

 

 

6,739

 

 

 —

 

 

(9)

 

 

6,730

 

 

 —

 

 

 —

 

 

6,730

 

Corporate bonds 

 

 

39,195

 

 

2

 

 

(51)

 

 

39,146

 

 

 —

 

 

33,156

 

 

5,990

 

Commercial paper 

 

 

1,100

 

 

 —