Control4 Corporation
CONTROL4 CORP (Form: 10-Q, Received: 11/03/2017 16:27:42)

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, 2017

 

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 October 27, 2017, 25,266,497 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 September 30, 2017 and December 31, 2016

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2017 and 2016

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6

 

 

 

 

 

Item 2.  

 

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

 

21

 

 

 

 

 

Item 3.  

 

Quantitative and Qualitative Disclosures about Market Risk

 

38

 

 

 

 

 

Item 4.  

 

Controls and Procedures

 

39

 

 

 

 

 

Part II — Other Information  

 

 

 

 

 

 

 

Item 1.  

 

Legal Proceedings

 

40

 

 

 

 

 

Item 1A.  

 

Risk Factors

 

40

 

 

 

 

 

Item 2.  

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

64

 

 

 

 

 

Item 4.  

 

Mine Safety Disclosures

 

64

 

 

 

 

 

Item 6.  

 

Exhibits

 

65

 

 

 

 

 

Signatures  

 

66

 

 

 

 

 

 

 

 

 

 

 


 

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,

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,627

 

$

34,813

 

Restricted cash

 

 

271

 

 

247

 

Short-term investments

 

 

41,467

 

 

22,970

 

Accounts receivable, net

 

 

29,992

 

 

24,727

 

Inventories

 

 

33,149

 

 

26,231

 

Prepaid expenses and other current assets

 

 

3,418

 

 

3,662

 

Total current assets

 

 

136,924

 

 

112,650

 

Property and equipment, net

 

 

7,419

 

 

6,463

 

Long-term investments

 

 

1,513

 

 

4,008

 

Intangible assets, net

 

 

25,675

 

 

23,120

 

Goodwill

 

 

21,855

 

 

16,809

 

Other assets

 

 

3,121

 

 

2,008

 

Total assets

 

$

196,507

 

$

165,058

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

22,953

 

$

17,010

 

Accrued liabilities

 

 

9,397

 

 

8,912

 

Current portion of deferred revenue

 

 

2,151

 

 

1,553

 

Total current liabilities

 

 

34,501

 

 

27,475

 

Other long-term liabilities

 

 

879

 

 

701

 

Total liabilities

 

 

35,380

 

 

28,176

 

Commitments and contingencies (Note 10)

 

 

 —

 

 

 —

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 500,000,000 shares authorized; 25,266,497 and 23,729,780 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

 3

 

 

 2

 

Additional paid-in capital

 

 

234,640

 

 

220,370

 

Accumulated deficit

 

 

(73,038)

 

 

(82,626)

 

Accumulated other comprehensive loss

 

 

(478)

 

 

(864)

 

Total stockholders’ equity

 

 

161,127

 

 

136,882

 

Total liabilities and stockholders’ equity

 

$

196,507

 

$

165,058

 

 

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

2


 

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,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

(unaudited)

 

(unaudited)

 

Revenue

 

$

64,742

 

$

55,185

 

$

176,386

 

$

151,435

 

Cost of revenue

 

 

31,520

 

 

27,566

 

 

86,572

 

 

77,303

 

Gross margin

 

 

33,222

 

 

27,619

 

 

89,814

 

 

74,132

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,347

 

 

9,190

 

 

30,246

 

 

26,708

 

Sales and marketing

 

 

12,692

 

 

10,852

 

 

36,082

 

 

32,101

 

General and administrative

 

 

5,109

 

 

5,407

 

 

16,413

 

 

15,279

 

Litigation settlement

 

 

 —

 

 

 —

 

 

 —

 

 

400

 

Total operating expenses

 

 

28,148

 

 

25,449

 

 

82,741

 

 

74,488

 

Income (loss) from operations

 

 

5,074

 

 

2,170

 

 

7,073

 

 

(356)

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

125

 

 

12

 

 

224

 

 

17

 

Other income (expense), net

 

 

79

 

 

(89)

 

 

183

 

 

(306)

 

Total other income (expense), net

 

 

204

 

 

(77)

 

 

407

 

 

(289)

 

Income (loss) before income taxes

 

 

5,278

 

 

2,093

 

 

7,480

 

 

(645)

 

Income tax expense (benefit)

 

 

93

 

 

316

 

 

(2,441)

 

 

(9,585)

 

Net income

 

$

5,185

 

$

1,777

 

$

9,921

 

$

8,940

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.21

 

$

0.08

 

$

0.40

 

$

0.38

 

Diluted

 

$

0.19

 

$

0.07

 

$

0.38

 

$

0.37

 

Weighted-average number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

25,050

 

 

23,424

 

 

24,551

 

 

23,307

 

Diluted

 

 

27,122

 

 

24,530

 

 

26,393

 

 

24,149

 

 

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

3


 

Table of Contents

CONTROL4 CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

(unaudited)

 

(unaudited)

 

Net income

 

$

5,185

 

$

1,777

 

$

9,921

 

$

8,940

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax

 

 

(155)

 

 

172

 

 

383

 

 

197

 

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

 

 

 6

 

 

(10)

 

 

 3

 

 

60

 

Total other comprehensive income (loss)

 

 

(149)

 

 

162

 

 

386

 

 

257

 

Comprehensive income

 

$

5,036

 

$

1,939

 

$

10,307

 

$

9,197

 

 

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

4


 

Table of Contents

CONTROL4 CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW S

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2017

    

2016

 

 

 

(unaudited)

 

Operating activities

 

 

 

 

 

 

 

Net income

 

$

9,921

 

$

8,940

 

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

 

 

 

 

 

 

 

Depreciation expense

 

 

2,703

 

 

2,402

 

Amortization of intangible assets

 

 

3,885

 

 

3,393

 

(Gain) loss on disposal of fixed assets

 

 

(1)

 

 

13

 

Provision for doubtful accounts

 

 

491

 

 

313

 

Investment discount and premium amortization

 

 

(57)

 

 

293

 

Stock-based compensation

 

 

9,191

 

 

5,933

 

Tax benefit from business acquisition

 

 

(2,415)

 

 

(9,402)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(4,890)

 

 

(3,469)

 

Inventories

 

 

(5,347)

 

 

(6,776)

 

Restricted cash

 

 

(3)

 

 

 —

 

Prepaid expenses and other current assets

 

 

390

 

 

1,740

 

Other assets

 

 

(1,002)

 

 

(341)

 

Accounts payable

 

 

3,495

 

 

2,333

 

Accrued liabilities

 

 

(1,675)

 

 

421

 

Deferred revenue

 

 

588

 

 

291

 

Other long-term liabilities

 

 

172

 

 

(451)

 

Net cash provided by operating activities

 

 

15,446

 

 

5,633

 

Investing activities

 

 

 

 

 

 

 

Purchases of available-for-sale investments

 

 

(52,472)

 

 

(10,147)

 

Proceeds from sales of available-for-sale investments

 

 

1,950

 

 

900

 

Proceeds from maturities of available-for-sale investments

 

 

34,580

 

 

33,858

 

Purchases of property and equipment

 

 

(3,003)

 

 

(1,780)

 

Business acquisitions, net of cash acquired

 

 

(7,881)

 

 

(32,891)

 

Net cash used in investing activities

 

 

(26,826)

 

 

(10,060)

 

Financing activities

 

 

 

 

 

 

 

Proceeds from exercise of options for common stock

 

 

11,290

 

 

3,021

 

Payments for taxes related to net share settlement of equity awards

 

 

(4,591)

 

 

 —

 

Repurchase of common stock

 

 

(1,821)

 

 

(3,242)

 

Repayment of notes payable

 

 

 —

 

 

(581)

 

Proceeds from revolving credit facility

 

 

 —

 

 

5,000

 

Repayment of revolving credit facility

 

 

 —

 

 

(3,500)

 

Payment of debt issuance costs

 

 

 —

 

 

(89)

 

Net cash provided by financing activities

 

 

4,878

 

 

609

 

Effect of exchange rate changes on cash and cash equivalents

 

 

316

 

 

(41)

 

Net change in cash and cash equivalents

 

 

(6,186)

 

 

(3,859)

 

Cash and cash equivalents at beginning of period

 

 

34,813

 

 

29,530

 

Cash and cash equivalents at end of period

 

$

28,627

 

$

25,671

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

 

$

65

 

$

164

 

Cash paid for taxes

 

 

1,120

 

 

858

 

Supplemental schedule of non-cash investing and financing activities

 

 

 

 

 

 

 

Business acquisitions holdback liability

 

 

1,068

 

 

 —

 

Purchases of property and equipment financed by accounts payable

 

 

396

 

 

 —

 

Net unrealized gains on available-for-sale investments

 

 

 3

 

 

60

 

 

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

5


 

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 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 balance sheets, condensed consolidated statements of operations, condensed consolidated statements of comprehensive income, 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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, 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 15, 2017. The December 31, 2016 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 September 30, 2017 and December 31, 2016.

 

No dealer or distributor accounted for more than 10% of total revenue for the three and nine months ended September 30, 2017 and 2016.

 

6


 

Table of Contents

While the Company partners with many manufacturers, in many cases 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 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, 2017 and 2016. 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,

 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

Revenue-United States

 

$

44,839

 

$

39,670

 

$

122,993

 

$

108,506

 

 

Revenue-Canada

 

 

5,403

 

 

4,246

 

 

14,911

 

 

11,355

 

 

Revenue-all other international sources

 

 

14,500

 

 

11,269

 

 

38,482

 

 

31,574

 

 

Total revenue

 

$

64,742

 

$

55,185

 

$

176,386

 

$

151,435

 

 

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

 

 

22

%  

 

20

%  

 

22

%  

 

21

%  

 

 

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, 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 nine months ended September 30, 2017 (in thousands):

 

 

 

 

 

 

 

    

Warranty Liability

 

Balance at December 31, 2016

 

$

1,945

 

Warranty costs accrued

 

 

2,854

 

Warranty claims

 

 

(2,509)

 

Balance at September 30, 2017

 

$

2,290

 

 

7


 

Table of Contents

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.

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,185

 

$

1,777

 

$

9,921

 

$

8,940

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

25,050

 

 

23,424

 

 

24,551

 

 

23,307

 

Effect of dilutive securities—stock options and restricted stock units

 

 

2,072

 

 

1,106

 

 

1,842

 

 

842

 

Weighted average common shares and dilutive securities outstanding

 

 

27,122

 

 

24,530

 

 

26,393

 

 

24,149

 

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

 

2016

    

2017

 

2016

 

Options to purchase common stock

 

23

 

2,221

 

881

 

2,490

 

Restricted stock units

 

 —

 

 —

 

 6

 

23

 

Total

 

23

 

2,221

 

887

 

2,513

 

 

Recent Accounting Pronouncements

 

In January 2017, the FASB issued ASU 2017-04, “ Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”. The amendments in this update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 31, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing after January 1, 2017. The Company notes that this guidance applies to its reporting requirements and will implement the new guidance accordingly in performing goodwill impairment testing; however, the Company does not believe this update will have a material impact on the consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, “ Business Combinations (Topic 805): Clarifying the Definition of a Business, ” which narrows the definition of a business. This update is effective for annual periods beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The guidance will impact the Company’s acquisitions beginning January 1, 2018 and could cause fewer acquired sets of assets to be identified as a business.

 

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

8


 

Table of Contents

December 15, 2017. Early adoption is permitted. Upon the adoption of this standard, the Company will combine restricted cash with unrestricted cash and cash and cash equivalents in the statement of cash flows.

 

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. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

 

In August 2016, the 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.

 

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 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. 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 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. The Company adopted the new guidance on January 1, 2017. The primary impact of adoption was the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital. Adoption of the new standard resulted in the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital of $9.6 million for the nine months ended September 30, 2017. However, as the Company has a full valuation allowance against its domestic net deferred tax asset, a corresponding adjustment was recorded to increase the valuation allowance by $9.6 million.

 

As of December 31, 2016, the Company had $20.6 million and $17.6 million of gross federal and state net operating losses (“NOLs”), respectively, attributable to excess windfall benefits from share-based compensation. As a result of the adoption of this new standard, on January 1, 2017, the Company increased its net deferred tax asset for NOL carryforwards, with an offsetting cumulative effect of adoption adjustment to accumulated deficit, in the amount of $7.7 million.  A corresponding adjustment was recorded to increase the valuation allowance by $7.7 million with an offsetting adjustment to accumulated deficit, resulting in no net impact to the financial statements. In addition, the Company has elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively which had no impact on the statement of cash flows for the nine months ended September 30, 2016. Further, under the provisions of ASU 2016-09, the Company has elected to recognize forfeitures as they occur to determine the amount of compensation cost to be recognized in each period. This resulted in an increase of $0.3 million to accumulated deficit with a corresponding increase to additional paid-in capital on January 1, 2017.  The amendment related to the accounting for minimum statutory withholding requirements had no impact on retained earnings as of January 1, 2017.

 

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

9


 

Table of Contents

retrospective application is required. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance.

 

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 it is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company does not plan to early adopt, and accordingly, will adopt the new standard effective January 1, 2018.

 

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company plans to adopt the standard using the full retrospective method to restate each prior reporting period presented. The Company’s ability to adopt using the full retrospective method is dependent on completion of the analysis of information necessary to restate prior period financial statements.

 

The Company has reached conclusions on key provisions of this standard as it relates to the sale of the Company’s products to dealers, retailers and distributors. The Company is in the process of finalizing revenue recognition policies under the new standard and will be calculating the expected impact during the final quarter of 2017.

 

The Company is making progress on its assessment of the impact of this new standard as it relates to other ancillary revenue streams such as software licenses,  subscription services, and third-party products sold through an online dealer portal. As these revenue streams represented less than 5% of overall revenue in 2016, the results of this assessment are not expected to have a significant impact on the Company’s financial statements. 

 

 

2. Balance Sheet Components

 

Inventories consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

 

2016

 

Finished goods

 

$

29,667

 

$

24,138

 

Component parts

 

 

3,312

 

 

1,880

 

Work-in-process

 

 

170

 

 

213

 

 

 

$

33,149

 

$

26,231

 

 

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

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

 

2016

 

Computer equipment and software

 

$

4,801

 

$

3,855

 

Manufacturing tooling and test equipment

 

 

4,962

 

 

4,216

 

Lab and warehouse equipment

 

 

4,661

 

 

3,649

 

Leasehold improvements

 

 

3,780

 

 

3,438

 

Furniture and fixtures

 

 

3,671

 

 

3,254

 

Other

 

 

1,215

 

 

753

 

 

 

 

23,090

 

 

19,165

 

Less: accumulated depreciation

 

 

(15,671)

 

 

(12,702)

 

 

 

$

7,419

 

$

6,463

 

 

10


 

Table of Contents

Accrued liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

 

2016

 

Sales returns and current portion of warranty accruals

 

$

2,917

 

$

2,892

 

Compensation accruals

 

 

4,533

 

 

4,445

 

Other accrued liabilities

 

 

1,947

 

 

1,575

 

 

 

$

9,397

 

$

8,912

 

 

 

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 nine months ended September 30, 2017 and 2016, 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, 2017 and December 31, 2016 (in thousands):

 

11


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and

 

 

 

 

 

 

 

 

 

Adjusted

 

Unrealized

 

Unrealized

 

 

 

 

Cash

 

Short-term

 

Long-term

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

    

Equivalents

    

Investments

    

Investments

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash 

 

$

20,170

 

$

 —

 

$

 —

 

$

20,170

 

$

20,170

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds 

 

 

5,061

 

 

 —

 

 

 —

 

 

5,061

 

 

5,061

 

 

 —

 

 

 —

 

U.S. government notes

 

 

6,998

 

 

 —

 

 

(4)

 

 

6,994

 

 

1,899

 

 

5,095

 

 

 —

 

Subtotal 

 

 

12,059

 

 

 —

 

 

(4)

 

 

12,055

 

 

6,960

 

 

5,095

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities 

 

 

1,000

 

 

 —

 

 

 —

 

 

1,000

 

 

 —

 

 

1,000

 

 

 —

 

Corporate bonds 

 

 

18,367

 

 

 —

 

 

(8)

 

 

18,359

 

 

 —

 

 

16,846

 

 

1,513

 

Commercial paper 

 

 

20,023

 

 

 —

 

 

 —

 

 

20,023

 

 

1,497

 

 

18,526

 

 

 —

 

Subtotal 

 

 

39,390

 

 

 —

 

 

(8)

 

 

39,382

 

 

1,497

 

 

36,372

 

 

1,513

 

Total 

 

$

71,619

 

$

 —

 

$

(12)

 

$

71,607

 

$

28,627

 

$

41,467

 

$

1,513

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and

 

 

 

 

 

 

 

 

 

Adjusted

 

Unrealized

 

Unrealized

 

 

 

 

Cash

 

Short-term

 

Long-term

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

    

Equivalents

    

Investments

    

Investments

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash 

 

$

24,708

 

$

 —

 

$

 —

 

$

24,708

 

$

24,708

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

10,105

 

 

 —

 

 

 —

 

 

10,105

 

 

10,105

 

 

 —

 

 

 —

 

U.S. government notes

 

 

2,001

 

 

 —

 

 

(1)

 

 

2,000

 

 

 —

 

 

2,000

 

 

 —

 

Subtotal

 

 

12,106

 

 

 —

 

 

(1)

 

 

12,105

 

 

10,105

 

 

2,000

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities 

 

 

4,008

 

 

 —

 

 

 —

 

 

4,008

 

 

 —

 

 

 —

 

 

4,008

 

Corporate bonds 

 

 

13,902

 

 

 —

 

 

(14)

 

 

13,888

 

 

 —

 

 

13,888

 

 

 —

 

Commercial paper 

 

 

7,082

 

 

 —

 

 

 —

 

 

7,082

 

 

 —

 

 

7,082

 

 

 —

 

Subtotal 

 

 

24,992

 

 

 —

 

 

(14)

 

 

24,978

 

 

 —

 

 

20,970

 

 

4,008

 

Total

 

$

61,806

 

$

 —

 

$

(15)

 

$

61,791

 

$

34,813

 

$

22,970

 

$

4,008

 

 

As of September 30, 2017, 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 nine months ended September 30, 2017 and 2016, 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 cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of the accounts.

12


 

Table of Contents

 

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 September 30, 2017. However, the notional principal of foreign exchange contracts for October 2017 was $12.8 million as of September 30, 2017.