cmbm-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period from

Commission File Number: 001-38952

 

CAMBIUM NETWORKS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Cayman Islands

 

Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

3800 Golf Road, Suite 360

Rolling Meadows, Illinois 60008

 

(345) 943-3100

(Address of principal executive offices, including zip code)

 

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Ordinary shares, $0.0001 par value

 

CMBM

 

Nasdaq Global Market

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

Large accelerated filer

  

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

Emerging growth company

 

 

 

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

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

As of May 8, 2020 the registrant had 25,684,049 shares of ordinary shares, $0.0001 par value per share, outstanding.

 

 

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations

2

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

3

 

Condensed Consolidated Statements of Shareholders’ (Deficit) Equity

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

34

PART II.

OTHER INFORMATION

35

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

Signatures

37

 


i


Note regarding forward-looking statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

 

In some cases, forward-looking statements may be identified by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, they should not be relied upon as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

 

 

the unpredictability of our operating results;

 

our inability to predict and respond to emerging technological trends and network operators’ changing needs;

 

the impact of actual or threatened health epidemics and other outbreaks;

 

our reliance on third-party manufacturers, which subjects us to risks of product delivery delays and reduced control over product costs and quality;

 

our reliance on distributors and value-added resellers for the substantial majority of our sales;

 

the inability of our third-party logistics and warehousing providers to deliver products to our channel partners and network operators in a timely manner;

 

the quality of our support and services offerings;

 

our expectations regarding outstanding litigation;

 

our or our distributors’ and channel partners’ inability to attract new network operators or sell additional products to network operators that currently use our products;

 

the difficulty of comparing or forecasting our financial results on a quarter-by-quarter basis due to the seasonality of our business;

 

our limited or sole source suppliers’ inability to produce third-party components to build our products;

 

the technological complexity of our products, which may contain undetected hardware defects or software bugs;

 

our channel partners’ inability to effectively manage inventory of our products, timely resell our products or estimate expected future demand;

 

credit risk of our channel partners, which could adversely affect their ability to purchase or pay for our products;

 

our inability to manage our growth and expand our operations;

 

unpredictability of sales and revenues due to lengthy sales cycles;

 

our inability to maintain an effective system of internal controls, produce timely and accurate financial statements or comply with applicable regulations;

 

our reliance on the availability of third-party licenses;

 

risks associated with international sales and operations;

 

current or future unfavorable economic conditions, both domestically and in foreign markets; and

 

our inability to obtain intellectual property protections for our products.

 

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

 

Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.

ii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Cambium Networks Corporation

Condensed Consolidated Balance Sheets

(in thousands, except for share and per share data)

 

 

 

December 31,

 

 

March 31,

 

 

 

2019

 

 

2020

 

 

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash

 

$

19,346

 

 

$

24,493

 

Receivables, net of allowances

 

 

58,628

 

 

 

61,606

 

Inventories, net

 

 

41,670

 

 

 

32,499

 

Recoverable income taxes

 

 

 

 

 

46

 

Prepaid expenses

 

 

5,323

 

 

 

4,078

 

Other current assets

 

 

4,350

 

 

 

4,944

 

Total current assets

 

 

129,317

 

 

 

127,666

 

Noncurrent assets

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

8,314

 

 

 

8,264

 

Software, net

 

 

3,395

 

 

 

3,185

 

Operating lease assets

 

 

6,872

 

 

 

6,443

 

Intangible assets, net

 

 

15,100

 

 

 

14,548

 

Goodwill

 

 

8,552

 

 

 

9,493

 

Deferred tax assets, net

 

 

929

 

 

 

815

 

Other noncurrent assets

 

 

 

 

 

417

 

TOTAL ASSETS

 

$

172,479

 

 

$

170,831

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

25,214

 

 

$

16,528

 

Accrued liabilities

 

 

15,034

 

 

 

15,017

 

Employee compensation

 

 

4,652

 

 

 

5,097

 

Current portion of long-term external debt, net

 

 

9,454

 

 

 

9,454

 

Deferred revenues

 

 

7,430

 

 

 

6,331

 

Other current liabilities

 

 

6,084

 

 

 

7,400

 

Total current liabilities

 

 

67,868

 

 

 

59,827

 

Noncurrent liabilities

 

 

 

 

 

 

 

 

Long-term external debt, net

 

 

54,158

 

 

 

61,795

 

Deferred revenues

 

 

4,852

 

 

 

4,337

 

Noncurrent operating lease liabilities

 

 

5,335

 

 

 

4,724

 

Deferred tax liabilities, net

 

 

337

 

 

 

61

 

Other noncurrent liabilities

 

 

 

 

 

520

 

Total liabilities

 

 

132,550

 

 

 

131,264

 

Shareholders' equity

 

 

 

 

 

 

 

 

Share capital; $0.0001 par value; 500,000,000 shares authorized at December 31, 2019 and

   March 31, 2020; 25,753,603 shares issued and 25,672,983 outstanding at December 31, 2019

   and 25,768,757 shares issued and 25,680,205 outstanding at March 31, 2020

 

 

3

 

 

 

3

 

Additional paid in capital

 

 

104,773

 

 

 

105,584

 

Treasury shares, at cost, 80,620 shares at December 31, 2019 and 88,552 shares at

   March 31, 2020

 

 

(1,094

)

 

 

(1,041

)

Accumulated deficit

 

 

(63,374

)

 

 

(64,212

)

Accumulated other comprehensive loss

 

 

(379

)

 

 

(767

)

Total shareholders' equity

 

 

39,929

 

 

 

39,567

 

TOTAL LIABILITIES AND EQUITY

 

$

172,479

 

 

$

170,831

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1


Cambium Networks Corporation

Condensed Consolidated Statements of Operations

(in thousands, except for share and per share data)

(unaudited)

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2020

 

Revenues

 

$

68,112

 

 

$

60,429

 

Cost of revenues

 

 

36,322

 

 

 

29,797

 

Gross profit

 

 

31,790

 

 

 

30,632

 

Operating expenses

 

 

 

 

 

 

 

 

Research and development

 

 

10,482

 

 

 

11,814

 

Sales and marketing

 

 

10,218

 

 

 

10,304

 

General and administrative

 

 

5,130

 

 

 

6,446

 

Depreciation and amortization

 

 

1,281

 

 

 

1,695

 

Total operating expenses

 

 

27,111

 

 

 

30,259

 

Operating income

 

 

4,679

 

 

 

373

 

Interest expense, net

 

 

2,268

 

 

 

1,345

 

Other expense (income), net

 

 

134

 

 

 

(216

)

Income (loss) before income taxes

 

 

2,277

 

 

 

(756

)

Provision for income taxes

 

 

415

 

 

 

82

 

Net income (loss)

 

$

1,862

 

 

$

(838

)

 

 

 

 

 

 

 

 

 

Earnings (loss) per share

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.14

 

 

$

(0.03

)

Weighted-average number of shares outstanding to compute

   net income (loss) per share

 

 

 

 

 

 

 

 

Basic and diluted

 

 

13,600,411

 

 

 

25,677,179

 

 

 

 

 

 

 

 

 

 

Share-based compensation included in costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenues

 

$

 

 

$

17

 

Research and development

 

 

 

 

 

368

 

Sales and marketing

 

 

 

 

 

232

 

General and administrative

 

 

 

 

 

194

 

Total share-based compensation

 

$

 

 

$

811

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


Cambium Networks Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2020

 

Net income (loss)

 

$

1,862

 

 

$

(838

)

Other comprehensive loss

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(2

)

 

 

(388

)

Comprehensive income (loss)

 

 

1,860

 

 

 

(1,226

)

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


Cambium Networks Corporation

Condensed Consolidated Statements of Shareholders’ (Deficit) Equity

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31, 2019

 

 

 

Share Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

paid in

capital

 

 

Capital

contribution

 

 

Treasury

shares

 

 

Accumulated

deficit

 

 

Accumulated

other

comprehensive

loss

 

 

Total

shareholders'

(deficit)

 

Balance at December 31, 2018

 

 

77

 

 

$

 

 

$

772

 

 

$

24,651

 

 

$

 

 

$

(45,773

)

 

$

(221

)

 

$

(20,571

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,862

 

 

 

 

 

 

1,862

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Balance at March 31, 2019

 

 

77

 

 

$

 

 

$

772

 

 

$

24,651

 

 

$

 

 

$

(43,911

)

 

$

(223

)

 

$

(18,711

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

 

 

Share Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

paid in

capital

 

 

Capital

contribution

 

 

Treasury

shares

 

 

Accumulated

deficit

 

 

Accumulated

other

comprehensive

loss

 

 

Total

shareholders'

equity

 

Balance at December 31, 2019

 

 

25,673

 

 

$

3

 

 

$

104,773

 

 

$

 

 

$

(1,094

)

 

$

(63,374

)

 

$

(379

)

 

$

39,929

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(838

)

 

 

 

 

 

(838

)

Share-based compensation

 

 

 

 

 

 

 

 

811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

811

 

Issuance of vested shares

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury shares withheld for net settlement

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

53

 

 

 

 

 

 

 

 

 

53

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(388

)

 

 

(388

)

Balance at March 31, 2020

 

 

25,680

 

 

$

3

 

 

$

105,584

 

 

$

 

 

$

(1,041

)

 

$

(64,212

)

 

$

(767

)

 

$

39,567

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


Cambium Networks Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2020

 

Cash flows from operating activities:

 

 

Net income (loss)

 

$

1,862

 

 

$

(838

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

882

 

 

 

955

 

Amortization of software and intangible assets

 

 

478

 

 

 

890

 

Amortization of debt issuance costs

 

 

165

 

 

 

137

 

Share-based compensation

 

 

 

 

 

811

 

Deferred income taxes

 

 

310

 

 

 

(162

)

Other

 

 

866

 

 

 

522

 

Change in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(3,487

)

 

 

(2,172

)

Inventories

 

 

(2,651

)

 

 

8,698

 

Accounts payable

 

 

1,830

 

 

 

(8,546

)

Accrued employee compensation

 

 

1,391

 

 

 

547

 

Accrued liabilities

 

 

1,542

 

 

 

(585

)

Accrued Sponsor interest and payables

 

 

43

 

 

 

 

Other assets and liabilities

 

 

24

 

 

 

(1,048

)

Net cash provided by (used in) operating activities

 

 

3,255

 

 

 

(791

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,128

)

 

 

(1,053

)

Purchase of software

 

 

(383

)

 

 

(157

)

Cash paid for acquisition

 

 

 

 

 

(334

)

Net cash used in investing activities

 

 

(1,511

)

 

 

(1,544

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of revolver debt

 

 

 

 

 

10,000

 

Repayment of term loan

 

 

(2,375

)

 

 

(2,500

)

Taxes paid related to net share settlement of equity awards

 

 

 

 

 

52

 

Net cash (used in) provided by financing activities

 

 

(2,375

)

 

 

7,552

 

Effect of exchange rate on cash

 

 

(9

)

 

 

(70

)

Net (decrease) increase in cash

 

 

(640

)

 

 

5,147

 

Cash, beginning of period

 

 

4,441

 

 

 

19,346

 

Cash, end of period

 

$

3,801

 

 

$

24,493

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

201

 

 

$

149

 

Interest paid

 

$

1,950

 

 

$

1,117

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

 

5


 

Cambium Networks Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Business and significant accounting policies

Business

Cambium Networks Corporation (“Cambium” or the “Company”), incorporated under the laws of the Cayman Islands, is a holding company whose principal operating entities are Cambium Networks, Ltd. (UK), Cambium Networks, Inc. (USA), and Cambium Networks Private Limited (India).  On October 28, 2011, Cambium acquired the point-to-point (“PTP”) and point-to-multi-point (“PMP”) businesses from Motorola Solutions, Inc. The acquisition was funded by investment funds affiliated with Vector Capital (“Sponsor”) and Cambium became the renamed entity subsequent to the acquisition.  

Cambium Networks Corporation and its wholly owned subsidiaries provide wireless broadband networking solutions for network operators, including medium-sized wireless internet service providers, enterprises and government agencies.

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of Cambium Networks Corporation and its wholly-owned subsidiaries.  All intercompany balances and transactions have been eliminated.  The condensed consolidated financial statements as of March 31, 2020, and for the three-month periods ended March 31, 2019 and 2020, and the related notes are unaudited. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements, and, in the opinion of management, reflect all adjustments, which comprise only normal recurring adjustments necessary to state fairly the Company’s financial position as of March 31, 2020 and results of operations for the three-month periods ended March 31, 2019 and 2020 and cash flows for the three-month periods ended March 31, 2019 and 2020. The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principals generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted.  The condensed consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and related notes thereto for the year ended December 31, 2019 included in the Company’s annual report on Form 10-K and filed with the SEC on March 23, 2020.  The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the operating results to be expected for the full year.

Update to Significant Accounting Policies

Other than the recently implemented accounting policy related to the allowances for credit losses per the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-03 (see below and Note 4 to the condensed consolidated financial statements), there have been no material changes to the Company’s signifiant accounting policies disclosed in the 2019 Form 10-K, Part II, Item 8.

 

Receivables and concentration of credit risk

Trade accounts receivable are recorded at invoiced amounts, net of the allowance for credit losses.  The Company considers the credit risk of all customers and regularly monitors credit risk exposure in its trade receivables.  The Company’s standard credit terms with its customers are generally net 30 to 60 days.  The Company had one customer representing more than 10% of trade receivables at December 31, 2019 and one customer at March 31, 2020.  The Company had four customers representing more than 10% of revenues for the three-month period ended March 31, 2019 and two customers for the three-month period ended March 31, 2020.  

The Company establishes an allowance for credit losses to present the net amount of accounts receivable expected to be collected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivables. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables, and credit and liquidity indicators for individual customers.

 

6


 

Recently adopted accounting pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Intruments, and subsequent amendments to the initial guidance: ASUs 2018-19, 2019-04, 2019-05, 2019-11, and 2020-02 (collectively, “Topic 326”).  Topic 326 sets forth an expected credit loss model which requires the measurement of expected credit losses for financial instruments based on historical experience, current conditions and reasonable and supportable forecasts.  This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, including trade accounts receivable, and certain off-balance sheet credit exposures.  The Company adopted Topic 326 on January 1, 2020 using the modified retrospective transition method for all financial assets measured at amortized costs, which is primarily trade accounts receivable. Results for reporting periods beginning after January 1, 2020 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The adoption of Topic 326 did not have a material impact on the condensed condolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs incurred in a Cloud Computing Arrangement That is a Service Contract.  The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).  The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update.  The Company adopted this ASU effective January 1, 2020 applying the changes prospectively to all implemenation costs incurred after this date. The adoption of ASU 2018-15 will not have a material impact on the condensed consolidated financial statements as there are no large implementations planned for 2020.

Recently issued accounting pronouncements not yet adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its Simplification Initiative to reduce the cost and comlexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company is assessing the impact of adopting this standard on its condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modification and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the potential impact of this ASU on its condensed consolidated financial statements.

 

Note 2. Business Combinations

In August 2019, the Company acquired select assets and assumed select liabilities of the Xirrus Wi-Fi products and cloud services business from Riverbed Technology, Inc. Xirrus has a portfolio of high performance enterprise Wi-Fi access points and subscription services.  The Company paid $2.0 million upon closing and through February 2020, paid the entire $3.0 million of the expected contingent consideration that was subject to attaining certain booking targets related to sales of Xirrus products, which were met by Decemebr 31, 2019. This acquisition will enhance and accelerate the Company’s existing network service application capabilities.

The Company accounts for business combinations in accordance with ASC 805, Business Combinations. The Company recorded the acquisition using the acquisition method of accounting and recognized assets and liabilities at their fair value as of the date of acquisition. The Company based the preliminary allocation of the puchase price on estimates and assumptions that are subject to change within the purchase price allocation period, which is generally one year from the acquisition date. During the three-month period ended March 31, 2020, the Company made adjustments to the preliminary purchase price allocation for inventory and accrued warranty. The purchase accounting is not yet complete and as such the final allocation may be subject to future adjustments, including, but not limited to, inventory, intangibles, accrued warranty, deferred revenue, and certain income tax matters. The Company determined the estimated fair value of identifiable intangible assets acquired primarily using an income approach.

7


 

The following table summarizes the preliminary allocation of the purchase price as of March 31, 2020 (in thousands):

 

Goodwill

 

$

1,433

 

Customer relationships

 

 

7,670

 

Unpatented technology

 

 

540

 

Deferred revenue

 

 

(7,460

)

Other net assets acquired

 

 

2,817

 

Total purchase price

 

$

5,000

 

The results from this acquisition have been included in the Company’s condensed consolidated financial statements since the closing of the acquisition.

Note 3. Fair value

The fair value of the Company’s external debt under its Credit Agreement approximates its carrying value because the terms and conditions approximate the terms and conditions of current market debt available to the Company. Due to the floating interest rate the debt is classified as Level 2 of the fair value hierarchy. The external debt was estimated based on the current rates offered to the Company for debt with the same remaining maturities. The fair value of the Company’s Credit Agreement was $65.3 million and $72.8 million as of December 31, 2019 and March 31, 2020, respectively.

The fair value of cash approximates its carrying value (Level 1 of the fair value hierarchy).

The Company’s Level 3 liability for contingent consideration of $3.0 million that was added during the three-month period ended September 30, 2019 was fully paid as of February 2020. The entire $3.0 million was earned as of December 31, 2019 and the Company made a payment of $2.7 million in November 2019 and paid the remaining $0.3 million in February 2020.

Note 4. Balance sheet components

Accounts Receivable, net

The Company’s accounts receivable arise from sales on credit to customers. The Company establishes an allowance for credit losses to present the net amount of accounts receivable expected to be collected. With the adoption of ASC 326 on January 1, 2020, the allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivables. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity indicators for individual customers. Prior to the adoption, the Company established the allowance under an incurred loss mode, considering the aging of the accounts receivable, the credit worthiness of each distributor based on payment history, and general economic factors, among other factors.

The components of accounts receivable, net are as follows (in thousands):

 

 

 

December 31,

 

 

March 31,

 

 

 

2019

 

 

2020

 

 

 

 

 

 

 

(unaudited)

 

Trade accounts receivable

 

$

58,774

 

 

$

62,000

 

Other receivables

 

 

434

 

 

 

296

 

Total receivables

 

 

59,208

 

 

 

62,296

 

Less: Allowance for credit losses

 

 

(580

)

 

 

(690

)

Receivables, net

 

$

58,628

 

 

$

61,606

 

 

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The allowance for credit losses activity was as follows (in thousands):

 

 

 

Year ended

December 31,

 

 

Three months

ended

March 31,

 

 

 

2019

 

 

2020

 

 

 

 

 

 

 

(unaudited)

 

Beginning balance

 

$

503

 

 

$

580

 

Increase, charged to expense

 

 

333

 

 

 

125

 

Recoveries

 

 

(204

)

 

 

(15

)

Amounts written-off

 

 

(52

)

 

 

 

Ending balance

 

$

580

 

 

$

690

 

Inventories, net

Inventories, net consisted of the following (in thousands):

 

 

 

December 31,

 

 

March 31,

 

 

 

2019

 

 

2020

 

 

 

 

 

 

 

(unaudited)

 

Finished goods

 

$

42,402

 

 

$

31,659

 

Raw materials

 

 

4,227

 

 

 

4,886

 

Gross inventory

 

 

46,629

 

 

 

36,545

 

Less: Excess and obsolete provision

 

 

(4,959

)

 

 

(4,046

)

Inventories, net

 

$

41,670

 

 

$

32,499

 

 

 

The following table reflects the activity in the Company’s inventory excess and obsolete provision (in thousands):

 

 

 

Year ended

December 31,

 

 

Three months

ended

March 31,

 

 

 

2019

 

 

2020

 

 

 

 

 

 

 

(unaudited)

 

Beginning balance

 

$

3,950

 

 

$

4,959

 

Inventory written off

 

 

(149

)

 

 

(1,290

)

Increase in excess and obsolete provision

 

 

1,158

 

 

 

377

 

Ending balance

 

$

4,959

 

 

$

4,046

 

 

Accrued liabilities

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

December 31,

 

 

March 31,

 

 

 

2019

 

 

2020

 

 

 

 

 

 

 

(unaudited)

 

Accrued goods and services

 

$

8,364

 

 

$

8,113

 

Accrued inventory purchases

 

 

3,094

 

 

 

2,417

 

Accrued customer rebates

 

 

3,569

 

 

 

4,479

 

Other

 

 

7

 

 

 

8

 

Accrued liabilities

 

$

15,034

 

 

$

15,017

 

 

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Accrued warranty

 

Provisions for warranty claims are primarily related to our hardware products and are recorded at the time products are sold. As per Note 2 – Business Combinations, during the three-month period ended March 31, 2020, the Company recorded an adjustment to the amount associated with the assumed warranty provision related to the Xirrus acquisition. The change to accrued warranty was as follows (in thousands):

 

 

 

Year ended

December 31,

 

 

Three months

ended

March 31,

 

 

 

2019

 

 

2020

 

 

 

 

 

 

 

(unaudited)

 

Beginning balance

 

$

488

 

 

$

706

 

Warranties assumed due to acquisition

 

 

180

 

 

 

825

 

Fulfillment of assumed acquisition warranty

 

 

 

 

 

(164

)

Provision increase, net

 

 

38

 

 

 

55

 

Ending balance

 

$

706

 

 

$

1,422

 

 

At December 31, 2019, $0.7 million is included in Other current liabilities on the Company’s condensed consolidated balance sheet. At March 31, 2020, $0.9 million is included in Other current liabilities and $0.5 million is included in Other noncurrent liabilities on the Company’s condensed consolidated balance sheet.

 

Note 5. Property and equipment

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

 

 

 

 

 

December 31,

 

 

March 31,

 

 

 

Useful Life

 

2019

 

 

2020

 

 

 

 

 

 

 

 

 

(unaudited)

 

Equipment and tooling

 

3 to 5 years

 

$

22,150

 

 

$

22,614

 

Computer equipment

 

3 to 5 years

 

 

2,888

 

 

 

2,892

 

Furniture and fixtures

 

10 years

 

 

749

 

 

 

737

 

Leasehold improvements

 

2 to 3 years

 

 

 

 

 

282

 

Total cost

 

 

 

 

25,787

 

 

 

26,525

 

Less: Accumulated depreciation

 

 

 

 

(17,473

)

 

 

(18,261

)

Property and equipment, net

 

 

 

$

8,314

 

 

$

8,264

 

 

Total depreciation expense was $0.9 million and $1.0 million for the three-month periods ended March 31, 2019 and 2020, respectively.

Note 6. Software

Software consisted of the following (in thousands):

 

 

 

 

 

December 31, 2019

 

 

March 31, 2020

 

 

 

Useful

Life

 

Gross carrying

amount

 

 

Accumulated

amortization

 

 

Net balance

 

 

Gross carrying

amount

 

 

Accumulated

amortization

 

 

Net balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

Acquired and Software

   for internal use

 

3 to 7 years

 

$

15,870

 

 

$

(13,471

)

 

$

2,399

 

 

$

15,884

 

 

$

(13,650

)

 

$

2,234

 

Software marketed for

   external sale

 

3 years

 

 

1,805

 

 

 

(809

)

 

 

996

 

 

 

1,911

 

 

 

(960

)

 

 

951

 

Total

 

 

 

$

17,675

 

 

$

(14,280

)

 

$

3,395

 

 

$

17,795

 

 

$

(14,610

)

 

$

3,185

 

 

Amortization of acquired and internal use software is computed using the straight-line method over an estimated useful life of generally three to seven years.  Amortization expense recognized on acquired and internal use software is reflected in depreciation and amortization in the condensed consolidated statements of operations.  Amortization expense was $0.1 million and $0.2 million for the three-month periods ended March 31, 2019 and 2020, respectively.

10


 

Amortization expense recognized on software to be sold or marketed externally was $0.1 million and $0.2 million for the three-month periods ended March 31, 2019 and 2020, respectively, and is included in cost of revenues on the condensed consolidated statements of operations.

Based on capitalized software assets at March 31, 2020, estimated amortization expense in future fiscal years is as follows (unaudited and in thousands):

 

Year ending December 31,

 

Acquired and

internal use

software