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.
|
|
Page |
PART I. |
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Item 1. |
1 |
|
|
1 |
|
|
2 |
|
|
Condensed Consolidated Statements of Comprehensive Income (Loss) |
3 |
|
Condensed Consolidated Statements of Shareholders’ (Deficit) Equity |
4 |
|
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. |
33 |
|
Item 4. |
34 |
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PART II. |
35 |
|
Item 1. |
35 |
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Item 1A. |
35 |
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Item 2. |
35 |
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Item 3. |
35 |
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Item 4. |
35 |
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Item 5. |
35 |
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Item 6. |
36 |
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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
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
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
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
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
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
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 |
|
8
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 |
|
9
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, |
|