casa-10q_20180331.htm

 

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 March 31, 2018

OR

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

For the transition period from __________ to _________.

Commission File Number: 001-38324

 

Casa Systems, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

75-3108867

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)

100 Old River Road

Andover, Massachusetts

 

01810

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (978) 688-6706

 

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, 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

 

  (Do not check if a smaller reporting company)

  

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 April 30, 2018, the registrant had 82,373,785 shares of common stock, $0.001 par value per share, issued and outstanding.

 

 

 


Table of Contents

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

3

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

 

3

 

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2018 and 2017

 

4

 

Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2018

 

5

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

 

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

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

 

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

32

Item 4.

Controls and Procedures

 

33

PART II.

OTHER INFORMATION

 

34

Item 1.

Legal Proceedings

 

34

Item 1A.

Risk Factors

 

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

57

Item 6.

Exhibits

 

57

Signatures

 

58

 

i


Cautionary Note Regarding Forward-Looking Statements  

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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, you can identify forward-looking statements by terms such as “may,” “might,” “should,” “expects,” “plans,” “anticipates,” “would,” “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 Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements 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:

 

our ability to anticipate technological shifts;

 

our ability to generate positive returns on our research and development;

 

changes in the rate of broadband service providers’ deployment of, and investment in, ultra-broadband network capabilities;

 

the lack of predictability of revenue due to lengthy sales cycles and the volatility in capital expenditure budgets of broadband service providers;

 

our ability to maintain and expand gross profit and net income;

 

the sufficiency of our cash resources and needs for additional financing;

 

our ability to further penetrate our existing customer base and obtain new customers;

 

changes in our pricing policies, whether initiated by us or as a result of competition;

 

the amount and timing of operating costs and capital expenditures related to the operation and expansion of our business;

 

the actual or rumored timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape of our industry, including consolidation among our competitors or customers;

 

our ability to successfully expand our business domestically and internationally;

 

insolvency or credit difficulties confronting our customers, which could adversely affect their ability to purchase or pay for our products and services, or confronting our key suppliers, which could disrupt our supply chain;

 

our inability to fulfill our customers’ orders due to supply chain delays, access to key commodities or technologies or events that impact our manufacturers or their suppliers;

 

future accounting pronouncements or changes in our accounting policies;

 

stock-based compensation expense;

 

the cost and possible outcomes of any potential litigation matters;

 

our overall effective tax rate, including impacts caused by the relative proportion of foreign to U.S. income, the amount and timing of certain employee stock-based compensation transactions, changes in the valuation of our deferred tax assets and any new legislation or regulatory developments;

1


 

increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates;

 

general economic conditions, both domestically and in foreign markets;

 

our ability to obtain and maintain intellectual property protection for our products; and

 

our use of proceeds from our initial public offering.

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.

2


PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

CASA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

307,095

 

 

$

260,820

 

Accounts receivable, net of provision for doubtful accounts of $692 as of

   March 31, 2018 and December 31, 2017

 

 

88,866

 

 

 

122,634

 

Inventory

 

 

29,354

 

 

 

36,148

 

Prepaid expenses and other current assets

 

 

3,920

 

 

 

5,151

 

Prepaid income taxes

 

 

1,811

 

 

 

538

 

Total current assets

 

 

431,046

 

 

 

425,291

 

Property and equipment, net

 

 

29,166

 

 

 

29,363

 

Accounts receivable, net of current portion

 

 

4,326

 

 

 

4,710

 

Deferred tax assets

 

 

8,719

 

 

 

9,718

 

Other assets

 

 

612

 

 

 

615

 

Total assets

 

$

473,869

 

 

$

469,697

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,741

 

 

$

15,833

 

Accrued expenses and other current liabilities

 

 

34,920

 

 

 

48,250

 

Accrued income taxes

 

 

1,818

 

 

 

118

 

Deferred revenue

 

 

27,820

 

 

 

34,224

 

Current portion of long-term debt, net of unamortized debt issuance costs

 

 

2,161

 

 

 

2,156

 

Total current liabilities

 

 

81,460

 

 

 

100,581

 

Accrued income taxes, net of current portion

 

 

9,085

 

 

 

8,810

 

Deferred revenue, net of current portion

 

 

16,576

 

 

 

14,691

 

Long-term debt, net of current portion and unamortized debt issuance costs

 

 

294,915

 

 

 

295,459

 

Total liabilities

 

 

402,036

 

 

 

419,541

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000 shares authorized as of March 31, 2018

   and December 31, 2017; no shares issued and outstanding as of

   March 31, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, $0.001 par value; 500,000 shares authorized as of March 31, 2018

   and December 31, 2017; 81,801 and 81,043 shares issued and outstanding

   as of March 31, 2018 and December 31, 2017, respectively

 

 

82

 

 

 

81

 

Additional paid-in capital

 

 

131,536

 

 

 

128,798

 

Accumulated other comprehensive income

 

 

1,356

 

 

 

194

 

Accumulated deficit

 

 

(61,141

)

 

 

(78,917

)

Total stockholders’ equity

 

 

71,833

 

 

 

50,156

 

Total liabilities and stockholders’ equity

 

$

473,869

 

 

$

469,697

 

 

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

3


CASA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

80,189

 

 

$

65,209

 

Service

 

 

8,885

 

 

 

7,520

 

Total revenue

 

 

89,074

 

 

 

72,729

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

 

25,780

 

 

 

19,132

 

Service

 

 

1,339

 

 

 

1,257

 

Total cost of revenue

 

 

27,119

 

 

 

20,389

 

Gross profit

 

 

61,955

 

 

 

52,340

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

20,530

 

 

 

14,468

 

Sales and marketing

 

 

11,268

 

 

 

10,080

 

General and administrative

 

 

7,188

 

 

 

4,995

 

Total operating expenses

 

 

38,986

 

 

 

29,543

 

Income from operations

 

 

22,969

 

 

 

22,797

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

1,095

 

 

 

504

 

Interest expense

 

 

(4,672

)

 

 

(4,193

)

Gain (loss) on foreign currency, net

 

 

(24

)

 

 

30

 

Other income, net

 

 

201

 

 

 

119

 

Total other income (expense), net

 

 

(3,400

)

 

 

(3,540

)

Income before provision for income taxes

 

 

19,569

 

 

 

19,257

 

Provision for income taxes

 

 

1,793

 

 

 

1,103

 

Net income

 

 

17,776

 

 

 

18,154

 

Other comprehensive income—foreign currency translation adjustment

 

 

1,162

 

 

 

239

 

Comprehensive income

 

$

18,938

 

 

$

18,393

 

Net income attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

17,776

 

 

$

7,588

 

Diluted

 

$

17,776

 

 

$

8,643

 

Net income per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

 

$

0.23

 

Diluted

 

$

0.19

 

 

$

0.20

 

Weighted-average shares used to compute net income per share attributable

   to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

 

81,629

 

 

 

33,618

 

Diluted

 

 

93,594

 

 

 

43,299

 

 

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

 

 

4


CASA SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balances at January 1, 2018

 

 

81,043

 

 

$

81

 

 

$

128,798

 

 

$

194

 

 

$

(78,917

)

 

$

50,156

 

Exercise of stock options and common stock issued

   upon vesting of equity awards

 

 

758

 

 

 

1

 

 

 

674

 

 

 

 

 

 

 

 

 

675

 

Foreign currency translation adjustment, net

   of tax of $0

 

 

 

 

 

 

 

 

 

 

 

1,162

 

 

 

 

 

 

1,162

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,064

 

 

 

 

 

 

 

 

 

2,064

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,776

 

 

 

17,776

 

Balances at March 31, 2018

 

 

81,801

 

 

$

82

 

 

$

131,536

 

 

$

1,356

 

 

$

(61,141

)

 

$

71,833

 

 

 

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

 

 

5


CASA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

17,776

 

 

$

18,154

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,302

 

 

 

1,728

 

Stock-based compensation

 

 

4,230

 

 

 

1,900

 

Deferred income taxes

 

 

1,040

 

 

 

1,815

 

Excess and obsolete inventory valuation adjustment

 

 

(1,043

)

 

 

162

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

28,470

 

 

 

53,134

 

Inventory

 

 

7,713

 

 

 

(7,495

)

Prepaid expenses and other assets

 

 

103

 

 

 

2,090

 

Prepaid income taxes

 

 

(1,273

)

 

 

(4,441

)

Accounts payable

 

 

1,644

 

 

 

(12,743

)

Accrued expenses and other current liabilities

 

 

(7,162

)

 

 

(10,000

)

Accrued income taxes

 

 

1,969

 

 

 

(10,746

)

Deferred revenue

 

 

(4,626

)

 

 

(20,142

)

Net cash provided by operating activities

 

 

51,143

 

 

 

13,416

 

Cash flows used in investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,539

)

 

 

(1,858

)

Net cash used in investing activities

 

 

(2,539

)

 

 

(1,858

)

Cash flows used in financing activities:

 

 

 

 

 

 

 

 

Principal repayments of debt

 

 

(826

)

 

 

(823

)

Proceeds from exercise of stock options

 

 

675

 

 

 

40

 

Payments of dividends and equitable adjustments

 

 

(2,241

)

 

 

(96,739

)

Payments of initial public offering costs

 

 

(976

)

 

 

(1,245

)

Employee taxes paid related to net share settlement of equity awards

 

 

 

 

 

(3,788

)

Net cash used in financing activities

 

 

(3,368

)

 

 

(102,555

)

Effect of exchange rate changes on cash and cash equivalents

 

 

1,039

 

 

 

65

 

Net increase (decrease) in cash and cash equivalents

 

 

46,275

 

 

 

(90,932

)

Cash and cash equivalents at beginning of period

 

 

260,820

 

 

 

329,554

 

Cash and cash equivalents at end of period

 

$

307,095

 

 

$

238,622

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,291

 

 

$

4,274

 

Cash paid for income taxes

 

$

53

 

 

$

14,320

 

Supplemental disclosures of non-cash operating, investing

   and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable

 

$

287

 

 

$

783

 

Prepaid expenses and other current assets included in accounts payable

 

$

241

 

 

$

77

 

Deferred offering costs included in accounts payable and accrued expenses and

   other current liabilities

 

$

171

 

 

$

375

 

Unpaid equitable adjustments included in accrued expenses and other current liabilities

 

$

8,420

 

 

$

10,770

 

Release of customer incentives included in accounts receivable and accrued expenses

   and other current liabilities

 

$

5,754

 

 

$

12,619

 

 

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

6


CASA SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share amounts)

(Unaudited)

1. Nature of Business and Basis of Presentation

Casa Systems, Inc. (the “Company”) was incorporated under the laws of the State of Delaware on February 28, 2003. The Company is a global communications technology company headquartered in Andover, Massachusetts and has wholly owned subsidiaries in China, France, Canada, Ireland, Spain and the Netherlands.

The Company offers solutions for next-generation centralized, distributed and virtualized architectures for cable broadband, fixed-line broadband and wireless networks. The Company’s solutions enable customers to cost-effectively and dynamically increase network speed, add bandwidth capacity and new services for consumers and enterprises, reduce network complexity and reduce operating and capital expenditures.

The Company is subject to a number of risks similar to other companies of comparable size and other companies selling and providing services to the communications industry. These risks include, but are not limited to, the level of capital spending by the communications industry, a lengthy sales cycle, dependence on the development of new products and services, unfavorable economic and market conditions, competition from larger and more established companies, limited management resources, dependence on a limited number of contract manufacturers and suppliers, the rapidly changing nature of the technology used by the communications industry and reliance on resellers and sales agents. Failure by the Company to anticipate or to respond adequately to technological developments in its industry, changes in customer or supplier requirements, changes in regulatory requirements or industry standards, or any significant delays in the development or introduction of products could have a material adverse effect on the Company’s operating results, financial condition and cash flows.

In December 2017, the Company closed its initial public offering (“IPO”) of 6,900 shares of its common stock at an offering price of $13.00 per share, including 900 shares pursuant to the underwriters’ option to purchase additional shares of the Company’s common stock. The Company received net proceeds of $79,327, after deducting underwriting discounts and commissions of $6,279 and offering costs of $4,094. Upon the closing of the IPO, all 4,038 shares of the Company’s then-outstanding preferred stock automatically converted on a ten-for-one basis into an aggregate of 40,382 shares of the Company’s common stock.  Upon conversion of the preferred stock, the Company reclassified $97,439 from temporary equity to additional paid-in capital and $40 from temporary equity to common stock.

The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may remain an emerging growth company until the last day of the fiscal year following the fifth anniversary of the initial public offering, subject to specified conditions.  The JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company will adopt the new or revised standard at the time private companies adopt the new or revised standard, provided that the Company continues to be an emerging growth company. The JOBS Act provides that the decision to take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable.

The accompanying condensed consolidated balance sheet as of March 31, 2018, the condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2018 and 2017, the condensed consolidated statements of cash flows for the three months ended March 31, 2018 and 2017 and the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2018 are unaudited. The financial data and other information disclosed in these notes related to the three months ended March 31, 2018 and 2017 are also unaudited. The accompanying condensed consolidated balance sheet as of December 31, 2017 was derived from the Company’s audited consolidated financial statements for the year ended December 31, 2017. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) regarding interim financial reporting. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 7, 2018 (the “Annual Report on Form 10-K”). There have been no material changes to the Company’s accounting policies from those disclosed in the Annual Report on Form 10-K that would have a material impact on the Company’s condensed consolidated financial statements.

7


The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and, in the opinion of management, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations and cash flows to be anticipated for the full year ending December 31, 2018 or any future period.

The accompanying condensed consolidated financial statements include the accounts and results of operations of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

Use of 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 and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.

Significant estimates and judgments relied upon by management in preparing these condensed consolidated financial statements include revenue recognition, provision for doubtful accounts, reserves for excess and obsolete inventory, valuation of inventory and deferred inventory costs, the expensing and capitalization of software-related research and development costs, amortization and depreciation periods, recoverability of net deferred tax assets, valuations of uncertain tax positions, provision for income taxes, warranty allowances, the valuation of the Company’s common stock and other equity instruments, and stock-based compensation expense.

Although the Company regularly reassesses the assumptions underlying these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances existing at the time such estimates are made.

Accounts Receivable

Accounts receivable are presented net of a provision for doubtful accounts, which is an estimate of amounts that may not be collectible. Accounts receivable for arrangements with customary payment terms, which are one year or less, are recorded at invoiced amounts and do not bear interest. The Company generally does not require collateral, but the Company may, in certain instances based on its credit assessment, require full or partial prepayment prior to shipment.

For certain customers and/or for certain transactions, the Company provides extended payment arrangements to allow the customer to pay for the purchased equipment in monthly, other periodic or lump-sum payments over a period of one to five years. Certain of these arrangements are collateralized by the underlying assets during the term of the arrangement. Payments due beyond 12 months from the balance sheet date are recorded as non-current assets. In addition, amounts recorded as current and non-current accounts receivable for extended payment term arrangements at any balance sheet date have a corresponding amount recorded as deferred revenue because the Company defers the recognition of revenue for all extended payment term arrangements and only recognizes revenue to the extent of the payment amounts that become due from the customer.

Although there is no contractual interest rate for customer arrangements with extended payment terms, the Company imputes interest on the accounts receivable related to these arrangements and reduces the arrangement fee that will be recognized as revenue for the amount of the imputed interest, which is recorded as interest income over the payment term using the effective interest method. For the periods presented in the accompanying condensed consolidated financial statements, the impact of imputing interest on revenue and interest income was insignificant.

8


Accounts receivable as of March 31, 2018 and December 31, 2017 consisted of the following:

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Current portion of accounts receivable, net:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

71,164

 

 

$

106,114

 

Amounts due from related party (see Note 14)

 

 

15,067

 

 

 

13,367

 

Accounts receivable, extended payment arrangements

 

 

2,635

 

 

 

3,153

 

 

 

 

88,866

 

 

 

122,634

 

Accounts receivable, net of current portion:

 

 

 

 

 

 

 

 

Accounts receivable, extended payment arrangements

 

 

4,326

 

 

 

4,710

 

 

 

$

93,192

 

 

$

127,344

 

 

The Company performs ongoing credit evaluations of its customers and, if necessary, provides a provision for doubtful accounts and expected losses. When assessing and recording its provision for doubtful accounts, the Company evaluates the age of its accounts receivable, current economic trends, creditworthiness of the customers, customer payment history, and other specific customer and transaction information. The Company writes off accounts receivable against the provision when it determines a balance is uncollectible and no longer actively pursues collection of the receivable. Adjustments to the provision for doubtful accounts are recorded as general and administrative expenses in the consolidated statements of operations and comprehensive income.

As of March 31, 2018 and December 31, 2017, the Company concluded that all amounts due under extended payment term arrangements were collectible and no reserve for credit losses was recorded. During the three months ended March 31, 2018 and 2017, the Company did not provide a reserve for credit losses and did not write off any uncollectible receivables due under extended payment term arrangements.

Concentration of Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash and cash equivalents consist of demand deposits, savings accounts, commercial paper, money market mutual funds, and certificates of deposit with financial institutions, which may exceed Federal Deposit Insurance Corporation limits. The Company has not experienced any losses related to its cash and cash equivalents and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

Significant customers are those that represent 10% or more of revenue or accounts receivable as set forth in the following table:

 

 

 

Revenue

 

 

Accounts Receivable, Net

 

 

 

Three Months Ended March 31,

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Customer A

 

 

27

%

 

 

13

%

 

 

25

%

 

 

44

%

Customer B

 

 

18

%

 

 

21

%

 

 

16

%

 

 

10

%

Customer C

 

 

12

%

 

*

 

 

 

11

%

 

*

 

Customer D

 

*

 

 

*

 

 

*

 

 

 

17

%

Customer E

 

*

 

 

 

14

%

 

*

 

 

*

 

 

*

Less than 10% of total

Customer B is a related party, Liberty Global Affiliates (see Note 14).

Certain of the components and subassemblies included in the Company’s products are obtained from a single source or a limited group of suppliers. In addition, the Company primarily relies on two third parties to manufacture certain components of its products. Although the Company seeks to reduce dependence on those limited sources of suppliers and manufacturers, the partial or complete loss of certain of these sources could have a material adverse effect on the Company’s operating results, financial condition and cash flows and damage its customer relationships.

9


Impact of Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes existing revenue recognition guidance under GAAP. The core principle of this standard 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, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 such that the standard is effective for public companies for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. The standard is effective for private companies, and emerging growth companies that choose to take advantage of the extended transition periods, for annual reporting periods beginning after December 15, 2018. Entities are not permitted to adopt the standard earlier than the original effective date for public entities. This standard can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”), which further clarifies the implementation guidance on principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”), clarifying the implementation guidance on identifying performance obligations and licensing. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), which clarifies the objective of the collectibility criterion, presentation of taxes collected from customers, non-cash consideration, contract modifications at transition, completed contracts at transition and how guidance in ASU 2014-09 is retrospectively applied. ASU 2016-08, ASU 2016-10 and ASU 2016-12 have the same effective dates and transition requirements as ASU 2014-09. The Company continues to assess the potential impact that the adoption of ASU 2014-09, ASU 2016-08, ASU 2016-10 and ASU 2016-12 will have on its consolidated financial statements. Based on its assessment to date, the Company does expect that the adoption of this new accounting standard will impact the timing and amount of assets, liabilities, revenue and/or expenses recorded and the financial statement disclosures related to the Company’s revenue from contracts with its customers. For example, the treatment of extended payment terms, contingent revenue elements, commissions and costs to obtain customer contracts may change under the new accounting standard. The Company is continuing to assess the impact of this new accounting standard and the expected adoption method. This assessment is subject to change, and the Company may identify other impacts on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which will require lessees to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability, and lessors to recognize a net lease investment. Additional qualitative and quantitative disclosures will also be required. The new guidance is effective for public companies for annual reporting periods beginning after December 15, 2018 and for interim periods within those fiscal years. The new guidance is effective for private companies, and emerging growth companies that choose to take advantage of the extended transition periods, for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted. The Company is currently assessing the potential impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This guidance requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The measurement of expected credit losses is based on historical experience, current conditions and reasonable and supportable forecasts that affect the collectibility. This guidance is effective for public companies for annual reporting periods beginning after December 15, 2019 and for interim periods within those fiscal years. This guidance is effective for private companies, and emerging growth companies that choose to take advantage of the extended transition periods, for annual reporting periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The Company is currently assessing the potential impact that the adoption of ASU 2016-13 will have on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The standard is effective for private companies, and emerging growth companies that choose to take advantage of the extended transition periods, for annual periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently assessing the potential impact that the adoption of ASU 2016-15 will have on its consolidated financial statements.

10


In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The standard is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The standard is effective for private companies, and emerging growth companies that choose to take advantage of the extended transition periods, for annual periods beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019. The Company is currently assessing the potential impact that the adoption of ASU 2016-16 will have on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging—Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which aims to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The standard is effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The standard is effective for private companies, and emerging growth companies that choose to take advantage of the extended transition periods, for annual periods beginning after December 15, 2019, and interim reporting periods within annual periods beginning after December 15, 2020. The Company is currently assessing the potential impact that the adoption of ASU 2017-12 will have on its consolidated financial statements.

3. Inventory

Inventory as of March 31, 2018 and December 31, 2017 consisted of the following:

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Raw materials

 

$

4,753

 

 

$

5,135

 

Work in process

 

 

 

 

 

7

 

Finished goods:

 

 

 

 

 

 

 

 

Manufactured finished goods

 

 

31,008

 

 

 

36,321

 

Deferred inventory costs

 

 

1,222

 

 

 

3,344

 

 

 

 

36,983

 

 

 

44,807

 

Valuation adjustment for excess and obsolete inventory

 

 

(7,629

)

 

 

(8,659

)

 

 

$

29,354

 

 

$

36,148

 

 

4. Property and Equipment

Property and equipment as of March 31, 2018 and December 31, 2017 consisted of the following:

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Computers and purchased software

 

$

13,377

 

 

$

12,343

 

Leasehold improvements

 

 

1,295

 

 

 

1,268

 

Furniture and fixtures

 

 

1,831

 

 

 

1,752

 

Machinery and equipment

 

 

18,798

 

 

 

17,911

 

Land

 

 

3,091

 

 

 

3,091

 

Building

 

 

4,765

 

 

 

4,765

 

Building improvements

 

 

5,004

 

 

 

4,906

 

Trial systems at customers’ sites

 

 

7,392

 

 

 

7,458

 

 

 

 

55,553

 

 

 

53,494

 

Less: Accumulated depreciation and amortization

 

 

(26,387

)

 

 

(24,131

)

 

 

$

29,166

 

 

$

29,363

 

 

During the three months ended March 31, 2018 and 2017, the Company transferred trial systems from inventory into property and equipment with values of ($65) and $435, respectively, net of transfers of trial systems to cost of revenue. In addition, the Company transferred $65 and $495 of equipment from inventory into property and equipment during the three months ended March 31, 2018 and 2017, respectively.

Total depreciation and amortization expense was $2,302 and $1,728 for the three months ended March 31, 2018 and 2017, respectively.

11


5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of March 31, 2018 and December 31, 2017 consisted of the following:

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Accrued compensation and related taxes

 

$

14,787

 

 

$

22,465

 

Accrued warranty

 

 

1,131

 

 

 

1,246

 

Dividends and equitable adjustments payable (see Note 10)

 

 

8,420

 

 

 

10,661

 

Accrued customer incentives

 

 

4,428

 

 

 

8,437

 

Other accrued expenses

 

 

6,154

 

 

 

5,441

 

 

 

$

34,920

 

 

$

48,250

 

 

Accrued Warranty

 

Substantially all of the Company’s products are covered by warranties for software and hardware for periods ranging from 90 days to one year. In addition, in conjunction with customers’ renewals of maintenance and support contracts, the Company offers an extended warranty for periods typically of one to three years for agreed-upon fees. In the event of a failure of a hardware product or software covered by these warranties, the Company must repair or replace the software or hardware or, if those remedies are insufficient, and at the discretion of the Company, provide a refund. The Company’s warranty reserve, which is included in accrued expenses and other current liabilities in the consolidated balance sheets, reflects estimated material, labor and other costs related to potential or actual software and hardware warranty claims for which the Company expects to incur an obligation. The Company’s estimates of anticipated rates of warranty claims and the costs associated therewith are primarily based on historical information and future forecasts. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary. If the historical data used to calculate the adequacy of the warranty reserve are not indicative of future requirements, additional or reduced warranty reserves may be required.

 

A summary of changes in the amount reserved for warranty costs for the three months ended March 31, 2018 and 2017 is as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Warranty reserve at beginning of period

 

$

1,246

 

 

$

1,256

 

Provisions

 

 

353

 

 

 

617

 

Charges

 

 

(468

)

 

 

(467

)

Warranty reserve at end of period

 

$

1,131

 

 

$

1,406

 

 

 

 

6. Fair Value Measurements

 

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 

Level 1—

Quoted prices in active markets for identical assets and liabilities.

 

 

Level 2—

Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities at the measurement date; quoted prices in markets that are not active for identical or similar assets and liabilities; or other inputs that are observable or can be corroborated by observable market data.

 

 

Level 3—

Unobservable inputs that involve management judgment and are supported by little or no market activity, including pricing models, discounted cash flow methodologies and similar techniques.

12


The following tables present information about the fair value of the Company’s financial assets and liabilities as of March 31, 2018 and December 31, 2017 and indicate the level of the fair value hierarchy utilized to determine such fair values:

 

 

 

Fair Value Measurements as of March 31, 2018 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

 

 

$

23,826

 

 

$

 

 

$

23,826

 

Commercial paper

 

 

 

 

 

48,392

 

 

 

 

 

 

48,392

 

Money market mutual funds

 

 

223,111

 

 

 

 

 

 

 

 

 

223,111

 

 

 

$

223,111

 

 

$

72,218

 

 

$

 

 

$

295,329

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SARs

 

$

 

 

$

 

 

$

4,321

 

 

$

4,321

 

Foreign currency forward contracts

 

 

 

 

 

217

 

 

 

 

 

 

217

 

 

 

$

 

 

$

217

 

 

$

4,321

 

 

$

4,538

 

 

 

 

Fair Value Measurements as of December 31, 2017 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

 

 

$

18,905

 

 

$

 

 

$

18,905

 

Commercial paper

 

 

 

 

 

11,483

 

 

 

 

 

 

11,483

 

Money market mutual funds

 

 

224,555

 

 

 

 

 

 

 

 

 

224,555

 

 

 

$

224,555

 

 

$

30,388

 

 

$

 

 

$

254,943

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SARs

 

$

 

 

$

 

 

$

2,155

 

 

$

2,155

 

Foreign currency forward contracts

 

 

 

 

 

150

 

 

 

 

 

 

150

 

 

 

$

 

 

$

150

 

 

$

2,155

 

 

$

2,305

 

 

During the three months ended March 31, 2018 and 2017 there were no transfers between Level 1, Level 2 and Level 3.

There were no changes to the valuation techniques used to measure asset and liability fair values on a recurring basis during the three months ended March 31, 2018 from those included in the Company’s audited consolidated financial statements for the year ended December 31, 2017. The following table provides a summary of changes in the fair values of the Company’s SARs liability, for which fair value is determined by Level 3 inputs:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Fair value at beginning of period

 

$

2,155

 

 

$

1,195

 

Change in fair value

 

 

2,166

 

 

 

(11

)

Exercises

 

 

 

 

 

 

Fair value at end of period

 

$

4,321

 

 

$

1,184

 

 

7. Derivative Instruments

The Company has certain international customers that are billed in foreign currencies. To mitigate the volatility related to fluctuations in the foreign exchange rates for accounts receivable denominated in foreign currencies, the Company enters into foreign currency forward contracts. As of March 31, 2018, the Company had foreign currency forward contracts outstanding with notional amounts totaling 10,611 euros maturing in the second, third and fourth quarters of 2018. As of December 31, 2017, the Company had foreign currency forward contracts outstanding with notional amounts totaling 5,924 euros maturing in the first and second quarters of 2018.

13


The Company’s foreign currency forward contracts economically hedge certain risk but are not designated as hedges for financial reporting purposes, and accordingly, all changes in the fair value of these derivative instruments are recorded as unrealized foreign currency transaction gains or losses and are included in the consolidated statements of operations and comprehensive income as a component of other income (expense). The Company records all derivative instruments in the consolidated balance sheet at their fair values. As of March 31, 2018 and December 31, 2017, the Company recorded a liability of $217 and $150, respectively, related to outstanding foreign currency forward contracts, which were included in accrued expenses and other current liabilities in the consolidated balance sheets.

8. Income Taxes

The Company’s effective income tax rate was 9.2% and 5.7% for the three months ended March 31, 2018 and 2017, respectively. The effective income tax rate is based on the estimated annual effective tax rate, adjusted for discrete tax items recorded in the period. The provision for income taxes was $1,793 and $1,103 for the three months ended March 31, 2018 and 2017, respectively.

The Company determines its estimated annual effective tax rate at the end of each interim period based on estimated pre-tax income and facts known at that time. The estimated annual effective tax rate is applied to the year-to-date pre-tax income at the end of each interim period with certain adjustments. The tax effects of significant unusual or extraordinary items are discretely reflected in the periods in which they occur. The Company’s estimated annual effective tax rate can change based on the mix of jurisdictional pre-tax income and other factors.

The effective income tax rate for the three months ended March 31, 2018 differed from the federal statutory rate due to the foreign tax rate differential, permanent differences, research and development tax credits, excess tax benefit from stock-based transactions, state taxes and impacts of the Tax Cuts and Jobs Act (the “TCJA”). Permanent differences primarily included the nondeductible stock-based compensation expense.

As of December 31, 2017, the Company has accounted for the impacts of the TCJA to the extent a reasonable estimate could be made and recognized provisional amounts related to the deemed repatriation tax, offset by the remeasurement of deferred tax assets and liabilities to record the effects of the tax law change in the period of enactment. This treatment is provided for in Staff Accounting Bulletin 118, which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law during the measurement period. The measurement period ends when the company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. During the first quarter of 2018, the Internal Revenue Service issued additional guidance providing clarification on certain aspects of the deemed repatriation tax calculation. The additional guidance did not result in an adjustment to the provisional amounts recorded as of December 31, 2017. The Company will continue to monitor for new guidance related to provisional amounts recorded. The change in the provision for income taxes for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 was primarily due to a decrease in tax benefits from stock-based transactions.

9. Debt

The aggregate principal amount of debt outstanding as of March 31, 2018 and December 31, 2017 consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Term loans

 

$

296,250

 

 

$

297,000

 

Mortgage loan

 

 

7,186

 

 

 

7,261

 

Total principal amount of debt outstanding

 

$

303,436

 

 

$

304,261

 

 

14


Current and non-current debt obligations reflected in the consolidated balance sheets as of March 31, 2018 and December 31, 2017 consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Current liabilities:

 

 

 

 

 

 

 

 

Term loans

 

$

3,000

 

 

$

3,000

 

Mortgage loan

 

 

306

 

 

 

303

 

Current portion of principal payment obligations

 

 

3,306

 

 

 

3,303

 

Unamortized debt issuance costs, current portion

 

 

(1,145

)

 

 

(1,147

)

Current portion of long-term debt, net of

   unamortized debt issuance costs

 

$

2,161

 

 

$

2,156

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Term loans

 

$

293,250

 

 

$

294,000

 

Mortgage loan

 

 

6,880

 

 

 

6,958

 

Non-current portion of principal payment obligations

 

 

300,130

 

 

 

300,958

 

Unamortized debt issuance costs, non-current portion

 

 

(5,215

)

 

 

(5,499

)

Long-term debt, net of current portion and

   unamortized debt issuance costs

 

$

294,915

 

 

$