casa-10q_20200331.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, 2020

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

 

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

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.001 par value per share

CASA

The Nasdaq Stock Market LLC

 

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

 

Large accelerated filer

  

Accelerated filer

Non-accelerated filer

  

  

Smaller reporting company

 

 

 

Emerging growth company

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 29, 2020, the registrant had 83,040,053 shares of common stock, $0.001 par value per share, issued and outstanding.

 

 

 

 


Table of Contents

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

3

Item 1.

Financial Statements

 

3

 

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

 

3

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three months ended March 31, 2020 and 2019

 

4

 

Condensed Consolidated Statements of Stockholders' Equity for the Three months ended March 31, 2020 and 2019

 

5

 

Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2020 and 2019

 

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

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

 

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

37

Item 4.

Controls and Procedures

 

38

PART II.

OTHER INFORMATION

 

39

Item 1.

Legal Proceedings

 

39

Item 1A.

Risk Factors

 

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

Item 6.

Exhibits

 

42

Signatures

 

43

 

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 integrate and generate potential synergies from our acquisition of NetComm Wireless Limited;

 

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 extent of the effects of the COVID-19 pandemic on the Company, which is highly uncertain and will depend on future developments;

 

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;

1


 

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;

 

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

 

the costs and possible outcomes of any legal actions or proceedings against us, including those described under “Part II, Item 1—Legal Proceedings”;

 

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. Financial Statements

CASA SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

134,752

 

 

$

113,638

 

Accounts receivable, net of provision for doubtful accounts of $22 and $20 as of

   March 31, 2020 and December 31, 2019, respectively

 

 

55,013

 

 

 

93,100

 

Inventory

 

 

81,014

 

 

 

93,604

 

Prepaid expenses and other current assets

 

 

7,239

 

 

 

4,884

 

Prepaid income taxes

 

 

9,663

 

 

 

3,217

 

Total current assets

 

 

287,681

 

 

 

308,443

 

Property and equipment, net

 

 

34,231

 

 

 

35,910

 

Accounts receivable, net of current portion

 

 

522

 

 

 

575

 

Deferred tax assets

 

 

319

 

 

 

69

 

Goodwill

 

 

50,347

 

 

 

50,347

 

Intangible assets, net

 

 

39,721

 

 

 

41,148

 

Other assets

 

 

6,037

 

 

 

7,820

 

Total assets

 

$

418,858

 

 

$

444,312

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

17,622

 

 

$

25,890

 

Accrued expenses and other current liabilities

 

 

26,120

 

 

 

34,567

 

Accrued income taxes

 

 

110

 

 

 

 

Deferred revenue

 

 

18,850

 

 

 

25,485

 

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

 

 

8,449

 

 

 

8,524

 

Total current liabilities

 

 

71,151

 

 

 

94,466

 

Accrued income taxes, net of current portion

 

 

10,667

 

 

 

12,381

 

Deferred tax liabilities

 

 

9,166

 

 

 

8,993

 

Deferred revenue, net of current portion

 

 

4,149

 

 

 

4,583

 

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

 

 

284,282

 

 

 

284,756

 

Other liabilities, net of current portion

 

 

522

 

 

 

569

 

Total liabilities

 

 

379,937

 

 

 

405,748

 

Commitments and contingencies (Note 18)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000 shares authorized as of March 31, 2020

   and December 31, 2019; no shares issued and outstanding as of

   March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $0.001 par value; 500,000 shares authorized as of March 31, 2020

   and December 31, 2019; 84,726 and 84,333 shares issued and outstanding

   as of March 31, 2020 and December 31, 2019, respectively

 

 

85

 

 

 

84

 

Treasury stock, at cost; 1,711 and 495 shares at March 31, 2020 and December 31, 2019,

   respectively

 

 

(4,793

)

 

 

(1,795

)

Additional paid-in capital

 

 

171,914

 

 

 

169,561

 

Accumulated other comprehensive loss

 

 

(2,383

)

 

 

(2,222

)

Accumulated deficit

 

 

(125,902

)

 

 

(127,064

)

Total stockholders’ equity

 

 

38,921

 

 

 

38,564

 

Total liabilities and stockholders’ equity

 

$

418,858

 

 

$

444,312

 

 

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 (LOSS)

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

73,758

 

 

$

26,653

 

Service

 

 

9,865

 

 

 

8,833

 

Total revenue

 

 

83,623

 

 

 

35,486

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

 

39,644

 

 

 

9,429

 

Service

 

 

1,326

 

 

 

1,560

 

Total cost of revenue

 

 

40,970

 

 

 

10,989

 

Gross profit

 

 

42,653

 

 

 

24,497

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

21,211

 

 

 

18,405

 

Selling, general and administrative

 

 

24,991

 

 

 

20,193

 

Total operating expenses

 

 

46,202

 

 

 

38,598

 

Loss from operations

 

 

(3,549

)

 

 

(14,101

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

406

 

 

 

1,652

 

Interest expense

 

 

(4,628

)

 

 

(5,197

)

Gain (loss) on foreign currency, net

 

 

152

 

 

 

(92

)

Other income, net

 

 

62

 

 

 

229

 

Total other income (expense), net

 

 

(4,008

)

 

 

(3,408

)

Loss before benefit from income taxes

 

 

(7,557

)

 

 

(17,509

)

Benefit from income taxes

 

 

(8,719

)

 

 

(2,170

)

Net income (loss)

 

 

1,162

 

 

 

(15,339

)

Other comprehensive income (loss)—foreign currency translation

   adjustment, net of tax

 

 

(516

)

 

 

713

 

Other comprehensive income (loss)—gain on foreign currency hedge, net of tax

 

 

356

 

 

 

 

Comprehensive income (loss)

 

$

1,002

 

 

$

(14,626

)

Net income (loss) attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

1,162

 

 

$

(15,339

)

Net income (loss) per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

(0.18

)

Diluted

 

$

0.01

 

 

$

(0.18

)

Weighted-average shares used to compute net income (loss) per

   share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

 

83,990

 

 

 

83,323

 

Diluted

 

 

85,009

 

 

 

83,323

 

 

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

 

 

Treasury Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances at January 1, 2020

 

 

84,333

 

 

$

84

 

 

 

495

 

 

$

(1,795

)

 

$

169,561

 

 

$

(2,222

)

 

$

(127,064

)

 

$

38,564

 

Exercise of stock options and common stock issued upon

   vesting of equity awards, net of shares withheld for

   employee taxes

 

 

393

 

 

 

1

 

 

 

 

 

 

 

 

 

(148

)

 

 

 

 

 

 

 

 

(147

)

Unrealized gain on cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

356

 

 

 

 

 

 

356

 

Foreign currency translation adjustment, net of tax of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(517

)

 

 

 

 

 

(517

)

Repurchases of treasury shares

 

 

 

 

 

 

 

 

1,216

 

 

 

(2,998

)

 

 

 

 

 

 

 

 

 

 

 

(2,998

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,501

 

 

 

 

 

 

 

 

 

2,501

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,162

 

 

 

1,162

 

Balances at March 31, 2020

 

 

84,726

 

 

$

85

 

 

 

1,711

 

 

$

(4,793

)

 

$

171,914

 

 

$

(2,383

)

 

$

(125,902

)

 

$

38,921

 

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances at January 1, 2019

 

 

82,961

 

 

$

83

 

 

$

156,939

 

 

$

(1,158

)

 

$

(81,008

)

 

$

74,856

 

Exercise of stock options and common stock issued upon vesting of

   equity awards, net of shares withheld for employee taxes

 

 

773

 

 

 

1

 

 

 

493

 

 

 

 

 

 

 

 

 

494

 

Foreign currency translation adjustment, net of tax of $0

 

 

 

 

 

 

 

 

 

 

 

713

 

 

 

 

 

 

713

 

Effect of adopted accounting standards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,150

 

 

 

2,150

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,560

 

 

 

 

 

 

 

 

 

2,560

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,339

)

 

 

(15,339

)

Balances at March 31, 2019

 

 

83,734

 

 

$

84

 

 

$

159,992

 

 

$

(445

)

 

$

(94,197

)

 

$

65,434

 

 

 

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,

 

 

 

2020

 

 

2019

 

Cash flows provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,162

 

 

$

(15,339

)

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

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,768

 

 

 

2,396

 

Stock-based compensation

 

 

2,437

 

 

 

1,900

 

Deferred income taxes

 

 

(75

)

 

 

(2,700

)

Increase in provision for doubtful accounts

 

 

2

 

 

 

1,255

 

Excess and obsolete inventory valuation adjustment

 

 

519

 

 

 

(613

)

Gain on disposal of assets

 

 

10

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

38,021

 

 

 

25,289

 

Inventory

 

 

11,873

 

 

 

(16,986

)

Prepaid expenses and other assets

 

 

(231

)

 

 

(1,721

)

Prepaid income taxes

 

 

(6,446

)

 

 

(1,245

)

Accounts payable

 

 

(9,128

)

 

 

1,165

 

Accrued expenses and other current liabilities

 

 

(8,204

)

 

 

(8,171

)

Accrued income taxes

 

 

(1,609

)

 

 

812

 

Deferred revenue

 

 

(7,030

)

 

 

109

 

Net cash provided by (used in) operating activities

 

 

26,069

 

 

 

(13,849

)

Cash flows used in investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(390

)

 

 

(1,835

)

Net cash used in investing activities

 

 

(390

)

 

 

(1,835

)

Cash flows used in financing activities:

 

 

 

 

 

 

 

 

Principal repayments of debt

 

 

(830

)

 

 

(828

)

Proceeds from exercise of stock options

 

 

312

 

 

 

1,498

 

Employee taxes paid related to net share settlement of equity awards

 

 

(459

)

 

 

(1,004

)

Payments of dividends and equitable adjustments

 

 

(176

)

 

 

(761

)

Repurchases of common stock

 

 

(2,998

)

 

 

 

Net cash used in financing activities

 

 

(4,151

)

 

 

(1,095

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(408

)

 

 

609

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

21,120

 

 

 

(16,170

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

114,657

 

 

 

281,606

 

Cash, cash equivalents and restricted cash at end of period (1)

 

$

135,777

 

 

$

265,436

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,194

 

 

$

4,682

 

Cash paid for income taxes

 

$

189

 

 

$

683

 

Supplemental disclosures of non-cash operating, investing

   and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable

 

$

1,879

 

 

$

858

 

Unpaid equitable adjustments included in accrued expenses and other current liabilities

 

$

555

 

 

$

2,575

 

Release of customer incentives included in accounts receivable and accrued expenses

   and other current liabilities

 

$

 

 

$

5,389

 

Fair value of cash flow hedges

 

$

356

 

 

$

 

 

(1)

See Note 2 of the accompanying notes for a reconciliation of the ending balance of cash, cash equivalents and restricted cash shown in these condensed consolidated statements of cash flows.

 

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, Colombia, the Netherlands, Hong Kong, Australia, Germany, the United Kingdom and New Zealand.

The Company offers converged 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, risks associated with coronavirus (COVID-19), 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.

On July 1, 2019, the Company acquired 100% of the equity interests in NetComm Wireless Limited (“NetComm”) for cash consideration of $161,963 Australian dollars (“AUD”) ($112,674 United States dollars (“USD”)), based on an exchange rate of USD $0.700 per AUD $1.00 on July 1, 2019) and NetComm became a wholly-owned subsidiary of the Company (the “Acquisition”). NetComm is a global leader in the development of fixed wireless and distribution point broadband solutions, and with the Acquisition, the Company now offers a broad, highly competitive product portfolio for new 4G and 5G fixed wireless access products and customer premise equipment for vDSL2 and G.fast services for service providers.

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, 2020, the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2020 and 2019, the condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 and the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2020 and 2019 are unaudited. The financial data and other information disclosed in these notes related to the three months ended March 31, 2020 and 2019 are also unaudited. The accompanying condensed consolidated balance sheet as of December 31, 2019 was derived from the Company’s audited consolidated financial statements for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 27, 2020 (the “Annual Report on Form 10-K”). 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 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, 2020 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, benefit from income taxes, warranty allowances, the valuation of 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.

The emergence of COVID-19 around the world, and particularly in the United States and China, presents various risks to the Company, not all of which the Company is able to fully evaluate or even to foresee at the current time, and could have a material effect upon the estimates and judgments relied upon by management in preparing these condensed consolidated financial statements. While the COVID-19 pandemic did not materially adversely affect the Company’s financial results and business operations in the quarter ended March 31, 2020, economic and health conditions in the United States and across most of the globe have changed rapidly since the end of the quarter.  Globally, all aspects of the Company’s business remain fully operational, and it is working with its supply chain to ensure continued availability of all anticipated inventory requirements.  The Company will continue to monitor its business very closely for any effects of COVID-19 for as long as necessary on an ongoing basis.  

 

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include all highly liquid investments maturing within three months from the date of purchase. As of March 31, 2020 and December 31, 2019, the Company’s cash and cash equivalents consisted of investments in certificates of deposit and money market mutual funds.

Restricted cash as of March 31, 2020 and December 31, 2019 consisted of a certificate of deposit of $1,025 and $1,019, respectively, pledged as collateral for a stand-by letter of credit required to support a contractual obligation.

The following table is a reconciliation of cash, cash equivalents and restricted cash included in the accompanying condensed consolidated balance sheets that sum to the total cash, cash equivalents and restricted cash included in the accompanying condensed consolidated statements of cash flows:

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Cash and cash equivalents

 

$

134,752

 

 

$

264,411

 

Restricted cash included in other assets

 

 

1,025

 

 

 

1,025

 

 

 

$

135,777

 

 

$

265,436

 

 

8


 

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 customer contracts 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.

In limited instances, for certain customers and/or for certain transactions, the Company provides extended payment terms that are considered significant financing components. These extended payment terms 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. In certain circumstances, the receivables may be collateralized by the underlying assets over the payment period. Payments due beyond 12 months from the balance sheet date are recorded as non-current assets.

Accounts receivable as of March 31, 2020 and December 31, 2019 consisted of the following:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Current portion of accounts receivable, net:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

53,390

 

 

$

91,273

 

Accounts receivable, extended payment terms

 

 

1,623

 

 

 

1,827

 

 

 

 

55,013

 

 

 

93,100

 

Accounts receivable, net of current portion:

 

 

 

 

 

 

 

 

Accounts receivable, extended payment terms

 

 

522

 

 

 

575

 

 

 

$

55,535

 

 

$

93,675

 

 

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 selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

As of March 31, 2020 and December 31, 2019, the Company concluded that all amounts due under extended payment terms were collectible and no reserve for credit losses was recorded. During the three months ended March 31, 2020 and 2019, the Company did not provide a reserve for credit losses and did not write off any uncollectible receivables due under extended payment terms.

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, 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 and are set forth in the following tables:

 

 

 

Revenue

 

 

Accounts Receivable, Net

 

 

 

Three Months Ended March 31,

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Customer A

 

*

 

 

 

25

%

 

*

 

 

 

11

%

Customer B

 

*

 

 

*

 

 

*

 

 

 

14

%

Customer C

 

*

 

 

 

12

%

 

*

 

 

*

 

Customer D

 

 

12

%

 

*

 

 

 

17

%

 

 

19

%

Customer E

 

 

23

%

 

*

 

 

*

 

 

*

 

 

*

Less than 10% of total

9


 

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.

Goodwill and Acquired Intangible Assets

Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. Goodwill has been recorded in connection with the acquisition of NetComm on July 1, 2019 (refer to Note 3).  The Company tests goodwill for impairment on an annual basis and between annual tests when impairment indicators are identified, and goodwill is written down when impaired.  As of March 31, 2020, the Company considered potential impairment indicators of goodwill and noted no indicators of impairment.

The Company performs its annual goodwill impairment test during its fourth quarter. For its annual goodwill impairment test, the Company operates under one reporting unit and the fair value of its reporting unit has been determined based on the Company’s enterprise value. As part of the annual goodwill impairment test, the Company has the option to perform a qualitative assessment to determine whether further impairment testing is necessary. Examples of events and circumstances that might indicate that the reporting unit’s fair value is less than its carrying amount include macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as a sustained decrease in the stock price on either an absolute basis or relative to peers. If, as a result of its qualitative assessment, it is more likely than not (i.e., greater than 50% chance) that the fair value of the Company’s reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.

The Company's intangible assets subject to amortization are amortized using the straight-line method over their estimated useful lives, ranging from three to ten years. The Company evaluates the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. The Company considered potential impairment indicators of acquired intangible assets at March 31, 2020 and noted no indicators of impairment.

Derivative Instruments

The Company has transactions and balances denominated in currencies other than the U.S. dollar. Most of these transactions or balances are denominated in Euros and Australian dollars. The Company has historically entered into foreign exchange contracts to reduce its exposure to currency fluctuations. Historically, these transactions have not qualified for hedge accounting. However, beginning in March 2020, the Company entered into two forward contracts to hedge against the impact of foreign currency fluctuations on certain forecasted operating expenses. These instruments qualified for hedge accounting as cash flow hedges, and were appropriately designated as such, thus permitting the application of special hedge accounting under ASC 815, Derivatives and Hedging, which states that changes in the market value of the hedging instrument are accounted for within stockholder’s equity as accumulated other comprehensive loss, until such time as the hedged cash flows take place. Upon utilization of the hedge instrument for the designated cash flows, the appropriate amounts are reclassified from accumulated other comprehensive loss to the relevant line items within the Statement of Operations for the period. For further information, please refer to Note 9, “Derivative Instruments”.

Impact of Recently Adopted Accounting Standards

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718) (“ASU 2018-07”), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted ASU 2018-07 as of January 1, 2020 and it did not have a material effect on its condensed consolidated financial statements.

10


 

Impact of Recently Issued Accounting Standards

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. In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”) to defer the effective dates of ASU 2016-02. This guidance is will become 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. Early application continues to be permitted. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842: Leases (“ASU 2018-10”), which affects narrow aspects of the guidance issued in the amendments in ASU 2016-02. ASU 2018-10 has the same effective dates and transition requirements as ASU 2016-02. In July 2018, the FASB issued update ASU 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”), which provided for an additional (and optional) transition method with which to adopt the new lease standard in ASU 2016-02. The additional method allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Additionally, in December 2018, the FASB issued update ASU 2018-20, Leases (Topic 842) – Narrow-Scope Improvements for Lessors (“ASU 2018-20”), which addresses stakeholders’ concerns about the operability challenges encountered in determining certain lessor costs paid by lessees directly to third parties by requiring lessors to exclude from variable payments, and thus from lease revenue, lessor costs paid by a lessee directly to a third party. The amendments in ASU 2018-20 also clarify that costs excluded from the consideration in a contract that are paid directly to a third party by a lessor and reimbursed by the lessee are lessor costs to be accounted for as variable payments. The Company is currently assessing the potential impact that the adoption of ASU 2016-02, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-10 will have on its consolidated financial statements. The Company is in the process of reviewing existing lease agreements to assess the impact this guidance may have on the consolidated financial statements. The Company currently expects that most of its operating lease commitments will be subject to the new standard and will affect the consolidated balance sheet by recognizing new right-of-use assets and operating lease liabilities upon the adoption of ASU 2016-02, which will increase the total assets and total liabilities that it reports relative to such amounts prior to adoption.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This guidance intended to provide more decision-useful information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The main provisions include presenting financial assets measured at amortized cost at the amount expected to be collected, which is net of an allowance for expected credit losses, and recording credit losses related to available-for-sale securities through an allowance for credit losses. The effective dates for the amendments in ASU 2016-13 were updated in ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), and as such ASU 2016-13 will now be effective for private companies, and emerging growth companies that choose to take advantage of the extended transition periods, for fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods, and must be applied using a modified retrospective approach. The Company is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements.

Other

For further information with regard to the Company’s significant accounting policies, please refer to Note 2 “Summary of Significant Accounting Policies” to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

3. Business Acquisition

On July 1, 2019, the Company acquired 100% of the equity interests in NetComm for cash consideration of $161,963 AUD ($112,674 USD, based on an exchange rate of USD $0.700 per AUD $1.00 on July 1, 2019) and NetComm became a wholly-owned subsidiary of the Company. The Acquisition was accounted for under the acquisition method. The total purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values. The excess of the purchase price over those fair values is recorded as goodwill. The fair value assigned to the tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions provided by management. Goodwill is not amortized but instead is tested for impairment at least annually.

NetComm is a global leader in the development of fixed wireless and distribution point broadband solutions. With the Acquisition, the Company now offers a broad, highly competitive product portfolio for new 4G and 5G fixed wireless access products and customer premise equipment for vDSL2 and G.fast services for service providers. This factor contributed to a purchase price in excess of fair value of NetComm’s net tangible and intangible assets, leading to the recognition of goodwill.

11


 

The total purchase price was preliminarily allocated to NetComm’s net tangible and intangible assets based upon their estimated fair values as of the date of Acquisition. NetComm’s cash and cash equivalents balance at the Acquisition date was $3,243; as such, total consideration net of cash acquired is $109,431. NetComm’s existing debt of approximately $3,507 as of the Acquisition date has been accounted for as an assumed liability. As of July 1, 2019, all contractual amounts receivable, which totaled $18,142, are expected to be collected. Based upon the purchase price and the valuation, the allocation of the total purchase price is as follows:

 

 

 

Preliminary

Purchase Price

Allocation

 

Assets acquired

 

 

 

 

Fair value of tangible assets:

 

 

 

 

Accounts receivable

 

$

18,142

 

Inventory

 

 

24,138

 

Prepaid expenses and other current assets

 

 

2,240

 

Property, plant and equipment

 

 

8,010

 

Deferred tax assets

 

 

365

 

Other assets

 

 

13

 

Goodwill

 

 

50,347

 

Identifiable intangible assets

 

 

44,000

 

Total assets acquired

 

$

147,255

 

Liabilities assumed

 

 

 

 

Accounts payable

 

$

(9,719

)

Accrued expenses

 

 

(13,178

)

Accrued income taxes

 

 

(140

)

Deferred tax liabilities

 

 

(10,791

)

Current portion of long-term debt

 

 

(3,507

)

Other liabilities

 

 

(489

)

Total liabilities assumed

 

$

(37,824

)

Net assets acquired

 

$

109,431

 

 

The preliminary allocation of the purchase price and the estimated useful lives associated with certain assets is as follows:

 

 

 

Amount

 

 

Estimated Useful

Life

 

Net tangible assets

 

$

15,084

 

 

 

 

Identifiable intangible assets:

 

 

 

 

 

 

 

 

Developed technology

 

 

25,000

 

 

7 years

 

Customer relationships

 

 

18,000

 

 

10 years

 

Trade name

 

 

1,000

 

 

3 years

 

Goodwill

 

 

50,347

 

 

 

 

Total purchase price

 

$

109,431

 

 

 

 

 

 

Intangible assets of $44,000 have been allocated to identifiable intangible assets consisting of developed technology, amortized over seven years using a straight-line amortization method; customer relationships, amortized over ten years using a straight-line amortization method; and a trade name, amortized over three years using a straight-line amortization method. The weighted average life of the identifiable intangible assets recognized from the Acquisition was 8.2 years.

The Acquisition accounting has resulted in goodwill of $50,347. Various factors contributed to the establishment of the goodwill, including: the strategic benefit of expanding the breadth of the Company’s product offerings; the value of NetComm’s highly trained work force; the expected revenue growth over time that is attributable to increased market penetration from future products and customers, and cross-selling by the sales force; and the synergies expected to result from reducing redundant infrastructure such as corporate costs and field operations. The goodwill acquired in the Acquisition is not deductible for tax purposes.

 

12


 

4. Goodwill and Intangible Assets

There were no changes to goodwill during the three months ended March 31, 2020.

Intangible assets, net consisted of the following at March 31, 2020 and December 31, 2019:

 

 

 

Cost

 

 

Accumulated

amortization

 

 

Net Balance

 

Developed Technology

 

$

25,000

 

 

$

(2,679

)

 

$

22,321

 

Customer Relationships

 

 

18,000

 

 

 

(1,350

)

 

 

16,650

 

Trade Name

 

 

1,000

 

 

 

(250

)

 

 

750

 

Totals as of March 31, 2020

 

$

44,000

 

 

$

(4,279

)

 

$

39,721

 

 

 

 

Cost

 

 

Accumulated

amortization

 

 

Net Balance

 

Developed Technology

 

$

25,000

 

 

$

(1,786

)

 

$

23,214

 

Customer Relationships

 

 

18,000

 

 

 

(900

)

 

 

17,100

 

Trade Name

 

 

1,000

 

 

 

(166

)

 

 

834

 

Totals as of December 31, 2019

 

$

44,000

 

 

$

(2,852

)

 

$

41,148

 

 

As of March 31, 2020, amortization expense on existing intangible assets for the next five years and beyond is as follows:

 

Year Ending December 31,

 

 

 

 

2020

 

$

4,279

 

2021

 

 

5,704

 

2022

 

 

5,538

 

2023

 

 

5,371

 

2024

 

 

5,371

 

Thereafter

 

 

13,458

 

 

 

$

39,721

 

 

The Company recorded amortization expense of $893 and $533 related to intangible assets, which were included in product cost of revenue and selling, general and administrative expense, respectively, for the three months ended March 31, 2020 in the condensed consolidated statements of operations and comprehensive income (loss).  The Company recorded no amortization expense related to intangible assets for the three months ended March 31, 2019.

 

5. Inventory

Inventory as of March 31, 2020 and December 31, 2019 consisted of the following:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Raw materials

 

$

28,455

 

 

$

24,000

 

Work in process

 

 

 

 

 

17

 

Finished goods:

 

 

 

 

 

 

 

 

Manufactured finished goods

 

 

57,838

 

 

 

70,923

 

Deferred inventory costs

 

 

836

 

 

 

4,263

 

 

 

 

87,129

 

 

 

99,203

 

Valuation allowance for excess and obsolete inventory

 

 

(6,115

)

 

 

(5,599

)

 

 

$

81,014

 

 

$

93,604

 

 

13


 

6. Property and Equipment

Property and equipment as of March 31, 2020 and December 31, 2019 consisted of the following: