The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Business and significant accounting policies
Business
Cambium Networks Corporation (“Cambium” or the “Company”), incorporated under the laws of the Cayman Islands, is a holding company whose principal operating entities are Cambium Networks, Ltd. (UK), Cambium Networks, Inc. (USA), and Cambium Networks Private Limited (India). On October 28, 2011, Cambium acquired the point-to-point (“PTP”) and point-to-multi-point (“PMP”) businesses from Motorola Solutions, Inc. The acquisition was funded by investment funds affiliated with Vector Capital (“Sponsor”) and Cambium became the renamed entity subsequent to the acquisition.
Cambium Networks Corporation and its wholly owned subsidiaries provide wireless broadband networking solutions for network operators, including medium-sized wireless internet service providers, enterprises and government agencies.
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of Cambium Networks Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The condensed consolidated financial statements as of March 31, 2020, and for the three-month periods ended March 31, 2019 and 2020, and the related notes are unaudited. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements, and, in the opinion of management, reflect all adjustments, which comprise only normal recurring adjustments necessary to state fairly the Company’s financial position as of March 31, 2020 and results of operations for the three-month periods ended March 31, 2019 and 2020 and cash flows for the three-month periods ended March 31, 2019 and 2020. The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited financial statements at that date.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principals generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. The condensed consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and related notes thereto for the year ended December 31, 2019 included in the Company’s annual report on Form 10-K and filed with the SEC on March 23, 2020. The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the operating results to be expected for the full year.
Update to Significant Accounting Policies
Other than the recently implemented accounting policy related to the allowances for credit losses per the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-03 (see below and Note 4 to the condensed consolidated financial statements), there have been no material changes to the Company’s signifiant accounting policies disclosed in the 2019 Form 10-K, Part II, Item 8.
Receivables and concentration of credit risk
Trade accounts receivable are recorded at invoiced amounts, net of the allowance for credit losses. The Company considers the credit risk of all customers and regularly monitors credit risk exposure in its trade receivables. The Company’s standard credit terms with its customers are generally net 30 to 60 days. The Company had one customer representing more than 10% of trade receivables at December 31, 2019 and one customer at March 31, 2020. The Company had four customers representing more than 10% of revenues for the three-month period ended March 31, 2019 and two customers for the three-month period ended March 31, 2020.
The Company establishes an allowance for credit losses to present the net amount of accounts receivable expected to be collected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivables. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables, and credit and liquidity indicators for individual customers.
6
Recently adopted accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Intruments, and subsequent amendments to the initial guidance: ASUs 2018-19, 2019-04, 2019-05, 2019-11, and 2020-02 (collectively, “Topic 326”). Topic 326 sets forth an expected credit loss model which requires the measurement of expected credit losses for financial instruments based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, including trade accounts receivable, and certain off-balance sheet credit exposures. The Company adopted Topic 326 on January 1, 2020 using the modified retrospective transition method for all financial assets measured at amortized costs, which is primarily trade accounts receivable. Results for reporting periods beginning after January 1, 2020 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The adoption of Topic 326 did not have a material impact on the condensed condolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The Company adopted this ASU effective January 1, 2020 applying the changes prospectively to all implemenation costs incurred after this date. The adoption of ASU 2018-15 will not have a material impact on the condensed consolidated financial statements as there are no large implementations planned for 2020.
Recently issued accounting pronouncements not yet adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its Simplification Initiative to reduce the cost and comlexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company is assessing the impact of adopting this standard on its condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modification and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the potential impact of this ASU on its condensed consolidated financial statements.
Note 2. Business Combinations
In August 2019, the Company acquired select assets and assumed select liabilities of the Xirrus Wi-Fi products and cloud services business from Riverbed Technology, Inc. Xirrus has a portfolio of high performance enterprise Wi-Fi access points and subscription services. The Company paid $2.0 million upon closing and through February 2020, paid the entire $3.0 million of the expected contingent consideration that was subject to attaining certain booking targets related to sales of Xirrus products, which were met by Decemebr 31, 2019. This acquisition will enhance and accelerate the Company’s existing network service application capabilities.
The Company accounts for business combinations in accordance with ASC 805, Business Combinations. The Company recorded the acquisition using the acquisition method of accounting and recognized assets and liabilities at their fair value as of the date of acquisition. The Company based the preliminary allocation of the puchase price on estimates and assumptions that are subject to change within the purchase price allocation period, which is generally one year from the acquisition date. During the three-month period ended March 31, 2020, the Company made adjustments to the preliminary purchase price allocation for inventory and accrued warranty. The purchase accounting is not yet complete and as such the final allocation may be subject to future adjustments, including, but not limited to, inventory, intangibles, accrued warranty, deferred revenue, and certain income tax matters. The Company determined the estimated fair value of identifiable intangible assets acquired primarily using an income approach.
7
The following table summarizes the preliminary allocation of the purchase price as of March 31, 2020 (in thousands):
Goodwill
|
|
$
|
1,433
|
|
Customer relationships
|
|
|
7,670
|
|
Unpatented technology
|
|
|
540
|
|
Deferred revenue
|
|
|
(7,460
|
)
|
Other net assets acquired
|
|
|
2,817
|
|
Total purchase price
|
|
$
|
5,000
|
|
The results from this acquisition have been included in the Company’s condensed consolidated financial statements since the closing of the acquisition.
Note 3. Fair value
The fair value of the Company’s external debt under its Credit Agreement approximates its carrying value because the terms and conditions approximate the terms and conditions of current market debt available to the Company. Due to the floating interest rate the debt is classified as Level 2 of the fair value hierarchy. The external debt was estimated based on the current rates offered to the Company for debt with the same remaining maturities. The fair value of the Company’s Credit Agreement was $65.3 million and $72.8 million as of December 31, 2019 and March 31, 2020, respectively.
The fair value of cash approximates its carrying value (Level 1 of the fair value hierarchy).
The Company’s Level 3 liability for contingent consideration of $3.0 million that was added during the three-month period ended September 30, 2019 was fully paid as of February 2020. The entire $3.0 million was earned as of December 31, 2019 and the Company made a payment of $2.7 million in November 2019 and paid the remaining $0.3 million in February 2020.
Note 4. Balance sheet components
Accounts Receivable, net
The Company’s accounts receivable arise from sales on credit to customers. The Company establishes an allowance for credit losses to present the net amount of accounts receivable expected to be collected. With the adoption of ASC 326 on January 1, 2020, the allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivables. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity indicators for individual customers. Prior to the adoption, the Company established the allowance under an incurred loss mode, considering the aging of the accounts receivable, the credit worthiness of each distributor based on payment history, and general economic factors, among other factors.
The components of accounts receivable, net are as follows (in thousands):
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
(unaudited)
|
|
Trade accounts receivable
|
|
$
|
58,774
|
|
|
$
|
62,000
|
|
Other receivables
|
|
|
434
|
|
|
|
296
|
|
Total receivables
|
|
|
59,208
|
|
|
|
62,296
|
|
Less: Allowance for credit losses
|
|
|
(580
|
)
|
|
|
(690
|
)
|
Receivables, net
|
|
$
|
58,628
|
|
|
$
|
61,606
|
|
8
The allowance for credit losses activity was as follows (in thousands):
|
|
Year ended
December 31,
|
|
|
Three months
ended
March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
(unaudited)
|
|
Beginning balance
|
|
$
|
503
|
|
|
$
|
580
|
|
Increase, charged to expense
|
|
|
333
|
|
|
|
125
|
|
Recoveries
|
|
|
(204
|
)
|
|
|
(15
|
)
|
Amounts written-off
|
|
|
(52
|
)
|
|
|
—
|
|
Ending balance
|
|
$
|
580
|
|
|
$
|
690
|
|
Inventories, net
Inventories, net consisted of the following (in thousands):
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
(unaudited)
|
|
Finished goods
|
|
$
|
42,402
|
|
|
$
|
31,659
|
|
Raw materials
|
|
|
4,227
|
|
|
|
4,886
|
|
Gross inventory
|
|
|
46,629
|
|
|
|
36,545
|
|
Less: Excess and obsolete provision
|
|
|
(4,959
|
)
|
|
|
(4,046
|
)
|
Inventories, net
|
|
$
|
41,670
|
|
|
$
|
32,499
|
|
The following table reflects the activity in the Company’s inventory excess and obsolete provision (in thousands):
|
|
Year ended
December 31,
|
|
|
Three months
ended
March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
(unaudited)
|
|
Beginning balance
|
|
$
|
3,950
|
|
|
$
|
4,959
|
|
Inventory written off
|
|
|
(149
|
)
|
|
|
(1,290
|
)
|
Increase in excess and obsolete provision
|
|
|
1,158
|
|
|
|
377
|
|
Ending balance
|
|
$
|
4,959
|
|
|
$
|
4,046
|
|
Accrued liabilities
Accrued liabilities consisted of the following (in thousands):
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
(unaudited)
|
|
Accrued goods and services
|
|
$
|
8,364
|
|
|
$
|
8,113
|
|
Accrued inventory purchases
|
|
|
3,094
|
|
|
|
2,417
|
|
Accrued customer rebates
|
|
|
3,569
|
|
|
|
4,479
|
|
Other
|
|
|
7
|
|
|
|
8
|
|
Accrued liabilities
|
|
$
|
15,034
|
|
|
$
|
15,017
|
|
9
Accrued warranty
Provisions for warranty claims are primarily related to our hardware products and are recorded at the time products are sold. As per Note 2 – Business Combinations, during the three-month period ended March 31, 2020, the Company recorded an adjustment to the amount associated with the assumed warranty provision related to the Xirrus acquisition. The change to accrued warranty was as follows (in thousands):
|
|
Year ended
December 31,
|
|
|
Three months
ended
March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
(unaudited)
|
|
Beginning balance
|
|
$
|
488
|
|
|
$
|
706
|
|
Warranties assumed due to acquisition
|
|
|
180
|
|
|
|
825
|
|
Fulfillment of assumed acquisition warranty
|
|
|
—
|
|
|
|
(164
|
)
|
Provision increase, net
|
|
|
38
|
|
|
|
55
|
|
Ending balance
|
|
$
|
706
|
|
|
$
|
1,422
|
|
At December 31, 2019, $0.7 million is included in Other current liabilities on the Company’s condensed consolidated balance sheet. At March 31, 2020, $0.9 million is included in Other current liabilities and $0.5 million is included in Other noncurrent liabilities on the Company’s condensed consolidated balance sheet.
Note 5. Property and equipment
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
Useful Life
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Equipment and tooling
|
|
3 to 5 years
|
|
$
|
22,150
|
|
|
$
|
22,614
|
|
Computer equipment
|
|
3 to 5 years
|
|
|
2,888
|
|
|
|
2,892
|
|
Furniture and fixtures
|
|
10 years
|
|
|
749
|
|
|
|
737
|
|
Leasehold improvements
|
|
2 to 3 years
|
|
|
—
|
|
|
|
282
|
|
Total cost
|
|
|
|
|
25,787
|
|
|
|
26,525
|
|
Less: Accumulated depreciation
|
|
|
|
|
(17,473
|
)
|
|
|
(18,261
|
)
|
Property and equipment, net
|
|
|
|
$
|
8,314
|
|
|
$
|
8,264
|
|
Total depreciation expense was $0.9 million and $1.0 million for the three-month periods ended March 31, 2019 and 2020, respectively.
Note 6. Software
Software consisted of the following (in thousands):
|
|
|
|
December 31, 2019
|
|
|
March 31, 2020
|
|
|
|
Useful
Life
|
|
Gross carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net balance
|
|
|
Gross carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Acquired and Software
for internal use
|
|
3 to 7 years
|
|
$
|
15,870
|
|
|
$
|
(13,471
|
)
|
|
$
|
2,399
|
|
|
$
|
15,884
|
|
|
$
|
(13,650
|
)
|
|
$
|
2,234
|
|
Software marketed for
external sale
|
|
3 years
|
|
|
1,805
|
|
|
|
(809
|
)
|
|
|
996
|
|
|
|
1,911
|
|
|
|
(960
|
)
|
|
|
951
|
|
Total
|
|
|
|
$
|
17,675
|
|
|
$
|
(14,280
|
)
|
|
$
|
3,395
|
|
|
$
|
17,795
|
|
|
$
|
(14,610
|
)
|
|
$
|
3,185
|
|
Amortization of acquired and internal use software is computed using the straight-line method over an estimated useful life of generally three to seven years. Amortization expense recognized on acquired and internal use software is reflected in depreciation and amortization in the condensed consolidated statements of operations. Amortization expense was $0.1 million and $0.2 million for the three-month periods ended March 31, 2019 and 2020, respectively.
10
Amortization expense recognized on software to be sold or marketed externally was $0.1 million and $0.2 million for the three-month periods ended March 31, 2019 and 2020, respectively, and is included in cost of revenues on the condensed consolidated statements of operations.
Based on capitalized software assets at March 31, 2020, estimated amortization expense in future fiscal years is as follows (unaudited and in thousands):
Year ending December 31,
|
|
Acquired and
internal use
software
|
|
|
Software
marketed for
external use
|
|
|
Total
|
|
2020 (April - December)
|
|
$
|
550
|
|
|
$
|
462
|
|
|
$
|
1,012
|
|
2021
|
|
|
698
|
|
|
|
330
|
|
|
|
1,028
|
|
2022
|
|
|
449
|
|
|
|
140
|
|
|
|
589
|
|
2023
|
|
|
209
|
|
|
|
19
|
|
|
|
228
|
|
2024
|
|
|
115
|
|
|
|
—
|
|
|
|
115
|
|
Thereafter
|
|
|
213
|
|
|
|
—
|
|
|
|
213
|
|
Total amortization
|
|
$
|
2,234
|
|
|
$
|
951
|
|
|
$
|
3,185
|
|
Note 7. Goodwill and Intangible Assets
When the Company acquired the trade assets of Motorola Solutions, Inc.’s wireless point-to-point and point-to-multi-point businesses, the transaction generated goodwill and certain intangible assets. The goodwill associated with this transaction was recorded by Cambium Networks Corporation and allocated to Cambium Networks, Ltd. and Cambium Networks, Inc. using a revenue and asset allocation method. Although goodwill has been allocated to two operating subsidiaries, as noted in Note 16 – Segment information and revenues by geography, the Company operates as one operating segment and one reporting unit and therefore, goodwill is reported, and impairment testing performed, at the Cambium Networks Corporation consolidated level.
See Note 2 – Business combinations for further information regarding the acquisition completed during 2019.
The change in the carrying amount of goodwill for the year ended and three-month period ended was as follows (in thousands):
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
(unaudited)
|
|
Beginning balance
|
|
$
|
8,060
|
|
|
$
|
8,552
|
|
Additions attributable to acquisition
|
|
|
492
|
|
|
|
941
|
|
Ending balance
|
|
$
|
8,552
|
|
|
$
|
9,493
|
|
The Company tests goodwill and intangible assets for impairment annually on December 31 and more frequently if impairment indicators exist. Accordingly, the Company performs quarterly qualitative assessment of significant events and circumstances such as a reporting unit’s historical and current results, assumptions regarding future performance, strategic initiatives and overall economic factors, including the current global outbreak of the Coronavirus (or COVID-19) and macro-economic developments, to determine the existence of potential indicators of impairment and assess if it is more likely than not that the fair value of the reporting unit or intangible asset is less than their carrying value. If indicators of impairment are identified, a quantitative impairment test is performed.
Qualitative tests for the quarter did not indicate the existence of impairment indicators. Based on the operating results for the three-month period ended March 31, 2020 and other considerations, the Company believes that it is more likely than not that the enterprise value for its one reporting unit and the fair value of intangibles is still greater than their carrying values. Accordingly, no goodwill impairment indicators were present at March 31, 2020 that would necessitate an interim impairment assessment. The Company will continue to monitor business performance and economic conditions, particularly the impact of the COVID-19 pandemic, throughout 2020 to determine if an interim evaluation should be conducted.
11
The useful life, gross carrying value, accumulated amortization, and net balance for each major class of definite-lived intangible assets at each balance sheet date were as follows (in thousands):
|
|
|
|
December 31, 2019
|
|
|
March 31, 2020
|
|
|
|
Useful Life
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net balance
|
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Unpatented
technology
|
|
3 - 7 years
|
|
$
|
14,660
|
|
|
$
|
(14,195
|
)
|
|
$
|
465
|
|
|
$
|
14,660
|
|
|
$
|
(14,240
|
)
|
|
$
|
420
|
|
Customer
relationships
|
|
5 - 18 years
|
|
|
19,300
|
|
|
|
(5,631
|
)
|
|
|
13,669
|
|
|
|
19,300
|
|
|
|
(6,006
|
)
|
|
|
13,294
|
|
Patents
|
|
7 years
|
|
|
11,300
|
|
|
|
(11,300
|
)
|
|
|
—
|
|
|
|
11,300
|
|
|
|
(11,300
|
)
|
|
|
—
|
|
Trademarks
|
|
10 years
|
|
|
5,270
|
|
|
|
(4,304
|
)
|
|
|
966
|
|
|
|
5,270
|
|
|
|
(4,436
|
)
|
|
|
834
|
|
Total
|
|
|
|
$
|
50,530
|
|
|
$
|
(35,430
|
)
|
|
$
|
15,100
|
|
|
$
|
50,530
|
|
|
$
|
(35,982
|
)
|
|
$
|
14,548
|
|
Intangible assets are amortized over their expected useful life and none are expected to have a significant residual value at the end of their useful life. Intangible assets amortization expense was $0.3 million and $0.6 million for the three-month periods ended March 31, 2019 and 2020, respectively (unaudited).
Based on capitalized intangible assets as of March 31, 2020, estimated amortization expense amounts in future fiscal years are as follows (unaudited and in thousands):
Year ending December 31,
|
|
Amortization
|
|
2020 (April - December)
|
|
$
|
1,654
|
|
2021
|
|
|
2,118
|
|
2022
|
|
|
1,603
|
|
2023
|
|
|
1,498
|
|
2024
|
|
|
1,498
|
|
Thereafter
|
|
|
6,177
|
|
Total amortization
|
|
$
|
14,548
|
|
Note 8. Debt
As of March 31, 2020, the Company had $62.8 million outstanding under its current term loan facility and $10.0 million in borrowings under its revolving credit facility (unaudited).
During the three-month period ended March 31, 2020, the Company entered into the following financing transaction:
|
•
|
In March 2020, the Company received $10.0 million after fully drawing down on its revolving credit facility as a proactive measure to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic.
|
The following table reflects the current and noncurrent portions of the external debt facilities at December 31, 2019 and March 31, 2020 (in thousands):
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
(unaudited)
|
|
Term loan facility
|
|
$
|
65,250
|
|
|
$
|
62,750
|
|
Revolving credit facility
|
|
|
—
|
|
|
|
10,000
|
|
Less debt issuance costs
|
|
|
(1,638
|
)
|
|
|
(1,501
|
)
|
Total debt
|
|
|
63,612
|
|
|
|
71,249
|
|
Less current portion of term facility
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
Current portion of debt issuance costs
|
|
|
546
|
|
|
|
546
|
|
Total long-term external debt
|
|
$
|
54,158
|
|
|
$
|
61,795
|
|
12
Secured credit agreement
Both the term loan facility and the revolving credit facility mature on December 22, 2022. Following the completion of the Third Amendment (“Third Amendment”) to the December 21, 2017 credit agreement (as amended and restated, the “Credit Agreement”) entered into on June 28, 2019, the total term loan commitment was reduced to $70.0 million and the revolving agreement had an available commitment of $10.0 million.
Interest accrues on the outstanding principal amount of the term loan on a quarterly basis and is equal to the three-month USD LIBOR rate plus a base rate of 4.75%, 4.25%, or 4.00%. The rate on the term loan at December 31, 2019 was 6.85% and was reduced to 6.0% on March 31, 2020 as a result of resetting the LIBOR rate applicable to the loan. The interest rate set on the revolving credit facility drawn on March 31, 2020 was 6.0%. In addition to paying interest on the outstanding principal under the term loan facility, the Company is required to pay a commitment fee in respect of the unutilized commitments under the revolving credit facility, payable quarterly in arrears. The Company is also required to pay letter of credit fees on the maximum amount available to be drawn under all outstanding letters of credit in an amount equal to the applicable margin on LIBOR based borrowings under the revolving credit facility on a per annum basis, payable in arrears, as well as customer fronting fees for the issuance of letters of credit and agency fees.
The Company is permitted to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the Credit Agreement at any time without premium or penalty, other than customary breakage costs with respect to LIBOR based loans.
Maturities on the external debt outstanding at March 31, 2020 is as follows (unaudited and in thousands):
Year ending December 31,
|
|
|
|
|
2020 (April - December)
|
|
$
|
7,500
|
|
2021
|
|
|
10,000
|
|
2022
|
|
|
55,250
|
|
Total
|
|
$
|
72,750
|
|
Borrowings under the Credit Agreement are secured by a first-priority lien on substantially all of the Company’s assets, the equity interests in the Company’s subsidiaries, and any intercompany debt. The Credit Agreement contains certain customary affirmative and negative covenants that are usual and customary for companies with similar credit ratings. As of March 31, 2020, the Company was in compliance with all affirmative and negative covenants (unaudited).
The Company’s current debt covenant requirements for the next four quarters reflect the following limits, based on the time period noted, for compliance with the covenant.:
|
|
Quarter ending
|
Covenant
|
Criteria
|
June 30, 2020
|
|
September 30, 2020
|
|
December 31, 2020
|
|
March 31, 2020
|
Monthly minimum adjusted quick ratio
|
Min ratio
|
Non quarter-end months 1.00:1.00 Quarter-end months 1.15:1.00
|
Quarterly consolidated fixed charge coverage ratio
|
Min ratio
|
1.25:1.00
|
|
1.25:1.00
|
|
1.25:1.00
|
|
1.25:1.00
|
Quarterly consolidated fixed charge coverage ratio
|
Time period
|
Trailing twelve-month
|
Quarterly consolidated leverage ratio
|
Max ratio
|
2.75:1.00
|
|
2.50:1.00
|
|
2.50:1.00
|
|
2.25:1.00
|
Quarterly consolidated leverage ratio
|
Time period
|
Trailing twelve-month
|
Interest expense, including bank charges and amortization of debt issuance costs on the external debt, was $2.3 million and $1.3 million for the three-months ended March 31, 2019 and 2020, respectively (unaudited).
Note 9. Employee benefit plans
The Company’s employee benefit plans currently consist of a defined contribution plan in the United States and a separate defined contribution plan in the UK. The Company does not offer any other postretirement benefit plans, such as retiree medical and dental benefits or deferred compensation agreements to its employees or officers.
13
U.S. plan
U.S. regular, full-time employees are eligible to participate in the Cambium Networks, Inc. 401(k) Plan, which is a qualified defined contribution plan under section 401(k) of the Internal Revenue Service Code. Under the Cambium Networks, Inc. 401(k) Plan, the Company contributes a dollar-for-dollar match of the first 4% an employee contributes to the plan. Employees are eligible to participate on the first day of the month following their date of hire and begin receiving company contributions three-months after they become eligible to participate in the plan. Company matching contributions are made each pay period, but the funds do not vest until the employee’s second anniversary of employment with the Company. Employees are always fully vested in their own contributions. All contributions, including the Company match, are made in cash and invested in accordance with the participants’ investment elections. Contributions made by the Company under the Cambium Networks, Inc. 401(k) Plan were $0.2 million and $0.2 million for the three-month periods ended March 31, 2019 and 2020, respectively (unaudited).
UK plan
Regular, full-time UK employees are eligible to participate in the Cambium Networks Ltd. Stakeholder Pension Scheme, which is a qualified defined contribution plan. Employees are eligible to participate on the first of the month following receipt of their enrollment form, and eligible employees are automatically enrolled in the plan at a default employee contribution rate of 3% and a company contribution rate of 5% of the employee’s basic salary. The Company contribution rate increases by 1% for each additional 1% that the employee contributes up to a maximum of 7%. Company matching contributions vest immediately and employees are always vested in their own contributions. All contributions, including the Company match, are made in cash and deposited in the participant’s account each pay period. The total contributed by the Company under this plan was $0.1 million and $0.1 million for the three-month periods ended March 31, 2019 and 2020, respectively (unaudited).
Note 10. Other expense (income)
Other expense (income) was $0.1 million and $(0.2) million for the three-month periods ended March 31, 2019 and 2020, respectively, and represents foreign exchange gains and losses (unaudited).
Note 11. Share-based compensation
2019 Share incentive plan
In June 2019, the Company’s Board of Directors adopted, and its shareholders approved, the 2019 Share Incentive Plan (“2019 Plan”). The 2019 Plan provides for the grant of incentive share options, nonqualified share options, share appreciation rights, restricted share awards (“RSAs”), restricted share units (“RSUs”), other share-based awards and performance awards. The number of shares that were issued under the 2019 Plan was 3,400,000, in addition to the 240,037 RSAs and RSUs the Company granted in substitution for unvested Class B Units or phantom units in connection with the Company’s IPO based on a price of $12.00 (“Recapitalization Awards”). The share reserve under the 2019 Plan will be automatically increased on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2020 and continue until, and including, the fiscal year ending December 31, 2029. The number of shares added annually will be equal to the lowest of 1,320,000 shares, 5% of the number of the Company’s shares outstanding on the first day of such fiscal year, or an amount determined by the Board of Directors. On March 24, 2020, the Company registered 1,283,649 additional shares that may be issued under the 2019 Plan.
The Company’s employees, officers, directors, consultants, and advisors are eligible to receive awards under the 2019 Plan. Incentive share options, however, may only be granted to its employees. Participants in the 2019 Plan will also consist of persons to whom restricted share awards and restricted share units are granted in substitution for Class B Units in VCH, L.P. in connection with the Company’s IPO.
The following table summarizes changes in the number of shares available for grant under the Company’s equity incentive plans during the three-month period ended March 31, 2020:
|
|
Number of shares
|
|
Available for grant at December 31, 2019
|
|
|
426,022
|
|
2019 Share Incentive Plan
|
|
|
1,283,649
|
|
RSUs granted
|
|
|
(470,000
|
)
|
Shares withheld in settlement of taxes
|
|
|
7,932
|
|
Forfeitures
|
|
|
155,000
|
|
Available for grant at March 31, 2020
|
|
|
1,402,603
|
|
14
Share-based compensation
The following table shows total share-based compensation expense for the three-month periods ended March 31, 2019 and 2020 (unaudited and in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
(unaudited)
|
|
Cost of revenues
|
|
$
|
—
|
|
|
$
|
17
|
|
Research and development
|
|
|
—
|
|
|
|
368
|
|
Sales and marketing
|
|
|
—
|
|
|
|
232
|
|
General and administrative
|
|
|
—
|
|
|
|
194
|
|
Total share-based compensation expense
|
|
$
|
—
|
|
|
$
|
811
|
|
The Company began recognizing share-based compensation expense during the three-month period ended June 30, 2019, the period in which the triggering event associated with transactions completed in connection with the Company’s initial public offering occurred.
As of March 31, 2020, the Company estimates the pre-tax unrecognized compensation expense of $12.7 million related to all unvested share-based awards, including share options, restricted share units and restricted share awards will be recognized through the fourth quarter of 2023. The Company expects to satisfy the exercise of share options and future distributions of shares for restricted share units and restricted share awards by issuing new ordinary shares which have been reserved under the 2019 Plan.
The Company utilized a forfeiture rate of 5% during the three-month period ended March 31, 2020 for estimating the forfeitures of share options and restricted share units granted.
Share options
The following is a summary of option activity for the Company’s share incentive plans for the three-month period ended March 31, 2020 (unaudited):
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
Average
remaining
contractual
term (years)
|
|
|
Aggregate
intrinsic
value
|
|
Outstanding at December 31, 2019
|
|
|
2,920,500
|
|
|
$
|
10.40
|
|
|
|
9.6
|
|
|
$
|
1,932,000
|
|
Options forfeited
|
|
|
(155,000
|
)
|
|
$
|
10.72
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at March 31, 2020
|
|
|
2,765,500
|
|
|
$
|
10.38
|
|
|
|
9.4
|
|
|
$
|
—
|
|
Options exercisable at March 31, 2020
|
|
|
165,000
|
|
|
$
|
12.00
|
|
|
|
9.2
|
|
|
$
|
—
|
|
Options vested and expected to vest at March 31, 2020
|
|
|
2,578,105
|
|
|
$
|
10.42
|
|
|
|
9.4
|
|
|
$
|
—
|
|
Share options typically have a contractual term of ten years from grant date.
At March 31, 2020, the aggregate intrinsic value of options exercisable under the Company’s share incentive plans was $0.00. The Company had 0 options exercised during the three-month period ended March 31, 2020.
At March 31, 2020, there was $8.9 million in unrecognized pre-tax share-based compensation expense, net of estimated forfeitures, related to unvested share option awards. The unrecognized share-based compensation expense is expected to be recognized through the fourth quarter of 2023.
15
The fair value of options granted during the three months ended March 31, 2020 were estimated on the date of grant using the Black-Scholes option pricing model. The fair value of share options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of share options are estimated using the following weighted-average assumptions (unaudited):
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
Expected dividend yield
|
|
|
—
|
|
Risk-free interest rate
|
|
|
1.80
|
%
|
Weighted-average expected volatility
|
|
|
40.8
|
%
|
Expected term (in years)
|
|
|
6.1
|
|
Weighted average grant-date fair value per share of options granted
|
|
$
|
4.34
|
|
Restricted shares
The following is a summary of restricted shares activity for the Company’s share incentive plans for the three-month period ended March 31, 2020 (unaudited):
|
|
Units
|
|
|
Weighted
average
grant date
fair value
|
|
RSU and RSA balance at December 31, 2019
|
|
|
257,119
|
|
|
$
|
12.00
|
|
RSUs and RSAs granted
|
|
|
470,000
|
|
|
$
|
4.50
|
|
RSUs and RSAs vested
|
|
|
(8,704
|
)
|
|
$
|
12.00
|
|
RSUs and RSAs forfeited
|
|
|
(5,078
|
)
|
|
$
|
12.00
|
|
RSU and RSA balance at March 31, 2020
|
|
|
713,337
|
|
|
$
|
7.06
|
|
RSUs and RSAs expected to vest at March 31, 2020
|
|
|
713,337
|
|
|
$
|
7.06
|
|
During the three-month period ended March 31, 2020, 470,000 RSUs were granted under the Company’s 2019 Share Incentive Plan and 8,704 RSUs vested. The Company withheld 1,480 of those shares to pay the employees’ portion of the minimum payroll withholding taxes.
As of March 31, 2020, there was $3.8 million in unrecognized pre-tax compensation expense, net of estimated forfeitures, related to unvested share awards. The unrecognized compensation expense is expected to be recognized through the second quarter of 2029.
Employee share purchase plan
In June 2019, the Company’s Board of Directors adopted, and its shareholders approved, the Employee Share Purchase Plan (“ESPP”). The ESPP was effective on June 25, 2019; however, no offering period or purchase period under the ESPP has begun as of March 31, 2020 and will begin when determined by the Company’s Board of Directors. During 2019, a total of 550,000 shares were made available under the ESPP. Per the ESPP, the number of shares that will be available for sale also includes an annual increase on the first day of each fiscal year beginning in 2020, equal to the lesser of: 275,000 shares; 1% of the outstanding shares as of the last day of the immediately preceding fiscal year, or such other amount as the administrator may determine. The purchase price of the shares will be 85% of the lower of the fair market value of our shares on the first trading day of each offering period or on the purchase date. On March 24, 2020, the Company registered 256,730 additional shares for the year ending December 31, 2020 that may be issued under the ESPP.
16
Note 12. Share capital - shares
The following table reflects the share capital activity:
|
|
Number of
shares
|
|
|
Value
(in thousands)
|
|
Balance at December 31, 2019
|
|
|
25,672,983
|
|
|
$
|
3
|
|
Shares withheld for net settlement of shares issued
|
|
|
(7,932
|
)
|
|
|
—
|
|
Issuance of vested shares
|
|
|
15,154
|
|
|
|
—
|
|
Balance at March 31, 2020
|
|
|
25,680,205
|
|
|
$
|
3
|
|
As of March 31, 2020, no dividends have been declared or paid.
|
|
|
|
|
|
|
|
|
Note 13. Earnings per share
Basic net earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding during the period. Diluted net earnings per share is computed by giving effect to all potentially dilutive ordinary share equivalents outstanding for the period. For purposes of this calculation, share options, RSUs, and RSAs are considered to be ordinary share equivalents but are excluded from the calculation of diluted earnings (loss) per share when including them would have an anti-dilutive effect. The following table sets forth the computation of basic and diluted net earnings (loss) per share (unaudited and in thousands, except for share and per share data):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,862
|
|
|
$
|
(838
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in computing net
income (loss), basic and diluted
|
|
|
13,600,411
|
|
|
|
25,677,179
|
|
Net income (loss) per share, basic and diluted
|
|
$
|
0.14
|
|
|
$
|
(0.03
|
)
|
The following outstanding shares of ordinary share equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect (unaudited and in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
(unaudited)
|
|
Share options
|
|
|
—
|
|
|
|
2,766
|
|
Restricted shares (RSUs and RSAs)
|
|
|
—
|
|
|
|
713
|
|
Total
|
|
|
—
|
|
|
|
3,479
|
|
Note 14. Income taxes
The Company’s provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state and foreign income. The Company recorded a provision for income taxes of $0.4 million and $0.1 million for the three-month periods ended March 31, 2019 and 2020, with an effective tax rate of 18.2% and (10.8) %, respectively. The reduction of the effective tax rate from 18.2% for the three-month period ended March 31, 2019 to (10.8)% for the three-month period ended March 31, 2020 was primarily driven by an increase in losses in a foreign jurisdiction that is excluded in calculating the quarterly income tax provision and overall lower earnings resulting from lower revenues. For the three-month period ended March 31, 2020, the Company’s effective tax rate of (10.8)% was different from the statutory rate of 21.0% primarily due to expected losses in a foreign jurisdiction for which no tax benefit will be recognized.
17
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into U.S. law to provide emergency aid and health care for individuals and businesses affected by the COVID-19 pandemic, generally supporting the U.S. economy. The CARES Act, among other things, includes provisions related to deferral of the employer portion of social security payments, refundable payroll tax credits, net operating loss carryback limitations, modifications to the net interest deduction thresholds, and technical corrections to tax depreciation methods for qualified improvement property. While the Company is still assessing the impact of the CARES Act, it does not currently expect it to have a material impact on its consolidated financial condition or results of operations.
Note 15. Commitments and contingencies
In accordance with ASC 460, Guarantees, the Company recognizes the fair value for guarantee and indemnification arrangements it issues or modifies, if these arrangements are within the scope of the interpretation. In addition, the Company must continue to monitor the conditions that are subject to the guarantees and indemnifications in order to identify if a loss has incurred. If the Company determines it is probable that a loss has occurred, then any such estimated loss would be recognized under those guarantees and indemnifications and would be recognized in the Company’s condensed consolidated statements of operations and corresponding condensed consolidated balance sheets during that period.
Indemnification
The Company generally indemnifies its distributors, value added reseller and network operators against claims brought by a third party to the extent any such claim alleges that the Company’s product infringes a patent, copyright or trademark or violates any other proprietary rights of that third party. Although the Company generally tries to limit the maximum amount of potential future liability under its indemnification obligations, in certain agreements this liability may be unlimited. The maximum potential amount of future payments the Company may be required to make under these indemnification agreements is not estimable.
The Company indemnifies its directors and officers and select key employees, including key employees serving as directors or officers of the Company’s subsidiaries, for certain events or occurrences, subject to certain limits, while the director or officer is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the director’s or officer’s term of service. The Company may terminate the indemnification agreements with its directors, officers or key employees upon the termination of their services as directors or officers of the Company or its subsidiaries, or the termination of activities for which indemnification has been provided, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that limits it exposure. The Company believes the fair value of these indemnification agreements is minimal.
Warranties
The Company offers a standard warranty on its products, with the term depending on the product, and records a liability for the estimated future costs associated with potential warranty claims. The Company’s responsibility under its standard warranty is the repair or replacement of in-warranty defective product, or to credit the purchase price of the defective product, at its discretion, without charge to the customer. The Company’s estimate of future warranty costs is largely based on historical experience factors including product failure rates, material usage, and service delivery cost incurred in correcting product failures. The standard warranty is included in either Other current liabilities or Other noncurrent liabilities on its condensed consolidated balance sheets, depending on the time period covered by the warranty. The Company also offers an extended warranty for purchase that represents a future performance obligation for the Company. The extended warranty is included in deferred revenues (both current and noncurrent) on the condensed consolidated balance sheets and recognized on a straight-line basis over the term of the extended warranty. The warranty costs are reflected in the Company’s condensed consolidated statements of operations within cost of revenues.
Legal proceedings
Third parties may from time to time assert legal claims against the Company. Except as set forth below, there is no pending or threatened legal proceedings to which the Company is a party to, and in the Company’s opinion, is likely to have a material adverse effect on its financial condition or results of operations.
On August 7, 2018, Ubiquiti Networks, Inc. filed a lawsuit in the United States District Court, Northern District of Illinois, against the Company, two of its employees, one of its distributors and one of its end users. The complaint alleged that the Company’s development of and sales and promotion of its Elevate software as downloaded on a Ubiquiti device violates the Computer Fraud and Abuse Act and Illinois Computer Crimes Prevention Law, the Digital Millennium Copyright Act and the Copyright Act and constitutes misrepresentation and false advertising and false designation of origin in violation of the Lanham Act and state competition laws, breach of contract, tortious interference with contract and unfair competition, and trademark infringement and common law misappropriation. The complaint also asserted additional claims against all defendants alleging that the development and sales of Elevate violated the Racketeer Influenced and Corrupt Organizations Act. On May 22, 2019, the Court issued its order dismissing
18
Ubiquiti’s complaint without prejudice. On June 18, 2019, Ubiquiti filed its First Amended Complaint (FAC). The FAC made substantially the same claims against the same parties with the exception that the FAC does not include claims for violation of the Illinois Computer Crime Prevention Law, Infringement of Registered Trademarks, False Designation of Origin, and Common Law Trademark Misappropriation that were included in the initial complaint. The Company filed a motion to dismiss the FAC on July 10, 2019. On November 14, 2019 the Court issued an order denying its motion to dismiss. The Court ordered that fact discovery will close on August 18, 2020 and that dispositive motions must be filed prior to December 22, 2020. The Court referred the case to a magistrate judge for a potential settlement conference, the timing of which is currently unknown as a result of the closure of courts due to the applicable regional shutdowns implemented in response to the COVID-19 pandemic. The Company believes Ubiquiti’s claims are without merit and plans to vigorously defend against these claims; however, there can be no assurance that it will prevail in the lawsuit. The Company cannot currently estimate the possible loss or range of losses, if any, that it may experience in connection with this litigation.
Note 16. Segment information and revenues by geography
The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer. The Company’s CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, the Company determined that it operates as one operating segment and one reporting unit.
Revenues by product were as follows (unaudited and in thousands, except percentages):
|
Three Months Ended March 31,
|
|
|
2019
|
|
|
2020
|
|
Point-to-Multi-Point
|
$
|
42,327
|
|
|
|
62
|
%
|
|
$
|
34,867
|
|
|
|
58
|
%
|
Point-to-Point
|
|
19,634
|
|
|
|
29
|
%
|
|
|
13,110
|
|
|
|
22
|
%
|
Wi-Fi
|
|
5,586
|
|
|
|
8
|
%
|
|
|
11,481
|
|
|
|
19
|
%
|
Other
|
|
565
|
|
|
|
1
|
%
|
|
|
971
|
|
|
|
1
|
%
|
Total Revenues
|
$
|
68,112
|
|
|
|
100
|
%
|
|
$
|
60,429
|
|
|
|
100
|
%
|
The Company’s products are predominately distributed through a third-party logistics provider in the United States, Netherlands and China. The Company has determined the geographical distribution of product revenues based upon the ship-to destinations.
Revenues by geography were as follows (unaudited and in thousands, except percentages):
|
Three Months Ended March 31,
|
|
|
2019
|
|
|
2020
|
|
North America
|
$
|
34,364
|
|
|
|
50
|
%
|
|
$
|
31,035
|
|
|
|
51
|
%
|
Europe, Middle East and Africa
|
|
21,970
|
|
|
|
32
|
%
|
|
|
18,744
|
|
|
|
31
|
%
|
Caribbean and Latin America
|
|
7,099
|
|
|
|
10
|
%
|
|
|
5,230
|
|
|
|
9
|
%
|
Asia Pacific
|
|
4,679
|
|
|
|
8
|
%
|
|
|
5,420
|
|
|
|
9
|
%
|
Total Revenues
|
$
|
68,112
|
|
|
|
100
|
%
|
|
$
|
60,429
|
|
|
|
100
|
%
|
Note 17. Revenues from contracts with customers
Revenues consist primarily of revenues from the sale of hardware products with essential embedded software. Revenues also include limited amounts for software products and extended warranty on hardware products. Substantially all products are sold through distributors and other channel partners, such as resellers and systems integrators.
In accordance with ASC 606, Revenue From Contracts with Customers, the Company recognizes revenue to reflect the transfer of control of promised products or services to a customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for products or services. Refer to Note 16 - Segment Information, for further details, including disaggregation of revenue based on product line and geographic location.
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
19
The Company identifies its distinct performance obligations under each contract. A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. Hardware products with essential embedded software, software products, and purchased extended warranty on hardware products have been identified as separate and distinct performance obligations.
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring products or services to a customer. Exchanges made as part of the Company’s stock rotation program meet the definition of a right of return under ASC 606. An adjustment to revenue is made to adjust the transaction price to exclude the consideration related to products expected to be returned. The Company records an asset at the carrying amount of the estimated stock returns and a liability for the estimated amount expected to be refunded to the customer. The transaction price also excludes other forms of consideration provided to the customer, such as volume-based rebates and cooperative marketing allowances.
The Company recognizes revenue when, or as, it satisfies a performance obligation by transferring control of a promised product or service to a customer. Revenue from hardware products with embedded software transferred at a point in time is recognized when obligations under the terms of the contract are satisfied. Generally, this occurs when control of the asset is transferred, which is at the time of shipment. Software revenue is from perpetual license software and is recognized at the point in time that the customer is able to use or benefit from the software. Extended warranty on hardware products is a performance obligation that is satisfied over time, beginning on the effective date of the warranty period and ending on the expiration of the warranty period. The Company recognizes revenue on extended warranties on a straight-line basis over the warranty period.
The Company enters into revenue arrangements that may consist of multiple performance obligations, such as hardware with embedded essential software and extended warranty. The Company allocates the transaction price to each performance obligation on a relative standalone selling price basis for each distinct product or service in the contract. The best evidence of standalone selling price is the observable price of a product or service when the Company sells that product or service separately in similar circumstances and to simlar customers. If a standalone selling price is not directly observable, the Company estimates the transaction price allocated to each performance obligation using the expected costs plus a margin approach.
Contract Balances
The following table summarizes contract balances as of December 31, 2019 and March 31, 2020 (in thousands):
|
|
December 31,
2019
|
|
|
March 31,
2020
|
|
|
|
|
|
(unaudited)
|
|
Trade accounts receivable, net of allowance for credit losses
|
|
$
|
58,254
|
|
|
$
|
61,370
|
|
Deferred revenue - current
|
|
|
7,430
|
|
|
|
6,331
|
|
Deferred revenue - noncurrent
|
|
|
4,852
|
|
|
|
4,337
|
|
Refund liability
|
|
$
|
2,223
|
|
|
$
|
3,052
|
|
Trade accounts receivable include amounts billed and currently due from customers. Amounts are billed in accordance with contractual terms and are recorded at face amount less an allowance for credit losses.
The Company had one customer representing more than 10% of trade receivables at December 31, 2019 and one customer representing more than 10% of trade receivables as of March 31, 2020.
Deferred revenue consists of amounts due or received from customers in advance of the Company satisfying performance obligations under contractual arrangements and generally relates to extended warranty on hardware products. Deferred revenue is classified as current or noncurrent based on the timing of when revenue will be recognized. The changes in deferred revenue were due to normal timing differences between the Company’s performance and the customers’ payment.
The refund liability is the estimated amount expected to be refunded to customers in relation to product exchanges made as part of the Company’s stock rotation program and returns that have been authorized, but not yet received by the Company. It is included within Other current liabilities in the Condensed Consolidated Balance Sheets.
20
Remaining performance obligations
Remaining performance obligations represent the revenue that is expected to be recognized in future periods related to performance obligations included in a contract that are unsatisfied, or partially satisfied, as of the end of a period. As of December 31, 2019, deferred revenue (current and noncurrent) of $12.3 million represents the Company’s remaining performance obligations, of which $7.4 million is expected to be recognized within one year, with the remainder to be recognized thereafter. As of March 31, 2020, deferred revenue (current and noncurrent) of $10.7 million represents the Company’s remaining performance obligations, of which $6.3 million is expected to be recognized within one year, with the remainder to be recognized thereafter(unaudited).
Revenue recognized during the three-month period ended March 31, 2020 which was previously included in deferred revenues as of December 31, 2019 was $2.7 million compared to $1.3 million of revenue recognized during the three-month period ended March 31, 2019 which was previously included in deferred revenues as of December 31, 2018 (unaudited). The increase is driven by the addition of deferred revenue related to the Xirrus acquisition (See Note 2 – Business Combinations).
Cost to obtain a contract
Sales commissions are incremental costs of obtaining a contract. The Company has elected to recognize these expenses as incurred due to the amortization period of these costs being one year or less.
Note 18. Leases
Right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The Company’s lease payments are typically fixed or contain fixed escalators. The Company’s leases typically include certain lock-in periods and renewal options to extend the leases, but does not consider options to extend the lease it is not reasonably certain to exercise. The Company elected the practical expedient to not separate the lease and non-lease components of its leases and currently has no leases with options to purchase the leased property.
The components of lease expense were as follows and are included in general and administrative expense (in thousands):
|
|
Three Months
Ended
March 31,
2019
|
|
|
Three Months
Ended
March 31,
2020
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Operating lease cost
|
|
$
|
586
|
|
|
$
|
644
|
|
Short-term lease cost
|
|
|
59
|
|
|
|
27
|
|
Variable lease costs
|
|
|
61
|
|
|
|
109
|
|
Total lease expense
|
|
$
|
706
|
|
|
$
|
780
|
|
Supplemental balance sheet information related to leases were as follows (in thousands, except lease term and discount rate):
|
|
Balance Sheet Caption
|
|
December 31, 2019
|
|
|
March 31, 2020
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease assets
|
|
$
|
6,872
|
|
|
$
|
6,443
|
|
Current lease liabilities
|
|
Other current liabilities
|
|
$
|
2,125
|
|
|
$
|
2,208
|
|
Noncurrent lease liabilities
|
|
Noncurrent operating lease liabilities
|
|
$
|
5,335
|
|
|
$
|
4,724
|
|
Weighted average remaining lease
term (years):
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
3.98
|
|
|
|
3.75
|
|
Weighted average discount rate:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
21
Supplemental cash flow information related to leases were as follows (in thousands):
|
|
Three months
ended
March 31,
|
|
|
Three months
ended
March 31,
|
|
|
|
2019
|
|
|
2020
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement
of lease liabilities
|
|
$
|
610
|
|
|
$
|
747
|
|
The Company’s lease terms range from one to seven years and may include options to extend the lease by one to four years.
Remaining maturities on lease liabilities as of March 31, 2020 is as follows (unaudited and in thousands):
|
|
Operating leases
|
|
2020 (excludes the three months ended March 31, 2020)
|
|
$
|
2,038
|
|
2021
|
|
|
2,471
|
|
2022
|
|
|
1,349
|
|
2023
|
|
|
1,292
|
|
2024
|
|
|
537
|
|
Thereafter
|
|
|
448
|
|
Total lease payments
|
|
|
8,135
|
|
Less: interest
|
|
|
1,203
|
|
Present value of lease liabilities
|
|
$
|
6,932
|
|
As of March 31, 2020, the Company does not have any additional leases for new office facilities that have not yet commenced.
Note 19. Related party transactions
The Company follows ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal.
For the three-month periods ended March 31, 2019 and 2020, Vector Capital Management, LP, an entity related to Holdings, charged $0.1 million and $0.0 million, respectively, for management and oversight fees. In connection with the IPO in June 2019, and the payment all outstanding management and oversight fees, the Vector Capital Management Agreement was terminated, and no further management and oversight fees are payable by the Company.
22
Note 20. Restructuring
On November 7, 2019, the Company announced a corporate restructuring to better align Cambium’s cost structure with current economic conditions and position the Company to achieve long-term targets and operating growth. The restructuring only affected personnel, including contract employees, and was completed in 2019. The Company incurred restructuring charges of approximately $0.7 million, of which $0.1 million was included in Accrued liabilities at December 31, 2019 in the condensed consolidated balance sheets. The $0.1 million was paid in the first quarter of 2020.
On February 10, 2020, the Company announced it was taking additional steps in connection with the abovementioned restructuring. The additional restructuring also only affects personnel, including contract employees, and is expected to be complete by the end of 2020. In the three months ended March 31, 2020, the Company recorded restructuring charges of approximately $1.2 million, consisting of involuntary employee termination costs, and is included in all operating expense lines in the Company’s condensed consolidated statements of operations. As of March 31, 2020, the Company paid approximately $1.1 million of this amount, leaving a restructuring liability of $0.1 million included in Accrued liabilities in the condensed consolidated balance sheets. The remaining amount is expected to be paid in the second quarter of 2020.
The following table reflects the restructuring liability activity for the three-month period ended March 31, 2020 (unaudited and in thousands):
Restructuring liability at December 31, 2019
|
|
$
|
138
|
|
Restructuring charges
|
|
|
1,152
|
|
Cost paid
|
|
|
(1,150
|
)
|
Restructuring liability at March 31, 2020
|
|
$
|
140
|
|
23