amba-10q_20181031.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 October 31, 2018

OR

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

For the transition period from             to             

Commission file number: 001-35667

 

AMBARELLA, INC.

(Exact name of registrant as specified in its charter)

 

 

Cayman Islands

 

98-0459628

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

3101 Jay Street

Santa Clara, California

 

95054

(Address of principal executive offices)

 

(Zip Code)

(408) 734-8888

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

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

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

The number of ordinary shares, $0.00045 par value, of the Registrant, outstanding as of December 3, 2018 was 32,051,011 shares.

 

 

 

 


AMBARELLA, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

3

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets at October 31, 2018 and January 31, 2018

 

3

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended October 31, 2018 and 2017

 

4

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended October 31, 2018 and 2017

 

5

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended October 31, 2018 and 2017

 

6

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

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

 

25

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

Item 4.

Controls and Procedures

 

35

 

 

 

 

PART II. OTHER INFORMATION

 

36

 

 

 

 

Item 1.

Legal Proceedings

 

36

 

 

 

 

Item 1A.

Risk Factors

 

36

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

60

 

 

 

 

Item 6.

Exhibits

 

60

 

 

 

 

Signatures

 

62

 

 

 

 

2


PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

AMBARELLA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

 

 

October 31,

 

 

January 31,

 

 

 

2018

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

212,338

 

 

$

346,672

 

Marketable securities

 

 

136,279

 

 

 

87,919

 

Accounts receivable, net

 

 

32,417

 

 

 

31,294

 

Inventories

 

 

23,328

 

 

 

23,383

 

Restricted cash

 

 

11

 

 

 

9

 

Prepaid expenses and other current assets

 

 

3,309

 

 

 

4,006

 

Total current assets

 

 

407,682

 

 

 

493,283

 

Property and equipment, net

 

 

6,746

 

 

 

6,449

 

Deferred tax assets, non-current

 

 

3,927

 

 

 

3,642

 

Intangible assets, net

 

 

11,222

 

 

 

14,417

 

Goodwill

 

 

26,601

 

 

 

26,601

 

Other non-current assets

 

 

2,470

 

 

 

2,257

 

Total assets

 

$

458,648

 

 

$

546,649

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

11,134

 

 

 

19,815

 

Accrued and other current liabilities

 

 

25,615

 

 

 

32,178

 

Income taxes payable

 

 

755

 

 

 

936

 

Deferred revenue, current

 

 

405

 

 

 

307

 

Total current liabilities

 

 

37,909

 

 

 

53,236

 

Other long-term liabilities

 

 

9,600

 

 

 

11,226

 

Total liabilities

 

 

47,509

 

 

 

64,462

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preference shares, $0.00045 par value per share, 20,000,000 shares

   authorized and no shares issued and outstanding at October 31, 2018 and

   January 31, 2018, respectively

 

 

 

 

 

 

Ordinary shares, $0.00045 par value per share, 200,000,000 shares

   authorized at October 31, 2018 and January 31, 2018, respectively;

   32,149,520 shares issued and outstanding at October 31, 2018; 33,489,614

   shares issued and outstanding at January 31, 2018

 

 

14

 

 

 

15

 

Additional paid-in capital

 

 

175,906

 

 

 

221,186

 

Accumulated other comprehensive loss

 

 

(185

)

 

 

(279

)

Retained earnings

 

 

235,404

 

 

 

261,265

 

Total shareholders’ equity

 

 

411,139

 

 

 

482,187

 

Total liabilities and shareholders' equity

 

$

458,648

 

 

$

546,649

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

3


AMBARELLA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended October 31,

 

 

Nine Months Ended October 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

57,286

 

 

$

89,062

 

 

$

176,698

 

 

$

224,827

 

Cost of revenue

 

 

22,701

 

 

 

32,448

 

 

 

69,208

 

 

 

82,445

 

Gross profit

 

 

34,585

 

 

 

56,614

 

 

 

107,490

 

 

 

142,382

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

31,653

 

 

 

29,796

 

 

 

95,446

 

 

 

83,936

 

Selling, general and administrative

 

 

12,354

 

 

 

11,700

 

 

 

38,098

 

 

 

35,406

 

Total operating expenses

 

 

44,007

 

 

 

41,496

 

 

 

133,544

 

 

 

119,342

 

Income (loss) from operations

 

 

(9,422

)

 

 

15,118

 

 

 

(26,054

)

 

 

23,040

 

Other income, net

 

 

993

 

 

 

319

 

 

 

2,517

 

 

 

696

 

Income (loss) before income taxes

 

 

(8,429

)

 

 

15,437

 

 

 

(23,537

)

 

 

23,736

 

Provision for income taxes

 

 

592

 

 

 

3,713

 

 

 

2,367

 

 

 

6,145

 

Net income (loss)

 

$

(9,021

)

 

$

11,724

 

 

$

(25,904

)

 

$

17,591

 

Net income (loss) per share attributable to ordinary shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.28

)

 

$

0.35

 

 

$

(0.79

)

 

$

0.53

 

Diluted

 

$

(0.28

)

 

$

0.34

 

 

$

(0.79

)

 

$

0.51

 

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

   shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

32,171,890

 

 

 

33,128,761

 

 

 

32,908,614

 

 

 

33,203,432

 

Diluted

 

 

32,171,890

 

 

 

34,358,893

 

 

 

32,908,614

 

 

 

34,538,968

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

4


AMBARELLA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited, in thousands)

 

 

 

Three Months Ended October 31,

 

 

Nine Months Ended October 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

 

$

(9,021

)

 

$

11,724

 

 

$

(25,904

)

 

$

17,591

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on investments

 

 

26

 

 

 

(34

)

 

 

94

 

 

 

(46

)

Other comprehensive income (loss), net of tax

 

 

26

 

 

 

(34

)

 

 

94

 

 

 

(46

)

Comprehensive income (loss)

 

$

(8,995

)

 

$

11,690

 

 

$

(25,810

)

 

$

17,545

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

5


AMBARELLA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

Nine Months Ended October 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(25,904

)

 

$

17,591

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

1,901

 

 

 

1,306

 

Amortization of intangible assets

 

 

3,454

 

 

 

2,018

 

Amortization/accretion of marketable securities

 

 

(311

)

 

 

152

 

Stock-based compensation

 

 

44,937

 

 

 

42,075

 

Other non-cash items, net

 

 

358

 

 

 

93

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,123

)

 

 

(8,601

)

Inventories

 

 

55

 

 

 

(952

)

Prepaid expenses and other current assets

 

 

700

 

 

 

380

 

Deferred tax assets

 

 

(285

)

 

 

(762

)

Other assets

 

 

(213

)

 

 

10

 

Accounts payable

 

 

(8,681

)

 

 

6,253

 

Accrued liabilities

 

 

(5,192

)

 

 

(2,460

)

Income taxes payable

 

 

(181

)

 

 

1,879

 

Deferred revenue

 

 

140

 

 

 

(2,206

)

Other long-term liabilities

 

 

843

 

 

 

3,518

 

Net cash provided by operating activities

 

 

10,498

 

 

 

60,294

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of investments

 

 

(139,816

)

 

 

(53,786

)

Sales of investments

 

 

50,618

 

 

 

8,500

 

Maturities of investments

 

 

40,928

 

 

 

34,460

 

Purchase of property and equipment

 

 

(2,380

)

 

 

(2,402

)

Net cash used in investing activities

 

 

(50,650

)

 

 

(13,228

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Stock repurchase

 

 

(96,419

)

 

 

(51,505

)

Proceeds from exercise of stock options and employee stock purchase plan

 

 

4,722

 

 

 

4,961

 

Payment for intangible asset

 

 

(2,483

)

 

 

(2,460

)

Net cash used in financing activities

 

 

(94,180

)

 

 

(49,004

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(134,332

)

 

 

(1,938

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

346,681

 

 

 

322,880

 

Cash, cash equivalents and restricted cash at end of period

 

$

212,349

 

 

$

320,942

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

1,263

 

 

$

762

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Unpaid liabilities related to intangible and fixed assets additions

 

$

299

 

 

$

10,731

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

6


AMBARELLA, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Organization and Summary of Significant Accounting Policies

Organization

Ambarella, Inc. (the “Company”) was incorporated in the Cayman Islands on January 15, 2004. The Company is a leading developer of low-power, high-definition (HD) and Ultra HD video compression and image processing solutions, and computer vision solutions. The Company combines its processor design capabilities with its expertise in video and image processing, algorithms and software to provide a technology platform that is designed to be easily scalable across multiple applications and enable rapid and efficient product development. The Company’s system-on-a-chip, or SoC, designs fully integrated high-definition video processing, image processing, analysis, audio processing and system functions onto a single chip, delivering exceptional video and image quality, differentiated functionality and low power consumption. Currently the Company is combining advanced computer vision technology with its state-of-the-art video to enable the next generation of intelligent cameras, advanced driver assistance systems (ADAS) and autonomous vehicles.

The Company sells its solutions to leading original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs, globally.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and notes normally provided in audited financial statements. The accounting policies are described in the “Notes to Consolidated Financial Statements” in the Annual Report on Form 10-K for the 2018 fiscal year filed with the SEC on March 30, 2018 (the “Form 10-K”) and updated, as necessary, in this Form 10-Q. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair statement have been included. The results of operations for any interim period are not necessarily indicative of, nor comparable to, the results of operations for any other interim period or for a full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Form 10-K.

Basis of Consolidation

The Company’s fiscal year ends on January 31. The condensed consolidated financial statements of the Company and its subsidiaries have been prepared in conformity with U.S. GAAP. All intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported periods. Actual results could differ from those estimates.

On an ongoing basis, management evaluates its estimates and assumptions, including those related to (i) the collectability of accounts receivable; (ii) write down of excess and obsolete inventories; (iii) intangible assets and goodwill; (iv) the estimated useful lives of long-lived assets; (v) impairment of long-lived assets and financial instruments; (vi) warranty obligations; (vii) the valuation of stock-based compensation awards and financial instruments; (viii) the probability of performance objectives achievement; (ix) the realization of tax assets and estimates of tax liabilities, including reserves for uncertain tax positions; and (x) the recognition and disclosure of contingent liabilities. These estimates and assumptions are based on historical experience and on various other factors which the Company believes to be reasonable under the circumstances. The Company may engage third-party valuation specialists to assist with estimates related to the valuation of financial instruments, assets and stock awards associated with various contractual arrangements. Such estimates often require the selection of appropriate valuation methodologies and significant judgment. Actual results could differ from these estimates under different assumptions or circumstances and such differences could be material.

 

7


Concentration of Risk

The Company’s products are manufactured, assembled and tested by third-party contractors located primarily in Asia. The Company does not have long-term agreements with these contractors. A significant disruption in the operations of one or more of these contractors would impact the production of the Company’s products which could have a material adverse effect on its business, financial condition and results of operations.

A substantial portion of the Company’s revenue is derived from sales through its distributors, Wintech Microelectronics Co., Ltd., or Wintech, which serves as its non-exclusive sales representative in Asia other than Japan, and directly to one ODM customer, Chicony Electronics Co., Ltd., or Chicony. Termination of the relationships with these customers could result in a temporary or permanent loss of revenue. Furthermore, any credit issues from these customers could impair their abilities to make timely payment to the Company. See Note 15 for additional information regarding revenue and credit concentration with these customers.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. The Company maintains its cash primarily in checking accounts with reputable financial institutions. Cash deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on deposits of its cash. In order to limit the exposure of each investment, the cash equivalents and marketable securities consist primarily of money market funds, certificates of deposit, asset-backed securities, commercial paper, U.S. government securities and debt securities of corporations which management assesses to be highly liquid. The Company does not hold or issue financial instruments for trading purposes.

The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and customers’ credit worthiness. The Company regularly monitors collections and payments from its customers.

Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments with original maturities of less than three months at the time of purchase to be cash equivalents. Investments that are highly liquid with original maturities at the time of purchase greater than three months are considered marketable securities.

The Company classifies these investments as “available-for-sale” securities carried at fair value, based on quoted market prices of similar assets, with the unrealized gains or losses reported, net of tax, as a separate component of shareholders’ equity and included in accumulated other comprehensive loss in the condensed consolidated balance sheets. The amortization of premiums and accretion of discounts and the realized gains and losses are both recorded in other income, net, in the condensed consolidated statements of operations. The Company reviews its investments for possible other-than-temporary impairments on a regular basis. If any loss on investment is believed to be other-than-temporary, a charge will be recorded and a new cost basis in the investment will be established. In evaluating whether a loss on a security is other-than-temporary, the Company considers the following factors: (i) general market conditions, (ii) the duration and extent to which the fair value is less than cost and (iii) the Company’s intent and ability to hold the investment.

For securities in an unrealized loss position which is deemed to be other-than-temporary, the difference between the security’s then-current amortized cost basis and fair value is separated into (i) the amount of the impairment related to the credit loss (i.e., the credit loss component) and (ii) the amount of the impairment related to all other factors (i.e., the non-credit loss component). The credit loss component is recognized in earnings. The non-credit loss component is recognized in accumulated other comprehensive loss. Due to the relative short term nature of the investments, there have been no other-than-temporary impairments recorded to date.

 

8


Restricted Cash

Amounts included in restricted cash represent those required to be set aside to secure certain transactions in a foreign entity. As of October 31, 2018 and January 31, 2018, the restricted cash was immaterial. The following table presents cash, cash equivalents and restricted cash reported on the condensed consolidated balance sheets and the sums are presented on the condensed consolidated statements of cash flows:

 

 

 

As of

 

 

 

October 31, 2018

 

 

January 31, 2018

 

 

October 31, 2017

 

 

January 31, 2017

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

212,338

 

 

$

346,672

 

 

$

320,933

 

 

$

322,872

 

Restricted cash

 

 

11

 

 

 

9

 

 

 

9

 

 

 

8

 

Total as presented in the consolidated statements of cash flows

 

$

212,349

 

 

$

346,681

 

 

$

320,942

 

 

$

322,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

The Company records inventories at the lower of cost or net realizable value. The cost includes materials and other production costs and is computed using standard cost on a first-in, first-out basis. Inventory reserves are recorded for estimated obsolescence or unmarketable inventories based on forecast of future demand and market conditions. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. Once inventory is written down, a new accounting cost basis is established and, accordingly, any associated reserve is not released until the inventory is sold or scrapped. There were no material inventory losses recognized for the three and nine months ended October 31, 2018 and 2017, respectively.

Noncancelable Internal-Use Software License

The Company accounts for a noncancelable on premise internal-use software license as the acquisition of an intangible asset and the incurrence of a liability to the extent that all or a portion of the software licensing fees are not paid on or before the license acquisition date. The intangible asset and related liability are recorded at net present value and interest expense is recorded over the payment term.

Goodwill and In-Process Research and Development

Goodwill and in-process research and development (“IPR&D”) are required to be tested for impairment at least annually in the fourth fiscal quarter or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The Company has a single reporting unit for goodwill impairment test purposes based on its business and reporting structure.

The Company does not amortize goodwill. Acquired IPR&D is capitalized at fair value as an intangible asset and amortization commences upon completion of the underlying projects. When a project underlying reported IPR&D is completed, the corresponding amount of IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. As of October 31, 2018, there was no IPR&D amortized.

Revenue Recognition

Effective February 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method applied to those contracts that were not completed as of February 1, 2018. Results for reporting periods beginning after February 1, 2018 are presented under ASC 606. Prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC Topic 605, Revenue Recognition (“ASC 605”). The most significant impacts of this new guidance for the Company relate to the determination of transaction price and the timing of revenue recognition for transactions with its distributors. As a result, the Company now recognizes product revenue upon shipment and transfer of control to distributors (known as “sell-in” revenue recognition) rather than shipment to the end customers (known as “sell-through” revenue recognition) based on its estimate of the consideration it expects to receive. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.

 

9


The sale of semiconductor products accounts for the substantial majority of the Company’s consolidated revenue. Sales agreements with customers are renewable periodically and contain terms and conditions with respect to payment, delivery, warranty, supply and other rights. The Company considers an accepted customer purchase order, governed by sales agreement, to be the contract with the customer. For each contract, the Company considers the promise to transfer tangible products to be the identified performance obligation. Product sales contracts may include volume-based tiered pricing or rebates that are fulfilled in cash or product. In determining the transaction price, the Company accounts for the right of returns, cash rebates, commissions and other pricing adjustments as variable consideration and estimates these amounts based on the expected amount to be provided to customers and reduces the revenue recognized. The Company estimates sales returns and rebates based on the Company’s historical patterns of return and pricing credits. As the Company’s standard payment terms are 30 days to 60 days, the contracts have no financing component. Under ASC 606, the Company estimates the total consideration to be received by using the expected value method for each contract, computes weighted average selling price for each unit shipped in cases where there is a material right due to the presence of volume-based tiered pricing, allocates the total consideration between the identified performance obligations, and recognizes revenue when control of its goods and services is transferred to its customers. The Company considers product control to be transferred at shipment or delivery because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risk and rewards of ownership of the asset.

The Company also enters into fixed-price engineering service agreements with certain customers. These agreements may include multiple performance obligations, such as software development services, licensing of intellectual property and post-contract customer support, or PCS. These multiple performance obligations are highly interdependent, highly interrelated, are typically not sold separately and do not have standalone selling prices. They are all inputs to generate one combined output which is incorporating the Company’s SoC into the customer’s product. Accordingly, the Company determines that they are not separately identifiable and shall be treated as a single performance obligation. Customers usually pay based on milestones achieved. Because payments received do not correspond directly with the value of the Company’s performance to date, for fixed-price engineering services arrangements, revenue is recognized using the time-based straight line method, which best depicts the Company’s performance toward complete satisfaction of the performance obligation based on the nature of such professional services. Revenues from engineering service agreements were not material for the three and nine months ended October 31, 2018 and 2017, respectively.  

Cost of Revenue

Cost of revenue includes cost of materials, cost associated with packaging and assembly, testing and shipping, cost of personnel, stock-based compensation, logistics and quality assurance, warranty cost, royalty expense, write-downs of inventories and allocation of overhead.

Income Taxes

The Company records income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. In estimating future tax consequences, generally all expected future events other than enactments or changes in the tax law or rates are considered. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company applies authoritative guidance for the accounting for uncertainty in income taxes. The guidance requires that tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits as of the reporting date. Upon estimating its tax positions and tax benefits, the Company considers and evaluates numerous factors, which may require periodic adjustments and which may not reflect the final tax liabilities. The Company adjusts its financial statements to reflect only those tax positions that are more likely than not to be sustained under examination.

As part of the process of preparing condensed consolidated financial statements, the Company is required to estimate its taxes in each of the jurisdictions in which it operates. The Company estimates actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets, which are included in the condensed consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the condensed consolidated statements of operations become deductible expenses under applicable income tax laws, or loss or credit carryforwards are utilized.

In assessing whether deferred tax assets may be realized, the Company considers whether it is more likely than not that some portion or all of deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income.

 

10


The Company makes estimates and judgments about its future taxable income based on assumptions that are consistent with its plans and estimates. Should the actual amounts differ from estimates, the amount of valuation allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded in the condensed consolidated income statement for the periods in which the adjustment is determined to be required.

Net Income (Loss) Per Ordinary Share

Basic earnings (losses) per share is computed by dividing net income (loss) available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period. Diluted earnings (losses) per share is computed by dividing net income (loss) available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period increased to include the number of additional ordinary shares that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan, unvested restricted stock and restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings (losses) per share by application of the treasury stock method.

Comprehensive Income (Loss)

Comprehensive income (loss) includes unrealized gains or losses from available-for-sale securities that are excluded from net income (loss).

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvement. Under these standards, the Company is required to adopt the lease standard on February 1, 2019 and expects to use the modified retrospective approach with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Upon adoption date, the Company will recognize right-of-use assets and corresponding liabilities related to substantially all of its operating lease arrangements. The Company is in the process of data gathering, determining the scope of impact, designing system solution and assessing available practical expedients and policy elections offered by the standard. The Company is also evaluating its processes and internal controls to meet the new standard’s requirements. Although the Company has not completed the assessment, it does not expect that the adoption of this new guidance will have a material impact to the Company’s consolidated statements of operations and cash flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), to introduce a new impairment model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses (“ECL”). Under the new model, an entity is required to estimate ECL on available-for-sale (AFS) debt securities only when the fair value is below the amortized cost of the asset and is no longer based on an impairment being “other-than-temporary”. The new model also requires the impairment calculation on an individual security level and requires an entity use present value of cash flows when estimating the ECL. The credit-related losses are required to be recognized through earnings and non-credit related losses are reported in other comprehensive income. The ASU will be effective for public entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings as of the beginning of the first period in which the guidance becomes effective. The Company does not believe the adoption of this new guidance will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment, to eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This new guidance will be applied prospectively and is effective for annual and interim periods beginning after December 15, 2019. The Company does not believe the adoption of this new guidance will have a material impact on its financial position, results of operations and disclosures.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization On Purchased Callable Debt Securities, to shorten the amortization period for the premium to the earliest call date instead of the contractual life of the instrument. This new guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Entities will be required to apply the new guidance using the modified retrospective method with a cumulative-effect adjustment to retained earnings upon the adoption date. The Company does not believe the adoption of this new guidance will have a material impact on its financial position, results of operations and disclosures.

 

11


In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to permit entities to have the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings. The FASB also gives entities the option to apply the guidance retrospectively or in the period of adoption. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption in any period is permitted. The Company has not early adopted this guidance and believes that the adoption of this new guidance will not have an impact on its financial position and disclosures.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, to align the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. This new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted, including in an interim period, but not before an entity adopts the new revenue guidance. The Company has early adopted this new guidance which did not have significant impact on its financial position, results of operations and disclosures.

In August 2018, the FASB issued 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. Under this new guidance, the entities will no longer be required to disclose the amount of and the reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019 and for the interim periods within those fiscal years. Early adoption is permitted. The Company does not believe the adoption of this new guidance will have a material impact on its financial position, results of operations and disclosures.

In August 2018, the FASB issued 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. Under this new guidance, the entities are required to capitalize implementation costs related to a hosting arrangement that is a service contract and amortize the costs over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The guidance is effective for fiscal years beginning after December 15, 2019 and for the interim periods within those fiscal years. Early adoption is permitted. The Company does not believe the adoption of this new guidance will have a material impact on its financial position, results of operations and disclosures.

 

2. Revenue Recognition

Effective February 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of February 1, 2018. Results for reporting periods beginning after February 1, 2018 are presented under ASC 606. Prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605. The Company recognizes revenue when control of its goods and services is transferred to its customers. The Company considers product control to be transferred at a point in time upon shipment or delivery because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risk and rewards of ownership of the asset. The majority of the Company’s product revenue is derived from sales through its distributors. As a result, sales of products are recognized upon shipment and transfer of control to distributors (known as “sell-in” revenue recognition) rather than shipment to the end customers (known as “sell-through” revenue recognition).

The cumulative effects of adjustments on the condensed consolidated balance sheet on February 1, 2018 upon the adoption of ASC 606 were as follows:

 

 

Balance as of

 

 

 

 

 

 

Opening Balance as of

 

 

 

January 31, 2018

 

 

Adjustment

 

 

February 1, 2018

 

 

 

(in thousands)

 

Deferred revenue, current

 

$

307

 

 

$

(43

)

 

$

264

 

Retained earnings

 

$

261,265

 

 

$

43

 

 

$

261,308

 

 

The following table summarizes the impacts of adopting the new revenue standard on our condensed consolidated balance sheets, statements of operations and statements of cash flows as of and for the three and nine months ended October 31, 2018:

 

 

12


 

 

October 31, 2018

 

 

 

As Reported

 

 

Impact of Adoption

 

 

Amounts under ASC 605

 

 

 

(in thousands)

 

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

11,134

 

 

 

(142

)

 

 

10,992

 

Accrued and other current liabilities

 

 

25,615

 

 

 

(46

)

 

 

25,569

 

Income taxes payable

 

 

755

 

 

 

194

 

 

 

949

 

Deferred revenue, current

 

 

405

 

 

 

5,276

 

 

 

5,681

 

Other long-term liabilities

 

 

9,600

 

 

 

1

 

 

 

9,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

$

235,404

 

 

 

(5,283

)

 

$

230,121

 

 

 

 

Three Months Ended October 31, 2018

 

 

 

As Reported

 

 

Impact of Adoption

 

 

Amounts under ASC 605

 

 

 

(in thousands, except per share data)

 

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

57,286

 

 

$

727

 

 

$

58,013

 

Cost of revenue

 

 

22,701

 

 

 

234

 

 

 

22,935

 

Gross profit

 

 

34,585

 

 

 

493

 

 

 

35,078

 

Loss from operations

 

 

(9,422

)

 

 

493

 

 

 

(8,929

)

Loss before income taxes

 

 

(8,429

)

 

 

493

 

 

 

(7,936

)

Provision for income taxes

 

 

592

 

 

 

(71

)

 

 

521

 

Net loss

 

$

(9,021

)

 

$

564

 

 

$

(8,457

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.28

)

 

$

0.02

 

 

$

(0.26

)

Diluted

 

$

(0.28

)

 

$

0.02

 

 

$

(0.26

)

 

 

 

Nine Months Ended October 31, 2018

 

 

 

As Reported

 

 

Impact of Adoption

 

 

Amounts under ASC 605

 

 

 

(in thousands, except per share data)

 

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

176,698

 

 

$

(7,583

)

 

$

169,115

 

Cost of revenue

 

 

69,208

 

 

 

(2,537

)

 

 

66,671

 

Gross profit

 

 

107,490

 

 

 

(5,046

)

 

 

102,444

 

Loss from operations

 

 

(26,054

)

 

 

(5,046

)

 

 

(31,100

)

Loss before income taxes

 

 

(23,537

)

 

 

(5,046

)

 

 

(28,583

)

Provision for income taxes

 

 

2,367

 

 

 

194

 

 

 

2,561

 

Net loss

 

$

(25,904

)

 

$

(5,240

)

 

$

(31,144

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.79

)

 

$

(0.16

)

 

$

(0.95

)

Diluted

 

$

(0.79

)

 

$

(0.16

)

 

$

(0.95

)

The impact of adoption on the comprehensive loss is the same as the impact on net loss.

 

 

13


 

 

Nine Months Ended October 31, 2018

 

 

 

As Reported

 

 

Impact of Adoption

 

 

Amounts under ASC 605

 

 

 

(in thousands)

 

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(25,904

)

 

$

(5,240

)

 

$

(31,144

)

Accounts payable

 

 

(8,681

)

 

 

(142

)

 

 

(8,823

)

Accrued liabilities

 

 

(5,192

)

 

 

(46

)

 

 

(5,238

)

Income taxes payable

 

 

(181

)

 

 

194

 

 

 

13

 

Deferred revenue

 

 

140

 

 

 

5,233

 

 

 

5,373

 

Other long-term liabilities

 

$

843

 

 

$

1

 

 

$

844

 

The impacts of adoption of the new revenue standard were primarily attributable to distributor revenues recognized using the sell-through method under ASC 605, while such revenues are recognized using the sell-in method under ASC 606.

 

Practical Expedients

 

 

The Company elects not to disclose the value of unsatisfied or partially unsatisfied performance obligations due to original expected contract duration of one year or less.

 

For contracts that were modified before the adoption date, the Company elects to reflect the aggregate effect of all modifications that occur before the adoption date when identifying performance obligations, determining the transaction price, and allocating the transaction price to performance obligations.

 

The Company also elects to exclude amounts collected from customers for all sales taxes from the transaction price.

Contract Assets

Timing of revenue recognition may differ from the timing of invoicing to the Company's customers. The Company records contract assets when revenue is recognized prior to invoicing. The contract assets are primarily related to the Company’s engineering service agreements and rights to consideration for performance obligations delivered but not billed at the reporting date. The contract assets are reclassified to receivables when the billing occurs. As of February 1, 2018, the contract assets were not material. All of the contract assets were either reclassified to receivables or recognized as cash receipts as of October 31, 2018.

 

Contract Liabilities (Deferred Revenues)

Contract liabilities are primarily related to the portion of transaction price that exceeds the weighted average selling price for products sold to date under tiered-pricing contracts which contain material rights. These contract liabilities are expected to be recognized over the course of the contract when products are delivered for future pricing below the weighted average selling price of the contract. The timing of recognition of these contract liabilities is dependent on the timing and size of future orders under the contract. For the three and nine months ended October 31, 2018, the Company did not recognize any material revenue adjustment related to performance obligations satisfied in prior periods released from these contract liabilities.

Contract liabilities are also recorded when cash payments are received in advance of performance for engineering service agreements. The contract liabilities related to these agreements are expected to be recognized when the performance is delivered. For the three and nine months ended October 31, 2018, the Company did not recognize any material revenue released from these contract liabilities as a result of performance obligations satisfied in the current period.

As of October 31, 2018 and February 1, 2018, the contract liabilities were not material. Additionally, the transaction price allocated to unsatisfied, or partially unsatisfied, purchase orders for contracts that are greater than a year was not material as of October 31, 2018 and February 1, 2018.

 

 

14


3. Financial Instruments and Fair Value

The Company invests a portion of its cash in debt securities that are denominated in United States dollars. During the three months ended October 31, 2018, the Company invested an additional $100.0 million in debt securities. The investment portfolio consists of money market funds, certificates of deposit, asset-backed securities, commercial paper, U.S. government securities, and debt securities of corporations. All of the investments are classified as available-for-sale securities and reported at fair value in the condensed consolidated balance sheets as follows:

 

 

 

As of October 31, 2018

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Money market funds

 

$

9,472

 

 

$

 

 

$

 

 

$

9,472

 

Certificates of Deposit

 

 

6,004

 

 

 

 

 

 

 

 

 

6,004

 

Commercial paper

 

 

87,756

 

 

 

 

 

 

 

 

 

87,756

 

Corporate bonds

 

 

70,169

 

 

 

1

 

 

 

(175

)

 

 

69,995

 

Asset-backed securities

 

 

9,547

 

 

 

 

 

 

(9

)

 

 

9,538

 

U.S. government securities

 

 

20,681

 

 

 

 

 

 

(2

)

 

 

20,679

 

Total cash equivalents and marketable securities

 

$

203,629

 

 

$

1

 

 

$

(186

)

 

$

203,444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 31, 2018

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Money market funds

 

$

13,788

 

 

$

 

 

$

 

 

$

13,788

 

Commercial paper

 

 

5,480

 

 

 

 

 

 

 

 

 

5,480

 

Corporate bonds

 

 

53,175

 

 

 

 

 

 

(196

)

 

 

52,979

 

Asset-backed securities

 

 

11,048

 

 

 

 

 

 

(44

)

 

 

11,004

 

U.S. government securities

 

 

18,495

 

 

 

 

 

 

(39

)

 

 

18,456

 

Total cash equivalents and marketable securities

 

$

101,986

 

 

$

 

 

$

(279

)

 

$

101,707

 

 

 

 

As of

 

 

 

October 31, 2018

 

 

January 31, 2018

 

 

 

(in thousands)

 

Included in cash equivalents

 

$

67,165

 

 

$

13,788

 

Included in marketable securities

 

 

136,279

 

 

 

87,919

 

Total cash equivalents and marketable securities

 

$

203,444

 

 

$

101,707

 

The contractual maturities of the investments at October 31, 2018 and January 31, 2018 were as follows:

 

 

 

As of

 

 

 

October 31, 2018

 

 

January 31, 2018

 

 

 

(in thousands)

 

Due within one year

 

$

171,284

 

 

$

63,476

 

Due within one to three years

 

 

32,160

 

 

 

38,231

 

Total cash equivalents and marketable securities

 

$

203,444

 

 

$

101,707

 

 

The unrealized losses on the available-for-sale securities were caused by fluctuations in market value and interest rates as a result of the economic environment. As the decline in market value was attributable to changes in market conditions and not credit quality, and because the Company neither intended to sell nor was it more likely than not that it will be required to sell these investments prior to a recovery of par value, the Company did not consider these investments to be other-than temporarily impaired as of October 31, 2018 and January 31, 2018, respectively.

The following fair value hierarchy is applied for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

 

15


Level 3—Unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

The Company measures the fair value of money market funds and certificates of deposit using quoted prices in active markets for identical assets and classifies them within Level 1. The fair value of the Company’s investments in other debt securities are obtained based on quoted prices for similar assets in active markets and are classified within Level 2.

The following table presents the fair value of the financial instruments measured on a recurring basis as of October 31, 2018 and January 31, 2018:

 

 

 

As of October 31, 2018

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

9,472

 

 

$

9,472

 

 

$

 

 

$

 

Certificates of Deposit

 

 

6,004

 

 

 

6,004

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

87,756

 

 

 

 

 

 

87,756

 

 

 

 

Corporate bonds

 

 

69,995