amba-10q_20170430.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 April 30, 2017

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

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

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

The number of ordinary shares, $0.00045 par value, of the Registrant, outstanding as of June 2, 2017 was 33,549,601 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 April 30, 2017 and January 31, 2017

 

3

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended April 30, 2017 and 2016

 

4

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended April 30, 2017 and 2016

 

5

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2017 and 2016

 

6

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

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

 

21

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

 

Item 4.

Controls and Procedures

 

30

 

 

 

 

PART II. OTHER INFORMATION

 

31

 

 

 

 

Item 1.

Legal Proceedings

 

31

 

 

 

 

Item 1A.

Risk Factors

 

32

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

55

 

 

 

 

Item 6.

Exhibits

 

55

 

 

 

 

Signatures

 

56

 

 

 

 

2


PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

AMBARELLA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

 

 

April 30,

 

 

January 31,

 

 

 

2017

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

335,182

 

 

$

322,872

 

Marketable securities

 

 

84,986

 

 

 

82,522

 

Accounts receivable, net

 

 

22,871

 

 

 

38,596

 

Inventories

 

 

19,066

 

 

 

20,145

 

Restricted cash

 

 

9

 

 

 

8

 

Prepaid expenses and other current assets

 

 

3,304

 

 

 

4,392

 

Total current assets

 

 

465,418

 

 

 

468,535

 

Property and equipment, net

 

 

5,241

 

 

 

4,988

 

Deferred tax assets, non-current

 

 

6,028

 

 

 

5,774

 

Intangible assets, net

 

 

13,613

 

 

 

4,149

 

Goodwill

 

 

26,601

 

 

 

26,601

 

Other non-current assets

 

 

2,168

 

 

 

2,224

 

Total assets

 

$

519,069

 

 

$

512,271

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

18,699

 

 

 

19,955

 

Accrued and other current liabilities

 

 

20,929

 

 

 

26,448

 

Income taxes payable

 

 

555

 

 

 

568

 

Deferred revenue

 

 

5,555

 

 

 

7,425

 

Total current liabilities

 

 

45,738

 

 

 

54,396

 

Other long-term liabilities

 

 

9,002

 

 

 

3,241

 

Total liabilities

 

 

54,740

 

 

 

57,637

 

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 April 30, 2017 and

   January 31, 2017, respectively

 

 

 

 

 

 

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

   authorized at April 30, 2017 and January 31, 2017, respectively;

   33,534,253 shares issued and outstanding at April 30, 2017; 33,369,032

   shares issued and outstanding at January 31, 2017

 

 

15

 

 

 

15

 

Additional paid-in capital

 

 

219,425

 

 

 

212,276

 

Accumulated other comprehensive loss

 

 

(88

)

 

 

(70

)

Retained earnings

 

 

244,977

 

 

 

242,413

 

Total shareholders’ equity

 

 

464,329

 

 

 

454,634

 

Total liabilities and shareholders' equity

 

$

519,069

 

 

$

512,271

 

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 April 30,

 

 

 

2017

 

 

2016

 

Revenue

 

$

64,135

 

 

$

57,157

 

Cost of revenue

 

 

23,172

 

 

 

20,450

 

Gross profit

 

 

40,963

 

 

 

36,707

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

26,602

 

 

 

24,466

 

Selling, general and administrative

 

 

11,744

 

 

 

10,893

 

Total operating expenses

 

 

38,346

 

 

 

35,359

 

Income from operations

 

 

2,617

 

 

 

1,348

 

Other income

 

 

153

 

 

 

27

 

Income before income taxes

 

 

2,770

 

 

 

1,375

 

Provision (benefit) for income taxes

 

 

206

 

 

 

(408

)

Net income

 

$

2,564

 

 

$

1,783

 

Net income per share attributable to ordinary shareholders:

 

 

 

 

 

 

 

 

Basic

 

$

0.08

 

 

$

0.05

 

Diluted

 

$

0.07

 

 

$

0.05

 

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

   shareholders:

 

 

 

 

 

 

 

 

Basic

 

 

33,253,817

 

 

 

32,428,047

 

Diluted

 

 

34,685,081

 

 

 

33,950,736

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

4


AMBARELLA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

 

 

Three Months Ended April 30,

 

 

 

2017

 

 

2016

 

Net income

 

$

2,564

 

 

$

1,783

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Unrealized gains (losses) on investments

 

 

(18

)

 

 

27

 

Other comprehensive income (loss), net of tax

 

 

(18

)

 

 

27

 

Comprehensive income

 

$

2,546

 

 

$

1,810

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

5


AMBARELLA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

Three Months Ended April 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,564

 

 

$

1,783

 

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

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

412

 

 

 

453

 

Amortization of intangible assets

 

 

292

 

 

 

11

 

Amortization/accretion of marketable securities

 

 

57

 

 

 

76

 

Stock-based compensation

 

 

12,972

 

 

 

11,301

 

Other non-cash items, net

 

 

38

 

 

 

30

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

15,725

 

 

 

8,907

 

Inventories

 

 

1,079

 

 

 

246

 

Prepaid expenses and other current assets

 

 

1,093

 

 

 

323

 

Deferred tax assets

 

 

(254

)

 

 

256

 

Other assets

 

 

56

 

 

 

32

 

Accounts payable

 

 

(2,084

)

 

 

2,172

 

Accrued liabilities

 

 

(7,055

)

 

 

(5,210

)

Income taxes payable

 

 

(13

)

 

 

(787

)

Deferred tax liabilities

 

 

 

 

 

(58

)

Deferred revenue

 

 

(1,870

)

 

 

(3,985

)

Other long-term liabilities

 

 

11

 

 

 

 

Net cash provided by operating activities

 

 

23,023

 

 

 

15,550

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of investments

 

 

(7,070

)

 

 

(35,857

)

Sales of investments

 

 

1,000

 

 

 

8,974

 

Maturities of investments

 

 

3,490

 

 

 

10,790

 

Purchase of property and equipment

 

 

(955

)

 

 

(469

)

Net cash used in investing activities

 

 

(3,535

)

 

 

(16,562

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Stock repurchase

 

 

(8,773

)

 

 

 

Proceeds from exercise of stock options and employee stock purchase plan

 

 

1,595

 

 

 

915

 

Net cash provided by (used in) financing activities

 

 

(7,178

)

 

 

915

 

Net increase (decrease) in cash and cash equivalents

 

 

12,310

 

 

 

(97

)

Cash and cash equivalents at beginning of period

 

 

322,872

 

 

 

268,056

 

Cash and cash equivalents at end of period

 

$

335,182

 

 

$

267,959

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

290

 

 

$

241

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Increase in liabilities related to intangible and fixed asset purchases

 

$

9,937

 

 

$

153

 

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 developer of semiconductor processing solutions for video that enable high-definition video capture, sharing, analysis and display. 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 (“SoC”) designs fully integrate 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.

The Company sells its solutions to leading original design manufacturers (“ODMs”) and original equipment manufacturers (“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 2017 fiscal year filed with the SEC on March 30, 2017 (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 collectibility 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 and assets 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.

 

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 logistics provider, Wintech Microelectronics Co., Ltd., or Wintech, which serves as its non-exclusive sales representative and logistics provider in Asia other than Japan. Termination of the relationship with Wintech could result in a temporary or permanent loss of revenue and result in an obligation to repurchase unsold product. Any Wintech credit issue could impair its ability to make timely payment to the Company. See Note 15 for additional information regarding revenue and credit concentration with this customer.

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 material losses on deposits of its cash. In order to limit the exposure of each investment, cash equivalents and marketable securities consist primarily of money market funds, demand deposits, 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 each of its customers and adjusts credit limits based upon payment history and the 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 income (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 (loss), 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: 1) general market conditions, 2) the duration and extent to which the fair value is less than cost, 3) 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 income (loss). Due to the relative short term nature of the investments, there have been no other-than-temporary impairments recorded to date.

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 months ended April 30, 2017 and 2016, respectively.

 

8


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.

Business Combinations and Intangible Assets

The Company allocates the fair value of purchase price to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets, management makes significant estimates and assumptions.

Critical estimates in valuing certain intangible assets include, but are not limited to, replacement cost. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

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 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.

Revenue Recognition

The Company generates revenue from the sales of its SoCs to OEMs or ODMs, either directly or through logistics providers. Revenue from sales directly to OEMs and ODMs is recognized upon shipment provided that persuasive evidence of an arrangement exists, legal title to the products and risk of ownership have transferred, the fee is fixed or determinable, and collection of the resulting receivable is reasonably assured. The Company provides its logistics providers with the rights to return excess levels of inventory and to future price adjustments. Given the inability to reasonably estimate these price changes and returns, revenue and costs related to shipments to logistics providers are deferred until the Company has received notification from its logistics providers that they have sold the Company’s products. Information reported by the Company’s logistics providers includes product resale price, quantity and end customer shipment information as well as remaining inventory on hand. At the time of shipment to a logistics provider, the Company records a trade receivable as there is a legally enforceable right to receive payment, reduces inventory for the value of goods shipped as legal title has passed to the logistics provider and defers the related margin as deferred revenue in the condensed consolidated balance sheets. Any price adjustments are recorded as a change to deferred revenue at the time the adjustments are agreed upon.

Arrangements with certain OEM customers provide for pricing that is dependent upon the end products into which the Company’s SoCs are used. These arrangements may also entitle the Company to a share of the product margin ultimately realized by the OEM. The minimum guaranteed amount of revenue related to the sale of products subject to these arrangements is recognized when all other elements of revenue recognition are met. Any amounts at the date of shipment invoiced in excess of the minimum guaranteed contract price are deferred until the additional amounts the Company is entitled to are fixed or determinable. Additional amounts earned by the Company resulting from margin sharing arrangements and determination of the end products into which the products are ultimately incorporated are recognized when end customer sales volume is reported to the Company. Revenues from margin sharing arrangements were not material for the three months ended April 30, 2017 and 2016, respectively.

The Company also enters into engineering service agreements with certain customers. These agreements may include multiple deliverables, such as software development services, licensing of intellectual property and post-contract customer support, or PCS. The Company does not sell separately any of these components and does not have Vendor Specific Objective Evidence, or VSOE, for the deliverables. Accordingly, revenues from these agreements are deferred for any amounts billed until delivery of all the elements. If the agreements include PCS, the revenues are recognized ratably over the estimated supporting periods. Revenues from engineering service agreements were not material for the three months ended April 30, 2017 and 2016, respectively.  

 

9


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. In estimating the Company’s 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, management 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.

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 Per Ordinary Share

Basic earnings per share is computed by dividing net income available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period. Diluted earnings per share is computed by dividing net income 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 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 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.

 

10


Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The new guidance clarifies the principles and develops a common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (“IFRS”). Under the new guidance, an entity is required to recognize an amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new revenue standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Subsequently, the FASB issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). Accordingly, the Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue standards”) in its first quarter of fiscal year 2019. The new revenue guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the method of adoption and the impact of adoption on its financial position, results of operations and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard is effective for fiscal years and the interim periods within those fiscal years beginning after December 15, 2018. The guidance is required to be applied by the modified retrospective transition approach. Early adoption is permitted. The Company is currently assessing the impact of the adoption of this new guidance on its financial position, results of operations and disclosures.

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. Early adoption is permitted. 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 October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted but should be in the first interim period. The new guidance should also be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact of the adoption of this new guidance on its financial position, results of operations and disclosures.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), to require entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of restricted cash and restricted cash equivalent balances. The new guidance will be effective for fiscal years beginning after December 15, 2017, including the interim periods within those years. Early adoption is permitted and the new guidance is applied retrospectively. The Company does not believe the adoption of this new guidance will have a material impact on its consolidated statement of cash flows and disclosures.

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. Early adoption is permitted for annual and interim periods after January 1, 2017. 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 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. Early adoption is permitted. 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.

 

 

2. Financial Instruments and Fair Value

The Company invests a portion of its cash in debt securities that are denominated in U.S. dollars. The investment portfolio consists of money market funds, demand deposits, 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 April 30, 2017

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Money market funds

 

$

74

 

 

$

 

 

$

 

 

$

74

 

Demand deposits

 

 

15,000

 

 

 

 

 

 

 

 

 

15,000

 

Commercial paper

 

 

10,762

 

 

 

 

 

 

 

 

 

10,762

 

Corporate bonds

 

 

41,281

 

 

 

6

 

 

 

(32

)

 

 

41,255

 

Asset-backed securities

 

 

10,621

 

 

 

1

 

 

 

(10

)

 

 

10,612

 

U.S. government securities

 

 

23,408

 

 

 

 

 

 

(53

)

 

 

23,355

 

Total cash equivalents and marketable securities

 

$

101,146

 

 

$

7

 

 

$

(95

)

 

$

101,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 31, 2017

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Money market funds

 

$

8,328

 

 

$

 

 

$

 

 

$

8,328

 

Demand deposits

 

 

10,000

 

 

 

 

 

 

 

 

 

10,000

 

Commercial paper

 

 

4,784

 

 

 

 

 

 

 

 

 

4,784

 

Corporate bonds

 

 

42,713

 

 

 

6

 

 

 

(41

)

 

 

42,678

 

Asset-backed securities

 

 

11,686

 

 

 

1

 

 

 

(12

)

 

 

11,675

 

U.S. government securities

 

 

23,409

 

 

 

6

 

 

 

(30

)

 

 

23,385

 

Total cash equivalents and marketable securities

 

$

100,920

 

 

$

13

 

 

$

(83

)

 

$

100,850

 

 

 

 

As of

 

 

 

April 30, 2017

 

 

January 31, 2017

 

 

 

(in thousands)

 

Included in cash equivalents

 

$

16,072

 

 

$

18,328

 

Included in marketable securities

 

 

84,986

 

 

 

82,522

 

Total cash equivalents and marketable securities

 

$

101,058

 

 

$

100,850

 

The contractual maturities of the investments at April 30, 2017 and January 31, 2017 were as follows:

 

 

As of

 

 

 

April 30, 2017

 

 

January 31, 2017

 

 

 

(in thousands)

 

Due within one year

 

$

90,440

 

 

$

76,992

 

Due within one to two years

 

 

10,618

 

 

 

23,858

 

Total cash equivalents and marketable securities

 

$

101,058

 

 

$

100,850

 

 

 

12


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 would 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 April 30, 2017 and January 31, 2017, 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.

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 demand deposits 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 April 30, 2017 and January 31, 2017:

 

 

 

 

As of April 30, 2017

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

74

 

 

$

74

 

 

$

 

 

$

 

Demand deposits

 

 

15,000

 

 

 

15,000

 

 

 

 

 

 

 

Commercial paper

 

 

10,762

 

 

 

 

 

 

10,762

 

 

 

 

Corporate bonds

 

 

41,255

 

 

 

 

 

 

41,255

 

 

 

 

Asset-backed securities

 

 

10,612

 

 

 

 

 

 

10,612

 

 

 

 

U.S. government securities

 

 

23,355

 

 

 

 

 

 

23,355

 

 

 

 

Total cash equivalents and marketable securities

 

$

101,058

 

 

$

15,074

 

 

$

85,984

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 31, 2017

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

8,328

 

 

$

8,328

 

 

$

 

 

$

 

Demand deposits

 

 

10,000

 

 

 

10,000

 

 

 

 

 

 

 

Commercial paper

 

 

4,784

 

 

 

 

 

 

4,784

 

 

 

 

Corporate bonds

 

 

42,678

 

 

 

 

 

 

42,678

 

 

 

 

Asset-backed securities

 

 

11,675

 

 

 

 

 

 

11,675

 

 

 

 

U.S. government securities

 

 

23,385

 

 

 

 

 

 

23,385

 

 

 

 

Total cash equivalents and marketable securities

 

$

100,850

 

 

$

18,328

 

 

$

82,522

 

 

$

 

 

 

3. Inventories

Inventory at April 30, 2017 and January 31, 2017 consisted of the following:

 

 

 

As of

 

 

 

April 30, 2017

 

 

January 31, 2017

 

 

 

(in thousands)

 

Work-in-progress

 

$

10,209

 

 

$

10,105

 

Finished goods

 

 

8,857

 

 

 

10,040

 

Total

 

$

19,066

 

 

$

20,145

 

 

 

13


 

4. Property and Equipment, Net

Depreciation expense was approximately $0.4 million and $0.5 million for the three months ended April 30, 2017 and 2016, respectively.  Property and equipment at April 30, 2017 and January 31, 2017 consisted of the following:

 

 

 

As of

 

 

 

April 30, 2017

 

 

January 31, 2017

 

 

 

(in thousands)

 

Computer equipment and software

 

$

6,992

 

 

$

6,798

 

Machinery and equipment

 

 

3,558

 

 

 

3,405

 

Furniture and fixtures

 

 

829

 

 

 

797

 

Leasehold improvements

 

 

1,587

 

 

 

1,672

 

Construction in progress

 

 

996

 

 

 

755

 

 

 

 

13,962

 

 

 

13,427

 

Less: accumulated depreciation and amortization

 

 

(8,721

)

 

 

(8,439

)

Total property and equipment, net

 

$

5,241

 

 

$

4,988

 

 

 

5. Intangible Assets

The intangible assets primarily consist of $4.1 million of IPR&D from the acquisition of VisLab S.r.l., or VisLab, in June 2015 and $9.8 million of a noncancelable software license. 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 April 30, 2017, there was no IPR&D amortized.

In March 2017, the Company entered into a noncancelable software license agreement with Cadence Design Systems, Inc. (“Cadence”), a related party of the Company. Under this license agreement, the Company committed to pay an aggregate amount of $10.3 million through January 2020. The license has been capitalized as an intangible asset and the corresponding future payments have been recorded as liabilities at net present value. As of April 30, 2017, $3.2 million was recorded in accrued and other current liabilities and $5.8 million was recorded in other long-term liabilities in the condensed consolidated balance sheet. For the three months ended April 30, 2017, there was $0.3 million of amortization expense for this noncancelable software license.

There were no intangible asset impairments for the three months ended April 30, 2017 and 2016, respectively.

 

 

6. Goodwill

On June 25, 2015, the Company completed the acquisition of VisLab, a privately-held Italian company that develops computer vision and intelligent control systems for automotive and other commercial applications, including advanced driver assistance systems and several generations of autonomous vehicle driving systems, for $30.0 million in cash. As a result, there was $25.3 million attributed to goodwill, $4.1 million attributed to intangible assets and $0.6 million attributed to net assets acquired. A deferred tax liability of $1.3 million related to the intangible assets was recorded to account for the difference between financial reporting and tax basis at the acquisition date, with an addition to goodwill. The Company does not amortize goodwill. There were no goodwill impairments for the three months ended April 30, 2017 and 2016, respectively. 

 

 

7. Accrued and Other Current Liabilities

Accrued and other current liabilities at April 30, 2017 and January 31, 2017 consisted of the following:

 

 

 

As of

 

 

 

April 30, 2017

 

 

January 31, 2017

 

 

 

(in thousands)

 

Accrued employee compensation

 

$

8,675

 

 

$

14,685

 

Accrued warranty

 

 

800

 

 

 

500

 

Accrued rebates

 

 

951

 

 

 

972

 

Accrued product development costs

 

 

5,152

 

 

 

7,605

 

Software license liabilities, current

 

 

3,177

 

 

 

 

Other accrued liabilities

 

 

2,174

 

 

 

2,686

 

Total accrued and other current liabilities

 

$

20,929

 

 

$

26,448

 

 

14


 

 

 

8. Deferred Revenue and Deferred Cost

Deferred revenue and related cost at April 30, 2017 and January 31, 2017 consisted of the following:

 

 

 

As of

 

 

 

April 30, 2017

 

 

January 31, 2017

 

 

 

(in thousands)

 

Deferred revenue on product shipments

 

$

6,211

 

 

$

7,725

 

Deferred revenue from licenses & services

 

 

1,036

 

 

 

1,748

 

Deferred cost of revenue on product shipments

 

 

(1,692

)

 

 

(2,048

)

Total deferred revenue, net

 

$

5,555

 

 

$

7,425

 

 

 

 

9. Other Long-Term Liabilities

Other long-term liabilities at April 30, 2017 and January 31, 2017 consisted of the following:

 

 

 

As of

 

 

 

April 30, 2017

 

 

January 31, 2017

 

 

 

(in thousands)

 

Unrecognized tax benefits, including interest

 

$

1,916

 

 

$

1,905

 

Deferred tax liabilities, non-current

 

 

1,333

 

 

 

1,333

 

Software license liabilities, non-current

 

 

5,751

 

 

 

 

Other long-term liabilities

 

 

2

 

 

 

3

 

Total other long-term liabilities

 

$

9,002

 

 

$

3,241

 

 

 

10. Capital Stock

Preference shares

After completion of the Company’s initial public offering in 2012, a total of 20,000,000 preference shares, with a $0.00045 par value per share, were authorized. There were no preference shares issued and outstanding as of April 30, 2017 and January 31, 2017, respectively.

Ordinary shares

As of April 30, 2017 and January 31, 2017, a total of 200,000,000 ordinary shares were authorized.

On March 30, 2017, the Company added 1,501,606 ordinary shares to the ordinary shares reserved for issuance, pursuant to an “evergreen” provision contained in the 2012 Equity Incentive Plan, or EIP. Pursuant to such provision, on February 1st of each fiscal year, the number of ordinary shares reserved for issuance under the EIP is automatically increased by a number equal to the lesser of (i) 3,500,000 ordinary shares, (ii) four and one half percent (4.5%) of the aggregate number of ordinary shares outstanding on January 31st of the preceding fiscal year, or (iii) a lesser number of shares that may be determined by the Company’s Board of Directors.

On March 30, 2017, the Company added 417,112 ordinary shares to the ordinary shares reserved for issuance, pursuant to an “evergreen” provision contained in the Amended and Restated 2012 Employee Stock Purchase Plan, or ESPP. Pursuant to such provision, on February 1st of each fiscal year, the number of ordinary shares reserved for issuance under the ESPP is automatically increased by a number equal to the lesser of (i) 1,500,000 ordinary shares, (ii) one and one quarter percent (1.25%) of the aggregate number of ordinary shares outstanding on such date, or (iii) an amount determined by the Company’s Board of Directors or a duly authorized committee of the Board of Directors.

 

15


As of April 30, 2017 and January 31, 2017, the following ordinary shares were reserved for future issuance under the EIP and ESPP:

 

 

 

As of

 

 

 

April 30, 2017

 

 

January 31, 2017

 

Shares reserved for options, restricted stock and restricted stock units under EIP

 

 

6,299,321

 

 

 

5,167,688

 

Shares reserved for ESPP

 

 

1,619,541

 

 

 

1,252,465

 

Shares repurchased

 

On May 31, 2016, the Company’s Board of Directors authorized the repurchase of up to $75.0 million of the Company’s ordinary shares over a six-month period. On November 29, 2016, this authorization was extended until June 30, 2017. Repurchases may be made from time-to-time through open market purchases or through privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate the Company to acquire any particular amount of ordinary shares, and it may be suspended at any time at the Company’s discretion. The repurchase program is funded using the Company’s working capital and any repurchased shares are recorded as authorized but unissued shares. There were 162,738 shares repurchased during the three months ended April 30, 2017 for approximately $8.8 million in cash. As of April 30, 2017, a total of 567,827 shares have been repurchased for approximately $29.0 million in cash and recorded as a reduction to equity.

 

11. Stock-based Compensation

The following table presents the classification of stock-based compensation for the periods indicated:

 

 

 

Three Months Ended April 30,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Stock-based compensation:

 

 

 

 

 

 

 

 

Cost of revenue

 

$

303

 

 

$

245

 

Research and development

 

 

7,977

 

 

 

6,719

 

Selling, general and administrative

 

 

4,692

 

 

 

4,337

 

Total stock-based compensation

 

$

12,972

 

 

$

11,301

 

As of April 30, 2017, total unrecognized compensation cost related to unvested stock options was $8.2 million and is expected to be recognized over a weighted-average period of 2.08 years. Total unrecognized compensation cost related to unvested restricted stock units was $105.0 million and is expected to be recognized over a weighted-average period of 2.69 years. Total unrecognized compensation cost related to unvested restricted stock awards was $5.8 million and is expected to be recognized over a weighted-average period of 1.58 years.

The following table sets forth the weighted-average assumptions used to estimate the fair value of stock options and employee stock purchase plan awards for the periods indicated:

 

 

Three Months Ended April 30,

 

 

2017

 

 

2016

 

Stock Options:

 

 

 

 

 

 

 

Volatility

 

53

%

 

 

38

%

Risk-free interest rate

 

2.17

%

 

 

1.57

%

Expected term (years)

6.07

 

 

 

5.95

 

Dividend yield

 

0

%

 

 

0

%

Employee stock purchase plan awards:

 

 

 

 

 

 

 

Volatility

 

39

%

 

 

67

%

Risk-free interest rate

 

0.89

%

 

 

0.52

%

Expected term (years)

 

0.5

 

 

 

0.5

 

Dividend yield

 

0

%

 

 

0

%

 

16


 

The Company calculates expected volatility for stock options based on the weighted average of historical volatilities of its own stock price and the share prices of similar companies that are publicly available for a period commensurate with the expected term. The Company calculates expected volatility for ESPP based on its own historical stock price for a period commensurate with the expected term.

The following table summarizes stock option activity for the three months ended April 30, 2017:

 

 

 

Option Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Intrinsic

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

Value Of

 

 

Remaining

 

 

Aggregate

 

 

 

 

 

 

 

Weighted-

 

 

Average

 

 

Options

 

 

Contractual

 

 

Intrinsic

 

 

 

 

 

 

 

Average

 

 

Grant-date

 

 

Exercised

 

 

Term

 

 

Value

 

 

 

Shares

 

 

Exercise Price

 

 

Fair Value

 

 

(in thousands)

 

 

(in years)

 

 

(in thousands)

 

Outstanding at January 31, 2017

 

 

1,703,524

 

 

$

21.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

50,600

 

 

 

56.27

 

 

$

29.23

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(47,480

)

 

 

12.23

 

 

 

 

 

 

$

2,080