Ambarella
AMBARELLA INC (Form: 10-Q, Received: 09/08/2016 13:04:34)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

x

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

For the quarterly period ended July 31, 2016

OR

o

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   x     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   x     No   ¨

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

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨   (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

The number of ordinary shares, $0.00045 par value, of the Registrant, outstanding as of September 1, 2016 was 32,699,784 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 July 31, 2016 and January 31, 2016

 

3

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended July 31, 2016 and 2015

 

4

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 31, 2016 and 2015

 

5

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended July 31, 2016 and 2015

 

6

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

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

 

22

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

 

Item 4.

Controls and Procedures

 

31

 

 

 

 

PART II. OTHER INFORMATION

 

32

 

 

 

 

Item 1.

Legal Proceedings

 

32

 

 

 

 

Item 1A.

Risk Factors

 

33

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

55

 

 

 

 

Item 6.

Exhibits

 

55

 

 

 

 

Signatures

 

56

 

 

 

 

2


P ART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

AMBARELLA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

 

 

July 31,

 

 

January 31,

 

 

 

2016

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

276,507

 

 

$

268,056

 

Marketable securities

 

 

50,520

 

 

 

39,837

 

Accounts receivable, net

 

 

33,588

 

 

 

39,408

 

Inventories

 

 

20,898

 

 

 

18,167

 

Restricted cash

 

 

8

 

 

 

7

 

Prepaid expenses and other current assets

 

 

4,180

 

 

 

4,170

 

Total current assets

 

 

385,701

 

 

 

369,645

 

Property and equipment, net

 

 

3,642

 

 

 

3,448

 

Deferred tax assets, non-current

 

 

5,743

 

 

 

4,626

 

Intangible assets, net

 

 

4,173

 

 

 

4,178

 

Goodwill

 

 

26,601

 

 

 

26,601

 

Other non-current assets

 

 

1,998

 

 

 

2,117

 

Total assets

 

$

427,858

 

 

$

410,615

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

19,723

 

 

 

14,175

 

Accrued liabilities

 

 

23,123

 

 

 

23,778

 

Income taxes payable

 

 

 

 

 

787

 

Deferred revenue

 

 

5,464

 

 

 

10,077

 

Total current liabilities

 

 

48,310

 

 

 

48,817

 

Other long-term liabilities

 

 

2,793

 

 

 

12,342

 

Total liabilities

 

 

51,103

 

 

 

61,159

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

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

   authorized and no shares issued and outstanding at July 31, 2016 and

   January 31, 2016, respectively

 

 

 

 

 

 

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

   authorized at July 31, 2016 and January 31, 2016, respectively;

   32,677,136 shares issued and outstanding at July 31, 2016; 32,333,359

   shares issued and outstanding at January 31, 2016

 

 

15

 

 

 

15

 

Additional paid-in capital

 

 

181,690

 

 

 

176,306

 

Accumulated other comprehensive income (loss)

 

 

33

 

 

 

(7

)

Retained earnings

 

 

195,017

 

 

 

173,142

 

Total shareholders’ equity

 

 

376,755

 

 

 

349,456

 

Total liabilities and shareholders' equity

 

$

427,858

 

 

$

410,615

 

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 July 31,

 

 

Six Months Ended July 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

$

65,142

 

 

$

84,193

 

 

$

122,299

 

 

$

155,206

 

Cost of revenue

 

 

21,672

 

 

 

29,345

 

 

 

42,122

 

 

 

54,440

 

Gross profit

 

 

43,470

 

 

 

54,848

 

 

 

80,177

 

 

 

100,766

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

23,643

 

 

 

20,840

 

 

 

48,109

 

 

 

37,423

 

Selling, general and administrative

 

 

10,565

 

 

 

9,087

 

 

 

21,458

 

 

 

18,097

 

Total operating expenses

 

 

34,208

 

 

 

29,927

 

 

 

69,567

 

 

 

55,520

 

Income from operations

 

 

9,262

 

 

 

24,921

 

 

 

10,610

 

 

 

45,246

 

Other income

 

 

171

 

 

 

127

 

 

 

198

 

 

 

154

 

Income before income taxes

 

 

9,433

 

 

 

25,048

 

 

 

10,808

 

 

 

45,400

 

Provision for income taxes

 

 

801

 

 

 

1,951

 

 

 

393

 

 

 

3,449

 

Net income

 

$

8,632

 

 

$

23,097

 

 

$

10,415

 

 

$

41,951

 

Net income per share attributable to ordinary shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

 

$

0.73

 

 

$

0.32

 

 

$

1.34

 

Diluted

 

$

0.25

 

 

$

0.68

 

 

$

0.31

 

 

$

1.25

 

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

   shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

32,557,398

 

 

 

31,515,446

 

 

 

32,492,723

 

 

 

31,307,236

 

Diluted

 

 

34,175,466

 

 

 

33,904,222

 

 

 

34,063,103

 

 

 

33,688,239

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

4


AMBARELLA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

 

 

Three Months Ended July 31,

 

 

Six Months Ended July 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

8,632

 

 

$

23,097

 

 

$

10,415

 

 

$

41,951

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on investments

 

 

13

 

 

 

(7

)

 

 

40

 

 

 

(23

)

Other comprehensive income (loss), net of tax

 

 

13

 

 

 

(7

)

 

 

40

 

 

 

(23

)

Comprehensive income

 

$

8,645

 

 

$

23,090

 

 

$

10,455

 

 

$

41,928

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

5


AMBARELLA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

Six Months Ended July 31,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

10,415

 

 

$

41,951

 

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

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

842

 

 

 

755

 

Amortization/accretion of marketable securities

 

 

125

 

 

 

283

 

Loss on disposal of long-lived assets

 

 

10

 

 

 

8

 

Stock-based compensation

 

 

22,767

 

 

 

11,603

 

Excess income tax benefits associated with stock-based compensation

 

 

 

 

 

(263

)

Other non-cash items, net

 

 

57

 

 

 

72

 

Changes in operating assets and liabilities, net of impact of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

5,820

 

 

 

(1,467

)

Inventories

 

 

(2,731

)

 

 

(5,979

)

Prepaid expenses and other current assets

 

 

2

 

 

 

1,369

 

Deferred tax assets

 

 

1,054

 

 

 

(223

)

Other assets

 

 

119

 

 

 

(26

)

Accounts payable

 

 

5,548

 

 

 

(741

)

Accrued liabilities

 

 

(543

)

 

 

5,466

 

Income taxes payable

 

 

(787

)

 

 

2,395

 

Deferred tax liabilities

 

 

(58

)

 

 

(20

)

Deferred revenue

 

 

(4,613

)

 

 

2,034

 

Other long-term liabilities

 

 

26

 

 

 

23

 

Net cash provided by operating activities

 

 

38,053

 

 

 

57,240

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition, net of cash acquired

 

 

 

 

 

(29,905

)

Purchase of investments

 

 

(50,214

)

 

 

(28,661

)

Sales of investments

 

 

19,827

 

 

 

9,908

 

Maturities of investments

 

 

19,560

 

 

 

15,900

 

Purchase of property and equipment

 

 

(997

)

 

 

(615

)

Net cash used in investing activities

 

 

(11,824

)

 

 

(33,373

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Stock repurchase

 

 

(20,183

)

 

 

 

Proceeds from exercise of stock options and employee stock purchase plan

 

 

2,405

 

 

 

5,156

 

Excess income tax benefits associated with stock-based compensation

 

 

 

 

 

263

 

Net cash provided by (used in) financing activities

 

 

(17,778

)

 

 

5,419

 

Net increase in cash and cash equivalents

 

 

8,451

 

 

 

29,286

 

Cash and cash equivalents at beginning of period

 

 

268,056

 

 

 

170,291

 

Cash and cash equivalents at end of period

 

$

276,507

 

 

$

199,577

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

637

 

 

$

551

 

Supplemental disclosure of noncash investing activities:

 

 

 

 

 

 

 

 

Increase in accrued liabilities related to non-monetary assets purchases

 

$

86

 

 

$

29

 

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 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, or SoC, designs fully integrate high-definition video processing, image processing, 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, 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 2016 fiscal year filed with the SEC on March 25, 2016 (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 in Asia other than Japan, and through one large direct ODM customer, Chicony Electronics Co., Ltd., or Chicony. Termination of the relationships with these two customers could result in a temporary or permanent loss of revenue and termination of the relationship with Wintech could result in an obligation to repurchase unsold product. Furthermore, any credit issues from these two customers could impair their abilities to make timely payment to the Company. See Note 14 for additional information regarding concentration with these two 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 and money market 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. The cash equivalents and marketable securities consist primarily of money market funds, asset-backed securities, commercial paper, U.S. government securities, agency bonds and debt securities of corporations which management assesses to be highly liquid, in order to limit the exposure of each investment. 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 customer’s 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 as 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 security 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 market. 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. If actual market conditions are less favorable than projected, or if future demand for the Company’s products decrease, additional inventory write-downs may be required. Once inventory is written down, a new accounting cost basis is established and, accordingly, any associated reserve is not reversed until the inventory is sold or scrapped. There were no material inventory losses recognized for the three and six months ended July 31, 2016 and 2015, respectively.

 

8


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 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.

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. The revenue from engineering service agreements was not material for the three and six months ended July 31, 2016 and 2015, 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.

 

9


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 the Company’s tax positions and tax benefits, the Company considered and evaluated 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 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 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 Pr onouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard 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 (the “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. The original effective date of the ASU would have required the public companies to adopt the standard for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In July 2015, the FASB voted to amend the ASU by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. The deferral results in this new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (“ASU 2016-08”), which clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing (“ASU 2016-10”), which amends the guidance in ASU 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property. Accordingly, the Company must adopt ASU 2016-08 and ASU 2016-10 with ASU 2014-09 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 impact of adoption on its financial position, results of operations and disclosures.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. In connection with each annual and interim period, management is required to assess whether there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date, and to provide related footnote disclosures in certain circumstances. The new guidance is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. This ASU is not expected to have an impact on the Company’s financial statements or disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. The new guidance changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. It applies to entities that measure inventory using a method other than last-in, first-out (“LIFO”) and the retail inventory method (“RIM”). The new guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating 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 March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, to simplify and improve the accounting for employee share-based awards. The new standard amends the accounting for employee share-based payment transactions to require recognition of the tax effects resulting from the settlement of stock-based awards as income tax benefit or expense in the income statement in the reporting period in which they occur. In addition, the tax-related cash flows resulting from share-based payments will be classified as cash flows from operating activities and cash payments made to the taxing authorities on the employees’ behalf for withheld shares will be classified as financing activities on the statement of cash flows. The new guidance also provides an accounting policy election to account for forfeitures as they occur. The new guidance is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is permitted with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company elected to early adopt this new guidance in the first quarter of its fiscal year 2017. As a result of this adoption, the Company recorded an increase to retained earnings of $11.7 million to recognize U.S. net operating loss carryforwards attributable to tax benefits from excess stock-based compensation that had not been previously recognized and recorded a decrease to retained earnings of $0.2 million resulting from the election of accounting policy to account for forfeitures as they occur as of February 1, 2016. The Company also elected to apply the presentation for cash flows related to excess tax benefits prospectively. The presentation requirements for cash flows related to employee taxes paid for withheld shares has no impact on the Company’s condensed consolidated statements of cash flows. On February 1, 2016, the cumulative effect adjustment of these changes recognized in the beginning of retained earnings was approximately $11.5 million.

 

11


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 financia l instruments based on an estimated of current expected credit losses (ECL). Under the new model, available-for-sale (AFS) debt securities are required to estimate ECL 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 gui dance becomes effective. The Company does not believe the adoption of this new guidance will have material impact on its consolidated financial statements.

 

 

2. Financial Instruments and Fair Value

The Company invested a portion of its cash in debt securities that are denominated in U.S. dollars. The investment portfolio consists of money market funds, demand deposit, asset-backed securities, commercial paper, U.S. government securities, agency bonds 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 July 31, 2016

 

 

 

Amortized   Cost

 

 

Unrealized   Gains

 

 

Unrealized Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Money market funds

 

$

103

 

 

$

 

 

$

 

 

$

103

 

Demand deposit

 

 

10,000

 

 

 

 

 

 

 

 

 

10,000

 

Commercial paper

 

 

7,479

 

 

 

 

 

 

 

 

 

7,479

 

Corporate bonds

 

 

19,342

 

 

 

17

 

 

 

(2

)

 

 

19,357

 

Asset-backed securities

 

 

8,446

 

 

 

6

 

 

 

 

 

 

8,452

 

U.S. government securities

 

 

13,197

 

 

 

11

 

 

 

 

 

 

13,208

 

Agency bonds

 

 

2,023

 

 

 

1

 

 

 

 

 

 

2,024

 

Total cash equivalents and marketable securities

 

$

60,590

 

 

$

35

 

 

$

(2

)

 

$

60,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 31, 2016

 

 

 

Amortized   Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Money market funds

 

$

530

 

 

$

 

 

$

 

 

$

530

 

Commercial paper

 

 

2,598

 

 

 

 

 

 

 

 

 

2,598

 

Corporate bonds

 

 

21,342

 

 

 

7

 

 

 

(9

)

 

 

21,340

 

Asset-backed securities

 

 

4,586

 

 

 

 

 

 

(1

)

 

 

4,585

 

U.S. government securities

 

 

9,274

 

 

 

4

 

 

 

(6

)

 

 

9,272

 

Agency bonds

 

 

2,044

 

 

 

 

 

 

(2

)

 

 

2,042

 

Total cash equivalents and marketable securities

 

$

40,374

 

 

$

11

 

 

$

(18

)

 

$

40,367

 

 

 

 

As of

 

 

 

July   31,   2016

 

 

January   31,   2016

 

 

 

(in thousands)

 

Included in cash equivalents

 

$

10,103

 

 

$

530

 

Included in marketable securities

 

 

50,520

 

 

 

39,837

 

Total cash equivalents and marketable securities

 

$

60,623

 

 

$

40,367

 

The contractual maturities of the investments at July 31, 2016 and January 31, 2016 were as follows:

 

 

As of

 

 

 

July   31,   2016

 

 

January   31,   2016

 

 

 

(in thousands)

 

Due within one year

 

$

52,856

 

 

$

33,449

 

Due within one to two years

 

 

7,767

 

 

 

6,918

 

Total cash equivalents and marketable securities

 

$

60,623

 

 

$

40,367

 

 

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 July 31, 2016 and January 31, 2016, 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 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, or model driven valuations using significant inputs derived from or corroborated by observable market data and are classified within Level 2.

The following table presents the fair value of the financial instruments measured on a recurring basis as of July 31, 2016 and January 31, 2016:

 

 

 

 

As of July 31, 2016

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

103

 

 

$

103

 

 

$

 

 

$

 

Demand deposit

 

 

10,000

 

 

 

10,000

 

 

 

 

 

 

 

 

Commercial paper

 

 

7,479

 

 

 

 

 

 

7,479

 

 

 

 

Corporate bonds

 

 

19,357

 

 

 

 

 

 

19,357

 

 

 

 

Asset-backed securities

 

 

8,452

 

 

 

 

 

 

8,452

 

 

 

 

U.S. government securities

 

 

13,208

 

 

 

 

 

 

13,208

 

 

 

 

Agency bonds

 

 

2,024

 

 

 

 

 

 

2,024

 

 

 

 

Total cash equivalents and marketable securities

 

$

60,623

 

 

$

10,103

 

 

$

50,520

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 31, 2016

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

530

 

 

$

530

 

 

$

 

 

$

 

Commercial paper

 

 

2,598

 

 

 

 

 

 

2,598

 

 

 

 

Corporate bonds

 

 

21,340

 

 

 

 

 

 

21,340

 

 

 

 

Asset-backed securities

 

 

4,585

 

 

 

 

 

 

4,585

 

 

 

 

U.S. government securities

 

 

9,272

 

 

 

 

 

 

9,272

 

 

 

 

Agency bonds

 

 

2,042

 

 

 

 

 

 

2,042

 

 

 

 

Total cash equivalents and marketable securities

 

$

40,367

 

 

$

530

 

 

$

39,837

 

 

$

 

 

 

 

13


3. Inventories

Inventory at July 31, 2016 and January 31, 2016 consisted of the following:

 

 

 

As of

 

 

 

July 31, 2016

 

 

January   31,   2016

 

 

 

(in thousands)

 

Work-in-progress

 

$

11,944

 

 

$

9,474

 

Finished goods

 

 

8,954

 

 

 

8,693

 

Total

 

$

20,898

 

 

$

18,167

 

 

 

4. Property and Equipment, Net

Depreciation expense was approximately $0.3 million and $0.4 million for the three months ended July 31, 2016 and 2015, respectively. Depreciation expense was approximately $0.8 million for the six months ended July 31, 2016 and 2015, respectively. Property and equipment at July 31, 2016 and January 31, 2016 consisted of the following:

 

 

 

As of

 

 

 

July 31, 2016

 

 

January   31,   2016

 

 

 

(in thousands)

 

Computer equipment and software

 

$

6,700

 

 

$

6,421

 

Machinery and equipment

 

 

3,004

 

 

 

2,706

 

Furniture and fixtures

 

 

794

 

 

 

492

 

Leasehold improvements

 

 

1,550

 

 

 

1,429

 

Construction in progress

 

 

195

 

 

 

253

 

 

 

 

12,243

 

 

 

11,301

 

Less: accumulated depreciation and amortization

 

 

(8,601

)

 

 

(7,853

)

Total property and equipment, net

 

$

3,642

 

 

$

3,448

 

 

 

5. Goodwill and Intangible Assets

On June 25, 2015, the Company completed the acquisition of VisLab S.r.l., 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. The intangible assets primarily consist of IPR&D. 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 July 31, 2016, there was no IPR&D amortized. There were no goodwill or intangible asset impairments for the three and six months ended July 31, 2016 and 2015, respectively. 

Pro forma results of operations for this acquisition have not been presented because they are not material to the consolidated results of operations.

 

 

 

14


6. Accrued Liabilities

Accrued liabilities at July 31, 2016 and January 31, 2016 consisted of the following:

 

 

 

As of

 

 

 

July 31, 2016

 

 

January   31,   2016

 

 

 

(in thousands)

 

Accrued employee compensation

 

$

11,806

 

 

$

14,512

 

Accrued warranty

 

 

200

 

 

 

234

 

Accrued rebates

 

 

1,191

 

 

 

824

 

Accrued product development costs

 

 

7,544

 

 

 

6,339

 

Other accrued liabilities

 

 

2,382

 

 

 

1,869

 

Total accrued liabilities

 

$

23,123

 

 

$

23,778

 

 

 

 

7. Deferred Revenue and Deferred Cost

Deferred revenue and related cost at July 31, 2016 and January 31, 2016 consisted of the following:

 

 

 

As of

 

 

 

July 31, 2016

 

 

January   31,   2016

 

 

 

(in thousands)

 

Deferred revenue on product shipments

 

$

6,048

 

 

$

12,201

 

Deferred revenue from licenses & services

 

 

1,957

 

 

 

1,653

 

Deferred cost of revenue on product shipments

 

 

(2,541

)

 

 

(3,777

)

Total deferred revenue, net

 

$

5,464

 

 

$

10,077

 

 

 

8. Other Long-Term Liabilities

Other long-term liabilities at July 31, 2016 and January 31, 2016 consisted of the following:

 

 

 

As of

 

 

 

July 31, 2016

 

 

January   31,   2016

 

 

 

(in thousands)

 

Unrecognized tax benefits, including interest

 

$

1,427

 

 

$

10,917

 

Deferred tax liabilities, non-current

 

 

1,364

 

 

 

1,423

 

Other long-term liabilities

 

 

2

 

 

 

2

 

Total other long-term liabilities

 

$

2,793

 

 

$

12,342

 

 

On February 1, 2016, upon the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting , the Company recognized approximately $11.7 million of tax-effected previously unrecognized excess stock-based compensation deductions. As a result of recognizing these deductions, the Company reduced its unrecognized tax benefits by $9.5 million pursuant to accounting guidance, which provides that an unrecognized tax benefit shall be presented as a reduction to a deferred tax benefit to the extent such deferred tax benefit is available.

 

 

9. Capital Stock

Preference shares

After completion of the Company’s initial public offering, or IPO, 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 July 31, 2016 and January 31, 2016, respectively.

Ordinary shares

As of July 31, 2016 and January 31, 2016, a total of 200,000,000 ordinary shares were authorized.

 

15


On February 1, 2016, the Company added 1,455,001 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 February 1, 2016, the Company added 404,166 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.

As of July 31, 2016 and January 31, 2016, the following ordinary shares were reserved for future issuance under the EIP and ESPP:

 

 

 

As of

 

 

 

July 31, 2016

 

 

January 31, 2016

 

Shares reserved for options, restricted stock and restricted stock units

 

 

5,791,467

 

 

 

5,027,475

 

Shares reserved for employee stock purchase plan

 

 

1,320,582

 

 

 

974,273

 

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. 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 will be funded using the Company’s working capital and any repurchased shares will be recorded as authorized but unissued shares and available for general corporate purposes. As of July 31, 2016, a total of 405,089 shares were repurchased for approximately $20.2 million in cash and recorded as a reduction to equity.

 

10. Stock-based Compensation

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

 

 

 

Three Months Ended July 31,

 

 

Six Months Ended July 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Stock-based compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

246

 

 

$

127

 

 

$

491