Description of Business and Summary of Significant Accounting Policies | 9 Months Ended |
Sep. 30, 2014 |
Description of Business and Summary of Significant Accounting Policies | ' |
Description of Business and Summary of Significant Accounting Policies | ' |
1. Description of Business and Summary of Significant Accounting Policies |
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Control4 Corporation (‘‘Control4’’ or the ‘‘Company’’) is a leading provider of automation and control solutions for the connected home. The Company unlocks the potential of connected devices, making entertainment systems easier to use, homes more comfortable, appliances more energy efficient, and families more secure. The Company was incorporated in the state of Delaware on March 27, 2003. |
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Unaudited Interim Financial Statements |
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The accompanying condensed consolidated balance sheets and the condensed consolidated statements of operations, comprehensive income and cash flows are unaudited. These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (‘‘GAAP’’) on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting of only normal recurring adjustments, considered necessary to present fairly the Company’s financial position, results of operations and cash flows. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014, or any other future interim or annual period. |
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These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 21, 2014. The December 31, 2013 consolidated balance sheet included herein was derived from the audited financial statements as of that date. |
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Reclassifications |
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Certain prior-year amounts have been reclassified in order to conform to the current-year presentation. A reclassification was made from general and administrative expenses to other income (expense) related to foreign currency transaction gains (losses). As a result, income from operations is impacted by $0.2 million for the three months ended September 30, 2013, and by $10,000 for the nine months ended September 30, 2013, but this reclassification did not impact previously reported net income, or related per share amounts, for either period. In addition, a reclassification was made related to international hospitality revenue previously disclosed as United States hospitality revenue. The reclassification did not materially impact previous disclosures related to geographic information. Furthermore, this reclassification had no effect on previously reported amounts related to total revenue, income from continuing operations, net income or related per share amounts, and does not impact previous disclosures regarding concentrations of revenue. |
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Basis of Presentation |
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The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in the unaudited condensed consolidated financial statements. |
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Segment Reporting |
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Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, the Chief Executive Officer, in making decisions regarding resource allocation and accessing performance. To date, the Company has viewed its operations and manages its business as one operating segment. |
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Concentrations of Risk |
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The Company’s accounts receivable are derived from revenue earned from its worldwide network of dealers and distributors. The Company’s sales to dealers and distributors located outside the United States are generally denominated in United States dollars, except for sales to dealers and distributors located in the United Kingdom and the European Union, which are generally denominated in pounds sterling and the euro, respectively. There were no individual account balances greater than 10% of total accounts receivable at December 31, 2013 and September 30, 2014. |
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No dealer or distributor accounted for more than 10% of total revenue for the three and nine months ended September 30, 2013 and 2014. |
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The Company relies on a limited number of suppliers for its contract manufacturing. A significant disruption in the operations of these manufacturers would impact the production of the Company’s products for a substantial period of time, which could have a material adverse effect on the Company’s business, financial condition and results of operations. |
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Geographic Information |
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The Company’s revenue includes amounts earned through sales to dealers and distributors located outside of the United States. With the exception of Canada, no single foreign country accounted for more than 10% of total revenue for the three and nine months ended September 30, 2013 and 2014. The following table sets forth revenue from the United States, Canada and all other international dealers and distributors combined (in thousands): |
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| | Three Months Ended | | Nine Months Ended | |
September 30, | September 30, |
| | 2013 | | 2014 | | 2013 | | 2014 | |
Revenue-United States | | $ | 22,140 | | $ | 25,517 | | $ | 60,933 | | $ | 71,211 | |
Revenue-Canada | | 3,641 | | 4,140 | | 10,690 | | 10,802 | |
Revenue-all other international sources | | 7,860 | | 9,463 | | 21,132 | | 25,623 | |
Total revenue | | $ | 33,641 | | $ | 39,120 | | $ | 92,755 | | $ | 107,636 | |
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International revenue (excluding Canada) as a percent of total revenue | | 23 | % | 24 | % | 23 | % | 24 | % |
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Use of Accounting Estimates |
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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates including those related to revenue recognition, sales returns, provisions for doubtful accounts, asset impairment, product warranty, inventory obsolescence, litigation, determination of fair value of stock options, deferred tax asset valuation allowances and income taxes. Actual results may differ from those estimates. |
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Product Warranty |
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The Company provides its customers a limited product warranty of two years, which requires the Company to repair or replace (at its option) defective products during the warranty period at no cost to the customer. The Company estimates the costs that may be incurred to replace or repair defective products and records a reserve at the time revenue is recognized. Factors that affect the Company’s warranty liability include the number of installed systems, the Company’s historical experience and management’s judgment regarding anticipated rates of product warranty returns, net of refurbished products. The Company assesses the adequacy of its recorded warranty liability each period and makes adjustments to the liability as necessary. Warranty costs accrued includes amounts accrued for products at the time of shipment, adjustments for changes in estimated costs for warranties on products shipped in the period, and changes in estimated costs for warranties on products shipped in prior periods. It is not practicable for the Company to determine the amounts applicable to each of these components. |
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The following table presents the changes in the product warranty liability (in thousands): |
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| | Warranty Liability | | | | | | | | | | |
Balance at December 31, 2013 | | $ | 1,213 | | | | | | | | | | |
Warranty costs accrued | | 679 | | | | | | | | | | |
Warranty claims | | (778 | ) | | | | | | | | | |
Balance at September 30, 2014 | | $ | 1,114 | | | | | | | | | | |
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Net Income Per Share |
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Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares outstanding and potentially dilutive common shares outstanding during the period that have a dilutive effect on net income per share. Potentially dilutive common shares result from the assumed exercise of outstanding stock options and the assumed conversion of outstanding convertible preferred stock and warrants using the if-converted method. In a net loss position, diluted net loss per share is computed using only the weighted-average number of common shares outstanding during the period, as any additional common shares would be anti-dilutive. |
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The following table presents the reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share (in thousands): |
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| | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2013 | | 2014 | | 2013 | | 2014 | |
Numerator: | | | | | | | | | |
Net income | | $ | 1,731 | | $ | 2,763 | | $ | 1,233 | | $ | 4,235 | |
Denominator: | | | | | | | | | |
Weighted average common stock outstanding for basic net income per common share | | 14,389 | | 23,840 | | 6,511 | | 23,559 | |
Effect of dilutive securities—stock options, convertible preferred stock, and warrants to purchase common stock and preferred stock | | 9,167 | | 1,750 | | 14,695 | | 2,112 | |
Weighted average common shares and dilutive securities outstanding | | 23,556 | | 25,590 | | 21,206 | | 25,671 | |
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The following weighted-average common stock equivalents were anti-dilutive and therefore were excluded from the calculation of diluted net income per share (in thousands): |
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| | Three Months Ended | | Nine Months Ended | | | | | |
| | September 30, | | September 30, | | | | | |
| | 2013 | | 2014 | | 2013 | | 2014 | | | | | |
Convertible preferred stock | | — | | — | | — | | — | | | | | |
Options to purchase common stock | | 253 | | 1,245 | | 355 | | 912 | | | | | |
Warrants to purchase common stock | | — | | — | | — | | — | | | | | |
Warrants to purchase preferred stock | | — | | — | | 1 | | — | | | | | |
Total | | 253 | | 1,245 | | 356 | | 912 | | | | | |
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Restricted Cash |
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Restricted cash as of September 30, 2014, is composed of a guarantee made by our subsidiary in the United Kingdom to HM Revenue & Customs related to a customs duty deferment account. |
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Recent Accounting Pronouncements |
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In July 2013, the FASB issued ASU 2013-11, ‘‘Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.’’ The amended guidance requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance was effective for the Company beginning January 1, 2014. The adoption of this guidance did not have an impact on the Company’s results of operations, financial position, or cash flows as it relates only to financial statement presentation. |
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In May 2014, the FASB issued ASU 2004-09, “Revenue from Contracts with Customers (Topic 606),” which amends the guidance in ASC 605, “Revenue Recognition.” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is still evaluating the impact of adopting this guidance as well as whether the Company will apply the amendments retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of applying this update at the date of initial application. |
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In August 2014, the FASB issued ASU 2014-15, ‘‘Presentation of Financial Statements — Going Concern (Subtopic 205-40).’’ The amended guidance requires an entity to prepare financial statements under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting, if liquidation of the entity becomes imminent. The guidance is effective for the annual period ending on December 31, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of this guidance will not have an impact on the Company’s results of operations, financial position, or cash flows. |
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