Description of Business and Summary of Significant Accounting Policies (Policies) |
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| Description of Business and Summary of Significant Accounting Policies | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation | Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly‑owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidated financial statements. |
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| Segment Reporting | Segment Reporting 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 assessing performance. To date, the Company has viewed its operations and manages its business as one operating segment. |
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| Concentrations of Risk | Concentrations of Risk The Company’s accounts receivable is derived from revenue earned from its worldwide network of independent dealers and distributors. The Company’s sales to dealers and distributors located outside the United States are generally denominated in U.S. dollars, except for sales to dealers and distributors located in the United Kingdom, Canada, Australia, and the European Union, which are generally denominated in pounds sterling, Canadian dollars, Australian dollars, and the euro, respectively. There were no individual account balances greater than 10% of total accounts receivable as of December 31, 2016 and 2015.
No dealer or distributor accounted for more than 10% of total revenue for the years ended December 31, 2016, 2015 and 2014. The Company relies on a limited number of suppliers for its contract manufacturing. A significant disruption in the operations of certain 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 | Geographic Information The Company’s revenue includes amounts earned through sales to dealers and distributors located outside of the United States. There was no single foreign country that accounted for more than 10% of total revenue for the years ended December 31, 2016 and 2015. With the exception of Canada, no single foreign country accounted for more than 10% of total revenue for the year December 31, 2014. The following table sets forth revenue from U.S., Canadian and all other international dealers and distributors combined (in thousands):
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| Use of Accounting Estimates | Use of Accounting Estimates 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, 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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| Limited Product Warranties | Limited Product Warranties
The Company provides its customers a limited product warranty of two years for all Control4 branded products and three years for all Pakedge branded products. The limited product warranties require the Company, at its option, to repair or replace defective products during the warranty period at no cost to the customer or refund the purchase price. The Company estimates the costs that may be incurred to replace, repair or issue a refund for defective products and records a reserve at the time revenue is recognized. Factors that affect the Company’s warranty liability include the cost of the products sold, 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 include 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.
The following table presents the changes in the product warranty liability (in thousands):
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| Net Income (Loss) Per Share | Net Income (Loss) Per Share Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) 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 settlement of restricted stock units. The following table presents the reconciliation of the numerator and denominator used in the calculation of basic and diluted net income (loss) per share (in thousands):
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 as they would decrease the loss per share. Potentially dilutive securities, including common equivalent shares, in which the assumed proceeds exceed the average market price of common stock for the applicable period, were not included in the calculation of diluted net income per share as their impact would be anti-dilutive. The following weighted-average common stock equivalents were anti-dilutive and therefore were excluded from the calculation of diluted net income (loss) per share (in thousands):
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| Revenue Recognition | Revenue Recognition The Company sells its products through a network of independent dealers, regional and national retailers and distributors. These dealers, retailers and distributors generally sell the Company’s products to the end consumer as part of a bundled sale, which typically includes other third‑party products and related services, project design and installation services and on‑going support. The Company records estimated reductions to revenue for dealer, retailer and distributor incentives at the time of the initial sale. The estimated reductions to revenue are based on the sales terms and the Company’s historical experience and trend analysis. The most common incentive relates to amounts paid or credited to dealers and distributors for achieving defined volume levels or growth objectives. The Company’s products include embedded software that is essential to the functionality of the hardware. Accordingly, the hardware and embedded software are accounted for as a single deliverable. The Company bundles Control4 App software licenses with its new controllers. These software licenses do not include acceptance provisions, rights to updates (e.g., when‑and‑if‑available enhancements or upgrades to the functionality of the software) or post‑contract customer support such as technical support. When a software license and controller are sold together, a multiple element arrangement exists and revenue is allocated to each deliverable based on relative selling prices. Typically, delivery of both the product and the software license occurs at the same time. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is reasonably assured. Product or licensed software is considered delivered once it has been shipped and title and risk of loss have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. Software license revenue represents fees earned from activating applications which allow end consumers to view and configure certain features of their dealer installed and Control4 managed devices. Software products such as Composer Home and Media Editions are sold on a limited basis and do not constitute a significant portion of revenue. The Company’s perpetual software licenses do not include acceptance provisions, rights to updates or upgrades or post‑contract customer support such as technical support; the Company generally recognizes revenue at the time the software license is provided. The Company offers a subscription service that allows consumers to control and monitor their homes remotely and allows the Company’s dealers to perform remote diagnostic services. Subscription revenue is deferred at the time of payment and recognized on a straight‑line basis over the period the service is provided. Total revenue for subscription services represents less than 10% of total revenue for all periods presented. The Company recognizes revenue net of cost of revenue for third‑party products sold through the Company’s online ordering system. While the Company assumes credit risk on sales to its dealers and distributors for third‑party products, the Company does not determine the product selling price, does not retain associated inventory risks and is not the primary obligor to the end consumer. The Company’s agreements with dealers and distributors generally do not include rights of return or acceptance provisions. Even though contractual agreements do not provide return privileges, there are circumstances in which the Company will accept returns. In addition, agreements with certain retail distributors contain price protection and limited rights of return. The Company maintains a reserve for such returns based on the Company’s historical return experience. Shipping charges billed to dealers and distributors are included in revenue and related shipping costs are included in cost of revenue. |
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| Cost of Revenue | Cost of Revenue Cost of revenue includes the following: the cost of inventory sold during the period, inventory write‑down costs, payroll, purchasing costs, royalty obligations, shipping expenses to dealers and distributors and warehousing costs, which include inbound freight costs from manufacturers, rent, payroll and benefit costs, acquisition-related costs, amortization of intangible assets and depreciation. |
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| Cash and Cash Equivalents | Cash and Cash Equivalents The Company considers all highly liquid short‑term investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents consist primarily of money market funds. |
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| Restricted Cash | Restricted Cash
Restricted cash as of December 31, 2016 and 2015, 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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| Allowance for Doubtful Accounts | Allowance for Doubtful Accounts The Company extends credit to the majority of its dealers and distributors, which consist primarily of small, local businesses. Issuance of credit is based on ongoing credit evaluations by the Company of dealers’ and distributors’ financial condition and generally requires no collateral. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts to reserve for potential uncollectible receivables. The allowance is based upon the creditworthiness of the Company’s dealers and distributors, the dealers’ and distributors’ historical payment experience, the age of the receivables and current market and economic conditions. Provisions for potentially uncollectible accounts are recorded in sales and marketing expenses. The Company writes off accounts receivable balances to the allowance for doubtful accounts when it becomes likely that they will not be collected. The following table presents the changes in the allowance for doubtful accounts (in thousands):
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| Inventories | Inventories Inventories consist primarily of hardware and related component parts and are stated at the lower of cost or net realizable value using the first‑in, first‑out method. The Company periodically assesses the recoverability of its inventory and reduces the carrying value of the inventory when items are determined to be obsolete, defective or in excess of forecasted sales requirements. Inventory write‑downs for excess, defective and obsolete inventory are recorded as a cost of revenue and totaled $3.1 million, $2.3 million, and $1.7 million, for the years ended December 31, 2016, 2015 and 2014, respectively. |
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| Property and Equipment | Property and Equipment Property and equipment are recorded at historical cost, less accumulated depreciation. Depreciation is computed using the straight‑line method over the following estimated useful lives:
Maintenance and repairs that do not extend the life of or improve the asset are expensed in the year incurred. Leasehold improvements are depreciated over the estimated useful life (usually 3‑8 years) or the life of the associated lease, whichever is less. For the years ended December 31, 2016 and 2015, the Company did not record significant leasehold improvement assets that were paid by the landlord. During the year ended December 31, 2014, the Company recorded approximately $0.7 million of leasehold improvement assets that were paid by the landlord, with a corresponding liability as the tenant improvement allowance was determined to be an incentive for renewing the lease. As of December 31, 2016 and 2015, $0.4 million and $0.5 million of these leasehold improvement assets are remaining, respectively. |
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| Intangible Assets | Intangible Assets Intangible assets primarily consist of acquired technology, customer relationships and trademarks/trade names. The Company amortizes, to cost of revenue and operating expenses, definite‑lived intangible assets on a straight‑line basis over the life of the asset. |
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| Impairment of Long-Lived Assets and Goodwill | Impairment of Long‑Lived Assets and Goodwill The carrying value of long‑lived assets is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. The Company tests goodwill for impairment annually as of October 1, or whenever events or changes in circumstances indicate that goodwill may be impaired. The Company initially assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then the Company performs a first step by comparing the book value of net assets to the fair value of the Company’s single reporting unit. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. There was no impairment of long-lived assets or goodwill during the years ended December 31, 2016, 2015 and 2014. |
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| Foreign Currency Translation | Foreign Currency Translation The functional currency of the Company’s subsidiaries in the United Kingdom, Germany, Australia, China, and India are the pound sterling, the euro, the Australian dollar, the Chinese yuan, and the Indian rupee, respectively. The subsidiary’s assets and liabilities have been translated to U.S. dollars using the exchange rates in effect at the balance sheet dates. Statements of operations amounts have been translated using the monthly average exchange rate for each year. Resulting gains or losses from translating foreign currency financial statements are recorded as other comprehensive income (loss). Foreign currency transaction gains and losses resulting from exchange rate fluctuations on transactions denominated in a currency other than the local currency are primarily included in other income (expense). The Company recognized foreign exchange losses of $0.6 million, $0.8 million and $0.4 million for the years ended December 31, 2016, 2015 and 2014, respectively. |
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| Stock-Based Compensation | Stock‑Based Compensation The Company recognizes compensation expense for all stock‑based awards issued to employees and directors based on estimated grant date fair values. The Company selected the Black‑Scholes option‑pricing model to determine the estimated fair value at the date of grant for stock options. The fair value of each restricted stock unit award is based on the number of shares granted and the closing price of the Company’s common stock as reported on the NASDAQ Global Select Market. The Company elected to amortize compensation expense using the straight‑line attribution method, under which stock‑based compensation expense is recognized on a straight‑line basis over the period the employee performs the related services, generally the vesting period, net of estimated forfeitures. The Company has estimated forfeiture rates based on its historical experience. The Black‑Scholes option‑pricing model requires management assumptions regarding various factors that require extensive use of accounting judgment and financial estimates. The Company estimates the expected term for options using the simplified method, which utilizes the weighted average expected life of each tranche of the stock option, determined based on the sum of each tranche’s vesting period plus one‑half of the period from the vesting date of each tranche to the stock option’s expiration, because the Company’s options are considered “plain vanilla.” The Company computed the expected volatility using multiple peer companies for a period approximating the expected term. The risk‑free interest rate was determined using the implied yield on U.S. Treasury issues with a remaining term within the expected life of the award. The Company accounts for stock‑based instruments and awards issued to non‑employees at fair value. Management believes that the fair value of the stock‑based awards is more reliably measured than the fair value of the services received. The fair value of each non‑employee award is re‑measured each period until a commitment date is reached, which is generally the vesting date. |
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| Income Taxes | Income Taxes The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the fiscal year in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. The Company provides for tax contingencies whenever it is deemed probable that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their technical merits, relative tax law and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies. The Company recognizes uncertain income tax positions taken on income tax returns at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of its income tax provision. During the years ended December 31, 2016, 2015 and 2014, we did not record any material interest income, interest expense or penalties related to uncertain tax positions or the settlement of audits for prior periods. |
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| Presentation of Certain Taxes | Presentation of Certain Taxes The Company collects various taxes from dealers and distributors and remits these amounts to the applicable taxing authorities. The Company’s accounting policy is to exclude these taxes from revenue and cost of revenue. |
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| Research and Development | Research and Development Research and development expenses consist primarily of personnel costs, including incentive compensation, depreciation associated with research and development equipment, contract labor and consulting services, facilities‑related costs, and travel‑related costs. Research and development costs are expensed as incurred. |
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| Sales and Marketing | Sales and Marketing Sales and marketing costs consist primarily of dealer-directed advertising and promotions, lead generation, social media engagements and training events, tradeshow expenditures and market-specific advertising. Advertising and other promotional costs are expensed as incurred and were $1.2 million, $2.4 million, and $0.5 million, for the years ended December 31, 2016, 2015, and 2014, respectively. |
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| Recent Accounting Pronouncements | Recent Accounting Pronouncements In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”. The amendments in this update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 31, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing after January 1, 2017. The Company notes that this guidance applies to its reporting requirements and will implement the new guidance accordingly in performing goodwill impairment testing; however, the Company doesn’t believe this update will have a material impact on the consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which provides amendments to current guidance to address the classifications and presentation of changes in restricted cash in the statement of cash flows. The effective date for the standard is for fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on the 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 amendments in this update will require recognition of current and deferred income taxes resulting from an intra-entity transfer of an asset other than inventory when the transfer occurs. This update is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. This standard is effective for fiscal periods beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted and the guidance must be applied using a retrospective transition method. The Company is currently evaluating the impact of adopting this guidance.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)” which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. For trade receivables, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The guidance is effective for fiscal years beginning after December 31, 2019, including interim periods within those years. Early application of the guidance is permitted for all entities for fiscal years beginning after December 15, 2018, including the interim periods within those fiscal years. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of this update on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 will be effective for the Company in fiscal year 2017. Any adjustments resulting from the adoption of this standard will be reflected as of the beginning of the fiscal year of adoption. In accordance with the provisions of this standard, beginning on January 1, 2017, the Company will recognize the effect of share-based compensation windfall or shortfall adjustments in the statement of operations in the period in which they arise, unlike the historical requirement to defer recognition of windfall or shortfall adjustments through an adjustment to shareholder equity in the period the windfall or shortfall adjustments impacted cash taxes paid.
As of December 31, 2016, the Company has $20.6 million and $17.6 million of gross federal and state NOLs attributable to excess windfall benefits from share-based compensation, respectively, which have not been historically recorded as a component of the deferred tax asset for NOL carryforwards. As a result of this new ASU, beginning January 1, 2017, the Company will increase its net deferred tax asset for NOL carryforwards, with a corresponding cumulative effect of adoption adjustment to accumulated deficit, in the amount of $7.7 million. If, at the date of adoption, the Company still has a full valuation allowance recorded against its domestic net deferred tax asset, a corresponding adjustment will be recorded to increase the valuation allowance by $7.7 million with an offsetting adjustment to accumulated deficit. In addition, the Company has elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively which will result in an increase in both net cash provided by operating activities and net cash used in financing activities of $0.1 million for the year ended December 31, 2016. The Company doesn’t anticipate that the amendment to the accounting for minimum statutory withholding requirements will have a material impact to retained earnings as of January 1, 2017. In addition, under the provisions of ASU 2016-09, the Company has elected to recognize forfeitures as they occur to determine the amount of compensation cost to be recognized in each period which will result in an increase of $0.3 million to accumulated deficit on January 1, 2017.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which supersedes the guidance in ASC 840, “Leases.” The purpose of the new standard is to improve transparency and comparability related to the accounting and reporting of leasing arrangements. The guidance will require balance sheet recognition for assets and liabilities associated with rights and obligations created by leases with terms greater than twelve months. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Modified retrospective application is required. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Subtopic 330) – Simplifying the Measurement of Inventory.” This update requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. The guidance is effective in fiscal years beginning after December 15, 2016, including interim periods within those years. Prospective application is required. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company early adopted this guidance this quarter, and the adoption of this guidance did not have an impact on the results of operations, financial position, or cash flows.
In May 2014, the FASB issued ASU 2014-09, “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. In August 2015, the FASB issued ASU 2015-14, deferring the effective date of this standard for one year, and is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The deferred standard allows early adoption of the standard on the original effective date which would be effective for annual reporting periods beginning after December 15, 2016. The Company does not plan to early adopt, and accordingly, will adopt the new standard effective January 1, 2018.
The Company is currently evaluating the impact of the new standard on the sale of the Company’s products to dealers, retailers and distributors and has defined what constitutes a contract for this revenue stream. The Company is in the final stages of analyzing performance obligations, but has not made any formal conclusions. Depending on the results of the performance obligation analysis, there could be changes to the timing of recognition of revenue and expenses.
The Company is still in the initial stages of assessing the impact of this ASU as it relates to other ancillary revenue streams such as software license revenue, service revenue, and revenue for third-party products sold. In addition, the Company is still evaluating the adoption method it will elect upon implementation. The final determination of the adoption method will depend on a number of factors including the significance of the new standard on the Company’s financial results. The Company is also in the process of implementing appropriate changes to its business processes, systems and controls to support recognition and disclosures under the new standard. |
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