UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM TO
Commission File Number 001-38952
CAMBIUM NETWORKS CORPORATION
(Exact name of Registrant as specified in its Charter)
Cayman Islands
(State or other jurisdiction of
incorporation or organization)
3800 Golf Road, Suite 360
Rolling Meadows, Illinois
(Address of principal executive offices)
Not Applicable
(I.R.S. Employer
Identification No.)
60008
(Zip Code)
Registrant’s telephone number, including area code: (345) 943-3100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary shares, $0.0001 par value
Trading
Symbol(s)
CMBM
Name of each exchange on which registered
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☐
☒
☒
Accelerated filer
Smaller reporting company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the ordinary shares held by non-affiliates on June 28, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter),
based on the last sale price of the common shares on that date of $9.59 was $55,769,964. For purposes of this calculation, shares held by Vector Capital and our Chief Executive
Officer are deemed to be affiliates of the registrant and are excluded from the calculation.
As of March 18, 2020, there were 25,680,831 shares of the registrant’s ordinary shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2020 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the
extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2019.
Table of Contents
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
Selected Financial Data
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16
Form 10-K Summary
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Note regarding forward-looking statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. All statements other than
statements of historical fact contained in this Annual Report on Form 10-K, including statements regarding our future results of operations and financial
position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known
and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, forward-looking statements may be identified by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,”
“intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar
expressions. The forward-looking statements in this Annual Report on Form 10-K are only predictions. We have based these forward-looking statements
largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and
results of operations. These forward-looking statements speak only as of the date of this report and are subject to a number of risks, uncertainties and
assumptions described in Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Because forward-looking statements are inherently
subject to risks and uncertainties, some of which cannot be predicted or quantified, they should not be relied upon as predictions of future events. The
events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those
projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:
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the unpredictability of our operating results;
our inability to predict and respond to emerging technological trends and network operators’ changing needs;
our reliance on third-party manufacturers, which subjects us to risks of product delivery delays and reduced control over product costs and
quality;
our reliance on distributors and value-added resellers for the substantial majority of our sales;
the impact of actual or threatened health epidemics and other outbreaks;
the inability of our third-party logistics and warehousing providers to deliver products to our channel partners and network operators in a
timely manner;
the quality of our support and services offerings;
our expectations regarding outstanding litigation;
our distributors’ and channel partners’ inability to attract new network operators or sell additional products to network operators that
currently use our products;
the difficulty of comparing or forecasting our financial results on a quarter-by-quarter basis due to the seasonality of our business;
our limited or sole source suppliers’ inability to produce third-party components to build our products;
the technological complexity of our products, which may contain undetected hardware defects or software bugs;
our channel partners’ inability to effectively manage inventory of our products, timely resell our products or estimate expected future
demand;
credit risk of our channel partners, which could adversely affect their ability to purchase or pay for our products;
our inability to manage our growth and expand our operations;
unpredictability of sales and revenues due to lengthy sales cycles;
our inability to maintain an effective system of internal controls, produce timely and accurate financial statements or comply with applicable
regulations;
our reliance on the availability of third-party licenses;
risks associated with international sales and operations;
current or future unfavorable economic conditions, both domestically and in foreign markets; and
our inability to obtain intellectual property protections for our products
1
The foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.
Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a
result of any new information, future events or otherwise.
Trademarks and Service Marks
“Cambium” , “Cambium Networks”, “cnPilot”, “cnMaestro”, ‘cnMedusa”, “cnArcher”, “cnReach”, “cnHeat”, “cnRanger”, “LinkPlanner”,
“Xirrus”, the Cambium and Xirrus logos and other trademarks or service marks of Cambium Networks, Ltd. appearing in this Annual Report are the
Property of Cambium Networks Corporation. This Annual Report contains additional trade names, trademarks and service marks, which are the property of
their respective owners.
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Item 1. Business.
Overview
PART I
We provide wireless broadband networking infrastructure solutions for network operators, including medium-sized wireless internet service
providers, enterprises and government agencies. Our scalable, reliable and high-performance solutions create a purpose-built wireless fabric which
connects people, places and things across distances ranging from two meters to more than 100 kilometers, indoors and outdoors, using licensed and
unlicensed spectrum, at attractive economics.
Our wireless fabric includes intelligent radios, smart antennas, radio frequency, or RF, algorithms, wireless-aware switches and our cloud-based
network management software. Our embedded proprietary RF technology and software enables automated optimization of data flow at the outermost points
in the network, which we refer to as the “intelligent edge.” This intelligent edge offers network operators increased performance, visibility, control and
management, as well as the ability to efficiently transfer large amounts of data back to enterprise data centers for fast and efficient analysis and decision-
making even in conditions characterized by a high degree of interfering signals generated both within the network or from outside sources, which we refer
to as noise.
Our solutions are deployed by medium-sized wireless internet service providers and enterprises, including petrochemical, military, state and local
government, education, hospitality, rail, utility, industrial and other network operators that use our technology to connect a wide range of network assets,
from traditional offices to complex sensor networks. Network operators deploy our enterprise-grade solutions to take advantage of their scalability,
intelligence, reliability, attractive economics and ease of deployment:
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Superior outdoor scalability. Our solutions scale to greater density for outdoor applications because of their leading spectral efficiency.
Embedded network intelligence. Our solutions have embedded intelligence, utilizing software and RF algorithms that work together to
optimize network performance. This intelligence allows networks to adapt and evolve as network requirements vary, environments change,
and network footprints grow over time.
Reliable wireless connectivity in congested environments. Our solutions deliver superior reliability enabled by our technology’s frequency
reuse capabilities, embedded dynamic spectrum optimization and dynamic filtering abilities.
High quality at attractive economics. Our solutions improve economics for network operators by supporting a large number of customer
premise equipment, or CPE, per access point while providing enterprise-grade performance and quality. We reduce ongoing management
costs through device reliability and embedded software that independently manages and resolves network performance issues.
Ease of deployment and simplicity to scale the network. Network operators can utilize our cloud-based software to help design, install and
manage their networks from cloud-to-tower-to-edge. Our cloud-based network management software offers full lifecycle management of a
network through a single pane of glass, reducing the complexity of network operations and the onboarding of large numbers of devices.
Our products are typically deployed by medium-sized service providers, such as wireless internet service provider networks serving from 5,000 to
over 200,000 subscribers, enterprise networks and sensor heavy industrial networks. We estimate that medium-sized internet service providers contributed
approximately half of our revenues in 2017, 2018 and 2019.
We market and sell our solutions through our global channel partner network, which drives a substantial majority of our revenues. We sell our
solutions as one-time sales, although a majority of our revenues in a given period typically is generated by purchases from network operators that have
previously purchased our products. Growth from these network operators is driven by expansion within existing networks and in new territories,
replacement of competitor products with our solutions, deployment of new and incremental use cases and, in the case of local governments, mandated to
offer fixed broadband wireless to all of their citizens.
We have experienced rapid revenue growth over the last several years and we have shipped more than six million devices since 2012, including over
1.5 million in 2019, to more than 10,000 network operators in over 145 countries. For 2017, 2018 and 2019, our revenues were $216.7 million, $241.8
million, and $267.0 million, respectively. During the same periods, our net income (loss) was $9.8 million, $(1.5) million, and $(17.6) million, respectively.
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Industry
According to Cisco Annual Internet Report (2018-2023), globally, the total number of Internet users is projected to grow from 3.9 billion in 2018 to
5.3 billion by 2023 at a compound annual growth rate (“CAGR”) of 6%. Mobile-to-Mobile connections will be the fastest-growing device and connections
category, growing nearly 2.4-fold during the forecast period (19% CAGR) to 14.7 billion connections by 2023. Wi-Fi hotspots will grow four-fold from
2018 to 2023. Globally, there will be nearly 628 million public Wi-Fi hotspots by 2023, up from 169 million hotspots in 2018. We believe that growth in
data traffic will be predominately driven by proliferation of connected devices, applications and sensors for both service provider and enterprise use cases.
For example:
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Consumers are using connected devices to access cloud applications, stream media-rich content and connect to friends and family utilizing
wireless connectivity.
Enterprises are increasingly deploying their own wireless broadband infrastructure to provide individuals access to, and machines and other
devices connectivity with, corporate networks, data centers and cloud applications.
Industrial enterprises are using wireless broadband to help replace periodic, manual system monitoring with hundreds of wireless sensors and
cameras that can monitor key production activities in real-time for safety, productivity and security. For example, wireless connectivity is
allowing industrial enterprises real-time comprehensive monitoring of operations across a field of onshore facilities or offshore platforms to
increase both the efficiency and safety of industrial operations.
The growing adoption of wireless networks is driving massive amounts of data that is being analyzed locally at the edge or at enterprise or cloud
data centers. This requires greater wireless connectivity to capture and evaluate the data locally or to backhaul large amounts of data to a data center. Local
operations centers or distant corporate data centers must also communicate with the edge devices to optimize operations. For example, when data is sent
back to an operations center that identifies potential equipment overheating, that command center can quickly transmit a data request directly to the
machine to analyze and resolve the issue or to a technician to rapidly address the developing situation.
Wireline broadband through cable, DSL and optical networks provides efficient bulk bandwidth transport to densely populated metropolitan areas
but can be cost prohibitive in lower-density environments and rural areas. Wireline broadband also lacks real-time adaptability required for industrial
networks and faces practical limitations in delivering connectivity to constantly evolving sensor and device networks. Similarly, many existing, more
affordable wireless network solutions lack the performance, scalability, reliability and support to provide enterprise-grade IT infrastructure required for
critical business applications.
Both wireless internet service providers and enterprises in lower-density, non-metropolitan areas require infrastructure that delivers always-on, high-
speed wireless bandwidth for the transmission of large amounts of data in a wide variety of challenging conditions such as noisy spectrum or terrain that
can impede wireless broadband communications, such as bodies of water or forests. Carrier-grade wireless infrastructure, primarily used in metropolitan
networks, is generally ill-suited to these deployments because the size of the deployment does not justify the high equipment expense and management
costs. Many existing wireless solutions are limited by their ability to deliver real-time adaptability, scalability, efficient use of spectrum, network reliability
and economical use cases:
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Limited real-time adaptability. Wireless network footprints are continually changing due to individuals moving within a network, rapidly
changing environments in an industrial footprint and expanding use cases or functionality. Many wireless solutions lack the software and RF
technology to continually optimize performance of rapidly evolving network infrastructure and in noisy conditions.
Lack of network scalability. Current wireless solutions often struggle to scale primarily because they lack end-to-end management
capabilities and integrated RF algorithms in the software. Software is required to efficiently plan, synchronize and optimize large-scale
deployments of wireless broadband, while mitigating self-interference. Existing solutions are typically provisioned manually and managed by
spreadsheets or management tools developed by customers internally. Real-time, efficient management requires embedded software and
technology capable of optimizing network performance at the edge in varying environmental conditions.
Inefficient use of spectrum. Many existing solutions do not contain data path optimization technologies that allow for efficient use of
frequency channels and available spectrum. This leads to performance degradation and limits the number of users and devices to which the
network can deliver quality access.
Lack of network reliability in areas with congested spectrum. Many existing solutions struggle with interference in high noise environments
because they cannot reuse frequencies to expand available channels for traffic. These solutions also do not include software that identifies
congested channels and automatically switches traffic to channels with less congestion. Inability to reuse frequencies or to recognize
congested channels can degrade performance and limit available bandwidth.
Uneconomical for certain use cases. Existing fixed wireless broadband solutions can be cost-prohibitive because of their inability to serve a
high concentration of CPE without the deployment of a high number of access points. Additionally, many existing solutions fail because of a
lack of software intelligence to foresee upcoming issues and an inefficient path to resolution for issues given limited services and support
capabilities.
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Our solutions
We offer fixed wireless broadband networking infrastructure solutions differentiated by scalability, embedded intelligence, reliability, high quality at
attractive economics and ease of deployment. Our enterprise-grade solutions provide outdoor and indoor capabilities and leading spectral efficiency that
reduces self-interference and optimizes spectral efficiency and frequency reuse across the network.
Our Point-to-Point, or PTP, solutions are typically connected to high-speed, high-bandwidth wireline networks, and provide wireless broadband
backhaul to facilities or Point-to-Multipoint, or PMP, access points deployed throughout a network over distances of more than 100 kilometers and at more
than 2 Gbps. Our PMP solutions extend wireless broadband access from tower mounted access points to CPE providing broadband access to residences and
enterprises covering wide areas with a range of 10 to 30 kilometers. Our PMP solutions are increasingly used to backhaul video surveillance systems. Our
cnPilot and Xirrus Wi-Fi solutions provide distributed access to individual users in indoor settings, such as office complexes, and outdoor settings, such as
athletic stadiums, over distances as short as two meters with high capacity. Our cnReach solutions offer narrow-band connectivity typically using licensed
spectrum below 1 GHz and typically used by industrial customers connecting remote field operations supporting sensors and devices at the network edge.
Our embedded proprietary RF technology and software enables automated optimization of data flow at the outermost points in the network. Our cnMatrix
cloud-managed wireless-aware switching solution provides the intelligent interface between wireless and wired networks.
Our competitive strengths
We have a number of competitive strengths, including the following:
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Wireless fabric that enables fast and efficient scalability. Our solutions allow network operators to densify their networks with incremental
access points that scale subscriber support in a linear manner without compromise to quality of service.
Advanced RF signal algorithms. Our RF algorithms drive network performance by employing technologies such as frequency reuse,
congestion-based channel switching and noise filtering.
Broad applicability of our wireless fabric. Our technology has broad application across a wide range of connectivity use cases, and our core
technologies underlying the wireless fabric offer broad extensibility to new markets such as Wi-Fi and Industrial Internet of Things, or IIoT,
solutions.
Network management software platform built for scale. Our cloud-based network management software increases ease of deployment and
usage through easy provisioning, configuration, monitoring and complete network visualization, with the ability to support over 100,000
devices.
Culture of constant innovation combined with high velocity product development and service. We pride ourselves in our strong work ethic
and focus on providing innovative products and first-class service to network operators. Our employees are united by our mission to eliminate
the “digital divide” by building innovative products to connect underserved and developing communities.
Market opportunity
The majority of our revenues today come from PTP and PMP solutions. According to Sky Light Research, the PTP Microwave and Millimeter
Wave market was estimated to be $3.58 billion in 2019. According to QYResearch, the PMP market was estimated to be $0.75 billion in 2019. We entered
into the Wi-Fi market in 2016 and it has become a meaningful portion of our revenues. According to IDC, a market research firm, the enterprise WLAN
market is estimated to be $7.0 billion in 2020. In 2018, we entered the Ethernet switching market, although to date our sales in this market have not been
material. According to IDC, the non-datacenter Ethernet switching market is estimated to be $14.7 billion in 2020. Combining these served markets, our
addressable market for 2020 exceeds $25.0 billion. In 2017, we introduced our cnReach IIoT products, and while the market remains at an early stage of
development, we believe this market presents a significant commercial opportunity in the longer term.
Our growth strategy
The key elements of our growth strategy include:
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Continued investment in wireless fabric while expanding into new markets. We are investing in our wireless fabric technology to expand
the breadth of our solutions and to take advantage of new frequencies and communication standards.
Expand our software capabilities. We will continue to invest in our embedded software capabilities which include GPS synchronization,
dynamic optimization and filtering technologies that facilitate the intelligent edge. We also plan to invest in cnMaestro, our cloud-based
network management software platform, to improve functionality, ease of deployment and operations.
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Drive greater penetration in our existing base. We intend to work collaboratively with key network operators to evaluate new use cases as
these network operators expand their geographical footprint into new territories and increase their deployment of our products.
Deepen and expand channel and network operator relationships. We intend to deepen and expand our relationships in our channel, which
includes over 6,800 channel partners as of December 31, 2019 and received CRN Magazine’s five star rating in 2017, 2018 and 2019, which
is its highest ranking awarded. We intend to invest in training and education for these channel partners while fostering new relationships with
incremental channel partners. Additionally, in order to deepen and broaden our network operator relationships, we will continue to invest in
our sales and marketing organization for both direct and channel engagements.
Position portfolio to take advantage of proliferation of higher-speed wireless connectivity. As wireless networks transition from 4G to 5G
technology, fixed wireless will be used more frequently in higher density environments. We intend to continue investing in and positioning
our portfolio to pursue opportunities in high density environments as these markets move towards fixed wireless technology that is
differentiated by reliability in congested environments.
Our technology and products
Network Management
Switching
Product Platform
Design Focus
Throughput
PTP 820
Licensed
Microwave and
mmWave
Backhaul
10+ Gbps
Cambium Network Product Portfolio Summary
cnMaestro - Cloud-Based Management Software
cnMatrix - Ethernet Enterprise Switching
PTP 670/700
PMP 450
ePMP
Sub-6 and 7/8 GHz
Backhaul
Performance
500 Mbps
Scalability for
Multipoint
networks
1.3 Gbps/ sector
900 MHz, 2.4, 3.5,
3.6,
4.9 - 5.9
Price/Performance
PTP and PMP
Leadership
200 Mbps/ sector
cnPilot
Configurable,
Cloud-managed,
High performance
Wi-Fi
250 Mbps/ AP
cnReach
Licensed
Narrowband in
rugged I/O rich
package
KB to MB
Spectrum (GHz except
as noted)
6 - 38
71 - 86
4.4 - 5.9
7.1 - 8.5
2.4, 4.9, 5, 6.4
2.4, 5
220, 450, 700, 900
MHz
We offer a portfolio of fixed wireless broadband solutions that connect people, places and things from distances of two meters to more than 100
kilometers, delivering data rates that range from kilobytes per second to over 2 gigabytes per second, operating indoor and outdoor and utilizing licensed
and unlicensed spectrum. The elements of our wireless fabric can be architected to meet a broad range of use cases and needs of network operators. Since
2012, we have shipped over 6 million devices. Our products are designed to support more CPE per access point and maximize uptime, providing an
attractive total cost of ownership for network operators while delivering a reliable, scalable, flexible and easily managed platform with differentiated
performance.
Our products can be categorized into our PTP backhaul, PMP distribution, Wi-Fi access, cnMatrix switching, and cnReach IIoT solutions. We also
offer a number of other network management and monitoring tools, such as cnMaestro, XMS Cloud, LINKPlanner, cnHeat, and cnArcher, to further
improve ease of use and network performance.
Point-to-Point backhaul solutions
Our PTP solutions are deployed globally and have proven to reliably operate in formidable and demanding environments. For example, we used
PTP 650 radios to establish high quality connectivity over 245 kilometers between Pikes Peak, Colorado and Cheyenne, Wyoming, delivering real-time
voice, video and data. We offer PTP solutions that are designed to operate in unlicensed spectrum from 900 MHz to 5.9 GHz and in licensed spectrum from
6-38 GHz. In addition, our PTP700 operates in NATO Band IV from 4.4-5.9 GHz, as well as in the 7 GHz and 8 GHz bands, and meets stringent federal
operating, performance and security standards.
Point-to-Multipoint distribution solutions
Our PMP portfolio is composed of the PMP and ePMP distribution and access solutions that enable network operators to provide high-speed
wireless broadband in a wide range of applications, ranging from connecting a small network of CCTV cameras, to deploying networks on hundreds of oil
pads, to providing broadband access to low-density urban and rural communities. Our PMP and ePMP solutions offer differentiated spectral efficiency,
which enables high data rates and efficient utilization of RF spectrum, as well as GPS synchronization and dynamic interference filtering to optimize
performance in noisy conditions. We also offer Massive Multi-User Multi-Input Multi-Output technology and proprietary beamforming sector antennas to
enable densification of CPE within a network. Together, these PMP distribution solutions allow networks to scale without compromise, from a single
access point and a handful of CPE to networks with hundreds of thousands of subscriber radios, both using the identical products and technologies.
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Wi-Fi access solutions
Our cnPilot and Xirrus enterprise and service provider Wi-Fi access points are easily deployed within both new and existing wireless local area
networks, including in existing networks with equipment from other manufacturers. Our products include enterprise access points for both indoor and
outdoor use cases, as well as internet service provider-managed home gateways. Our adaptive architecture provides controller functionality and services
with high agility for the network operator.
cnMatrix Ethernet enterprise switching solutions
Our cnMatrix Ethernet Enterprise Switching solutions simplify network deployment and operation. When deployed with cnPilot WLAN access
points and the cnMaestro management system, network operators have an affordable, feature-rich, high quality unified wired/wireless enterprise grade
network. Our cnMatrix solutions incorporate policy-based automation, automated device segmentation, enhanced power management, and are cloud-
managed, to enhance performance, security, and end-user satisfaction while reducing costs.
cnReach IIoT solutions
Our cnReach IIoT solutions offer connectivity for distributed sensors and controls across industrial deployments, delivering real-time monitoring,
measurement and analytics to optimize system performance. Our products can be deployed in a variety of industrial verticals such as oil and gas, electrical
utilities, water management, rail and transportation operations and smart cities. cnReach focuses on supervisory control and data acquisition systems for
process control and monitoring, providing affordable, narrowband wireless connectivity to support distribution automation, substation switches, circuit
control and telemetry.
cnMaestro and network management tools
Our cloud-based cnMaestro network management platform and our Xirrus XMS Cloud platform provide users with an integrated, intelligent, easy to
use tool for end-to-end network management of our portfolio from the network operating center to individual CPE on a single pane of glass. cnMaestro’s
interface allows users to easily onboard large numbers of new devices, configure existing devices, monitor the entire network and troubleshoot end-to-end.
LINKPlanner is a comprehensive tool, developed over the past 10 years, used to plan PTP and PMP networks. LINKPlanner allows users to
visualize and analyze hypothetical network deployment scenarios to evaluate performance and reliability allowing for cost-effective expansion and
deployment of their networks. cnArcher is a smartphone app that accelerates installation and deployment of our products by field technicians.
Network operators and distribution channel
We sell our solutions globally through out channel partners to wireless Internet service providers, enterprises and government agencies. Wireless
Internet service providers using our products are generally medium-sized service providers serving between 5,000 and more than 200,000 subscribers.
Enterprises using our products are in industries such as oil and gas, agriculture, mining, utilities, transportation, surveillance, hospitality, education and
general corporate enterprises. Government entities using our products include local government agencies, federal agencies and defense organizations. The
following table provides an illustrative list of network operators in three sectors using our products:
Service Provider
Enterprises
Government
● Digicel
● Airtel
● Eolo
● 360 Communications
● Anadarko
● Chevron
● Duke Energy
● CSX
● United States Federal Agencies
● City of Irving
● City of Calgary
● San Antonio Water
Historically, over 95% of our revenues are derived from sales through our ConnectedPartner channel partner platform, which consists of over 6,800
channel partners, including over 160 distributors as of December 31, 2019. In 2017, revenues from three of our distributors, Winncom Technologies,
Aikom Technology and WAV, represented 15.3%, 15.2% and 11.2% of our revenues, respectively. In 2018, revenues from Winncom Technologies and
Aikom Technology represented 16.1% and 12.0% of our revenues, respectively. In 2019, revenue from Winncom Technologies and Aikom Technology
represented 16.0% and 10.9% of our revenues, respectively. We had no other network operator or distributor that accounted for 10% or more of our
revenues for the years ended December 31, 2017, 2018 or 2019.
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Through our channel sales network, we sell to our global network of distributors who in turn either sell directly to network operators or supply our
products to value added resellers. These channel partners provide lead generation, pre-sales support and product fulfillment. Playing a central role in the
channel, distributors support us by promoting and distributing our products in target vertical markets, providing value-added support to the reseller channel
by bringing core strengths in technical support and professional services, all in addition to financing, logistics, and sales and marketing support. Our
distributors typically stock and manage inventory of our products.
Our ConnectedPartner platform is designed to maximize global coverage while minimizing channel conflict and enhance the ability of our channel
partners to succeed in the sale and deployment of our products and solutions. Channel partners registered under our ConnectedPartner program gain access
to product discounts, sales and marketing tools, marketing materials, specifications sheets, case studies and solution papers to aid in the sale and
deployment of our products and solutions globally. We also offer access through our ConnectedPartner platform to technical product training, deal
registration, account management support, business development support, webinars and events, promotions and joint marketing initiatives, and qualified
lead information as well as participation in our demonstration equipment programs.
Sales and marketing
We promote the sale of our products globally in partnership with our channel partners as well as through our direct sales force. Our sales
organization typically engages directly with large Internet service providers and certain enterprises even though product fulfillment generally involves our
channel partners, and also provide sales support to our channel partners across the platform. Our sales organization includes field and inside sales
personnel, as well as regional technical managers with deep technical expertise who are responsible for pre-sales technical support and solutions
engineering for network operators, systems integrators and channel partners. As of December 31, 2019, we had 124 sales personnel operating in over 25
countries.
Our marketing activities consist primarily of technology conferences, web marketing, trade shows, seminars, webinars and events, public training
classes, public relations, analyst relations, demand generation and direct marketing to build our brand, increase customer awareness, communicate our
product advantages and generate qualified leads for our field sales force and channel partners.
Support and service
Customer support
We support our enterprise class solutions with a range of flexible service plans and 24/7 availability that provide assurance to network operators that
their always-on, mission critical communications requirements will be met. We employ a team of support engineers and other support personnel to provide
customer service and technical support for our products. Our support organization both supports channel partners in supporting their direct customers and
provides first-line support to our direct customers. We offer multiple service options that allow network operators to select the service level that best meets
their needs. Our team of support engineers and services personnel provides 24/7 technical support and customer service globally to our network operators.
Technical support is also available on-line via chat and automated ticketing systems.
Training
We work closely with our channel partners and network operators to provide comprehensive product training so that they are familiar with the
implementation and usage of our products. The training and certification system is administered through a learning management system that provides the
user a record of their course work, exam results, current certifications and access to on demand self-directed training resources that complement instructor-
led sessions scheduled frequently around the world. In 2017, we also launched Cambium College, a free education program where senior members of our
design and development teams share their experience to familiarize people with the math and physics concepts involved in designing and operating a
wireless broadband or Wi-Fi network.
Cambium Community Forum
To complement our customer support and training, we launched the Cambium Community Forum in 2014 as a platform where we, our network
operators and our channel partners can collaborate in real-time on practical solutions to real-world deployment situations, contribute to and consult a
collective online knowledge base concerning our products and best practices, and share stories and photographs of customer experiences about product
installations and unique use cases of our technology. In 2019, we added discussion forums focusing on Citizens Broadband Radio Service (CBRS), Video
Surveillance, and Wi-Fi 6. Our Community Forum is moderated by our staff with direct and active engagement by our development engineering and
product management personnel. Leveraging the Community Forum, we collect network operator and channel partner feedback on potential product
improvements and new product ideas, including through the administration of beta testing on our products. As of December 31, 2019, there were
approximately 30,000 registered forum members on our Community Forum, including our WISP Forum.
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Manufacturing and supply
We outsource the manufacturing of our products to conserve working capital, reduce our manufacturing overhead and inventory, optimize delivery
lead times while maintaining high product quality and scale quickly to handle increased order volume. For certain products, we outsource both the design
and manufacture of the product and distribute the product under our name on a white label basis. We require all of our primary contract manufacturers to be
ISO-9001 certified.
Our contract manufacturing partners generally procure the components needed to build and assemble our products according to our design
specifications. This allows us to leverage the purchasing power of our contract manufacturing partners. For items that we design, we generally retain
complete control over the bill of material, test procedures and quality assurance programs. We review, on an ongoing basis, forecasts, inventory levels,
processes, capacity, yields and overall quality. Our contract manufacturers procure components and assemble our products based on our demand forecasts.
These forecasts represent our estimates of future demand for our products based on historical trends and analyses from our sales and product management
functions as adjusted for overall market conditions. Generally, for our primary contract manufacturers, we update these forecasts monthly.
Once the completed products are manufactured and tested, configured, inspected and pass quality control inspection, our contract manufacturers
ship the products to our direct fulfillment facilities in Kentucky, the Netherlands and Shanghai for shipment to our distributor partners and network
operators. We outsource the warehousing and delivery of our products at these fulfillment facilities to a third-party logistics provider for worldwide
fulfillment. Our products are installed by network operators or by third-party service providers such as system integrators or value-added resellers on behalf
of the customer.
While components and supplies are generally available from a variety of sources, we and our contract manufacturers currently depend on a single or
limited number of suppliers for several components for our products. For example, the majority of our products are dependent upon the incorporation of
components from Qualcomm Atheros and we do not have a second source for these components. In addition, we currently have a limited number of
suppliers for several other components for our products. We and our contract manufacturers generally rely on purchase orders rather than long-term
contracts with these suppliers, although for certain components our contract suppliers have contracts in place with component suppliers that we are able to
leverage. If we need to seek a suitable second source for key components or to modify our designs to use substitute components, our ability to meet the
demand for our products, and as a result our business and operating results, could suffer.
Some of our outsourced contract manufacturers are located in China, and one of our primary distribution centers for the sale and distribution of
some of our products is a third-party logistics provider in China. As a result, our business could be adversely impacted by the effects of the recent outbreak
of respiratory illness caused by a novel coronavirus (COVID-19) first identified in Wuhan, China. In an effort to halt the outbreak of COVID-19, the
Chinese government placed significant restrictions on travel within China, leading to extended business closures. Our suppliers and manufacturers in China
could continue to be disrupted by worker absenteeism, quarantines, office and factory closures, disruptions to ports and other shipping infrastructure, or
other travel or health-related restrictions and such restrictions could spread to other locations where we outsource the manufacture or distribution of our
products if the virus spreads. If our supply chain operations continue to be affected or are curtailed by the outbreak of diseases such as COVID-19, our
supply chain, manufacturing and product shipments will be delayed, which could adversely affect our business, operations and customer relationships. We
may need to seek alternate sources of supply which may be more expensive, unavailable or may result in delays in shipments to us and from our supply
chain and subsequently to our customers. See “Risk Factors, We face risks related to actual or threatened health epidemics and other outbreaks, which
could significantly disrupt our manufacturing, sales and other operations” below.
Research and development
As of December 31, 2019, our research and development organization has over 280 employees located primarily in San Jose and Thousand Oaks,
California, Rolling Meadows, Illinois, Ashburton, United Kingdom and Bangalore, India. We also work with contract engineers in various locations
globally. Our research and development team have deep expertise and experience in wireless technology, antenna design and network architecture and
operation. We expect to continue to expand our product offerings and solutions capabilities in the future and to invest significantly in continued research
and development efforts. Our research and development expenses were $32.2 million, $38.9 million, and $47.7 million in 2017, 2018 and 2019,
respectively.
Intellectual property
Our success depends in part on our ability to protect our core technology and innovations. We rely on federal, state, common law and international
rights, as well as contractual restrictions, to protect our intellectual property. We control access to our proprietary technology by entering into
confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with third parties, such as Internet
service providers, vendors, individuals and entities that may be exploring a business relationship with us. In addition to these contractual arrangements, we
also rely on a combination of trade secrets, copyrights, patents, trademarks, service marks and domain names to protect our intellectual property. We seek
patent protection for
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certain of our key innovations, protocols, processes and other inventions. We pursue the registration of our trademarks, service marks and domain names in
the United States and England and in certain other locations outside of these jurisdictions. These laws, procedures and restrictions provide only limited
protection and the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain and still
evolving. Furthermore, effective patent, trademark, copyright and trade secret protection may not be available in every country in which our products are
available.
As of December 31, 2019, we had 35 issued U.S. patents and 72 patents issued in various foreign jurisdictions as well as 10 U.S. and 51 foreign
patent applications pending. We file patent applications in the United States and other countries where we believe there to be a strategic technological or
business reason to do so. Although we actively attempt to utilize patents to protect our technologies, we believe that none of our patents, individually, are
material to our business.
Competition
The market for wireless broadband solutions is rapidly evolving, highly competitive and subject to rapid technological change. We expect
competition to persist, intensify and increase in the future.
In all of our markets, we compete with a number of wireless equipment providers worldwide that vary in size and in the products and solutions
offered. Our competitors for products and solutions for the unlicensed, sub-6 GHz spectrum bands include Radwin, MicroTik and Ubiquiti. In the licensed
microwave market, our competitors include SIAE, SAF Technica and Aviat. Our Wi-Fi products and solutions compete with HPE (Aruba), CommScope
(Ruckus Wireless), Extreme Networks, and Ubiquiti. Our cnReach IIoT products and solutions compete with GE MDS and Freewave. As our target
markets continue to develop and expand, and as the technology for wireless broadband continues to evolve, we expect competition to increase and expand
from both established and emerging market participants. We also expect consolidation to impact the competitive landscape, such as the acquisition by Arris
Group of Ruckus Wireless in 2017, and the subsequent acquisition of Arris Group by CommScope in 2019, as well as the acquisition of Aerohive by
Extreme Networks in 2019.
The market for our products and solutions is influenced by a variety of factors, including the following:
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Total cost of ownership and return on investment associated with the solutions;
Ease of configuration, installation and use of the solution;
Ability to provide a complete compatible solution;
Broad application across a range of use cases and frequencies;
Product quality, functionality and reliability;
Ability to allow centralized management of the solutions to enable better network planning, including scalable provisioning, configuration,
monitoring and complete network visualization; and
Ability to provide quality, full service pre- and post-sales product support.
We believe we compete favorably on each of these factors.
Regulatory requirements
In addition to regulations of general application to global businesses, we are subject to a number of regulatory requirements specific to our industry,
including, without limitation:
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Radio frequency usage. Because our products transmit energy in radio frequency spectrum, our products are subject to:
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rules relating to radio frequency spectrum allocation and authorization of certain radio equipment issued by the Federal
Communications Commission for non-federal uses or the National Telecommunications and Information Administration for federal
uses; and
local type approval, or homologation, rules requiring confirmation that our products meet minimum regulatory, technical and safety
requirements prior to sale in various countries around the world, for example: European Technical Standards Institute (ETSI), Industry
Canada (IC) and Agencia National De Telecommunicatoes (Anatel).
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The applicable regulatory agencies in each jurisdiction adopt regulations to manage spectrum use, establish and enforce priorities among competing
uses, limit harmful radio frequency interference and promote policy goals such as broadband deployment. These spectrum regulations regulate allocation,
licensing, and equipment authorizations. Since our customers purchase devices to operate in specific spectrum bands allocated by the regulatory authorities,
our products must meet the technical requirements set forth for such spectrum allocation(s).
In some bands, the operator, such as our customer, must seek prior regulatory authority to operate using specified frequencies, and the resulting
spectrum license authorizes the licensee, for a limited term, to operate in a spectrum consistent with licensed technical parameters within a specified
geographic area. We must design and manufacture our products to comply with these technical parameters.
Our products generally are subject to compliance testing prior to approval, and, as a condition of authority in each jurisdiction, we must ensure that
our products have the proper labels and documentation specifying such authority. We generally use telecommunications certification bodies to obtain
certification for our devices in each jurisdiction in which we intend to market and sell our products.
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Trade compliance requirements. We are subject to compliance with rules in jurisdictions from which we export or into which we import our
products, including export control and reporting, import clearance, anti-bribery, antitrust and competition rules and regulations, including:
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Import and export requirements issued by the United States, the European Union or other jurisdictions, including the U.S. Department
of Commerce, the Office of Foreign Assets Control, the U.K. Foreign & Commonwealth Office, Department for International
Development, Ministry of Defense and Department of International Trade including rules banning sales to persons or entities on
applicable designated parties lists, or to persons or entities in embargoed countries, rules requiring export licenses prior to sales of
products incorporating encryption technology to certain end users, and local rules governing import of products, including packaging
and labeling laws. In addition, some of our products include enabled encryption technology, which may require us to obtain a license
prior to a sale to certain foreign agencies. These rules require us to monitor databases of, and establish and enforce policies to prohibit
the sale of our products to, embargoed persons, entities and countries.
Rules and regulations, particularly in the United States and the European Union, governing environmental matters that restrict the use
of certain dangerous substances in electrical or electronic equipment, govern use of certain chemical substances throughout their
lifecycle and Waste Electrical and Electronic Equipment, Directive 2012/2019/EU, related to the collection, treatment, recycling and
recovery of waste electrical and electronic equipment in the European Union and related laws elsewhere. These rules govern our use of
components in our products, requiring us to comply with environmental rules and regulations in our selection of component parts and
in the manufacturing process, as well as over the disposal upon destruction or retirement of our products.
We are also subject to rules governing our use of personal data, such as the General Data Protection Regulation in the European Union, the
California Consumer Privacy Act, and other applicable regulations in the United States and around the world, and current and proposed e-privacy and
direct marketing rules governing direct and email marketing. These rules govern how we use personal data of our employees, customers and others with
whom we might do business, including in our marketing activities.
Employees
We are focused on hiring, training, and retaining exceptional talent. As of December 31, 2019, we had approximately 533 full-time employees, of
whom 306 are located outside the United States. We have not experienced any work stoppages, and we consider our relationship with our employees to be
good.
Available information
Our Internet address is www.cambiumnetworks.com and our investor relations website is located at http://investors.cambiumnetworks.com. We
make available free of charge on our investor relations website under the heading “Financials” our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after such materials are electronically filed
with (or furnished to) the SEC. Information contained on our websites is not incorporated by reference into this Annual Report on Form 10-K. In addition,
the public may read and copy materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
site, www.sec.gov, that includes filings of and information about issuers that file electronically with the SEC.
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Item 1A. Risk Factors.
This Report contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from
those projected. These risks and uncertainties include, but are not limited to, the risk factors set forth below. These risk and uncertainties are not the only
ones we face. Our business, financial condition, results of operations or prospects could also be harmed by risks and uncertainties not currently known to
us or that we currently do not believe are material. If any of the risks actually occur, our business, financial condition, results of operations and prospects
could be adversely affected.
Risks related to our business
Our operating results can be difficult to predict and may fluctuate significantly, which could result in a failure to meet investor expectations or our
guidance and a decline in the trading price of our shares.
Our quarterly and annual operating results have fluctuated in the past and may fluctuate significantly in the future. In particular, the timing and size
of our sales of our products are difficult to predict and can result in significant fluctuations in our revenues from period to period. For instance, we have
historically received and fulfilled a substantial portion of sales orders and generated a substantial portion of revenues during the last few weeks of each
quarter. In addition, we generally recognize all product revenues in the same period in which the related products are sold. Because our operating results are
relatively fixed in the short term, any failure to meet expectations regarding sales could have an immediate and material effect on our earnings. If our
revenues or operating results fall below the expectations of investors or securities analysts or below any estimates we may provide to the market, the
trading price of our shares would likely decline, which could have a material and adverse impact on investor confidence and employee retention.
Our operating results may fluctuate due to a variety of factors, many of which are outside of our control, and which we may not foresee. In addition
to other risks listed in this “Risks Factors” section, factors that may affect our operating results include:
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Fluctuations in demand for our products, including seasonal variations;
Our failure to timely fulfill orders for our products, which may be due to inability of our third-party manufacturers and suppliers to meet our
demand, logistical failures in warehousing and shipping products or other factors;
Failure of our distributors and channel partners to effectively promote and sell our products or manage their inventory and fulfillment;
Our ability to control costs, including our manufacturing and component costs and operating expenses;
Our ability to develop, introduce and ship in a timely manner new products and product enhancements, and to anticipate future market
demands;
Changes in the competitive dynamics of our target markets, including new entrants, consolidation and pricing pressures;
The inherent complexity, length and associated unpredictability of the sales cycles for our products;
Announcements made by us or our competitors of new or enhanced products, promotions or other transactions;
Variation in product costs, prices or mix of products we sell;
Product quality issues that could result in increases in product warranty costs and harm to our reputation and brand;
General economic or political conditions in our markets; and
Increasing uncertainty of international trade relations and tariffs.
The effects of these or other factors individually or in combination could result in fluctuations and unpredictability in our operating results, our
ability to forecast those results and the trading price of our shares. As a result, our past results should not be relied upon as an indication of our future
performance.
The introduction of new products and technology is key to our success, and if we fail to predict and respond to emerging technological trends and network
operators’ changing needs, we may be unable to remain competitive.
The wireless broadband market is generally characterized by rapidly changing technology, changing needs of network operators, evolving
regulations and industry standards and frequent introductions of new products and services. Historically, new product introductions have been a key driver
of our revenue growth. To succeed, we must effectively anticipate and adapt in a timely manner to network operator requirements and continue to develop
or acquire new products and features that meet market demands, technology trends and evolving regulatory requirements and industry standards. Our
ability to keep pace with technological developments, such as 5G and LTE, satisfy increasing network operator requirements, and achieve product
acceptance depends upon our ability to enhance
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our current products and develop and introduce or otherwise acquire the rights to new products on a timely basis and at competitive prices. The process of
developing new technology is complex and uncertain, and the development of new products and enhancements typically requires significant upfront
investment, which may not result in material improvements to existing products or result in marketable new products or cost savings or revenues for an
extended period of time, if at all. We are currently investing in the development of products and technology for the 5G standard once it is generally adopted
in our target markets. There can be no assurance we will successfully address the new standard in a timely manner or that our products will achieve market
acceptance. Network operators have delayed, and may in the future delay, purchases of our products while awaiting release of new products or product
enhancements. In addition, the introduction of new or enhanced products requires that we carefully manage the transition from older products to minimize
disruption in channel partner ordering practices. If we fail to anticipate industry trends and evolving regulations by developing or acquiring rights to new
products or product enhancements and timely and effectively introducing such new products and enhancements, or network operators do not perceive our
products to have compelling technological advantages, our business would be adversely affected.
Competitive pressures may harm our business, revenues, growth rates and market share.
We generate a majority of our revenues from sales to wireless internet service providers. The market for wireless broadband products is rapidly
evolving, highly competitive and subject to rapid technological change. We expect competition to persist, intensify and increase.
In all our markets, we compete with a number of wireless equipment providers worldwide that vary in size and in the products and solutions offered.
Our competitors for products and solutions for the unlicensed, sub-6 GHz spectrum bands include Ubiquiti, Radwin, MikroTik and Telrad. In the licensed
microwave markets, our competitors include SIAE, SAF Tehnica and Aviat. Our Wi-Fi products and solutions compete with CommScope (Ruckus
Wireless), Cisco Meraki, HPE (Aruba) and Ubiquiti. Our cnReach IIoT products and solutions compete with GE MDS and Freewave. Our cnMatrix cloud-
managed switch platform competes with Ubiquiti, Ruckus, HPE and MikroTik. Our cnMatrix Ethernet enterprise switching products and solutions compete
with MikroTik, Ubiquiti, and HPE. As our target markets continue to develop and expand, and as the technology for wireless broadband continues to
evolve, we expect competition to increase. We also expect consolidation to impact the competitive landscape, such as the acquisition by Arris Group of
Ruckus Wireless in 2017, and the subsequent acquisition of Arris Group by CommScope in 2019, as well as the acquisition of Aerohive by Extreme
Networks in 2019.
Demand for our solutions versus those of our competitors is influenced by a variety of factors, including the following:
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Product quality, performance, features and functionality, and reliability;
Depth and breadth of the sales channel;
Brand awareness and reputation;
Total cost of ownership and return on investment associated with the products;
Ease of configuration, installation and use of the products;
Ability to provide a complete compatible and scalable solution;
Broad application across a range of use cases;
Ability to allow centralized management of the products and network to better enable network planning, including scalable provisioning,
configuration, monitoring and complete network visualization; and
Strength, quality and scale of pre- and post-sales product support.
We expect increased competition from our current competitors, as well as emerging companies and established companies, such as Nokia, Ericsson,
Huawei and NEC, that may enter our markets. Further, we have in the past and may again experience price competition from lower cost vendors selling to
network operators that have lower budget or less demanding applications than our products have been designed to serve. To address these competitive
conditions, we introduced our lower cost ePMP and PTP 550 products that allow us to target certain market segments without compromising our gross
margins on our more sophisticated and functionally versatile products. We also expect that even higher cost competitors may engage in price competition to
establish greater market share, which may adversely affect our ability to grow our revenues and profitability. Competition could result in loss of market
share, increased pricing pressure, reduced profit margins, or increased sales and marketing expense, any of which would likely cause serious harm to our
business, operating results or financial condition.
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A number of our current or potential competitors have longer operating histories, greater name recognition, significantly larger customer bases and
sales channels and significantly greater financial, technical, sales, marketing and other resources than we do. Our competitors may be able to anticipate,
influence or adapt more quickly to new or emerging technologies and changes in network operator requirements, devote greater resources to the promotion
and sale of their products and services, initiate or withstand substantial price competition, bundle similar products to compete, take advantage of
acquisitions or other opportunities more readily, and develop and expand their product and service offerings more quickly than we can.
Some of our competitors have been acquired or entered into partnerships or other strategic relationships to offer a more comprehensive solution than
they had previously offered. We expect this trend to continue. The companies resulting from such consolidation may create more compelling products and
be able to offer greater pricing flexibility, making it more difficult for us to compete effectively. In addition, continued industry consolidation might
adversely affect network operators’ perceptions of the viability of smaller and even medium-sized wireless broadband equipment providers and,
consequently, network operators’ willingness to purchase from those companies.
Additionally, the markets for development, distribution and sale of our products are rapidly evolving. New entrants seeking to gain market share by
introducing new technology and new products may make it more difficult for us to sell our products, and could create increased pricing pressure, reduced
profit margins due to increased expenditure on sales and marketing, or the loss of market share or expected market share, any of which may significantly
harm our business, operating results and financial condition. The success of new products depends on several factors, including appropriate new product
definition, component costs, timely completion and introduction of products, differentiation of new products from those of our competitors and market
acceptance of these products. We may not be able to successfully anticipate or adapt to changing technology on a timely basis, or at all. New technologies
could render our existing products less attractive and if such technologies are widely adopted as the industry standard for wireless Internet service
providers, our business financial condition, results of operations and prospects could be materially adversely affected.
We rely on third-party manufacturers, which subjects us to risks of product delivery delays and reduced control over product costs and quality.
We outsource the manufacturing of our products to third-party manufacturers such as Flextronics, with whom we entered into an agreement pursuant
to which Flextronics manufactures and supplies certain of our products subject to orders from us and our demand forecasts. In certain cases, we rely on
third-party manufacturers to design products to our specifications and license those designs back to us. Purchases from these third-party manufacturers
account for the most significant portion of our cost of revenues. Our reliance on third-party manufacturers reduces our control over the manufacturing
process, including reduced control over quality, product costs and product supply and timing. From time to time, we have experienced and may in the
future experience delays in shipments or issues concerning product quality from our third-party manufacturers. For example, in the third quarter of 2018,
we experienced a delay in expected bookings for new products that in turn led us to delay procurement of finished goods from our contract manufacturers.
The delay resulted in our inability to fulfill orders placed late in the quarter and a delay in recognition for these sales until the fourth quarter of 2018. If any
of our third-party manufacturers suffer interruptions, delays or disruptions in supplying our products, including by natural disasters or work stoppages or
capacity constraints, our ability to ship products to distributors and network operators would be delayed. Additionally, if any of our third-party
manufacturers experience quality control problems in their manufacturing operations and our products do not meet network operators’ requirements, we
could be required to cover the repair or replacement of any defective products. These delays or product quality issues could have an immediate and material
adverse effect on our ability to fulfill orders and could have a negative impact on our operating results. In addition, such delays or issues with product
quality could harm our reputation and our relationship with our channel partners.
Our agreements do not typically obligate our third-party manufacturers to supply products to us in specific quantities or for an extended term, which
could result in short notice to us of supply shortages and increases in the prices we are charged for manufacturing services. We believe that our orders may
not represent a material portion of the total orders of our primary third-party manufacturers, such as Flextronics, and, as a result, fulfilling our orders may
not be prioritized in the event they are constrained in their abilities or resources to fulfill all of their customer obligations in a timely manner. Although we
provide demand forecasts to some of our third-party manufacturers, such forecasts are not generally binding and if we overestimate our requirements, some
of our third-party manufacturers may assess charges, or we may have liabilities for excess inventory, each of which could negatively affect our gross
margins. Conversely, because lead times for required materials and components vary significantly and depend on factors such as the specific supplier,
contract terms and the demand for each component at a given time, if we underestimate our requirements, our third-party manufacturer may have
inadequate materials and components required to produce our products. This could result in an interruption of the manufacturing of our products, delays in
shipments and deferral or loss of revenues.
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If our third-party manufacturers experience financial, operational, manufacturing capacity or other difficulties, or experience shortages in required
components, or if they are otherwise unable or unwilling to continue to manufacture our products in required volumes or at all, our supply may be
disrupted, we may be required to seek alternate manufacturers and we may be required to re-design our products. It would be time-consuming and costly,
and could be impracticable, to begin to use new manufacturers and designs and such changes could cause significant interruptions in supply and could have
an adverse impact on our ability to meet our scheduled product deliveries and may subsequently lead to the loss of sales, delayed revenues or an increase in
our costs, which could materially and adversely affect our business and operating results.
We rely on distributors and value-added resellers for the substantial majority of our sales, and the failure of our channel partners to promote and support
sales of our products would materially reduce our expected future revenues.
We rely on channel partners for a substantial majority of our sales and our future success is highly dependent upon establishing and maintaining
successful relationships with distributors and value-added resellers. Recruiting and retaining qualified channel partners and training them in our technology
and products require significant time and resources. Our reliance on channel partners for sales of our products results in limited visibility into demand and
channel inventory levels which in turn adversely impacts our ability to accurately forecast our future revenues. By relying on our channel partners, we may
have less contact with network operators, thereby making it more difficult for us to establish brand awareness, service ongoing network operator
requirements and respond to evolving needs for new product functionality.
Sales through distributors have been highly concentrated in a few distributors, with over 40%, 37%, and 36% of our revenues in 2017, 2018 and
2019, respectively, coming from our three largest distributors. In addition, certain of our distributors may rely disproportionately on sales to a small number
of end customers. For example, purchases from Aikom Technology by an end customer accounted for 12% of our revenues in 2017 and 8.7% in both 2018
and 2019. Termination or degradation of a relationship with a major distributor, or of a distributor with its major customer, could result in a temporary or
permanent material loss of revenues. We may not be successful in finding other distributors on satisfactory terms, or at all, and our distributors may fail to
maintain or replace business with their major customer, either of which could adversely affect our ability to sell in certain geographic markets or to certain
network operators, adversely impacting our revenues, cash flow and market share.
We generally do not require minimum purchase commitments from our channel partners, and our agreements do not prohibit our channel partners
from offering products or services that compete with ours or from terminating our contract on short notice. Many of our channel partners also sell products
from our competitors. Some of our competitors may have stronger relationships with our channel partners than we do and we have limited control, if any,
over the sale by our channel partners of our products instead of our competitors’ products, or over the extent of the resources devoted to market and support
our competitors’ products, rather than our products or solutions. Our competitors may be more effective in providing incentives to existing and potential
channel partners to favor their products or to prevent or reduce sales of our products. Our failure to establish and maintain successful relationships with our
channel partners would materially and adversely affect our business, operating results and financial condition.
We face risks related to actual or threatened health epidemics and other outbreaks, which could significantly disrupt our manufacturing, sales and other
operations.
Our business could be adversely impacted by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory
illness caused by a novel coronavirus (COVID-19). The impacts of the global emergence of COVID-19 on our business and financial results are currently
unknown. We are conducting business with substantial modifications to employee travel, employee work locations, and virtualization or cancellation of
certain sales and marketing events, among other modifications. Our business is highly dependent on travel of our sales, operations, quality and technical
support, and other managers and employees. Limitations placed on travel, both to China and other regions in Asia, Europe or elsewhere could significantly
limit our ability to market our products, establish relationships with new customers, and manage post-contract support and maintenance activities. Other
companies as well as many governments are taking precautionary and preemptive actions to address COVID-19, and they may take further actions that
cause us or our customers or suppliers to alter their normal business operations. We will continue to actively monitor the situation and may take further
actions that alter our business operations as may be required by federal, state or local authorities, or that we determine are in the best interest of our
employees, customers, partners, suppliers and shareholders. It is not clear what the potential effects any such alterations or modifications may have on our
business, including the effects on our customers and prospects, or on our financial results.
In addition, we have third-party outsourced contract manufacturers in China for the manufacture of some of our products, and one of our primary
distribution centers for the sale and distribution of some of our products is a third-party logistics provider in China. Previously, in an effort to halt the
outbreak of COVID-19, the Chinese government placed significant restrictions on travel within China, leading to extended business closures. Although
many of the restrictions on operations of our subcontractors have been eased, our suppliers and manufacturers in China could continue to be disrupted by
worker absenteeism, quarantines, office and factory closures, disruptions to ports and other shipping infrastructure, or other travel or health-related
restrictions and such restrictions could
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spread to other locations where we outsource manufacture or distribution of our products if the virus continues to spread. If our supply chain operations are
affected or are curtailed by the outbreak of diseases such as COVID-19, our supply chain, manufacturing and product shipments will be delayed, which
could adversely affect our business, operations and customer relationships. We may need to seek alternate sources of supply which may be more
expensive, unavailable or may result in delays in shipments to us from our supply chain and subsequently to our customers. Further, if our distributors’ or
end user customers’ businesses are similarly affected, they might delay or reduce purchases from us, which could adversely affect our results of operations.
We may suffer delays introducing new products to the market as a result of parts unavailability or shortage, resulting in loss or delay of revenue.
The macroeconomic effects of the coronavirus outbreak could adversely affect the economies and financial markets of many countries, resulting in
an economic downturn that could affect demand for our products and likely impact our operating results. Although the impact of the coronavirus outbreak
on our business and operations remains uncertain and will depend on developments such as the impact on our customers, vendors, distributors and resellers,
the continued spread of the coronavirus or the occurrence of other epidemics or pandemics and the imposition of related public health measures and travel
restrictions may adversely impact our business, financial condition, operating results and cash flows.
Our revenue growth rate in recent periods may not be indicative of our future performance.
Our revenue growth rate in recent periods may not be indicative of our future performance. For example, our revenues grew 19.4% from 2016 to
2017, 11.6% from 2017 to 2018, but only 10.4% from 2018 to 2019. Accordingly, we may not achieve similar revenue growth rates of our earlier years in
future periods. Our revenues for any prior annual period may not be an indication of our future revenues or revenue growth. If we are unable to maintain
consistent revenues or revenue growth, our operating results and the trading price of our shares could be materially affected.
Our third-party logistics and warehousing provider may fail to deliver products to our channel partners and network operators in a timely manner, which
could harm our reputation and operating results.
We rely on our third-party logistics and warehousing provider, with distribution hubs in the United States, the Netherlands and China, to fulfill the
majority of our worldwide sales and deliver our products on a timely basis. Any delay in delivery of our products to distributors or network operators could
create dissatisfaction, harm our reputation, result in the loss of future sales and, in some cases, subject us to penalties. We rely on our third-party logistics
and warehousing provider to accurately segregate and record our inventory for us and to report to us the receipt and shipments of our products. Our third-
party logistics and warehousing provider also manages and tracks the delivery of our products from the warehouse and safeguards our inventory, which
accounts for a vast majority of our inventory balance. The failure of our third-party logistics and warehousing provider to perform these key tasks
sufficiently could disrupt the shipment of our products to distributors and network operators or cause errors in our recorded inventory, either of which could
adversely affect our business and operating results.
Our ability to sell our products is highly dependent on the quality of our support and services offerings, and our failure to offer high-quality support and
services could have a material adverse effect on our business, operating results and financial condition.
Network operators rely on our products for critical applications and, as such, high-quality support is critical for the successful marketing and sale of
our products. If we or our channel partners do not provide adequate support to network operators in deploying our products or in resolving post-deployment
issues quickly, our reputation may be harmed and our ability to sell our products could be materially and adversely affected.
If we or our distributors and channel partners are unable to attract new network operators or sell additional products to network operators that currently
use our products, our revenue growth would be adversely affected, and our revenues could decrease.
To increase our revenues, we depend on the adoption of our solutions by network operators that purchase our products through our channel partners.
Network operators typically need to make substantial investments when deploying network infrastructure, which can delay a purchasing decision. Once a
network operator has deployed infrastructure for a particular portion of its network, it is often difficult and costly to switch to another vendor’s equipment.
Although our ePMP Elevate product enables network operators to use Cambium ePMP equipment to leverage an installed base of CPE provided by certain
other vendors, if we or our channel partners are unable to demonstrate that our products offer significant performance, functionality or cost advantages to
the competitor’s product, it would be difficult for us to generate sales to that network operator once a competitor’s equipment has been deployed.
Our future success also depends significantly on additional purchases of our products by network operators that have previously purchased our
products. Network operators may choose not to purchase additional products because of several factors, including dissatisfaction with our products or
pricing relative to competitive offerings, reductions in network operators’ spending levels or other causes outside of our control. If we are not able to
generate repeat purchases from network operators, our revenues may grow more slowly than expected or may decline, and our business and operating
results would be adversely affected.
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The seasonality of our business creates significant variance in our quarterly revenues, which makes it difficult to compare or forecast our financial results
on a quarter-by-quarter basis.
Our revenues fluctuate on a seasonal basis, which affects the comparability of our results between sequential periods. While generally consistent, in
certain periods other business factors have masked this seasonal pattern and the quantifiable effects of these seasonal variations are difficult to predict
accurately. For example, in the second quarter of 2019 we achieved record sales level in part driven by sales to a large customer in Europe, Middle East,
Africa region, but we also experienced declines in our Asia Pacific region due to delayed spending in the government sector. These factors introduce risk
into our business as we rely upon forecasts of demand to build inventory in advance of anticipated sales. If our sales mix changes, or if the geographic mix
of our sales changes, the seasonal nature of our revenues may change in unpredictable ways, which could increase the volatility of both our financial results
and share price.
We require third-party components, including components from limited or sole source suppliers, to build our products. The unavailability of these
components could substantially disrupt our ability to manufacture our products and fulfill sales orders.
We rely on third-party components to build our products, and we rely on our third-party manufacturers to obtain the components necessary for the
manufacture of our products. If we underestimate our requirements or our third-party suppliers are not able to timely deliver components, our third-party
manufacturers may have inadequate materials and components required to produce our products. This could result in an interruption in the manufacture of
our products, delays in shipments and deferral or loss of revenues.
We have in the past and may in the future experience shortages in available supply of required components. Unpredictable price increases for such
components may also occur. We and our third-party manufacturers generally rely on purchase orders rather than long-term contracts with suppliers of
required components. As a result, our third-party manufacturers may not be able to secure sufficient components at reasonable prices or of acceptable
quality to build our products in a timely manner, adversely impacting our ability to meet demand for our products. In addition, if our component suppliers
cease manufacturing needed components, we could be required to redesign our products to incorporate components from alternative sources or designs, a
process which would cause significant delays in the manufacture and delivery of our products.
We currently depend on a limited number of suppliers for several critical components for our products, including chipsets from Qualcomm Atheros.
In some instances, we use sole or single source suppliers for our components to simplify design and fulfillment logistics. Neither we nor our third-party
manufacturers carry substantial inventory of our product components. Many of these components are also widely used in other product types. Shortages are
possible and our ability to predict the availability of such components may be limited. In the event of a shortage or supply interruption from our component
suppliers, we or our third-party manufacturers may not be able to develop alternate or second sources in a timely manner, on commercially reasonable
terms or at all, and the development of alternate sources may be time-consuming, difficult and costly. Any resulting failure or delay in shipping products
could result in lost revenues and a material and adverse effect on our operating results.
Our gross margin varies from period to period and may decline in the future.
Our gross margin varies from period to period, may be difficult to predict and may decline in future periods. Variations in our gross margin are
generally driven by shifts in the mix of products we sell, the timing and related cost of fulfilling orders and other factors. In addition, the market for
wireless broadband solutions is characterized by rapid innovation and declining average sale prices as products mature in the marketplace. The sales prices
and associated gross margin for our products may decline due to change in sales strategy, competitive pricing pressures, demand, promotional discounts
and seasonal changes in demand. Larger competitors with more diverse product and service offerings may reduce the price of products or services that
compete with ours or may bundle them with other products and services. If we meet such price reductions but do not similarly reduce our product
manufacturing costs, our margins would decline. Any decline in our gross margins could have an adverse impact on the trading price of our shares.
Our products are technologically complex and may contain undetected hardware defects or software bugs, which could result in increased warranty claims,
loss of revenues and harm to our reputation.
Our products are technologically complex and, when deployed, are critical to network operations. Our products rely on our proprietary embedded
software, and have in the past contained and may in the future contain undetected errors, bugs or security vulnerabilities, or suffer reliability or quality
issues. Some defects in our products may only be discovered after a product has been installed and used by network operators. Any errors, bugs, defects,
security vulnerabilities or quality or reliability issues discovered in our products after commercial release could result in increased warranty claims, damage
to our reputation and brand, loss of market shares or loss of revenues, any of which could adversely affect our business, operating results and financial
condition. In addition, our products operate in part in outdoor settings and must withstand environmental effects such as severe weather, lightning or other
damage. Our products may also contain latent defects and errors from time to time related to embedded third-party components.
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We have in the past and may in the future become subject to warranty claims that may require us to make significant expenditures to repair or
replace defective products, or redesign our products to eliminate product vulnerabilities. We may in the future also be the subject of product liability claims.
Such claims could require a significant amount of time and expense to resolve and defend against and could harm our reputation by calling into question
the quality of our products. We also may incur costs and expenses relating to a recall of one or more of our products. The process of identifying recalled
products that have been widely distributed may be lengthy and require significant resources and we may incur significant replacement costs, contract
damage claims from network operators and harm to our reputation. Additionally, defects and errors may cause our products to be vulnerable to security
attacks, cause them to fail to help secure networks or temporarily interrupt network traffic. Although we disclaim responsibility for certain warranty and
product liability claims as well as product recalls or security problems, any substantial costs or payments made in connection with warranty and product
liability claims, product recalls or security problems could cause our operating results to decline and harm our brand.
If our channel partners do not effectively manage inventory of our products, fail to timely resell our products or overestimate expected future demand, they
may reduce purchases in future periods, causing our revenues and operating results to fluctuate or decline.
Our channel partners purchase and maintain inventories of our products to meet future demand and have only limited rights to return the products
they have purchased from us. Our channel partners are not generally committed to volume purchases of our products in any period. Accordingly, if our
channel partners purchase more product than is required to meet demand in a particular period, causing their inventory levels to grow, they may delay or
reduce additional future purchases, causing our quarterly results to fluctuate and adversely impacting our ability to accurately predict future earnings.
If we are not able to effectively forecast demand or manage our inventory, we may be required to record write-downs for excess or obsolete inventory.
We maintain inventory of finished goods and, to a lesser extent, raw materials that we believe are sufficient to allow timely fulfillment of sales.
Growth in our sales and new product launches may require us to build inventory in the future. Higher levels of inventory expose us to a greater risk of
carrying excess or obsolete inventory, which may in turn lead to write-downs. We may also record write-downs in connection with the end-of-life for
specific products. For example, in 2019, our inventories increased by $11.1 million due to changes in the demand outlooks across a larger customer in Italy
and in the defense sector. Decisions to increase or maintain higher inventory levels are typically based upon uncertain forecasts or other assumptions.
Because the markets in which we compete are volatile, competitive and subject to rapid technology and price changes, if the assumptions on which we base
these decisions turn out to be incorrect, our financial performance could suffer and we could be required to write-off the value of excess products or
components inventory.
We are exposed to the credit risk of our channel partners, which could result in material losses.
We generate a substantial majority of our revenues through sales to our distributors. Distributors may not have the resources required to meet
payment obligations, or may delay payments if their end customers are late making payments. Our exposure to credit risks of our channel partners and their
end customers may increase if such entities are adversely affected by global or regional economic conditions. Given the broad geographic coverage of our
distributor relationships, we have in the past and may in the future experience difficulties surrounding the collection of payments. Any significant delay or
default in the collection of significant accounts receivable could result in the need for us to obtain working capital from other sources.
If we do not effectively deploy and train our direct sales force, we may be unable to increase sales.
Although we rely on channel partners to fulfill the substantial majority of our sales, our direct sales force plays a critical role driving our sales
through direct engagement with network operators. We have invested and will continue to invest substantially in our sales organization. Our sales
headcount has grown from 87 as of December 31, 2016 to 125 as of December 31, 2019, as we focus on growing our business, entering new markets and
increasing our market share, and we expect to continue to incur significant expenses as we continue to invest in sales and marketing in order to achieve
revenue growth. There is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve
significant revenue growth will depend, in large part, on our success in recruiting, training, retaining and integrating sufficient numbers of sales personnel
to support our growth, particularly in international markets. New hires require significant training and may take significant time before they achieve full
productivity. Our recent hires may not become productive as quickly as we expect, and we may be unable to hire and retain sufficient numbers of qualified
individuals needed to increase our sales. If we are unable to hire and train a sufficient number of effective sales personnel, or the sales personnel we hire do
not achieve expected levels of productivity, our business, operating results and financial condition could be materially adversely affected.
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Our business and prospects depend on the strength of our brand. Failure to maintain and enhance our brand would harm our ability to increase sales by
expanding our network of channel partners as well as the number of network operators who purchase our products.
Maintaining and enhancing our brand is critical to expanding our base of channel partners and the number of network operators who purchase our
products. Maintaining and enhancing our brand will depend largely on our ability to continue to develop products and solutions that provide the high
quality at attractive economics sought by network operators. If we fail to promote, maintain and protect our brand successfully, our ability to sustain and
expand our business and enter new markets will suffer. Our brand may be impaired by a number of factors, including product failure and counterfeiting. If
we fail to maintain and enhance our brand, or if we need to incur unanticipated expenses to establish the brand in new markets, our operating results would
be negatively affected.
If we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed.
We have expanded our operations significantly since inception and anticipate that further significant geographic and market expansion will be
required to achieve our business objectives. The growth and expansion of our geographic sales, expansion of our products and our entry into new industry
verticals places a significant strain on our management, operational and financial resources. Any such future growth would also add complexity to and
require effective coordination throughout our organization. To manage any future growth effectively, we must continue to improve and expand our
information technology and financial infrastructure, our operating and administrative systems and controls, and our ability to manage headcount, capital
and processes in an efficient manner. We may not be able to successfully implement improvements to these systems and processes in a timely or efficient
manner, which could result in additional operating inefficiencies and could cause our costs to increase more than planned. If we do increase our operating
expenses in anticipation of the growth of our business and this growth does not meet our expectations, our operating results may be negatively impacted. If
we are unable to manage future expansion, our ability to provide high quality products and services could be harmed, which could damage our reputation
and brand and may have a material adverse effect on our business, operating results and financial condition.
Our sales cycles can be long and unpredictable and our sales efforts require considerable time and expense. As a result, our sales and revenues are difficult
to predict and may vary substantially from period to period.
Our sales efforts involve educating channel partners and network operators about the technical capabilities, applications and benefits of our
products. Network operators typically require long sales cycles to select a product supplier and place sales orders. The sale process usually begins with an
evaluation, followed by one or more network trials, followed by vendor selection and finally installation, testing and deployment. Network operator
purchasing activity depends upon the stage of completion of expanding network infrastructures and the availability of funding, among other factors. We
spend substantial time and resources on our sales efforts without any assurance that our efforts will produce any sales. In addition, purchases of our
products are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Moreover, the
evolving nature of the market may lead prospective network operators to postpone their purchasing decisions pending resolution of network standards or
adoption of technology by others. Network operators may also postpone a purchase decision pending the release of new or enhanced products by us or
others. As a result, it is difficult to predict whether a sale will be completed, the particular period in which a sale will be completed or the period in which
revenues from a sale will be recognized. Our operating results may therefore vary significantly from quarter to quarter.
A portion of our revenues are generated by sales to government entities, which are subject to a number of challenges and risks.
We derive a portion of our revenues from contracts with government agencies and we believe the success and growth of our business will in part
depend on our continued and increasing sales to U.S. and foreign, federal, state and local governmental end customers in the future. However, demand from
government agencies is often unpredictable, and we may be unable to maintain or grow our revenues from this market. Sales to government agencies are
subject to substantial risks, including but not limited to the following:
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selling to government agencies can be highly competitive, expensive and time-consuming, often requiring significant upfront time and
expense without any assurance that such efforts will generate a sale;
government entities may have statutory, contractual or other legal rights to terminate contracts with our channel partners or us for
convenience or due to a default, and any such termination may adversely impact our future business, financial condition, results of operations
and prospects;
U.S. or other government certification requirements applicable to our goods and services may be difficult to meet, require an additional
administrative or compliance burden on us not found in our commercial contracts, and if we are unable to meet these certification
requirements, our ability to sell into the government sector may be adversely impacted until we have attained required certifications;
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government demand and payment for our services may be adversely impacted by public sector budgetary cycles and funding constraints;
selling to government entities may require us to comply with various regulations that are not applicable to sales to non-government entities,
including regulations that may relate to pricing, classified material and other matters, or requirements regarding the development and
maintenance of programs such as small business subcontracting, or compliance with EEOC requirements. Complying with such regulations
may also require us to put in place controls and procedures to monitor compliance with the applicable regulations that may be costly or not
possible;
the U.S. government may require certain products that it purchases be manufactured in the United States and other relatively high-cost
manufacturing locations under Buy American Act or other regulations, and we may not manufacture all products in locations that meet these
requirements, which may preclude our ability to sell some products or services; and
governments may investigate and audit government contractors’ administrative and financial processes and compliance with laws and
regulations applicable to government contractors, and any unfavorable audit could result in fines, civil or criminal liability, damage to our
reputation and suspension or debarment from further government business.
The occurrence of any of the foregoing could cause governments and governmental agencies to delay or refrain from purchasing our products in the
future which could materially and adversely affect our operating results.
We generate a significant amount of revenues from sales outside of the United States, and we are therefore subject to a number of risks associated with
international sales and operations.
We have extensive international operations and generate a significant amount of revenues from sales to channel partners in Europe, the Middle East
and Africa, Asia-Pacific and South America. For example, sales outside of the United States accounted for 58% of our total revenues in 2017, 57% in 2018,
and 55% in 2019. We rely on our third-party logistics and warehousing provider, with distribution hubs in the United States, the Netherlands and China, to
fulfill the majority of our worldwide sales and to deliver our products to our customers. We have estimated the geographical distribution of our product
revenues based on the ship-to destinations specified by our distributors when placing orders with us. Our ability to grow our business and our future
success will depend on our ability to continue to expand our global operations and sales worldwide.
As a result of our international reach, we must hire and train experienced personnel to manage our international operations. If we experience
difficulties in recruiting, training, managing and retaining an international staff, and specifically staff related to sales management and sales personnel, we
may experience difficulties expanding our sales outside of the United States. If we are not able to maintain these relationships internationally or to recruit
additional channel partners, our future international sales could be limited. Business practices in the international markets that we serve may differ from
those in the United States and may require us in the future to include terms other than our standard terms in contracts. In addition, we face risks to our
business based on changes in tariffs, trade barriers, export regulations, political conditions and contractual restrictions. For example, our cost of goods in
the Wi-Fi and switch products, as well as most of our ePMP products, has been adversely affected by U.S. tariffs on goods produced for us in China and
later imported into the United States. Our products manufactured in China may also be adversely affected by the outbreak of diseases such as the
coronavirus, if such diseases result in delays, shutdowns or other restrictions on our manufacturing processes in China, or on our ability to distribute
products from our distribution centers in China. We also have products manufactured for us in Mexico, and there is increasing uncertainty of trade relations
between Mexico and the United States. Our future operating results could be materially affected to the extent additional tariffs are imposed by the United
States or other countries.
Our international sales and operations are subject to a number of risks, including the following:
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fluctuations in currency exchange rates, which could drive fluctuations in our operating expenses;
required local regulatory certifications in each jurisdiction, which may be delayed for political or other reasons other than product quality or
performance;
requirements or preferences for domestic products, which could reduce demand for our products;
differing technical standards, existing or future regulatory and certification requirements and required product features and functionality;
management communication problems related to entering new markets with different languages, cultures and political systems;
difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;
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heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may
impact financial results and result in restatements of, and irregularities in, financial statements;
difficulties and costs of staffing and managing foreign operations;
the uncertainty of protection of intellectual property rights in some countries;
potentially adverse tax consequences, including regulatory requirements regarding our ability to repatriate profits to the United Kingdom;
requirements to comply with foreign privacy, information security, and data protection laws and regulations and the risks and costs of non-
compliance;
added legal compliance obligations and complexity;
the increased cost of terminating employees in some countries;
political and economic instability and terrorism; and
the impact of the spread of any diseases globally that might impact our operations.
These and other factors could harm our ability to generate future international revenues. Expanding our existing international operations and
entering into additional international markets will require significant management attention and financial commitments. Our failure to successfully manage
our international operations and the associated risks effectively could limit our future growth or materially adversely affect our business, operating results
and financial condition.
Economic conditions and regulatory changes following the United Kingdom’s exit from the European Union could adversely impact our operations,
operating results and financial condition.
The United Kingdom ceased to be a member of the European Union on January 31, 2020. The provisions governing the U.K.’s departure from the
European Union, Brexit, will be determined during the 11-month period ending December 31, 2020, during which time the UK will continue to follow all
of the EU’s rules and its trading relationship will remain the same as prior to Brexit. The future effects of Brexit following this transition period will depend
on any agreements the United Kingdom makes to retain access to the European Union or other markets either during a transitional period or more
permanently. Given the lack of comparable precedent, it is unclear what economic, financial, trade and legal implications the withdrawal of the United
Kingdom from the European Union will have generally and how such withdrawal will affect us.
A withdrawal may, among other outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the European
Union, undermine bilateral cooperation in key geographic areas, disrupt the markets we serve, and significantly disrupt trade between the United Kingdom
and the European Union or other nations as the United Kingdom pursues independent trade relations. Since we derive most of our revenues through our
U.K. subsidiary, which owns our intellectual property, the consequences of Brexit, together with the significant uncertainty regarding the provisions
governing the relationship between the U.K. and the European Union after December 31, 2020, could adversely change our tax benefits or liabilities in
certain jurisdictions and adversely impact our trade operations and our management of our export compliance from our Netherlands distribution hub. Our
U.K. operations may be adversely affected as we become subject to new laws and regulations implemented in the U.K. as part of Brexit, including
compliance with U.K. labor and other regulations as well as compliance with EU privacy laws. Brexit could also create uncertainty with respect to the legal
and regulatory requirements over the operation of our products to which we and our network operators in the U.K. are subject and lead to divergent
national laws and regulations as the U.K. government determines which EU laws to replace or replicate.
While we are not experiencing any immediate adverse impact on our financial condition as a direct result of Brexit, the effects of Brexit will depend
on any agreements the United Kingdom makes to retain access to the European Union or other markets either during a transitional period or more
permanently. Compliance with new laws or regulations regarding trade, delivery and other cross-border activities between the United Kingdom and the
European Union could be costly, negatively impacting our business, financial condition, operating results and cash flows.
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The loss of key personnel or an inability to attract, retain and motivate qualified personnel may impair our ability to expand our business.
Our success is substantially dependent upon the continued service and performance of our senior management team and key technical, marketing
and production personnel. Our employees, including our senior management team, are at-will employees, and therefore may terminate employment with us
at any time with no advance notice. The replacement of any members of our senior management team or other key personnel likely would involve
significant time and costs and may significantly delay or prevent the achievement of our business objectives.
Our future success also depends, in part, on our ability to continue to attract and retain highly skilled personnel. Competition for highly skilled
personnel is frequently intense, particularly for highly skilled research and development personnel. Any failure to successfully attract or retain qualified
personnel to fulfill our current or future needs may negatively impact our growth.
If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or comply with applicable
regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the rules and regulations of
Nasdaq. The requirements of these rules and regulations has and will increase our legal, accounting and financial compliance costs, make some activities
more difficult, time-consuming and costly and place strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures over financial reporting. We are
continuing to develop and refine our disclosure controls, internal control over financial reporting and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and
communicated to our principal executive and financial officers.
Our current controls and any new controls we develop may become inadequate because of growth in our business. Further, weaknesses in our
internal controls have been discovered and additional ones may be discovered in the future. Any failure to develop or maintain effective controls, or any
difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and
may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal controls also could
adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the
effectiveness of our internal control over financial reporting that we will be required to include in our periodic reports we will file with the SEC under
Section 404 of the Sarbanes-Oxley Act once we cease to be an emerging growth company. Ineffective disclosure controls and procedures and internal
control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a
negative effect on the market price of our shares.
We have expended and anticipate we will continue to expend significant resources, and we expect to provide significant management oversight, to
maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting. Any future failure to
maintain the adequacy of our internal controls, or consequent inability to produce accurate financial statements on a timely basis, could increase our
operating costs and could materially impair our ability to operate our business. If our internal controls are perceived as inadequate or we are unable to
produce timely or accurate financial statements, investors may lose confidence in our operating results and our share price could decline. In addition, if we
are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq.
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial
reporting until after we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that
is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Any failure to maintain effective
disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results and could
cause a decline in the price of our shares.
A substantial portion of our product portfolio relies on the availability of unlicensed RF spectrum and if such spectrum were to become unavailable
through overuse or licensing, the performance of our products could suffer and our revenues from their sales could decrease.
A substantial portion of our product portfolio operates in unlicensed RF spectrum, which is used by a wide range of consumer devices and is
becoming increasingly crowded. If such spectrum usage continues to increase through the proliferation of consumer electronics and products competitive
with ours, the resultant higher levels of noise in the bands of operation our products use could decrease the effectiveness of our products, which could
adversely affect our ability to sell our products. Our business could be further
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harmed if currently unlicensed RF spectrum becomes licensed in the United States or elsewhere. Network operators that use our products may be unable to
obtain licenses for RF spectrum. Even if the unlicensed spectrum remains unlicensed, existing and new governmental regulations may require we make
changes in our products. For example, to provide products for network operators who utilize unlicensed RF spectrum, we may be required to limit their
ability to use our products in licensed or otherwise restricted RF spectrum. The operation of our products by network operators in the United States or
elsewhere in a manner not in compliance with local law could result in fines, operational disruption, or harm to our reputation.
Our business, operating results and growth rates may be adversely affected by current or future unfavorable economic and market conditions.
Our business depends on the overall demand for wireless network technology and on the economic health and general willingness of our current and
prospective end-customers to make those capital commitments necessary to purchase our products. If the conditions in the U.S. and global economies
deteriorate, become uncertain or volatile, our business, operating results and financial condition may be materially adversely affected. Economic weakness,
end-customer financial difficulties, limited availability of credit and constrained capital spending have resulted, and may in the future result, in challenging
and delayed sales cycles, slower adoption of new technologies and increased price competition, and could negatively impact our ability to forecast future
periods, which could result in an inability to satisfy demand for our products and a loss of market share.
In particular, we cannot be assured of the level of spending on wireless network technology, the deterioration of which would have a material
adverse effect on our results of operations and growth rates. The purchase of our products or willingness to replace existing infrastructure is discretionary
and highly dependent on a perception of continued rapid growth in consumer usage of mobile devices and in many cases involves a significant commitment
of capital and other resources. Therefore, weak economic conditions or a reduction in capital spending would likely adversely impact our business,
operating results and financial condition. A reduction in spending on wireless network technology could occur or persist even if economic conditions
improve.
In addition, if interest rates rise or foreign exchange rates weaken for our international customers, overall demand for our products and services
could decline and related capital spending may be reduced. Furthermore, any increase in worldwide commodity prices may result in higher component
prices for us and increased shipping costs, both of which may negatively impact our financial results.
We may acquire other businesses which could require significant management attention, disrupt our business, dilute shareholder value and adversely affect
our operating results.
To execute on our business strategy, we may acquire or make investments in complementary companies, products or technologies such as our
August 2019 acquisition of the assets and liabilities of the Xirrus business from Riverbed Technology, Inc. Our integration of the Xirrus business may not
be successful and we may not achieve the benefits of the acquisition. We may be unable to acquire and integrate additional companies, products or
technologies in a successful manner. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on
favorable terms, if at all. If we do complete additional acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and
any acquisitions we complete could be viewed negatively by our channel partners, investors and financial analysts. In addition, if we are unsuccessful at
integrating such acquisitions, or the technologies associated with such acquisitions, into our company, the revenues and operating results of the combined
company could be adversely affected. Any integration process may require significant time and resources, and we may be unable to manage the process
successfully. We may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition
transaction, including unexpected liability or accounting charges. We may pay cash, incur debt or issue equity securities to pay for any future acquisition,
each of which could adversely affect our financial condition or the value of our shares. The sale of equity or issuance of debt to finance any such
acquisitions could result in dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could also include
covenants or other restrictions that would impede our ability to manage our operations.
Our credit facility contains restrictive financial covenants that may limit our operating flexibility.
Our credit facility contains certain restrictive covenants that either limit our ability to, or require a mandatory prepayment in the event we, among
other things, incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies,
engage in new lines of business, change business locations, make certain investments, make any payments on any subordinated debt, transfer or dispose of
assets, amend certain material agreements, and enter into various specified transactions. We, therefore, may not be able to engage in any of the foregoing
transactions unless we obtain the consent of our lenders or prepay certain amounts under the credit facility. The credit facility also contains certain financial
covenants and financial reporting requirements. We have in the past, and may in the future, fail to comply with all of the financial or restrictive covenants
of our credit facility, requiring a waiver from our lenders. Our obligations under the credit facility are secured by substantially all of our assets. We may not
be able to generate or sustain sufficient cash flow or sales to meet the financial covenants or pay the principal and interest
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under the credit facility, and we may in the future be unable to meet our financial covenants, requiring additional waivers that our lenders may be unwilling
to grant. Furthermore, our future working capital, proceeds of borrowings or proceeds of equity financings could be required to be used to repay or
refinance the amounts outstanding under the credit facility and, therefore, may be unavailable for other purposes. In the event of a liquidation, our lenders
would be repaid all outstanding principal and interest prior to distribution of assets to unsecured creditors, and the holders of our shares would receive a
portion of any liquidation proceeds only if all of our creditors, including our lenders, were first repaid in full.
The elimination of LIBOR could adversely affect our business, results of operations or financial condition.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced plans to phase out the use of LIBOR by the end of 2021.
Although the impact is uncertain at this time, the elimination of LIBOR could have an adverse impact on our business, results of operations, or financial
condition. We may incur significant expenses to amend our LIBOR-indexed loans, and other applicable financial or contractual obligations, including our
credit facilities, to a new reference rate, which may differ significantly from LIBOR. Accordingly, the use of an alternative rate could result in increased
costs, including increased interest expense on our credit facilities, and increased borrowing and hedging costs in the future. At this time, no consensus
exists as to what rate or rates may become acceptable alternatives to LIBOR and we are unable to predict the effect of any such alternatives on our
business, results of operations or financial condition.
We may face exposure to unknown tax liabilities, which could adversely affect our financial condition, cash flows and results of operations .
We are subject to income and non-income based taxes in the United States and in various non-U.S. jurisdictions. We file U.S. federal income tax
returns as well as income tax returns in various U.S. state and local jurisdictions and many non-U.S. jurisdictions. The United States, United Kingdom,
India, Mexico, and Brazil are the main taxing jurisdictions in which we operate. Significant judgment is required in dealing with uncertainties in the
application of complex tax regulations when calculating our worldwide income tax liabilities and other tax liabilities. We are not aware of any uncertain tax
positions as specified by Accounting Standards Codification 740, Income Taxes. We expect to continue to benefit from our implemented tax positions. We
believe that our tax positions comply with applicable tax law and intend to vigorously defend our positions. However, as described below, tax authorities
could take differing positions on certain issues.
We may be subject to income tax audits in all the jurisdictions in which we operate. The years open for audit vary depending on the tax jurisdiction.
In the United States, we are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2016. In the non-U.S.
jurisdictions, the tax returns that are open vary by jurisdiction and are generally for tax years between 2013 through 2019. We routinely assess exposures to
any potential issues arising from current or future audits of current and prior years’ tax returns. When assessing such potential exposures and where
necessary, we provide a reserve to cover any expected loss. To the extent that we establish a reserve, we increase our provision for income taxes. If we
ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we
determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that tax
liability is greater than the original estimate. If the governing tax authorities have a differing interpretation of the applicable law, a successful challenge of
any of our tax positions could adversely affect our financial condition, cash flows and/or results of operations.
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Our business is subject to the risks of earthquakes, fire, floods and other catastrophic events, and to interruption by manmade problems such as network
security breaches, computer viruses, terrorism and war.
We have substantial operations in Illinois, California, England and India, and our third-party manufacturers are predominantly located in Mexico,
China, Taiwan and Israel. Operations in some of these areas are susceptible to disruption due to severe weather, seismic activity, political unrest and other
factors. For example, a significant natural disaster, such as an earthquake, a fire or a flood, occurring at the facilities of one of our third-party manufacturers
could have a material adverse impact on their ability to manufacture and timely deliver our products. In addition, due to the current fears over the spread of
the coronavirus that commenced in China, our third-party manufacturers in China may experience disruption of their operations. Despite the
implementation of network security measures, we also may be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized
tampering with our solutions. In addition, natural disasters, acts of terrorism or war could cause disruptions in the businesses of our suppliers,
manufacturers, network operators or the economy as a whole. To the extent that any such disruptions result in delays or cancellations of orders or impede
our ability to timely deliver our products, or the deployment of our products, our business, operating results and financial condition would be adversely
affected.
Risks related to our industry
New regulations or standards or changes in existing regulations or standards in the United States or internationally related to our products may result in
unanticipated costs or liabilities, which could have a material adverse effect on our business, results of operations and future sales.
Our products are subject to governmental regulations in a variety of jurisdictions. To achieve and maintain market acceptance, our products must
comply with these regulations as well as a significant number of industry standards. In the United States, our products must comply with various
regulations defined by the Federal Communications Commission, or FCC, Underwriters Laboratories and others. We must also comply with similar
international regulations. In addition, radio emissions, such as our products, are subject to health and safety regulation in the United States and in other
countries in which we do business, including by the Center for Devices and Radiological Health of the Food and Drug Administration, the Occupational
Safety and Health Administration and various state agencies. Member countries of the European Union have enacted similar standards concerning electrical
safety and electromagnetic compatibility and emissions, and chemical substances and use standards. As these regulations and standards evolve, and if new
regulations or standards are implemented, we could be required to modify our products or develop and support new versions of our products, and our
compliance with these regulations and standards may become more burdensome. The failure of our products to comply, or delays in compliance, with the
various existing and evolving industry regulations and standards could prevent or delay introduction of our products, which could harm our business.
Foreign regulatory agencies may delay or fail to certify our products for political or other reasons other than product quality or performance. Network
operator uncertainty regarding future policies may also affect demand for wireless broadband products, including our products. Our inability to alter our
products to address these requirements and any regulatory changes may have a material adverse effect on our business, operating results and financial
condition.
We are subject to governmental export and import controls that could impair our ability to compete in international markets and subject us to liability if we
are not in compliance with applicable laws.
Our technology and products are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations,
U.S. customs regulations, the economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls,
and applicable U.K. export and import laws and regulations. Exports, re-exports and transfers of our products and technology must be made in compliance
with these laws and regulations. U.S. and U.K. export control laws and economic sanctions include a prohibition on the shipment of certain products and
technology to embargoed or sanctioned countries, governments and persons. We take precautions to prevent our products and technology from being
shipped to, downloaded by or otherwise transferred to applicable sanctions targets, but our products could be shipped to those targets by our channel
partners despite such precautions. If our products are shipped to or downloaded by sanctioned targets in the future in violation of applicable export laws, we
could be subject to government investigations, penalties and reputational harm. Certain of our products incorporate encryption technology and may be
exported, re-exported or transferred only with the required applicable export license from the U.S. or the U.K. or through an export license exception.
If we fail to comply with applicable export and import regulations, customs and trade regulations, and economic sanctions and other laws, we could
be subject to substantial civil and criminal penalties, including fines and incarceration for responsible employees and managers, and the possible loss of
export or import privileges as well as harm our reputation and indirectly have a material adverse effect on our business, operating results and financial
condition. In addition, if our channel partners fail to comply with applicable export and import regulations, customs regulations, and economic and
sanctions and other laws in connection with our products and technology, then we may also be adversely affected, through reputational harm and penalties.
Obtaining the necessary export license for a particular sale may be time-consuming, may result in the delay or loss of sales opportunities and approval is
not guaranteed.
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Any change in export or import, customs or trade and economic sanctions laws, and regulations, shift in the enforcement or scope of existing laws
and regulations, or change in the countries, governments, persons or technologies targeted by such laws and regulations, could also result in decreased use
of our products, or in our decreased ability to export or sell our products to existing or potential network operators with international operations. Any
decreased use of our products or limitation on our ability to export or sell our products could affect our business, financial condition and results of
operations.
We do business in countries with a history of corruption and transact business with foreign governments, which increases the risks associated with our
international activities.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.K. Bribery Act of 2010, and many other laws
around the world that prohibit improper payments or offers or authorization of payments to governments and their employees, officials, and agents and
political parties for the purpose of obtaining or retaining business, inducing an individual to not act in good faith, direct business to any person, or secure
any advantage. We have operations, deal with and make sales to governmental entities in countries known to experience corruption, particularly certain
emerging countries in Asia, Eastern Europe, the Middle East and South America. Our activities in these countries create the risk of illegal or unauthorized
payments or offers of payments or other things of value by our employees, consultants or channel partners that could be in violation of applicable anti-
corruption laws, including the FCPA. In many foreign countries where we operate, particularly in countries with developing economies, it may be a local
custom for businesses to engage in practices that are prohibited by the FCPA or other similar laws and regulations. Although we have taken actions to
discourage and prevent illegal practices including our anti-corruption compliance policies, procedures, training and monitoring, the actions taken to
safeguard against illegal practices, and any future improvements in our anti-corruption compliance practices, may not be effective, and our employees,
consultants or channel partners may engage in illegal conduct for which we might be held responsible. Violations of anti-corruption laws may result in
severe criminal or civil sanctions, including suspension or debarment from government contracting, and we may be subject to other liabilities and
significant costs for investigations, litigation and fees, diversion of resources, negative press coverage, or reputational harm, all of which could negatively
affect our business, operating results and financial condition. In addition, the failure to create and maintain accurate books and records or the failure to
maintain an adequate system of internal accounting controls may subject us to sanctions.
If we fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be adversely affected.
We are subject to various environmental laws and regulations including laws governing the hazardous material content of our products and laws
relating to the recycling of electrical and electronic equipment. The laws and regulations to which we are subject include the European Union’s Restriction
of Hazardous Substances Directive, or RoHS, and Waste Electrical and Electronic Equipment Directive, or WEEE, as implemented by EU member states.
Similar laws and regulations exist or are pending in other regions, including in the United States, and we are, or may in the future be, subject to these laws
and regulations.
RoHS restricts the use of certain hazardous materials, including lead, mercury and cadmium, in the manufacture of certain electrical and electronic
products, including some of our products. We have incurred, and expect to incur in the future, costs to comply with these laws, including research and
development costs, and costs associated with assuring the supply of compliant components. Certain of our products are eligible for an exemption for lead
used in network infrastructure equipment. If this exemption is revoked, or if there are other changes to RoHS (or its interpretation) or if similar laws are
passed in other jurisdictions, we may be required to reengineer our products to use components compatible with these regulations. This reengineering and
component substitution could result in additional costs to us or disrupt our operations or logistics.
WEEE requires producers of electrical and electronic equipment to be responsible for the collection, reuse, recycling and treatment of their products.
Currently, our distributors generally take responsibility for this requirement, as they are often the importer of record. However, changes to WEEE and
existing or future laws similar to WEEE may require us to incur additional costs in the future.
If we are unable to comply with these or similar laws or regulations, we could incur fines, penalties, restrictions on our ability to manufacture our
products or restrictions or limitations on our ability to import or export our products to or from various jurisdictions.
Any failure to comply with current and future environmental laws could result in the incurrence of fines or penalties and could adversely affect the
demand for or sales of our products.
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If we were not able to satisfy data protection, security, privacy and other government- and industry-specific requirements or regulations, our business,
results of operations and financial condition could be harmed.
Personal privacy, data protection, information security and telecommunications-related laws and regulations have been widely adopted in the United
States, Europe and in other jurisdictions where we offer our products. The regulatory frameworks for these matters, including privacy, data protection and
information security matters, is rapidly evolving and is likely to remain uncertain for the foreseeable future. We expect that there will continue to be new
proposed laws, regulations and industry standards concerning privacy, data protection, information security and telecommunications services in the United
States, the European Union and other jurisdictions in which we operate or may operate, and we cannot yet determine the impact such future laws,
regulations and standards may have on our business. For example, the European Commission adopted the General Data Protection Regulation, effective in
May 2018, that supersedes prior EU data protection legislation, imposes more stringent EU data protection requirements and imposes greater penalties for
noncompliance. Additionally, California enacted the California Consumer Privacy Act of 2018, which took effect on January 1, 2020, and broadly defines
personal information, gives California residents expanded privacy rights and protections and provides for civil penalties for violations. We understand that
additional states as well as other countries around the world are also in the process of enacting or amending data protection, security, and privacy
regulations. We also expect that existing laws, regulations and standards may be interpreted in new manners in the future. Future laws, regulations,
standards and other obligations, and changes in the interpretation of existing laws, regulations, standards and other obligations could require us to modify
our products, restrict our business operations, increase our costs and impair our ability to maintain and grow our channel partner base and increase our
revenues. The cost of compliance with, and other burdens imposed by, the GDPR, CCPA and other new privacy laws may limit the use and adoption of our
products and services and could have an adverse impact on our business, results of operations and financial condition.
Although we work to comply with applicable privacy and data security laws and regulations, industry standards, contractual obligations and other
legal obligations, those laws, regulations, standards and obligations are evolving and may be modified, interpreted and applied in an inconsistent manner
from one jurisdiction to another, and may conflict with one another. As such, we cannot assure ongoing compliance with all such laws, regulations,
standards and obligations. Any failure or perceived failure by us to comply with applicable laws, regulations, standards or obligations, or any actual or
suspected security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of personally identifiable information or
other data, may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity, and could cause
channel partners to lose trust in us, which could have an adverse effect on our reputation and business.
Risks related to our intellectual property
We rely on the availability of third-party licenses, the loss of which could materially harm our ability to sell our products.
We rely on certain software or other intellectual property licensed from third parties. It may be necessary in the future to seek new licenses or renew
existing licenses. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. If we are unable to maintain these
licenses, or obtain licenses to alternative third-party intellectual property, on acceptable terms, we may be precluded from selling our products, may be
required to re-design our products to eliminate reliance on such third-party intellectual property or otherwise experience disruption in operating our
business. Third parties owning such intellectual property may engage in litigation against us seeking protection of their intellectual property rights, any of
which could have a material adverse effect on our business, operating results, and financial condition.
If we are unable to protect our intellectual property rights, our competitive position could be harmed or we may incur significant expenses to enforce our
rights.
We protect our proprietary information and technology through license agreements, nondisclosure agreements, noncompetition covenants, and other
contractual provisions and agreements, as well as through patent, trademark, copyright and trade secret laws in the United States and similar laws in other
countries. These protections may not be available in all jurisdictions and may be inadequate to prevent our competitors or other third-party manufacturers
from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or products. For example, the laws of certain
countries in which our products are manufactured or licensed do not protect our proprietary rights to the same extent as the laws of the United States. In
addition, third parties may seek to challenge, invalidate or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the
foregoing. We have focused patent, trademark, copyright and trade secret protection primarily in the United States and Europe, although we distribute our
products globally. As a result, we may not have sufficient protection of our intellectual property in all countries where infringement may occur. There can
be no assurance that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology or design
around our proprietary rights. In each case, our ability to compete could be significantly impaired. To prevent substantial unauthorized use of our
intellectual property rights, it may be necessary to prosecute actions for infringement and/or misappropriation of our proprietary rights against third parties.
Any such action could result in significant costs and diversion of our resources and management’s attention, and we may not be successful in such action.
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Claims by others that we infringe their intellectual property rights could harm our business.
Our industry is characterized by vigorous protection and pursuit of intellectual property rights. A number of companies hold a large number of
patents that may cover technology necessary to our products. We have in the past received and expect to continue to receive claims by third parties that we
infringe their intellectual property rights. For example, on August 7, 2018, Ubiquiti Networks, Inc. filed a lawsuit, which we refer to as the Ubiquiti
Litigation, in the United States District Court, Northern District of Illinois, against us, two of our employees, one of our distributors and one of our end
users. The complaint alleged that our development of and sales and promotion of our Elevate software as downloaded on a Ubiquiti device violates the
Computer Fraud and Abuse Act and Illinois Computer Crimes Prevention Law, the Digital Millennium Copyright Act and the Copyright Act and
constitutes misrepresentation and false advertising and false designation of origin in violation of the Lanham Act and state competition laws, breach of
contract, tortious interference with contract and unfair competition, and trademark infringement and common law misappropriation. The complaint also
asserted additional claims against all defendants alleging that the development and sales of Elevate violated the Racketeer Influenced and Corrupt
Organizations Act. On May 22, 2019, the Court issued its order dismissing Ubiquiti’s complaint without prejudice. On June 18, 2019, Ubiquiti filed its
First Amended Complaint (FAC). The FAC made substantially the same claims against the same parties with the exception that the FAC does not include
claims for violation of the Illinois Computer Crime Prevention Law, Infringement of Registered Trademarks, False Designation of Origin, and Common
Law Trademark Misappropriation that were included in the initial complaint. We filed a motion to dismiss the FAC on July 10, 2019. On November 14,
2019 the Court issued an order denying our motion to dismiss. The Court ordered that fact discovery will close on August 18, 2020 and that dispositive
motions must be filed prior to December 22, 2020. The Court referred the case to a magistrate judge for a potential settlement conference. There can be no
assurance that we will prevail in the lawsuit.
In addition, we have received correspondence from certain patent holding companies who assert that we infringe certain patents related to wireless
communication technologies. A court adjudicating a claim that we infringe these patents may not rule in our favor should these patent holding companies
file suit against us. As our business expands, we enter into new technologies, and the number of products and competitors in our market increases, we
expect that infringement claims may increase in number and significance. It is not uncommon for suppliers of certain components of our products, such as
chipsets, to be involved in intellectual property-related lawsuits by or against third parties. Our key component suppliers are often targets of such
assertions, and we may become a target as well. Any claims or proceedings against us, whether meritorious or not, could be time-consuming, result in
costly litigation, require significant amounts of management time or result in the diversion of significant operational resources, any of which could
materially and adversely affect our business and operating results.
Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain
that we will be successful in defending ourselves against intellectual property claims. In addition, we currently have a limited portfolio of issued patents
compared to our larger competitors, and therefore may not be able to effectively utilize our intellectual property portfolio to assert defenses or
counterclaims in response to patent infringement claims or litigation brought against us by third parties. Patent holding companies may seek to monetize
patents they previously developed, have purchased or otherwise obtained. Many companies, including our competitors, may now, and in the future, have
significantly larger and more mature patent portfolios than we have, which they may use to assert claims of infringement, misappropriation and other
violations of intellectual property rights against us. In addition, future litigation may involve non-practicing entities or other patent owners who have no
relevant products or revenue and against whom our own patents may therefore provide little or no deterrence or protection, and many other potential
litigants have the capability to dedicate substantially greater resources than we do to enforce their intellectual property rights and to defend claims that may
be brought against them.
A successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from distributing certain products,
obtaining the services of certain employees or independent contractors, or performing certain services. In addition, we might be required to seek a license
for the use of such intellectual property, which may not be available on commercially acceptable terms or at all. Alternatively, we may be required to
develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Any claims or proceedings
against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the
diversion of significant operational resources, or require us to enter into royalty or licensing agreements.
Although we may be able to seek indemnification from our component suppliers and certain of our third-party manufacturers who have provided us
with design and build services, these third-party manufacturers or component suppliers may contest their obligations to indemnify us, or their available
assets or indemnity obligation may not be sufficient to cover our losses.
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Our obligations to indemnify our channel partners and network operators against intellectual property infringement claims could cause us to incur
substantial costs.
We have agreed, and expect to continue to agree, to indemnify our channel partners and network operators for certain intellectual property
infringement claims, such as the Ubiquiti Litigation. If intellectual property infringement claims are made against our channel partners or network operators
concerning our products, we could be required to indemnify them for losses resulting from such claims or to refund amounts they have paid to us. The
maximum potential amount of future payments we could be required to make may be substantial or unlimited and could materially harm our business. We
may in the future agree to defend and indemnify our distributors, network operators and other parties, even if we do not believe that we have an obligation
to indemnify them or that our services and products infringe the asserted intellectual property rights. Alternatively, we may reject certain of these indemnity
demands, which may lead to disputes with a distributor, network operator or other party and may negatively impact our relationships with the party
demanding indemnification or result in litigation against us.
If our third-party manufacturers do not respect our intellectual property and trade secrets and produce competitive products using our design, our business
would be harmed.
We outsource manufacture, and in some cases hardware or software design, to third-party manufacturers predominantly in Mexico, China, and
Taiwan. Prosecution of intellectual property infringement and trade secret theft is more difficult in some of these jurisdictions than in the United States.
Although our agreements with our third-party manufacturers generally preclude them from misusing our intellectual property and trade secrets, or using our
designs to manufacture product for our competitors, we may be unsuccessful in monitoring and enforcing our intellectual property rights and may find
counterfeit goods in the market being sold as our products or products similar to ours produced for our competitors using our intellectual property.
Although we take steps to stop counterfeits, we may not be successful and network operators who purchase these counterfeit goods may experience product
defects or failures, harming our reputation and brand and causing us to lose future sales.
We use open source software in our products that may subject our firmware to general release or require us to re-engineer our products and the firmware
contained therein, which may cause harm to our business.
We incorporate open source software into our products. Use and distribution of open source software may entail greater risks than use of third-party
commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the
quality of the software code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we
create based upon the open source software and that we license such modifications or derivative works under the terms of a particular open source license
or other license granting third parties certain rights of further use. If we combine our proprietary firmware or other software with open source software in a
certain manner, we could, under certain of the open source licenses, be required to release our proprietary source code publicly or license such source code
on unfavorable terms or at no cost. Open source license terms relating to the disclosure of source code in modifications or derivative works to the open
source software are often ambiguous and few if any courts in jurisdictions applicable to us have interpreted such terms. As a result, many of the risks
associated with usage of open source software cannot be eliminated, and could, if not properly addressed, negatively affect our business.
If we were found to have inappropriately used open source software, we may be required to release our proprietary source code, re-engineer our
firmware or other software, discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or take other remedial
action that may divert resources away from our development efforts, any of which could adversely increase our expenses and delay our ability to release
our products for sale. We could also be subject to similar conditions or restrictions should there be any changes in the licensing terms of the open source
software incorporated into our products.
Risks related to ownership of our ordinary shares
Because Vector Capital holds a controlling interest in us, the influence of our public shareholders over significant corporate actions will be limited.
Affiliates of Vector Capital directly or indirectly own approximately 75% of our outstanding shares through their ownership of Vector Cambium
Holdings (Cayman), L.P., or VCH, L.P. As a result, Vector Capital has the power to:
•
•
•
control all matters submitted to our shareholders;
elect our directors; and
exercise control over our business, policies and affairs.
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Vector Capital is not prohibited from selling its interest in us to third parties. Accordingly, our ability to engage in significant transactions, such as a
merger, acquisition or liquidation, is limited without the consent of Vector Capital. Conflicts of interest could arise between us and Vector Capital, and any
conflict of interest may be resolved in a manner that does not favor us. Vector Capital may continue to retain control of us for the foreseeable future and
may decide not to enter into a transaction in which our shareholders would receive consideration for their shares that is much higher than the cost to them
or the then-current market price of those shares. In addition, Vector Capital could elect to sell a controlling interest in us and shareholders may receive less
than the then-current fair market value or the price paid for their shares. Any decision regarding their ownership of us that Vector Capital may make at
some future time will be in their absolute discretion.
In addition, pursuant to the terms of our Amended and Restated Memorandum and Articles of Association, Vector Capital and its affiliates have the
right to, and have no duty to abstain from, exercising its right to engage or invest in the same or similar business as us, and do business with any of our
channel partners, distributors, network operators and any other party with which we do business. In the event that any of our directors or officers who is
also a director, officer or employee of Vector Capital or its affiliates acquires knowledge of a corporate opportunity or is offered a corporate opportunity,
then Vector Capital or its affiliates may pursue or acquire such corporate opportunity without presenting the corporate opportunity to us without liability,
and to the maximum extent permitted by applicable law, such relevant director will be deemed to have fully satisfied their fiduciary duty if the knowledge
of such corporate opportunity was not acquired solely in such person’s capacity as our director or officer and such person acted in good faith.
In addition, pursuant to our Amended and Restated Memorandum and Articles of Association, a director who is in any way interested in a contract
or transaction with us will declare the nature of his interest at a meeting of the board of directors. A director may vote in respect of any such contract or
transaction notwithstanding that he may be interested therein and if he does so his vote will be counted and he may be counted in the quorum at any
meeting of the board of directors at which any such contract or transaction shall come before the meeting of the board of directors for consideration. We
have adopted a written audit committee charter, pursuant to which the audit committee must review all related party transactions required to be disclosed in
our financial statements and approve any such related party transaction, unless the transaction is approved by another independent committee of our board.
We are a controlled company within the meaning of Nasdaq rules and, as a result, we qualify for and are relying on exemptions from certain corporate
governance requirements.
Vector Capital controls a majority of the voting power of our outstanding shares and as a result, we are a controlled company within the meaning of
the corporate governance standards of the Nasdaq. Under Nasdaq rules, a controlled company may elect not to comply with certain corporate governance
requirements of the Nasdaq, including the requirements that:
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a majority of the board of directors consist of independent directors;
the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the
committee’s purpose and responsibilities;
the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and
responsibilities; and
there be an annual performance evaluation of the nominating and corporate governance and compensation committees.
We are utilizing these exemptions, including the exemption for a board of directors composed of a majority of independent directors. In addition,
although we have adopted charters for our audit and compensation committees and intend to conduct annual performance evaluations for these committees,
none of these committees are or will in the foreseeable future be composed entirely of independent directors. We are relying on the phase-in rules of the
SEC and Nasdaq with respect to the audit committee. These rules permit us to have an audit committee that is comprised of one independent member at the
time of the effectiveness of our registration statement for our IPO which occurred on June 25, 2019, a majority of members that are independent within 90
days thereafter, and all members that are independent within one year thereafter. Accordingly, shareholders may not have the same protections afforded to
shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
30
The price of our shares may be volatile, and shareholders could lose all or part of their investment.
The trading price of our shares may fluctuate substantially. The trading price of our shares will depend on a number of factors, including those
described in this “Risk factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations
could cause shareholders to lose all or part of their investment in our shares since they might be unable to sell their shares at or above the price paid for
them. Factors that could cause fluctuations in the trading price of our shares include the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;
actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;
sales of our shares by us or our shareholders or hedging activities by market participants;
failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure
to meet these estimates or the expectations of investors;
operating performance or stock market valuations of other technology companies generally, or those in our industry in particular;
announced or completed acquisitions of businesses or technologies by us or our competitors;
general economic conditions and slow or negative growth of our markets;
rumors and market speculation involving us or other companies in our industry;
litigation involving us, our industry or both or investigations by regulators into our operations or those of our competitors;
developments or disputes concerning our intellectual property or other proprietary rights;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidelines, interpretations or principles;
any major change in our management; and
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may
seriously affect the market price of our shares, regardless of our actual operating performance. In the past, following periods of volatility in the overall
market and the market prices of particular companies’ securities, securities class action litigations have often been instituted against these companies.
Litigation of this type, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our
shares.
Our Amended and Restated Memorandum and Articles of Association contain provisions to limit the ability of others to acquire control of our
company through non-negotiated transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at
a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar
transaction. For example, our board of directors has the authority to issue undesignated, or “blank-check,” preferred shares without shareholder approval.
As a result, our board of directors could authorize and issue a series of preferred shares with terms calculated to delay or prevent a change in control of our
company or make removal of management more difficult, which may not be in the interests of holders of our ordinary shares. In addition, our board is
staggered and divided into three classes, with each class subject to re-election once every three years on a rotating basis, special meeting of shareholders
may only be called by a specified group of directors, executives or shareholders and shareholders must comply with advance notice provisions in order to
bring business before or nominate directors for election at shareholder meetings. As a result, shareholders would be prevented from electing an entirely new
board of directors at any annual meeting and the ability of shareholders to change the membership of a majority of our board of directors may be delayed.
31
Because we are incorporated under Cayman Islands law, shareholders may face difficulties in protecting their interests, and the ability to protect rights
through U.S. courts may be limited.
We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our Amended and Restated
Memorandum and Articles of Association, the Companies Law (2018 Revision) of the Cayman Islands and the common law of the Cayman Islands. The
rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under
Cayman Islands law are governed by the common law of the Cayman Islands and we have adopted an exclusive forum by law that requires certain
shareholder litigations regarding such matters to be brought in Cayman Islands Courts. These exclusive forum provisions do not apply to claims under U.S.
federal securities laws. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as
well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands.
The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be
under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws
than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman
Islands.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to
obtain copies of lists of shareholders of these companies. Our directors have discretion under our existing articles of association to determine whether or
not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our
shareholders. This may make it more difficult for shareholders to obtain the information needed to establish any facts necessary for a shareholder motion or
to solicit proxies from other shareholders in connection with a proxy contest.
In addition, the Cayman Islands courts are also unlikely (1) to recognize or enforce against us judgments of courts of the United States based on
certain civil liability provisions of U.S. securities laws, or (2) to impose liabilities against us, in original actions brought in the Cayman Islands, based on
certain civil liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the Cayman Islands of judgments
obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a foreign judgment of a
foreign court of competent jurisdiction without any re-examination of the merits at common law.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by
management, members of the board of directors or large shareholders than they would as shareholders of a public company incorporated in the United
States.
We are an emerging growth company, and any decision on our part to comply only with certain reduced disclosure requirements applicable to emerging
growth companies could make our shares less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may
choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies,
including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a
nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an
emerging growth company for up to five years, although if the market value of our shares that is held by non-affiliates exceeds $700 million as of any June
30 before that time or if we have total annual gross revenues of $1.07 billion or more during any fiscal year before that time, we would cease to be an
emerging growth company as of the end of that fiscal year, or if we issue more than $1 billion in non-convertible debt in a three-year period, we would
cease to be an emerging growth company immediately. Investors may find our shares less attractive because we choose to rely on these exemptions. If
some investors find our shares less attractive as a result of our choice to reduce our disclosures, there may be a less active trading market for our shares and
our share price may be more volatile.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply
to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we
will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
32
Our directors may have conflicts of interest because of their ownership of equity interests of, and their employment with, our parent company and our
affiliates.
Two of our directors hold ownership interests in Vector Capital as well as ownership in and employment positions with its affiliates. Ownership
interests in Vector Capital by our directors could create, or appear to create, potential conflicts of interest when our directors are faced with decisions that
could have different implications for us and for Vector Capital or its affiliates. Conflicts of interest may not be resolved in our favor.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of December 31, 2019, we occupied approximately 38,000 square feet of office space in Rolling Meadows, Illinois under lease agreements that
expire in 2024, where we have corporate and executive functions, research and development, customer support, operations and administration and finance
services. We also lease approximately 27,000 square feet of office space in Ashburton, England under lease agreements all of which expire in 2026,
approximately 32,000 square feet of space in Bangalore, India under two leases that expire in 2021, approximately 9,000 square feet of office space in San
Jose, California under a lease that expires in 2022, and approximately 9,000 square feet of office space in Thousand Oaks, California under a lease that
expires in 2022. In addition, we maintain offices in Miami, Florida, Italy, Dubai, Mexico and Singapore.
For additional information regarding obligations under operating leases, see Note 18 - Leases in the Notes to the Consolidated Financial Statements
included in Part II, Item 8: “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Item 3. Legal Proceedings.
Third parties may from time to time assert legal claims against us.
Our industry is characterized by vigorous protection and pursuit of intellectual property rights. A number of companies hold a large number of
patents that may cover technology necessary to our products. We have in the past received and expect to continue to receive claims by third parties that we
infringe their intellectual property rights. For example, on August 7, 2018, Ubiquiti Networks, Inc. filed a lawsuit, which we refer to as the Ubiquiti
Litigation, in the United States District Court, Northern District of Illinois, against us, two of our employees, one of our distributors and one of our end
users. The complaint alleged that our development of and sales and promotion of our Elevate software as downloaded on a Ubiquiti device violates the
Computer Fraud and Abuse Act and Illinois Computer Crimes Prevention Law, the Digital Millennium Copyright Act and the Copyright Act and
constitutes misrepresentation and false advertising and false designation of origin in violation of the Lanham Act and state competition laws, breach of
contract, tortious interference with contract and unfair competition, and trademark infringement and common law misappropriation. The complaint also
asserted additional claims against all defendants alleging that the development and sales of Elevate violated the Racketeer Influenced and Corrupt
Organizations Act. On May 22, 2019, the Court issued its order dismissing Ubiquiti’s complaint without prejudice. On June 18, 2019, Ubiquiti filed its
First Amended Complaint (FAC). The FAC made substantially the same claims against the same parties with the exception that the FAC does not include
claims for violation of the Illinois Computer Crime Prevention Law, Infringement of Registered Trademarks, False Designation of Origin, and Common
Law Trademark Misappropriation that were included in the initial complaint. We filed a motion to dismiss the FAC on July 10, 2019. On November 14,
2019 the Court issued an order denying our motion to dismiss. The Court ordered that fact discovery will close on August 18, 2020 and that dispositive
motions must be filed prior to December 22, 2020. The Court referred the case to a magistrate judge for a potential settlement conference. There can be no
assurance that we will prevail in the lawsuit.
Item 4. Mine Safety Disclosures.
Not applicable.
33
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market information
Our ordinary shares are listed on the NASDAQ Global Market under the symbol “CMBM”. The following table sets forth for the periods indicated
the high and low intra-day sale prices per share of our ordinary shares as reported on the NASDAQ Global Market:
PART II
Year ended December 31, 2019
Second quarter (from June 26, 2019)
Third quarter
Fourth quarter
High
Low
$
$
$
10.50 $
11.75 $
9.96 $
8.50
8.04
5.75
On March 18, 2020, the last reported sale price of our ordinary shares on the NASDAQ Global Market was $4.53 per share, and there were 243
holders of record of our ordinary shares. The actual number of holders of ordinary shares is greater than these numbers of record holders and includes
stockholders who are beneficial owners, but whose shares are held in street name by brokers and nominees. The number of holders of record also does not
include shareholders whose shares may be held in trust by other entities.
Recent sale of unregistered securities
Just prior to our initial public offering, we effected a recapitalization as described in our Prospectus filed with the Securities and Exchange
Commission dated June 25, 2019, which comprised (i) an increase in the authorized and outstanding shares held by Vector Cambium Holdings (Cayman),
L.P., or VCH L.P., and (ii) an exchange of the vested share-based compensation awards held by our employees in VCH L.P. for our shares and unvested
share-based compensation awards for restricted shares or restricted share units issued by us, each on a value-for-value basis. As a result, and based on the
IPO price of $12.00, we issued (a) 17,627,575 shares to VCH, L.P. and (b) 2,220,788 shares to our employees and service providers, of which 91,125
shares were withheld from the employees and services providers in net settlement of amounts due.
Use of proceeds from Initial Public Offering of ordinary shares
On June 28, 2019, we completed our IPO in which we sold 5,800,000 ordinary shares at a price of $12.00 per share. The offer and sale of all of the
shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-21789), which was declared
effective by the SEC on June 25, 2019. We raised approximately $61.4 million in net proceeds after deducting underwriting discounts and commissions of
$3.6 million and $4.6 million for offering expenses. We used a portion of the proceeds to pay down debt of $30.7 million on July 1, 2019, to pay $5.6
million on July 3, 2019 to Vector Capital Management, an affiliate of (i) Vector Cambium Holdings (Cayman), L.P., who owns 75% of our outstanding
ordinary shares and (ii) Robert Amen and Alexander Slusky, members of our board of directors. The managing underwriters of our IPO were J.P. Morgan
Securities LLC and Goldman Sachs & Co. LLC. In addition, on August 5, 2019, we used $2.0 million of the net proceeds to pay to Riverbed Technology,
Inc. the initial purchase price of the acquisition of assets and liabilities of its Xirrus Wi-Fi business, and through February 2020, paid the full $3.0 million
of remaining consideration to Riverbed Technology, Inc.
Dividend policy
We have not declared or paid dividends on our ordinary shares since our IPO. Neither Cayman Island law nor our amended and restated certificate
of incorporation requires our board of directors to declare dividends on our ordinary shares. Any future determination to declare cash dividends on our
ordinary shares will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital
requirements, general business conditions and other factors that our board of directors may deem relevant. We do not anticipate paying cash dividends on
our ordinary shares for the foreseeable future.
Equity compensation plan information
Information regarding the securities authorized for issuance under our equity compensation plans will be included in our Proxy Statement relating to
our 2020 annual meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2019 and is
incorporated herein by reference.
34
Performance graph
Notwithstanding any statement to the contrary in any of our filings with the SEC, the following information shall not be deemed “filed” with the
SEC or “soliciting material” under the Securities Exchange Act of 1934 and shall not be incorporated by reference into any such filings irrespective of any
general incorporation language contained in such filing.
The following graph compares the total cumulative stockholder return on our ordinary shares with the total cumulative return of the Russell 3000
Index and the NASDAQ Composite Index during the period commencing on June 26, 2019, the initial trading day of our ordinary shares, and ending on
December 31, 2019. The graph assumes that $100 was invested at the beginning of the period in our ordinary shares and in each of the comparative indices,
and the reinvestment of any dividends. Historical share price performance should not be relied upon as an indication of future share price performance.
Cambium Networks Corporation
Russell 3000 (TR)
NASDAQ Composite (TR)
6/26/2019
6/28/2019
7/31/2019
8/31/2019
9/30/2019
10/31/2019
11/30/2019
100.00
100.00
100.00
98.87
101.26
101.23
99.07
102.76
103.41
92.68
100.67
100.87
100.00
102.44
101.41
90.31
104.64
105.17
74.74
108.62
110.06
12/31/2019
90.10
111.75
114.05
35
Item 6. Selected Financial Data.
Consolidated Selected Financial Data
The following selected consolidated financial data should be read together with our consolidated financial statements and related notes included
elsewhere in this Annual Report on Form 10-K and the information in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations.” Our fiscal year ends on December 31. The following selected financial data has been derived from our audited consolidated financial
statements. Historical results are not necessarily indicative of future results.
Consolidated Statements of Operations Data:
Revenues
Cost of revenues
Gross profit
Operating expenses
Research and development
Sales and marketing
General and administrative
Depreciation and amortization
Total operating expenses
Operating income
Interest expense
Other expense
Income (loss) before income taxes
(Benefit) provision for income taxes
Net income (loss)
Earnings (loss) per share
Basic and diluted
Weighted-average number of shares outstanding to
compute net income (loss) per share
Basic and diluted
Consolidated Balance Sheet Data:
Cash
Working capital (1)
Total assets
Total debt (2)
Total shareholders' (deficit) equity
2017
Year Ended December 31,
2018
(in thousands)
2019
$
216,671 $
105,960
110,711
241,762 $
126,267
115,495
267,028
135,799
131,229
47,692
46,253
30,125
5,858
129,928
1,301
8,076
546
(7,321)
10,280
(17,601)
32,227
37,209
17,578
8,824
95,838
14,873
5,018
474
9,381
(418)
9,799 $
38,917
42,658
18,804
8,765
109,144
6,351
8,113
550
(2,312)
(799)
(1,513) $
$
$
$
0.67 $
(0.11) $
(0.89)
13,600,411
13,600,411
19,741,764
2017
As of December 31,
2018
(in thousands)
$
7,377
30,986
121,613
87,377
(17,826)
$
4,441
39,274
142,057
103,019
(20,571)
2019
19,346
61,449
172,479
63,612
39,929
(1) Working capital is defined as total current assets minus total current liabilities.
(2)
Total debt is shown net of deferred financing fees of $2.6 million, $2.4 million and $1.6 million for 2017, 2018 and 2019, respectively.
36
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial
statements and related notes thereto of Cambium Networks Corporation (“Cambium”, “we”, “our”, or “us”) included elsewhere in this Annual Report on
Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ
materiality from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed
below and elsewhere in this Annual Report on Form 10-K, particularly those discussed under Part I, Item 1A. “Risk Factors.” Our historical results are
not necessarily indicative of the results that may be expected for any period in the future.
Overview
We provide wireless broadband networking infrastructure solutions for network operators, including medium-sized wireless Internet service
providers, enterprises, and government agencies. Our scalable, reliable and high-performance solutions create a purpose-built wireless fabric that connects
people, places and things across distances ranging from two meters to more than 100 kilometers, indoors and outdoors, using licensed and unlicensed
spectrum at attractive economics. Our embedded proprietary RF technology and software enables automated optimization of data flow at the outermost
points in the network, which we refer to as the “Intelligent edge.”
We were formed in 2011 when Cambium Networks acquired the PTP and PMP businesses from Motorola Solutions. Prior to the acquisition by
Cambium Networks, Motorola Solutions had invested over a decade in developing the technology and intellectual property assets that formed the
foundation for our business, having launched the Canopy PMP business in 1999 and having acquired the Orthogon Systems PTP business in
2006. Following the acquisition, we renamed the business Cambium Networks and leveraged the technology to continue to develop and offer an extensive
portfolio of reliable, scalable and secure enterprise-grade fixed wireless broadband and PTP and PMP platforms, Wi-Fi and IIoT solutions.
We offer our wireless broadband solutions in three categories:
•
•
•
PTP: Our PTP backhaul portfolio is comprised of products operating in unlicensed spectrum below 6 GHz, and those operating in licensed
spectrum between 6 and 38 GHz. The mainstay of our backhaul offering is the PTP 670 for commercial applications and PTP 700 for
defense and national security applications. In addition, our PTP 820 series offers carrier-grade microwave backhaul in licensed spectrum, and
our recently introduced PTP 550 offers price-performance leadership in spectral efficiency in sub-6GHz unlicensed spectrum.
PMP: Our PMP portfolio ranges from our top-of-the-line PMP 450 series to our ePMP solutions for network operators that need to optimize
for both price and performance to our cnReach family of narrow-bandwidth connectivity products for industrial communications. The PMP
450 series is optimized for performance in high-density and demanding physical environments, and includes the PMP 450m with integrated
cnMedusa massive multi-user multiple input/multiple output, or MU-MIMO, technology. For less demanding environments, ePMP provides
a high-quality platform at a more affordable price. The recently released ePMP 3000 supports 4x4 MU-MIMO and is complemented by a
broad portfolio of ePMP Force 300 subscriber radios. cnReach products enables IIoT applications, such as supervisory control and data
acquisition, or SCADA, processes in the oil and gas, electric utility, water, railroad and other industrial settings.
Wi-Fi: Our Wi-Fi portfolio includes our cnPilot cloud-managed Wi-Fi solutions, our cnMatrix cloud-managed wireless-aware switching
solution, and our Xirrus Wi-Fi solutions. cnPilot is for indoor and outdoor enterprise, small business and home applications and offers a range
of access points and RF technology that enable network optimization based on desired geographic coverage and user density. cnMatrix
provides the intelligent interface between wireless and wired networks. cnMatrix’s policy-based configuration accelerates network
deployment, mitigates human error, increases security, and improves reliability. Xirrus has a portfolio of high performance enterprise Wi-Fi
access points and cloud based subscription services.
We generate a substantial majority of our sales through our global channel distribution network, including, as of December 31, 2019, approximately
150 distributors that we sell to directly, together with over 6,800 value added resellers and system integrators supplied by these distributors. Our channel
partners provide lead generation, pre-sales support and product fulfillment, along with professional services for network design, installation,
commissioning and on-going field support. Although we fulfill sales almost exclusively through our channel partners, through our global sales team we
engage directly with network operators in our key vertical markets including service providers, enterprises, industrials, defense and national security, and
state and local governments. Our sales team responds to bids or requests for quotes, typically in collaboration with a channel partner. Our distributors carry
inventory of our products for resale, and generally have stock rotation rights only if they simultaneously place an off-setting order for product. As such, we
generally recognize revenue from sales to distributors on a sell-in basis, and manage our finished goods inventory efficiently to plan for distributor demand.
37
We outsource production to third-party manufacturers, which are responsible for purchasing and maintaining inventory of components and raw
materials and, in certain cases, we resell third-party products on a white-label basis. We believe that this approach gives us the advantages of relatively low
capital investment and significant flexibility in scheduling production, managing inventory levels and providing a comprehensive solution to meet network
operator demand. The majority of our products are delivered to us at one of three distribution hubs, where we have outsourced the warehousing and
delivery of our products to a third-party logistics provider and from which we manage worldwide fulfillment.
Initial public offering
Our registration statement filed with the Securities and Exchange Commission in connection with our initial public offering, or IPO, was declared
effective on June 25, 2019, and our ordinary shares began trading on the Nasdaq Global Market on June 26, 2019. On June 28, 2019, we completed our
IPO, in which we sold 5,800,000 shares at a public offering price of $12.00 per share, of which 1,500,000 shares were purchased by our majority
shareholder, VCH, L.P. On June 28, 2019, we received net proceeds of $66.0 million after deducting underwriting discounts and commissions of $3.6
million. The net proceeds from the IPO were used to pay down $30.7 million of our debt, $4.6 million of deferred offering costs, $5.6 million to Vector
Capital Management, and $4.7 million to Riverbed Technology, Inc. for the Xirrus acquisition.
Our consolidated financial statements for the year ended December 31, 2019 reflect share-based compensation expense of $16.1 million associated
with the one-time recognition of deferred share-based compensation expense and the the one-time issuance of 2,172,000 share options and restricted share
units, each upon the completion of our IPO.
Xirrus acquisition
In August 2019, we acquired select assets and assumed select liabilities of the Xirrus Wi-Fi products and cloud services business from Riverbed
Technology, Inc. Xirrus has a portfolio of high performance enterprise Wi-Fi access points and subscription services. We paid $2.0 million upon closing
and the agreement provided for additional $3.0 million subject to Xirrus attaining certain booking targets. As of December 31, 2019, all booking targets
have been meet. We paid the full $3.0 million of remaining consideration through February 2020. This acquisition will enhance and accelerate our existing
network service application capabilities.
We account for business combinations in accordance with ASC 805, Business Combinations. We recorded the acquisition using the acquisition
method of accounting and recognized assets and liabilities at their fair value as of the date of acquisition. We based the preliminary allocation of the
puchase price on estimates and assumptions that are subject to change within the purchase price allocation period, which is generally one year from the
acquisition date. The purchase accounting is not yet complete and as such the final allocation may be subject to change. We determined the estimated fair
value of identifiable intangible assets acquired primarily using an income approach.
Basis of presentation
Revenues
Our revenues are generated primarily from the sale of our products, which consist of hardware with essential embedded software. Our revenues also
include limited amounts for software products and extended warranty on hardware products. We generally recognize product revenues at the time of
shipment, provided that all other revenue recognition criteria have been met. Revenues are recognized net of estimated stock returns, volume-based rebates
and cooperative marketing allowances that we provide to distributors. We provide a standard one-year or three-year warranty on our hardware products,
that includes access to telephone and internet support. In addition, we offer extended warranties on certain hardware products. We recognize revenues on
extended warranties on a straight-line basis over the contractual period. We provide our cnMaestro, LINKPlanner and cnArcher applications as
supplemental tools to help network operators design, install, and manage their networks, and as a means of driving sales of our hardware products. We
presently offer these applications without additional charge to the customer and these applications are not essential to the operation of our products.
Cost of revenues and gross profit
Our cost of revenues is comprised primarily of the costs of procuring finished goods from our third-party manufacturers, third-party logistics and
warehousing provider costs, freight costs and warranty costs. We outsource our manufacturing to third-party manufacturers located primarily in Mexico,
China and Israel. Cost of revenues also includes costs associated with supply operations, including personnel related costs, provision for excess and
obsolete inventory, third-party license costs and third-party costs related to services we provide. Beginning in the fourth quarter of 2017, cost of revenues
includes amortization of capitalized internal costs for software to be sold or marketed externally.
38
Gross profit has been and will continue to be affected by various factors, including changes in product mix. The margin profile of products within
each of our core product categories can vary significantly depending on the operating performance, features and manufacturer of the product. Generally,
our gross margins on backhaul and access point products are greater than those on our CPE products. Because the ratio of CPE to PTP and PMP access
points typically increases as network operators build out the density of their networks, increases in follow-on sales to network operators as a percentage of
our total sales typically have a downward effect on our overall gross margins. Finally, gross margin will also vary as a function of changes in pricing due to
competitive pressure, our third-party manufacturing and other production costs, cost of shipping and logistics, provision for excess and obsolete inventory
and other factors. We expect our gross margins will fluctuate from period to period depending on the interplay of these various factors.
Operating expenses
We classify our operating expense as research and development, sales and marketing, and general and administrative expense. Personnel costs are
the primary component of each of these operating expense categories, which consist of cash-based personnel costs, such as salaries, sales commissions,
benefits and bonuses. From and after our IPO, operating expenses also include share-based compensation expense. In addition, we separate depreciation
and amortization in their own category.
Research and development
In addition to personnel-related costs, research and development expense consists of costs associated with design and development of our products,
product certification, travel and recruiting. We generally recognize research and development expense as incurred. For certain of our software projects
under development, we capitalize the development cost during the period between determining technological feasibility of the product and commercial
release. We amortize the capitalized development cost upon commercial release, generally over three years. We typically do not capitalize costs related to
the development of first-generation product offerings as technological feasibility generally coincides with general availability of the software. We expect
research and development expense to increase in absolute dollars as we continue to invest in our future products and services.
Sales and marketing
In addition to personnel costs for sales, marketing, service and product line management personnel, sales and marketing expense consists of our
training programs, trade shows, marketing programs, promotional materials, demonstration equipment, national and local regulatory approval on our
products, travel and entertainment, and recruiting. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size
of our sales, marketing, service, and product line management organization in support of our investment in our growth opportunities, and, in particular, as
we continue to expand our global distribution network.
General and administrative
In addition to personnel costs, general and administrative expense consists of professional fees, such as legal, audit, accounting, information
technology and consulting costs, facilities and other supporting overhead costs, as well as loan transaction fees and management fees paid to Vector
Capital. We expect general and administrative expense to increase in absolute dollars as we continue to incur additional costs associated with being a public
company, partially offset by the absence of financing and management fees previously paid to Vector Capital.
Depreciation and amortization
Depreciation and amortization expense consist of depreciation related to fixed assets such as computer equipment, furniture and fixtures, and testing
equipment, as well as amortization related to acquired and internal use software and definite lived intangibles.
Provision for income taxes
Our provision for income taxes consists primarily of income taxes in the jurisdictions in which we conduct business. As we have expanded our
international operations, we have incurred additional foreign tax expense, and we expect this to continue. Management assesses our deferred tax assets in
each reporting period, and if it is determined that it is not more likely than not to be realized, we will record a change in our valuation allowance in that
period.
39
Results of operations
The following table presents the consolidated statements of operations, as well as the percentage relationship to total revenues for items included in
our consolidated statements of operations:
(in thousands)
Statements of Operations Data:
Revenues
Cost of revenues
Gross profit
Operating expenses
Research and development
Sales and marketing
General and administrative
Depreciation and amortization
Total operating expenses
Operating income
Interest expense
Other expense
Income (loss) before income taxes
(Benefit) provision for income taxes
Net income (loss)
Percentage of Revenues:
Revenues
Cost of revenues
Gross margin
Operating expenses
Research and development
Sales and marketing
General and administrative
Depreciation and amortization
Total operating expenses
Operating income
Interest expense
Other expense
Income (loss) before income taxes
(Benefit) provision for income taxes
Net income (loss)
2017
2018
2019
$
$
216,671
105,960
110,711
$
241,762
126,267
115,495
32,227
37,209
17,578
8,824
95,838
14,873
5,018
474
9,381
(418)
$
9,799
38,917
42,658
18,804
8,765
109,144
6,351
8,113
550
(2,312)
(799)
(1,513) $
$
267,028
135,799
131,229
47,692
46,253
30,125
5,858
129,928
1,301
8,076
546
(7,321)
10,280
(17,601)
2017
2018
2019
100.0%
48.9%
51.1%
100.0%
52.2%
47.8%
100.0%
50.9%
49.1%
14.9%
17.2%
8.1%
4.1%
44.3%
6.8%
2.3%
0.2%
4.3%
(0.2)%
4.5%
16.1%
17.6%
7.8%
3.6%
45.1%
2.7%
3.4%
0.2%
(0.9)%
(0.3)%
(0.6)%
17.9%
17.3%
11.3%
2.2%
48.7%
0.4%
3.0%
0.2%
(2.8)%
3.8%
(6.6)%
Comparison of the year ended December 31, 2018 to the year ended December 31, 2019
Revenues
(dollars in thousands)
Revenues
2018
241,762
$
2019
267,028
$
$
$
25,266
%
10.5%
Change
Revenues increased $25.3 million, or 10.5%, from $241.8 million in 2018 to $267.0 in 2019, which was attributable to growth in our point-to-
multipoint and Wi-Fi lines, including newer products, as well as pricing actions taken in February 2019. Complementing increased product demand, as
described below, revenue growth in 2019 also benefitted from continued expansion of our channel, bringing the total registered channel partners to over
6,800 as of December 31, 2019.
40
Revenues by product category
(dollars in thousands)
Point-to-MultiPoint
Point-to-Point
Wi-Fi
Other
Total revenues by product category
Point-to-MultiPoint
2018
146,621
71,678
19,571
3,892
241,762
$
$
2019
156,157
71,618
35,678
3,575
267,028
$
$
Change
$
%
$
9,536
(60)
16,107
(317)
$
25,266
6.5%
(0.1)%
82.3%
(8.1)%
10.5%
Our PMP products comprised 61% of total revenues for 2018 and 58% of total revenues for 2019. PMP revenue growth was attributable to
continued growth in core PMP products and new product introduction.
Point-to-Point
PTP revenue was essentially flat due to funding delays in the defense sector.
Wi-Fi
Wi-Fi revenue increased primarily as a result of recent new product introductions, including cnMatrix as well as sales of Xirrus products and
services which was acquired in the current year.
Revenues by geography
(dollars in thousands)
North America
Europe, Middle East, Africa
Caribbean and Latin America
Asia Pacific
Total revenues by geography
2018
108,884
75,503
29,833
27,542
241,762
$
$
2019
122,565
85,930
31,767
26,766
267,028
$
$
$
Change
$
13,681
10,427
1,934
(776)
$
25,266
%
12.6%
13.8%
6.5%
(2.8)%
10.5%
Revenues increased in all but one region with North America and Europe, Middle East, Africa contributing 76% and 78% of total revenues for 2018
and 2019, respectively. North America sales benefited from new product introductions of PMP products, but were affected by decreased sales to the
defense industry due to funding timing. Europe, Middle East, Africa sales increased due to increased sales to the enterprise sector as well as increased sales
of ePMP and wireless products. Caribbean and Latin America sales increased due to increased sales of wireless products to enterprise customers while
Asia Pacific sales were lower due to government sector spending delays in the Wi-Fi category.
Cost of revenues and gross margin
(dollars in thousands)
Cost of revenues
Gross margin
$
2018
126,267
$
47.8%
2019
135,799
$
49.1%
Change
$
9,532
%
7.5%
130 bps
Cost of revenues increased $9.5 million, or 7.5%, from $126.3 million for 2018 to $135.8 million for 2019. The increase in cost of revenues was
primarily due to increased product and freight costs as a result of increased sales.
Gross margin increased from 47.8% in 2018 to 49.1% in 2019. The increase was driven by higher volumes, improved product and geographical
mix, and key initiatives put in place focused on price management, cost reductions, and supply chain efficiencies.
41
Operating expenses
(dollars in thousands)
Research and development
Sales and marketing
General and administrative
Depreciation and amortization
Total operating expenses
Research and development
2018
2019
$
%
Change
$
$
38,917
42,658
18,804
8,765
109,144
$
$
47,692
46,253
30,125
5,858
129,928
$
$
8,775
3,595
11,321
(2,907)
20,784
22.5%
8.4%
60.2%
(33.2)%
19.0%
Research and development expense increased $8.8 million, or 22.5%, from $38.9 million in 2018 to $47.7 million in 2019. As a percentage of
revenues, research and development expenses increased from 16.1% in 2018 to 17.9% in 2019. Research and development expense increased due to $5.4
million of share-based compensation expense as well as a $3.6 million increase in headcount costs primarily related to additional headcount added as part
of our Xirrus acquisition and our continued investment in product development to grow our business. As a percentage of revenues, the increases in
research and development expense related to headcount investment and share-based compensation expense outpaced revenue growth.
Sales and marketing
Sales and marketing expense increased $3.6 million, or 8.4%, from $42.7 million in 2018 to $46.3 million in 2019. As a percentage of revenues,
sales and marketing expense decreased from 17.6% in 2018 to 17.3% in 2019. Sales and marketing expense increased due to $4.2 million of share-based
compensation expense offset by $0.8 million of lower variable pay from employee incentive plans. As a percentage of revenues, the decrease was largely
due to our efforts to control spending in line with revenue growth.
General and administrative
General and administrative expense increased $11.3 million, or 60.2%, from $18.8 million in 2018 to $30.1 million in 2019. As a percentage of
revenues, general and administrative expense increased from 7.8% in 2018 to 11.3% in 2019. The increase in general and administrative expense consisted
of $7.9 million of share-based compensation expense, $1.5 million of directors and officers insurance premiums as well as higher facility and technology
costs of $1.0 million and accounting and tax fees of $0.5 million. As a percentage of revenues, general and administrative expense was higher largely as a
result of share-based compensation expense and directors and officers insurance premiums as a result of transitioning to a public company.
Depreciation and amortization
Depreciation and amortization expense decreased $2.9 million, or (33.2)%, from $8.8 million in 2018 to $5.9 million in 2019. The decrease in
depreciation and amortization was driven by decreases in intangible asset amortization, as certain acquired software, technology and patents became fully
amortized during the fourth quarter of 2018, offset by an increase in amortization due to new intangibles being recognized as a result of the Xirrus
acquisition.
Interest expense
(dollars in thousands)
Interest expense
2018
2019
$
%
$
8,113
$
8,076
$
(37)
(0.5)%
Change
Interest expense remained relatively flat from 2018 to 2019. This was primarily due to a $0.5 million write-down of deferred financing fees in July
2019 related to the prepayment on the term loan offset by $0.5 million in lower interest expense as a result of the lower debt balance.
Other expense
(dollars in thousands)
Other expense
2018
2019
$
%
550
$
546
$
(4)
(0.7)%
Change
$
42
Other expense remained relatively flat from 2018 to 2019, and was primarily associated with foreign currency fluctuations.
(Benefit) provision for income taxes
(dollars in thousands)
(Benefit) provision for income taxes
Effective income tax rate
2018
2019
$
(799)
$
34.6%
10,280
$
(140.4)%
Change
$
11,079
%
nm
Our income tax expense increased $11.1 million from a benefit of $0.8 million for the year ended December 31, 2018 to a provision of $10.3 million
for the year ended December 31, 2019. The effective tax rates were 34.6% and (140.4)% for the years ended 2018 and 2019, respectively. Tax expense was
higher in 2019 due to an establishment of a valuation allowance against our deferred tax assets recognized during 2019 of $9.6 million, as well as taxation
of pre-IPO Management Incentive Unit (“MIU”) equity awards of $2.8 million, partially offset by tax benefits on research and development of $1.3 million
and foreign derived intangible income of $1.2 million in the year ended December 31, 2019 versus a tax benefit on a pre-tax operating loss of $2.3 million
recognized in the year ended December 31, 2018.
Comparison of the year ended December 31, 2017 to the year ended December 31, 2018
Revenues
(dollars in thousands)
Revenues
2017
216,671
$
2018
241,762
$
$
$
25,091
%
11.6%
Change
Revenues increased $25.1 million, or 11.6%, from $216.7 million in 2017 to $241.8 million in 2018, which was attributable to growth in all of our
core products. Complementing increased product demand, as described below, revenue growth in 2018 benefitted from continued expansion of our channel,
bringing the total registered channel partners to over 5,300 as of December 31, 2018.
Revenues by product category
(dollars in thousands)
Point-to-MultiPoint
Point-to-Point
Wi-Fi
Other
Total revenues by product category
Point-to-MultiPoint
2017
142,000
56,130
14,620
3,921
216,671
$
$
2018
146,621
71,678
19,571
3,892
241,762
$
$
$
Change
$
4,621
15,548
4,951
(29)
$
25,091
%
3.3%
27.7%
33.9%
(0.7)%
11.6%
Our PMP products comprised 66% of total revenues for 2017 and 61% of total revenues for 2018. PMP revenue growth was attributable to
continued growth in core PMP products and new product introductions including 3 GHz and ePMP 3000.
Point-to-Point
The increase in our PTP revenue was driven principally by strong sales of new products, primarily for the defense industry.
Wi-Fi
Wi-Fi revenue increased primarily as a result of continued adoption of core wireless products across international regions as discussed further in “-
Revenues by geography” below.
43
Revenues by geography
(dollars in thousands)
North America
Europe, Middle East, Africa
Caribbean and Latin America
Asia Pacific
Total revenues by geography
2017
100,676
68,208
26,962
20,825
216,671
$
$
2018
108,884
75,503
29,833
27,542
241,762
$
$
$
$
Change
$
8,208
7,295
2,871
6,717
25,091
%
8.2%
10.7%
10.6%
32.3%
11.6%
Revenues increased in all regions over the period, with North America and EMEA contributing 78% of total revenues for 2017 and 76% of total
revenues for 2018. North America sales benefited from new product introductions, specifically for the defense industry. Europe, Middle East, Africa sales
increased due to increasing momentum of product adoption of indoor Wi-Fi products and expansion into new geographies including North Africa and
Saudi Arabia. Caribbean and Latin America sales increased due to infrastructure replacement initiatives, and sales of 3 GHz PMP products. Asia Pacific
benefited from substantial sales growth in India, which was driven by a government sponsored initiative to increase rural internet connectivity and general
growth in the wireless internet service provider industry.
Cost of revenues and gross margin
(dollars in thousands)
Cost of revenues
Gross margin
$
2017
105,960
$
51.1%
2018
126,267
$
47.8%
Change
$
20,307
%
19.2%
(330) bps
Cost of revenues increased $20.3 million, or 19.2%, from $106.0 million in 2017 to $126.3 million in 2018. The increase in cost of revenues was
primarily due to increased product sales, changes in product mix, freight costs, and increases in excess and obsolescence reserves.
Gross margin decreased from 51.1% in 2017 to 47.8% in 2018. The decrease in gross margin reflected competitive pricing impacts from larger
customers as we expanded into new countries such as India as well as new product delays in the second half of 2018, which affected both mix and freight
costs as shipments were delayed toward the end of the quarters. Margins were also negatively impacted by the absence of a favorable adjustment to excess
and obsolescence reserves in 2017 that did not repeat in 2018.
Operating expenses
(dollars in thousands)
Research and development
Sales and marketing
General and administrative
Depreciation and amortization
Total operating expenses
Research and development
2017
2018
$
%
Change
$
$
32,227
37,209
17,578
8,824
95,838
$
$
38,917
42,658
18,804
8,765
109,144
$
6,690
5,449
1,226
(59)
$
13,306
20.8%
14.6%
7.0%
(0.7)%
13.9%
Research and development expense increased $6.7 million, or 20.8%, from $32.2 million in 2017 to $38.9 million in 2018. As a percentage of
revenues, research and development expense increased from 14.9% in 2017 to 16.1% in 2018. The increase in research and development expense, both in
absolute dollars and as a percentage of revenues, was due to our continued investment in product development to grow our business, including a $3.9
million increase in headcount and personnel costs and a $2.0 million increase in materials and regulatory testing in our design and development activities.
Sales and marketing
Sales and marketing expense increased $5.5 million, or 14.6%, from $37.2 million in 2017 to $42.7 million in 2018. As a percentage of revenues,
sales and marketing expense increased from 17.2% in 2017 to 17.6% in 2018. Sales and marketing expense increased, both in absolute dollars and as a
percentage of revenues, largely due to our continued investment in growing our sales to drive growth in new geographies and in mid-market customers,
marketing and product line management infrastructures, including a
44
$3.8 million increase in sales and marketing headcount and personnel costs, and a $1.0 million increase in other costs, primarily marketing and promotions-
related spending.
General and administrative
General and administrative expense increased $1.2 million, or 7.0%, from $17.6 million in 2017 to $18.8 million in 2018. As a percentage of
revenues, general and administrative expense decreased from 8.1% in 2017 to 7.8% in 2018. General and administrative expense increased in absolute
dollars largely due to a $2.3 million increase in headcount costs, primarily personnel in administration and finance, and a $0.7 million increase in facilities
costs, partially offset by the non-recurrence of the $1.0 million in loan transaction fees recognized in 2017 to an affiliate of Vector Capital related to our
refinancing of our secured credit facility. Absent the loan transaction fee, general and administrative expense increased as a percentage of revenues from
7.2% in 2017 to 7.8% in 2018.
Depreciation and amortization
Depreciation and amortization expense was $8.8 million in both 2017 and 2018.
Interest expense
(dollars in thousands)
Interest expense
2017
2018
$
%
$
5,018
$
8,113
$
3,095
61.7%
Change
Interest expense increased $3.1 million, or 61.7%, from $5.0 million in 2017 to $8.1 million for 2018. The increase was primarily due to refinancing
of our bank loans and settlement of related party financial instruments in July 2017 and December 2017, whereby certain related party debt was converted
to contributed capital in July 2017 and subsequently returned to such related party in cash through increased borrowings in December 2017. See Note 7 -
Debt, Note 8 - Loan from Sponsor and capital contribution, and Note 19 - Related party transactions in the Notes to Consolidated Financial Statements for
further information.
Other expense
(dollars in thousands)
Other expense
2017
2018
$
%
$
474
$
550
$
76
16.0%
Change
Other expense increased $0.1 million from $0.5 million in 2017 to $0.6 million for 2018, which was primarily associated with foreign currency
fluctuations.
Benefit for income taxes
(dollars in thousands)
Benefit for income taxes
Effective income tax rate
2017
2018
$
$
(418)
(4.5)%
(799) $
34.6%
Change
$
(381)
Our tax benefit increased from $0.4 million in 2017 to $0.8 million for 2018. The effective tax rates for the years ended December 31, 2017 and
2018 were (4.5)% and 34.6%, respectively. For the year ended December 31, 2017, our income tax expense was reduced by a $6.4 million decrease in our
valuation allowance primarily related to net operating loss carryforwards and research and development credits partially offset by a $3.1 million decrease in
deferred tax assets related to interest expense. Excluding these two items, we had an income tax expense of $2.9 million for the year ended December 31,
2017, on pre-tax income of $9.4 million representing an effective tax rate of 30.9% compared with a pre-tax loss of $(2.3) million for the year ended
December 31, 2018. See Note 14 - Income taxes in the Notes to the Consolidated Financial Statements for more information related to income taxes.
Liquidity and Capital Resources
As of December 31, 2019, we had a cash balance of $19.3 million. Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to
meet interest and principal requirements of our outstanding indebtedness; and (iii) to fund capital expenditures. We believe these needs will be satisfied
over at least the next 12 months using cash flow generated by our operations, our cash proceeds from our IPO, and our available borrowings under our
revolving credit facility. Our future capital requirements may vary materially
45
from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support
development efforts, the timing of new product introductions, market acceptance of our products and overall economic conditions. We expect to regularly
assess market conditions and may raise additional equity or incur additional debt if and when our board of directors determines that doing so is in our best
interest.
On June 28, 2019, we received net proceeds of $66.0 million upon the completion of our IPO, after deducting underwriting commission and fees.
We used $30.7 million of the net proceeds to pay down our external debt, $5.6 million to pay management fees owed to Vector Capital, $4.6 million to pay
deferred offering costs in conjunction with the offering, and $4.7 million to pay for the initial purchase price and contingent consideration related to our
acquisition of the Xirrus Wi-Fi business.
Cash Flows
The following table sets forth summarized cash flow data for the periods indicated (in thousands):
Cash provided by (used in) operating activities
Cash used in investing activities
Cash (used in) provided by financing activities
Cash flows from operating activities
2017
Years Ended December 31,
2018
2019
$
$
$
23,001
$
(5,931) $
(24,347) $
(10,395) $
(7,500) $
$
15,066
3,553
(8,612)
20,002
Net cash provided by operating activities in 2017 of $23.0 million consisted primarily of net income of $9.8 million, adjustments for depreciation
and amortization of $8.9 million and changes in operating assets and liabilities that resulted in net cash inflows of $5.8 million. The changes in operating
assets and liabilities consisted primarily of a $4.7 million increase in accounts payable mostly due to increased payment terms and increased volumes with
suppliers, a $5.1 million increase in accrued interest and payables to Vector Capital, a $3.0 million increase in accrued employee compensation expense due
to increased headcount and accrued bonuses and commissions, partially offset by $10.7 million increase in net accounts receivable due to increased sales.
Net cash used in operating activities for 2018 of $10.4 million consisted primarily of a net loss of $1.5 million, adjustments for depreciation and
amortization of $9.6 million and changes in operating assets and liabilities that resulted in net cash outflows of $17.6 million. The changes in operating
assets and liabilities consisted primarily of a $10.0 million increase in inventories as we procured inventory of new products introduced toward the end of
the year and a $7.4 million increase in accounts receivable due to increased sales and a $4.1 million decrease in accrued employee compensation partially
offset by a $4.3 million increase in accounts payable.
Net cash provided by operating activities for 2019 of $3.6 million consisted primarily of a net loss of $17.6 million, adjustments for share-based
compensation expense of $17.7 million, depreciation and amortization of $7.5 million and changes in deferred tax assets of $7.4 million along with
changes in operating assets and liabilities that resulted in net cash outflows of $11.8 million. The changes in operating assets and liabilities consisted
primarily of a $7.6 million increase in inventories as we procured additional inventory of new products in anticipation of increased sales, reduced accounts
payable of $2.1 million and reduced accrued payables to Vector Capital of $5.5 million as we paid the accrued Vector Capital management fees following
the IPO in June 2019.
Cash flows from investing activities
Our investing activities for all periods presented consisted of capital expenditures for property, equipment and software in support of the growth of
our business. Our investing activities in 2019 also included $2.0 million of cash paid for the acquisition of select assets and assumption of select liabilities
of the Xirrus Wi-Fi business and a $2.7 million contingent consideration paid in November 2019 related to the acquisition.
Cash flows from financing activities
We used $24.3 million of cash for financing activities during 2017. During 2017, we received $120.0 million in cash from our lenders under the two
debt refinancing transactions described below in “-Secured credit agreement”, paid $66.5 million in debt repayments to our lender, returned capital to and
redeemed preference shares from Vector Capital for an aggregate of $75.0 million and incurred $2.8 million in debt financing costs.
46
Net cash provided by financing activities of $15.1 million for 2018 was primarily due to $10.0 million in proceeds received from borrowing under
our revolving credit facility, $10.0 million in proceeds received from our term loan, partially offset by $4.5 million of scheduled principal payments due
under our term loan facility and $0.4 million of new debt issuance costs paid for the December 2017 refinancing.
Net cash provided by financing activities of $20.0 million for 2019 was primarily due to $66.0 million in proceeds received from the issuance of
shares in our IPO, net of underwriters commissions, paid down $30.7 million in principal under our term loan and revolving loan facilities, payment of $9.5
million in scheduled principal payments due under our term loan facility, and payment of $4.6 million of deferred issuance costs related to the IPO.
Debt
We had outstanding external debt on our term loan of $95.5 million and $65.3 million, including the current portions of $9.5 million and $10.0
million at December 31, 2018 and 2019, respectively. We had outstanding external debt on our revolving credit facility of $10.0 million and $0.0 million at
December 31, 2018 and 2019, respectively.
On June 28, 2019, we entered into a Third Amendment to Amended and Restated Credit Agreement (the “Third Amendment”). The Third
Amendment amends the Amended and Restated Credit Agreement, dated December 21, 2017, as amended by that Waiver and First Amendment to
Amended and Restated Credit Agreement dates as of November 21, 2018 and as further amended by the Consent, Waiver and Second Amendment to
Amended and Restated Credit Agreement dated as of April 26, 2019 (as amended, amended and restated, supplemented, restructured or otherwise
modified, renewed or replaced from time to time, the “Credit Agreement”).
Pursuant to the Third Amendment, certain actions taken by us in connection with our June 2019 IPO were consented to by Silicon Valley Bank and
the Lenders, including (i) the exchange of outstanding vested and unvested Class B units and phantom units in VCH L.P. for ordinary shares in us (in
exchange for vested units) and restricted stock awards (for unvested Class B units) and restricted stock units (for unvested phantom units) and the adoption
of the employee share incentive plan and employee share purchase plan and forms of award agreement thereunder by us; (ii) the payment of accrued and
unpaid management fees owed to an affiliate of VCH, L.P.; and (iii) the entering into of the Shareholder Agreement by and between VCH, L.P. as a
guarantor and loan party and terminated the guaranty granted by an affiliate of VCH, L.P. In addition, the prior two tranches under the loan were
combined, with only one tranche of term loan remaining. The minimum consolidated fixed charge coverage ratio for the trailing twelve-month period
ending December 31, 2019 and each trailing twelve-month quarterly period ending thereafter was amended to 1.25:1.00. All other financial covenants
remained the same.
On July 1, 2019, we repaid $30.7 million to the Lenders out of the net proceeds of our IPO, comprised of $20.7 million repayment of the term loan
and repayment of all outstanding amounts under the revolving credit facility, leaving an available revolving commitment of $10.0 million.
The Credit Agreement contains customary representations, warranties and affirmative and negative covenants. We are required to maintain quarterly
minimum consolidated fixed charge coverage ratio and minimum consolidated leverage ratio, and a monthly minimum adjusted quick ratio. As of
December 31, 2018, we were in compliance with all affirmative covenants and our monthly negative covenant, but were in default of both the quarterly
maximum consolidated leverage ratio and the minimum consolidated fixed charge coverage ratio. On April 26, 2019, we entered into a Consent, Waiver
and Second Amendment to Amended and Restated Credit Agreement, under which the Lenders waived the December 31, 2018 default, as well as reset
certain of the debt covenants. We failed to comply with the minimum adjusted quick ratio for the month ended May 31, 2019. As a result, on June 21,
2019, our lenders provided a Waiver Agreement which waived our failure to meet this financial covenant. As of December 31, 2019, we were in
compliance with all affirmative and negative covenants.
Contractual Obligations and Commercial Commitments
We lease office space and equipment under operating leases that run through 2026. Additionally, we entered into the Credit Agreement that matures
in 2022.
47
Contractual obligations as of December 31, 2019 are as follows (in thousands):
Operating lease obligations
Term credit facility (1)
Term credit facility interest (1)
Purchase obligations
Total
Less than
1 year
$
$
2,781
10,000
3,960
32,724
49,465
$
$
Payments due by period
1 to 3 years
3 to 5 years
More than
5 years
3,881
55,250
5,977
—
65,108
$
$
1,859
—
—
—
1,859
$
$
468
—
—
—
468
$
$
Total
8,989
65,250
9,937
32,724
116,900
(1)
Based upon the Credit Agreement debt outstanding and interest rate in effect on December 31, 2019, of 6.85%.
Off-balance sheet arrangements
We do not engage in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to
as variable interest entities, structured finance, or special purpose entities, as part of our ongoing business. Accordingly, our operating results, financial
condition and cash flows are not subject to off-balance sheet risks.
Recent accounting pronouncements
We have reviewed all recently issued accounting standards and have disclosed in Note 1 in this Annual Report on Form 10-K the results of our
review and assessment of the impact of each of the standards on our consolidated financial statements.
Critical accounting policies and estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires our
management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expense and related disclosures.
Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. We believe that the
accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas
involving management’s judgments and estimates. For a summary of all of our accounting policies, including the accounting policies discussed below, see
Note 1, Description of Business and Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
Recognition of revenues
Our revenues are generated primarily from the sale of hardware products, with essential embedded software. Our revenues also include limited
amounts for software products and extended warranty on hardware products. We account for revenues under Accounting Standards Codification (“ASC”)
606, Revenue from Contracts with Customers (“ASC 606”), which we adopted on January 1, 2018. Revenue is recognized upon transfer of control of
promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products. We determine the
appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of each contract or arrangement. Certain of our
contracts have multiple performance obligations for which we allocate the transaction price to each performance obligation based on the standalone selling
price of each distinct product or service in the contract. The standalone selling price is the price at which we expect to be entitled to in exchange for
transferring the promised good or service to the customer. The best evidence of standalone selling price is the observable price of a product or service when
the Company sells that product or service separately in similar circumstances and to similar customers. In certain cases, the standalone sales price is not
directly observable, and we estimate the transaction price allocated to each performance obligation using the expected cost plus margin approach. When, or
as, a performance obligation is satisfied, we recognize as revenue the amount of the transaction price that is allocated to that performance obligation. The
transaction price recognized excludes an estimate for the consideration related to products we expect to be returned or amounts we expect to refund.
Inventory and inventory valuation
Inventories are stated at the lower of cost and net realizable value. In determining the cost of raw materials, consumables and goods purchased for
resale, the weighted average purchase price is used. For finished goods, cost is computed as production cost including capitalized inbound freight costs.
48
The valuation of inventory requires us to estimate excess or obsolete inventory. The determination of excess or obsolete inventory is estimated based
on a comparison of the quantity and cost of inventory on hand to our forecast of customer demand. The actual amount of inventory written off in future
periods will likely differ from the inventory excess and obsolete provisions reflected in our consolidated balance sheets due to difference between estimated
and actual future demand, which could have a material effect on our net inventory as reported in our consolidated financial statements. Any adjustments to
the valuation of inventory are included in cost of revenues.
Product warranties
We provide a standard one-year or three-year warranty on most hardware products and record a liability for the estimated future costs associated with
potential warranty claims at the time products are sold. Our responsibility under our standard warranty is the repair or replacement of in-warranty defective
product, or to credit the purchase price of the defective product, at our discretions, without charge to the customer. Provisions for warranty claims are based on
historical experience factors, including product failure rates, material usage, and service delivery cost incurred in correcting product failures. These
provisions are reviewed and adjusted by management periodically to reflect actual and anticipated experience. The warranty costs are reflected in our
consolidated statements of income within cost of revenues. In certain circumstances, we may have recourse from our contract manufacturers for replacement
cost of defective products, which we also factor into our warranty liability assessment.
Income taxes
We account for income taxes under 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 included in our consolidated financial statements. Under this method, deferred tax assets and liabilities are
determined on the basis of the differences between the financial statement carrying amount and the tax bases of assets and liabilities using enacted income
tax rates in effect for the year in which the differences are expected to be recovered or settled. The effect of a change in income tax rates on deferred tax
assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we
consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income,
tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax asset in the future in excess of their
net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We may be subject to income tax audits in all the jurisdictions in which we operate and, as a result, we must also assess exposures to any potential
issues arising from current or future audits of current and prior years’ tax returns. Accordingly, we must assess such potential exposures and, where
necessary, provide a reserve to cover any expected loss. We recognize the benefit of a tax position if it is more likely than not to be sustained. Recognized
tax positions are measured at the largest amount more likely than not of being realized upon settlement. To the extent that we establish a reserve, our income
tax expense would be increased. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize an income
tax benefit during the period in which new information becomes available indicating the liability is no longer necessary. We record an additional income tax
expense in the period in which new information becomes available indicating the tax liability is greater than our original estimate.
Share-based compensation
We recognize all share-based compensation expense as a cost in the consolidated financial statements. Equity classified awards are measured at the
grant date fair value of the award and expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period for each
separately vesting portion of the award and forfeiture rates are periodically updated for actual experience over the vesting term. For share options, we
estimate the grant date fair value using the Black-Scholes option-pricing model.
Business Combinations
We apply the provisions of ASC 805, Business Combinations, in the accounting for our acquisitions. Assets and liabilities assumed are recognized at
their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition
date fair values of the assets acquired and the liabilities assumed. Estimates are used in valuing certain intangible assets and include, but are not limited to,
future expected cash flows as well as assumptions about the period to be used and discount rates. During the measurement period, which may be up to one
year from the acquisition date, any adjustments to the value of the assets acquired and liabilities assumed are recorded with the corresponding offset to
goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes
first, any subsequent adjustments are recorded to the consolidated statements of operations.
49
JOBS Act accounting election
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or
revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have
irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, are subject to the same new or revised
accounting standards as other public companies that are not emerging growth companies.
2020 Restructuring
On February 10, 2020, the Company announced it took additional steps in connection with its previously announced corporate restructuring. The
additional restructuring will only affect personnel, including contract employees, and is expected to be complete by the end of 2020. The Company will
incur between $1.2 million and $1.4 million in personnel costs, including salary continuation and other benefits over the first three quarters of 2020.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest rate risk
We had $65.3 million of debt outstanding as of December 31, 2019 under our Credit Agreement. We are exposed to interest rate risk from
fluctuations in the three-month US LIBOR rate that is a component of the interest rate used to calculate interest expense on the debt.
Interest accrues on the outstanding principal amount of the term loan on a quarterly basis and is equal to the three-month US LIBOR rate plus a base
rate of 4.75%, 4.25% or 4.00%. The base rate is affected by our financial performance as measured by the consolidated leverage ratio. The rate on the
term loan was 6.85% as of December 31, 2019 and was reduced to 6.69% on January 1, 2020 due to a reduction in the US LIBOR rate. A hypothetical
100-basis point increase in interest rates, and assuming a constant base rate, would result in an additional $0.6 million in interest expense related to our
external debt per year.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced plans to phase out the use of LIBOR by the end of 2021. At
this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and we are unable to predict the effect of any such
alternatives on our current interest rate.
Foreign currency exchange risk
We conduct business in all parts of the world and are thereby exposed to market risks related to fluctuations in foreign currency exchange rates. The
U.S. dollar is the single largest currency in which our revenue contracts are denominated. Any decline in the value of local foreign currencies against the
U.S. dollar results in our products and services being more expensive to a potential foreign customer. In those instances where our goods and services have
already been sold, receivables may be more difficult to collect. Additionally, in jurisdictions where the revenue contracts are denominated in U.S. dollars
and operating expenses are incurred in the local currency, any decline in the value of the U.S. dollar will have an unfavorable impact to operating
margins. We have not entered into any foreign currency hedging transactions. We do not purchase or hold any derivative financial instruments for
speculation or arbitrage.
We do not hold any cash in any investment accounts and all cash is deposited with financial institutions that management believes are of high credit
quality. Our cash consists primarily of U.S. dollar denominated demand accounts.
Inflation risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations during the years ended
December 31, 2017, 2018, and 2019.
Credit risk
We consider the credit risk of all customers and regularly monitor credit risk exposures in our trade receivables. Our standard credit terms with our
customers are generally net 30 to 60 days. We had one customer representing more than 10% of trade receivables at December 31, 2018 and 2019. In
addition, we had three customers representing more than 10% of revenue for the year ended December 31, 2017, and two customers for the years ended
December 31, 2018 and 2019.
50
Item 8. Financial Statements and Supplementary Data.
The information required by this item is incorporated by reference to the consolidated financial statements and accompanying notes set forth on
pages F-1 through F-40 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended, or the
Exchange Act), as of December 31, 2019, the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our principal
executive officer and principal financial officer have concluded, that as of such date, our disclosure controls and procedures were effective at a reasonable
assurance level.
Management’s Report on Internal Control over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an
attestation report of our independent registered public accounting firm due to a transition period established by the rules of the Securities and Exchange
Commission for newly public companies. Additionally, our auditors will not be required to formally opine on the effectiveness of our internal control over
financial reporting pursuant to Section 404 until we are no longer an “emerging growth company” as defined in the JOBS act.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(e) and 15d-
15(e) of the Exchange Act for the year ended December 31, 2019 that materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting. Effective January 1, 2019, we adopted Accounting Standards Codification Topic 842, Leases (“ASC 842”). Changes were made to
the relevant business processes and the related control activities in order to monitor and maintain appropriate controls over financial reporting.
Limitations on Effectiveness of Controls and Procedures
None.
Item 9B. Other Information.
On March 19, 2020, the Company entered into an amendment to the offer letter (the “Offer Letter”) with its Chief Financial Officer, Stephen
Cumming (the “Amended Offer Letter”). The Amendment updates the severance provision of the Amended Offer Letter to provide that, if Mr. Cumming’s
employment with the Company (or its successor) is terminated without cause within 12 months following a Change in Control (as defined in the Cambium
Networks Corporation 2019 Share Incentive Plan), Mr. Cumming will receive (i) one-year of base salary, payable in equal monthly installments during the
12-month period following such termination, (ii) a pro-rated annual bonus for the fiscal year in which such termination occurs, and (iii) continued
participation in the Company’s group health plan (to the extent permitted under applicable law and the terms of such plan) for Mr. Cumming and his
eligible dependents for a period of 12 months at the Company’s expense (collectively, the “Severance Benefits”). The Severance Benefits will be subject to
Mr. Cumming’s execution and non-revocation of a customary release of claims in favor of the Company within the period specified by the Company.
Under the Amended Offer Letter, Mr. Cumming also remains entitled to six months’ base salary continuation in the event his employment is terminated by
the Company without cause prior to a Change in Control, as provided in his offer letter prior to the Amendment.
A copy of the Offer Letter is attached as Exhibit 10.32 and the Amended Offer Letter is attached as Exhibit 10.33 to this Annual Report on Form 10-
K and are incorporated by this reference.
In addition, on March 19, 2020, the Company appointed Marc Nelson as its Chief Accounting Officer.
51
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required by Part III, Item 10, will be included in our Proxy Statement relating to our 2020 annual meeting of shareholders to be filed
with the SEC within 120 days after the end of our year ended December 31, 2019, and is incorporated herein by reference.
Item 11. Executive Compensation.
Information required by Part III, Item 11, will be included in our Proxy Statement relating to our 2020 annual meeting of shareholders to be filed
with the SEC within 120 days after the end of our year ended December 31, 2019, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by Part III, Item 12, will be included in our Proxy Statement relating to our 2020 annual meeting of shareholders to be filed
with the SEC within 120 days after the end of our year ended December 31, 2019, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by Part III, Item 13, will be included in our Proxy Statement relating to our 2020 annual meeting of shareholders to be filed
with the SEC within 120 days after the end of our year ended December 31, 2019, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Information required by Part III, Item 14, will be included in our Proxy Statement relating to our 2020 annual meeting of shareholders to be filed
with the SEC within 120 days after the end of our year ended December 31, 2019, and is incorporated herein by reference.
52
Item 15. Exhibits, Financial Statement Schedules.
Documents filed as part of this annual report on Form 10-K:
PART IV
(1)
Financial Statements. The following index lists consolidated financial statements and notes thereto filed as part of this annual report on
Form 10-K:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2018 and 2019
Consolidated Statements of Operations for the years ended December 31, 2017, 2018 and 2019
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2018 and 2019
Consolidated Statements of Shareholders’ (Deficit) Equity for the years ended December 31, 2017, 2018 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2018 and 2019
Notes to Consolidated Financial Statements
F-2
F-4
F-5
F-6
F-7
F-8
F-9
(2)
(3)
Financial Statement Schedules. All schedules have been omitted because they are not applicable as the required information is included in
the consolidated financial statements or notes thereto.
Exhibits. A list of exhibits filed or furnished with this report on Form 10-K (or incorporated by reference to exhibits previously files by
Cambium) is provided in the accompanying Exhibit Index.
Item 16. Form 10-K Summary
None.
53
Exhibit Index
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
Incorporated by Reference
3.1
Form of Amended and Restated Memorandum and Articles of Association to be
effective upon completion of this offering
S-1/A 333-231789
4.1 Form of Ordinary Share Certificate of Registrant
S-1/A 333-231789
3.1
4.1
June 13, 2019
June 24, 2019
4.2
Form of Shareholders Agreement by and among Registrant and certain security
holders of Registrant to be effective upon completion of this offering
S-1/A 333-231789
4.2
June 13, 2019
10.1+
Form of Indemnification Agreement entered into between Registrant and its
directors and executive officers
S-1
333-231789
10.1
May 29, 2019
10.2
10.3
10.4
10.5
10.6
Renewal Lease by Reference to an Existing Lease, Part Unit A, Linhay
Business Park, Eastern Road, Ashburton, Devon TQ13 7UP, United Kingdom,
dated as of November 22, 2016, by and between Registrant and Stephanie
Myers Palk, Richard John Palk and Alison June Palk
Renewal Lease by Reference to an Existing Lease, Unit B2/3, Linhay Business
Park, Eastern Road, Ashburton, Devon TQ13 7UP, United Kingdom, dates as of
November 22, 2016, by and between Registrant and Stephanie Myers Palk,
Richard John Palk and Alison June Palk
Renewal Lease by Reference to an Existing Lease, Unit B2/3, Linhay Business
Park, Eastern Road, Ashburton, Devon TQ13 7UP, United Kingdom, dated as
of April 9, 2018, by and between Registrant and Stephanie Myers Palk, Richard
John Palk and Alison June Palk
Renewal Lease by Reference to an Existing Lease, Unit D1, Linhay Business
Park, Eastern Road, Ashburton, Devon TQ13 7UP, United Kingdom, dated as
of November 22, 2016, by and between Registrant and Stephanie Myers Palk,
Richard John Palk and Alison June Palk
Renewal Lease by Reference to an Existing Lease, Unit D1, Linhay Business
Park, Eastern Road, Ashburton, Devon TQ13 7UP, United Kingdom, dated as
of April 9, 2018, by and between Registrant and Stephanie Myers Palk, Richard
John Palk and Alison June Palk
S-1
333-231789
10.2
May 29, 2019
S-1
333-231789
10.3
May 29, 2019
S-1
333-231789
10.4
May 29, 2019
S-1
333-231789
10.5
May 29, 2019
S-1
333-231789
10.6
May 29, 2019
10.7
Office Lease, dated as of January 31, 2012, by and between Cambium
Networks, Inc. and Atrium at 3800 Golf LLC
S-1
333-231789
10.7
May 29, 2019
10.8
The First Amendment, dated March 6, 2012, by and between Cambium
Networks, Inc. and Atrium at 3800 Golf LLC
S-1
333-231789
10.8
May 29, 2019
10.9
The Second Amendment, dated February 21, 2013, by and between Cambium
Networks, Inc. and Atrium at 3800 Golf LLC
S-1
333-231789
10.9
May 29, 2019
10.10
The Third Amendment, dated June 3, 2015, by and between Cambium
Networks, Inc. and Atrium at 3800 Golf LLC
S-1
333-231789
10.10
May 29, 2019
54
10.11
The Fourth Amendment, dated January 18, 2018, by and between Cambium
Networks, Inc. and Atrium at 3800 Golf LLC
S-1
333-231789
10.11
May 29, 2019
10.12
Lease Deed, dated as of June 20, 2016, by and between Cambium Networks
Consulting Private Limited and Umiya Holdings Private Limited
S-1
333-231789
10.12
May 29, 2019
10.13
Lease, dated as of December 4, 2017, by and between Cambium Networks, Inc.
and Silicon Valley Center Office LLC
S-1
333-231789
10.13
May 29, 2019
10.14++
Corporate Supply Agreement between Cambium Networks Limited and
Flextronics Telecom Systems, Ltd. dated as of April 23, 2012
S-1
333-231789
10.14
May 29, 2019
10.15+ 2019 Employee Share Purchase Plan
S-1/A 333-231789
10.15
June 13, 2019
10.16 Intentionally Omitted
10.17+ 2019 Share Incentive Plan
S-1/A 333-231789
10.17
June 13, 2019
10.18+
Form of Share Option Grant Notice and Restricted Share Award Agreement
under 2019 Share Incentive Plan (to be executed by Atul Bhatnagar)
S-1/A 333-231789
10.18
June 13, 2019
10.19+
Form of Restricted Share Grant Notice and Restricted Share Award Agreement
under 2019 Share Incentive Plan (to be executed by Atul Bhatnagar)
S-1/A 333-231789
10.19
June 13, 2019
10.20+
Form of Restricted Share Grant Notice and Restricted Share Award Agreement
under 2019 Share Incentive Plan (to be executed by Atul Bhatnagar, Bryan
Sheppeck and Ronald Ryan)
S-1/A 333-231789
10.20
June 13, 2019
10.21
Amended and Restated Credit Agreement, dated as of December 21, 2017, by
and among Registrant, as Holdings, Cambium Networks, Ltd., as Borrower,
Silicon Valley Bank, as Administrative Agent and Issuing Lender, and the
lenders party thereto and the other loan parties thereto
10.22
Waiver and First Amendment to Amended and Restated Credit Agreement,
dated as of November 21, 2018, by and among Vector Cambium Holding
(Cayman), L.P., as Holdings, Cambium Networks, Ltd., as Borrower, Silicon
Valley Bank, as Administrative Agent and Issuing Lender, and the lenders party
thereto and the other loan parties thereto
10.23
Consent, Waiver and Second Amendment to Amended and Restated Credit
Agreement, dated as of April 26, 2019, by and among Vector Cambium
Holdings (Cayman), L.P. as Holdings, Cambium Networks, Ltd., as Borrower,
Silicon Valley Bank, as Administrative Agent and Issuing Lender, and the
lenders party thereto and the other loan parties thereto
S-1
333-231789
10.21
May 29, 2019
S-1
333-231789
10.22
May 29, 2019
S-1
333-231789
10.23
May 29, 2019
10.24+
Employment agreement, dated as of February 15, 2013, between Cambium
Networks, Inc. and Atul Bhatnagar
S-1/A 333-231789
10.24
June 13, 2019
10.25+
Sales Incentive Plan Document for Regional Vice Presidents: SVP Global
Channels
S-1/A 333-231789
10.25
June 13, 2019
10.26+ Sales Incentive Plan Document for SVP Global Sales
S-1/A 333-231789
10.26
June 13, 2019
55
10.27+ Form of Executive Restricted Share Unit Grant
S-1/A 333-231789
10.27
June 24, 2019
10.28+ Form of Executive Stock Option Grant
S-1/A 333-231789
10.28
June 24, 2019
10.29+ Form of Director Stock Option Grant
S-1/A 333-231789
10.29
June 24, 2019
10.30
Third Amendment to Amended and Restated Credit Agreement dated June 28,
2019
8-K
001-38952
10.30
July 1, 2019
10.31*
Sublease, dated December 1, 2019, by and between Cambium Networks, Inc.
and Agfa Corporation
10.32+*
Offer Letter, dated as of June 14, 2018, between Cambium Networks, Inc. and
Stephen Cumming
10.33+*
Amended Offer Letter, dated as of March 19, 2020, between Cambium
Networks, Inc. and Stephen Cumming
21.1 Subsidiaries of the Registrant
S-1
333-231789
21.1
May 29, 2019
23.1* Consent of KPMG LLP (UK), independent registered public accounting firm
23.2* Consent of KPMG LLP (US), independent registered public accounting firm
31.1* Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
XBRL Instance Document
101.INS*
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
101.DEF*
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
+
++
#
*
Indicates management contract or compensatory plan
Confidential treatment has been granted for portions of this exhibit. These portions have been omitted from this Registration Statement and have
been filed separately with the SEC.
Portions of the exhibit have been excluded because it both (i) is not material and (ii) would be competitively harmful if publicly disclosed.
Filed herewith.
56
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 23, 2020
By:
/s/ STEPHEN CUMMING
Stephen Cumming
Chief Financial Officer
Cambium Networks Corporation
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Name
Title
Date
/s/ ATUL BHATNAGAR
Atul Bhatnagar
/s/ STEPHEN CUMMING
Stephen Cumming
/s/ MARC NELSON
Marc Nelson
/s/ ROBERT AMEN
Robert Amen
/s/ ALEXANDER R. SLUSKY
Alexander R. Slusky
/s/ BRUCE FELT
Bruce Felt
/s/ VIKRAM VERMA
Vikram Verma
President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Chairman of the Board
Director
Director
Director
March 23, 2020
March 23, 2020
March 23, 2020
March 23, 2020
March 23, 2020
March 23, 2020
March 23, 2020
57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2018 and 2019
Consolidated Statements of Operations for the years ended December 31, 2017, 2018 and 2019
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2018 and 2019
Consolidated Statements of Shareholders’ (Deficit) Equity for the years ended December 31, 2017, 2018 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2018 and 2019
Notes to Consolidated Financial Statements
F-1
2
4
5
6
7
8
9
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Cambium Networks Corporation:
Opinion on the consolidated financial statements
We have audited the consolidated financial statements and the related notes (collectively, the consolidated financial statements) of Cambium Networks
Corporation and subsidiaries (the Company) as listed in the accompanying index. In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for each of the years
in the two-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2016 to 2019.
London, United Kingdom
May 3, 2019, except for Note 12 and Note 13 as to which the date is June 12, 2019.
F-2
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Cambium Networks Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Cambium Networks Corporation and subsidiaries (the Company) as of December 31,
2019, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for the year ended December 31, 2019,
and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended
December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases effective January 1, 2019,
due to the adoption of Accounting Standards Update 2016-02 and all related amendments, which established Accounting Standards Codification Topic 842,
Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included
performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2019.
Chicago, Illinois
March 23, 2020
F-3
CAMBIUM NETWORKS CORPORATION
Consolidated Balance Sheets
as of December 31, 2018 and 2019
(in thousands, except for share and per share amounts)
December 31,
2018
December 31,
2019
$
$
$
ASSETS
Current assets
Cash
Receivables, net of allowances
Inventories, net
Recoverable income taxes
Prepaid expenses
Other current assets
Total current assets
Noncurrent assets
Property and equipment, net
Software, net
Operating lease assets
Intangible assets, net
Goodwill
Deferred tax assets, net
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities
Accounts payable
Accrued liabilities
Employee compensation
Current portion of long-term external debt, net
Payable to Sponsor
Deferred revenues
Other current liabilities
Total current liabilities
Noncurrent liabilities
Long-term external debt, net
Deferred revenues
Noncurrent operating lease liabilities
Deferred tax liabilities, net
Other noncurrent liabilities
Total liabilities
Shareholders' (deficit) equity
Share capital; $0.0001 par value; 500,000,000 shares authorized at December 31, 2018 and
December 31, 2019; 77,179 shares issued and outstanding at December 31, 2018 and
25,753,603 issued and 25,672,983 outstanding at December 31, 2019
Additional paid in capital
Capital contribution
Treasury shares, at cost, 0 shares at December 31, 2018 and 80,620 shares at December 31,
2019
Accumulated deficit
Accumulated other comprehensive loss
Total shareholders’ (deficit) equity
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
$
4,441 $
60,389
30,710
679
3,465
5,889
105,573
7,965
3,944
—
8,493
8,060
8,022
142,057 $
23,710 $
18,263
4,377
8,836
5,582
2,770
2,761
66,299
94,183
1,541
—
—
605
162,628
—
772
24,651
—
(45,773)
(221)
(20,571)
142,057 $
19,346
58,628
41,670
—
5,323
4,350
129,317
8,314
3,395
6,872
15,100
8,552
929
172,479
25,214
15,034
4,652
9,454
—
7,430
6,084
67,868
54,158
4,852
5,335
337
—
132,550
3
104,773
—
(1,094)
(63,374)
(379)
39,929
172,479
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-4
CAMBIUM NETWORKS CORPORATION
Consolidated Statements of Operations
for the Years ended December 31, 2017 and 2018, and 2019
(in thousands, except for share and per share amounts)
2017
Years Ended December 31,
2018
2019
Revenues
Cost of revenues
Gross profit
Operating expenses
Research and development
Sales and marketing
General and administrative
Depreciation and amortization
Total operating expenses
Operating income
Interest expense
Other expense
Income (loss) before income taxes
(Benefit) provision for income taxes
Net income (loss)
$
216,671 $
105,960
110,711
241,762 $
126,267
115,495
38,917
42,658
18,804
8,765
109,144
6,351
8,113
550
(2,312)
(799)
(1,513)
—
(1,513) $
267,028
135,799
131,229
47,692
46,253
30,125
5,858
129,928
1,301
8,076
546
(7,321)
10,280
(17,601)
—
(17,601)
32,227
37,209
17,578
8,824
95,838
14,873
5,018
474
9,381
(418)
9,799
671
9,128 $
0.67 $
(0.11) $
(0.89)
13,600,411
13,600,411
19,741,764
— $
—
—
—
— $
— $
—
—
—
— $
211
5,363
4,185
7,937
17,696
Less: Net income attributable to noncontrolling interest
Net income (loss) attributable to shareholders
Earnings (loss) per share
Basic and diluted
Weighted-average number of shares outstanding to compute net
earnings (loss) per share
Basic and diluted
Share-based compensation included in costs and expenses:
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total
$
$
$
$
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-5
CAMBIUM NETWORKS CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
for the Years ended December 31, 2017 and 2018, and 2019
(in thousands)
Net income (loss)
Other comprehensive (loss) income
Foreign currency translation adjustment
Comprehensive income (loss)
Less: Comprehensive income attributable to noncontrolling interest
Comprehensive income (loss)
2017
Years Ended December 31,
2018
2019
$
9,799 $
(1,513) $
(17,601)
67
9,866
671
9,195 $
(372)
(1,885)
—
(1,885) $
(158)
(17,759)
—
(17,759)
$
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-6
CAMBIUM NETWORKS CORPORATION
Consolidated Statements of Shareholders’ (Deficit) Equity
for the Years ended December 31, 2017, 2018 and 2019
(in thousands)
Share Capital
Shares Amount
Additional
paid in
capital
77 $
—
— $
—
Capital
contribution
2,000
—
Treasury
shares
—
—
$
772 $
—
—
—
—
—
77
—
—
—
77
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
772
—
88,363
(65,712)
—
24,651
—
—
—
772
—
17,696
—
—
—
24,651
—
—
29
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
19,848
2
24,651
(24,651)
—
5,800
1
61,372
(81)
—
25,673 $
—
—
3 $
282
—
104,773 $
—
—
—
—
—
Balance at December 31, 2016
Net income
Distribution to noncontrolling
interest
Sponsor contributed capital
Return of capital to sponsor
Foreign currency translation
Balance at December 31, 2017
Adjustment for adoption of
ASC 606
Net loss
Foreign currency translation
Balance at December 31, 2018
Net loss
Share-based compensation
Issuance of shares upon vesting
of restricted share units
Issuance of shares in
Recapitalization and related
reclassification
Issuance of shares in initial
public offering, net of
issuance costs of $8,228
Treasury shares withheld for
net settlement in
Recapitalization
Foreign currency translation
Balance at December 31, 2019
Accumulated
deficit
$
(52,528) $
9,128
Accumulated
other
comprehensive
income (loss)
84
—
Total
shareholders'
(deficit)
equity
Noncontrolling
interest
$
(49,672) $
9,128
8,617
671
Total
(deficit)
equity
$ (41,055)
9,799
—
—
—
—
(43,400)
(860)
(1,513)
—
(45,773)
(17,601)
—
—
—
—
—
—
—
67
151
—
—
(372)
(221)
—
—
—
—
—
—
88,363
(65,712)
67
(17,826)
(860)
(1,513)
(372)
(20,571)
(17,601)
17,696
—
2
(9,288)
—
—
—
—
—
—
—
—
—
—
—
—
(9,288)
88,363
(65,712)
67
(17,826)
(860)
(1,513)
(372)
(20,571)
(17,601)
17,696
—
2
61,373
—
61,373
(1,094)
—
$ (1,094) $
—
—
(63,374) $
—
(158)
(379) $
(812)
(158)
$
39,929
—
—
—
(812)
(158)
$ 39,929
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-7
CAMBIUM NETWORKS CORPORATION
Consolidated Statements of Cash Flows
for the Years ended December 31, 2017 and 2018, and 2019
(in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation
Amortization of software and intangible assets
Amortization of debt issuance costs
Share-based compensation
Deferred income taxes
Other
Change in assets and liabilities:
Receivables
Inventories
Accounts payable
Accrued employee compensation
Accrued liabilities
Accrued Sponsor interest and payables
Other assets and liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchase of property and equipment
Purchase of software
Cash paid for acquisitions
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of term loan
Proceeds from issuance of revolver debt
Repayment of term loan
Repayment of revolver debt
Payment of debt issuance costs
Proceeds from initial public offering, net of underwriters commission
and fees
Payment of deferred offering costs
Taxes paid related to net share settlement of equity awards
Return of capital to Sponsor
Distribution to noncontrolling interest
Net cash (used in) provided by financing activities
Effect of exchange rate on cash
Net (decrease) increase in cash
Cash, beginning of period
Cash, end of period
Supplemental disclosure of cash flow information:
Income taxes paid
Interest paid
Significant non-cash activities:
Issuance of shares for unreturned capital and accumulated yield
Sponsor contributed capital
2017
Years Ended December 31,
2018
2019
$
9,799 $
(1,513) $
(17,601)
2,069
6,802
209
—
(1,884)
201
(10,723)
586
4,726
3,012
3,380
5,081
(257)
23,001
(3,346)
(2,585)
—
(5,931)
120,000
—
(46,553)
(19,962)
(2,832)
—
—
—
(65,712)
(9,288)
(24,347)
27
(7,250)
14,627
7,377 $
1,490 $
1,532 $
— $
88,363 $
2,836
6,182
576
—
(1,863)
952
(7,395)
(10,009)
4,261
(4,081)
1,539
564
(2,444)
(10,395)
(5,588)
(1,912)
—
(7,500)
9,962
10,000
(4,500)
—
(396)
—
—
—
—
—
15,066
(107)
(2,936)
7,377
4,441 $
1,074 $
7,614 $
— $
— $
3,583
2,784
1,141
17,696
7,402
311
622
(7,634)
2,096
14
(1,296)
(5,457)
(108)
3,553
(3,002)
(944)
(4,666)
(8,612)
—
—
(30,212)
(10,000)
(336)
65,988
(4,616)
(802)
—
—
20,022
(58)
14,905
4,441
19,346
1,702
6,455
49,252
—
$
$
$
$
$
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-8
CAMBIUM NETWORKS CORPORATION
Notes to Consolidated Financial Statements
Note 1. Description of Business and Summary of Significant Accounting Policies
Business
Cambium Networks Corporation (“Cambium” or the “Company”), incorporated under the laws of the Cayman Islands, is a holding company whose
principal operating entities are Cambium Networks, Ltd. (UK), Cambium Networks, Inc. (USA), and Cambium Networks Private Limited (India). On
October 28, 2011, Cambium acquired the point-to-point (“PTP”) and point-to-multi-point (“PMP”) businesses from Motorola Solutions, Inc. in an
acquisition funded by investment funds affiliated with Vector Capital (“Sponsor”).
Cambium Networks Corporation and its wholly owned subsidiaries provide wireless broadband networking solutions for network operators,
including medium-sized wireless internet service providers, enterprises and government agencies.
The Company operates on a calendar year ending December 31. As such, all references to 2017, 2018 and 2019 contained within these notes relate
to the calendar year, unless otherwise indicated.
Basis of Presentation
The Company’s consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) and include the accounts of Cambium Networks Corporation and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated. The consolidated financial statements have been prepared on the same basis other than the
adoption with effect from January 1, 2018 of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 606, Revenue from
Contracts with Customers, and from January 1, 2019 of FASB Accounting Standards Codification 842, Leases, and, in the opinion of management, reflect
all adjustments, which comprise only normal recurring adjustments necessary to state fairly the Company’s financial position as of December 31, 2018 and
2019.
On June 6, 2019, the Company completed a 100:1 share subdivision to its sole shareholder of record. Accordingly, all share and per share amounts
for all periods presented in these consolidated financial statements and notes thereto have been adjusted retrospectively to reflect the subdivision.
Initial public offering
The Company’s registration statement on Form S-1 (the “IPO Registration Statement”) related to its initial public offering (“IPO”) was declared
effective on June 25, 2019, and the Company’s ordinary shares began trading on the Nasdaq Global Market on June 26, 2019. On June 28, 2019, the
Company completed its IPO, in which the Company sold 5,800,000 shares at a price of $12.00 per share. The Company received aggregate net proceeds of
$66.0 million after deducting underwriting discounts and commissions of $3.6 million. As of December 31, 2019, the Company used the proceeds from its
IPO to pay offering costs of $4.6 million, paydown debt of $30.7 million, pay management fees owed to Vector Capital of $5.6 million, and pay $4.7
million to acquire select assets and assume select liabilities of the Xirrus Wi-Fi business from Riverbed Technology, Inc.
Immediately prior to the completion of the IPO, the Company effected a recapitalization, which comprised (i) an increase in the authorized and
outstanding shares held by Vector Cambium Holdings (Cayman), L.P. (“VCH, L.P.”) and (ii) the exchange of the vested share-based compensation awards
held by its employees for the Company’s shares and unvested share-based compensation awards for restricted share awards or restricted share units issued
by the Company, in each case on a value-for-value basis (the “Recapitalization”).
Immediately prior to the completion of the IPO, the Company filed its Amended and Restated Memorandum and Articles of Association, which
authorizes a total of 500,000,000 ordinary shares. Upon the filing of the Amended and Restated Memorandum and Articles of Association, based on the
IPO price of $12.00 per share as part of the Recapitalization described above, the Company (i) issued additional shares to VCH, L.P., such that its aggregate
shareholding in it is now 17,704,754 shares, (ii) issued 2,129,663 net shares to its employees and service providers and (iii) granted 240,037 restricted share
awards or restricted share units in respect of shares that would be subject to vesting based on continued employment with or provision of services to the
Company. The Company recorded non-cash share-based compensation expense of $15.4 million in June 2019 related to the aforementioned issuance of the
shares to its employees and service providers. In addition, the Company issued an aggregate 2,172,000 share options and restricted share units to
employees and directors, effective upon pricing of the IPO of $12.00 per share and recorded an additional $2.2 million of share-based compensation
expense related to these awards during 2019.
F-9
Use of Accounting Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates these estimates, including those
related to the provision for excess and obsolete inventory, the carrying amount of estimated inventory returns, the estimated amount expected to be
refunded to customers in respect of inventory returns, fair value of equity awards granted to employees and the associated forfeiture rates, fair value of
assets acquired, liabilities assumed, goodwill and identifiable intangible assets in business combinations, leases, provision for income taxes, recoverability
of deferred tax assets. The Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from those estimates.
Segments
Management has determined that it operates as one operating segment and one reporting unit as it only reports financial information on an aggregate
and consolidated basis to its Chief Executive Officer, who is the Company’s chief operating decision maker. Decisions about resource allocation or
operating performance assessments are not made below a total company level. Consequently, impairment testing is performed at the consolidated level as
one reporting unit. See Note 16 – Segment information and revenues by geography for additional information.
Recognition of revenues
Revenues consist primarily of revenues from the sale of hardware products with essential embedded software. Revenues also include limited
amounts for software products and extended warranty on hardware products. Substantially all products are sold through distributors and other channel
partners, such as resellers and systems integrators.
ASC 606
The Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), and all the related
amendments on January 1, 2018, applying the modified retrospective method to all contracts not completed as of the date of adoption. The Company
assessed the impact of ASC 606 using the prescribed 5-step model and based on this assessment concluded the recognition of revenue under ASC 606 is
generally consistent with how revenue was being recognized prior to the adoption of the new standard. See Note 17 – Revenue from contracts with
customers for further details on the impact of adoption.
In accordance with ASC 606, the Company recognizes revenue to reflect the transfer of control of promised products or services to a customer in an
amount that reflects the consideration to which the Company expects to be entitled in exchange for products or services.
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms
are identified, the contract has commercial substance and collectability of consideration is probable.
The Company identifies its distinct performance obligations under each contract. A performance obligation is a promise in a contract to transfer a
distinct product or service to the customer. Hardware products with essential embedded software, software products, and extended warranty on hardware
products have been identified as separate performance obligations.
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring products or services to
a customer. Exchanges made as part of the Company’s stock rotation program meet the definition of a right of return under ASC 606. An adjustment to
revenue is made to adjust the transaction price to exclude the consideration related to products expected to be returned. The Company records an asset at
the carrying amount of the estimated stock returns and a liability for the estimated amount expected to be refunded to the customer. The transaction price
also excludes other forms of consideration provided to the customer, such as volume-based rebates and cooperative marketing allowances.
The Company recognizes revenue when, or as, it satisfies a performance obligation by transferring control of a promised product or service to a
customer. Revenue from hardware products with embedded software is recognized when control is transferred to the customer, which is typically at the
time of shipment. Software revenue is from perpetual license software and is recognized at the point in time that the customer is able to use or benefit from
the software. Extended warranty is available for purchase on hardware products and is a performance obligation that is satisfied over time, beginning on
the effective date of the warranty period and ending on the expiration of the warranty period. The Company recognizes revenue on extended warranties on
a straight-line basis over the warranty period.
F-10
ASC 605
For 2017, under ASC 605, the Company recognized revenue when it was realized or realizable and earned. The Company considered revenue
realized or realizable and earned when it had persuasive evidence of an arrangement, delivery had occurred, the sales price was fixed or determinable and
collectability was reasonably assured. Delivery did not occur until products shipped to the customer, risk of loss transferred to the customer, and either
customer acceptance was obtained, customer acceptance provisions lapsed or the Company had objective evidence that the criteria specified in the
customer acceptance provisions had been satisfied. The sales price was considered to be fixed and determinable when all contingencies related to the sale
had been resolved.
Hardware revenue was generally recognized at the time of shipment, provided that all other revenue recognition criteria had been met including
transfer of risk to the customer and fulfilling all Company obligations that effect customer acceptance.
Software revenue was from perpetual license software and recognized at inception, typically at the point of making the software available to the
customer if all revenue recognition criteria had been met. Supplemental management tools, including cnMaestro, LINKPlanner and cnArcher applications,
were provided to help network operators design, install, and manage their networks, and as a means of driving sales of hardware products. The Company
offered these applications without additional charge to the customer, as these applications are not essential for the operation of its products.
The Company offered a standard one-year warranty on its hardware products that included access to telephone and internet support and was
included in the price of the product. The cost of providing the standard warranty was insignificant. The Company also offered for purchase an extended
warranty on most of its products; a limited lifetime warranty on select hardware products; and an all risks advance replacement warranty covering
additional types of equipment damage not covered by its standard warranty. The Company recognized revenue on extended warranties on a straight-line
basis over the contractual period. Revenue was recognized net of volume-based rebates and cooperative marketing allowances that the Company provided
to its distributors.
Deferred revenues included advance payments received from customers for hardware with embedded essential software and extended warranty.
Deferred revenues included both current and non-current components with the non-current component expected to be recognized more than one year from
the reporting date.
The Company included freight billed to customers in revenues and the cost of freight in cost of revenues.
Multiple performance obligations/Multiple-deliverable arrangements
The Company enters into revenue arrangements that may consist of multiple performance obligations (multiple deliverables under ASC 605), such
as an arrangement containing hardware with embedded essential software and extended warranty.
Under ASC 606, the Company determines if the contract includes multiple performance obligations and allocates the transaction price to each
performance obligation on a relative standalone selling price basis for each distinct product or service in the contract. The best evidence of standalone
selling price is the observable price of a product or service when the Company sells that product or service separately in similar circumstances and to
similar customers. If a standalone selling price is not directly observable, the Company estimates the transaction price allocated to each performance
obligation using the expected costs plus a margin approach.
Prior to the adoption of ASC 606, the Company applied the guidance in ASC 605 to determine if the arrangement qualified as a multiple-deliverable
agreement for separability and allocation of the revenue. For multiple-deliverable arrangements, deliverables are separated into more than one unit of
accounting when (i) the delivered element(s) have value to the customer on a stand-alone basis and (ii) deliver of the undelivered element(s) is probable
and substantially in the control of the Company. In these arrangements, the Company generally allocated revenue to all deliverables based on their relative
selling prices, applying an estimated selling price as its best estimate of fair value.
Cash
The Company deposits cash with financial institutions that management believes are of high credit quality. The Company’s cash consists primarily
of U.S. dollar denominated demand accounts.
F-11
Receivables and concentration of credit risk
Trade accounts receivable are recorded at invoiced amounts, net of the allowance for doubtful accounts. The Company considers the credit risk of
all customers and regularly monitors credit risk exposure in its trade receivables. The Company’s standard credit terms with their customers are generally
net 30 to 60 days. The Company had one customer representing more than 10% of trade receivables at December 31, 2018 and 2019. The Company had
three customers representing more than 10% of revenues for the year ended December 31, 2017, and two customers for the years ended December 31, 2018
and 2019.
The Company records an allowance for doubtful accounts for estimated probable losses on uncollectible accounts receivable. In estimating the
allowance, management considers the aging of the accounts receivable, the Company’s historical write offs, the credit worthiness of each distributor based
on payment history, and general economic conditions, among other factors.
Inventory
The Company’s inventories are primarily finished goods for resale and, to a lesser extent, raw materials, which have been either consigned to the
Company’s third-party manufacturers or are held by the Company. Inventories are stated at the lower of cost or net realizable value. In determining the
cost of raw materials, consumables and goods purchased for resale, the weighted average purchase price is used. For finished goods, cost is computed as
production cost including capitalized inbound freight costs.
The valuation of inventory also requires the Company to estimate excess or obsolete inventory. The determination of excess or obsolete inventory is
estimated based on a comparison of the quantity and cost of inventory on hand to the Company’s forecast of customer demand and in consideration of
historical usage. Any adjustments to the valuation of inventory are included in cost of revenues.
Deferred offering costs
Deferred offering costs, consisting of legal, accounting and other fees and costs related to the IPO are capitalized and reflected in other current
assets on the Company’s consolidated balance sheets. There was $2.0 million of deferred offering costs capitalized at December 31, 2018. The Company
deferred an additional $2.6 million of costs in 2019. The $4.6 million has been offset against IPO proceeds as a reduction of additional paid in
capital. There were no deferred IPO costs at December 31, 2019.
Property and equipment
Per ASC 360, Property, Plant, and Equipment, property and equipment are stated at cost. The Company calculates depreciation expense using the
straight-line method over the estimated useful lives of each asset based on its asset class. Leasehold improvements are amortized over the shorter of their
useful lives or the lease term. See Note 4 – Property and equipment for the useful lives for each asset class.
Upon retirement or disposition, the asset cost and related accumulated depreciation are removed with any gain or loss recognized in general and
administrative expense in the Consolidated Statements of Operations. For the years ended 2017, 2018 and 2019, the loss recognized was immaterial.
Software
Software may be purchased or developed internally for internal use. Costs related to internal use software are accounted for in accordance with
ASC 350-40, Internal Use Software, where the expected life is greater than one year. Costs are expensed as incurred during the preliminary project stage of
an internal use software project. Costs are capitalized once the project has been approved by management and is in the application development
stage. Post implementation/operation costs, such as maintenance and training costs, are expensed as incurred. Any costs incurred to provide upgrades or
enhancements are capitalized only if they provide additional functionality that did not previously exist.
Amortization of internal use software begins when the software is ready for internal use and is amortized over its estimated useful life. The
amortization expense for internal use software is computed using the straight-line method over three to seven years.
F-12
Costs related to certain software, which is available for sale, are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased,
or Marketed, when the resulting product reaches technological feasibility. The Company generally determines technological feasibility when it has a
detailed program design that takes product function, feature and technical requirements to their most detailed, logical form and the product is ready for
coding. The Company does not typically capitalize costs related to the development of first-generation product offerings as technological feasibility
generally coincides with general availability of the software.
Amortization of software costs to be sold or marketed externally begins when the product is available for sale to customers and is amortized using
the straight-line method over its estimated useful life of three years.
Business Combinations
The Company applies the provisions of ASC 805, Business Combinations, in the accounting for its acquisitions. It requires the Company to
recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is
measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While
the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are
inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, it
records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement
period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the
Consolidated Statements of Operations.
Critical accounting estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer
relationships, as well as assumptions about customer attrition rate.
Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets
acquired and liabilities assumed.
Fair Value
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy for valuation
inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. ASC
820 requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair
value. The fair value hierarchy prioritizes the inputs into three levels that may be used in measuring fair value as follows:
Level 1 – observable inputs which include quoted prices in active markets for identical assets or liabilities.
Level 2 – inputs which include observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices for identical or
similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the asset or liability.
Level 3 – inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
underlying assets or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted
cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
Financial assets and liabilities are classified, in their entirety, based on the lowest level of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input, to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities
and their placement within the fair value hierarchy levels.
The fair value of the Company’s external debt under its Credit Agreement approximates its carrying value due to the floating interest rate (Level 2 of
the fair value hierarchy). The Company measures the fair value of its Credit Agreement based on Level 2 inputs, which include quoted market prices and
interest rate spreads of similar debt instruments. The fair value of the Company’s Credit Agreement was $105.5 million and $65.3 million as of December
31, 2018 and 2019, respectively.
The fair value of the Payable to Sponsor approximated its carrying value given the expected remaining duration of the contract (Level 1 of the fair
value hierarchy). The fair value of the Payable to Sponsor was $5.6 million and $0.0 million as of December 31, 2018 and 2019, respectively. The
Company made a payment of $5.6 million in July 2019 to extinguish this liability.
The fair value of cash approximates its carrying value (Level 1 of the fair value hierarchy).
F-13
The Company added a Level 3 liability for contingent consideration of $3.0 million during the three-month period ended September 30, 2019. The
Company utilized a Monte Carlo Simulation to determine the fair value of the contingent consideration due to Riverbed Technology, Inc. associated with
the acquisition of the Xirrus Wi-Fi assets and liabilities as of the acquisition date. The $3.0 million represented management’s best estimate of the liability
and was based on obtaining the required booking targets relating to the acquired assets for Riverbed to be eligible for the additional consideration. Based on
bookings through December 31, 2019, management determined the entire $3.0 million of contingent consideration was earned. The Company made a
payment of $2.7 million to Riverbed in November 2019 and paid the remaining $0.3 million in February 2020. At December 31, 2019, the $0.3 million of
contingent consideration is included in Accrued liabilities on the Consolidated Balance Sheet.
Goodwill and intangible assets
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired in a business combination. Goodwill is measured
at cost and is not amortized. Intangible assets acquired, either individually or with a group of assets, are initially recognized and measured at fair
value. The Company uses third-party specialists to assist management to determine fair values and estimated useful lives for intangible assets acquired in
business combinations. Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives of between 3 and 18
years. The Company has no intangible assets with indefinite lives.
In accordance with ASC 350, Goodwill and Other, the Company assesses goodwill for impairment at least annually and whenever events or
circumstances that would more likely than not, reduce the fair value below its carrying value. For 2018 and 2019, the Company tested goodwill for
impairment at December 31.
Annual impairment testing is completed at the reporting unit level. Management has concluded the Company operates as one reporting unit and one
operating segment for annual impairment testing. Refer to Note 16 – Segment information and revenues by geography for more information.
The Company early adopted Accounting Standard Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment on January 1, 2018. In completing its impairment evaluations, the Company first assesses qualitative factors to determine whether it
is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. In performing this qualitative assessment,
the Company assesses relevant events and changes in circumstances, including industry and market conditions, observable earnings before interest, taxes,
depreciation and amortization (“EBITDA”) multiples for peer companies, operating results, business plans, and entity-specific events that would affect the
fair value or the carrying amount of a reporting unit. If it is more likely than not that the fair value of a reporting unit is less than its carrying value, the
Company determines the fair value of the reporting unit and compares the fair value to its carrying value. If the fair value of the reporting unit exceeds its
carrying amount, goodwill of the reporting unit is not considered impaired and no further steps are required.
Impairment of long-lived assets
The Company evaluates its long-lived assets, including property and equipment, software and intangible assets, for impairment whenever events or
changes in circumstances indicate that the carrying value of these assets may not be recoverable. An impairment loss is recognized when the net book
value of such assets exceeds the estimated future undiscounted cash flows attributable to the assets or asset group. If impairment is indicated, the asset is
written down to its estimated fair value. The Company did not recognize any impairment losses for the years ended December 31, 2017, 2018 and 2019.
Leases
The Company has both cancelable and noncancelable operating leases for office space, vehicles, and office equipment. The Company adopted ASC
842, Leases, (“ASC 842”) and all the related amendments on January 1, 2019, using the optional transition method to not apply the lease standard in the
comparative periods presented. The Company elected the “practical expedient package” which permitted the Company to not reassess prior conclusions
about lease identification, lease classification, and initial direct costs. The Company also elected the short-term lease recognition for all leases that qualify
and to combine the lease and non-lease components into a single lease component for all of its leases.
F-14
In accordance with ASC 842, the Company recorded a right-of-use asset and lease liability on its consolidated balance sheet for all leases that
qualified. The operating lease liability represents the present value of the future minimum lease payments over the lease term using the Company’s
incremental borrowing rate at the lease commencement date. The right-of-use asset reflects adjustments for the derecognition of deferred rent and prepaid
rent. Leases with an initial term of 12 months or less are not recorded on the Company’s consolidated balance sheet, and are expensed on a straight-line
basis over the lease term. The Company does not include any renewal periods in the lease term for its leases as sufficient economic factors do not exist that
would compel it to continue to use the underlying asset beyond the initial non-cancelable term. See Note 18 – Leases for further details.
Through December 31, 2018, the Company classified leases in accordance with guidance in ASC 840, Leases. For any leases that contained lease
escalation or rent concession provisions, the Company recorded the total rent expense during the lease term on a straight-line basis over the term of the
lease. The Company recorded the difference between the rent paid and the straight-line rent as an increase or decrease to the deferred rent liability included
in accrued liabilities in its consolidated balance sheet.
Product warranties
The Company provides a one-year and three-year standard warranty on most of its products, and records a liability for the estimated future costs
associated with potential warranty claims. Provisions for warranty claims are recorded at the time products are sold based on historical experience factors
including product failure rates, material usage, and service delivery cost incurred in correcting product failures. These provisions are reviewed and
adjusted by management periodically to reflect actual and anticipated experience. The warranty costs are reflected in the Company’s consolidated
statements of operations within cost of revenues. In certain circumstances, the Company may have recourse from its contract manufacturers for
replacement cost of defective products, which it also factors into its warranty liability assessment.
Income taxes
The Company accounts for income taxes under 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 included in its financial statements. Under this method, deferred tax assets and liabilities are
determined on the basis of the differences between the financial statement carrying amount and the tax basis of assets and liabilities using enacted income
tax rates in effect for the year in which the differences are expected to be recovered or settled. The effect of a change in income tax rates on deferred tax
assets and liabilities is recognized in the income tax provision in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized and adjusts the valuation allowances accordingly. In making such a determination, the Company considers all available
positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning
strategies, and results of recent operations.
In general, it is the practice and intention of the Company to reinvest the earnings of its subsidiaries in those operations. As of December 31, 2017,
2018 and 2019, the Company had not made a provision for withholding taxes on approximately $4.1 million, $5.4 million and $8.5 million, respectively, of
undistributed earnings that are indefinitely reinvested. Generally, such amounts become subject to taxation upon the remittance of dividends and under
certain other circumstances. It is not practicable to estimate the amount of deferred tax liability to the undistributed earnings in these subsidiaries.
The Company may be subject to income tax audits in all of the jurisdictions in which it operates and, as a result, must also assess exposures to any
potential issues arising from current or future audits of current and prior years’ tax returns. Accordingly, the Company must assess such potential
exposures and, where necessary, provide for any expected loss. The Company would recognize the benefit of a tax position if it is more likely than not to be
sustained. Recognized tax positions are measured at the largest amount more likely than not to be realized upon settlement. To the extent that the
Company establishes a liability, its income tax expense would be increased. If the Company ultimately determines that payment of these amounts is
unnecessary, it would reverse the liability and recognize an income tax benefit during the period in which new information becomes available indicating
that the liability is no longer necessary. The Company would record an additional income tax expense in the period in which new information becomes
available indicating that the income tax liability is greater than its original estimate. The Company did not record such an adjustment for the years ended
December 31, 2017, 2018 or 2019.
F-15
Share-based compensation
The Company accounts for share-based compensation in accordance with the guidance in ASC 718, Share-based Payments, by measuring and
recognizing compensation expense for all share-based payments based on estimated grant date fair values for equity settled awards and period-end fair
values for cash settled awards. Employees were granted both equity settled and cash settled awards under the Vector Cambium Holdings (Cayman), L.P.
limited partnership agreement (VCH LPA) that included both time-based and performance-based equity awards and were subject to the achievement of
varying participation thresholds and contingent conditions prior to being eligible to participate in distributions from VCH L.P. For the year ended
December 31, 2018, both equity-settled and cash-settled awards had not met all of the contingent conditions. Accordingly, the Company did not recognize
any share-based compensation expense in its financial statements prior to 2019.
Prior to the IPO, the Company effected a Recapitalization, which exchanged the vested share-based compensation awards held by its employees for
shares and unvested share-based compensation awards for restricted shares or restricted share units issued by the Company, on a value-for-value basis.
After completion of the Recapitalization and the IPO, the Company is no longer party to nor subject to any obligations under the VCH LPA. As a result of
the Recapitalization and the completion of the Company’s IPO, the contingent conditions had been met on some of the share-based compensation awards
and the Company recorded share-based compensation of $15.4 million related to these awards during the year ended December 31, 2019.
Following the IPO, awards are granted under the 2019 Share Incentive Plan. The 2019 Share Incentive Plan provides for the grant of incentive share
options, nonqualified share options, share appreciation rights, restricted share awards, restricted share units, or other share-based awards and performance
awards. Effective upon pricing of the IPO at $12.00 per share, the Company issued an aggregate 2,172,000 share options and restricted share units to
employees and directors and recorded an additional $2.2 million of share-based compensation expense related to these awards in the year ended December
31, 2019.
Contingencies
In accordance with ASC 450, Contingencies, the Company periodically evaluates all pending or threatened contingencies and any commitments, if
any, that are reasonably likely to have a material adverse effect on its results of operations, financial position or cash flows. Liabilities for loss
contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been
incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Foreign currency translation
The Company records any gain and loss associated with foreign currencies in accordance with ASC 830, Foreign Currency Matters. The reporting
currency of the Company is the U.S. dollar and the functional currency for each operating subsidiary is the local currency of the operating subsidiary other
than for Cambium Networks, Ltd. (UK) for which the functional currency is the U.S. dollar. Local currency denominated monetary assets and liabilities
are translated at exchange rates in effect at the balance sheet date, and revenues, cost of revenues and expenses are translated at the average exchange rate
in effect during the applicable period. The Company recognizes foreign exchange gains and losses in other expense on its consolidated statements of
operations and accumulated other comprehensive income (loss) on its consolidated balance sheets.
Research and development costs
Research and development expenses consists primarily of salary and benefit expenses for employees and contractors engaged in research, design
and development activities, and costs for prototypes, facilities and travel costs. For 2019, research and development expenses also include share-based
compensation expenses. The Company also incurs research and development costs associated with the development of software for both internal use and to
be marketed externally. Research and development costs, other than those associated with the development of software that meet the criteria for
capitalization, are expensed as incurred.
For the years ended December 31, 2017, 2018 and 2019, the Company expensed $32.2 million, $38.9 million, and $47.7 million, respectively, which
included $0, $0 and $5.4 million of share-based compensation expense, respectively, of research and development costs.
F-16
Recently adopted accounting pronouncements
Beginning in February 2016, the FASB issued ASU 2016-02, Leases, plus a number of related ASUs, which sets out the principles for the
recognition, measurement, presentation and disclosures of leases for both parties to a contract (i.e., lessees and lessors) (collectively codified as “ASC
842”).
ASC 842 requires lessees to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases unless a lessee elects not to
apply ASC 842 to short-term leases. In addition, this standard requires both lessees and lessors to disclose certain key information about lease
transactions. The Company adopted ASC 842 on January 1, 2019 (the effective date), using the optional transition method to not apply the new lease
standard in the comparative periods presented and elected the “practical expedient package”, which permits the Company to not reassess prior conclusions
about lease identification, lease classification, and initial direct costs. ASC 842 also provides practical expedients for the Company’s ongoing
accounting. The Company elected the short-term lease recognition for all leases that qualify and to combine lease and non-lease components into a single
lease component for all of its leases. On January 1, 2019, the Company recognized ROU assets and operating lease liabilities of $8.2 million and $8.8
million, respectively. The difference between ROU assets and operating lease liabilities recognized is due to deferred rent recorded under prior lease
accounting standards. ASC 842 requires such balances to be reclassified against ROU assets at transition. Refer to Note 18 – Leases for further details.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income. This ASU provides an option to reclassify stranded tax effects within accumulated other comprehensive
income (“AOCI”) to retained earnings in the period in which the effect of the change in the U.S. federal corporate income tax rate in the 2018 U.S. Tax
Cuts and Job Act, and information about the income tax effects that are reclassified. The Company adopted ASU 2018-02 as of January 1, 2019. The
adoption of ASU 2018-02 had no impact on the Company’s consolidated financial statements.
Beginning in 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, plus a number of related ASUs designed to clarify
and interpret ASC 606 (collectively codified as “ASC 606”). The new standard replaced most existing revenue recognition guidance in U.S. GAAP. The
core principle of the ASU requires revenue recognition based upon newly defined criteria, either at a point in time or over time, as control of good or
services is transferred. The ASU requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from
customer contracts, including significant judgments and estimates, and changes in those estimates. The new standard became effective as of January 1,
2018 and the Company adopted ASC 606 using the modified retrospective transition method which required an adjustment to accumulated deficit for the
cumulative effect of applying ASC 606 to active contracts as of the adoption date. The Company recorded an increase to accumulated deficit of $0.9
million upon adoption.
Recently issued accounting pronouncements not yet adopted
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, as part of its Simplification Initiative to reduce the
cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the
methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12
also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual
period beginning after December 15, 2020, with early adoption permitted. The Company is assessing the impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this update align the
requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The
accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in
this update are effective for interim and annual periods for the Company beginning on January 1, 2020, with early adoption permitted. The amendments in
this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company has
determined the impact the adoption of ASU 2018-15 will not be material to its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). ASU 2016-13 sets forth an expected credit loss
model which requires the measurement of expected credit losses for financial instruments based on historical experience, current conditions and reasonable
and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured
at amortized cost, and certain off-balance sheet credit exposures. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019, with early adoption permitted. Adoption will require a modified retrospective transition. This ASU is effective for the
Company in the first quarter of fiscal 2020. The adoption of ASU 2016-13 is not expected to be material to the consolidated financial statements.
F-17
Note 2. Business Combinations
In August 2019, the Company acquired select assets and assumed select liabilities of the Xirrus Wi-Fi products and cloud services business from
Riverbed Technology, Inc. Xirrus has a portfolio of high-performance enterprise Wi-Fi access points and subscription services. The Company paid $2.0
million upon closing and in November 2019 paid an additional $2.7 million of the expected $3.0 million total contingent consideration subject to attaining
certain booking targets related to sales of the Xirrus products. Booking targets were met by December 31, 2019 and the remaining $0.3 million is included
in Accrued liabilities at December 31, 2019. This acquisition will enhance and accelerate the Company’s existing network service application capabilities.
The Company accounts for business combinations in accordance with ASC 805, Business Combinations. The Company recorded the acquisition
using the acquisition method of accounting and recognized assets and liabilities at their fair value as of the date of acquisition. The Company based the
preliminary allocation of the purchase price on estimates and assumptions that are subject to change within the purchase price allocation period, which is
generally one year from the acquisition date. The purchase accounting is not yet complete, and as such, the final allocation may be subject to future
adjustments, including, but not limited to, inventory, intangibles, deferred revenue, and certain income tax matters. The Company determined the estimated
fair value of identifiable intangible assets acquired primarily using an income approach.
The following table summarizes the preliminary allocation of the purchase price for Xirrus:
Goodwill
Customer relationships
Unpatented technology
Deferred revenue
Other net assets acquired
Total purchase price
$
$
492
7,670
540
(7,460)
3,758
5,000
Goodwill represents the excess of the total purchase consideration over the fair value of the underlying assets acquired and liabilities assumed. The
acquisition is considered to be an asset acquisition for tax purposes and goodwill recognized in the acquisition is not deductible for tax purposes.
The results from this acquisition have been included in the Company’s consolidated financial statements since the closing of the acquisition.
Proforma information is not presented because the effect of the acquisition was not material to the Company’s consolidated financial statements.
Note 3. Balance sheet components
Receivables, net
Receivables are recorded at invoiced amounts, net of the allowance for doubtful accounts. The receivables activity was as follows (in thousands):
Trade accounts receivable
Other receivables
Total receivables
Less: Allowance for doubtful accounts
Receivables, net
F-18
December 31,
2018
December 31,
2019
$
$
60,235 $
657
60,892
(503)
60,389 $
58,774
434
59,208
(580)
58,628
The allowance for doubtful accounts activity was as follows (in thousands):
Beginning balance
Increase, charged to expense
Recoveries
Reclassification to non-current
Amounts written-off
Ending balance
Inventories, net
Inventories consisted of the following (in thousands):
Finished goods
Raw materials
Gross inventory
Less: Excess and obsolete provision
Inventories, net
Year ended
December 31,
2018
Year ended
December 31,
2019
823 $
332
(213)
(180)
(259)
503 $
503
333
(204)
—
(52)
580
December 31,
2018
December 31,
2019
32,702 $
1,958
34,660
(3,950)
30,710 $
42,402
4,227
46,629
(4,959)
41,670
$
$
$
$
The following table reflects the activity in the Company’s inventory excess and obsolete provision (in thousands):
Beginning balance
Inventory written off
Increase in excess and obsolete provision
Ending balance
Accrued liabilities
Accrued liabilities consisted of the following (in thousands):
Accrued goods and services
Accrued inventory purchases
Accrued customer rebates
Other
Accrued liabilities
F-19
Year ended
December 31,
2018
Year ended
December 31,
2019
2,766 $
(528)
1,712
3,950 $
3,950
(149)
1,158
4,959
December 31,
2018
December 31,
2019
8,174 $
5,339
4,635
115
18,263 $
8,364
3,094
3,569
7
15,034
$
$
$
$
Accrued warranty
The accrued warranty provision is included in other current liabilities on the Company’s consolidated balance sheets. Warranty obligations were as
follows (in thousands):
Beginning balance
Addition for Xirrus acquisition
Provision increase (decrease), net
Ending balance
Note 4. Property and equipment
Property and equipment, net consisted of the following (in thousands):
Equipment and tooling
Computer equipment
Furniture and fixtures
Total cost
Less: Accumulated depreciation
Property and equipment, net
Year ended
December 31,
2018
Year ended
December 31,
2019
$
$
400 $
—
88
488 $
488
180
38
706
Useful Life
3 to 5 years
3 to 5 years
10 years
December 31,
December 31,
2018
2019
$
$
18,552 $
2,644
666
21,862
(13,897)
7,965 $
22,150
2,888
749
25,787
(17,473)
8,314
Total depreciation expense was $2.1 million, $2.8 million and $3.6 million for the years ended December 31, 2017, 2018 and 2019, respectively.
Note 5. Software
Software consisted of the following (in thousands):
Acquired and Software
for internal use
Software marketed for
external sale
Total
December 31, 2018
December 31, 2019
Useful
Life
Gross
carrying
amount
Accumulated
amortization
Net balance
Gross
carrying
amount
Accumulated
amortization
Net balance
3 to 7 years $
15,513 $
(12,802) $
2,711 $
15,870 $
(13,471) $
2,399
3 years
1,534
17,047 $
(301)
(13,103) $
1,233
3,944 $
1,805
17,675 $
(809)
(14,280) $
$
996
3,395
Amortization of acquired and internal use software is computed using the straight-line method over an estimated useful life of generally three to
seven years. Amortization expense recognized on acquired and internal use software is reflected in depreciation and amortization in the consolidated
statements of operations. Amortization expense was $2.0 million, $1.7 million and $0.7 million for the years ended December 31, 2017, 2018 and 2019,
respectively.
The Company began capitalizing costs associated with software marketed for external sale in 2017. Amortization expense recognized on software
to be sold or marketed externally was $0.1 million, $0.3 million and $0.5 million for the years ended December 31, 2017, 2018 and 2019, respectively, and
is included in cost of revenues on the consolidated statements of operations.
F-20
Based on capitalized software assets at December 31, 2019, estimated amortization expense in future fiscal years is as follows (in thousands):
Year ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total amortization
Acquired and
internal use
software
Software
marketed for
external use
Total
$
$
730
714
442
209
115
189
2,399
$
$
597
294
105
—
—
—
996
$
$
1,327
1,008
547
209
115
189
3,395
Note 6. Goodwill and Intangible Assets
When the Company acquired the trade assets of Motorola Solutions, Inc.’s wireless point-to-point and point-to-multipoint businesses, the transaction
generated goodwill and certain intangible assets. The goodwill associated with this transaction was recorded by Cambium Networks Corporation and
allocated to Cambium Networks, Ltd. and Cambium Networks, Inc. using a revenue and asset allocation method. Although goodwill has been allocated to
two operating subsidiaries, as noted in Note 16 – Segment information and revenues by geography, the Company operates as one operating segment and
one reporting unit and therefore, goodwill is reported, and impairment testing performed, at the Cambium Networks Corporation consolidated level.
See Note 2 – Business combinations for information regarding the acquisition completed during 2019.
The change in the carrying amount of goodwill for the years ended December 31, 2018 and 2019 was as follows (in thousands):
Beginning balance
Additions attributable to acquisition
Ending balance
December 31,
2018
December 31,
2019
$
$
8,060 $
—
8,060 $
8,060
492
8,552
The Company completed a qualitative assessment of goodwill for 2018 and 2019. In completing the qualitative assessment, the Company assessed
relevant events and changes in circumstances, including industry and market conditions, macroeconomic conditions such as a deterioration in general
economic conditions, operating results, business plans, and entity-specific events.
Based on the results of the 2018 and 2019 qualitative assessment, the Company determined it was not more likely than not that the fair value of its
reporting unit was less than its carrying amount and there was no impairment to record for either period. In addition, there were no triggering events or
changes in circumstances during 2018 and 2019 that would have required a review other than at the annual test date.
The useful life, gross carrying value, accumulated amortization, and net balance for each major class of definite-lived intangible assets at each
balance sheet date were as follows (in thousands):
Unpatented technology
Customer relationships
Patents
Trademarks
Total
December 31, 2018
December 31, 2019
Gross
carrying
amount
Accumulated
amortization
Net balance
Gross
carrying
amount
Accumulated
amortization
Net balance
14,120 $
11,630
11,300
5,270
42,320 $
(14,120) $
(4,630)
(11,300)
(3,777)
(33,827) $
— $
7,000
—
1,493
8,493 $
14,660 $
19,300
11,300
5,270
50,530 $
(14,195) $
(5,631)
(11,300)
(4,304)
(35,430) $
465
13,669
—
966
15,100
Useful Life
3 - 7 years
9 - 18 years
7 years
10 years
$
$
F-21
The $0.5 million increase in unpatented technology and $7.7 million increase in customer relationships is related to the acquisition of Xirrus as
discussed in Note 2 – Business combinations. Intangible assets are amortized over their expected useful life and none are expected to have a significant
residual value at the end of their useful life. Intangible assets amortization expense was $4.8 million, $4.2 million and $1.6 million for the years ended
December 31, 2017, 2018 and 2019, respectively.
Based on capitalized intangible assets as of December 31, 2019, estimated amortization expense amounts in future fiscal years are as follows (in
thousands):
Year ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total amortization
Amortization
2,205
2,118
1,603
1,498
1,498
6,178
15,100
$
$
Note 7. Debt
As of December 31, 2019, the Company had $65.3 million outstanding under its current term loan facility and $0.0 million in borrowings under its
revolving credit facility.
As of December 31, 2018, the Company had $95.5 million outstanding under its current term loan facility and $10.0 million in borrowings under its
revolving credit facility.
The following table reflects the current and noncurrent portions of the external debt facilities at December 31, 2018 and December 31, 2019 (in
thousands):
Term loan facility
Tranche A
Tranche B
Revolving credit facility
Less debt issuance costs
Total debt
Less current portion of term facility
Current portion of debt issuance costs
Total long-term external debt
December 31,
2018
December 31,
2019
$
$
— $
72,735
22,727
10,000
(2,443)
103,019
(9,500)
664
94,183 $
65,250
—
—
—
(1,638)
63,612
(10,000)
546
54,158
Secured credit agreements
On March 22, 2017, the Company entered into the second amended and restated credit agreement (“Second Amended and Restated Credit
Agreement”) extending the Company’s existing credit facility from October 28, 2018 to March 22, 2022. The Second Amended and Restated Credit
Agreement provided an aggregate borrowing amount not to exceed $45.0 million consisting of a term loan facility in the aggregate principal amount of
$35.0 million and a revolving loan facility in an aggregate principal amount of $10.0 million, including a letter of credit sub-facility in the aggregate
availability amount of $10.0 million. The Company initially borrowed $30.0 million under the term facility provisions of the Second Amended and
Restated Credit Agreement.
On December 21, 2017, the Company entered into the third amended and restated credit agreement (as amended and restated, the “Credit
Agreement”) to refinance the obligations under the Company’s existing credit facility, to an aggregate amount of $100.0 million, consisting of a term loan
facility in the aggregate principal amount of $90.0 million and a revolving loan facility in an aggregate principal amount of $10.0 million, including a letter
of credit sub-facility in the aggregate availability amount of $5.0 million. The Company may request borrowings under the revolving credit facility until
December 21, 2022, which is the date it becomes due. The term loan matures and also becomes due on December 21, 2022.
F-22
The proceeds were used to: (i) pay fees and expenses incurred in connection with the refinancing; (ii) pay off the existing senior indebtedness under
the Second Amended and Restated Credit Agreement; (iii) finance the return of capital to the Company’s Sponsor; and (iv) provide ongoing working
capital and other general corporate purposes. The Credit Agreement includes an accordion feature, permitting the Company on not more than five
occasions prior to the fourth anniversary of the date of the Credit Agreement to increase the aggregate amount of the term loan by up to $40.0 million, the
proceeds of which may be used for permitted acquisitions.
In November 2018, the Company entered into a Waiver and First Amendment to the Credit Agreement (“Amendment”). The Amendment waived
certain events of default, reset the debt covenants, and modified and amended certain terms of the Credit Agreement. Any terms not amended or modified
by the Amendment were governed under the existing Credit Agreement. The Events of Default (as defined in the Credit Agreement) occurred as a result of
the Company’s failure to maintain certain financial covenants. The Events of Default occurred for the months ended May 31, 2018, July 31, 2018, and
August 31, 2018 with the minimum adjusted quick ratio and for the quarter ended September 30, 2018 with the maximum consolidated leverage ratio and
the minimum consolidated fixed charge coverage ratio (together known as the “Existing Events of Default”).
Per the Amendment, the outstanding term loan was continued as two separate tranches of term loans, one tranche in the aggregate principal amount
outstanding of $73.9 million (inclusive of the conversion of the outstanding revolving loan) as of the Amendment effective date (“Tranche A”) and a
separate tranche in the aggregate principal amount outstanding of $22.7 million as of the Amendment effective date (“Tranche B”). The outstanding
revolving loan in the amount of $10.0 million was converted into, aggregated with, and continued as Tranche A as of the Amendment effective date. The
Amendment also maintained the $10.0 million revolving credit facility.
The Amendment also amended the following financial covenants: Consolidated EBITDA to reflect changes to the new definition and minimum
requirements for consolidated EBITDA; consolidated fixed charge coverage ratio to reflect the modification to reduce the minimum ratio until June 30,
2020; consolidated leverage ratio to reflect the modifications to increase the maximum ratio until June 30, 2019; and minimum adjusted quick ratio to
reflect the modification to reduce the ratio through the maturity date of the loan. Further, the repayment schedule for the principal repayment of the term
loans was amended to reflect the new installment amounts due on the last day of each fiscal quarter.
In connection with the execution of the Amendment, Vector Capital IV, L.P., an affiliate of the general partner of the Company’s sole shareholder,
executed a Limited Guaranty agreement whereby it agreed to guarantee the Tranche B loan up to a maximum of the lesser of: (i) $25.0 million and (ii) an
amount equal to (a) 1.10 multiplied by (b) an amount equal to the then aggregate principal amount of the Tranche B loan.
The Company incurred a $0.25 million administrative fee and all lenders’ term commitment percentage and revolving commitment percentage
remained the same as a result of the Amendment.
The amended term loan is repayable quarterly as follows: (i) $2.375 million is payable in each quarter for the first four (4) payment dates starting
after January 1, 2019; and (ii) $2.5 million is payable in each quarter of each year thereafter, with the remaining principal due on maturity on December 21,
2022. Principal payments are applied to Tranche A until the balance is paid in full. In addition, 50% of excess cash, defined as EBITDA less tax, capital
expenditures, certain investments, scheduled loan repayments, declared distributions, interest, working capital requirement and other items paid in cash to
the extent included as an add back to EBITDA, is payable to the lenders at the end of each year as a repayment of outstanding borrowings.
Interest accrues on the outstanding principal amount of the term loan on a quarterly basis and is equal to the three-month USD LIBOR rate plus a
base rate of 4.75%, 4.25% or 4.00%. In addition to paying the interest on the outstanding principal under the term loan facility, the Company is required to
pay a commitment fee in respect of the unutilized commitments under the revolving credit facility, payable quarterly in arrears. The Company is also
required to pay letter of credit fees on the maximum amount available to be drawn under all outstanding letters of credit in an amount equal to the
applicable margin on LIBOR based borrowings under the revolving credit facility on a per annum basis, payable in arrears, as well as customer fronting
fees for the issuance of letters of credit fees and agency fees.
The Company is permitted to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the Credit
Agreement at any time without premium or penalty, other than customary breakage costs with respect to LIBOR based loans.
F-23
Maturities on the long-term external debt outstanding at December 31, 2019 are as follows (in thousands):
Year ending December 31,
2020
2021
2022
Total
$
$
10,000
10,000
45,250
65,250
Borrowings under the Credit Agreement are secured by a first-priority lien on substantially all of the Company’s assets, the equity interests in the
Company’s subsidiaries, and any intercompany debt. The Credit Agreement also contains certain customary mandatory prepayment provisions. If certain
events, as specified in the Credit Agreement, occur, the Company may be required to repay all or a portion of the amounts outstanding under the Credit
Agreement.
On April 26, 2019, the Company entered into a Consent, Waiver and Second Amendment to the Credit Agreement (“Second Amendment”). The
Second Amendment waived the Company’s failure to comply with the quarterly maximum consolidated leverage ratio and minimum consolidated fixed
charge coverage ratio at December 31, 2018.
The Second Amendment also modified the following financial covenants: Minimum Adjusted Quick Ratio to exclude certain accrued legal
expenses associated with the Company’s IPO and the current lease liability associated with the adoption of ASC 842 starting in April 2019 and continuing
through maturity of the loan; consolidated fixed charge coverage ratio to reflect the change in the time period from a trailing twelve-month to a trailing
three-month, trailing six-month and trailing nine-month for the quarters ended March 31, 2019, June 30, 2019 and September 30, 2019, respectively, and
increased the minimum ratio just for the quarter ended June 30, 2019; and the consolidated leverage ratio to reflect the increase in the maximum ratio until
June 30, 2019. There were no modifications to the interest rate, loan maturity date, principal repayment schedule or total borrowings.
On June 21, 2019, the Company entered into a Waiver Agreement (“Waiver Agreement”). The Waiver Agreement waived the Company’s failure to
comply with the monthly minimum adjusted quick ratio at May 31, 2019. The Waiver Agreement did not modify any financial covenants, interest rate,
loan maturity date, principal repayment schedule, or total borrowings.
On June 28, 2019, the Company entered into a Third Amendment to the Credit Agreement (the “Third Amendment”).
Pursuant to the Third Amendment, certain actions taken by the Company in connection with its IPO were consented to by Silicon Valley Bank and
the lenders, including (i) the exchange of outstanding vested and unvested Class B units and phantom units in VCH L.P. for ordinary shares of the
Company (in exchange for vested units) and restricted stock awards (for unvested Class B units) and restricted stock units (for unvested phantom units) and
the adoption of the employee share incentive plan and employee share purchase plan and forms of award agreement thereunder by the Company; (ii) the
payment of accrued and unpaid management fees owed to an affiliate of VCH, L.P.; and (iii) the entering into of the Shareholder Agreement by and
between VCH, L.P. as a guarantor and loan party and termination of the guaranty granted by an affiliate of VCH, L.P. In addition, the Tranche A and
Tranche B are dissolved and only one tranche of term loan remains.
On July 1, 2019, the Company paid $30.7 million of principal under the Credit Agreement out of the net proceeds of its IPO. Following the
repayment, the total term loan commitment under the Credit Agreement was reduced to $70.0 million and all outstanding amounts under the revolving
credit facility were repaid, leaving an available revolving commitment of $10.0 million. The minimum consolidated fixed charge coverage ratio for the
trailing twelve-month period ending December 31, 2019 and each trailing twelve-month quarterly period ending thereafter was amended to 1.25:1.00. All
other financial covenants remained the same.
The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its
subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, pay dividends or make distributions,
make investments, make acquisitions, prepay certain indebtedness, change the nature of its business, enter into certain transactions with affiliates, enter into
restrictive agreements, and make capital expenditures, in each case subject to customary exceptions for a credit facility of this size and type.
F-24
The Company’s current debt covenant requirements reflect the following limits required, based on the time period noted, for compliance with the
covenant:
Covenant
Monthly minimum adjusted quick ratio
Quarterly consolidated fixed charge
coverage ratio
Quarterly consolidated fixed charge
coverage ratio
Quarterly consolidated leverage ratio
Quarterly consolidated leverage ratio
Criteria
Min ratio
December 31,
2019
Quarter ending
June 30,
December 31,
2020
2020
Non quarter-end months 1.00:1.00 Quarter-end months 1.15:1.00
September 30,
2020
March 31,
2020
Min ratio
1.25:1.00
1.25:1.00
1.25:1.00
1.25:1.00
1.25:1.00
Time period
Max ratio
Time period
3.00:1.00
3.00:1.00
Trailing twelve-month
2.75:1.00
Trailing twelve month
2.50:1.00
2.50:1.00
Based on the modified covenants, the Company believes that all covenants will be met at subsequent testing dates for the next twelve months and
has classified the amounts due in excess of twelve months as noncurrent. As of December 31, 2019, the Company was in compliance with all affirmative
and negative quarterly covenants as defined in the Third Amendment.
Interest expense, including bank charges and amortization of debt issuance costs on the external debt, was $2.2 million, $8.1 million and $8.1
million for the years ended December 31, 2017, 2018 and 2019, respectively. Interest expense for the year ended December 31, 2019 included $0.5 million
of additional amortization of deferred issuance costs for the write-down of deferred issuance costs related to the $20.7 million prepayment of the term loan.
Note 8. Loan from Sponsor and contributed capital
In October 2011, a subsidiary of the Company issued convertible preferred equity certificates (“CPECs”) to the Sponsor in connection with the
purchase of the PTP and PMP businesses from Motorola Solutions, Inc. Under ASC 815-10, the option to convert the CPECs into ordinary shares does not
meet the definition of a derivative. Therefore, the CPECs were classified as debt, as they did not provide for net settlement and there was no active market
for the shares. The CPECs had both a fixed and variable yield component, with the fixed yield component of 1% per annum. The variable yield was
dependent upon the income obtained from amounts lent to, and equity investment in, certain subsidiaries. The Company had the option to either accrue the
interest or cash settle, and since the inception of the CPECs, the Company elected to accrue the interest. The CPECs were redeemable at the earlier of 49
years after issuance or upon the occurrence of specified events, including the realization of certain of the Company’s investments.
On July 31, 2017, in connection with the dissolution of the subsidiary, the CPECs and associated accrued interest were redeemed, and
simultaneously the Sponsor made a non-cash capital contribution of $88.4 million. The $88.4 million non-cash capital contribution represented principal
on the CPECs of $62.5 million and accrued interest of $25.9 million. Interest expense on the loan from Sponsor was $2.8 million, $0.0 million, and $0.0
million in 2017, 2018 and 2019, respectively.
On December 21, 2017, the Company made a cash return of contributed capital to VCH, L.P. in the amount of $65.7 million.
On June 28, 2019, in connection with the Recapitalization, the unreturned capital and accumulated yield of $49.2 million payable to holders of Class
A Units under the VCH, LPA was settled in the form of additional shares in the Company. The Company issued shares to VCH., L.P on a value-for-value
basis based on the $12.00 per share offering price. The Recapitalization was recorded as a non-cash transaction which resulted in the transfer of equity
ownership from capital contribution to additional paid in capital. After completion of the Recapitalization, the Company is neither party to nor subject to
any obligations under the VCH LPA.
F-25
Note 9. Employee benefit plans
The Company’s employee benefit plans currently consist of a defined contribution plan in the United States and a separate defined contribution plan
in the UK. The Company does not offer any other postretirement benefit plans, such as retiree medical and dental benefits or deferred compensation
agreements to its employees or officers.
U.S. plan
U.S. regular, full-time employees are eligible to participate in the Cambium Networks, Inc. 401(k) Plan, which is a qualified defined contribution
plan under section 401(k) of the Internal Revenue Service Code. Under the Cambium Networks, Inc. 401(k) Plan, the Company contributes a dollar-for-
dollar match of the first 4% an employee contributes to the plan. Employees are eligible to participate on the first day of the month following their date of
hire and begin receiving company contributions three-months after they become eligible to participate in the plan. Company matching contributions are
made each pay period, but the funds do not vest until the employee’s second anniversary of employment with the Company. Employees are always fully
vested in their own contributions. All contributions, including the Company match, are made in cash and invested in accordance with the participants’
investment elections. Contributions made by the Company under the Cambium Networks, Inc. 401(k) Plan were $0.7 million, $1.0 million and $1.1
million for the years ended December 31, 2017, 2018 and 2019, respectively.
UK plan
Regular, full-time UK employees are eligible to participate in the Cambium Networks Ltd. Stakeholder Pension Scheme, which is a qualified
defined contribution plan. Employees are eligible to participate on the first of the month following receipt of their enrollment form, and eligible employees
are automatically enrolled in the plan at a default employee contribution rate of 3% and a company contribution rate of 5% of the employee’s basic
salary. The Company contribution rate increases by 1% for each additional 1% that the employee contributes up to a maximum of 7%. Company matching
contributions vest immediately and employees are always vested in their own contributions. All contributions, including the Company match, are made in
cash and deposited in the participant’s account each pay period. The total contributed by the Company under this plan was $0.4 million, $0.4 million and
$0.4 million for the years ended December 31, 2017, 2018 and 2019, respectively.
Note 10. Other expense
Other expenses were $0.5 million, $0.6 million and $0.5 million for the years ended December 31, 2017, 2018 and 2019, respectively, and
represents foreign exchange losses.
Note 11. Share-based compensation
2011 Management incentive compensation plan
Prior to its IPO, the Company’s management incentive compensation represented management incentive units in its sole shareholder, VCH, L.P.
Just prior to the IPO, the Company effected the Recapitalization, which comprised an increase in the authorized and outstanding shares held by
VCH, L.P., and the exchange of the vested share-based compensation awards held by its employees for its ordinary shares and unvested share-based
compensation awards for restricted shares or restricted share units issued by the Company, in each case, on a value-for-value basis. After completion of the
Recapitalization and the IPO, the Company is no longer party to nor subject to any obligations under the VCH LPA. As a result of the Recapitalization and
the completion of the Company’s IPO, the contingent conditions had been met on some of the equity-settled and cash-settled awards and the Company
recorded one time share-based compensation expense of $15.4 million related to these awards in the year ended December 31, 2019.
F-26
The following table reflects the number of MIUs and phantom units (not including the Class A units) exchanged as part of the Recapitalization:
Balance at December 31, 2017
Granted
Forfeitures and cancellations
Balance at December 31, 2018
Granted
Forfeitures
Recapitalization - cancellations
Recapitalization - converted to restricted
shares
Recapitalization - converted to ordinary
shares
Balance at December 31, 2019
Number of units
(time-based)
9,843,098
2,440,000
(139,800)
12,143,298
234,000
(82,100)
(2,622,250)
Number of units
(performance- based)
5,417,093
—
—
5,417,093
—
—
—
(758,138)
(4,038,643)
(8,914,810)
—
(1,378,450)
—
The numbers above are on a pre-Recapitalization basis; the outstanding management incentive units and phantom units were not exchanged one-for-
one, to reflect the value for value exchange including a reverse split of outstanding units. Following the Recapitalization, management incentive and
phantom units were exchanged for an aggregate of 2,220,788 shares, 240,327 restricted share awards and restricted share units, less 80,620 shares held in
treasury in payment of amounts due against the outstanding management incentive and phantom units. The restricted share awards and restricted share units
were issued under our 2019 Share Incentive Plan, and are included in the tables below.
2019 Share incentive plan
In June 2019, the Company’s Board of Directors adopted, and its shareholders approved, the 2019 Share Incentive Plan (“2019 Plan”). The 2019
Plan provides for the grant of incentive share options, nonqualified share options, share appreciation rights, restricted share awards (“RSAs”), restricted
share units (“RSUs”), other share-based awards and performance awards. The number of shares that may be issued under the 2019 Plan is 3,400,000, in
addition to the 240,037 RSAs and RSUs the Company granted in substitution for unvested Class B Units or phantom units in connection with the
Company’s IPO based on a price of $12.00 (“Recapitalization Awards”). The share reserve under the 2019 Plan will be automatically increased on the first
day of each fiscal year, beginning with the fiscal year ending December 31, 2020 and continue until, and including, the fiscal year ending December 31,
2029. The number of shares added annually will be equal to the lowest of 1,320,000 shares, 5% of the number of the Company’s shares outstanding on the
first day of such fiscal year, or an amount determined by the Board of Directors.
The Company’s employees, officers, directors, consultants, and advisors are eligible to receive awards under the 2019 Plan. Incentive share options,
however, may only be granted to its employees. Participants in the 2019 Plan will also consist of persons to whom restricted share awards and restricted
share units are granted in substitution for Class B Units in VCH, L.P. in connection with the Company’s IPO. The Company granted an aggregate of
2,172,000 share options and restricted share units under the 2019 Plan effective upon pricing of the offering, with an exercise price of options equal to
$12.00 per share and recorded share-based compensation expense of $2.2 million during the year ended December 31, 2019. Subsequent to this offering,
the Company granted an additional 845,000 share options under the plan during 2019. For the year ended December 31, 2019, the Company recorded
additional share-based compensation expense of $0.1 million related to these share options.
F-27
The following table summarizes changes in the number of shares available for grant under the Company’s equity incentive plans during the year
ended December 31, 2019:
Available for grant at December 31, 2018
Recapitalization awards authorized
2019 Share Incentive Plan
RSUs and RSAs granted, including
Recapitalization awards
Options granted
Forfeitures of options
Available for grant at December 31, 2019
Number of shares
—
240,037
3,400,000
(294,037)
(2,963,000)
43,022
426,022
Share-based compensation
The following table shows total share-based compensation expense for the years ended December 31, 2017, 2018 and 2019 (in thousands):
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total share-based compensation expense
Year ended December 31,
2018
2017
2019
— $
—
—
—
— $
— $
—
—
—
— $
211
5,363
4,185
7,937
17,696
$
$
As of December 31, 2019, the Company estimates the pre-tax unrecognized compensation expense of $13.3 million related to all unvested share-
based awards, including share options, restricted share units and restricted share awards will be recognized through the fourth quarter of 2023. The
Company expects to satisfy the exercise of share options and future distributions of shares for restricted share units and restricted share awards by issuing
new ordinary shares which have been reserved under the 2019 Plan.
In connection with the Recapitalization, phantom units, which were previously accounted for as liability-settled awards, were modified to equity-
settled awards. Due to a performance condition associated with the phantom units, a liability was not recognized in the Company’s consolidated financial
statements, but was disclosed as liability-settled awards. For the year ended December 31, 2019, the Company recognized $2.2 million in share-based
compensation expense associated with the vesting of phantom unit awards upon Recapitalization.
The Company utilized a forfeiture rate of 5% during the year ended December 31, 2019 for estimating the forfeitures of share options and restricted
share units granted.
Share options
The following is a summary of option activity for the Company’s share incentive plans for year ended December 31, 2019:
Weighted
average
exercise
price
Weighted
Average
remaining
contractual
term (years)
Aggregate
intrinsic
value
Options
Outstanding at December 31, 2018
Options granted
Options forfeited
Outstanding at December 31, 2019
Options exercisable at December 31, 2019
Options vested and expected to vest at
December 31, 2019
—
2,963,000
$
$
(42,500) $
$
2,920,500
140,625
$
—
10.00
12.00
10.00
12.00
—
—
—
9.6
9.5
$
$
$
$
$
—
—
—
1,932,000
—
2,776,797
$
10.00
9.6
$
1,838,832
F-28
Share options typically have a contractual term of ten years from grant date.
During the year ended December 31, 2019, the aggregate intrinsic value of options exercisable under the Company’s share incentive plans was $0.00
as determined as of the date of grant. The Company had 0 options exercised during the year ended December 31, 2019.
At December 31, 2019, there was $10.3 million in unrecognized pre-tax share-based compensation expense, net of estimated forfeitures, related to
unvested share option awards. The unrecognized share-based compensation expense is expected to be recognized through the fourth quarter of 2023.
The Company estimates the fair value of share options using the Black-Scholes option pricing model. The fair value of share options is being
amortized on a straight-line basis over the requisite service period of the awards. The fair value of share options is estimated using the following weighted-
average assumptions:
Expected dividend yield
Risk-free interest rate
Weighted-average expected volatility
Expected term (in years)
Weighted average grant-date fair value per
share of options granted
For the years ended December 31,
2018
2017
2019
—
2.27%
46.8%
6.0
—
2.70%
46.8%
6.0
—
1.81%
40.8%
6.1
$
—
$
—
$
4.34
Restricted shares
The following is a summary of restricted shares activity for the Company’s share incentive plans for the year ended December 31, 2019:
RSU and RSA balance at December 31, 2018
RSUs and RSAs granted
RSUs and RSAs vested
RSUs and RSAs forfeited
RSU and RSA balance at December 31, 2019
RSUs and RSAs expected to vest at
December 31, 2019
Weighted
average
grant date
fair value
—
12.00
12.00
12.00
12.00
Units
$
—
294,037
$
(34,511) $
(2,407) $
$
257,119
257,119
$
12.00
Upon completion of the Company’s IPO, 240,037 RSAs and RSUs were granted to employees in substitution for unvested Class B Units or phantom
units with a grant date fair value of $12.00, of which 34,111 of the RSAs and RSUs awards granted carry-forward their prior vesting terms and expiration
dates and 205,926 RSA equity awards vest based upon the achievement of a total equity return multiple performance condition. In addition, 54,000 RSAs
were granted under the Company’s 2019 Share Incentive Plan.
At December 31, 2019, there was $3.0 million in unrecognized pre-tax compensation expense, net of estimated forfeitures, related to unvested share
awards. The unrecognized compensation expense is expected to be recognized through the fourth quarter of 2022.
Employee share purchase plan
In June 2019, the Company’s Board of Directors adopted, and its shareholders approved, the Employee Share Purchase Plan (“ESPP”). The ESPP
was effective on June 25, 2019; however, no offering period or purchase period under the ESPP will begin unless and until determined by the Company’s
Board of Directors. A total of 550,000 shares will be available under the ESPP. The number of shares that will be available for sale under the ESPP also
includes an annual increase on the first day of each fiscal year beginning in 2020, equal to the lesser of: 275,000 shares; 1% of the outstanding shares as of
the last day of the immediately preceding fiscal year, or such other amount as the administrator may determine. The purchase price of the shares will be
85% of the lower of the fair market value of our shares on the first trading day of each offering period or on the purchase date.
F-29
Note 12. Share capital – shares
The following table reflects the share capital activity:
Balance at December 31, 2017
Shares issued/cancelled
Balance at December 31, 2018
Issuance of shares to VCH, L.P. as part of
Recapitalization
Issuance of shares to VCH, L.P for return of capital
and accumulated yield
Issuance of shares to MIU holders
Shares withheld for net settlement of shares issued
to MIU holders
Issuance of shares in Initial Public Offering
Issuance of vested shares
Balance at December 31, 2019
Number of
shares
Value
(in thousands)
77,179 $
—
77,179 $
13,523,232 $
4,104,343
2,220,788
(80,620)
5,800,000
28,061
25,672,983 $
—
—
—
1
1
—
—
1
—
3
On October 28, 2011, 771.79 shares with a par value of $0.01 per share were issued at an initial subscription price of $1,000 per share. Holders of
these shares are entitled to dividends as declared. As of December 31, 2019, no dividends have been declared or paid.
On April 23, 2019, the Board of Directors approved a share subdivision (“Subdivision”) whereby the authorized share capital of the Company was
subdivided from 5,000,000 shares having a par value of $0.01 per share into 500,000,000 shares with a par value of $0.0001 per share. The Board
resolution was made effective in accordance with Cayman law on June 6, 2019. As a result of the Subdivision, issued and outstanding shares for all periods
presented increased from 771.79 to 77,179 shares. Earnings per share as calculated and shown throughout has also been recalculated with the revised
issued and outstanding shares.
Just prior to the IPO, the Company effected the Recapitalization, which comprised (i) an increase in the authorized and outstanding shares held by
VCH, L.P. and (ii) an exchange of the vested share-based compensation awards held by the Company’s employees for its shares and unvested share-based
compensation awards for restricted shares or restricted share units issued by the Company, in each case on a value-for-value basis. As part of the
Recapitalization, VCH, L.P. determined that the unreturned capital and accumulated yield payable to holders of Class A Units under the VCH, LPA will be
settled in the form of additional shares in the Company. Based on the share-based compensation awards outstanding and unreturned capital and
accumulated yield, and based on the IPO price of $12.00, the Company issued 17,627,575 shares to VCH, L.P and 2,220,788 shares to its employees and
service providers, of which 80,620 shares were withheld in net settlement of amounts due. The impact of the Recapitalization does not result in issued and
outstanding shares being restated for any prior period. Refer to Note 13 – Earning per share for information on how the issuance of the shares as part of the
Recapitalization are reflected in earnings per share.
In June 2019, the Company issued 5,800,000 shares at a price of $12.00 per share in its IPO, which included 1,500,000 shares to it majority
shareholder, VCH, L.P.
F-30
Note 13. Earnings per share
Basic net earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding during the
period. Diluted net earnings per share is computed by giving effect to all potentially dilutive ordinary share equivalents outstanding for the period. For
purposes of this calculation, share options, RSUs, and RSAs are considered to be ordinary share equivalents but are excluded from the calculation of
diluted earnings (loss) per share when including them would have an anti-dilutive effect. The following table sets forth the computation of basic and
diluted net earnings (loss) per share (in thousands, except for share and per share data):
Numerator:
Net income (loss)
Denominator:
Weighted average shares outstanding used in computing net
income (loss), basic and diluted
2017
Year ended December 31,
2018
2019
$
9,128
$
(1,513)
$
(17,601)
13,600,411
13,600,411
19,741,764
Net income (loss) per share, basic and diluted
$
0.67
$
(0.11) $
(0.89)
The following outstanding shares of ordinary share equivalents were excluded from the computation of diluted net loss per share for the periods
presented because including them would have had an anti-dilutive effect:
Share options
Restricted shares (RSUs and RSAs)
Total
Year ended December 31,
2019
2018
—
—
—
2,921
257
3,178
On April 23, 2019, the Board of Directors approved the Subdivision whereby the authorized share capital of the Company was subdivided from
5,000,000 shares having a par value of $0.01 per share into 500,000,000 shares with a par value of $0.0001 per share. The Subdivision was effective in
accordance with Cayman law on June 6, 2019. As a result of the Subdivision, issued and outstanding shares for all periods presented have been restated
from 771.79 shares to 77,179 shares. Earnings per share as calculated and shown has been recalculated with the revised issued and outstanding shares.
Just prior to the IPO, the Company completed a Recapitalization. As part of the Recapitalization, the Company issued an additional 17,627,575
shares to VCH, L.P. which comprised 4,104,343 shares related to the unreturned capital and accumulated yield to the holder of Class A Units of VCH, L.P.
and 13,523,232 shares related to the residual share of Cambium’s value attributable to VCH, L.P.’s ownership after such return, based on an IPO price of
$12.00. Using guidance in ASC 260, Earnings per Share, for purposes of calculating earnings per share, the 13,523,232 shares are retrospectively adjusted
as if the exchange had occurred at the beginning of the first period of earnings per share information presented. The 4,104,343 shares issued related to the
unreturned capital and accumulated yield and were issued in lieu of payment of cash to VCH, L.P. and therefore, the shares issued are not retrospectively
reflected in shares outstanding in the prior periods for purposes of determining earnings per share.
Also as part of the Recapitalization, the Company issued 2,220,788 gross shares to its employees and service providers in exchange for the vested
share-based compensation awards in VCH, L.P. held by them. For purposes of calculating earnings per share, the 2,220,788 shares are included in the
weighted average number of shares outstanding used in the computation of the basic earnings per share only from the date on which the shares are issued,
or June 28, 2019.
Note 14. Income taxes
For the years ended December 31, 2017, 2018 and 2019, income (loss) before income taxes includes the following components (in thousands):
United States
Foreign
Total
2017
Years ended December 31,
2018
2019
$
$
3,356 $
6,025
9,381 $
3,544 $
(5,856)
(2,312) $
4,183
(11,504)
(7,321)
F-31
For the years ended December 31, 2017, 2018 and 2019, the (benefit) provision for income taxes consists of the following (in thousands):
Current:
U.S. federal
State
Foreign
Current tax provision
Deferred:
U.S. federal
State
Foreign
Deferred tax (benefit) provision
(Benefit) provision for income taxes
2017
Years ended December 31,
2018
2019
$
$
$
379
40
1,047
1,466
3,109
340
(5,333)
(1,884)
(418)
$
$
$
200
129
735
1,064
107
(14)
(1,956)
(1,863)
(799)
$
$
$
1,078
643
1,157
2,878
380
(6)
7,028
7,402
10,280
For the years ended December 31, 2017, 2018, and 2019, differences between the income tax expense computed at the statutory U.S. federal income
tax rate (35% for 2017 and 21% for 2018 and 2019) and the (benefit) provision for income taxes computed per the Company’s consolidated statements of
operation are summarized as follows (in thousands):
Income tax expense (benefit) at federal statutory rate
State and local income taxes net of federal benefit
Tax rate changes
Valuation allowance changes
Deferred tax asset adjustment related to interest
Foreign rate differential
Non-deductible interest
Research and development
Share-based compensation - excess tax benefit
Foreign derived intangible income
Other
(Benefit) provision for income taxes
2017
Years ended December 31,
2018
$
$
3,283
373
(92)
(6,417)
3,103
(918)
376
(449)
—
—
323
(418)
$
$
(486)
115
(178)
(112)
—
329
2
(488)
—
(266)
285
(799)
2019
$
$
(1,537)
540
662
9,599
—
369
—
(1,286)
2,807
(1,166)
292
10,280
Foreign rate differential represents the non-U.S. jurisdictions. The country having the greatest impact on the tax rate adjustment line shown in the
above table as “foreign rate differential” for the years ended December 31, 2017, 2018 and 2019 is the UK where the statutory rate was 19.25%, 19.0% and
19.0%, respectively.
The deferred tax assets and liabilities result from differences in the timing of the recognition of certain income and expense items for tax and
financial reporting purposes.
F-32
The sources of these differences for the years ended December 31, 2018 and 2019 are as follows (in thousands):
NOL and tax credit carryforwards
Disallowed interest carryforwards
Lease liability
Property and equipment
Share-based compensation
Intangible assets
Other
Subtotal
Less: Valuation allowance
Net deferred tax assets
Property and equipment
ROU asset
Prepaid expenses and other assets
Other
Subtotal
Less: Valuation allowance
Net deferred tax liabilities
Total deferred tax assets, net
Deferred tax assets/liabilities included in the balance sheet are:
Deferred tax assets - non-current
Deferred tax liabilities - non-current
Total deferred tax assets, net
Years ended December 31,
2018
2019
7,064
847
—
368
—
325
176
8,780
—
8,780
(313)
—
—
(445)
(758)
—
(758)
8,022
$
$
Years ended December 31,
2018
2019
8,022
—
8,022
$
$
8,466
1,686
1,481
146
488
155
73
12,495
(9,599)
2,896
—
(1,312)
(635)
(357)
(2,304)
—
(2,304)
592
929
337
592
$
$
$
$
For the years ended December 31, 2018 and 2019, the following table reflects the activity in the Company’s valuation allowance on deferred tax
assets (in thousands):
Beginning balance
(Release) increase of valuation allowance
Ending balance
Years ended December 31,
2018
2019
112
(112)
—
$
$
—
9,599
9,599
$
$
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in
which those temporary differences become deductible. The Company considers projected future taxable income, reversing taxable temporary differences,
carryback opportunities, and tax-planning strategies in making this assessment.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the
existing deferred tax assets before they otherwise expire. In evaluating the recoverability of its deferred tax assets, a significant piece of negative evidence
evaluated was the cumulative loss incurred over the three-year period ended December 31, 2019. Cumulative losses are objective evidence that limit the
ability to consider other subjective evidence such as the Company’s projections for future growth. The amount of the deferred tax asset considered
realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative
evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as the Company’s
projections for growth.
F-33
As of December 31, 2018, the Company’s deferred tax assets were primarily the result of UK net operating loss (“NOL”), tax credit carryforwards
from the UK and U.S., and the UK corporate interest reduction. For the year ended December 31, 2018, the Company recorded a change in its valuation
allowance of $0.1 million on the basis of management’s assessment of the amount of its deferred tax. The $0.1 million change in its valuation allowance
comprised a change in judgement on the ability to utilize beginning deferred tax assets in future years and the realization of benefits of operation loss
carryforward utilized during 2018.
For the year ended December 31, 2019, the Company recorded a change in its valuation allowance of $9.6 million on the basis of management’s
reassessment of the amount of its deferred tax assets (NOL and research and development credits) that are more likely than not to be realized. As a result of
a 3-year cumulative loss analysis, there was sufficient objective evidence that UK cumulative losses over the recent 3-year period for the years ended
December 31, 2017, 2018 and 2019 were strong negative and objective evidence that sufficient future income would not be generated to utilize its deferred
tax assets. Consequently, the Company established a valuation allowance against its deferred tax asset to income tax expense by $9.3 million. Additionally,
during 2019, the Company identified a state research and development tax credit benefit in the state of California, which is only available to offset actual
tax liabilities, that is in excess of the amount reasonably expected to be utilized over the next five years. As such, the Company established a valuation
allowance against an additional $0.3 million of its deferred tax asset to income tax expense.
The Company has gross income tax NOL carryforwards related to its international operations. For the year ended December 31, 2018, the NOL
carryforward was approximately $30.4 million, of which $30.1 million has an indefinite life. For the year ended December 31, 2019, the NOL carryforward
was approximately $38.3 million, of which $38.0 million has an indefinite life. The Company has recorded a deferred tax asset of $5.8 million related to
NOL as of December 31, 2018. The Company has recorded a deferred tax asset of $6.7 million related to NOL as of December 31, 2019. The Company’s
gross NOL carryforwards expire as follows:
Unlimited carryforward
10+ year carryforward
Years ended December 31,
2018
$30.1 million
$0.3 million
2019
$38.0 million
$0.3 million
The Company has tax credit carryforwards related to research and development. For the year ended December 31, 2018, the carryforward was
approximately $1.3 million, of which $1.1 million has an indefinite life and $0.2 million that expires in 2038. For the year ended December 31, 2019, the
carryforward was approximately $1.7 million, of which $1.7 million has an indefinite life. The Company’s research and development tax credit
carryforwards and their expiration are as follows:
Unlimited carryforward
10+ year carryforward
Years ended December 31,
2018
$1.1 million
$0.2 million
2019
$1.7 million
—
The Company has gross corporate interest restriction (“CIR”) disallowance carryforwards related to it UK operations. For the year ended December
31, 2018, the CIR carryforward was approximately $4.7 million, which has an indefinite life. For the year ended December 31, 2019, the CIR carryforward
was approximately $9.9 million, which has an indefinite life. The Company has recorded a deferred tax asset of $1.7 million related to the CIR
disallowance as of December 31, 2019. The Company’s gross carryforwards expire as follows:
Unlimited carryforward
Years ended December 31,
2018
$4.7 million
2019
$9.9 million
The Company files income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions and many foreign jurisdictions. The U.S.,
UK, and India are the main taxing jurisdictions in which the Company operates. Open tax years subject to audit vary depending on the tax jurisdiction. In
the U.S., the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2016. In the UK, the tax returns that
are open are for the tax years 2017 and 2018. In India, the tax returns that are open are for India assessment years 2013 through 2019.
The Company believes its tax positions comply with applicable tax law and intends to vigorously defend its position. However, differing positions
on certain issues could be upheld by tax authorities, which could adversely affect the Company’s financial condition and results of operations. The
Company does not have any unrecognized tax positions as of December 31, 2018 and 2019.
F-34
In 2019, the Company recorded compensation expense related to is management incentive compensation plan upon the completion of its IPO, which
was considered a triggering event for such recognition. The Company has reviewed the tax treatment in the various jurisdictions in which it operates and
has reflected the associated impacts to taxable income and income tax expense. These expenses and deductions have had a significant impact on the
Company’s determination to record a valuation allowance in the same period as the triggering event during 2019.
The Company recorded income tax benefit of $(0.4) million, $(0.8) million and income tax expense of $10.3 million for the years ended December
31, 2017, 2018 and 2019, with an effective tax rate of (4.5)%, 34.6 % and (140.4) %, respectively. The Company’s effective tax rate for the year ended
December 31, 2017 differed from the U.S. statutory rate primarily due to the release of a valuation allowance against deferred tax assets, deferred tax asset
adjustments related to interest, and the foreign tax rate differential. The Company’s effective tax rate for the year ended December 31, 2018 differed from
the U.S. statutory rate primarily due to a benefit on research and development credit among other smaller tax adjustments. The Company’s effective tax rate
for the year ended December 31, 2019 differed from the U.S. statutory rate primarily due to the recognition of a valuation allowance against its UK
deferred tax assets, taxation of pre-IPO MIU equity awards, tax benefits on research and development, and tax benefits on foreign derived intangible
income.
Note 15. Commitments and contingencies
In accordance with ASC 460, Guarantees, the Company recognizes the fair value for guarantee and indemnification arrangements it issues or
modifies, if these arrangements are within the scope of the interpretation. In addition, the Company must continue to monitor the conditions that are
subject to the guarantees and indemnifications in order to identify if a loss has incurred. If the Company determines it is probable that a loss has occurred,
then any such estimated loss would be recognized under those guarantees and indemnifications and would be recognized in the Company’s consolidated
statements of operations and corresponding consolidated balance sheets during that period.
Indemnification
The Company generally indemnifies its distributors, value added reseller and network operators against claims brought by a third party to the extent
any such claim alleges that the Company’s product infringes a patent, copyright or trademark or violates any other proprietary rights of that third
party. Although the Company generally tries to limit the maximum amount of potential future liability under its indemnification obligations, in certain
agreements this liability may be unlimited. The maximum potential amount of future payments the Company may be required to make under these
indemnification agreements is not estimable.
The Company indemnifies its directors and officers and select key employees, including key employees serving as directors or officers of the
Company’s subsidiaries, for certain events or occurrences, subject to certain limits, while the director or officer is or was serving at the Company’s request
in such capacity. The term of the indemnification period is for the director’s or officer’s term of service. The Company may terminate the indemnification
agreements with its directors, officers or key employees upon the termination of their services as directors or officers of the Company or its subsidiaries, or
the termination of activities for which indemnification has been provided, but termination will not affect claims for indemnification related to events
occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Company has a
director and officer insurance policy that limits its exposure. The Company believes the fair value of these indemnification agreements is minimal.
Warranties
The Company provides a one-year and three-year standard warranty on most hardware products and records a liability for the estimated future costs
associated with potential warranty claims. The Company’s responsibility under its standard warranty is the repair or replacement of in-warranty defective
product, or to credit the purchase price of the defective product, at its discretion, without charge to the customer. The warranty costs are reflected in the
Company’s consolidated statements of operations within cost of revenues. The Company’s estimate of future warranty costs is largely based on historical
experience factors including product failure rates, material usage, and service delivery cost incurred in correcting product failures. The Company also
offers for purchase an extended warranty on most of its products; a limited lifetime warranty on select hardware products; and an all risks advance
replacement warranty covering additional types of equipment damage not covered by its standard warranty.
Legal proceedings
Third parties may from time to time assert legal claims against the Company. Except as set forth below, there is no pending or threatened legal
proceedings to which the Company is a party to, and in the Company’s opinion, is likely to have a material adverse effect on its financial condition or
results of operations.
F-35
On August 7, 2018, Ubiquiti Networks, Inc. filed a lawsuit in the United States District Court, Northern District of Illinois, against the Company,
two of its employees, one of its distributors and one of its end users. The complaint alleged that the Company’s development of and sales and promotion of
its Elevate software as downloaded on a Ubiquiti device violates the Computer Fraud and Abuse Act and Illinois Computer Crimes Prevention Law, the
Digital Millennium Copyright Act and the Copyright Act and constitutes misrepresentation and false advertising and false designation of origin in violation
of the Lanham Act and state competition laws, breach of contract, tortious interference with contract and unfair competition, and trademark infringement
and common law misappropriation. The complaint also asserted additional claims against all defendants alleging that the development and sales of Elevate
violated the Racketeer Influenced and Corrupt Organizations Act. On May 22, 2019, the Court issued its order dismissing Ubiquiti’s complaint without
prejudice. On June 18, 2019, Ubiquiti filed its First Amended Complaint (FAC). The FAC made substantially the same claims against the same parties with
the exception that the FAC does not include claims for violation of the Illinois Computer Crime Prevention Law, Infringement of Registered Trademarks,
False Designation of Origin, and Common Law Trademark Misappropriation that were included in the initial complaint. The Company filed a motion to
dismiss the FAC on July 10, 2019. On November 14, 2019 the Court issued an order denying its motion to dismiss. The Court ordered that fact discovery
will close on August 18, 2020 and that dispositive motions must be filed prior to December 22, 2020. The Court referred the case to a magistrate judge for
a potential settlement conference. The Company believes Ubiquiti’s claims are without merit and plans to vigorously defend against these claims; however,
there can be no assurance that it will prevail in the lawsuit. The Company cannot currently estimate the possible loss or range of losses, if any, that it may
experience in connection with this litigation.
Note 16. Segment information and revenues by geography
The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer. The Company’s CODM reviews financial information
presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, the Company determined that it
operates as one operating segment and one reporting unit.
Revenues by product category were as follows (in thousands, except percentages):
Point-to-MultiPoint
Point-to-Point
Wi-Fi
Other
Total Revenues
2017
142,000
56,130
14,620
3,921
216,671
$
$
Years ended December 31,
2018
146,621
71,678
19,571
3,892
241,762
61% $
30%
8%
1%
100% $
66% $
26%
6%
2%
100% $
2019
156,157
71,618
35,678
3,575
267,028
59%
27%
13%
1%
100%
The Company’s products are predominately distributed through a third-party logistics provider in the United States, Netherlands and China. The
Company has determined the geographical distribution of product revenues based upon the ship-to destinations.
Revenue by geography were as follows (in thousands, except percentages):
North America
Europe, Middle East and Africa
Caribbean and Latin America
Asia Pacific
Total Revenues
2017
100,676
68,208
26,962
20,825
216,671
$
$
Years Ended December 31,
2018
108,884
75,503
29,833
27,542
241,762
45% $
31%
12%
12%
100% $
47% $
31%
12%
10%
100% $
2019
122,565
85,930
31,767
26,766
267,028
46%
32%
12%
10%
100%
The following countries had revenues greater than 10% of total revenues:
•
•
United States - $90.9 million for 2017, $101.5 million for 2018 and $121.3 million for 2019
Italy - $39.9 million for 2017, $36.8 million for 2018 and $38.4 million for 2019
F-36
Customers with an accounts receivable balance of 10% or greater of total accounts receivable and customers with net revenues of 10% or greater of
total revenues are presented below for the periods indicated:
Customer A
Customer B
Customer C
* denotes percentage is less than 10%
Note 17. Revenue from contracts with customers
Percentage of Revenues
Years Ended December 31,
2018
2017
Percentage of Accounts Receivable
As of December 31,
2019
2018
2019
15%
15%
11%
16%
12%
*
16%
11%
*
16%
*
*
20%
*
*
In accordance with ASC 606, Revenue From Contracts with Customers, the Company recognizes revenue to reflect the transfer of control of
promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those
products and services. Refer to Note 16 - Segment Information, for further details, including disaggregation of revenue based on product category and
geographic location.
Contract Balances
The following table summarizes contract balances as of December 31, 2018 and December 31, 2019:
Trade accounts receivable, net of allowance for
doubtful accounts
Deferred revenue - current
Deferred revenue - noncurrent
Refund liability
December 31,
2018
December 31,
2019
$
$
59,797 $
2,770
1,541
1,810 $
58,254
7,430
4,852
2,223
Trade accounts receivable include amounts billed and currently due from customers. Amounts are billed in accordance with contractual terms and
are recorded at face amount less an allowance for doubtful accounts.
Deferred revenue consists of amounts due or received from customers in advance of the Company satisfying performance obligations under
contractual arrangements and generally relates to extended warranty on hardware products. Deferred revenue is classified as current or noncurrent based
on the timing of when revenue will be recognized. The changes in deferred revenue were due to normal timing differences between the Company’s
performance and the customers’ payment, other than the $7.5 million of deferred revenue assumed as part of the Xirrus acquisition completed in August
2019. As noted in Note 2 – Business Combinations, this amount is currently considered provisional as the purchase price allocation is not complete as of
December 31, 2019.
The refund liability is the estimated amount expected to be refunded to customers in relation to product exchanges made as part of the Company’s
stock rotation program and returns that have been authorized, but not yet received by the Company. It is included within other current liabilities in the
consolidated balance sheets.
Remaining performance obligations
Remaining performance obligations represent the revenue that is expected to be recognized in future periods related to performance obligations
included in a contract that are unsatisfied, or partially satisfied, as of the end of a period. As of December 31, 2018 and 2019, deferred revenue (current and
noncurrent) of $4.3 million and $12.3 million, respectively, represents the Company’s remaining performance obligations, of which $2.8 million and $7.4
million, respectively, is expected to be recognized within one year, with the remainder to be recognized thereafter.
Revenue recognized during the year ended December 31, 2019 which was previously included in deferred revenues as of December 31, 2018 was
$2.8 million.
F-37
Cost to obtain a contract
Sales commissions are incremental costs of obtaining a contract. The Company has elected to recognize these expenses as incurred due to the
amortization period of these costs being one year or less.
Note 18. Leases
The Company adopted ASC 842 on January 1, 2019 using the optional transition method for all leases existing at January 1, 2019, the date of initial
application.
The Company has operating leases for offices, vehicles, and office equipment. Leases with a term of 12 months or less are not recorded on the
consolidated balance sheets, and are expensed on a straight-line basis over the lease term.
ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the
commencement date. The Company’s lease payments are typically fixed or contain fixed escalators. The Company’s leases typically include certain lock-
in periods and renewal options to extend the leases, but it does not consider options to extend the lease it is not reasonably certain to exercise. The
Company elected the practical expedient to not separate the lease and non-lease components of its leases and currently has no leases with options to
purchase the leased property.
The components of lease expense were as follows and are included in general and administrative expense (in thousands):
Operating lease cost
Short-term lease cost
Variable lease costs
Total lease expense
Year Ended
December 31, 2019
2,410
183
406
2,999
$
$
Rent expense totaled $1.4 million and $2.3 million in 2017 and 2018, respectively.
Supplemental balance sheet information related to leases were as follows (in thousands, except lease term and discount rate):
Balance Sheet Caption
December 31, 2019
Operating leases:
Operating lease assets
Current lease liabilities
Noncurrent lease liabilities
Weighted average remaining lease
term (years):
Operating leases
Weighted average discount rate:
Operating leases
$
Operating lease assets
Other current liabilities
$
Noncurrent operating lease liabilities $
6,872
2,125
5,335
3.98
8.50%
Supplemental cash flow information related to leases were as follows (in thousands):
Supplemental cash flow information:
Cash paid for amounts included in the measurement
of lease liabilities
Year Ended
December 31, 2019
$
2,461
The Company’s lease terms range from one to seven years and may include options to extend the lease by one to four years.
F-38
Maturities on lease liabilities at December 31, 2019 were as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: interest
Present value of lease liabilities
Operating leases
2,682
2,468
1,361
1,305
554
468
8,838
1,378
7,460
$
$
Future payments under operating lease agreements accounted for under ASC 840, Leases, as of December 31, 2018 were as follows (in thousands):
Operating leases
$
2,409
$
2,418
$
2,203
$
1,307
$
1,267
$
1,072
$
10,676
2019
2020
2021
2022
2023
Thereafter
Total
As of December 31, 2019, the Company does not have any additional leases for new office facilities that have not yet commenced.
Note 19. Related party transactions
The Company follows ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. A
party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is
under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties with which the Company may deal.
VCH, L.P., the ultimate controlling party, provided funding to the Company in the form of CPECs, as described in Note 8 – Loan from Sponsor and
capital contribution, and contributed capital of $62.5 million and $2.0 million, respectively. On July 31, 2017, the Company redeemed the CPECs and
VCH, L.P. made a non-cash capital contribution to the Company of $88.4 million, including principal of $62.5 million and accrued interest of $25.9
million. On December 21, 2017, the Company made a cash return of contributed capital to VCH, L.P. in the amount of $65.7 million.
In connection with the Company’s execution of the Waiver and First Amendment to Amended and Restated Credit Agreement dated November 21,
2018 (Refer to Note 7– Debt), Vector Capital IV, L.P., an affiliate of the general partner of the Company’s sole shareholder, executed a Limited Guaranty
agreement whereby it has agreed to guarantee the Company’s Tranche B loan up to a maximum of the lesser of: (i) $25.0 million and (ii) an amount equal
to (a) 1.10 multiplied by (b) an amount equal to the then aggregate principal amount of the Tranche B loan.
In connection with the Company’s execution of the Third Amendment to Amended and Restated Credit Agreement dated June 28, 2019 (Refer to
Note 7 – Debt), Vector Capital IV, L.P., an affiliate of the general partner of the Company’s sole shareholder was relieved of its Limited Guaranty
agreement.
For the years ended December 31, 2018 and 2019, Vector Capital Management, LP, an entity related to VCH, L.P., charged $0.5 million and $0.3
million, respectively, for management and oversight fees. In addition to the management and oversight fees, in 2017, Vector Capital Management, LP
charged the Company $2 million in management fees in connection with the Company’s $90 million debt financing as discussed in Note 7 –
Debt. Amounts due to Vector Capital Management, LP at December 31, 2018 and 2019 were $5.6 million and $0.0 million, respectively, and were
included as Payable to Sponsor in the Company’s consolidated balance sheets. On July 3, 2019, the Company paid $5.6 million to Vector Capital
Management from the net proceeds from the Company’s IPO. In connection with the IPO and the payment of these fees, the Vector Capital Management
Agreement is terminated.
In connection with the Recapitalization and upon consummation of the Company’s IPO, the Company issued shares to VCH, L.P. representing the
amount of unreturned capital and accumulated yield payable to holder of Class A Units of VCH, plus the residual shares of the Company’s value
attributable to VCH’s ownership after such return, based on the IPO price of $12.00 per share. After completion of the Recapitalization and the offering,
the Company is neither party to nor subject to any obligations under the VCH LPA.
F-39
Note 20. Quarterly financial data (unaudited)
The following table presents the Company’s unaudited consolidated statements of operations data for each of the eight quarters during the years
ended December 31, 2018 and 2019. This information has been presented on the same basis as the audited consolidated financial statements included in
this report, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to state fairly the
unaudited quarterly results when read in conjunction with the audited consolidated financial statements and related notes.
Revenues
Cost of revenues
Gross profit
Operating expenses
Research and development
Sales and marketing
General and administrative
Depreciation and amortization
Total operating expenses
Operating income (loss)
Interest expense
Other expense
(Loss) income before income taxes
(Benefit) provision for income taxes
Net (loss) income
Revenues
Cost of revenues
Gross profit
Operating expenses
Research and development
Sales and marketing
General and administrative
Depreciation and amortization
Total operating expenses
Operating income (loss)
Interest expense
Other expense
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Note 21. Subsequent event
March 31,
2018
June 30,
2018
September 30,
December 31,
December 31,
2018
2018
2018
Three months ended
Year ended
$
$
58,453 $
30,250
28,203
9,385
10,419
4,321
2,370
26,495
1,708
1,758
231
(281)
(54)
(227) $
(unaudited)
61,019 $
31,710
29,309
9,688
10,066
4,323
2,338
26,415
2,894
2,088
110
696
171
525 $
58,981 $
31,469
27,512
9,810
10,805
5,520
2,448
28,583
(1,071)
2,033
116
(3,220)
(665)
(2,555) $
63,309 $
32,838
30,471
10,034
11,368
4,640
1,609
27,651
2,820
2,234
93
493
(251)
744 $
241,762
126,267
115,495
38,917
42,658
18,804
8,765
109,144
6,351
8,113
550
(2,312)
(799)
(1,513)
March 31,
2019
June 30,
2019
September 30,
December 31,
December 31,
2019
2019
2019
Three months ended
Year ended
$
$
68,112 $
36,322
31,790
10,482
10,218
5,130
1,281
27,111
4,679
2,268
134
2,277
415
1,862 $
(unaudited)
69,151 $
34,839
34,312
15,189
14,227
13,063
1,227
43,706
(9,394)
2,301
56
(11,751)
8,623
(20,374) $
65,703 $
33,871
31,832
9,895
10,363
5,996
1,449
27,703
4,129
2,105
61
1,963
3
1,960 $
64,062 $
30,767
33,295
12,126
11,445
5,936
1,901
31,408
1,887
1,402
295
190
1,239
(1,049) $
267,028
135,799
131,229
47,692
46,253
30,125
5,858
129,928
1,301
8,076
546
(7,321)
10,280
(17,601)
On February 10, 2020, the Company announced it took additional steps in connection with its previously announced corporate restructuring. The
additional restructuring will only affect personnel, including contract employees, and is expected to be complete by the end of 2020. The Company will
incur between $1.2 million and $1.4 million in personnel costs, including salary continuation and other benefits over the first three quarters of 2020.
F-40
COMMERCIAL SUBLEASE
Exhibit 10.31
Effective Date of this Agreement:
December 1, 2019 (the “Effective Date,” hereinafter defined)
This Agreement is by and between
Agfa Corporation (“Sublessor”)
located at 611 River Drive Center 3, Elmwood Park, NJ 07407
AND
Cambium Networks, Inc. (“Sublessee”)
located at 3800 Golf Road, Suite 360, Rolling Meadows, IL 60008
Background
A.
B.
This is an agreement (the “Sublease”) to sublet real property according to the terms specified below.
The Sublessee and Sublessor are herein referred to individually as a “Party” and collectively as the “Parties.”
IN CONSIDERATION OF the Sublessor subletting and the Sublessee renting the Premises (hereinafter defined), both Parties agree to keep,
perform and fulfill the promises, conditions and agreements below:
1.
FACILITY AND PREMISES
Sublessor is the tenant by virtue of a lease wherein Thousand Oaks Arbors LLC was the original landlord, and subsequently assigned its interest to :
LAX Sixth Avenue Arbors Equities LLC, a Delaware limited liability company, and LAX Arbors LLC, a Delaware limited liability company
(collectively “Landlord”) and wherein the lease was amended by First Amendment to Lease dated as of June 12, 2013, and Second Amendment to
Lease dated as of August 21, 2018 (collectively, the “Master Lease”). The facility consists of an office building located at 2545 W. Hillcrest Dr.,
Thousand Oaks, CA. Those certain premises known as Suite 220 located on the second floor of the Facility, consisting of approximately 8,722 square
feet, (the “Premises”) which, for purposes of this Sublease, Sublessor hereby leases to the Sublessee. A layout of the Premises is attached hereto as
Exhibit A.
This Sublease is contingent upon Landlord’s consent with the sublease of the Premises to Sublessee. In the event Landlord does not consent with the
sublease of the Premises, this Sublease shall be null and void.
2.
TERM AND TERMINATION
The term (the “Term”) begins at 12:01 a.m. PST on the Effective Date and ends at 12:00 a.m. PST on January 31, 2022 (the “End Date”). The Term
may be extended beyond the End Date by mutual agreement by the Parties provided that Sublessee gives written notice of its intent to extend the
Term to Sublessor no later than December 31, 2020 (the “Extended Term”).
3.
PAYABLE RENT AND SECURITY DEPOSIT
The Base Rental Rate payable by Sublessee to Sublessor is agreed as follows:
Term (Months)
1
2
3
4
5
6
Date
12/1/2019
1/1/2020
2/1/2020
3/1/2020
4/1/2020
5/1/2020
Base Rent per RSF per month
$2.16
$0.00
$2.16
$0.00
$2.16
$2.16
Monthly Base Rent
$18,839.52
free
$14,221.52 (partial month free)
free
$18,839.52
$9,419.76 (1/2 month free)
{00532541 - 2}
1
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
6/1/2020
7/1/2020
8/1/2020
9/1/2020
10/1/2020
11/1/2020
12/1/2020
1/1/2021
2/1/2021
3/1/2021
4/1/2021
5/1/2021
6/1/2021
7/1/2021
8/1/2021
9/1/2021
10/1/2021
11/1/2021
12/1/2021
1/1/2022
$2.16
$0.00
$2.23
$2.23
$0.00
$2.23
$2.23
$0.00
$2.23
$2.23
$2.23
$2.23
$2.23
$2.30
$2.30
$2.30
$2.30
$2.30
$2.30
$2.30
Exhibit 10.31
$18,839.52
free
$19,450.06
$19,450.06
free
$19,450.06
$19,450.06
free
$19,450.06
$19,450.06
$19,450.06
$9,725.03 (1/2 month free)
$19,450.06
$10,016.78 (1/2 month free)
$20,033.56
$10,016.78 (1/2 month free)
$20,033.56
$10,016.78 (1/2 month free)
$20,033.56
$10,016.78 (1/2 month free)
Amounts are due and payable beginning on the Effective Date and the first day of each month thereafter during the Term. Sublessee shall pay a
security deposit to Sublessor in the amount of $10,016.78 due and payable on the Effective Date.
4.
NOTICES AND RECORDS
Any notice that either party may give, or is required to give, shall be given by mailing the same, postage prepaid, to the Sublessor at the address in
the introductory paragraph of this Agreement, or the Sublessee at the address in the introductory paragraph of this Agreement, or at such other places
as may be designated by the Parties in writing from time to time.
5.
TERMINATION
a)
b)
6.
USE
a)
Sublessor may terminate the lease without cause by giving written notice to Sublessee at least thirty (30) days prior to the date of
termination. /s/ SC 12/19/19 /s/ DR 01/02/20
Upon the expiration or earlier termination of this Agreement, Sublessee shall pay all fees due and payable to Sublessor, and shall return
the Premises to Sublessor in good repair, condition and working order, ordinary wear and tear resulting from proper use thereof alone
excepted. Upon the expiration or termination of this Agreement, Sublessee shall return all badges, keys, any access keys and the like to
Sublessor.
Uses Permitted. The Sublessee may occupy and use the Premises for research and development, general office and administrative
functions. The Sublessee may occupy or use the Premises in this manner during the normal business hours. The Premises shall be for no
other purpose. The Sublessor represents that the Premises may lawfully be used for such purpose, which representation is a material term
of the Sublease on which Sublessee relies in entering into the Sublease. Sublessee at its sole expense shall obtain all licenses or permits
which may be required for its business within the terms of this Sublease, or for the making of approved repairs, alterations or
improvements.
{00532541 - 2}
2
Exhibit 10.31
b)
c)
d)
e)
Sublessee shall not use the Premises or permit the use of any dangerous, noxious, or offensive trade or business, nor cause or maintain
any nuisance upon the Premises and shall comply with all federal, state and local environmental laws and regulations now in force, or
that may hereafter be in force. Sublessee shall give Sublessor immediate notice of any failure of Sublessee to comply with any such law
or regulation.
Sublessee may use the existing Supplemental HVAC system under the Master Lease. Sublessee shall be responsible for all preventative
maintenance and repairs by hiring a third party maintenance service at its sole cost and expense.
Sublessee shall have use of the existing furniture in the Premises.
The use and occupation by the Sublessee of the Premises shall include the right to use in common with others entitled thereto the
common area, subject to the terms and conditions of this Sublease and reasonable rules and regulations for the use thereof, as prescribed
from time to time by the Facility owner. The term “Common Areas” as used in this Sublease shall mean all facilities furnished in the
Facility and designated for the general use, in common with other occupants of the Facility, including Sublessee, its officers, agents,
employees, and customers, which facilities may include, but are not limited to, walkways, elevators, landscaped areas and other similar
facilities available for common use which may from time to time exist.
7.
ALTERATIONS
The Sublessee shall not, without first obtaining the written consent of the Sublessor or Landlord, as applicable, make any alterations, additions, or
improvements, in, to or about the Premises.
8.
DUTIES AND PERFORMANCE OF SUBLESSEE
a)
b)
During the term of this Sublease and for all periods subsequent for obligations which have arisen prior to the termination of this
Sublease, Sublessee does hereby expressly assume and agree to perform and comply with, for the benefit of Sublessor and Lessor, each
and every obligation of Sublessor under the Master Lease to the extent such obligations apply to the Premises.
Sublessee shall hold Sublessor free and harmless from all liability, judgments, costs, damages, claims or demands, including reasonable
attorneys’ fees, arising out of Sublessee’s failure to comply with or perform Sublessee’s obligations.
c)
Sublessee Improvements. Sublessee shall not make any improvements on the Premises.
7.
ASSIGNMENT & SUBLETTING
The Sublessee shall not assign this Sublease or sublet any portion of the Premises without prior written consent of the Sublessor. Consent to
subleasing shall not be unreasonably withheld unless it is based upon refusal by the Owner to give consent, in the Owner’s sole judgment. Any such
assignment or subletting without consent shall be void.
8.
INDEMNIFICATION
Sublessee hereby agrees to indemnify, defend and hold Sublessor harmless from any and all third-party claims, damages, liabilities or expenses
arising out of or related to (i) Sublessee’s use of the Premises or the Common Areas, (ii) any and all claims arising from any breach or default in the
performance of any obligation of Sublessee, and (iii) any act, omission or negligence of Sublessee, its agents or its employees, except in each case to
the extent arising out of the negligence, breach, willful misconduct, or other action or inaction of Sublessor or any of its agents or employees.
Sublessee further releases Sublessor from liability for any damages sustained by Sublessee or any other person claiming by, through or under
Sublessee due to repair of the Premises, the Facility, or any part thereof, to the extent that repairing same is Sublessee’s obligation hereunder.
{00532541 - 2}
3
Exhibit 10.31
9.
INSURANCE
Sublessee shall maintain at its sole expense during the Term hereof public liability insurance covering the Premises in an amount of $1,000,000.00
for injury or death to any one person; $2,000,000.00 for injury and/or death to any number of persons in any one accident; and property damage
insurance in an amount of
$1,000,000.00. Sublessee will cause such insurance policies to name Sublessor as an additional insured on a primary and non-contributory basis with
respect to Sublessee’s liabilities assumed under the indemnification provisions of Section 8 of this Sublease. Sublessee shall also keep in force fire
and extended coverage insurance for the full replacement value of Sublessee’s improvements and Sublessee’s property, including, but not limited to,
inventory, trade fixtures, furnishings and other personal property. Sublessee will cause such insurance policies to name of Sublessor as additional
insureds and to be written so as to provide that the insurer waives all right of recovery by way of subrogation against Sublessor in connection with
any loss or damage covered by the policy. In addition, Sublessee shall keep in force workman's compensation or similar insurance to the extent
required by law. Sublessee shall deliver said policies or certificates thereof to Sublessor at least ten (10) days prior to the commencement of the Term.
Should Sublessee fail to effect the insurance called for herein Sublessor may, at its sole option, procure said insurance and pay the requisite
premiums, in which event, Sublessee shall pay all sums so expended to Sublessor, as additional rent following invoice. Each insurer under the
policies required hereunder shall agree by endorsement on the policy issued by it or by independent instrument furnished to Sublessor that it will give
Sublessor thirty (30) days prior written notice before the policy or policies in question shall be altered or cancelled.
10.
SUBLESSOR’S REMEDIES UPON DEFAULT
If the Sublessee defaults in the performance of any of the covenants or conditions of this Agreement, the Sublessor may give the Sublessee written
notice of such default and if the Sublessee does not cure any such default within thirty (30) business days after the giving of such notice (or, if such
other default is of such a nature that it cannot be completely cured within such period, then within a reasonable time), then the Sublessor may
terminate this Sublease by giving not less than thirty (30) calendar days’ written notice to the Sublessee. On the date specified in such notice the
Term of this Sublease shall terminate, and the Sublessee shall then quit and surrender the Premises to the Sublessor. If this Sublease shall have been
so terminated by the Sublessor, the Sublessor may at any time thereafter resume possession of the Premises by any lawful means and remove the
Sublessee or other occupants and their effects.
11. WAIVER
No failure of the Sublessor or the Sublessee to enforce any term of this Agreement shall be deemed to be a waiver.
12. HEIRS, ASSIGNS & SUCCESSORS
This Agreement is binding upon and inures to the benefit of the heirs, assigns and successors in interest to the parties.
13. REPRESENTATION ON AUTHORITY OF PARTIES/SIGNATORIES
Each person signing this Agreement represents and warrants that he or she is duly authorized and has legal capacity to execute and deliver this
Agreement on behalf of their respective corporation, sole proprietorship, partnership or other entity. Each Party represents and warrants to the other
that the execution and delivery of the Agreement and the performance of such Party's obligations hereunder have been duly authorized and that the
Agreement is a valid and legal agreement binding on such Party and enforceable in accordance with its terms.
14.
SUBORDINATION
This Sublease is and shall be subordinated to all existing and future liens and encumbrances against the property, including the Master Lease. If any
proceedings are brought for foreclosure, or in the event of
{00532541 - 2}
4
Exhibit 10.31
the exercise of the power of sale under any mortgage or deed of trust made by the Sublessor covering the Subleased Premises, the Sublessee shall
recognize such purchaser as the Sublessor under this Sublease.
15.
SEVERABILITY
If any provision of this Sublease is found invalid or unenforceable under judicial decree or decision, the remainder shall remain valid and enforceable
according to its terms. Without limiting the previous, it is expressly understood and agreed that each and every provision of this Sublease that
provides for a limitation of liability, disclaimer of warranties, or exclusion of damages is intended by the Parties to be severable and independent of
any other provision and to be enforced as such. Further, it is expressly understood and agreed that if any remedy under this Sublease is determined to
have failed of its essential purpose, all other limitations of liability and exclusion of damages set forth in this Agreement shall remain in full force and
effect.
16. GOVERNING LAW AND JURISDICTION
This Sublease shall be governed by the laws of the State where the Facility is located. Any claims, legal proceeding or litigation arising in connection
with this Sublease will be brought solely in state and federal courts of the State of New Jersey, and the Parties consent to the jurisdiction of such
courts.
17. LIMITATION OF LIABILITY
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR INDIRECT, SPECIAL, INCIDENTAL AND/OR CONSEQUENTIAL DAMAGES,
INCLUDING WITHOUT LIMITATION LOST PROFITS OR DAMAGES RESULTING FROM BUSINESS INTERRUPTION WHETHER
BASED IN WARRANTY, CONTRACT, TORT, OR ANY OTHER LEGAL THEORY, AND WHETHER OR NOT ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. NEITHER PARTY SHALL BE LIABLE FOR LOST PROFITS OF ANY NATURE OR CHARACTER.
18. CONSTRUCTION OF CONTRACT
This Sublease was negotiated pursuant to an arms’ length transaction and is the product of joint drafting. Each party acknowledges that it has had
sufficient opportunity to consult with attorneys concerning the terms of this Sublease before singing it. This Sublease will not be construed against
either party more strictly than against the other party.
19. COUNTERPARTS
This Sublease may be executed on any number of counterparts with the same effect as if the signatures were on the same instrument.
20.
SUBJECT TO MASTER LEASE
The sublease will in all respects be subject to the terms and conditions of the Master Lease, and Sublessee will be bound by all of the provisions
applicable to “Tenant” thereunder as to the Sublease Premises, except for those portions that are by their express terms personal to Sublessor or that
contradict provisions in this Sublease.
{00532541 - 2}
[signature page follows on next page]
5
Understood, Agreed & Approved
We have carefully reviewed this contract and agree to and accept all of its terms and conditions. We are executing this Agreement as of the Effective
Date above.
Exhibit 10.31
Sublessee: Cambium Networks, Inc
Sublessor: Agfa Corporation
/s/ STEPHEN CUMMING
By
Stephen Cumming
Name
CFO
Title
December 13, 2019
Date
{00532541 - 2}
/s/ DAVID RITTER
By
David Ritter
Name
CFO
Title
December 13, 2019
Date
6
Exhibit A
Exhibit 10.31
{00532541 - 2}
7
Exhibit 10.31
{00532541 - 2}
8
Exhibit 10.31
{00532541 - 2}
9
Exhibit 10.32
June 14, 2018
Stephen Cumming
c/o Cambium Networks, Inc.
3800 Golf Road, Ste 360
Rolling Meadows, IL 60008
Dear Stephen,
I am pleased to extend you an offer of employment with Cambium Networks (“Cambium” or the “Company”) as its Chief Financial Officer,
commencing July 9, 2018. Your principal place of employment will be San Jose, California, with travel commensurate with your
position. This letter (this “Agreement”) outlines certain terms of your employment should you choose to accept this offer.
•
•
Base Salary. You will receive an annualized base salary of $350,000, paid in accordance with the Company’s standard payroll
practices (currently paid biweekly), subject to applicable withholding and other required deductions.
Annual Cash Incentive Bonus. You will be eligible to receive an annual cash incentive bonus based upon the achievement of
annual performance goals or objectives established and measured by the Compensation Committee (the “Committee”) of the
Company’s Board of Directors (the “Board”) in its sole discretion. You shall have a target annual incentive bonus opportunity
equal to 60% of your annual base salary, payable in accordance with the Company’s annual cash incentive bonus program, as may
be amended from time to time (but in no event shall any actual bonus be paid later than March 15th of the calendar year
immediately following the year for which such compensation is earned). Actual bonus awards may pay below or above your target
opportunity, including a zero payout, based on your and the Company’s achievement of the applicable performance goals or
objectives. For the 2018 performance year, you will receive a guaranteed payout equal to your target opportunity, but prorated to
reflect the period during the year in which you were employed by the Company, provided that you remain employed with the
Company through the payment date of the 2018 bonus.
Initial Equity Award. Subject to approval by the Board, you will be eligible for an equity award of 600,000 Management
Incentive Units (MIUs), with the effective date of such grant to be the date of Board approval. Twenty-five percent (25%) of the
MIUs shall vest on the one-year anniversary of the grant date (the “initial vesting date”) with the remaining 75% of the MIUs
vesting on a monthly basis over the next 36 months following the initial vesting date, subject to your continued employment
with the Company on the applicable vesting date. If, on or prior to the one-year anniversary of your commencement of
employment with the Company a (l) change of control ("Change of Control") of the Company occurs whereby (i) there is a sale
of all or substantially all of the assets of the Company to an entity not wholly-owned by the Company or (ii) a merger or a
consolidation in which the Company is not the surviving corporation and the stockholders of the Company prior to the Change
of Control do not own 50% of the outstanding voting securities of the surviving corporation. or a parent thereof, and (2) within
one year following such Change of Control, your employment with the Company (a) is terminated by the Company without
cause or (b) is terminated by you following a material reduction in your responsibilities (which may include, but cannot be
exclusively limited to a change in title) or a change in your primary work location of more than 25 miles unless the change
would move you closer to your primary residence, provided that in the case of clause (b), you provide the Company with notice
of the event giving rise to your right to
3800 Golf Road, Suite 360 Rolling Meadows IL 60008
Exhibit 10.32
terminate employment within 30 days of the initial occurrence of the event, the Company has 30 days to cause such event and, if
uncured, you terminate your employment within 60 days following the expiration of the cure period (collectively "Qualifying
Termination"), then 50% of the MIUs granted to you under this Agreement shall vest in full. Following the expiration of such
one-year period, the MIUs granted to you under this Agreement shall vest in full in the event you experience a Qualifying
Termination within the one-year period following a Change of Control of the Company. You will receive the MIU award
agreement following your commencement of employment with the Company.
•
•
•
Severance. In the event your employment is terminated by the Company without cause, you will be eligible to receive 6 months of
base salary continuation following your termination of employment, subject to your execution and non-revocation of a customary
release of claims in favor of the Company.
Employee Benefits. You will be eligible to participate in the Company’s standard employee benefits including medical, dental,
life, 401(k), accidental life and dismemberment, and disability benefits, as in effect from time-to-time. Further information about
the Company’s current benefits offerings is available in your Welcome Packet. Participation in any benefit program is not to be
regarded as assurance of continued employment for any particular period of time.
Company Policies. You acknowledge that during your employment with the Company you will be subject to Company policies
including, without limitation, any clawback policy, insider trading policy, and stock ownership guidelines.
As a Cambium employee, you will be expected to maintain the confidentiality of all proprietary and other confidential information of the
Company and, as a condition of your employment, will be asked to enter into a Confidentiality, Invention Assignment, Non-Competition, and
Non-Solicitation Agreement. Among other things, it requires that you hold in confidence any proprietary information received as an
employee of Cambium and to assign to us any inventions that you make while employed by the Company. For the avoidance of doubt,
nothing contained in this Agreement or the Confidentiality, Invention Assignment, Non-Competition, and Non-Solicitation Agreement limits
your ability to report possible violations of law or regulation to, or file a charge or complaint with any federal, state or local governmental
agency or commission (“Government Agencies”). Further, nothing in this Agreement or the Confidentiality, Invention Assignment, Non-
Competition, and Non-Solicitation Agreement shall limit your ability under applicable law to (i) disclose in confidence trade secrets to
federal, state, and local government officials, or to an attorney, for the sole purpose of reporting or investigating a suspected violation of law,
(ii) disclose trade secrets in a document filed in a lawsuit or other proceeding, but only if the filing is made under seal and protected from
public disclosure or (iii) communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be
conducted by any Government Agency, including providing documents or other information, without notice to the Company.
It is the Company's policy not to infringe upon the proprietary information, trade secrets, or confidential information of third parties. In
addition, it is the Company's policy not to interfere with third parties' contractual or business relations. Accordingly, by signing this
Agreement you represent and warrant that you are not subject to any non-disclosure agreement (including any agreement concerning trade
secrets or confidential information owned by any other party), non-compete agreement, non-solicitation agreement, and/or any other
agreement that would prevent you from performing your duties for the Company and/or restrict your activities at Cambium.
Neither this Agreement nor the Confidentiality, Invention Assignment, Non-Competition, and Non-Solicitation Agreement constitute a
contract of employment for any specific period of time, but instead will create an “employment at will” relationship, meaning that either you
or the Company may terminate the employment
relationship at any time, for any lawful reason. In addition, nothing in this Agreement prohibits the Company from terminating or modifying
any of its compensation or benefits programs at any time. The offer of employment as described in this Agreement is contingent on
satisfactory completion of a criminal background check, an education verification to be administered by the Human Resources department
and your completion of other required and customary onboarding documentation.
Please confirm your acceptance of this Agreement in the space indicated and return this Agreement to me by June 28, 2018. Unless we agree
otherwise, this offer will expire if not accepted by that date. Should you have any questions about this Agreement, please do not hesitate to
contact me.
I look forward to having you join the team and to your contributions to the success of Cambium.
Exhibit 10.32
Atul Bhatnagar
President & CEO
Sincerely,
/s/ ATUL BHATNAGAR
ACCEPTED AND AGREED
June 24, 2018
______________________________________
Date
/s/ STEPHEN CUMMING
______________________________________
Signature
STEPHEN CUMMING
______________________________________
Print Name
Exhibit 10.33
March 19, 2020
Stephen Cumming
c/o Cambium Networks, Inc.
3800 Golf Road, Suite 360
Rolling Meadows, IL 60008
Dear Stephen,
This letter agreement serves as a modification to your existing offer letter (the “Offer Letter”) with Cambium Networks, Inc. (the
“Company”), dated as of June 27, 2018. The paragraph entitled “Severance” shall be replaced in its entirety with the following:
•
Severance. In the event your employment is terminated by the Company without cause prior to a Change in Control (as defined in
the Cambium Networks Corporation 2019 Share Incentive Plan), you shall receive six months of base salary continuation during
the six-month period following your termination of employment, with such payments to occur in equal monthly installments;
provided, however, in the event your employment is terminated by the Company (or its successor) without cause within 12 months
following a Change in Control, you shall receive (i) one-year of base salary, payable in equal monthly installments during the 12-
month period following your termination, (ii) a pro-rata portion of your annual bonus for the fiscal year in which your termination
occurs based on actual results for such year (determined by multiplying the amount of such bonus which would be due for the full
fiscal year by a fraction, the numerator of which is the number of days during the fiscal year of termination that you were
employed by the Company and the denominator of which is 365) payable at the same time bonuses for such year are paid to other
senior executives of the Company (but no later than March 15th following the conclusion of the fiscal year in which the bonus is
earned); and (iii) subject to your timely election of continuation coverage under the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended, continued participation in the Company’s group health plan (to the extent permitted under applicable law
and the terms of such plan) which covers you (and your eligible dependents) for a period of twelve (12) months at the Company’s
expense. The severance benefits shall be subject to your execution and non-revocation of a customary release of claims in favor of
the Company within the period specified by the Company (but in any event not to exceed 52 days following your termination) and
any payments that would be paid to you prior to the effectiveness of the release shall be delayed and paid to you in one installment
on the 60th day following your termination of employment. The payments under this paragraph are subject to your continued
compliance with your Confidentiality, Invention Assignment, Non-Competition, and Non-Solicitation Agreement.
In addition, Offer Letter shall be amended to add the following at the end thereof:
This Agreement is intended to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended
(the “Code”), and shall be interpreted and construed consistently with such intent. The payments to you pursuant to this
Agreement are also intended to be exempt from Section 409A of the Code to the maximum extent possible, under either the
separation pay exemption pursuant to Treasury regulation §1.409A-1(b)(9)(iii) or as short-term deferrals pursuant to Treasury
regulation §1.409A-1(b)(4), and for such purposes, each installment paid to you under this Agreement shall be considered a
separate payment. In the event the terms of this Agreement would subject you to taxes or penalties under Section 409A of the
Code (“409A Penalties”), the Company and you shall cooperate
Page 2 of 2
diligently to amend the terms of the Agreement to avoid such 409A Penalties, to the extent possible; provided that in no event shall
the Company be responsible for any 409A Penalties that arise in connection with any amounts payable under this Agreement. To
the extent any amounts under this Agreement are payable by reference to your “termination of employment” such term and similar
terms shall be deemed to refer to your “separation from service,” within the meaning of Section 409A of the
Code. Notwithstanding any other provision in this Agreement, if you are a “specified employee,” as defined in Section 409A of
the Code, as of the date of your separation from service, then to the extent any amount payable under this Agreement (a)
constitutes the payment of nonqualified deferred compensation, within the meaning of Section 409A of the Code, (b) is payable
upon your separation from service and (c) under the terms of this Agreement would be payable prior to the six-month anniversary
of your separation from service, such payment shall be delayed until the earlier to occur of (i) the six-month anniversary of the
separation from service or (ii) the date of your death. In addition, each payment of nonqualified deferred compensation, within the
meaning of Section 409A of the Code, which is conditioned upon your execution of a release and which is to be paid during a
designated period that begins in a first taxable year and ends in a second taxable year shall be paid in the second taxable year.
Except as amended by this letter agreement, the Offer Letter remains in full force and effect in accordance with its terms.
Sincerely,
/s/ATUL BHATNAGAR
Cambium Networks, Inc.
ACCEPTED AND AGREED
/s/STEPHEN CUMMING
Stephen Cumming
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Cambium Networks Corporation:
We consent to the incorporation by reference in the registration statement (No. 333-232341) on Form S-8 of Cambium Networks Corporation of our report
dated May 3, 2019, except for note 12 and note 13, as to which the date is June 12, 2019, with respect to the consolidated balance sheet of Cambium
Networks Corporation as of December 31, 2018, the related consolidated statements of operations, comprehensive income/(loss), shareholders’
(deficit)/equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes, which report appears in the
December 31, 2019 annual report on Form 10-K of Cambium Networks Corporation.
/s/ KPMG LLP
London, United Kingdom
March 23, 2020
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
The Board of Directors
Cambium Networks Corporation:
We consent to the incorporation by reference in the registration statement (No. 333-232341) on Form S-8 of Cambium Networks Corporation of our report
dated March 23, 2020, with respect to the consolidated balance sheet of Cambium Networks Corporation as of December 31, 2019, the related consolidated
statements of operations, comprehensive loss, shareholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes
(collectively, the consolidated financial statements), which report appears in the December 31, 2019 annual report on Form 10-K of Cambium Networks
Corporation.
Our report refers to a change to the lease accounting principle as a result of the adoption of Accounting Standards Codification Topic 842, Leases.
/s/ KPMG LLP
Chicago, Illinois
March 23, 2020
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Atul Bhatnagar, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Cambium Networks Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 23, 2020
By:
/s/ ATUL BHATNAGAR
Atul Bhatnagar
Chief Executive Officer
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Stephen Cumming, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Cambium Networks Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 23, 2020
By:
/s/ STEPHEN CUMMING
Stephen Cumming
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Cambium Networks Corporation (the “Company”) on Form 10-K for the year ended December 31, 2019 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906
of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
Date: March 23, 2020
By:
/s/ ATUL BHATNAGAR
Atul Bhatnagar
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Cambium Networks Corporation (the “Company”) on Form 10-K for the year ended December 31, 2019 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906
of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
Date: March 23, 2020
By:
/s/ STEPHEN CUMMING
Stephen Cumming
Chief Financial Officer