Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The Company prepared its condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the unaudited information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

There have been no changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K that have had a material impact on the Company’s condensed consolidated financial statements and related notes except for the adoption of the accounting standard update related to Improvements to Employee Share-Based Payment Accounting, which amends Compensation - Stock Compensation and the accounting standard update related to restricted cash, which affected the presentation in the condensed statements of cash flows.

Certain prior periods’ amounts were reclassified to conform to the current year’s presentation. None of these reclassifications impacted the reported net income (loss) or earnings per share for any of the periods presented.

The Company's fiscal year is 52 or 53 weeks and ends on the last Saturday in December. Fiscal 2016 was a 53-week fiscal year ending on December 31, 2016; the first quarter was a 14-week quarter ended on April 2, 2016 and each subsequent quarter was a 13-week quarter. Fiscal 2017 is a 52-week fiscal year ending on December 30, 2017, with each quarter therein being a 13-week quarter.

Unaudited Interim Financial Statements

The accompanying unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary to fairly state the Company’s financial position as of April 1, 2017, its results of operations and comprehensive income (loss) for the three months ended April 1, 2017 and April 2, 2016, respectively, and cash flows for the three months ended April 1, 2017 and April 2, 2016, respectively. The financial data and the other financial information disclosed in the accompanying notes to the condensed consolidated financial statements related to these three month periods are also unaudited. The fiscal year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The statement of income for the three months ended April 1, 2017 is not necessarily indicative of the results to be expected for the full fiscal year or any other future periods.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. On an ongoing basis, the Company evaluates its estimates, including but not limited to those related to revenue recognition, allowance for doubtful accounts, warranty reserve, excess and obsolete inventory write-downs, stock-based compensation expense, depreciable useful lives and income taxes. The Company bases its estimates on historical experience, projections for future performance and other assumptions that it believes to be reasonable under the circumstances. Actual results could differ materially from those estimates.

Concentrations

The Company operates in highly competitive and rapidly changing markets that could negatively impact the Company’s operating results. A number of components that meet the Company’s manufacturing requirements are available only from single source suppliers. In addition, the Company relies on two contract manufacturers to manufacture a substantial majority of its products. The inability of its single source suppliers and contract manufacturers to provide the Company with adequate supplies of high-quality components and products could cause a delay in order fulfillment, which could adversely affect the Company’s revenue, cost of revenue and operating results.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. The majority of the Company's cash, cash equivalents and short-term investments are held in, or managed by a limited number of major financial institutions in the United States that management believes are creditworthy. Such deposits may exceed the insured limits provided on them. The Company mitigates credit risk associated with its accounts receivable by performing ongoing credit evaluations of its customers and determines if it needs to establish an allowance for doubtful accounts for estimated losses based on management’s assessment of the collectability of customer accounts.

The following customers represented more than 10% or more of total revenue or accounts receivable:



	Three Months Ended
	April 1, 2017		April 2, 2016
Percent of Revenue:
Customer A (distributor)	25	%	35	%
Customer B (distributor)	18	%	24	%
Customer C (end user)	18	%	14	%



	As of
	April 1, 2017		December 31, 2016
Percent of Accounts Receivable:
Customer A (distributor)	17	%	32	%
Customer B (distributor)	18	%	16	%
Customer C (end user)	24	%	10	%

Recent Accounting Pronouncements

New Accounting Updates Recently Adopted

The Company has adopted the accounting standard update related to Improvements to Employee Share-Based Payment Accounting, which amends Compensation – Stock Compensation during the first quarter of fiscal 2017. Specifically, the Company elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The net cumulative effect of the change was recognized as a $3.6 million reduction to retained earnings as of January 1, 2017. Stock-based excess tax benefits or shortfalls are now reflected in the results of operations as a component of the income tax benefit (provision), whereas they previously were recognized in equity. The cumulative impact of this change was recorded as a deferred tax asset of $7.6 million for the previously unrecognized excess tax benefits with an adjustment of $7.1 million and $0.5 million to retained earnings and a valuation allowance for a certain jurisdiction, respectively. Additionally, the Company's condensed consolidated statements of cash flows now includes excess tax benefits as an operating activity with the prior period adjusted accordingly.

The Company has adopted the restricted cash guidance, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods presented in the consolidated statements of cash flows in the first quarter of fiscal 2017 using a retrospective transition method for each period presented.

Recent Accounting Updates Not Yet Effective

In May 2014, the Financial Accounting Standards Board (the "FASB") issued an accounting standards update related to revenue from contracts with customers, which supersedes the revenue recognition requirements in the current Accounting Standards Codification. This standard is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB voted to defer the effective date of this standard by one year. Additionally, in March 2016 the FASB issued additional information that clarifies the implementation guidance on principal versus agent considerations. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The new standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company did not elect to early adopt, and accordingly, it will adopt the new standard effective for its fiscal year 2018.

The Company is evaluating the impact of the new standard on its accounting policies, processes, and system requirements and currently plans to adopt using the full retrospective approach. However, a final decision regarding the adoption method has not been finalized at this time. The Company's final determination will depend on a number of factors, such as the significance of the impact of the new standard on our financial results, system readiness, including that of software procured from third-party providers, and its ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements, as necessary.

Revenue recognition for non-essential software is currently accounted for under the Software Revenue Recognition guidance, which entails allocating the arrangement consideration to deliverables that have established vendor specific objective evidence Value (“VSOE”) or fair value and the residual to other deliverables based on third party evidence or best estimates of selling prices. Revenue from each deliverable is then recognized when all requirements are met for that specific deliverable. The new standard does not retain the concept of VSOE, the Company preliminarily believes it will use the Standalone Selling Price to determine the appropriate amount to be allocated to each separate performance obligation using the Relative Selling Price approach. As part of the Company's preliminary evaluation, it has considered the impact of the guidance relating to Other Assets and Deferred Costs; Contracts with customers, and the interpretations of the FASB Transition Resource Group for Revenue Recognition ("TRG") from their November 7, 2016 meeting with respect to capitalization and amortization of incremental costs of obtaining a contract. As a result of this new guidance, the Company preliminarily believes that it will capitalize certain costs of obtaining the contract, including additional sales commissions, as the new cost guidance, as interpreted by the TRG, requires the capitalization of all incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided it expects to recover the costs. Under the Company's current accounting policy, it expenses the commission costs immediately as incurred.

While the Company continues to assess the potential impacts of the new standard, it anticipates this standard could have a material impact on its consolidated financial statements. However, the Company cannot reasonably estimate quantitative information related to the impact of the new standard on its consolidated financial statements at this time.

In February 2016, the FASB issued an accounting standard update which amends the existing accounting standards for leases. Consistent with current guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize assets and liabilities for all leases with lease terms of more than 12 months. The effective date of this update will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 using a modified retrospective transition method with early adoption permitted. The Company expects the standard to have a material impact on its assets and liabilities for the addition of right-of-use assets and lease liabilities, but the Company does not expect it to have a material impact on its results of operations or liquidity.

In June 2016, the FASB issued new guidance that changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The effective date of this standard will be for annual periods ending after December 15, 2019, and interim periods within that reporting period. Early adoption is permitted starting in annual periods ending after December 15, 2018. The Company is evaluating the impact of this guidance on its consolidated financial statements.

In October 2016, the FASB issued new guidance that requires a reporting entity to recognize the tax expense from intra-entity asset transfers of assets other than inventory in the selling entity’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buying entity’s jurisdiction would also be recognized at the time of the transfer. The new guidance will likely impact reporting entities’ effective tax rates. The new guidance is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The amendment should be adopted using the modified retrospective approach with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. The Company is evaluating the impact of this guidance on its consolidated financial statements.