UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended ~~September~~March 3031, ~~2018~~2019

☐	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 001-36017

Control4 Corporation

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		42-1583209 (I.R.S. Employer Identification No.)

11734 S. Election Road Salt Lake City, Utah (Address of principal executive offices)		84020 (Zip Code)

(801) 523-3100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	CTRL	The NASDAQ Stock Market LLC

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, a 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 ☐ Accelerated filer ☒ Non‑accelerated filer ☐ Smaller reporting company ☐ Emerging growth 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 ☒

On ~~October~~May 263, ~~2018~~2019, 26,~~708~~660,~~202~~960 shares of the registrant’s Common Stock, $0.0001 par value, were outstanding.

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Control4 Corporation

Index

Part I — Financial Information
Item 1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2018 and December 31, 2017	2
	Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2019 and December 31, 2018	2
	Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017	3
	Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2019 and 2018	3
	Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three Months Ended March 31, 2019 and 2018	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2018 and 2017	5
	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the Three Months Ended March 31, 2019 and 2018	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
	Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2019 and 2018	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 4.	Controls and Procedures	40
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	42
Part II — Other Information
Item 1.	Legal Proceedings	4143
Item 1A.	Risk Factors	4143
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6368
Item 6.	Exhibits	6569
Signatures		6670

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Control4 Corporation

PART I — Financial Information

ITEM 1. Condensed Consolidated Financial Statements

CONTROL4 CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	September 30,		December 31,
	March 31,		December 31,
	2018		2017
	2019		2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	3519,~~373~~828	$	2940,~~761~~395
Restricted cash		264		~~273~~259
Short-term investments		5448,~~544~~789		4452,~~057~~794
Accounts receivable, net		3430,~~157~~316		2933,~~925~~016
Inventories		4145,~~621~~867		3742,~~171~~684
Prepaid expenses and other current assets		59,~~058~~633		46,~~369~~100
Total current assets		~~171~~154,~~017~~697		~~145~~175,~~556~~248
Property and equipment, net		89,~~684~~540		79,~~337~~663
Long-term investments		1,085		12,038
Operating lease right-of-use assets		10,567		—
Intangible assets, net		21,962		26,081
Long-term investments		3,201		—
Goodwill		21,598		21,867
Intangible assets, net		25,389		20,651
Other assets		1,330		1,618
Goodwill		31,403		21,530
Total assets	$	225,676	$	214,497
Other assets		22,560		25,456
Total assets	$	257,357	$	252,548
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	2623,~~932~~083	$	2526,~~654~~213
Accrued liabilities		87,~~431~~151		109,~~835~~142
Current portion of deferred revenue		5,~~121~~588		45,~~538~~507
Total current liabilities		40,484		41,027
Current operating lease liability		3,924		—
Other long-term liabilities		4,500		3,942
Total current liabilities		39,746		40,862
Total liabilities		44,984		44,969
Long-term operating lease liability		7,924		—
Commitments and contingencies (Note 11)		—		—
Other long-term liabilities		5,838		5,339
Total liabilities		53,508		46,201
Commitments and contingencies (Note 14)		—		—
Stockholders’ equity:
Common stock, $0.0001 par value; 500,000,000 shares authorized; 26,707,025 and 25,832,895 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively		3		3
Common stock, $0.0001 par value; 500,000,000 shares authorized; 26,655,506 and 26,516,912 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively		3		3
Additional paid-in capital		~~240~~234,~~394~~999		~~242~~235,~~281~~529
Accumulated deficit		(5830,~~908~~355)		(7228,~~225~~385)
Accumulated other comprehensive loss		(~~797~~798)		(~~531~~800)
Total stockholders’ equity		~~180~~203,~~692~~849		~~169~~206,~~528~~347
Total liabilities and stockholders’ equity	$	~~225~~257,~~676~~357	$	~~214~~252,~~497~~548

See accompanying notes to condensed consolidated financial statements (unaudited).

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CONTROL4 CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Three Months Ended

~~Nine Months Ended~~

September 30,

March 31,

2018

2017

2018

2017

2019

2018

(unaudited)

~~(unaudited)~~

Revenue

7160,~~594~~425

6459,~~583~~149

~~199,971~~

~~176,043~~

Cost of revenue

3431,~~484~~142

3128,~~520~~410

~~95,760~~

~~86,572~~

Gross margin

3729,~~110~~283

3330,~~063~~739

~~104,211~~

~~89,471~~

Operating expenses:

Research and development

11,~~144~~817

10,~~347~~940

~~32,595~~

~~30,246~~

Sales and marketing

13,~~520~~342

12,~~692~~535

~~38,608~~

~~36,082~~

General and administrative

67,~~913~~117

56,~~109~~293

~~19,534~~

~~16,413~~

Total operating expenses

3132,~~577~~276

2829,~~148~~768

~~90,737~~

~~82,741~~

Income from operations

5,533

4,915

13,474

6,730

Income (loss) from operations

(2,993)

971

Other income (expense), net:

Interest, net

~~327~~344

~~125~~236

~~819~~

~~224~~

Other income (expense), net

(8287)

79(357)

~~(864)~~

~~183~~

Total other income (expense), net

~~245~~257

~~204~~(121)

~~(45)~~

~~407~~

Income before income taxes

5,778

5,119

13,429

7,137

Income (loss) before income taxes

(2,736)

850

Income tax expense (benefit)

112

(2,459)

Income tax benefit

(766)

(116)

Net income

5,711

5,034

13,317

9,596

Net income (loss)

(1,970)

966

Net income per common share:

Net income (loss) per common share:

Basic

(0.2207)

0.2004

~~0.51~~

~~0.39~~

Diluted

(0.2107)

0.1904

~~0.48~~

~~0.36~~

Weighted-average number of shares:

Basic

26,~~397~~563

25,~~050~~904

~~26,116~~

~~24,551~~

Diluted

2726,~~671~~563

27,~~122~~526

~~27,489~~

~~26,393~~

See accompanying notes to condensed consolidated financial statements (unaudited).

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CONTROL4 CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

	Three Months Ended				~~Nine Months Ended~~
	September 30,				September 30,
	March 31,
	2018		2017		2018		2017
	2019		2018
	(unaudited)				~~(unaudited)~~
Net income	$	5,711	$	5,034	$	13,317	$	9,596
Net income (loss)	$	(1,970)	$	966
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax		(~~105~~53)		(~~155~~51)		~~(263)~~		~~383~~
Net unrealized gains (losses) on available-for-sale investments, net of tax		3255		6(64)		~~(3)~~		3
Total other comprehensive income (loss)		~~(73)~~2		(~~149~~115)		~~(266)~~		~~386~~
Comprehensive income	$	5,638	$	4,885	$	13,051	$	9,982
Comprehensive income (loss)	$	(1,968)	$	851

See accompanying notes to condensed consolidated financial statements (unaudited).

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CONTROL4 CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH~~STOCKHOLDERS’ ~~FLOWS~~EQUITY

(in thousands, except share data)

	Nine Months Ended
	September 30,
	2018		2017
	(unaudited)
Operating activities
Net income	$	13,317	$	9,596
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		2,852		2,703
Amortization of intangible assets		4,286		3,885
Loss (gain) on disposal of fixed assets		5		(1)
Provision for doubtful accounts		760		491
Investment discount and premium amortization		(349)		(57)
Stock-based compensation		10,085		9,191
Tax benefit from business acquisition		—		(2,415)
Changes in assets and liabilities:
Accounts receivable, net		(5,353)		(4,890)
Inventories		(5,015)		(5,347)
Prepaid expenses and other current assets		(644)		390
Other assets		255		(1,018)
Accounts payable		1,816		3,495
Accrued liabilities		(1,223)		(1,675)
Deferred revenue		574		870
Other long-term liabilities		622		171
Net cash provided by operating activities		21,988		15,389
Investing activities
Purchases of available-for-sale investments		(51,538)		(52,472)
Proceeds from sales of available-for-sale investments		1,000		1,950
Proceeds from maturities of available-for-sale investments		51,350		34,580
Purchases of property and equipment		(3,914)		(3,003)
Business acquisitions, net of cash acquired		(1,411)		(7,881)
Net cash used in investing activities		(4,513)		(26,826)
Financing activities
Proceeds from exercise of options for common stock		10,729		11,290
Payments for withholding taxes related to net share settlement of equity awards		(6,378)		(4,591)
Repurchase of common stock		(15,957)		(1,821)
Payment of debt issuance costs		(113)		—
Net cash (used in) provided by financing activities		(11,719)		4,878
Effect of exchange rate changes on cash and cash equivalents		(153)		397
Net change in cash and cash equivalents		5,603		(6,162)
Unrestricted and restricted cash and cash equivalents at beginning of period		30,034		35,060
Unrestricted and restricted cash and cash equivalents at end of period	$	35,637	$	28,898
Supplemental disclosure of cash flow information
Cash paid for interest	$	105	$	65
Cash paid for taxes		988		1,120
Supplemental schedule of non-cash investing and financing activities
Business acquisitions holdback liability		—		1,068
Purchases of property and equipment financed by accounts payable		689		396
Net unrealized gains (losses) on available-for-sale investments		(3)		3

(unaudited)


	Stockholders’ Equity
											Accumulated
	Common Stock			Treasury Stock			Additional				Other		Total
	Number of			Number of			Paid-In		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Deficit		(Loss) Income		Equity
Balance at December 31, 2018	26,516,912	$	3	—	$	—	$	235,529	$	(28,385)	$	(800)	$	206,347
Net loss	—		—	—		—		—		(1,970)		—		(1,970)
Other comprehensive income	—		—	—		—		—		—		2		2
Stock-based compensation	34,854		—	—		—		3,529		—		—		3,529
Issuance of common stock upon exercise of stock options and vesting of restricted stock	243,522		—	—		—		(1,537)		—		—		(1,537)
Repurchase of common stock for treasury	(139,782)		—	139,782		(2,522)		—		—		—		(2,522)
Retirement of treasury stock	—		—	(139,782)		2,522		(2,522)		—		—		—
Balance at March 31, 2019	26,655,506	$	3	—	$	—	$	234,999	$	(30,355)	$	(798)	$	203,849


	Stockholders’ Equity
											Accumulated
	Common Stock			Treasury Stock			Additional				Other		Total
	Number of			Number of			Paid-In		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Deficit		(Loss) Income		Equity
Balance at December 31, 2017	25,832,895	$	3	—	$	—	$	242,281	$	(72,226)	$	(531)	$	169,527
Net income	—		—	—		—		—		966		—		966
Other comprehensive loss	—		—	—		—		—		—		(115)		(115)
Stock-based compensation	—		—	—		—		2,921		—		—		2,921
Issuance of common stock upon exercise of stock options and vesting of restricted stock	475,399		—	—		—		(1,525)		—		—		(1,525)
Repurchase of common stock for treasury	(300,000)		—	300,000		(7,448)		—		—		—		(7,448)
Retirement of treasury stock	—		—	(300,000)		7,448		(7,448)		—		—		—
Balance at March 31, 2018	26,008,294	$	3	—	$	—	$	236,229	$	(71,260)	$	(646)	$	164,326

See accompanying notes to condensed consolidated financial statements (unaudited).

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CONTROL4 CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Three Months Ended
	March 31,
	2019		2018
	(unaudited)
Operating activities
Net income (loss)	$	(1,970)	$	966
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation expense		1,109		969
Amortization of intangible assets		1,620		1,446
Loss on disposal of fixed assets		—		14
Provision for doubtful accounts		8		71
Investment discount and premium amortization, net		(169)		(83)
Stock-based compensation		3,529		3,335
Changes in assets and liabilities:
Accounts receivable, net		2,064		3,235
Inventories		(1,741)		(2,003)
Prepaid expenses and other current assets		(3,034)		(916)
Other assets		1,784		194
Accounts payable		(3,887)		(3,923)
Accrued liabilities		(3,395)		(3,083)
Deferred revenue		25		163
Other long-term liabilities		(650)		84
Net cash provided by (used in) operating activities		(4,707)		469
Investing activities
Purchases of available-for-sale investments		(27,171)		(19,501)
Proceeds from sales of available-for-sale investments		1,800		1,000
Proceeds from maturities of available-for-sale investments		26,399		18,200
Purchases of property and equipment		(1,171)		(892)
Business acquisitions, net of cash acquired		(11,695)		—
Net cash used in investing activities		(11,838)		(1,193)
Financing activities
Proceeds from exercise of options for common stock		310		2,089
Payments for withholding taxes related to net share settlement of equity awards		(1,847)		(3,614)
Repurchase of common stock		(2,522)		(7,448)
Payment of debt issuance costs		—		(113)
Net cash used in financing activities		(4,059)		(9,086)
Effect of exchange rate changes on cash and cash equivalents		42		48
Net change in cash and cash equivalents		(20,562)		(9,762)
Unrestricted and restricted cash and cash equivalents at beginning of period		40,654		30,034
Unrestricted and restricted cash and cash equivalents at end of period	$	20,092	$	20,272
Supplemental disclosure of cash flow information
Cash paid for interest	$	81	$	25
Cash paid for taxes		184		167
Supplemental schedule of non-cash investing and financing activities
Settlement of accounts receivable and other assets in business combinations		4,250		—
Business acquisitions holdback liability		1,310		—
Purchases of property and equipment financed by accounts payable		61		207
Net unrealized gains (losses) on available-for-sale investments		55		(64)

See accompanying notes to condensed consolidated financial statements (unaudited)

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Control4 Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Description of Business and Summary of Significant Accounting Policies

Control4 Corporation (‘‘Control4’’ or the ‘‘Company’’) is a leading provider of professionally-installed smart home and business solutions that are designed to personalize and enhance how consumers engage with an ever-changing connected world. ~~Our~~The Company’s entertainment, smart lighting, comfort and convenience, safety and security, and networking solutions unlock the potential of connected devices, making entertainment systems easier to use and more accessible, homes and businesses more comfortable and energy efficient, and individuals more connected and secure. The Company’s premium smart home and small business solutions provide consumers with the ability to integrate audio, video, lighting, temperature, security, communications, network management and other functionalities into a unified automation solution, customized to match their lifestyles and business needs. The Company’s advanced software, delivered through the controller and user-interface products together with various cloud services, power this customized experience, enabling cohesive interoperability with thousands of connected Control4 and third-party devices. The Company was incorporated in the state of Delaware on March 27, 2003.

Unaudited Interim Financial Statements

The accompanying condensed consolidated financial statements are unaudited. These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to present fairly the Company’s financial position, results of operations and cash flows. The results of operations for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018~~2019, or any other future interim or annual period.

These unaudited ~~interim~~ condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K filed with the SEC on February 1511, ~~2018~~2019. The December 31, ~~2017~~2018 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date.

Basis of Presentation

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

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as one operating segment.

Concentrations of Risk

The Company’s accounts receivable are derived from revenue earned from its worldwide network of independent dealers and distributors. The Company’s sales to dealers and distributors located outside the United States are generally denominated in U.S. dollars, except for sales to dealers and distributors located in Australia, Canada, the ~~United~~European ~~Kingdom~~Union, ~~Canada~~New Zealand, ~~Australia~~Switzerland, and the ~~European~~United ~~Union~~Kingdom, which are generally denominated in ~~pounds~~Australian ~~sterling~~dollars, Canadian dollars, ~~Australian~~euros, New Zealand dollars, Swiss francs, and ~~euros~~pounds sterling, respectively. There were no individual account balances greater than 10% of total accounts receivable as of ~~September~~March 3031, ~~2018~~2019 and December 31, ~~2017~~2018.

~~No dealer or distributor accounted for more than 10% of total revenue for the three and nine months ended September 30, 2018 and 2017.~~7

While the Company partners with many manufacturers, generally one manufacturer is our sole source for a particular product or product family. A significant disruption in the operations of one of these manufacturers would

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~~impact~~ No ~~the~~dealer ~~production~~or ofdistributor ~~the~~accounted ~~Company’s products~~ for amore ~~substantial~~than ~~period~~10% of ~~time,~~total ~~which~~revenue ~~could~~for ~~have~~the athree ~~material~~months ~~adverse~~ended ~~effect~~March ~~on the Company’s business~~31, ~~financial~~2019 ~~condition~~ and ~~results of operations~~2018.

While the Company partners with many manufacturers, generally one manufacturer is the Company’s sole source for a particular product or product family. A significant disruption in the operations of one of these manufacturers would impact the production of the Company’s products for a substantial period of time, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

Use of Accounting Estimates

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, sales returns, provisions for doubtful accounts, product warranty, inventory obsolescence, litigation, determination of fair value of stock options, deferred tax asset valuation allowances and income taxes. Actual results may differ from those estimates.

Limited Product Warranties

The Company provides its customers a limited product warranty of two, three, or ten years depending on product type and brand. The limited product warranties require the Company, at its option, to repair or replace defective products during the warranty period at no cost to the customer or refund the purchase price. The Company estimates the costs that may be incurred to replace, repair or issue a refund for defective products and records a reserve at the time revenue is recognized. Factors that affect the Company’s warranty liability include the cost of the products sold, the Company’s historical experience, and management’s judgment regarding anticipated rates of product warranty returns, net of refurbished products. The Company assesses the adequacy of its recorded warranty liability each period and makes adjustments to the liability as necessary. Warranty costs accrued include amounts accrued for products at the time of shipment, adjustments for changes in estimated costs for warranties on products shipped in the period, and changes in estimated costs for warranties on products shipped in prior periods. It is not practicable for the Company to determine the amounts applicable to each of these components.

The following table presents the changes in the product warranty liability for the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019 (in thousands):

	Warranty Liability
Balance at December 31, 2017	$	2,032
Balance at December 31, 2018	$	2,524
Warranty costs accrued		~~2,452~~905
Warranty claims		(21,~~375~~030)
Balance at September 30, 2018	$	2,109
Balance at March 31, 2019	$	2,399

Net Income (Loss) Per Common Share

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares outstanding and potentially dilutive common shares outstanding during the period that have a dilutive effect on net income (loss) per share. Potentially dilutive common shares result from the assumed exercise of outstanding stock options and settlement of restricted stock units.

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The following table presents the reconciliation of the numerator and denominator used in the calculation of basic and diluted net income (loss) per share (in thousands):

	Three Months Ended				~~Nine Months Ended~~
	September 30,				September 30,
	March 31,
	2018		2017		2018		2017
	2019		2018
Numerator:
Net income	$	5,711	$	5,034	$	13,317	$	9,596
Net income (loss)	$	(1,970)	$	966
Denominator:
Weighted average common stock outstanding for basic net income per common share		26,397		25,050		26,116		24,551
Weighted average common stock outstanding for basic net income (loss) per common share		26,563		25,904
Effect of dilutive securities—stock options and restricted stock units		~~1,274~~—		21,~~072~~622		~~1,373~~		~~1,842~~
Weighted average common shares and dilutive securities outstanding		2726,~~671~~563		27,~~122~~526		~~27,489~~		~~26,393~~

Potentially dilutive securities, including common equivalent shares, in which the assumed proceeds exceed the average market price of common stock for the applicable period, were not included in the calculation of diluted net income (loss) per share as their impact would be anti-dilutive. The following weighted-average common stock equivalents were anti-dilutive and therefore were excluded from the calculation of diluted net income (loss) per share (in thousands):

	Three Months Ended		~~Nine Months Ended~~
	September 30,		September 30,
	March 31,
	2018	2017	2018	2017
	2019	2018
Options to purchase common stock	—1,065	23—	—	~~881~~
Restricted stock units	71,114	—166	~~122~~	6
Total	72,179	23166	~~122~~	~~887~~

Restricted Cash

Restricted cash as of ~~September~~March 3031, ~~2018~~2019 and December 31, ~~2017~~2018 is composed of a guarantee made by the Company’s subsidiary in the United Kingdom to HM Revenue & Customs related to a customs duty deferment account.

~~Recent Accounting Pronouncements~~Leases

In ~~August~~February ~~2018~~2016, the ~~SEC~~FASB ~~adopted~~issued ~~the~~ASU ~~final rule under SEC Release No. 33~~2016-~~10532~~02, “~~Disclosure~~Leases ~~Update~~(Topic ~~and Simplification~~842),” ~~amending~~which ~~certain~~supersedes ~~disclosure~~the ~~requirements~~guidance ~~that~~in ~~were~~ASC ~~redundant~~840, ~~duplicative, overlapping, outdated or superseded~~“Leases.” InThe ~~addition,~~guidance ~~the~~requires ~~amendments~~balance ~~expanded~~sheet ~~the~~recognition ~~disclosure~~for ~~requirements~~assets onand ~~the~~liabilities ~~analysis~~associated ofwith ~~stockholders’~~rights ~~equity~~and ~~for~~obligations ~~interim~~created ~~financial~~by ~~statements.~~leases ~~Under~~with ~~the~~terms ~~amendments,~~greater anthan ~~analysis~~twelve ofmonths. ~~changes~~The inCompany ~~each~~adopted ~~caption of stockholders’ equity presented in~~ the ~~balance~~standard ~~sheet~~effective ~~must~~January be1, ~~provided~~2019 inand aelected ~~note~~the orpackage ~~separate statement. This analysis should present a reconciliation~~ of ~~the~~practical ~~beginning~~expedients ~~balance~~available tounder the ~~ending~~standard. The ~~balance~~Company ofalso ~~each~~elected ~~period~~to ~~for~~apply ~~which~~the asimplified ~~statement~~transition ofoption ~~comprehensive~~that ~~income~~allows isentities ~~required~~ to benot ~~filed.~~apply ~~This~~the ~~final~~new ~~rule~~leases isstandard ~~effective~~in asthe ofcomparative ~~November~~periods 5,presented ~~2018.~~in ~~The~~financial ~~Company~~statements ~~does~~in ~~not expect~~ the ~~adoption~~year of ~~this~~adoption. ~~final~~Internal ~~rule~~controls to have abeen ~~material~~implemented ~~impact~~to onenable the ~~consolidated~~preparation of financial ~~statements~~information on adoption.

InThe ~~June~~adoption ~~2018,~~of the ~~FASB~~standard ~~issued~~resulted ~~ASU~~in ~~2018~~recording right-~~07,~~of-use ~~“Compensation – Stock Compensation~~ (~~Topic 718~~“ROU”): ~~Improvements~~assets toof ~~Nonemployee~~$10.0 ~~Share-Based~~million ~~Payment~~and ~~Accounting,”~~lease ~~which~~liabilities ~~expands the scope~~ of ~~Topic~~$11.9 ~~718~~million toas ~~include~~of ~~all~~January ~~share-based~~1, ~~payment~~2019. ~~transactions~~The ~~for~~ROU ~~acquiring~~assets ~~goods~~are ~~and~~lower ~~services~~than ~~from~~the ~~non-employees. This~~lease ~~pronouncement~~liabilities isas ~~effective~~existing ~~for~~deferred ~~fiscal~~rent ~~years,~~ and ~~for~~lease ~~interim~~incentive ~~periods~~liabilities ~~within~~were ~~those~~recorded ~~fiscal~~against ~~years,~~the ~~beginning~~right-of-use ~~after~~assets ~~December~~at ~~15,~~adoption ~~2018,~~in accordance with ~~early~~the ~~adoption permitted~~standard. The ~~Company~~standard ~~elected~~did tonot ~~early-adopt~~materially ~~this~~affect ~~standard~~our incondensed ~~the~~consolidated ~~current~~statements ~~period; the adoption~~ of ~~this~~operations ~~standard~~or ~~did~~condensed ~~not~~consolidated ~~impact~~statements ~~the~~of ~~consolidated~~cash ~~financial statements~~flows.

InThe ~~November~~Company ~~2016,~~determines ~~the~~if ~~FASB~~an ~~issued~~arrangement ~~ASU~~is ~~2016-18, “Statement~~a oflease ~~Cash~~at ~~Flows~~inception. ~~(Topic~~Operating ~~230):~~lease ~~Restricted~~activity ~~Cash,”~~is ~~which~~included ~~provides amendments to current guidance to address the classifications and presentation of changes~~ in ~~restricted~~operating ~~cash~~lease ~~in the statement~~ right-of-use ~~cash flows. The effective date for the standard is for fiscal years beginning after December 15~~assets, ~~2017.~~and ~~The~~current ~~Company~~and ~~adopted~~long-term ~~the~~operating ~~standard~~lease ~~effective~~liabilities ~~January~~on ~~1, 2018;~~ the ~~adoption~~condensed ofconsolidated ~~this~~balance ~~standard~~sheets ~~did~~for ~~not~~leases ~~have~~with aterms ~~material~~greater ~~impact~~than on12 ~~the consolidated financial statements~~months.

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InOperating ~~October~~lease ~~2016,~~ROU ~~the~~assets ~~FASB~~and ~~issued~~operating ~~ASU~~lease ~~2016-16,~~liabilities ~~“Income~~are ~~Taxes~~recognized ~~(Topic~~based ~~740):~~on ~~Intra-Entity~~the ~~Transfers~~present value of ~~Assets~~the ~~Other~~future ~~Than~~minimum ~~Inventory.”~~lease ~~The~~payments ~~amendments~~over inthe ~~this~~lease ~~update~~term ~~will~~at ~~require~~commencement ~~recognition~~date. ofAs ~~current~~most ~~and~~of ~~deferred~~the ~~income~~leases ~~taxes~~do ~~resulting~~not ~~from~~provide an ~~intra-entity~~implicit ~~transfer~~rate, ofthe anCompany ~~asset~~uses ~~other~~its ~~than~~incremental ~~inventory~~borrowing ~~when~~rate based on information available at the ~~transfer~~commencement ~~occurs~~date in determining the present value of future payments. ~~This~~The ~~update~~operating islease ~~effective~~ROU ~~for~~asset ~~annual~~also ~~and~~includes ~~interim~~any ~~periods~~lease ~~beginning~~payments ~~after~~made ~~December~~and ~~15,~~excludes ~~2017.~~lease ~~The~~incentives ~~Company~~and ~~adopted~~initial ~~the~~direct ~~standard~~costs ~~effective~~incurred. ~~January~~Lease 1,terms ~~2018;~~may ~~the~~include ~~adoption~~options ofto ~~this~~extend ~~standard~~or ~~did~~terminate ~~not~~the ~~have~~lease awhen ~~material~~its ~~impact~~reasonably oncertain the ~~consolidated~~Company ~~financial~~will ~~statements~~exercise that option.

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements For Defined Benefit Plans.” The new standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures for these plans. The new standard is effective for public business entities for annual periods ending after December 31, 2020; early adoption is permitted, and the amendments are applied on a retrospective basis to all periods presented. The Company is currently evaluating the impact of this update on the consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)” which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. For trade receivables, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The guidance is effective for fiscal years beginning after December 31, 2019, including interim periods within those years. Early application of the guidance is permitted for all entities for fiscal years beginning after December 15, 2018, including the interim periods within those fiscal years. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of this update on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which supersedes the guidance in ASC 840, “Leases.” The purpose of the new standard is to improve transparency and comparability related to the accounting and reporting of leasing arrangements. The guidance will require balance sheet recognition for assets and liabilities associated with rights and obligations created by leases with terms greater than twelve months. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Although the standard initially required the modified retrospective approach for adoption, in July 2018, the FASB issued ASU 2018-18, allowing companies to initially apply the new lease requirements at the effective date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Early adoption is permitted.

The Company expects the standard will have a material impact on the Company’s consolidated balance sheets but will not have a material impact on the consolidated statements of operations. The most significant impact will be the recognition of right of use assets and lease liabilities for operating leases. In connection with the adoption of the new lease accounting standard, the Company has completed scoping reviews and continues to make progress implementing new processes, systems, accounting policies and internal controls relevant to the standard. We anticipate adopting this standard on January 1, 2019 using the prospective adoption approach and electing the practical expedients allowed under the standard.

2. Balance Sheet Components

Inventories consisted of the following (in thousands):

	September 30,		December 31,
	March 31,		December 31,
	2018		2017
	2019		2018
Finished goods	$	3742,~~801~~213	$	3339,~~050~~142
Component parts		3,~~773~~630		43,~~025~~490
Work-in-process		4724		9652
	$	4145,~~621~~867	$	3742,~~171~~684

910

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Prepaid expenses and other current assets consisted of the following (in thousands):


	March 31,		December 31,
	2019		2018
Income tax receivable	$	4,215	$	2,073
Prepaid expenses		2,436		1,683
Other		2,982		2,344
	$	9,633	$	6,100

Property and equipment, net consisted of the following (in thousands):

	September 30,		December 31,
	March 31,		December 31,
	2018		2017
	2019		2018
Computer equipment and software	$	5,137	$	5,030
Leasehold improvements	$	6,426	$	5,954
Manufacturing tooling and test equipment		4,297		4,894
Lab and warehouse equipment		6,137		5,938
Lab and warehouse equipment		5,692		4,869
Computer equipment and software		5,788		5,380
Leasehold improvements		5,059		3,960
Manufacturing tooling and test equipment		4,697		4,598
Furniture and fixtures		4,~~457~~645		34,~~698~~670
Other		1,~~086~~159		1,~~086~~159
		25,728		23,537
		28,852		27,699
Less: accumulated depreciation		(1719,~~044~~312)		(1618,~~200~~036)
	$	89,~~684~~540	$	79,~~337~~663

Accrued liabilities consisted of the following (in thousands):

	September 30,		December 31,
	March 31,		December 31,
	2018		2017
	2019		2018
Sales returns and current portion of warranty liability	$	2,517	$	2,872
Compensation accruals	$	3,054	$	5,444
Compensation accruals		5,014		5,241
Sales returns and current portion of warranty liability		2,564		2,539
Other accrued liabilities		~~900~~1,533		21,~~722~~159
	$	87,~~431~~151	$	109,~~835~~142

Other long-term liabilities consisted of the following (in thousands):

	September 30,		December 31,
	March 31,		December 31,
	2018		2017
	2019		2018
Deferred revenue	$	3,~~096~~156	$	3,~~143~~192
Warranty		621		600
Other		1,855		1,272
Other		783		199
Warranty		827		875
	$	45,~~500~~838	$	35,~~942~~339

3. Financial Instruments

Fair Value Measurements

The Company’s financial assets that are measured at fair value on a recurring basis consist of money market funds and available-for-sale investments. The following three levels of inputs are used to measure the fair value of financial instruments:

Level 1: Quoted prices in active markets for identical assets or liabilities;

Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3: Unobservable inputs are used when little or no market data is available.

The fair values for substantially all of the Company’s financial assets are based on quoted prices in active markets or observable inputs. For Level 2 securities, the Company uses a third-party pricing service which provides documentation on an ongoing basis that includes, among other things, pricing information with respect to reference data, methodology, inputs summarized by asset class, pricing application and corroborative information.11

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Cash, Cash Equivalents and Marketable Securities

The Company determines realized gains or losses on the sale of marketable securities on a specific identification method. During the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~ 2019 and ~~2017~~2018, the Company did not record significant realized gains or losses on the sales of available-for-sale investments.

The following tables show the Company’s cash and available-for-sale investments’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category, recorded as cash and cash equivalents or short- or long-term investments as of ~~September~~March 3031, ~~2018~~ 2019 and December 31, ~~2017~~2018 (in thousands):

September 30, 2018

March 31, 2019

Cash and

Adjusted

Unrealized

Cash

Short-term

Long-term

Cost

Gains

Losses

Fair Value

Equivalents

Investments

Cash

2814,~~687~~782

—

2814,~~687~~782

—

Level 1:

Money market funds

5,~~039~~046

—

5,~~039~~046

—

U.S. government notes

815,~~958~~083

—1

~~(29)~~—

815,~~929~~084

—

815,~~929~~084

—

Subtotal

1320,~~997~~129

—1

~~(29)~~—

1320,~~968~~130

5,~~039~~046

815,~~929~~084

—

Level 2:

Corporate bonds

2522,~~755~~098

(375)

2522,~~719~~102

—

2418,~~634~~901

13,~~085~~201

Commercial paper

2214,~~628~~804

—

2214,~~628~~804

~~1,647~~—

2014,~~981~~804

—

Subtotal

4836,~~383~~902

(375)

4836,~~347~~906

~~1,647~~—

4533,~~615~~705

13,~~085~~201

Total

9171,~~067~~813

110

(665)

9171,~~002~~818

3519,~~373~~828

5448,~~544~~789

13,~~085~~201

	December 31, 2017
	December 31, 2018
									Cash and
	Adjusted		Unrealized		Unrealized				Cash		Short-term		Long-term
	Cost		Gains		Losses		Fair Value		Equivalents		Investments		Investments
Cash	$	2430,~~367~~501	$	—	$	—	$	2430,~~367~~501	$	2430,~~367~~501	$	—	$	—
Level 1:
Money market funds		56,~~394~~903		—		—		56,~~394~~903		56,~~394~~903		—		—
U.S. government notes		910,~~060~~420		—		(1314)		910,~~047~~406		—		410,~~098~~406		~~4,949~~—
Subtotal		1417,~~454~~323		—		(1314)		1417,~~441~~309		56,~~394~~903		410,~~098~~406		~~4,949~~—
Level 2:
Corporate bonds		2421,~~943~~612		—1		(4937)		2421,~~894~~576		—		1721,~~805~~576		~~7,089~~—
Commercial paper		2223,~~154~~803		—		—		2223,~~154~~803		—2,991		2220,~~154~~812		—
Subtotal		4745,~~097~~415		—1		(4937)		4745,~~048~~379		—2,991		3942,~~959~~388		~~7,089~~—
Total	$	8593,~~918~~239	$	—1	$	(6251)	$	8593,~~856~~189	$	2940,~~761~~395	$	4452,~~057~~794	$	~~12,038~~—

As of ~~September~~March 3031, ~~2018~~ 2019, the Company considers the declines in market value of its investment portfolio to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. During the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~ 2019 and ~~2017~~2018, the Company did not recognize any significant impairment charges. The Company invests in highly-rated securities, and its investment policy limits the amount of credit exposure to any one issuer. The policy requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. The maturities of the Company’s long-term investments range from one to two years. When evaluating an investment for other-than-temporary impairment the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and

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issuer. The policy requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. The maturities of the Company’s long-term investments range from one to two years. When evaluating an investment for other-than-temporary impairment the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates, and the Company’s intent to sell, as well as the fact it is not more likely than not that the Company will be required to sell the investment before recovery of the investment’s cost basis, which may be maturity.

Fair Value of Other Financial Instruments

The carrying amounts reported in the accompanying condensed consolidated financial statements for restricted cash, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of the accounts.

Derivative Financial Instruments

The Company has foreign currency exposure related to the operations in Australia, Canada, the ~~United~~European ~~Kingdom~~Union, ~~Canada~~New Zealand, ~~Australia~~Switzerland, and the ~~European~~United ~~Union~~Kingdom, as well as other foreign locations. The Company has entered into forward contracts to help offset the exposure to movements in foreign currency exchange rates in relation to certain U.S. dollar denominated balance sheet accounts of its subsidiaries in the United Kingdom and Australia. The foreign currency derivatives are not designated as accounting hedges. The Company recognizes these derivative instruments as either assets or liabilities in the accompanying condensed consolidated balance sheets at fair value. The Company records changes in the fair value (i.e. gains or losses) of these derivative instruments in the accompanying condensed consolidated statement of operations as other income (expense), net. Gains and losses on derivative instruments are included in operating activities in the accompanying condensed consolidated statement of cash flows.

The Company settles its foreign exchange contracts on the last day of every month and enters into a new forward contract for the next month. As a result, there are no assets or liabilities recorded in the accompanying condensed consolidated balance sheets related to derivative instruments as of ~~September~~March 3031, ~~2018~~ 2019.

The following table shows the pre-tax income (losses) of the Company’s derivative instruments not designated as hedging instruments (in thousands):

Three Months Ended

~~Nine Months Ended~~

September 30,

March 31,

Income Statement Location

~~2018~~2019

~~2017~~2018

~~2018~~

~~2017~~

Foreign exchange forward contracts

Other income (expense), net

64(420)

(~~501~~548)

~~(1,433)~~

4. ~~Acquisitions~~Leases

~~ihiji~~Operating ~~Acquisition~~Leases

OnThe ~~December 22, 2017, the~~ Company ~~acquired~~leases ~~the~~office ~~intellectual~~and ~~property~~warehouse ~~and~~space ~~key~~under operating ~~assets~~leases ofthat ~~ihiji,~~expire abetween ~~provider~~2019 ofand ~~remote management services for technical integrators servicing connected home customers~~2025. ~~Total consideration transferred for this acquisition was immaterial.~~ The ~~majority~~terms of the ~~consideration~~leases ~~transferred~~include ~~was~~periods ~~allocated~~of tofree arent, ~~developed~~options ~~technology~~for ~~intangible~~the ~~asset. In~~Company ~~accordance~~to ~~with~~extend the ~~purchase~~leases ~~agreement,~~(typically athree ~~portion~~to offive ~~the~~years) ~~purchase~~and ~~price~~increasing ~~was~~rental ~~withheld~~rates atover ~~the~~time. ~~acquisition~~The ~~date~~Company torecognizes ~~cover~~rental ~~any~~expense ofunder ~~the~~these ~~sellers’~~operating ~~post-closing~~leases ~~obligations and~~on ~~was~~a ~~subsequently~~straight-line ~~distributed~~basis toover the ~~shareholders~~lives ~~during~~of the ~~second quarter of 2018~~leases.

~~Acquisition~~Operating oflease ~~Triad~~cost ~~Holdings~~was approximately $1.1 million and $0.8 million for the three months ended March 31, ~~Inc~~2019 and 2018, respectively.

On February 27, 2017, the Company entered into a definitive agreement to acquire Triad Holdings, Inc., (“Triad Holdings”), along with its wholly owned subsidiary Triad Speakers, Inc. (“Triad Speakers” and together with Triad Holdings “Triad”) through the purchase of all the outstanding shares of common stock of Triad for a purchase price of $9.2 million, which included cash acquired of $0.3 million. In accordance with the purchase agreement, $1.4 million of the purchase price was to be held for up to 18 months from the acquisition date to cover any of the sellers’ post-closing obligations, including without limitation any indemnification obligations that may arise (the “Holdback”). Due to customary working capital adjustments after the acquisition date, the Holdback was reduced to $1.1 million and was subsequently distributed during the third quarter of 2018.13

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~~The~~Other ~~Company~~information ~~determined~~related ~~the~~to ~~Triad~~leases ~~acquisition~~ was ~~not~~as afollows ~~significant~~(in ~~acquisition under Rule 3-05 of Regulation S‑X.~~thousands):

5. Goodwill and Intangible Assets


	Three Months Ended
	March 31,
	2019

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,274
Right-of-use assets obtained in exchange for new operating lease liabilities		1,088
Weighted-average remaining lease term - operating leases		3.2	years
Weighted-average discount rate - operating leases		5.8	%

Future minimum rental payments due under non-cancelable operating leases with initial or remaining terms in excess of one year consist of the following as of March 31, 2019 (in thousands):


One year	$	5,140
Two years		4,730
Three years		2,000
Four years		902
Five years		482
Thereafter		610
Total lease payments		13,864
Less landlord paid tenant improvements		(597)
Less imputed interest		(1,419)
Total	$	11,848

5. Acquisitions

NEEO Acquisition

On February 1, 2019, Control4 acquired all the outstanding shares of common stock of the Switzerland-based, NEEO AG (“NEEO”) for total consideration transferred of $14.5 million. In accordance with the purchase agreement, $1.3 million of the purchase price will be held for up to 18 months from the acquisition date to cover any of the sellers’ post-closing obligations, including without limitation any indemnification that may arise. The Company has classified the $1.3 million holdback in other long-term liabilities.

Total consideration transferred for the NEEO acquisition was allocated to tangible and identifiable intangible assets acquired and liabilities assumed. The Company has adjusted the preliminary allocation of consideration as included in Exhibit 99.2 of Form 8-K/A filed with the U.S. Securities and Exchange Commission on April 16, 2019, with corresponding impacts to the pro forma adjustments reported in the unaudited pro forma condensed combined balance sheet as of December 31, 2018. First, total consideration transferred was increased from $11.0 million to $14.5 million due to a pre-existing relationship between Control4 and NEEO that was effectively settled as a result of the acquisition. Second, a measurement period adjustment was made to remove the deferred tax liability of $1.7 million due to NEEO’s net deferred tax asset position.

The preliminary amount of consideration transferred is subject to potential adjustments in the event that the preliminary estimates of accrued liabilities or intangible assets are adjusted pending final valuation, and due to tax-related matters that could have a material impact on the consolidated financial statements. The Company expects the allocation of the consideration transferred to be final within the measurement period (up to one year from the acquisition date).

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The following reflects the Company’s preliminary allocation of consideration transferred for the NEEO acquisition (in thousands):


	NEEO
	Acquisition
Cash	$	445
Accounts receivable		17
Inventory		577
Other assets acquired		542
Intangible assets		6,384
Goodwill		9,242
Total assets acquired		17,207
Accounts payable		758
Accrued liabilities		1,478
Pension liability		488
Total net assets acquired	$	14,483

Identifiable Intangible Assets

The Company acquired intangible assets that consisted of remote-control technology and other internally developed technologies, which had estimated fair values of $5.8 million and $0.6 million, respectively. The Company will amortize the intangible assets on a straight-line basis over their estimated useful lives of 5 years for the remote-control technology and 2-3 years for the other internally developed technologies. The amortization of these intangible assets is not deductible for income tax purposes.

Goodwill

Goodwill of $9.2 million represents the excess of consideration transferred over the fair value of assets acquired and liabilities assumed and is attributable to NEEO’s assembled workforce, expected synergies and new products. This goodwill is not deductible for income tax purposes.

Other

From the date of acquisition through March 31, 2019, the Company recorded losses of $0.2 million associated with NEEO but did not record any revenue. In addition, the Company incurred approximately $0.5 million in total acquisition-related costs, which are included in the accompanying condensed consolidated statements of operations as research and development and general and administrative expenses for the three months ended March 31, 2019.

Pro Forma Information

The unaudited pro forma information for the three months ended March 31, 2019 and 2018 presented below includes the effects of the NEEO acquisition as if it had been consummated as of January 1, 2018, with adjustments to give effect to pro forma events that are directly attributable to the acquisition, including adjustments related to the amortization of acquired intangible assets, stock-based compensation expense, interest expense and estimated tax impacts. These adjustments are based upon information and assumptions available at the time of filing this Quarterly Report on Form 10-Q. The unaudited pro forma information does not reflect any operating efficiency or potential cost savings that could result from the consolidation of NEEO. Accordingly, the unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the actual results of the combined company if the acquisition had occurred at the beginning of the period presented, nor is it indicative of the future results of operations.

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	Three Months Ended
	March 31,
	2019		2018

Revenue	$	60,447	$	59,306
Income (loss) from operations		(3,242)		(247)
Net income (loss)	$	(2,386)	$	(241)
Net income (loss) per common share:
Basic	$	(0.09)	$	(0.01)
Diluted	$	(0.09)	$	(0.01)

Distributor Acquisitions

During the three months ended March 31, 2019, the Company began working directly with home automation integrators in Ireland, New Zealand, and Switzerland to better serve and support customers in those countries. The Company transferred $1.4 million in consideration for the acquisition of these distributors. This consideration was allocated to $0.7 million of inventory, $0.1 million of other assets, and $0.6 million of goodwill.

The Company determined these acquisitions were not significant.

6. Goodwill and Intangible Assets

Goodwill

Changes in the carrying amount of goodwill consisted of the following (in thousands):

	Amount
Balance at December 31, 2017	$	21,867
Balance at December 31, 2018	$	21,530
Measurement period adjustments		(37)
Current period acquisitions		9,874
Foreign currency translation adjustment		(~~232~~1)
Balance at September 30, 2018	$	21,598
Balance at March 31, 2019	$	31,403

Goodwill represents the excess of consideration transferred over the fair value of assets acquired and liabilities assumed.

~~Amortizable Intangible Assets~~16

The Company’s intangible assets and related accumulated amortization consisted of the following as of September 30, 2018 and December 31, 2017 (in thousands):

	September 30, 2018
		Gross Carrying		Accumulated
		Amount		Amortization		Net
Developed technology	$	17,428	$	(9,281)	$	8,147
Customer relationships		12,009		(3,677)		8,332
Trademark/trade name		6,776		(1,293)		5,483
Non-competition agreements		295		(295)		—
Total intangible assets	$	36,508	$	(14,546)	$	21,962
	December 31, 2017
	Gross Carrying		Accumulated
	Amount		Amortization		Net
Developed technology	$	19,626	$	(8,914)	$	10,712
Customer relationships		12,009		(2,556)		9,453
Trademark/trade name		6,776		(869)		5,907
Non-competition agreements		295		(286)		9
Total intangible assets	$	38,706	$	(12,625)	$	26,081

The weighted average amortization period for developed technology, customer relationships, and trademarks/trade names is 6.9 years, 8.4 years, and 12.0 years, respectively; and 7.3 years for all amortizable intangible assets in total.

The Company recorded amortization expense during the three and nine month periods ended September 30, 2018 and 2017 for these intangible assets as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Cost of revenue	$	888	$	802	$	2,733	$	2,367
Research and development		17		50		63		145
Sales and marketing		496		482		1,490		1,373
Total amortization of intangible assets	$	1,401	$	1,334	$	4,286	$	3,885

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~~Amortization~~Amortizable ofIntangible ~~finite lived intangible assets as of September 30, 2018 for the next five years is as follows (in thousands):~~Assets

	Amount
Remainder of 2018	$	1,366
2019		5,593
2020		4,611
2021		2,256
2022		2,093
Thereafter		6,043
	$	21,962

The Company’s intangible assets and related accumulated amortization consisted of the following as of March 31, 2019 and December 31, 2018 (in thousands):

6. Long-Term Obligations


	March 31, 2019
		Gross Carrying		Accumulated
		Amount		Amortization		Net
Developed technology	$	23,854	$	(11,251)	$	12,603
Customer relationships		12,009		(4,424)		7,585
Trademark/trade name		6,776		(1,575)		5,201
Total intangible assets	$	42,639	$	(17,250)	$	25,389

	December 31, 2018
	Gross Carrying		Accumulated
	Amount		Amortization		Net
Developed technology	$	17,495	$	(10,145)	$	7,350
Customer relationships		12,009		(4,050)		7,959
Trademark/trade name		6,776		(1,434)		5,342
Non-competition agreements		295		(295)		—
Total intangible assets	$	36,575	$	(15,924)	$	20,651

The weighted average amortization period for developed technology, customer relationships, and trademarks/trade names is 5.2 years, 8.4 years, and 12.0 years, respectively; and 7.0 years for all amortizable intangible assets in total.

The Company recorded amortization expense during the three-month periods ended March 31, 2019 and 2018 for these intangible assets as follows (in thousands):


	Three Months Ended
	March 31,
	2019		2018
Cost of revenue	$	864	$	921
Research and development		259		28
Sales and marketing		497		497
Total amortization of intangible assets	$	1,620	$	1,446

Amortization of finite lived intangible assets as of March 31, 2019 for the next five years is as follows (in thousands):


	Amount
Remainder of 2019	$	5,355
2020		6,051
2021		3,457
2022		3,243
2023		3,183
Thereafter		4,100
	$	25,389

7. Long-Term Obligations

Loan and Security Agreement

On February 6, 2018, Control4 entered into the 2018 Loan Amendment with SVB, which amends the 2013 Loan Agreement.

In the 2018 Loan Amendment, Control4 increased the revolving credit facility from $30.0 million to $40.0 million under the terms of the 2013 Loan Agreement (the “New Credit Facility”). All borrowings under the New Credit Facility are collateralized by the general assets of the Company. Amounts borrowed under the New Credit Facility are due and payable in full on the maturity date, which is January 29, 2020. Advances made pursuant to the New Credit Facility depend on Control4’s leverage ratio and are either: (i) Prime Rate Advances, which bear interest at the Prime Rate plus a Prime Rate Margin of either 0% or 0.25%, or (ii) LIBOR Rate Advances, which bear interest at the LIBOR Rate plus a LIBOR Rate Margin of either 2.50% or 2.75%. 17

Control4 will be assessed an unused revolving line facility fee of 0.25% in any quarter wherein the amount of advances under the New Credit Facility is less than $15.0 million. As of September 30, 2018, Control4 had no outstanding borrowings under the revolving credit facility.

The 2018 Loan Amendment contains various restrictive and financial covenants, and the Company was in compliance with each of these covenants as of September 30, 2018.

7. Revenue Recognition

ASC 606 Adoption

On January 1, 2018, the Company adopted “Revenue from Contracts with Customers (Topic 606),” (“ASC 606”) utilizing the full retrospective method of transition, which required a retrospective adjustment of each prior reporting period presented. The Company applied the new standard using a practical expedient where the consideration allocated to the remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue for all reporting periods presented before the date of the initial application is not disclosed. Upon adoption of ASC 606, the Company implemented internal controls over revenue recognition and related financial statement disclosures.

Adoption of ASC 606 did not have a significant impact on the Company’s financial statements, however, while preparing for the adoption of ASC 606, the Company evaluated the accounting for technical support and unspecified upgrade rights, which the Company considered inconsequential under ASC 605. While the Company determined that these services are immaterial in the context of the contract under ASC 606, the Company believes that as product offerings continue to mature these services will become more material over time. Accordingly, under ASC 606, the Company will account for technical support and unspecified upgrade rights as a performance obligation, distinct from the hardware product and embedded software, with the associated revenue satisfied over time.

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~~The~~In ~~adoption~~the 2018 Loan Amendment, Control4 increased the revolving credit facility from $30.0 million to $40.0 million under the terms of ~~ASC~~the ~~606~~2013 ~~impacted~~Loan Agreement (the “New Credit Facility”). All borrowings under the New Credit Facility are collateralized by the general assets of the Company. Amounts borrowed under the New Credit Facility are due and payable in full on the maturity date, which is January 29, 2020. Advances made pursuant to the New Credit Facility depend on Control4’s ~~previously~~leverage ~~reported~~ratio ~~results~~and asare ~~follows~~either: (ini) ~~thousands~~Prime Rate Advances, ~~except~~which ~~share~~bear ~~data~~interest at the Prime Rate plus a Prime Rate Margin of either 0% or 0.25%, or (ii): LIBOR Rate Advances, which bear interest at the LIBOR Rate plus a LIBOR Rate Margin of either 2.50% or 2.75%.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017						2017
	As previously reported		ASC 606 adjustment		As adjusted		As previously reported		ASC 606 adjustment		As adjusted
Revenue	$	64,742	$	(159)	$	64,583	$	176,386	$	(343)	$	176,043
Income tax expense (benefit)		93		(8)		85		(2,441)		(18)		(2,459)
Net income		5,185		(151)		5,034		9,921		(325)		9,596
Basic earnings per share	$	0.21	$	(0.01)	$	0.20	$	0.40	$	(0.01)	$	0.39
Diluted earnings per share	$	0.19	$	—	$	0.19	$	0.38	$	(0.02)	$	0.36

Control4 will be assessed an unused revolving line facility fee of 0.25% in any quarter wherein the amount of advances under the New Credit Facility is less than $15.0 million. As of March 31, 2019, Control4 had no outstanding borrowings under the revolving credit facility.

	December 31, 2017
	As previously reported		ASC 606 adjustment		As adjusted
Other assets	$	1,576	$	42	$	1,618
Current portion of deferred revenue		2,311		2,227		4,538
Other long-term liabilities		882		3,060		3,942
Stockholders’ equity		174,773		(5,245)		169,528

The 2018 Loan Amendment contains various restrictive and financial covenants, and the Company was in compliance with each of these covenants as of March 31, 2019.

8. Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Shipping charges billed to dealers and distributors are included in product revenue and related shipping costs are included in cost of revenue. The Company has elected to account for shipping and handling activities performed after control has been transferred to the customer as a fulfillment cost and accrues for these costs if revenue is recognized before contractually agreed-upon shipping and handling occurs.

Solution Products Revenue

The Company sells its solution products through a network of independent dealers, distributors and retailers. These dealers, distributors and retailers generally sell the Company’s products as part of a bundled sale, which typically includes other third‑party products and related services, project design, installation services and on‑going support.

The Company’s products are generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to dealers, distributors, and retailers, which is typically at the time the product is shipped. In cases where revenue is allocated to software updates and technical support, primarily because the updates and technical support are provided at no additional charge, revenue is recognized as the updates and technical support are provided, which is ratably over the estimated life of the related device.

Certain customers may receive cash-based incentives or credits; which are accounted for as variable consideration. The Company records estimated reductions to revenue for dealer incentives at the time of the initial sale. The estimated reductions to revenue are based on the sales terms and the Company’s historical experience and trend analysis. The most common incentive relates to amounts paid or credited to dealers for achieving defined volume levels or growth objectives.

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Subscription Service Revenue

The Company offers a subscription service that allows consumers to control and monitor their homes remotely and allows the consumer’s respective Control4 dealer to perform remote diagnostic services. Subscription revenue is deferred at the time of payment and recognized ratably over the contract period which is typically one year.

Third-Party Product Revenue

The Company recognizes revenue net of cost of revenue for non-inventoried, third‑party products sold through the Company’s online ordering system. The Company’s primary role is to arrange for another entity to provide the goods or services and the Company does not control the promised good or service before it is transferred to the customer.

Significant Judgments

The Company’s contracts with dealers, distributors, and retailers can include promises to transfer multiple products and services. Determining whether multiple products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

Judgment is required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. The Company uses a single amount to estimate SSP for items that are not sold separately, including software updates and technical support provided at no additional charge. In instances where SSP is not directly observable, such as when the Company does not sell the product or service separately, the SSP is determined using information that may include market conditions and other observable inputs.

The Company’s products are generally sold with a limited right of return and the Company may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize.

Disaggregated Revenue

The Company’s revenue includes amounts earned through sales to dealers and distributors located outside of the United States. There was no single foreign country that accounted for more than 10% of total revenue for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018. The following table sets forth revenue from the United States, Canada and all other international dealers and distributors combined (in thousands):

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2018			2017			2018			2017
	2019			2018
Revenue-United States	$	4941,~~780~~003		$	4440,~~728~~964		$	~~139,021~~		$	~~122,751~~
Revenue-Canada		5,~~812~~171			5,~~386~~264			~~16,714~~			~~14,882~~
Revenue-all other international sources		1614,~~002~~251			1412,~~469~~921			~~44,236~~			~~38,410~~
Total revenue	$	7160,~~594~~425		$	6459,~~583~~149		$	~~199,971~~		$	~~176,043~~
International revenue (excluding Canada) as a percent of total revenue		2224	%		22	%		22	%		22	%

Contract Balances

As of ~~September~~March 3031, ~~2018~~2019 and December 31, ~~2017~~2018, accounts receivable, net of allowance for doubtful accounts, were $3430.23 million and $2933.90 million, respectively.

The Company extends credit to some of its dealers and distributors, which consist primarily of small, local businesses. Issuance of credit is based on ongoing credit evaluations by the Company of dealers’ and distributors’ financial condition and generally requires no collateral. Trade accounts receivable are recorded at the invoiced amount and do not generally bear interest. The Company maintains an allowance for doubtful accounts to reserve for potential uncollectible receivables. The allowance is based upon the creditworthiness of the Company’s dealers

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~~for potential uncollectible receivables. The allowance is based upon the creditworthiness of the Company’s dealers~~ and distributors, the dealers’ and distributors’ historical payment experience, the age of the receivables and current market and economic conditions. Provisions for potentially uncollectible receivables are recorded in sales and marketing expenses. The Company writes off accounts receivable balances to the allowance for doubtful accounts when it becomes likely that they will not be collected.

The following table presents the changes in the allowance for doubtful accounts (in thousands):

	Allowance
Balance at December 31, 2017	$	1,147
Balance at December 31, 2018	$	1,529
Provision		~~760~~8
Write-offs		(~~365~~291)
Balance at September 30, 2018	$	1,542
Balance at March 31, 2019	$	1,246

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined the contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services, not to receive financing from customers, such as invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period.

Deferred revenue is comprised mainly of unearned revenue related to subscription services as well as revenue deferred on the sale of solution products for software updates and technical support. The following table presents the changes in deferred revenue for the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019 (in thousands):

	Deferred Revenue
Balance at December 31, 2017	$	7,682
Balance at December 31, 2018	$	8,699
Deferred revenue		64,~~253~~593
Recognition of deferred revenue		(54,~~718~~548)
Balance at September 30, 2018	$	8,217
Balance at March 31, 2019	$	8,744

Revenue allocated to remaining performance obligations represent contracted revenue that has not yet been recognized (“contracted not recognized”), which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but not recognized revenue was $9.18 million as of ~~September~~March 3031, ~~2018~~2019, of which the Company expects to recognize approximately 4244% of the revenue over the next 12 months and the remainder over a period of three to four years.

Assets Recognized from the Costs to Obtain a Contract with a Customer

The Company has elected to immediately expense contract acquisition costs that would be amortized in one year or less. The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year; these incremental costs were immaterial during both periods presented.

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89. Equity Compensation

Stock Options

In 2003, the Board of Directors adopted the 2003 Equity Incentive Plan (the “2003 Plan”), which provided for the granting of nonqualified and incentive stock options, stock appreciation rights, stock awards, restricted stock units and restricted stock awards. Under the 2003 Plan, the Company was able to grant nonqualified and incentive stock options to directors, employees and non-employees providing services to the Company. On June 11, 2013, the Company’s Board of Directors adopted the 2013 Stock Option and Incentive Plan (the “2013 Plan”), which was subsequently approved by the Company’s stockholders. The 2013 Plan became effective as of the closing of the Company’s initial public offering. To the extent that any awards outstanding under the 2003 Plan are forfeited or lapse unexercised after August 1, 2013, the shares of common stock subject to such awards will become available for issuance under the 2013 Plan. The 2013 Plan provides for annual increases in the number of reserved shares of 5% of the outstanding number of shares of the Company’s Common Stock as of the preceding December 31. On January 1, ~~2018~~2019, the number of reserved shares was increased by 1,~~291~~325,~~644~~845 in accordance with the provisions of the 2013 Plan.

A summary of stock option activity for the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~ 2019 is presented below:

				Weighted
				Average
	Shares Subject	Weighted		Remaining
	to Options	Average		Contractual
	Outstanding	Exercise Price		Life (Years)
Balance at December 31, 2017	2,069,802		12.13
Balance at December 31, 2018	1,081,212		12.98
Exercised	(~~942~~32,~~665~~010)		119.3870
Expired	(2,~~809~~626)		516.7296
Forfeited	(51,~~048~~336)		137.4228
Balance at September 30, 2018	1,119,280		12.77
Balance at March 31, 2019	1,045,240		13.08
Exercisable options at September 30, 2018	1,031,009		12.93	4.7
Exercisable options at March 31, 2019	1,010,354		13.21	4.4
Vested and expected to vest at September 30, 2018	1,119,280		12.77	4.9
Vested and expected to vest at March 31, 2019	1,045,240		13.08	4.4

The following table summarizes information about stock options outstanding and exercisable at ~~September~~March 3031, ~~2018~~ 2019:

				Options Outstanding				Options Exercisable
							Weighted-		Weighted-
				Weighted			Average		Average
				Average		Number of	Remaining	Number of	Remaining
				Exercise		Underlying	Contractual	Underlying	Contractual
Range of Exercise Prices				Price		Shares	Life (in years)	Shares	Life (in years)
$	4.89	-	7.49		6.1222	~~315~~269,~~730~~614	2.84	~~309~~267,~~965~~480	2.73
$	8.16	-	12.93		10.5157	~~287~~274,~~084~~926	54.59	~~228~~242,~~793~~174	54.38
$	12.98	-	19.56		15.60	~~284~~270,~~397~~481	65.16	~~260~~270,~~182~~481	65.16
$	20.91	-	22.92		21.1516	~~232~~230,~~069~~219	5.4.8	~~232~~230,~~069~~219	5.4.8
						1,119,280		1,031,009
						1,045,240		1,010,354

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For the stock option awards vested during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~ 2019, the total fair value was $0.~~4 million and $~~1.6 million~~, respectively~~. The following table summarizes the aggregate intrinsic-value of options exercised, exercisable and vested and expected to vest (in thousands):

	For the Nine Months Ended
	For the Three Months Ended
	and as of September 30,
	and as of March 31,
	2018		2017
	2019		2018
Options Exercised	$	~~18,077~~269	$	82,~~927~~765
Options Exercisable		224,~~068~~757		3915,~~360~~335
Options Vested and Expected to Vest		245,~~130~~026		4517,~~152~~203

Restricted stock units

A summary of restricted stock unit activity for the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~ 2019 is presented below:

	Number of	Weighted Average
	Shares	Grant Date Fair Value
Non-vested balance at December 31, 2017	1,290,660	$	9.75
Non-vested balance at December 31, 2018	824,365	$	19.77
Awarded	~~461~~808,~~350~~520		2817.4669
Vested	(~~743~~314,~~514~~606)		1019.0407
Forfeited	(539,~~880~~002)		1119.1839
Non-vested balance at September 30, 2018	954,616		18.49
Non-vested balance at March 31, 2019	1,309,277		18.66

During the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~ 2019, ~~743~~314,~~514~~606 restricted stock units vested of which ~~242~~103,~~531~~094 shares were withheld for tax purposes resulting in the issuance of ~~500~~211,~~983~~512 shares of common stock.

Company Matching Contribution to ~~our~~the 401(k) Plan

The Company offers a 401(k) Plan and in November 2016, the Company’s Board of Directors authorized a matching contribution by the Company starting in 2017 and amended effective in 2019. Current ~~Matching~~matching contributions are as follows: the Company will match 100% of the first 1% of salary contributed by a participant, and 5070% of the next 5% of salary contributed by a participant, for a maximum matching contribution of 34.5% of the salary of a participant up to the limit on contributions imposed by the Internal Revenue Service (“IRS”). Currently, the Company funds its match in contribution with shares of Control4’s common stock. During the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~ 2019, the Company contributed 3034,~~482~~854 shares of stock to employees under this plan and recorded $10.16 million of expenses associated with this contribution.

Stock-based compensation expense

Total stock-based compensation expense has been classified as follows in the accompanying ~~Condensed~~condensed ~~Consolidated~~consolidated ~~Statements~~statements of ~~Operations~~operations (in thousands):

Three Months Ended

~~Nine Months Ended~~

September 30,

March 31,

2018

2017

2018

2017

2019

2018

Cost of revenue

5978

6668

~~182~~

~~185~~

Research and development

1,~~115~~287

1,~~031~~084

~~3,233~~

~~3,210~~

Sales and marketing

~~941~~870

~~883~~959

~~2,877~~

~~2,831~~

General and administrative

1,~~314~~294

1,~~048~~224

~~3,793~~

~~2,965~~

Total stock-based compensation expense

3,~~429~~529

3,~~028~~335

~~10,085~~

~~9,191~~

At ~~September~~March 3031, ~~2018~~ 2019, there was $1.0.6 million of total unrecognized compensation cost related to non-vested stock option awards that will be recognized over a weighted-average period of 0.53 years. At ~~September~~March 3031, 2019, there was $18.0 million of total unrecognized compensation cost related to non-vested restricted stock units that will be recognized over a weighted-average period of 2.3 years if all vesting conditions are met.

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~~2018, there was $13~~ 10.4 ~~million~~Share ~~of total unrecognized compensation cost related to non-vested restricted stock units that will be recognized over a weighted-average period of 1.8 years if all vesting conditions are met.~~Repurchases

9During the three months ended March 31, 2019, the Company repurchased 139,782 shares for $2.5 ~~Share~~million ~~Repurchases~~compared to 300,000 shares for $7.4 million in the same period in 2018.

In ~~February~~October 2018, the Company’s Board of Directors authorized the ~~repurchase~~expansion of upthe repurchase program providing approval for the Company to repurchase an additional $20.0 million in Control4 common stock from time to time on the open market. ~~During~~until ~~the~~December ~~nine~~31, ~~months~~2019. ~~ended~~As ~~September~~a 30result, ~~2018,~~ the Company ~~repurchased~~has ~~600,000 shares for~~ $1613.06 million ~~compared~~remaining tounder ~~119,007 shares for $1.8 million in~~ the ~~same~~share ~~period~~repurchase ~~in 2017~~program.

In October 2018, the Company’s Board of Directors authorized the expansion of the repurchase program providing approval for the Company to repurchase an additional $20 million in Control4 common stock from time to time on the open market until December 31, 201911. AsIncome ~~a result, the Company has $24.0 million remaining under the share repurchase program.~~Taxes

10Income tax benefit was $0.8 ~~Income~~million ~~Taxes~~for the three months ended March 31, 2019, compared to $0.1 million for the three months ended March 31, 2018, or approximately 28% and 14% of income (loss) before income taxes, respectively. The effective tax rate for the three months ended March 31, 2019 differs from the U.S. federal statutory rate of 21% primarily due to the limitations on tax deductions allowable for executive compensation and global intangible low-taxed income, or GILTI, state income taxes, and foreign income taxes; offset by tax deductions resulting from stock-based compensation.

OnAs of December 2231, ~~2017~~2018, the ~~United~~Company’s ~~States~~NOL ~~enacted~~carryforward ~~tax~~amounts ~~reform~~for ~~legislation~~U.S. ~~commonly~~federal ~~referred~~income ~~to as the Tax Cuts~~ and ~~Jobs~~state ~~Act~~tax ~~(“the~~purposes ~~Tax~~were ~~Act”)~~$57.1 ~~The~~million ~~Tax Act makes broad~~ and ~~complex changes to the U~~$61.S.1 ~~tax code~~million, ~~including,~~respectively. ~~but~~The ~~not~~federal ~~limited~~and ~~to,~~state aNOL ~~one-time~~carryforwards ~~mandatory~~will ~~transition~~expire ~~tax~~between on2020 ~~accumulated foreign earnings~~ and a2037 ~~reduction~~if ofnot ~~the corporate income tax rate to 21% effective January 1, 2018~~utilized. ~~The~~In ~~Company~~addition ~~is required~~ to ~~recognize~~ the ~~effect~~NOL ofcarryforwards, ~~the~~as ~~tax law changes in the period~~ of ~~enactment.~~December In31, ~~order to calculate this effect~~2018, the Company ~~must~~had ~~determine the transition tax amount and remeasure~~ U.S. ~~deferred~~federal ~~tax assets~~ and ~~liabilities.~~state Inresearch ~~December~~and ~~2017,~~development ~~the~~credit ~~SEC~~carryforwards ~~staff~~of ~~issued Staff Accounting Bulletin No~~$6.4 ~~118,~~million ~~Income Tax Accounting Implications of the Tax Cuts~~ and ~~Jobs Act (“SAB 118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date~~$2.8 ~~Where the Company has been able to make reasonable estimates of the effects of the Tax Act for which its analysis is not yet complete~~million, ~~the Company has recorded provisional amounts in accordance with SAB 118. Where the Company has not yet been able to make reasonable estimates of the impact of certain elements of the Tax Act~~respectively, ~~the~~which ~~Company~~will ~~has~~expire ~~not~~between ~~recorded~~2019 ~~any amounts related to those elements~~ and ~~has continued accounting for them in accordance with the tax laws in effect immediately prior to the enactment of the Tax Act~~2034.

~~Although~~The ~~the~~Company ~~accounting~~files ~~for~~income ~~the~~tax ~~Tax~~returns ~~Act~~in isthe ~~incomplete~~United States, ~~the~~including ~~Company~~various ~~was~~state ~~able~~and tolocal ~~make~~jurisdictions. ~~reasonable~~The ~~estimates~~Company’s ofsubsidiaries ~~certain~~file ~~effects~~income oftax ~~the~~returns ~~Tax~~in ~~Act~~Australia, ~~and~~China, ~~record~~Germany, ~~provisional~~India, ~~amounts~~New atZealand, ~~December~~Serbia, 31Switzerland, ~~2017~~and the United Kingdom. The ~~Tax~~Company ~~Act~~is ~~reduces~~subject ~~the~~to ~~U.S.~~ federal ~~corporate~~income tax ~~rate~~as ~~from~~well ~~34%~~as toincome ~~21% for~~ tax ~~years~~of ~~beginning~~multiple ~~after~~state ~~December~~and ~~31,~~foreign ~~2017~~jurisdictions. The Company ~~evaluated~~is ~~the~~no ~~decrease~~longer insubject ~~the~~to ~~tax~~income ~~rate and in 2017 recorded a provisional, one-time~~ tax ~~expense~~examinations offor ~~approximately~~the ~~$9.0~~following ~~million.~~jurisdictions ~~This~~and ~~expense~~years: ~~was~~federal, ~~offset~~for byyears anbefore ~~equal~~2015; ~~change~~state inand ~~the valuation allowance~~local, ~~resulting~~for inyears abefore ~~net~~2014; ~~tax expense~~ or ~~benefit~~foreign, ~~of $0. The~~for ~~Company~~years ~~also~~before ~~recorded~~2013. aHowever, ~~one-time~~federal ~~tax~~net ~~benefit~~operating loss and ~~corresponding~~credit ~~reduction~~carryforwards tofrom ~~the~~all ~~valuation~~years ~~allowance~~are ofsubject ~~$0.4 million related~~ to ~~Alternative~~examination ~~Minimum~~and ~~Tax~~adjustments ~~credit~~for ~~carryforwards~~at ~~that~~least ~~are~~three ~~expected~~years tofollowing ~~be refundable;~~ the ~~Tax~~year ~~Act~~in ~~contributed~~which tothe ~~$0.2~~attributes ~~million~~are ~~of this tax benefit~~used.

During the three and six months ended June 30, 2018, the Company recorded the federal income tax impact of the one-time mandatory transition tax on unrepatriated foreign earnings resulting in a one-time deferred tax expense of $012.4 Retirement million. As anticipated, the Company fully offset the one-time deferred tax expense with a corresponding reduction to the valuation allowance of $0.4 million. During the three and nine months ended September 30, 2018, the Company recorded an additional $0.1 million expense for the transition tax on unrepatriated foreign earnings due to new regulations the Treasury Department issued during the third quarter. This additional expense was also fully offset by a corresponding reduction in the valuation allowance of $0.1 million. The total impact of the one-time mandatory transition tax on unrepatriated foreign earnings reduced the Company’s net operating loss (“NOL”) carryforwards for U.S. federal income tax purposes by $2.2 million, from $66.7 million to $64.5 million at December 31, 2017. Benefits

~~The~~As ~~financial~~part ~~statements~~of ~~for~~ the ~~three~~acquisition ~~and~~of ~~nine months ended September 30~~NEEO, ~~2018 do not reflect~~ the ~~impact~~Company ofassumed ~~certain~~a ~~aspects~~defined ofbenefit ~~the~~plan ~~Tax~~covering ~~Act~~all asemployees ~~the~~in ~~Company~~Switzerland. ~~did~~GAAP ~~not~~requires ~~have~~recognition of the ~~necessary~~funded ~~information available~~status, ~~prepared,~~ or ~~analyzed~~difference inbetween ~~sufficient~~the ~~detail~~fair tovalue ~~determine~~of anplan ~~actual~~assets orand ~~provisional amount for~~ the ~~tax~~projected ~~effects~~benefit obligations of the ~~Tax~~pension ~~Act.~~plan ~~Although~~on the ~~Company~~balance ~~completed~~sheet, ~~its~~by ~~accounting~~recording ~~for~~a ~~the~~corresponding ~~federal~~expense ~~income~~in ~~tax~~net ~~impact~~loss. ofIf the ~~one-time~~projected ~~tax~~benefit onobligation ~~unrepatriated~~exceeds ~~foreign~~the ~~earnings~~fair asvalue of ~~September~~plan 30assets, ~~2018, it~~then ~~was~~that ~~not~~difference ~~able~~or tounfunded ~~complete~~status represents the ~~accounting~~pension ~~for state income~~ liability.

20The Company records a net periodic pension cost in the condensed consolidated statements of comprehensive income (loss). The liabilities and annual income or expense of the pension plan is determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate and the long-term rate of asset return, based on the market-related value of assets. The expected long-term rate of return on plan assets during the year is 1.5% Future benefits, to the extent that they are based on compensation, include salary increases consistent with past experiences and estimates of future increases in the Swiss labor market. The fair value of plan assets is determined based on prevailing market prices.

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~~tax~~ The ~~items~~components ~~related~~of tonet ~~this~~periodic ~~one-time~~pension ~~tax.~~cost Asand aother ~~result, no provisional~~ amounts ~~have~~recognized ~~been recorded for the state tax impact of the one-time tax. Additionally, the Company is still evaluating the unrecognized deferred tax liability related to investment~~ in ~~foreign~~other ~~subsidiaries~~comprehensive ~~that~~loss ~~will~~before ~~remain~~taxes ~~indefinitely~~are ~~reinvested subsequent to the one-time transition tax. The Company anticipates that this will not impact tax expense,~~ as ~~the~~follows ~~Company intends to continue indefinitely reinvesting its unremitted foreign earnings~~ (in ~~Australia and the U.K.~~thousands):

During the three and nine months ended September 30, 2018, the Company concluded a U.S. federal income tax examination with the IRS for the tax years ended December 31, 2015 and December 31, 2016. The examination resulted in reductions to U.S. federal NOL carryovers of $0.6 million. The Company recognized a deferred tax expense of $0.1 million as a result of the IRS exam, which was offset by a corresponding reduction in the valuation allowance and a deferred tax benefit of $0.1 million, for a net tax impact of $0.


	Three Months Ended
	March 31,
	2019
Service Cost	$	50
Interest Cost		2
Expected Return on Plan Assets		(2)
Amortization of initial net obligation (asset)		7
Amortization of net (gain) loss		2
Net periodic benefit cost		59

The ~~Tax~~components ~~Act~~of ~~also~~net ~~creates~~periodic abenefit ~~new~~cost ~~requirement~~other onthan ~~global intangible low-taxed income (“GILTI”) earned by foreign subsidiaries. The GILTI provisions require foreign subsidiary earnings in excess of an allowable return on~~ the ~~foreign~~service ~~subsidiary’s~~cost ~~assets~~component toare be included in the ~~Company’s~~line ~~U.S.~~item ~~income~~“other ~~tax return. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable~~ income ~~related to GILTI as a current-period~~ (expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company is estimating a taxable income inclusion related to GILTI for the three and nine months ended September 30), ~~2018~~net” ~~and~~in ~~has made~~ the ~~election~~condensed toconsolidated ~~account~~statement ~~for GILTI as a component~~ of ~~current taxes incurred rather than as a component of deferred taxes~~operations.

InThe ~~order~~Company tocontributed ~~determine the quarterly provision for income taxes~~$172,000 ~~the~~to ~~Company considers~~ the ~~estimated~~pension ~~annual~~plan ~~effective~~during ~~tax rate, which is based on expected annual taxable income and statutory tax rates in~~ the ~~various~~three ~~jurisdictions~~months inended ~~which~~March ~~the~~31, ~~Company operates~~2019. ~~Certain~~The ~~significant~~Company orexpects ~~unusual~~to ~~items~~contribute ~~are~~approximately ~~separately~~$60,000 ~~recognized~~to in the ~~quarter~~pension plan during ~~which~~the ~~they~~remainder ~~occur and can be a source~~ of ~~variability in the effective tax rates from quarter to quarter~~2019.

~~Income tax expense was $0~~13.1 million for the three months ended September 30, 2018, compared to $0.1 million for the three months ended September 30, 2017, or approximately 1% and 2% of income before income taxes, respectively. Income tax expense was $0.1 million for the nine months ended September 30, 2018 compared to income tax benefit of $2.5 million for the nine months ended September 30, ~~2017,~~Related orParty approximately 1% and 34% of income before taxes, respectively. The effective tax rate for the three and nine months ended September 30, 2018 differs from the U.S. federal statutory rate of 21% primarily due to the domestic valuation allowance offsetting most of the statutory rate. The rate is increased by foreign income taxes, state income taxes or taxes in states for which net operating loss carryforwards are not available, and the impact of incentive stock options as well as other permanent differences. As of December 31, 2017, the Company’s NOL carryforward amounts for U.S. federal income and state tax purposes were $63.9 million and $67.8 million, respectively. The NOL carryforwards will expire between 2020 and 2037. In addition to the NOL carryforwards, as of December 31, 2017, the Company had U.S. federal and state research and development credit carryforwards of $6.6 million and $2.8 million, respectively, which will expire between 2018 and 2034.Transactions

~~Significant~~As judgment is required in determining the Company’s provision for income taxes, recording valuation allowances against deferred tax assets and evaluating the Company’s uncertain tax positions. In evaluating the ability to recover its deferred tax assets, in full or in part, ~~the Company considers all available positive and negative evidence, including past operating results, forecast~~ of ~~future market growth, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. Due to historical net losses incurred and~~ the ~~uncertainty~~acquisition of ~~realizing the deferred tax assets~~NEEO, ~~for all~~ the ~~periods presented, the~~ Company ~~has~~assumed a ~~full valuation allowance against domestic deferred tax assets~~$0.2 Tomillion ~~the~~obligation ~~extent~~due ~~that the Company generates positive income and expects, with reasonable certainty,~~ to ~~continue~~one toof ~~generate positive domestic income,~~ the ~~Company~~former ~~may~~owners ~~release the valuation allowance in a future period. This release would result in the recognition~~ of ~~certain deferred tax assets~~NEEO, ~~resulting~~who ~~in a decrease to income tax expense for the period such release~~ is ~~made.~~now Ina ~~addition,~~current ~~the effective tax rate in subsequent periods would increase~~employee, ~~and~~that ~~more~~is ~~closely~~outstanding ~~approximate~~as ~~the federal statutory rate~~ of ~~21%,~~March ~~after giving consideration to state income taxes~~31, ~~foreign income taxes, tax credits, the effect of stock-based compensation windfalls or shortfalls, and the exercise of incentive stock options~~2019.

~~The Company files income tax returns in the United States, including various state and local jurisdictions~~14. ~~The~~Commitments ~~Company’s subsidiaries file income tax returns in the United Kingdom, Australia, China, Germany, India~~ and Contingencies

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Serbia. We are subject to federal income tax as well as income tax of multiple state and foreign jurisdictions. We are no longer subject to income tax examinations for the following jurisdictions and years: federal, for years before 2015; state and local, for years before 2013; or foreign, for years before 2012. However, federal net operating loss and credit carryforwards from all years are subject to examination and adjustments for at least three years following the year in which the attributes are used.

11. Commitments and Contingencies

Operating Leases

The Company leases office and warehouse space under operating leases that expire between 2019 and 2025. The terms of the leases include periods of free rent, options for the Company to extend the leases (three to five years) and increasing rental rates over time. The Company recognizes rental expense under these operating leases on a straight-line basis over the lives of the leases and has accrued for rental expense recorded but not paid.

Rental expense was approximately $1.0 million and $0.7 million for the three months ended September 30, 2018 and 2017, respectively, and $2.7 million and $2.2 million for the nine months ended September 30, 2018 and 2017, respectively.

Future minimum rental payments required under non-cancelable operating leases with initial or remaining terms in excess of one year consist of the following as of September 30, 2018 (in thousands):

Remainder of 2018	$	1,166
2019		4,860
2020		4,598
2021		2,391
2022		866
Thereafter		1,313
	$	15,194

Purchase Commitments

The Company had non-cancellable purchase commitments for the purchase of inventory, which extend through ~~August~~March ~~2019~~2020 totaling approximately $5461.23 million as of ~~September~~March 3031, ~~2018~~2019.

Indemnification of Directors and Officers

The Company has agreed to indemnify its officers and directors for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company has a directors’ and officers’ insurance policy that provides corporate reimbursement coverage that limits its exposure and enables it to recover a portion of any future amounts paid. The Company has no liabilities recorded for these agreements as of ~~September~~March 3031, ~~2018~~2019, as there were no outstanding claims.

Legal Matters

From time to time, wethe Company may become involved in legal proceedings arising in the ordinary course of ~~our~~ business. WeThe ~~are~~Company is not presently a party to any legal proceedings, that if determined adversely to usControl4, the weCompany ~~believe~~believes would individually or in the aggregate have a material adverse effect on ~~our~~the business, results of operations, financial condition or cash flows.

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15. Subsequent Events

On May 8, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Wirepath Home Systems, LLC, a North Carolina limited liability company (“Parent”), and Copper Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Parent, to be acquired for an aggregate value of approximately $680 million (the “Merger”). Under the terms of the Merger Agreement, Company stockholders will receive $23.91 per share in cash upon the closing of the Merger. The Merger is subject to approval by the Company’s stockholders, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the decisions, orders, consents or expiration of any waiting periods required to consummate the Merger under the foreign investment, monopolization and anti-competition laws and regulations of certain foreign jurisdictions, the accuracy of the representations and warranties and compliance with the covenants contained in the Merger Agreement, subject to qualifications, and other customary closing conditions. The Merger is currently expected to close in the second half of 2019.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to provide greater details of our results of operations and financial condition and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 1511, ~~2018~~2019, and our condensed consolidated financial statements and the notes thereto included elsewhere in this document, as well as other documents we file with the SEC from time to time. Certain statements in this Quarterly Report constitute forward-looking statements and as such, involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectation of earnings, revenues or other financial items including without limitation statements about the anticipated effect of any acquisitions on our business or financial performance; any statements of the plans, strategies and objectives of management for future operations or growth; factors that may affect our operating results; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends or market opportunities and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may” or “will,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report, and the risks discussed in our other SEC filings.

We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report and not give undue reliance to these forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements, except as required by law.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) is provided in addition to the accompanying condensed consolidated financial statements and notes to assist readers in understanding our operations, financial condition and cash flows. Our MD&A is organized as follows:

Overview. Discussion of our business and overall analysis of financial and other highlights affecting our business in order to provide context for the remainder of the MD&A.

Factors and Trends Affecting our Performance. A summary of certain market factors and trends that we believe are important to our business that we must successfully address in order to continue to grow our business.

Key Operating and Financial Metrics. Key operating and financial metrics that we use to evaluate and manage our business.

· Results of Operations. An analysis of our financial results comparing ~~2018~~2019 to ~~2017~~2018.

Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity.

Non-GAAP Financial Measures. A reconciliation of certain non-GAAP financial measures used by management to understand and evaluate our operating performance and trends, to prepare and approve our annual budget, and to develop short- and long-term operational plans.

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· Contractual Obligations and Off-Balance Sheet Arrangements. An overview of our contractual obligations, contingent liabilities, commitments and off-balance sheet arrangements outstanding as of ~~September~~March 3031, ~~2018~~2019, including an expected payment schedule.

Critical Accounting Estimates. Accounting estimates that we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

Overview

~~Control4~~We isare a leading provider of professionally-installed smart home and business solutions that are designed to personalize and enhance how consumers engage with an ever-changing connected world. Our entertainment, smart lighting, comfort and convenience, safety and security, and networking solutions unlock the potential of connected devices, making entertainment systems easier to use and more accessible, homes and businesses more comfortable and energy efficient, and individuals more connected and secure. Our premium smart home and small business solutions provide consumers with the ability to integrate audio, video, lighting, temperature, security, communications, network management and other functionalities into a unified automation solution, customized to match their lifestyles and business needs. Our advanced software, delivered through our controller ~~products, cloud services~~ and user-interface products together with various cloud services, power this customized experience, enabling cohesive interoperability with thousands of connected Control4 and third-party devices.

Consumers purchase our smart solutions from our worldwide network of certified independent dealers, distributors, and retailers. These dealers, distributors and retailers design and install customized solutions to fit the specific needs of each consumer, whether it is a one-room home theater set-up or a whole-home automation system that features the integration of audio, video, lighting, temperature, security, network management, and communications devices. Our products are installed in both new and existing residences, multi-dwelling units and small commercial facilities. We refer to revenue from sales of our products through these dealers, distributors and retailers as our Core revenue (“Core revenue”). In addition, a portion of our revenue is attributable to sales in the hospitality industry, primarily related to products installed in hotels, which is excluded from our calculation of Core revenue as well as certain specialty display products and associated installation sales in Australia. Our revenue from sales to hotels is generally project-based and has been significant in some periods and insignificant in other periods. In the future, we expect revenue from hospitality to continue to be project-based and uneven from period to period. During the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019, over 4,~~440~~590 active direct dealers were authorized to sell and install the full Control4 line of products in the United States, Australia, Canada, the United Kingdom, ~~Australia, China, Germany~~ and 57 63 other countries, and 3231 distributors were authorized to cover an additional 4442 countries where we do not have direct dealer relationships. These distributors sell our solutions through dealers and provide warehousing, training, technical support, and billing for dealers in each of those countries. We have approximately ~~980~~ 870 additional active dealers and 168 distributors that are currently authorized to sell only our Pakedge and Triad product lines.

We derive the majority of our revenue from the sale of products that contain our proprietary software, which functions as the operating system of the home or business and other related ancillary products used in automation projects. We also generate revenue from the sale of annual subscriptions to our 4Sight subscription service. Our 4Sight services give homeowners the ability to, ~~(1)~~among ~~personalize~~other ~~their automation system through simple programming~~things, ~~referred to as “When >> Then”;~~ (21) remotely monitor and control their smart home solutions from their mobile devices; (32) ~~receive e-mail and push notification alerts regarding their home; (4)~~ communicate through our audio/video application, Intercom Anywhere; and (53) enable voice recognition services.

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We were founded in 2003 and began shipping our products and generating revenue in 2005. Our revenue growth rates for the last five complete calendar years are shown in the following table (dollars in millions):

	For the Years Ended December 31,
	2017 * As adjusted			2016 * As adjusted			2015			2014			2013
	2018			2017 * As adjusted			2016 * As adjusted			2015			2014
Core revenue	$	~~238~~267.87		$	~~203~~238.28		$	~~160~~203.72		$	~~144~~160.7		$	~~126~~144.47
Core revenue growth over prior year		1812	%		2618	%		1126	%		1411	%		2014	%
Other revenue	$	5.4.8		$	45.94		$	24.59		$	42.15		$	24.1
Other revenue changes over prior year		10(11)	%		9610	%		~~(39)~~96	%		95(39)	%		~~(46)~~95	%
Total revenue	$	~~244~~272.25		$	~~208~~244.12		$	~~163~~208.21		$	~~148~~163.82		$	~~128~~148.58
Total revenue growth over prior year		1712	%		2817	%		1028	%		1610	%		1716	%

*The revenue growth rate data for the years ended December 31, 2017 and 2016 reflects the adoption of ASC 606. The revenue growth rate data for the years ended December 31, 2015, 2014 and 2013 does not reflect the adoption of ASC 606.

Over the past five years, we have experienced double-digit annual growth in Core revenue. Our Core revenue growth during that period has been the result of a combination of the net addition of new independent dealers and distributors to our sales channels, an increase in the number of projects performed by our existing network of independent dealers and distributors, and the addition of new products developed internally and acquired through business combinations. We believe our ability to grow our core sales channel has been enhanced through product innovation, expansion of our product offerings and helping our independent dealers and distributors grow their business. Some recent developments that we believe may enhance our offerings and help drive growth include, but are not limited to, the following:

· ~~Added~~Opened ~~BakPak~~an ~~remote~~additional ~~management~~fulfillment ~~capability~~center toin ~~all~~Hebron, ~~Pakedge~~Kentucky, WKin ~~and~~an WXeffort ~~access~~to ~~points,~~better assupport ~~well~~our asdealers ~~PowerPak~~with ~~power~~faster ~~distribution~~shipping ~~units,~~on ~~allowing~~all ~~our~~products ~~Dealers~~and to ~~easily~~provide ~~reboot~~additional ~~their~~redundancy ~~customers’~~if ~~devices,~~there ~~update~~is ~~firmware,~~an orinterruption ~~change~~of ~~WiFi~~service ~~passwords~~experienced ~~remotely~~by one of our other fulfillment facilities;

Expanded our KNX, a popular standard for lighting and HVAC control in global markets including Australia, China, Germany, Singapore, and the United Kingdom, solution to natively support over 300 KNX products including new keypads, lighting, HVAC, and shades. This support for KNX enables interoperability with the entire Control4 ecosystem, including support for Amazon Alexa voice control, where available, and nearly 13,000 other connected products;

Released OS 2.10.4, featuring expanded music streaming service integration with Amazon Music and Deezer HiFi as well as added hands-on personalization choices for homeowners with our “When >> Then” automation;

· Released Intercom Anywhere, a modern video doorbell enabling homeowners to see and communicate with visitors at the front door, whether they~~’re~~ are home or away, in addition to allowing the homeowner to see who’s is at the door prior to answering; and

· Unveiled over ~~150~~200 Control4 Certified Showrooms built by Control4 ~~Authorized~~authorized ~~Dealers~~dealers at their locations across the United States, ~~Canada~~Australia, ~~United Kingdom~~Canada, China, and ~~Australia~~the United Kingdom, revolutionizing how people learn about, experience, and interact with Control4 smart home solutions. The Control4 Certified Showroom program is designed to direct homeowners, architects, and designers in the market for smart home solutions to a location where they can experience Control4 solutions in a showroom environment;.

· While ~~Introduced~~ our ~~new~~historical ~~CA-1~~revenue ~~controller~~growth has been primarily organic, anwe ~~entry~~have ~~level~~completed ~~controller~~several acquisitions that we believe enhance our product offerings and position us for ~~projects~~continued growth in the future. Recent acquisitions that ~~only~~have impacted our growth include ~~lighting,~~the ~~temperature~~acquisition ~~control,~~of ~~and~~Pakedge ~~security~~in ~~integration,~~2016 and doTriad ~~not~~in ~~require~~2017. More ~~additional~~recently, ~~entertainment~~we ~~features~~have ~~found~~acquired NEEO in 2019, which will enhance our EAuser ~~series~~interface ofproduct ~~controllers;~~offerings and impact our growth in the

· Launched an extensive line of Triad high-resolution multi-room audio products featuring a single-zone streaming amplifier, a power amplifier, and two audio matrix switches, designed to deliver high-resolution audio in every corner of the home, from the source to the listener’s ears. 28

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~~While~~future. ~~our~~Moreover, ~~historical~~in ~~revenue~~the ~~growth~~first ~~has~~quarter ~~been~~of ~~primarily organic~~2019, we ~~have~~transitioned ~~completed~~from ~~several~~a ~~recent~~two-tier ~~acquisitions~~distribution ~~that~~model weto ~~believe~~a ~~enhance~~direct-to-dealer ~~our~~model ~~product~~in ~~offerings~~Ireland, ~~and~~New ~~position~~Zealand, usand ~~for~~Switzerland, ~~continued~~which ~~growth~~we inbelieve ~~the~~will ~~future.~~position ~~Recent~~us ~~acquisitions~~for ~~that~~continued ~~have impacted our~~ growth ~~include the acquisition of Pakedge~~ in ~~2016~~those ~~and Triad in 2017~~countries.

Historically, we have experienced seasonal variations in our revenue as a result of holiday-related factors that are common in our industry. Our revenue is generally highest in the fourth quarter due to consumers’ desires to complete their home installations prior to the holiday season. We generally see decreased sales in the first quarter due to seasonal purchase tendencies of consumers as well as the impact of winter weather on new construction and travel in certain geographies. In addition, our year-over-year revenue growth on a quarterly basis is not always linear for a variety of reasons including: the timing of new product releases, the use of marketing programs to accelerate intra-quarter sales of certain products or product families, the impact of foreign currency fluctuations, and the impact of general regional economic conditions on consumer buying decisions and harsh weather that delayed or canceled building projects. We generally expect these seasonal and other trends to continue in the future, which may cause quarterly fluctuations in our results of operations and certain financial metrics.

Factors and Trends Affecting Our Performance

A number of industry trends have facilitated our growth over the past several years, including the proliferation of connected devices and the constant growth of network-enabled homes and businesses. From smartphones to smart watches to smart cars, technology is transforming nearly every aspect of our lives, streamlining daily routines and providing quick, easy access to the capabilities and content we want most. Not only are new technologies providing convenience on-the-go, but they are becoming increasingly accessible and interconnected. Voice services are a recent example of an emerging technology in our connected world, and our integration with Amazon Alexa helps keep us at the forefront of our industry in our adoption of voice-activated solutions. We remain committed to embracing emerging technologies through our open platform and broad ecosystem.

Our open platform makes it easy for a broad community of original equipment manufacturer partners to participate in our smart home ecosystem, which includes over 1213,500 drivers and approximately 5 7,~~800~~ 500 Simple Device Discovery Protocol ~~enabled~~ (“SDDP”~~-enabled~~) enabled products,. SDDP ~~compared~~is toa ~~3,300~~software ~~SDDP-enabled~~solution ~~products~~that ~~reported~~we inmake Q1available ~~2018. The~~to ~~increase~~manufacturers inof ~~SDDP-enabled~~network ~~products~~aware isdevices, ~~due~~which toallows ~~the~~them ~~implementation~~to ~~and~~be ~~shipment~~immediately ofrecognized ~~hundreds~~by ofa ~~new~~Control4 ~~SDDP-enabled~~system, ~~television~~allowing ~~models~~our ~~worldwide~~integration byto ~~manufacturers~~be ~~such~~completed asquickly ~~LG, Samsung~~ and ~~Sony~~seamlessly. We believe that ~~these and other~~ companies are increasingly recognizing the value of including SDDP with their new releases to simplify integration of their products into Control4 installations. Our broad ecosystem, which includes audio, video, lighting, temperature, network, security and communication device categories, gives consumers flexibility to integrate nearly any connectable device into their smart home. In addition, our partners are constantly contributing new device integrations. As such, our dynamic ecosystem remains current with the latest product innovations and allows our smart home platform to grow alongside emerging technologies to meet our consumers’ changing needs and preferences. We believe that our open platform and the resulting ecosystem is a key competitive advantage that will continue to facilitate our growth.

Our products leverage both wired and wireless technologies and are designed to be installed in both new construction and existing homes. We expect that future increases in both new home construction and existing home renovations will have a positive impact on our revenue. In new home construction, we continue to engage builders to introduce entry- to mid-level Control4 systems as a standard feature in new home projects, and we believe that the release of our new CA-1 controller, which is offered at the lowest price point of any Control4 controller, will help with adoption of our solutions in these types of projects. We further believe home automation is increasingly becoming a higher priority for home buyers, and this is one of the reasons for our investment in national and regional builder programs.

We believe that the growth of our business and our future success are dependent upon many factors, including the rates at which consumers adopt our products and services, our commitment to growing the awareness of our brands, our ability to optimize and expand our dealer and distributor network, our ability to expand internationally, our ability to meet competitive challenges, and our ability to respond to worldwide economic events. While each of these areas presents significant opportunities for us, they also pose important challenges that we must successfully address to sustain or expand the growth of our business and improve our results of operations. These challenges include:

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Increasing Adoption Rates of Our Products and Services. We are focused on increasing adoption rates of our products and services through enhancements to our software platform and product offerings. We intend to accomplish these enhancements through both continued investments in research and development activities and acquisitions of complementary businesses and technologies.

· Growing Our Leadership Position in the Industry. We are committed to growing awareness of the Control4, Pakedge, and Triad brands among our dealers, distributors and partners. We believe that our investments in creating brand awareness in the industry have contributed to dealer recruitment, product adoption, and revenue growth. We are proud of the many awards we received from various industry groups and dealer consortiums, formally recognizing our commitment to excellence. For example, Control4 was named the top home automation provider in seven of the 2018 CE Pro Brand Analysis categories. Notably, Control4 was named the Brand Leader in Whole-House Automation for the fourth consecutive year, and Pakedge was named the Brand Leader for Home Networks for the sixth year in a row. Furthermore, in 2019, Control4 received a record 10 CE Pro Quest for Quality awards, the highest number of awards given to a single manufacturer, including Platinum for Best Technical Support, Best Lead Generation, and Best Sales & Marketing Assistance.

Accelerating and Enhancing Consumer Lead Generation. We remain focused on generating and pursuing leads received from our marketing efforts. We are continuing to invest in new online tools and inside sales representatives to qualify inbound inquiries and direct them to qualified independent dealers. To date, our enhanced lead generation strategies continue to increase consultations, bids and project installations. Through the continual optimization of our marketing efforts and investment, we believe we can improve lead conversion rates and increase the amount of revenue per lead.

Optimizing and Expanding Our North America Dealer Network. We intend to continue to optimize the performance of and expand our network of dealers in North America to ensure that we have geographic coverage and technical expertise to address our existing markets and new markets into which we plan to expand. We continue to work with all appropriately qualified dealers to explore our home control, networking, and audio solutions, and we continue to cross-train and cross-certify dealers in accordance with our existing standards of technical proficiency and business practices.

· Expanding our International Dealer and Distributor Network. We believe that our future growth will depend in part on our ability to expand our dealer and distributor network outside of North America, to adapt our products and services to foreign markets, and to increase awareness of our brands internationally. We continue to add field sales and service personnel to assist in the optimization of our international channels. We have adopted a direct-to-dealer model in specific international regions, namely in ~~the United Kingdom~~Australia, China, Germany, Ireland, New Zealand, Switzerland, and ~~Australia~~the United Kingdom, and we will continue to evaluate opportunities in other countries.

Managing Competition. The market for home automation is fragmented, highly competitive and continually evolving. In addition to competing with traditional players in the luxury segment of the home automation market, including Crestron, Elan, and Savant, a number of large technology companies such as Amazon, Apple, Google, and Samsung offer device control capabilities within some of their products, applications and services, and are engaged in ongoing efforts to address the broader home automation market. In addition, managed service companies such as ADT, Alarm.com, Comcast, and Vivint, have broadened their service offerings to include control of devices such as door locks, lights, and cameras. Our ability to compete in the growing home automation market over the next several years will be a key factor in our ability to continue to grow our business and meet or exceed our future expectations.

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Key Operating and Financial Metrics

We use the following key operating and financial metrics to evaluate and manage our business.

North America Direct Dealers(1)

	Three Months Ended				~~Nine Months Ended~~
	September 30,				September 30,
	March 31,
	2018		2017		2018		2017
	2019		2018
Authorized dealers at the beginning of the period	3,~~280~~402		3,~~085~~174		~~3,174~~		~~2,994~~
Additions	9094		6983		~~254~~		~~233~~
Terminations	(1433)		(1542)		~~(72)~~		~~(88)~~
Authorized dealers at the end of the period	3,~~356~~463		3,~~139~~215		~~3,356~~		~~3,139~~
Number of active dealers(2)	3,~~217~~305		3,~~019~~108		~~3,217~~		~~3,019~~
Active dealers as a % of authorized dealers(2)	9695	%	9697	%	96	%	96	%

International Direct Dealers(1)

	Three Months Ended				~~Nine Months Ended~~
	September 30,				September 30,
	March 31,
	2018		2017		2018		2017
	2019		2018
Authorized dealers at the beginning of the period	1,~~410~~479		1,~~242~~315		~~1,315~~		~~1,147~~
Additions	59		61		183		178
Additions(3)	183		52
Terminations	(725)		(209)		~~(36)~~		~~(42)~~
Authorized dealers at the end of the period	1,~~462~~637		1,~~283~~358		~~1,462~~		~~1,283~~
Number of active dealers(2)	1,~~226~~290		1,~~148~~195		~~1,226~~		~~1,148~~
Active dealers as a % of authorized dealers(2)	8479	%	8988	%	84	%	89	%

	Three Months Ended				~~Nine Months Ended~~
	September 30,				September 30,
	March 31,
	2018		2017		2018		2017
	2019		2018
Number of controllers sold	3123,~~017~~517		2623,~~814~~413		~~83,301~~		~~74,297~~
Core revenue growth	123	%	1718	%	14	%	17	%
International core revenue as a percentage of total revenue	2223	%	22	%	22	%	21	%

(1) These dealer figures only include dealers authorized to sell and install the full Control4 line of products and exclude the approximately ~~980~~870 dealers that are currently authorized to sell only the Pakedge and Triad line of products.

(2)

An “active dealer” is an authorized dealer that has placed an order with us in the trailing 12-month period.

(3)

The figures for the three months ended March 31, 2019 include 133 dealers that were acquired as part of the direct-to-dealer transitions in Ireland, New Zealand, and Switzerland.

Number of North America and Direct International Dealers

Because our dealers promote, sell, install and support our products, a broader dealer network allows us to reach more potential consumers across more geographic regions. We expect our dealer network to continue to grow, both in North America and internationally. While we have historically focused on dealers affiliated with CEDIA, our sales team focus includes adding new dealers outside of CEDIA, including non-traditional A/V dealers, electrical contractors, and security system installers.

Strengthening our worldwide dealer channel through business and installation tools, education programs, and new dealer recruitment also remains an ongoing priority. Our goal is to continuously increase our dealers’ productivity and growth. Enabling our dealers to increase productivity will ultimately drive our revenue growth.

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In conjunction with the broad availability of our newest generation products and software, we periodically review each of our current dealers with regard to their ability to successfully market, sell and install our current solutions. Part of developing a productive, capable dealer network, requires us to regularly review individual dealer performance and as necessary, terminate dealer licenses where volume, technical training and performance requirements are not fulfilled. We view this as a healthy part of growing our dealer channel worldwide.

As a result of our traditional efforts to expand our channel, the number of active international dealers for our full Control4 line of products increased 78% from ~~September~~March 3031, ~~2017~~2018 to ~~September~~March 3031, ~~2018~~2019, and we saw an increase of 76% in the number of active North American direct dealers during the same period.

Number of Controllers Sold

Our controllers contain our proprietary software and provide consumers with the essential technology to enable home control, automation and personalization. The number of controllers we sell in a given period provides us with an indication of consumer adoption of our technology, though a variety of other factors may also impact controller sales variability from period to period. Our sales of controllers also create significant opportunity to sell our other products and services. Once a consumer has deployed our controller, we believe that the consumer is more likely to remain committed to our technology platform and purchase more of our products, applications and services in the future.

In February 2018, we released our CA-1 controller, which is designed for entry-level projects for homeowners interested in lighting, temperature control, and security. Our Entertainment and Audio (“EA”) and Controller and Automation (“CA”) controllers, together, better address a broad range of solutions from simple single room projects to large, elegant whole-home deployments. Our EA-1 and CA-1 controllers broaden the addressable market for our solutions by providing single-room and lower cost solutions which typically involve more narrowly defined use cases with fewer connected devices. During the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~ 2019, 24 25% of the Control4 automation projects our dealers sold were single-room or low-cost projects consisting only of a controller or controller paired with a remote.

During the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019, we sold 3123,~~017~~517 ~~and 83,301~~ controllers, ~~respectively,~~ compared to 2623,~~814~~413 ~~and 74,297~~ controllers sold in the same period in ~~2017, respectively, an increase of 16% and 12%, respectively~~2018.

Core Revenue Growth

The majority of our revenue comes from sales of our products through our distribution channels comprised of independent dealers in the United States and Canada, and independent dealers and distributors located throughout the rest of the world. We refer to revenue attributable to sales through dealers located in the United States and Canada as “North America Core revenue,” and revenue attributable to sales through dealers and distributors located throughout the rest of the world as “International Core revenue.” Core revenue does not include revenue from sales to hotels or certain specialty display products and associated installation sales in Australia.

International Revenue as a Percentage of Total Revenue

We believe that the international market represents a large and underpenetrated opportunity for us. We have established or acquired sales support offices in the United Kingdom, Australia, New Zealand, Germany, China, and India. We have formed relationships with independent international dealers and distributors, and we have expanded foreign language support for our solutions. We track international revenue as a percentage of total revenue as a key measure of our success in expanding our business internationally.

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Results of Operations

Revenue

The following is a breakdown of our revenue between North America and International Core revenue and other revenue:

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2018			2017			2018			2017
	2019			2018
	(in thousands)
North America Core Revenue	$	5446,~~030~~199		$	4845,~~601~~701		$	~~152,087~~		$	~~135,074~~
International Core Revenue		1514,~~815~~145			1312,~~973~~790			~~43,756~~			~~37,308~~
Other Revenue		~~1,749~~81			~~2,009~~658			~~4,128~~			~~3,661~~
Total Revenue	$	7160,~~594~~425		$	6459,~~583~~149		$	~~199,971~~		$	~~176,043~~
North America Core Revenue as a % of Total Revenue		7576	%		7577	%		76	%		77	%
International Core Revenue as a % of Total Revenue		2223	%		22	%		22	%		21	%

North America Core revenue increased $50.45 million, or 111%, ~~and $17.0 million, or 13%,~~ for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019, ~~respectively,~~ compared to the same ~~periods~~period in ~~2017~~2018. International Core revenue increased $1.~~8 million, or 13%, and $6.~~4 million, or 1711%, in the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019, ~~respectively,~~ compared to the same ~~periods~~period in ~~2017~~2018.

Revenue growth in both North America and internationally is driven by a variety of factors. We continue to see growth from net new dealer additions as well as growth from existing dealers driven by an increase in the number of projects that are being performed and increased ~~project~~revenue ~~share~~per project, which is a derivative of our new product innovation and our acquisition strategy. However, we believe macro-economic factors are creating headwinds for many businesses, including ours, which has contributed to a deceleration in our growth rate starting in the third quarter of 2018 and influence our perspective on near-term opportunities and our current year guidance.

Our international sales model includes both direct-to-dealer and distribution channels. In targeted international regions and countries, we generally invest in some combination of local technical support, training personnel and facilities, warehousing and fulfillment, and sales support personnel. We have made these types of investments in the regions serviced by our offices in the United Kingdom, Germany, Australia, New Zealand, China, and India and these are markets where we see our greatest opportunity for international growth and expansion.

The following table further breaks out our International Core revenue and illustrates the relative revenue growth we are experiencing in the regions serviced by our offices in the United Kingdom, Germany, Australia, New Zealand, China, and India compared to other international regions. The revenue figures for the three months ended March 31, 2018 have been adjusted in the following table to include New Zealand as a Targeted International Region for comparability to the three months ended March 31, 2019.

Three Months Ended

~~Nine Months Ended~~

September 30,

March 31,

2018

2017

2018

2017

2019

2018

(in thousands)

Targeted International Regions (1)

12,~~298~~172

1011,~~692~~055

~~35,549~~

~~29,258~~

Other International Regions

31,~~517~~973

31,~~281~~735

~~8,207~~

~~8,050~~

Total International Core Revenue

1514,~~815~~145

1312,~~973~~790

~~43,756~~

~~37,308~~

(1) Serviced by our offices in the United Kingdom, Germany, Australia, China, and India.

(1) Serviced by our offices in the Australia, China, Germany, India, New Zealand and the United Kingdom.

International Core revenue in the targeted international regions grew 1510% ~~and 22%~~ during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019, ~~respectively,~~ compared to the same ~~periods~~period in ~~2017~~2018, while International Core revenue in the other international regions increased 714% ~~and~~ 2% during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019, ~~respectively,~~ compared to the same ~~periods~~period in ~~2017~~2018.

Improvements in ~~foreign~~channel ~~currency~~mix, ~~exchange~~with ~~rates~~more ~~and~~revenue ~~general~~being ~~economic~~generated ~~conditions~~from sales to dealers instead of distributors, in our targeted international regions have generally contributed to an increase in revenue for the three and nine months ended September 30, 2018 compared to the same periods in 2017. A higher percentage of sales were made direct-to-dealer in our other international regions during the three months ended September 30, 2018 compared to the same period in

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~~2017~~months ended March 31, 2019 compared to the same period in 2018. ~~The~~A ~~revenue~~higher ~~growth~~percentage of sales were made direct-to-dealer in our other international regions during the three months ended March 31, 2019 compared to the same period in 2018. Revenue in our other international regions was negatively impacted by ownership changes and unfavorable geo-political conditions during ~~the first half of~~ 2018.

We continue to make investments internationally to improve our dealers’ ability to sell and install our products and believe that these investments will enable us to grow our key international markets. Notwithstanding the foregoing, we sell broadly throughout the world and we believe that regional, adverse international economic conditions may create challenges and slow growth in certain geographies in the future.

Gross Margin

As a percentage of revenue, our gross margin has been, and will continue to be, affected by a variety of factors. Our gross margin is relatively consistent across our products. Our gross margin on third-party products that we sell through our online distribution platform is higher than our gross margin on our other product sales because we only recognize our net profit on these sales as revenue. While software licensing and subscription revenue is not material for all periods presented, our gross margin is higher on software licensing and subscription revenue than it is on product sales. Our gross margin is also higher on our sales made directly through dealers than it is on our sales made through distributors. Gross margin may be negatively affected by price competition in our target markets, associated promotional or volume incentive rebates offered to our independent dealers and distributors, as well as import and export tariffs.

InGross ~~addition,~~margin infor ~~conjunction~~the ~~with~~three ~~our~~months ~~acquisition~~ended ofMarch ~~Triad in 2017~~31, we2019 ~~were~~and ~~required~~2018 towas ~~record acquired inventory at fair value,~~ as ~~determined~~follows ~~under ASC 805, Business Combinations, resulting~~ (in ~~a step-up in the inventory value. Such step-up is recorded through cost of goods sold when the specific inventory is sold~~thousands, ~~resulting~~except ~~in a negative impact to our gross margin. Also, cost of goods sold includes ongoing, periodic amortization of the acquired technology.~~percentages):

Gross margin for the three and nine months ended September 30, 2018 and 2017 was as follows (in thousands, except percentages):


	Three Months Ended
	March 31,
	2019			2018
Gross margin	$	29,283		$	30,739
Percentage of revenue		48.5	%		52.0	%

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Gross margin	$	37,110		$	33,063		$	104,211		$	89,471
Percentage of revenue		51.8	%		51.2	%		52.1	%		50.8	%

As a percentage of revenue, our gross margin was 48.5% for the three months ended March 31, 2019, compared to 52.0% for the same period in 2018. The decrease in gross margin was primarily due to unfavorable fluctuations in exchange rates in markets where we sell our products in the local currency, higher programmatic price reductions, higher fixed overhead costs and product mix; offset by lower volume incentive rebates and an increase in 4Sight subscriptions due to enabling end customers with the ability to self-renew their subscriptions online.

AsOur asales ~~percentage~~in ofEurope, ~~revenue~~Australia, ~~our~~New ~~gross~~Zealand ~~margin~~and ~~was~~Canada ~~51.8%~~are ~~and~~generally ~~52.1%~~priced ~~for~~in the ~~three~~pound ~~and~~sterling, ~~nine~~Swiss franc, ~~months~~or ~~ended~~the ~~September 30~~euro, ~~2018,~~the ~~respectively~~Australian dollar, ~~compared~~the toNew ~~51.2%~~Zealand dollar, and ~~50.8% for~~ the ~~same~~Canadian ~~periods in 2017~~dollar, respectively., ~~The~~while ~~increase~~our incost ~~gross~~of ~~margin~~goods ~~was~~sold ~~primarily~~is ~~due~~denominated toin ~~favorable~~the ~~fluctuations~~U.S. indollar. ~~exchange~~The ~~rates~~changing invalue ~~markets~~of ~~where~~the wepound ~~sell~~sterling, ~~our~~the ~~products~~euro, inand the ~~local currency~~Australian, ~~lower~~New ~~programmatic~~Zealand ~~price~~and ~~reductions,~~Canadian ~~and~~dollars anrelative ~~increase~~to inthe ~~4Sight~~U.S. ~~subscriptions~~dollar ~~due~~will continue to ~~enabling~~contribute ~~end customers~~to ~~with~~variability ~~the~~in ~~ability~~our togross ~~self-renew~~margin ~~their~~for ~~subscriptions~~sales ~~online~~in Europe, Australia, New Zealand and Canada.

Our sales in Europe, Australia and Canada are generally priced in the pound sterling or the euro, the Australian dollar and the Canadian dollar, respectively, while our cost of goods sold is denominated in the U.S. dollar. The changing value of the pound sterling, the euro, and the Australian and Canadian dollars relative to the U.S. dollar will continue to contribute to variability in our gross margin for sales in Europe, Australia and Canada.

The impact of distribution and other overhead expenses as a percentage of revenue on our gross margin percentage varies depending on total revenue and overhead spending in a given period.

Beginning in the second quarter of 2018, we began making incremental investments in our global fulfillment centers to accommodate growth and improve delivery times to our dealers, which ~~will~~put ~~moderate~~downward pressure on our gross margin ~~improvements during the remainder of 2018~~ but should enable us to continue to scale and improve gross margins in future years. ~~These expenses will continue to increase during the fourth quarter as we begin shipping out of our new domestic east coast fulfillment center.~~

~~Recently~~In 2018, the U.S. government announced new tariff rules on goods imported from China. The first of these new tariffs went into effect on July 6 and August 23, 2018 for certain classes of imported goods, while further tariffs are currently under consideration. To date, we have absorbed the impact of the new tariffs. We will continue to monitor developments and changes to import tariffs so that we can plan and address these developments and changes, as well as explore all options to reduce the impact of any further rule changes.

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are currently under consideration. During the fourth quarter of 2018, we expect to absorb the impact of the currently announced new tariffs. We will continue to monitor developments and changes to import tariffs so that we can plan and address these developments and changes, as well as explore all options to reduce the impact of any further rule changes.

Research and Development Expenses

Research and development expenses consist primarily of compensation for our engineers and product managers, including non-cash stock compensation expense. Research and development expenses also include prototyping and field-testing expenses incurred in the development of our products. We also include fees paid to agencies to obtain regulatory certifications. Finally, research and development expenses include ongoing, periodic amortization of acquired intangible assets.

Research and development expenses for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018 were as follows (in thousands, except percentages):

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2018			2017			2018			2017
	2019			2018
Research and development	$	11,~~144~~817		$	10,~~347~~940		$	~~32,595~~		$	~~30,246~~
Percentage of revenue		1620	%		1618	%		16	%		17	%

Research and development expenses increased $0.89 million, or 8%, ~~and $2.3 million, or 8%,~~ in the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019, ~~respectively,~~ compared to the same ~~periods~~period in ~~2017~~2018. The increase in absolute dollars primarily relates to ~~personnel~~ costs, ~~which~~associated inwith ~~part~~personnel, ~~can~~including benon-cash ~~attributed~~stock tocompensation ~~increased headcount from our recent business acquisitions as well as support for existing product lines and ongoing innovations~~expense, as well as product development, tooling, and ~~contract~~costs ~~labor~~associated ~~costs~~with NEEO.

Our research and development expenses both as a percentage of revenue and in absolute dollars fluctuate depending on our investments in the development of new solutions. For example, the timing of new hardware and software releases and the expense associated with prototyping, beta testing and compliance and regulatory fees can have an impact on total research and development expenses from period to period.

~~For~~We ~~the remainder of 2018, we~~ expect research and development expenses to increase year over year in absolute dollars, as we continue to invest in new product development to drive future revenue growth, but to remain flat ~~or decrease slightly as a percentage of revenue~~.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of compensation and related travel expenses for our sales, technical support and marketing personnel, including non-cash stock compensation expense. Sales and marketing expenses also include expenses associated with trade shows, marketing events, advertising and other marketing-related programs. We also include the amortization of certain intangible assets such as those related to our dealer network as well as those related to trademarks/trade names.

Sales and marketing expenses for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018 were as follows (in thousands, except percentages):

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2018			2017			2018			2017
	2019			2018
Sales and marketing	$	13,~~520~~342		$	12,~~692~~535		$	~~38,608~~		$	~~36,082~~
Percentage of revenue		1922	%		2021	%		19	%		20	%

Sales and marketing expenses increased $0.8 million, or 76%, ~~and $2.5 million, or 7%,~~ in the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019, ~~respectively,~~ compared to the same ~~periods~~period in ~~2017~~2018. The increase in absolute dollars primarily relates to increased personnel costs, which can be attributed to expanding our support for our growing channel including additional staffing to support marketing and sales services provided on behalf of our dealers, as well as credit card processing fees associated with revenue growth and discretionary marketing costs.

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growing channel including additional staffing to support marketing and sales services provided on behalf of our dealers, as well as credit card processing fees associated with revenue growth and offsite events related to the release of the CA-1 controller.

We expect our sales and marketing expenses to increase year over year in absolute dollars as we work to grow our global sales channels, but to decrease slightly as a percent of revenue in future periods.

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General and Administrative Expenses

General and administrative expenses consist primarily of compensation for our employees in our executive administration, finance, information systems, human resource and legal departments, including non-cash stock-based compensation expense. Also included in general and administrative expenses are outside legal fees, audit fees, facilities expenses and insurance costs. Finally, during a period with an acquisition, we also include acquisition-related costs in general and administrative expenses.

General and administrative expenses for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018 were as follows (in thousands, except percentages):

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2018			2017			2018			2017
	2019			2018
General and administrative	$	67,~~913~~117		$	56,~~109~~293		$	~~19,534~~		$	~~16,413~~
Percentage of revenue		1012	%		811	%		10	%		9	%

General and administrative expenses increased $10.8 million, or 3513%, and ~~$3.1 million, or 19%,~~ in the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019, ~~respectively,~~ compared to the same ~~periods~~period in ~~2017~~2018. The increase in absolute dollars ~~for the three and nine months ended September 30, 2018~~ primarily relates to personnel costs, including non-cash stock compensation expense, ~~and~~ as well as professional fees, including costs associated with ~~revised~~the ~~customs~~integration ~~tariff~~of ~~rules~~NEEO, and ~~the~~facilities ~~audit~~costs ofwith ~~internal~~our ~~controls~~various asoffices wethroughout ~~transition~~the ~~from~~world, ~~being~~including anthree ~~“emerging~~new ~~growth~~offices ~~company”~~in New Zealand and Switzerland as ~~defined~~a inresult of the ~~JOBS~~direct-to-dealer ~~Act~~transition asin ofNew ~~December~~Zealand ~~31,~~and ~~2018~~the NEEO acquisition.

We expect our general and administrative expenses to increase year over year in absolute dollars as a result of growth in the business, increasing facilities costs associated with our various offices throughout the world, incremental professional fees related to the ~~audit~~integration of ~~internal~~business ~~controls~~combinations, and increases in administrative expenses and fees that typically occur over time.

Income Tax ~~Expense (~~Benefit)

Income tax ~~expense (~~benefit) for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018 was as follows (in thousands, except percentages):

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2018			2017			2018			2017
	2019			2018
Income tax expense (benefit)	$	67		$	85		$	112		$	(2,459)
Income tax benefit	$	(766)		$	(116)
Percentage of revenue		01	%		0	%		0	%		1	%

We recognized income tax ~~expense~~benefit of $0.~~1 million~~8 ~~and $0.1~~ million, or approximately 128% ~~and 1%~~ of ~~income~~loss before income taxes, for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019, ~~respectively,~~ compared to income tax ~~expense~~benefit of $0.1 million ~~and income tax benefit of $2.5 million~~, or approximately 214% ~~and 34%~~ of income before income taxes, for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2017, respectively~~2018. The effective tax rate differs from the U.S. federal statutory rate of 21% ~~in 2018 and 35% in 2017~~ primarily due to the ~~domestic~~limitations ~~valuation~~on ~~allowance offsetting most of the statutory rate, partial reversal of the valuation allowance due to the deferred~~ tax ~~liabilities~~deductions ~~that~~allowable ~~were~~for ~~recorded~~executive ascompensation ~~part~~and ofglobal ~~the~~intangible ~~Triad~~low-taxed ~~acquisition~~income, inor ~~2017~~GILTI, state income taxes, and foreign income taxes, ~~and~~offset by tax ~~credits~~deductions ~~related~~resulting tofrom ~~the exercise of incentive~~ stock-based ~~options~~compensation.

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Significant judgment is required in determining our provision for income taxes and evaluating our uncertain tax positions. In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, our forecast of future market growth, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. Due to historical net losses incurred and the uncertainty of realizing the deferred tax assets, for all the periods presented, we have a full valuation allowance against our domestic deferred tax assets. To the extent that we generate positive domestic income and expect, with reasonable certainty, to continue to generate positive income, we may release our valuation allowance in a future period. This release would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period such release is made.

On December 22, 2017, the United States enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax and remeasuring U.S. deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Where we have been able to make reasonable estimates of the effects of the Tax Act for which our analysis is not yet complete, we have recorded provisional amounts in accordance with SAB 118. Where we have not yet been able to make reasonable estimates of the impact of certain elements of the Tax Act, we have not recorded any amounts related to those elements and have continued accounting for them in accordance with the tax laws in effect immediately prior to the enactment of the Tax Act.

For additional information with respect to our accounting for the Tax Act, see Note 10 “Income Taxes” in the notes to condensed consolidated financial statements (unaudited).

Liquidity and Capital Resources

Primary Sources of Liquidity

As of ~~September~~March 3031, ~~2018~~2019, we had $9172.20 million in unrestricted cash and cash equivalents and net marketable securities, ana ~~increase~~decrease of $521.1 3 million from December 31, ~~2017~~2018. The overall change in cash and cash equivalents and net marketable securities was primarily due to the following:

· We ~~generated~~acquired NEEO for $2214.05 million in consideration, less the non-cash ~~from~~settlement ~~operations~~of ~~during~~receivables ~~the~~outstanding ~~period;~~as of December 31, 2018 of $1.7 million, acquired cash of approximately $0.4 million and

~~· We received $10.7 million in proceeds from the exercise of options for common stock;~~ 36

· In February 2018, our Board of Directors authorized the expansion of the repurchase program providing approval to repurchase up to $20 million in Control4 common stock from time to time on the open market; and in October 2018, the Board of Directors amended this amount by an additional $20 million and extended the repurchase period to December 31, 2019. For the nine months ended September 30, 2018, we have repurchased a total of 600,000 shares for approximately $16.0 million;

· We made $6.4 million in payments for withholding taxes in lieu of issuing an additional 242,531 shares related to the net share settlement of restricted stock units that lapsed during the period;

· We made capital purchases of approximately $3.9 million; and

· We paid the $1.1 million Holdback to Triad in accordance with the purchase agreement.

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~~one~~a toholdback ~~two~~of ~~years~~approximately $1.3 million, ~~with~~resulting ~~the~~in ~~average~~net ~~maturity~~cash paid of ~~our~~approximately ~~investment~~$11.1 ~~portfolio~~million. ~~less~~The ~~than~~remaining ~~one year~~$1.3 ~~Cash~~million ~~equivalents~~holdback ~~and~~will ~~marketable~~be ~~securities~~held ~~are~~for ~~comprised~~up ofto ~~money~~18 ~~market~~months ~~and~~from ~~other~~the ~~funds,~~acquisition ~~highly~~date ~~liquid~~to ~~debt~~cover ~~instruments~~any of the ~~U.S.~~sellers’ ~~government~~post-closing ~~and its agencies~~obligations, ~~debt~~including ~~instruments~~without ~~issued~~limitation byany ~~municipalities~~indemnification inobligations ~~the~~that ~~United~~may ~~States., corporate securities, and asset-backed securities.~~ arise;

~~The~~· ~~following~~In ~~table~~February ~~shows~~2018, ~~selected~~our ~~financial~~Board ~~information~~of asDirectors authorized the expansion of ~~September~~the ~~30,~~repurchase program providing approval to repurchase up to $20 million in Control4 common stock from time to time on the open market; and in October 2018, the Board of Directors amended this amount by an additional $20 million and extended the repurchase period to December 31, ~~2017~~2019. ~~(in~~For ~~thousands):~~ the three months ended March 31, 2019, we have repurchased a total of 139,782 shares for approximately $2.5 million;

	September 30, 2018		December 31, 2017
Cash and cash equivalents	$	35,373	$	29,761
Investments, net(1)		55,779		56,254
Accounts receivable, net		34,157		29,925
Inventories		41,621		37,171
Working capital		130,533		104,529
(1) Includes accrued investment balances not included in the investments line items on the condensed consolidated balance sheet.

We made $1.8 million in payments for withholding taxes in lieu of issuing an additional 103,094 shares related to the net share settlement of restricted stock units that lapsed during the period;

· We ~~closely~~used ~~monitor~~cash ~~accounts~~from ~~receivable~~operations ~~and inventory because~~ of ~~their significant impact on cash and working capital. Our accounts receivable balance at September 30, 2018 has increased by~~ $4.27 million, orduring 14%, since December 31, 2017, due to our revenue growth. Furthermore, inventory has increased by $4.5 million from December 31, 2017 to September 30, 2018. The increase in inventory was due primarily to normal inventory buildup associated with revenue growth and the ~~introduction of new products.~~ period;

· We ~~have~~made ancapital ~~asset-based,~~purchases ~~revolving credit facility~~ of approximately $401.0 2 million; and ~~at September 30, 2018 we had no outstanding borrowings under the credit facility.~~

We received $0.3 million in proceeds from the exercise of options for common stock.

We invest in highly-rated securities, and our investment policy generally limits the amount of credit exposure to any one issuer. Our investment policy requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. The maturities of our long-term investments range from one to two years, with the average maturity of our investment portfolio less than one year. Cash equivalents and marketable securities are comprised of money market and other funds, highly liquid debt instruments of the U.S. government and its agencies, debt instruments issued by municipalities in the United States, corporate securities, and asset-backed securities.

The following table shows selected financial information as of March 31, 2019 and December 31, 2018 (in thousands):



	March 31, 2019		December 31, 2018
Cash and cash equivalents	$	19,828	$	40,395
Investments, net(1)		52,154		52,932
Accounts receivable, net		30,316		33,016
Inventories		45,867		42,684
Working capital		114,951		134,386

(1) Includes accrued investment balances not included in the investments line items on the consolidated balance sheet.

We closely monitor accounts receivable and inventory because of their significant impact on cash and working capital. Our accounts receivable balance at March 31, 2019 has decreased by $2.7 million, or 8%, since December 31, 2018 due to collection efforts made during the first quarter of 2019 as well as lower sales in the first quarter compared to the preceding fourth quarter reflecting the typical seasonality of our business. Furthermore, inventory has increased by $3.2 million from December 31, 2018 to March 31, 2019. The increase in inventory was due primarily to the addition of our new fulfillment center, purchases of certain product components in advance of anticipated price increases as a result of quantity shortages worldwide, and acquired inventory from NEEO as well as acquired inventory from the distributors in Ireland, New Zealand, and Switzerland as a result of the direct-to-dealer transition in these countries.

We have an asset-based, revolving credit facility of $40.0 million and at March 31, 2019 we had no outstanding borrowings under the credit facility.

We believe that our existing cash and cash equivalents, as well as our borrowing capacity on our revolving credit facility, will be sufficient to fund our operations for at least the next 12 months.

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Cash Flow Analysis

A summary of our cash flows for the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018 is set forth below (in thousands):

	Nine Months Ended
	Three Months Ended
	September 30,
	March 31,
	2018		2017
	2019		2018
Unrestricted and restricted cash and cash equivalents at the beginning of the period	$	3040,~~034~~654	$	3530,~~060~~034
Net cash provided by operating activities		21,988		15,389
Net cash provided by (used in) operating activities		(4,707)		469
Net cash used in investing activities		(411,~~513~~838)		(261,~~826~~193)
Net cash (used in) provided by financing activities		(11,719)		4,878
Net cash used in financing activities		(4,059)		(9,086)
Effect of exchange rate changes on cash and cash equivalents		~~(153)~~42		~~397~~48
Net change in cash and cash equivalents		5(20,~~603~~562)		(69,~~162~~762)
Unrestricted and restricted cash and cash equivalents at the end of the period	$	3520,~~637~~092	$	2820,~~898~~272

Operating Activities

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities.

The ~~increase~~decrease in cash provided by (used in) operating activities of $65.62 million during the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019 compared to the same period in ~~2017~~2018 is due to the differences in working capital account changes such as accounts receivable, inventory, accounts payable, and accrued liabilities partially offset by net income after adjusting for the non-cash effects of the amortization of intangible assets and tax benefits recorded in 2018 from business acquisitions.

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income after adjusting for the non-cash effects of the amortization of intangible assets and tax benefits recorded in 2017 from business acquisitions.

Investing Activities

Cash used in investing activities primarily consist of purchases, maturities, and sales of marketable securities, business acquisitions, net of cash acquired, and purchases of property and equipment.

Cash used in investing activities ~~decreased~~increased to $411.58 million in ~~2018~~2019 from $261.82 million in ~~2017~~2018. The year-over-year ~~decrease~~increase in cash used in investing activities is due to cash used for business acquisitions in ~~2017~~2019.

Financing Activities

Financing cash flows consist primarily of the repurchase of common stock on the open market, proceeds from the exercise of options to acquire common stock, and tax payments related to the net share settlement of restricted stock units.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019, we repurchased ~~600~~139,~~000~~782 shares of our stock in the open market for $162.05 million compared to ~~119~~300,~~007~~000 shares for $17.84 million in the same period in ~~2017~~2018.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018, we received proceeds of $100.73 million and $112.31 million, respectively, from the exercise of options to purchase common stock.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018, we made withholding tax payments of $61.48 million and $43.6 million, respectively, related to the net share settlement of restricted stock units that lapsed during the period.

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Non-GAAP Financial Measures

In addition to our GAAP operating results, we use certain non-GAAP financial measures to understand and evaluate our operating performance and trends, to prepare and approve our annual budget, and to develop short- and long-term operational plans. These measures, which we refer to as our non-GAAP financial measures, are not prepared in accordance with generally accepted accounting principles in the United States. Non-GAAP gross margin, non-GAAP income from operations, and non-GAAP net income exclude non-cash expenses related to stock-based compensation, amortization of intangible assets, acquisition-related costs, as well as expenses related to executive severance and litigation settlements.

Management believes that it is useful to exclude stock-based compensation expense because the amount of such expense in any specific period may not directly correlate to the underlying performance of our business operations.

We have recently completed acquisitions which resulted in operating expenses that would not have otherwise been incurred. Management has provided supplementary non-GAAP financial measures, which exclude acquisition-related expense items, to allow more accurate comparisons of the financial results to historical operations, forward-looking guidance and the financial results of less acquisitive peer companies. Management considers these types of costs and adjustments to be largely unpredictable and dependent on a significant number of factors that are outside of our control. Furthermore, we do not consider these acquisition-related costs and adjustments to be related to the organic continuing operations of the acquired businesses and are generally not relevant to assessing or estimating the long-term performance of the acquired assets. In addition, the size, complexity and/or volume of past acquisitions, which often drives the magnitude of acquisition-related costs, may not be indicative of the size, complexity and/or volume of future acquisitions. By excluding acquisition-related costs and adjustments from our non-GAAP measures, management is better able to evaluate our ability to utilize its existing assets and estimate the long-term value that acquired assets will generate for us. We believe that providing a supplemental non-GAAP measure which excludes these items allows management and investors to consider the ongoing operations of the business both with, and without, such expenses.

36These acquisition-related costs are included in the following categories: (i) professional service fees, recorded in operating expenses, which include third-party costs related to transactions, and legal and other professional service fees associated with diligence, entity formation and corporate structuring, disputes and regulatory matters related to transactions; (ii) transition and integration costs, recorded in operating expenses, which include retention payments, transitional employee costs, earn-out payments treated as compensation expense, as well as the costs of integration-related services provided by third parties; and (iii) acquisition-related adjustments, which include adjustments to acquisition-related items such as being required to record inventory at its fair value, resulting in a step-up in the inventory value, and having to reverse part of our valuation allowance in order to offset the deferred tax liability that was recorded based on differences between the book and tax basis of assets acquired and liabilities assumed. The step-up in inventory is recorded through cost of goods sold when the inventory is sold, resulting in a negative impact to our gross margin. Although these expenses are not recurring with respect to past acquisitions, we will generally incur these types of expenses in connection with any future acquisitions.

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These acquisition-related costs are included in the following categories: (i) professional service fees, recorded in operating expenses, which include third-party costs related to the acquisition, and legal and other professional service fees associated with diligence, entity formation and corporate structuring, disputes and regulatory matters related to acquired entities; (ii) transition and integration costs, recorded in operating expenses, which include retention payments, transitional employee costs, earn-out payments treated as compensation expense, as well as the costs of integration-related services provided by third parties; and (iii) acquisition-related adjustments, which include adjustments to acquisition-related items such as being required to record inventory at its fair value, resulting in a step-up in the inventory value, and having to reverse part of our valuation allowance in order to offset the deferred tax liability that was recorded based on differences between the book and tax basis of assets acquired and liabilities assumed. The step-up in inventory is recorded through cost of goods sold when the inventory is sold, resulting in a negative impact to our gross margin. Although these expenses are not recurring with respect to past acquisitions, we will generally incur these types of expenses in connection with any future acquisitions.

We exclude the amortization of acquired intangible assets from non-GAAP measures. These amounts are inconsistent in amount and frequency and are significantly impacted by the timing and size of acquisitions. Providing a supplemental measure that excludes these charges allows management and investors to evaluate results “as-if” the acquired intangible assets had been developed internally rather than acquired. Although we exclude amortization of acquired intangible assets from non-GAAP measures, we believe that it is important for investors to understand that such intangible assets contribute to revenue generation. Amortization of intangible assets that relate to past acquisitions will recur in future periods until such intangible assets have been fully amortized. Future acquisitions may result in the amortization of additional intangible assets.

Furthermore, we believe it is useful to exclude expenses related to litigation settlements and executive severance because of the variable and unpredictable nature of these expenses which are not indicative of past or future operating performance. We believe that past and future periods are more comparable if we exclude these expenses.

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We believe these adjustments provide useful comparative information to investors. Non-GAAP results are presented for supplemental informational purposes only for understanding our operating results. The non-GAAP results should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies. Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. We urge our investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.


		Three Months Ended
		March 31,
		2019			2018
	(in thousands, except percentages and per share data)
Reconciliation of Gross Margin to Non-GAAP Gross Margin:
Gross margin		$	29,283		$	30,739
Stock-based compensation expense in cost of revenue			78			68
Amortization of intangible assets in cost of revenue			864			921
Non-GAAP gross margin		$	30,225		$	31,728
Revenue		$	60,425		$	59,149
Gross margin percentage			48.5	%		52.0	%
Non-GAAP gross margin percentage			50.0	%		53.6	%

Reconciliation of Income (Loss) from Operations to Non-GAAP Income (Loss) from Operations:
Income (loss) from operations		$	(2,993)		$	971
Stock-based compensation expense			3,529			3,335
Amortization of intangible assets			1,620			1,446
Acquisition-related costs			459			16
Non-GAAP income (loss) from operations		$	2,615		$	5,768
Revenue		$	60,425		$	59,149
Operating margin percentage			(5.0)	%		1.6	%
Non-GAAP operating margin percentage			4.3	%		9.8	%

Reconciliation of Net Income (Loss) to Non-GAAP Net Income:
Net income (loss)		$	(1,970)		$	966
Stock-based compensation expense			3,529			3,335
Amortization of intangible assets			1,620			1,446
Acquisition-related costs			459			16
Non-GAAP net income (loss)		$	3,638		$	5,763
Non-GAAP net income (loss) per common share:
Basic		$	0.14		$	0.22
Diluted		$	0.13		$	0.21
Weighted-average number of shares:
Basic			26,563			25,904
Diluted			27,133			27,526

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		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2018			2017			2018			2017
	(in thousands, except percentages and per share data)
Reconciliation of Gross Margin to Non-GAAP Gross Margin:
Gross margin		$	37,110		$	33,063		$	104,211		$	89,471
Stock-based compensation expense in cost of revenue			59			66			182			185
Amortization of intangible assets in cost of revenue			888			802			2,733			2,367
Acquisition-related costs in cost of revenue			—			37			—			165
Non-GAAP gross margin		$	38,057		$	33,968		$	107,126		$	92,188
Revenue		$	71,594		$	64,583		$	199,971		$	176,043
Gross margin percentage			51.8	%		51.2	%		52.1	%		50.8	%
Non-GAAP gross margin percentage			53.2	%		52.6	%		53.6	%		52.4	%
Reconciliation of Income (Loss) from Operations to Non-GAAP Income (Loss) from Operations:
Income (loss) from operations		$	5,533		$	4,915		$	13,474		$	6,730
Stock-based compensation expense			3,429			3,028			10,085			9,191
Amortization of intangible assets			1,401			1,334			4,286			3,885
Acquisition-related costs			—			17			16			446
Non-GAAP income (loss) from operations		$	10,363		$	9,294		$	27,861		$	20,252
Revenue		$	71,594		$	64,583		$	199,971		$	176,043
Operating margin percentage			7.7	%		7.6	%		6.7	%		3.8	%
Non-GAAP operating margin percentage			14.5	%		14.4	%		13.9	%		11.5	%
Reconciliation of Net Income (Loss) to Non-GAAP Net Income:
Net income (loss)		$	5,711		$	5,034		$	13,317		$	9,596
Stock-based compensation expense			3,429			3,028			10,085			9,191
Amortization of intangible assets			1,401			1,334			4,286			3,885
Acquisition-related costs			—			17			16			(1,969)
Non-GAAP net income (loss) (1)		$	10,541		$	9,413		$	27,704		$	20,703
Non-GAAP net income (loss) (1) per common share:
Basic		$	0.40		$	0.38		$	1.06		$	0.84
Diluted		$	0.38		$	0.35		$	1.01		$	0.78
Weighted-average number of shares:
Basic			26,397			25,050			26,116			24,551
Diluted			27,671			27,122			27,489			26,393
(1) Excludes the calculated effect of non-GAAP adjustments on income tax expense of $0.3 million and $0.8 million for the three and nine months ended September 30, 2018, respectively.

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Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements ~~as defined in SEC Regulation S-K- 303(a)(4)(ii)~~.

Contractual Obligations

We enter into long-term contractual obligations in the normal course of business, primarily purchase commitments and non-cancellable operating leases.

Our contractual cash obligations as of ~~September~~March 3031, ~~2018~~2019 are as follows:

Less than

More than

Total

1 year

12 - 3 years

3 - 5 years

5 years

(in thousands)

Operating lease obligations

1513,~~194~~864

45,~~853~~140

76,~~940~~730

1,~~612~~384

~~789~~610

Purchase commitments

5461,~~164~~349

—

Total contractual obligations

6975,~~358~~213

5966,~~017~~489

76,~~940~~730

1,~~612~~384

~~789~~610

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. These estimates and assumptions are often based on judgments that we believe to be reasonable under the circumstances at the time made, but all such estimates and assumptions are inherently uncertain and unpredictable. Actual results may differ from those estimates and assumptions, and it is possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that would result in material changes to our operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

Our critical accounting policies and estimates are detailed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K as filed with the SEC on February 1511, ~~2018~~2019. None of our critical accounting policies and estimates have changed significantly since that filing.

Recently Issued and Adopted Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our condensed consolidated financial statements, see Note 1 “Description of Business and Summary of Significant Accounting Policies — Recent Accounting Pronouncements” in the notes to condensed consolidated financial statements (unaudited).

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Our market risk disclosures are detailed in Quantitative and Qualitative Disclosures about Market Risk contained in the Annual Report on Form 10-K as filed with the SEC on February 1511, ~~2018~~2019. Other than our interest rate risk described below, our market risk has not changed significantly since that filing.

Interest Rate Risk

Changes in interest rates could affect the interest earned on our cash, cash equivalents and investments as well as the fair value of our investments. Our investment policy and strategy are focused on preservation of capital and supporting our liquidity requirements. A portion of our cash is managed by external managers within the guidelines of our investment policy.

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Our exposure to changes in interest rates relates primarily to our investment portfolio. We invest in highly-rated securities, and our investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss.

We performed a sensitivity analysis on the value of our investment portfolio assuming a hypothetical change in rates of 100 basis points. Based on investment positions as of ~~September~~March 3031, ~~2018~~ 2019, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $0.2 million incremental decline in the fair market value of the portfolio. Such losses would only be realized if we sold the investments prior to maturity.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief 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 Exchange Act of 1934, as amended ~~(the “Exchange Act”)),~~ as of the end of the period covered by this Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

~~There~~Except ~~were~~as noset ~~changes~~forth inbelow, ~~our internal control over financial reporting~~ during ~~our~~the ~~most~~three ~~recent~~months ~~fiscal~~ended ~~quarter~~March ~~that~~31, ~~have materially affected~~2019, orwe ~~are~~did ~~reasonably~~not ~~likely~~make toany ~~materially~~material ~~affect,~~changes in our internal control over financial reporting. ~~The~~that ~~adoption~~have ofmaterially ~~ASC~~affected, ~~606~~or ~~required~~are ~~the~~reasonably ~~implementation~~likely ~~of new controls and the modification of certain accounting processes related~~ to ~~revenue~~materially ~~recognition.~~affect, ~~The impact of these changes was not material to~~ our internal control over financial reporting.

The Company implemented a new lease accounting system and process in response to the adoption of ASU 2016-02, “Leases (Topic 842),” effective January 1, 2019. These implementations resulted in a material change in a component of our internal control over financial reporting. The operating effectiveness of these changes will be evaluated as part of our annual assessment of the effectiveness of internal control over financial reporting.

Inherent Limitations of Internal Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings, that if determined adversely to us, we believe would individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition or cash flows.

ITEM 1A. Risk Factors

A description of certain risks and uncertainties associated with our business is set forth below. You should carefully consider such risks and uncertainties, together with the other information contained in this report, and in our other public filings. Factors that could cause our business, financial condition or operating results to differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings include, but are not limited to, the following risks and uncertainties, which could cause substantial harm to our business, financial condition or operating results and the market price of our stock to decline, perhaps significantly.

Risks Related to Our Business and Industry

The announcement and pendency of our agreement to merge with SnapAV could adversely affect our business.

On May 8, 2019, we announced that we had entered into the Merger Agreement, the effect of which will be to combine the Company and SnapAV. Uncertainty about the effect of the proposed transaction on our customers, employees, dealers, partners, end users, and other parties may adversely affect our business. Our employees may experience uncertainty about their roles or seniority following the transaction. There can be no assurance that our employees, including key personnel, can be retained to the same extent that we have previously been able to attract and retain employees. Any loss or distraction of such employees could adversely affect our business and operations. In addition, we have diverted, and will continue to divert, significant management resources toward the completion of the transaction, which could adversely affect our business and operations. Parties with which we do business may experience uncertainty associated with the transaction and related transactions, including with respect to current or future business relationships with us. Uncertainty may cause clients to refrain from doing business with us, which could adversely affect our business, results of operations and financial condition.

The failure to complete the merger with SnapAV could adversely affect our business.

Completion of the merger with SnapAV is subject to several conditions beyond our control that may prevent, delay, or otherwise adversely affect its completion. The consummation of the transaction is conditioned on receipt of certain regulatory approvals, including expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; the decisions, orders, consents or expiration of any waiting periods required to consummate the Merger under the foreign investment, monopolization and anti-competition laws and regulations of certain foreign jurisdictions, the accuracy of the representations and warranties and compliance with the covenants contained in the Merger Agreement, subject to qualifications; and other customary conditions. Many of the conditions to consummation of the transaction are not within our control or the control of Parent and none of us can predict when or if these conditions will be satisfied. If any of these conditions are not satisfied or waived, it is possible that the transaction will not be consummated in the expected time frame or that the Merger Agreement may be terminated. If the proposed sale or a similar transaction is not completed, the share price of our common stock could drop to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community. Finally, any disruption to our business resulting from the announcement and pendency of the transaction and from intensifying competition from our competitors, including any adverse changes in our relationships with our dealers, employees, partners, end users, and other parties, could continue or accelerate in the event of a failed transaction. There can be no assurance that our business, these

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relationships or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the transaction, if the transaction is not consummated.

While the Merger is pending, we are subject to business uncertainties and contractual restrictions that could harm our operations and the future of our business or result in a loss of employees.

The Merger Agreement includes restrictions on the conduct of our business prior to the completion of the transaction, generally requiring us to conduct our businesses in the ordinary course, consistent with past practice, and subjecting us to a variety of specified limitations unless we obtain Parent’s prior written consent. We may find that these and other contractual arrangements in the Merger Agreement may delay, prevent or limit us from responding effectively to competitive pressures, industry developments and future business opportunities that may arise during such period, even if our management and board of directors think that they may be advisable. The pendency of the transaction may also divert management’s attention and our resources from ongoing business and operations. Our dealers, employees, partners and other parties may have uncertainties about the effects of the transaction. In connection with the pending transaction, it is possible that some dealers, partners, end users, and other persons with whom we have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationship with us as a result of the transaction. Similarly, current and prospective employees may experience uncertainty about their future roles with us following completion of the transaction, which may harm our ability to attract and retain key employees. If any of these effects were to occur, it could materially and adversely impact our revenue, earnings and cash flows and other business results and financial condition, as well as the market price of our common stock and our perceived acquisition value, regardless of whether the transaction is completed. In addition, whether or not the transaction is completed, while it is pending we will continue to incur costs, fees, expenses and charges related to the proposed transaction, which may materially and adversely affect our business results and financial condition.

The markets in which we participate are highly competitive and many companies, including large technology companies, retailers, broadband and security service providers, as well as other managed service providers, are actively targeting the home automation market. Our failure to differentiate ourselves and compete successfully against these companies would make it difficult for us to add and retain consumers, and our sales and profitability could be adversely affected.

The market for home automation is fragmented, highly competitive and continually evolving. A number of technology companies, including industry leaders such as Amazon, Apple, Google, Honeywell, Lutron and Samsung, offer device control capabilities in some of their products, applications and services and are engaged in ongoing development efforts to address even broader segments of the home automation market. These large technology companies already have broad consumer awareness and sell a variety of devices for the home, and consumers may choose their offerings instead of ours, even if we offer broader interoperability or superior products and services. Additionally, these and other companies may further expand into our industry by developing additional solutions or by acquiring other providers. Similarly, many managed service providers, such as cable TV, telephone and security companies, are offering services that provide device control capability within the home for an additional monthly service fee. For example, Comcast’s Xfinity service offers residential security, energy and automation services, and Vivint and ADT have made significant efforts to market smart home services that incorporate these companies’ traditional security offerings. These managed service providers have the advantage of leveraging their existing consumer base, network of installation and support technicians and name recognition to gain traction in the home automation market. In addition, consumers may prefer the monthly service fee ~~with~~model ~~little to no upfront cost~~ offered by some of these managed service providers, ~~over~~which aallows ~~larger~~them to get certain control and automation services with little to no upfront cost as compared to a model with a higher upfront cost but little to no monthly service fees.

We expect competition from these large technology companies, retailers and managed service providers to increase in the future. This increased competition could result in pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance. To remain competitive and to maintain our position as a leading provider of professionally installed automation and control solutions for the connected home, we will need to invest continuously in product development, marketing, dealer and distributor service and support, and product delivery infrastructure. We may not have sufficient resources to continue to make the investments in all of the areas needed to maintain our competitive position. In addition, many of our competitors have longer operating histories, greater name recognition, larger consumer bases and significantly greater financial, technical, sales, marketing and other resources than us, which may provide them with an advantage in developing, marketing or servicing new solutions. Increased competition could reduce our market share, revenue and operating margins, increase our operating costs, harm our competitive position or otherwise harm our business and results of operations.

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technical, sales, marketing and other resources than us, which may provide them with an advantage in developing, marketing or servicing new solutions. Increased competition could reduce our market share, revenue and operating margins, increase our operating costs, harm our competitive position or otherwise harm our business and results of operations.

Consumers may choose to adopt point products that provide control of discrete home functionality or do-it-yourself (“DIY”) home automation solutions rather than adopt our unified, professionally-installed home automation solution. If we are unable to increase market acceptance of the benefits of our unified solution, our revenue may not continue to grow, or it may decline.

Many vendors have emerged, and may continue to emerge, to provide point products with advanced functionality for use in the home, such as ~~a thermostat~~thermostats, lighting, ~~doorbell~~doorbells or alarm system that can be controlled by an application on a smartphone or control panel. We expect ~~more~~an ~~and~~increasing ~~more~~number of consumer electronic and consumer appliance products to be network-aware and connected—each very likely to have its own smart device (phone or tablet) application. Consumers may be attracted to the relatively low costs and ease of installation of these point products and the ability to expand their home control solution over time with minimal upfront costs, despite the disadvantages of this approach such as requiring multiple interfaces and an inability to conveniently interoperate. While we have built our solution to be flexible and support many third-party point products, the adoption of these products may reduce the revenue we receive for each installation. It is therefore important that we provide attractive top-quality products in many areas, such as networking, lighting, audio, video, thermostats and security, and establish broad market awareness and acceptance of these solutions as well as the advantages of integrating them in a unified solution. If a significant number of consumers in our target market choose to rely solely on the functionality included in point products or DIY solutions rather than acquiring our unified automation solution, then our business, financial condition and results of operations will be harmed, and we may not be able to achieve sustained growth or our business may decline.

Providers of luxury integrated installations with long operating histories, established markets, broad user bases and proven consumer acceptance, may be successful in expanding their offerings in the ~~mainstream~~ home automation market, or otherwise compete against our solutions, which may reduce our market share and harm our growth and future prospects.

Many companies with which we directly compete have been operating in this industry for many years, and as a result, have established significant name recognition in the home automation industry. For example, Crestron, a provider of luxury integrated installations, has been in business for over 4045 years and has become an established presence in the home and commercial automation industry.

New entrants may be successful in penetrating the home automation market, which may reduce our market share and harm our growth and future prospects.

Given the growth potential of the market, we expect there may be many new entrants in the future. To the extent these providers are able to develop more affordable or attractive products or otherwise compete with our ~~solutions across any of our target demographics~~business, our growth may be constrained and our business could suffer.

We have incurred operating losses in the past, may incur operating losses in the future, and may not achieve or maintain profitability.

We began our operations in 2003. For most of our history, we have experienced net losses and negative cash flows from operations. As of ~~September~~March 3031, ~~2018~~2019, we had an accumulated deficit of $5830.94 million. We expect our operating expenses to increase in the future as we expand our operations. If our revenue does not continue to grow to offset any increased expenses, we will not continue to be profitable. After achieving profitability in 2013 and 2014 of $3.5 million and $8.2 million respectively, we sustained a net loss of $1.7 million in 2015. Our net income for the years ended December 31, 2016, 2017 and ~~2017~~2018 was $1312.03 million, $15.5 million, and $1643.08 million, respectively, ~~but~~and consequently we released our U.S. federal and state deferred tax asset valuation allowance in 2018. However, we may incur significant losses in the future for a number of reasons, including without limitation the other risks and uncertainties described herein. Additionally, we may encounter unforeseen operating or legal expenses, difficulties, complications, delays in manufacturing and selling our products and other unknown factors that may result in losses ~~in future periods. If these losses exceed our expectations or our revenue growth expectations are not met in future periods, our profitability will be harmed and our stock price may fall.~~

Our quarterly results of operations have fluctuated and may continue to fluctuate. As a result, we may fail to meet or exceed the expectations of investors or securities analysts, which could cause our stock price to decline.45

Our quarterly revenue and results of operations have fluctuated and may continue to fluctuate as a result of a variety of factors, many of which are outside of our control. In the past when our quarterly revenue or results of operations have fallen below the consensus expectations of securities analysts, the price of our common stock has declined. If our quarterly revenue or results of operations fall below the consensus expectations of investors or securities analysts in the

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in future, ~~the~~periods. ~~price~~If ofthese losses exceed our ~~common~~expectations ~~stock~~or ~~could~~our revenue ~~decline~~growth ~~again,~~expectations ~~perhaps~~are ~~substantially.~~not ~~Fluctuations~~met in ~~our~~future ~~results~~periods, ofour ~~operations~~profitability ~~may~~will be ~~due~~harmed and we may need to establish a ~~number~~valuation ofallowance ~~factors,~~for ~~including~~our ~~but~~U.S. ~~not~~federal ~~limited~~and ~~to:~~state deferred taxes assets again in the future and our stock price may fall.

Demand for and market acceptance of our solutions;

Our ability to continue to develop and maintain relationships with productive independent dealers and distributors and incentivize them to continue to market, sell, install and support our solutions;

The ability of our contract manufacturers to continue to manufacture high-quality products, and to supply sufficient products to meet our demands;

The timing and success of acquisitions, new product introductions or upgrades by us or by our competitors;

The strength of regional, national and global economies;

Our ability to develop products and programs that sell successfully into hospitality projects and new home developments;

The strength of the U.S. dollar relative to other currencies and the impact this has on dealer and distributor margins and their ability to competitively sell our products to consumers;

The impact of harsh seasonal weather, natural disasters or manmade problems such as terrorism;

Changes in our business and pricing policies, or those of our competitors;

Competition, including entry into the industry by new competitors and new offerings by existing competitors;

The impact of seasonality on our business;

· A systemic impairment or failure of one or more of our products that erodes dealer and/or end -user confidence;

Changes in applicable tax and tariff rates;

Political or regulatory changes in the markets in which we operate;

The cost and availability of component parts used in our products;

Aggressive business tactics by our competitors, including: selling at a discount, offering products on a bundled basis at no charge, extensive marketing efforts, and providing financing incentives;

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The amount and timing of expenditures, including those related to expanding our operations, increasing research and development, introducing new solutions or costs related to disputes and litigation; and

Temporary discounts or permanent changes in the price or payment terms for our solutions.

Due to the foregoing factors and the other risks discussed herein, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance, nor should you consider any revenue growth or results of operations in any quarter to be indicative of our future performance.

If we are unable to develop new solutions, sell our solutions into new markets, or further penetrate our existing markets, our revenue may not grow as expected or it may decline.

Our ability to increase sales will depend in large part on our ability to enhance and improve our solutions, to introduce new solutions in a timely manner, to sell into new markets, and to further penetrate our existing markets. The success of any enhancement or new product or solution depends on several factors, including the timely completion, introduction and market acceptance of enhanced or new solutions, the ability to attract, retain and effectively train product development, sales and marketing personnel (among others), the ability to develop relationships with independent dealers and distributors and the effectiveness of our marketing programs. Any new product or solution we develop or acquire may not be introduced in a timely or cost-effective manner, and may not achieve the broad market acceptance necessary to generate significant revenue. Any new markets into which we attempt to sell our solutions, including new vertical markets and new countries or regions, may not be receptive. Our ability to further penetrate our existing markets depends on the quality of our solutions and our ability to design our solutions to meet consumer demand. Moreover, we are frequently required to enhance and update our solutions as a result of changing standards and technological developments, which makes it difficult to recover the cost of development and forces us to continually qualify new solutions with our consumers. If we are unable to successfully develop or acquire new solutions, enhance our existing solutions to meet consumer requirements in a timely manner, sell solutions into new markets, or sell our solutions to additional consumers in our existing markets, our revenue may not grow as expected or it may decline.

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generate significant revenue. Any new markets into which we attempt to sell our solutions, including new vertical markets and new countries or regions, may not be receptive. Our ability to further penetrate our existing markets depends on the quality of our solutions and our ability to design our solutions to meet consumer demand. Moreover, we are frequently required to enhance and update our solutions as a result of changing standards and technological developments, which makes it difficult to recover the cost of development and forces us to continually qualify new solutions with our consumers. If we are unable to successfully develop or acquire new solutions, enhance our existing solutions to meet consumer requirements in a timely manner, sell solutions into new markets, or sell our solutions to additional consumers in our existing markets, our revenue may not grow as expected or it may decline.

We rely on our independent dealers and distributors to sell our solutions, and if our dealers and distributors fail to perform, our ability to sell and distribute our products and services will be limited, and our results of operations may be harmed.

Substantially all of our revenue is generated through the sales of our solutions by our authorized dealers and distributors. Our dealers and distributors are independent businesses that voluntarily sell our products as well as the products of other companies to consumers. We provide our dealers and distributors with specific training programs to assist them in selling, installing and servicing our products, and we also provide our dealer-network with leads to potential customers which we generate through our internal marketing efforts, but we cannot assure that these steps will be effective. We have observed, and expect to continue to observe, high volatility in the monthly, quarterly and annual sales performance of individual dealers and distributors. Although we can make estimated forecasts of cumulative sales of large numbers of dealers and distributors, we cannot assure their accuracy collectively or individually. Accordingly, we may not be able to reduce or slow our spending quickly enough if our actual sales fall short of our expectations. As a result, we expect that our revenues, results of operations and cash flows may fluctuate significantly on a quarterly basis. We believe that period-to-period comparisons of our revenues, results of operations and cash flows should not be relied upon as an indication of future performance.

Our independent dealers and distributors may be unsuccessful in marketing, selling, installing and supporting our products and services. If we are unable to provide high-quality products in a timely manner at competitive prices and to develop and maintain effective sales incentive programs for our dealers and distributors, we may not be able to incentivize them to sell our products to consumers. Our dealers and distributors may also market, sell and support products and services that are competitive with ours, and may devote more resources to the marketing, sales, and support of such competitive products. Our dealers and distributors may have incentives to promote our competitors’ products to the detriment of our own, or may cease selling our products altogether. Our agreements with our dealers and distributors may generally be terminated for any reason by either party with ~~advance notice. We cannot assure that we will retain these dealers and distributors, or that we will be able to secure additional or replacement dealers and distributors.~~

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advance notice. We cannot assure that we will retain these dealers and distributors, or that we will be able to secure additional or replacement dealers and distributors.

In addition, while we take certain steps to protect ourselves from liability for the actions of our dealers and distributors, such as including contractual provisions limiting our liability with both consumers and dealer/distributors, consumers may seek to recover amounts from us for any damages caused by independent dealers in connection with system installations, or the failure of a system to perform properly due to an incorrect installation by a dealer, and, in the event of litigation with respect to these matters, we cannot guarantee that our contractual protections will be enforced. Furthermore, dealers and distributors may initiate claims against us related to any failure or perceived failure to operate our business in accordance with our contracts and the law. In addition, our independent dealers and distributors may use our name and our brand in ways we do not authorize, and any such improper use may harm our reputation or expose us to liability for their actions.

If we fail to effectively manage our existing sales channels then our results of operations may be harmed.

Our success depends, in part, on our ability to develop and expand our global network of independent dealers and distributors.

As of ~~September~~March 3031, ~~2018~~2019, we have over 5,~~420~~460 active direct dealers and 4839 distributors authorized to sell, install and support our solutions. We rely on our independent dealers and distributors to provide consumers with a successful Control4 home automation experience. In some cases, dealers may choose not to offer our solution and instead offer a product from one of our competitors or, in other cases, the dealer may simply discontinue its operations. In order to continue our growth and expand our business, it is important that we continue to add new dealers and distributors and ensure that ~~most of~~ our existing relationships remain productive. We must also work to expand our network of dealers and distributors to ensure that we have sufficient geographic coverage and technical expertise to address new markets and technologies. While it is difficult to estimate the total number of available dealers in our markets, there are a finite number of dealers that are able to perform the types of technical installations required for home automation systems. In the event that we saturate the available dealer pool, or if market or other forces cause the available pool of dealers to decline, it may be increasingly difficult to grow our business. As consumers’ home automation options grow, it is important that we enhance our dealer footprint by broadening the expertise of our dealers, working with larger and more sophisticated dealers and distributors and expanding our line of consumer products that our dealers and distributors offer. If we are unable to expand our network of independent dealers and distributors, or maintain productive relationships with our existing dealers and distributors, our business could be harmed.

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of dealers that are able to perform the types of technical installations required for home automation systems. In the event that we saturate the available dealer pool, or if market or other forces cause the available pool of dealers to decline, it may be increasingly difficult to grow our business. As consumers’ home automation options grow, it is important that we enhance our dealer footprint by broadening the expertise of our dealers, working with larger and more sophisticated dealers and distributors and expanding our line of mainstream consumer products that our dealers and distributors offer. If we are unable to expand our network of independent dealers and distributors, or maintain the relationships with our existing dealers and distributors, our business could be harmed.

Since we rely on third-party dealers and distributors to sell and install our solutions, we do not have a direct sales pipeline, which makes it difficult for us to accurately forecast future sales and correctly predict manufacturing requirements.

We depend on our independent dealer and distributor network to sell and install our solution. As a result, we do not directly develop or control our sales pipeline, making it difficult for us to accurately predict future sales. In addition, because the production of certain of our products requires long lead times, we enter into agreements for the manufacture and purchase of certain of our products well in advance of the time in which those products will be sold. These contracts are based on our best estimates of our near-term product needs. If we underestimate consumer demand, we may forego revenue opportunities, lose market share and damage our relationships. Conversely, if we overestimate consumer demand, we may purchase more inventory than we are able to sell at any given time, or at all. If we fail to accurately estimate demand for our products, we could have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our costs of revenues and reduce our liquidity. Our failure to accurately manage inventory relative to demand would adversely affect our results of operations.

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We have relatively limited visibility regarding the consumers that ultimately purchase our products, and we often rely on information from third-party dealers and distributors to help us manage our business. If we are unable to obtain timely or accurate information, our ability to quickly react to market changes and effectively manage our business may be harmed.

We sell our solutions through independent dealers and distributors. These dealers and distributors work with consumers to design, install, update and maintain their home automation installations. While we are able to track orders from dealers and distributors and have access to certain information about the configurations of the Control4 systems they install that we receive through our controllers, we also rely on these dealers and distributors to provide us with information about consumer behavior, product and system feedback, consumer demographics, buying patterns and information about our competitors. We use this channel sell-through data, along with other metrics, to assess consumer demand for our solutions, develop new products, adjust pricing and make other strategic business decisions. Our channel sell-through data is subject to limitations due to collection methods and the third-party nature of the data and thus may not be complete or accurate. In addition, from time to time we collect information directly from consumers through surveys that we conduct and other methods, but the consumers who chose to participate self-select and vary by geographic region and from period to period, which may impact the usefulness of the results. If we do not receive consumer information on a timely or accurate basis, or if we do not properly interpret this information, our ability to quickly react to market changes and effectively manage our business may be harmed.

We have entered into several strategic arrangements and intend to pursue additional strategic opportunities in the future. If the intended benefits from our strategic relationships are not realized, our results of operations may be harmed.

We are working to develop relationships with strategic partners in order to increase awareness of our solutions and to attempt to reach markets that we cannot currently address cost-effectively. If these relationships do not develop in the manner we intend, our future growth could be impacted. Any loss of a major partner or distribution channel or other channel disruption could harm our results of operations and make us more dependent on alternate channels, damage our reputation, increase pricing and promotional pressures from other partners and distribution channels, increase our marketing costs, or harm buying and inventory patterns, payment terms or other contractual terms.

If we do not maintain the compatibility of our solutions with third-party products and applications that our consumers use, demand for our solutions could decline.

Our solutions are designed to interoperate with a wide range of other third-party products, including products in the areas of audio, video, lighting, temperature, and security, and we benefit from our relationships with partners that allow our system to provide integrated and extensible control of ~~over~~approximately 1213,500 third‑party devices and services. If we do not support the continued integration of our solutions with third-party products and applications, including new and additional products, demand for our solutions could decline and we could lose sales. In addition, companies that provide certain point solutions have eliminated or restricted, and may in the future, eliminate or restrict, our ability to integrate with, control and otherwise be compatible with these products. As a result, we may not be successful in making our solutions compatible with these third-party products and applications or lose functionality in existing systems to the extent that they depend on the ability to integrate with third-party products, which could reduce demand for our solutions. In addition, if prospective consumers require customized features or functions that we do not offer, then the market for our solutions may be harmed.

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support the continued integration of our solutions with third-party products and applications, including new and additional products, demand for our solutions could decline and we could lose sales. In addition, companies that provide certain point solutions have eliminated or restricted, and may in the future, eliminate or restrict, our ability to integrate with, control and otherwise be compatible with these products. As a result, we may not be successful in making our solutions compatible with these third-party products and applications or lose functionality in existing systems to the extent that they depend on the ability to integrate with third-party products, which could reduce demand for our solutions. In addition, if prospective consumers require customized features or functions that we do not offer, then the market for our solutions may be harmed.

If we are unable to adapt to technological change and implement technological and aesthetic enhancements to our products, this could impair our ability to remain competitive.

The market for home automation and control solutions is characterized by rapid technological change, frequent introductions of new products and evolving industry standards. However, product development often requires significant lead-time and upfront investment and our ability to attract new consumers and increase revenue from existing consumers will depend in significant part on our ability to accurately anticipate changes in industry standards and to continue to appropriately fund development or acquisition efforts to enhance existing solutions or introduce new solutions in a timely basis to keep pace with technological developments. This is true of all our products but is particularly important with respect to our user interface and other direct consumer interface products. Similarly, if any of our competitors implement new technologies before we are able to implement them, those competitors may be able to provide more effective products than ours, possibly at lower prices, which could impact sales and decrease our market share. Any delay or failure in the introduction of new or enhanced solutions could harm our business, results of operations and financial condition.

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products but is particularly important with respect to our user interface and other direct consumer interface products. Similarly, if any of our competitors implement new technologies before we are able to implement them, those competitors may be able to provide more effective products than ours, possibly at lower prices, which could impact sales and decrease our market share. Any delay or failure in the introduction of new or enhanced solutions could harm our business, results of operations and financial condition.

If we are unable to design products that scale for use in larger projects, this could impair our ability to remain competitive.

As the market for automation, control, and networking matures, the complexity of projects pursued by our consumers is increasing. If we are not able to design products that work in such larger and more complex projects, our reputation may suffer, we may lose business opportunities, and projects may fail.

We currently rely on contract manufacturers to manufacture our products and on component vendors to supply parts used in our products. Any disruption in our supply chain, or our failure to successfully manage our relationships with our contract manufacturers or component vendors could harm our business.

Our reliance on contract manufacturers reduces our control over the assembly process, exposing us to risks, including reduced control over quality assurance, production costs and product supply. We rely on a limited number of contract manufacturers to manufacture most of our products and components, and in many cases one of these manufacturers is our only source for a particular product or product family. We also do business with a number of component vendors, and the parts they supply may not perform as expected. ~~For the nine months ended September 30, 2018, three contract manufacturers, iLife, RCS and Sanmina, manufactured approximately 51% of our inventory purchases.~~ Most of our contract manufacturers and component vendors are located outside of the United States, and all of them may be subject to political, economic, social, regulatory and legal uncertainties that may harm our relationships with them. If we fail to manage our relationships with our contract manufacturers, component vendors or shipping partners effectively, or if our contract manufacturers, component vendors or shipping partners experience delays, disruptions, capacity constraints or quality control problems in their operations, our ability to ship products may be impaired and our competitive position and reputation could be harmed. In addition, any adverse change in our contract manufacturers’, component vendors’ or shipping partners’ financial or business condition could disrupt our ability to supply quality products to our dealers and distributors. If we are required to change contract manufacturers, component vendors, or shipping partners we may lose revenue, incur increased costs or damage our relationships, or we might be unable to find a new contract manufacturer or component vendor on acceptable terms, or at all. In addition, qualifying a new contract manufacturer or component vendor could be an expensive and lengthy process. If we experience increased demand that our contract manufacturers or component vendors are unable to fulfill, or if they are unable to provide us with adequate supplies of high-quality products for any reason, we could experience a delay in our order fulfillment, and our business, results of operations and financial condition would be harmed.

Changes in import/export regulatory regimes and duties could negatively impact our business.

In 2018, the United States. implemented a number of new tariffs on the importation of materials, which prompted some affected nations to respond with new tariffs on U.S. exports. Of particular note, ~~are~~ the United States recently imposed and proposed tariffs on a number of goods from China. In turn, China has responded by imposing reciprocal tariffs on U.S. exports to China, and both countries have indicated that there could be continued escalation of protectionist policies. ~~These~~We ~~recently~~continue ~~enacted~~to ~~tariffs~~evaluate ~~have~~the ~~not~~impact ~~had~~of athese ~~material~~tariffs ~~impact~~and policies on our ~~overall~~supply ~~production~~chain ~~costs~~ and atto ~~this~~consider ~~point~~appropriate weresponses ~~have~~in ~~opted~~our ~~not~~sourcing ~~to increase the prices~~ of ~~any of our~~ products soand ascomponents towhile ~~minimize~~exploring ~~the~~certain ~~impact~~government onaffairs ~~sales;~~initiatives ~~however,~~to ~~the~~help ~~international~~shape ~~trade~~future ~~landscape~~policies. isIncreased ~~changing, and increased~~ import taxes or duties could negatively impact our cost structures in future periods~~. We~~ ~~continue~~and make it prudent for us to ~~evaluate~~move certain manufacturing to alternative geographies. If the ~~impact~~United ofStates, ~~these~~or ~~policies~~other oncountries ~~our~~in ~~supply~~which ~~chain~~we ~~and~~do ~~consider~~significant ~~appropriate~~business, ~~responses~~were into ~~our~~withdraw ~~sourcing~~from or materially modify certain international trade agreements, further change tariff or tax provisions related to the global manufacturing and sales of our products, ~~and~~or ~~components~~otherwise ~~while~~alter ~~exploring~~regulations ~~certain~~impacting ~~government~~our ~~affairs~~existing ~~initiatives~~business, or if these changes negatively affect us disproportionately as compared to ~~help~~our ~~shape~~competitors, ~~future~~our ~~policies~~financial condition and results of operations could be adversely affected. In addition, if any of our products are found to have been misclassified under various tariff codes, we could be subject to higher duties and/or fines.

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and/or fines. If the United States or other countries in which we do significant business were to withdraw from or materially modify certain international trade agreements, further change tariff or tax provisions related to the global manufacturing and sales of our products, or otherwise alter regulations impacting our existing business, or if these changes negatively affect us disproportionately to our competitors, our financial condition and results of operations could be adversely affected.

Growth of our business may depend on market awareness and a strong brand, and any failure to develop, broaden, protect and enhance market awareness of our products could hurt our ability to retain or attract consumers.

Because of the competitive nature of the ~~mainstream~~ home automation market, we believe that building and maintaining market awareness, brand recognition and goodwill may be material to our success. This will depend largely on our ability to continue to provide high-quality solutions, and we may not be able to do so effectively. We may choose to engage in a broader marketing campaigns to further promote our brand, but this effort may not be successful. Our efforts in developing our brand may be affected by the marketing efforts of our competitors, negative publicity and social media commentary, and our reliance on our independent dealers, distributors and strategic partners to install our products and promote our brand effectively. If we are unable to cost-effectively maintain and increase positive awareness of our brand, our business, results of operations and financial condition could be harmed.

We operate in the emerging and evolving home automation market, which may develop more slowly or differently than we expect. If the ~~mainstream~~ home automation market does not grow as we expect, or if we cannot expand our solutions to meet the demands of this market, our revenue may decline, fail to grow or fail to grow at an accelerated rate, and we may incur operating losses.

The market for home automation and control solutions is evolving, and it is uncertain whether our solutions will achieve and sustain high levels of demand and market acceptance. Some consumers may be reluctant or unwilling to use our solutions for a number of reasons, including satisfaction with other solutions, concerns about cost, and lack of awareness of our solutions. Unified home automation solutions such as ours have traditionally been luxury purchases for the high end of the residential market, and while our solutions target the high end of the market, we also have solutions that target middle- and entry-level home owners, including our EA-1 that is designed to control smaller, single room projects with an entertainment component and the CA-1 controller for smaller projects that only include lighting, comfort, and/or security. Our ability to expand the sales of our solutions to a broader consumer base depends on several factors, including market awareness of our solutions, the timely completion, introduction and market acceptance of our solutions, the ability to attract, retain and effectively train sales and marketing personnel, the effectiveness of our marketing programs, the ability to develop effective relationships with independent dealers and distributors, homebuilders, and other strategic partners, the cost and functionality of our solutions and the success of our competitors. If we are unsuccessful in developing and marketing our home automation solutions to ~~mainstream~~ consumers, or if these consumers do not perceive or value the benefits of our solutions, the market for our solutions might not continue to develop or might develop more slowly than we expect, either of which would harm our revenue and growth prospects.

Our consumers may experience service failures or interruptions due to defects in the software, products, infrastructure, third-party components or processes that comprise our solutions, or due to errors in product installation or servicing by our independent dealers, any of which could harm our business.

Our solutions may contain undetected defects in the software, products, infrastructure, third-party components or processes. If these defects lead to service failures, we could be subject to liability for such failures and we could experience harm to our branded reputation. Such defects could also result in a loss of, or delay in, market acceptance of our solutions, which could harm our business, results of operations and financial condition.

In addition to failures due to product defects, because our solutions are installed by independent dealers, if they do not install or maintain our solutions correctly or if the underlying network or infrastructure in a home or business is not sufficiently robust, our solutions may not function properly. If the improper installation or maintenance of our solutions leads to service failures of a product or solution, we could experience harm to our branded reputation, claims by our consumers, dealers, distributors, strategic partners or developers and we may incur increased expense during the period required to address the cause of the problem, which could harm our business, results of operations and financial condition.

Any defect in, or disruption to, our solutions could cause consumers to remove their products, not to purchase additional products from us, prevent other potential consumers from purchasing our solutions, or harm our reputation. The nature of the solutions we provide, including our interface with home security solutions, may expose ~~us to greater risks of liability for system failure or even installation errors by our independent dealers than may be inherent in other businesses.~~

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us to greater risks of liability for system failure or even installation errors by our independent dealers than may be inherent in other businesses. Substantially all of our dealer agreements contain provisions limiting our liability to dealers and our consumers in an attempt to reduce this risk. However, in the event of litigation with respect to these matters, we cannot be sure that these limitations will be enforced, and defending a lawsuit, regardless of its merit, could be costly, divert management’s attention, affect our ability to obtain or maintain liability insurance on acceptable terms and could harm our business. In addition, there can be no assurance that we are adequately insured for these risks. Certain of our insurance policies and the laws of some jurisdictions may limit or prohibit insurance coverage for punitive or certain other types of damages or liability arising from gross negligence. Although we currently maintain some warranty reserves, we cannot be sure that these warranty reserves will be sufficient to cover future liabilities. Furthermore, we may be required to indemnify our dealers, distributors and other partners against certain liabilities they may incur as a result of defects of our products or third-party intellectual property claims related to our products or other materials we provide to them.

Our networking solutions business may be harmed if users perceive our solution as the cause of a slow or unreliable network connection, or in the event of a high-profile network failure, even though certain technical problems experienced by users may not be caused by our products.

Our networking solutions have been deployed in many different locations and user environments and are capable of providing connectivity to many different types of Wi-Fi-enabled devices operating a variety of applications. The ability of our products to operate effectively can be negatively impacted by many different elements unrelated to our products. For example, a user’s experience may suffer from an incorrect setting in a Wi-Fi device. Although certain technical problems experienced by users may not be caused by our products, users often may perceive the underlying cause to be a result of poor performance of the wireless network. This perception, even if incorrect, could harm our business and reputation. Similarly, a high-profile network failure may be caused by improper operation of the network or failure of a network component that we did not supply, but users and other service providers may perceive that our products were implicated, which, even if incorrect, could harm our business, operating results and financial condition.

Failure to maintain the security of our information and technology networks, including information relating to our dealers, distributors, partners, consumers and employees, could adversely affect our business. Furthermore, without limiting the preceding sentence, if security breaches in connection with the delivery of our products and services allow unauthorized third parties to obtain control of or otherwise access consumers’ networks or appliances, our reputation, business, results of operations and financial condition could be harmed.

The legal, regulatory and contractual environment surrounding information security, privacy and fraud is constantly evolving and companies that collect and retain information are under increasing attack by cyber- criminals around the world. We are dependent on information technology networks and systems, including the Internet, to process, transmit and store electronic information and, in the normal course of our business, we collect and retain certain information, including financial information and personally identifiable information, from and pertaining to our dealers, distributors, partners, consumers and employees. The protection of dealer, distributor, partner, consumer and employee data is important to us, and we devote significant resources to addressing security vulnerabilities in our products and information technology systems, including encrypting some data repositories and engaging security experts to conduct penetration testing to help us uncover vulnerabilities in our systems. However, the policies and security measures that we put in place could prove to be inadequate and cannot guarantee security, and our information technology infrastructure may be vulnerable to criminal cyber-attacks or data security incidents due to employee or dealer negligence, error, malfeasance, or other vulnerabilities. Cyber security attacks are increasingly sophisticated, change frequently, and often go undetected until after an attack has been launched. We may fail to identify these new and complex methods of attack or fail to invest sufficient resources in security measures. We have and will continue to experience cyber-attacks, and we cannot be certain that advances in cyber-capabilities or other developments will not permit compromise or breach the technology protecting the networks that access our products and services and repositories where we store this information.

We have acquired a number of companies over the years and may continue to do so in the future. While we make significant efforts to address any information technology security issues with respect to our acquisitions, we may still inherit such risks when we integrate the acquired products and systems.

In addition, consumers can use our tools for authorized, remote access to their automation systems, and certain of our employees and independent dealers can be provided authorized access to monitor and update certain of our products and services remotely. Security breaches by third parties or by, or originating from, one or more of our dealers, distributors or employees, that allow unauthorized access or control of our consumers’ appliances through our products or to obtain, collect, use or disclose any personal data of consumers, could harm our reputation, business, results of operations and financial condition. Furthermore, although we do not recommend or approve of port forwarding for remote access to our 52

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It is difficult to determine what harm may result from any specific interruption or security breach. Any failure or perceived failure to maintain performance, reliability, security and availability of systems or the actual or potential theft, loss, fraudulent use or misuse of our products or associated confidential information, including personally identifiable data of a dealer, distributor, partner, consumer, and employee, could result in:

harm to our reputation or brand, which could lead some consumers to stop using certain of our products or services, reduce or delay future purchases of our products or services, use competing products or services, or materially and adversely affect the overall market perception of the security and reliability of our services and home automation products generally;

individual and/or class action lawsuits, which could result in financial judgments against us and that would cause us to incur legal fees and costs;

legal or regulatory enforcement action, which could result in fines and/or penalties and which would cause us to incur legal fees and costs; and/or

additional costs associated with responding to the interruption or security breach, such as investigative and remediation costs, the costs of providing individuals and/or data owners with notice of the breach, legal fees, the costs of any additional fraud detection activities, or the costs of prolonged system disruptions or shutdowns.

Any of these actions could materially adversely impact our business and results of operations.

Because we store, process, and use data, some of which contains personal information, we are subject to complex and evolving federal, state, and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in investigations, claims, changes to our business practices, increased cost of operations, and declines in user growth, retention, or engagement, any of which could seriously harm our business.

We are subject to a variety of laws and regulations that involve matters central to our business, including ~~user~~ privacy, rights of publicity, data protection, content, intellectual property, distribution, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation, and online-payment services. Because we store, process, and use data, some of which contains personal information, we are subject to complex and evolving federal, state, and foreign laws and regulations regarding privacy, data protection, and other matters. Both in the United States and abroad, these laws and regulations constantly evolve and are subject to significant change. In addition, in the United States each state has a separate statutory approach to privacy regulation, and recently states such as California have been very active in pursuing new regulations that are typically more restrictive than other jurisdictions. The application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate. Continually implementing up-to-date data security tools and procedures and maintaining privacy standards that comply with ever-changing privacy regulations in multiple jurisdictions is challenging. For example, the General Data Protection Regulation (GDPR) in the European Union, which went into effect on May 25, 2018, has not yet been fully interpreted by legal and regulatory bodies, and while we have invested significant resources in compliance efforts, there is no guarantee that our efforts to date will be found to be adequate.

In addition, onthere ~~July~~are ~~12,~~restrictions ~~2016~~on the European Commission formally adopted the new EU – U.S. Privacy Shield, which provides a safe harbor for the transfer of personal information, by U.S. companies doing business in Europe from the European Economic Area to the United States provided that such U.S. companies selfcross-~~certify~~border ~~under~~transfers ~~this framework. We have submitted our self-certification application pursuant to the Privacy Shield, and as part~~ of ~~this self-certification, we have committed to abide by the Privacy Shield principles with respect to any~~ personal ~~information transferred~~data. ~~However~~For example, ~~the~~jurisdictions ~~Privacy~~such ~~Shield~~as ~~is subject to an annual review by~~ the European ~~Commission,~~Union and onSwitzerland ~~July~~do 5, 2018 members of the European Parliament passed a nonbinding resolution calling for the Privacy Shield to be suspended at the European Commission’s next review in September. Thus far the Privacy Shield has not ~~been~~view ~~suspended, but if it is suspended in~~ the ~~future,~~privacy we

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