EFTA00293531.pdf

AliphCom Consolidated Financial Statements December 31, 2009 and 2008 EFTA00293531 AliphCom Index December 31, 2009 and 2008 Page(s) Report of Independent Auditors 1 Consolidated Financial Statements Balance Sheets 2 Statements of Operations 3 Statements of Stockholders' Equity 4 Statements of Cash Flows 5 Notes to Financial Statements 6-29 EFTA00293532 pwc Report of Independent Auditors To the Board of Directors and Stockholders of AliphCom: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of AliphCom and its subsidiary at December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. taListuttitasknataor‘ LL August 19, 2011 PricewaterhouseCoopers LLP, 488 Al Suite Moo, San Jose, CA 95110 (408) 817 3700, F: (408) 817 5050, EFTA00293533 AliphCom Consolidated Balance Sheets December 31, 2009 and 2008 (in thousands, except share and per share amounts) 2009 2008 Assets Current assets Cash and cash equivalents $ 34,091 S 38,500 Accounts receivable 5,644 1.513 Inventories 5,396 5,275 Prepaid and other current assets 1,032 985 Total current assets 46,163 46,273 Property and equipment, net 2,357 3,980 Other long-term assets 6.259 11.139 Total Assets S 54,779 $ 61,392 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 10,082 $ 7,862 Accrued liabilities 17,359 10.342 Capital lease obligations, current portion 79 44 Income taxes payable 553 4,757 Total current liabilities 28,073 23.005 Preferred stock warrant liability 6.874 2,331 Capital lease obligations, less current portion 63 141 Total liabilities 35,010 25.477 Commitments and Contingencies (Note 5) Stockholders' Equity Redeemable convertible preferred stock: $0.001 par value; 111,853,887 shares authorized at December 31, 2009 and 2008, 88,277,291 shares issued and outstanding at December 31, 2009 and 2008 43,725 43,725 Common Stock: $0.001 par value; 215,000,000 shares authorized at December 31, 2009 and 2008, 40,724,308 and 38,383,508 shares issued and outstanding at December 31, 2009 and 2008. respectively 40 38 Additional paid-in capital 3,329 2,460 Stockholder's notes receivable (180) (180) Accumulated deficit (27,145) (10,128) Total stockholders' equity 19,769 35,915 Total liabilities and stockholders' equity $ 54,779 $ 61,392 The accompanying notes are an integral part of these consolidated financial statements. 2 EFTA00293534 AliphCom Consolidated Statements of Operations Years Ended December 31, 2009 and 2008 (in thousands) 2009 2008 Revenues $ 66,789 $ 145.455 Cost of revenues 42,706 100.644 Gross profit 24,083 44,811 Operating expenses Research and development 9.902 10,270 Selling, general and administrative 24,268 28,165 Litigation expense 5.410 Total operating expenses 39.580 38,435 (Loss) Income from operations (15,497) 6,376 Total other (expense) income, net Warrant revaluation (expense) income (4.543) 2,629 Interest expense (60) (549) Interest and other (expense) income, net (23) 629 Total other (expense) income, net (4,626) 2,709 Net (loss) income before income taxes (20,123) 9.085 (Benefit) provision for income tax (3,106) 4.633 Net (loss) income S (17,017) $ 4,452 The accompanying notes are an integral part of these consolidated financial statements. 3 EFTA00293535  AliphCom Consolidated Statements of Stockholders' Equity Years Ended December 31, 2009 and 2008 Redeernabb Convertible Additional Shsckholdres Total Preferred Stock Common Stock Paid-In Notes Accumulated Stockholders' an thousands. except shoe andper share amounts) Shares Amount Shares Amount Capital Receivable Deficit Equity Balance at December 31.2007 87.151.799 S 43.527 38.775.091 S 36 S 1.680 S (180) S (14.580) S 30.483 Issuance of Semis 2 redeemable cementite preened stock lot Cash. net of issuance costs c4 12 1.125,492 198 - - 198 Exercise of common stock warrants 711,473 I 35 36 Issuance of common stock warrants - 115 115 Emrcises of common clock options 896.944 1 197 198 Steck-based compensation expense - 433 433 Na income - • 4.452 4,452 Dance at December 31.2001 88277.291 43.725 38.383.508 38 2.460 (180) (10.128) 35,915 Issuance of common stock warrants • 7 7 Exercise a common stock warrants 1.688,238 2 298 300 Stock-based compensation expense - 523 523 Exercises et common dock options 652.582 41 • 41 Melees . - (17.017) (17,017) Balance al December 31, 2009 88.277.291 3 43.725 40.724.308 $ 40 3 3.329 3 (180) S (27,145) S 19,769 The accompanying notes are an integral part of these consolidated financial statements. 4 EFTA00293536 AliphCom Consolidated Statements of Cash Flows Years Ended December 31, 2009 and 2008 (in thousands) 2009 2008 Cash flows from operating activities Net (loss) income $ (17,017) $ 4,452 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Inventory write-down 478 324 Depreciation and amortization 2,509 1,266 Issuance of warrants for services 7 103 Stock-based compensation 523 433 Remeasurement of preferred stock warrant liability 4,543 (2,629) Changes in current assets and liabilities: Accounts receivable (4,131) 4,911 Inventories (600) (3,072) Prepaid and other current assets (2,367) (638) Accounts payable 2,220 (3,888) Accrued liabilities and other long-term liabilities 7,017 6,278 Deferred taxes (4.203) 4.639 Net cash (used in) provided by operating activities (11,021) 12,179 Cash flows from Investing activities Purchases of property and equipment (885) (5,029) Disposal of property and equipment 193 Changes in restricted cash 7,200 (7,118) Net cash provided by (used in) investing activities 6,315 (11,954) Cash flows from financing activities Proceeds from issuance of redeemable convertible preferred stock 198 Proceeds from exercises of stock options and warrants 341 234 Repayment of capital lease obligations (44) (8) Net cash provided by financing activities 297 424 Net (decrease) increase in cash and cash equivalents (4,409) 649 Cash and cash equivalents Beginning of year 38,500 37,851 End of year 34,091 38,500 Supplemental cash flow Information Cash paid for income taxes 2,450 118 Cash paid for interest 34 389 Supplemental noncash investing and financing activities Assets purchased through capital lease obligations 193 The accompanying notes are an integral part of these consolidated financial statements. 5 EFTA00293537 AliphCom Notes to Consolidated Financial Statements December 31, 2009 and 2008 1. The Company and Summary of Significant Accounting Policies AliphCom ('aliph' or the 'Company') was incorporated in the State of California on March 12, 1998. Together with its wholly owned subsidiary the Company designs, develops and markets lightweight communications headset products under the Jawbone® brand. The Company sells its products primarily through a global sales channel network, which includes distributors and traditional retailers. Through December 31, 2009, the Company has completed approximately $46.0 million of equity financing since incorporation. In March 2011, the Company issued 7,131,940 shares of Series 4 preferred stock at $3.926 per share for gross proceeds of approximately $28.0 million. In March 2011, the Company also issued 2,025,300 shares of common stock at $0.54 per share for proceeds of $1.1 million to the purchaser of the Series 4 preferred stock. In June 2011, the Company issued 5,562,408 shares of Series 5 preferred stock at $7.19113 per share for gross proceeds of approximately $40.0 million. However, the Company has incurred significant losses and negative cash flows from operating activities. For the year ended December 31, 2009, the Company incurred a loss from operations of approximately $15.5 million and negative cash flows from operating activities of approximately $11.0 million. Operating losses and negative cash flows from operating activities may continue for the foreseeable future because of the additional costs and expenses related to product development, promotional activities, and continued expansion of operations and development of relationships with other businesses. Management's plans include increasing the Company's revenues, focusing on the Company's fixed cost base and improving its working capital position to better align with operations, market demand and current sales levels. However, if projected sales do not materialize, management may reduce expenses. Principles of Consolidation The Company operates a wholly owned sales and customer support subsidiary in the United Kingdom. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. The functional currency of the Company's subsidiary is the U.S. dollar. Accordingly, assets and liabilities denominated in foreign currency are remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities and historical exchange rates for nonmonetary assets and liabilities. Expenses are remeasured at average exchange rates in effect during the period. Gains and losses from foreign currency remeasurement are included in interest and other (expense) income, net in the consolidated statements of operations and to date have not been material. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management involve: the assessment of collectability of accounts receivable, inventory valuations, the determination of accruals, the valuation and useful lives of long-lived assets, the fair value of the Company's equity instruments and the valuation of deferred tax asset balances. Actual results could differ from those estimates. and such differences may be material to the financial statements. 6 EFTA00293538 AliphCom Notes to Consolidated Financial Statements December 31, 2009 and 2008 Revenue Recognition Revenue from product sales is recognized at the time the product is shipped provided that persuasive evidence of an arrangement exists, title and risk of loss has transferred to the customer, the selling price is fixed or determinable, and collection of the related receivable is reasonably assured. The Company assesses collectability based on a number of factors, including general economic and market conditions, past transaction history with the customer, and the creditworthiness of the customer. The Company recognizes revenue net of estimated sales returns, price protection, and sales incentives. Upon shipment of the product, the Company reduces revenue for an estimate of potential future returns, price protection and sales incentives related to the current period revenue. Management analyzes historical returns, channel inventory levels, current economic trends, new product introduction timelines and changes in customer demand for the Company's products when evaluating the adequacy of the allowance for sales returns, price protection and sales incentives. In late 2009, the Company released its ICON headset product. In connection with the ICON product, the Company provides firmware updates that may result in additional features and functionality, on an if-and-when available basis. The firmware updates represent an undelivered element in the revenue arrangement. In order for revenue to be recognized for the delivered elements in an arrangement, the Company must be able to establish vendor specific evidence of fair value ("VSOE") for the undelivered element. The Company had not established VSOE for the firmware updates as of December 31, 2009. Accordingly, the Company has deferred all revenue and associated cost of sales relating to sales of its ICON headsets and recognizes both on a straight-line basis over the estimated economic life of the product, with any loss recognized at the time of sale. Sales Incentives The Company accrues for sales incentives as a marketing expense if it receives an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received. Otherwise, the sales incentives are recorded as a reduction to revenues. The Company records its channel marketing costs as a reduction of revenues. The Company records estimated reductions to revenues for sales incentives upon the later of when the related revenue is recognized or when the program is offered to the customer or end consumer. Cash Equivalents All highly liquid investments with an original or remaining maturity of three months or less at the date of purchase are classified as cash equivalents. The Company maintains its cash and cash equivalents with major, high credit quality financial institutions. At December 31, 2009 and 2008, cash equivalents consisted primarily of money market funds and commercial paper. Deposits Certain deposits are required by the Company's landlords to guarantee the contractual obligations under its office lease agreements. As of December 31, 2009 and 2008, deposits totaled $92,000 and $73,000, respectively, and were recorded within other long-term assets in the accompanying consolidated balance sheets. 7 EFTA00293539 AliphCom Notes to Consolidated Financial Statements December 31, 2009 and 2008 Restricted Cash At December 31, 2009 and 2008, the Company maintained $3.8 million and $11.0 million. respectively, of restricted cash in the form of institutional money market funds and certificates of deposit to support letters of credit required by the Company's primary inventory supplier. Restricted cash is recorded within other long-term assets in the accompanying consolidated balance sheets. Allowance for Doubtful Accounts The Company makes judgments as to its ability to collect outstanding accounts receivable and provides allowances for accounts receivable when and if collection becomes doubtful. To date, the Company has not recorded any allowance for doubtful accounts on customer accounts. Fair Value of Financial Instruments The Company's financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, and preferred stock warrant liability. The fair value of the Company's cash equivalents is determined based on quoted prices in active markets for identical assets. The recorded values of the Company's accounts receivable and accounts payable approximate their current fair values due to the relatively short-term nature of these accounts. Business Risk and Concentration of Credit Risk The Company's products are concentrated in an industry characterized by rapid technological advances, changes in customer requirements and evolving regulatory requirements and industry standards. Any significant delays in the development or introduction of products or services, or any failure by the Company to anticipate or to respond adequately to technological developments in its industry, changes in customer requirements or changes in regulatory requirements or industry standards, could have a material adverse effect on the Company's business and operating results. The Company's products are manufactured, assembled and tested by a third-party contractor in Asia. There is no long-term agreement with the contractor. A significant disruption in the operations of the contractor 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. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, and trade accounts receivable. Cash and cash equivalents are deposited with major financial institutions in the United States. Deposits in the United States may exceed federally insured limits. Management believes that the financial institutions that hold the Company's deposits are financially credit worthy and, accordingly, minimal credit risk exists with respect to those balances. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal interest rate risk. The Company's accounts receivable are derived from customers located principally in the United States. The Company performs ongoing credit evaluations of its customers, does not require collateral, and maintains allowances for potential credit losses on customers' accounts when deemed necessary. 8 EFTA00293540 AliphCom Notes to Consolidated Financial Statements December 31, 2009 and 2008 As of and for the years ended December 31, 2009 and 2008, customers representing 10% or more of the accounts receivable balance and/or revenues were as follows: Percentage of Percentage of Accounts Receivable Net Revenues 2009 2008 2009 2008 Customer A 52 % 38 % 59 % 82 % Customer B 12 Customer C 28 Inventories Inventories are stated at the lower of cost or market, cost being determined using the first-in, first out method. The Company reduces the value of its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value. Allowances, once established, are not reversed until the related inventory has been subsequently sold or scrapped. Property and Equipment, Net Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, as described in the table below. Maintenance and repairs are expensed as incurred. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in the statement of operations. Asset Estimated Useful Lives Computer equipment 3 years Software 2 years Office equipment, furniture and fixtures 5 years Manufacturing equipment and tools Based on the estimated life of the product Leasehold improvements The shorter of the lease term or the estimated useful fives of the improvements Capitalized Software Development Costs Software development costs are included in research and development and are expensed as incurred. After technological feasibility is established, software development costs are capitalized. To date, the period between achieving technological feasibility. which the Company has defined as the establishment of a working model which typically occurs when the beta testing commences, and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. Impairment of Long-Lived Assets The Company reviews the recoverability of its long-lived assets, such as property and equipment, when events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on the Company's ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows, undiscounted and without interest charges, of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized 9 EFTA00293541 AliphCom Notes to Consolidated Financial Statements December 31, 2009 and 2008 for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. Through December 31, 2009, the Company has not identified any impairment on its long-lived assets. Research and Development Costs The Company expenses costs related to research, design and development of products to research and development as incurred. The costs included in research and development primarily consist of salaries, contractor fees and allocated overhead costs. Income Taxes The Company accounts for income taxes based on the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. In evaluating the ability to recover its deferred income tax assets the Company considers all available positive and negative evidence, including its operating results, forecasts of future taxable income and ongoing tax planning on a jurisdiction-by-jurisdiction basis. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. The Company recognizes and measures benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates its uncertain tax positions annually. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Advertising Costs Costs related to advertising and promotions of products are expensed to sales and marketing as incurred. Advertising and promotion expense for the years ended December 31, 2009 and 2008 was $507,000 and $2.5 million, respectively. Product Warranty The Company offers a standard product warranty that the product will operate under normal use for a period of one year from date of original purchase. The Company shall, at its option, either repair or replace the defective product. If the Company determines that it is not reasonable to replace the defective product, the Company may refund the purchase price paid for the product. 10 EFTA00293542 AliphCom Notes to Consolidated Financial Statements December 31, 2009 and 2008 At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of revenues. Factors that affect the warranty obligation include product failure rates and service delivery costs incurred in correcting the product failures. Because the Company's products are manufactured by a third party manufacturer, in certain cases the Company has recourse to the third party manufacturer in determining its warranty liability. Product warranty accrual is included within accrued liabilities in the accompanying consolidated balance sheets, and its activity for the years ended December 31.2009 and 2008 was as follows: (in thousands) 2009 2008 Balance at beginning of the year $ 626 $ 497 Provision for warranty liability made during the year 687 1.596 Settlements made during the year (1.037) (1,467) Balance at end of the year $ 276 5 626 Shipping and Handling Fees and Costs The Company accounts for shipping and handling fees billed to customers as revenues and the associated shipping and handling costs as cost of revenues. In addition, shipping and handling costs for inbound freight are included in cost of revenues. Preferred Stock Warrant Liability The freestanding warrant related to the Company's preferred stock is classified as a liability on its consolidated balance sheets. The warrant is subject to re-measurement at each balance sheet date and any change in fair value is recognized as a component of interest and other (expense) income, net. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrant or the completion of a liquidation event, including the completion of an initial public offering, at which time the preferred stock warrant will be converted into a warrant to purchase common stock and, accordingly, the liability would be reclassified to stockholders' equity. Stock-Based Compensation Stock-based compensation expense for the years ended December 31, 2009 and 2008, includes compensation expense for all stock-based compensation awards granted on or after January 1. 2006 and is based on the grant-date fair value estimated using the Black-Scholes option pricing model. Stock-based compensation expense recognized in the statements of operations is based on options ultimately expected to vest, reduced by the amount of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. When estimating forfeitures. the Company considers historic voluntary termination behaviors as well as trends of actual option forfeitures. The Company accounts for stock-based compensation arrangements with nonemployees, using the Black-Scholes option-pricing model, based on the fair value as these instruments vest. Accordingly, at each reporting date. the Company revalues the unearned portion of the stock-based compensation and the resulting change in fair value is recognized in the consolidated statements of operations over the period the related services are rendered. 11 EFTA00293543 AliphCom Notes to Consolidated Financial Statements December 31, 2009 and 2008 Recently Issued Accounting Standards In January 2010, the Financial Accounting Standards Board (FASB) issued authoritative guidance related to additional requirements regarding disclosures of fair value measurements. The guidance requires the gross presentation of activity within the Level 3 fair value measurement roll forward and details of transfers in and out of Level 1 and 2 fair value measurements. It also clarifies two existing disclosure requirements on the level of disaggregation of fair value measurements and disclosures on inputs and valuation techniques. The new requirements and guidance are effective for interim and annual periods beginning after December 15, 2009, except for the Level 3 roll forward which is effective for fiscal years beginning after December 15, 2010 (including interim periods within those fiscal years). The Company is currently assessing the potential effect, if any, on its footnote disclosures. In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for the Company beginning January 1, 2011, with earlier adoption permitted. Under the new guidance, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The Company is currently assessing the potential effect of adoption, if any, on its financial statements. In May 2009, the FASB issued new guidance which establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued. This new guidance is for annual periods ending after June 15, 2009, and: (i) sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, (ii) identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures that should be made about events or transactions that occur after the balance sheet date. This new guidance provides largely the same framework for the evaluation of subsequent events which previously existed only in auditing literature. The Company has performed an evaluation of subsequent events through August 19, 2011, which is the day the financial statements were issued. 2. Fair Value of Financial Instruments Effective January 1, 2008, the Company adopted the accounting guidance which defines fair value, establishes a framework for measuring fair value and expands required disclosures about fair value measurements. Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. The impact of adopting this guidance as of January 1, 2008 was not material to the consolidated financial statements. 12 EFTA00293544 AliphCom Notes to Consolidated Financial Statements December 31, 2009 and 2008 The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company primarily applies the market approach for recurring fair value measurements. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. As of December 31, 2009 and 2008, those assets and liabilities that are measured at fair value on a recurring basis consisted of the Company's short-term securities it classifies as cash equivalents and its preferred stock warrant liability. The Company believes that the carrying amounts of its other financial instruments, including accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses, approximate fair value due to their short-term maturities. The following table presents information about assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008, and indicates the fair value hierarchy utilized to determine such fair value. INts0400 ZOO* ZOOS twat trap', Tata Asia itatittlYNILett ". S 35 102 t 1 1 3t Ott I n 1 S 44 771 x 0:0 Con•con otaceat a :o co...was MOO' 5t4 TOISIMISMIG10.0 now von I bbl I $ ).5 2" t 44 771 sn; 4.• NS' labilfle• 5 eat 3 eat let , t SOMIPSIMIO• /NSA* SIM .1040 t 5 5 !UI t cart $ ]m t 51I t,oM!auY W MaqaMonit rid (Sr lytttr• "...no Co...try. t,t434retfrotre<4 Vert "'bmn olw blew, me% tv- tte Co—pflttetsolda.4.10464."4 Vet% The change in the fair value of the Level 3 preferred stock warrant liability is summarized below: (in thousands) 2009 2008 Fair value at beginning of period 2,331 $ 4,960 Issuances Change in fair value recorded in warrant revaluation (expense) income (4.543) 2,629 Fair value at end of period 6,874 S 2,331 13 EFTA00293545 AliphCom Notes to Consolidated Financial Statements December 31, 2009 and 2008 3. Balance Sheet Components Inventories December 31, (in thousands) 2009 2008 Finished goods S 5,396 S 5.275 Property and Equipment, Net December 31, (in thousands) 2009 2008 Computer equipment S 619 $ 582 Software 247 188 Office equipment, furniture and fixtures 870 838 Leasehold improvements 552 535 Manufacturing equipment and tools 4,177 3.436 6,465 5,579 Accumulated depreciation and amortization (4,108) (1,599) Property and equipment, net 2,357 $ 3,980 Depreciation and amortization expense totaled $2.5 million and $1.3 million for the years ended December 31, 2009 and 2008, respectively. Property and equipment acquired through capital leases during 2008 totaled $193,000 and was written off during the year ended December 31, 2008. As such, there was no property and equipment acquired through capital leases on the Company's consolidated balance sheets at December 31, 2009 and 2008 and no related accumulated depreciation and amortization at December 31, 2009 and 2008. Accrued Liabilities December 31, (in thousands) 2009 2008 Accrued compensation $ 1.016 $ 588 Purchase commitment 1,100 5.200 Accrued product returns 4,794 3.110 Litigation expense 5.410 Price protection and discounts 591 52 Product warranty reserve