Notes to Consolidated Financial Statements
(1) NATURE OF THE BUSINESS
Sonus Networks, Inc. ("Sonus" or the "Company") is a leading provider of networked solutions for communications service providers (e.g., telecommunications, wireless and cable service providers) and enterprises to help them secure and unify their real-communications infrastructures. Sonus helps many of the world's leading communications service providers and enterprises embrace the next generation of Session Initiation Protocol ("SIP") and 4G/LTE (Long Term Evolution)-based solutions, including Voice over Internet Protocol ("VoIP"), Voice over WiFi ("VoWiFi"), video and Unified Communications ("UC") through secure, reliable and scalable Internet Protocol ("IP") networks. Sonus' products include session border controllers ("SBCs"), diameter signaling controllers ("DSCs") and VoWiFi solutions, which are supported by a global services team with experience in design, deployment and maintenance of some of the world's largest IP networks.
Sonus' communications solutions provide a secure way for its customers to link and leverage multivendor, multiprotocol communications systems and applications across their networks, around the world and in a rapidly changing ecosystem of IP-enabled devices such as smartphones and tablets. Sonus' solutions help realize the intended value and benefits of UC platforms by allowing disparate communications environments, commonplace in most enterprises today, to work seamlessly together. Likewise, Sonus' solutions facilitate the evolution to cloud-based delivery of UC solutions.
Sonus utilizes both direct and indirect sales channels to reach its target customers. Customers and prospective customers in the service provider space are traditional and emerging communications service providers, including long distance carriers, local exchange carriers, Internet service providers, wireless operators, cable operators, international telephone companies and carriers that provide services to other carriers. Enterprise customers and target enterprise customers include financial institutions, retailers, state and local governments, and other multinational corporations.
(2) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States ("GAAP").
On September 26, 2016 (the "Taqua Acquisition Date"), the Company acquired Taqua, LLC ("Taqua"), a leading supplier of IP communications systems, applications and services to mobile and fixed operators. The financial results of Taqua are included in the Company's consolidated financial statements starting on the Taqua Acquisition Date.
On January 2, 2015 (the "Treq Asset Acquisition Date"), the Company acquired from Treq Labs, Inc. ("Treq") certain assets related to Treq's business of designing, developing, marketing, selling, servicing and maintaining software-defined networking ("SDN") technology, SDN controller software and SDN management software (the "SDN Business"). The financial results of the SDN Business are included in the Company's consolidated financial statements starting on the Treq Asset Acquisition Date.
On February 19, 2014 (the "PT Acquisition Date"), the Company completed the acquisition of Performance Technologies, Incorporated ("PT"). The financial results of PT are included in the Company's consolidated financial statements for the periods subsequent to the PT Acquisition Date.
Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Sonus and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
Use of Estimates and Judgments
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and judgments relied upon in preparing these consolidated financial statements include accounting for business combinations, revenue recognition for multiple element arrangements, inventory valuations, assumptions used to determine the fair value of stock-based compensation, intangible assets and goodwill valuations, legal contingencies and recoverability of Sonus' net deferred tax assets and the related valuation allowances. Sonus regularly assesses these estimates and records changes in estimates in the period in which they become known. Sonus bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Business Combinations
The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired in the business combination that are not individually identified and separately recognized. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to
one
year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.
Revenue Recognition
The Company recognizes revenue from sales when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectability of the related receivable is reasonably assured. In instances where customer acceptance is required, revenue is deferred until the acceptance has been achieved. When fees for products or services are not fixed and determinable, the Company defers the recording of receivables, deferred revenue and revenue until such time as the fees become due or are collected.
Revenue from maintenance and support services is recognized ratably over the service period. Maintenance revenue is deferred until the associated product is accepted by the customer and all other revenue recognition criteria have been met. Maintenance and support services include telephone support, return and repair support and unspecified rights to product upgrades and enhancements. Revenue from other professional services is typically recognized as the services are delivered if all other revenue recognition criteria have been met.
The Company's products typically have both software and non-software components that function together to deliver the products' essential functionality. In addition, hardware sold generally cannot be used apart from the software. Therefore, the Company considers its principal products to be both software and hardware-related. Many of the Company's sales involve multiple element arrangements that include product, maintenance and various professional services. The Company recognizes revenue in accordance with the provisions of Accounting Standards Codification ("ASC") 605-25,
Revenue Recognition - Multiple-Element Arrangements
("ASC 605-25") for transactions that include both hardware and software components. The Company recognizes revenue from stand-alone software sales under the software revenue recognition guidance in ASC 985-605,
Software - Revenue Recognition
("ASC 985-605"). The Company limits the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations, or subject to customer-specific return or refund privileges.
For multiple-element arrangements that include both software-only products and non-software products, the Company allocates the total arrangement consideration to the software-only deliverables as a group and to the individual non-software deliverables based on their relative selling prices. If an undelivered element (such as maintenance and support services) relates to both the software-only and non-software deliverables, the Company bifurcates the consideration allocated to the undelivered
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Notes to Consolidated Financial Statements (Continued)
element (such as maintenance and support services) into a non-software component and the software-only component using the relative selling price method. The consideration allocated to the non-software and software-only deliverables is recognized in accordance with the guidance as discussed in this note.
Under ASC 985-605, revenue for any undelivered elements that are considered not essential to the functionality of the product and for which vendor-specific objective evidence of selling price (“VSOE”) has been established is deferred and recognized upon delivery utilizing the residual method. If the Company has undelivered product for which VSOE has not been established, it defers all revenue on the entire arrangement until VSOE is established or until such elements are delivered, provided that all other revenue recognition criteria are met. If the Company has undelivered services for which VSOE has not been established, the entire arrangement is recognized as revenue over the longest remaining service period from the point in time that all services have commenced and all products have been delivered, provided that all other revenue recognition criteria are met.
For transactions that include multiple elements, arrangement consideration is allocated to each element based on the relative selling prices of all of the elements in the arrangement using the fair value hierarchy as required by ASC 605-25.
The Company establishes VSOE based upon the price charged when the same element is sold separately or established by management having the relevant pricing authority. The Company has VSOE for its maintenance and support services and certain professional services. When VSOE exists it is used to determine the selling price of a deliverable. The Company has not been able to establish VSOE of any of its products and for certain of its services because the Company has not sold such products or services on a stand-alone basis, has not priced its products or services within a narrow range, or has limited sales history.
When VSOE is not established, the Company attempts to establish the selling price of each element based on third-party evidence of selling price (“TPE”). The Company's solution typically differs from that of its peers as there are no similar or interchangeable competitor products or services. The Company's various product, service and maintenance offerings contain a significant level of unique features and functionality and therefore, comparable pricing of competitors' products and services with similar functionality cannot be obtained. Accordingly, the Company is not able to determine TPE for its products or services.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses estimated selling price (“ESP”) in its allocation of arrangement consideration for the relevant deliverables. The objective of ESP is to determine the price at which the Company would transact a sale if a product or service was sold on a stand-alone basis. The Company determines ESP for its products and certain services by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional-specific market factors, profit objectives and historical pricing practices for such deliverables. The determination of ESP is a formal process within the Company that includes review and approval by the Company's management.
Deferred revenue typically includes customer deposits and amounts associated with partial product shipments and maintenance or service contracts. Deferred revenue expected to be recognized as revenue more than one year subsequent to the balance sheet date is reported as a component of long-term liabilities in the consolidated balance sheets. The Company defers recognition of incremental direct costs, such as cost of goods, third-party installations and commissions, until recognition of the related revenue. Such costs are classified as current assets if the deferred revenue is initially classified as current and noncurrent assets if the related deferred revenue is initially classified as long-term.
The Company excludes any taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction (i.e., sales, use and value added) from its revenue and costs. Reimbursement received for out-of-pocket expenses and shipping costs is recorded as revenue.
The Company sells the majority of its products directly to its end customers. For products sold to resellers and distributors, the Company recognizes revenue on a sell-through basis.
Financial Instruments
The carrying amounts of Sonus' financial instruments, which include cash equivalents, investments, accounts receivable
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
and accounts payable, approximate their fair values.
All investments in marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in Accumulated other comprehensive loss, which is a component of stockholders' equity. Unrealized losses that are determined to be other-than-temporary, based on current and expected market conditions, are recognized in earnings. Declines in fair value determined to be credit-related are charged to earnings. The cost of marketable securities sold is determined by the specific identification method.
Financial instruments with remaining maturities or that are due within one year from the balance sheet date are classified as current. Financial instruments with remaining maturities or that are payable more than one year from the balance sheet date are classified as noncurrent.
Cash and Cash Equivalents
Cash equivalents are stated at fair value. Cash equivalents are liquid securities that have remaining maturities of three months or less at the date of purchase.
Restricted Cash
The Company classifies as restricted cash all cash pledged as collateral to secure long-term obligations and all cash whose use is otherwise limited by contractual provisions. Restricted cash is recorded within other assets on the consolidated balance sheet.
Foreign Currency Translation
For foreign subsidiaries where the functional currency is the local currency, assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries are included in Accumulated other comprehensive loss. The primary component of Accumulated other comprehensive loss at both December 31, 2016 and 2015 was cumulative translation adjustments.
For foreign subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Revenue and expense items are translated at average rates of exchange prevailing during each period.
Realized and unrealized foreign currency gains and losses arising from transactions denominated in currencies other than the subsidiary's functional currency are reflected in earnings with the exception of intercompany transactions considered to be of a long-term investment nature.
The components of foreign currency transaction gains (losses) are reported as a component of General and administrative expenses in the consolidated statements of operations. The Company recognized net transaction losses of
$0.3 million
for the year ended December 31, 2016 and
$0.4 million
for the year ended December 31, 2015. The Company recognized a net transaction gain of
$1.6 million
for the year ended December 31, 2014.
Inventory
Inventory is recorded at the lower of cost or market value using the first-in, first-out convention. The Company reduces the carrying value of inventory for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors.
Sonus writes down evaluation equipment at the time of shipment to its customers, as it is probable that the inventory value will not be realized.
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Notes to Consolidated Financial Statements (Continued)
Deferred product costs represent deferred cost of revenue for product shipments to customers prior to satisfaction of Sonus' revenue recognition criteria. The Company classifies inventory that is not expected to be consumed within one year from the balance sheet date as noncurrent and includes such inventory as a component of Other assets.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from
two
to
five
years. Leasehold improvements are amortized over the lesser of the lease term or
five
years. When an asset is sold or retired, the cost and related accumulated depreciation or amortization are eliminated, and the resulting gain or loss, if any, is recognized in income (loss) from operations in the consolidated statement of operations. The Company reviews property and equipment for impairment in the same manner as intangible assets discussed below.
Software development costs associated with internal use software are incurred in three stages of development: the preliminary project stage, the application development stage and the post-implementation stage. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property and equipment. Internal use software is amortized on a straight-line basis over its estimated useful life of
three
years, beginning when the software is ready for its intended use.
Intangible Assets and Goodwill
Intangible assets are comprised of certain intangible assets arising from the 2012 acquisition of NET, comprised of developed technology, customer relationships and internal use software, which are amortized over their estimated useful lives of
three
to
five
years; the 2014 acquisition of PT, comprised of developed technology and customer relationships, which are amortized over their estimated useful lives of
six
to
seven
years; the 2015 acquisition of the SDN Business, comprised of developed technology, which is amortized over its estimated useful life of
seven
years and the September 2016 acquisition of Taqua, comprised of developed technology and customer relationships, which are amortized over their estimated useful lives of six to eight years. Intangible assets are reviewed for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable based upon the estimated undiscounted cash flows. Recoverability of intangible assets with estimated lives and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the Company will recognize an impairment loss for the amount by which the carrying value of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the nature of the asset. See
Note 9
for additional information regarding the Company's intangible assets.
Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but instead is tested for impairment at least annually or if indicators of potential impairment exist by comparing the fair value of the Company's reporting unit to its carrying value.
The Company's annual testing for impairment of goodwill is completed as of November 30. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. The Company performed its step one assessments as proscribed by
Intangibles - Goodwill and Other (ASC Topic 350)
for each of the years ended December 31, 2016, 2015 and 2014 and concluded each year that it was not more likely than not that the fair value of the Company's reporting unit was less than its carrying value.
Other Assets
Other assets are primarily comprised of the long-term portion of deferred cost of goods sold, prepaid expenses and deposits.
Stock-Based Compensation
The Company's stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
of the awards that will be forfeited.
The Company uses the Black-Scholes valuation model for estimating the fair value on the date of grant of stock options. The fair value of stock option awards is affected by the Company's stock price as well as valuation assumptions, including the volatility of Sonus' stock price, expected term of the option, risk-free interest rate and expected dividends.
In 2015, the Company began to grant performance-based stock units ("PSUs") that include a market condition to certain of its executives. The Company uses a Monte Carlo simulation approach to model future stock price movements based upon the risk-free rate of return, the volatility of each entity and the pair-wise covariance between each entity. These results are then used to calculate the grant date fair values of the PSUs.
Research and Development Costs
Research and development costs are expensed as incurred.
Software Development Costs
The costs for the development of new software and substantial enhancements to existing software are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized until the product is available for general release. The Company has determined that technological feasibility is established at the time a working model of the software is completed. The Company's process for developing software is essentially completed concurrently with the establishment of technological feasibility. Accordingly, no costs have been capitalized to date.
Concentrations of Credit Risk and Single Source Suppliers
The financial instruments that potentially subject Sonus to concentrations of credit risk are cash, cash equivalents, investments and accounts receivable. The Company's cash equivalents and investments were managed by one financial institution at December 31, 2016 and
two
financial institutions at December 31,
2015
.
Certain components and software licenses from third parties used in Sonus' products are procured from single sources of supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt Sonus' delivery of products and thereby materially adversely affect Sonus' revenues and operating results.
Sonus had
four
contract manufacturers at
December 31, 2016
, of which one is primarily replied upon. Failure to manage the activities of these manufacturers or any disruption in these relationships could result in the disruption in the supply of its products and in delays in the fulfillment of the Company's customer orders.
Advertising Costs
Advertising costs are expensed as incurred and included as a component of Sales and marketing expense in the Company's consolidated statements of operations. Advertising expenses were
$0.1 million
for the year ended
December 31, 2016
,
$0.9 million
for the year ended
December 31, 2015
and
$1.5 million
for the year ended
December 31, 2014
.
Operating Segments
The Company operates in a single segment. 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 in making decisions regarding resource allocation and assessing performance. To date, the chief operating decision maker has made such decisions and assessed performance at the company level, as
one
segment. The Company's chief operating decision maker is its President and Chief Executive Officer.
Loss Contingencies and Reserves
Loss Contingencies.
Sonus is subject to ongoing business risks arising in the ordinary course of business that affect the estimation process of the carrying value of assets, the recording of liabilities and the possibility of various loss contingencies.
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Notes to Consolidated Financial Statements (Continued)
An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. Sonus regularly evaluates current information available to determine whether such amounts should be adjusted and records changes in estimates in the period they become known.
Allowance for Doubtful Accounts
.
Sonus establishes billing terms at the time it negotiates purchase agreements with its customers. Sonus monitors its outstanding receivables for timely payments and potential collection issues. An allowance for doubtful accounts is estimated based on Sonus' assessment of the collectability of specific customer accounts.
Accrual for Royalties
.
Sonus accrues for royalties for technology that it licenses from vendors based on established royalty rates and usage. In certain cases, Sonus has been contacted by third parties who claim that Sonus' products infringe on certain intellectual property of the third party. Sonus evaluates these claims and accrues amounts only when it is probable that the obligation has been incurred and the amounts are reasonably estimable.
Reserve for Litigation and Legal Fees
.
Sonus is subject to various legal claims. Sonus reserves for legal contingencies and legal fees when it is probable that a loss has been incurred and the amounts are reasonably estimable.
Accounting for Income Taxes
Deferred tax assets and liabilities are recognized for the expected future consequences of events that have been reflected in the consolidated financial statements. Deferred tax assets and liabilities are determined based on the differences between the book and tax bases of assets and liabilities and operating loss carryforwards, using tax rates expected to be in effect for the years in which the differences are expected to reverse. Such differences arise primarily from stock-based compensation, depreciation, accruals and reserves, acquired intangible assets, deferred revenue, tax credits, net operating loss carryforwards and allowances for accounts receivable. Sonus records valuation allowances to reduce deferred income tax assets to the amount that is more likely than not to be realized.
Sonus has not provided for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries, as the Company plans to permanently reinvest these amounts. Cumulative undistributed foreign earnings were approximately
$28 million
at each of
December 31, 2016
and
December 31, 2015
. Generally, the undistributed foreign earnings become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. The Company has been taxed on certain earnings of its non-U.S. subsidiaries. Previously taxed earnings were approximately
$16 million
at each of December 31, 2016 and December 31, 2015. Thus,
$12 million
of the undistributed earnings at each of December 31, 2016 and December 31, 2015 are subject to U.S. income taxes on undistributed earnings. The Company's non-U.S. subsidiaries had cash balances aggregating approximately 4% of the Company's total cash and investments, which the Company believes is indicative of its policy of reinvesting the undistributed earnings of its subsidiaries. The Company has a significant federal net operating loss ("NOL") carryforward which could be offset upon a distribution depending on the timing of such distribution. The Company does not believe it is practicable to estimate with reasonable accuracy the hypothetical amount of the unrecognized deferred tax liability on its undistributed foreign earnings given the large number of tax jurisdictions involved and the many factors and assumptions required to estimate the amount of the U.S. federal income tax on the undistributed earnings after reduction for the available foreign tax credits.
The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, no amount of the benefit attributable to the position is recognized. The tax benefit to be recognized of any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than
50%
likely of being realized upon resolution of the contingency. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill impairment, clarifies that an entity should consider income tax effects from any tax
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for the Company beginning January 1, 2020 for both interim and annual reporting periods, with early adoption permitted. The Company is currently assessing the potential impact of the adoption of ASC 2017-04 on its consolidated financial statements.
In October 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-16 ("ASU 2016-16"), which removes the prohibition in Accounting Standards Codification ("ASC") 740,
Income Taxes,
against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. ASU 2016-16 is intended to reduce the complexity of GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving IP. ASU 2016-16 is effective for the Company beginning January 1, 2019 for both interim and annual reporting periods. The Company does not believe that the adoption of this standard will have a material impact on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
("ASU 2016-15"), which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of ASU 2016-15 is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. ASU 2016-15 adds or clarifies guidance on eight cash flow issues, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or certain other debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for the Company beginning January 1, 2018 for both interim and annual reporting periods, with early adoption permitted. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. The Company does not expect that the adoption of ASU 2016-13 will have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument
s ("ASU 2016-13"), which adds an impairment model that is based on expected losses rather than incurred losses. Under ASU 2016-13, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is effective for the Company beginning January 1, 2020 for both interim and annual reporting periods, with early adoption permitted. The Company does not expect that the adoption of ASU 2016-13 will have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 was effective for the Company beginning January 1, 2017 for both interim and annual reporting periods. Under ASU 2016-09, the Company will now recognize unrealized excess tax benefits. Due to the Company's full valuation allowance on its federal and state income taxes, the adoption of ASU 2016-09 will not impact the Company's accounting for income taxes. Without the valuation allowance, the Company estimates it would recognize a deferred tax asset approximating $6 million upon adoption of ASU 2016-09. The Company has elected to continue to apply forfeiture rates to its expense attribution related to stock options, restricted stock awards and restricted stock units, as the Company believes that such continued application results in more accurate expense attribution over the life of these equity grants.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842) Section A - Leases: Amendments to the FASB Accounting Standards Codification
("ASU 2016-02"), its new standard on accounting for leases. ASU 2016-02 introduces a lessee model that brings most leases onto the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in ASC 606, the FASB's new revenue recognition standard (i.e., those related to evaluating when profit can be recognized). Furthermore, ASU 2016-02 addresses other concerns related to the current leases model. For example, ASU 2016-02 eliminates the current GAAP requirement for an entity to use bright-line tests in determining lease classification. ASU 2016-02 is effective for the Company for both interim and annual periods beginning January 1, 2019. The Company is currently assessing the potential impact of the adoption of ASU 2016-02 on its consolidated financial statements.
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
("ASU 2015-17"), which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in the condensed consolidated balance sheet. Netting of deferred tax assets and deferred tax liabilities is still required under ASU 2015-17. ASU 2015-17 is effective for the Company for its annual report for the year ending December 31, 2018 and for interim period reporting beginning January 1, 2019, with early adoption permitted. The Company elected to early-adopt ASU 2015-17 prospectively and accordingly, reclassified its net current deferred tax asset totaling
$1.0 million
to its noncurrent net deferred tax asset as of December 31, 2015. No prior periods were retrospectively adjusted. The early adoption of ASU 2015-17 did not have a material impact on the Company's consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments
("ASU 2015-16"), which eliminates the requirement to restate prior periods to reflect adjustments made to provisional amounts recognized in a business combination. Under ASU 2015-16, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, rather than retrospectively, as had previously been required. ASU 2015-16 also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 was effective for the Company as of January 1, 2016. The adoption of ASU 2015-16 did not have a material impact on the Company's consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
("ASU 2015-11"), which simplifies the measurement of inventory by requiring entities to measure most inventory at the lower of cost and net realizable value, replacing the previous requirement to measure most inventory at the lower of cost or market. ASU 2015-11 does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. ASU 2015-11 was effective for the Company for both interim and annual reporting periods beginning January 1, 2017. The adoption of ASU 2015-11 is not expected to have a material impact on the Company's consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15,
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
("ASU 2014-15"), which provides guidelines for determining when and how to disclose going concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within
one
year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's ability to continue as a going concern. ASU 2014-15 was effective for the Company for annual periods beginning January 1, 2017, and interim periods thereafter, with early adoption permitted. The adoption of ASU 2014-15 is not expected to have a material impact on the Company's consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12,
Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)
(“ASU 2014-12”). ASU 2014-12 clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. ASU 2014-12 does not contain any new disclosure requirements. ASU 2014-12 was effective for the Company as of January 1, 2016. The adoption of ASU 2014-12 did not have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), its final standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
other topics in the FASB ASC. Certain of ASU 2014-09’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (i.e., property, plant and equipment; real estate; or intangible assets). Existing accounting guidance applicable to these transfers has been amended or superseded. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
("ASU 2015-14"), which defers the original effective date of interim and annual reporting periods by
one
year. As a result, the Company will not be required to apply the new revenue standard until annual reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08,
Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)
("ASU 2016-08") to clarify certain aspects of the principal-versus-agent guidance in its new revenue recognition standard in response to feedback received from the FASB-International Accounting Standards Board joint revenue recognition transition resource group. ASU 2016-08 clarifies the implementation guidance on principal-versus-agent considerations regarding how an entity determines whether it is a principal or an agent for each specified good or service promised to the customer and how an entity determines the nature of each specified good or service. ASU 2016-08 also provides clarification regarding the application of the principal-versus-agent guidance. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
("ASU 2016-10"), which amends certain aspects of the guidance in ASU 2014-09 on identifying performance obligations, including immaterial promised goods or services, shipping and handling activities and identifying when promises represent performance obligations; and licensing implementation guidance, including determining the nature of an entity's promise in granting a license, sales-based and usage-based royalties, restrictions of time, geographical location and use, and renewals of licenses that provide a right to use IP. In May 2016, the FASB issued ASU 2016-11, R
evenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)
("ASU 2016-11"), which rescinds certain SEC guidance from the Codification in response to announcements made by the SEC staff at the Emerging Issues Task Force's March 3, 2016 meeting, and which supersedes certain SEC observer comments on the topics of revenue and expense recognition for freight services in process, accounting for shipping and handling fees and costs, accounting for consideration given by a vendor to a customer and accounting for gas-balancing arrangements upon the adoption of ASU 2014-09. In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606)
("ASU 2016-12"), which amends certain aspects of ASU 2014-09, including regarding collectability, the presentation of sales tax and other similar taxes collected from customers, non-cash consideration, contract modifications and completed contracts at transition. ASU 2016-08, ASU 2016-10, ASU 2016-11 and ASU 2016-12 are effective at the same time as ASU 2014-09 (as amended by ASU 2015-14). The Company continues to assess the potential impact of the adoption of these ASUs on its consolidated financial statements, and currently believes that such adoption will, in general, accelerate the recognition of revenue (i.e., more revenue will be recognized upon delivery than is currently recognized ratably or upon payment) compared to the current standards in effect, in particular, sales of software-only products and sales to customers currently accounted for on a cash basis. The Company currently expects to adopt these ASUs using the modified retrospective option.
(3) BUSINESS ACQUISITIONS
Taqua, LLC
On the Taqua Acquisition Date, the Company acquired Taqua, a privately-held company. Taqua enables the transformation of software-based service provider networks to deliver next-generation voice, video and messaging services, including VoIP, VoWiFi and Voice over Long-Term Evolution ("VoLTE"). The Company believes that the acquisition of Taqua will, among other things, accelerate the Company's mobile strategy by adding a Virtualized Mobile Core ("VMC") Platform and an IP Multimedia Subsystem ("IMS") Service Core and expand the Company's fixed portfolio by adding a Class 5 Softswitch (the T7000) for network transformation projects and a Multimedia Controller used in IP Peering applications (the T7100), both of which were complementary to Sonus' product offerings. In consideration for the acquisition of Taqua, Sonus paid
$19.9 million
in cash to the sellers on the Taqua Acquisition Date, net of cash acquired. The Company also entered into an Earn-Out Agreement, dated as of September 26, 2016, with Taqua Holdings, LLC and Jeffrey L. Brawner, the seller representative in the transaction, under which there is the potential for additional cash payments of up to
$65 million
in the aggregate to the sellers if certain annual revenue thresholds are exceeded as measured annually through 2020. The Company had initially recorded
$10.0 million
of contingent consideration as of the Taqua Acquisition Date, with the estimate based on historical sales and probability weighted cash flows related to forecasted sales. Because there are unobservable inputs to the valuation methodology that are significant to the measurement of its fair value, namely, forecasted sales, the Company had categorized the earn-out at Level 3 within the fair value hierarchy. During the fourth quarter of 2016, the Company reassessed the historical and updated forecasted sales and accordingly, reversed the previous estimated contingent consideration such that as of December 31, 2016,
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
no incremental contingent consideration was recorded.
The transaction has been accounted for as a business combination and the financial results of Taqua have been included in the Company's consolidated financial statements for the period subsequent to its acquisition.
As of December 31, 2016, the valuation of acquired assets, identifiable intangible assets and certain accrued liabilities is preliminary. The Company is still in the process of investigating the facts and circumstances existing as of the Taqua Acquisition Date in order to finalize its valuation, particularly, short-term assets and liabilities, including accounts receivable, inventory, accrued expenses and intangible assets. During the fourth quarter of 2016, the Company recorded changes to the initial preliminary purchase price allocation. The primary adjustments recorded in the fourth quarter of 2016 were the aforementioned reversal of the
$10.0 million
of previously recorded contingent consideration, a reduction of
$12.1 million
to the developed technology intangible asset and an increase of
$5.5 million
to the customer relationship intangible asset. These adjustments, as well as other immaterial adjustments to other balance sheet accounts, resulted in a net reduction to goodwill of
$2.7 million
. Based on this updated preliminary purchase price allocation, the Company recorded
$9.1 million
of goodwill, which is primarily due to expected synergies between the combined companies and expanded market opportunities resulting from the expanded product offering portfolio. The goodwill is deductible for tax purposes. The Company expects to finalize the valuation of the assets acquired and liabilities assumed in the first half of 2017.
A summary of the preliminary allocation of the purchase consideration for Taqua as of December 31, 2016 is as follows (in thousands):
|
|
|
|
|
|
|
|
Fair value of consideration transferred:
|
|
|
Cash, net of cash acquired
|
$
|
19,919
|
|
|
|
|
|
Fair value of assets acquired and liabilities assumed:
|
|
|
Current assets
|
3,347
|
|
|
Property and equipment
|
1,478
|
|
|
Intangible assets:
|
|
|
Developed technology
|
2,100
|
|
|
Customer relationships
|
9,510
|
|
|
Goodwill
|
9,083
|
|
|
Other noncurrent assets
|
23
|
|
|
Current liabilities
|
(5,039
|
)
|
|
Long-term liabilities
|
(583
|
)
|
|
|
$
|
19,919
|
|
The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired developed technology and customer relationship intangible assets. The preliminary valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company's estimates of technology attrition and revenue growth projections. The Company is amortizing the identifiable intangible assets in relation to the expected cash flows from the individual intangible assets over their respective useful lives (see
Note 9
).
The Company's revenue for the year ended December 31, 2016 included
$1.9 million
of revenue attributable to Taqua since the Taqua Acquisition Date. The inclusion of Taqua's operations for the period from the Taqua Acquisition Date to December 31, 2016 in the Company's financial results for the year ended December 31, 2016 increased the Company's loss by
$4.7 million
. The Company has not provided pro forma financial information, as the historical amounts are not significant to the Company's consolidated financial statements.
SDN Business of Treq Labs, Inc.
On the Treq Asset Acquisition Date, the Company acquired from Treq the SDN Business. The SDN Business provides
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
solutions that optimize networks for voice, video and UC for both enterprise and service provider customers. The Company believes that the acquisition of the SDN Business has helped to accelerate Sonus' delivery of its SDN strategy. In consideration for the acquisition of the SDN Business, Sonus paid
$10.1 million
in cash on the Treq Asset Acquisition Date, and an additional consideration payment of
$750,000
on each of July 2, 2015 and January 4, 2016. The Company also entered into an Earn-Out Agreement, dated as of January 2, 2015, with Treq and Karl F. May, the seller representative in the transaction (the "Earn-Out Agreement"), under which the Company agreed to issue up to an aggregate of
1.3 million
shares of common stock over a
three
-year period subsequent to the Treq Asset Acquisition Date if aggregate revenue thresholds of at least
$60 million
are achieved by the SDN Business during that period, and up to an aggregate of an additional
2.2 million
shares of common stock (
3.5 million
shares in total) if aggregate revenue thresholds of at least
$150 million
are achieved by the SDN Business during that period. If the initial revenue thresholds are not met,
no
shares will be issued. Based on historical and forecasted sales, no incremental contingent consideration was recorded either initially as of the Treq Asset Acquisition Date or through
December 31, 2016
. Any shares issued pursuant to the Earn-Out Agreement will be issued in reliance on the exemption from registration available under Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"), and will be subsequently registered for resale under the Securities Act by the Company.
The transaction has been accounted for as a business combination. The Company finalized its valuation of the identifiable intangible assets in the second quarter of fiscal 2015. Based on the purchase price allocation, the Company recorded
$1.0 million
of goodwill, primarily due to expected synergies between the combined companies and expanded market opportunities. The goodwill is deductible for tax purposes.
A summary of the allocation of the purchase consideration for the SDN Business is as follows (in thousands):
|
|
|
|
|
|
|
|
Fair value of consideration transferred:
|
|
|
Cash, net of cash acquired
|
$
|
11,647
|
|
|
Fair value of assets acquired:
|
|
|
Intangible assets:
|
|
|
In-process research and development
|
$
|
9,100
|
|
|
Developed technology
|
1,500
|
|
|
Goodwill
|
1,047
|
|
|
|
$
|
11,647
|
|
The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired in-process research and development and developed technology intangible assets. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company's estimates of technology attrition and revenue growth projections. In the three months ended September 25, 2015, the Company reclassified
$7.5 million
of its in-process research and development intangible assets to its developed technology intangible assets. During the three months ended March 31, 2016, the Company reclassified the remaining
$1.6 million
of in-process research and development intangible assets to its developed technology intangible assets. These amounts were reclassified from in-process research and development intangible assets to developed technology intangible assets in the periods that the related products became generally available and began to record amortization expense for such developed technology intangible assets. Accordingly, at December 31, 2016, the Company no longer had an in-process research and development intangible asset. The Company is amortizing the identifiable intangible assets in relation to the expected cash flows from the individual intangible assets over their respective useful lives (see
Note 9
).
The Company has not disclosed the amount of revenue or earnings of the SDN Business since the SDN Business Acquisition Date or pro forma financial information, as these amounts are not significant to the Company's consolidated financial statements.
Performance Technologies, Incorporated
On the PT Acquisition Date, the Company acquired all of the outstanding common stock of PT for cash consideration of
$35.0 million
, or
$3.75
per share of PT common stock. This acquisition has enabled Sonus to expand its solutions portfolio with signaling technology and acquire expertise to enable mobile service providers to offer new real-time multimedia services
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
through their mobile infrastructure. Delivering these services across the LTE next-generation mobile networks will require adoption of the next-generation signaling technology known in the industry as Diameter Signal. The acquisition of PT has allowed Sonus to diversify its product portfolio with an integrated, virtualized Diameter and SIP-based solution and deliver strategic value to service providers seeking to offer new multimedia services through mobile, cloud-based, real-time communications.
The transaction has been accounted for as a business combination and the financial results of PT have been included in the Company's consolidated financial statements starting on the PT Acquisition Date.
The Company finalized the valuation of acquired assets, identifiable intangible assets, uncertain tax liabilities and certain accrued liabilities in the fourth quarter of 2014. The Company recorded
$8.8 million
of goodwill, primarily due to expected synergies between the combined companies and expanded market opportunities. The goodwill is not deductible for tax purposes.
A summary of the allocation of the purchase consideration for PT is as follows (in thousands):
|
|
|
|
|
|
|
|
Fair value of consideration transferred:
|
|
|
Cash, net of cash acquired
|
$
|
35,022
|
|
|
Fair value of equity awards assumed (see Note 15)
|
1,671
|
|
|
Fair value of total consideration
|
$
|
36,693
|
|
|
Fair value of assets acquired and liabilities assumed:
|
|
|
Marketable securities
|
$
|
2,315
|
|
|
Other current assets
|
9,337
|
|
|
Property and equipment
|
2,251
|
|
|
Intangible assets
|
17,100
|
|
|
Goodwill
|
8,781
|
|
|
Current liabilities
|
(2,762
|
)
|
|
Other long-term liabilities
|
(329
|
)
|
|
|
$
|
36,693
|
|
The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired developed technology and customer relationships intangible assets. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company's estimates of contract renewal, technology attrition and revenue growth projections. The Company is amortizing the identifiable intangible assets in relation to the expected cash flows from the individual intangible assets over their respective useful lives. These intangible assets have a weighted average useful life of
6.8 years
(see
Note 9
).
The identifiable intangible assets recorded in connection with the PT acquisition are as follows (in thousands):
|
|
|
|
|
|
|
|
Developed technology
|
$
|
13,200
|
|
|
Customer relationships
|
3,900
|
|
|
|
$
|
17,100
|
|
The Company recognized revenue aggregating
$14.6 million
in the period from the PT Acquisition Date through December 31, 2014. The Company has not disclosed the amount of earnings of PT since the PT Acquisition Date or pro forma financial information, as these amounts are not significant to the Company's consolidated financial statements.
Sale of Multi-Protocol Server Business
On June 20, 2014 (the "MPS Sale Date"), the Company sold its PT Multi-Protocol Server ("MPS") business for
$2.0 million
, comprised of
$0.2 million
of inventory,
$0.1 million
of fixed assets,
$0.2 million
of deferred revenue and
$1.9 million
of PT goodwill allocable to the MPS business. The Company had acquired the MPS business in connection with the acquisition of PT. The Company incurred
$0.4 million
of transaction costs, which are included as a component of General and
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
administrative expenses. The results of operations of the MPS business are excluded from the Company's consolidated results for the period subsequent to the MPS Sale Date.
Acquisition-Related Expenses
Acquisition-related expenses include those expenses related to acquisitions that would otherwise not have been incurred by the Company. These expenses include professional and services fees, such as legal, audit, consulting, paying agent and other fees, and expenses related to cash payments to certain former executives of the acquired businesses under their respective change of control agreements. The amount recorded in the year ended December 31, 2016 relates to professional fees in connection with the acquisition of Taqua. The amount recorded in the year ended December 31, 2015 relates to professional fees in connection with the acquisition of the SDN Business. Of the amount recorded in the year ended December 31, 2014,
$1.3 million
relates to the acquisition of PT, comprised of
$1.0 million
for professional and services fees and
$0.3 million
for change of control agreements, and
$0.3 million
relates to professional fees in connection with acquisition of the SDN Business.
The components of acquisition-related costs incurred in the years ended
December 31, 2016, 2015 and 2014
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Professional and services fees
|
$
|
1,152
|
|
|
$
|
131
|
|
|
$
|
1,309
|
|
|
Change of control agreements
|
—
|
|
|
—
|
|
|
249
|
|
|
|
$
|
1,152
|
|
|
$
|
131
|
|
|
$
|
1,558
|
|
(4) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. For periods in which the Company reports net income, diluted net income per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period unless the effect is antidilutive.
The calculations of shares used to compute basic and diluted loss per share are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Weighted average shares outstanding—basic
|
49,385
|
|
|
49,560
|
|
|
50,245
|
|
|
Potential dilutive common shares
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted average shares outstanding—diluted
|
49,385
|
|
|
49,560
|
|
|
50,245
|
|
Options to purchase the Company's common stock, unvested shares of restricted stock, shares underlying unvested performance-based stock grants sand shares in connection with future purchases under the Company's Amended and Restated 2000 Employee Stock Purchase Plan, as amended (the "ESPP"), aggregating
8.0 million
shares for the year ended
December 31, 2016
have not been included in the computation of diluted loss per share because their effect would have been antidilutive. Options to purchase the Company's common stock, unvested shares of restricted stock and unvested performance-based equity awards for which the performance conditions had been satisfied aggregating
8.2 million
shares for the year ended
December 31, 2015
and
8.0 million
shares for the year ended
December 31, 2014
have not been included in the computation of diluted loss per share because their effect would have been antidilutive.
(5) CASH EQUIVALENTS AND INVESTMENTS
The Company invests in debt and equity instruments, primarily U.S. government-backed, municipal and corporate obligations, which management believes to be high quality (investment grade) credit instruments.
During the year ended December 31, 2016, the Company sold
$1.1 million
of its available-for-sale securities that were impacted by the Money Market Reform Act, which became effective October 14, 2016 for institutional money markets, to avoid any negative impact on the Company's institutional money market investments. The Company also sold
$3.8 million
of
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
its available-for-sale securities during the year ended December 31, 2016. The Company recognized nominal gross gains and losses from the sales of these securities. The Company did not sell any of its available-for-sale securities during the year ended December 31, 2015. During the year ended December 31, 2014, the Company sold
$45.9 million
of its available-for-sale securities and realized gross gains aggregating
$46,000
, which are included as a component of Other income, net, in the Company's consolidated statement of operations for that period. The Company did not realize any gross losses on these sales.
Investments with continuous unrealized losses for one year or greater at
December 31, 2016
were nominal; however, since the Company does not intend to sell these securities and does not believe it will be required to sell any securities before they recover in value, it does not believe these declines are other-than-temporary.
On a quarterly basis, the Company reviews its investments to determine if there have been any events that could create a credit impairment. Based on its reviews, the Company does not believe that any impairment existed with its current holdings at
December 31, 2016
.
The amortized cost, gross unrealized gains and losses and fair value of the Company's cash equivalents and investments at
December 31, 2016
and
2015
were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Amortized
cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair
value
|
|
Cash equivalents
|
$
|
6,619
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,619
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
Municipal obligations
|
$
|
3,264
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
3,261
|
|
|
U.S. government agency notes
|
16,477
|
|
|
3
|
|
|
(3
|
)
|
|
16,477
|
|
|
Corporate debt securities
|
41,893
|
|
|
4
|
|
|
(45
|
)
|
|
41,852
|
|
|
Certificates of deposit
|
246
|
|
|
—
|
|
|
—
|
|
|
246
|
|
|
|
$
|
61,880
|
|
|
$
|
7
|
|
|
$
|
(51
|
)
|
|
$
|
61,836
|
|
|
Investments
|
|
|
|
|
|
|
|
|
U.S. government agency notes
|
$
|
19,473
|
|
|
$
|
3
|
|
|
$
|
(39
|
)
|
|
$
|
19,437
|
|
|
Corporate debt securities
|
10,520
|
|
|
—
|
|
|
(44
|
)
|
|
10,476
|
|
|
Certificates of deposit
|
2,458
|
|
|
—
|
|
|
—
|
|
|
2,458
|
|
|
|
$
|
32,451
|
|
|
$
|
3
|
|
|
$
|
(83
|
)
|
|
$
|
32,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Amortized
cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair
value
|
|
Cash equivalents
|
$
|
7,122
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,122
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
Municipal obligations
|
$
|
3,910
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
3,909
|
|
|
U.S. government agency notes
|
3,450
|
|
|
—
|
|
|
(2
|
)
|
|
3,448
|
|
|
Corporate debt securities
|
46,736
|
|
|
2
|
|
|
(56
|
)
|
|
46,682
|
|
|
Commercial paper
|
3,994
|
|
|
—
|
|
|
—
|
|
|
3,994
|
|
|
Certificates of deposit
|
500
|
|
|
—
|
|
|
—
|
|
|
500
|
|
|
|
$
|
58,590
|
|
|
$
|
2
|
|
|
$
|
(59
|
)
|
|
$
|
58,533
|
|
|
Investments
|
|
|
|
|
|
|
|
|
Municipal obligations
|
$
|
2,165
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
2,161
|
|
|
U.S. government agency notes
|
1,999
|
|
|
—
|
|
|
(13
|
)
|
|
1,986
|
|
|
Corporate debt securities
|
29,541
|
|
|
2
|
|
|
(85
|
)
|
|
29,458
|
|
|
|
$
|
33,705
|
|
|
$
|
2
|
|
|
$
|
(102
|
)
|
|
$
|
33,605
|
|
The Company's available-for-sale debt securities that are classified as Investments in the consolidated balance sheet mature after
one year
but within
two years
or less from the balance sheet date.
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
Fair Value Hierarchy
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tier fair value hierarchy is based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
Level 1.
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2.
Level 2 applies to assets or liabilities for which there are inputs that are directly or indirectly observable in the marketplace, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets).
Level 3.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The following table shows the fair value of the Company's financial assets at
December 31, 2016
and
2015
. These financial assets are comprised of the Company's available-for-sale debt securities and reported under the captions Cash and cash equivalents, Short-term investments and Investments in the consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at
December 31, 2016 using:
|
|
|
Total carrying
value at
December 31,
2016
|
|
Quoted prices
in active
markets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Cash equivalents
|
$
|
6,619
|
|
|
$
|
6,619
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
Municipal obligations
|
$
|
3,261
|
|
|
$
|
—
|
|
|
$
|
3,261
|
|
|
$
|
—
|
|
|
U.S. government agency notes
|
16,477
|
|
|
—
|
|
|
16,477
|
|
|
—
|
|
|
Corporate debt securities
|
41,852
|
|
|
—
|
|
|
41,852
|
|
|
—
|
|
|
Certificates of deposit
|
246
|
|
|
—
|
|
|
246
|
|
|
—
|
|
|
|
$
|
61,836
|
|
|
$
|
—
|
|
|
$
|
61,836
|
|
|
$
|
—
|
|
|
Investments
|
|
|
|
|
|
|
|
|
U.S. government agency notes
|
$
|
19,437
|
|
|
$
|
—
|
|
|
$
|
19,437
|
|
|
$
|
—
|
|
|
Corporate debt securities
|
10,476
|
|
|
—
|
|
|
10,476
|
|
|
—
|
|
|
Certificates of deposit
|
2,458
|
|
|
—
|
|
|
2,458
|
|
|
—
|
|
|
|
$
|
32,371
|
|
|
$
|
—
|
|
|
$
|
32,371
|
|
|
$
|
—
|
|
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at
December 31, 2015 using:
|
|
|
Total carrying
value at
December 31,
2015
|
|
Quoted prices
in active
markets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Cash equivalents
|
$
|
7,122
|
|
|
$
|
7,122
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
Municipal obligations
|
$
|
3,909
|
|
|
$
|
—
|
|
|
$
|
3,909
|
|
|
$
|
—
|
|
|
U.S. government agency notes
|
3,448
|
|
|
—
|
|
|
3,448
|
|
|
—
|
|
|
Corporate debt securities
|
46,682
|
|
|
—
|
|
|
46,682
|
|
|
—
|
|
|
Commercial paper
|
3,994
|
|
|
—
|
|
|
3,994
|
|
|
—
|
|
|
Certificates of deposit
|
500
|
|
|
—
|
|
|
500
|
|
|
—
|
|
|
|
$
|
58,533
|
|
|
$
|
—
|
|
|
$
|
58,533
|
|
|
$
|
—
|
|
|
Investments
|
|
|
|
|
|
|
|
|
Municipal obligations
|
$
|
2,161
|
|
|
$
|
—
|
|
|
$
|
2,161
|
|
|
$
|
—
|
|
|
U.S. government agency notes
|
1,986
|
|
|
—
|
|
|
1,986
|
|
|
—
|
|
|
Corporate debt securities
|
29,458
|
|
|
—
|
|
|
29,458
|
|
|
—
|
|
|
|
$
|
33,605
|
|
|
$
|
—
|
|
|
$
|
33,605
|
|
|
$
|
—
|
|
The Company's marketable securities and investments have been valued with the assistance of valuations provided by third-party pricing services, as derived from such services' pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. The Company is ultimately responsible for the consolidated financial statements and underlying estimates. Accordingly, the Company assesses the reasonableness of the valuations provided by the third-party pricing services by reviewing actual trade data, broker/dealer quotes and other similar data, which are obtained from quoted market prices or other sources.
(6) ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Accounts receivable, gross
|
$
|
53,872
|
|
|
$
|
51,543
|
|
|
Allowance for doubtful accounts
|
(10
|
)
|
|
(10
|
)
|
|
Accounts receivable, net
|
$
|
53,862
|
|
|
$
|
51,533
|
|
The activity in the Company's allowance for doubtful accounts was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
Balance at
beginning
of year
|
|
Charges
to expense
|
|
Write-offs
|
|
Balance at
end of
year
|
|
2016
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
(10
|
)
|
|
$
|
10
|
|
|
2015
|
$
|
58
|
|
|
$
|
17
|
|
|
$
|
(65
|
)
|
|
$
|
10
|
|
|
2014
|
$
|
157
|
|
|
$
|
92
|
|
|
$
|
(191
|
)
|
|
$
|
58
|
|
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
(7) INVENTORY
Inventory consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
On-hand final assemblies and finished goods inventories
|
$
|
15,346
|
|
|
$
|
17,136
|
|
|
Deferred cost of goods sold
|
4,237
|
|
|
5,975
|
|
|
|
19,583
|
|
|
23,111
|
|
|
Less current portion
|
(18,283
|
)
|
|
(23,111
|
)
|
|
Noncurrent portion (included in Other assets)
|
$
|
1,300
|
|
|
$
|
—
|
|
(8) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Useful Life
|
|
2016
|
|
2015
|
|
Equipment
|
3 years
|
|
$
|
63,622
|
|
|
$
|
63,667
|
|
|
Software
|
2-3 years
|
|
19,378
|
|
|
17,463
|
|
|
Furniture and fixtures
|
3-5 years
|
|
698
|
|
|
675
|
|
|
Leasehold improvements
|
Shorter of the life of the lease or estimated useful life (1-5 years)
|
|
11,757
|
|
|
11,615
|
|
|
|
|
|
95,455
|
|
|
93,420
|
|
|
Less accumulated depreciation and amortization
|
|
|
(83,714
|
)
|
|
(79,800
|
)
|
|
Property and equipment, net
|
|
|
$
|
11,741
|
|
|
$
|
13,620
|
|
The Company recorded depreciation and amortization expense related to property and equipment of
$8.0 million
for the year ended
December 31, 2016
,
$12.0 million
for the year ended
December 31, 2015
and
$11.5 million
for the year ended
December 31, 2014
. During each of the years ended December 31, 2016 and 2015, the Company disposed of certain property and equipment that was fully depreciated at the time of disposal, which resulted in reductions in both Cost and Accumulated depreciation.
Property and equipment under capital leases included in the amounts above were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Cost
|
$
|
173
|
|
|
$
|
137
|
|
|
Less accumulated depreciation
|
(68
|
)
|
|
(9
|
)
|
|
Property and equipment under capital leases, net
|
$
|
105
|
|
|
$
|
128
|
|
The net book values of the Company's property and equipment by geographic area were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
United States
|
$
|
7,939
|
|
|
$
|
9,145
|
|
|
Asia/Pacific
|
2,963
|
|
|
3,098
|
|
|
Europe
|
593
|
|
|
818
|
|
|
Other
|
246
|
|
|
559
|
|
|
|
$
|
11,741
|
|
|
$
|
13,620
|
|
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
(9) INTANGIBLE ASSETS AND GOODWILL
The Company's intangible assets at
December 31, 2016
and
2015
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Weighted average amortization period
(years)
|
|
Cost
|
|
Accumulated
amortization
|
|
Net
carrying value
|
|
Developed technology
|
6.54
|
|
$
|
34,980
|
|
|
$
|
16,453
|
|
|
$
|
18,527
|
|
|
Customer relationships
|
5.78
|
|
19,540
|
|
|
7,870
|
|
|
11,670
|
|
|
Internal use software
|
3.00
|
|
730
|
|
|
730
|
|
|
—
|
|
|
|
6.23
|
|
$
|
55,250
|
|
|
$
|
25,053
|
|
|
$
|
30,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Weighted average amortization period
(years)
|
|
Cost
|
|
Accumulated
amortization
|
|
Net
carrying value
|
|
Intellectual property
|
*
|
|
$
|
1,600
|
|
|
$
|
—
|
|
|
$
|
1,600
|
|
|
Developed technology
|
6.42
|
|
31,280
|
|
|
10,415
|
|
|
20,865
|
|
|
Customer relationships
|
5.57
|
|
10,030
|
|
|
6,408
|
|
|
3,622
|
|
|
Internal use software
|
3.00
|
|
730
|
|
|
730
|
|
|
—
|
|
|
|
6.19
|
|
$
|
43,640
|
|
|
$
|
17,553
|
|
|
$
|
26,087
|
|
* An in-process research and development intangible asset has an indefinite life until the product is generally available, generally at which time such asset is reclassified to developed technology.
Amortization expense for intangible assets for the years ended December 31,
2016
,
2015
and
2014
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Statement of operations classification
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Developed technology
|
$
|
6,038
|
|
|
$
|
5,222
|
|
|
$
|
2,464
|
|
|
Cost of revenue - product
|
|
Customer relationships
|
1,462
|
|
|
1,723
|
|
|
1,889
|
|
|
Sales and marketing
|
|
Internal use software
|
—
|
|
|
162
|
|
|
244
|
|
|
Cost of revenue - product
|
|
|
$
|
7,500
|
|
|
$
|
7,107
|
|
|
$
|
4,597
|
|
|
|
Estimated future amortization expense for the Company's intangible assets at
December 31, 2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
Years ending December 31,
|
|
|
2017
|
$
|
9,139
|
|
|
2018
|
6,615
|
|
|
2019
|
5,608
|
|
|
2020
|
4,166
|
|
|
2021
|
2,395
|
|
|
Thereafter
|
2,274
|
|
|
|
$
|
30,197
|
|
Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. The changes in the carrying value of the Company's goodwill in the years ended
December 31, 2016
and
2015
were as follows (in thousands):
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
Balance at January 1
|
|
|
|
|
Goodwill
|
$
|
43,416
|
|
|
$
|
42,369
|
|
|
Accumulated impairment losses
|
(3,106
|
)
|
|
(3,106
|
)
|
|
|
40,310
|
|
|
39,263
|
|
|
Acquisition of Taqua
|
9,083
|
|
|
—
|
|
|
Acquisition of SDN Business
|
—
|
|
|
1,047
|
|
|
Balance at December 31
|
$
|
49,393
|
|
|
$
|
40,310
|
|
The components of the Company's goodwill balances at
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Goodwill
|
$
|
52,499
|
|
|
$
|
43,416
|
|
|
Accumulated impairment losses
|
(3,106
|
)
|
|
(3,106
|
)
|
|
|
$
|
49,393
|
|
|
$
|
40,310
|
|
(10) ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Employee compensation and related costs
|
$
|
15,879
|
|
|
$
|
22,180
|
|
|
Other
|
10,007
|
|
|
9,783
|
|
|
|
$
|
25,886
|
|
|
$
|
31,963
|
|
(11) RESTRUCTURING ACCRUALS
The Company has committed to streamlining operations and reducing operating costs by closing and consolidating certain facilities and reducing its worldwide workforce. Accordingly, the Company recorded restructuring expense aggregating
$2.7 million
in the year ended
December 31, 2016
,
$2.1 million
in the year ended
December 31, 2015
and
$5.6 million
in the year ended
December 31, 2014
.
2016 Restructuring Initiative
In July 2016, the Company announced a program to further accelerate its investment in new technologies as the communications industry migrates to a cloud-based architecture (the "2016 Restructuring Initiative"). The Company expects to record restructuring expense aggregating between
$3 million
and
$4 million
in connection with this action, resulting in expected annual savings of approximately
$6 million
to
$8 million
. The Company recorded
$1.5 million
of expense in the year ended December 31, 2016 and expects to record the remaining expense by the end of the second quarter of 2017. The Company intends to utilize the majority of the savings to shift headcount toward new strategic initiatives, such as new products and an expanded go-to-market footprint in selected geographies and discrete vertical markets. A summary of the 2016 Restructuring Initiative accrual activity for the year ended December 31, 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
January 1,
2016
|
|
Initiatives
charged to
expense
|
|
Adjustments for changes in estimate
|
|
Cash
payments
|
|
Balance at
December 31,
2016
|
|
Severance
|
$
|
—
|
|
|
$
|
1,484
|
|
|
$
|
—
|
|
|
$
|
(987
|
)
|
|
$
|
497
|
|
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
The Company expects that the amounts accrued under the 2016 Restructuring Initiative will be paid by end of the fourth quarter of 2017.
Taqua Restructuring Initiative
In connection with the acquisition of Taqua, the Company's management approved a restructuring plan in the third quarter of 2016 to eliminate certain redundant positions within the combined companies. On October 24, 2016, the Audit Committee of the Board of Directors of the Company approved a broader Taqua restructuring plan related to headcount and redundant facilities (both restructuring plans, the "Taqua Restructuring Initiative"). In connection with this initiative, the Company recorded
$1.2 million
in the year ended December 31, 2016. The Company anticipates it will record additional future expense in connection with this initiative for headcount and redundant facilities aggregating approximately
$1 million
. A summary of the Taqua Restructuring Initiative accrual activity for the year ended December 31, 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
January 1,
2016
|
|
Initiatives
charged to
expense
|
|
Adjustments for changes in estimate
|
|
Cash
payments
|
|
Balance at
December 31,
2016
|
|
Severance
|
$
|
—
|
|
|
$
|
971
|
|
|
$
|
—
|
|
|
$
|
(587
|
)
|
|
$
|
384
|
|
|
Facilities
|
—
|
|
|
218
|
|
|
—
|
|
|
—
|
|
|
218
|
|
|
|
$
|
—
|
|
|
$
|
1,189
|
|
|
$
|
—
|
|
|
$
|
(587
|
)
|
|
$
|
602
|
|
The Company expects that the amounts accrued under the Taqua Restructuring Initiative will be paid by the end of the second quarter of 2017.
2015 Restructuring Initiative
To better align the Company's cost structure to its then-current revenue expectations, in April 2015, the Company announced a cost reduction review. As part of this review, on April 16, 2015, the Company initiated a restructuring plan to reduce its workforce by approximately
150
positions, or
12.5%
of its worldwide workforce (the "2015 Restructuring Initiative"). In connection with the 2015 Restructuring Initiative, the Company recorded
$3.8 million
of restructuring expense for severance and related costs in the year ended December 31, 2015. The Company recorded
$67,000
in the year ended December 31, 2016 to adjust the amount expected to ultimately be paid for severance. Summaries of the 2015 Restructuring Initiative accrual for the years ended December 31, 2016 and 2015 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
January 1,
2016
|
|
Initiatives
charged to
expense
|
|
Adjustments for changes in estimate
|
|
Cash
payments
|
|
Balance at
December 31,
2016
|
|
Severance
|
$
|
749
|
|
|
$
|
—
|
|
|
$
|
67
|
|
|
$
|
(648
|
)
|
|
$
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
January 1,
2015
|
|
Initiatives
charged to
expense
|
|
Adjustments for changes in estimate
|
|
Cash
payments
|
|
Balance at
December 31,
2015
|
|
Severance
|
$
|
—
|
|
|
$
|
3,804
|
|
|
$
|
—
|
|
|
$
|
(3,055
|
)
|
|
$
|
749
|
|
The Company expects that the remaining amount accrued under the 2015 Restructuring Initiative will be paid by the end of 2017.
2012 Restructuring Initiative
In August 2012, the Company announced that it had committed to a restructuring initiative to streamline operations and reduce operating costs by closing and consolidating certain facilities and reducing its worldwide workforce (the "2012 Restructuring Initiative"). The Company regularly reviews its restructuring accruals against expected cash expenditures to determine if adjustments are required. As a result of such reviews, the Company recorded a net credit to restructuring expense
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
aggregating
$1.7 million
in the year ended December 31, 2015. This amount is comprised of credits of
$1.4 million
in connection with a settlement with the landlord of the Company's Fremont, California facility to vacate the facility without penalty or future payments,
$0.3 million
in connection with a settlement with the landlord of the Company's Dulles, Virginia facility for an amount that was lower than had previously been accrued and
$0.1 million
in connection with changes in the amounts of severance ultimately paid to certain individuals. These credits were partially offset by
$0.1 million
of incremental expense related to vacating the Company's Rochester, New York facility. As of December 31, 2016, the payments related to the 2012 Restructuring Initiative had been completed. A summary of the 2012 Restructuring Initiative accrual activity for the year ended December 31, 2015 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
Balance at
January 1,
2015
|
|
Initiatives
charged to
expense
|
|
Adjustments for changes in estimate
|
|
Cash
payments
|
|
Balance at
December 31,
2015
|
|
Severance
|
$
|
1,682
|
|
|
$
|
—
|
|
|
$
|
(67
|
)
|
|
$
|
(1,615
|
)
|
|
$
|
—
|
|
|
Facilities
|
3,652
|
|
|
—
|
|
|
(1,589
|
)
|
|
(2,063
|
)
|
|
—
|
|
|
|
$
|
5,334
|
|
|
—
|
|
|
$
|
(1,656
|
)
|
|
$
|
(3,678
|
)
|
|
$
|
—
|
|
Balance Sheet Classification
At
December 31, 2016
, the long-term portion of accrued restructuring was approximately
$62,000
and represented future lease payments on restructured facilities. At December 31, 2015, the Company's accrued restructuring was all classified as current.
(12) DEBT
Credit Agreement
The Company entered into a credit agreement by and among the Company, as Borrower, Bank of America, N.A. ("Bank of America"), as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders from time to time party thereto on June 27, 2014, which agreement was amended by a First Amendment to Credit Agreement on June 26, 2015 (the "Credit Agreement"), which agreement was amended by a First Amendment to Credit Agreement on June 26, 2015 (the "First Amendment") and further amended by a Second Amendment to Credit Agreement on June 13, 2016 (the "Second Amendment" and collectively with the Credit Agreement and the First Amendment, the "Amended Credit Agreement"). Certain terms of the Credit Agreement have been amended by the Second Amendment, including, among other things: (1) an increase of the commitments from
$15 million
to
$20 million
; (ii) an extension of the maturity date from June 30, 2016 to June 30, 2017; (iii) a reduction to the aggregate amount of cash and cash equivalents that the Loan Parties (as defined below) are required to hold at any time from
$85 million
to
$50 million
; and (iv) a reduction of the commitment fee on the unused commitments available for borrowing from
0.15%
to
0.1125%
. The Amended Credit Agreement provides that the Company may select the interest rates under the credit facility from among the following options: (i) the Eurodollar Rate (which is defined as the rate per annum equal to the London Interbank Offered Rate plus
1.5%
per annum) for a Eurodollar Rate Loan; and (ii) the highest of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the rate of interest in effect on the borrowing date as publicly announced from time to time by Bank of America as its prime rate, and (c) the monthly Eurodollar Rate plus
1%
.
The obligations of the Company under the Amended Credit Agreement are guaranteed by Sonus International, Inc., Sonus Federal, Inc., Taqua, LLC and Network Equipment Technologies, Inc. ("NET") (collectively with the Company, the "Loan Parties") pursuant to a Master Continuing Guaranty and are secured by the assets of the Loan Parties pursuant to a Security and Pledge Agreement.
The Amended Credit Agreement contains affirmative, negative and financial covenants customary for financings of this type. The negative covenants include limitations on liens, indebtedness, fundamental changes, dispositions, restricted payments, investments, transactions with affiliates, certain restrictive agreements and compliance with sanctions laws and regulations. The total revenues of the Loan Parties cannot be less than an aggregate of
$50 million
as of the last day of the Loan Parties' fiscal quarter, computed on a fiscal quarterly basis. The credit facility will become due on June 30, 2017, subject to acceleration upon certain specified events of default, including, without limitation, payment defaults, defaults in the
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency-related defaults, defaults relating to judgments, an ERISA Event (as defined in the Credit Agreement), the failure to pay specified indebtedness and a change of control default.
The Company did not have any amounts outstanding under the Amended Credit Agreement at
December 31, 2016
.
Assumed Debt - NET Acquisition
In
December 2007
, NET issued
$85.0 million
of 3 3/4% Convertible Senior Notes due December 15, 2014 (the "2007 Notes") in a private placement, of which
$10.5 million
in principal remained outstanding at the NET Acquisition Date, and under which NET remained obligated after the acquisition. The 2007 Notes bore interest at a rate of
3 3/4 %
per annum and matured on
December 15, 2014
.
The
$2.4 million
in aggregate principal underlying the 2007 Notes was paid in full on December 4, 2014 and accordingly, at December 31, 2014, NET's obligations under the 2007 Notes were discharged.
(13) LONG-TERM LIABILITIES
Long-term liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Capital lease obligations
|
$
|
124
|
|
|
$
|
131
|
|
|
Deferred rent
|
1,812
|
|
|
2,606
|
|
|
Restructuring
|
1,267
|
|
|
749
|
|
|
Other
|
790
|
|
|
844
|
|
|
|
3,993
|
|
|
4,330
|
|
|
Current portion
|
(2,360
|
)
|
|
(1,570
|
)
|
|
Long-term liabilities, net of current portion
|
$
|
1,633
|
|
|
$
|
2,760
|
|
(14) COMMON STOCK REPURCHASES AND UNDERWRITTEN OFFERING
Stock Buyback Program
On July 29, 2013, the Company announced that its Board of Directors had authorized a stock buyback program to repurchase up to
$100 million
of the Company's common stock from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased will be determined by the Company's management based on its evaluation of market conditions and other factors. The Company may elect to implement a 10b5-1 repurchase program, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The buyback program does not have a fixed expiration date but may be suspended or discontinued at any time. The buyback program is being funded using the Company's working capital.
During the year ended
December 31, 2016
, the Company spent
$9.5 million
, including transaction fees, to repurchase and retire
1.3 million
shares of its common stock under the buyback program. During the year ended
December 31, 2015
, the Company spent
$7.9 million
, including transaction fees, to repurchase and retire
0.6 million
shares of its common stock under the buyback program.
At
December 31, 2016
, the Company had
$5.4 million
remaining under the stock buyback program for future repurchases.
Underwritten Offering
On March 20, 2014, the Company announced the commencement of an underwritten public offering of
7.5 million
shares of its common stock on behalf of Galahad Securities Limited and its affiliated entities (collectively, the "Legatum Group"). The underwriter of the offering was granted a
30
-day option to purchase up to
1.125 million
additional shares from
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
the Legatum Group. The Legatum Group received all the proceeds from the underwritten offering; no shares in the underwritten offering were sold by Sonus or any of its officers or directors. Sonus purchased
4.3 million
shares of its common stock from the underwriter for
$17.4410
per share, the price equal to the price paid by the underwriter to the Legatum Group in the underwritten offering, for a total of
$75.3 million
, including transaction fees of
$0.3 million
. This repurchase was not completed under the Company's stock buyback program. Sonus funded the share repurchase with cash on hand. The repurchased shares were retired upon completion of the transaction.
(15) STOCK-BASED COMPENSATION PLANS
Amended and Restated Stock Incentive Plan
The Company's 2007 Stock Incentive Plan (the "2007 Plan") was approved at, and became effective on the date of, the Company's Annual Meeting of Stockholders on November 12, 2007. The 2007 Plan provides for the award of options to purchase the Company's common stock ("stock options"), stock appreciation rights ("SARs"), restricted stock awards ("RSAs"), restricted stock units ("RSUs"), performance-based stock awards ("PSAs"), PSUs and other stock-based awards to employees, officers, directors (including those directors who are not employees or officers of the Company), consultants and advisors of the Company and its subsidiaries.
At its 2016 Annual Meeting of Stockholders held on June 9, 2016 (the "2016 Annual Meeting"), the Company's stockholders approved (i) changing the name of the 2007 Plan to the Amended and Restated Stock Incentive Plan (the "Stock Plan") and (ii) other amendments to the Stock Plan including, among other things, to:
|
|
|
|
•
|
Increase the number of shares of the Company's common stock authorized for issuance under the Stock Plan by
800,000
shares;
|
|
|
|
|
•
|
Extend the Stock Plan's termination date through June 9, 2026, the tenth anniversary of the 2016 Annual Meeting;
|
|
|
|
|
•
|
Revise the rate at which RSAs, RSUs, PSAs and PSUs (collectively, "full value awards") are counted against the shares of common stock available for issuance under the Stock Plan from
1.61
shares for every one share subject to such award to
1.50
shares for every one share subject to such award (the "fungible share pool formula"). Shares of common stock subject to full value awards that were granted under any prior ratio that applied at the time such awards were granted will continue to return to the Stock Plan upon forfeiture of such awards at the respective previous ratio of
1.50
,
1.57
and
1.61
, as applicable;
|
|
|
|
|
•
|
Increase the maximum number of shares of the Company's common stock with respect to which awards may be granted to any participant under the Stock Plan to
1,000,000
shares per calendar year;
|
|
|
|
|
•
|
Increase the maximum number of shares of the Company's common stock with respect to which awards may be granted under the Stock Plan to any director who is not an employee of the Company at the time of grant to
100,000
shares per calendar year; and
|
|
|
|
|
•
|
Prohibit stock options and SARs granted under the Stock Plan from (i) providing for the payment or accrual of dividend equivalents or (ii) containing any provision entitling the grantee to the automatic grant of additional stock options or SARs, as applicable, in connection with the exercise of the original stock option or SAR, as applicable.
|
In June 2016, the Compensation Committee of the Company's Board of Directors (the "Compensation Committee") voted to change the standard vesting terms for awards of stock options, RSAs and RSUs granted after June 9, 2016 as follows:
|
|
|
|
•
|
Stock options will generally vest over a period of
three years
, with
one-third
of the stock options vesting on the first anniversary of the grant date and the remaining
two-thirds
vesting in equal monthly increments thereafter through the third anniversary of the grant date. Stock options had previously generally vested over a period of
four
years, with one-fourth of the stock options vesting on the first anniversary of the grant date and the remaining three-fourths vesting in equal monthly increments thereafter through the fourth anniversary of the grant date.
|
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
|
|
|
|
•
|
RSAs and RSUs (collectively, the "restricted stock grants") will generally vest over a period of
three years
, with
one-third
of the shares underlying the grant vesting on the first anniversary of the grant date and the remaining
two-thirds
vesting in equal increments semi-annually through the third anniversary of the grant date. Restricted stock grants had previously vested over a period of
four
years, with one-fourth of the shares underlying the grant vesting on the first anniversary of the grant date and the remaining three-fourths vesting in equal increments semi-annually through the fourth anniversary of the grant date.
|
The Company neither adjusted nor intends to adjust the vesting schedules of stock options or restricted stock grants awarded prior to June 9, 2016 to reflect the new three-year vesting schedules.
At
December 31, 2016
, there were
1.7 million
shares available for future issuance under the Stock Plan. Under the fungible share pool formula, the number of total shares available for future awards under the Stock Plan would be reduced by the fungible share pool multiple of
1.50
. Accordingly, the total number of shares awarded in the future under the Stock Plan could be less than the number of shares currently available for issuance.
2008 Stock Incentive Plan
In connection with the acquisition of NET, the Company assumed NET's 2008 Equity Incentive Plan and subsequently renamed it the 2008 Stock Incentive Plan (the "2008 Plan"). In December 2014 all of the unissued shares under the 2008 Plan were transferred to the 2007 Plan (now the Stock Plan). Any outstanding awards under the 2008 Plan that in the future expire, terminate, are canceled, surrendered or forfeited, or are repurchased by the Company will be returned to the Stock Plan. Accordingly, at December 31, 2016, there were no shares available for future issuance under the 2008 Plan.
2012 Stock Incentive Plan
In connection with the acquisition of PT, the Company assumed PT's 2012 Amended Performance Technologies, Incorporated Omnibus Incentive Plan, and subsequently renamed it the 2012 Stock Incentive Plan (the "2012 Plan"). In December 2014 all of the unissued shares under the 2012 Plan were transferred to the 2007 Plan (now the Stock Plan). Any outstanding awards under the 2012 Plan that in the future expire, terminate, are canceled, surrendered or forfeited, or are repurchased by the Company will be returned to the Stock Plan. Accordingly, at December 31, 2016, there were no shares available for future issuance under the 2012 Plan.
Executive Equity Arrangements
On April 1, 2016, the Company granted an aggregate of
131,250
PSUs with both market and service conditions to
six
of its executives (the "2016 PSUs"). The terms of the 2016 PSUs are such that up to
one-third
of the shares subject to the 2016 PSUs will vest, if at all, on each of the first, second and third anniversaries of the date of grant (collectively, the "2016 PSU Vesting Dates") depending on the Company's total shareholder return ("TSR") compared to the TSR of the companies included in the NASDAQ Telecommunications Index for the same fiscal year, measured by the Compensation Committee after each of the 2016, 2017 and 2018 fiscal years, respectively (as used in this paragraph, each, a "Performance Period"). The shares determined to be earned will vest on the anniversary of the grant date following each Performance Period. Shares subject to the 2016 PSUs that fail to be earned will be forfeited. The 2016 PSUs included a market condition that required the use of a Monte Carlo simulation approach to model future stock price movements based upon the risk-free rate of return, the volatility of each entity, and the pair-wise covariance between each entity. These results were then used to calculate the grant date fair values of the 2016 PSUs. Because the 2016 PSUs have market conditions, the Company is required to record expense for the 2016 PSUs through the final 2016 PSU Vesting Date of April 1, 2019, regardless of the number of shares that are ultimately earned.
On March 16, 2015, the Company granted an aggregate of
131,250
PSUs with both market and service conditions to
eight
of its executives (the "2015 PSUs"). The terms of the 2015 PSUs are such that up to
one-third
of the shares subject to the 2015 PSUs will vest, if at all, on each of the first, second and third anniversaries of the date of grant (collectively, the "2015 PSU Vesting Dates") depending on the Company's TSR compared to the TSR of the companies included in the NASDAQ Telecommunications Index for the same Performance Period, measured by the Compensation Committee at the end of each of the 2015, 2016 and 2017 fiscal years, respectively (as used in this paragraph, each, a "Performance Period"). The shares determined to be earned will vest on the anniversary of the grant date following each Performance Period. Shares subject to the 2015 PSUs that fail to be earned will be forfeited. The 2015 PSUs included a market condition that required the use of a Monte
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
Carlo simulation approach to calculate the grant date fair values of the 2015 PSUs. Because the 2015 PSUs have market conditions, the Company is required to record expense for the 2015 PSUs through the final 2015 PSU Vesting Date of March 16, 2018, regardless of the number of shares that are ultimately earned, if any. In February 2016, the Compensation Committee determined that the performance metrics for the 2015 PSUs were not achieved for the 2015 Performance Period. Accordingly,
37,081
shares in the aggregate, representing
one-third
of the 2015 PSUs held by the then-remaining
six
executives, were forfeited, and are reported as such in the performance-based units table below.
In connection with the Company's annual incentive program,
22
executives of the Company were given the choice to receive all or half of their fiscal year 2015 bonuses (the "2015 Bonus"), if any were earned, in the form of shares of the Company's common stock (the "2015 Bonus Shares"). Each executive could also elect not to participate in this program and to earn his or her 2015 Bonus, if any, in the form of cash. Under this program, the amount of the 2015 Bonus, if any, for each executive would be determined by the Compensation Committee. The number of shares of the Company's common stock that would be granted to those executives who elected to receive their 2015 Bonus entirely in the form of shares of common stock would be calculated by dividing an amount equal to
1.5
times each executive's 2015 Bonus earned by
$20.55
, the closing price of the Company's common stock on January 2, 2015. The number of shares of the Company's common stock that would be granted to those executives who elected to receive one-half of their 2015 Bonus in the form of shares of common stock would be calculated by dividing an amount equal to
1.5
times one-half of each executive's 2015 Bonus earned by
$20.55
, with the cash portion equal to
50%
of their respective 2015 Bonus earned. Under this program, the 2015 Bonus, if any, would be granted and/or paid on a date concurrent with the timing of the payout of bonuses under the Company-wide incentive bonus program and would be fully vested on the date of grant. Of the eligible executives,
16
elected to receive their entire 2015 Bonus in shares of common stock,
five
elected to receive
50%
of their 2015 Bonus in shares of common stock and
50%
in cash, and
one
elected not to participate and instead to receive his entire 2015 Bonus in cash. The Company determined that the grant date criteria for the 2015 Bonus Shares was met on July 2, 2015, and accordingly, recorded stock-based compensation expense based on the grant date fair value of
$6.79
per share. Subsequent to that date, in September 2015, the Compensation Committee considered the impact on employee retention and incentive compensation caused by the drop in the price of the Company's common stock since January 2, 2015, and indicated its intent to pay all such executives their 2015 Bonus, if any was earned, in cash. As a result, at September 25, 2015, the Company reclassified the stock-based compensation expense recorded through that date in connection with the 2015 Bonus Shares aggregating
$1.0 million
from Additional paid-in capital to Accrued expenses and recorded incremental bonus expense of
$1.3 million
related to the estimated 2015 Bonus payment. The Company recorded bonus expense in the fourth quarter of 2015 and paid the cash bonuses in March 2016.
In June 2014, the Company modified the outstanding stock options that had been granted to its non-employee members of the Board of Directors (the "Board Members") to extend the exercise period to the lesser of
three
years from the date that a Board Member stepped down from his or her position on the Board of Directors or the remaining contractual life of the respective stock options. In connection with this modification, the Company recorded
$0.7 million
of incremental stock-based compensation expense in 2014. This expense is included as a component of General and administrative expense in the Company's consolidated statement of operations for the year ended December 31, 2014.
On January 2, 2014, Raymond P. Dolan, the Company's President and Chief Executive Officer, elected to accept shares of restricted stock in lieu of base salary for the period from January 1, 2014 through December 31, 2014. Accordingly, the Company granted Mr. Dolan restricted stock (the "2014 Dolan Salary Shares") on January 2, 2014, with the number granted calculated by dividing an amount equal to
1.5
times Mr. Dolan's base salary for the period from January 1, 2014 through December 31, 2014 by the closing price of the Company's common stock on the date of grant. The 2014 Dolan Salary Shares vested on December 31, 2014. Effective September 16, 2014, Mr. Dolan's annual base salary was increased from
$500,000
to
$600,000
. For the remainder of 2014, such increase was prorated and paid in cash and was not subject to any stock-for-cash election. The Company recorded stock-based compensation expense related to the 2014 Dolan Salary Shares ratably from January 1, 2014 to December 31, 2014.
In January 2014,
21
of the Company's executives were given the choice to receive all or half of their fiscal year 2014 bonuses (the "2014 Bonus"), if any were earned, in the form of shares of the Company's common stock (the "2014 Bonus Shares"). Each executive could also elect not to participate in this program and to earn his or her 2014 Bonus in the form of cash. The amount of the 2014 Bonus was determined by the Compensation Committee on February 19, 2015. The number of 2014 Bonus Shares that was granted to those executives who elected to receive their 2014 Bonus entirely in the form of shares of common stock was calculated by dividing an amount equal to
1.5
times each executive's 2014 Bonus earned by the closing price of the Company's common stock on January 2, 2014. The number of 2014 Bonus Shares that was granted to those
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
executives who elected to receive
one-half
of their 2014 Bonus in the form of shares of common stock was calculated by dividing an amount equal to
1.5
times
one-half
of each executive's 2014 Bonus earned by the closing price of the Company's common stock on January 2, 2014, with the cash portion equal to
50%
of their respective 2014 Bonus earned. The 2014 Bonus Shares were granted on February 20, 2015 and vested immediately. Each executive who received the 2014 Bonus Shares was obligated to hold such shares for at least one year, until February 20, 2016. Of the eligible executives,
17
elected to receive their entire 2014 Bonus in shares of common stock and
4
elected to receive
50%
of their 2014 Bonus in shares of common stock and
50%
in cash. The Company determined that the grant date criteria for accounting purposes for the 2014 Bonus Shares was met on July 9, 2014, and accordingly, the Company determined that the grant date fair value of the 2014 Bonus Shares was
$19.25
per share, the closing price of the Company's common stock on that date. The Company recorded expense through February 20, 2015, when the shares were issued.
In connection with the October 2016 separation of one executive from the Company and in accordance with his employment agreement with the Company, as amended, the Company accelerated the vesting of certain unvested stock options, RSAs and PSUs. The accelerated RSAs and PSUs are reported as "Vested" in the respective tables below.
In connection with the separation of three executives from the Company during 2015 and in accordance with their respective employment agreements with the Company, the Company accelerated the vesting of certain unvested stock options, RSAs and PSUs.
Stock Options
Options are issued to purchase shares of common stock of the Company at prices that are equal to the fair market value of the shares on the date the option is granted. Options granted under the Stock Plan generally expire
ten years
from the date of grant. Outstanding options under the 2008 Plan generally expire
seven years
from the date of grant. Outstanding options under the 2012 Plan generally expire
five
years from the date of grant. The grant date fair value of options, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. Forfeitures are estimated based on historical experience.
The activity related to the Company's outstanding stock options during the year ended
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual Term
(years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at January 1, 2016
|
6,352,208
|
|
|
$
|
15.99
|
|
|
|
|
|
|
Granted
|
172,450
|
|
|
$
|
8.31
|
|
|
|
|
|
|
Exercised
|
(23,070
|
)
|
|
$
|
6.63
|
|
|
|
|
|
|
Forfeited
|
(202,233
|
)
|
|
$
|
14.32
|
|
|
|
|
|
|
Expired
|
(689,249
|
)
|
|
$
|
16.99
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
5,610,106
|
|
|
$
|
15.73
|
|
|
5.32
|
|
$
|
109
|
|
|
Vested or expected to vest at December 31, 2016
|
5,541,766
|
|
|
$
|
15.75
|
|
|
5.29
|
|
$
|
108
|
|
|
Exercisable at December 31, 2016
|
4,754,860
|
|
|
$
|
15.81
|
|
|
4.91
|
|
$
|
105
|
|
The grant date fair values of options to purchase common stock granted in the years ended December 31,
2016
,
2015
and
2014
were estimated using the Black-Scholes valuation model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Risk-free interest rate
|
1.00% - 1.61%
|
|
1.46%-1.75%
|
|
1.53%-2.70%
|
|
Expected dividends
|
—
|
|
—
|
|
—
|
|
Weighted average volatility
|
54.8%
|
|
54.3%
|
|
60.8%
|
|
Expected life (years)
|
5.0-10.0
|
|
5.0-6.0
|
|
4.5-6.0
|
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
The risk-free interest rate used is the average U.S. Treasury Constant Maturities Rate for the expected life of the award. The expected dividend yield of
zero
is based on the fact that the Company has never paid dividends and has no present intention to pay cash dividends. The expected life for stock options is based on a combination of the Company's historical option patterns and expectations of future employee actions.
The weighted average grant-date fair values of options granted during the year were
$4.39
for the year ended
December 31, 2016
,
$7.30
for the year ended
December 31, 2015
and
$8.32
for the year ended
December 31, 2014
.
The total intrinsic values of options exercised during the year were
$42,000
for the year ended
December 31, 2016
,
$0.9 million
for the year ended
December 31, 2015
and
$5.1 million
for the year ended
December 31, 2014
.
The Company received cash from option exercises of
$153,000
in the year ended
December 31, 2016
,
$1.8 million
in the year ended
December 31, 2015
and
$10.1 million
in the year ended
December 31, 2014
.
Restricted Stock Grants - Restricted Stock Awards and Restricted Stock Units
The Company's outstanding restricted stock grants consist of both RSAs and RSUs. Holders of unvested RSAs have voting rights and rights to receive dividends, if declared; however, these rights are forfeited if the underlying unvested RSA shares are forfeited. Holders of unvested RSUs do not have such voting and dividend rights. The grant date fair value of restricted stock grants, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period. The fair value of restricted stock grants is determined based on the market value of the Company's shares on the date of grant.
The activity related to the Company's RSAs for the year ended
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested balance at January 1, 2016
|
1,512,783
|
|
|
$
|
13.48
|
|
|
Granted
|
1,666,682
|
|
|
$
|
7.70
|
|
|
Vested
|
(757,580
|
)
|
|
$
|
12.65
|
|
|
Forfeited
|
(391,857
|
)
|
|
$
|
10.09
|
|
|
Unvested balance at December 31, 2016
|
2,030,028
|
|
|
$
|
9.69
|
|
The activity related to the Company's RSUs for the year ended
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested balance at January 1, 2016
|
95,361
|
|
|
$
|
16.05
|
|
|
Granted
|
53,400
|
|
|
$
|
7.58
|
|
|
Vested
|
(35,193
|
)
|
|
$
|
16.05
|
|
|
Forfeited
|
(3,349
|
)
|
|
$
|
16.05
|
|
|
Unvested balance at December 31, 2016
|
110,219
|
|
|
$
|
11.95
|
|
The total fair value of restricted stock grant shares vested was
$10.1 million
in the year ended
December 31, 2016
,
$8.5 million
in the year ended
December 31, 2015
and
$6.7 million
in the year ended
December 31, 2014
.
Performance-Based Stock Grants - Performance-Based Stock Units
In 2016, the Company's outstanding performance-based stock grants consisted of PSUs. Holders of unvested PSUs do not have voting and dividend rights. The Company recognizes the grant date fair value of PSUs on a graded attribution basis through the vest date of the respective awards so long as it remains probable that the related service conditions will be satisfied.
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
The activity related to the Company's PSUs for the year ended
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested balance at January 1, 2016
|
111,250
|
|
|
$
|
14.68
|
|
|
Granted
|
131,250
|
|
|
$
|
10.24
|
|
|
Vested
|
(18,438
|
)
|
|
$
|
12.34
|
|
|
Forfeited
|
(76,977
|
)
|
|
$
|
12.57
|
|
|
Unvested balance at December 31, 2016
|
147,085
|
|
|
$
|
12.11
|
|
The total fair value of performance-based stock grant shares vested was
$0.2 million
in the year ended
December 31, 2016
,
$0.6 million
in the year ended
December 31, 2015
and
$1.7 million
in the year ended
December 31, 2014
.
ESPP
The ESPP is designed to provide eligible employees of the Company and its participating subsidiaries an opportunity to purchase common stock of the Company through accumulated payroll deductions.
The ESPP provides for six-month consecutive offering periods, with the purchase price of the stock equal to
85%
of the lesser of the market price on the first or last day of the offering period. The maximum number of shares of common stock an employee may purchase during each offering period is
500
, subject to certain adjustments pursuant to the ESPP.
At
December 31, 2016
,
5.0 million
shares, the maximum number of shares that may be issued under the ESPP, were authorized, and
1.7 million
shares were available under the ESPP for future issuance.
Stock-Based Compensation
The consolidated statements of operations included stock-based compensation for the years ended
December 31, 2016
,
2015
and
2014
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Product cost of revenue
|
$
|
359
|
|
|
$
|
317
|
|
|
$
|
337
|
|
|
Service cost of revenue
|
1,314
|
|
|
1,524
|
|
|
1,449
|
|
|
Research and development
|
5,014
|
|
|
5,439
|
|
|
5,759
|
|
|
Sales and marketing
|
6,209
|
|
|
5,423
|
|
|
5,437
|
|
|
General and administrative
|
6,872
|
|
|
8,996
|
|
|
10,932
|
|
|
|
$
|
19,768
|
|
|
$
|
21,699
|
|
|
$
|
23,914
|
|
There was no income tax benefit for employee stock-based compensation expense for the years ended December 31,
2016
,
2015
and
2014
due to the valuation allowance recorded.
At
December 31, 2016
, there was
$20.9 million
, net of expected forfeitures, of unrecognized stock-based compensation expense related to unvested stock options, RSAs, RSUs and PSUs. This expense is expected to be recognized over a weighted average period of approximately
two years
.
Common Stock Reserved
Common stock reserved for future issuance at
December 31, 2016
consists of the following:
|
|
|
|
|
|
|
Stock Plan
|
1,718,751
|
|
|
ESPP
|
1,681,134
|
|
|
|
3,399,885
|
|
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
The Company's policy is to issue authorized but unissued shares upon the exercise of stock options, grant restricted common stock awards and units and performance-based stock awards and units, and authorize the purchase of shares of the Company's common stock under the ESPP.
(16) EMPLOYEE DEFINED CONTRIBUTION PLAN
The Company offers a 401(k) savings plan to eligible employees. In the years ended December 31, 2015 and 2014, the Company did not provide a matching contribution for deferral contributions made by employees. However, in June 2016, at the recommendation of the Compensation Committee, the Company’s Board of Directors elected to reinstate a discretionary limited 401(k) match program of up to
$2,000
per year ($1,000 per each half-year) per eligible employee, contingent upon the Company’s achievement of certain financial metric targets set by the Compensation Committee. The matching contribution became effective July 1, 2016. The Company recorded
$0.6 million
of expense related to its employee defined contribution plan in the year ended December 31, 2016. The Company did not record expense related to its employee defined contribution plan in the years ended December 31, 2015 or 2014.
(17) INCOME TAXES
The components of loss from continuing operations before income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
United States
|
$
|
(11,973
|
)
|
|
$
|
(29,595
|
)
|
|
$
|
(16,582
|
)
|
|
Foreign
|
557
|
|
|
(293
|
)
|
|
1,941
|
|
|
|
$
|
(11,416
|
)
|
|
$
|
(29,888
|
)
|
|
$
|
(14,641
|
)
|
The provision (benefit) for income taxes from continuing operations consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
12
|
|
|
$
|
60
|
|
|
$
|
23
|
|
|
State
|
24
|
|
|
150
|
|
|
150
|
|
|
Foreign
|
1,378
|
|
|
982
|
|
|
926
|
|
|
Total current
|
1,414
|
|
|
1,192
|
|
|
1,099
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
(301
|
)
|
|
(7,069
|
)
|
|
(3,885
|
)
|
|
State
|
(1,007
|
)
|
|
4,962
|
|
|
(1,656
|
)
|
|
Foreign
|
338
|
|
|
155
|
|
|
414
|
|
|
Change in valuation allowance
|
2,072
|
|
|
2,767
|
|
|
6,242
|
|
|
Total deferred
|
1,102
|
|
|
815
|
|
|
1,115
|
|
|
Total
|
$
|
2,516
|
|
|
$
|
2,007
|
|
|
$
|
2,214
|
|
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
A reconciliation of the Company's effective tax rate for continuing operations to the statutory federal rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
U.S. statutory income tax rate
|
(35.0
|
)%
|
|
(35.0
|
)%
|
|
(35.0
|
)%
|
|
State income taxes, net of federal benefit
|
—
|
|
|
—
|
|
|
(4.9
|
)
|
|
Foreign income taxes
|
7.9
|
|
|
3.6
|
|
|
5.1
|
|
|
Settlement of foreign tax audit
|
5.2
|
|
|
—
|
|
|
—
|
|
|
Foreign deemed dividends
|
5.0
|
|
|
1.7
|
|
|
11.5
|
|
|
Stock-based compensation
|
38.9
|
|
|
14.4
|
|
|
12.0
|
|
|
Tax credits
|
(11.6
|
)
|
|
(3.3
|
)
|
|
(14.6
|
)
|
|
Valuation allowance
|
1.9
|
|
|
24.3
|
|
|
29.8
|
|
|
Goodwill amortization
|
6.7
|
|
|
2.2
|
|
|
4.8
|
|
|
Meals and entertainment
|
1.4
|
|
|
0.8
|
|
|
2.5
|
|
|
Tax gain on sale of acquired assets
|
—
|
|
|
—
|
|
|
4.2
|
|
|
Other, net
|
1.6
|
|
|
(2.0
|
)
|
|
(0.3
|
)
|
|
Effective income tax rate
|
22.0
|
%
|
|
6.7
|
%
|
|
15.1
|
%
|
The following is a summary of the significant components of deferred income tax assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Assets:
|
|
|
|
|
Net operating loss carryforwards
|
$
|
77,425
|
|
|
$
|
76,970
|
|
|
Research and development tax credits
|
24,440
|
|
|
22,412
|
|
|
Other tax credits
|
230
|
|
|
230
|
|
|
Intangible assets
|
9,270
|
|
|
7,128
|
|
|
Deferred revenue
|
3,176
|
|
|
3,936
|
|
|
Accrued expenses
|
6,699
|
|
|
8,706
|
|
|
Inventory
|
5,010
|
|
|
6,103
|
|
|
Stock-based compensation
|
14,295
|
|
|
13,594
|
|
|
Other temporary differences
|
2,892
|
|
|
2,623
|
|
|
|
143,437
|
|
|
141,702
|
|
|
Valuation allowance
|
(141,895
|
)
|
|
(139,823
|
)
|
|
Total deferred tax assets
|
1,542
|
|
|
1,879
|
|
|
Liabilities:
|
|
|
|
|
Purchased intangible assets
|
(3,047
|
)
|
|
(2,282
|
)
|
|
Total deferred tax liabilities
|
(3,047
|
)
|
|
(2,282
|
)
|
|
Total net deferred tax assets
|
$
|
(1,505
|
)
|
|
$
|
(403
|
)
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
Deferred income taxes - noncurrent assets
|
$
|
1,542
|
|
|
$
|
1,879
|
|
|
Deferred income taxes - noncurrent liabilities
|
(3,047
|
)
|
|
(2,282
|
)
|
|
|
$
|
(1,505
|
)
|
|
$
|
(403
|
)
|
At
December 31, 2016
, the Company had cumulative NOLs of
$226.5 million
for federal income tax purposes and
$111.2 million
for state income tax purposes. The federal NOL carryforwards expire at various dates from 2020 through 2034. The state NOL carryforwards expire at various dates from 2017 through 2036. Of the federal NOL,
$150.8 million
is attributable to stock option deductions. The Company's federal NOL carryforwards for tax return purposes are
$22.7 million
greater than its recognized federal NOL for financial reporting purposes, primarily due to excess tax benefits (stock-based compensation deductions in excess of book compensation costs) not recognized for financial statement purposes until realized. The tax benefit of this loss would be recognized for financial statement purposes in the period in which the tax benefit reduces income taxes payable, which will not be recognized until the Company recognizes a reduction in taxes payable from all other NOL carryforwards. In addition, the Company had
$14.3 million
of deferred tax assets as of
December 31, 2016
related to compensation expenses recognized for financial reporting purposes that are not deductible for tax purposes until options are exercised or shares vest. The ultimate realization of the benefit related to stock options is directly associated with the price of
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
the Company's common stock. Employees will not exercise the underlying options unless the current market price exceeds the option exercise price.
The Company also has available federal and state research and development credit carryforwards of approximately
$25 million
that expire at various dates from 2017 through 2036.
In November 2015, the FASB issued ASU 2015-17, which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in the consolidated balance sheet. The Company elected to early-adopt ASU 2015-17 and accordingly, reclassified its net current deferred tax asset totaling
$1.0 million
to its noncurrent net deferred tax asset as of December 31, 2015. No prior periods were retrospectively adjusted.
During
2016
and
2015
, the Company performed an analysis to determine if, based on all available evidence, it considered it more likely than not that some portion or all of the recorded deferred tax assets will not be realized in a future period. As a result of the Company's evaluation, the Company concluded that there was insufficient positive evidence to overcome the more objective negative evidence related to its cumulative losses and other factors. Accordingly, the Company has maintained a valuation allowance against its domestic deferred tax asset amounting to
$141.9 million
at
December 31, 2016
and
$139.8 million
at
December 31, 2015
.
A reconciliation of the Company's unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Unrecognized tax benefits at January 1
|
$
|
8,888
|
|
|
$
|
8,875
|
|
|
$
|
8,861
|
|
|
Increases related to current year tax positions
|
36
|
|
|
13
|
|
|
14
|
|
|
Increases related to prior period tax positions
|
723
|
|
|
—
|
|
|
—
|
|
|
Decreases related to prior period tax positions
|
(81
|
)
|
|
—
|
|
|
—
|
|
|
Settlements
|
(597
|
)
|
|
—
|
|
|
—
|
|
|
Unrecognized tax benefits at December 31
|
$
|
8,969
|
|
|
$
|
8,888
|
|
|
$
|
8,875
|
|
The Company recorded liabilities for potential penalties and interest of
$80,721
for the year ended
December 31, 2016
,
$13,000
for the year ended
December 31, 2015
and
$14,000
for the year ended
December 31, 2014
. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months. Due to the Company's valuation allowance at
December 31, 2016
, none of the Company's unrecognized tax benefits, if recognized, would affect the effective tax rate.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, as well as various state and foreign jurisdictions. Generally, the tax years 2013 through 2015 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company's federal NOLs generated prior to 2013 could be adjusted on examination even though the year in which the loss was generated is otherwise closed by the statute of limitations. The Company's primary state jurisdiction, Massachusetts, has open periods from 2011 through 2013.
The acquisition of PT was accounted for as a taxable business combination and the Company carried over the existing tax basis of the acquired assets and liabilities as the Company did not make the election under Section 338(g) of the Internal Revenue Code to have the transaction treated as an asset acquisition election to step up the basis in the acquired assets and liabilities to fair market value for tax purposes. Deferred taxes were recorded as part of the business combination based on the differences between the tax basis of the acquired assets or liabilities and their reported amounts for financial reporting purposes. The Company concluded that there was insufficient positive evidence to overcome the more objective negative evidence related to cumulative losses and other factors. Accordingly, the Company recorded a valuation allowance against the acquired deferred tax assets. As a result of the change in control of PT, the NOL and credit carryforwards are limited under Internal Revenue Code Section 382.
The Company acquired approximately
$26 million
of federal and state NOL carryforwards and federal and state research and development credit carryforwards as a result of the PT acquisition. Under the provisions of the Internal Revenue Code, the NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership of significant shareholders over a
three
-year period in excess of
50%
, as defined under Sections 382 and 383 of the Internal Revenue Code, as well as similar state provisions. This could limit the amount of tax attributes that can
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has not performed a comprehensive Section 382 study to determine any potential loss limitation with regard to NOL carryforwards and tax credits acquired as a result of the PT acquisition.
The acquisition of the SDN Business was a taxable purchase of a business under Section 197 of the Internal Revenue Code. The tax amortization related to the SDN Business goodwill created a deferred tax liability.
The acquisition of Taqua was a taxable purchase of a business under Section 197 of the Internal Revenue Code. The tax amortization related to Taqua goodwill created a deferred tax liability.
(18) MAJOR CUSTOMERS
The following customer contributed
10%
or more of the Company's revenue in each of the years ended
December 31, 2016, 2015 and 2014
:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
AT&T
|
12%
|
|
13%
|
|
19%
|
At
December 31, 2016
,
no
customer accounted for
10%
or more of the Company's accounts receivable balance. At
December 31, 2015
,
one
customer accounted for
10%
or more of the Company's accounts receivable balance, representing approximately
11%
of total accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The Company maintains an allowance for doubtful accounts and such losses have been within management's expectations.
(19) GEOGRAPHIC AND SEGMENT INFORMATION
The Company's classification of revenue by geographic area is determined by the location of the Company's customers. The following table summarizes revenue by geographic area as a percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
United States
|
69
|
%
|
|
71
|
%
|
|
71
|
%
|
|
Europe, Middle East and Africa
|
13
|
|
|
13
|
|
|
13
|
|
|
Japan
|
10
|
|
|
10
|
|
|
9
|
|
|
Other Asia Pacific
|
5
|
|
|
4
|
|
|
5
|
|
|
Other
|
3
|
|
|
2
|
|
|
2
|
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The Company's service revenue is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Maintenance
|
$
|
86,995
|
|
|
$
|
89,280
|
|
|
$
|
90,003
|
|
|
Professional services
|
19,215
|
|
|
17,841
|
|
|
23,868
|
|
|
|
$
|
106,210
|
|
|
$
|
107,121
|
|
|
$
|
113,871
|
|
(20) RELATED PARTIES
H. Brian Thompson, who was an independent member of the Company's Board of Directors until the Company's 2016 Annual Meeting on June 9, 2016, is the Executive Chairman of GTT Communications, Inc., a leading global cloud networking provider to multinational clients ("GTT"). Howard Janzen is an independent member of the Company's Board of Directors and also serves as an independent director of GTT. In October 2015, GTT completed the acquisition of One Source Networks Inc.,
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
a provider of global data, Internet, SIP trunking and managed services ("One Source"). One Source is a customer of the Company. The Company had a well-established and ongoing business relationship with One Source prior to its acquisition by GTT. The Company recognized revenue aggregating approximately
$23,000
from One Source in the period from January 1, 2016 through June 9, 2016, and approximately
$150,000
in the year ended December 31, 2015, pursuant to the terms of a contract between the parties, effective June 28, 2010. The Company believes the terms of this contract are consistent with third-party arrangements that provide similar services.
Since Mr. Thompson is no longer a member of the Company's Board of Directors, the Company's relationship with GTT no longer triggers a related party transaction unless and until any of the Company's directors, executive officers or holders of 5% or more of any class of its capital stock or any member of their immediate family has a direct or indirect material interest in a transaction between the Company and GTT in which the amount involved exceeds or will exceed
$120,000
.
As a matter of corporate governance policy and practice, related party transactions are presented and considered by the Audit Committee of the Company's Board of Directors in accordance with the Company's Related Person Transaction Policy.
(21) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities under operating leases, which expire at various times through 2024. The Company is responsible for certain real estate taxes, utilities and maintenance costs under these leases. The Company's corporate headquarters is located in a leased facility in Westford, Massachusetts, consisting of
97,500
square feet under a lease that expires in
August 2018
.
Escalation clauses, free rent and other lease concessions are recognized on a straight-line basis over the minimum lease term. Rent expense was
$4.5 million
for the year ended
December 31, 2016
,
$5.2 million
for the year ended
December 31, 2015
and
$6.1 million
for the year ended
December 31, 2014
.
Future minimum payments under operating lease arrangements as of
December 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
Years ending December 31,
|
|
|
2017
|
$
|
4,600
|
|
|
2018
|
3,593
|
|
|
2019
|
2,094
|
|
|
2020
|
640
|
|
|
2021
|
266
|
|
|
Thereafter
|
—
|
|
|
|
$
|
11,193
|
|
Litigation and Contingencies
On April 6, 2015, Ming Huang, a purported shareholder of the Company, filed a Class Action Complaint (Civil Action No. 3:15-02407), alleging violations of the federal securities laws (the \"Complaint") in the United States District Court for the District of New Jersey (the "District of New Jersey"), against the Company and
two
of its officers, Raymond P. Dolan, the Company's President and Chief Executive Officer, and Mark T. Greenquist, the Company's former Chief Financial Officer (collectively, the "Defendants"). On September 21, 2015, in response to motions subsequently filed with the District of New Jersey by
four
other purported shareholders of the Company seeking status as lead plaintiff, the District of New Jersey appointed Richard Sousa as lead plaintiff (the "Plaintiff"). The Plaintiff claims to represent purchasers of the Company's common stock during the period from October 23, 2014 to March 24, 2015, and seeks unspecified damages. The principal allegation contained in the Complaint is that the Defendants made misleading forward-looking statements concerning the Company's fiscal first quarter of 2015 financial performance. On September 22, 2015, the Company filed a Motion to Transfer (the “Motion to Transfer”) this case to the United States District Court for the District of Massachusetts. The Plaintiff filed his opposition to the Motion to Transfer on October 5, 2015, and the Company filed a reply to the Motion to Transfer on October 13, 2015. On March 21, 2016, the District of New Jersey granted the Company's Motion to Transfer. Thus, this case will now be litigated in the United States District Court for the District of Massachusetts (Civil Action No. 1:16-cv-10657-GAO). On May 4, 2016, the Plaintiff filed an amended complaint (the "Amended Complaint"), which is now the operative complaint in this litigation. On June 20, 2016, the Company and the other Defendants filed a Motion to Dismiss the Amended Complaint (the "Motion to Dismiss") and on July 25, 2016, the Plaintiff filed an opposition to the Motion to Dismiss. The Company filed its reply to the Plaintiff's opposition to the Motion to Dismiss on August 15, 2016. A hearing on the Motion to Dismiss is
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
scheduled for February 28, 2017. The Company believes that the Defendants have meritorious defenses to the allegations made in the Amended Complaint and does not expect the results of this suit to have a material effect on its business or consolidated financial statements. The Company is also fully cooperating with an SEC inquiry regarding the development and issuance of the Company's first quarter 2015 revenue and earnings guidance. At this time, it is not possible to predict the outcome of the SEC's inquiry, including whether or not any proceedings will be initiated or, if so, when or how the matter will be resolved and therefore an estimate of the possible range of loss, if any, cannot be made.
In addition, the Company is often a party to disputes and legal proceedings that it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material effect on the Company's business or consolidated financial statements.
(22) QUARTERLY RESULTS (UNAUDITED)
The Company's fiscal year ends on December 31. For fiscal year 2015, the Company reported its first, second and third quarters on a 4-4-5 basis, with the quarter ending on the Friday closest to the last day of each third month. In 2015, the Company's first quarter ended on March 27, 2015, the second quarter ended on June 26, 2015 and the third quarter ended on September 25, 2015.
The following tables present the Company's quarterly operating results for the years ended December 31,
2016
and
2015
. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited consolidated quarterly results when read in conjunction with the Company's audited consolidated financial statements and related notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter (1)
|
|
Fourth
Quarter
|
|
|
(In thousands, except per share data)
|
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
59,151
|
|
|
$
|
60,857
|
|
|
$
|
65,011
|
|
|
$
|
67,572
|
|
|
Cost of revenue
|
20,748
|
|
|
20,629
|
|
|
21,425
|
|
|
22,178
|
|
|
Gross profit
|
$
|
38,403
|
|
|
$
|
40,228
|
|
|
$
|
43,586
|
|
|
$
|
45,394
|
|
|
Loss from operations
|
$
|
(3,881
|
)
|
|
$
|
(2,708
|
)
|
|
$
|
(4,316
|
)
|
|
$
|
(2,704
|
)
|
|
Net loss
|
$
|
(4,654
|
)
|
|
$
|
(2,916
|
)
|
|
$
|
(3,731
|
)
|
|
$
|
(2,631
|
)
|
|
Loss per share (3):
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.09
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.05
|
)
|
|
Diluted
|
$
|
(0.09
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.05
|
)
|
|
Shares used in computing loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
49,484
|
|
|
49,423
|
|
|
49,402
|
|
|
49,232
|
|
|
Diluted
|
49,484
|
|
|
49,423
|
|
|
49,402
|
|
|
49,232
|
|
SONUS NETWORKS, INC.
Notes to Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter (2)
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
(In thousands, except per share data)
|
|
Fiscal 2015
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
50,145
|
|
|
$
|
54,701
|
|
|
$
|
67,862
|
|
|
$
|
76,326
|
|
|
Cost of revenue
|
20,915
|
|
|
20,287
|
|
|
22,150
|
|
|
24,025
|
|
|
Gross profit
|
$
|
29,230
|
|
|
$
|
34,414
|
|
|
$
|
45,712
|
|
|
$
|
52,301
|
|
|
Income (loss) from operations
|
$
|
(18,866
|
)
|
|
$
|
(15,049
|
)
|
|
$
|
(1,362
|
)
|
|
$
|
4,060
|
|
|
Net income (loss)
|
$
|
(19,359
|
)
|
|
$
|
(15,343
|
)
|
|
$
|
(1,896
|
)
|
|
$
|
4,703
|
|
|
Income (loss) per share (3):
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.39
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.09
|
|
|
Diluted
|
$
|
(0.39
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.09
|
|
|
Shares used in computing income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
49,423
|
|
|
49,484
|
|
|
49,625
|
|
|
49,685
|
|
|
Diluted
|
49,423
|
|
|
49,484
|
|
|
49,625
|
|
|
49,906
|
|
__________________________________
|
|
|
|
(1)
|
Includes the results of Taqua for the period subsequent to September 26, 2016.
|
|
|
|
|
(2)
|
Includes the results of the SDN Business for the period subsequent to January 2, 2015.
|
|
|
|
|
(3)
|
Income (loss) per share is calculated independently for each of the quarters presented; accordingly, the sum of the quarterly earnings (loss) per share amounts may not equal the total calculated for the year.
|