NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Significant Accounting Policies
Radisys Corporation (the “Company” or “Radisys”) has adhered to the accounting policies set forth in its Annual Report on Form 10-K for the year ended
December 31, 2016
in preparing the accompanying interim condensed consolidated financial statements. The preparation of these statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Additionally, the accompanying financial data as of
June 30, 2017
and for the three and six months ended
June 30, 2017
and
2016
has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2016
.
Certain changes in presentation have been made to conform prior presentations to the current year's presentation in the condensed consolidated statement of cash flows within cash flows from operating and cash flows from financing activities.
The financial information included herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for interim periods.
Recent Accounting Pronouncements
In October 2016, the FASB issued Accounting standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (''ASU 2016-16''). ASU 2016-16 modifies how intra-entity transfer of assets other than inventory are accounted for and presented in the financial statements. ASU 2016-16 is effective for public companies for annual reporting periods beginning after December 15, 2017. The Company adopted this ASU in the first quarter of 2017. The Company recognized a tax charge of
$2.0 million
related to intra-entity transactions other than inventory which could not be previously recognized. The unrecognized tax charge is reflected as an adjustment to retained earnings.
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting (''ASU 2016-09''). ASU 2016-09 simplifies how several aspects of share-based payments are accounted for and presented in the financial statements. ASU 2016-09 is effective for public companies for annual reporting periods beginning after December 15, 2016. The Company adopted this ASU in the first quarter of 2017. Upon adoption, the Company no longer uses a forfeiture rate in the calculation of stock based compensation expense. The impact of this election did not result in a significant charge to retained earnings from applying an estimated forfeiture rate in previous periods. The balance of the unrecognized excess tax benefits was reversed with the impact recorded to retained earnings and included changes to the valuation allowance as a result of the adoption. The Company has excess tax benefits for which a benefit could not be previously recognized of
$4.5 million
. Due to the full valuation allowance on the U.S. deferred tax assets, there was no impact to the financial statements beyond disclosure as a result of this adoption.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact on the condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which was
issued in August 2015, revised the effective date for this ASU to annual and interim periods beginning on or after December 15, 2017, with early adoption permitted, but not earlier than the original effective date of annual and interim periods beginning on or after December 15, 2016, for public entities.
The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The Company does not plan to early adopt this new standard, and accordingly, the Company will adopt the new standard effective January 1, 2018. The Company plans to adopt using the modified retrospective approach.
The Company's evaluation of the impact of the new standard on the Company's accounting policies, processes, and system requirements is ongoing. While the Company continues to assess all potential impacts under the new standard, the Company does not believe there will be significant changes to the timing of recognition of hardware sales, software license sales or service contracts.
As part of the Company's preliminary evaluation, the Company also considered the impact of the guidance in ASC 340-40, "
Other Assets and Deferred Costs; Contracts with Customers
". This guidance requires the capitalization of all incremental costs that we incur to obtain a contract with a customer that the Company would not have incurred if the contract had not been obtained, provided the Company expects to recover the costs. The Company preliminarily believes that there will not be significant changes to the timing of the recognition of sales commissions since the Company's commission plan is earned based on the recognition of revenue; however, there is a potential that the amortization period for commission costs may be longer than the contract term in some cases, as the new cost guidance requires entities to determine whether the costs relate to specific anticipated contracts as well.
While the Company continues to assess the potential impacts of the new standard, including the areas described above, the Company cannot reasonably estimate quantitative information related to the impact of the new standard on its financial statements at this time.
Immaterial Revision to Prior Period Financial Statement
The Company has revised the presentation of revenue and cost of sales to separately present those amounts that are associated with service and related activities from those amounts associated with product sales. This change does not impact the Company’s previously reported total revenues, gross margin, loss from operations or net loss for the periods presented.
Note 2 — Fair Value of Financial Instruments
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company measures at fair value certain financial assets and liabilities. GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the following fair-value hierarchy:
Level 1— Quoted prices for identical instruments in active markets;
Level 2— Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3— Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Foreign currency forward contracts are measured at fair value using models based on observable market inputs such as foreign currency exchange rates; therefore, they are classified within Level 2 of the valuation hierarchy.
The following table summarizes the fair value measurements for the Company's financial instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, 2017
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Foreign currency forward contracts
|
$
|
713
|
|
|
—
|
|
|
$
|
713
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2016
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Foreign currency forward contracts
|
$
|
94
|
|
|
—
|
|
|
$
|
94
|
|
|
—
|
|
Note 3 — Accounts Receivable and Other Receivables
Accounts receivable consists of sales to the Company's customers which are generally based on standard terms and conditions. Accounts receivable balances consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Accounts receivable, gross
|
$
|
43,641
|
|
|
$
|
38,433
|
|
Less: allowance for doubtful accounts
|
(55
|
)
|
|
(55
|
)
|
Accounts receivable, net
|
$
|
43,586
|
|
|
$
|
38,378
|
|
As of
June 30, 2017
and
December 31, 2016
, the balance in other receivables was
$4.3 million
and
$4.2 million
. Other receivables consisted primarily of non-trade receivables including inventory sold to the Company's contract manufacturing partner or other integration partners (on which the Company does not recognize revenue) and net receivables for value-added taxes.
Note 4 — Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Raw materials
|
$
|
19,327
|
|
|
$
|
24,805
|
|
Work-in-process
|
—
|
|
|
12
|
|
Finished goods
|
5,040
|
|
|
5,005
|
|
|
24,367
|
|
|
29,822
|
|
Less: inventory valuation allowance
|
(9,619
|
)
|
|
(9,801
|
)
|
Inventories, net
|
$
|
14,748
|
|
|
$
|
20,021
|
|
Consigned inventory is held at third-party locations, which include the Company's contract manufacturing partner and customers. The Company retains title to the inventory until purchased by the third-party. Consigned gross inventory, consisting of raw materials and finished goods was
$10.9 million
and
$11.8 million
at
June 30, 2017
and
December 31, 2016
.
The Company’s consignment inventory with its contract manufacturer consists of inventory transferred from the Company’s prior contract manufacturer as well as inventory that has been purchased by the contract manufacturer as a result of the Company's forecasted demand. The Company was contractually obligated to purchase inventory transferred from the Company's prior contract manufacturer after it aged for
365
days. All transferred inventory not consumed was repurchased by the Company in 2016. The Company is also contractually obligated to purchase inventory that has been purchased by its contract manufacturer as a result of the Company's forecasted demand when the inventory ages beyond
180
days and has no forecasted demand. All of the Company's consigned inventory was held by its contract manufacturing partner as of
June 30, 2017
and
December 31, 2016
. The Company records a liability for adverse purchase commitments of inventory owned by its contract manufacturing partner. See Note 7 -
Commitments and Contingencies
for additional information regarding the Company's adverse purchase commitment liability.
The Company recorded the following charges associated with the valuation of inventory and the adverse purchase commitment liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Inventory, net
|
$
|
(15
|
)
|
|
$
|
2,237
|
|
|
$
|
486
|
|
|
$
|
2,503
|
|
Adverse purchase commitments
(A)
|
172
|
|
|
(1,393)
|
|
|
373
|
|
|
(1,114)
|
|
Net charges
|
$
|
157
|
|
|
$
|
844
|
|
|
$
|
859
|
|
|
$
|
1,389
|
|
|
|
(A)
|
When the Company takes possession of inventory reserved for under the adverse purchase liability (Note 7 —
Commitments and Contingencies),
the associated liability is transferred from other accrued liabilities to the excess and obsolete inventory valuation allowance.
|
Note 5 — Restructuring and Other Charges
The following table summarizes the Company's restructuring and other charges as presented in the Condensed Consolidated Statement of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Employee-related restructuring expenses
|
$
|
1,215
|
|
|
$
|
118
|
|
|
$
|
1,257
|
|
|
$
|
800
|
|
Integration-related and other non-recurring expenses
|
20
|
|
|
147
|
|
|
213
|
|
|
147
|
|
Restructuring and other charges, net
|
$
|
1,235
|
|
|
$
|
265
|
|
|
$
|
1,470
|
|
|
$
|
947
|
|
Restructuring and other charges includes expenses incurred for employee terminations due to a reduction of personnel resources resulting from modifications of business strategy or business emphasis. Employee-related restructuring expenses include severance benefits, notice pay and outplacement services. Restructuring and other charges may also include expenses incurred associated with acquisition or divestiture activities, facility abandonments and other expenses associated with business restructuring actions.
For the
three
months ended
June 30, 2017
, the Company recorded the following restructuring charges:
|
|
•
|
$1.2 million
net expense relating to the severance for 28 employees primarily in North America and Asia in connection with a reduction in legacy Hardware Solutions engineering and support staff as well as rationalization across various other functional organizations to better align with the Company's go-forward strategy.
|
For the
three
months ended
June 30, 2016
, the Company recorded the following restructuring and other charges:
|
|
•
|
$0.1 million
net expense relating to the severance for 2 employees; and
|
|
|
•
|
$0.1 million
integration-related net expense principally associated with asset disposals and subsidiary liquidations resulting from resource and site consolidation actions.
|
For the
six
months ended
June 30, 2017
, the Company recorded the following restructuring charges:
|
|
•
|
$1.3 million
net expense relating to the severance for 30 employees primarily in North America and Asia in connection with a reduction in legacy Hardware Solutions engineering and support staff as well as rationalization across various other functional organizations to better align with the Company's go-forward strategy; and
|
|
|
•
|
$0.2 million
in non-recurring legal expenses associated with closing a strategic agreement with a MediaEngine channel partner.
|
For the
six
months ended
June 30, 2016
, the Company recorded the following restructuring and other charges:
|
|
•
|
$0.8 million
net expense relating to the severance for 23 employees primarily in connection with a reduction to the Company's hardware engineering presence in Shenzhen; and
|
|
|
•
|
$0.1 million
integration-related net expense principally associated with asset disposals and subsidiary liquidations resulting from resource and site consolidation actions.
|
Accrued restructuring, which is included in other accrued liabilities in the accompanying Condensed Consolidated Balance Sheets as of
June 30, 2017
and
December 31, 2016
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance, payroll taxes and other employee benefits
|
|
Facility reductions
|
|
Total
|
Balance accrued as of December 31, 2016
|
$
|
1,347
|
|
|
$
|
90
|
|
|
$
|
1,437
|
|
Additions
|
1,371
|
|
|
—
|
|
|
1,371
|
|
Reversals
|
(114
|
)
|
|
—
|
|
|
(114
|
)
|
Expenditures
|
(1,392
|
)
|
|
(60
|
)
|
|
(1,452
|
)
|
Balance accrued as of June 30, 2017
|
$
|
1,212
|
|
|
$
|
30
|
|
|
$
|
1,242
|
|
The Company evaluates the adequacy of the accrued restructuring charges on a quarterly basis. Reversals are recorded in the period in which the Company determines that expected restructuring obligations are less than the amounts accrued.
Note 6 — Short-Term Borrowings
Silicon Valley Bank
On September 19, 2016, the Company entered into a Credit Agreement (as amended, the “Credit Agreement”) with Silicon Valley Bank (“SVB”), as administrative agent, and the other lenders party thereto. The Credit Agreement replaces the Company’s Third Amended and Restated Loan and Security Agreement with SVB, dated March 14, 2014 (as amended, the “2014 Agreement”). On June 30, 2017, the Company entered into the Second Amendment to the Credit Agreement. The following takes into account the terms per the agreement as amended on June 30, 2017.
The Credit Agreement provides for a revolving loan commitment of
$55.0
million and has a stated maturity date of September 19, 2019. The Credit Agreement includes a
$10.0
million sub-limit for swingline loans and a
$10.0
million sub-limit for letters of credit. The Credit Agreement also includes an accordion feature that allows the Company, at any time, to increase the aggregate revolving loan commitments by up to an additional
$25.0
million, subject to the satisfaction of certain conditions, including obtaining the lenders’ agreement to participate in the increase.
Borrowings under the Credit Agreement are subject to a borrowing base, which is a formula based upon certain eligible accounts receivable plus up to
$7.5 million
if the Company’s Liquidity (as defined in the Credit Agreement) is above
$20.0
million in the first and second month of any fiscal quarter and
$25.0
million for the last month of a fiscal quarter, measured as of the last day of the applicable month. Eligible accounts receivable include
85%
of certain U.S. and
75%
of certain foreign accounts receivable (
85%
in certain cases). The Credit Agreement also provides for non-formula advances during the last business day of any fiscal quarter, provided that Liquidity on the date of a requested non-formula advance must be greater than or equal to
$40.0 million
, the non-formula advance must be repaid on or before the first business day after the applicable fiscal quarter end, and subject to the satisfaction of certain other conditions.
Outstanding borrowings under the revolving loan commitment bear interest at a per annum rate based upon the Company's Availability (as defined in the Credit Agreement), which means the quotient of the amount available for borrowings under the Credit Agreement divided by the lesser of the total commitment and the borrowing base, calculated as a daily average over the immediately preceding fiscal month. The Credit Agreement provides that the per annum interest rate commencing on June 30, 2017 when the Consolidated Adjusted EBITDA (as defined in the Credit Agreement) as measured on a trailing twelve-month basis for the immediately preceding fiscal quarter period is less than
$8.0 million
will be as follows:
|
|
•
|
When Availability is
70%
or more, the interest rate is the prime rate (as published in Wall Street Journal) plus
0.75%
;
|
|
|
•
|
When Availability is
30%
or more and less than
70%
, the interest rate is the prime rate plus
1.00%
; and
|
|
|
•
|
When Availability is below
30%
, the interest rate is the prime rate plus
1.25%
.
|
Commencing on June 30, 2017, if Consolidated Adjusted EBITDA as measured on a trailing twelve-month basis for the immediately preceding fiscal quarter period is equal to or greater than
$8.0 million
, the rate per annum will be as follows:
|
|
•
|
When Availability is
70%
or more, the interest rate is the prime rate plus
0.25%
;
|
|
|
•
|
When Availability is
30%
or more and less than
70%
, the interest rate is the prime rate plus
0.50%
; and
|
|
|
•
|
When Availability is below
30%
, the interest rate is the prime rate plus
0.75%
.
|
Under the Credit Agreement, the Company is required to make interest payments monthly. The Company is further required to pay
$25,000
in annual administrative fees,
$82,500
in annual commitment fees and a commitment fee based on the average unused portion of the revolving credit commitment, and certain other fees in connection with letters of credit. The commitment fee is determined as follows and is payable quarterly in arrears:
|
|
•
|
When Availability is
70%
or more, the commitment fee is
0.35%
of the average unused portion of the revolving credit commitment;
|
|
|
•
|
When Availability is
30%
or more and less than
70%
, the commitment fee is
0.325%
of the average unused portion of the revolving credit commitment; and
|
|
|
•
|
When Availability is below
30%
, the commitment fee is
0.3%
of the average unused portion of the revolving credit commitment.
|
The Company paid a total of
$0.4
million loan origination fees which were capitalized and will be expensed over the term of the Credit Agreement. If the Company reduces or terminates the revolving loan commitment under the Credit Agreement prior to September 19, 2017, the Company is required to pay a cancellation fee equal to
0.75%
of the total revolving loan commitment.
The Credit Agreement requires that the Company comply with financial covenants requiring the Company to maintain a minimum monthly Liquidity of
$15.0
million as of the last day of the first and second month of any fiscal quarter and
$20.0
million as of the last day of the third month of any fiscal quarter. Additionally, the Credit Agreement requires the Company to maintain a minimum trailing twelve months Consolidated Adjusted EBITDA in the second, third, and fourth quarter of fiscal year 2017 as follows:
|
|
|
Quarter Ending
|
Minimum Consolidated Adjusted EBITDA
|
6/30/17
|
$0
|
9/30/17
|
($1,500,000)
|
12/31/17
|
$3,000,000
|
The Credit Agreement also provides limits for the add-back of certain restructuring costs on a trailing twelve month basis in the calculation of Consolidated Adjusted EBITDA as follows:
|
|
|
Quarter Ending
|
Restructuring Costs
|
6/30/17
|
$5,205,000
|
9/30/17
|
$9,550,000
|
12/31/17
|
$8,235,000
|
The Credit Agreement also provides that following fiscal year 2017, SVB, as administrative agent, and the required lenders under the Credit Agreement will re-set the required minimum Consolidated Adjusted EBITDA levels for the periods tested in fiscal years 2018 and 2019.
All obligations under the Credit Agreement are unconditionally guaranteed by the Company's wholly owned subsidiary, Radisys International LLC. The obligations under the Credit Agreement are secured by a first priority lien on the assets of the Company and the subsidiary guarantor. If the Company acquires or forms a material U.S. subsidiary, then that subsidiary will also be required to guarantee the obligations under the Credit Agreement and grant a first priority lien on its assets.
As of
June 30, 2017
and
December 31, 2016
, the Company had an outstanding balance of
$45.0 million
and
$25.0 million
under the Credit Agreement. Under the revolving credit facility, the Company may borrow up to
$55.0 million
at fiscal quarter ends. At
June 30, 2017
, the Company utilized the quarter end availability feature to borrow beyond our ongoing available borrowing base of
$31.4 million
. At
June 30, 2017
, the Company was in compliance with all covenants under the Amended Agreement.
Note 7 — Commitments and Contingencies
Adverse Purchase Commitments
The Company is contractually obligated to reimburse its contract manufacturer for the cost of excess inventory used in the manufacture of the Company's products if there is no alternative use. Estimates for adverse purchase commitments are derived from reports received on a quarterly basis from the Company's contract manufacturer. Increases to this liability are charged to cost of sales. If and when the Company takes possession of inventory reserved for in this liability, the liability is transferred from other accrued liabilities to the excess and obsolete inventory valuation allowance (Note 4 —
Inventories and Deferred Cost of Sales
).
The adverse purchase commitment liability is included in other accrued liabilities in the accompanying Condensed Consolidated Balance Sheets and was
$0.7 million
and
$0.3 million
as of
June 30, 2017
and
December 31, 2016
.
Guarantees and Indemnification Obligations
As permitted under Oregon law, the Company has agreements whereby it indemnifies its officers, directors and certain finance employees for certain events or occurrences while an officer, director or employee is or was serving in such capacity at the request of the Company. The term of the indemnification period is for the officer's, director's or employee's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. To date, the Company has not incurred any costs associated with these indemnification agreements and, as a result, management believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of
June 30, 2017
.
The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company's business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to the Company's current products, as well as claims relating to property damage or personal injury resulting from the performance of services by us or the Company's subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is generally limited. Historically, the Company's costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal.
Accrued Warranty
The Company provides for the estimated cost of product warranties at the time it recognizes revenue. Products are generally sold with warranty coverage for a period of
12
or
24
months after shipment. Parts and labor are covered under the terms of the warranty agreement. The workmanship of the Company’s products produced by the contract manufacturer is covered under warranties provided by the contract manufacturer for 12 to 24 months. The warranty provision is based on historical experience by product family. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its components suppliers; however ongoing failure rates, material usage and service delivery costs incurred in correcting product failure, as well as specific product class failures out of the Company’s baseline experience, affect the estimated warranty obligation. If actual product failure rates, material usage or service delivery costs differ from estimates, revisions to the estimated warranty liability would be required.
The following is a summary of the change in the Company's warranty accrual reserve (in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30,
|
|
2017
|
|
2016
|
Warranty liability balance, beginning of the period
|
$
|
1,821
|
|
|
$
|
2,553
|
|
Product warranty accruals
|
445
|
|
|
754
|
|
Utilization of accrual
|
(672
|
)
|
|
(1,146
|
)
|
Warranty liability balance, end of the period
|
$
|
1,594
|
|
|
$
|
2,161
|
|
At
June 30, 2017
and
December 31, 2016
,
$1.3 million
and
$1.5 million
of the warranty liability balance was included in other accrued liabilities and
$0.3 million
and
$0.4 million
was included in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets.
Liquidity Outlook
At
June 30, 2017
, the Company's cash and cash equivalents amounte
d to
$46.2 million
. The Company believes current cash and cash equivalents, cash expected to be generated from operations, available borrowings under the Silicon Valley Bank line of credit and availability under the
$100.0 million
unallocated shelf registration statement will satisfy the short and long-term expected working capital needs, capital expenditures, acquisitions, stock repurchases, and other liquidity requirements associated with present business operations. The Company believes current working capital, plus availability under the SVB line of credit, provides sufficient liquidity to operate the business at normal levels; however, to accelerate growth objectives, the Company may, among other available options, raise additional capital in the public or private markets or pursue alternative financing arrangements. If the Company becomes unable to comply with various covenants under the SVB line of credit due to expected declines in orders and shipments predominantly associated with DCEngine products and the timing of orders from large high-margin Software-Systems customers, without an amendment or waiver, the liquidity outlook could be adversely impacted. The Company continues to pursue a number of actions to improve cash position including (i) minimizing capital expenditures, (ii) effectively managing working capital, (iii) seeking amendments or waivers from lenders and (iv) improving cash flows from operations. These efforts continue in earnest and the Company is considering all available strategic alternatives and financing possibilities, including, without limitation, the incurrence of additional secured indebtedness and the exchange or refinancing of existing obligations.
Note 8 — Basic and Diluted Net Loss per Share
A reconciliation of the numerator and the denominator used to calculate basic and diluted net loss per share is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator
|
|
|
|
|
|
|
|
Net loss
|
$
|
(7,554
|
)
|
|
$
|
(591
|
)
|
|
$
|
(17,562
|
)
|
|
$
|
(3,556
|
)
|
Denominator — Basic
|
|
|
|
|
|
|
|
Weighted average shares used to calculate net loss per share, basic
|
38,966
|
|
|
37,143
|
|
|
38,840
|
|
|
37,075
|
|
Denominator — Diluted
|
|
|
|
|
|
|
|
Weighted average shares used to calculate net loss per share, basic
|
38,966
|
|
|
37,143
|
|
|
38,840
|
|
|
37,075
|
|
Effect of dilutive restricted stock units
(A)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Effect of dilutive stock options
(A)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average shares used to calculate net loss per share, diluted
|
38,966
|
|
|
37,143
|
|
|
38,840
|
|
|
37,075
|
|
Net loss per share
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.19
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.10
|
)
|
Diluted
|
$
|
(0.19
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.10
|
)
|
|
|
(A)
|
For the
three
and six months ended
June 30, 2017
and
2016
, the following equity awards, by type, were excluded from the calculation, as their effect would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock options
|
3,700
|
|
|
3,958
|
|
|
3,700
|
|
|
3,958
|
|
Restricted stock units
|
698
|
|
|
183
|
|
|
698
|
|
|
183
|
|
Performance based restricted stock units
(B)
|
1,087
|
|
|
2,470
|
|
|
1,087
|
|
|
2,470
|
|
Total equity award shares excluded
|
5,485
|
|
|
6,611
|
|
|
5,485
|
|
|
6,611
|
|
|
|
(B)
|
Performance based restricted stock units are presented based on attainment of 100% of the performance goals being met.
|
Note 9 — Income Taxes
The Company's effective tax rate for the
three
months ended
June 30, 2017
differs from the statutory rate due to a full valuation allowance provided against its United States (“U.S.”) net deferred tax assets, and taxes on foreign income that differ from the U.S. tax rate.
The Company utilizes the asset and liability method of accounting for income taxes. The Company records deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon the Company's review of all positive and negative evidence, including its three year U.S. cumulative pre-tax book loss and taxable loss, it concluded that a full and a partial valuation allowance should continue to be recorded against its U.S. and Canadian net deferred tax assets at
June 30, 2017
. In certain other foreign jurisdictions, where the Company does not have cumulative losses or other negative evidence, the Company had net deferred tax assets of
$1.0 million
and
$1.1 million
at
June 30, 2017
and
December 31, 2016
. In the future, if the Company determines that it is more likely than not that it will realize its U.S. and Canadian net deferred tax assets, it will reverse the applicable portion of the valuation allowance and recognize an income tax benefit in the period in which such determination is made.
The ending balance for the unrecognized tax benefits for uncertain tax positions was approximately
$3.5 million
at
June 30, 2017
. The related interest and penalties were
$0.8 million
and
$0.2 million
. The uncertain tax positions that are reasonably possible to decrease in the next twelve months are insignificant.
The Company is currently under tax examination in India. The periods covered under examination are the Company's financial years 2005, 2006, 2008 and 2011. The examinations are in various stages of appellate proceedings and all material uncertain tax positions associated with the examination have been taken into account in the ending balance of the unrecognized tax benefits at
June 30, 2017
. The Company is currently under tax examination in Canada. The periods covered under examination in Canada are the Company's financial years 2013, 2014, 2015 and 2016. No examination adjustments have been proposed. As of
June 30, 2017
, the Company is not under examination by tax authorities in any other jurisdictions.
Note 10 — Stock-based Compensation
The following table summarizes awards granted under the Radisys Corporation 2007 and LTIP Stock Plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock options
|
—
|
|
|
275
|
|
|
—
|
|
|
1,311
|
|
Restricted stock units
|
190
|
|
|
97
|
|
|
657
|
|
|
97
|
|
Performance based restricted stock awards
(A)
|
—
|
|
|
165
|
|
|
670
|
|
|
845
|
|
Total
|
190
|
|
|
537
|
|
|
1,327
|
|
|
2,253
|
|
|
|
(A)
|
On March 10, 2017, the Compensation Committee approved grants of performance-based restricted stock units ("PRSUs") to certain employees. The awards will vest only on satisfaction of certain performance criteria during
two
separate annual performance periods and a portion of the award earned will vest upon satisfaction of a time-based service component.
50%
of the awards can be earned by meeting strategic revenue targets in fiscal year 2017 and
50%
can be earned by meeting strategic revenue targets in fiscal year 2018. One-half of any PRSUs earned during each performance period will vest upon meeting the performance criteria, and the remaining half will be subject to a further time-based service component and will vest
one year
after meeting the targets. By meeting the relevant performance criteria set forth in the award agreement, employees can earn
0%
,
75%
,
100%
or
125%
of the award during each performance period. If an employee earns less than
100%
of the award for the 2017 performance period, the employee is eligible to earn the remaining portion of the award in fiscal year 2018 if cumulative 2017 and 2018 strategic revenue targets are met in the
two years
period. Shares are presented based on attainment of
100%
of the performance goals being met. At attainment of
125%
, the amount of shares eligible to be earned is
837,500
.
|
On March 28, 2016, the Compensation Committee approved grants of PRSUs to certain senior executives. The PRSUs will vest only on satisfaction of certain annual performance criteria during the performance period beginning on the grant date. Specifically,
50%
of shares will vest on meeting targets of strategic revenue during fiscal year 2016 and
50%
of shares will vest on meeting targets of strategic revenue during fiscal year 2017, subject to the attainment of achieving certain operating income thresholds defined by the Company's ratified 2017 annual operating plans. The awards have two separate annual performance achievement periods in 2016 and 2017 and vest upon attainment and approval of the respective performance conditions.
The awards associated with strategic revenue targets in 2016 were earned and settled in shares in the three month period ended March 31, 2017.
For the period ended June 30, 2017, management assessed it was no longer probable that the 2016 and 2017 PRSU award targets would be achieved. Thus, no expense associated with these awards was recognized in the three months ended June 30, 2017.
Stock-based compensation was recognized and allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of sales
|
$
|
40
|
|
|
$
|
131
|
|
|
$
|
137
|
|
|
$
|
177
|
|
Research and development
|
113
|
|
|
285
|
|
|
343
|
|
|
438
|
|
Selling, general and administrative
|
385
|
|
|
776
|
|
|
1,212
|
|
|
1,265
|
|
Total
|
$
|
538
|
|
|
$
|
1,192
|
|
|
$
|
1,692
|
|
|
$
|
1,880
|
|
Note 11 — Hedging
The Company’s activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates. The Company manages these risks through the use of forward exchange contracts, designated as foreign-currency cash flow hedges, in an attempt to reduce the potentially adverse effects of foreign currency exchange rate fluctuations that occur in the normal course of business. As such, the Company’s hedging activities are employed solely for risk management purposes. All hedging transactions are conducted with, in the opinion of management, financially stable and reputable financial institutions. As of
June 30, 2017
and
December 31, 2016
, the only hedge instruments executed by the Company are associated with its exposure to fluctuations in the Indian Rupee, which result from obligations such as payroll and rent paid in this currency.
These derivatives are recognized on the balance sheet at their fair value. Unrealized gain positions are recorded as other current assets and unrealized loss positions are recorded as other current liabilities. Changes in the fair values of the outstanding derivatives that are highly effective are recorded in other comprehensive income until net income (loss) is affected by the variability of the cash flows of the hedged transaction. Typically, hedge ineffectiveness could result when the amount of the Company’s hedge contracts exceed the Company’s forecasted or actual transactions for which the hedge contracts were designed to hedge. Once a hedge contract matures, the associated gain (loss) on the contract will remain in other comprehensive income (loss) until the underlying hedged transaction affects net income (loss), at which time the gain (loss) will be reclassified out of accumulated other comprehensive income (loss) and recorded to the expense line item being hedged.
The Company only enters into derivative contracts in order to hedge foreign currency exposure, and these contracts do not exceed
two
years from inception. If the Company entered into a contract for speculative reasons or if the Company’s current hedge position becomes ineffective, changes in the fair values of the derivatives would be recognized in earnings in the current period.
The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives are expected to remain highly effective in future periods. For the
three
and six months ended
June 30, 2017
and
2016
, the Company had no hedge ineffectiveness.
During the
three
and six months ended
June 30, 2017
the Company entered into
6
and
12
new foreign currency forward contracts, with total contractual values of
$3.3 million
and
$6.9 million
. During the
three
and six months ended
June 30, 2016
, the Company entered into
9
and
21
new foreign currency contracts, with total contractual values of
$3.1 million
and
$6.6 million
.
A summary of the aggregate contractual or notional amounts, balance sheet location and estimated fair values of derivative financial instruments designated as cash flow hedges at
June 30, 2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual/ Notional
Amount
|
|
Condensed Consolidated Balance Sheet
Classification
|
|
Estimated Fair Value
|
Type of Cash Flow Hedge
|
|
Asset
|
|
(Liability)
|
Foreign currency forward exchange contracts
|
|
$
|
16,669
|
|
|
Other current assets
|
|
$
|
713
|
|
|
$
|
—
|
|
A summary of the aggregate contractual or notional amounts, balance sheet location and estimated fair values of derivative financial instruments designated as cash flow hedges at
December 31, 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual/ Notional
Amount
|
|
Condensed Consolidated Balance Sheet
Classification
|
|
Estimated Fair Value
|
Type of Cash Flow Hedge
|
|
Asset
|
|
(Liability)
|
Foreign currency forward exchange contracts
|
|
$
|
16,166
|
|
|
Other current assets
|
|
$
|
94
|
|
|
$
|
—
|
|
The following table summarizes the effect of derivative instruments on the consolidated financial statements as a loss (gain) as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of sales
|
$
|
(60
|
)
|
|
$
|
75
|
|
|
$
|
(50
|
)
|
|
$
|
183
|
|
Research and development
|
(84
|
)
|
|
122
|
|
|
(70
|
)
|
|
295
|
|
Selling, general and administrative
|
(28
|
)
|
|
47
|
|
|
(23
|
)
|
|
114
|
|
Total
|
$
|
(172
|
)
|
|
$
|
244
|
|
|
$
|
(143
|
)
|
|
$
|
592
|
|
The following is a summary of changes to comprehensive income (loss) associated with the Company's hedging activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Beginning balance of unrealized loss on forward exchange contracts
|
$
|
(25
|
)
|
|
$
|
(685
|
)
|
|
$
|
(527
|
)
|
|
$
|
(819
|
)
|
Other comprehensive income (loss) before reclassifications
|
101
|
|
|
(162
|
)
|
|
574
|
|
|
(376
|
)
|
Amounts reclassified from other comprehensive income (loss)
|
(172
|
)
|
|
244
|
|
|
(143
|
)
|
|
592
|
|
Other comprehensive income (loss)
|
(71
|
)
|
|
82
|
|
|
431
|
|
|
216
|
|
Ending balance of unrealized loss on forward exchange contracts
|
$
|
(96
|
)
|
|
$
|
(603
|
)
|
|
$
|
(96
|
)
|
|
$
|
(603
|
)
|
Over the next twelve months, the Company expects to reclassify into earnings income of approximately
$0.4 million
currently recorded as accumulated other comprehensive income, as a result of the maturity of currently held forward exchange contracts.
The bank counterparties in these contracts expose the Company to credit-related losses in the event of their nonperformance. However, to mitigate that risk, the Company only contracts with counterparties who meet its minimum requirements regarding counterparty credit worthiness. In addition, the Company monitors credit ratings, credit spreads and potential downgrades prior to entering into any new hedging contracts.
Note 12 — Segment Information
The Company is comprised of two operating segments: Software-Systems and Hardware Solutions. The Company's Chief Executive Officer, or chief operating decision maker, regularly reviews discrete financial information for purposes of allocating resources and assessing the performance of each segment:
|
|
•
|
Software-Systems. Software-Systems is comprised of three product lines: FlowEngine, MediaEngine and CellEngine, each of which delivers software-centric solutions to service providers.
|
|
|
•
|
Hardware Solutions. Hardware Solutions includes the Company's DCEngine products and legacy embedded product portfolio which includes hardware solutions targeted for service providers.
|
Cost of sales, research and development and selling, general and administrative expenses are allocated to Software-Systems and Hardware Solutions. Expenses, reversals, gains and losses not allocated to Software-Systems or Hardware Solutions include amortization of acquired intangible assets, stock-based compensation, restructuring and other charges, and other one-time non-recurring events. These items are allocated to corporate and other.
The Company recorded the following revenues, gross margin and income (loss) from operations by operating segment for the
three
months ended
June 30, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue
|
|
|
|
|
|
|
|
|
Software-Systems
|
|
$
|
11,488
|
|
|
$
|
14,601
|
|
|
$
|
21,637
|
|
|
$
|
28,660
|
|
Hardware Solutions
|
|
23,605
|
|
|
46,687
|
|
|
51,066
|
|
|
87,774
|
|
Total revenues
|
|
$
|
35,093
|
|
|
$
|
61,288
|
|
|
$
|
72,703
|
|
|
$
|
116,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Gross margin
|
|
|
|
|
|
|
|
Software-Systems
|
$
|
6,243
|
|
|
$
|
9,172
|
|
|
$
|
11,708
|
|
|
$
|
17,960
|
|
Hardware Solutions
|
5,732
|
|
|
8,331
|
|
|
10,513
|
|
|
14,300
|
|
Corporate and other
|
(1,967
|
)
|
|
(2,058
|
)
|
|
(3,991
|
)
|
|
(4,031
|
)
|
Total gross margin
|
$
|
10,008
|
|
|
$
|
15,445
|
|
|
$
|
18,230
|
|
|
$
|
28,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
Software-Systems
|
|
$
|
(1,943
|
)
|
|
$
|
31
|
|
|
$
|
(5,216
|
)
|
|
$
|
811
|
|
Hardware Solutions
|
|
208
|
|
|
3,681
|
|
|
(1,078
|
)
|
|
5,008
|
|
Corporate and other
|
|
(4,960
|
)
|
|
(4,644
|
)
|
|
(9,536
|
)
|
|
(9,201
|
)
|
Total loss from operations
|
|
$
|
(6,695
|
)
|
|
$
|
(932
|
)
|
|
$
|
(15,830
|
)
|
|
$
|
(3,382
|
)
|
Assets are not allocated to segments for internal reporting purposes. A portion of depreciation is allocated to the respective segment. It is impracticable for the Company to separately identify the amount of depreciation by segment that is included in the measure of segment profit or loss.
Revenues by geographic area were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
United States
|
$
|
14,776
|
|
|
$
|
44,275
|
|
|
$
|
37,928
|
|
|
$
|
82,040
|
|
Other North America
|
415
|
|
|
39
|
|
|
434
|
|
|
117
|
|
Asia Pacific ("APAC")
|
6,697
|
|
|
6,461
|
|
|
12,116
|
|
|
14,079
|
|
Netherlands
|
8,378
|
|
|
7,838
|
|
|
13,601
|
|
|
15,073
|
|
Other EMEA
|
4,827
|
|
|
2,675
|
|
|
8,624
|
|
|
5,125
|
|
Europe, the Middle East and Africa (“EMEA”)
|
13,205
|
|
|
10,513
|
|
|
22,225
|
|
|
20,198
|
|
Foreign Countries
|
20,317
|
|
|
17,013
|
|
|
34,775
|
|
|
34,394
|
|
Total
|
$
|
35,093
|
|
|
$
|
61,288
|
|
|
$
|
72,703
|
|
|
$
|
116,434
|
|
Long-lived assets by geographic area are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Property and equipment, net
|
|
|
|
United States
|
$
|
4,925
|
|
|
$
|
4,566
|
|
Other North America
|
78
|
|
|
129
|
|
China
|
369
|
|
|
438
|
|
India
|
1,881
|
|
|
1,580
|
|
Total APAC
|
2,250
|
|
|
2,018
|
|
Foreign Countries
|
2,328
|
|
|
2,147
|
|
Total property and equipment, net
|
$
|
7,253
|
|
|
$
|
6,713
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
United States
|
$
|
11,202
|
|
|
$
|
17,575
|
|
Total intangible assets, net
|
$
|
11,202
|
|
|
$
|
17,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following customers accounted for more than 10% of the Company's total revenues:
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Customer A
|
21.8
|
%
|
|
49.6
|
%
|
|
31.9
|
%
|
|
46.2
|
%
|
Customer B
|
25.9
|
%
|
|
13.4
|
%
|
|
20.3
|
%
|
|
13.8
|
%
|
Customer C
|
13.7
|
%
|
|
N/A
|
|
|
10.9
|
%
|
|
N/A
|
|
|
|
|
|
|
|
|
The following customers accounted for more than 10% of accounts receivable:
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Customer D
|
20.8
|
%
|
|
32.6
|
%
|
Customer A
|
18.8
|
%
|
|
10.4
|
%
|
Customer B
|
17.4
|
%
|
|
15.4
|
%
|