NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
1.
|
ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Company Background
Prior to October 31, 2012, the date of the Share Distribution (as defined below), Xura, Inc. (formerly known as Comverse, Inc.) (the “Company”) was a wholly-owned subsidiary of Comverse Technology, Inc. (“CTI”). On October 31, 2012, CTI completed the spin-off of the Company as an independent, publicly traded company, accomplished by means of a pro rata distribution of 100% of our outstanding common shares to CTI's shareholders (such transaction referred to as the “Share Distribution”). Following the Share Distribution, CTI no longer held any of our outstanding capital stock, and we became an independent publicly-traded company. Effective September 9, 2015, the Company changed its name from Comverse, Inc. to Xura, Inc. The Company was organized as a Delaware corporation in November 1997.
The Company is a global provider of digital communications solutions for communication service providers (“CSPs”), enterprises and application providers. The Company's solutions are designed to enhance CSPs’ ability to address evolving market trends with the simplification and modernization of networks, as well as to create monetizable services with both existing and emerging technologies, such as voice over long-term evolution (“VoLTE”), rich communication services (“RCS”) credit orchestration and internet protocol (“IP”) messaging and web real-time communications (“WebRTC”). The Company also provides solutions for messaging security, network signaling security, data analytics, and machine-to-machine messaging. The Company continues to offer traditional value-added services (“VAS”) solutions, including voicemail, visual voicemail, call completion, short messaging service (“SMS”), multimedia picture and video messaging (“MMS”) and IP-messaging designed to provide CSPs the ability to augment their networks with emerging products and solutions to address opportunities provided by new types of devices, technologies, and multi-device user experiences. In addition, the Company offers CSPs innovative monetization solutions using messaging as transport to exchange billing credits between subscribers, primarily in prepaid markets. The Company's enterprise solutions are designed to accelerate the Company's enterprise customers’ shift towards mobile-enablement and to improve their customer engagement. These solutions include secure enterprise application-to-person messaging (“A2P”), two-factor authentication (or “2FA”) and developer tools for customized service creation.
The Company's solutions can be delivered via the cloud, in a “software-as-a-service” model, which allows the Company to speed up deployment and permit rapid introduction of additional services. With the acquisition of Acision (as defined below), several of the Company's monetization solutions are offered in a revenue-share model, which reduces the customers' up-front investments and ties payments to actual service usage, provides continual revenue streams and allows the Company to actively participate in service value creation.
Basis of Presentation
The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and on the same basis as the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended
January 31, 2016
filed with the SEC on May 23, 2016 (the “2015 Form 10-K”).
The condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the periods ended
April 30, 2016
and
2015
, and the condensed consolidated balance sheet as of
April 30, 2016
are not audited but in the opinion of management reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair statement of the results of the periods presented. Certain information and disclosures normally included in audited financial statements have been omitted in these condensed consolidated financial statements pursuant to the rules and regulations of the SEC. Because the condensed consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for annual financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in the 2015 Form 10-K. The results for the
three months ended April 30, 2016
are not necessarily indicative of the results for the full fiscal year ending
January 31, 2017
.
Intercompany accounts and transactions within the Company have been eliminated.
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company has experienced operating losses in the past two years. In addition, the Company has utilized cash to fund operations, resulting in negative operating cash flows and a decrease in total cash balances. As of
April 30, 2016
, the Company had approximately
$120.2 million
of unrestricted cash on-hand. During the most recent fiscal quarter, we utilized approximately
$4.6 million
of cash to fund continuing operations.
The Company’s liquidity is dependent on its ability to profitably grow revenues while further reducing costs under its restructuring initiatives announced as well as cost reduction efforts in the future, in connection with plans to consolidate further its operations and integrate the Acision business, realizing favorable cost synergies as a result. The Company’s liquidity is also dependent on the ability of its Acision subsidiary to satisfy the operating financial covenants required by the terms of the senior credit facility agreement. Management believes that future sources of liquidity will include cash and cash equivalents, cash flows from operations, refinancing of the senior credit facility or proceeds from the issuance of equity or debt securities.
The Company currently forecasts available cash and cash equivalents will be sufficient to meet its liquidity needs, including capital expenditures, for at least the next 12 months.
Management's current forecast is based upon a number of assumptions including, among others: assumed levels of customer order activity, revenue and collections; continued implementation of initiatives to reduce operating costs; no significant degradation in operating margins; increased spending on certain investments in the business; slight reductions in the unrestricted cash levels required to support the working capital needs of the business and other professional fees; successful integration of the Acision business; intra-period working capital fluctuations consistent with historical trends. Management believes that the above-noted assumptions are reasonable.
Segment Information
The Company operates as a single business segment the results of which are included in the Company's income statement from continuing operations.
Use of Estimates
The preparation of the condensed consolidated financial statements and the accompanying notes in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses.
The most significant estimates among others include:
|
|
•
|
Estimates relating to the recognition of revenue, including the determination of vendor specific objective evidence (“VSOE”) of fair value and the determination of best estimate of selling price for multiple element arrangements;
|
|
|
•
|
Fair value of stock-based compensation;
|
|
|
•
|
Fair value of long-lived assets and asset groups;
|
|
|
•
|
Realization of deferred tax assets;
|
|
|
•
|
The identification and measurement of uncertain tax positions;
|
|
|
•
|
Contingencies and litigation;
|
|
|
•
|
Total estimates to complete on percentage-of-completion (“POC”) projects;
|
|
|
•
|
Valuation of inventory;
|
|
|
•
|
Allowance for doubtful accounts;
|
|
|
•
|
Purchase price accounting valuation; and
|
|
|
•
|
Valuation of other intangible assets.
|
The Company’s actual results may differ from its estimates.
Revenue Recognition
Management is required to make judgments to estimate the total estimated costs and progress to completion. Changes to such estimates can impact the timing of the revenue recognition period to period. The Company uses historical experience, project plans, and an assessment of the risks and uncertainties inherent in the arrangement to establish these estimates. Uncertainties in these arrangements include implementation delays or performance issues that may or may not be within the Company's control. If some level of profitability is assured, but the related revenue and costs cannot be reasonably estimated,
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
then revenue is recognized to the extent of costs incurred until such time that the project's profitability can be estimated or the services have been completed. If the Company determines that based on its estimates its costs exceed the sales price, the entire amount of the estimated loss is accrued in the period that such losses become known.
The Company accounts for the expected loss estimate projected for the completion of the projects under the percentage of completion method. During the
three months ended April 30, 2016
and 2015, the Company recognized changes in loss estimate that negatively impacted income from continuing operations of
$1.0 million
and
$1.0 million
, respectively, and positively impacted income from operations by
$0.2 million
and
$0.4 million
, respectively.
|
|
2.
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
|
Standards To Be Implemented
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance on revenue recognition. This topic requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued an amendment to defer the effective date of this guidance by one year and allow entities to early adopt beginning after December 15, 2016. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact of the adoption of this accounting standard update on its financial statements.
In August 2014, the FASB issued new guidance on going concern. Under the new guidance, management will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently evaluating the potential impact of this standard.
In February 2016, the FASB issued new guidance on Leases. The new guidance requires that lessees recognize lease assets and lease liabilities on the balance sheet for all leases with a lease term greater than 12 months. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard.
In March 2016, the FASB issued new guidance on Stock Compensation. The new guidance is intended to simplify aspects of the accounting for share-based payment transactions, including income tax impacts, classification on the statement of cash flows and forfeitures. The various amendments within the standard require different approaches to adoption of either retrospective, modified retrospective or prospective. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard as well as the as available transition methods.
|
|
3.
|
DISCONTINUED OPERATIONS
|
Amdocs Asset Purchase Agreement
On April 29, 2015, the Company entered into an Asset Purchase Agreement (including the ancillary agreements and documents thereto, the “Amdocs Purchase Agreement") with Amdocs Limited, a Guernsey company (the “Purchaser”). Pursuant to the Amdocs Purchase Agreement, the Company agreed to sell substantially all of its assets required for operating the Company's converged, prepaid and postpaid billing and active customer management systems for wireless, wireline, cable and multi-play communication service providers (the “BSS Business”) to the Purchaser, and the Purchaser agreed to assume certain post-closing liabilities of the Company (the “Asset Sale”). The initial closing of the Asset Sale occurred on July 2, 2015.
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In connection with the Asset Sale, the Company agreed to indemnify the Purchaser for certain pre-closing liabilities and breaches of certain representations and warranties. Upon the closing
$26 million
of the purchase price was deposited into escrow to fund potential indemnification claims and certain adjustments for a period of
12
months following the closing. This
$26 million
is classified as a current asset within restricted cash in the Company's consolidated balance sheet. In August 2015 and May 2016, the Company received various claims for indemnification against the escrow from the Purchaser. While the Company continues to evaluate certain claims made, it believes several pending claims are without merit and intends to vigorously defend against them.
In connection with the Amdocs Purchase Agreement, the Company and the Purchaser have also entered into a Transition Services Agreement (the “TSA”), which provides for support services between the Company and the Purchaser in connection with the transition of the BSS Business to the Purchaser, for various periods up to 12 months following the closing of the Asset Sale. During the three months ended April 30, 2016, approximately
$0.7 million
and
$0.3 million
have been recognized for services provided under the TSA and expenses to be reimbursed by the Purchaser, respectively. As of April 30, 2016 and January 31, 2016, the balance due of
$3.1 million
and
$2.4 million
, respectively, is classified in “Other current assets” within the consolidated balance sheets.
The table below provides a breakout of the discontinued operations statements of operations.
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Revenue:
|
|
|
|
Total revenue
|
—
|
|
|
48,588
|
|
Total costs and expenses
|
1,575
|
|
|
40,380
|
|
(Loss) income from operations
|
(1,575
|
)
|
|
8,208
|
|
Benefit for income taxes
|
296
|
|
|
5,111
|
|
Net (loss) income from discontinued operations
|
$
|
(1,279
|
)
|
|
$
|
13,319
|
|
Stock-based compensation expense associated with awards granted included awards granted to BSS employees of
$0.7 million
for the
three months ended April 30, 2015
.
Acision
On August 6, 2015 (the “Closing Date”), the Company completed its acquisition (the “Acquisition”) of Acision Global Limited. Acision is a provider of messaging software solutions to CSPs and enterprises, including SMS, MMS, IM and IP messaging. The Company acquired Acision to complement its solution portfolio, enhance its market leadership, penetrate growth markets and improve its operational efficiency.
The Company acquired 100% of the equity interests of Acision in exchange for
$171.3 million
in cash (excluding cash acquired and closing costs), earnout payments (as discussed below), and
3.14 million
shares of the Company’s common stock, par value
$0.01
per share (the “Consideration Shares”), which were issued in a private placement transaction conducted pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended (the “Securities Act”). As previously disclosed, pursuant to the terms of the Purchase Agreement, an amount up to
$35.0 million
of cash consideration is subject to an earnout, contingent on the achievement of revenue targets by certain of Acision’s business activities through the first quarter of 2016. Earnout revenue targets through December 31, 2015 and March 31. 2016 were not achieved and accordingly, no earnout was paid in respect thereof. To secure claims the Company may have under the Purchase Agreement,
$10.0 million
of the cash consideration was retained in escrow. Such monies will be released to the Seller two years after completion of the Acquisition, subject to any claims.
Each party agreed to indemnify the other for certain potential liabilities and claims, subject to certain exceptions and limitations. As of each of April 30, 2016 and January 31, 2016, the Company had accrued approximately
$2.0 million
in connection with indemnification demands from two customers of Acision in connection with claims of intellectual property infringement made by third parties arising from the use of Acision’s products prior to the Company’s acquisition of Acision. Pursuant to the terms of the Purchase Agreement, the Seller agreed to indemnify the Company up to a maximum of
$10.0
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
million
for losses in connection with certain IP claims. In connection with the Acquisition, the Company reflected a
$2.0 million
indemnification asset for such claims for intellectual property infringement. In addition, pursuant to the Purchase Agreement, subject to the Company notifying the Seller within two years after the Closing Date of its claim against the Seller, the Seller is liable for the pre-Closing Date tax liabilities of Acision and its subsidiaries (the “Group”) up to an initial cap of
$10 million
. The precise cap for tax liabilities depends on whether the Company makes any payment to the Seller under the earn-out (in which case the cap may increase) and represents the aggregate liability of the Seller in respect of certain other potential claims under the Purchase Agreement. The Purchase Agreement also contains certain provisions to ensure that the Seller obtains the benefit of certain tax assets for which the Company has not paid relating broadly to pre-Closing Date periods. This is achieved generally by means of offset against payments due to the Company from the Seller. The Purchase Agreement also contains provisions relating to the preparation of tax returns for pre-Closing Date periods that have not been filed and the current period at the Closing Date, and to the conduct of tax authority claims relating to pre-Closing Date periods. The Company is liable under the Purchase Agreement for secondary tax liabilities imposed on the Seller as a result of the Company’s failure after the Closing Date to settle tax liabilities for which it is primarily responsible.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
January 31,
|
|
2016
|
|
2016
|
|
(In thousands)
|
Raw materials
|
$
|
6,918
|
|
|
$
|
7,388
|
|
Work in process
|
4,489
|
|
|
2,999
|
|
Finished goods
|
—
|
|
|
—
|
|
|
$
|
11,407
|
|
|
$
|
10,387
|
|
The changes in the carrying amount of goodwill for the
three
months ended
April 30, 2016
are as follows:
|
|
|
|
|
|
(In thousands)
|
Goodwill, gross, at January 31, 2016
|
$
|
410,274
|
|
Accumulated impairment losses at January 31, 2016
|
(156,455
|
)
|
Goodwill, net, at January 31, 2016
|
253,819
|
|
Effect of changes in foreign currencies and other
|
(1,386
|
)
|
Goodwill, net, at April 30, 2016
|
$
|
252,433
|
|
Balance at April 30, 2016
|
|
Goodwill, gross, at April 30, 2016
|
$
|
408,888
|
|
Accumulated impairment losses at April 30, 2016
|
(156,455
|
)
|
Goodwill, net, at April 30, 2016
|
$
|
252,433
|
|
The Company tests goodwill for impairment annually as of November 1 or more frequently if events or circumstances indicate the potential for an impairment exists.
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
|
|
7.
|
INTANGIBLE ASSETS, NET
|
Intangible assets, net are as follows:
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
January 31,
|
|
2016
|
|
2016
|
|
(In thousands)
|
Gross carrying amount:
|
|
|
|
Acquired technology
|
$
|
58,051
|
|
|
$
|
56,012
|
|
Customer relationships
|
150,142
|
|
|
146,382
|
|
Backlog
|
21,811
|
|
|
21,192
|
|
Leasehold contracts
|
983
|
|
|
921
|
|
Total intangible assets
|
230,987
|
|
|
224,507
|
|
Accumulated amortization:
|
|
|
|
Acquired technology
|
13,205
|
|
|
9,805
|
|
Customer relationships
|
3,147
|
|
|
743
|
|
Backlog
|
13,800
|
|
|
11,877
|
|
Leasehold contracts
|
160
|
|
|
98
|
|
Total accumulated depreciation
|
30,312
|
|
|
22,523
|
|
Total
|
$
|
200,675
|
|
|
$
|
201,984
|
|
Amortization of intangible assets was
$6.9 million
and
$0.1 million
, respectively, for the
three months ended April 30, 2016
and
2015
.
There were no impairments of intangible assets for the
three months ended April 30, 2016
and
2015
.
Estimated future amortization expense on finite-lived acquisition-related assets for each of the succeeding fiscal years is as follows:
|
|
|
|
|
|
Fiscal Years Ending January 31,
|
|
(In thousands)
|
2017 (remainder of fiscal year)
|
|
$
|
20,909
|
|
2018
|
|
25,734
|
|
2019
|
|
22,859
|
|
2020
|
|
19,323
|
|
2021 and thereafter
|
|
111,850
|
|
|
|
$
|
200,675
|
|
The Company reviews its business, manages costs and aligns resources with market demand and in conjunction with various acquisitions. As a result, the Company has taken several actions to improve its cash position, reduce fixed costs, eliminate redundancies, strengthen operational focus and better position itself to respond to market pressures or unfavorable economic conditions. Restructuring expenses are recorded within "Other operating expenses" in the consolidated statements of operations.
2016 Initiatives
During the fiscal year ended January 31, 2016, the Company approved the commencement of a restructuring plan primarily in connection with a continuation of the 2015 initiative with the acquisition of Acision and the realization of synergies. The aggregate cost of the plan is currently estimated at
$15 million
in severance and facilities-related costs, respectively, which is expected to be paid by January, 2017. During the
three months ended April 30, 2016
, the Company recorded severance-related and facilities-related costs of
$9.8 million
and
$0.2 million
, respectively, and paid
$1.5 million
and
$0.2 million
, respectively.
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2015 Initiatives
During the fiscal year ended January 31, 2016, the Company approved the commencement of a restructuring plan primarily in connection with the MSA with Tech Mahindra, the BSS Business sale and the acquisition of Acision which primarily includes a reduction of workforce included in cost of revenue, research and development and selling, general and administrative expenses. During the
three months ended April 30, 2016
, the Company recorded severance-related costs of
$0.4 million
and paid
$1.5 million
. The remaining severance-related and facilities-related costs accrued under the plan are expected to be paid by October, 2016 and December, 2024, respectively.
2014 Initiatives
During the fiscal year ended January 31, 2015, the Company commenced certain initiatives with a plan to further restructure its operations towards aligning operating costs and expenses with anticipated revenue. On September 9, 2014, the Company commenced an expansion of its previously disclosed 2014 restructuring plan. The restructuring plan has been facilitated by efficiencies gained through initiatives implemented in recent fiscal periods and the expectation that software will account for a higher portion of the Company's revenue in future periods. The restructuring is designed to align operating costs and expenses with currently anticipated revenue. The restructuring plan (as expanded) includes a reduction of workforce included in cost of revenue, research and development and selling, general and administrative expenses. During the
three months ended April 30, 2016
, the Company paid severance and facilities-related costs of
$0.0 million
and
$0.2 million
, respectively. The remaining facilities-related costs accrued under the plan are expected to be paid by December, 2024.
Fourth Quarter 2012 Initiatives and prior initiatives
During the fourth quarter of the fiscal year ended January 31, 2013, following the Share Distribution, the Company commenced certain initiatives to restructure its operations and reorganize its activities and go-to-market strategy, including a plan to restructure the operations of the Company with a view towards aligning operating costs and expenses with anticipated revenue and the new go-to-market strategy. During the
three months ended April 30, 2016
, the Company paid facilities-related costs of
$0.2 million
. The remaining facilities-related costs accrued under the plan are expected to be paid by
October 2019
.
The following tables represent a roll forward of the workforce reduction and restructuring activities noted above for the
three months ended April 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Initiative
|
|
2015 Initiative
|
|
2014 Initiative
|
|
Fourth Quarter 2012 and Prior Initiatives
|
|
|
|
Severance
Related
|
|
Facilities
Related
|
|
Severance
Related
|
|
Facilities
Related
|
|
Severance
Related
|
|
Facilities
Related
|
|
Facilities
Related
|
|
Total
|
|
(In thousands)
|
January 31, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,179
|
|
|
$
|
398
|
|
|
$
|
13
|
|
|
$
|
384
|
|
|
$
|
2,261
|
|
|
$
|
6,235
|
|
Expenses
|
9,775
|
|
|
210
|
|
|
407
|
|
|
17
|
|
|
—
|
|
|
84
|
|
|
6
|
|
|
10,499
|
|
Change in assumptions
|
—
|
|
|
—
|
|
|
(271
|
)
|
|
11
|
|
|
4
|
|
|
16
|
|
|
5
|
|
|
(235
|
)
|
Translation and other adjustments
|
67
|
|
|
—
|
|
|
71
|
|
|
8
|
|
|
—
|
|
|
(16
|
)
|
|
—
|
|
|
130
|
|
Paid or utilized
|
(1,532
|
)
|
|
(210
|
)
|
|
(1,548
|
)
|
|
(93
|
)
|
|
(17
|
)
|
|
(176
|
)
|
|
(224
|
)
|
|
(3,800
|
)
|
April 30, 2016
|
$
|
8,310
|
|
|
$
|
—
|
|
|
$
|
1,838
|
|
|
$
|
341
|
|
|
$
|
—
|
|
|
$
|
292
|
|
|
$
|
2,048
|
|
|
$
|
12,829
|
|
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Initiative
|
2014 Initiative
|
|
Fourth Quarter 2012 and Prior Initiatives
|
|
|
|
Severance
Related
|
|
Facilities
Related
|
Severance
Related
|
|
Facilities
Related
|
|
Facilities
Related
|
|
Total
|
|
(In thousands)
|
January 31, 2015
|
$
|
—
|
|
|
$
|
—
|
|
$
|
2,843
|
|
|
$
|
1,837
|
|
|
$
|
3,086
|
|
|
$
|
7,766
|
|
Expenses
|
4,097
|
|
|
161
|
|
23
|
|
|
40
|
|
|
25
|
|
|
$
|
4,346
|
|
Change in assumptions
|
—
|
|
|
—
|
|
(482
|
)
|
|
93
|
|
|
18
|
|
|
$
|
(371
|
)
|
Translation and other adjustments
|
(1
|
)
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
(1
|
)
|
Paid or utilized
|
(508
|
)
|
|
(130
|
)
|
(1,217
|
)
|
|
(374
|
)
|
|
(333
|
)
|
|
$
|
(2,562
|
)
|
April 30, 2015
|
$
|
3,588
|
|
|
$
|
31
|
|
$
|
1,167
|
|
|
$
|
1,596
|
|
|
$
|
2,796
|
|
|
$
|
9,178
|
|
Includes restructuring expense associated with BSS employees of
$(0.1) million
and
$0.6 million
, respectively, for the
three months ended April 30, 2016
and
2015
.
Spanish Government Sponsored Loans
On August 1, 2014, the Company assumed in connection with the acquisition of Solaiemes approximately
$1.4 million
of debt. The debt consists of loans sponsored by the government of Spain that are extended for research and development projects. The loans are subject to certain acceleration clauses which are not considered probable.
Acision Indebtedness
In connection with the of Acision acquisition, Acision, in consultation with the Company, entered into the previously disclosed Amendment with the requisite lenders under the Acision Credit Agreement governing Acision’s existing approximately
$156.0 million
senior credit facility, which Amendment became effective upon completion of the Acquisition on August 6, 2015 (see Note 4 Acquisition).
The loan commenced on December 15, 2014, and accrues interest at
10.75%
(
9.75%
plus Libor) payable quarterly. Capital repayments are also payable quarterly;
1.25%
of the outstanding principal amount of the loan per quarter in 2015,
1.875%
of the outstanding principal amount of the loan per quarter in 2016 and
2.5%
of the outstanding principal amount of the loan per quarter in 2017 and 2018. The remaining balance is due for repayment on December 15, 2018.
The Acision Credit Agreement contains customary representations and warranties and affirmative, restrictive and financial covenants. These provisions, with certain exceptions, restrict Acision’s ability and the ability of its subsidiaries to (i) incur additional indebtedness, (ii) create, incur, assume or permit to exist any liens, (iii) enter into mergers, consolidations or similar transactions, (iv) make investments and acquisitions, (v) make certain dispositions of assets, (vi) make dividends, distributions and prepayments of certain indebtedness, and (vii) enter into certain transactions with affiliates. The Acision Credit Agreement also contains customary events of default, including, among other things, non-payment defaults, covenant defaults, material adverse effect defaults, bankruptcy and insolvency defaults and material judgment default.
The Acision Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay principal or interest under the new credit agreement when due, failure to comply with covenants, any representation or warranty made by Acision proving to be inaccurate in any material respect, a change of control (which was triggered by the acquisition of Acision and waived by the requisite lenders in the aforementioned amendment). Upon an event of default, all of Acision's indebtedness under the Acision Credit Agreement may be declared immediately due and payable, and the lenders' commitments to provide loans under the Acision Credit Agreement may be terminated.
The Acision Credit Agreement also contains a number of affirmative reporting and operational covenants, including a requirement to submit consolidated financial statements to the lenders within certain periods after the end of each fiscal year and quarter. On May 13, 2016, the Company entered into an amendment agreement with the requisite lenders to extend the period requirement to submit consolidated financial statements for the fiscal year ended December 31, 2015 and for the three months ended March 31, 2016 to July 5, 2016.
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Acision Credit Agreement also contains a financial covenant that requires Acision to maintain under IFRS a Consolidated Debt to Consolidated Earnings before Interest, Taxes, Depreciation and Amortization (or Consolidated EBITDA) (all of the foregoing as defined in the Acision Credit Agreement) leverage ratio measured quarterly of no greater than
3.75
to 1. At the last covenant reporting date, March 31, 2016, the Company was in compliance with the financial covenant under IFRS and its consolidated leverage ratio was approximately
3.47
to 1.
As of
April 30, 2016
and
January 31, 2016
, the balance of total outstanding debt is as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
April 30, 2016
|
|
January 31, 2016
|
Acision debt
|
|
|
|
|
10.75% notes due 2018
|
|
$
|
149,000
|
|
|
$
|
152,000
|
|
Solaiemes debt:
|
|
|
|
|
3.98% note due 2017
|
|
167
|
|
|
159
|
|
0.53% note due 2018
|
|
317
|
|
|
300
|
|
2.48% note due 2018
|
|
86
|
|
|
81
|
|
3.95% note due 2020
|
|
86
|
|
|
81
|
|
0% note due 2022
|
|
356
|
|
|
337
|
|
|
|
150,012
|
|
|
152,958
|
|
Less: current portion
|
|
13,262
|
|
|
12,248
|
|
Long-term debt
|
|
$
|
136,750
|
|
|
$
|
140,710
|
|
Aggregate debt maturities for each of the succeeding fiscal years are as follows:
|
|
|
|
|
|
Fiscal Years Ending January 31,
|
|
(In thousands)
|
2017 (remainder of fiscal year)
|
|
$
|
13,262
|
|
2018
|
|
16,265
|
|
2019
|
|
120,252
|
|
2020
|
|
71
|
|
2020 and thereafter
|
|
162
|
|
|
|
$
|
150,012
|
|
Xura Ltd. Lines of Credit
As of
April 30, 2016
and
January 31, 2016
, Xura Ltd., the Company’s wholly-owned Israeli subsidiary, had a
$5.0 million
and
$17.0 million
, respectively, line of credit with a bank to be used for various performance guarantees to customers and vendors, letters of credit and foreign currency transactions in the ordinary course of business. During the
three months ended April 30, 2016
, Xura Ltd. decreased the line of credit from
$17.0 million
to
$5.0 million
with a corresponding decrease in the cash balances Xura Ltd. is required to maintain with the bank to
$5.0 million
. This line of credit is not available for borrowings. The line of credit bears no interest and is subject to renewal on an annual basis. Xura Ltd. is required to maintain cash balances with the bank of no less than the capacity under the line of credit at all times regardless of amounts utilized under the line of credit. As of
April 30, 2016
and
January 31, 2016
, Xura Ltd. had utilized
$0.7 million
and
$10.3 million
, respectively, of capacity under the line of credit for guarantees and foreign currency transactions.
As of
April 30, 2016
and
January 31, 2016
, Xura Ltd. had an additional line of credit with a bank for
$5.0 million
, to be used for borrowings, various performance guarantees to customers and vendors, letters of credit and foreign currency transactions in the ordinary course of business. Borrowings under the line of credit bear interest at an annual rate of London Interbank Offered Rate plus a variable margin determined based on the bank’s underlying cost of capital. Xura Ltd. is required to maintain cash balances with the bank of no less than the capacity under the line of credit at all times regardless of amounts borrowed or utilized under the line of credit. As of
April 30, 2016
and
January 31, 2016
, Xura Ltd. had no outstanding
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
borrowings under the line of credit. As of
April 30, 2016
and
January 31, 2016
, Xura Ltd. had utilized
$3.9 million
and
$3.7 million
, respectively, of capacity under the line of credit for guarantees and foreign currency transactions.
Other than Xura Ltd.’s requirement to maintain cash balances with the banks as discussed above, the lines of credit have no financial covenants. These cash balances required to be maintained with the banks were classified as “Restricted cash and bank deposits” and “Long-term restricted cash” included within the condensed consolidated balance sheets as of
April 30, 2016
and
January 31, 2016
.
|
|
10.
|
DERIVATIVES AND FINANCIAL INSTRUMENTS
|
The Company entered into derivative arrangements to manage a variety of risk exposures during the
three months ended April 30, 2015
, including foreign currency risk related to forecasted foreign currency denominated payroll costs. The Company assesses the counterparty credit risk for each party prior to entering into its derivative financial instruments and in valuing the derivative instruments for the periods presented.
Forward Contracts
During the
three months ended April 30, 2015
, the Company entered into a series of short-term foreign currency forward contracts to limit the variability in exchange rates between the U.S. dollar (the “USD”) and the new Israeli shekel (“NIS”) to hedge probable cash flow exposure from expected future payroll expense. The transactions qualified for cash flow hedge accounting under the FASB’s guidance and there was no hedge ineffectiveness. Accordingly, the Company recorded all changes in fair value of the forward contracts as part of other comprehensive income (loss) in the condensed consolidated statements of comprehensive income (loss). Such amounts are reclassified to the statements of operations when the effects of the item being hedged are recognized. There were no outstanding currency forward contract as of April 30, 2016 or January 31, 2016.
The following tables summarize the Company’s classification of gains and losses on derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, 2015
|
|
|
Gain (Loss)
|
Type of Derivative
|
|
Recognized in
Other Comprehensive
Income (Loss)
|
|
Reclassified from
Accumulated
Other Comprehensive
Income into
Statement
of Operations
|
|
Recognized in
foreign currency transaction gain (loss), net
|
|
|
(In thousands)
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
Foreign currency forward
|
|
$
|
322
|
|
|
$
|
(107
|
)
|
|
$
|
—
|
|
Total
|
|
$
|
322
|
|
|
$
|
(107
|
)
|
|
$
|
—
|
|
There were no gains or losses from ineffectiveness of these hedges recorded for the
three months ended April 30, 2015
.
|
|
11.
|
FAIR VALUE MEASUREMENTS
|
Under the FASB’s guidance, fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., “the exit price”).
In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. The FASB's guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company's judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
|
|
•
|
Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.
|
|
|
•
|
Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
|
•
|
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in transfers within fair value measurement hierarchy. All transfers into and/or out of all levels are assumed to occur at the end of the reporting period. The Company did not have any transfers between levels of the fair value measurement hierarchy during the
three months ended April 30, 2016
and
2015
.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value of financial instruments is estimated by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Money Market Funds.
The Company values these assets using quoted market prices for such funds.
Derivative assets and liabilities.
The fair value of derivative instruments is based on quotes or data received from counterparties and third party financial institutions. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and market rates for similar contracts using readily observable market prices thereof.
The following tables present financial instruments according to the fair value hierarchy as defined by the FASB’s guidance:
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2016
|
|
Quoted Prices
to Active
Markets for
Identical
Instruments
(Level 1)
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fair Value
|
|
(In thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
2,405
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2016
|
|
Quoted Prices
to Active
Markets for
Identical
Instruments
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fair Value
|
|
(In thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
10,403
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,403
|
|
|
|
(1)
|
Money market funds are classified in “Cash and cash equivalents” within the condensed consolidated balance sheets.
|
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company also measures certain assets and liabilities at fair value on a nonrecurring basis. The Company measures non-financial assets, classified within Level 3 of the fair value hierarchy, including goodwill, intangible assets and property and equipment, at fair value when there is an indication of impairment. These assets are recorded at fair value only when an impairment expense is recognized. The Company has elected not to apply the fair value option for non-financial assets and non-financial liabilities.
The carrying amounts of cash and cash equivalents, restricted cash and bank deposits, accounts receivable and accounts payable are reasonable estimates of their fair value.
|
|
12.
|
OTHER LONG-TERM LIABILITIES
|
Other long-term liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
January 31,
|
|
2016
|
|
2016
|
|
(In thousands)
|
Liability for severance pay
|
$
|
449
|
|
|
$
|
742
|
|
Tax contingencies
|
82,096
|
|
|
77,503
|
|
Long-term contingencies
|
25,699
|
|
|
22,442
|
|
Other long-term liabilities
|
5,699
|
|
|
6,498
|
|
Total
|
$
|
113,943
|
|
|
$
|
107,185
|
|
13.
STOCK-BASED COMPENSATION
2012 Stock Incentive Compensation Plan
In October 2012, in connection with the Share Distribution the Company adopted the 2012 Stock Incentive Compensation Plan, which was amended and restated in June 2015 (as amended, the "2012 Incentive Plan"). The 2012 Incentive Plan provides for the issuance of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance-based compensation awards, and other stock-based awards (referred to collectively as the "Awards") based on shares of the Company's common stock (referred to as "Shares"). The Company's employees, non-employee directors and consultants as well as employees and consultants of its subsidiaries and affiliates are eligible to receive Awards. In June 2015, the Company registered additional shares under the 2012 Incentive Plan in connection with its amendment and restatement.
A total of
5.0 million
Shares are reserved for issuance under future Awards to be granted under the 2012 Incentive Plan following the effective date of the plan (referred to as the "Future Awards").
As of
April 30, 2016
, stock options to purchase
1,377,815
Shares and additional Awards covering
557,771
Shares were outstanding. As of
April 30, 2016
, an aggregate of
2,953,704
Future Awards are available for future grant under the 2012 Incentive Plan.
Employee Stock Purchase Plan
In June 2015, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The ESPP authorizes an aggregate of 840,000 Shares to be purchased by eligible employees. The ESPP allows eligible employees to purchase Shares at certain regular purchase dates through payroll deductions of up to a maximum of 15% of the employee’s compensation. The purchase price for each offering period is 85% of the lesser of (a) the fair market value of the Shares on the offering date or (b) the fair market value of the Shares on the purchase date. During the three months ended April 30, 2016,
13,272
shares were awarded upon purchase at the end of offering period under the ESPP plan.
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Share-Based Awards
Stock-based compensation expense associated with awards for the
three months ended April 30, 2016
and
2015
included in the condensed consolidated statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Stock options:
|
|
|
|
Service costs
|
$
|
(6
|
)
|
|
$
|
21
|
|
Research and development, net
|
57
|
|
|
49
|
|
Selling, general and administrative
|
492
|
|
|
617
|
|
|
543
|
|
|
687
|
|
Restricted/Deferred stock awards:
|
|
|
|
Service costs
|
136
|
|
|
762
|
|
Research and development, net
|
201
|
|
|
216
|
|
Selling, general and administrative
|
1,365
|
|
|
1,391
|
|
|
1,702
|
|
|
2,369
|
|
ESPP
|
|
|
|
Service costs
|
14
|
|
|
—
|
|
Research and development, net
|
7
|
|
|
—
|
|
Selling, general and administrative
|
15
|
|
|
—
|
|
|
36
|
|
|
—
|
|
Total
(1)
|
$
|
2,281
|
|
|
$
|
3,056
|
|
(1) Stock-based compensation expense associated with awards granted, including awards granted to BSS employees of
$0.7 million
for the
three months ended April 30, 2015
.
Restricted Awards and Stock Options
The Company grants restricted stock unit awards subject to vesting provisions (“RSUs”) and stock options to certain key employees and director stock unit awards (“DSUs”) to non-employee directors (such RSUs and DSUs collectively referred to as “Restricted Awards”). For the
three months ended April 30, 2016
and 2015, the Company did not grant any Restricted Awards or stock options.
For the
three months ended April 30, 2016
and 2015, there were no shares issued upon exercise of stock options under the 2012 Incentive Plan.
The fair market value of the Company's Restricted Awards that vested during the
three months ended April 30, 2016
and 2015 was
$0.03 million
and
$2.2 million
, respectively.
As of
April 30, 2016
, the unrecognized Company compensation expense, net of estimated forfeitures, related to unvested Restricted Awards was
$7.1 million
, which is expected to be recognized over a weighted-average period of
2.01
years.
The Company's outstanding stock options as of
April 30, 2016
include unvested stock options to purchase
769,311
Shares with a weighted-average grant date fair value of
$6.55
, an expected term of
4.0
years and a total fair value of
$5.0 million
. The unrecognized compensation expenses related to the remaining unvested stock options to purchase Shares was
$3.0 million
, which is expected to be recognized over a weighted-average period of
1.93
years.
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
|
|
14.
|
EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME
|
Components of equity are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Balance, January 31
|
$
|
199,295
|
|
|
$
|
13,382
|
|
Net loss
|
(26,807
|
)
|
|
(26,661
|
)
|
Unrealized gain for cash flow hedge positions, net of reclassification adjustments and net of zero tax
|
—
|
|
|
429
|
|
Foreign currency translation adjustment
|
4,270
|
|
|
2,695
|
|
Stock-based compensation expense
|
2,281
|
|
|
3,056
|
|
Repurchase of common stock in connection with tax liabilities upon settlement of stock awards
|
—
|
|
|
(81
|
)
|
Employee stock purchase plan
|
221
|
|
|
—
|
|
Balance, April 30
|
$
|
179,260
|
|
|
$
|
(7,180
|
)
|
Accumulated Other Comprehensive Income
The components of Accumulated Other Comprehensive Income (“AOCI”), net of zero tax, were as follows (in thousands, unaudited):
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
Balance as of January 31, 2016
|
$
|
23,107
|
|
Other comprehensive income
|
4,270
|
|
Balance as of April 30, 2016
|
$
|
27,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gains on Cash Flow Hedges
|
|
Total
|
Balance as of January 31, 2015
|
$
|
30,939
|
|
|
$
|
(117
|
)
|
|
$
|
30,822
|
|
Other comprehensive income before reclassifications
|
2,695
|
|
|
322
|
|
|
3,017
|
|
Amounts reclassified from AOCI
|
—
|
|
|
107
|
|
|
107
|
|
Other comprehensive income
|
2,695
|
|
|
429
|
|
|
3,124
|
|
Balance as of April 30, 2015
|
$
|
33,634
|
|
|
$
|
312
|
|
|
$
|
33,946
|
|
The amounts of unrealized losses (gains) on cash flow hedges reclassified out of accumulated other comprehensive income (loss) into the condensed consolidated condensed statements of operations, with presentation location, were as follows:
|
|
|
|
|
(In thousands)
|
Three Months Ended April 30, 2015
|
Cost of revenue
|
$
|
47
|
|
Research and development, net
|
20
|
|
Selling, general and administrative
|
40
|
|
Total
|
$
|
107
|
|
Net Operating Loss Rights Agreement
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Effective April 29, 2015, the Company's Board of Directors adopted a rights plan (the “Rights Plan”) and declared a dividend of one preferred share purchase right for each outstanding share of common stock. The dividend is payable to the Company's stockholders of record as of May 11, 2015.
The Company's Board of Directors adopted the Rights Plan in an effort to protect stockholder value by attempting to diminish the risk that the Company's ability to use its net operating losses and unrealized losses (collectively, the “NOLs”) to reduce potential future federal income tax obligations may become substantially limited. The Company has experienced and may continue to experience substantial operating losses, including realized losses for tax purposes from sales inventory previously written down for financial statement purposes, which would produce NOLs. Under the Internal Revenue Code and regulations promulgated by the U.S. Treasury Department, the Company may “carry forward” these NOLs in certain circumstances to offset any current and future taxable income and thus reduce the Company's federal income tax liability, subject to certain requirements and restrictions. To the extent that the NOLs do not otherwise become limited, the Company projects to be able to carry forward a significant amount of NOLs, and therefore these NOLs could be a substantial asset to the Company. However, if the Company experiences an “Ownership Change,” as defined in Section 382 of the Internal Revenue Code, the ability to use the NOLs, including NOLs later arising from sales inventory previously written down, will be substantially limited, and the timing of the usage of the NOLs could be substantially delayed, which could therefore significantly impair the value of that asset.
The Rights Plan is intended to act as a deterrent to any person or group acquiring
4.9%
or more of the Company's outstanding common stock (an “Acquiring Person”) without the approval of the Company's Board of Directors. Stockholders who own
4.9%
or more of the Company's outstanding common stock as of the close of business on May 11, 2015 will not trigger the Rights Plan so long as they do not (i) acquire any additional shares of common stock or (ii) fall under
4.9%
ownership of common stock and then re-acquire
4.9%
or more of the common stock of the Company. The Rights Plan does not exempt any future acquisitions of common stock by such persons. Any rights held by an Acquiring Person are void and may not be exercised. The Board of Directors may, in its sole discretion, exempt any person or group from being deemed an Acquiring Person for purposes of the Rights Plan.
The Company's Board of Directors authorized the issuance of one right per each outstanding share of the Company's common stock payable to the Company's stockholders of record as of May 11, 2015. Subject to the terms, provisions and conditions of the Rights Plan, if the rights become exercisable, each right would initially represent the right to purchase from the Company one one-thousandth of a share of the Company's Series A Junior Participating Preferred Stock (the “Series A Preferred Stock”) for a purchase price of
$100.00
(the “Purchase Price”). If issued, each fractional share of preferred stock would give the stockholder approximately the same dividend, voting and liquidation rights as one share of the Company's common stock. However, prior to exercise, a right does not give its holder any rights as a stockholder of the Company, including without limitation any dividend, voting or liquidation rights.
The rights and the Rights Plan will expire on the earliest of (i) April 29, 2018, (ii) the time at which the rights are redeemed pursuant to the Rights Agreement, (iii) the time at which the rights are exchanged pursuant to the Rights Agreement, (iv) the repeal of Section 382 of the Code or any successor statute if the Board of Directors determines that the Rights Agreement is no longer necessary for the preservation of Tax Benefits, (v) the beginning of a taxable year of the Company to which the Board of Directors determines that no Tax Benefits may be carried forward and (vi) April 29, 2016 if Stockholder Approval has not been obtained.
Basic loss per share is computed using the weighted average number of shares of common stock outstanding. For purposes of computing diluted loss per share attributable to the Company's stockholders, shares issuable upon exercise of stock options and deliverable in settlement of unvested Restricted Awards are included in the weighted average number of shares of common stock outstanding, except when the effect would be antidilutive.
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The calculation of loss per share is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
2016
|
|
2015
|
|
(In thousands, except per share data)
|
Numerator:
|
|
|
|
Net loss attributable to continuing operations
|
$
|
(25,528
|
)
|
|
$
|
(39,980
|
)
|
Net (loss) earnings attributable to discontinued operations
|
(1,279
|
)
|
|
13,319
|
|
Denominator:
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
25,040
|
|
|
21,865
|
|
(Loss) earnings per share basic and diluted:
|
|
|
|
Loss per share from continuing operations
|
$
|
(1.02
|
)
|
|
$
|
(1.83
|
)
|
(Loss) earnings per share from discontinued operations
|
(0.05
|
)
|
|
0.61
|
|
Basic and diluted loss per share
|
$
|
(1.07
|
)
|
|
$
|
(1.22
|
)
|
As a result of the Company’s net loss from continuing operation during the
three months ended April 30, 2016
and 2015, the diluted earnings per share computation excludes
0.1 million
and
0.1 million
shares, respectively, of stock-based awards from the calculations because their inclusion would have been anti-dilutive.
The Company's quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented. The significant differences that impact the effective tax rate relate to the difference between the U.S. federal statutory rate and the rates in foreign tax jurisdictions, withholding taxes, incremental valuation allowances and tax contingencies.
The Company recorded an income tax benefit from continuing operations of
$8.9 million
for the
three months ended April 30, 2016
, representing an effective tax benefit rate of
25.8%
compared with an income tax expense from operations of
$4.8 million
, representing an effective tax rate of
(13.6)%
for the
three months ended April 30, 2015
. During the three months ended April 30, 2016 and 2015, the effective tax rates were different from the U.S. statutory rate primarily due to the fact that the Company did not record an income tax benefit on losses incurred in certain of the Company's tax jurisdictions in which the Company maintains valuation allowances against the Company's net deferred tax assets, statutory tax rate differences in various foreign jurisdictions in which the company operates and withholding taxes. The income tax provisions from continuing operations are comprised of income tax expense recorded in non-loss tax jurisdictions, withholding taxes, incremental valuation allowances and certain tax contingencies. The change in the Company's effective tax rate for the three months ended April 30, 2016, compared to the three months ended April 30, 2015 was primarily attributable to changes in the relative mix of income and losses across various tax jurisdictions, a reduction of withholding tax provisions, a reduction in the provisions for tax contingencies and a reduction in the U.S. deferred tax provision for non reversing temporary differences relating to goodwill. The three months ended April 30, 2016 tax provision also includes the operations of Acision compared to the pre-acquisition operations for the three months ended April 30, 2015.
As required by the authoritative guidance on accounting for income taxes, the Company evaluates the realizability of deferred tax assets on a tax jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more-likely-than-not realizable, the Company establishes a valuation allowance. The Company determined that there is sufficient negative evidence to maintain valuation allowances against certain of the Company's federal, state and foreign deferred tax assets as a result of historical losses in the most recent three-year period in the U.S. and certain state and foreign tax jurisdictions. During the three months ended April 30, 2016, the Company reassessed its valuation allowance requirements taking into account the disposition of the BSS business and concluded that it intends to maintain its valuation allowance until sufficient positive evidence exists to support its reversal.
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company regularly assesses the adequacy of the Company's provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the Company may adjust the reserves for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. As of
April 30, 2016
, the total amount of unrecognized tax benefits that, if recognized, would impact the Company's effective tax rate were approximately
$81.7 million
(see Note 12, Other Long-Term Liabilities). The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of
April 30, 2016
could decrease by approximately
$19.4 million
within the next twelve months as a result of settlements of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional taxes, the adjustment of deferred taxes, including the need for additional valuation allowances and the recognition of tax benefits.
The Company's policy is to include interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes in the condensed consolidated statements of operations. Accrued interest and penalties was
$36.5 million
as of
April 30, 2016
.
|
|
17.
|
COMMITMENTS AND CONTINGENCIES
|
Indemnification Obligations
In the normal course of business, the Company provides indemnification to various customers against claims of intellectual property infringement made by third parties arising from the use of the Company's products. The Company evaluates its indemnification obligations for potential losses and in its evaluation considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Generally, the Company has not encountered significant expenses as a result of such indemnification provisions. As of
April 30, 2016
, the Company had accrued approximately
$2.0 million
in connection with indemnification demands from two customers of Acision in connection with claims of intellectual property infringement made by third parties arising from the use of Acision’s products prior to the Company's acquisition of Acision. Pursuant to the terms of the Purchase Agreement, the Seller agreed to indemnify the Company up to a maximum of
$10.0 million
for losses in connection with certain IP claims. In connection with the Acquisition, the Company reflected a
$2.0 million
indemnification asset for such claims for intellectual property infringement.
To the extent permitted under state laws or other applicable laws, the Company has agreements in which it agreed to indemnify its directors and officers for certain events or occurrences while the director or officer is, or was, serving at the Company's request in such capacity. The indemnification period covers all pertinent events and occurrences during the Company's director's or officer's lifetime. The maximum potential amount of future payments that the Company could be required to make under these indemnification agreements is unlimited; however, the Company has certain director and officer insurance coverage that limits the Company's exposure and enables the Company to recover a portion of any future amounts paid. The Company is not able to estimate the fair value of these indemnification agreements in excess of applicable insurance coverage, if any.
In addition, under the Share Distribution Agreements the Company entered into in connection with the Share Distribution, the Company agreed to indemnify CTI and its affiliates (including Verint following the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution.
As a result of the Verint Merger, Verint assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the actions discussed below. Under the terms of the Distribution Agreement between CTI and the Company relating to the Share Distribution, Verint, as successor to CTI, is entitled to indemnification from the Company for any losses it suffers in its capacity as successor-in-interest to CTI in connection with these actions. As of the closing of the Verint Merger, the Company recognized the estimated fair value of the potential indemnification liability.
Israeli Optionholder Class Action
CTI and certain of its former subsidiaries, including Xura Ltd. (formerly Xura Ltd., a subsidiary of the Company), were named as defendants in
four
potential class action litigations in the State of Israel involving claims to recover damages incurred as a result of purported negligence or breach of contract due to previously-settled allegations regarding illegal backdating of CTI options that allegedly prevented certain current or former employees from exercising certain stock options. The Company intends to vigorously defend these actions.
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Two
cases were filed in the Tel Aviv District Court against CTI on March 26, 2009, by plaintiffs Katriel (a former Xura Ltd. employee) and Deutsch (a former Verint Systems Ltd. employee). The Katriel case (Case Number 1334/09) and the Deutsch case (Case Number 1335/09) both seek to approve class actions to recover damages that are claimed to have been incurred as a result of CTI’s negligence in reporting and filing its financial statements, which allegedly prevented the exercise of certain stock options by certain employees and former employees. By stipulation of the parties, on September 30, 2009, the court ordered that these cases, including all claims against CTI in Israel and the motion to approve the class action, be stayed until resolution of the actions pending in the United States regarding stock option accounting, without prejudice to the parties’ ability to investigate and assert the unique facts, claims and defenses in these cases. On May 7, 2012, the court lifted the stay, and the plaintiffs have filed an amended complaint and motion to certify a class of plaintiffs in a single consolidated class action. The defendants responded to this amended complaint on November 11, 2012, and the plaintiffs filed a further reply on December 20, 2012. A pre-trial hearing for the case was held on December 25, 2012, during which all parties agreed to attempt to settle the dispute through mediation.
The mediation process ended without success. According to the parties’ consent to submit summations in the motion to certify the claims as a class action (the “Motion to Certify”), including the certification of the class of plaintiffs, the court held the following dates for submission of summations: Summations on behalf of the plaintiffs were submitted on August 31, 2014; Summations on behalf of the defendants were submitted on November 20, 2014; and summations of response by the plaintiffs were submitted on December 30, 2014. On February 9, 2015, the Judge presiding over the case recused herself due to a conflict of interests. On March 30, 2015, the plaintiffs filed a motion to the Court seeking to have the case assigned to a new presiding Judge and as a result on April 4, 2015 a new presiding judge was assigned to the case. The parties are now waiting for the Court’s decision on the Motion to Certify.
Two
cases were also filed in the Tel Aviv Labor Court by plaintiffs Katriel and Deutsch, and both sought to approve class actions to recover damages that are claimed to have been incurred as a result of breached employment contracts, which allegedly prevented the exercise by certain employees and former employees of certain CTI and Verint stock options, respectively. The Katriel litigation (Case Number 3444/09) was filed on March 16, 2009, against Xura Ltd., and the Deutsch litigation (Case Number 4186/09) was filed on March 26, 2009, against Verint Systems Ltd. The Tel Aviv Labor Court has ruled that it lacks jurisdiction, and both cases have been transferred to the Tel Aviv District Court. These cases have been consolidated with the Tel Aviv District Court cases discussed above.
The Company has not accrued for these matters as the potential loss is currently not probable or estimable.
Starhome Sale and Indemnification
Starhome was a CTI subsidiary (
66.5%
owned prior to the disposition). On September 19, 2012, CTI, in order to ensure it could meet the conditions of the Verint Merger, contributed to the Company its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement discussed below. The Starhome Disposition was completed on October 19, 2012. Under the terms of the Starhome Share Purchase Agreement, the Company has certain indemnification obligations to the purchaser, subject to certain exceptions and limitations.
Amdocs Asset Purchase Agreement
On April 29, 2015, the Company entered into an Asset Purchase Agreement (including the ancillary agreements and documents thereto, the “Amdocs Purchase Agreement”) with Amdocs Limited, a Guernsey company (the “Purchaser”). Pursuant to the Amdocs Purchase Agreement, the Company’s BSS Business to the Purchaser, and the Purchaser agreed to assume certain post-closing liabilities of the Company (the “Asset Sale”). The initial closing of the Asset Sale occurred on July 2, 2015. The total cash purchase price payable by the Purchaser to the Company in connection with the Asset Sale was approximately
$271.7 million
, including purchase price adjustment of approximately
$0.7 million
, of which an aggregate of
$5.5 million
was paid upon certain deferred closings.
In connection with the Asset Sale, the Company agreed to indemnify Amdocs for certain pre-closing liabilities and breaches of certain representations and warranties. Upon the closing,
$26 million
of the purchase price was deposited into escrow to fund potential indemnification claims and certain adjustments for a period of
12
months following the closing. This $26.0 million is classified as a current asset within restricted cash in the Company's consolidated balance sheet (see Note 3, Discontinued Operations). In August 2015 and May 2016, the Company received various claims for indemnification against the escrow from Amdocs. While the Company continues to evaluate certain claims made, it believes several pending claims are without merit and intends to vigorously defend against them.
Agreement with Tech Mahindra
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On April 14, 2015, the Company entered into a MSA with Tech Mahindra pursuant to which Tech Mahindra performs certain services for the Company’s business on a global basis. The services include research and development, project deployment and delivery and maintenance and support for certain customers of the Company. In connection with the transaction, approximately
500
employees of the Company and its subsidiaries have been rehired by Tech Mahindra or its affiliates.
Under the MSA, the Company is obligated to pay to Tech Mahindra in the aggregate approximately
$212 million
in base fees for services to be provided pursuant to the MSA for a term of six years, renewable at the Company’s option. The services under the MSA started on June 1, 2015.
The Company has the right to terminate the MSA for convenience subject to the payment of certain termination fees. The Company may terminate the MSA upon certain material breaches, certain material performance failures or violations of applicable law by Tech Mahindra without termination fees. Tech Mahindra may terminate the MSA upon certain material breaches by the Company, including the failure to pay undisputed amounts. Upon any termination or expiration, Tech Mahindra will provide reverse transition services to transition the services being provided by Tech Mahindra pursuant to the MSA back to the Company or its designee. The MSA contains certain customary indemnification provisions by both the Company and Tech Mahindra.
Acision
On August 6, 2015, the Company completed its acquisition of Acision pursuant to the terms of the share sale and purchase agreement, dated June 15, 2015.
The Acision Purchase Agreement contains customary representations, warranties and covenants, by the parties thereto. Each party agreed to indemnify the other for certain potential liabilities and claims, subject to certain exceptions and limitations (see indemnification obligation included Note 4, Acquisition).
Guarantees
The Company provides certain customers in the ordinary course of business with financial performance guarantees, which in certain cases are backed by standby letters of credit or surety bonds, the majority of which are cash collateralized and accounted for as restricted cash and bank deposits. The Company is only liable for the amounts of those guarantees in the event of its nonperformance, which would permit the customer to exercise the guarantee. As of
April 30, 2016
and
January 31, 2016
, the Company believes that it was in compliance with its performance obligations under all contracts for which there is a financial performance guarantee, and that any liabilities arising in connection with these guarantees will not have a material adverse effect on the Company’s condensed consolidated results of operations, financial position or cash flows. The Company also obtained bank guarantees primarily to provide customer assurance relating to the performance of certain obligations required by customer agreements for the guarantee of certain payment obligations. These guarantees, which aggregated
$9.6 million
and
$19.1 million
as of
April 30, 2016
and
January 31, 2016
, respectively, are generally scheduled to be released upon the Company’s performance of specified contract milestones, a majority of which are scheduled to be completed at various dates through
July 31, 2017
.
Legal Proceedings
From time to time, the Company and its subsidiaries are subject to claims in legal proceedings arising in the normal course of business. The Company does not believe that it or its subsidiaries are currently party to any pending legal action not described herein or disclosed in the consolidated financial statements that could reasonably be expected to have a material adverse effect on its business, financial condition or results of operations.
Brazil Tax and Labor Contingencies
The Company's operations in Brazil are involved in various litigation matters and have received or been the subject of numerous governmental assessments related to indirect and other taxes, as well as disputes associated with former Company employees. The tax matters, which comprise a significant portion of the contingencies, principally relate to claims for taxes on the transfers of inventory, municipal service taxes on rentals and gross revenue taxes. The Company is disputing these tax matters and intends to vigorously defend its positions. The labor matters principally relate to claims made by former Company employees for pay wages, social security and other related labor benefits, as well as related tax obligations. As of
April 30, 2016
, the total amounts related to the reserved portion of the tax and labor contingencies was
$10.3 million
and the unreserved portion of the tax and labor contingencies totaled approximately
$37.8 million
. With respect to the unreserved balance, these
XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
have been assessed by management as being either remote or possible as to the likelihood of ultimately resulting in a loss to the Company. Local laws and regulations often require that the Company make deposits or post other security in connection with such proceedings. As of
April 30, 2016
, the Company had
$5.2 million
of deposits, included in Long-term restricted cash, with the government in Brazil for claims that the Company is disputing which provides security with respect to these matters. Generally, any deposits would be refundable to the extent the matters are resolved in the Company's favor. Management routinely assesses these matters as to probability of ultimately incurring a liability against the Company's Brazilian operations and the Company records its best estimate of the ultimate loss in situations where management assesses the likelihood of an ultimate loss as probable.
Agreement and Plan of Merger
On May 23, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sierra Private Holdings II Ltd., a private limited company incorporated under the laws of England and Wales (“Sierra”), and Sierra Private Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Sierra (“Merger Sub”), under which Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing after the Merger as the surviving corporation and a wholly-owned subsidiary of Sierra, subject to the terms and conditions set forth in the Merger Agreement. Parent and Merger Sub are affiliates of Siris Capital Group, LLC (“Siris”). The Merger Agreement was unanimously approved by the Company’s Board of Directors.
Under the terms of the Merger Agreement, Sierra will acquire all of the Company's outstanding common stock for
$25.00
per share in cash. The completion of the Merger is subject to approval by the Company's stockholders, certain regulatory approvals and other closing conditions.
Nasdaq Notification
On June 15, 2016, the Company received a notification letter from the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”), informing the Company that it is not in compliance with Nasdaq Listing Rule 5250(c)(1) because the Company did not timely file this Quarterly Report on Form 10-Q with the Securities and Exchange Commission. The Nasdaq letter provided that the Company has until August 14, 2016 to submit a plan to regain compliance. The Company believes that with the filing of this Quarterly Report on Form 10-Q, it will regain compliance with Nasdaq’s listing rules.