UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20142015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 000-21783
8X8, INC.
(Exact name of Registrant as Specified in its Charter)
2125 O'Nel Drive
San Jose, CA 95131
(Address of Principal Executive Offices)
(408) 727-1885
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. x YES ¨ NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The number of shares of the Registrant's Common Stock outstanding as of July 23, 201427, 2015 was 88,727,860.88,598,106.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | Page No. |
Item 1. Financial Statements: | |
Condensed Consolidated Balance Sheets at June 30, | |
Condensed Consolidated Statements of Income (Loss) for the three months ended June 30, | |
Condensed Consolidated Statements of Comprehensive Income for the three months ended June 30, | |
Condensed Consolidated Statements of Cash Flows for the three months | |
Notes to Unaudited Condensed Consolidated Financial Statements | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. Controls and Procedures | |
PART II. OTHER INFORMATION | |
Item 1. Legal Proceedings | |
Item 1A. Risk Factors | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 5. Other Information | |
Item 6. Exhibits | |
Signature |
2
Part I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
8X8, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
June 30, | March 31, | June 30, | March 31, | |||||||||
2014 | 2014 | 2015 | 2015 | |||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 55,073 | $ | 59,159 | $ | 29,298 | $ | 53,110 | ||||
Short-term investments | 126,937 | 47,181 | 127,668 | 123,984 | ||||||||
Accounts receivable, net | 5,947 | 5,503 | 8,041 | 6,642 | ||||||||
Inventory | 753 | 811 | 618 | 704 | ||||||||
Deferred cost of goods sold | 106 | 263 | 500 | 428 | ||||||||
Deferred tax asset | 1,732 | 2,065 | 3,978 | 4,454 | ||||||||
Other current assets | 2,201 | 1,951 | 4,034 | 2,274 | ||||||||
Total current assets | 192,749 | 116,933 | 174,137 | 191,596 | ||||||||
Long-term investments | - | 72,021 | ||||||||||
Property and equipment, net | 8,339 | 7,711 | 11,714 | 10,248 | ||||||||
Intangible assets, net | 14,670 | 15,095 | 28,510 | 12,260 | ||||||||
Goodwill | 38,802 | 38,461 | 48,039 | 36,887 | ||||||||
Non-current deferred tax asset | 47,520 | 47,797 | 43,169 | 43,169 | ||||||||
Other assets | 1,074 | 1,185 | 1,463 | 1,464 | ||||||||
Total assets | $ | 303,154 | $ | 299,203 | $ | 307,032 | $ | 295,624 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 8,217 | $ | 6,789 | $ | 9,736 | $ | 7,775 | ||||
Accrued compensation | 5,264 | 4,583 | 7,305 | 6,183 | ||||||||
Accrued warranty | 619 | 660 | 342 | 339 | ||||||||
Accrued taxes | 2,453 | 2,323 | 3,437 | 2,800 | ||||||||
Deferred revenue | 1,741 | 1,857 | 1,514 | 1,768 | ||||||||
Other accrued liabilities | 1,492 | 1,909 | 3,354 | 2,965 | ||||||||
Total current liabilities | 19,786 | 18,121 | 25,688 | 21,830 | ||||||||
Non-current liabilities | 1,555 | 1,619 | 4,709 | 1,352 | ||||||||
Non-current deferred revenue | 1,072 | 1,285 | 196 | 231 | ||||||||
Total liabilities | 22,413 | 21,025 | 30,593 | 23,413 | ||||||||
Commitments and contingencies (Note 8) | ||||||||||||
Commitments and contingencies (Note 6) | ||||||||||||
Stockholders' equity: | ||||||||||||
Common stock | 89 | 88 | 88 | 88 | ||||||||
Additional paid-in capital | 386,340 | 384,325 | 382,241 | 378,971 | ||||||||
Accumulated other comprehensive gain | 969 | 430 | ||||||||||
Accumulated other comprehensive loss | (679) | (2,109) | ||||||||||
Accumulated deficit | (106,657) | (106,665) | (105,211) | (104,739) | ||||||||
Total stockholders' equity | 280,741 | 278,178 | 276,439 | 272,211 | ||||||||
Total liabilities and stockholders' equity | $ | 303,154 | $ | 299,203 | $ | 307,032 | $ | 295,624 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Three Months Ended | Three Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||
Service revenue | $ | 34,276 | $ | 26,499 | $ | 44,168 | $ | 34,276 | ||||
Product revenue | 3,637 | 2,752 | 3,724 | 3,637 | ||||||||
Total revenue | 37,913 | 29,251 | 47,892 | 37,913 | ||||||||
Operating expenses: | ||||||||||||
Cost of service revenue | 6,997 | 4,786 | 8,459 | 6,997 | ||||||||
Cost of product revenue | 3,969 | 3,347 | 4,382 | 3,969 | ||||||||
Research and development | 3,406 | 2,336 | 5,080 | 3,406 | ||||||||
Sales and marketing | 19,160 | 13,072 | 23,824 | 19,160 | ||||||||
General and administrative | 3,878 | 2,772 | 6,068 | 3,878 | ||||||||
Total operating expenses | 37,410 | 26,313 | 47,813 | 37,410 | ||||||||
Income from operations | 503 | 2,938 | 79 | 503 | ||||||||
Other income, net | 177 | 15 | 234 | 177 | ||||||||
Income from continuing operations before provision for income taxes | 680 | 2,953 | ||||||||||
Income from operations before provision for income taxes | 313 | 680 | ||||||||||
Provision for income taxes | 672 | 961 | 785 | 672 | ||||||||
Income from continuing operations | 8 | 1,992 | ||||||||||
Income from discontinued operations, net of income tax provision | - | 147 | ||||||||||
Net income | $ | 8 | $ | 2,139 | ||||||||
Net income (loss) | $ | (472) | $ | 8 | ||||||||
Income per share - continuing operations: | ||||||||||||
Net income (loss) per share: | ||||||||||||
Basic | $ | 0.00 | $ | 0.03 | $ | (0.01) | $ | 0.00 | ||||
Diluted | $ | 0.00 | $ | 0.03 | $ | (0.01) | $ | 0.00 | ||||
Income per share - discontinued operations: | ||||||||||||
Basic | $ | 0.00 | $ | 0.00 | ||||||||
Diluted | $ | 0.00 | $ | 0.00 | ||||||||
Net income per share: | ||||||||||||
Basic | $ | 0.00 | $ | 0.03 | ||||||||
Diluted | $ | 0.00 | $ | 0.03 | ||||||||
Weighted average number of shares: | ||||||||||||
Basic | 88,592 | 72,510 | 88,233 | 88,592 | ||||||||
Diluted | 91,445 | 75,756 | 88,233 | 91,445 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, unaudited)
Three Months Ended | Three Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||
Net income | $ | 8 | $ | 2,139 | ||||||||
Net income (loss) | $ | (472) | $ | 8 | ||||||||
Other comprehensive income (loss), net of tax | ||||||||||||
Unrealized gain (loss) on investments in securities | 86 | (65) | (48) | 86 | ||||||||
Foreign currency translation adjustment | 453 | - | 1,478 | 453 | ||||||||
Comprehensive income | $ | 547 | $ | 2,074 | $ | 958 | $ | 547 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Three Months Ended | Three Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 8 | $ | 2,139 | ||||||||
Adjustments to reconcile net income to net cash | ||||||||||||
Net income (loss) | $ | (472) | $ | 8 | ||||||||
Adjustments to reconcile net income (loss) to net cash | ||||||||||||
provided by operating activities: | ||||||||||||
Depreciation | 755 | 675 | 993 | 755 | ||||||||
Amortization of intangible assets | 567 | 340 | 546 | 567 | ||||||||
Amortization of capitalized software | 85 | - | 456 | 85 | ||||||||
Net accretion of discount and amortization of premium on | ||||||||||||
marketable securities | 192 | - | ||||||||||
Net accretion of discount and amortization of | ||||||||||||
premium on marketable securities | 236 | 192 | ||||||||||
Stock-based compensation | 1,847 | 907 | 3,022 | 1,847 | ||||||||
Deferred income tax provision | 610 | 873 | 476 | 610 | ||||||||
Other | 9 | 158 | 74 | 9 | ||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable, net | (402) | 132 | (612) | (402) | ||||||||
Inventory | 47 | (61) | 88 | 47 | ||||||||
Other current and noncurrent assets | (175) | (306) | (470) | (175) | ||||||||
Deferred cost of goods sold | 157 | 30 | (53) | 157 | ||||||||
Accounts payable | 988 | (316) | 1,132 | 988 | ||||||||
Accrued compensation | 674 | 82 | 725 | 674 | ||||||||
Accrued warranty | (41) | 22 | 3 | (41) | ||||||||
Accrued taxes and fees | 128 | 192 | 492 | 128 | ||||||||
Deferred revenue | (352) | 373 | (704) | (352) | ||||||||
Other current and noncurrent liabilities | (447) | (7) | (1,272) | (447) | ||||||||
Net cash provided by operating activities | 4,650 | 5,233 | 4,660 | 4,650 | ||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property and equipment | (1,026) | (466) | (1,073) | (1,026) | ||||||||
Purchase of businesses, net of cash acquired | (23,434) | - | ||||||||||
Cost of capitalized software | - | (328) | (471) | - | ||||||||
Proceeds from maturity of investments | 3,300 | - | 7,820 | 3,300 | ||||||||
Sales of investments - available for sale | 18,992 | - | 22,620 | 18,992 | ||||||||
Purchases of investments - available for sale | (30,134) | - | ||||||||||
Purchase of investments - available for sale | (34,409) | (30,134) | ||||||||||
Net cash used in investing activities | (8,868) | (794) | (28,947) | (8,868) | ||||||||
Cash flows from financing activities: | ||||||||||||
Capital lease payments | (46) | (5) | (54) | (46) | ||||||||
Repurchase of common stock | (48) | (120) | (25) | (48) | ||||||||
Proceeds from issuance of common stock under employee stock plans | 170 | 1,296 | 336 | 170 | ||||||||
Net cash provided by financing activities | 76 | 1,171 | 257 | 76 | ||||||||
Effect of exchange rate changes on cash | 56 | - | 218 | 56 | ||||||||
Net (decrease) increase in cash and cash equivalents | (4,086) | 5,610 | ||||||||||
Net decrease in cash and cash equivalents | (23,812) | (4,086) | ||||||||||
Cash and cash equivalents at the beginning of the period | 59,159 | 50,305 | 53,110 | 59,159 | ||||||||
Cash and cash equivalents at the end of the period | $ | 55,073 | $ | 55,915 | $ | 29,298 | $ | 55,073 | ||||
Supplemental cash flow information | ||||||||||||
Income taxes paid | $ | 85 | $ | 156 | $ | 52 | $ | 85 | ||||
Interest paid | 1 | 1 | 6 | 1 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
8X8, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANYDESCRIPTION OF BUSINESS
8x8, Inc. ("8x8"(8x8 or the "Company") developsCompany) is a leading provider of VoIP (Voice over Internet Protocol) technology and marketsSaaS (Software as a comprehensive portfolioService) communication solutions in the cloud for SMBs (Small and Midsize Business) and mid-market and distributed enterprises. The Company delivers a broad suite of cloud-based communicationsSaaS services to in-office and collaboration solutions that include hostedmobile devices spanning cloud telephony, unified communications,virtual contact center video conferencing and virtual desktop software and services. Thesemeeting through its proprietary unified communications and collaboration services are offered from the Internet cloud via a software-as-a-service subscription. The Company also provides cloud-based computing services. As of June 30, 2014, the Company had 39,340 business customers.SaaS platform.
The Company was incorporated in California in February 1987 and was reincorporated in Delaware in December 1996.
BASIS OF PRESENTATION
The Company's fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the condensed consolidated financial statements refers to the fiscal year endingended March 31 of the calendar year indicated (for example, fiscal 20152016 refers to the fiscal year endingended March 31, 2015)2016).
2. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements are unaudited and have been prepared on substantially the same basis as our annual consolidated financial statements for the fiscal year ended March 31, 2014.2015. In the opinion of the Company's management, these interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.
The March 31, 20142015 year-end condensed consolidated balance sheet data in this document waswere derived from audited consolidated financial statements and does not include all of the disclosures required by U.S. generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements as of and for the fiscal year ended March 31, 20142015 and notes thereto included in the Company's fiscal 20142015 Annual Report on Form 10-K.
The results of operations and cash flows for the interim periods included in these condensed consolidated financial statements are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.
ReclassificationPRINCIPLES OF CONSOLIDATION
Certain amounts previously reported withinThe consolidated financial statements include the Company's consolidated statementsaccounts of income8x8 and its subsidiaries. All material intercompany accounts and transactions have been reclassified to conform toeliminated.
SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in our Annual Report on Form 10-K for the current period presentation. The reclassification included certain prior-period amounts relatedfiscal year ended March 31, 2015 filed with the SEC on May 29, 2015, and there have been no changes to the Company's discontinued operations.
The reclassification had no impact on the Company's previously reported net income or basic and diluted net income per share amounts.
7
Service and Product Revenue
The Company recognizes service revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, price is fixed or determinable and collectability is reasonably assured. The Company defers recognition of service revenues in instances when cash receipts are received before services are delivered and recognizes deferred revenues ratably as services are provided.
The Company recognizes revenue from product sales for which there are no related services to be rendered upon shipment to customers provided that persuasive evidence of an arrangement exists, the price is fixed, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Gross outbound shipping and handling charges are recorded as revenue, and the related costs are included in cost of goods sold. Reserves for returns and allowances for customer sales are recorded at the time of shipment. In accordance with the ASC 985-605, the Company records shipments to distributors, retailers, and resellers, where the right of return exists, as deferred revenue. The Company defers recognition of revenue on sales to distributors, retailers, and resellers until products are resold to the customer.
The Company records revenue net of any sales-related taxes that are billed to its customers. The Company believes this approach results in consolidated financial statements that are more easily understood by users.
Under the terms of the Company's typical subscription agreement, new customers can terminate their service within 30 days of order placement and receive a full refund of fees previously paid. The Company has determined that it has sufficient history of subscriber conduct to make a reasonable estimate of cancellations within the 30-day trial period. Therefore, the Company recognizes new subscriber revenue in the month in which the new order was shipped, net of an allowance for expected cancellations.
Multiple Element Arrangements
Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605-25 requires that revenue arrangements with multiple deliverables be divided into separate units of accounting if the deliverables in the arrangement meet specific criteria. The provisioning of the 8x8 cloud service with the accompanying 8x8 IP telephone constitutes a revenue arrangement with multiple deliverables. For arrangements with multiple deliverables, the Company allocates the arrangement consideration to all units of accounting based on their relative selling prices. In such circumstances, the accounting principles establish a hierarchy to determine the relative selling price to be used for allocating arrangement consideration to units of accounting as follows: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE"), and (iii) best estimate of the selling price ("BESP").
VSOE generally exists only when the Company sells the deliverable separately, on more than a limited basis, at prices within a relatively narrow range. When VSOE cannot be established, the Company attempts to establish the selling price of deliverables based on relevant TPE. TPE is determined based on manufacturer's prices for similar deliverables when sold separately, when possible. When the Company is unable to establish selling price using VSOE or TPE, it uses a BESP for the allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service was sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. The Company determines BESP for a product or service by considering multiple factors including, but not limited to:
In accordance with the guidance of ASC 605-25, when the Company enters into revenue arrangements with multiple deliverables the Company allocates arrangement consideration, including activation fees, among the 8x8 IP telephones and subscriber services based on their relative selling prices. Arrangement consideration allocated to the IP telephones that is fixed or determinable and that is not contingent on future performance or future deliverables is recognized as product revenues during the period of the sale less the allowance for estimated returns during the 30-day trial period. Arrangement consideration allocated to subscriber services that is fixed or determinable and that is not contingent on future performance or future deliverables is recognized ratably as service revenues as the related services are provided, which is generally over the initial contract term.
8
Deferred Cost of Goods Sold
Deferred cost of goods sold represents the cost of products sold for which the end customer or distributor has a right of return. The cost of the products sold is recognized contemporaneously with the recognition of revenue, when the subscriber has accepted the service.
Cash, Cash Equivalents and Investments
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Management determines the appropriate categorization of its investments at the time of purchase and reevaluates the classification at each reporting date. The cost of the Company's investments is determined based upon specific identification.
The Company's investments are comprised of mutual funds, commercial paper, corporate debt, municipal securities, asset backed securities, mortgage backed securities, international government securities and money market funds. At June 30, 2014 and March 31, 2014, all investments were classified as available-for-sale and reported at fair value, based either upon quoted prices in active markets, quoted prices in less active markets, or quoted market prices for similar investments, with unrealized gains and losses, net of related tax, if any, included in other comprehensive loss and disclosed as a separate component of consolidated stockholders' equity. Realized gains and losses on sales of all such investments are reported within the caption of other income, net in the consolidated statements of income and computed using the specific identification method. The Company classifies its investments as current based on the nature of the investments and their availability for use in current operations. The Company's investments in marketable securities are monitored on a periodic basis for impairment. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. These available-for-sale investments are primarily held in the custody of a major financial institution.
Available-for-sale investments were (in thousands):
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||
As of June 30, 2014 | Costs | Gain | Loss | Fair Value | ||||||||
Money market funds | $ | 25,020 | $ | - | $ | - | $ | 25,020 | ||||
Fixed income | ||||||||||||
Mutual funds | 1,909 | 21 | - | 1,930 | ||||||||
Commercial paper | 24,583 | 6 | - | 24,589 | ||||||||
Corporate debt | 69,163 | 69 | (8) | 69,224 | ||||||||
Municipal securities | 5,434 | 4 | (3) | 5,435 | ||||||||
Asset backed securities | 20,067 | 11 | (3) | 20,075 | ||||||||
Mortgage backed securities | 4,882 | - | (3) | 4,879 | ||||||||
International government securities | 800 | 5 | - | 805 | ||||||||
Total available-for-sale investments | $ | 151,858 | $ | 116 | $ | (17) | $ | 151,957 | ||||
Reported as (in thousands): | ||||||||||||
Cash and cash equivalents | $ | 25,020 | ||||||||||
Short-term investments | 126,937 | |||||||||||
Total | $ | 151,957 |
9
Contractual maturities of mutual funds, commercial paper, corporate debt, municipal securities, asset backed securities, mortgage backed securities, international government securities and money market funds as of June 30, 2014 are set forth below (in thousands):
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||
As of March 31, 2014 | Costs | Gain | Loss | Fair Value | ||||||||
Money market funds | $ | 32,611 | $ | - | $ | - | $ | 32,611 | ||||
Fixed income | ||||||||||||
Mutual funds | 1,964 | - | (55) | 1,909 | ||||||||
Commercial paper | 30,374 | 5 | - | 30,379 | ||||||||
Corporate debt | 63,621 | 35 | (39) | 63,617 | ||||||||
Municipal securities | 5,435 | 5 | (1) | 5,439 | ||||||||
Asset backed securities | 17,049 | 6 | (1) | 17,054 | ||||||||
International government securities | 800 | 4 | - | 804 | ||||||||
Total available-for-sale investments | $ | 151,854 | $ | 55 | $ | (96) | $ | 151,813 | ||||
Reported as (in thousands): | ||||||||||||
Cash and cash equivalents | $ | 32,611 | ||||||||||
Short-term investments | 47,181 | |||||||||||
Long-term investments | 72,021 | |||||||||||
Total | $ | 151,813 |
Contractual maturities of mutual funds, commercial paper, corporate debt, municipal securities, asset backed securities, international government securities and money market funds as of March 31, 2014 are set forth below (in thousands):
10
Intangible Assets
Amortization expense for the customer relationship intangible asset is included in sales and marketing expenses. Amortization expense for technology is included in cost of service revenue. The carrying values of intangible assets were as follows (in thousands):
June 30, 2014 | March 31, 2014 | ||||||||||||||||
Gross | Gross | ||||||||||||||||
Carrying | Accumulated | Net Carrying | Carrying | Accumulated | Net Carrying | ||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||
Technology | $ | 8,242 | $ | (2,286) | $ | 5,956 | $ | 8,242 | $ | (2,080) | $ | 6,162 | |||||
Customer relationships | 9,686 | (1,929) | 7,757 | 9,686 | (1,710) | 7,976 | |||||||||||
Trade names/domains | 957 | - | 957 | 957 | - | 957 | |||||||||||
Total acquired identifiable | |||||||||||||||||
intangible assets | $ | 18,885 | $ | (4,215) | $ | 14,670 | $ | 18,885 | $ | (3,790) | $ | 15,095 |
At June 30, 2014, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following (in thousands):
Amount | |||
Remaining 2015 | $ | 1,712 | |
2016 | 2,282 | ||
2017 | 2,275 | ||
2018 | 2,027 | ||
2019 | 1,781 | ||
Thereafter | 3,636 | ||
Total | $ | 13,713 |
Research, Development and Software Costs
The Company accounts for software to be sold or otherwise marketed in accordance with ASC 985-20 -Costs of Software to be Sold, Leased or Marketed, which requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. The Company defines establishment of technological feasibility as the completion of a working model. Software development costs for software to be sold or otherwise marketed incurred prior to the establishment of technological feasibility are included in research and development and are expensed as incurred. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of the product are capitalized, if material.
In the first three months of fiscal 2015, the Company expensed all research and development costs in accordance with ASC 985-20. At June 30, 2014, total capitalized software development costs included in other long-term assets was approximately $945,000 and accumulated amortization costs related to capitalized software was approximately $233,000.
Foreign Currency Translation
The Company has determined that the functional currency of its UK foreign subsidiary is the subsidiary's local currency, the British Pound Sterling ("GBP"), which the Company believes most appropriately reflects the current economic facts and circumstances of the UK subsidiary's operations. The assets and liabilities of the subsidiary are translated at the applicable exchange rate as of the end of the balance sheet period and revenue and expenses are translated at an average rate over the period presented. Resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income or loss within the stockholder's equity in the consolidated balance sheets.
11
Stock Purchase Right/Restricted Stock Unit and Option Activity
Stock purchase right activity for the three months ended June 30, 2014 is summarized as follows:
Weighted | Weighted | |||||||
Average | Average | |||||||
Grant-Date | Remaining | |||||||
Number of | Fair Market | Contractual | ||||||
Shares | Value | Term (in Years) | ||||||
Balance at March 31, 2014 | 489,627 | $ | 4.83 | 1.93 | ||||
Granted | 31,432 | 7.88 | ||||||
Vested | (56,057) | 2.80 | ||||||
Forfeited | (24,625) | 5.50 | ||||||
Balance at June 30, 2014 | 440,377 | $ | 5.27 | 1.91 |
Restricted stock unit and performance stock unit activity for the three months ended June 30, 2014 is summarized as follows:
Weighted | ||||||||
Weighted | Average | |||||||
Average | Remaining | |||||||
Number of | Purchase | Contractual | ||||||
Shares | Price | Term (in Years) | ||||||
Balance at March 31, 2014 | 1,134,856 | $ | - | 2.00 | ||||
Granted | 77,750 | - | ||||||
Vested | (7,875) | - | ||||||
Forfeited | (74,204) | - | ||||||
Balance at June 30, 2014 | 1,130,527 | $ | - | 1.80 |
Option activity for the three months ended June 30, 2014 is summarized as follows:
Weighted | ||||||||
Shares | Average | |||||||
Shares | Subject to | Exercise | ||||||
Available | Options | Price | ||||||
for Grant | Outstanding | Per Share | ||||||
Balance at March 31, 2014 | 1,613,943 | 6,002,382 | $ | 4.14 | ||||
Granted - options | (10,000) | 10,000 | 7.88 | |||||
Stock purchase rights/restricted stock unit (1) | (109,182) | - | - | |||||
Exercised | - | (137,940) | 1.55 | |||||
Canceled/forfeited - options | 269,056 | (269,056) | 5.10 | |||||
Canceled/forfeited - restricted stock unit | 74,393 | - | - | |||||
Balance at June 30, 2014 | 1,838,210 | 5,605,386 | $ | 4.16 |
(1) The reduction to shares available for grant includes awards granted of 109,182 shares.
12
The following table summarizes the stock options outstanding and exercisable at June 30, 2014:
Options Outstanding | Options Exercisable | |||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||
Average | Average | Average | ||||||||||||||||
Exercise | Remaining | Aggregate | Exercise | Aggregate | ||||||||||||||
Range of | Price | Contractual | Intrinsic | Price | Intrinsic | |||||||||||||
Exercise Price | Shares | Per Share | Life (Years) | Value | Shares | Per Share | Value | |||||||||||
$0.55 - $1.26 | 1,628,745 | $ | 1.04 | 3.6 | $ | 11,472,489 | 1,628,745 | $ | 1.04 | $ | 11,472,489 | |||||||
$1.27 - $1.79 | 1,238,578 | $ | 1.53 | 1.7 | 8,110,169 | 1,238,578 | $ | 1.53 | 8,110,169 | |||||||||
$1.80 - $5.87 | 1,345,025 | $ | 4.67 | 6.7 | 4,593,163 | 834,255 | $ | 4.24 | 3,201,363 | |||||||||
$5.88 - $9.74 | 1,243,038 | $ | 9.49 | 9.2 | 95,930 | 93,135 | $ | 8.92 | 40,317 | |||||||||
$10.97 - $11.26 | 150,000 | $ | 11.11 | 9.5 | - | - | $ | - | - | |||||||||
5,605,386 | $ | 24,271,751 | 3,794,713 | $ | 22,824,338 |
Stock-based Compensation Expense
The Company accounts for its employee stock options, stock purchase rights, restricted stock units including restricted performance stock units granted under the 1996 Stock Plan, 1996 Director Option Plan, the 2006 Stock Plan, the 2003 Contactual Plan, the 2012 Equity Incentive Plan, the 2013 New Employee Inducement Incentive Plan and stock purchase rights under the 1996 Employee Stock Purchase Plan (collectively "Equity Compensation Plans") under the provisions of ASC 718 -Stock Compensation. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant), net of estimated forfeitures.
To value option grants, stock purchase rights and restricted stock units under the Equity Compensation Plans for stock-based compensation, the Company used the Black-Scholes option valuation model. Fair value determined using the Black-Scholes option valuation model varies based on assumptions used for the expected stock prices volatility, expected life, risk-free interest rates and future dividend payments. For the three months ended June 30, 2014 and 2013, the Company used the historical volatility of its stock over a period equal to the expected life of the options. The expected life assumptions represent the weighted-average period stock-based awards are expecting to remain outstanding. These expected life assumptions were established through the review of historical exercise behavior of stock-based award grants with similar vesting periods. The risk-free interest rate is based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term equal to the expected term of the option. The dividend yield assumption is based on the Company's history and expectation of future dividend payout. Compensation expense for stock-based payment awards is recognized using the straight-line single-option method and includes the impact of estimated forfeitures.
As of June 30, 2014, there was $15.6 million of unamortized stock-based compensation expense related to unvested stock awards which is expected to be recognized over a weighted average period of 2.83 years.
The following table summarizes the assumptions used to compute reported stock-based compensation to employees and directors for the three months ended June 30, 2014 and 2013:
Three Months Ended | ||||||
June 30, | ||||||
2014 | 2013 | |||||
Expected volatility | 59% | 66% | ||||
Expected dividend yield | - | - | ||||
Risk-free interest rate | 1.53% | 0.73% | ||||
Weighted average expected option term | 5.00 years | 4.50 years | ||||
Weighted average fair value of options granted | $ | 4.01 | $ | 3.96 |
13
In accordance with ASC 718 -Stock Compensation, the Company recorded $1,671,000 and $718,000 in compensation expense relative to stock-based awards for the three months ended June 30, 2014 and 2013, respectively.
Employee Stock Purchase Plan
Under the Company's Employee Stock Purchase Plan, or ESPP, eligible employees can participate and purchase common stock semi-annually through payroll deductions at a price equal to 85% of the fair market value of the common stock at the beginning of each one year offering period or the end of the applicable nine month purchase period within that offering period, whichever is lower. The contribution amount may not exceed 10% of an employee's base compensation, including commissions but not including bonuses and overtime. The Company accounts for the ESPP as a compensatory plan and recorded compensation expense of $176,000 and $189,000 for the three months ended June 30, 2014 and 2013, respectively, in accordance with ASC 718.
As of June 30, 2014, there was $179,000 of total unrecognized compensation cost related to employee stock purchases. This cost is expected to be recognized over a weighted average period of 0.5 years.
ASC 718 requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow, rather than as an operating cash flow. The future realization of tax benefits related to stock-based compensation is dependent upon the timing of employee exercises and future taxable income, among other factors. The Company did not realize any tax benefit from the stock-based compensation charges incurredpolicies during the three months ended June 30, 2015, except as described in the "Recent Accounting Pronouncements"section below.
7
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08,Presentation of Financial Statements (Topic 205) and 2013.
Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the requirements for reporting discontinued operations in FASB ASU 205-20, such that a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. This ASU requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position, as well as additional disclosures about discontinued operations. Additionally, the ASU requires disclosures about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements and expands the disclosures about an entity's significant continuing involvement with a discontinued operation. The following table summarizes the classification of stock-based compensation expense related to employee stock optionsaccounting update is effective for annual periods beginning on or after December 15, 2014. We adopted this pronouncement for our fiscal year beginning April 1, 2015, and employee stock purchases under ASC 718 among the Company's operating functions for the three months ended June 30, 2014 and 2013 whichthere was recorded as follows (in thousands):
Three Months Ended | ||||||
June 30, | ||||||
2014 | 2013 | |||||
Cost of service revenue | $ | 115 | $ | 68 | ||
Cost of product revenue | - | - | ||||
Research and development | 314 | 154 | ||||
Sales and marketing | 744 | 347 | ||||
General and administrative | 674 | 338 | ||||
Total stock-based compensation expense related to employee | ||||||
stock options and employee stock purchases, pre-tax | 1,847 | 907 | ||||
Tax benefit | - | - | ||||
Stock-based compensation expense related to employee | ||||||
stock options and employee stock purchases, net of tax | $ | 1,847 | $ | 907 |
Recent Accounting Pronouncementsno effect on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606) and the IASBInternational Accounting Standards Board (IASB) has issued IFRSInternational Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers. The issuance of these documents completes the joint effort by the FASB and the IASB to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and IFRS. The new guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. For public entities,In July 2015, the amendments areFASB voted to delay the effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.date of this standard until the first quarter of 2018. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.
142. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash, cash equivalents, and available-for-sale investments were (in thousands):
Gross | Gross | Cash and | ||||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | Cash | Short-Term | |||||||||||||
As of June 30, 2015 | Costs | Gain | Loss | Fair Value | Equivalents | Investments | ||||||||||||
Cash | $ | 12,466 | - | $ | - | $ | 12,466 | $ | 12,466 | $ | - | |||||||
Level 1: | ||||||||||||||||||
Money market funds | 16,832 | - | - | 16,832 | 16,832 | - | ||||||||||||
Mutual funds | 2,000 | - | (139) | 1,861 | - | 1,861 | ||||||||||||
Subtotal | 31,298 | - | (139) | 31,159 | 29,298 | 1,861 | ||||||||||||
Level 2: | ||||||||||||||||||
Commercial paper | 9,783 | 2 | (1) | 9,784 | - | 9,784 | ||||||||||||
Corporate debt | 72,828 | 38 | (29) | 72,837 | - | 72,837 | ||||||||||||
Municipal securities | 6,471 | 2 | (1) | 6,472 | - | 6,472 | ||||||||||||
Asset backed securities | 23,427 | 5 | (8) | 23,424 | - | 23,424 | ||||||||||||
Mortgage backed securities | 5,000 | 1 | (23) | 4,978 | - | 4,978 | ||||||||||||
Agency bond | 7,509 | 2 | (2) | 7,509 | - | 7,509 | ||||||||||||
International government securities | 800 | 3 | - | 803 | - | 803 | ||||||||||||
Subtotal | 125,818 | 53 | (64) | 125,807 | - | 125,807 | ||||||||||||
Total | $ | 157,116 | $ | 53 | $ | (203) | $ | 156,966 | $ | 29,298 | $ | 127,668 |
8
Gross Gross Cash and Amortized Unrealized Unrealized Estimated Cash Short-Term As of March 31, 2015 Costs Gain Loss Fair Value Equivalents Investments Cash $ 24,734 $ - $ - $ 24,734 $ 24,734 $ - Level 1: Money market funds 28,376 - - 28,376 28,376 - Mutual funds 2,000 - (107) 1,893 - 1,893 Subtotal 55,110 - (107) 55,003 53,110 1,893 Level 2: Commercial paper 9,043 1 - 9,044 - 9,044 Corporate debt 75,284 57 (10) 75,331 - 75,331 Municipal securities 5,435 2 (1) 5,436 - 5,436 Asset backed securities 21,503 4 (5) 21,502 - 21,502 Mortgage backed securities 5,822 - (52) 5,770 - 5,770 Agency bond 4,201 3 - 4,204 - 4,204 International government securities 800 4 - 804 - 804 Subtotal 122,088 71 (68) 122,091 - 122,091 Total $ 177,198 $ 71 $ (175) $ 177,094 $ 53,110 $ 123,984
Contractual maturities of cash equivalents and investments as of June 30, 2015 are set forth below (in thousands):
Estimated | |||
Fair Value | |||
Due within one year | $ | 68,976 | |
Due after one year | 58,692 | ||
Total | $ | 127,668 |
3. BALANCE SHEET DETAIL
June 30, | March 31, | |||||
2015 | 2015 | |||||
Inventory (in thousands) | ||||||
Work-in-process | $ | 11 | $ | 169 | ||
Finished goods | 607 | 535 | ||||
$ | 618 | $ | 704 |
9
4. INTANGIBLE ASSETS
The carrying value of intangible assets consisted of the following (in thousands):
June 30, 2015 | March 31, 2015 | ||||||||||||||||
Gross | Net | Gross | Net | ||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||
Technology | $ | 21,840 | $ | (2,978) | $ | 18,862 | $ | 8,242 | $ | (2,905) | $ | 5,337 | |||||
Customer relationships | 10,554 | (3,778) | 6,776 | 9,686 | (3,720) | 5,966 | |||||||||||
Trade names/domains | 2,522 | - | 2,522 | 957 | - | 957 | |||||||||||
In-process research and development | 350 | - | 350 | - | - | - | |||||||||||
Total acquired identifiable | |||||||||||||||||
intangible assets | $ | 35,266 | $ | (6,756) | $ | 28,510 | $ | 18,885 | $ | (6,625) | $ | 12,260 |
At June 30, 2015, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following (in thousands):
Amount | |||
Remaining 2016 | $ | 3,891 | |
2017 | 4,714 | ||
2018 | 4,445 | ||
2019 | 4,192 | ||
2020 | 4,192 | ||
Thereafter | 4,554 | ||
Total | $ | 25,988 |
5. RESEARCH, DEVELOPMENT AND SOFTWARE COSTS
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718, Compensation-Stock Compensation, as it relates to such awards. ASU 2014-12 is effective for us in our first quarterthree months of fiscal 20172016, the Company expensed all research and development costs in accordance with early adoption permitted using eitherASC 985-20, Costs of two methods: (i) prospectiveSoftware to all awards grantedbe Sold, Leased or modified after the effective date; or (ii) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.
3. FAIR VALUE MEASUREMENT
The following tables present the Company's fair value hierarchy for assets and liabilities measured at fair value on a recurring basis atMarketed (ASC 985-20). At June 30, 20142015 and March 31, 2014 (in thousands):
Quoted Prices in | Other | Significant | ||||||||||
Active Markets for | Observable | Unobservable | Balance at | |||||||||
Identical Assets | Inputs | Inputs | June 30, | |||||||||
(Level 1) | (Level 2) | (Level 3) | 2014 | |||||||||
Cash equivalents: | ||||||||||||
Money market funds | $ | 25,020 | $ | - | $ | - | $ | 25,020 | ||||
Short-term investments: | ||||||||||||
Mutual funds | 1,930 | - | - | 1,930 | ||||||||
Commercial paper | - | 24,589 | - | 24,589 | ||||||||
Corporate debt | - | 69,224 | - | 69,224 | ||||||||
Municipal securities | - | 5,435 | - | 5,435 | ||||||||
Asset backed securities | - | 20,075 | - | 20,075 | ||||||||
Mortgage backed securities | - | 4,879 | - | 4,879 | ||||||||
International government securities | - | 805 | - | 805 | ||||||||
Total | $ | 26,950 | $ | 125,007 | $ | - | $ | 151,957 |
15
Quoted Prices in Other Significant Active Markets for Observable Unobservable Balance at Identical Assets Inputs Inputs March 31, (Level 1) (Level 2) (Level 3) 2014 Cash equivalents: Money market funds $ 32,611 $ - $ - $ 32,611 Short-term investments: Mutual funds 1,909 - - 1,909 Commercial paper - 30,379 - 30,379 Corporate debt - 14,893 - 14,893 Long-term investments: Corporate debt - 48,724 - 48,724 Municipal securities - 5,439 - 5,439 Asset backed securities - 17,054 - 17,054 International government securities - 804 - 804 Total $ 34,520 $ 117,293 $ - $ 151,813
4. BALANCE SHEET DETAIL
June 30, | March 31, | |||||
2014 | 2014 | |||||
Inventory (in thousands): | ||||||
Work-in-process | $ | 9 | $ | 23 | ||
Finished goods | 744 | 788 | ||||
$ | 753 | $ | 811 |
16
5. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available2015, total capitalized software development costs included in other long-term assets was approximately $0 and $1.0 million, respectively, and accumulated amortization costs related to common stockholders (numerator) by the weighted average number of vested, unrestricted common shares outstanding during the period (denominator). Diluted net income per share is computed on the basis of the weighted average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include shares issuable upon exercise of outstanding stock optionscapitalized software was approximately $0 and under the ESPP.
Three Months Ended | ||||||
June 30, | ||||||
2014 | 2013 | |||||
(in thousands, except per share amounts) | ||||||
Numerator: | ||||||
Income from continuing operations | $ | 8 | $ | 1,992 | ||
Income from discontinued operations, net of income tax provision | - | 147 | ||||
Net income available to common stockholders | 8 | 2,139 | ||||
Denominator: | ||||||
Common shares | 88,592 | 72,510 | ||||
Denominator for basic calculation | 88,592 | 72,510 | ||||
Employee stock options | 2,480 | 2,911 | ||||
Stock purchase rights | 373 | 335 | ||||
Denominator for diluted calculation | 91,445 | 75,756 | ||||
Income per share - continuing operations: | ||||||
Basic | $ | 0.00 | $ | 0.03 | ||
Diluted | $ | 0.00 | $ | 0.03 | ||
Income per share - discontinued operations: | ||||||
Basic | $ | 0.00 | $ | 0.00 | ||
Diluted | $ | 0.00 | $ | 0.00 | ||
Net income per share: | ||||||
Basic | $ | 0.00 | $ | 0.03 | ||
Diluted | $ | 0.00 | $ | 0.03 |
17
The following shares attributable to outstanding stock options and stock purchase rights were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive (in thousands):
Three Months Ended | ||||||
June 30, | ||||||
2014 | 2013 | |||||
Employee stock options | 1,370 | 935 | ||||
Stock purchase rights | 79 | 2 | ||||
Total anti-dilutive employee stock-based securities | 1,449 | 937 |
6. INCOME TAXES
For the three months ended June 30, 2014, the Company recorded a provision for income taxes of $0.7$0.5 million, which was primarily attributable to net income from continuing operations. For the three months ended June 30, 2013, the Company recorded a provision for income taxes of $1.1 million, which was primarily attributable to net income from continuing operations ($1.0 million) and from discontinued operations ($0.1 million).
The effective tax rate is calculated by dividing the income tax provision by net income before income tax expense.
At March 31, 2014, there were $2.2 million of unrecognized tax benefits that, if recognized, would have affected the effective tax rate. The Company does not believe that there has been any significant change in the unrecognized tax benefits in the three-month period ended June 30, 2014, and does not expect the remaining unrecognized tax benefit to change materially in the next 12 months. To the extent that the remaining unrecognized tax benefits are ultimately recognized, they will have an impact on the effective tax rate in future periods. respectively.
The Company accounts for computer software developed or obtained for internal use in accordance with ASC 350-40,Internal Use Software (ASC 350-40). In the first three months of fiscal 2016, the Company capitalized $0.5 million in accordance with ASC 350-40, which is subject to taxationclassified as other assets. No such costs were capitalized in the U.S., California and various other states and foreign jurisdictions in which it has or had a subsidiary or branch operations or it is collecting sales tax. All tax returns fromfirst three months of fiscal 1995 to fiscal 2014 may be subject to examination by the Internal Revenue Service, California and various other states.2015. As of July 23, 2014, there were no active federal or state income tax audits. Returns filed in foreign jurisdictions may be subject to examination for the fiscal years 2010 to 2014.
7. SEGMENT REPORTING
ASC 280, "Segment Reporting" establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Under ASC 280, the method for determining what information to report is based upon the way management organizes the operating segments withinJune 30, 2015, the Company for making operating decisionscapitalized $2.0 million in accordance with ASC 350-40, of which $1.2 million is classified as other assets, and assessing financial performance. The Company has determined that it has only one reportable segment. The Company's chief operating decision makers, the Chief Executive Officer, Chief Financial Officer$0.8 million is classified as property and Chief Technology Officer, evaluate performanceequipment. As of March 31, 2015, the Company and make decisions regarding allocationcapitalized $1.5 million in accordance with ASC 350-40, of resources based on total Company results.
No customer represented greater than 10% of the Company's total revenues for the three months ended June 30, 2014 or 2013. The Company's revenue distribution by geographic region (based upon the destination of shipments and the customer's service address) waswhich $0.8 million is classified as follows:
Three Months Ended | ||||||
June 30, | ||||||
2014 | 2013 | |||||
Americas (principally US) | 91% | 99% | ||||
Europe | 8% | 0% | ||||
Asia Pacific | 1% | 1% | ||||
100% | 100% |
18
Geographic area data is based upon the location of the property and equipment and $0.7 million is classified as follows (in thousands):long-term assets. At June 30, 2015, the projects had not yet been placed into service, and accordingly no amortization has been recognized.
June 30, | March 31, | |||||
2014 | 2014 | |||||
United States | $ | 6,483 | $ | 6,305 | ||
Europe | 1,567 | 1,087 | ||||
Asia | 289 | 319 | ||||
Total | $ | 8,339 | $ | 7,711 |
8.10
6. COMMITMENTS AND CONTINGENCIES
Guarantees
Indemnifications
In the normal course of business, the Company indemnifiesmay agree to indemnify other parties, including customers, lessors and parties to other transactions with the Company, with respect to certain matters. Under these arrangements, the Company typically agrees to hold the other party harmless against losses arising from a breachmatters such as breaches of representations or covenants or intellectual property infringement or other claims made against certainby third parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors.
It is not possible to determine the maximum potential amount of the Company's exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on the Company's operating results, financial position or cash flows. Under some of these agreements, however, the Company's potential indemnification liability might not have a contractual limit.
Product Warranties
The Company accrues for the estimated costs that may be incurred under its product warranties upon revenue recognition. Changes in the Company's product warranty liability, which is included in cost of product revenuerevenues in the condensed consolidated statements of income (loss), were as follows (in thousands):
Three Months Ended | Three Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||
Balance at beginning of period | $ | 660 | $ | 452 | $ | 339 | $ | 660 | ||||
Accruals for warranties | 54 | 177 | 98 | 54 | ||||||||
Payments | (95) | (155) | ||||||||||
Settlements | (83) | (95) | ||||||||||
Adjustments | (12) | - | ||||||||||
Balance at end of period | $ | 619 | $ | 474 | $ | 342 | $ | 619 |
Minimum Third Party Customer Support Commitments
In the third quarter of fiscal 2010, the Company amended aits contract with one of its third party customer support vendors containing a minimum monthly commitment of approximately $0.4 million.million effective April 1, 2010. The agreement requires a 150-day notice to terminate. TheAt June 30, 2015, the total remaining obligation under the amended contract iswas $2.2 million.
19
Minimum Third Party Network Service Provider Commitments
The Company entered into contracts with multiple vendors for third party network services thatservice which expire on various dates in fiscal 20152016 through 2016.2018. At June 30, 2014,2015, future minimum annual payments under these third party network service contracts were as follows (in thousands):
Year ending March 31: | ||||||||||||
Remaining 2015 | $ | 1,355 | ||||||||||
2016 | 214 | |||||||||||
Remaining 2016 | $ | 2,231 | ||||||||||
2017 | 2,452 | |||||||||||
2018 | 891 | |||||||||||
Total minimum payments | $ | 1,569 | $ | 5,574 |
11
Legal Proceedings
FromThe Company, from time to time, the Company may becomeis involved in various legal claims andor litigation, including patent infringement claims that can arise in the normal course of itsthe Company's operations. WhilePending or future litigation could be costly, could cause the resultsdiversion of such claimsmanagement's attention and litigation cannot be predicted with certainty, the Company is not currently aware of any such matters that it believes wouldcould upon resolution, have a material adverse effect on its financial position,the Company's business, results of operations, orfinancial condition and cash flows.
On February 22, 2011, we werethe Company was named a defendant in, a lawsuit, Bear Creek Technologies, Inc. v. 8x8, Inc. et al., filed in the U.S. District Court for the District of Delaware, along with 20 other defendants. On August 17, 2011, we werethe suit was dismissed without prejudice from this lawsuitas to the Company under Rule 21 of the Federal Rules of Civil Procedure. On August 17, 2011, we were sued again by Bear Creek Technologies, Inc. refiled its suit against the Company in the United States District Court for the District of Delaware. We believe we have factual and legal defenses to these claims and are presenting a vigorous defense. Further, on November 28, 2012, the U.S. Patent & Trademark Office initiated a Reexamination proceeding with a Reexamination Declaration explaining that there is a substantial new question of patentability, based on four separate grounds and affecting each claim of the patent which is the basis for the complaint filed against us. On March 26, 2013, the USPTO issued a first Office Action in the Reexamination, with all claims of the '722 patent being rejected on each of the four separate grounds raised in the Request for Reexamination. On July 10, 2013, wethe Company filed an informational pleading in support of and joining a motion to stay the proceeding in the District Court; the District Court granted the motion on July 17, 2013, based on the possibility that at least one of the USPTO rejections will be upheld and considering the USPTO's conclusion that Bear Creek's patent suffers from a defective claim for priority. On March 24, 2014, the USPTO issued another Office Action in which the rejections of the claims were maintained. We cannot estimate potential liability inOn August 15, 2014, the USPTO issued a Right of Appeal Notice, as the USPTO maintained all rejections of the patent claims. On September 15, 2014, Bear Creek Technologies, Inc. filed a Notice of Appeal of this decision with the Patent Trial and Appeal Board, and the USPTO's rejections are currently on appeal. By an order issued on May 5, 2015, the Court administratively closed this case at this early stage of litigation.with leave to reopen if further attention by the Court is required.
On October 25, 2011, we wereMarch 31, 2014, the Company was named as a defendant in a lawsuit, Klausner Technologies,CallWave Communications LLC (CallWave) v. 8x8, Inc. CallWave also sued Fonality Inc. on March 31, 2014, and previously had sued other companies including Verizon, Google, T-Mobile, and AT&T. The Company answered the complaint and filed counterclaims in response thereto. On April 21, 2015, the Company filed its answer and alleged a number of counterclaims including patent misuse. On or about May 26, 2015, the parties agreed to settle all claims in the suit, including, (but not necessarily limited to) a release and/or covenant not to sue by the plaintiff on future claims that 8x8 products infringe the CallWave patents alleged to have been infringed. The case was dismissed with prejudice on June 5, 2015.
On December 31, 2014, the Company was named as a defendant in a lawsuit, Adaptive Data, LLC v. Oracle Corporation et al.8x8, Inc., along with 30 other defendants filed in the U.S. District Court for the District of Delaware. BasedAdaptive Data, LLC also sued another 36 other defendants on December 31, 2014 and another 16 defendants on January 5, 2015 regarding the same patents asserted in our case. Service of process was never effected on the Company. The Court issued a transferNotice of ownership ofVoluntary Dismissal on January 23, 2015.
On April 15, 2015, the patentCompany was named as a defendant in suit, thea lawsuit, against 8x8 became IPVX Patent Holdings, Inc.,UrgenSync, LLC v. 8x8, Inc. The lawsuit alleges infringement of a patent that is believed to have expired. On November 1, 2011, IPVX dismissed the complaint voluntarily and, filed new complaints separating the defendants, including a new complaint against 8x8. On March 21, 2013, the District Court granted 8x8's Motion to Change Venue, and ordered the transfer of the case toin the U.S. District Court for the Northern DistrictE.D. of California. The Company filed its answer toTexas. UrgenSync, LLC also sued another 14 other defendants on the same day regarding the same patent asserted in the complaint filed against 8x8. The Court issued an Order of Voluntary Dismissal with Prejudice on June 18, 2015.
On April 25, 2014. On July 7, 2014, the parties agreed to participate in a Court-facilitated mediation session, and subsequently agreed to settle all claims in the suit under confidential terms which await finalization; subject to such the written agreement being finalized, this lawsuit is dismissed. The impact of the settlement on16, 2015, the Company will be immaterial.
On March 31, 2014, we werewas named as a defendant in a lawsuit, CallWave Communications LLCSlocumb Law Firm v. 8x8, Inc. CallWave Communications also sued Fonality Inc. on March 31, 2014,, filed in the United States District Court for the Middle District of Alabama. The Slocumb Law Firm alleges that it purchased certain business services from the Company that did not perform as advertised or expected, and previously sued other companiesasserts various causes of actions including Verizon, Google, T-Mobile, and AT&T. We are currently assessing factual and legal defenses to these claims and expect to present a vigorous defense. We have answered the complaint and filed counterclaims in response thereto. We cannot estimate potential liability in this case at this early stagefraud, breach of contract, violations of the litigation.Alabama Deceptive Trade Practices Act and negligence. On June 30, 2015, the Court granted the Company's motion to stay the case and compel the Slocumb Law Firm to arbitrate its claims against the Company in Santa Clara County, California pursuant to a clause mandating arbitration of disputes set forth in the terms and conditions to which Slocumb Law Firm agreed in connection with its purchase of business services from the Company. The Company has not yet received a formal arbitration demand from the Slocumb Law Firm, nor has discovery commenced. The Company intends to vigorously defend against the Slocumb Law Firm's claims.
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State and Municipal Taxes
From time to time, the Company has received inquiries from a number of state and municipal taxing agencies with respect to the remittance of sales, use, telecommunications, excise, and income taxes. Several jurisdictions currently are conducting tax audits of the Company's records. The Company collects or has accrued for taxes that it believes are required to be remitted. The amounts that have been remitted have historically been within the accruals established by the Company.
207. STOCK-BASED COMPENSATION
The following table summarizes stock-based compensation expense (in thousands):
Three Months Ended | ||||||
June 30, | ||||||
2015 | 2014 | |||||
Cost of service revenue | $ | 219 | $ | 115 | ||
Cost of product revenue | - | - | ||||
Research and development | 531 | 314 | ||||
Sales and marketing | 1,197 | 744 | ||||
General and administrative | 1,075 | 674 | ||||
Total stock-based compensation expense related to employee | ||||||
stock options and employee stock purchases, pre-tax | 3,022 | 1,847 | ||||
Tax benefit | - | - | ||||
Stock-based compensation expense related to employee | ||||||
stock options and employee stock purchases, net of tax | $ | 3,022 | $ | 1,847 |
Stock Options, Stock Purchase Right and Restricted Stock Unit Activity
Stock Option activity under all the Company's stock option plans for the three months ended June 30, 2015, is summarized as follows:
Weighted Average | |||||
Number of | Exercise Price | ||||
Shares | Per Share | ||||
Outstanding at March 31, 2015 | 5,327,907 | $ | 5.19 | ||
Granted | 229,000 | 8.66 | |||
Exercised | (88,048) | 3.10 | |||
Canceled/Forfeited | (8,167) | 6.78 | |||
Outstanding at June 30, 2015 | 5,460,692 | $ | 5.37 | ||
Vested and expected to vest at June 30, 2015 | 5,460,692 | $ | 5.37 | ||
Exercisable at June 30, 2015 | 3,316,717 | $ | 3.57 |
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9. DISCONTINUED OPERATIONSStock Purchase Right activity for the three months ended June 30, 2015 is summarized as follows:
Weighted | Weighted | |||||||
Average | Average | |||||||
Grant-Date | Remaining | |||||||
Number of | Fair Market | Contractual | ||||||
Shares | Value | Term (in Years) | ||||||
Balance at March 31, 2015 | 223,835 | $ | 5.92 | 1.50 | ||||
Granted | - | - | ||||||
Vested | (28,760) | 4.42 | ||||||
Forfeited | (1,875) | 11.26 | ||||||
Balance at June 30, 2015 | 193,200 | $ | 6.09 | 1.31 |
Restricted Stock Unit activity for the three months ended June 30, 2015 is summarized as follows:
Weighted | ||||||||
Weighted | Average | |||||||
Average | Remaining | |||||||
Number of | Grant Date | Contractual | ||||||
Shares | Fair Value | Term (in Years) | ||||||
Balance at March 31, 2015 | 2,698,686 | $ | 7.33 | 1.88 | ||||
Granted | 543,147 | 8.85 | ||||||
Vested | (39,921) | 7.86 | ||||||
Forfeited | (35,462) | 8.63 | ||||||
Balance at June 30, 2015 | 3,166,450 | $ | 7.57 | 1.77 |
The following table summarizes stock options outstanding and exercisable at June 30, 2015:
Options Outstanding | Options Exercisable | |||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||
Average | Average | Average | ||||||||||||||||
Exercise | Remaining | Aggregate | Exercise | Aggregate | ||||||||||||||
Price | Contractual | Intrinsic | Price | Intrinsic | ||||||||||||||
Shares | Per Share | Life (Years) | Value | Shares | Per Share | Value | ||||||||||||
$ 0.55 to $ 1.26 | 1,095,000 | $ | 1.11 | 2.6 | $ | 8,595,630 | 1,095,000 | $ | 1.11 | $ | 8,595,630 | |||||||
$ 1.27 to $ 4.32 | 1,166,033 | $ | 1.98 | 1.9 | 8,144,892 | 1,141,467 | $ | 1.93 | 8,029,723 | |||||||||
$ 4.45 to $ 6.86 | 1,353,069 | $ | 6.33 | 8.3 | 3,558,963 | 544,405 | $ | 5.87 | 1,682,505 | |||||||||
$ 7.52 to $ 9.70 | 1,272,022 | $ | 8.99 | 8.8 | 368,605 | 295,412 | $ | 9.54 | 2,925 | |||||||||
$ 9.74 to $ 11.26 | 574,568 | $ | 10.10 | 8.3 | - | 240,433 | $ | 10.05 | - | |||||||||
5,460,692 | $ | 20,668,090 | 3,316,717 | $ | 18,310,783 |
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On September
As of June 30, 2013,2015, there was $26.3 million of unamortized stock-based compensation expense related to unvested stock options and awards which is expected to be recognized over a weighted average period of 2.71 years.
Assumptions Used to Calculate Stock-Based Compensation Expense
The fair value of each of the Company's option grants has been estimated on the date of grant using the Black-Scholes pricing model with the following assumptions:
Three Months Ended | ||||||
June 30, | ||||||
2015 | 2014 | |||||
Expected volatility | 53% | 59% | ||||
Expected dividend yield | - | - | ||||
Risk-free interest rate | 1.59% | 1.53% | ||||
Weighted average expected option term | 5.25 years | 5.00 years | ||||
Weighted average fair value of options granted | $ | 4.17 | $ | 4.01 |
Stock Repurchases
In February 2015, the Company's board of directors authorized the Company completed the saleto purchase up to $20.0 million of its dedicated server hostingcommon stock from time to time until February 29, 2016 (the Repurchase Plan). Share repurchases, if any, will be funded with available cash. Repurchases under the Repurchase Plan may be made through open market purchases at prevailing market prices or in privately negotiated transactions. The timing, volume and nature of share repurchases are subject to market prices and conditions, applicable securities laws and other factors, and are at the discretion of the Company's management. Share repurchases under the Repurchase Plan may be commenced, suspended or discontinued at any time. The remaining authorized repurchase amount at June 30, 2015 was approximately $15.7 million. There were no stock repurchases made under the Repurchase Plan in the three months ended June 30, 2015.
The stock repurchase activity as of June 30, 2015 is summarized as follows:
Shares | Weighted Average Price | Amount | ||||||
Repurchased | Per Share | Repurchased(1) | ||||||
Repurchase of common stock | ||||||||
under 2015 Repurchase Plan | 574,467 | $ | 7.38 | $ | 4,239,216 | |||
Total | 574,467 | $ | 4,239,216 | |||||
(1) Amount excludes commission fees. |
8. INCOME TAXES
For the three months ended June 30, 2015, the Company recorded a provision for income taxes of $0.8 million, which was primarily attributable to income from operations. For the three months ended June 30, 2014, the Company recorded a provision for income taxes of $0.7 million which was primarily attributable to income from operations.
The effective tax rate is calculated by dividing the income tax provision by net income before income tax expense.
At March 31, 2015, there were $2.4 million of unrecognized tax benefits that, if recognized, would have affected the effective tax rate. The Company does not believe that there has been any significant change in the unrecognized tax benefits in the three-month period ended June 30, 2015, and does not expect the remaining unrecognized tax benefit to change materially in the next 12 months. To the extent that the remaining unrecognized tax benefits are ultimately recognized, they will have an impact on the effective tax rate in future periods.
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The Company is subject to taxation in the U.S., California and various other states and foreign jurisdictions in which it has or had a subsidiary or branch operations or it is collecting sales tax. All tax returns from fiscal 1996 to fiscal 2015 may be subject to examination by the Internal Revenue Service, California and various other states. As of July 22, 2015, there were no active federal or state income tax audits. Returns filed in foreign jurisdictions may be subject to examination for the fiscal years 2011 to 2015.
9. NET INCOME (LOSS) PER SHARE
The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net income per share (in thousands, except share and per share data):
Three Months Ended | ||||||
June 30, | ||||||
2015 | 2014 | |||||
Numerator: | ||||||
Net income (loss) available to common stockholders | $ | (472) | $ | 8 | ||
Denominator: | ||||||
Common shares | 88,233 | 88,592 | ||||
Denominator for basic calculation | 88,233 | 88,592 | ||||
Employee stock options | - | 2,480 | ||||
Stock purchase rights | - | 373 | ||||
Denominator for diluted calculation | 88,233 | 91,445 | ||||
Net income (loss) per share | ||||||
Basic | $ | (0.01) | $ | 0.00 | ||
Diluted | $ | (0.01) | $ | 0.00 |
The following shares attributable to outstanding stock options and restricted stock purchase rights were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive (in thousands):
Three Months Ended | ||||||
June 30, | ||||||
2015 | 2014 | |||||
Employee stock options | 2,447 | 1,370 | ||||
Stock purchase rights | 70 | 79 | ||||
Total anti-dilutive employee stock-based securities | 2,517 | 1,449 |
10. SEGMENT REPORTING
ASC 280,Segment Reporting, establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Under ASC 280, the method for determining what information to IRCreport is based upon the way management organizes the operating segments within the Company Inc. ("IRC")for making operating decisions and assessing financial performance.
As of June 30, 2015, the Company has reclassified the presentation of the information regarding its reportable segments to reflect a change from one reportable segment in prior periods to two reportable segments, due to changes in reporting structure as a result no longer provides dedicated server hosting services. Inof a business acquisition that occurred in the transaction, IRC purchased 100%first fiscal quarter of 2016. The Company manages its operations primarily on a geographic basis. The Company's chief operating decision makers (CODMs) are the Chief Executive Officer, the Chief Financial Officer, and the Chief Technology Officer, who evaluate performance of the stockCompany and make decisions regarding allocation of Central Host, Inc., whichresources based on geographic results. The Company's reportable operating segments are the Americas and Europe. The Americas segment is primarily North America. The Europe segment is primarily the United Kingdom. Each operating segment provides similar products and services.
The Company's CODMs evaluate the performance of its operating segments based on revenues and net income. Revenues are attributed to each segment based on the ordering location of the customer or ship to location. The Company allocates corporate overhead costs such as research and development, sales and marketing, general and administrative, amortization expense, stock-based compensation expense, and commitment and contingencies to the US segment. The Company did not allocate goodwill for each segment as the Company had been wholly ownednot completed its analysis of assigning goodwill to its reporting units as of July 31, 2015.
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The Company's revenue distribution by geographic region (based upon the destination of shipments and the customer's service address) was as follows:
Three Months Ended | ||||||
June 30, | ||||||
2015 | 2014 | |||||
Americas (principally US) | 88% | 91% | ||||
Europe | 9% | 8% | ||||
Asia-Pacific | 3% | 1% | ||||
100% | 100% |
Geographic area data is based upon the location of the property and equipment and is as follows (in thousands):
June 30, | March 31, | |||||
2015 | 2015 | |||||
Americas (principally US) | $ | 8,280 | $ | 8,348 | ||
Europe | 2,931 | 1,411 | ||||
Asia-Pacific | 503 | 489 | ||||
Total | $ | 11,714 | $ | 10,248 |
The following table provides financial information by operating segment for the three month period ending June 30, 2015 and 2014 (in thousands):
Three Months Ended | ||||||
June 30, | ||||||
2015 | 2014 | |||||
Americas (principally US): | ||||||
Net Revenues | $ | 43,588 | $ | 35,128 | ||
Net Income (loss) | $ | 251 | $ | 803 | ||
Europe: | ||||||
Net Revenues | $ | 4,304 | $ | 2,785 | ||
Net Income (loss) | $ | (723) | $ | (795) |
11. ACQUISITIONS
DXI Group Limited
On May 26, 2015, the Company entered into a share purchase agreement with the shareholders of DXI Limited, API Telecom Limited, Easycallnow Limited and RAS Telecom Limited (collectively, DXI) for the purchase of the entire share capital of DXI. The transaction closed effective May 29, 2015 and was not subject to regulatory approvals. The total aggregate purchase price was approximately $22.5 million, consisting of $18.7 million in cash paid to the DXI shareholders at closing, and $3.8 million in cash deposited into escrow to be held for two years as security against indemnity claims made by the Company after the closing date. Approximately 352,000 shares of common stock valued at approximately $3.0 million were issued only to former management shareholders of DXI as part of the share purchase agreement and allare subject to certain restrictions, including a four-year annual vesting requirement based on the continued employment of such shareholders. Under ASC 805-10-55-25,Business Combinations, the shares are considered post acquisition compensation vs. consideration transferred. The value of the shares will be amortized over the vesting period of forty-eight months. The shares are further subject to indemnity claims asserted by the Company prior to vesting. Vesting of the shares is subject to acceleration in the event of the shareholder's death or disability, or upon an employment termination without adequate cause, as provided in the share purchase agreement. The cash escrow also applies only to the management shareholders of DXI and is to be released in annual installments over two years. The share purchase agreement contains representations and warranties by the management shareholders that are
17
customary in the UK for transactions of this size and nature. The Company also awarded restricted stock units representing the right to receive approximately 53,000 shares of common stock that were valued at approximately $482,000to certain continuing employees of DXI, which will be amortized as stock-based compensation over the requisite service period.
The Company recorded the acquired tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values. The excess of the consideration transferred over the aggregate fair values of the assets specificacquired and liabilities assumed is recorded as goodwill. The amount of goodwill recognized is primarily attributable to the dedicated server hostingexpected contributions of the entity to the overall corporate strategy in addition to synergies and acquired workforce of the acquired business. The finite−lived intangible assets consist of the following: customer relationships, with an estimated weighted-average useful life of two and five years; and developed technology, with an estimated weighted-average useful life of seven years. The indefinite lived intangible asset consisted of a tradename. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management using various income approach methods. Intangible assets are amortized on a straight-line basis.
The preliminary fair values of the assets acquired and liabilities assumed are as follows (in thousands):
Estimated | |||
Fair Value | |||
Assets acquired: | |||
Cash | $ | 1,318 | |
Current assets | 2,016 | ||
Property and equipment | 1,453 | ||
Intangible assets | 14,691 | ||
Total assets acquired | 19,478 | ||
Liabilities assumed: | |||
Current liabilities and non-current liabilities | (5,997) | ||
Total liabilities assumed | (5,997) | ||
Net identifiable assets acquired | 13,481 | ||
Goodwill | 9,071 | ||
Total consideration transferred | $ | 22,552 |
None of the goodwill recognized is expected to be deductible for income tax purposes.
DXI contributed revenue of approximately $1.1 million and net income was not material for the period from the date of acquisition to June 30, 2015. Total acquisition related costs were approximately $0.8 million. The Company determined it is impractical to include pro forma information given the difficulty in obtaining the historical financial information of DXI. Inclusion of such information would require the Company to make estimates and assumptions regarding DXI's historical financial results that we believe may ultimately prove inaccurate.
Quality Software Corporation
On June 18, 2015, the Company entered into an asset purchase agreement with the shareholder of Quality Software Corporation (QSC) and other parties affiliated with the shareholder and QSC for the purchase of certain assets as per the purchase agreement. The total aggregate fair value of the consideration was approximately $2.9 million, which was paid in cash to the QSC shareholder at closing. As part of the aggregate purchases price, there is also $0.5 million in contingent consideration payable subject to attainment of certain revenue and product release milestones for the acquired business, and $0.3 million in cash held by the Company in escrow to be retained for two years as security against indemnity claims made by the Company after the closing date. The preliminary fair value of the contingent consideration and escrow amounts was $0.7 million at the acquisition date.
The Company sold its dedicated server hosting business for totalrecorded the acquired identifiable intangible assets and liabilities assumed based on their estimated fair values. The excess of the consideration transferred over the aggregate fair values of $3.0 millionthe assets acquired and liabilities assumed is recorded as goodwill. The amount of goodwill recognized is primarily attributable to the expected contributions of the entity to the overall corporate strategy in cash, whichaddition to synergies and acquired workforce of the acquired business. The finite−lived intangible assets consist of the following: customer relationships, with an estimated weighted-average useful life of five years; and developed technology, with an estimated weighted-average useful life of seven years. The indefinite lived intangible asset consisted of a tradename. The fair value assigned to identifiable intangible assets acquired was receivedbased on October 1, 2013.estimates and assumptions made by management using various income approach methods. Intangible assets are amortized on a straight-line basis.
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The dedicated server hosting business has been reportedpreliminary fair values of the assets acquired and liabilities assumed are as discontinued operations. follows (in thousands):
Estimated | |||
Fair Value | |||
Assets acquired: | |||
Intangible assets | $ | 1,675 | |
Goodwill | 1,214 | ||
Total consideration transferred | $ | 2,889 |
The resultsgoodwill recognized is expected to be deductible for income tax purposes.
QSC's contributions to revenue and income for the period from the date of operations position of these discontinued operations is as follows:acquisition to June 30, 2015 was not material. Total acquisition related costs were approximately $0.1 million.
Results of operations:
Three Months Ended | ||||||
June 30, | ||||||
2014 | 2013 | |||||
Revenue | $ | - | $ | 753 | ||
Operating expense | - | 502 | ||||
Income before income taxes | - | 251 | ||||
Provision for income taxes | - | 104 | ||||
Income from discontinued operations | - | 147 |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may," "will," "should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends," and similar expressions are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors. These factors include, but are not limited to, customer acceptance and demand for our cloud communications and collaboration services, the quality and reliability of our services, the prices for our services, customer renewal rates, customer acquisition costs, our ability to compete effectively in the hosted telecommunications and cloud-based computing services business, actions by our competitors, including price reductions for their competitive services, our ability to provide cost-effective and timely service and support to larger distributed enterprises, potential federal and state regulatory actions, compliance costs, potential warranty claims and product defects, our need for and the availability of adequate working capital, our ability to innovate technologically, the timely supply of products by our contract manufacturers, our management's ability to execute its plans, strategies and objectives for future operations, including the execution of integration plans, and to realize the expected benefits of our acquisitions, and potential future intellectual property infringement claims and other litigation that could adversely affect our business and operating results. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. In addition to the factors discussed elsewhere in this Form 10-Q, see the Risk Factors discussion in Item 1A of our 20132015 Form 10-K. The forward-looking statements included in this Form 10-Q are made only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.
BUSINESS OVERVIEW
We developare a leading provider of VoIP and marketSaaS communication solutions in the cloud for SMBs and mid-market and distributed enterprises. We deliver a comprehensive portfoliobroad suite of cloud-based communication and collaboration solutions that includeSaaS services including hosted cloud telephony, virtual contact center, and virtual meeting to in-office and mobile devices through our proprietary unified SaaS platform. Our integrated, "pure-cloud" services platform is based on internally owned and managed technologies and is uniquely positioned to serve mid-market and enterprise businesses making the shift to cloud based Unified Communications. We make a full set of unified communications capabilities including cloud telephony, contact center, video and web conferencing available from anywhere in the world. With 8x8 analytics and virtual desktop software and services. These communication and collaboration servicesreporting, our customers have a robust suite of web based tools that provide enterprise-level analytics that can be used to make highly informed business decisions, whether employees are offered frommobile via the Internet cloud viamobile client or in-office using a software-as-a-service subscription. We also provide cloud-based computing services. As of June 30, 2014, we had 39,340 business customers.softphone, or a desk phone. Since fiscal 2004, substantially all of our revenue has been generated from the sale, license and provision of these cloud products, services and technology.communications services. Prior to fiscal 2003, our focus was on our Voice over Internet Protocol semiconductor business.
Our fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in this report refers to the fiscal year ending March 31 of the calendar year indicated (for example, fiscal 20152016 refers to the fiscal year ending March 31, 2015)2016).
RECLASSIFICATION
Certain amounts previously reported within our consolidated statements of income have been reclassified to conform to the current period presentation. The reclassification included certain prior-period amounts that are related to our discontinued operations.
The reclassification had no impact on our previously reported net income or basic and diluted net income per share amounts. The operating results discussed under "Results of Operations" exclude the impact of our discontinued operations for all periods presented.
22
SUMMARY AND OUTLOOK
In the first quarter of fiscal 2015, we displayed continued momentum with revenue increasing 30% year over year to a record $37.9 million;2016, our channel and mid-market sales increasing 94% year over year, representing 44% of new monthly recurring revenue sold to mid-market customers and by channel sales teams increased 38% year-over-year reflecting strong demand for our services in our target market segment. Revenue from midmarket customers increased 40% year-over year and now represents 45% of our total service revenue. Average monthly service revenue per business customer increased 20% to a record $353, compared with $293 in the quarter;same period last year. Of the $353, DXI contributed $27 to our average monthly service revenue per customer. DXI revenues are primarily usage based. As such, revenues and average monthly service revenue per customer can fluctuate from quarter to quarter. The Company added more than 1,000 net new customers in our first fiscal quarter excluding customers from DXI.
In addition, we closed the acquisitions of DXI and QSC, which broaden our geographic footprint in the UK and Europe, expand our cloud communications portfolio, and add technical development talent in both London, England and Cluj, Romania. We also enhanced our contact center capabilities with focused R&D to deliver one of the most complete platform of cloud-based communications services available to midmarket and enterprise customers. Our ability to offer a broad range of cloud-based mission critical communications services is bringing us larger deals where we continue to displace incumbent, premises-based systems.
As we continue our focus on building a more profitable and sustaining midmarket customer base, one that contributes significantly greater lifetime value than the average small business customer, of $293, up 11% compared with $263 inwe are adding fewer one - five line business customers. We expect this trend to continue based on our continued focus on selling to larger businesses. As our average business customer size continues to grow, 8x8 management believes the same period last year.net additional customer metric no longer correlates to our monthly recurring and top line revenue growth.
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CRITICAL ACCOUNTING POLICIES & ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
RECENT ACCOUNTING PRONOUNCEMENTS
See Item 1 of Part I, "Financial Statements - Note 21 - Basis of Presentation - Recent Accounting Pronouncements."
SELECTED OPERATING STATISTICS
We periodically review certain key business metrics, within the context of our articulated performance goals, in order to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business. The selected operating statistics include the following:
Selected Operating Statistics (1) | Selected Operating Statistics | |||||||||||||||||||
June 30, | March 31, | Dec 31, | Sept. 30, | June 30, | June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | |||||||||||
2014 | 2014 | 2013 | 2013 | 2013 | 2015 | 2015 | 2014 | 2014 | 2014 | |||||||||||
Total business customers(2) | 39,340 | 37,933 | 36,753 | 34,674 | 33,374 | |||||||||||||||
Business customers average monthly | ||||||||||||||||||||
service revenue per customer (3) | $ 293 | $ 287 | $ 274 | $ 268 | $ 263 | |||||||||||||||
Monthly business service revenue churn | 0.4% | 1.2% | 1.5% | 1.2% | 1.2% | |||||||||||||||
service revenue per customer (1) | $ 353 | $ 320 | $ 305 | $ 299 | $ 293 | |||||||||||||||
Monthly business service revenue churn (2)(3) | 1.0% | 0.5% | 1.0% | 0.9% | 0.4% | |||||||||||||||
Overall service margin | 80% | 79% | 81% | 81% | 82% | 81% | 81% | 80% | 79% | 80% | ||||||||||
Overall product margin | -9% | -23% | -34% | -27% | -22% | -18% | -19% | -11% | -8% | -9% | ||||||||||
Overall gross margin | 71% | 70% | 71% | 71% | 72% | 73% | 73% | 72% | 72% | 71% |
_____________
(1) |
|
|
|
| Business customer average monthly service revenue per customer is service revenue from business customers in the period divided by the number of months in the period divided by the simple average number of business customers during the period. |
(2) | Business customer service revenue churn is calculated by dividing the service revenue lost from business customers (after the expiration of 30-day trial) during the period by the simple average of business customer service revenue during the same period and dividing the result by the number of months in the period. |
(3) | Excludes DXI business customer service revenue churn for the period ending June 30, 2015. |
2321
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto.
June 30, | Dollar | Percent | June 30, | Dollar | Percent | |||||||||||||||||
Service revenue | 2014 | 2013 | Change | Change | 2015 | 2014 | Change | Change | ||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||
Three months ended | $ | 34,276 | $ | 26,499 | $ | 7,777 | 29.3% | $ | 44,168 | $ | 34,276 | $ | 9,892 | 28.9% | ||||||||
Percentage of total revenue | 90.4% | 90.6% | 92.2% | 90.4% |
Service revenue consists primarily of revenue attributable to the provision of our 8x8 cloud communication and collaboration services, and royalties earned from cloud technology licenses. We expect that cloud communication and collaboration8x8 service revenues will continue to comprise nearly all of our service revenues for the foreseeable future. 8x8 service revenues increased in the first quarter of fiscal 20152016 primarily due to thea one-time $1.2 million accelerated technology license payment, an increase in our business customer subscriber base (net of customer churn) which includes customers acquired as part of the DXI and QSC acquisitions in the latter part of the quarter, and an increase in the average monthly service revenue per customer. Our businessAverage monthly service subscriber base grewrevenue per customer increased from 33,374$293 at June 30, 2014 to $353 for at June 30, 2015. We expect growth in the number of business customers on June 30, 2013,and average monthly service revenue per customer to 39,340 on June 30, 2014.continue to grow in fiscal 2016.
June 30, | Dollar | Percent | June 30, | Dollar | Percent | |||||||||||||||||
Product revenue | 2014 | 2013 | Change | Change | 2015 | 2014 | Change | Change | ||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||
Three months ended | $ | 3,637 | $ | 2,752 | $ | 885 | 32.2% | $ | 3,724 | $ | 3,637 | $ | 87 | 2.4% | ||||||||
Percentage of total revenue | 9.6% | 9.4% | 7.8% | 9.6% |
Product revenueconsistsrevenue consists primarily of revenue from sales of IP telephones in conjunction with our 8x8 cloud telephony service. Product revenue increased for the three months ended June 30, 20142015 primarily due to an increase in equipment sales to business customers.
No customer represented greater than 10% of the Company's total revenues for the three months ended June 30, 20142015 or 2013.2014.
June 30, | Dollar | Percent | June 30, | Dollar | Percent | |||||||||||||||||
Cost of service revenue | 2014 | 2013 | Change | Change | 2015 | 2014 | Change | Change | ||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||
Three months ended | $ | 6,997 | $ | 4,786 | $ | 2,211 | 46.2% | $ | 8,459 | $ | 6,997 | $ | 1,462 | 20.9% | ||||||||
Percentage of service revenue | 20.4% | 18.1% | 19.2% | 20.4% |
The cost of service revenue primarily consists of costs associated with network operations and related personnel, telephony origination and termination services provided by third party carriers and technology license and royalty expenses. Cost of service revenue for the three months ended June 30, 20142015 increased over the comparable period in the prior fiscal year primarily due to costs associated with a $1.1one-time accelerated technology license payment of $0.4 million, a $0.3 million increase in payroll and related expenses, a $0.3 million increase in third party network services expenses, a $0.5$0.2 million increase in payroll and related expenses,amortization expense, a $0.2$0.1 million increase in depreciation expense, and a $0.1 million increase in consulting, temporary personnel, and outside service expenses.stock-based compensation cost.
June 30, | Dollar | Percent | |||||||||
Cost of product revenue | 2015 | 2014 | Change | Change | |||||||
(dollar amounts in thousands) | |||||||||||
Three months ended | $ | 4,382 | $ | 3,969 | $ | 413 | 10.4% | ||||
Percentage of product revenue | 117.7% | 109.1% |
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June 30, Dollar Percent Cost of product revenue 2014 2013 Change Change (dollar amounts in thousands) Three months ended $ 3,969 $ 3,347 $ 622 18.6% Percentage of product revenue 109.1% 121.6%
The cost of product revenue consists primarily of IP Telephones, estimated warranty obligations and direct and indirect costs associated with product purchasing, scheduling, shipping and handling. The amount of revenue allocated to product revenue based on the relative selling price is less than the cost of the IP phone equipment. The cost of product revenue for the three months ended June 30, 20142015 increased over the comparable period in the prior fiscal year primarily due to an increase in equipment shipped to customers. The decreaseincrease in negative margin is due to lessmore discounting of equipment in the current period.
June 30, | Dollar | Percent | June 30, | Dollar | Percent | |||||||||||||||||
Research and development | 2014 | 2013 | Change | Change | 2015 | 2014 | Change | Change | ||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||
Three months ended | $ | 3,406 | $ | 2,336 | $ | 1,070 | 45.8% | $ | 5,080 | $ | 3,406 | $ | 1,674 | 49.1% | ||||||||
Percentage of total revenue | 9.0% | 8.0% | 10.6% | 9.0% |
Historically, our research and development expenses have consisted primarily of personnel, system prototype design, and equipment costs necessary for us to conduct our development and engineering efforts. During the three months ended June 30, 2014,2015, we expensed all research and development costs as they were incurred in accordance with ASC 985-20. The research and development expenses for the three months ended June 30, 20142015 increased over the comparable period in the prior fiscal year primarily due to a $0.3$1.2 million increase in payroll and related costs, a $0.2 million increase in stock-based compensation costs, a $0.1 million increase in consulting, temporary personnel, and outside service expenses, offset by a $0.3$0.5 million decreaseof consulting and outside services capitalized in amounts capitalized as software developments costs, a $0.2 million increase in stock-based compensation expenses, and a $0.1 million increase in payroll and related costs.accordance with ASC 350-40.
June 30, | Dollar | Percent | June 30, | Dollar | Percent | |||||||||||||||||
Sales and marketing | 2014 | 2013 | Change | Change | 2015 | 2014 | Change | Change | ||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||
Three months ended | $ | 19,160 | $ | 13,072 | $ | 6,088 | 46.6% | $ | 23,824 | $ | 19,160 | $ | 4,664 | 24.3% | ||||||||
Percentage of total revenue | 50.5% | 44.7% | 49.7% | 50.5% |
Sales and marketing expenses consist primarily of personnel and related overhead costs for sales, marketing, and customer service.service which includes deployment engineering. Such costs also include outsourced customer service call center operations, sales commissions, as well as trade show, advertising and other marketing and promotional expenses. Sales and marketing expenses for the first quarter of fiscal 20152016 increased over the same quarter in the prior fiscal year primarily because of a $3.5$2.2 million increase in payroll and related costs, a $0.5 million increase in indirect channel commission expenses, a $0.4 million increase in temporary personnel, consulting and outside service expenses, a $0.5 million increase in indirect channel commission expenses, and a $0.4 increase in stock-based compensation costs, a $0.3 million increase in travel costs, and a $0.3 million increase in advertising expenses.
June 30, | Dollar | Percent | June 30, | Dollar | Percent | |||||||||||||||||
General and administrative | 2014 | 2013 | Change | Change | 2015 | 2014 | Change | Change | ||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||
Three months ended | $ | 3,878 | $ | 2,772 | $ | 1,106 | 39.9% | $ | 6,068 | $ | 3,878 | $ | 2,190 | 56.5% | ||||||||
Percentage of total revenue | 10.2% | 9.5% | 12.7% | 10.2% |
General and administrative expenses consist primarily of personnel and related overhead costs for finance, human resources and general management. General and administrative expenses for the first quarter of fiscal 20152016 increased over the same quarter in the prior fiscal year primarily because of a $0.3$0.6 million increase in legal fees, which are primarily related to our business acquisition costs, a $0.5 million increase in payroll and related costs, a $0.3$0.4 million increase in stock-based compensation expenses, a $0.2 million increase in legal fees,costs, and a $0.2 million increase in recruiting, temporary personnel, consulting and outside service expenses. Increases in legal fees and consulting expenses were primarily due to acquisition activities during the quarter.
June 30, | Dollar | Percent | |||||||||
Other income, net | 2015 | 2014 | Change | Change | |||||||
(dollar amounts in thousands) | |||||||||||
Three months ended | $ | 234 | $ | 177 | $ | 57 | 32.2% | ||||
Percentage of total revenue | 0.5% | 0.5% |
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June 30, Dollar Percent Other income, net 2014 2013 Change Change (dollar amounts in thousands) Three months ended $ 177 $ 15 $ 162 1080.0% Percentage of total revenue 0.5% 0.1%
In the three months ended June 30, 2014, otherOther income, net, primarily consisted of interest income earned on our cash, cash equivalents and investments.investments and amortization or accretion of investments in fiscal 2016 and 2015.
June 30, | Dollar | Percent | June 30, | Dollar | Percent | |||||||||||||||||
Provision for income tax | 2014 | 2013 | Change | Change | 2015 | 2014 | Change | Change | ||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||
Three months ended | $ | 672 | $ | 961 | $ | (289) | -30.1% | $ | 785 | $ | 672 | $ | 113 | 16.8% | ||||||||
Percentage of income | ||||||||||||||||||||||
before provision for income taxes | 98.8% | 32.5% | 250.8% | 98.8% |
For the three months ended June 30, 2015, we recorded a provision for income taxes of $0.8 million, all of which related to net income (loss) from operations. For the three months ended June 30, 2014, we recorded a provision for income taxes of $0.7 million,all of which was primarily attributable to income from continuing operations. For the three months ended June 30, 2013, we recorded a provision for income taxes of $1.1 million which was primarily attributablerelated to net income from continuing operations ($1.0 million) and discontinued operations ($0.1 million).operations.
The effective tax rate set forth in the previous table is calculated by dividing the income tax provision by net income before income tax expense. We estimate our annual effective tax rate at the end of each quarter. In estimating the annual effective tax rate, we, in consultation with our tax advisors, consider, among other things, annual pre-tax income, permanent tax differences, the geographic mix of pre-tax income and the application and interpretations of existing tax laws.
Income from discontinued operations, | June 30, | Dollar | Percent | ||||||||
net of income tax provision | 2014 | 2013 | Change | Change | |||||||
(dollar amounts in thousands) | |||||||||||
Three months ended | $ | - | $ | 147 | $ | (147) | -100.0% | ||||
Percentage of total revenue | 0.0% | 0.5% |
On SeptemberThe increase in the effective tax rate for the three months ended June 30, 2013, we sold2015 compared to the three months ended June 30, 2014 was primarily attributable to net operating losses incurred by our dedicated server hosting business. TheUK subsidiaries not currently tax deductible for US purposes, and various one-time discrete tax items occurring in the current historical results of our dedicated server hosting business have been reclassified to income from discontinued operations, net of income tax provision.quarter.
Liquidity and Capital Resources
As of June 30, 2014,2015, we had approximately $182.0$157.0 million in cash, cash equivalents and short-term investments.
Net cash provided by operating activities for the three months ended June 30, 20142015 was approximately $4.7 million, compared with $5.2$4.7 million for the three months ended June 30, 2013.2014. Cash provided by operating activities has historically been affected by the amount of net income (loss), sales of subscriptions, changes in working capital accounts particularly in deferred revenue due to timing of annual plan renewals, add-backs of non-cash expense items such as the use of deferred tax assets, depreciation and amortization and the expense associated with stock-based awards.
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Net cash used in investing activities was approximately $8.9$28.9 million during the three months ended June 30, 2014.2015. We spent approximately $1.0$1.1 million on the purchase of property and equipment, we spent approximately $23.4 million on acquisitions of two businesses, and we purchased $7.9approximately $4.0 million of short-termshort term investments, net of sales and proceeds from maturities of short-termshort term investments. The net cash used in investing activities for the three months ended June 30, 20132014 was $0.8$8.9 million during which periodpurchased approximately $7.8 million of short term investments, net of sales and maturities of short term investments, and we spent approximately $0.5$1.0 million on the purchase of additional furnitureproperty and fixtures and leasehold and capitalizedequipment.
Net cash provided by financing activities for the three months ended June 30, 2015 were approximately $0.3 million, which was primarily due from cash received from the issuance of software costs.
common stock under our employee stock purchase plan. Our financing activities for the three months ended June 30, 2014 were not material. For the three-month period ended June 30, 2013, our financing activities consisted primarily of cash proceeds of $1.3 million related to the exercise of employee stock options and the purchase of shares under the employee stock purchase plan and $0.1 million of cash used to repurchase shares of our common stock.
Contractual Obligations
We lease our headquarters facility in San Jose, California under an operating lease agreement that expires in October 2019. The lease is an industrial net lease with monthly base rent of $130,821 for the first 15 months with a 3% increase each year thereafter, and requires us to pay property taxes, utilities and normal maintenance costs.
We lease our UK headquarters in Aylesbury UK under an operating lease agreement that expires in March 2017, with a break clause in March 2015 exercisable with six months' notice. The lease has a base monthly rent of $9,201 until March 2015, rising to $9,909 thereafter, and requires us to pay property taxes, service charges, utilities and normal maintenance costs.
We entered into a series of noncancelable capital lease agreements for office equipment bearing interest at various rates. Assets under capital lease at June 30, 20142015 totaled $502,000$0.5 million with accumulated amortization of $325,000.$0.3 million.
In the third quarter of 2010, we amended the contract with one of our third party customer support vendors containing a minimum monthly commitment of approximately $0.4 million. The agreement requires a 150-day notice to terminate. At June 30, 2014,2015, the total remaining obligation under the contract was $2.2 million.
We have entered into contracts with multiple vendors for third party network services. At June 30, 2014,2015, future minimum annual payments under these third party network service contracts were $1.4$2.2 million in fiscal 2015 and $0.22016, $2.5 million for fiscal 2016.2017, and $0.9 million for fiscal 2018.
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We lease our UK headquarters in Aylesbury UK under operating lease agreements that expires in March 2017. The lease was amended in September 2014 for additional space. The lease has a base monthly rent of approximately $8,800, and requires us to pay property taxes, service charges, utilities and normal maintenance costs. We also lease office space in London UK under an operating lease agreement that expires in April 2019. The lease has a base monthly rent of approximately $7,100 until March 2016, rising to approximately $7,300 thereafter.
We lease additional spaces in London UK for our DXI location under operating leases that expire through October 2016. The lease has a base monthly rent of approximately $18,200, and requires us to payservice charges and normal maintenance costs.
DXI has entered into a series of noncancelable capital lease agreements for office equipment bearing interest at various rates. Assets under capital lease at June 30, 2015 totaled $1.9 million with accumulated amortization of $0.8 million.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency
Our financial market risk consists primarily of risks associated with international operations and related foreign currencies. We derive a portion of our revenue from customers in Europe and Asia. In order to reduce the risk from fluctuation in foreign exchange rates, the vast majority of our sales are denominated in U.S. dollars. In addition, almost all of our arrangements with our contract manufacturers are denominated in U.S. dollars. We have not entered into any currency hedging activities. To date, our exposure to exchange rate volatility has not been significant; however, there can be no assurance that there will not be a material impact in the future.
Investments
The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we may maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, debt securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 10% change in interest rates would have a significant impact on our interest income.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Disclosure Controls")(Disclosure Controls) that are designed to ensure that information we are required to disclose in reports filed or submitted under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
As of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision of our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our Disclosure Controls. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our Disclosure Controls were effective as of June 30, 2014.2015.
Limitations on the Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, do not expect that our Disclosure Controls or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Changes in Internal Control over Financial Reporting
During the first quarter of fiscal 2015,2016, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II -- OTHER INFORMATION
Descriptions of our legal proceedings are contained in Part I, Item 1, Financial Statements - Notes to Condensed Consolidated Financial Statements - "Note 8""Note 6".
We face many significant risks in our business, some of which are unknown to us and not presently foreseen. These risks could have a material adverse impact on our business, financial condition and results of operations in the future. We have disclosed a number of material risks under Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended March 31, 2014,2015, which we filed with the Securities and Exchange Commission on May 29, 2015.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 29, 2015, we issued a total of 352,044 shares of our common stock to certain shareholders of DXI Limited as partial consideration in connection with our acquisition of all of the outstanding shares of DXI Limited and several affiliated entities. The shares are subject to a right of repurchase in our favor at a nominal purchase price upon the termination of the recipient's employment or other association with us. This right of repurchase lapses over a four-year period, with one-fourth of such shares being released on each anniversary of the original issuance date, subject to the recipient's continuing employment or other association with us.
The shares were issued pursuant to Regulation S and/or Section 4(2) under the Securities Act of 1933, as amended. The purchasers to whom we offered and sold the shares were residents of the United Kingdom, the offer and sale of such shares were made outside of the United States and we did not conduct any directed selling efforts in the United States.
On July 21, 2015, our board of directors approved the equity-based and cash compensation described below for our non-employee directors for the year beginning with our 2015 Annual Meeting of Stockholders. The board's compensation decisions were based on data and analysis from a study of director compensation prepared by Compensia, our compensation committee's independent compensation consultant, initiated in May 2015.
As equity-based compensation, our non-employee directors receive the following awards:
As cash compensation, non-employee directors receive the following amounts:
Total compensation for each non-employee director upon re-election this year is less than what was paid last year, with the value of the equity-based compensation less than what was paid last year and the cash compensation substantially the same as what was paid last year (based on attendance at board and committee meetings).
27 2014.
Exhibit | Description |
3.2 | |
10.2 | Amendment of Employment Agreement between the Company and Vikram Verma dated June 23, 2015 |
10.3 | Form of Indemnification Agreement for directors and certain officers |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
101.LAB | XBRL Taxonomy Extension Label Linkbase |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
|
|
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: July 25, 201431, 2015
8X8, INC. |
(Registrant) |
By: /s/ |
|
Chief Financial Officer |
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