Exhibit 1.2
MANAGEMENT’S STATEMENT OF RESPONSIBILITIES
The accompanying consolidated financial statements have been prepared by management and approved by the Board of Directors of Sierra Wireless, Inc. The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States and, where appropriate, reflect management’s best estimates and judgments. Where alternative accounting methods exist, management has chosen those methods deemed most appropriate in the circumstances. Management is responsible for the accuracy, integrity and objectivity of the consolidated financial statements within reasonable limits of materiality. Financial information provided elsewhere in the Annual Report is consistent with that in the consolidated financial statements.
To assist management in the discharge of these responsibilities, the Company maintains a system of internal controls over financial reporting as described in Management’s Annual Report on Internal Control Over Financial Reporting on page 36 of Management’s Discussion and Analysis.
The Company’s Audit Committee is appointed by the Board of Directors annually and is comprised exclusively of outside, independent directors. The Audit Committee meets with management as well as with the independent auditors to satisfy itself that management is properly discharging its financial reporting responsibilities and to review the consolidated financial statements and the independent auditors’ report. The Audit Committee reports its findings to the Board of Directors for consideration in approving the consolidated financial statements for presentation to the shareholders. The Audit Committee considers, for review by the Board of Directors and approval by the shareholders, the engagement or reappointment of the independent auditors. KPMG LLP has direct access to the Audit Committee of the Board of Directors.
The consolidated financial statements have been independently audited by KPMG LLP, Chartered Professional Accountants, on behalf of the shareholders, in accordance with the standards of the Public Company Accounting Oversight Board (United States) with respect to the consolidated financial statements for the year ended December 31, 2015. Their report outlines the nature of their audit and expresses their opinion on the consolidated financial statements of the Company.
/s/ Jason W. Cohenour | /s/ David G. McLennan | |
Jason W. Cohenour | David G. McLennan | |
President and | Chief Financial Officer | |
Chief Executive Officer |
February 29, 2016 |
Vancouver, Canada |
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Sierra Wireless, Inc.
We have audited the accompanying consolidated balance sheets of Sierra Wireless, Inc. as of December 31, 2015 and 2014 and the related consolidated statements of operations and comprehensive earnings (loss), equity and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements are the responsibility of Sierra Wireless, Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sierra Wireless, Inc. as of December 31, 2015 and 2014 and its consolidated results of operations and its consolidated cash flows for each of the years in the three-year period ended December 31, 2015 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sierra Wireless, Inc.’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 29, 2016 expressed an unqualified opinion on the effectiveness of Sierra Wireless, Inc.’s internal control over financial reporting.
“KPMG LLP”
Chartered Professional Accountants
February 29, 2016
Vancouver, Canada
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Sierra Wireless, Inc.
We have audited Sierra Wireless, Inc.’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Sierra Wireless, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Sierra Wireless, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sierra Wireless, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive earnings (loss), equity and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 29, 2016 expressed an unqualified opinion on those consolidated financial statements.
“KPMG LLP”
Chartered Professional Accountants
February 29, 2016
Vancouver, Canada
3
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS (LOSS)
(In thousands of U.S. dollars, except where otherwise stated)
Years ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Revenue | $ | 607,798 | $ | 548,523 | $ | 441,860 | ||||||
Cost of goods sold | 413,943 | 369,544 | 296,219 | |||||||||
Gross margin | 193,855 | 178,979 | 145,641 | |||||||||
Expenses | ||||||||||||
Sales and marketing | 54,144 | 50,476 | 42,182 | |||||||||
Research and development (note 8) | 74,020 | 80,937 | 73,112 | |||||||||
Administration | 40,321 | 37,027 | 35,164 | |||||||||
Acquisition-related costs | 1,474 | 1,588 | 508 | |||||||||
Integration | 471 | 1,082 | 27 | |||||||||
Restructuring (note 9) | 951 | 1,598 | 171 | |||||||||
Impairment (note 17 and note 18) | — | 3,756 | — | |||||||||
Amortization | 12,360 | 9,109 | 12,141 | |||||||||
183,741 | 185,573 | 163,305 | ||||||||||
Earnings (loss) from operations | 10,114 | (6,594 | ) | (17,664 | ) | |||||||
Foreign exchange gain (loss) | (11,843 | ) | (12,390 | ) | 3,823 | |||||||
Other income (expense) (note 10) | 115 | 854 | (98 | ) | ||||||||
Loss before income taxes | (1,614 | ) | (18,130 | ) | (13,939 | ) | ||||||
Income tax expense (recovery) (note 11) | 1,060 | (1,277 | ) | 1,611 | ||||||||
Net loss from continuing operations | (2,674 | ) | (16,853 | ) | (15,550 | ) | ||||||
Net earnings from discontinued operations (note 6) | — | — | 70,588 | |||||||||
Net earnings (loss) | (2,674 | ) | (16,853 | ) | 55,038 | |||||||
Other comprehensive income (loss), net of taxes: | ||||||||||||
Foreign currency translation adjustments, net of taxes of $nil | (2,013 | ) | 893 | 604 | ||||||||
Total comprehensive earnings (loss) | $ | (4,687 | ) | $ | (15,960 | ) | $ | 55,642 | ||||
Basic and diluted net earnings (loss) per share (in dollars) (note 13) | ||||||||||||
Continuing operations | $ | (0.08 | ) | $ | (0.53 | ) | $ | (0.50 | ) | |||
Discontinued operations | — | — | 2.29 | |||||||||
$ | (0.08 | ) | $ | (0.53 | ) | $ | 1.79 | |||||
Weighted average number of shares outstanding (in thousands) (note 13) | ||||||||||||
Basic and diluted | 32,166 | 31,512 | 30,771 |
The accompanying notes are an integral part of the consolidated financial statements.
4
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
As at December 31, | ||||||||
2015 | 2014 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 93,936 | $ | 207,062 | ||||
Accounts receivable (note 14) | 116,246 | 106,799 | ||||||
Inventories (note 15) | 32,829 | 17,445 | ||||||
Deferred income taxes (note 11) | 4,735 | 4,779 | ||||||
Prepaids and other (note 16) | 14,179 | 7,826 | ||||||
261,925 | 343,911 | |||||||
Property and equipment (note 17) | 28,947 | 20,717 | ||||||
Intangible assets (note 18) | 84,250 | 37,893 | ||||||
Goodwill (note 19) | 156,488 | 103,966 | ||||||
Deferred income taxes (note 11) | 10,130 | 3,898 | ||||||
Other assets | 4,592 | 4,979 | ||||||
$ | 546,332 | $ | 515,364 | |||||
Liabilities | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities (note 20) | $ | 128,537 | $ | 128,196 | ||||
Deferred revenue and credits | 3,479 | 3,245 | ||||||
132,016 | 131,441 | |||||||
Long-term obligations (note 21) | 44,353 | 26,608 | ||||||
Deferred income taxes (note 11) | 11,667 | 453 | ||||||
188,036 | 158,502 | |||||||
Equity | ||||||||
Shareholders’ equity | ||||||||
Common stock: no par value; unlimited shares authorized; issued and outstanding: | ||||||||
32,337,201 shares (December 31, 2014 — 31,868,541 shares) | 346,453 | 339,640 | ||||||
Preferred stock: no par value; unlimited shares authorized; issued and outstanding: nil shares | — | — | ||||||
Treasury stock: at cost; 240,613 shares (December 31, 2014 — 342,645 shares) | (4,017 | ) | (6,236 | ) | ||||
Additional paid-in capital | 23,998 | 26,909 | ||||||
Retained earnings (deficit) | (160 | ) | 2,514 | |||||
Accumulated other comprehensive loss (note 22) | (7,978 | ) | (5,965 | ) | ||||
358,296 | 356,862 | |||||||
$ | 546,332 | $ | 515,364 | |||||
Commitments and contingencies (note 26) | ||||||||
Subsequent events (note 23) |
The accompanying notes are an integral part of the consolidated financial statements.
On behalf of the Board: | ||
/s/ Jason W. Cohenour | /s/ Robin A. Abrams | |
Jason W. Cohenour | Robin A. Abrams | |
Director | Director |
5
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands of U.S. dollars)
Common Stock | Treasury Shares | |||||||||||||||||||||||||||||
# of shares | $ | # of shares | $ | Additional paid-in capital | Retained earnings (deficit) | Accumulated other comprehensive income (loss) | Total | |||||||||||||||||||||||
Balance as at December 31, 2012 | 30,592,423 | $ | 322,770 | 716,313 | $ | (5,172 | ) | $ | 23,203 | $ | (35,283 | ) | $ | (7,462 | ) | $ | 298,056 | |||||||||||||
Common share cancellation (note 23) | (510,439 | ) | (5,384 | ) | — | — | — | (388 | ) | — | (5,772 | ) | ||||||||||||||||||
Stock option exercises (note 12) | 965,228 | 11,853 | — | — | (3,747 | ) | — | — | 8,106 | |||||||||||||||||||||
Stock-based compensation (note 12) | — | — | — | — | 9,347 | — | — | 9,347 | ||||||||||||||||||||||
Purchase of treasury shares for RSU distribution | — | — | 270,265 | (3,433 | ) | — | — | — | (3,433 | ) | ||||||||||||||||||||
Distribution of vested RSUs | 50,632 | 389 | (479,431 | ) | 3,468 | (4,265 | ) | — | — | (408 | ) | |||||||||||||||||||
Excess tax benefits from equity awards | — | — | — | — | 1,458 | — | — | 1,458 | ||||||||||||||||||||||
Net earnings | — | — | — | — | — | 55,038 | — | 55,038 | ||||||||||||||||||||||
Foreign currency translation adjustments, net of tax | — | — | — | — | — | — | 604 | 604 | ||||||||||||||||||||||
Balance as at December 31, 2013 | 31,097,844 | $ | 329,628 | 507,147 | $ | (5,137 | ) | $ | 25,996 | $ | 19,367 | $ | (6,858 | ) | $ | 362,996 | ||||||||||||||
Stock option exercises (note 12) | 686,384 | 9,236 | — | — | (2,832 | ) | — | — | 6,404 | |||||||||||||||||||||
Stock-based compensation (note 12) | — | — | — | — | 9,404 | — | — | 9,404 | ||||||||||||||||||||||
Purchase of treasury shares for RSU distribution | — | — | 311,333 | (5,955 | ) | — | — | — | (5,955 | ) | ||||||||||||||||||||
Distribution of vested RSUs | 84,313 | 776 | (475,835 | ) | 4,856 | (7,035 | ) | — | — | (1,403 | ) | |||||||||||||||||||
Excess tax benefits from equity awards | — | — | — | — | 1,376 | — | — | 1,376 | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (16,853 | ) | — | (16,853 | ) | ||||||||||||||||||||
Foreign currency translation adjustments, net of tax | — | — | — | — | — | — | 893 | 893 | ||||||||||||||||||||||
Balance as at December 31, 2014 | 31,868,541 | $ | 339,640 | 342,645 | $ | (6,236 | ) | $ | 26,909 | $ | 2,514 | $ | (5,965 | ) | $ | 356,862 | ||||||||||||||
Stock option exercises (note 12) | 357,136 | 5,434 | — | — | (1,597 | ) | — | — | 3,837 | |||||||||||||||||||||
Stock-based compensation (note 12) | — | — | — | — | 8,942 | — | — | 8,942 | ||||||||||||||||||||||
Purchase of treasury shares for RSU distribution | — | — | 306,476 | (6,584 | ) | — | — | — | (6,584 | ) | ||||||||||||||||||||
Distribution of vested RSUs | 111,524 | 1,379 | (408,508 | ) | 8,803 | (12,526 | ) | — | — | (2,344 | ) | |||||||||||||||||||
Excess tax benefits from equity awards | — | — | — | — | 2,270 | — | — | 2,270 | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (2,674 | ) | — | (2,674 | ) | ||||||||||||||||||||
Foreign currency translation adjustments, net of tax | — | — | — | — | — | — | (2,013 | ) | (2,013 | ) | ||||||||||||||||||||
Balance as at December 31, 2015 | 32,337,201 | $ | 346,453 | 240,613 | $ | (4,017 | ) | $ | 23,998 | $ | (160 | ) | $ | (7,978 | ) | $ | 358,296 |
The accompanying notes are an integral part of the consolidated financial statements.
6
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
Years ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Cash flows provided by (used in): | ||||||||||||
Operating activities | ||||||||||||
Net earnings (loss) | $ | (2,674 | ) | $ | (16,853 | ) | $ | 55,038 | ||||
Items not requiring (providing) cash | ||||||||||||
Amortization | 20,216 | 23,517 | 28,296 | |||||||||
Stock-based compensation (note 12(a)) | 8,942 | 9,404 | 9,347 | |||||||||
Gain on sale of AirCard business (note 6) | — | — | (94,078 | ) | ||||||||
Deferred income taxes | (2,841 | ) | 771 | 16,339 | ||||||||
Loss (gain) on disposal of property and equipment | 92 | 21 | (10 | ) | ||||||||
Fair value adjustment of contingent consideration | (761 | ) | — | — | ||||||||
Impairment | — | 3,756 | — | |||||||||
Impairment of assets related to discontinued operations | — | — | 1,012 | |||||||||
Other | 6,115 | 6,764 | (2,687 | ) | ||||||||
Changes in non-cash working capital | ||||||||||||
Accounts receivable | (8,437 | ) | (5,180 | ) | 10,897 | |||||||
Inventories | (16,262 | ) | (8,949 | ) | 11,908 | |||||||
Prepaid expenses and other | (5,748 | ) | 25,421 | (7,254 | ) | |||||||
Accounts payable and accrued liabilities | 16,342 | 10,538 | (13,139 | ) | ||||||||
Deferred revenue and credits | (451 | ) | (510 | ) | 1,147 | |||||||
Cash flows provided by operating activities | 14,533 | 48,700 | 16,816 | |||||||||
Investing activities | ||||||||||||
Acquisition of M2M business of AnyDATA (note 5(a)) | — | — | (5,196 | ) | ||||||||
Acquisition of In Motion Technology, net of cash acquired (note 5(b)) | — | (23,853 | ) | — | ||||||||
Acquisition of Wireless Maingate AB, net of cash acquired (note 5(c)) | (88,449 | ) | — | — | ||||||||
Acquisition of Accel Networks LLC (note 5(d)) | (9,471 | ) | — | — | ||||||||
Acquisition of MobiquiThings SAS, net of cash acquired (note 5(e)) | (14,975 | ) | — | — | ||||||||
Additions to property and equipment | (14,003 | ) | (9,078 | ) | (11,359 | ) | ||||||
Proceeds from sale of property & equipment | 5 | 130 | 32 | |||||||||
Increase in intangible assets | (1,076 | ) | (1,751 | ) | (2,211 | ) | ||||||
Proceeds from sale of AirCard Business (note 6) | — | 13,800 | 119,958 | |||||||||
Net change in short-term investments | — | 2,470 | (2,470 | ) | ||||||||
Increase in other assets | — | (4,054 | ) | — | ||||||||
Cash flows provided by (used in) investing activities | (127,969 | ) | (22,336 | ) | 98,754 | |||||||
Financing activities | ||||||||||||
Issuance of common shares, net of share issue costs | 3,837 | 6,404 | 8,106 | |||||||||
Repurchase of common shares for cancellation (note 23) | — | — | (5,772 | ) | ||||||||
Purchase of treasury shares for RSU distribution | (6,584 | ) | (5,955 | ) | (3,433 | ) | ||||||
Taxes paid related to net settlement of equity awards | (2,344 | ) | (1,403 | ) | (408 | ) | ||||||
Excess tax benefits from equity awards | 2,270 | 1,376 | 1,458 | |||||||||
Decrease in other long-term obligations | (226 | ) | (400 | ) | (876 | ) | ||||||
Cash flows provided by (used in) financing activities | (3,047 | ) | 22 | (925 | ) | |||||||
Effect of foreign exchange rate changes on cash and cash equivalents | 3,357 | 3,260 | (875 | ) | ||||||||
Cash and cash equivalents, increase (decrease) in the year | (113,126 | ) | 29,646 | 113,770 | ||||||||
Cash and cash equivalents, beginning of year | 207,062 | 177,416 | 63,646 | |||||||||
Cash and cash equivalents, end of year | $ | 93,936 | $ | 207,062 | $ | 177,416 | ||||||
Supplemental disclosures: | ||||||||||||
Net income taxes paid | $ | 3,093 | $ | 3,763 | $ | 5,746 | ||||||
Interest paid | 137 | 63 | 130 | |||||||||
Non-cash purchase of property and equipment (funded by obligation under capital lease) | 237 | 296 | 243 |
The accompanying notes are an integral part of the consolidated financial statements.
7
SIERRA WIRELESS, INC.
TABLE OF CONTENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page | ||
Note 1 | Nature of Operations | |
Note 2 | Summary of Significant Accounting Policies | |
Note 3 | Recently Implemented Accounting Standards | |
Note 4 | Changes in Future Accounting Standards | |
Note 5 | Acquisitions | |
Note 6 | Disposition of AirCard Business | |
Note 7 | Segmented Information | |
Note 8 | Research and Development | |
Note 9 | Restructuring | |
Note 10 | Other Income (Expense) | |
Note 11 | Income Taxes | |
Note 12 | Stock-based Compensation Plans | |
Note 13 | Earnings (Loss) Per Share | |
Note 14 | Accounts Receivable | |
Note 15 | Inventories | |
Note 16 | Prepaids and Other | |
Note 17 | Property and Equipment | |
Note 18 | Intangible Assets | |
Note 19 | Goodwill | |
Note 20 | Accounts Payable and Accrued Liabilities | |
Note 21 | Long-term Obligations | |
Note 22 | Accumulated Other Comprehensive Loss | |
Note 23 | Share Capital | |
Note 24 | Fair Value Measurement | |
Note 25 | Financial Instruments | |
Note 26 | Commitments and Contingencies |
8
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
1. NATURE OF OPERATIONS
Sierra Wireless, Inc., together with its subsidiaries (collectively, "the company, we, our”) was incorporated under the Canada Business Corporations Act on May 31, 1993. Sierra Wireless is building the Internet of Things ("IoT") with intelligent wireless solutions that empower organizations to innovate in the connected world. We offer the industry's most comprehensive portfolio of second generation ("2G"), third generation ("3G") and fourth generation ("4G") cellular embedded wireless modules and gateways, seamlessly integrated with our secure cloud and connectivity services. Original Equipment Manufacturers ("OEMs") and enterprises worldwide trust our innovative cellular solutions to get their connected products and services to market faster. Our products, services and solutions connect people, their mobile computers and machines to wireless voice and data networks around the world. We have sales, engineering, and research and development teams located in offices around the world.
We have three reportable segments effective October 1, 2015 reflecting our current organization subsequent to the acquisitions of Wireless Maingate AB ("Maingate"), Accel Networks LLC ("Accel"), and MobiquiThings SAS ("MobiquiThings") (note 5), combined with a reorganization of our Enterprise Solutions business segment to provide dedicated focus on our gateways business. Prior to October 1, 2015, we had two reportable segments, OEM Solutions and Enterprise Solutions, and the operations of the three acquisitions during the year were included in the Enterprise Solutions segment.
We have the following three segments:
OEM Solutions | - AirPrime embedded wireless modules for IoT connectivity, including an embedded application framework to support customer applications |
Enterprise Solutions | - Airlink intelligent gateways, including systems and services for secure gateway management |
Cloud and Connectivity Services | - Cloud and Connectivity services, including managed cellular connectivity for the IoT and cloud based services for operations management and application enablement (reflects our AirVantage cloud plus the acquisitions of Maingate, Accel, MobiquiThings) |
The primary markets for our products are North America, Europe and Asia Pacific.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with U.S. GAAP.
(a) Basis of consolidation
Our consolidated financial statements include the accounts of the company and its subsidiaries, all of which are wholly-owned, from their respective dates of acquisition of control. All inter-company transactions and balances have been eliminated on consolidation.
(b) Use of estimates
The consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the year. On an ongoing basis, management reviews its estimates, including those related to inventory obsolescence,
9
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
estimated useful lives of long-lived assets, valuation of intangible assets, goodwill, royalty and warranty accruals, other liabilities, stock-based compensation, allowance for doubtful accounts receivable, income taxes, restructuring costs, contingent consideration and commitments and contingencies, based on currently available information. Actual amounts could differ from estimates.
(c) Revenue recognition
Revenue from sales of products and services is recognized upon the later of transfer of title or upon shipment of the product to the customer or rendering of the service, so long as persuasive evidence of an arrangement exists, delivery has occurred, price is fixed or determinable, and collection is reasonably assured.
Cash received in advance of the revenue recognition criteria being met is recorded as deferred revenue.
Revenues from contracts with multiple-element arrangements are recognized as each element is earned based on the relative fair value of each element and only when there are no undelivered elements that are essential to the functionality of the delivered elements.
Revenue from activation or set up fees charged in advance of contracted monthly recurring revenue is deferred and recognized over the estimated customer life on a straight line basis.
Revenue from licensed software is recognized at the inception of the license term. Revenue from software maintenance, unspecified upgrades and technical support contracts is recognized over the period such items are delivered or services are provided. Technical support contracts extending beyond the current period are recorded as deferred revenue and amortized into income over the applicable earning period.
Funding from certain research and development agreements is recognized as revenue when certain criteria stipulated under the terms of those funding agreements have been met, and when there is reasonable assurance the funding will be received. Certain research and development funding may be repayable on the occurrence of specified future events. We recognize the liability to repay research and development funding in the period in which conditions arise that would cause research and development funding to be repayable.
(d) Research and development costs
Research and development costs are expensed as they are incurred. Certain software development costs associated with the development of our cloud platform to be sold, leased or marketed are capitalized once technological feasibility is reached.
We follow the cost reduction method of accounting for certain agreements, including government research and development funding, whereby the benefit of the funding is recognized as a reduction in the cost of the related expenditure when certain criteria stipulated under the terms of those funding agreements have been met, and there is reasonable assurance the research and development funding will be received. Certain research and development funding is repayable on the occurrence of specified future events. We recognize the liability to repay research and development funding in the period in which conditions arise that will cause research and development funding to be repayable.
10
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(e) Warranty costs
Warranty costs are accrued upon the recognition of related revenue, based on our best estimates, with reference to past and expected future experience. Warranty obligations are included in accounts payable and accrued liabilities in our consolidated balance sheet.
(f) Royalty costs
We have intellectual property license agreements which generally require us to make royalty payments based on a combination of fixed fees and percentage of the revenue generated by sales of products incorporating the licensed technology. We recognize royalty obligations in accordance with the terms of the respective royalty agreements. Royalty costs are recorded as a component of cost of goods sold in the period when incurred. We also accrue royalty potential obligations based on current best estimates where agreements have not been finalized.
(g) Market development costs
Market development costs are charged to sales and marketing expense to the extent that the benefit is separable from the revenue transaction and the fair value of that benefit is determinable. To the extent that such costs either do not provide a separable benefit, or the fair value of the benefit cannot be reliably estimated, such amounts are recorded as a reduction of revenue.
(h) Income taxes
Income taxes are accounted for using the asset and liability method. Deferred income tax assets and liabilities are based on temporary differences (differences between the accounting basis and the tax basis of the assets and liabilities) and non-capital loss, capital loss, and tax credits carry-forwards are measured using the enacted tax rates and laws expected to apply when these differences reverse. Deferred tax benefits, including non-capital loss, capital loss, and tax credits carry-forwards, are recognized to the extent that realization of such benefits is considered more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that enactment occurs.
We include interest and penalties related to income taxes, including unrecognized tax benefits, in income tax expense (recovery).
Liabilities for uncertain tax positions are recorded based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. We regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.
11
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
We recognize the windfall tax benefits associated with the exercise of stock options and release of restricted share units to additional paid-in capital (“APIC”) when realized. This tax benefit is not recognized until the deduction reduces taxes payable and all other available loss carry-forwards and tax credits have been utilized.
(i) Stock-based compensation and other stock-based payments
Stock options and restricted share units granted to the company’s key officers, directors and employees are accounted for using the fair value-based method. Under this method, compensation cost for stock options is measured at fair value at the date of grant using the Black-Scholes valuation model, and is expensed over the award’s vesting period using the straight-line method. Any consideration paid by plan participants on the exercise of stock options or the purchase of shares is credited to common stock together with any related stock-based compensation expense. Compensation cost for restricted share units is measured at fair value at the date of grant which is the market price of the underlying security, and is expensed over the award’s vesting period using the straight-line method.
(j) Earnings (loss) per common share
Basic earnings (loss) per share is computed by dividing net earnings (loss) for the period by the weighted average number of company common shares outstanding during the reporting period. Diluted earnings (loss) per share is computed using the treasury stock method. When the effect of options and other securities convertible into common shares is anti-dilutive, including when the company has incurred a loss for the period, basic and diluted earnings (loss) per share are the same.
Under the treasury stock method, the number of dilutive shares, if any, is determined by dividing the average market price of shares for the period into the net proceeds of in-the-money options.
(k) Translation of foreign currencies
Our functional or primary operating currency is the U.S. dollar.
Revenue and expense items denominated in foreign currencies are translated at exchange rates prevailing during the period. Monetary assets and liabilities denominated in foreign currencies are translated at the period-end exchange rates. Non-monetary assets and liabilities are translated at exchange rates in effect when the assets are acquired or the obligations are incurred. Foreign exchange gains and losses are reflected in net earnings (loss) for the period.
We have foreign subsidiaries that are considered to be self-contained and integrated within their foreign jurisdiction, and accordingly, use the respective local currency as their functional currency. The assets and liabilities of the foreign subsidiaries, including goodwill and fair value adjustments arising on acquisition, are translated at exchange rates at the balance sheet dates, equity is translated at historical rates, and revenue and expenses are translated at exchange rates prevailing during the period. The foreign exchange gains and losses arising from the translation are reported as a component of other comprehensive income (loss), as presented in note 22, Accumulated Other Comprehensive Loss.
12
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(l) Cash and cash equivalents
Cash and cash equivalents include cash and short-term deposits with original maturities of three months or less. Short-term deposits are valued at amortized cost. The carrying amounts approximate fair value due to the short-term maturities of these instruments.
(m) Allowance for doubtful accounts receivable
We maintain an allowance for our accounts receivable for estimated losses that may result from our customers’ inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged receivables, economic conditions, historical losses, insured amounts, if any, and changes in customer payment cycles and credit-worthiness. Amounts later determined and specifically identified to be uncollectible are charged against this allowance.
If the financial condition of any of our customers deteriorates resulting in an impairment of their ability to make payments, we may increase our allowance.
(n) Inventories
Inventories consist of electronic components and finished goods and are valued at the lower of cost or estimable realizable value, determined on a first-in-first-out basis. Cost is defined as all costs that relate to bringing the inventory to its present condition and location under normal operating conditions.
We review the components of our inventory and our inventory purchase commitments on a regular basis for excess and obsolete inventory based on estimated future usage and sales. Write-downs in inventory value or losses on inventory purchase commitments depend on various items, including factors related to customer demand, economic and competitive conditions, technological advances and new product introductions that vary from current expectations. We believe that the estimates used in calculating the inventory provision are reasonable and properly reflect the risk of excess and obsolete inventory. If customer demands for our inventory are substantially less than our estimates, additional inventory write-downs may be required.
(o) Property and equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. We amortize our property and equipment on a straight-line basis over the following estimated economic lives:
Furniture and fixtures | 3-5 years | ||
Research and development equipment | 3-10 years | ||
Production equipment | 2-7 years | ||
Tooling | 1.5-3 years | ||
Computer equipment | 1-5 years | ||
Software | 1-5 years | ||
Office equipment | 3-5 years | ||
Network equipment | 3-7 years |
13
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
Research and development equipment related amortization is included in research and development expense. Tooling, production and certain network equipment related amortization is included in cost of goods sold. All other amortization is included in amortization expense.
Leasehold improvements and leased vehicles are amortized on a straight-line basis over the lesser of their expected average service life or term of the initial lease.
When we sell property and equipment, we net the historical cost less accumulated depreciation and amortization against the sale proceeds and include the difference in Other income (expense).
(p) Intangible assets
The estimated useful life of intangible assets with definite lives is the period over which the assets are expected to contribute to our future cash flows. When determining the useful life, we consider the expected use of the asset, useful life of any related intangible asset, any legal, regulatory or contractual provisions that limit the useful life, any legal, regulatory, or contractual renewal or extension provisions without substantial costs or modifications to the existing terms and conditions, the effects of obsolescence, demand, competition and other economic factors, and the expected level of maintenance expenditures relative to the cost of the asset required to obtain future cash flows from the asset.
We amortize our intangible assets on a straight-line basis over the following specific periods:
Patents and trademarks | — | 3-5 years | |
Licenses | — | over the shorter of the term of the license or an estimate of their useful life, ranging from three to ten years | |
Intellectual property and customer relationships | — | 3-13 years | |
Brand | — | over the estimated life | |
In-process research and development | — | over the estimated life |
In-process research and development (“IPRD”) are intangible assets acquired as part of business combinations. Prior to their completion, IPRD are intangible assets with indefinite life and they are not amortized but subject to impairment test on an annual basis.
Research and development related amortization is included in research and development expense. All other amortization is included in amortization expense.
(q) Goodwill
Goodwill represents the excess of the purchase price of an acquired business over the fair value assigned to assets acquired and liabilities assumed in a business combination.
Goodwill has an indefinite life, is not amortized, and is subject to a two-step impairment test on an annual basis. The first step compares the fair value of the reporting unit to its carrying amount, which includes the goodwill. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is unnecessary. If the carrying amount exceeds the implied fair value of the
14
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
goodwill, the second step measures the amount of the impairment loss. If the carrying amount exceeds the fair value of the goodwill, an impairment loss is recognized equal to that excess.
(r) Impairment of long-lived assets
Long-lived assets, including property and equipment, and intangible assets other than goodwill, are assessed for potential impairment when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. Intangible assets with indefinite lives are tested annually for impairment and in interim periods if certain events occur indicating that the carrying value of the intangible assets may be impaired.
(s) Comprehensive income (loss)
Comprehensive income (loss) includes net earnings (loss) as well as changes in equity from other non-owner sources. The other changes in equity included in comprehensive income (loss) are comprised of foreign currency cumulative translation adjustments and unrealized gains or losses on available-for-sale investments.
(t) Investment tax credits
Investment tax credits are accounted for using the flow-through method whereby such credits are accounted for as a reduction of income tax expense in the period in which the credit arises.
(u) Comparative figures
Certain figures presented in the consolidated financial statements have been reclassified to conform to the presentation adopted for the current year.
3. RECENTLY IMPLEMENTED ACCOUNTING STANDARDS
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The standard is effective for fiscal years beginning after December 15, 2015. Early application is permitted. We elected to early adopt this standard in the fourth quarter of 2015. During the fourth quarter of 2015, we made adjustments to the amounts previously recorded on the 2015 acquisitions of Wireless Maingate AB, Accel Networks LLC, and MobiquiThings SAS.
15
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
4. CHANGES IN FUTURE ACCOUNTING STANDARDS
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606). The update is intended to clarify the principles of recognizing revenue, and to develop a common revenue standard for U.S. GAAP and IFRS that would remove inconsistencies in revenue requirements, leading to improved comparability of revenue recognition practices across entities and industries. ASC 606 contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much, and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard is effective for annual and interim financial statements for fiscal years beginning after December 15, 2017. Early application is permitted in fiscal years beginning after December 15, 2016. We are in the process of evaluating the impact of this update and cannot reasonably estimate the effect on our financial statements and business at this time.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The update provides guidance about management's responsibility in evaluating whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. Given our financial condition, we do not expect the update to have a significant impact on our disclosures.
In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The update provides accounting guidance for customers with cloud computing arrangements. The standard is effective for interim and annual periods ending after December 15, 2015. Early application is permitted. We do not expect this update to have a material impact on our financial statements and business.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The update provides that an entity should measure inventory within the scope of the standard at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The standard is effective for interim and annual periods ending after December 15, 2016 and applied prospectively. Early application is permitted. We do not expect this update to have a material impact on our financial statements and business.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The standard is effective for interim and annual periods ending after December 15, 2016. Early application is permitted. Other than the revised presentation of deferred tax liabilities and assets from current to noncurrent, we do not expect this update to have an impact on our financial statements and business.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update is to improve transparency and comparability among organizations by requiring lessees to recognize right-of-use assets and lease liabilities on the balance sheet and requiring additional disclosure about leasing arrangements. The standard is effective for fiscal years beginning after December 15, 2018. Early application is permitted. We are in the process of evaluating the impact of this update and cannot reasonably estimate the effect on our financial statements and business at this time.
16
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
5. ACQUISITIONS
(a) M2M business of AnyDATA
On October 16, 2013, we completed the acquisition of substantially all of the M2M embedded module and modem related assets of AnyDATA Corporation ("AnyDATA") for cash consideration of $5.2 million. The acquisition extended our global leadership position in the growing M2M market and offered a significantly enhanced market position for us in key segments, as well as new geographical expansion into Korea. AnyDATA’s results of operations and fair value of assets acquired and liabilities assumed are included in our consolidated financial statements from the date of acquisition.
We accounted for the transaction using the acquisition method and accordingly, the consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values, as at October 16, 2013. The excess of the purchase price over the final value assigned to the net assets acquired was recorded as goodwill.
The following table summarizes the final amounts of the assets acquired and liabilities assumed recognized at the acquisition date:
$ | |||
Assets acquired | |||
Inventory | 1,296 | ||
Machinery and equipment | 68 | ||
Identifiable intangible assets | 1,793 | ||
Goodwill | 2,061 | ||
5,218 | |||
Liabilities assumed | |||
Accrued liabilities | 22 | ||
Fair value of net assets acquired | 5,196 |
The goodwill of $2.1 million resulting from the acquisition offers us a significantly enhanced market position. Goodwill was assigned to the OEM Solutions segment and is not deductible for tax purposes.
The following table provides the components of the identifiable intangible assets acquired that are subject to amortization:
Estimated useful life (in years) | $ | ||||
Customer relationships | 5 | 1,284 | |||
Existing technology | 3 | 385 | |||
In-process research and development | 2 | 124 | |||
1,793 |
17
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(b) In Motion Technology
On March 3, 2014, we completed the acquisition of all the shares of In Motion Technology Inc. ("In Motion") for total cash consideration of $26.1 million. In Motion is a leader in mobile enterprise networks that provides customers with fleets in mission critical environments with a secure, managed end-to-end communications system. In Motion's solutions are used by public safety, transit and utility fleets across the US and Canada.
In Motion's results of operations and fair value of assets acquired and liabilities assumed are included in our consolidated financial statements from the date of acquisition.
We accounted for the transaction using the acquisition method and accordingly, the consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values as at March 3, 2014. The excess of the purchase price over the final value assigned to the net assets acquired was recorded as goodwill.
The following table summarizes the final amounts of the assets acquired and liabilities assumed at the acquisition date:
$ | |||
Assets acquired | |||
Cash | 2,255 | ||
Accounts receivable | 5,189 | ||
Prepaid and other assets | 329 | ||
Inventory | 1,059 | ||
Property and equipment | 84 | ||
Identifiable intangible assets | 13,529 | ||
Goodwill | 8,697 | ||
31,142 | |||
Liabilities assumed | |||
Accounts payable and accrued liabilities | 2,817 | ||
Deferred revenue | 1,772 | ||
Deferred income tax | 445 | ||
Fair value of net assets acquired | 26,108 |
Goodwill of $8.7 million resulting from the acquisition consists largely of the expectation that the acquisition will extend our leadership position in the M2M market and offer us a significantly enhanced market position. Goodwill was assigned to the Enterprise Solutions segment and is not deductible for tax purposes.
18
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The following table provides the components of the identifiable intangible assets acquired that are subject to amortization:
Estimated useful life | $ | ||||
Backlog | 7 months | 358 | |||
Customer relationships | 13 years | 8,739 | |||
Existing technology | 7 years | 3,144 | |||
In-process research and development | 5 years | 1,288 | |||
13,529 |
The following table presents the unaudited pro forma results for the year ended December 31, 2014 and 2013. The pro forma financial information combines the results of operations of Sierra Wireless, Inc. and In Motion as though the businesses had been combined as of the beginning of fiscal 2013. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2013. The pro forma financial information presented includes amortization charges for acquired tangible and intangible assets, and related tax effects.
2014 | 2013 | ||||||
Pro forma information | |||||||
Revenue | $ | 550,279 | $ | 457,152 | |||
Loss from operations | (7,507 | ) | (18,233 | ) | |||
Net earnings (loss) | (17,559 | ) | 54,875 | ||||
Basic and diluted earnings (loss) per share (in dollars) | $ | (0.56 | ) | $ | 1.78 |
(c) Wireless Maingate AB
On January 16, 2015, we acquired all of the shares of Wireless Maingate AB ("Maingate") for cash consideration of $91.6 million ($88.4 million, net of cash acquired). Maingate is a Sweden-based provider of M2M connectivity and data management services.
We accounted for the transaction using the acquisition method and accordingly, recorded the tangible and intangible assets acquired and liabilities assumed on the basis of our estimates of their respective fair values as at January 16, 2015. The excess of the purchase price over the final value assigned to the net assets acquired is recorded as goodwill.
19
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The following table summarizes the final values assigned to the assets acquired and liabilities assumed at the acquisition date:
$ | |||
Assets acquired | |||
Cash | 3,139 | ||
Accounts receivable | 2,795 | ||
Prepaid and other assets | 270 | ||
Inventory | 75 | ||
Property and equipment | 275 | ||
Identifiable intangible assets | 50,231 | ||
Goodwill | 45,593 | ||
102,378 | |||
Liabilities assumed | |||
Accounts payable and accrued liabilities | 4,437 | ||
Deferred revenue | 172 | ||
Deferred income tax | 6,181 | ||
Fair value of net assets acquired | 91,588 |
The goodwill of $45.6 million resulting from the acquisition consists largely of the expectation that the acquisition will strengthen our business and offer us significantly enhanced market position in Europe. Goodwill has been assigned to the Cloud and Connectivity Services segment and is not deductible for tax purposes.
The following table provides the components of the identifiable intangible assets acquired that are subject to amortization:
Estimated useful life | $ | ||||
Brand | 20 years | 4,820 | |||
Customer relationships | 12 years | 34,571 | |||
Existing technology | 4 years | 3,411 | |||
In-process research and development | 8 years | 7,429 | |||
50,231 |
The amount of revenue of Maingate included in our consolidated statements of operations from the acquisition date, through the period ended December 31, 2015, was $15.3 million. The amount of net loss of Maingate included in our consolidated statements of operations for the aforementioned period was $0.3 million.
20
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The following table presents the unaudited pro forma results for the year ended December 31, 2015 and 2014. The pro forma financial information combines the results of operations of Sierra Wireless, Inc. and Maingate as though the businesses had been combined as of the beginning of fiscal 2014. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2014. The unaudited pro forma financial information presented includes amortization charges for acquired tangible and intangible assets, and related tax effects.
2015 | 2014 | ||||||
Pro forma information | |||||||
Revenue | $ | 608,516 | $ | 569,340 | |||
Earnings (loss) from operations | 8,861 | (4,719 | ) | ||||
Net loss | (3,652 | ) | (15,339 | ) | |||
Basic and diluted loss per share (in dollars) | $ | (0.11 | ) | $ | (0.49 | ) |
(d) Accel Networks LLC
On June 18, 2015, we acquired substantially all of the assets of Accel Networks LLC ("Accel") for cash consideration of $9.5 million, plus a maximum contingent consideration of $1.5 million under a performance-based earnout formula. Accel is a leader in managed cellular broadband technology and connectivity services in North America.
At acquisition date, we recognized the fair value of the contingent consideration at $0.8 million based on a weighted probability estimate of achievement of the earnout within the specified 12 month period of the contingent consideration. At December 31, 2015, management determined that the achievement of the earnout will not be attained and recorded the reversal of the fair value of the contingent consideration in acquisition-related costs.
We accounted for the transaction using the acquisition method and accordingly, we have recorded the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values as at June 18, 2015. The excess of the purchase price over the final value assigned to the net assets acquired is recorded as goodwill.
Total consideration for the acquisition is as follows:
$ | |||
Cash | 9,471 | ||
Contingent consideration | 753 | ||
10,224 |
21
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The following table summarizes the final values assigned to the assets acquired and liabilities assumed at the acquisition date:
$ | |||
Assets acquired | |||
Accounts receivable | 551 | ||
Prepaid and other assets | 59 | ||
Inventory | 133 | ||
Property and equipment | 1,388 | ||
Identifiable intangible assets | 5,499 | ||
Goodwill | 3,706 | ||
11,336 | |||
Liabilities assumed | |||
Accounts payable and accrued liabilities | 1,034 | ||
Deferred revenue | 78 | ||
Fair value of net assets acquired | 10,224 |
The goodwill of $3.7 million resulting from the acquisition consists largely of the expectation that the acquisition will strengthen our Cloud and Connectivity Services segment. Goodwill has been assigned to the Cloud and Connectivity Services segment and is deductible for tax purposes.
The following table provides the components of the identifiable intangible assets acquired that are subject to amortization:
Estimated useful life | $ | ||||
Brand | 20 years | 1,169 | |||
Customer relationships | 10 years | 2,352 | |||
Existing technology | 5 years | 1,978 | |||
5,499 |
The amount of revenue of Accel included in our consolidated statements of operations from the acquisition date, through the period ended December 31, 2015, was $4.0 million. The amount of net loss of Accel included in our consolidated statements of operations for the aforementioned period was $0.3 million.
The acquisition had no significant impact on revenues and net earnings for the year ended December 31, 2015. There was also no significant impact on the Company's revenues and net income on a pro forma basis for all periods presented.
22
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(e) MobiquiThings SAS
On September 2, 2015, we acquired all of the shares of MobiquiThings SAS ("MobiquiThings") for cash consideration of €13.5 million ($15.2 million), plus a maximum contingent consideration of €12 million under a performance-based earnout formula. MobiquiThings is a France-based mobile virtual network operator dedicated exclusively to the Machine-to-Machine and Telematics marketplace.
At acquisition date, we recognized the contingent consideration at fair value based on a weighted probability estimate of achievement of the earnout within the specified periods of the contingent consideration. In accordance with ASC 805, Business Combinations, $0.5 million was recognized as purchase price consideration and the remaining balance will be expensed to acquisition-related costs over the earnout period. The change in fair value at each reporting period will be recognized in earnings.
Total consideration for the acquisition is as follows:
€ | $ | ||||
Cash | 13,506 | 15,216 | |||
Contingent consideration | 470 | 529 | |||
13,976 | 15,745 |
We accounted for the transaction using the acquisition method and accordingly, we have recorded the tangible and intangible assets acquired and liabilities assumed on the basis of our estimates of their respective fair values as at September 2, 2015. The excess of the purchase price over the preliminary value assigned to the net assets acquired is recorded as goodwill.
The following table summarizes the preliminary values assigned to the assets acquired and liabilities assumed at the acquisition date:
€ | $ | ||||
Assets acquired | |||||
Cash | 214 | 241 | |||
Accounts receivable | 1,026 | 1,156 | |||
Prepaids and other assets | 107 | 120 | |||
Property and equipment | 1,041 | 1,173 | |||
Identifiable intangible assets | 5,071 | 5,713 | |||
Goodwill | 9,922 | 11,179 | |||
17,381 | 19,582 | ||||
Liabilities assumed | |||||
Accounts payable and accrued liabilities | 1,715 | 1,932 | |||
Deferred income tax | 1,690 | 1,905 | |||
Fair value of net assets acquired | 13,976 | 15,745 |
The goodwill of $11.2 million resulting from the acquisition consists largely of the expectation that the acquisition will further solidify our device-to-cloud strategy. Goodwill will be assigned to the Cloud and Connectivity Services segment and is not deductible for tax purposes.
23
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The following table provides the preliminary components of the identifiable intangible assets acquired that are subject to amortization:
Estimated useful life | € | $ | ||||||
Customer relationships | 11 years | 3,379 | 3,807 | |||||
Existing technology | 4.5 years | 1,692 | 1,906 | |||||
5,071 | 5,713 |
The amount of revenue of MobiquiThings included in our consolidated statements of operations from the acquisition date, through the period ended December 31, 2015, was $0.8 million. The amount of net loss of MobiquiThings included in our consolidated statements of operations for the aforementioned period was $0.2 million.
The acquisition had no significant impact on revenues and net earnings for the year ended December 31, 2015. There was also no significant impact on the Company's revenues and net income on a pro forma basis for all periods presented.
6. DISPOSITION OF AIRCARD BUSINESS
On April 2, 2013, we completed the sale of substantially all of the assets and operations related to our AirCard business to Netgear, Inc. ("Netgear") for total proceeds of $136.6 million after final inventory adjustments plus assumed liabilities. After transaction costs of $2.8 million, we recorded an after tax gain on disposal of $70.2 million. On April 3, 2014, we received the full $13.8 million cash proceeds previously held in escrow for realized net cash proceeds of $127.8 million from the divestiture after giving consideration to related taxes and transaction costs.
The gain on sale of the AirCard business consisted of:
Cash proceeds received | $ | 122,807 | ||
Proceeds held in escrow | 13,800 | |||
Total proceeds | $ | 136,607 | ||
Transaction costs | (2,849 | ) | ||
Net proceeds | $ | 133,758 | ||
Assets and liabilities held for sale | (39,680 | ) | ||
Gross gain on disposal | $ | 94,078 | ||
Income tax expense | (23,896 | ) | ||
Gain on disposal, net of taxes | $ | 70,182 | ||
The company utilized $14.4 million of deferred income tax assets against the gain on sale of the AirCard business.
24
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The results related to the AirCard business have been presented as discontinued operations in the statement of earnings for the year ended December 31, 2013 and were as follows:
2013 | ||||
Revenue | $ | 46,701 | ||
Cost of goods sold | 32,978 | |||
Gross margin | $ | 13,723 | ||
Expenses | (12,918 | ) | ||
Gain on sale of AirCard business | 94,078 | |||
Earnings before income taxes | $ | 94,883 | ||
Income tax expense | (24,295 | ) | ||
Net earnings from discontinued operations | $ | 70,588 |
7. SEGMENTED INFORMATION
We implemented a new organizational structure during the third quarter of 2015 and we have three reportable segments effective October 1, 2015.
•OEM Solutions
•Enterprise Solutions
•Cloud and Connectivity Services
Our segments have changed from those reported at December 31, 2014 when we reported two segments. We have not restated our comparative information as the operations related to Cloud and Connectivity Services that were formerly included in the Enterprise Solutions segment were not material prior to 2015.
As we do not evaluate the performance of our operating segment based on segment assets, management does not classify asset information on a segmented basis. Despite the absence of discrete financial information we do measure our revenue based on other forms of categorization such as by the geographic distribution in which our products are sold.
REVENUE AND GROSS MARGIN BY SEGMENT
Year ended December 31, 2015 | ||||||||||||||||
OEM Solutions | Enterprise Solutions | Cloud and Connectivity Services | Total | |||||||||||||
Revenue | $ | 523,366 | $ | 63,072 | $ | 21,360 | $ | 607,798 | ||||||||
Cost of goods sold | 371,559 | 29,945 | 12,439 | 413,943 | ||||||||||||
Gross margin | $ | 151,807 | $ | 33,127 | $ | 8,921 | $ | 193,855 | ||||||||
Gross margin % | 29.0 | % | 52.5 | % | 41.8 | % | 31.9 | % | ||||||||
Expenses | 183,741 | |||||||||||||||
Earnings from operations | $ | 10,114 | ||||||||||||||
Total assets | $ | 546,332 |
25
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
Year ended December 31, 2014 | ||||||||||||||||
OEM Solutions | Enterprise Solutions | Cloud and Connectivity Services | Total | |||||||||||||
Revenue | $ | 476,650 | $ | 71,873 | $ | — | $ | 548,523 | ||||||||
Cost of goods sold | 336,132 | 33,412 | — | 369,544 | ||||||||||||
Gross margin | $ | 140,518 | $ | 38,461 | $ | — | $ | 178,979 | ||||||||
Gross margin % | 29.5 | % | 53.5 | % | — | 32.6 | % | |||||||||
Expenses | 185,573 | |||||||||||||||
Loss from operations | $ | (6,594 | ) | |||||||||||||
Total assets | $ | 515,364 |
Year ended December 31, 2013 | ||||||||||||||||
OEM Solutions | Enterprise Solutions | Cloud and Connectivity Services | Total | |||||||||||||
Revenue | $ | 382,016 | $ | 59,844 | $ | — | $ | 441,860 | ||||||||
Cost of goods sold | 266,867 | 29,352 | — | 296,219 | ||||||||||||
Gross margin | $ | 115,149 | $ | 30,492 | $ | — | $ | 145,641 | ||||||||
Gross margin % | 30.1 | % | 51.0 | % | — | 33.0 | % | |||||||||
Expenses | 163,305 | |||||||||||||||
Loss from operations | $ | (17,664 | ) | |||||||||||||
Total assets | $ | 512,000 |
REVENUE BY GEOGRAPHICAL REGION
2015 | 2014 | 2013 | ||||||||||
Americas | $ | 196,476 | $ | 157,803 | $ | 135,560 | ||||||
Europe, Middle East and Africa | 116,686 | 87,629 | 91,839 | |||||||||
Asia-Pacific | 294,636 | 303,091 | 214,461 | |||||||||
$ | 607,798 | $ | 548,523 | $ | 441,860 |
PROPERTY AND EQUIPMENT BY GEOGRAPHICAL REGION
2015 | 2014 | |||||||
Americas | $ | 15,324 | $ | 9,477 | ||||
Europe, Middle East and Africa | 8,171 | 6,760 | ||||||
Asia-Pacific | 5,452 | 4,480 | ||||||
$ | 28,947 | $ | 20,717 |
26
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
8. RESEARCH AND DEVELOPMENT
The components of research and development costs consist of the following:
2015 | 2014 | 2013 | ||||||||||
Gross research and development | $ | 74,599 | $ | 82,649 | $ | 75,980 | ||||||
Government tax credits | (579 | ) | (1,712 | ) | (2,868 | ) | ||||||
$ | 74,020 | $ | 80,937 | $ | 73,112 |
9. RESTRUCTURING
The following table provides the activity in the restructuring liability:
2015 | 2014 | |||||||
Balance, beginning of year | $ | 348 | $ | 88 | ||||
Expensed in year | 951 | 1,598 | ||||||
Disbursements | (894 | ) | (1,261 | ) | ||||
Foreign exchange | (32 | ) | (77 | ) | ||||
Balance, end of year | $ | 373 | $ | 348 | ||||
Classification: | ||||||||
Accounts payable and accrued liabilities | $ | 373 | $ | 348 | ||||
By restructuring initiative: | ||||||||
June 2015 | $ | 48 | $ | — | ||||
June 2014 | 325 | 270 | ||||||
May 2009 and prior | — | 78 | ||||||
$ | 373 | $ | 348 |
In June 2015, management implemented a plan to realign responsibilities within our Enterprise Solutions segment to reflect the natural evolution of our business and to provide dedicated focus on our AirLink gateways business and on integrating recent acquisitions with our AirVantage cloud and connectivity capabilities, in order to accelerate services revenue growth. We recorded $590 in severance and other related costs associated with this reorganization. The remaining liability is expected to be paid out by February 2016. During the year ended December 31, 2015, we recorded additional restructuring expenses of $361 related to prior initiatives.
During the year ended December 31, 2014, we made the decision to reduce the scope of our 2G chipset development activities and recorded $1,430 in related severance and other costs.
10. OTHER INCOME (EXPENSE)
The components of other income (expense) for the years ended December 31 were as follows:
2015 | 2014 | 2013 | ||||||||||
Interest income | $ | 269 | $ | 1,009 | $ | 237 | ||||||
Interest expense | (154 | ) | (134 | ) | (345 | ) | ||||||
Other | — | (21 | ) | 10 | ||||||||
$ | 115 | $ | 854 | $ | (98 | ) |
27
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
11. INCOME TAXES
The components of earnings (loss) before income taxes consist of the following:
2015 | 2014 | 2013 | ||||||||||
Continuing operations: | ||||||||||||
Canadian | $ | 2,611 | $ | 3,604 | $ | 6,497 | ||||||
Foreign | (4,225 | ) | (21,734 | ) | (20,436 | ) | ||||||
(1,614 | ) | (18,130 | ) | (13,939 | ) | |||||||
Discontinued operations: | ||||||||||||
Canadian | — | — | 80,395 | |||||||||
Foreign | — | — | 14,488 | |||||||||
— | — | 94,883 | ||||||||||
Earnings (loss) before income taxes | $ | (1,614 | ) | $ | (18,130 | ) | $ | 80,944 |
The income tax expense (recovery) consists of:
2015 | 2014 | 2013 | ||||||||||
Canadian: | ||||||||||||
Current | $ | 11 | $ | (1,165 | ) | $ | 64 | |||||
Deferred | (2,086 | ) | (2,510 | ) | 10,614 | |||||||
(2,075 | ) | (3,675 | ) | 10,678 | ||||||||
Foreign: | ||||||||||||
Current | $ | 5,511 | $ | 2,630 | $ | 9,646 | ||||||
Deferred | (2,376 | ) | (232 | ) | 5,582 | |||||||
3,135 | 2,398 | 15,228 | ||||||||||
Total: | ||||||||||||
Current | $ | 5,522 | $ | 1,465 | $ | 9,710 | ||||||
Deferred | (4,462 | ) | (2,742 | ) | 16,196 | |||||||
$ | 1,060 | $ | (1,277 | ) | $ | 25,906 |
Classification: | ||||||||||||
Income tax expense (recovery) — continuing operations | $ | 1,060 | $ | (1,277 | ) | $ | 1,611 | |||||
Income tax expense — discontinued operations | — | — | 24,295 | |||||||||
$ | 1,060 | $ | (1,277 | ) | $ | 25,906 |
28
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The reconciliation of income taxes calculated at the statutory rate to the actual income tax provision for the years ended December 31 was as follows:
2015 | 2014 | 2013 | ||||||||||
Income tax expense (recovery) at Canadian statutory income tax rates of 26.01% (2014 - 26.02%; 2013 - 25.79%) | $ | (421 | ) | $ | (4,733 | ) | $ | 20,872 | ||||
Increase (decrease) in income taxes for: | ||||||||||||
Permanent and other differences | (464 | ) | (227 | ) | (2,339 | ) | ||||||
Change in statutory/foreign tax rates | (979 | ) | (2,930 | ) | (1,210 | ) | ||||||
Change in valuation allowance | 1,952 | 5,051 | 8,875 | |||||||||
Stock-based compensation expense | 1,206 | 1,385 | (150 | ) | ||||||||
Adjustment to prior years | (234 | ) | 177 | (142 | ) | |||||||
Income tax expense (recovery) | $ | 1,060 | $ | (1,277 | ) | $ | 25,906 |
Deferred tax assets and liabilities
The tax effects of temporary differences that give rise to significant deferred tax assets and deferred tax liabilities were as follows at December 31:
2015 | 2014 | |||||||
Deferred income tax assets (liabilities) | ||||||||
Property and equipment | $ | 2,532 | $ | 3,014 | ||||
Non capital loss carry-forwards | 76,183 | 74,269 | ||||||
Capital loss carry-forwards | 4,487 | 4,778 | ||||||
Scientific research and development expenses and credits | 21,988 | 23,250 | ||||||
Reserves and other | 13,716 | 12,086 | ||||||
Acquired Intangibles | (9,498 | ) | 1,629 | |||||
109,408 | 119,026 | |||||||
Valuation allowance | 106,210 | 110,802 | ||||||
$ | 3,198 | $ | 8,224 |
2015 | 2014 | |||||||
Classification: | ||||||||
Assets | ||||||||
Current | $ | 4,735 | $ | 4,779 | ||||
Non-current | 10,130 | 3,898 | ||||||
Liabilities | ||||||||
Non-current | (11,667 | ) | (453 | ) | ||||
$ | 3,198 | $ | 8,224 |
At December 31, 2015, we have provided for a valuation allowance on our deferred tax assets of $106,210 (2014 - $110,802).
At December 31, 2015, we have Canadian allowable capital loss carry-forwards of $11,519 that are available, indefinitely, to be deducted against future Canadian taxable capital gains. In addition, we have investment tax credits of $20,208 and $8,529 available to offset future Canadian federal and provincial income taxes payable, respectively. Of these amounts, $670 and $472, respectively, are associated with
29
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
windfall tax benefits and will be recorded as additional paid-in-capital when realized. The investment tax credits expire between 2016 and 2035. At December 31, 2015, our U.S. subsidiary has $6,486 of California research & development tax credits which may be carried forward indefinitely. The amounts are after the estimated utilization from the sale of AirCard business described below.
At December 31, 2015, net operating loss carry-forwards for our foreign subsidiaries were $8,291 for U.S. income tax purposes that expire between 2020 and 2023, $91 for Hong Kong income tax purposes, $17,693 for Sweden income tax purposes, $559 for Luxembourg income tax purposes, and $196,938 for French income tax purposes. The Hong Kong, Sweden, Luxembourg and French net operating loss carry-forward may be carried forward indefinitely. Our foreign subsidiaries may be limited in their ability to use foreign net operating losses in any single year depending on their ability to generate significant taxable income. In addition, the utilization of the U.S. net operating losses is also subject to ownership change limitations provided by U.S. federal and specific state income tax legislation. The amount of French net operating losses deducted each year is limited to €1.0 million plus 50% of French taxable income in excess of €1.0 million. Our French net operating losses carry-forward is subject to the “continuity of business” requirement. Our French subsidiaries also have research tax credit carried forward of $6,613 as at December 31, 2015. The French research tax credit may be used to offset against corporate income tax and if any credit is not fully utilized within a three year period following the year the research tax credit is earned, it may be refunded by the French tax authorities. Tax loss and research tax credit carry-forwards are denominated in the currency of the countries in which the respective subsidiaries are located and operate. Fluctuations in currency exchange rates could reduce the U.S. dollar equivalent value of these tax loss and research tax credit carry forwards in future years.
In assessing the realizability of our deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which temporary differences become deductible and the loss carry-forwards or tax credits can be utilized. Management considers projected future taxable income and tax planning strategies in making our assessment.
On the disposition of the AirCard assets to Netgear (note 6), we utilized $27,680 of Canadian scientific research and development expenditures, $44 of Canadian allowable capital loss, $2,621 of Canadian Federal and Provincial investment tax credits, $4,401 and $1,555 of U.S. Federal and California net operating loss, respectively, and $2,439 of U.S. Federal research & development tax credit.
No provision for taxes have been provided on undistributed foreign earnings, as it is the company’s intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. It is not practical to estimate the income tax liability that might be incurred if there is a change in management’s intention in the event that a remittance of such earnings occurs in the future.
Accounting for uncertainty in income taxes
At December 31, 2015, we had gross unrecognized tax benefits of $4,346 (2014 — $5,913). Of this total, $879 (2014 — $2,429) represents the amount of unrecognized tax benefits that, if recognized, would favorably impact our effective tax rate.
30
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
Below is a reconciliation of the total amounts of unrecognized tax benefits for the years ended December 31:
2015 | 2014 | |||||||
Unrecognized tax benefits, beginning of year | $ | 5,913 | $ | 8,304 | ||||
Increases — tax positions taken in prior periods | 78 | 61 | ||||||
Increases — tax positions taken in current period | 115 | 15 | ||||||
Settlements and lapses of statute of limitations | (1,760 | ) | (2,467 | ) | ||||
Unrecognized tax benefits, end of year | $ | 4,346 | $ | 5,913 |
We recognize interest expense and penalties related to unrecognized tax benefits within the provision for income tax expense on the consolidated statement of operations. At December 31, 2015, we had accrued $1,044 (2014 - $1,305) for interest and penalties.
In the normal course of business, we are subject to audit by the Canadian federal and provincial taxing authorities, by the U.S. federal and various state taxing authorities and by the taxing authorities in various foreign jurisdictions. Tax years ranging from 2004 to 2015 remain subject to examination in Canada, the United States, the United Kingdom, France, Germany, Australia, China, Hong Kong, Brazil, South Africa, Japan, Korea, Taiwan, Italy, Sweden, Norway, India, Spain, and Luxembourg.
The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. The Company believes it is reasonably possible that certain tax matters may be concluded in the next 12 months. The Company estimates that the unrecognized tax benefits at December 31, 2015 could be increased by approximately $162 in the next 12 months.
12. STOCK-BASED COMPENSATION PLANS
(a) Stock-based compensation expense:
2015 | 2014 | 2013 | ||||||||||
Cost of goods sold | $ | 630 | $ | 519 | $ | 406 | ||||||
Sales and marketing | 2,151 | 1,868 | 1,862 | |||||||||
Research and development | 1,422 | 1,809 | 1,433 | |||||||||
Administration | 4,739 | 5,208 | 4,289 | |||||||||
Continuing operations | 8,942 | 9,404 | 7,990 | |||||||||
Discontinued operations | — | — | 1,357 | |||||||||
$ | 8,942 | $ | 9,404 | $ | 9,347 | |||||||
Stock option plan | 2,090 | 2,250 | 2,548 | |||||||||
Restricted stock plan | 6,852 | 7,154 | 6,799 | |||||||||
$ | 8,942 | $ | 9,404 | $ | 9,347 |
(b) Stock option plan
Under the terms of our Stock Option Plan (the “Plan”), our Board of Directors may grant options to employees, officers and directors. The maximum number of shares available for issue under the Plan is the lesser of 10% of the number of issued and outstanding common shares from time to time or 7,000,000 common shares. Based on the number of shares outstanding as at December 31, 2015, stock options exercisable into 2,267,809 common shares are available for future allocation under the Plan.
31
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The Plan provides that the exercise price of an option will be determined on the date of grant and will not be less than the closing market price of our stock at that date. Options generally vest over four years, with the first 25% vesting at the first anniversary date of the grant and the balance vesting in equal amounts at the end of each month thereafter. We determine the expiry date of each option at the time it is granted, which cannot be more than five years after the date of the grant.
The fair value of share options was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
2015 | 2014 | 2013 | ||||||||||
Risk-free interest rate | 0.97 | % | 1.25 | % | 0.89 | % | ||||||
Annual dividends per share | Nil | Nil | Nil | |||||||||
Expected stock price volatility | 44 | % | 46 | % | 50 | % | ||||||
Expected option life (in years) | 4.0 | 4.0 | 4.0 | |||||||||
Average fair value of options granted (in dollars) | $ | 10.64 | $ | 6.86 | $ | 4.42 |
There is no dividend yield because we do not pay, and do not plan to pay, cash dividends on our common shares. The expected stock price volatility is based on the historical volatility of our average monthly stock closing prices over a period equal to the expected life of each option grant. The risk-free interest rate is based on yields from risk-free instruments with a term equal to the expected term of the options being valued. The expected life of options represents the period of time that the options are expected to be outstanding based on historical data of option holder exercise and termination behavior. We estimate forfeitures at the time of grant and, if necessary, revise that estimate if actual forfeitures differ and adjust stock-based compensation expense accordingly.
The following table presents stock option activity for the years ended December 31:
Number of | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||
Options | Cdn.$ | U.S.$ | In Years | U.S.$ | ||||||||||
Outstanding, December 31, 2012 | 2,355,877 | 9.89 | 9.96 | 2.5 | 735 | |||||||||
Granted | 642,025 | 11.92 | 11.22 | |||||||||||
Exercised | (965,228 | ) | 8.81 | 8.29 | 5,425 | |||||||||
Forfeited | (495,088 | ) | 15.14 | 14.25 | ||||||||||
Outstanding, December 31, 2013 | 1,537,586 | 10.37 | 9.76 | 3.1 | 22,164 | |||||||||
Granted | 300,150 | 21.57 | 18.57 | |||||||||||
Exercised | (686,384 | ) | 10.64 | 9.15 | 10,535 | |||||||||
Forfeited | (7,295 | ) | 11.83 | 10.18 | ||||||||||
Outstanding, December 31, 2014 | 1,144,057 | 13.94 | 12.00 | 2.9 | 40,550 | |||||||||
Granted | 218,331 | 41.62 | 29.94 | |||||||||||
Exercised | (357,136 | ) | 14.42 | 10.37 | 6,813 | |||||||||
Forfeited | (39,341 | ) | 23.74 | 17.09 | ||||||||||
Outstanding, December 31, 2015 | 965,911 | 21.47 | 15.44 | 2.5 | 3,541 |
The intrinsic value of outstanding stock options is calculated as the quoted market price of the stock at the balance sheet date, or date of exercise, less the exercise price of the option.
32
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The following table summarizes the stock options outstanding and exercisable at December 31, 2015:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Range of | Number of | Weighted Average Remaining Option Life | Weighted Average Exercise Price | Number of Options | Weighted Average Exercise Price | |||||||||||||||
Exercise Prices | Options | (years) | Cdn.$ | U.S.$ | Exercisable | Cdn.$ | U.S.$ | |||||||||||||
$5.38 – $8.45 U.S. $7.48 – $11.75 Cdn | 293,562 | 1.5 | 10.62 | 7.64 | 206,966 | 10.41 | 7.49 | |||||||||||||
$8.46 – $11.72 U.S. $11.76 – $16.28 Cdn | 237,441 | 2.0 | 15.52 | 11.17 | 138,421 | 15.41 | 11.09 | |||||||||||||
$11.73 – $19.46 U.S. $16.29 – $27.05 Cdn | 228,609 | 3.2 | 23.16 | 16.66 | 67,859 | 22.92 | 16.49 | |||||||||||||
$19.47 – $33.60 U.S. $27.06 – $46.71 Cdn | 206,299 | 4.1 | 41.86 | 30.12 | 5,276 | 33.50 | 24.10 | |||||||||||||
965,911 | 2.5 | 21.47 | 15.44 | 418,522 | 14.38 | 10.35 |
The options outstanding at December 31, 2015 expire between February 14, 2016 and November 9, 2020.
As at December 31, 2015, the unrecognized stock-based compensation cost related to the non-vested stock options was $3,171 (2014 — $3,369; 2013 — $3,641), which is expected to be recognized over a weighted average period of 2.4 years (2014 — 2.4 years; 2013 — 2.5 years).
(c) Restricted share plans
We have two market based restricted share unit plans: one for U.S. employees and one for all non-U.S. employees, and a treasury based restricted share unit plan (collectively, the “RSPs”). The RSPs further our growth and profitability objectives by providing long-term incentives to certain executives and other key employees and also encourage our objective of employee share ownership through the granting of restricted share units (“RSUs”). There is no exercise price or monetary payment required from the employees upon the grant of an RSU or upon the subsequent delivery of our common shares (or, in certain jurisdictions, cash in lieu at the option of the Company) to settle vested RSUs. The form and timing of settlement is subject to local laws. With respect to the treasury based RSPs, the maximum number of share units outstanding under the Plan shall not exceed 3.5% of the number of issued and outstanding shares. Based on the number of shares outstanding as at December 31, 2015, 601,187 share units are available for future allocation under the Plan. With respect to the two market based RSPs, independent trustees purchase Sierra Wireless common shares over the facilities of the TSX and Nasdaq, which are used to settle vested RSUs. The existing trust funds are variable interest entities and are included in these consolidated financial statements as treasury shares held for RSU distribution.
Generally, RSUs vest over three years, in equal one-third amounts on each anniversary date of the grant. RSU grants to employees who are resident in France for French tax purposes will not vest before the second anniversary from the date of grant, and any shares issued are subject to an additional two year tax hold period.
The intrinsic value of outstanding RSUs is calculated as the quoted market price of the stock at the balance sheet date, or date of vesting.
33
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The following table summarizes the RSU activity for the years ended December 31:
Number of | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||
RSUs | Cdn.$ | U.S.$ | In years | U.S.$ | ||||||||||
Outstanding, December 31, 2012 | 1,224,995 | 8.71 | 8.68 | 1.9 | 9,746 | |||||||||
Granted | 843,592 | 12.09 | 11.38 | �� | ||||||||||
Vested / settled | (573,613 | ) | 9.54 | 8.98 | 6,456 | |||||||||
Forfeited | (52,859 | ) | 9.74 | 9.17 | ||||||||||
Outstanding, December 31, 2013 | 1,442,115 | 10.59 | 9.98 | 1.8 | 34,867 | |||||||||
Granted | 342,225 | 21.67 | 18.66 | |||||||||||
Vested / settled | (617,755 | ) | 10.64 | 9.16 | 12,364 | |||||||||
Forfeited | (4,820 | ) | 13.24 | 11.40 | ||||||||||
Outstanding, December 31, 2014 | 1,161,765 | 14.56 | 12.54 | 1.7 | 55,118 | |||||||||
Granted | 230,689 | 42.16 | 30.33 | |||||||||||
Vested / settled | (590,720 | ) | 14.20 | 10.21 | 19,494 | |||||||||
Forfeited | (23,501 | ) | 30.02 | 21.60 | ||||||||||
Outstanding, December 31, 2015 | 778,233 | 25.08 | 18.04 | 1.8 | 12,219 | |||||||||
Outstanding – vested and not settled | 99,552 | |||||||||||||
Outstanding – unvested | 678,681 | |||||||||||||
Outstanding, December 31, 2015 | 778,233 |
As at December 31, 2015, the total remaining unrecognized compensation cost associated with the RSUs totaled $6,838 (2014 — $7,209; 2013 — $8,058), which is expected to be recognized over a weighted average period of 1.3 years (2014 — 1.1 years; 2013 — 1.8 years).
13. EARNINGS (LOSS) PER SHARE
The following table provides the reconciliation between basic and diluted earnings (loss) per share:
2015 | 2014 | 2013 | ||||||||||
Net loss from continuing operations | $ | (2,674 | ) | $ | (16,853 | ) | $ | (15,550 | ) | |||
Net earnings from discontinued operations | — | — | 70,588 | |||||||||
Net earnings (loss) | $ | (2,674 | ) | $ | (16,853 | ) | $ | 55,038 | ||||
Weighted average shares used in computation of: | ||||||||||||
Basic | 32,166 | 31,512 | 30,771 | |||||||||
Assumed conversion | — | — | — | |||||||||
Diluted | 32,166 | 31,512 | 30,771 | |||||||||
Basic and dilutive earnings (loss) per share (in dollars): | ||||||||||||
Continuing operations | $ | (0.08 | ) | $ | (0.53 | ) | $ | (0.50 | ) | |||
Discontinued operations | — | — | 2.29 | |||||||||
$ | (0.08 | ) | $ | (0.53 | ) | $ | 1.79 |
34
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
As the Company incurred a loss for the year ended December 31, 2015, all equity awards were anti-dilutive and are excluded from the diluted weighted average shares.
14. ACCOUNTS RECEIVABLE
The components of accounts receivable at December 31 were as follows:
2015 | 2014 | |||||||
Trade receivables | $ | 99,027 | $ | 92,531 | ||||
Less: allowance for doubtful accounts | (2,088 | ) | (2,275 | ) | ||||
96,939 | 90,256 | |||||||
Sales taxes receivable | 2,096 | 1,979 | ||||||
Other receivables | 17,211 | 14,564 | ||||||
$ | 116,246 | $ | 106,799 |
The movement in the allowance for doubtful accounts during the years ended December 31 were as follows:
2015 | 2014 | 2013 | ||||||||||
Balance, beginning of year | $ | 2,275 | $ | 2,279 | $ | 2,435 | ||||||
Bad debt expense | 615 | 329 | 1,077 | |||||||||
Write-offs and settlements | (792 | ) | (290 | ) | (1,242 | ) | ||||||
Foreign exchange | (10 | ) | (43 | ) | 9 | |||||||
$ | 2,088 | $ | 2,275 | $ | 2,279 |
15. INVENTORIES
The components of inventories at December 31 were as follows:
2015 | 2014 | |||||||
Electronic components | $ | 19,203 | $ | 5,608 | ||||
Finished goods | 13,626 | 11,837 | ||||||
$ | 32,829 | $ | 17,445 |
16. PREPAIDS AND OTHER
The components of prepaids and other at December 31 were as follows:
2015 | 2014 | |||||||
Inventory advances | $ | 1,159 | $ | 639 | ||||
Insurance and licenses | 7,601 | 3,009 | ||||||
Other | 5,419 | 4,178 | ||||||
$ | 14,179 | $ | 7,826 |
35
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
17. PROPERTY AND EQUIPMENT
The components of property and equipment at December 31 were as follows:
2015 | ||||||||||||
Cost | Accumulated amortization | Net book value | ||||||||||
Furniture and fixtures | $ | 1,420 | $ | 867 | $ | 553 | ||||||
Research and development equipment | 29,184 | 21,435 | 7,749 | |||||||||
Production equipment and tooling | 40,181 | 29,161 | 11,020 | |||||||||
Computer equipment | 7,256 | 5,562 | 1,694 | |||||||||
Software | 7,134 | 4,852 | 2,282 | |||||||||
Leasehold improvements | 4,456 | 2,121 | 2,335 | |||||||||
Leased vehicles | 947 | 547 | 400 | |||||||||
Office equipment | 2,533 | 2,132 | 401 | |||||||||
Network equipment | 2,828 | 315 | 2,513 | |||||||||
$ | 95,939 | $ | 66,992 | $ | 28,947 |
2014 | ||||||||||||
Cost | Accumulated amortization | Net book value | ||||||||||
Furniture and fixtures | $ | 1,245 | $ | 708 | $ | 537 | ||||||
Research and development equipment | 28,217 | 20,805 | 7,412 | |||||||||
Production equipment and tooling | 34,590 | 27,212 | 7,378 | |||||||||
Computer equipment | 6,053 | 4,770 | 1,283 | |||||||||
Software | 5,476 | 4,178 | 1,298 | |||||||||
Leasehold improvements | 3,244 | 1,412 | 1,832 | |||||||||
Leased vehicles | 1,111 | 663 | 448 | |||||||||
Office equipment | 2,594 | 2,065 | 529 | |||||||||
$ | 82,530 | $ | 61,813 | $ | 20,717 |
During the year ended December 31, 2014, the Company decided to reduce the scope of its 2G chipset development activities, resulting in a $611 impairment to production equipment and tooling. For the year ended December 31, 2015, no impairment was recognized relating to property and equipment.
Amortization expense relating to property and equipment was $8,479, $8,974, and $10,057 for the years ended December 31, 2015, 2014, and 2013, respectively.
36
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
18. INTANGIBLE ASSETS
The components of intangible assets at December 31 were as follows:
2015 | ||||||||||||
Cost | Accumulated amortization | Net book value | ||||||||||
Patents and trademarks | $ | 14,285 | $ | 8,701 | $ | 5,584 | ||||||
Licenses | 54,622 | 53,143 | 1,479 | |||||||||
Intellectual property | 17,622 | 9,231 | 8,391 | |||||||||
Customer relationships | 89,638 | 35,543 | 54,095 | |||||||||
Brand | 5,787 | 252 | 5,535 | |||||||||
In-process research and development | 12,984 | 3,818 | 9,166 | |||||||||
$ | 194,938 | $ | 110,688 | $ | 84,250 |
2014 | ||||||||||||
Cost | Accumulated amortization | Net book value | ||||||||||
Patents and trademarks | $ | 14,919 | $ | 8,114 | $ | 6,805 | ||||||
Licenses | 58,302 | 54,866 | 3,436 | |||||||||
Intellectual property | 8,418 | 7,081 | 1,337 | |||||||||
Customer relationships | 52,989 | 31,060 | 21,929 | |||||||||
In-process research and development | 8,498 | 4,112 | 4,386 | |||||||||
$ | 143,126 | $ | 105,233 | $ | 37,893 |
Estimated annual amortization expense for the next 5 years ended December 31 are as follows:
2016 | $ | 12,441 | |
2017 | 12,003 | ||
2018 | 11,206 | ||
2019 | 9,420 | ||
2020 | 7,692 |
During the year ended December 31, 2014, the Company decided to reduce the scope of its 2G chipset development activities, resulting in a $3,145 impairment to licenses and in-process research and development. For the year ended December 31, 2015, no impairment was recognized relating to intangible assets.
Amortization expense relating to intangible assets was $11,737, $14,543, and $18,239 for the years ended December 31, 2015, 2014, and 2013, respectively.
The weighted-average remaining useful lives of intangible assets was 8.7 years as at December 31, 2015.
At December 31, 2015, a net carrying amount of $8,404 (December 31, 2014 - $1,288) included in intangible assets was not subject to amortization.
37
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
19. GOODWILL
We assessed the recoverability of goodwill as at September 30, 2015 for each of the identified reporting units and determined that the fair value of each of the two reporting units exceeded its carrying value. Therefore, the second step of the impairment test that measures the amount of an impairment loss by comparing the implied fair market value with the carrying amount of goodwill for each reporting unit was not required.
We implemented a new organization structure that resulted in three reportable segments effective October 1, 2015. Accordingly, we reassigned goodwill using a relative fair value allocation approach and updated our goodwill valuation analysis. There was no impairment of goodwill during the years ended December 31, 2015, 2014 and 2013.
The changes in the carrying amount of goodwill for the years ended December 31 were as follows:
2015 | 2014 | |||||||
Balance at beginning of year | $ | 103,966 | $ | 102,718 | ||||
Goodwill acquired (note 5(c), 5(d) and 5(e)) | 60,478 | 8,697 | ||||||
Foreign currency translation adjustments | (7,956 | ) | (7,449 | ) | ||||
$ | 156,488 | $ | 103,966 | |||||
OEM Solutions | $ | 103,567 | $ | 80,699 | ||||
Enterprise Solutions | 24,993 | 23,267 | ||||||
Cloud and Connectivity Services | 27,928 | — | ||||||
$ | 156,488 | $ | 103,966 |
20. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities at December 31 were as follows:
2015 | 2014 | |||||||
Trade payables | $ | 81,879 | $ | 75,452 | ||||
Inventory commitment reserve | 1,866 | 1,777 | ||||||
Accrued royalties | 9,750 | 18,895 | ||||||
Accrued payroll and related liabilities | 10,879 | 11,300 | ||||||
Taxes payable (including sales taxes) | 2,501 | 4,742 | ||||||
Product warranties (note 26(b)(iii)) | 7,362 | 5,951 | ||||||
Other | 14,300 | 10,079 | ||||||
$ | 128,537 | $ | 128,196 |
38
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
21. LONG-TERM OBLIGATIONS
The components of long-term obligations at December 31 were as follows:
2015 | 2014 | |||||||
Accrued royalties | $ | 35,451 | $ | 22,101 | ||||
Other | 8,902 | 4,507 | ||||||
$ | 44,353 | $ | 26,608 |
22. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss at December 31, net of taxes, were as follows:
2015 | 2014 | |||||||
Release of foreign currency translation relating to acquisition of non-controlling interest | $ | 178 | $ | 178 | ||||
Translation adjustment related to change in functional currency | (728 | ) | (728 | ) | ||||
Foreign currency translation adjustments | (7,428 | ) | (5,415 | ) | ||||
$ | (7,978 | ) | $ | (5,965 | ) |
During the second quarter of 2015, we classified an intercompany EUR denominated loan as a net investment in a foreign subsidiary which resulted in foreign exchange gains and losses on revaluation being prospectively classified in other comprehensive income.
23. SHARE CAPITAL
On February 4, 2016, we received approval from the TSX of our Notice of Intention to make a Normal Course Issuer Bid (the "Bid"). Pursuant to the Bid, we may purchase for cancellation up to 3,149,199 of our common shares, or approximately 9.7% of the common shares outstanding as of the date of the announcement. The Bid commenced on February 9, 2016 and will terminate on the earlier of: (i) February 8, 2017, (ii) the date the Company completes its purchases pursuant to the notice of intention filed with the TSX, or (iii) the date of notice by the Company of termination of the Bid. As of February 29, 2016, we had purchased 549,583 common shares at an average price of $11.18 per share.
On February 29, 2016, we established an automatic share purchase plan in connection with the previously announced Bid with a designated broker to allow for the purchase of Common Shares under the NCIB at times when the Company would ordinarily not be permitted to purchase shares due to regulatory restrictions.
On February 6, 2013, we received regulatory approval allowing us to purchase for cancellation up to 1,529,687 of our common shares by a normal course issuer bid (“the Bid”) on the Toronto Stock Exchange and NASDAQ Global Market. The Bid commenced on February 14, 2013 and terminated on February 13, 2014. During the course of the Bid, no purchases and cancellations were made in 2014 (2013 - 510,439 common shares).
39
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
24. FAIR VALUE MEASUREMENT
(a) Fair value presentation
An established fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:
Level 1 | — | Quoted prices in active markets for identical assets or liabilities. |
Level 2 | — | Observable inputs other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3 | — | Inputs that are generally unobservable and are supported by little or no market activity and that are significant to the fair value determination of the assets or liabilities. |
The carrying value of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate their fair value due to the immediate or short-term maturity of these financial instruments. Based on borrowing rates currently available to us for loans with similar terms, the carrying values of our obligations under capital leases, long-term obligations and other long-term liabilities approximate their fair values.
We have contingent consideration related to the acquisitions of Accel and MobiquiThings in 2015 that was measured using unobservable inputs which represents a Level 3 measurement within the fair value hierarchy. The contingent consideration is measured at each reporting period and any changes in the fair value are recorded in earnings.
(b) Credit Facilities
We have a $10 million revolving term credit facility ("Revolving Facility") with Toronto Dominion Bank and the Canadian Imperial Bank of Commerce. The expiry date on this Revolving Facility has been extended to January 31, 2017. The Revolving Facility is for working capital requirements, is secured by a pledge against all of our assets and is subject to borrowing base limitations. As at December 31, 2015, there were no borrowings under the Revolving Facility.
(c) Letters of credit
We have access to a revolving standby letter of credit facility of $10 million from Toronto Dominion Bank. The credit facility is used for the issuance of letters of credit for project related performance guarantees and is guaranteed by Export Development Canada. As at December 31, 2015, there were no letters of credit issued against the revolving standby letter of credit facility.
40
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
25. FINANCIAL INSTRUMENTS
Financial Risk Management
Financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities.
We have exposure to the following business risks:
We maintain substantially all of our cash and cash equivalents with major financial institutions or invest in government instruments. Our deposits with banks may exceed the amount of insurance provided on such deposits.
We outsource manufacturing of our products to third parties and, accordingly, we are dependent upon the development and deployment by third parties of their manufacturing abilities. The inability of any supplier or manufacturer to fulfill our supply requirements could impact future results. We have supply commitments to our contract manufacturers based on our estimates of customer and market demand. Where actual results vary from our estimates, whether due to execution on our part or market conditions, we are at risk.
Financial instruments that potentially subject us to concentrations of credit risk are primarily accounts receivable. We perform on-going credit evaluations of our customer’s financial condition and require letters of credit or other guarantees whenever deemed appropriate.
Although a significant portion of our revenues are in U.S. dollars, we incur operating costs that are denominated in other currencies. Fluctuations in the exchange rates between these currencies could have a material impact on our business, financial condition and results of operations.
We are generating and incurring an increasing portion of our revenue and expenses, respectively, outside of North America including Europe, the Middle East and Asia. To manage our foreign currency risks, we may enter into foreign currency forward and options contracts should we consider it to be advisable to reduce our exposure to future foreign exchange fluctuations. As at December 31, 2015 and 2014, we had no such contracts in place.
We are subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures other regulations and restrictions and foreign exchange rate volatility. Accordingly, our future results could be materially affected by changes in these or other factors.
41
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
26. COMMITMENTS AND CONTINGENCIES
(a) Operating leases
We have entered into operating leases for property and equipment. The minimum future payments under various operating leases for our continuing operations in each of the years ended December 31 is as follows:
2016 | $ | 5,224 | |
2017 | 4,815 | ||
2018 | 3,735 | ||
2019 | 3,099 | ||
2020 | 2,527 | ||
Subsequent years | 1,978 | ||
$ | 21,378 |
(b) Contingent liability on sale of products
(i) | Under license agreements, we are committed to make royalty payments based on the sales of products using certain technologies. We recognize royalty obligations as determinable in accordance with agreement terms. Where agreements are not finalized, we have recognized our current best estimate of the obligation. When the agreements are finalized or the potential obligation becomes statute barred, the estimate will be revised accordingly. |
(ii) | We are a party to a variety of agreements in the ordinary course of business under which we may be obligated to indemnify a third party with respect to certain matters. Typically, these obligations arise as a result of contracts for sale of our products to customers where we provide indemnification against losses arising from matters such as potential intellectual property infringements and product liabilities. The impact on our future financial results is not subject to reasonable estimation because considerable uncertainty exists as to whether claims will be made and the final outcome of potential claims. To date, we have not incurred material costs related to these types of indemnifications. |
(iii) | We accrue product warranty costs, when we sell the related products, to provide for the repair or replacement of defective products. Our accrual is based on an assessment of historical experience and on management’s estimates. An analysis of changes in the liability for product warranties follows: |
2015 | 2014 | |||||||
Balance, beginning of year | $ | 5,951 | $ | 5,861 | ||||
Provisions | 4,180 | 5,260 | ||||||
Expenditures | (2,769 | ) | (5,310 | ) | ||||
Liabilities from acquisition of In Motion | — | 140 | ||||||
Balance, end of year | $ | 7,362 | $ | 5,951 |
42
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(c) Other commitments
We have entered into purchase commitments totaling approximately $87,631 net of related electronic components inventory of $18,390 (December 31, 2014 — $85,192, net of electronic components inventory of $5,079), with certain contract manufacturers under which we have committed to buy a minimum amount of designated products between January 2016 and June 2016. In certain of these agreements, we may be required to acquire and pay for such products up to the prescribed minimum or forecasted purchases.
(d) Legal proceedings
We are from time to time involved in litigation, certain other claims and arbitration matters arising in the ordinary course of our business. We accrue for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. These accruals are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and technical experts and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility (within the meaning of ASC 450, Contingencies) that the losses could exceed the amounts already accrued for those cases for which an estimate can be made, management believes that the amount of any such additional loss would not be material to our results of operations or financial condition.
In some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have on the company. There are many reasons why we cannot make these assessments, including, among others, one or more of the following: in the early stage of a proceeding, the claimant is not required to specifically identify the patent that has allegedly been infringed; damages sought that are unspecified, unsupportable, unexplained or uncertain; discovery not having been started or being incomplete; the complexity of the facts that are in dispute (e.g., once a patent is identified, the analysis of the patent and a comparison to the activities of the company is a labor-intensive and highly technical process); the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and the often slow pace of patent litigation.
We are required to apply judgment with respect to any potential loss or range of loss in connection with litigation. While we believe we have meritorious defenses to the claims asserted against us in our currently outstanding litigations, and intend to defend ourselves vigorously in all cases, in light of the inherent uncertainties in litigation there can be no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us for those cases for which an estimate can be made. Losses in connection with any litigation for which we are not presently able to reasonable estimate any potential loss or range of loss could be material to our results of operations and financial condition.
In February 2015, a patent holding company, Wetro Lan, filed a patent infringement lawsuit in the United States District Court for the Eastern District of Texas, asserting patent infringement by us of one patent which expired in 2012. The lawsuit makes certain allegations concerning our AirLink router products which were sold prior to the patent’s expiry. The lawsuit was dismissed with prejudice in the fourth quarter of 2015 and did not have a material impact on our operating results.
43
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
On January 6, 2014, we received notice from the International Chamber of Commerce ("ICC") of arbitration proceedings launched by Nokia against us, for alleged unpaid royalties of approximately €32 million. On November 24, 2015, following a hearing, we received notice from the ICC of a decision in our favour in the proceedings.
In January 2012, a patent holding company, M2M Solutions LLC ("M2M"), filed a patent infringement lawsuit in the United States District Court for the District of Delaware asserting patent infringement by us and our competitors. The lawsuit makes certain allegations concerning the AirPrime embedded wireless module products, related AirLink products and related services sold by us for use in M2M communication applications. The claim construction order has determined one of the two patents-in-suit to be indefinite and therefore invalid. A motion for summary judgment of non-infringement and invalidity has been filed by us and a decision is currently pending. We anticipate that M2M will not proceed with its infringement case against us, but will eventually appeal the claim construction order. Trials against two other defendants in related cases involving the same patents are scheduled for March and April 2016, respectively. Any appeals from the claim construction order may follow the disposition of these trials. In August 2014, M2M filed a second patent infringement lawsuit against us in the same court with respect to a recently issued patent held by M2M, which patent is a continuation of one of the patents-in-suit in the original lawsuit filed against us by M2M. The lawsuit has been administratively closed pending the result of several Inter Partes Review proceedings filed by us and the other defendants with the United States Patent and Trial Appeal Board (PTAB) in August and October of 2015. The PTAB has declined to institute proceedings in respect of the first two of these filings and has yet to make a determination on the remaining three filings, including ours.
Although there can be no assurance that an unfavorable outcome would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims made in the foregoing legal proceedings are without merit and intend to defend ourselves and our products vigorously in all cases.
IP Indemnification Claims
We have been notified by one or more of our customers in each of the following matters that we may have an obligation to indemnify them in respect of the products we supply to them:
In May 2013, a patent holding company, Adaptix, Inc., filed a patent infringement lawsuit in the United States District Court for the Eastern District of Texas against one of our customers asserting patent infringement in relation to our customer’s products, which may include certain LTE products which utilize modules sold to them by us. In March 2014, the lawsuit was transferred to the United States District Court for the Northern District of California. The lawsuit was dismissed with prejudice in June 2015 and we do not believe that this outcome will have a material adverse effect on our operating results. In June 2015, Adaptix filed amended complaints in the Eastern District of Texas against two carriers asserting patent infringement against them in relation to certain cellular communication devices sold by the carriers for use on their 4G LTE wireless networks, which products include certain products which may utilize modules sold to the original equipment manufacturer by us and certain AirCard products sold to the carriers by us prior to the transfer of the AirCard business to Netgear. The two cases have been consolidated and the claim construction hearing is scheduled for July 2016, with the first trial for the consolidated cases to occur in May 2017.
In February 2012, a patent holding company, Intellectual Ventures (comprised of Intellectual Ventures I LLC and Intellectual Ventures II LLC), filed a patent infringement lawsuit in the United States District Court for the District of Delaware against two of our customers asserting patent infringement in relation to several of our customer's products and services, including the mobile hotspots sold to them
44
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
by us prior to the transfer of the AirCard business to Netgear. The lawsuit was split into several separate lawsuits and amended complaints were filed in October 2013. We are currently intervening in two of the cases in defense of our products with respect to one patent-in-suit alleged to relate to Wi-Fi standards. The lawsuits are in the discovery stage. A claim construction order was issued in March 2015.
A patent holding company, Eon Corp. IP Holdings, LLC ("Eon"), filed a patent infringement lawsuit against one of our customers in October 2010 in the United States District Court for the Eastern District of Texas, which was subsequently transferred to the United States District Court for the Northern District of California. The lawsuit involves assertions of patent infringement in relation to wireless modems sold to our customer by us prior to the transfer of the AirCard business to Netgear. A claim construction order was issued in July 2013, and the defendant's motion for summary judgment of non-infringement was granted by the Court in March 2014. In March 2015, this judgment was affirmed by the United States Court of Appeals for the Federal Circuit. Eon filed a patent litigation lawsuit against another of our former AirCard customers in January 2012 in the United States District Court for the District of Puerto Rico involving the same patent-in-suit in the California lawsuit plus three additional patents. This lawsuit was transferred in part to the District of Delaware with respect to claims related to one of the four patents-in-suit, which claims related to interactive television. The Delaware case has since been closed. The claim construction order in the Puerto Rico case was issued in April 2014. The case was closed in September 2014 following the filing of a joint notice of stipulation of dismissal without prejudice.
Although there can be no assurance that an unfavorable outcome would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims made in the foregoing legal proceedings are without merit and intend to defend ourselves and our products vigorously in all cases.
We are engaged in certain other claims, legal actions and arbitration matters, all in the ordinary course of business, and believe that the ultimate outcome of these claims, legal actions and arbitration matters will not have a material adverse effect on our operating results, liquidity or financial position.
45