Business Combinations and Divestitures | 9 Months Ended |
Sep. 30, 2014 |
Business Combinations [Abstract] | ' |
Business Combinations and Divestitures | ' |
5. Business Combinations and Divestitures |
Variable Interest Entity |
Between May 2012 and September 2014, the Company entered into several note purchase agreements and promissory notes with Xpliant, Inc. (“Xpliant” or the “VIE”) to provide cash advances. Xpliant is a Delaware incorporated and privately held company, engaged in the design and development of next generation software defined network switch chips. The Company has concluded that it is the primary beneficiary of the VIE due to the Company’s involvement with the VIE and the purchase option to acquire the VIE. As such, the Company has included the accounts of the VIE in the condensed consolidated financial statements. |
As of September 30, 2014, the Company had made cash advances of $21.0 million, consisting of $10.0 million under nine convertible notes receivable which, as amended, matured on August 31, 2014 and $11.0 million under several promissory notes which mature between April 2015 and September 2015, or earlier at the closing date of acquisition. The outstanding convertible notes and promissory notes bear an annual interest rate of 6%. The Company had a purchase option to acquire the assets of the VIE on terms specified in one of the note purchase agreements. Two of the convertible notes held by the Company are collateralized by a lien on the VIE’s assets. |
In addition to the funding received by the VIE from the Company, between May 2012 and September 2014, certain third party investors (“non-controlling interest”) made cash advances of $13.0 million under fifteen convertible notes receivable which, as amended, matured on August 31, 2014. All of the convertible notes bear interest at a rate of 6%, payable at maturity. Two of the convertible notes held by a third party investor with a principal amount of $1.0 million matured and were paid by the VIE in December 2013. Pursuant to the convertible notes, in the event the VIE closes a corporate transaction, as defined in the convertible notes, the holders of the convertible notes will be entitled to receive two times the outstanding principal plus any unpaid accrued interest, while in case of a qualified financing of the VIE, as defined in the convertible notes, the outstanding principal balance plus the accrued interest on the convertible notes will be automatically converted into convertible preferred stock of the VIE at a discounted price. |
In December 2013, a third party investor exchanged its convertible note with a principal of $1.4 million and invested additional cash of $1.5 million with the VIE for a $2.9 million convertible security which has the same features as the convertible notes, with the exception of the requirement for repayment, interest and maturity. The Company has determined that for accounting purposes, the convertible security has derivative features, and as such, the Company estimated the fair value of the derivative features based on market approach using Level 3 inputs. The assumptions used in the fair value estimate are related to the probability of the aforementioned capital scenarios. The assumptions used in the fair value estimate are based, in part, on significant uncertainties, are difficult to predict and could differ materially in the future. Based on the most reasonable assumptions determined by management, the fair value of the derivative feature of the convertible security at the issuance date was approximately the same as the principal amount. Accordingly, the Company classified the $2.9 million convertible security as a derivative liability within notes payable and other on the condensed consolidated balance sheets. |
All of the convertible notes and the derivative feature of convertible security relating to the non-controlling interests included in the condensed consolidated financial statements are classified as Level 3 liability due to the above mentioned features and therefore they are all measured and presented at fair value in the condensed consolidated financial statements. The convertible notes and the derivative feature of the convertible security are remeasured at each reporting period and, depending on the probability of the occurrence of the features mentioned above, the valuation of these instruments could range from their current fair value to approximately two times the principal amount of the convertible notes and the convertible security. The probability scenarios used in the fair value estimation included assumptions of a corporate transaction and a qualified financing for both the convertible notes and derivative feature of convertible security and an additional probability assumption for a redemption at maturity for the convertible notes. |
On June 30, 2014, pursuant to the option to acquire the VIE set forth in one of the note purchase agreements, the Company provided notice to the VIE of its decision to exercise the purchase option. As a result, the occurrence of a corporate transaction is highly probable, which changed significantly the fair value estimation of the convertible notes and derivative feature of convertible security as of June 30, 2014 compared to the previous reporting periods. Considering the change in the probability of a corporate transaction, the estimated fair value of the convertible notes and derivative feature of the convertible security as of June 30, 2014 was close to two times the outstanding principal amount, factoring in the time value of money through settlement at maturity date. As a result, the Company recorded the change in fair value of the notes and other of $13.9 million in the statements of operations in the three months ended June 30, 2014. During the three months ended September 30, 2014, the Company recorded the change in fair value of the notes and other related to the time value of money. The change in estimated fair value recognized in the statements of operations for the three and nine months ended September 30, 2014 amounted to $0.1 million and $14.9 million, respectively. |
The table below summarizes the change in the value of the convertible notes and derivative features of the convertible security for the nine months ended September 30, 2014: |
|
| | Fair Value | | | Additions | | | Change in estimated fair value recognized in statements of operations | | | Fair Value | |
As of December 31, 2013 | As of September 30, 2014 |
| | (in thousands) | |
Convertible notes | | $ | 10,612 | | | $ | 1,400 | | | $ | 11,988 | | | $ | 24,000 | |
Derivative feature of convertible security | | | 2,900 | | | | - | | | | 2,900 | | | | 5,800 | |
Total notes payable and other | | $ | 13,512 | | | $ | 1,400 | | | $ | 14,888 | | | $ | 29,800 | |
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The significant components of the VIE’s financial statements included in the Company’s condensed consolidated financial statements as of September 30, 2014 include cash of $1.5 million; property and equipment and intangible assets of $9.7 million; accounts payable and accrued expenses of $2.9 million; notes payable and other of $29.8 million; capital lease and technology license obligations of $9.7 million and non-controlling interest of $21.8 million. As of December 31, 2013, the significant component of the VIE’s financial statements included in the Company’s condensed consolidated financial statements include cash of $1.9 million; property and equipment and intangible assets of $6.7 million; accounts payable and accrued expenses of $3.4 million; notes payable and other of $13.5 million; capital lease and technology license obligations of $6.3 million and non-controlling interest of $11.8 million. The Company’s portion of the net loss of the VIE for the three months ended September 30, 2014 and 2013 was $4.3 million and $1.3 million, respectively, and for the nine months ended September 30, 2014 and 2013 was $23.9 million and $4.1 million, respectively. Included in the net loss for the nine months ended September 30, 2014 was a charge of $14.9 million related to the change in fair value of notes payable and other. |
On July 30, 2014, the Company entered into an Agreement and Plan of Merger and Reorganization, which was amended on October 8, 2014 (the “Merger Agreement”) with the VIE. Under the terms of the Merger Agreement, the Company will pay approximately $3.6 million in total consideration in a mix of cash and shares of the Company’s common stock in exchange for all outstanding securities held by Xpliant stockholders. The transaction contemplated by the Merger Agreement is expected to be completed before April 15, 2015, subject to certain closing conditions. The Company will also provide additional funding to the VIE to pay-out its outstanding liabilities, expenses and other costs through the completion of the Merger Agreement. |
In addition, pursuant to the Merger Agreement and in connection with the transaction contemplated by the Merger Agreement, in October 2014, the Company extended additional loans to the VIE in the amount of $39.8 million in exchange for promissory notes that bear annual interest rate of 6% that mature in October 2015, or earlier of the closing date of the acquisition. In October 2014, these cash advances to the VIE were used settle all outstanding convertible notes, related accrued interest and convertible security held by non-controlling interest $30.8 million. Additionally, $1.7 million was used to make cash payments to the employees of the VIE and $7.3 million to cover settlement of certain outstanding liabilities of the VIE. Further, per the Merger Agreement, in October 2014, the Company issued RSU’s of approximately 193,000 shares with a fair value of $8.7 million based on the Company’s stock price at the actual grant date to the employees of the VIE. |
Disposition of Certain Consumer Product Assets |
In September 2012, the Company completed the sale of certain consumer product assets to a third party company. The consumer product assets that were sold originated from the acquisition of Star Semiconductor Corporation in fiscal year 2008 and had been further developed by the Company. Under an asset purchase agreement, the Company agreed to transfer certain assets such as property and equipment and intangible assets to the third party company for an aggregate cash consideration of $2.4 million, payable in installments starting from January 10, 2013 through January 10, 2015. The Company determined that the payment terms were not fixed and determinable and as such the Company treated this transaction as disposition of assets and will recognize the future payments as a credit to sales, general and administrative expenses when the payments are due. The carrying value of the assets related to the sale of $2.7 million was recognized as a loss on disposition of certain consumer product assets within sales, general and administrative expenses during the third quarter of 2012. The Company received total installment cash consideration of $0.3 million each for the three months ended September 30, 2014 and 2013, respectively and $0.8 million each for the nine months ended September 30, 2014 and 2013, respectively. The cash consideration received was recognized as credits within sales, general and administrative expenses. |
Sale of Held for Sale Assets |
In January 2013, the Company completed the sale of certain assets to a third-party company. The assets sold originated from the acquisition of MontaVista Software, Inc. in fiscal year 2009. Under the asset purchase agreement, the Company agreed to transfer certain assets for an aggregate cash consideration of $3.3 million and the carrying value of the assets held for sale was approximately $2.6 million. The difference between the sale consideration and the carrying value of the assets held for sale of $0.7 million was recognized as a gain on sale of held for sale assets within sales, general and administrative expenses during the first quarter of 2013. |