UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __ to __.

Commission file number 001-35801

Xoom Corporation

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

On October 30,  2015,  39,606,189 shares of the registrant’s Common Stock, $0.0001 par value, were issued and outstanding.

Xoom Corporation and Subsidiaries

Table of Contents

PART I – Financial Information

ITEM 1. Financial Statements

XOOM CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

XOOM CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share data)

See accompanying notes to consolidated financial statements.

XOOM CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

See accompanying notes to consolidated financial statements.

XOOM CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

See accompanying notes to consolidated financial statements.

Xoom Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)

(1)  Business and Basis of Presentation

(a)  Business Overview

Xoom Corporation and its subsidiaries (together, “Xoom” or the “Company”) is a leader in the digital consumer-to-consumer international money transfer industry. Xoom provides its customers with fast and convenient ways to send money to, pay bills for and send prepaid mobile phone reloads to family and friends around the world using their bank account, credit card or debit card.  We offer money transfer services from the United States to 39 countries, cross-border bill payment services from the United States to six countries and prepaid mobile phone reload services in 22 countries.  

Xoom was incorporated in California in June 2001 and reincorporated in Delaware in November 2012. The Company’s corporate headquarters is located in San Francisco, California.

(b)  Proposed Acquisition by PayPal, Inc.

On July 1, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with PayPal, Inc. (“Parent”), Timer Acquisition Corp., a wholly-owned subsidiary of Parent (“Merger Sub”), and PayPal Holdings, Inc., the ultimate parent entity of Parent and Merger Sub (“PayPal”). The Merger Agreement provides that upon the closing of the transaction, the Company will become a wholly-owned subsidiary of Parent (the “Merger”).  The Merger is conditioned upon, among other things, the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). The waiting period under the HSR Act expired on August 14, 2015. The Company’s stockholders approved the adoption of the Merger Agreement at a special meeting of stockholders held on September 4, 2015. The Merger remains subject to the satisfaction or waiver of customary closing conditions and the receipt of certain regulatory consents relating to Xoom's money transmitter licenses. 

(c)  Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements.

In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair presentation of the results for the interim periods presented have been included. All intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. These estimates are based on information available as of the date of the unaudited consolidated financial statements. Therefore, actual results could differ from these estimates. Interim results are not necessarily indicative of the results for a full year.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2015 (the “Annual Report”).

Business events in 2015 required the Company to make an addition to the accounting policies for stock-based compensation, as more fully set forth below. There have been no other changes in the significant accounting policies as disclosed in the audited consolidated financial statements for 2014 included in the Annual Report.

The Company granted performance-based restricted stock units (“PSUs”) to certain employees in February 2015. The fair value of PSUs is equal to the closing market price of the Company’s common stock on the date of grant. The number of PSUs that will ultimately vest will range from 0% to 170% of the target amount depending on the actual level of achievement within the specified performance bands. The performance condition will be evaluated quarterly to determine the probable level of achievement within specified performance bands as defined in the PSU agreement. The corresponding amount of stock-based compensation expense related to PSUs is amortized over a graded vesting period of three years.  Changes in the quarterly estimate of probable achievement impact the total amount of stock-based compensation expense on a cumulative basis.

 (d) Recently Issued Accounting Guidance

In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. Early application is permitted after January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the impact of this accounting guidance on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance costs be presented in the consolidated balance sheet as  a direct deduction from the carrying amount of debt liability, consistent with debt discounts. This new accounting guidance is effective for the Company on January 1, 2016. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements. Given the absence of authoritative guidance within ASU No. 2015-03 for debt issuance costs related to line-of-credit arrangements, in June 2015, the FASB issued ASU No. 2015-15, "Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” This standard states that the SEC staff will not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing these costs. This guidance is effective for the Company on January 1, 2016, and must be applied on a retrospective basis with early adoption permitted. The Company is evaluating the impact of this accounting guidance on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software license. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change U.S. GAAP for a customer's accounting for service contracts. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with the option of applying the guidance prospectively or retrospectively. Early adoption is permitted. The Company is evaluating the impact of this accounting guidance on its consolidated financial statements.

In May 2015, the FASB issued ASU No. 2015-07, “Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent),” which removes the requirement to categorize within the fair value hierarchy all investments for which fair values are estimated using the net asset value per share (“NAV”) provided by ASC 820, Fair Value Measurement. The ASU also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using NAV. Those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with retrospective application to all periods presented. Early adoption is permitted.

The Company elected to early adopt ASU No. 2015-07 in the second quarter of 2015.  Because the Company measures money market funds using NAV, the assignment of fair value hierarchy to money market funds has been removed in all periods presented in these consolidated interim financial statements.

(2)  Short-term Investments

Short-term investments, classified as available for sale, are stated at fair value. Determination of the fair values of each short-term investment is further discussed in Note (3) below.

As of September 30, 2015, the fair value of the Company’s short-term investments was as follows (in thousands):

As of December 31, 2014, the fair value of the Company’s short-term investments was as follows (in thousands):

The Company considers any declines in the market value of its marketable securities to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer, changes in market interest rates, the Company’s intent to sell, and/or whether it is more likely than not that the Company will be required to sell the investment before recovery of the investment’s cost basis. During the periods presented, the Company did not recognize any other-than-temporary impairment charges. The maturity period of the Company’s available for sale securities is within one year.

(3)  Fair Value Measurements

Fair value is an exit price, defined as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.

The following three levels of inputs are used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include items where the determination of fair value requires significant management judgment or estimation.

Cash equivalents and short-term investments are measured at fair value on a recurring basis. The following table indicates the fair value hierarchy of the valuation for the Company’s cash equivalents and short-term investments, except money market funds which are valued using NAV and are not required to be assigned with a fair value hierarchy level according to ASU 2015-07 (in thousands):

The Company obtains the fair value of all the financial instruments in the table above, except the certificates of deposit, from the Company’s investment banks. The investment banks may use quoted market prices for identical or comparable instruments, or inputs other than quoted prices that are directly or indirectly observable. The investment banks gather quoted market prices and observable inputs for the Company’s financial instruments from a variety of industry data providers. The Company performs independent testing to validate the reasonableness of fair values provided by the investment banks. The fair value of certificates of deposit is discussed with other financial instruments in the paragraphs below.

The fair values of Level 2 financial instruments were derived from nonbinding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments or pricing models. There were no material changes in the valuation techniques utilized during any of the periods presented. There were no transfers between Level 1 and Level 2 assets during any of the periods presented.

For certain financial instruments on the consolidated balance sheets, book values approximate fair values due to their short-term, highly liquid nature. Such instruments generally include cash, restricted cash, disbursement prefunding, certificates of deposit, customer funds receivables, prepaid and other current assets, lines of credit, customer liabilities, and accounts payable and accrued liabilities as disclosed in Note (6) below. The fair value of all of these instruments would be categorized as Level 2 of the fair value hierarchy, with the exception of cash which would be categorized as Level 1.

Certain non-financial assets are measured at fair value on a nonrecurring basis when an impairment charge is recognized. These assets include property, plant and equipment, intangible assets and goodwill. These assets are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. If measured at fair value in the consolidated balance sheets, these would generally be classified as Level 3 of the fair value hierarchy.

(4)  Property, Equipment and Software, Net

The following is a summary of property, equipment and software at cost, less accumulated depreciation and amortization (in thousands):

Depreciation and amortization expense of $1.2 million and $3.5 million were recorded for the three and nine months ended September 30, 2015, respectively. Depreciation and amortization expense of $1.1 million and $2.7 million were recorded for the three and nine months ended September 30, 2014, respectively.

(5)  Goodwill and Other Intangible Assets

In connection with the acquisition of BlueKite, LTD (the “BlueKite Acquisition”) on January 10, 2014 (the “Closing Date”), the Company recorded $9.0 million of goodwill and $5.7 million of developed technology. There were no changes in the carrying amount of goodwill during the three and nine months ended September 30, 2015.  Developed technology is classified as an intangible asset and is being amortized on a straight-line basis over an estimated useful life of seven years.

As of September 30, 2015 and December 31, 2014, the gross accumulated amortization of the developed technology asset was $1.4 million and $0.8 million, respectively. 

Amortization expense related to the acquired intangible asset for both the three-month periods ended September 30, 2015 and 2014 was $0.2 million, and for both the nine-month periods ended September 30, 2015 and 2014 was $0.6 million, and was included in technology and development expense in the consolidated statements of operations.

In accordance with the terms of the BlueKite Acquisition agreement, the Company issued payments to the selling stockholders in the amount of $1.5 million in July 2015. The $1.5 million was a component of the $14.9 million BlueKite Acquisition purchase price, which was held back for 18 months following the Closing Date to satisfy any unresolved claims that may have arisen during the holdback period. In October 2015, the remaining 50% of the contingent common stock equity under the BlueKite Acquisition agreement was issued to selling stockholders pursuant the terms of the BlueKite Acquisition agreement and the Merger Agreement. 

(6)  Accounts Payable and Accrued Expenses

The following is a summary of accounts payable and accrued expenses (in thousands):

Other accrued expenses in the table above include a reserve for transaction losses. The Company is exposed to transaction losses due to fraud, as well as nonperformance of third parties and customers. The Company establishes a reserve for such losses based on historical trends and any specific risks identified in processing customer transactions. The following table summarizes the activities of the Company’s reserve for transaction losses during the period presented (in thousands):

(7)  Line of Credit

In September 2013, the Company entered into an Amended and Restated Credit Agreement (the “Restated Loan Agreement”) with Silicon Valley Bank (“SVB”) and other lenders. The Restated Loan Agreement added additional lenders, increased the available borrowing amount to $150.0 million through September 2016 and changed certain of the financial provisions. The Company is required to repay the outstanding principal balance under the line of credit in full at least once every eight business days. Under the Restated Loan Agreement, the Company pays a fee of 0.50% per annum for the daily unused portions of the line of credit. The interest rate at September 30, 2015 and December 31, 2014 was 4.25%. In 2013, the Company paid SVB a one-time commitment fee of $430,000 and  a one-time arrangement fee of 0.30% of the amount available under the line of credit. These expenses are being amortized over the period of the Restated Loan Agreement.  In addition, the Company pays an annual administration fee of $45,000.

SVB issued a standby letter of credit for $15.0 million in May 2013 which satisfied an additional collateral requirement to maintain the Company’s India operations. SVB issued a $3.9 million letter of credit in January 2014 as a security deposit for the Company’s office lease.

As of September 30, 2015, the Company had $131.1 million available under its $150.0 million line of credit, reflecting $18.9 million reserved under the two letters of credit. There was zero outstanding under the line of credit as of September 30, 2015. As of December 31, 2014, the Company had $103.1 million available under its $150.0 million line of credit, reflecting $28.0 million outstanding under the line of credit and $18.9 million reserved under the two letters of credit.

(8)  Income Taxes

The Company’s income tax provisions for the three months ended September 30, 2015 and 2014 were $43,000 and $30,000, respectively, and the income tax provisions for the nine months ended September 30, 2015 and 2014 were $123,000 and $61,000, respectively, which were primarily attributable to U.S. state and foreign income taxes.

The Company’s effective income tax rates were (0.3%) and 7.0% for the three months ended September 30, 2015 and 2014, respectively, and (0.6%) and 2.8% for the nine months ended September 30, 2015 and 2014, respectively. Calculation of the effective tax rate for both periods includes a non-cash valuation allowance recorded against the Company’s deferred tax assets, which partially offsets a tax benefit resulting from the operating loss generated in the period.

(9)  Stock-based Compensation

The Company may grant stock options to purchase shares of its common stock, restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”) or common stock awards to its employees and non-employee directors. Stock‑based compensation expense included in the Company’s consolidated statements of operations during the periods presented is as follows (in thousands):

(a)  Stock Options

The fair value of options granted was estimated at the date of the grant using a Black-Scholes option-pricing model. The following table presents the weighted-average assumptions used in estimating the fair value of options granted during the periods presented:

The Company’s common stock has been publicly traded for over two years, which has provided a history of the Company’s share price and volatility. As part of its continuous review of the key assumptions in the Black-Scholes option-pricing model, the Company phased in its own historical volatility to estimate its expected volatility based on the Company’s historical share prices. For the options with expected terms of

less than the Company’s tenure as a publicly-traded company, a weighting equal to the division of the length of the Company’s public tenure over the expected term of stock options was assigned to the Company’s historical volatility. The remaining weightings were assigned based on the average of comparable public companies’ historical volatilities.

The following table presents the stock option activity and related information for the nine months ended September 30, 2015:

(1) Exercised options in the table above included both settled and unsettled exercises during the nine months ended September 30, 2015. 

The following table presents the total intrinsic value of stock options exercised and the weighted-average grant date fair value of stock options granted for the periods presented:

As of September 30, 2015, there was $14.2 million of total unrecognized compensation expense related to option grants, which is expected to be recognized over a weighted-average remaining period of 2.3 years.

(b)  Restricted Stock Units and Performance-based Restricted Stock Units

The fair value of RSUs is equal to the closing market price of the Company’s common stock on the date of grant. Stock-based compensation expense is amortized on a straight-line basis over the requisite service period, which is generally four years.

In February 2015, the Company granted PSUs to certain employees, which contain both service and performance requirements. The number of PSUs that will ultimately vest will range from 0% to 170% of the target amount depending on the actual level of achievement within the specified performance bands for the year ended December 31, 2015. The performance condition will be evaluated quarterly to determine the probable level of achievement within specified performance bands as defined in the PSU agreement. Stock-based compensation expense related to PSUs is amortized over a graded vesting period of three years. Changes in the quarterly estimate of probable achievement impact the total amount of stock-based compensation expense on a cumulative basis. Pursuant to the PSU agreements and to the Merger Agreement, after the Merger closes,  an employee who was granted PSUs will be credited with RSUs at 100% of the target amount.

The following table shows a summary of RSU and PSU activity for the nine months ended September 30, 2015:  

(1) Represents the maximum number of performance units which could be earned. 

The following table presents the total fair value and the aggregate intrinsic value of RSUs vested and the weighted-average grant date fair value of RSUs granted for the periods presented:

The weighted-average per share grant-date fair value of PSUs granted was $15.71 during the nine months ended September 30, 2015. There were no PSUs granted during the three months ended September 30, 2015.  No PSUs vested during any of the periods presented.  

As of September 30, 2015, there was $13.0 million of total unrecognized compensation expense related to RSUs, which is expected to be recognized over a weighted-average remaining period of 3.1 years. Based on estimated level of achievement as of September 30, 2015, there was $0.7 million of total unrecognized compensation expense related to PSUs, which is expected to be recognized over a weighted-average remaining period of 1.6 years. 

(10)  Earnings Per Share

Basic earnings (loss) per share (“EPS”) is computed by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period.  Diluted EPS is computed using the weighted-average number of shares of common stock outstanding during the period and, when dilutive, potential common shares outstanding during the period. Potential common shares consist of incremental shares issuable upon the assumed exercise of stock options, preferred stock, unvested RSUs and PSUs, and contingent consideration related to the BlueKite Acquisition. The estimated shares of PSUs are excluded in the diluted EPS calculation as the performance conditions were not met by the end of this period. 

The following table presents the calculation of earnings (loss) per share (in thousands, except per share data):

The following securities have been excluded from the calculation of diluted earnings (loss) per share of common stock for the periods presented because their effect would have been anti-dilutive (in thousands):

(11)  Commitments and Contingencies

(a)  Operating Leases

Pursuant to the terms of the lease agreement for the Company’s corporate headquarters, the Company took possession of additional office space in the same building in February 2015. The term of the lease for the additional space will expire in 2024.

 (b)  Litigation

The Company is involved from time to time in various legal proceedings in the normal course of business that individually or in the aggregate would not have a material effect on its results of operations or financial position. On January 6, 2015, the Company, John Kunze and Ryno Blignaut were sued in a putative class action lawsuit, captioned Alexander Liu v. Xoom Corporation, et al., Case No. CGC-15-543531, filed in San Francisco Superior Court by purported stockholders of the Company, in connection with its January 5, 2015 announcement that the Company was the victim of criminal fraud resulting in the transfer of $30.8 million in