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EX-31.1 - EXHIBIT 31.1 - Sonus, Inc.sons-ex31120160331.htm
EX-10.1 - EXHIBIT 10.1 - Sonus, Inc.sons-ex10120160331.htm
EX-31.2 - EXHIBIT 31.2 - Sonus, Inc.sons-ex31220160331.htm
EX-32.2 - EXHIBIT 32.2 - Sonus, Inc.sons-ex32220160331.htm
EX-32.1 - EXHIBIT 32.1 - Sonus, Inc.sons-ex32120160331.htm
EX-10.2 - EXHIBIT 10.2 - Sonus, Inc.sons-ex10220160331.htm

 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
o
 
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 001-34115
SONUS NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
 
04-3387074
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)

4 Technology Park Drive, Westford, Massachusetts 01886
(Address of principal executive offices) (Zip code)

(978) 614-8100
(Registrant's telephone number, including area code)

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

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

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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer x
 
Non-accelerated filer o
 (Do not check if a smaller
reporting company)
 
Smaller reporting company o

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

As of April 22, 2016, there were 49,591,400 shares of the registrant's common stock, $0.001 par value, outstanding.
 



SONUS NETWORKS, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2016
TABLE OF CONTENTS

Item
 
Page
 
PART I FINANCIAL INFORMATION
 
 
 
 
 
 
 
PART II OTHER INFORMATION
 
 
 



Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, which are subject to a number of risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy, plans and objectives of management for future operations, plans for future cost reductions and plans for future product development and manufacturing are forward-looking statements. Without limiting the foregoing, the words "anticipates", "believes", "could", "estimates", "expects", "intends", "may", "plans", "seeks" and other similar language, whether in the negative or affirmative, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We therefore caution you against relying on any of these forward-looking statements.
Important factors that could cause actual results to differ materially from those in these forward-looking statements are discussed in Part I, Items 2 and 3, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures About Market Risk," respectively, and Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q. Also, any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.
References in this Quarterly Report on Form 10-Q to “Sonus,” “Sonus Networks,” “Company,” “we,” “us,” and “our” are to Sonus Networks, Inc. and its subsidiaries, collectively, unless the context requires otherwise.



3


PART I FINANCIAL INFORMATION


Item 1. Financial Statements
SONUS NETWORKS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)


 
March 31,
2016
 
December 31,
2015
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
42,649

 
$
50,111

Marketable securities
55,712

 
58,533

Accounts receivable, net of allowance for doubtful accounts of $0 at March 31, 2016 and $10 at December 31, 2015
34,416

 
51,533

Inventory
22,450

 
23,111

Other current assets
14,599

 
11,853

Total current assets
169,826

 
195,141

Property and equipment, net
12,694

 
13,620

Intangible assets, net
24,141

 
26,087

Goodwill
40,310

 
40,310

Investments
44,007

 
33,605

Deferred income taxes
1,712

 
1,879

Other assets
5,188

 
2,249

 
$
297,878

 
$
312,891

Liabilities and Stockholders' Equity
Current liabilities:
 
 
 
Accounts payable
$
4,468

 
$
5,949

Accrued expenses
17,381

 
31,963

Current portion of deferred revenue
40,956

 
38,716

Current portion of long-term liabilities
1,071

 
821

Total current liabilities
63,876

 
77,449

Deferred revenue
7,349

 
7,374

Deferred income taxes
2,457

 
2,282

Other long-term liabilities
2,588

 
2,760

Total liabilities
76,270

 
89,865

Commitments and contingencies (Note 16)

 

Stockholders' equity:
 
 
 
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized, none issued and outstanding

 

Common stock, $0.001 par value per share; 120,000,000 shares authorized; 49,590,047 shares issued and outstanding at March 31, 2016; 49,473,789 shares issued and outstanding at December 31, 2015
50

 
49

Additional paid-in capital
1,243,612

 
1,240,803

Accumulated deficit
(1,027,896
)
 
(1,023,242
)
Accumulated other comprehensive income
5,842

 
5,416

Total stockholders' equity
221,608

 
223,026

 
$
297,878

 
$
312,891


See notes to the unaudited condensed consolidated financial statements.

4


SONUS NETWORKS, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)


 
Three months ended
 
March 31,
2016
 
March 27,
2015
Revenue:
 
 
 
Product
$
34,769

 
$
24,865

Service
24,382

 
25,280

Total revenue
59,151

 
50,145

Cost of revenue:
 
 
 
Product
11,536

 
11,648

Service
9,212

 
9,267

Total cost of revenue
20,748

 
20,915

Gross profit
38,403

 
29,230

Operating expenses:
 
 
 
Research and development
17,318

 
19,339

Sales and marketing
16,595

 
19,765

General and administrative
8,371

 
9,224

Acquisition-related

 
107

Restructuring

 
(339
)
Total operating expenses
42,284

 
48,096

Loss from operations
(3,881
)
 
(18,866
)
Interest income, net
164

 
28

Other income, net
103

 
45

Loss before income taxes
(3,614
)
 
(18,793
)
Income tax provision
(1,040
)
 
(566
)
Net loss
$
(4,654
)
 
$
(19,359
)
Loss per share:
 
 
 
Basic
$
(0.09
)
 
$
(0.39
)
Diluted
$
(0.09
)
 
$
(0.39
)
Shares used to compute loss per share:
 
 
 
Basic
49,484

 
49,423

Diluted
49,484

 
49,423


See notes to the unaudited condensed consolidated financial statements.


5


SONUS NETWORKS, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)


 
Three months ended
 
March 31,
2016
 
March 27,
2015
Net loss
$
(4,654
)
 
$
(19,359
)
Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments
173

 
42

Unrealized gain on available-for sale marketable securities, net of tax
235

 
105

Reclassification adjustment for (gains) losses included in net loss
18

 

Other comprehensive income, net of tax
426

 
147

Comprehensive loss, net of tax
$
(4,228
)
 
$
(19,212
)

See notes to the unaudited condensed consolidated financial statements.


6


SONUS NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


 
Three months ended
 
March 31,
2016
 
March 27,
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(4,654
)
 
$
(19,359
)
Adjustments to reconcile net loss to cash flows provided by (used in) operating activities:
 
 
 
Depreciation and amortization of property and equipment
1,981

 
2,575

Amortization of intangible assets
1,946

 
1,647

Stock-based compensation
4,415

 
4,820

Loss on disposal of property and equipment
14

 
12

Deferred income taxes
418

 
155

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
17,267

 
7,302

Inventory
(1,237
)
 
(3,034
)
Other operating assets
(3,531
)
 
(75
)
Accounts payable
(1,592
)
 
(2,115
)
Accrued expenses and other long-term liabilities
(13,855
)
 
(13,014
)
Deferred revenue
2,142

 
3,610

Net cash provided by (used in) operating activities
3,314

 
(17,476
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(952
)
 
(2,512
)
Business acquisition, net of cash acquired
(750
)
 
(10,147
)
Purchases of marketable securities
(29,574
)
 
(1,649
)
Maturities/sales of marketable securities
21,867

 
13,518

Net cash used in investing activities
(9,409
)
 
(790
)
Cash flows from financing activities:
 
 
 
Proceeds from sale of common stock in connection with employee stock purchase plan
632

 
1,668

Proceeds from exercise of stock options
5

 
1,687

Payment of tax withholding obligations related to net share settlements of restricted stock awards
(786
)
 
(1,995
)
Repurchase of common stock
(1,456
)
 
(6,084
)
Principal payments of capital lease obligations
(14
)
 
(20
)
Net cash used in financing activities
(1,619
)
 
(4,744
)
Effect of exchange rate changes on cash and cash equivalents
252

 
(55
)
Net decrease in cash and cash equivalents
(7,462
)
 
(23,065
)
Cash and cash equivalents, beginning of year
50,111

 
41,157

Cash and cash equivalents, end of period
$
42,649

 
$
18,092

Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
9

 
$
8

Income taxes paid
$
248

 
$
151

Income tax refunds received
$
165

 
$
20

Supplemental disclosure of non-cash investing activities:
 
 
 
Capital expenditures incurred, but not yet paid
$
248

 
$
881

Property and equipment acquired under capital lease
$
36

 
$


See notes to the unaudited condensed consolidated financial statements.

7


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

(1) BASIS OF PRESENTATION

Business

Sonus Networks, Inc. (“Sonus” or the “Company”) is a leading provider of networked solutions for communications service providers (e.g., telecommunications, wireless and cable service providers) and enterprises to help them advance, protect and unify their communications and improve collaboration. Sonus helps many of the world's leading communications service providers and enterprises embrace the next generation of Session Initiation Protocol ("SIP") and 4G/LTE (Long Term Evolution)-based solutions, including Voice over IP ("VoIP") video and Unified Communications ("UC") through secure, reliable and scalable Internet Protocol ("IP") networks. Sonus' products include session border controllers ("SBCs"), diameter signaling controllers ("DSCs"), policy/routing servers, network intelligence applications ("VellOS") and are designed to provide network-wide security and other cloud network exchange services, media and signaling gateways and network analytics tools. Sonus products are supported by a global services team with experience in design, deployment and maintenance of some of the world's largest IP networks.

Sonus utilizes both direct and indirect sales channels to reach its target customers. Customers and prospective customers in the service provider space are traditional and emerging communications service providers, including long distance carriers, local exchange carriers, Internet service providers, wireless operators, cable operators, international telephone companies and carriers that provide services to other carriers. Enterprise customers and target enterprise customers include financial institutions, retailers, state and local governments, and other multinational corporations.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring items, necessary for their fair presentation with accounting principles generally accepted in the United States of America ("GAAP") and with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC").

Interim results are not necessarily indicative of results for a full year or any future interim period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (the "Annual Report") filed with the SEC on February 23, 2016.

For the year ended December 31, 2015, the Company reported its first, second and third quarters on a 4-4-5 basis, with the quarter ending on the Friday closest to the last day of each third month. Accordingly, the Company's first quarter ended on March 27, 2015, the second quarter ended on June 26, 2015 and the third quarter ended on September 25, 2015. Effective January 1, 2016, the Company is reporting its first, second and third quarters on a month-end basis, such that the first quarter ended on March 31, 2016, the second quarter will end on June 30, 2016 and the third quarter will end on September 30, 2016. The Company's fiscal year will continue to end on December 31.

During the preparation of the Company's consolidated financial statements for the three-month period ended June 26, 2015, the Company identified an error related to the historical foreign translation of depreciation expense on certain foreign fixed assets that resulted in a historical understatement of expense in prior fiscal years totaling $1.4 million on a cumulative basis. There is no tax effect on these expenses as the amounts were calculated in the appropriate foreign currencies. The Company does not believe this error is material to its previously issued historical consolidated financial statements for any of the periods impacted and accordingly, has not adjusted its historical financial statements. The Company recorded the cumulative impact of the adjustment in the three months ended June 26, 2015. This adjustment resulted in a one-time $1.4 million overstatement of depreciation expense. The Company does not believe this adjustment is material to its condensed consolidated financial statements for the periods presented.

On January 2, 2015 (the "Treq Asset Acquisition Date"), the Company acquired from Treq Labs, Inc. ("Treq") certain assets related to Treq's business of designing, developing, marketing, selling, servicing and maintaining software-defined networking ("SDN") technology, SDN controller software and SDN management software (the "SDN Business"). The financial results of the SDN Business are included in the Company's condensed consolidated financial statements starting on the Treq Asset Acquisition Date.

8


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


Significant Accounting Policies

The Company's significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in the Annual Report. There were no material changes to the significant accounting policies during the three months ended March 31, 2016.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Sonus and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates and Judgments

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and judgments relied upon in preparing these consolidated financial statements include accounting for business combinations, revenue recognition for multiple element arrangements, inventory valuations, assumptions used to determine the fair value of stock-based compensation, intangible assets and goodwill valuations, including impairments, legal contingencies and recoverability of Sonus' net deferred tax assets and the related valuation allowances. Sonus regularly assesses these estimates and records changes in estimates in the period in which they become known. Sonus bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments, which include cash equivalents, marketable securities, investments, accounts receivable, accounts payable and other long-term liabilities, approximate their fair values.

Operating Segments

The Company operates in a single segment. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. To date, the chief operating decision maker has made such decisions and assessed performance at the company level, as one segment. The Company's chief operating decision maker is its President and Chief Executive Officer.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for the Company beginning January 1, 2017 for both interim and annual reporting periods. The Company is currently assessing the potential impact of the adoption of ASU 2016-09 on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) Section A - Leases: Amendments to the FASB Accounting Standards Codification ("ASU 2016-02"), its new standard on accounting for leases. ASU 2016-02 introduces a lessee model that brings most leases onto the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification ("ASC") 606, the FASB's new revenue recognition standard (i.e., those related to evaluating when profit can be recognized). Furthermore, ASU 2016-02 addresses other concerns related to the current leases model. For example, ASU 2016-02 eliminates the current GAAP requirement for an

9


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

entity to use bright-line tests in determining lease classification. ASU 2016-02 also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. ASU 2016-02 is effective for the Company for both interim annual periods beginning January 1, 2020. The Company is currently assessing the potential impact of the adoption of ASU 2016-02 on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"), which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in the condensed consolidated balance sheet. Netting of deferred tax assets and deferred tax liabilities is still required under ASU 2015-17. The ASU is effective for the Company for its annual report of the year ending December 31, 2018 and for interim period reporting beginning January 1, 2019, with early adoption permitted. The Company elected to early-adopt ASU 2015-17 prospectively and accordingly, reclassified its net current deferred tax asset totaling $1.0 million to its noncurrent net deferred tax asset as of December 31, 2015. No prior periods were retrospectively adjusted.

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments ("ASU 2015-16"), which eliminates the requirement to restate prior periods to reflect adjustments made to provisional amounts recognized in a business combination. Under ASU 2015-16, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, rather than retrospectively, as had previously been required. ASU 2015-16 also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 was effective for the Company as of January 1, 2016. The adoption of ASU 2015-16 did not have a material impact on the Company's consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"). ASU 2015-11 simplifies the measurement of inventory by requiring entities to measure most inventory at the lower of cost and net realizable value, replacing the previous requirement to measure most inventory at the lower of cost or market. ASU 2015-11 does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. ASU 2015-11 is effective for the Company for both interim and annual reporting periods beginning January 1, 2017. The adoption of ASU 2015-11 is not expected to have a material impact on the Company's consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"). ASU 2014-15 provides guidelines for determining when and how to disclose going concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's ability to continue as a going concern. ASU 2014-15 is effective for the Company for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of ASU 2014-15 is not expected to have a material impact on the Company's consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (“ASU 2014-12”). ASU 2014-12 clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent upon the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. ASU 2014-12 does not contain any new disclosure requirements. ASU 2014-12 was effective for the Company as of January 1, 2016. The adoption of ASU 2014-12 did not have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) its final standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict

10


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of other topics in the FASB ASC. Certain of ASU 2014-09’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (i.e., property, plant and equipment; real estate; or intangible assets). Existing accounting guidance applicable to these transfers has been amended or superseded. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the original effective date of interim and annual reporting periods by one year. As a result, public entities would not be required to apply the new revenue standard until annual reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net) ("ASU 2016-08") to clarify certain aspects of the principal-versus-agent guidance in its new revenue recognition standard in response to feedback received from the FASB-IASB joint revenue recognition transition resource group. ASU 2016-08 clarifies the implementation guidance on principal-versus-agent considerations regarding how an entity determines whether it is a principal or an agent for each specified good or service promised to the customer and how an entity determines the nature of each specified good or service. ASU 2016-08 also provides clarification regarding the application of the principal-versus-agent guidance. ASU 2016-08 is effective at the same time as ASU 2014-09 (as amended by ASU 2015-14). The Company is currently assessing the potential impact of the adoption of both ASU 2014-09 and ASU 2016-08 on its consolidated financial statements.


(2) BUSINESS ACQUISITION

Treq Labs, Inc.

On the Treq Asset Acquisition Date, the Company acquired from Treq the SDN Business. The SDN Business provides solutions that optimize networks for voice, video and UC for both enterprise and service provider customers. The Company believes that the acquisition of the SDN Business will accelerate Sonus' delivery of its SDN strategy. In consideration for the acquisition of the SDN Business, Sonus paid $10.1 million in cash on the Treq Asset Acquisition Date, and an additional consideration payment of $750,000 on each of July 2, 2015 and January 4, 2016. The Company also entered into an Earn-Out Agreement, dated as of January 2, 2015, with Treq and Karl F. May, the seller representative in the transaction (the "Earn-Out Agreement"), under which the Company agreed to issue up to an aggregate of 1.3 million shares of common stock over a three-year period subsequent to the Treq Asset Acquisition Date if aggregate revenue thresholds of at least $60 million are achieved by the SDN Business during that period, and up to an aggregate of an additional 2.2 million shares (3.5 million shares in total) if aggregate revenue thresholds of at least $150 million are achieved by the SDN Business during that period. If the initial revenue thresholds are not met, no shares will be issued. Based on historical and forecasted sales, no incremental contingent consideration was recorded either initially as of the Treq Asset Acquisition Date or through March 31, 2016. Any shares issued pursuant to the Earn-Out Agreement will be issued in reliance on the exemption from registration available under Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"), and will be subsequently registered for resale under the Securities Act by the Company.

The transaction has been accounted for as a business combination. The Company finalized its valuation of the identifiable intangible assets in the second quarter of fiscal 2015. Based on the purchase price allocation, the Company recorded $1.0 million of goodwill, primarily due to expected synergies between the combined companies and expanded market opportunities. The goodwill is deductible for tax purposes.


11


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

A summary of the purchase consideration for the SDN Business is as follows (in thousands):

Fair value of consideration transferred:
 
  Cash, net of cash acquired
$
11,647

Fair value of assets acquired and liabilities assumed:
 
  Intangible assets:
 
    In-process research and development
$
9,100

    Developed technology
1,500

  Goodwill
1,047

 
$
11,647



The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired in-process research and development and developed technology intangible assets. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company's estimates of technology attrition and revenue growth projections. As of March 31, 2016, the Company was recording amortization expense in connection with the acquired in-process research and development intangible assets related to products that became generally available in the three months ended March 31, 2016 and the three months ended September 25, 2015 and no longer had an in-process research and development intangible asset recorded. During the three months ended March 31, 2016, the Company began to record amortization expense in connection with the in-process research and development intangible assets related to a product that became generally available in that quarter and accordingly, reclassified the asset with a cost basis of $1.6 million to its developed technology intangible assets. During the three months ended September 25, 2015, the Company began to record amortization expense in connection with certain of the in-process research and development intangible assets related to a product that became generally available in that quarter and accordingly, reclassified the asset with a cost basis of $7.5 million to its developed technology intangible assets. The Company is amortizing the identifiable intangible assets in relation to the expected cash flows from the individual intangible assets over their respective useful lives (see Note 6).

The Company has not disclosed the amount of revenue or earnings of the SDN Business since the SDN Business Acquisition Date or pro forma financial information, as these amounts are not significant to the Company's consolidated financial statements.

Acquisition-Related Expenses

Acquisition-related expenses include those expenses related to acquisitions that would otherwise not have been incurred by the Company. These expenses include professional and services fees, such as legal, audit, consulting, paying agent and other fees, as well as cash payments to certain employees of acquired companies in connection with change of control agreements. The amount recorded in the three months ended March 27, 2015 related to professional fees in connection with the acquisition of the SDN Business. The Company did not record acquisition-related expenses in the three months ended March 31, 2016.

The component of acquisition-related expenses included in the Company's results of operations for the three months ended March 27, 2015 is as follows (in thousands):
 
Three months ended
 
March 27,
2015
Professional and services fees
$
107




12


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

(3) EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. For periods in which the Company reports net income, diluted net income per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period unless the effect is antidilutive.

The calculations of shares used to compute basic and diluted loss per share are as follows (in thousands):
 
Three months ended
 
March 31,
2016
 
March 27,
2015
Weighted average shares outstanding—basic
49,484

 
49,423

Potential dilutive common shares

 

Weighted average shares outstanding—diluted
49,484

 
49,423



Options to purchase the Company's common stock, unvested shares of restricted stock, unvested shares of performance-based stock and shares in connection with future purchases under the Company's Amended and Restated 2000 Employee Stock Purchase Plan, as amended (the "ESPP"), aggregating 7.7 million shares for the three months ended March 31, 2016 and 9.4 million shares for the three months ended March 27, 2015 have not been included in the computation of diluted loss per share because their effect would have been antidilutive.


(4) CASH EQUIVALENTS AND INVESTMENTS

The Company invests in debt instruments, primarily U.S. government-backed, municipal and corporate obligations, which management believes to be high quality (investment grade) credit instruments.

During the three months ended March 31, 2016, the Company sold $3.8 million of its available-for-sale securities and recognized gross losses aggregating $18,000, which are included as a component of Other income (expense), net, in the Company's condensed consolidated statement of operations for the three months ended March 31, 2016. The Company did not realize any gross gains on these sales. The Company did not sell any of its available-for-sale securities during the three months ended March 27, 2015. Investments with continuous unrealized losses for one year or greater at March 31, 2016 were nominal. Since the Company currently does not intend to sell these securities and does not believe it will be required to sell any securities before they recover in value, it does not believe these declines are other-than-temporary.

On a quarterly basis, the Company reviews its marketable securities and investments to determine if there have been any events that could create a credit impairment. Based on its reviews, the Company does not believe that any impairment existed with its current holdings at March 31, 2016.

The amortized cost, gross unrealized gains and losses and fair value of the Company's marketable debt securities and investments at March 31, 2016 and December 31, 2015 were comprised of the following (in thousands):


13


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

 
March 31, 2016
 
Amortized
cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
Cash equivalents
$
5,542

 
$

 
$

 
$
5,542

 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
Municipal obligations
$
3,984

 
$
6

 
$

 
$
3,990

U.S. government agency notes
8,278

 
6

 

 
8,284

Corporate debt securities
42,226

 
21

 
(9
)
 
42,238

Commercial paper
700

 

 

 
700

Certificates of deposit
500

 

 

 
500

 
$
55,688

 
$
33

 
$
(9
)
 
$
55,712

Investments
 
 
 
 
 
 
 
Municipal obligations
$
1,579

 
$
9

 
$

 
$
1,588

U.S. government agency notes
20,063

 
28

 
(2
)
 
20,089

Corporate debt securities
22,293

 
50

 
(13
)
 
22,330

 
$
43,935

 
$
87

 
$
(15
)
 
$
44,007



 
December 31, 2015
 
Amortized
cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
Cash equivalents
$
7,122

 
$

 
$

 
$
7,122

 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
Municipal obligations
$
3,910

 
$

 
$
(1
)
 
$
3,909

U.S. government agency notes
3,450

 

 
(2
)
 
3,448

Corporate debt securities
46,736

 
2

 
(56
)
 
46,682

Commercial paper
3,994

 

 

 
3,994

Certificates of deposit
500

 

 

 
500

 
$
58,590

 
$
2

 
$
(59
)
 
$
58,533

Investments
 
 
 
 
 
 
 
Municipal obligations
$
2,165

 
$

 
$
(4
)
 
$
2,161

U.S. government agency notes
1,999

 

 
(13
)
 
1,986

Corporate debt securities
29,541

 
2

 
(85
)
 
29,458

 
$
33,705

 
$
2

 
$
(102
)
 
$
33,605



The Company's available-for-sale debt securities classified as Investments in the condensed consolidated balance sheets at March 31, 2016 and December 31, 2015 had maturity dates after one year but within two years or less from the balance sheet date.

Fair Value Hierarchy

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tier fair value hierarchy is based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

Level 1. Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

14


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


Level 2. Level 2 applies to assets or liabilities for which there are inputs that are directly or indirectly observable in the marketplace, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets).

Level 3. Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The following table shows the fair value of the Company's financial assets at March 31, 2016 and December 31, 2015. These financial assets are comprised of the Company's available-for-sale debt securities and reported under the captions Cash and cash equivalents, Marketable securities and Investments in the condensed consolidated balance sheets (in thousands):
 
 
 
Fair value measurements at
March 31, 2016 using:
 
Total carrying
value at
March 31, 2016
 
Quoted prices
in active
markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Cash equivalents
$
5,542

 
$
4,540

 
$
1,002

 
$

 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
Municipal obligations
$
3,990

 
$

 
$
3,990

 
$

U.S. government agency notes
8,284

 

 
8,284

 

Corporate debt securities
42,238

 

 
42,238

 

Commercial paper
700

 

 
700

 

Certificates of deposit
500

 

 
500

 

 
$
55,712

 
$

 
$
55,712

 
$

Investments
 
 
 
 
 
 
 
Municipal obligations
$
1,588

 
$

 
$
1,588

 
$

U.S. government agency notes
20,089

 

 
20,089

 

Corporate debt securities
22,330

 

 
22,330

 

 
$
44,007

 
$

 
$
44,007

 
$



 
 
 
Fair value measurements at
December 31, 2015 using:
 
Total carrying
value at
December 31,
2015
 
Quoted prices
in active
markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Cash equivalents
$
7,122

 
$
7,122

 
$

 
$

 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
Municipal obligations
$
3,909

 
$

 
$
3,909

 
$

U.S. government agency notes
3,448

 

 
3,448

 

Corporate debt securities
46,682

 

 
46,682

 

Commercial paper
3,994

 

 
3,994

 

Certificates of deposit
500

 

 
500

 

 
$
58,533

 
$

 
$
58,533

 
$

Investments
 
 
 
 
 
 
 
Municipal obligations
$
2,161

 
$

 
$
2,161

 
$

U.S. government agency notes
1,986

 

 
1,986

 

Corporate debt securities
29,458

 

 
29,458

 

 
$
33,605

 
$

 
$
33,605

 
$


15


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


The Company's marketable securities and investments have been valued with the assistance of valuations provided by third-party pricing services, as derived from such services' pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. The Company is ultimately responsible for the condensed consolidated financial statements and underlying estimates. Accordingly, the Company assesses the reasonableness of the valuations provided by the third-party pricing services by reviewing actual trade data, broker/dealer quotes and other similar data, which are obtained from quoted market prices or other sources.


(5) INVENTORY

Inventory at March 31, 2016 and December 31, 2015 consists of the following (in thousands):
 
March 31,
2016
 
December 31,
2015
On-hand final assemblies and finished goods inventories
$
18,667

 
$
17,136

Deferred cost of goods sold
5,683

 
5,975

 
24,350

 
23,111

Less current portion
(22,450
)
 
(23,111
)
Noncurrent portion (included in Other assets)
$
1,900

 
$



(6) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets at March 31, 2016 and December 31, 2015 consist of the following (dollars in thousands):
March 31, 2016
Weighted average amortization period
(years)
 
Cost
 
Accumulated
amortization
 
Net
carrying value
Developed technology
6.45
 
$
32,880

 
$
12,042

 
$
20,838

Customer relationships
5.57
 
10,030

 
6,727

 
3,303

Internal use software
3.00
 
730

 
730

 

 
6.19
 
$
43,640

 
$
19,499

 
$
24,141


December 31, 2015
Weighted average amortization period
(years)
 
Cost
 
Accumulated
amortization
 
Net
carrying value
In-process research and development
*
 
$
1,600

 
$

 
$
1,600

Developed technology
6.42
 
31,280

 
10,415

 
20,865

Customer relationships
5.57
 
10,030

 
6,408

 
3,622

Internal use software
3.00
 
730

 
730

 

 
6.19
 
$
43,640

 
$
17,553

 
$
26,087


________________
* An in-process research and development intangible asset has an indefinite life until the product is generally available, at which time such asset is reclassified to developed technology. As of March 31, 2016, all of the Company's in-process research and development intangible assets had been reclassified to developed technology and are being amortized over their respective estimated useful lives.

16


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


Amortization expense for intangible assets for the three months ended March 31, 2016 and March 27, 2015 was as follows (in thousands):
 
Three months ended
 
Statement of operations classification
 
March 31,
2016
 
March 27,
2015
 
Developed technology
$
1,627

 
$
1,107

 
Cost of revenue - product
Customer relationships
319

 
479

 
Sales and marketing
Internal use software

 
61

 
Cost of revenue - product
 
$
1,946

 
$
1,647

 
 


As of March 31, 2016, the Company was recording amortization expense in connection with the in-process research and development intangible assets recorded in connection with the acquisition of the SDN Business, of which $1.6 million had been reclassified to developed technology in the three months ended March 31, 2016 and $7.5 million had been reclassified to developed technology in the three months ended September 25, 2015, representing the cost basis of products that became generally available in the respective quarters. The Company has determined that the reclassified assets each have an estimated useful life of 7 years. The Company is amortizing the identifiable intangible assets in relation to the expected cash flows from the individual intangible assets over their respective useful lives. Estimated future amortization expense for the Company's intangible assets at March 31, 2016 is as follows (in thousands):

Years ending December 31,
 
Remainder of 2016
$
5,322

2017
7,265

2018
4,596

2019
3,571

2020
2,069

Thereafter
1,318

 
$
24,141



There were no changes in the carrying value of the Company's goodwill in the three months ended March 31, 2016. The changes in the carrying value of the Company's goodwill in the three months ended March 27, 2015 were as follows (in thousands):
 
 
 
 
Balance at January 1, 2015
 
  Goodwill
$
42,369

  Accumulated impairment losses
(3,106
)
 
39,263

Acquisition of SDN Business
1,047

Balance at March 27, 2015
$
40,310

 
 
Balance at March 27, 2015
 
  Goodwill
$
43,416

  Accumulated impairment losses
(3,106
)
 
$
40,310




17


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

(7) ACCRUED EXPENSES
Accrued expenses at March 31, 2016 and December 31, 2015 consist of the following (in thousands):
 
March 31,
2016
 
December 31,
2015
Employee compensation and related costs
$
9,760

 
$
22,180

Other
7,621

 
9,783

 
$
17,381

 
$
31,963



(8) RESTRUCTURING ACCRUAL

To better align the Company's cost structure to its current revenue expectations, in April 2015, the Company announced a cost reduction review and restructuring initiative (the "2015 Restructuring Initiative"). A summary of the 2015 Restructuring Initiative accrual activity for the three months ended March 31, 2016 is as follows (in thousands):

 
Balance at
January 1,
2016
 
Initiatives
charged to
expense
 
Adjustments for changes in estimate
 
Cash
payments
 
Balance at
March 31,
2016
Severance
$
749

 
$

 
$

 
$
(591
)
 
$
158



The Company expects that the remaining amounts accrued under the 2015 Restructuring Initiative will be paid by the end of 2016. At both March 31, 2016 and December 31, 2015, all of the restructuring accrual was included in Accrued expenses, as there was no long-term portion.


(9) DEBT

The Company entered into a credit agreement by and among the Company, as Borrower, Bank of America, N.A. ("Bank of America"), as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders from time to time party thereto on June 27, 2014, which agreement was amended by a First Amendment to Credit Agreement on June 26, 2015 (the "Credit Agreement"). The Credit Agreement provides for a revolving credit facility of up to $15 million with a maturity date of June 30, 2016 and provides that the Company may select the interest rates under the credit facility from among the following options: (1) the Eurodollar Rate (which is defined as the rate per annum equal to the London Interbank Offered Rate plus 1.5% per annum) for a Eurodollar Rate Loan; and (2) the highest of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the rate of interest in effect on the borrowing date as publicly announced from time to time by Bank of America as its prime rate, and (c) the monthly Eurodollar Rate plus 1%. The Credit Agreement also provides that the Company pay a 0.15% commitment fee on the unused commitments available for borrowing.

The obligations of the Company under the Credit Agreement are guaranteed by Sonus International, Inc., Sonus Federal, Inc. and Network Equipment Technologies, Inc. ("NET") (collectively with the Company, the "Loan Parties") pursuant to a Master Continuing Guaranty and are secured by the assets of the Loan Parties pursuant to a Security and Pledge Agreement.

The Credit Agreement contains affirmative, negative and financial covenants customary for financings of this type. The negative covenants include limitations on liens, indebtedness, fundamental changes, dispositions, restricted payments, investments, transactions with affiliates, certain restrictive agreements and compliance with sanctions laws and regulations. The amount of cash and cash equivalents of the Loan Parties, subject to certain exclusions, cannot be less than an aggregate of $85 million at any time, and the total revenues of the Loan Parties cannot be less than an aggregate of $50 million as of the last day of the Loan Parties' fiscal quarter, computed on a fiscal quarterly basis beginning with the fiscal quarter ended September 25, 2015. The credit facility will become due on June 30, 2016, subject to acceleration upon certain specified events of default, including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations of warranties, bankruptcy and insolvency-related defaults, defaults relating to judgments, an

18


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

ERISA Event (as defined in the Credit Agreement), the failure to pay specified indebtedness and a change of control default.

The Company did not have any amounts outstanding under the Credit Agreement at March 31, 2016.


(10) COMMON STOCK REPURCHASES

On July 29, 2013, the Company announced that its Board of Directors had authorized a stock buyback program to repurchase up to $100 million of the Company's common stock from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased will be determined by the Company's management based on its evaluation of market conditions and other factors. The Company may elect to implement a 10b5-1 repurchase program, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The Company has not implemented such a 10b5-1 repurchase program to date. The stock buyback program may be suspended or discontinued at any time. The stock buyback program is being funded using the Company's working capital. During the three months ended March 31, 2016, the Company spent $1.5 million, including transaction fees, to repurchase and retire 0.2 million shares of its common stock under the stock buyback program. During the three months ended March 27, 2015, the Company spent $6.1 million, including transaction fees, to repurchase and retire 0.4 million shares of its common stock under the stock buyback program. At March 31, 2016, the Company had $13.5 million remaining under the stock buyback program for future repurchases.


(11) STOCK-BASED COMPENSATION PLANS

Stock Incentive Plan

The Company's 2007 Stock Incentive Plan, as amended (the "2007 Plan"), provides for the award of options to purchase the Company's common stock ("stock options"), stock appreciation rights ("SARs"), restricted common stock awards ("RSAs"), restricted common stock units ("RSUs"), performance-based stock awards ("PSAs"), performance-based stock units ("PSUs") and other stock-based awards to employees, officers, directors (including those directors who are not employees or officers of the Company), consultants and advisors of the Company and its subsidiaries.

Executive Equity Arrangements

On March 16, 2015, the Company granted an aggregate of 131,250 PSUs with both market and service conditions to eight of its executives. Subsequent to the grant date, two executives separated from the Company and, in accordance with their respective employment agreements with the Company, the Company accelerated the vesting of certain unvested PSUs. The terms of the PSUs are such that up to one-third of the shares subject to the PSUs will vest on each of the first, second and third anniversaries of the date of grant (collectively, the "Vesting Dates") to the extent of achievement of the Company's total shareholder return ("TSR") compared to the TSR of the companies included in the NASDAQ Telecommunications Index for the same Performance Period, measured by the Compensation Committee of the Company's Board of Directors (the "Compensation Committee") at the end of each of the 2015, 2016 and 2017 fiscal years, respectively (each, a "Performance Period"). The shares determined to be earned will vest on the anniversary of the grant date following each Performance Period. Shares subject to the PSUs that fail to be earned will be forfeited. The PSUs include a market condition that requires the use of a Monte Carlo simulation approach to model future stock price movements based upon the risk-free rate of return, the volatility of each entity, and the pair-wise covariance between each entity. These results were then used to calculate the grant date fair values of the PSUs. Because the PSUs have market conditions, the Company must record expense for the PSUs through the final Vesting Date of March 16, 2018 regardless of the number of shares that are ultimately earned, if any. In February 2016, the Compensation Committee determined that the performance metrics for the PSUs were not achieved for the 2015 Performance Period. Accordingly, 37,081 shares in the aggregate, representing one-third of the PSUs held by the remaining six executives, were forfeited, and are reported as such in the performance-based units table below.


19


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

Stock Options

The activity related to the Company's outstanding stock options during the three months ended March 31, 2016 is as follows:
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual Term
(years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding at January 1, 2016
6,352,208

 
$
15.99

 
 
 
 
Granted
25,760

 
$
6.73

 
 
 
 
Exercised
(1,293
)
 
$
3.70

 
 
 
 
Forfeited
(43,270
)
 
$
14.01

 
 
 
 
Expired
(176,374
)
 
$
19.11

 
 
 
 
Outstanding at March 31, 2016
6,157,031

 
$
15.86

 
6.07
 
$
272

Vested or expected to vest at March 31, 2016
6,010,400

 
$
15.87

 
6.03
 
$
259

Exercisable at March 31, 2016
4,567,678

 
$
15.82

 
5.45
 
$
221



The grant date fair values of options to purchase common stock granted in the three months ended March 31, 2016 were estimated using the Black-Scholes valuation model with the following assumptions:
 
Three months ended
 
March 31,
2016
Risk-free interest rate
1.37%
Expected dividends
Weighted average volatility
54.0%
Expected life (years)
5.0


Additional information regarding the Company's stock options for the three months ended March 31, 2016 is as follows:
 
Three months ended
 
March 31,
2016
Weighted average grant date fair value of stock options granted
$
3.18

Total intrinsic value of stock options exercised (in thousands)
$
4

Cash received from the exercise of stock options (in thousands)
$
5



Restricted Stock Awards and Units

The activity related to the Company's RSAs for the three months ended March 31, 2016 is as follows:
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested balance at January 1, 2016
1,512,783

 
$
13.48

Granted
25,000

 
$
6.93

Vested
(285,631
)
 
$
15.94

Forfeited
(10,425
)
 
$
15.41

Unvested balance at March 31, 2016
1,241,727

 
$
12.76



20


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


The activity related to the Company's RSUs for the three months ended March 31, 2016 is as follows:
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested balance at January 1, 2016
95,361

 
$
16.05

Granted

 
$

Vested
(20,870
)
 
$
16.05

Forfeited
(225
)
 
$
16.05

Unvested balance at March 31, 2016
74,266

 
$
16.05



The total fair value of shares of restricted stock granted under RSAs and RSUs that vested during the three months ended March 31, 2016 was $4.9 million.

Performance-Based Stock Units
 
 
 
 
The activity related to the Company's PSUs for the three months ended March 31, 2016 is as follows:
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested balance at January 1, 2016
111,250

 
$
14.68

Granted

 
$

Vested

 
$

Forfeited
(37,081
)
 
$
13.27

Unvested balance at March 31, 2016
74,169

 
$
15.38



Employee Stock Purchase Plan

The Company's ESPP provides for six-month offering periods with the purchase price of the stock equal to 85% of the lesser of the market price on the first or last day of the offering period. The maximum number of shares of common stock an employee may purchase during each offering period is 500, subject to certain adjustments pursuant to the ESPP.

Stock-Based Compensation

The condensed consolidated statements of operations include stock-based compensation for the three months ended March 31, 2016 and March 27, 2015 as follows (in thousands):
 
Three months ended
 
March 31,
2016
 
March 27,
2015
Product cost of revenue
$
71

 
$
74

Service cost of revenue
332

 
380

Research and development
1,179

 
1,358

Sales and marketing
1,020

 
1,016

General and administrative
1,813

 
1,992

 
$
4,415

 
$
4,820


There is no income tax benefit for employee stock-based compensation expense for the three months ended March 31, 2016 or March 27, 2015 due to the valuation allowance recorded.


21


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

At March 31, 2016, there was $24.9 million, net of expected forfeitures, of unrecognized stock-based compensation expense related to unvested stock options, awards and units. This expense is expected to be recognized over a weighted average period of approximately two years.


(12) MAJOR CUSTOMERS

The following customers contributed 10% or more of the Company's revenue in at least one of the three-month periods ended March 31, 2016 and March 27, 2015:
 
Three months ended
 
 
March 31,
2016
 
March 27,
2015
 
Level 3 Communications
19%
 
*
 
AT&T Inc.
11%
 
*
 
Verizon Communications Inc.
*
 
15%
 
SoftBank Corporation
*
 
11%
 
_______________________
* Represents less than 10% of revenue

There were no other customers who contributed 10% or more of the Company's revenue in either of the three-month periods ended March 31, 2016 or March 27, 2015.

At March 31, 2016, two customers each accounted for 10% or more of the Company's accounts receivable balance, representing approximately 21% in the aggregate of the Company's accounts receivable balance. At December 31, 2015, one customer accounted for 10% or more of the Company's accounts receivable balance, representing approximately 11% of the Company's accounts receivable balance. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The Company maintains an allowance for doubtful accounts and such losses have been within management's expectations.


(13) GEOGRAPHIC INFORMATION

The Company's classification of revenue by geographic area is determined by the location to which the product is shipped or where the services are performed. The following table summarizes revenue by geographic area as a percentage of total revenue:
 
Three months ended
 
 
March 31,
2016
 
March 27,
2015
 
United States
68
%
 
62
%
 
Europe, Middle East and Africa
13

 
14

 
Japan
13

 
18

 
Other Asia Pacific
4

 
4

 
Other
2

 
2

 
 
100
%
 
100
%
 


International revenue, both as a percentage of total revenue and absolute dollars, may vary from one period to the next, and accordingly, historical data may not be indicative of future periods.


(14) RELATED PARTY


22


SONUS NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

H. Brian Thompson, an independent member of the Company's Board of Directors, is the Executive Chairman of GTT Communications, Inc., a leading global cloud networking provider to multinational clients ("GTT"). Howard Janzen is the independent Chairman of the Company's Board of Directors and also serves as an independent director of GTT. In October 2015, GTT completed the acquisition of One Source Networks Inc., a provider of global data, Internet, SIP trunking and managed services ("One Source"). One Source is a customer of the Company. The Company had a well-established and ongoing business relationship with One Source prior to its acquisition by GTT. The Company recognized revenue aggregating approximately $23,000 from One Source in the three months ended March 31, 2016, pursuant to the terms of a contract between the parties, effective June 28, 2010. The Company believes the terms of this contract are consistent with third-party arrangements that provide similar services.

As a matter of corporate governance policy and practice, related party transactions are presented and considered by the Audit Committee of the Company's Board of Directors in accordance with the Company's Related Person Transaction Policy.


(15) INCOME TAXES

The Company's income tax provisions for the three months ended March 31, 2016 and March 27, 2015 reflect the Company's estimates of the effective rates expected to be applicable for the respective full years, adjusted for any discrete events, which are recorded in the period that they occur. These estimates are reevaluated each quarter based on the Company's estimated tax expense for the full year. The estimated effective rates for the three months ended March 31, 2016 and March 27, 2015 do not include any benefit for the Company's domestic losses, as the Company has concluded that a valuation allowance on any domestic benefit is required. Included in the Company's provision for the three months ended March 31, 2016 is a discrete charge of $0.7 million related to an uncertain tax position of the Company's subsidiary in France.


(16) COMMITMENTS AND CONTINGENCIES

On April 6, 2015, Ming Huang, a purported shareholder of the Company, filed a Class Action Complaint (Civil Action No. 3:15-02407), alleging violations of the federal securities laws (the "Complaint") in the United States District Court for the District of New Jersey (the "District of New Jersey"), against the Company and two of its officers, Raymond P. Dolan, the Company's President and Chief Executive Officer, and Mark T. Greenquist, the Company's Chief Financial Officer (collectively, the "Defendants"). On September 21, 2015, in response to motions subsequently filed with the District of New Jersey by four other purported shareholders of the Company seeking status as lead plaintiff, the District of New Jersey appointed Richard Sousa as lead plaintiff (the "Plaintiff"). The Plaintiff claims to represent purchasers of the Company's common stock during the period from October 23, 2014 to March 24, 2015, and seeks unspecified damages. The principal allegation contained in the Complaint is that the Defendants made misleading forward-looking statements concerning the Company's fiscal first quarter of 2015 financial performance. On September 22, 2015, the Company filed a Motion to Transfer (the “Motion to Transfer”) this case to the United States District Court for the District of Massachusetts. The Plaintiff filed his opposition to the Motion to Transfer on October 5, 2015, and the Company filed a reply to the Motion to Transfer on October 13, 2015. On March 21, 2016, the District of New Jersey granted the Company's Motion to Transfer. Thus, this case will now be litigated in the United States District Court for the District of Massachusetts (the “Court”) (Civil Action No. 1:16-cv-10657-GAO). The Plaintiff’s amended and operative complaint (the “Amended Complaint”) is due by May 4, 2016, and the Company’s Motion to Dismiss is due on June 20, 2016. The Company believes that the Defendants have meritorious defenses to the allegations made in the Complaint and does not expect the results of this suit to have a material effect on its business or consolidated financial statements.

In addition, the Company is often a party to disputes and legal proceedings that it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material effect on the Company's business or consolidated financial statements.



Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations


The following discussion of the financial condition and results of operations of Sonus Networks, Inc. should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended

23


December 31, 2015, which was filed with the U.S. Securities and Exchange Commission on February 23, 2016.

Overview

We are a leading provider of networked solutions for communications service providers (e.g., telecommunications, wireless and cable service providers) and enterprises to help them advance, protect and unify their communications and improve collaboration. We help many of the world's leading communications service providers and enterprises embrace the next generation of Session Initiation Protocol ("SIP") and 4G/LTE (Long Term Evolution)-based solutions, including Voice over IP ("VoIP") video and Unified Communications ("UC") through secure, reliable and scalable Internet Protocol ("IP") networks. Our products include session border controllers ("SBCs"), diameter signaling controllers ("DSCs"), policy/routing servers, network intelligence applications ("VellOS") and are designed to provide network-wide security and other cloud network exchange services, media and signaling gateways and network analytics tools. Our products are supported by a global services team with experience in design, deployment and maintenance of some of the world's largest IP networks.

Our solutions enable our customers to seamlessly link and leverage multivendor, multiprotocol communications systems and applications across their networks, around the world and in a rapidly changing ecosystem of IP-enabled devices such as smartphones and tablets. Our solutions help our customers realize the intended value and benefits of UC platforms by allowing disparate communications environments, commonplace in most enterprises today, to work seamlessly together. Likewise, our solutions facilitate the evolution to cloud-based delivery of UC solutions.

We utilize both direct and indirect sales channels to reach our target customers. Customers and prospective customers in the service provider space are traditional and emerging communications service providers, including long distance carriers, local exchange carriers, Internet service providers, wireless operators, cable operators, international telephone companies and carriers that provide services to other carriers. Enterprise customers and target enterprise customers include financial institutions, retailers, state and local governments, and other multinational corporations. We collaborate with our customers to identify and develop new, advanced services and applications that can help to reduce costs, improve productivity and generate new revenue.

We have traditionally sold our products principally through a global direct sales force, with additional sales support from regional channel partners throughout the world. In 2012, we launched an expanded channel partner program, the Sonus Partner Assure Program, to address service provider and enterprise market opportunities. In 2013, we introduced a two-tier distribution channel model.

For the year ended December 31, 2015, we reported our first, second and third quarters on a 4-4-5 basis, with the quarter ending on the Friday closest to the last day of each third month. Accordingly, our first quarter ended on March 27, 2015, our second quarter ended on June 26, 2015 and our third quarter ended on September 25, 2015. Effective January 1, 2016, we are reporting our first, second and third quarters on a month-end basis, such that our first quarter ended on March 31, 2016, our second quarter will end on June 30, 2016 and our third quarter will end on September 30, 2016. Our fiscal year will continue to end on December 31.

On January 2, 2015 (the "Treq Asset Acquisition Date"), we acquired from Treq Labs, Inc. ("Treq") certain assets related to its business of designing, developing, marketing, selling, servicing and maintaining software-defined networking ("SDN") technology, SDN controller software and SDN management software (the "SDN Business") for $10.1 million in cash on the Treq Asset Acquisition Date, and an additional consideration payment of $750,000 paid on each of July 2, 2015 and January 4, 2016. We also entered into an Earn-Out Agreement under which we agreed to issue to the sellers up to an aggregate of 1.3 million shares of common stock over a three-year period subsequent to the Treq Asset Acquisition Date if aggregate revenue thresholds of at least $60 million are achieved by the SDN Business during that period, and up to an aggregate of an additional 2.2 million shares (3.5 million shares in total) if aggregate revenue thresholds of at least $150 million are achieved by the SDN Business during that period. If the initial revenue thresholds are not met, no shares will be issued. Based on historical and forecasted sales, no incremental contingent consideration was recorded initially as of the Treq Asset Acquisition Date or through March 31, 2016. The SDN Business provides solutions that optimize networks for voice, video and UC for both enterprise and service provider customers. We believe that the acquisition of the SDN Business will accelerate our delivery of our SDN strategy. The financial results of the SDN Business are included in our condensed consolidated financial statements starting on the Treq Asset Acquisition Date.

Our strategy is designed to capitalize on our technology and market lead and to build a premier franchise in multimedia infrastructure solutions. We are currently focusing our major efforts on the following aspects of our business which enable next generation communications, including SIP- and 4G/LTE-based networks:


24


expanding our communications network solutions to address emerging UC-, IP- and cloud-based enterprise and service providers;
embracing the principles outlined by 3GPP, 4GPP2 and LTE architectures and delivering the industry's most advanced IMS (IP Multimedia Subsystem)-ready SBC and DSC product suites;
leveraging our TDM (time division multiplexing)-to-IP gateway technology leadership with service providers to accelerate adoption of SIP-enabled UC services;
expanding and broadening our customer base by targeting the enterprise market for SIP trunking and access solutions;
providing an environment for our customers to enable real-time communication to embed into their presence on the worldwide web;
expanding our global sales distribution, marketing and support capabilities;
actively contributing to the SIP standards definition and adoption process;
pursuing strategic transactions and alliances;
successfully implementing our cost reduction initiatives; and
delivering sustainable profitability by continuing to improve our overall performance.

We reported losses from operations of $3.9 million for the three months ended March 31, 2016 and $18.9 million for the three months ended March 27, 2015.

We reported net losses of $4.7 million for the three months ended March 31, 2016 and $19.4 million for the three months ended March 27, 2015.

Our revenue was $59.2 million in the three months ended March 31, 2016 and $50.1 million in the three months ended March 27, 2015.

Our gross profit was $38.4 million in the three months ended March 31, 2016 and $29.2 million in the three months ended March 27, 2015. Our gross profit as a percentage of revenue ("total gross margin") was 64.9% in the three months ended March 31, 2016 and 58.3% in the three months ended March 27, 2015.

Our operating expenses were $42.3 million in the three months ended March 31, 2016, compared to $48.1 million in the three months ended March 27, 2015.

We recorded stock-based compensation expense of $4.4 million in the three months ended March 31, 2016, compared to $4.8 million in the three months ended March 27, 2015. These amounts are included as components of both Cost of revenue and Operating expenses in our condensed consolidated statements of operations.

See "Results of Operations" in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for a discussion of these changes in our revenue and expenses.

Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. If actual results differ significantly from management's estimates and projections, there could be a material effect on our condensed consolidated financial statements. The significant accounting policies that we believe are the most critical include the following:

Revenue recognition;
Valuation of inventory;
Loss contingencies and reserves;
Stock-based compensation;
Business combinations;
Goodwill and intangible assets; and
Accounting for income taxes.


25


For a further discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There were no significant changes to our critical accounting policies from December 31, 2015 through March 31, 2016.


Results of Operations

Three months ended March 31, 2016 and March 27, 2015

Revenue. Revenue for the three months ended March 31, 2016 and March 27, 2015 was as follows (in thousands, except percentages):
 
Three months ended
 
Increase (decrease)
from prior year
 
March 31,
2016
 
March 27,
2015
 
$
 
%
Product
$
34,769

 
$
24,865

 
$
9,904

 
39.8
 %
Service
24,382

 
25,280

 
(898
)
 
(3.6
)%
Total revenue
$
59,151

 
$
50,145

 
$
9,006

 
18.0
 %

 
 
 
 
 
 
 
 
Product revenue is comprised of sales of our communication infrastructure products. The increase in product revenue in the three months ended March 31, 2016 compared to the three months ended March 27, 2015 was primarily the result of the growth in sales of our SBC product line, in particular, our SBC 7000.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In the three months ended March 31, 2016, approximately 21% of our total product revenue was from indirect sales through our channel program, compared to approximately 24% in the three months ended March 27, 2015.

In the three months ended March 31, 2016, our product revenue from sales to enterprise customers was approximately 18% of our total product revenue, compared to approximately 15% in the three months ended March 27, 2015. These sales were made both through our direct sales team and indirect sales channel partners.

We expect that our product revenue in 2016 will increase from 2015 levels, primarily due to our expanding product portfolio and continued focus on additional new product offerings to address the emerging UC and IP-based markets, such as SBC, in both the enterprise and service provider markets.

Service revenue is primarily comprised of hardware and software maintenance and support (“maintenance revenue”) and network design, installation and other professional services (“professional services revenue”).

Service revenue for the three months ended March 31, 2016 and March 27, 2015 was comprised of the following (in thousands, except percentages):
 
Three months ended
 
Increase (decrease)
from prior year
 
March 31,
2016
 
March 27,
2015
 
$
 
%
Maintenance
$
20,750

 
$
20,083

 
$
667

 
3.3
 %
Professional services
3,632

 
5,197

 
(1,565
)
 
(30.1
)%
 
$
24,382

 
$
25,280

 
$
(898
)
 
(3.6
)%

 
 
 
 
 
 
 
 
Our maintenance revenue increased slightly in the three months ended March 31, 2016 compared to the three months ended March 27, 2015, primarily due to customer mix and the timing of product shipments with related maintenance revenue.

The decrease in our professional services revenue in the three months ended March 31, 2016 compared to the three months ended March 27, 2015 primarily relates to lower project services in the quarter compared to the prior year quarter.


26


The timing of the completion of projects for revenue recognition, customer payments and maintenance contracts may cause our services revenue to fluctuate from one period to the next. We expect that our service revenue in fiscal 2016 will decrease slightly from fiscal 2015 levels as a result of customer merger activities and lower project-related service work.

The following customers contributed 10% or more of our revenue in at least one of the three month periods ended March 31, 2016 and March 27, 2015:
 
Three months ended
Customer
March 31,
2016
 
March 27,
2015
Level 3 Communications
19%
 
*
AT&T Inc.
11%
 
*
Verizon Communications Inc.
*
 
15%
SoftBank Corporation
*
 
11%
_______________________
* Represents less than 10% of revenue

There were no other customers who contributed 10% or more of the Company's revenue in either of the three month periods ended March 31, 2016 and March 27, 2015.

International revenue was approximately 32% of revenue in the three months ended March 31, 2016 and approximately 38% of revenue in the three months ended March 27, 2015. Due to the timing of project completions, we expect that the domestic and international components as a percentage of our revenue will fluctuate from quarter to quarter and year to year.

Our deferred product revenue was $9.1 million at March 31, 2016 and $12.5 million at December 31, 2015. Our deferred service revenue was $39.2 million at March 31, 2016 and $33.6 million at December 31, 2015. Our deferred revenue balance may fluctuate as a result of the timing of revenue recognition, customer payments, maintenance contract renewals, contractual billing rights and maintenance revenue deferrals included in multiple element arrangements.

Cost of Revenue/Gross Margin. Our cost of revenue consists primarily of amounts paid to third-party manufacturers for purchased materials and services, royalties, manufacturing and professional services personnel and related costs, and provision for inventory obsolescence. Our cost of revenue and gross margins for the three months ended March 31, 2016 and March 27, 2015 were as follows (in thousands, except percentages):
 
Three months ended
 
Decrease
from prior year
 
March 31,
2016
 
March 27,
2015
 
$
 
%
Cost of revenue
 
 
 
 
 
 
 
Product
$
11,536

 
$
11,648

 
$
(112
)
 
(1.0
)%
Service
9,212

 
9,267

 
(55
)
 
(0.6
)%
Total cost of revenue
$
20,748

 
$
20,915

 
$
(167
)
 
(0.8
)%
Gross margin
 
 
 
 
 
 
 
Product
66.8
%
 
53.2
%
 
 
 
 
Service
62.2
%
 
63.3
%
 
 
 
 
Total gross margin
64.9
%
 
58.3
%
 
 
 
 
 
 
 
 
 
 
 
 

The increase in product gross margin in the three months ended March 31, 2016 compared to the three months ended March 27, 2015 was primarily due to higher product revenue against certain fixed manufacturing costs, coupled with lower variable costs in connection with our inventory valuation, which increased our product gross margin in the aggregate by approximately eleven percentage points. Our product and customer mix, in particular, sales of our SBC 7000, in the current quarter increased our product gross margin by approximately two and one-half percentage points.

The decrease in service gross margin in the three months ended March 31, 2016 compared to the three months ended March 27, 2015 was primarily due to slightly lower revenue against relatively fixed costs, which decreased our service gross margin by approximately one percentage point.

We believe that our total gross margin will continue to be greater than 60% in the foreseeable future.


27


Research and Development Expenses. Research and development expenses consist primarily of salaries and related personnel expenses and prototype costs related to the design, development, testing and enhancement of our products. Research and development expenses for the three months ended March 31, 2016 and March 27, 2015 were as follows (in thousands, except percentages):
 
 
 
Decrease
from prior year
 
March 31,
2016
 
March 27,
2015
 
$
 
%
Three months ended
$
17,318

 
$
19,339

 
$
(2,021
)
 
(10.5
)%


The decrease in research and development expenses in the three months ended March 31, 2016 compared to the three months ended March 27, 2015 is attributable to $0.8 million of lower employee-related expenses, $0.5 million of lower facilities expense, $0.5 million of lower product development (third-party development, prototype and equipment) costs and $0.2 million of net reductions in other research and development expenses. The decrease in employee-related expenses in the three months ended March 31, 2016 is attributable to $1.8 million of lower salary and related expenses and $0.2 million of lower stock-based compensation expense, partially offset by $1.2 million of higher expense related to our Company-wide cash bonus program. Our lower employee-related expenses are primarily due to reduced headcount in connection with our 2015 restructuring initiative.

Some aspects of our research and development efforts require significant short-term expenditures, the timing of which may cause significant variability in our expenses. Rapid technological innovation is critical to our long-term success, and we believe that we are tailoring our investments to meet the requirements of our customers and market. We anticipate that our research and development expenses for fiscal 2016 will decrease from fiscal 2015 levels due to our cost reduction initiatives, partially offset by our continued focus on new product development.

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and related personnel costs, commissions, travel and entertainment expenses, promotions, customer trial and evaluations inventory and other marketing and sales support expenses. Sales and marketing expenses for the three months ended March 31, 2016 and March 27, 2015 were as follows (in thousands, except percentages):
 
 
 
Decrease
from prior year
 
March 31,
2016
 
March 27,
2015
 
$
 
%
Three months ended
$
16,595

 
$
19,765

 
$
(3,170
)
 
(16.0
)%


The decrease in sales and marketing expenses in the three months ended March 31, 2016 compared to the three months ended March 27, 2015 is attributable to $2.4 million of lower employee-related expenses, $0.4 million of lower marketing and trade show expenses, $0.3 million of lower expense related to evaluation equipment at customer sites and $0.1 million of net reductions in other sales and marketing expenses. The decrease in employee-related expenses was the result of $1.6 million of lower salary and commissions and related expenses and $1.5 million of lower employee travel, training and related expenses, partially offset by $0.7 million of higher expense related to our Company-wide cash bonus program. Our lower employee-related expenses are primarily due to reduced headcount and related expenses in connection with our 2015 restructuring initiative.

We believe that our sales and marketing expenses will decrease in fiscal 2016 from fiscal 2015 levels, primarily attributable to our cost reduction initiatives, partially offset by higher commissions expense driven by our anticipated higher revenue.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related personnel costs for executive and administrative personnel, recruiting expenses and audit and professional fees. General and administrative expenses for the three months ended March 31, 2016 and March 27, 2015 were as follows (in thousands, except percentages):

28


 
 
 
Decrease
from prior year
 
March 31,
2016
 
March 27,
2015
 
$
 
%
Three months ended
$
8,371

 
$
9,224

 
$
(853
)
 
(9.2
)%


The decrease in general and administrative expenses in the three months ended March 31, 2016 compared to the three months ended March 27, 2015 is attributable to $0.3 million of lower employee-related expenses, $0.2 million of lower expense related to foreign currency translation, $0.2 million of lower depreciation and $0.2 million of net reductions in other general and administrative expenses. The decrease in employee-related expenses resulted from $0.6 million of lower salary and related expenses, $0.2 million of lower stock-based compensation expense and $0.1 million of lower employee travel and related expenses, partially offset by $0.6 million of higher expense related to our Company-wide cash bonus program.

We believe that our general and administrative expenses will decrease in fiscal 2016 compared to fiscal 2015 levels, primarily due to our cost reduction initiatives.

Acquisition-Related Expenses. We recorded $0.1 million of acquisition-related expenses in the three months ended March 27, 2015 for professional fees, primarily legal fees, in connection with the acquisition of the SDN Business. We did not record any acquisition-related expenses in the three months ended March 31, 2016.

Restructuring Expense. We reversed $0.3 million of restructuring expense in the three months ended March 27, 2015. This reversal is comprised of approximately $272,000 in connection with the settlement with the landlord of our Dulles, Virginia facility for an amount that was lower than had previously been accrued and approximately $67,000 in connection with changes in the amounts of severance ultimately paid to certain individuals.

We currently expect that the remaining restructuring accrual related to severance and related costs will be paid by the end of 2016.

Interest Income (Expense), Net. Interest income and interest expense for the three months ended March 31, 2016 and March 27, 2015 were as follows (in thousands, except percentages):
 
Three months ended
 
Increase (decrease)
from prior year
 
March 31,
2016
 
March 27,
2015
 
$
 
%
Interest expense
$
(9
)
 
$
(76
)
 
$
(67
)
 
(88.2
)%
Interest income
173

 
104

 
69

 
66.3
 %
Interest income, net
$
164

 
$
28

 
$
136

 
485.7
 %

 
 
 
 
 
 
 
 
Interest expense primarily relates to the amortization of debt issuance costs in connection with our revolving credit facility. Interest income consists of interest earned on our cash equivalents, marketable securities and long-term investments.

Income Taxes. We recorded provisions for income taxes of $1.0 million in the three months ended March 31, 2016 and $0.6 million in the three months ended March 27, 2015. These amounts reflect our estimates of the effective rates expected to be applicable for the respective full fiscal years, adjusted for any discrete events, which are recorded in the period that they occur. These estimates are reevaluated each quarter based on our estimated tax rate for the full fiscal year. The estimated amounts recorded do not include any benefit for our domestic losses, as we have concluded that a valuation allowance on any domestic benefit is required. Included in our provision for the three months ended March 31, 2016 is a discrete charge of $0.7 million related to an uncertain tax position of our subsidiary in France.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial position, changes in financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


29


Liquidity and Capital Resources

Our consolidated statements of cash flows are summarized as follows (in thousands):
 
Three months ended
 
 
 
March 31,
2016
 
March 27,
2015
 
Change
Net loss
$
(4,654
)
 
$
(19,359
)
 
$
14,705

Adjustments to reconcile net loss to cash flows provided by operating activities
8,774

 
9,209

 
(435
)
Changes in operating assets and liabilities
(806
)
 
(7,326
)
 
6,520

Net cash provided by (used in) operating activities
$
3,314

 
$
(17,476
)
 
$
20,790

Net cash used in investing activities
$
(9,409
)
 
$
(790
)
 
$
(8,619
)
Net cash used in financing activities
$
(1,619
)
 
$
(4,744
)
 
$
3,125



Our cash, cash equivalents, and short- and long-term investments totaled $142.4 million at March 31, 2016 and $142.2 million at December 31, 2015. We had cash and short-term investments held by our foreign subsidiaries aggregating approximately $7 million at March 31, 2016 and approximately $4 million at December 31, 2015. We do not intend to repatriate these funds and, as such, they are not available to fund our domestic operations. If we were to repatriate the funds, they would likely be treated as income for U.S. tax purposes, fully offset by our net operating losses. We do not believe this has a material impact on our liquidity.

We entered into a credit agreement by and among the Company, as Borrower, Bank of America, N.A. ("Bank of America"), as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders from time to time party thereto on June 27, 2014, which agreement was amended on June 26, 2015 by a First Amendment to Credit Agreement (the "Credit Agreement"). The Credit Agreement provides for a revolving credit facility of up to $15 million with a maturity date of June 30, 2016, and provides that we may select the interest rates under the credit facility from among the following options: (1) the Eurodollar Rate (which is defined as the rate per annum equal to the London Interbank Offered Rate plus 1.5% per annum) for a Eurodollar Rate Loan; and (2) the highest of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the rate of interest in effect on the borrowing date as publicly announced from time to time by Bank of America as its prime rate, and (c) the monthly Eurodollar Rate plus 1%. The Credit Agreement also provides that we pay a 0.15% commitment fee on the unused commitments available for borrowing. Our obligations under the Credit Agreement are guaranteed by Sonus International, Inc., Sonus Federal, Inc. and Network Equipment Technologies, Inc. ("NET") (collectively, with us, the "Loan Parties") pursuant to a Master Continuing Guaranty and are secured by the assets of the Loan Parties pursuant to a Security and Pledge Agreement. We did not have any amounts outstanding under the Credit Agreement at March 31, 2016.

On July 29, 2013, we announced that our Board of Directors had authorized a stock buyback program to repurchase up to $100 million of our common stock from time to time on the open market or in privately negotiated transactions. The stock buyback program is being funded using our working capital. During the three months ended March 31, 2016, we repurchased and retired 0.2 million shares under our stock buyback program for $1.5 million in the aggregate, including transaction fees. During the three months ended March 27, 2015, we repurchased and retired 0.4 million shares under our stock buyback program for $6.1 million in the aggregate, including transaction fees. These amounts are included in financing activities in our condensed consolidated statements of cash flows for the three months ended March 31, 2016 and March 27, 2015.

Our operating activities provided $3.3 million of cash in the three months ended March 31, 2016 and used $17.5 million of cash in the three months ended March 27, 2015.

Cash provided by operating activities in the three months ended March 31, 2016 was primarily the result of lower accounts receivable and higher deferred revenue, partially offset by increases in other operating assets and inventory and decreases in accrued expenses and other long-term liabilities and accounts payable, as well as our net loss, net of non-cash operating expenses. Our lower accounts receivable reflects our focused collections efforts coupled with our historically higher revenue in the fourth quarter of the prior year. The increase in our other operating assets primarily relates to higher prepaid expenses. The increase in our inventory reflects our purchase in the quarter of last time buy materials required for certain of our products. We estimate that such materials will not be used until at least one year from the balance sheet date. The decrease in accrued expenses and other long-term liabilities was primarily related to employee compensation and related costs, including payments in connection with our Company-wide cash bonus program, payments in connection with our previously recorded restructuring initiatives and lower accruals for our Amended and Restated 2000 Employee Stock Purchase Plan, as amended

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("ESPP"), as a purchase was completed on behalf of participating employees on February 29, 2016. Our net loss, adjusted for non-cash items such as depreciation, amortization and stock-based compensation, used $4.1 million of cash.

Cash used in operating activities in the three months ended March 27, 2015 was primarily the result of lower accrued expenses and other long-term liabilities and accounts payable, coupled with increases in inventory and other operating assets. These amounts were partially offset by lower accounts receivable and higher deferred revenue. The decrease in accrued expenses and other long-term liabilities was primarily related to employee compensation and related costs, including payments in connection with our Company-wide cash bonus program and payments in connection with our restructuring initiatives. The increase in our inventory primarily reflected our reduced product sales compared to original projections. Our lower accounts receivable reflected collections on sales made in the prior year, coupled with lower revenue in the three months ended March 27, 2015. Our net loss, adjusted for non-cash items such as depreciation, amortization and stock-based compensation, provided $10.2 million of cash.

Our investing activities used $9.4 million of cash in the three months ended March 31, 2016, comprised of $7.7 million of net purchases of marketable securities, $1.0 million of investments in property and equipment and $0.8 million of cash paid as the final consideration installment for the acquisition of the SDN Business.

Our investing activities used $0.8 million of cash in the three months ended March 27, 2015, comprised of $10.1 million, net of cash acquired, for the acquisition of the SDN Business and $2.5 million of investments in property and equipment, partially offset by $11.9 million of aggregate maturities and sales of marketable securities.

Our financing activities used $1.6 million of cash in the three months ended March 31, 2016, comprised of $1.5 million, including transaction fees, for the repurchase of common stock, $0.8 million used to pay withholding obligations related to the net share settlement of restricted stock awards upon vesting and approximately $14,000 for payments on our capital leases for office equipment. These amounts were partially offset by $0.6 million of proceeds from the sale of our common stock in connection with our ESPP and approximately $5,000 of proceeds from the exercise of stock options.

Our financing activities used $4.7 million of cash in the three months ended March 27, 2015, comprised of $6.1 million, including transaction fees, for the repurchase of common stock, $2.0 million used to pay withholding obligations related to the net share settlement of restricted stock awards upon vesting and $20,000 for payments on our capital leases for office equipment. These amounts were partially offset by $1.7 million of proceeds from the exercise of stock options and $1.7 million of proceeds from the sale of our common stock in connection with our ESPP.

Based on our current expectations, we believe our current cash, cash equivalents, marketable securities and long-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least twelve months, including any future stock repurchases under the aforementioned stock buyback program. It is difficult to predict future liquidity requirements with certainty. The rate at which we will consume cash will be dependent on the cash needs of future operations, including changes in working capital, which will, in turn, be directly affected by the successful implementation of our cost reduction initiatives, the levels of demand for our products, the timing and rate of expansion of our business, the resources we devote to developing our products and any litigation settlements. We anticipate devoting substantial capital resources to continue our research and development efforts, to maintain our sales, support and marketing, to improve our controls environment, for other general corporate activities and to vigorously defend against existing and potential litigation. See Note 16 to our condensed consolidated financial statements for a description of our contingencies.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for us beginning January 1, 2017 for both interim and annual reporting periods. We are currently assessing the potential impact of the adoption of ASU 2016-09 on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) Section A - Leases: Amendments to the FASB Accounting Standards Codification ("ASU 2016-02"), its new standard on accounting for leases. ASU 2016-02 introduces a lessee model that brings most leases onto the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification ("ASC") 606, the FASB's new revenue recognition standard (i.e., those related to evaluating when profit can be recognized). Furthermore, ASU 2016-02 addresses other concerns

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related to the current leases model. For example, ASU 2016-02 eliminates the current GAAP requirement for an entity to use bright-line tests in determining lease classification. ASU 2016-02 also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. ASU 2016-02 is effective for us for both interim annual periods beginning January 1, 2020. We are currently assessing the potential impact of the adoption of ASU 2016-02 on our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"), which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in the condensed consolidated balance sheet. Netting of deferred tax assets and deferred tax liabilities is still required under ASU 2015-17. The ASU is effective for us for our annual report of the year ending December 31, 2018 and for interim period reporting beginning January 1, 2019, with early adoption permitted. We elected to early-adopt ASU 2015-17 prospectively and accordingly, we reclassified our net current deferred tax asset totaling $1.0 million to its noncurrent net deferred tax asset as of December 31, 2015. No prior periods were retrospectively adjusted.

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments ("ASU 2015-16"), which eliminates the requirement to restate prior periods to reflect adjustments made to provisional amounts recognized in a business combination. Under ASU 2015-16, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, rather than retrospectively, as had previously been required. ASU 2015-16 also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 was effective for us as of January 1, 2016. The adoption of ASU 2015-16 did not have a material impact on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"). ASU 2015-11 simplifies the measurement of most inventory by requiring entities to measure inventory at the lower of cost and net realizable value, replacing the previous requirement to measure most inventory at the lower of cost or market. ASU 2015-11 does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. ASU 2015-11 is effective for us for both interim and annual reporting periods beginning January 1, 2017. The adoption of ASU 2015-11 is not expected to have a material impact on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"). ASU 2014-15 provides guidelines for determining when and how to disclose going concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's ability to continue as a going concern. ASU 2014-15 is effective for us for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of ASU 2014-15 is not expected to have a material impact on our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (“ASU 2014-12”). ASU 2014-12 which clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. ASU 2014-12 does not contain any new disclosure requirements. ASU 2014-12 was effective for us as of January 1, 2016. The adoption of ASU 2014-12 did not have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) its final standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of

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other topics in the FASB ASC. Certain of ASU 2014-09’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (i.e., property, plant and equipment; real estate; or intangible assets). Existing accounting guidance applicable to these transfers has been amended or superseded. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the original effective date of interim and annual reporting periods by one year. As a result, public entities would not be required to apply the new revenue standard until annual reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net) ("ASU 2016-08") to clarify certain aspects of the principal-versus-agent guidance in its new revenue recognition standard in response to feedback received from the FASB-IASB joint revenue recognition transition resource group. ASU 2016-08 clarifies the implementation guidance on principal-versus-agent considerations regarding how an entity determines whether it is a principal or an agent for each specified good or service promised to the customer and how an entity determines the nature of each specified good or service. ASU 2016-08 also provides clarification regarding the application of the principal-versus-agent guidance. ASU 2016-08 is effective at the same time as ASU 2014-09 (as amended by ASU 2015-14). We are currently assessing the potential impact of the adoption of both ASU 2014-09 and ASU 2016-08 on our consolidated financial statements.


Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of market risks, including changes in interest rates affecting the return on our investments and foreign currency fluctuations. We do not believe that a hypothetical 10% adverse movement in interest rates and foreign currency exchange rates would have a materially different impact from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.



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Item 4.    Controls and Procedures

Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2016.

Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II OTHER INFORMATION

Item 1.    Legal Proceedings

On April 6, 2015, Ming Huang, a purported shareholder of ours, filed a Class Action Complaint (Civil Action No. 3:15-02407), alleging violations of the federal securities laws (the "Complaint") in the United States District Court for the District of New Jersey (the "District of New Jersey"), against us and two of our officers, Raymond P. Dolan, our President and Chief Executive Officer, and Mark T. Greenquist, our Chief Financial Officer (collectively, the "Defendants"). On September 21, 2015, in response to motions subsequently filed with the District of New Jersey by four other purported shareholders of ours seeking status as lead plaintiff, the District of New Jersey appointed Richard Sousa as lead plaintiff (the "Plaintiff"). The Plaintiff claims to represent purchasers of our common stock during the period from October 23, 2014 to March 24, 2015, and seeks unspecified damages. The principal allegation contained in the Complaint is that the Defendants made misleading forward-looking statements concerning our fiscal first quarter of 2015 financial performance. On September 22, 2015, we filed a Motion to Transfer (the “Motion to Transfer”) this case to the United States District Court for the District of Massachusetts. The Plaintiff filed his opposition to the Motion to Transfer on October 5, 2015, and we filed a reply to the Motion to Transfer on October 13, 2015. On March 21, 2016, the District of New Jersey granted our Motion to Transfer. Thus, this case will now be litigated in the United States District Court for the District of Massachusetts (the “Court”) (Civil Action No. 1:16-cv-10657-GAO). The Plaintiff’s amended and operative complaint (the “Amended Complaint”) is due by May 4, 2016, and our Motion to Dismiss is due on June 20, 2016. We believe that the Defendants have meritorious defenses to the allegations made in the Complaint and do not expect the results of this suit to have a material effect on our business or consolidated financial statements.

We are often a party to disputes and legal proceedings that we consider routine and incidental to our business. Management does not expect the results of any of these actions to have a material effect on our business or consolidated financial statements.


Item 1A.    Risk Factors

We have revised and updated our discussion of the risk factors affecting our business since those presented in our Annual Report on Form 10-K, Part I, Item 1A. for the fiscal year ended December 31, 2015.  The following discussion includes one revised risk factor: “If in the future we do not have a sufficient number of shares available to issue to our employees, the limited number of shares we could issue may impact our ability to attract, retain and motivate key personnel”, which reflects a material development subsequent to the discussion of risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.  Except for the one risk factor noted above, there have been no material changes in our assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. For convenience, all of our risk factors are included below.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below before buying our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and cash flows could be materially adversely affected, the trading price of our common stock could decline materially and you could lose all or part of your investment.


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Our quarterly revenue and operating results are unpredictable and may fluctuate significantly from quarter to quarter, which could adversely affect our business, consolidated financial statements and the trading price of our common stock.

Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. The primary factors that may affect our revenues and operating results include, but are not limited to, the following:

consolidation within the telecommunications industry, including acquisitions of or by our customers;
general economic conditions in our markets, both domestic and international, as well as the level of discretionary IT spending;
competitive conditions in our markets, including the effects of new entrants, consolidation, technological innovation and substantial price discounting;
fluctuation in demand for our products and services, and the timing and size of customer orders;
fluctuations in foreign exchange rates;
cancellation or deferral of existing customer orders or the renegotiation of existing contractual commitments;
mix of product configurations sold;
length and variability of the sales cycle for our products;
application of complex revenue recognition accounting rules to our customer arrangements;
timing of revenue recognition;
changes in our pricing policies, the pricing policies of our competitors and the prices of the components of our products;
market acceptance of new products, product enhancements and services that we offer;
the quality and level of our execution of our business strategy and operating plan, and the effectiveness of our sales and marketing programs;
new product announcements, introductions and enhancements by us or our competitors, which could result in deferrals of customer orders;
our ability to develop, introduce, ship and successfully deliver new products and product enhancements that meet customer requirements in a timely manner;
our reliance on contract manufacturers for the production and shipment of our hardware products;
our or our contract manufacturers' ability to obtain sufficient supplies of sole or limited source components or materials;
our ability to attain and maintain production volumes and quality levels for our products;
variability and unpredictability in the rate of growth in the markets in which we compete;
costs related to acquisitions; and
corporate restructurings.

Equipment purchases by communications service providers and enterprises continue to be unpredictable. As with other telecommunications product suppliers, we typically recognize a portion of our revenue in a given quarter from sales booked and shipped in the last weeks of that quarter. As a result, delays in customer orders may result in delays in shipments and recognition of revenue beyond the end of a given quarter. Additionally, it can be difficult for us to predict the timing of receipt of major customer orders, and we are unable to control timing decisions made by our customers. Consequently, our quarterly operating results are difficult to predict even in the short term and a delay in an anticipated sale past the end of a particular quarter may negatively impact our results of operations for that quarter, or in some cases, that year. Therefore, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. If our revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we may provide to the market, the price of our common stock could decline substantially. Such a stock price decline could also occur even if we meet our publicly stated revenue and/or earnings guidance.

A significant portion of our operating expenses is fixed in the short term. If revenues for a particular quarter are below expectations, we may not be able to reduce costs and expenses proportionally for that quarter. Any such revenue shortfall would, therefore, have a significant effect on our operating results for that quarter.

We have incurred net losses and may incur additional net losses.

We incurred net losses in the first quarter of 2016, as well as in fiscal years 2015 and 2014. We may incur additional net losses in future quarters and years. Our revenues may not grow and we may never generate sufficient revenues to sustain profitability.

We will not be successful if we do not grow our customer base, especially since our revenue has historically been generated from a limited number of customers and the per-order revenue from orders placed by the majority of our new customers is

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generally lower than the per-order revenue generated from our historical sales. Additionally, if we are unable to generate recurring business from our existing customers, our consolidated financial statements could be materially and adversely affected.

Prior to our acquisition of Network Equipment Technologies, Inc. ("NET") in August 2012, we had shipped our products to a limited number of customers. Since the acquisition of NET, as well as our acquisition of Performance Technologies, Incorporated ("PT") in February 2014, the number of customers to whom we have shipped our products has increased significantly. However, due to the nature of certain of our new product offerings, the per-order revenue from orders placed by the majority of our new customers is generally lower than the per-order revenue generated from our historical sales.

Our future success will depend on our ability to attract additional customers beyond our current customer base. One customer, AT&T, contributed more than 10% of our revenue in each of the past three years, representing approximately 13% of our revenue in 2015, 19% of our revenue in 2014 and 15% of our revenue in 2013. Factors that may affect our ability to grow our customer base include but are not limited to the following:

economic conditions that discourage potential new customers from making the capital investments required to adopt new technologies;
deterioration in the general financial condition of service providers and enterprises, or their ability to raise capital or access lending sources;
new product introductions by our competitors; and
the development of our channel partner program.

If we are unable to expand our customer base, we will be forced to rely on generating recurring revenue from existing customers, which may not be successful. We expect to derive an increasing percentage of our revenue from engagements with our value-added resellers ("VAR") and global system integration partners; however, in the foreseeable future, the majority of our revenue will continue to depend on sales of our products to a limited number of existing customers or sales to customers with lower per-order revenue than those generated from our historical sales. Factors that may affect our ability to generate recurring revenues from our existing customers include but are not limited to the following:

customer willingness to implement our products;
the timing of industry transitions to new network technologies;
acquisitions of or by our customers;
delays or difficulties that we may incur in completing the development and introduction of our planned products or product enhancements;
failure of our products to perform as expected; and
difficulties we may incur in meeting customers' delivery requirements or with software development, hardware design, manufacturing or marketing of our products and/or services.

The loss of any significant customer, or any substantial reduction in purchase orders or deferral of purchasing decisions from these customers, could materially and adversely affect our consolidated financial statements.

We continue to enhance our sales strategy, which we expect will include more partner sales engagements to resell our products and services through authorized Sonus distributors, value added resellers, system integrators and other channel partners. Disruptions to, or our failure to effectively develop and manage, these partners and the processes and procedures that support them could adversely affect our ability to generate revenues from the sale of our products and services. If we do not have adequate personnel, experience and resources to manage the relationships with these partners and to fulfill our responsibilities under such arrangements, such shortcomings could lead to the decrease of the sales of our products and services and our operating results could suffer.

We continue to enhance our sales strategy, which we expect will include more partner sales engagements to resell our products and services through authorized Sonus distributors, value added resellers, system integrators and other channel partners. Our future success is dependent upon establishing and maintaining successful relationships with a variety of distributors, value added resellers, system integrators and other channel partners. We may also need to pursue strategic partnerships with vendors who have broader technology or product offerings in order to compete with end-to-end solution providers. In addition, many of the enterprise markets we are pursuing require a broad network of resale partners in order to achieve effective distribution.

Many of our distribution and channel partners sell competitive products and services and the loss of, or reduction in sales by, these partners could materially reduce our revenues. Our sales through channel partners typically involve the use of our products as components of a larger solution being implemented by the systems integrator. In these instances, the purchase and

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sale of our products are dependent on the channel partner, who typically controls the timing, prioritization and implementation of the project. Project delays, changes in priority or solution re-design decisions by the systems integrator can adversely affect our product sales. If we fail to maintain relationships with our distribution, VAR and systems integration partners; fail to develop new relationships with other partners in new markets; fail to manage, train or provide incentives to our existing partners effectively; or if these partners are not successful in their sales efforts, sales of our products and services may decrease and our operating results could suffer. Moreover, if we do not have adequate personnel, experience and resources to manage the relationships with our partners and to fulfill our responsibilities under such arrangements, any shortcomings could have a material adverse impact on our business and consolidated financial statements.

In addition, we recognize some of our revenue based on a sell-through model using information provided by our partners. If those partners provide us with inaccurate or untimely information, the amount or timing of our revenues could be adversely affected. We may also experience financial failure of our partners, which could result in our inability to collect accounts receivable in full.

As the telecommunications industry and the requirements of our current and potential customers evolve, we are redirecting certain of our resources to more readily respond to the changing environment through the research and development of innovative new products and the improvement of existing products. If our strategic plan is not aligned with the direction our customers take as they invest in the evolution of their networks, customers may not buy our products or use our services.

Success in our industry requires large investments in technology and creates exposure to rapid technological and market changes. We spend a significant amount of time, money and resources both developing new technology, products and solutions and acquiring new businesses or business assets, as applicable, such as NET in August 2012 and PT in February 2014. In January 2015, we acquired from Treq Labs, Inc. ("Treq") certain assets related to Treq's business of designing, developing, marketing, selling, servicing and maintaining software-defined networking ("SDN") technology, SDN controller software and SDN management software (the "SDN Business"). Our strategic plan includes a significant shift in our investments from mature technologies that previously generated significant revenue for us toward certain next-generation technologies, as well as working with channel partners to sell our products. In order for us to be successful, our technologies, products and solutions must be accepted by relevant standardization bodies and by the industry as a whole. Our choices of specific technologies to pursue, and those to de-emphasize, may prove to be inconsistent with our customers' investment spending. Our success also depends upon our ability to integrate new and acquired products and services, as well as our ability to enhance our existing products and services. Moreover, if we invest in the development of technologies, products and solutions that do not function as expected, are not adopted by the industry, are not ready in time, are not accepted by our customers as quickly as anticipated or are not successful in the marketplace, our sales and earnings may suffer and, as a result, our stock price could decline. As technology advances, we may not be able to respond quickly or effectively to developments in the market for our products, or new industry standards may emerge and could render our existing or future products and services obsolete. If our products and services become technologically obsolete or if we are unable to develop successor products and services that are accepted by our customers, we may be unable to sell our products and services in the marketplace and face declines in sales. We may also experience difficulties with software development, hardware design, manufacturing or marketing that could delay or prevent our development, introduction or marketing of new products and enhancements.

We believe the telecommunications industry is in the early stages of a major architectural shift to the virtualization of networks.  If the architectural shift does not occur, if it does not occur at the pace we predict, or if the products and services we have developed are not attractive to our customers after such shift takes place, our revenues could decline.

We believe the telecommunications industry is in the early stages of transitioning to the virtualization of networks, and we are developing products and services that we believe will be attractive to our customers and potential customers who make that shift.  While we anticipate that the industry shift to a software-centric cloud-based architecture is all but certain to happen, fundamental changes like this often take time to accelerate.  In addition, our customers may adapt to such changes at varying rates.  As our customers take time to determine their future network architectures, we may encounter delayed timing of orders, deferred purchasing decisions and reduced expenditures.  These longer decision cycles and reduced expenditures may negatively impact our revenues, or make it difficult for us to accurately predict our revenues, either of which could materially adversely affect our consolidated financial statements and cause our stock price to decline.

In 2012, the macro-environment for our media gateway trunking business faced significant declining revenues that happened faster than we were anticipating. In the past three years, we continued to experience significant declines in customer spending in our media gateway trunking business, and these declines have continued to date. Even though we continue to transform our company from a media gateway trunking business to an SBC and DSC business, a portion of our current revenue remains dependent upon the commercial success of our voice infrastructure products, which we believe will

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remain true for the foreseeable future. If the market for these products continues to significantly decline and if our SBC and DSC sales do not accelerate as quickly as we forecast, our operating results could suffer.

While we continue to transform our company from a media gateway trunking business to a Session Border Controller ("SBC") and Diameter Signaling Controller ("DSC") business, a portion of our current revenue still depends upon the commercial success of our TDM-to-IP and our all-IP voice infrastructure products and solutions, and we believe this will remain true for the foreseeable future. If the market for these products continues to significantly decline and if our SBC and DSC sales do not accelerate as quickly as we forecast, our operating results could suffer.

Restructuring activities could adversely affect our ability to execute our business strategy.

We recorded net restructuring expense of $13.2 million in the aggregate in 2015, 2014 and 2013, comprised of $12.5 million for severance and related costs, $0.5 million for the consolidation of certain facilities and $0.2 million for the write-off of assets associated with the headcount reduction and facilities consolidations. We initiated a new restructuring plan in April 2015 pursuant to which we reduced our workforce by approximately 150 positions, or 12.5% of our worldwide workforce.

This restructuring and any future restructurings, should it become necessary for us to continue to restructure our business due to worldwide market conditions or other factors that reduce the demand for our products and services, could adversely affect our ability to execute our business strategy in a number of ways, including through:

loss of key employees;
diversion of management's attention from normal daily operations of the business;
diminished ability to respond to customer requirements related to both products and services;
decrease in cash and profits related to severance payments and facility termination costs;
disruption of our engineering and manufacturing processes, which could adversely affect our ability to introduce new products and to deliver products both on a timely basis and in accordance with the highest quality standards; and/or
reduced ability to execute effectively internal administrative processes, including the implementation of key information technology programs.

If we fail to realize the anticipated benefits from our acquisitions of PT and the SDN Business on a timely basis, or at all, our business and financial condition may be adversely affected.

We may fail to realize the anticipated benefits from our acquisitions of PT and/or the SDN Business on a timely basis, or at all, for a variety of reasons, including but not limited to the following:

problems or delays in assimilating or transitioning to us the acquired assets, operations, systems, processes, controls, technologies, products or personnel;
loss of acquired customer accounts;
unanticipated costs associated with the acquisitions;
failure to identify in the due diligence process or assess the magnitude of certain liabilities we assumed in the acquisitions, which could result in unexpected litigation or regulatory exposure, unfavorable accounting treatment, unexpected increases in taxes due, significant issues with product quality or development or other adverse effects on our business or consolidated financial statements;
multiple or overlapping product lines as a result of the acquisitions that are offered, priced and supported differently, which could cause customer confusion and delays;
higher than anticipated costs in continuing support and development of acquired products;
diversion of management’s attention from our core business and the challenges of managing larger and more widespread operations from the acquisitions;
adverse effects on existing business relationships of Sonus, PT and/or the SDN Business with respective suppliers, licensors, contract manufacturers, customers, distributors, resellers and industry experts;
significant impairment, exit and/or restructuring charges if the products or technologies acquired in the acquisitions do not meet our sales expectations or are unsuccessful;
insufficient revenue to offset increased expenses associated with the acquisitions;
risks associated with entering markets in which we have no or limited prior experience;
potential loss of the employees we acquired in the acquisitions or our own employees; and/or
failure to properly integrate internal controls and financial systems of the combined companies.


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If we are not able to successfully manage these issues, the anticipated benefits and efficiencies of the PT and/or the SDN Business acquisitions may not be realized fully or at all, or may take longer to realize than expected, and our ability to compete, our revenue and gross margins and our results of operations may be adversely affected.

Any future investments, mergers or acquisitions we make or enter into, as applicable, could be difficult to integrate, disrupt our business, dilute shareholder value and seriously harm our financial condition.

We are not currently a party to any material pending merger or acquisition agreements. However, we may merge with or acquire additional businesses, products or technologies in the future. No assurance can be given that any future merger or acquisition will be successful or will not materially and adversely affect our business, operating results or financial condition. We continue to review opportunities to merge with or acquire other businesses or technologies that would add to our existing product line, complement and enhance our current products, expand the breadth of our markets, enhance our technical capabilities or otherwise offer growth opportunities. If we enter into a merger or make acquisitions in the future, we could, among other things:

issue stock that would dilute existing stockholders' percentage ownership;
incur debt or assume liabilities;
reduce significantly our cash and investments;
incur significant impairment charges related to the write-off of goodwill and intangible assets;
incur significant amortization expenses related to intangible assets; and/or
incur large and immediate write-offs for in-process research and development and stock-based compensation.

Mergers and acquisitions are inherently risky and subject to many factors outside of our control. Therefore, we cannot be certain that we would be successful in overcoming problems in connection with our past or future acquisitions. Our inability to do so could significantly harm our business, revenues, and results of operations.

If in the future we do not have a sufficient number of shares available to issue to our employees, the limited number of shares we could issue may impact our ability to attract, retain and motivate key personnel.

We historically have used stock options, restricted stock and other equity awards as a significant component of our employee compensation program in order to align our employees' interests with the interests of our stockholders, encourage employee retention and provide competitive compensation packages. In 2007, our stockholders approved our 2007 Stock Incentive Plan (the "Plan"), which includes a limited amount of shares to be granted under such plan. Our stockholders approved amendments to the Plan in June 2010, June 2013, December 2014 and June 2015. At our 2016 annual meeting of stockholders, we are asking our stockholders to approve (i) amendments to the Plan that will, among other things, increase the aggregate number of shares of our common stock authorized for issuance under the Plan by 800,000 new shares, from 15,676,713 shares to 16,476,713 shares, and (ii) a stock option exchange program that, if implemented, will return shares of our common stock to the Plan that would then be available for future issuance under the Plan.

Since it is not certain that our stockholders will approve these proposals at our 2016 annual meeting of stockholders, we may not have sufficient shares for our needs in the near future. If our stockholders do not approve these proposals or any other future amendments that we determine are needed to the Plan, the limited number of shares available for use as equity incentives to employees may make it more difficult for us to attract, retain and motivate key personnel.

Worldwide efforts to contain capital spending, general uncertainty as to slow economic growth during the current post-recessionary global economy, the possibility of another recession and a continued weakened global economy could have a material adverse effect on us.

One factor that significantly affects our operating results is the impact of economic conditions on the willingness of our current and potential customers to make capital investments. Given the general uncertainty and slow economic growth during the current post-recessionary global economy, we believe that customers have tried to maintain or improve profitability through cost control and constrained capital spending, which places additional pressure on IT departments to demonstrate acceptable return on investment. Some of our current or prospective customers may cancel or delay spending on the development or roll-out of capital and technology projects with us due to economic uncertainty and, consequently, our results of operations may be adversely affected. In addition, current uncertain worldwide economic and political environments make it increasingly difficult for us, our customers and our suppliers to accurately forecast future product demand, which could result in an inability to satisfy demand for our products and a loss of market share. Our revenues are likely to decline in such circumstances and our profit margins could erode, or we could incur significant losses.


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Moreover, economic conditions worldwide may contribute to slowdowns in the communications and networking industries, as well as to specific segments and markets in which we operate, resulting in, among other things:

reduced demand for our products and services as a result of our customers choosing to refrain from building capital intensive networks;
increased price competition for our products, not only from our competitors, but also as a consequence of customers disposing of unutilized products;
risk of excess and obsolete inventories;
excess facilities and manufacturing capacity; and/or
higher overhead costs as a percentage of revenue and higher interest expense.

Continuing turmoil in the geopolitical environment in many parts of the world, including terrorist activities and military actions, as well as political and economic issues in many regions, continue to put pressure on global economic conditions. Our operating results and our ability to expand into other international markets may also be affected by changing economic conditions particularly germane to that sector or to particular customer markets within that sector.

If we fail to compete successfully against telecommunications equipment and networking companies, our ability to increase our revenues and achieve profitability will be impaired.

Competition in the telecommunications market is intense. This market has historically been dominated by large incumbent telecommunications equipment companies, such as Ericsson LM Telephone Company and Huawei Technologies Co. Ltd., both of which are our direct competitors. We also face competition from other telecommunications and networking companies, including Alcatel Lucent, ALOE Systems Inc., AudioCodes Ltd., Avaya Inc., Cisco Systems, Inc., Dialogic Inc., F5 Networks, Inc., GENBAND Inc., Metaswitch Networks Corporation, Mitel Networks Corporation, Nokia Systems Network (NSN), Oracle Corporation, Sansay, Inc., Technicolor SA and ZTE Corporation, all of which design competing products. These or other competitors may also merge, intensifying competition. Additional competitors with significant financial resources may enter our markets and further intensify competition.

Many of our current and potential competitors have significantly greater selling and marketing, technical, manufacturing, financial and other resources than we have. Further, some of our competitors sell significant amounts of other products to our current and prospective customers and have the ability to offer lower prices to win business. Our competitors' broad product portfolios, coupled with already existing relationships, may cause our customers to buy our competitors' products or harm our ability to attract new customers.

To compete effectively, we must deliver innovative products that:

provide extremely high reliability and quality;
deploy and scale easily and efficiently;
interoperate with existing network infrastructures and multivendor solutions;
provide effective network management;
are accompanied by comprehensive customer support and professional services;
provide a cost-effective and space-efficient solution for enterprises and service providers; and
meet price competition from low cost equipment providers.

If we are unable to compete successfully against our current and future competitors, we could experience price reductions, order cancellations and loss of customers and revenues, and our operating results could be adversely affected.

If we do not anticipate and meet specific customer requirements or if our products do not interoperate with our customers' existing networks, we may not retain current customers or attract new customers.

To achieve market acceptance for our products, we must effectively anticipate, and adapt in a timely manner to, customer requirements and offer products and services that meet changing customer demands. Prospective customers may require product features and capabilities that our current products do not have. The introduction of new or enhanced products also requires that we carefully manage the transition from older products in order to minimize disruption in customer ordering patterns and ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. If we fail to develop products and offer services that satisfy customer requirements or if we fail to effectively manage the transition from older products, our ability to create or increase demand for our products and services could be seriously harmed and we may lose current and prospective customers.


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Many of our customers will require that our products be designed to interface with their existing networks, each of which may have different specifications. Issues caused by an unanticipated lack of interoperability may result in significant warranty, support and repair costs, divert the attention of our engineering personnel from our hardware and software development efforts and cause significant customer relations problems. If our products do not interoperate with those of our customers' networks, installations could be delayed or orders for our products could be canceled, which would seriously harm our gross margins and result in loss of revenues or customers. Additionally, our customers may decide to devote a significant portion of their budgets to evolving technology as they consider national or worldwide build-outs. Therefore, if the demand for our products is not strong and if our target customers do not adopt, purchase and successfully deploy our current or planned products, our revenues will not grow.

Our large customers have substantial negotiating leverage, and they may require that we agree to terms and conditions that may have an adverse effect on our business.

Large communications service providers have substantial purchasing power and leverage in negotiating contractual arrangements with us. These customers may, among other things, require us to develop additional features, require penalties for failure to deliver such features, require us to partner with a certain reseller before purchasing our products and/or seek discounted product and/or service pricing. As we sell more products to this class of customer, we may be required to agree to terms and conditions that are less beneficial to us, which may affect the timing of revenue recognition, amount of deferred revenues or product and service margins and may adversely affect our financial position and cash flows in certain reporting periods.

Our stock price has been and may continue to be volatile.

The market for technology stocks has been, and will likely continue to be, volatile. The following factors, among others, could cause the market price of our common stock to fluctuate significantly:

addition or loss of any major customer;
continued significant declines in customer spending in the media gateway trunking business;
consolidation and competition in the telecommunications industry;
changes in the financial condition or anticipated capital expenditure purchases of any existing or potential major customer;
economic conditions for the telecommunications, networking and related industries;
quarterly variations in our bookings, revenues and operating results;
changes in financial estimates by securities analysts;
speculation in the press or investment community;
announcements by us or our competitors of significant contracts, new products or acquisitions, distribution partnerships, joint ventures, mergers or capital commitments;
activism by any single large stockholder or combination of stockholders;
sales of common stock or other securities by us or by our stockholders in the future;