The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
We are an industry leader in the
delivery of multiscreen video, advertising and premium
over-the-top
(OTT) video. Our products and services facilitate the aggregation, licensing, management
and distribution of video and advertising content to cable television system operators, telecommunications companies, satellite operators and media companies.
2. Summary of Significant Accounting Policies
Significant accounting policies followed in the preparation of the accompanying consolidated financial statements are as follows:
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
(U.S. GAAP). We consolidate the financial statements of our wholly-owned subsidiaries and all intercompany transactions and account balances have been eliminated in consolidation. We have reclassified certain prior period data to conform
to our current fiscal year presentation.
We also hold minority investments in the capital stock of certain private companies having product offerings or
customer relationships that have strategic importance. We evaluate our equity and debt investments and other contractual relationships with affiliate companies to determine whether the guidelines regarding the consolidation of variable interest
entities (VIEs) should be applied in the financial statements. We use qualitative analysis to determine whether or not we are the primary beneficiary of a VIE. We consider the rights and obligations conveyed by the implicit and explicit
variable interest in each VIE and the relationship of these with the variable interests held by other parties to determine whether its variable interests will absorb most of a VIEs expected losses, receive most of its expected residual returns, or
both. If we determine that our variable interests will absorb most of the VIEs expected losses, receive most of their expected residual returns, or both, we consolidate the VIE as the primary beneficiary, and if not, it is not consolidated. We have
concluded that we are not the primary beneficiary for any VIEs during fiscal 2016.
The Company believes that existing funds and cash provided by future
operating activities are adequate to satisfy our working capital, potential acquisitions and capital expenditure requirements and other contractual obligations for the foreseeable future, including at least the next 12 months. However, if our
expectations are incorrect, we may need to raise additional funds to fund our operations, to take advantage of unanticipated strategic opportunities or to strengthen our financial position. In the future, we may enter into other arrangements for
potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt financing. Additional funds may not be available on terms that are favorable.
In addition, we actively review potential acquisitions that would complement our existing product offerings, enhance our technical capabilities or expand our
marketing and sales presence. Any future transaction of this nature could require potentially significant amounts of capital or could require us to issue our stock and dilute existing stockholders. If adequate funds are not available, or are not
available on acceptable terms, we may not be able to take advantage of market opportunities, to develop new products or to otherwise respond to competitive pressures.
In the second quarter of fiscal 2017, following a review of our operations, liquidity and funding, and investment in our product roadmap, we determined that
the ability to access cash resulting from earnings in prior fiscal years
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that had previously been deemed permanently restricted for foreign investment would provide greater flexibility to meet the Companys working capital needs. Accordingly, in the second
quarter of fiscal 2017, we withdrew the permanent reinvestment assertion on $58.6 million of earnings generated by our Irish operations through July 2016. We recorded a deferred tax liability of $14.7 million related to the foreign income taxes on
$58.6 million of undistributed earnings.
Use of Estimates
The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates and judgments, including those related to the timing and amounts of revenue recognition,
valuation of inventory, collectability of accounts receivable, valuation of investments and income taxes, assumptions used to determine stock-based compensation, valuation of goodwill and intangible assets and related amortization. Management bases
these estimates on historical and anticipated results and trends and on various other assumptions that management believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from managements estimates.
Cash and Cash Equivalents
Cash and cash
equivalents include cash on hand and on deposit and highly liquid investments in money market mutual funds, government sponsored enterprise obligations, treasury bills, commercial paper and other money market securities with remaining maturities at
date of purchase of 90 days or less. All cash equivalents are carried at cost, which approximates fair value.
Marketable Securities
We account for investments in accordance with authoritative guidance that defines investment classifications. We determine the appropriate classification of
debt securities at the time of purchase and reevaluate such designation as of each balance sheet date. Our investment portfolio consists primarily of money market funds, U.S. treasury notes or bonds and U.S. government agency bonds at
January 31, 2017 and 2016, but can consist of corporate debt investments, asset-backed securities and government-sponsored enterprises. Our marketable securities are classified as
available-for-sale
and are reported at fair value with unrealized gains and losses, net of tax, reported in stockholders equity as a component of accumulated other
comprehensive loss. The amortization of premiums and accretion of discounts to maturity are computed under the effective interest method and are included in other expenses, net in our consolidated statements of operations and comprehensive loss.
Interest on securities is recorded as earned and is also included in other expenses, net. Any realized gains or losses would be shown in the accompanying consolidated statements of operations and comprehensive loss in other expenses, net.
We evaluate our investments on a regular basis to determine whether an other-than-temporary decline in fair value has occurred. This evaluation consists of a
review of several factors, including, but not limited to: the length of time and extent that an investment has been in an unrealized loss position; the existence of an event that would impair the issuers future earnings potential; and our
intent and ability to hold an investment for a period of time sufficient to allow for any anticipated recovery in fair value. Declines in value below cost for investments where it is considered probable that all contractual terms of the investment
will be satisfied, are due primarily to changes in interest rates, and where the company has the intent and ability to hold the investment for a period sufficient to allow a market recovery, are not assumed to be other-than-temporary. Any
other-than-temporary declines in fair value are recorded in earnings and a new cost basis for the investment is established.
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Fair Value Measurements
Definition and Hierarchy
The applicable accounting
guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. The guidance establishes a framework for measuring fair value and expands required disclosure about the fair value measurements of assets and liabilities. This guidance requires us to classify and disclose assets and
liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities measured on a
non-recurring
basis in periods after initial measurement, in a fair value
hierarchy.
The fair value hierarchy is broken down into three levels based on the reliability of inputs and requires an entity to maximize the use of
observable inputs, where available. The following summarizes the three levels of inputs required, as well as the assets and liabilities that we value using those levels of inputs:
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Level 1Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
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Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not very active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
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Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The fair value measurements of the contingent consideration
obligations related to our business acquisitions are valued using Level 3 inputs.
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Valuation Techniques
Inputs to valuation techniques are observable and unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable
inputs reflect our market assumptions. When developing fair value estimates for certain financial assets and liabilities, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted market
prices, market comparables and discounted cash flow projections. Financial assets include money market funds, U.S. treasury notes or bonds and U.S. government agency bonds.
In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value. If quoted prices in
active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly. In periods of market inactivity,
the observability of prices and inputs may be reduced for certain instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3.
Concentration of Credit Risk
Financial
instruments which potentially expose us to concentrations of credit risk include cash equivalents, investments in treasury bills, certificates of deposits and commercial paper, trade accounts receivable, accounts payable and accrued liabilities. We
have cash investment policies which, among other things, limit investments to investment-grade securities. We restrict our cash equivalents and investments in marketable securities to repurchase agreements with major banks and U.S. government and
corporate securities which are subject to minimal credit and market risk. We perform ongoing credit evaluations of our customers. As of January 31, 2017, two customers represented more than 10% of consolidated accounts receivable while as of
January 31, 2016, one customer did. For fiscal 2017, one customer accounted for more than 10% of our total revenue compared to two customers accounting for more than 10% of our total revenue in fiscal 2016 and 2015.
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Accounts Receivable and Allowances for Doubtful Accounts
For trade accounts receivable, we evaluate customers financial condition, require advance payments from certain of our customers and maintain reserves
for potential credit losses. We perform ongoing credit evaluations of customers financial condition but generally do not require collateral. For some international customers, we may require an irrevocable letter of credit to be issued by the
customer before the purchase order is accepted. We monitor payments from customers and assess any collection issues. We maintain an allowance for specific doubtful accounts for estimated losses resulting from the inability of our customers to make
required payments and record these allowances as a charge to general and administrative expenses in our consolidated statements of operations and comprehensive loss. We base our allowances for doubtful accounts on historical collections and
write-off
experience, current trends, credit assessments, and other analysis of specific customer situations. At January 31, 2017, we had an allowance for doubtful accounts of $0.9 to provide for potential
credit losses. Our allowance for doubtful accounts was $0.4 million at January 31, 2016. We charge off trade accounts receivables against the allowance after all means of collection have been exhausted and the potential for recovery is
considered remote. Recoveries of trade receivables previously charged off are recorded when received.
Inventory Valuation
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the
first-in,
first-out
method. Inventories consist primarily of components and subassemblies and finished products held for sale. The values of inventories are reviewed quarterly to determine that the carrying value is stated at
the lower of cost or net realizable value. We record charges to reduce inventory to its net realizable value when impairment is identified through a quarterly review process. The obsolescence evaluation is based upon assumptions and estimates about
future demand, or possible alternative uses and involves significant judgments.
Property and Equipment
Property and equipment consists of land and buildings, office and computer equipment, leasehold improvements, demonstration equipment, deployed assets and
spare components and assemblies used to service our installed base. Property and equipment are recorded at cost, net of accumulated depreciation and amortization, and are depreciated over their estimated useful lives. Determining the useful lives of
property and equipment requires us to make significant judgments that can materially impact our operating results. If our estimates require adjustment, it could have a material impact on our reported results.
Demonstration equipment consists of systems manufactured by us for use in marketing and selling activities. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the term of the respective leases using the straight-line method. Deployed assets consist of movie systems owned and manufactured by us that are installed in a hotel environment. Deployed assets are
depreciated over the life of the related service agreements. Capitalized service and spare components are depreciated over the estimated useful lives using the straight-line method. Maintenance and repair costs are expensed as incurred.
Generally, property and equipment include assets in service. Fully depreciated assets remaining in service along with related accumulated depreciation are not
removed from the balance sheet until the corresponding asset is removed from service either through a retirement or sale. Upon retirement or sale of an asset or asset group, the cost of the assets disposed of and the related accumulated depreciation
are removed from the accounts and the resulting gain or loss, if any, is recognized in other expenses, net in our consolidated statements of operations and comprehensive loss.
Investments in Affiliates
Our investments in
affiliates include investments accounted for under the cost method of accounting as the investments represent less than a 20% ownership interest of the common shares of the affiliate.
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We periodically review indicators of the fair value of our investments in affiliates to assess whether available
facts or circumstances, both internally and externally, may suggest an other-than-temporary decline in the value of the investment. If we determine that an other-than-temporary impairment has occurred, we will write-down the investment to its fair
value. The carrying value of an investment in an affiliate accounted for under the cost method of accounting may be affected by the affiliates ability to obtain adequate funding and execute its business plans, general market conditions, its
current cash position, earnings and cash flow forecasts, recent operational performance, and any other readily available data. We record an impairment charge when we believe an investment has experienced a decline in value that is
other-than-temporary. In January 2017, we recorded a $0.5 million impairment charge to loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive loss for one of our cost-method investments as we
determined that the fair value of the investment was below its carrying value and that the carrying value was not expected to be recoverable within a reasonable amount of time (see Note 3,
Fair Value Measurements
to this Form
10-K
for more information).
Intangible Assets and Goodwill
Intangible assets consist of customer contracts, completed technology,
non-compete
agreements, trademarks, backlogs and
patents. The intangible assets are amortized to cost of sales and operating expenses, as appropriate, on a straight-line or accelerated basis, using the economic consumption life basis, to reflect the period that the assets will be consumed, which
are:
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Intangible assets with finite useful lives:
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Customer contracts
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1 - 8 years
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Non-compete
agreements
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2 - 3 years
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Completed technology
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4 - 6 years
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Trademarks, patents and other
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5 - 7 years
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Certain costs incurred in the application development phase of software development for internal use are capitalized and
amortized over the products estimated useful life, which is three years. The Company expenses all costs incurred that relate to planning and post implementation phases of development. Capitalized costs related to internally developed software
under development are treated as construction in progress until the technology is available for intended use, at which time the amortization commences. Capitalized internally developed software costs were $2.7 million as of January 31,
2017. Maintenance and training costs are expensed as incurred.
Goodwill is recorded when the consideration for an acquisition exceeds the fair value of
net tangible and identifiable intangible assets acquired.
Impairment of Assets
Indefinite-lived intangible assets, such as goodwill, are not amortized but are evaluated for impairment at the reporting unit level annually, in our third
quarter beginning August 1
st
. Indefinite-lived intangible assets may be tested for impairment on an interim basis in addition to the annual evaluation if an event occurs or circumstances change
such as declines in sales, earnings or cash flows, decline in the Companys stock price, or material adverse changes in the business climate, which would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The process of evaluating indefinite-lived intangible assets for impairment requires several judgments and assumptions to be made to determine the fair
value, including the method used to determine fair value, discount rates, expected levels of cash flows, revenues and earnings, and the selection of comparable companies used to develop market-based assumptions. We may employ the three generally
accepted approaches for valuing businesses: the market approach, the income approach and the asset-based (cost) approach to arrive at the fair
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value. The choice of which approach and methods to use in a particular situation depends on the facts and circumstances.
We also evaluate property and equipment, intangible assets with finite useful lives and other long-lived assets on a regular basis for the existence of facts
or circumstances, both internal and external that may suggest an asset is not recoverable. If such circumstances exist, we evaluate the carrying value of long-lived assets to determine if impairment exists based upon estimated undiscounted future
cash flows over the remaining useful life of the assets and compare that value to the carrying value of the assets. Our cash flow estimates contain managements best estimates, using appropriate and customary assumptions and projections at the
time.
In the third quarter of fiscal 2017, we finalized our Step 1 analysis of our annual goodwill impairment test. Our forecast indicated
that the estimated fair value of net assets may be less than its carrying value which is a potential indicator of impairment. As such, we were required to perform Step 2 of the impairment test during which we compared the implied fair
value of our goodwill to its carrying value. We completed the goodwill impairment testing of our reporting unit during the fourth quarter of fiscal 2017. Since the implied fair value of goodwill was determined to be lower than its carrying value, we
recorded an impairment charge of $23.5 million to loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive loss (see Note 6,
Goodwill and Intangible Assets
to this Form
10-K
for more information).
In January 2017, after a potential buyer declined to purchase our facility in Greenville,
New Hampshire, we determined that the sale of this facility was not imminent due to the location of the building and the overall market conditions in the area. Consequently, we decided to fully impair the facility since we felt the carrying amount
was greater than the fair value. As a result, we recorded a $0.3 million loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive loss.
In the fourth quarter of fiscal 2017, a certain cost-method investment was determined to be impaired and written off. Accordingly, we recorded a
$0.5 million impairment charge in January 2017 which is included in loss on investment in affiliates in our consolidated statements of operations and comprehensive loss. The cost-method investment is a privately-held entity without quoted
market prices and therefore, falls within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine its fair value. In determining the fair value of this cost-method investment, we considered many
factors including, but not limited to, operating performance of the investee, the amount of cash that the investee has on hand and the overall market conditions in which the investee operates.
As of January 31, 2016, the Company reviewed the projected future cash flows of the Timeline Labs operations and determined that the carrying amount was
greater than the fair value. As a result, all long-term assets related to Timeline Labs were fully impaired and reflected as a $21.9 million loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive
loss for the fiscal year ended January 31, 2016 which included: i) $15.8 million relating to the Timeline Labs acquired goodwill, ii) $5.2 million of acquired intangible assets, and iii) $0.9 million of capitalized internal use
software. Additionally, we reduced the contingent consideration liability associated with the Timeline Labs acquisition to zero, as we determined the defined performance criteria would not be achieved. Therefore, we recorded the reversal of the
liability of $0.4 million to the loss on impairment of long-lived assets. The amount of goodwill impaired represented all the goodwill that resulted from this acquisition due to the short duration of time between the acquisition and the event
causing us to impair the assets.
Income Taxes
Income tax comprises current and deferred tax. Income tax is recognized in the consolidated statements of operations and comprehensive loss except to the
extent that it relates to items recognized directly within equity or in other comprehensive loss. Income taxes payable, which is included in other accrued expenses in our consolidated balance sheets, is the expected tax payable on the taxable income
for the year, using tax rates
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enacted or substantially-enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax assets and liabilities are recognized, using the balance sheet method, for the expected tax consequences of temporary differences between the
carrying amounts of assets and liabilities and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets and liabilities in
a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred
tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantially-enacted by the reporting date.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future
taxable profits will be available against which they can be utilized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the countries where the deferred tax assets originated and during the
periods when the deferred tax assets become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
We operate in multiple jurisdictions with complex tax policy and regulatory environments. In certain of these jurisdictions, we may take tax positions that
management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. These interpretational differences with the respective governmental taxing authorities can be impacted by the local economic
and fiscal environment. We evaluate our tax positions and establish liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. We review these tax uncertainties in light of changing facts and circumstances,
such as the progress of tax audits, and adjust them accordingly.
Because there are several estimates and assumptions inherent in calculating the various
components of our tax provision, certain changes or future events such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans could have an impact on those estimates and our effective tax
rate.
Restructuring
Restructuring charges
that we record consist of employee-related severance charges, termination costs and the disposal of related equipment. Restructuring charges represent our best estimate of the associated liability at the date the charges are recognized. Adjustments
for changes in assumptions are recorded as a component of operating expenses in the period they become known. Differences between actual and expected charges and changes in assumptions could have a material effect on our restructuring accrual as
well as our consolidated results of operations. See Note 7,
Severance and Other Restructuring Costs,
to this Form
10-K
for more information on the current restructuring plan.
Foreign Currency Translation
For subsidiaries
where the U.S. dollar is designated as the functional currency of the entity, we translate that entitys monetary assets and liabilities denominated in local currencies into U.S. dollars (the functional and reporting currency) at current
exchange rates, as of each balance sheet date.
Non-monetary
assets (e.g., inventories, property and equipment and intangible assets) and related income statement accounts (e.g., cost of sales, depreciation,
amortization of intangible assets) are translated at historical exchange rates between the functional currency (the U.S. dollar) and the local currency. Revenue and other expense items are translated using average exchange rates during the fiscal
period. Translation adjustments resulting from translation of the subsidiaries accounts are included in accumulated other comprehensive loss, a separate component of
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stockholders equity. Gains and losses on foreign currency transactions, and any unrealized gains and losses on short-term intercompany transactions are included in other expenses, net.
For subsidiaries where the local currency is designated as the functional currency, we translate their assets and liabilities into U.S. dollars (the reporting
currency) at current exchange rates as of each balance sheet date. Revenue and expense items are translated using average exchange rates during the period. Cumulative translation adjustments are presented as a separate component of
stockholders equity. Exchange gains and losses on foreign currency transactions and unrealized gains and losses on short-term inter-company transactions are included in other expenses, net.
The aggregate foreign exchange transaction losses included in other expenses, net, on the consolidated statements of operations and comprehensive loss, were
$2.1 million, $0.7 million and approximately $2.3 million for fiscal 2017, 2016 and 2015, respectively.
Comprehensive Loss
We present accumulated other comprehensive loss in our consolidated balance sheets and comprehensive loss in the consolidated statement of
operations and comprehensive loss. At the end of fiscal 2017, 2016 and 2015, our comprehensive loss of $70.0 million, $48.6 million and $31.1 million consists of net loss, cumulative translation adjustments and unrealized gains and
losses on marketable securities.
Revenue Recognition
Our transactions frequently involve the sales of hardware, software, systems and services in multiple-element arrangements. Revenues from sales of hardware,
software and systems that do not require significant modification or customization of the underlying software are recognized when:
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persuasive evidence of an arrangement exists;
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delivery has occurred, and title and risk of loss have passed to the customer;
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fees are fixed or determinable; and
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collection of the related receivable is considered probable.
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Customers are billed for installation, training,
project management and at least one year of product maintenance and technical support at the time of the product sale. Revenue from these activities is deferred at the time of the product sale and recognized ratably over the period these services
are performed. Revenue from ongoing product maintenance and technical support agreements is recognized ratably over the period of the related agreements. Revenue from software development contracts that include significant modification or
customization, including software product enhancements, is recognized based on the percentage of completion contract accounting method using labor efforts expended in relation to estimates of total labor efforts to complete the contract. The
percentage of completion method requires that adjustments or
re-evaluations
to estimated project revenues and costs be recognized on a
project-to-date
cumulative basis, as changes to the estimates are identified. Revisions to project estimates are made as additional information becomes known, including
information that becomes available after the date of the consolidated financial statements up through the date such consolidated financial statements are filed with the SEC. If the final estimated profit to complete a long-term contract indicates a
loss, a provision is recorded immediately for the total loss anticipated. Accounting for contract amendments and customer change orders are included in contract accounting when executed. Revenue from shipping and handling costs and other
out-of-pocket
expenses reimbursed by customers are included in revenues and cost of revenues. Our share of intercompany profits associated with sales and services provided to
affiliated companies are eliminated in consolidation in proportion to our equity ownership.
Contract accounting requires judgment relative to assessing
risks, estimating revenues and costs and making assumptions including, in the case of our professional services contracts, the total amount of labor required to
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complete a project and the complexity of the development and other technical work to be completed. Due to the size and nature of many of our contracts, the estimation of total revenues and cost
at completion is complicated and subject to many variables. Assumptions must be made regarding the length of time to complete the contract because costs also include estimated third-party vendor and contract labor costs. Penalties related to
performance on contracts are considered in estimating sales and profit, and are recorded when there is sufficient information for us to assess anticipated performance. Third-party vendors assertions are also assessed and considered in
estimating costs and margin.
Revenue from the sale of software-only products remains within the scope of the software revenue recognition rules.
Maintenance and support, training, consulting, and installation services no longer fall within the scope of the software revenue recognition rules, except when they are sold with and relate to a software-only product. Revenue recognition for
products that no longer fall under the scope of the software revenue recognition rules is like that for other tangible products and Accounting Standard Update No. (ASU)
2009-13,
Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,
amended ASC 605 and is applicable for multiple-deliverable revenue arrangements. ASU
2009-13
allows
companies to allocate revenue in a multiple-deliverable arrangement in a manner that better reflects the transactions economics.
Under the software
revenue recognition rules, the fee is allocated to the various elements based on vendor-specific objective evidence (VSOE) of fair value. Under this method, the total arrangement value is allocated first to undelivered elements based on
their fair values, with the remainder being allocated to the delivered elements. Where fair value of undelivered service elements has not been established, the total arrangement value is recognized over the period during which the services are
performed. The amounts allocated to undelivered elements, which may include project management, training, installation, maintenance and technical support and certain hardware and software components, are based upon the price charged when these
elements are sold separately and unaccompanied by the other elements. The amount allocated to installation, training and project management revenue is based upon standard hourly billing rates and the estimated time necessary to complete the service.
These services are not essential to the functionality of systems as these services do not alter the equipments capabilities, are available from other vendors and the systems are standard products. For multiple-element arrangements that include
software development with significant modification or customization and systems sales where VSOE of the fair value does not exist for the undelivered elements of the arrangement (other than maintenance and technical support), percentage of
completion accounting is applied for revenue recognition purposes to the entire arrangement except for maintenance and technical support.
Under the
revenue recognition rules for tangible products as amended by ASU
2009-13,
the fee from a multiple-deliverable arrangement is allocated to each of the deliverables based upon their relative selling prices as
determined by a selling-price hierarchy. A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. A delivered item that does not qualify as a separate unit of
accounting is combined with the other undelivered items in the arrangement and revenue is recognized for those combined deliverables as a single unit of accounting. The selling price used for each deliverable is based upon VSOE if available,
third-party evidence (TPE) if VSOE is not available, and best estimate of selling price (BESP) if neither VSOE nor TPE are available. TPE is the price of the Companys, or any competitors, largely interchangeable
products or services in stand-alone sales to similarly situated customers. BESP is the price at which we would sell the deliverable if it were sold regularly on a stand-alone basis, considering market conditions and entity-specific factors.
The selling prices used in the relative selling price allocation method for certain of our services are based upon VSOE. The selling prices used in the
relative selling price allocation method for third-party products from other vendors are based upon TPE. The selling prices used in the relative selling price allocation method for our hardware products, software, subscriptions, and customized
services for which VSOE does not exist are based upon BESP. We do not believe TPE exists for these products and services because they are differentiated from competing products and services in terms of functionality and performance and there are no
competing products or services that are largely interchangeable. Management establishes BESP with consideration for market
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conditions, such as the impact of competition and geographic considerations, and entity-specific factors, such as the cost of the product, discounts provided and profit objectives. Management
believes that BESP is reflective of reasonable pricing of that deliverable as if priced on a stand-alone basis.
For our cloud and managed service
revenues, we generate revenue from two sources: (1) subscription and support services; and (2) professional services and other. Subscription and support revenue includes subscription fees from customers accessing our cloud-based software
platform and support fees. Our arrangements with customers do not provide the customer with the right to take possession of the software supporting the cloud-based software platform at any time. Professional services and other revenue include fees
from implementation and customization to support customer requirements. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. For
the most part, subscription and support agreements are entered into for 12 to 36 months. Generally, most of the professional services components of the arrangements with customers are performed within a year of entering a contract with the customer.
In most instances, revenue from a new customer acquisition is generated under sales agreements with multiple elements, comprised of subscription and
support and other professional services. We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has
standalone value and delivery of the undelivered element is probable and within our control.
In determining when to recognize revenue from a customer
arrangement, we are often required to exercise judgment regarding the application of our accounting policies to an arrangement. The primary judgments used in evaluating revenue recognized in each period involve: determining whether collection is
probable, assessing whether the fee is fixed or determinable, and determining the fair value of the maintenance and service elements included in multiple-element software arrangements. Such judgments can materially impact the amount of revenue that
we record in a given period. While we follow specific and detailed rules and guidelines related to revenue recognition, we make and use significant management judgments and estimates about the revenue recognized in any reporting period, particularly
in the areas described above. If management made different estimates or judgments, material differences in the timing of the recognition of revenue could occur.
Stock-based Compensation
We account for all
employee and
non-employee
director stock-based compensation awards using the authoritative guidance regarding share-based payments. We continue to use the Black-Scholes pricing model as we feel it is the most
appropriate method for determining the estimated fair value of the
non-market-based
awards. We also use the Monte Carlo pricing model for our market-based option awards and performance stock units
(PSUs). Determining the appropriate fair value model and calculating the fair value of share-based payment awards requires the input of highly subjective assumptions, including the expected life of the share-based payment awards and
stock price volatility. Management estimates the volatility based on the historical volatility of our stock. The assumptions used in calculating the fair value of share-based payment awards represent managements best estimates, but these
estimates involve inherent uncertainties and the application of managements judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In
addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be
significantly different from what we have recorded in the current period. The estimated fair value of our market-based awards, less expected forfeitures, is amortized over the awards vesting period on a graded vesting basis, whereas the fair
value of
non-market-based
awards and employee stock purchase plan (ESPP) stock units, less estimated forfeitures, are amortized on a straight-line basis.
81
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs were $0.1 million for fiscal 2017, 2016 and 2015, respectively.
Earnings Per Share
Earnings per share are
presented in accordance with authoritative guidance which requires the presentation of basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing earnings available to common
shareholders by the weighted-average shares of common stock outstanding during the period. For the purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of shares of common stock outstanding
during the period and the weighted average number of potential shares of common stock, such as stock options and restricted stock, calculated using the treasury stock method. For calculating diluted loss per share, we do not include these shares in
the denominator because these shares would have an anti-dilutive effect on periods in which we incur a net loss. Certain shares of our common stock have exercise prices in excess of the average market price. These shares are anti-dilutive and are
omitted from the calculation of earnings per share. For more information on this see Note 14.,
Net Loss Per Share,
to this Form
10-K.
Recent Accounting Pronouncements
Recently
Issued Accounting Standards UpdatesNot Yet Adopted
We consider the applicability and impact of all ASUs. Updates not listed below were assessed
and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
Revenue from Contracts with Customers (Topic 606)
In May
2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606),
to clarify the principles for recognizing revenue and to develop a common revenue standard
for U.S. GAAP and the International Financial Reporting Standards. This guidance supersedes previously issued guidance on revenue recognition and gives a five step process an entity should follow so that the entity recognizes revenue that depicts
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 July 2015, the FASB deferred the effective date of this
guidance to annual reporting periods beginning after December 15, 2017, which would be our fiscal 2019 reporting period. Early adoption is permitted.
Subsequently, the FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09. In March 2016, the FASB issued ASU 2016-08,
Principal versus Agent Considerations (Reporting Revenue Gross
versus Net),
which finalizes its amendments to the guidance in the new revenue standard on assessing whether an entity is a principal or an agent in a revenue
transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued ASU 2016-08
Identifying Performance Obligations and Licensing,
which finalizes its amendments to the
guidance in the new revenue standard regarding the identification of performance obligations and accounting for the license of intellectual property. And in May 2016, the FASB issued ASU 2016-12,
Narrow-Scope Improvements and Practical
Expedients
which finalizes its amendments to the guidance in the new revenue standard on collectability, noncash consideration, presentation of sales tax, and transition. The amendments are intended to make the guidance more operable and
lead to more consistent application. The amendments have the same effective date and transition requirements as the new revenue recognition standard. We are continuing to evaluate what impact future adoption of this guidance will have on our
consolidated financial statements.
82
Leases
In
February 2016, the FASB issued ASU
2016-02,
Leases (Topic 842).
ASU
2016-02
requires a lessee to recognize a
right-of-use
asset and a lease liability for operating leases with terms over twelve months, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a
lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. It also requires lessees to classify leases as either finance or operating leases based on the
principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis
over the term of the lease. ASU
2016-02
is effective for us in the first quarter of fiscal 2020. Early adoption is permitted. We are currently evaluating what impact the adoption of this update will have on
our consolidated financial statements.
Stock Compensation
In March 2016, the FASB issued ASU
2016-09,
CompensationStock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting.
ASU
2016-09
intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes,
forfeitures and statutory tax withholding requirements, as well as classification in the statements of cash flows. ASU
2016-09
is effective for us in the first quarter of fiscal 2018. Early adoption is
permitted.
The new standard requires prospective recognition of excess tax benefits and deficiencies resulting from the vesting and exercise of stock
awards in the income statement. Previously, these amounts were recognized in additional
paid-in-capital.
In addition, ASU
2016-09
requires excess tax benefits and deficiencies to be prospectively excluded from the assumed future proceeds in the calculation of diluted shares and to be reported as operating activities in the consolidated statements of cash flows where they were
previously reported in financing activities. We have excess tax benefits of $1.8 million that will increase the deferred tax assets related to our various tax attribute carryforwards when the new guidance is adopted. We expect a corresponding
increase to our valuation allowance, consistent with our existing valuation allowance assessment.
Once we adopt this guidance, we will elect to continue
to estimate the number of stock-based awards expected to vest, as permitted by ASU
2016-09,
rather than electing to account for forfeitures as they occur.
This ASU requires that employee taxes paid when an employer withholds shares for
tax-withholding
purposes be reported
as financing activities in the consolidated statements of cash flows. Previously, these cash flows were included in operating activities. This change was required to be applied on a retrospective basis. We are currently evaluating this piece of the
guidance and will plan to make the appropriate changes to the statements of cash flows on a retrospective basis in the first quarter of fiscal 2018.
Cash Flow Statement
In August 2016, the FASB issued ASU
2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
ASU
2016-15
provides guidance on the classification
of certain cash receipts and payments in the statement of cash flows where diversity in practice exists. The guidance is effective for interim and annual periods beginning in our first quarter of fiscal 2019, and early adoption is permitted. ASU
2016-15
must be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. We are currently evaluating what impact the adoption of this
update will have on our consolidated financial statements.
In November 2016, the FASB issued ASU
2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash.
ASU
2016-18
requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and
amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts
83
generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown on the statement
of cash flows. The guidance is effective for us in the first quarter of fiscal 2019 and early adoption is permitted. ASU
2016-18
must be applied retrospectively to all periods presented. We are currently
evaluating what impact the adoption of this update will have on our consolidated financial statements.
Intangibles-Goodwill and Other
In January 2017, the FASB issued ASU
2017-04,
Intangibles-Goodwill and Other (Topic 350),
which simplifies
the subsequent measurement of goodwill by removing Step 2 of the
two-step
impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. A goodwill impairment will be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is effective
for us beginning in the first quarter of fiscal 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating what impact the adoption of this
update will have on our consolidated financial statements.
3. Fair Value Measurements
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The following tables set forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of January 31, 2017 and
January 31, 2016. There were no fair value measurements of our financial assets and liabilities using significant level 3 inputs for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at January 31, 2017 Using
|
|
|
|
January 31,
2017
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
|
(Amounts in thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts (a)
|
|
$
|
2,726
|
|
|
$
|
2,726
|
|
|
$
|
|
|
Available-for-sale
marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bondsconventional
|
|
|
4,253
|
|
|
|
4,253
|
|
|
|
|
|
U.S. government agency issues
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
Non-current
marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bondsconventional
|
|
|
1,997
|
|
|
|
1,997
|
|
|
|
|
|
U.S. government agency issues
|
|
|
2,994
|
|
|
|
|
|
|
|
2,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,970
|
|
|
$
|
8,976
|
|
|
$
|
3,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at January 31, 2016 Using
|
|
|
|
January 31,
2016
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
|
(Amounts in thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts (a)
|
|
$
|
3,654
|
|
|
$
|
3,654
|
|
|
$
|
|
|
Available-for-sale
marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bondsconventional
|
|
|
502
|
|
|
|
502
|
|
|
|
|
|
U.S. government agency issues
|
|
|
1,002
|
|
|
|
|
|
|
|
1,002
|
|
Non-current
marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bondsconventional
|
|
|
7,762
|
|
|
|
7,762
|
|
|
|
|
|
U.S. government agency issues
|
|
|
3,002
|
|
|
|
|
|
|
|
3,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,922
|
|
|
$
|
11,918
|
|
|
$
|
4,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a)
|
Money market funds and U.S. treasury bills are included in cash and cash equivalents on the accompanying consolidated balance sheets and are valued at quoted market prices for identical instruments in active markets.
|
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible property and equipment, goodwill, and other
intangible assets, which are
re-measured
when the derived fair value is below carrying value on our consolidated balance sheets. For these assets and liabilities, we do not periodically adjust carrying value
to fair value except in the event of impairment. When we determine that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is recorded to loss from impairment of long-lived assets in our consolidated
statements of operations and comprehensive loss.
In the third quarter of fiscal 2017, we finalized our Step 1 analysis of our annual goodwill
impairment test. Our forecast indicated that the estimated fair value of our reporting units net assets may be less than its carrying value which is a potential indicator of impairment. As such, we were required to perform Step 2
of the impairment test during which we compared the implied fair value of our goodwill to its carrying value. We completed the goodwill impairment testing of our reporting unit during the fourth quarter of fiscal 2017 and recorded an impairment
charge of $23.5 million to loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive loss (see Note 6,
Goodwill and Intangible Assets
to this Form
10-K
for more information). This impairment was determined based on Level 2 inputs, as we used a third-party valuation firm to assist in the calculation of fair value.
In January 2017, after a potential buyer declined to purchase our facility in Greenville, New Hampshire, we determined that the sale of this facility was not
imminent due to the location of the building and the overall market conditions in the area and decided to fully impair the facility because the carrying amount was greater than the fair value. As a result, we recorded a $0.3 million loss on
impairment of long-lived assets in our consolidated statements of operations and comprehensive loss.
We also have direct investments in privately-held
companies accounted for under the cost-method of accounting, of which we do not have significant influence over their operating and financial activities. Management periodically assesses these investments for other-than-temporary impairment
considering available information provided by the investees and any other readily available market data. If we determine that an other-than-
85
temporary impairment has occurred, we write-down the investment to its fair value. This impairment was determined based on Level 3 of the fair value hierarchy due to the use of significant
unobservable inputs to determine fair value.
In the fourth quarter of fiscal 2017, we determined that the fair value of a certain cost-method investments
was less than its carrying value. Accordingly, we recorded a $0.5 million impairment charge in January 2017 which is included in loss on investment in affiliates in our consolidated statements of operations and comprehensive loss. The
cost-method investment is a privately-held entity without quoted market prices and therefore, falls within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine its fair value. In determining the
fair value of this cost-method investment, we considered many factors including, but not limited to, operating performance of the investee, the amount of cash that the investee has on hand and the overall market conditions in which the investee
operates.
As of January 31, 2016, the Company reviewed the projected future cash flows of the Timeline Labs operations and determined that the
carrying amount was greater than the fair value. As a result, all long-term assets related to Timeline Labs were fully impaired and reflected as a $21.9 million loss on impairment of long-lived assets in our consolidated statements of
operations and comprehensive loss for the fiscal year ended January 31, 2016 which included: i) $15.8 million relating to the Timeline Labs acquired goodwill, ii) $5.2 million of acquired intangible assets, and iii) $0.9 million
of capitalized internal use software. Additionally, we reduced the contingent consideration liability associated with the Timeline Labs acquisition to zero, as we determined the defined performance criteria would not be achieved. Therefore, we
recorded the reversal of the liability of $0.4 million to the loss on impairment of assets.
Available-for-Sale
Securities
We determine the appropriate classification of debt investment securities
at the time of purchase and reevaluate such designation as of each balance sheet date. Our investment portfolio consists of money market funds, U.S. treasury notes and bonds, and U.S. government agency notes and bonds as of January 31, 2017 and
2016. All highly liquid investments with an original maturity of three months or less when purchased are cash equivalents. All cash equivalents are carried at cost, which approximates fair value. Our marketable securities are classified as
available-for-sale
and are reported at fair value with unrealized gains and losses, net of tax, reported in stockholders equity as a component of accumulated other
comprehensive loss. The amortization of premiums and accretions of discounts to maturity are computed under the effective interest method and is included in other expenses, net, in our consolidated statements of operations and comprehensive loss.
Interest on securities is recorded as earned and is also included in other expenses, net. Any realized gains or losses would be shown in the accompanying consolidated statements of operations and comprehensive loss in other expenses, net. We provide
fair value measurement disclosures of
available-for-sale
securities in accordance with one of three levels of fair value measurement mentioned above.
86
The following is a summary of cash, cash equivalents and
available-for-sale
securities, including the cost basis, aggregate fair value and unrealized gains and losses, for
short-and
long-term marketable securities portfolio
as of January 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
|
|
(Amounts in thousands)
|
|
January 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
25,576
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,576
|
|
Cash equivalents
|
|
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
28,302
|
|
|
|
|
|
|
|
|
|
|
|
28,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bondsshort-term
|
|
|
4,248
|
|
|
|
5
|
|
|
|
|
|
|
|
4,253
|
|
U.S. treasury notes and bondslong-term
|
|
|
2,003
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
1,997
|
|
U.S. government agency issuesshort-term
|
|
|
991
|
|
|
|
9
|
|
|
|
|
|
|
|
1,000
|
|
U.S. government agency issueslong-term
|
|
|
2,996
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
2,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities
|
|
$
|
38,540
|
|
|
$
|
14
|
|
|
$
|
(8
|
)
|
|
$
|
38,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
55,079
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
55,079
|
|
Cash equivalents
|
|
|
3,654
|
|
|
|
|
|
|
|
|
|
|
|
3,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
58,733
|
|
|
|
|
|
|
|
|
|
|
|
58,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bondsshort-term
|
|
|
503
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
502
|
|
U.S. treasury notes and bondslong-term
|
|
|
7,756
|
|
|
|
6
|
|
|
|
|
|
|
|
7,762
|
|
U.S. government agency issuesshort-term
|
|
|
1,001
|
|
|
|
1
|
|
|
|
|
|
|
|
1,002
|
|
U.S. government agency issueslong-term
|
|
|
2,977
|
|
|
|
25
|
|
|
|
|
|
|
|
3,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities
|
|
$
|
70,970
|
|
|
$
|
32
|
|
|
$
|
(1
|
)
|
|
$
|
71,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross realized gains and losses on sale of
available-for-sale
securities for fiscal 2017, 2016 and 2015 were immaterial. For purposes of determining gross realized gains and losses, the cost of securities sold is
based on specific identification.
Contractual maturities of
available-for-sale
debt securities at January 31, 2017 are as follows (amounts in thousands):
|
|
|
|
|
|
|
Estimated
Fair Value
|
|
Maturity of one year or less
|
|
$
|
5,253
|
|
Maturity between one and five years
|
|
|
4,991
|
|
|
|
|
|
|
Total
|
|
$
|
10,244
|
|
|
|
|
|
|
We concluded that there were no other-than-temporary declines of available-for-sale securities as of January 31, 2017,
2016 and 2015. The unrealized holding losses, net of tax, on
available-for-sale
securities, which are not material for the periods presented, have been included in
stockholders equity as a component of accumulated other comprehensive loss.
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents consist primarily of highly liquid investments in money market mutual funds, government sponsored enterprise obligations, treasury
bills, commercial paper and other money market securities with remaining maturities at date of purchase of 90 days or less.
87
The fair value of cash, cash equivalents, restricted cash and marketable securities at January 31, 2017 and
2016 was $38.7 million and $71.1 million, respectively.
Restricted Cash
At times, we may be required to maintain cash held as collateral for performance obligations with our customers which we classify as restricted cash on our
consolidated balance sheets. As of January 31, 2017 and 2016, we had $0.1 million in restricted cash related to performance obligations.
4.
Acquisitions and Loss on Impairment of TLL, LLC
DCC Labs
On May 5, 2016, we acquired a 100% share of DCC Labs in exchange for an aggregate of $2.7 million in newly issued shares of SeaChange common stock
and $5.2 million in cash, net of cash acquired, resulting in a total net purchase price of $7.9 million. DCC Labs is a developer of
set-top
and multiscreen device software. Under the purchase
agreement, $0.5 million in cash and all the stock was initially held in escrow as security for the indemnification obligations of the sellers to SeaChange. The stock consideration was determined by dividing the total value of $2.6 million
by the volume weighted average closing price of our common stock for the twenty trading days preceding the closing.
The acquisition of DCC Labs enables
us to optimize the operations of our
In-Home
business, which develops home video gateway software including SeaChanges Nucleus and NitroX products. In addition, the acquisition brings market-ready
products, including an optimized television software stack for Europes Digital Video Broadcasting community and an HTML5 framework for building additional user experience client applications across a variety of CPE devices, including Android
TV STBs, tablets, mobile and compute devices.
We accounted for the acquisition of DCC Labs as a business combination, which requires us to record the
assets acquired and liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of the net assets acquired is recorded as goodwill. We engaged an independent appraiser to assist management in assessing the fair
values of the tangible and intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the acquisition date. Assets acquired in the acquisition include receivables, prepaid expenses and property and equipment
while liabilities assumed include accounts payable, other accrued expenses, deferred taxes and income taxes payable. The amounts recorded for these assets and liabilities are final based on information obtained about the facts and circumstances that
existed as of the acquisition date.
The allocation of purchase price was as follows (amounts in thousands):
|
|
|
|
|
Estimated Fair value of consideration:
|
|
|
|
|
Cash, net of cash acquired
|
|
$
|
5,243
|
|
Stock consideration
|
|
|
2,640
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
7,883
|
|
|
|
|
|
|
|
|
Estimated Fair value of assets acquired and liabilities assumed:
|
|
|
|
|
Current assets
|
|
|
826
|
|
Other long-term assets
|
|
|
116
|
|
Finite-life intangible assets
|
|
|
810
|
|
Goodwill
|
|
|
7,255
|
|
Current liabilities
|
|
|
(618
|
)
|
Other long-term liabilities
|
|
|
(506
|
)
|
|
|
|
|
|
Allocated purchase price
|
|
$
|
7,883
|
|
|
|
|
|
|
88
Acquired Goodwill
We finalized the purchase price allocation in January 2017 after we received additional information from the independent appraiser related to the fair value of
identifiable intangible assets and deferred tax liabilities. As a result, we recorded measurement period adjustments during the fourth quarter of fiscal 2017 that resulted in a $1.9 million net increase in goodwill. We recorded the
$7.3 million excess of the purchase price over the fair value of the identified tangible and intangible assets as goodwill, primarily due to expected synergies between the combined companies and expanded market opportunities. The goodwill is
not deductible for tax purposes.
Intangible Assets
In determining the fair value of the intangible assets, the Company considered, among other factors, the intended use of the assets and the estimates of future
performance of DCC Labs, based on analyses of historical financial performance. The fair values of identified intangible assets were calculated using an income-based approach based on estimates and assumptions provided by DCC Labs and the
Companys management.
The following table sets forth the components of the identified intangible assets associated with the DCC Labs acquisition and
their estimated useful lives:
|
|
|
|
|
|
|
|
|
|
|
Useful life
|
|
|
Fair Value
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Tradename
|
|
|
4 years
|
|
|
$
|
60
|
|
Customer contracts
|
|
|
2 years
|
|
|
|
230
|
|
Non-compete
agreements
|
|
|
2 years
|
|
|
|
30
|
|
Existing technology
|
|
|
3 years
|
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
810
|
|
|
|
|
|
|
|
|
|
|
Impact to Fiscal 2017 Financial Results
DCC Labs financial results have been included in our consolidated financial results only for the period from the May 5, 2016 acquisition date
through January 31, 2017. As a result, our consolidated financial results for fiscal 2017 do not reflect a full year of DCC Labs results. From the May 5, 2016 acquisition date through January 31, 2017, DCC Labs generated revenue
of $0.7 million and an operating loss of $4.7 million, which includes a loss on impairment of long-lived assets of $3.4 million which was recorded in January 2017 as a result of our annual goodwill impairment test at August 1,
2016.
Acquisition-related Costs
In connection with
the acquisition, we incurred approximately $0.2 million in acquisition-related costs, including legal, accounting and other professional services for fiscal 2017. The acquisition costs were expensed as incurred and included in professional
feesother, in our consolidated statements of operations and comprehensive loss for the fiscal year ended January 31, 2017.
TLL, LLC
On February 2, 2015, pursuant to an Agreement and Plan of Merger (the Merger Agreement), dated as of December 22, 2014, we
acquired 100% of the member interests in Timeline Labs, a privately-owned California-based
software-as-a-service
(SaaS) company.
We accounted for the acquisition of Timeline Labs as a business combination and the financial results of Timeline Labs have
been included in our consolidated financial statements as of the date of acquisition. Under the acquisition method of accounting, the purchase price was allocated to SeaChanges net tangible and intangible assets based upon their fair values as
of February 2, 2015.
89
The allocation of the purchase price was as follows (amounts in thousands):
|
|
|
|
|
Fair value of consideration:
|
|
|
|
|
Cash, net of cash acquired
|
|
$
|
14,186
|
|
Closing stock consideration
|
|
|
3,019
|
|
Deferred stock consideration
|
|
|
4,959
|
|
Contingent consideration
|
|
|
475
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
22,639
|
|
|
|
|
|
|
|
|
Fair value of assets acquired and liabilities assumed:
|
|
|
|
|
Current assets
|
|
|
95
|
|
Other long-term assets
|
|
|
108
|
|
Finite-life intangible assets
|
|
|
6,720
|
|
Goodwill
|
|
|
15,787
|
|
Current liabilities
|
|
|
(71
|
)
|
|
|
|
|
|
Allocated purchase price
|
|
$
|
22,639
|
|
|
|
|
|
|
Fair Value of Consideration Transferred
Upon completion of the acquisition, the Company made cash consideration payments to the former members of Timeline Labs in the amount of $14.2 million
(Closing Cash Consideration). The Closing Cash Consideration included $1.4 million deposited in escrow to secure certain indemnification obligations of the former members of Timeline Labs under the Merger Agreement. Also upon
completion of the acquisition, the Company issued 344,055 shares of common stock to the former members of Timeline Labs and deposited 173,265 shares of common stock into the indemnification escrow.
On August 3, 2015, we issued 260,537 shares of our common stock with a value of $1.8 million to the former members of Timeline Labs, in satisfaction
of the
six-month
deferred stock consideration obligation pursuant to the Merger Agreement. In satisfaction of the twelve-month deferred stock consideration obligation pursuant to the Merger Agreement, on
February 2, 2016, we issued 542,274 shares of our common stock with a value of $3.2 million and in May 2016, pursuant to an adjustment mechanism based on the stock price provided for in the Merger Agreement with respect to deferred stock
consideration issuances, we issued an additional 70,473 shares of our common stock with a value of $0.2 million.
Contingent Consideration
The former interest holders of Timeline Labs were eligible to receive
earn-out
compensation, consisting of
shares of our common stock, if defined performance criteria were achieved for fiscal 2016 and 2017. We recorded a liability of $3.2 million in February 2015 in our consolidated balance sheets that represented the fair value of the estimated
shares at full achievement of the defined performance criteria on the date of acquisition. As of January 31, 2016, the Company determined that the defined performance criteria would not be achieved and the liability was reduced to zero with a
$0.4 million reversal of liability credited to loss on impairment of TLL, LLC net assets in our consolidated statements of operations and comprehensive loss for the fiscal year ended January 31, 2016.
Intangible Assets
In determining the fair value of the
intangible assets, the Company considered, among other factors, the intended use of the assets, the estimates of future performance of Timeline Labs products and analyses of historical financial performance. The fair values of identified
intangible assets were calculated using an income-based approach based on estimates and assumptions provided by Timeline Labs and the Companys management.
90
The following table sets forth the components of the identified intangible assets associated with the Timeline
Labs acquisition and their estimated useful lives:
|
|
|
|
|
|
|
|
|
|
|
Useful life
|
|
|
Fair Value
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Tradename
|
|
|
7 years
|
|
|
$
|
620
|
|
Customer contracts
|
|
|
7 years
|
|
|
|
4,760
|
|
Non-compete
agreements
|
|
|
2 years
|
|
|
|
170
|
|
Existing technology
|
|
|
5 years
|
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,720
|
|
|
|
|
|
|
|
|
|
|
Acquired Goodwill
We
finalized the purchase price allocation in January 2016. We recorded the $15.8 million excess of the purchase price over the fair value of the identified tangible and intangible assets as goodwill, primarily due to expected synergies between
the combined companies and expanded market opportunities. The goodwill was considered deductible for tax purposes.
Acquisition-related Costs
In connection with the acquisition, we incurred approximately $0.1 million in acquisition-related costs, including legal, accounting and other
professional services for fiscal 2016. The acquisition costs were expensed as incurred and included in professional feesother, in our consolidated statements of operations and comprehensive loss.
Loss on Impairment of TLL, LLC
In January 2016, our
Board of Directors authorized a restructuring plan, as previously reported in a Form
8-K
filed with the SEC on February 17, 2016. Based on the decision to enter the restructuring plan and the plans
impact on the projected future cash flows of the Timeline Labs operations, we determined that the carrying amount of all long-term assets that resulted from the February 2015 acquisition had exceeded the fair value as of January 31, 2016. As a
result, these long-term assets were deemed fully impaired and we recorded the $21.9 million net book value of these long-term assets as a component of loss on impairment of long-lived assets in our consolidated statements of operations and
comprehensive loss for the fiscal year ended January 31, 2016. Additionally, we reduced the contingent consideration liability associated with the Timeline Labs acquisition to zero, as we determined that the defined performance criteria would
not be achieved, and credited the reversal of the liability of $0.4 million to loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive loss for the fiscal year ended January 31, 2016. In
addition, we incurred $0.7 million in severance and restructuring charges in February 2016 related to the cost-saving actions taken with respect to the Timeline Labs business.
5. Consolidated Balance Sheet Detail
Inventories,
net
Inventories consist primarily of hardware and related component parts and are stated at the lower of cost (on a
first-in,
first-out
basis) or market. Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Amounts in thousands)
|
|
Components and assemblies
|
|
$
|
500
|
|
|
$
|
1,223
|
|
Finished products
|
|
|
270
|
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
770
|
|
|
$
|
1,682
|
|
|
|
|
|
|
|
|
|
|
91
Property and equipment, net
Property and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful
Life (Years)
|
|
|
January 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Land
|
|
|
|
|
|
$
|
2,780
|
|
|
$
|
2,880
|
|
Buildings
|
|
|
20
|
|
|
|
11,726
|
|
|
|
11,908
|
|
Office furniture and equipment
|
|
|
5
|
|
|
|
1,091
|
|
|
|
1,099
|
|
Computer equipment, software and demonstration equipment
|
|
|
3
|
|
|
|
18,194
|
|
|
|
18,639
|
|
Service and spare components
|
|
|
5
|
|
|
|
1,158
|
|
|
|
1,158
|
|
Leasehold improvements
|
|
|
1-7
|
|
|
|
1,064
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,013
|
|
|
|
36,771
|
|
LessAccumulated depreciation and amortization
|
|
|
|
|
|
|
(24,528
|
)
|
|
|
(22,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
|
|
|
$
|
11,485
|
|
|
$
|
14,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense of property and equipment was $3.0 million, $3.4 million and $3.7 million
for the years ended January 31, 2017, 2016 and 2015, respectively.
Other accrued expenses
Other accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Amounts in thousands)
|
|
Accrued compensation and commissions
|
|
$
|
1,799
|
|
|
$
|
1,676
|
|
Accrued bonuses
|
|
|
1,871
|
|
|
|
2,902
|
|
Accrued restructuring
|
|
|
1,023
|
|
|
|
|
|
Employee benefits
|
|
|
885
|
|
|
|
1,484
|
|
Accrued provision for contract loss(1)
|
|
|
168
|
|
|
|
6,497
|
|
Accrued other
|
|
|
4,182
|
|
|
|
4,855
|
|
|
|
|
|
|
|
|
|
|
Total other accrued expenses
|
|
$
|
9,928
|
|
|
$
|
17,414
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes a reduction to the provision for loss contract of $4.1 million recorded in the fourth quarter of fiscal 2017 resulting from an amendment to a contract with a fixed-price customer which changed the scope of
the project and add the remaining costs and revenue to complete the project.
|
92
6. Goodwill and Intangible Assets
Goodwill, net
At January 31, 2017 and 2016,
we had goodwill of $23.3 million and $40.2 million, respectively. The following table represents the changes in goodwill for the fiscal year ended January 31, 2017 (amounts in thousands):
|
|
|
|
|
Balance as of February 1, 2016:
|
|
|
|
|
Goodwill, gross
|
|
$
|
55,962
|
|
Accumulated impairment losses
|
|
|
(15,787
|
)
|
|
|
|
|
|
Goodwill, net
|
|
|
40,175
|
|
Acquisition of DCC Labs
|
|
|
7,255
|
|
Goodwill impairment charge
|
|
|
(23,492
|
)
|
Cumulative translation adjustment
|
|
|
(651
|
)
|
|
|
|
|
|
Balance as of January 31, 2017
|
|
|
|
|
Goodwill, gross
|
|
|
61,707
|
|
Accumulated impairment losses
|
|
|
(39,279
|
)
|
|
|
|
|
|
Goodwill, net
|
|
$
|
23,287
|
|
|
|
|
|
|
The valuation of goodwill related to the DCC Labs acquisition was finalized in the fourth quarter of fiscal 2017 based on the
final allocation of the purchase price.
In the second quarter of fiscal 2017, triggering events prompted us to perform Step 1 of the goodwill
impairment test. The triggering events included; a sustained decrease in our stock price during the period, the withdrawal of the permanent reinvestment assertion on earnings generated by our Irish operations (see Note 12,
Income
Taxes
to this Form
10-K
for more information) and a decline in actual revenue for the quarter compared to projected amounts, which was previously reported in a Current Report on Form
8-K
furnished to the SEC on August 23, 2016. The outcome of that preliminary Step 1 analysis revealed that as of July 31, 2016, the fair value of the net assets exceeded its carrying value by a
range of $15.4 million to $25.0 million, or 15.0% to 24.4% of the carrying value of our net assets.
We determined based on Step 1
of our fiscal 2017 annual impairment test, that the fair value of our reporting unit was less than its carrying value, which was $102.5 million at August 1, 2016. Since the estimated fair value of our reporting unit was less than its
carrying value, we determined that it was necessary to perform Step 2 of the impairment test. In Step 2 of the impairment test we compared the implied fair value of our goodwill to its carrying value. After adjusting the
carrying value of all assets, liabilities and equity to fair value at August 1, 2016, the estimated implied fair value of goodwill was calculated to be $22.3 million. Since the implied fair value of goodwill of $22.3 million is less
than the carrying value of $45.8 million as of August 1, 2016, we recorded an impairment charge of $23.5 million to loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive loss.
93
Intangible assets, net
Intangible assets, net, consisted of the following at January 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2017
|
|
|
January 31, 2016
|
|
|
|
Weighted average
remaining life
(Years)
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
(Amounts in thousands)
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer contracts
|
|
|
2.4
|
|
|
$
|
30,056
|
|
|
$
|
(28,019
|
)
|
|
$
|
2,037
|
|
|
$
|
29,956
|
|
|
$
|
(26,284
|
)
|
|
$
|
3,672
|
|
Non-compete
agreements
|
|
|
1.3
|
|
|
|
2,374
|
|
|
|
(2,356
|
)
|
|
|
18
|
|
|
|
2,365
|
|
|
|
(2,365
|
)
|
|
|
|
|
Completed technology
|
|
|
2.4
|
|
|
|
10,496
|
|
|
|
(9,997
|
)
|
|
|
499
|
|
|
|
10,075
|
|
|
|
(9,621
|
)
|
|
|
454
|
|
Trademarks, patents and other
|
|
|
3.3
|
|
|
|
7,125
|
|
|
|
(7,076
|
)
|
|
|
49
|
|
|
|
7,068
|
|
|
|
(7,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible assets
|
|
|
2.4
|
|
|
$
|
50,051
|
|
|
$
|
(47,448
|
)
|
|
$
|
2,603
|
|
|
$
|
49,464
|
|
|
$
|
(45,338
|
)
|
|
$
|
4,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets was $3.3 million, $4.8 million and $5.2 million for fiscal 2017,
2016 and 2015, respectively.
The total amortization expense for each of the next five fiscal years is as follows (amounts in thousands):
|
|
|
|
|
For the Fiscal Years Ended January 31,
|
|
Estimated
Amortization
Expense
|
|
2018
|
|
$
|
1,412
|
|
2019
|
|
|
931
|
|
2020
|
|
|
257
|
|
2021
|
|
|
3
|
|
2022
|
|
|
|
|
2023 and thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,603
|
|
|
|
|
|
|
Actual amortization may differ from estimated amounts in the table above due to fluctuations in foreign currency exchange
rates, additional intangible asset acquisitions, potential impairment, accelerated amortization, or other events.
7. Severance and Other Restructuring
Costs
Restructuring Costs
During fiscal
2017, we incurred restructuring charges totaling $5.7 million primarily from employee-related benefits for terminated employees and costs to close facilities.
The following table shows the change in balances of our accrued restructuring reported as a component of other accrued expenses on the consolidated balance
sheet as of January 31, 2017 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-
Related
Benefits
|
|
|
Closure of
Leased
Facilities
|
|
|
Other
Restructuring
|
|
|
Total
|
|
Accrual balance as of January 31, 2016
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring charges incurred
|
|
|
4,543
|
|
|
|
509
|
|
|
|
603
|
|
|
|
5,655
|
|
Cash payments
|
|
|
(3,741
|
)
|
|
|
(379
|
)
|
|
|
(495
|
)
|
|
|
(4,615
|
)
|
Other charges
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual balance as of January 31, 2017
|
|
$
|
785
|
|
|
$
|
130
|
|
|
$
|
108
|
|
|
$
|
1,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
During the third quarter of fiscal 2017, we implemented a restructuring program (Fiscal 2017 Restructuring
Plan) with the purpose of reducing costs and assisting in restoring SeaChange to profitability and positive cash flow. The total estimated restructuring costs associated with the Fiscal 2017 Restructuring Plan are anticipated to be
approximately $5.1 million and will be recorded in severance and other restructuring costs in our consolidated statements of operations and comprehensive loss as they are incurred. We recorded $3.1 million of restructuring expense in
connection with this plan during fiscal 2017, which was primarily made up of employee-related costs, and we expect to incur most of the estimated remaining costs in the first half of fiscal 2018. Any changes to the estimate of executing the Fiscal
2017 Restructuring Plan will be reflected in our future results of operations.
During the second quarter of fiscal 2017, we restructured our operations
in connection with the acquisition of DCC Labs. This restructuring resulted in a workforce reduction within our
In-Home
engineering and services organization and in the closing of our facility in Portland,
Oregon. We incurred charges totaling $1.9 million in severance and other restructuring costs during fiscal 2017 related to the acquisition of DCC Labs. Once we complete our integration plan, any further reduction in workforce may result in
additional restructuring charges.
Because of restructuring activities relating to our Timeline Labs operations in fiscal 2017, we incurred
$0.7 million of charges, which include $0.4 million in severance to former Timeline Labs employees and $0.3 million in other restructuring charges relating to our remaining lease obligation of our Timeline Labs facilities in San
Francisco and Santa Monica, California.
Severance Costs
During fiscal 2017, we incurred severance charges of $1.5 million primarily from the departure of our former Chief Executive Officer (CEO) and
Chief Financial Officer (CFO) during the first half of fiscal 2017 as well as the termination of 13 other former employees.
Effective
April 6, 2016, we terminated the employment of Jay Samit, our former CEO. In connection with his termination, Mr. Samit and SeaChange entered a Separation Agreement and Release of Claims (the CEO Separation Agreement). Under
the terms of the CEO Separation Agreement and consistent with our
pre-existing
obligations to Mr. Samit in connection with a termination without cause, we incurred a charge of $1.0 million in the
first quarter of fiscal 2017, which included $0.2 million for satisfaction of his remaining fiscal 2016 and 2017 annual bonuses and $0.8 million in severance payable in twelve equal monthly installments which will be completed in the first
quarter of fiscal 2018. In addition, on July 6, 2016, Anthony Dias resigned as CFO of SeaChange, though he continued as an employee until July 31, 2016. In connection with his resignation, Mr. Dias and SeaChange entered an Employment
Separation Agreement and Voluntary Release, dated July 6, 2016 (the CFO Separation Agreement). Under the terms of the CFO Separation Agreement, we incurred a charge of $0.2 million, which included his fiscal 2017
pro-rated
bonus (paid in fiscal 2018) and six months base salary as severance payable in twelve equal semi-monthly installments, which was completed as of January 31, 2017.
8. Commitments and Contingencies
Indemnification
and Warranties
We provide indemnification, to the extent permitted by law, to our officers, directors, employees and agents for liabilities
arising from certain events or occurrences while the officer, director, employee or agent is, or was, serving at our request in such capacity. With respect to acquisitions, we provide indemnification to, or assume indemnification obligations for,
the current and former directors, officers and employees of the acquired companies in accordance with the acquired companies governing documents. As a matter of practice, we have maintained directors and officers liability
insurance including coverage for directors and officers of acquired companies.
We enter agreements in the ordinary course of business with customers,
resellers, distributors, integrators and suppliers. Most of these agreements require us to defend and/or indemnify the other party against intellectual
95
property infringement claims brought by a third-party with respect to our products. From time to time, we also indemnify customers and business partners for damages, losses and liabilities they
may suffer or incur relating to personal injury, personal property damage, product liability, and environmental claims relating to the use of our products and services or resulting from the acts or omissions of us, our employees, authorized agents
or subcontractors. From time to time, we have received requests from customers for indemnification of patent litigation claims. Management cannot reasonably estimate any potential losses, but these claims could result in material liability for us.
There are no current pending legal proceedings, in the opinion of management that would have a material adverse effect on our financial position, results from operations and cash flows. There is no assurance that future legal proceedings arising
from ordinary course of business or otherwise, will not have a material adverse effect on our financial position, results from operations or cash flows.
We warrant that our products, including software products, will substantially perform in accordance with our standard published specifications in effect at
the time of delivery. In addition, we provide maintenance support to our customers and therefore allocate a portion of the product purchase price to the initial warranty period and recognize revenue on a straight-line basis over that warranty period
related to both the warranty obligation and the maintenance support agreement. When we receive revenue for extended warranties beyond the standard duration, it is deferred and recognized on a straight-line basis over the contract period. Related
costs are expensed as incurred.
Revolving Line of Credit/Demand Note Payable
We had a letter agreement with JP Morgan Chase Bank, N.A. (JP Morgan) for a demand discretionary line of credit and a Demand Promissory Note in the
aggregate amount of $20.0 million, which expired on August 31, 2016 with no outstanding balance. This line of credit and Demand Promissory Note was not renewed.
Operating Leases
We lease certain of our
operating facilities, automobiles and office equipment under
non-cancelable
operating leases, which expire at various dates through fiscal 2023. Leases for our facilities typically contain standard commercial
lease provisions, including renewal options and rent escalation clauses. Rental expense under operating leases was $2.4 million, $2.7 million and $2.9 million for fiscal 2017, 2016 and 2015, respectively. Future commitments under
minimum lease payments as of January 31, 2017 are as follows (amounts in thousands):
|
|
|
|
|
For the Fiscal Years Ended January 31,
|
|
Operating
Leases
|
|
2018
|
|
$
|
1,826
|
|
2019
|
|
|
1,604
|
|
2020
|
|
|
1,234
|
|
2021
|
|
|
747
|
|
2022
|
|
|
461
|
|
2023 and thereafter
|
|
|
116
|
|
|
|
|
|
|
Minimum operating lease payments
|
|
$
|
5,988
|
|
|
|
|
|
|
9. Stockholders Equity
Stock Authorization
The Board of Directors is
authorized to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock, in one or more series. Each such series of preferred stock shall have the number of shares, designations, preferences, voting powers, qualifications and
special or relative rights or privileges to be determined by the Board of Directors, including dividend rights, voting rights, redemption rights and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights. No
preferred stock has been issued as of January 31, 2017.
96
Stock Option Plans