The accompanying notes are an integral part of these unaudited, consolidated financial statements.
The accompanying notes are an integral part of these unaudited, consolidated financial statements.
The accompanying notes are an integral part of these unaudited, consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Nature of Business and Basis of Presentation
|
The Company
SeaChange International, Inc. and its consolidated subsidiaries (collectively “SeaChange”, “we”, or the “Company”) is 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.
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of SeaChange International, Inc. and its subsidiaries (“SeaChange” or the “Company”) and are prepared
in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reports as well as rules and regulations of the Securities and Exchange Commission (“SEC”). All intercompany transactions and balances have been eliminated. Certain information and footnote disclosures normally included in financial statements prepared under U.S. GAAP have been condensed or omitted pursuant to such regulations.
However, we believe that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the accompanying financial statements include all adjustments, consisting of only normal recurring items, necessary to present a fair presentation of the consolidated financial statements for the periods shown. These consolidated financial statements should be read in conjunction with our most recently audited financial statements and related footnotes included in our Annual Report on Form 10-K (“Form 10-K”) as filed with the SEC. The balance sheet data as of January 31, 2017 that is included in this Quarterly Report on Form 10-Q (“Form 10-Q”) was derived from our audited financial statements. We have reclassified certain amounts previously reported in our financial statements to conform to current presentation.
Effective February 1, 2017, the Company changed how it classifies costs associated with its solution architect employees. In fiscal 2017, all solution architect costs were classified as cost of revenues. However, beginning in fiscal 2018, the Company began reflecting in cost of revenues only those costs associated with revenue-generating projects, based on the hours worked by solutions architect employees. Solutions architect costs that are not associated with revenue-generating projects are recognized as selling and marketing expenses since these employees are involved in pre-sales and other customer-facing activities.
We have adjusted prior fiscal year amounts to conform to the current fiscal year presentation. The effect of this change in methodology, which is a decrease to cost of revenues and an increase to selling and marketing expenses, is reflected in our current statements of operations and comprehensive loss for the three and nine months ended October 31, 2016 as follows:
|
|
|
|
|
|
Adjustment to
|
|
|
|
|
|
|
|
As Filed Fiscal 2017
|
|
|
Conform to
|
|
|
Adjusted
|
|
|
|
Three Months Ended
|
|
|
Current Year
|
|
|
Three Months Ended
|
|
|
|
October 31, 2016
|
|
|
Presentation
|
|
|
October 31, 2016
|
|
|
|
(Amounts in thousands)
|
|
Cost of revenues - service
|
|
$
|
8,036
|
|
|
$
|
(566
|
)
|
|
$
|
7,470
|
|
Selling and marketing expenses
|
|
$
|
3,422
|
|
|
$
|
566
|
|
|
$
|
3,988
|
|
|
|
|
|
|
|
Adjustment to
|
|
|
|
|
|
|
|
As Filed Fiscal 2017
|
|
|
Conform to
|
|
|
Adjusted
|
|
|
|
Nine Months Ended
|
|
|
Current Year
|
|
|
Nine Months Ended
|
|
|
|
October 31, 2016
|
|
|
Presentation
|
|
|
October 31, 2016
|
|
|
|
(Amounts in thousands)
|
|
Cost of revenues - service
|
|
$
|
27,982
|
|
|
$
|
(1,646
|
)
|
|
$
|
26,336
|
|
Selling and marketing expenses
|
|
$
|
10,841
|
|
|
$
|
1,646
|
|
|
$
|
12,487
|
|
6
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 liabilit
ies.
Interim results are not necessarily indicative of the operating results for the full fiscal year or any future periods
and actual results may differ from our estimates. During the three
and
nine
months ended
October 31, 2017
, there have been no
material changes to our significant accounting policies that were described in our fiscal 201
7
Form 10-K, as filed with the SEC.
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. 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 that had previously been deemed permanently restricted for foreign investment would provide greater flexibility to meet the Company’s working capital needs. Accordingly, in the second quarter of fiscal 2017, we changed our 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. The balance of the deferred tax liability is $16.3 million as of October 31, 2017.
2.
|
Significant Accounting Policies
|
Cash, cash equivalents, and restricted cash
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. Restricted cash represents cash that is restricted as to withdrawal or usage and consists primarily of cash held as collateral for performance obligations with our customers.
We early adopted the new Financial Accounting Standards Board (“FASB”) guidance on August 1, 2017, which changed the presentation of our consolidated statements of cash flows and related disclosures for all periods presented (see Note 14,
“Recent Accounting Standard Updates,”
for more information on the adoption of this guidance). Accordingly, the following is a summary of our cash, cash equivalents, and restricted cash total as presented in our consolidated statements of cash flows for the nine months ended October 31, 2017 and 2016:
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Amounts in thousands)
|
|
Cash and cash equivalents
|
|
$
|
27,155
|
|
|
$
|
27,484
|
|
Restricted cash
|
|
|
8
|
|
|
|
108
|
|
Total cash, cash equivalents, and restricted cash
|
|
$
|
27,163
|
|
|
$
|
27,592
|
|
|
|
|
|
|
|
|
|
|
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:
|
•
|
persuasive evidence of an arrangement exists;
|
|
•
|
delivery has occurred, and title and risk of loss have passed to the customer;
|
|
•
|
fees are fixed or determinable; and
|
|
•
|
collection of the related receivable is considered probable.
|
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
7
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 rela
tion 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 th
e 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 financia
l 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 inc
luded 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 service
s 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 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 transaction’s 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 equipment’s 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 Company’s, or any competitor’s, 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 conditions, such as the impact of competition and geographic considerations, and entity-specific factors, such as the cost
8
of the product, discounts provided and profit objectives. Management believes t
hat 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.
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, sustained decline in the Company’s 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. See Note 6,
“Goodwill and Intangible Assets,”
to our consolidated financial statements for more information.
9
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
primary
asset
in the asset group
and compare that value to the carrying value of the assets.
In
August 2017, we placed our corporate headquarters and the adjacent land (the “
Corporate Headquarters
”), located in Acton, Massachusetts, on the market for sale. We assessed whether the
Corpora
te Headquarters
would
qualif
y
as an asset held for sale and determined that it would not
since
it did not meet all six of the criteria of an asset held for sale under current accounting guidance. During the assessment
,
we received information from a third-
party
real estate
broker
which led management to believe that there was a significant decrease in the
fair value
of th
e
Corporate Headquarters
. We considered this to be a t
riggering
e
vent
and were required
to test the
Corporate Headquarters
for recoverabil
ity. We evaluated the undiscounted future cash flows over the remaining useful life of the
primary asset of the a
sset
g
roup and determined that an impairment d
id
not exist as of the date of the
t
riggering
e
vent.
Our cash flow estimates contain management’s
best estimates, using appropriate and customary assumptions and projections at the time.
In addition, since we considered the significant decrease in fair value of the Corporate Headquarters a triggering event, we were required to complete an additional goodwill impairment test as of the date of the triggering event. We completed the additional goodwill impairment test and determined that the implied fair value of the reporting unit exceeds its carrying value as of the date of the triggering event. Accordingly, no impairment charge was recognized as of October 31, 2017.
Liquidity
We continue to realize the savings related to our restructuring activities. During fiscal 2018, we made significant reductions to our headcount as part of our ongoing restructuring effort from which we expect to generate annualized savings of approximately $18 million. These measures are important steps in restoring SeaChange to profitability and positive cash flow. The Company believes that existing funds and cash expected to be provided by future operating activities, augmented by the plans highlighted above, 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.
3.
|
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 subsequent to 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:
|
•
|
Level 1 – Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
|
|
•
|
Level 2 – Observable 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.
|
|
•
|
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
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, U.S. government agency bonds and corporate 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
10
observability of prices and inputs may be redu
ced 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.
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 October 31, 2017 and January 31, 2017. There were no fair value measurements of our financial assets and liabilities using significant Level 3 inputs for the periods presented:
|
|
|
|
|
|
Fair Value at October 31, 2017 Using
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
Active
|
|
|
Other
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
|
October 31,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
|
2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
|
(Amounts in thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (a)
|
|
$
|
3,550
|
|
|
$
|
500
|
|
|
$
|
3,050
|
|
Available-for-sale marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bonds - conventional
|
|
|
1,993
|
|
|
|
1,993
|
|
|
|
—
|
|
U.S. government agency issues
|
|
|
2,997
|
|
|
|
—
|
|
|
|
2,997
|
|
Non-current marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bonds - conventional
|
|
|
1,735
|
|
|
|
1,735
|
|
|
|
—
|
|
U.S. government agency issues
|
|
|
993
|
|
|
|
—
|
|
|
|
993
|
|
Corporate bonds
|
|
|
1,757
|
|
|
|
—
|
|
|
|
1,757
|
|
Total
|
|
$
|
13,025
|
|
|
$
|
4,228
|
|
|
$
|
8,797
|
|
|
|
|
|
|
|
Fair Value at January 31, 2017 Using
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
Active
|
|
|
Other
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
|
January 31,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
|
2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
|
(Amounts in thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (a)
|
|
$
|
2,726
|
|
|
$
|
2,726
|
|
|
$
|
—
|
|
Available-for-sale marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bonds - conventional
|
|
|
4,253
|
|
|
|
4,253
|
|
|
|
—
|
|
U.S. government agency issues
|
|
|
1,000
|
|
|
|
—
|
|
|
|
1,000
|
|
Non-current marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bonds - conventional
|
|
|
1,997
|
|
|
|
1,997
|
|
|
|
—
|
|
U.S. government agency issues
|
|
|
2,994
|
|
|
|
—
|
|
|
|
2,994
|
|
Total
|
|
$
|
12,970
|
|
|
$
|
8,976
|
|
|
$
|
3,994
|
|
11
(a)
|
Money market funds and U.S. treasury bills are included in cash and cash equivalents on the accompanying consolidated balance sheets.
|
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. If we determine that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is recorded to loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive loss.
In the third quarter of fiscal 2018, we finalized the “Step 1” analysis of our annual goodwill impairment test for fiscal 2018. Based on this analysis, we determined that fair value of our reporting unit exceeded its carrying value, which was $64.2 million at August 1, 2017. As a result, no impairment charge was required related to the annual test.
In August 2017, we placed the Corporate Headquarters on the market for sale. We assessed whether the Corporate Headquarters would qualify as an asset held for sale and determined that it would not since it did not meet all six of the criteria of an asset held for sale under current accounting guidance. During the assessment, we received information from a third-party real estate broker that led management to believe that there was a significant decrease in the fair value of the Corporate Headquarters. We considered this to be a triggering event and were required to test the Corporate Headquarters for recoverability. We evaluated the undiscounted future cash flows over the remaining useful life of the primary asset of the asset group and determined that an impairment did not exist as of the date of the triggering event.
In addition, since we considered the significant decrease in fair value of the Corporate Headquarters a triggering event, we were required to complete an additional goodwill impairment test as of the date of the triggering event. We completed the additional goodwill impairment test and determined that the implied fair value of the reporting unit exceeds its carrying value as of the date of the triggering event. Accordingly, no impairment charge was recognized as of October 31, 2017.
During the three and nine months ended October 31, 2016, we recorded a $0.1 million loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive loss. This impairment was taken on an asset group classified as an asset held for sale on our consolidated balances sheet as of October 31, 2016, (as disclosed in Note 5,
“Consolidated Balances Sheet Detail”).
We also have direct investments in privately-held companies, over which we do not have significant influence of their operating and financial activities and account for under the cost-method of accounting. 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-temporary impairment has occurred, we write-down the investment to its fair value. Our ability to realize value from these investments depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them, we will not be able to obtain fair value for them.
During the three and nine months ended October 31, 2017, the Company did not recognize any impairment charges related to goodwill, intangible assets, long-lived assets or cost-method investments.
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, U.S. government agency notes and bonds and corporate bonds as of October 31, 2017 and January 31, 2017. All highly liquid investments with an original maturity of three months or less when purchased are considered to be 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 accretion of discounts to maturity are computed under the effective interest method and are included in other income (expenses), net, in our consolidated statements of operations and comprehensive loss. Interest on securities is recorded as earned and is also included in other income (expenses), net. Any realized gains or losses would be shown in the accompanying consolidated statements of operations and comprehensive loss in other income (expenses), net. We provide fair value measurement disclosures of available-for-sale securities in accordance with one of the three levels of fair value measurement mentioned above.
12
The following is a summary of cash, cash equivalents and available-for-sale securities, including the cost basis, aggregate fair value and gross unrealized gains and losses, for short- and long-term
marketable securities portfolio as of
October 31, 2017
and
January 31, 2017
:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
|
|
(Amounts in thousands)
|
|
October 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
23,605
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,605
|
|
Cash equivalents
|
|
|
3,549
|
|
|
|
1
|
|
|
|
—
|
|
|
|
3,550
|
|
Cash and cash equivalents
|
|
|
27,154
|
|
|
|
1
|
|
|
|
—
|
|
|
|
27,155
|
|
U.S. treasury notes and bonds - short-term
|
|
|
2,001
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
1,993
|
|
U.S. treasury notes and bonds - long-term
|
|
|
1,740
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
1,735
|
|
U.S. government agency issues - short-term
|
|
|
2,982
|
|
|
|
17
|
|
|
|
(2
|
)
|
|
|
2,997
|
|
U.S. government agency issues - long-term
|
|
|
1,003
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
993
|
|
Corporate bonds - long-term
|
|
|
1,761
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
1,757
|
|
Total cash, cash equivalents and marketable securities
|
|
$
|
36,641
|
|
|
$
|
18
|
|
|
$
|
(29
|
)
|
|
$
|
36,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 bonds - short-term
|
|
|
4,248
|
|
|
|
5
|
|
|
|
—
|
|
|
|
4,253
|
|
U.S. treasury notes and bonds - long-term
|
|
|
2,003
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
1,997
|
|
U.S. government agency issues - short-term
|
|
|
991
|
|
|
|
9
|
|
|
|
—
|
|
|
|
1,000
|
|
U.S. government agency issues - long-term
|
|
|
2,996
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
2,994
|
|
Total cash, cash equivalents and marketable securities
|
|
$
|
38,540
|
|
|
$
|
14
|
|
|
$
|
(8
|
)
|
|
$
|
38,546
|
|
The gross realized gains and losses on sale of available-for-sale securities as of October 31, 2017 and January 31, 2017 were immaterial. For purposes of determining gross realized gains and losses, the cost of securities is based on specific identification.
Contractual maturities of available-for-sale investments as of October 31, 2017 are as follows (amounts in thousands):
|
|
Estimated
|
|
|
|
Fair Value
|
|
Maturity of one year or less
|
|
$
|
4,990
|
|
Maturity between one and five years
|
|
|
4,485
|
|
Total
|
|
$
|
9,475
|
|
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.
The fair value of cash, cash equivalents, restricted cash and marketable securities at October 31, 2017 and January 31, 2017 was $36.6 million and $38.7 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.
13
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. The stock consideration was determined by dividing the total value of $2.7 million by the volume weighted average closing price of our common stock for the twenty trading days preceding the closing. DCC Labs is a developer of set-top and multiscreen device software. Of the total consideration, $0.5 million in cash and all the stock (681,278 shares) were initially held in escrow as security for the indemnification obligations of the former DCC Labs owners to SeaChange under the purchase agreement, with one-third of the stock in escrow to be released to the former DCC Labs owners annually on the anniversary date of the acquisition beginning on May 5, 2017 and ending May 5, 2019, and one-half of the cash in escrow to be released to the former DCC Labs owners on May 5, 2017 and May 5, 2018. On May 5, 2017, $0.3 million in cash and 227,090 shares of our common stock initially deposited with an Escrow Agent were disbursed to the sellers.
The acquisition of DCC Labs enables us to optimize the operations of our In-Home business, which develops home video gateway software including SeaChange’s Nucleus and NitroX products. In addition, the acquisition brings market-ready products, including an optimized television software stack for Europe’s 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 computer 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 was 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
|
|
Acquired 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 Company’s management.
14
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 only been included in our fiscal 2017 consolidated financial results for the period from the May 5, 2016 acquisition date through January 31, 2017. As a result, our consolidated financial results for the nine months ended October 31, 2016 does not include DCC Labs’ results for the period from February 1, 2016 to May 4, 2016. For that period, DCC Labs’ revenue was not significant and its operating loss was approximately $1.2 million.
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 fees – other, in our consolidated statements of operations and comprehensive loss for the period ended January 31, 2017.
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:
|
|
As of
|
|
|
|
October 31,
|
|
|
January 31,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
(Amounts in thousands)
|
|
Components and assemblies
|
|
$
|
506
|
|
|
$
|
500
|
|
Finished products
|
|
|
344
|
|
|
|
270
|
|
Total inventories, net
|
|
$
|
850
|
|
|
$
|
770
|
|
Property and equipment, net
Property and equipment, net consists of the following:
|
|
Estimated
|
|
|
As of
|
|
|
|
Useful
|
|
|
October 31,
|
|
|
January 31,
|
|
|
|
Life (Years)
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Land
|
|
|
|
|
|
$
|
2,780
|
|
|
$
|
2,780
|
|
Buildings
|
|
|
20
|
|
|
|
11,839
|
|
|
|
11,726
|
|
Office furniture and equipment
|
|
|
5
|
|
|
|
1,222
|
|
|
|
1,091
|
|
Computer equipment, software and demonstration equipment
|
|
|
3
|
|
|
|
16,428
|
|
|
|
18,194
|
|
Service and spare components
|
|
|
5
|
|
|
|
1,158
|
|
|
|
1,158
|
|
Leasehold improvements
|
|
1-7
|
|
|
|
1,081
|
|
|
|
1,064
|
|
|
|
|
|
|
|
|
34,508
|
|
|
|
36,013
|
|
Less - Accumulated depreciation and amortization
|
|
|
|
|
|
|
(24,377
|
)
|
|
|
(24,528
|
)
|
Total property and equipment, net
|
|
|
|
|
|
$
|
10,131
|
|
|
$
|
11,485
|
|
Depreciation and amortization expense on property and equipment, net was $0.6 million and $1.8 million for the three and nine months ended October 31, 2017 and $0.7 million and $2.3 million for the three and nine months ended October 31, 2016.
15
|
Loss on Impairment of Long-Lived Assets
|
During the third quarter of fiscal 2017, we began actively marketing our facility in Greenville, New Hampshire for sale and identified a potential buyer. Accordingly, we determined at the time that the sale of the asset group was probable by the end of the fourth quarter of fiscal 2017. We determined that the asset group met all the criteria of held for sale accounting and classified the asset group as held for sale on our consolidated balance sheets beginning in the third quarter of fiscal 2017. We originally placed the asset group for sale in August 2016 for $0.3 million, which was the net book value of the asset group at that time. To be more competitive in the real estate market in which the property is located, we reduced the selling price in September 2016 to $0.2 million. As a result, we recorded a loss on impairment of long-lived assets of $0.1 million in our consolidated statements of operations and comprehensive loss during the three and nine months ended October 31, 2016. Subsequently, in January 2017, after a potential buyer declined to purchase this facility, we determined that the sale of the 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 that 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 at January 31, 2017.
Other accrued expenses
Other accrued expenses consist of the following:
|
|
As of
|
|
|
|
October 31,
|
|
|
January 31,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
(Amounts in thousands)
|
|
Accrued compensation and commissions
|
|
$
|
1,880
|
|
|
$
|
1,799
|
|
Accrued bonuses
|
|
|
2,467
|
|
|
|
1,871
|
|
Accrued restructuring
|
|
|
850
|
|
|
|
1,023
|
|
Employee benefits
|
|
|
372
|
|
|
|
885
|
|
Taxes
|
|
|
3,850
|
|
|
|
919
|
|
Accrued other
|
|
|
3,369
|
|
|
|
3,431
|
|
Total other accrued expenses
|
|
$
|
12,788
|
|
|
$
|
9,928
|
|
6.
|
Goodwill and Intangible Assets
|
Goodwill
Goodwill represents the difference between the purchase price and the estimated fair value of identifiable assets acquired and liabilities assumed. We are required to perform impairment tests related to our goodwill annually, which we perform during the third quarter of each fiscal year, or when we identify certain triggering events or circumstances that would more likely than not reduce the estimated fair value of the goodwill of the Company below its carrying amount. At October 31, 2017 and January 31, 2017, we had goodwill of $24.5 million and $23.3 million, respectively. The change in the carrying amount of goodwill for the nine months ended October 31, 2017 is due to the impact of foreign currency translation adjustments related to goodwill balances that are recorded in currencies other than the U.S. dollar. The following table represents the changes in the carrying amount of goodwill for the nine months ended October 31, 2017 (amounts in thousands):
Balance as of February 1, 2017:
|
|
|
|
|
Goodwill, gross
|
|
$
|
62,566
|
|
Accumulated impairment losses
|
|
|
(39,279
|
)
|
Goodwill, net
|
|
|
23,287
|
|
Cumulative translation adjustment
|
|
|
1,219
|
|
Balance as of October 31, 2017:
|
|
|
|
|
Goodwill, gross
|
|
|
63,785
|
|
Accumulated impairment losses
|
|
|
(39,279
|
)
|
Goodwill, net
|
|
$
|
24,506
|
|
We are required to perform impairment tests related to our goodwill annually, which we perform during the third quarter of each fiscal year or sooner if an indicator of impairment occurs. In the third quarter of fiscal 2018, we finalized the “Step 1” analysis of our annual goodwill impairment test for fiscal 2018. Based on this analysis, we determined that fair value of our reporting unit exceeded its carrying value, which was $64.2 million at August 1, 2017. As a result, no impairment charge was required related to
16
the annual test. See
“Critical Accounting Policies and Significant Judgment and Estimates – Goodwill,”
in Part I, Item 2 of this Form 10-Q for more information.
During the third quarter of fiscal 2018, we determined that there was a significant decrease in fair value of the Corporate Headquarters (see Note 2,
“Significant Accounting Policies – Impairment of Assets,”
for more information). We considered this significant decrease in fair value a triggering event. As a result, we were required to complete an additional goodwill impairment test as of the date of the triggering event. We completed the additional goodwill impairment test and determined that the implied fair value of the reporting unit exceeds its carrying value as of the date of the triggering event. Accordingly, no impairment charge was recognized as of October 31, 2017
Other than the potential impairment indicator of goodwill mentioned above, we noted no other indicators that would require us to perform an impairment test in the fiscal third quarter ended October 31, 2017.
Intangible Assets
Intangible assets, net, consisted of the following at October 31, 2017 and January 31, 2017:
|
|
|
|
|
|
As of October 31, 2017
|
|
|
As of January 31, 2017
|
|
|
|
Weighted
average remaining life (Years)
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
|
(Amounts in thousands)
|
|
Finite-life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer contracts
|
|
|
2.3
|
|
|
$
|
30,982
|
|
|
$
|
(29,743
|
)
|
|
$
|
1,239
|
|
|
$
|
30,056
|
|
|
$
|
(28,019
|
)
|
|
$
|
2,037
|
|
Non-compete agreements
|
|
|
0.5
|
|
|
|
2,517
|
|
|
|
(2,509
|
)
|
|
|
8
|
|
|
|
2,374
|
|
|
|
(2,356
|
)
|
|
|
18
|
|
Completed technology
|
|
|
2.6
|
|
|
|
11,024
|
|
|
|
(10,697
|
)
|
|
|
327
|
|
|
|
10,496
|
|
|
|
(9,997
|
)
|
|
|
499
|
|
Trademarks, patents and other
|
|
|
2.5
|
|
|
|
7,159
|
|
|
|
(7,117
|
)
|
|
|
42
|
|
|
|
7,125
|
|
|
|
(7,076
|
)
|
|
|
49
|
|
Total finite-life intangible assets
|
|
|
2.4
|
|
|
$
|
51,682
|
|
|
$
|
(50,066
|
)
|
|
$
|
1,616
|
|
|
$
|
50,051
|
|
|
$
|
(47,448
|
)
|
|
$
|
2,603
|
|
As of October 31, 2017, the estimated future amortization expense for our finite-life intangible assets is as follows (amounts in thousands):
|
|
Estimated
|
|
|
|
Amortization
|
|
Fiscal Year Ended January 31,
|
|
Expense
|
|
2018 (for the remaining three months)
|
|
$
|
478
|
|
2019
|
|
|
873
|
|
2020
|
|
|
260
|
|
2021
|
|
|
5
|
|
2022
|
|
|
—
|
|
2023 and thereafter
|
|
|
—
|
|
Total
|
|
$
|
1,616
|
|
7.
|
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 into 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 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
17
of patent litigation claims. Management cannot reasonably estimate any potential losses, but these claims could result in material l
iability 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 enter into arrangements that include revenue for extended warranties beyond the standard duration, the revenue is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred.
8.
|
Severance and Other Restructuring Costs
|
Restructuring Costs
During the nine months ended October 31, 2017, we incurred restructuring charges of $3.3 million primarily from employee-related benefits for terminated employees and costs to close facilities.
The following table shows the activity in accrued restructuring reported as a component of other accrued expenses on the consolidated balance sheet as of October 31, 2017 (amounts in thousands):
|
|
Employee-Related
|
|
|
Closure of Leased
|
|
|
Other
|
|
|
|
|
|
|
|
Benefits
|
|
|
Facilities
|
|
|
Restructuring
|
|
|
Total
|
|
Accrual balance as of January 31, 2017
|
|
$
|
785
|
|
|
$
|
130
|
|
|
$
|
108
|
|
|
$
|
1,023
|
|
Restructuring charges incurred
|
|
|
2,937
|
|
|
|
89
|
|
|
|
262
|
|
|
|
3,288
|
|
Cash payments
|
|
|
(2,938
|
)
|
|
|
(228
|
)
|
|
|
(312
|
)
|
|
|
(3,478
|
)
|
Other charges
|
|
|
17
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
Accrual balance as of October 31, 2017
|
|
$
|
801
|
|
|
$
|
(9
|
)
|
|
$
|
58
|
|
|
$
|
850
|
|
During the third quarter of fiscal 2017, we implemented a restructuring program (“Restructuring Plan”) with the purpose of reducing costs and assisting in restoring SeaChange to profitability and positive cash flow. This program included measures intended to allow the Company to more efficiently operate in a leaner, more direct cost structure. These measures included reductions in workforce, consolidation of facilities, transfers of certain business processes to lower cost regions and reduction in third-party service costs. The total estimated restructuring costs associated with the Restructuring Plan are anticipated to be approximately $7.5 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 $3.2 million of restructuring expense in connection with this plan during the nine months ended October 31, 2017, which was primarily made up of employee-related costs. Since its implementation, we have recognized $6.3 million in restructuring charges related to the Restructuring Plan and we expect to incur any remaining charges by the end of fiscal 2018.
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 and a substantial reduction to our facility in Milpitas, California. We recorded $0.1 million of restructuring expense in connection with this action during the nine months ended October 31, 2017, which was primarily made up of facility and other costs not related to employees. We incurred charges totaling $2.0 million in severance and other restructuring costs from the second quarter of fiscal 2017 through the third quarter of fiscal 2018 related to the acquisition. Once we complete our integration plan, any further reduction in workforce may result in additional restructuring charges.
18
2011 Compensation and Incentive Plan
In July 2011, our stockholders approved the adoption of our 2011 Compensation and Incentive Plan (the “2011 Plan”). The 2011 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units (“RSUs”), deferred stock units (“DSUs”) and other equity based non-stock option awards as determined by the plan administrator to officers, employees, consultants, and directors of the Company.
On July 13, 2017, our stockholders approved an amendment to the 2011 Plan which increased the number of shares under the 2011 Plan by 4,000,000 shares and correspondingly increased the number of incentive stock options that can be authorized for issuance under the 2011 Plan.
We may satisfy awards upon the exercise of stock options or the vesting of stock units with newly issued shares or treasury shares. The Board of Directors is responsible for the administration of the 2011 Plan and determining the terms of each award, award exercise price, the number of shares for which each award is granted and the rate at which each award vests. In certain instances, the Board of Directors may elect to modify the terms of an award. As of October 31, 2017, there were 3,989,268 shares available for future grant under the 2011 Plan.
Option awards may be granted to employees at an exercise price per share of not less than 100% of the fair market value per common share on the date of the grant. Stock units may be granted to any officer, employee, director, or consultant at a purchase price per share as determined by the Board of Directors. Option awards granted under the 2011 Plan generally vest over a period of one to four years and expire ten years from the date of the grant.
In fiscal 2016, the Board of Directors developed a new Long-Term Incentive (“LTI”) Program under which the named executive officers and other key employees of the Company will receive long-term equity-based incentive awards, which are intended to align the interests of our named executive officers and other key employees with the long-term interests of our stockholders and to emphasize and reinforce our focus on team success. Long-term equity-based incentive compensation awards are made in the form of stock options, RSUs and performance stock units (“PSUs”) subject to vesting based in part on the extent to which employment continues for three years.
We have granted market-based options to certain officers concurrent with their appointment. These stock options have an exercise price equal to our closing stock price on the date of grant and will vest in approximately equal increments based upon the closing price of SeaChange’s common stock. We record the fair value of these stock options using the Monte Carlo simulation model, since the stock option vesting is variable depending on the closing price of our traded common stock. The model simulated the daily trading price of the market-based stock options expected terms to determine if the vesting conditions would be triggered during the term. Effective April 6, 2016, Ed Terino, who previously served as our Chief Operating Officer (“COO”), was appointed Chief Executive Officer (“CEO”) of SeaChange and was granted 600,000 market-based options, bringing the total of his market-based options, when added to the 200,000 market-based options he received upon hire as COO in June 2015, to 800,000 market-based options. The fair value of these 800,000 stock options was estimated to be $2.1 million. As of October 31, 2017, $0.4 million remained unamortized on these market-based stock options, which will be expensed over the next 1.7 years, the remaining weighted average amortization period.
2015 Employee Stock Purchase Plan
In July 2015, we adopted the 2015 Employee Stock Purchase Plan (the “ESPP”). The purpose of the ESPP is to provide eligible employees, including executive officers of SeaChange, with the opportunity to purchase shares of our common stock at a discount through accumulated payroll deductions of up to 15%, but not less than one percent of their eligible compensation, subject to any plan limitations. Offering periods typically commence on October 1
st
and April 1
st
and end on March 31
st
and September 30
th
with the last trading day being the exercise date for the offering period. On each purchase date, eligible employees will purchase our stock at a price per share equal to 85% of the closing price of our common stock on the exercise date, but no less than par value. The maximum number of shares of our common stock which will be authorized for sale under the ESPP is 1,150,000 shares. Stock-based compensation expense related to the ESPP was not significant for the three and nine months ended October 31, 2017.
19
10.
|
Accumulated Other Comprehensive Loss
|
The following shows the changes in the components of accumulated other comprehensive loss for the nine months ended October 31, 2017:
|
|
|
|
|
|
Changes in
|
|
|
|
|
|
|
|
Foreign
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
Currency
|
|
|
Available-
|
|
|
|
|
|
|
|
Translation
|
|
|
for-Sale
|
|
|
|
|
|
|
|
Adjustment
|
|
|
Investments
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
Balance at January 31, 2017
|
|
$
|
(5,377
|
)
|
|
$
|
6
|
|
|
$
|
(5,371
|
)
|
Other comprehensive loss
|
|
|
(76
|
)
|
|
|
(17
|
)
|
|
|
(93
|
)
|
Balance at October 31, 2017
|
|
$
|
(5,453
|
)
|
|
$
|
(11
|
)
|
|
$
|
(5,464
|
)
|
Unrealized holding gains (losses) on securities available-for-sale are not material for the periods presented.
Comprehensive loss consists of our net loss and other comprehensive loss, which includes foreign currency translation adjustments and changes in unrealized gains and losses on marketable securities available-for-sale. Except in unusual circumstances, we do not recognize tax effects on foreign currency translation adjustments because they are not expected to result in future taxable income or deductions.
11.
|
Segment Information, Significant Customers and Geographic Information
|
Segment Information
Our operations are organized into one reportable segment. Operating segments are defined as components of an enterprise evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assess performance. Our reportable segment was determined based upon the nature of the products offered to customers, the market characteristics of each operating segment and the Company’s management structure.
Significant Customers
One customer accounted for 10% or more of our total revenues for the three and nine months ended October 31, 2017 and 2016 as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Customer A
|
|
|
53%
|
|
|
|
33%
|
|
|
|
38%
|
|
|
|
31%
|
|
Geographic Information
The following table summarizes revenues by customers’ geographic locations for the periods presented:
|
|
Three Months Ended October 31,
|
|
|
Nine Months Ended October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Revenues by customers’ geographic locations:
|
|
(Amounts in thousands, except percentages)
|
|
North America (1)
|
|
$
|
6,931
|
|
|
|
29
|
%
|
|
$
|
9,116
|
|
|
|
45
|
%
|
|
$
|
23,577
|
|
|
|
41
|
%
|
|
$
|
28,306
|
|
|
|
47
|
%
|
Europe and Middle East
|
|
|
14,560
|
|
|
|
62
|
%
|
|
|
8,518
|
|
|
|
43
|
%
|
|
|
28,203
|
|
|
|
49
|
%
|
|
|
26,098
|
|
|
|
44
|
%
|
Latin America
|
|
|
1,545
|
|
|
|
7
|
%
|
|
|
1,334
|
|
|
|
7
|
%
|
|
|
4,408
|
|
|
|
8
|
%
|
|
|
3,785
|
|
|
|
6
|
%
|
Asia Pacific
|
|
|
394
|
|
|
|
2
|
%
|
|
|
993
|
|
|
|
5
|
%
|
|
|
1,134
|
|
|
|
2
|
%
|
|
|
1,794
|
|
|
|
3
|
%
|
Total
|
|
$
|
23,430
|
|
|
|
|
|
|
$
|
19,961
|
|
|
|
|
|
|
$
|
57,322
|
|
|
|
|
|
|
$
|
59,983
|
|
|
|
|
|
(1)
|
Includes total revenues for the United States for the periods shown as follows (amounts in thousands, except percentage data):
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
U.S. Revenue
|
|
$
|
6,105
|
|
|
$
|
6,905
|
|
|
$
|
20,180
|
|
|
$
|
22,040
|
|
% of total revenues
|
|
|
26.1
|
%
|
|
|
34.6
|
%
|
|
|
35.2
|
%
|
|
|
36.7
|
%
|
20
We recorded an income tax provision of $1.2 million and an income tax benefit of $(0.4) million for the three months ended October 31, 2017 and 2016, respectively. The tax provision for the nine months ended October 31, 2017 includes a $0.6 million tax benefit related to the reversal of tax reserves for uncertain tax positions due to the expiration of the Irish statute of limitations and $1.8 million of tax expense that is largely attributable to a shift in the jurisdictions where income is earned. We recorded a tax provision of $1.5 million and $14.4 million, respectively, for the nine months ended October 31, 2017 and 2016. In the second quarter of fiscal 2017, we recorded a charge of $14.7 million related to the change in assertion regarding the undistributed foreign earnings of certain of our foreign subsidiaries. Our effective tax rate in fiscal 2018 and in future periods may fluctuate on a quarterly basis as a result of changes in our jurisdictional forecasts where losses cannot be benefitted due to the existence of valuation allowances on our deferred tax assets, changes in actual results versus our estimates, or changes in tax laws, regulations, accounting principles, or interpretations thereof.
The Company reviews all available evidence to evaluate the recovery of deferred tax assets, including the recent history of losses in all tax jurisdictions, as well as its ability to generate income in future periods. As of October 31, 2017, due to the uncertainty related to the ultimate use of certain deferred income tax assets, the Company has recorded a valuation allowance on certain of its deferred assets.
We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign jurisdictions. We have closed out an audit with the Internal Revenue Service (“IRS”) through fiscal 2013. We are no longer subject to U.S. federal examinations before fiscal 2015. However, the taxing authorities will still have the ability to review the propriety of certain tax attributes created in closed years if such tax attributes are utilized in an open tax year, such as our federal research and development credit carryovers.
Net loss per share is presented in accordance with authoritative guidance which requires the presentation of “basic” and “diluted” earnings per share. Basic earnings (loss) per share is computed by dividing earnings (loss) 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 shares of potential dilutive shares of common stock, such as stock awards, calculated using the treasury stock method. Basic and diluted net loss per share was the same for all the periods presented as the impact of potential dilutive shares outstanding was anti-dilutive.
The following table sets forth our computation of basic and diluted net loss per common share (amounts in thousands, except per share amounts):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(220
|
)
|
|
$
|
(8,082
|
)
|
|
$
|
(7,120
|
)
|
|
$
|
(43,873
|
)
|
Weighted average shares used in computing net loss per
share - basic and diluted
|
|
|
35,479
|
|
|
|
35,186
|
|
|
|
35,381
|
|
|
|
34,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(1.26
|
)
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(1.26
|
)
|
21
The number of common shares used in the computation of diluted net loss per share for the three
and
nine
months ended
October 31, 2017
and
2016
does not include the effect of the following potentially outstanding common shares because the effect would have been anti-dilutive (amounts in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
|
1,588
|
|
|
|
1,756
|
|
|
|
1,676
|
|
|
|
1,443
|
|
Restricted stock units
|
|
|
483
|
|
|
|
514
|
|
|
|
349
|
|
|
|
472
|
|
Deferred stock units
|
|
|
42
|
|
|
|
28
|
|
|
|
88
|
|
|
|
55
|
|
Performance stock units
|
|
|
339
|
|
|
|
331
|
|
|
|
494
|
|
|
|
315
|
|
Total
|
|
|
2,452
|
|
|
|
2,629
|
|
|
|
2,607
|
|
|
|
2,285
|
|
14.
|
Recent Accounting Standard Updates
|
We consider the applicability and impact of all ASUs on our consolidated financial statements. 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. Recently issued ASUs which we feel may be applicable to us are as follows:
Recently Issued Accounting Standard Updates – Not Yet Adopted
Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU. 2014-09, “
Revenue from Contracts with Customers (Topic 606).”
ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies using International Financial Reporting Standards and U.S. GAAP. The core principle requires entities to recognize revenue in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration an entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB voted to approve a one year deferral, making the standard effective for public entities for annual and interim periods beginning after December 15, 2017.
In March 2016, the FASB issued ASU 2016-08, “
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
.” The purpose of ASU 2016-08 is to clarify the guidance on principal versus agent considerations. It includes indicators that help to determine whether an entity controls the specified good or service before it is transferred to the customer and to assist in determining when the entity satisfied the performance obligation and as such, whether to recognize a gross or a net amount of consideration in their consolidated statement of operations.
In April 2016, the FASB issued ASU 2016-10, “
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.”
ASU 2016-10 clarifies that entities are not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract. ASU 2016-10 also addresses how to determine whether promised goods or services are separately identifiable and permits entities to make a policy election to treat shipping and handling costs as fulfillment activities. In addition, it clarifies key provisions in Topic 606 related to licensing.
In May 2016, the FASB issued ASU 2016-11, “
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815).”
ASU 2016-11 rescinds previous SEC comments that were codified in Topic 605, Topic 932 and Topic 815. Upon adoption of Topic 606, certain SEC comments including guidance on accounting for shipping and handling fees and costs and consideration given by a vendor to a customer should not be relied upon.
In May 2016, the FASB also issued ASU 2016-12, “
Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients
.” ASU 2016-12 provides clarity around collectability, presentation of sales taxes, non-cash consideration, contract modifications at transition and completed contracts at transition. ASU 2016-12 also includes a technical correction within Topic 606 related to required disclosures if the guidance is applied retrospectively upon adoption.
In December 2016, the FASB issued ASU 2016-20, “
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
.” ASU 2016-20 allows entities not to make quantitative disclosures about remaining performance obligations in certain cases and requires entities that use any of the optional exemptions to expand their qualitative disclosures. ASU 2016-20 also clarifies other areas of the new revenue standard, including disclosure requirements for prior period performance obligations, impairment guidance for contract costs and the interaction of impairment guidance in ASC 340-40 with other guidance elsewhere in the Codification.
The Company will adopt Topic 606 effective February 1, 2018 under the modified retrospective method and will only apply this method to contracts that are not completed as of the date of adoption. The modified retrospective method will result in a cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings at the date of
22
initial application for any open contracts as of the adoption date. The Company has established an implementation team to assist with its assessment of the impact of the new revenue guidance on it
s operations, consolidated financial statements and related disclosures. In addition, the Company has made investments in systems to enable timely and accurate reporting under the new standard. To date, the Company’s assessment has included (1) utilizing q
uestionnaires to assist with the identification of revenue streams, (2) performing sample contract analyses for each revenue stream identified, (3) assessing the noted differences in recognition and measurement that may result from adopting this new standa
rd, (4) performing detailed analyses of contracts with larger customers, (5) test
ing
transactions for consistency with contract provisions that affect revenue recognition
, and (6) developing a standalone selling price for all performance obligations.
Based
on the results of the
assessment
, the Company currently believes the most significant potential changes to
be
in the identification of performance obligations, the timing of revenue recognition and
the allocation of transaction price to
the
performance ob
ligations. As part of the procedures completed by the Company
,
incremental costs to obtain a contract and costs incurred in fulfilling a contract
have also been assessed
. Based on preliminary results of the
assessment
, which is still in process, the Compan
y currently believes that the most significant potential change
s
to be accounting for commissions
associated with the initial year of contract, as
incremental costs are expected to be capitalized
as a contract asset
and
they
will be amortized over
the esti
mated
customer life,
which could extend beyond the contract
life
.
The Company also anticipates changes to the consolidated balance sheet related to accounts receivable, contract assets, and contract liabilities, as well as, significant changes to its disc
losures
,
to comply with the new disclosure requirements under Topic 606. The Company is continuing to design the necessary changes to its business processes, systems and controls to
support recognition and disclosure under the new standard. Further, the Co
mpany is continuing to assess what incremental disaggregated revenue and other disclosures will be required in its consolidated financial statements, which the Company believes will be significant.
Based on the procedures performed, the Company expects the following impacts:
|
•
|
Currently, the Company recognizes revenue from perpetual licenses with extended payment terms over the term of the agreement as payments are received, provided all other criteria for revenue recognition have been met, and any corresponding maintenance over the term of the agreement. The adoption of ASC 606 will result in revenue for performance obligations being recognized as they are satisfied. Therefore, revenue from perpetual license performance obligations with extended payment terms will be recognized when control is transferred to the customer. Any unrecognized license revenue from the arrangement, included in deferred revenue at January 31, 2018, will not be recognized in revenue in future periods but as a cumulative adjustment to retained earnings. Further, revenue from the maintenance performance obligations is expected to be recognized on a straight-line basis over the contractual term. Due to the revenue from perpetual licenses with extended payment terms being recognized prior to amounts being billed to the customer, the Company expects to recognize a net contract asset on the balance sheet.
|
|
•
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Currently, the Company allocates revenue to licenses under the residual method when it has Vendor Specific Objective Evidence (“VSOE”) for the remaining undelivered elements, which allocates any future credits or significant discounts entirely to the license. The adoption of ASC 606 will result in future credits, significant discounts, and material rights under ASC 606, being allocated to all performance obligations based upon their relative selling price. Under ASC 606, additional license revenue from the reallocation of such arrangement considerations will be recognized when control is transferred to the customer, which is generally upon delivery of the license.
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Currently, the Company does not have VSOE for professional services and maintenance in certain geographical areas, which results in revenue being deferred in such instances until such time as VSOE exists for all undelivered elements or recognized ratably over the longest performance period. The adoption of ASC 606 eliminates the requirement for VSOE and replaces it with the concept of a standalone selling price. Once the transaction price is allocated to each of the performance obligations, the Company can recognize revenue as the performance obligations are delivered, either at a point in time or over time. Under ASC 606, license revenue will be recognized when control is transferred to the customer and professional services revenue will be recognized over time based on labor hours expended. This will result in the acceleration of professional services revenue when compared to the current practice of ratable recognition for professional services when there is a lack of VSOE.
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Sales commissions and other third-party acquisition costs resulting directly from securing contracts with customers are currently expensed when incurred. ASC 606 will require these costs to be recognized as an asset when incurred and to be expensed over the associated contract term. However, because the sales commission paid on the maintenance renewals is not commensurate with the original deal, ASC 606 requires that these acquisition costs be expensed over the customer life. The Company expects this change to impact all arrangements that included implicit or explicit maintenance contracts.
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ASC 606 provides additional accounting guidance for contract modifications whereby changes must be accounted for either as a retrospective change (creating either a catch up or deferral of past revenues), prospectively with a reallocation
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of revenues amongst identified performance obligations, or prospectively as separate contracts which will not require any reallocation. This may result in a difference in the timing of t
he recognition of revenue as compared to how contract modifications are recognized currently.
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There will be a corresponding effect on tax liabilities in relation to all of the above impacts.
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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.
Recently Issued Accounting Standard Updates – Adopted During the Period
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. The Company early adopted this standard on August 1, 2017. The adoption of this standard did not have any effect on our consolidated financial statements because the cash receipts and cash payments described in ASU 2016-15 are not applicable to the Company currently or retrospectively.
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 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. The Company early adopted the standard on August 1, 2017 and retrospectively applied the amendment. Other than the change in presentation of restricted cash within the consolidated statements of cash flows, the adoption of this standard did not have a material impact on our consolidated financial statements.
Intangibles-Goodwill and Other
In January 2017, the FASB issued ASU 2017-04,
“Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,”
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 unit’s 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. The Company early adopted ASU 2017-04 effective August 1, 2017 in conjunction with its annual goodwill impairment testing. Because the results of “Step 1” of the impairment test indicated that the fair value of the Company’s goodwill exceeded its carrying amount, the adoption of ASU 2017-04 did not change the impairment testing process for the fiscal 2018 annual goodwill impairment test. See Note 6,
“Goodwill and Intangible Assets,”
for more information on our annual goodwill impairment test.
Stock Compensation
In May 2017, the FASB issued ASU 2017-09,
“Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,
which provides guidance about which changes to the terms or conditions of a share-based payment awards require an entity to apply modification accounting under ASC 718. The guidance is effective for us beginning in the first quarter of fiscal 2019 and early adoption is permitted. The Company early adopted ASU 2017-09 in the fiscal quarter ended October 31, 2017. The implementation of this standard had no impact on the Company’s consolidated financial statements.
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