Quarterly Report (10-q)

Date : 06/07/2019 @ 10:06PM
Source : Edgar (US Regulatory)
Stock : Seachange International, Inc. (SEAC)
Quote : 1.7  0.01 (0.59%) @ 10:14PM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended April 30, 2019

OR

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

For the transition period from                      to                     

Commission File Number: 001-38828

 

SEACHANGE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

04-3197974

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

 

50 Nagog Park, Acton, MA

 

01720

Address of Principal Executive Offices

 

Zip Code

(978) 897-0100

 

Registrant’s Telephone Number, Including Area Code

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 Par Value

SEAC

The Nasdaq Global Select Market

Series A Participating Preferred Stock Purchase Rights

SEAC

The Nasdaq Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES      NO  

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    YES       NO  

 

The number of shares outstanding of the registrant’s Common Stock on May 31, 2019 was 36,607,461.

 


SEACHANGE INTERNATIONAL, INC.

Table of Contents

 

 

 

 

 

 


PART I – FINANC IAL INFORMATION

ITEM 1.

Financial Statements

SEACHANGE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands, except share data)

 

 

 

April 30,

 

 

January 31,

 

 

 

2019

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,697

 

 

$

20,317

 

Marketable securities

 

 

3,282

 

 

 

4,020

 

Accounts receivable, net of allowance for doubtful accounts of $628 and

   $577 at April 30, 2019 and January 31, 2019, respectively

 

 

9,921

 

 

 

19,267

 

Unbilled receivables

 

 

5,961

 

 

 

5,448

 

Inventory

 

 

758

 

 

 

924

 

Prepaid expenses and other current assets

 

 

6,660

 

 

 

6,033

 

Total current assets

 

 

41,279

 

 

 

56,009

 

Property, plant and equipment, net

 

 

6,979

 

 

 

7,192

 

Operating lease right-of-use assets

 

 

1,964

 

 

 

 

Marketable securities, long-term

 

 

6,362

 

 

 

6,339

 

Intangible assets, net

 

 

3,287

 

 

 

 

Goodwill

 

 

9,812

 

 

 

8,753

 

Other assets

 

 

614

 

 

 

450

 

Total assets

 

$

70,297

 

 

$

78,743

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,565

 

 

$

4,503

 

Accrued expenses

 

 

8,626

 

 

 

7,762

 

Deferred revenue

 

 

7,804

 

 

 

8,104

 

Total current liabilities

 

 

19,995

 

 

 

20,369

 

Deferred revenue, long-term

 

 

2,114

 

 

 

2,642

 

Operating lease liabilities

 

 

1,255

 

 

 

 

Taxes payable, long-term

 

 

420

 

 

 

429

 

Deferred tax liabilities, long-term

 

 

571

 

 

 

203

 

Total liabilities

 

 

24,355

 

 

 

23,643

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 100,000,000 shares authorized at

   April 30, 2019 and January 31, 2019; 36,553,025 shares issued and

   36,512,535 shares outstanding at April 30, 2019, 35,946,100 shares

   issued and 35,905,610 outstanding at January 31, 2019

 

 

365

 

 

 

359

 

Additional paid-in capital

 

 

242,885

 

 

 

242,442

 

Treasury stock, at cost; 40,490 shares at April 30, 2019 and

   January 31, 2019

 

 

(5

)

 

 

(5

)

Accumulated other comprehensive loss

 

 

(2,151

)

 

 

(3,393

)

Accumulated deficit

 

 

(195,152

)

 

 

(184,303

)

Total stockholders' equity

 

 

45,942

 

 

 

55,100

 

Total liabilities and stockholders' equity

 

$

70,297

 

 

$

78,743

 

 

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

 

2


SEACHANGE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited, amounts in thousands, except per share data)

 

 

 

For the Three Months Ended April 30,

 

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

1,179

 

 

$

3,091

 

Service

 

 

7,306

 

 

 

11,844

 

Total revenue

 

 

8,485

 

 

 

14,935

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

 

909

 

 

 

326

 

Service

 

 

4,668

 

 

 

5,703

 

Total cost of revenue

 

 

5,577

 

 

 

6,029

 

Gross profit

 

 

2,908

 

 

 

8,906

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

4,252

 

 

 

5,729

 

Selling and marketing

 

 

2,852

 

 

 

3,667

 

General and administrative

 

 

4,249

 

 

 

4,572

 

Severance and restructuring costs

 

 

211

 

 

 

54

 

Total operating expenses

 

 

11,564

 

 

 

14,022

 

Loss from operations

 

 

(8,656

)

 

 

(5,116

)

Other expense, net

 

 

(1,791

)

 

 

(849

)

Loss from operations before income taxes

 

 

(10,447

)

 

 

(5,965

)

Income tax expense (benefit)

 

 

402

 

 

 

(494

)

Net loss

 

$

(10,849

)

 

$

(5,471

)

Net loss per share, basic and diluted

 

$

(0.30

)

 

$

(0.15

)

Weighted average common shares outstanding, basic and diluted

 

 

36,461

 

 

 

35,608

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,849

)

 

$

(5,471

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

1,207

 

 

 

575

 

Unrealized gains (losses) on marketable securities

 

 

35

 

 

 

(29

)

Total other comprehensive income

 

 

1,242

 

 

 

546

 

Comprehensive loss

 

$

(9,607

)

 

$

(4,925

)

 

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

3


SEACHANGE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, amounts in thousands except share data)

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Number of

Shares

 

 

Par Value

 

 

Paid-in

Capital

 

 

Treasury

Stock

 

 

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Stockholders'

Equity

 

Balances at January 31, 2019

 

 

35,946,100

 

 

$

359

 

 

 

242,442

 

 

$

(5

)

 

$

(3,393

)

 

$

(184,303

)

 

$

55,100

 

Issuance of common stock pursuant to

   acquisition of Xstream

 

 

541,738

 

 

 

5

 

 

 

869

 

 

 

 

 

 

 

 

 

 

 

 

874

 

Issuance of common stock pursuant to

   vesting of restricted stock units

 

 

57,368

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock pursuant to

   ESPP purchases

 

 

7,819

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

9

 

Stock-based compensation credit

 

 

 

 

 

 

 

 

(434

)

 

 

 

 

 

 

 

 

 

 

 

(434

)

Unrealized gains on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35

 

 

 

 

 

 

35

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,207

 

 

 

 

 

 

1,207

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,849

)

 

 

(10,849

)

Balances at April 30, 2019

 

 

36,553,025

 

 

$

365

 

 

$

242,885

 

 

$

(5

)

 

$

(2,151

)

 

$

(195,152

)

 

$

45,942

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Number of

Shares

 

 

Par Value

 

 

Paid-in

Capital

 

 

Treasury

Stock

 

 

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Stockholders'

Equity

 

Balances at January 31, 2018

 

 

35,634,984

 

 

$

356

 

 

 

239,423

 

 

$

(5

)

 

 

(5,434

)

 

$

(148,620

)

 

$

85,720

 

Adjustment resulting from the adoption

   of ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,319

 

 

 

2,319

 

Issuance of common stock pursuant to

   exercise of stock options

 

 

5,875

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

16

 

Issuance of common stock pursuant to

   vesting of restricted stock units

 

 

8,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock pursuant to

   ESPP purchases

 

 

9,421

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

21

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

879

 

 

 

 

 

 

 

 

 

 

 

 

879

 

Unrealized losses on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29

)

 

 

 

 

 

(29

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

575

 

 

 

 

 

 

575

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,471

)

 

 

(5,471

)

Balances at April 30, 2018

 

 

35,658,636

 

 

$

356

 

 

$

240,339

 

 

$

(5

)

 

$

(4,888

)

 

$

(151,772

)

 

$

84,030

 

 

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

4


SEACHANGE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

 

 

 

For the Three Months Ended April 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,849

)

 

$

(5,471

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

550

 

 

 

787

 

Provision for bad debts

 

 

98

 

 

 

 

Stock-based compensation (credit) expense

 

 

(434

)

 

 

879

 

Deferred income taxes

 

 

368

 

 

 

 

Unrealized foreign currency transaction gain

 

 

1,207

 

 

 

575

 

Other

 

 

42

 

 

 

(7

)

Changes in operating assets and liabilities, including impact of

   acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

9,870

 

 

 

10,449

 

Unbilled receivables

 

 

(491

)

 

 

(3,571

)

Inventory

 

 

166

 

 

 

(80

)

Prepaid expenses and other current assets and other assets

 

 

(355

)

 

 

224

 

Accounts payable

 

 

(1,591

)

 

 

(576

)

Accrued expenses and other liabilities

 

 

(438

)

 

 

(6,139

)

Deferred revenue

 

 

(828

)

 

 

(2,778

)

Other operating activities

 

 

 

 

 

2,356

 

Net cash used in operating activities

 

 

(2,685

)

 

 

(3,352

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(50

)

 

 

(113

)

Cash paid for acquisitions, net

 

 

(3,838

)

 

 

 

Purchases of marketable securities

 

 

(6,231

)

 

 

(3,830

)

Proceeds from sales and maturities of marketable securities

 

 

6,946

 

 

 

2,009

 

Net cash used in investing activities

 

 

(3,173

)

 

 

(1,934

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

9

 

 

 

37

 

Other financing activities

 

 

 

 

 

(9

)

Net cash provided by financing activities

 

 

9

 

 

 

28

 

Effect of exchange rate on cash and cash equivalents

 

 

229

 

 

 

453

 

Net decrease in cash and cash equivalents

 

 

(5,620

)

 

 

(4,805

)

Cash and cash equivalents at beginning of period

 

 

20,317

 

 

 

43,661

 

Cash and cash equivalents at end of period

 

$

14,697

 

 

$

38,856

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Income taxes paid

 

$

17

 

 

$

182

 

Non-cash activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable

 

$

19

 

 

$

 

Fair value of common stock issued in acquisition

 

$

874

 

 

$

 

 

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

 

5


SEACHANGE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

Nature of Business and Basis of Presentation

SeaChange International, Inc., a Delaware corporation, was founded on July 9, 1993. We are an industry leader in the delivery of multiscreen, advertising and premium over-the-top (“OTT”) video management solutions.  Our software products and services are designed to empower video providers to create, manage and monetize the increasingly personalized, highly engaging experiences that viewers demand.

Liquidity

We continue to realize the savings related to our restructuring activities. During fiscal 2019, we made significant reductions to our headcount as part of our ongoing restructuring effort from which we expect to generate annualized savings of more than $6 million. These measures are important steps in restoring us to profitability and positive cash flow. We believe that existing cash and investments and cash expected to be provided by future operating results,  augmented by the plans highlighted below (see Note 9), are adequate to satisfy our working capital, capital expenditure requirements and other contractual obligations for at least the next 12 months.

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.

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.

2.

Significant Accounting Policies

Use of Estimates

The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities.  Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, those related to revenue recognition, allowance for doubtful accounts, goodwill and intangible assets, right-of-use operating leases, impairment of long-lived assets, accounting for income taxes, and the valuation of stock-based awards.  We base our estimates on historical experience, known trends and other market-specific or relevant factors that are believed to be reasonable under the circumstances.  On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known.  Actual results may differ from those estimates or assumptions.

Concentration of Credit Risk and of Significant Customers

Financial instruments which potentially expose us to concentrations of credit risk include cash and cash equivalents, marketable securities and accounts receivable. We have cash investment policies which, among other things, limit investments to investment-grade securities. We restrict our cash equivalents and 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.

We sell our software products and services worldwide primarily to service providers, consisting of operators, telecommunications companies, satellite operators and broadcasters. One customer accounted for 17% of total revenue in the first quarter of fiscal 2020.  Two customers accounted for 19% and 10%, respectively, of total revenue in the first quarter of fiscal 2019.  Two customers accounted for 25% and 15%, respectively, of the accounts receivable balance as of April 30, 2019. Two customers accounted for 44% and 15%, respectively, of the accounts receivable balance as of January 31, 2019.

6


Marketable Securities

Our investments, consisting of debt securities, are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value determined to be other than temporary are based on the specific identification method and are included as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss.

We evaluate our investments with unrealized losses for other-than-temporary impairment. When assessing investments for other-than-temporary declines in value, we consider such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, our ability and intent to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value and market conditions in general. If any adjustment to fair value reflects a decline in the value of the investment that we consider to be “other than temporary,” we reduce the investment to fair value through a charge to the statement of operations and comprehensive loss. No such adjustments were necessary during the periods presented.

Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 

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

 

Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

Our cash equivalents and marketable securities are carried at fair value determined according to the fair value hierarchy described above (see Note 3). The carrying values of our accounts and other receivables, unbilled receivables, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities.

Goodwill and Acquired Intangible Assets

We record goodwill when consideration paid in a business acquisition exceeds the value of the net assets acquired. Our estimates of fair value are based upon assumptions believed to be reasonable at that time but that are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events or circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results.  Goodwill is not amortized, but rather is tested for impairment annually in our third quarter beginning August 1 st of each year, or more frequently if facts and circumstances warrant a review, such as the ones mentioned in impairments of long-lived assets below . We have determined that there is a single reporting unit for the purpose of conducting this goodwill impairment assessment. We assess both the existence of potential impairment and the amount of impairment loss by comparing the fair value of the reporting unit with its carrying amount, including goodwill.   Through April 30, 2019, we have recorded accumulated goodwill impairment charges of $54.8 million (see Note 6).

Intangible assets are recorded at their estimated fair values at the date of acquisition. We amortize acquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.

7


Impairment of Long-Lived Assets

Long-lived assets primarily consist of property, plant and equipment and intangible assets with finite lives. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. Recoverability of long-lived assets or groups of assets is assessed based on a comparison of the carrying amount to the estimated future undiscounted cash flows. If estimated future undiscounted net cash flows are less than the carrying amount, the asset is considered impaired and expense is recorded at an amount required to reduce the carrying amount to fair value. Determining the fair value of long-lived assets includes significant judgment by management, and different judgments could yield different results.

We assess the useful lives and possible impairment of existing recognized long-lived assets whenever events or changes in circumstances occur that indicate that it is more likely than not that an impairment has occurred. We test long-lived assets for impairment by comparing the carrying amount to the sum of the net undiscounted cash flows expected to be generated by the asset whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of the asset exceeds its net undiscounted cash flows, then an impairment loss is recognized for the amount by which the carrying amount exceeds its fair value. We use a discounted cash flow approach or other methods, if appropriate, to assess fair value. Factors considered important which could trigger a review include:

 

significant underperformance relative to historical or projected future operating results;

 

significant changes in the manner of use of the acquired assets or the strategy for our overall business;

 

identification of other impaired assets within a reporting unit;

 

significant negative industry or economic trends;

 

a significant decline in our stock price for a sustained period; and

 

a decline in our market capitalization relative to net book value.

Determining whether a triggering event has occurred involves significant judgment. (see Note 6).

Revenue Recognition

Our revenue is derived from sales of hardware, software licenses, professional services, and maintenance fees related to the hardware and our software licenses.

Our contracts often contain multiple performance obligations. For contracts with multiple performance obligations, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. If the transaction price contains discounts or we expect to provide future price concessions, these elements are considered when determining the transaction price prior to allocation. Variable fees within the transaction price are estimated and recognized as revenue when we satisfy our performance obligations to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. If the contract grants the client the option to acquire additional products or services, we assess whether or not any discount on the products and services is in excess of levels normally available to similar clients and, if so, we account for that discount as an additional performance obligation.

Hardware

We have concluded that hardware is either (1) a distinct performance obligation as the client can benefit from the product on its own or (2) a combined performance obligation with software licenses. This conclusion is dependent on the nature of the promise to the customer. In either scenario, hardware revenue is typically recognized at a point in time when control is transferred to the client, which is defined as the point in time when the client can use and benefit from the hardware. In situations where the hardware is distinct, it is delivered before services are provided and is functional without services, therefore the point in time when control is transferred is upon delivery or acceptance by the customer. When hardware and software are combined, we have determined standalone selling price for hardware utilizing the relative allocation method based on observable evidence.

8


Software licenses

We have concluded that our software licenses are either (1) a distinct performance obligation as the client can benefit from the software on its own or (2) a combined performance obligation with hardware, depending on the nature of the promise to the customer. In either scenario, software license revenue is typically recognized at a point in time when control is transferred to the client, which is defined as the point in time when the client can use and benefit from the license. The software license is delivered before related services are provided and is functional without services, updates, and technical support. Our license arrangements generally contain multiple performance obligations, including hardware, installation services, training, and maintenance. We have determined standalone selling price for software utilizing the relative allocation method based on observable evidence.

Maintenance

Maintenance revenue, which is included in services revenue in our consolidated statements of operations and comprehensive loss, includes revenue from client support and related professional services. Client support includes software upgrades on a when and-if available basis, telephone support, bug fixes or patches and general hardware maintenance support. Maintenance is priced as a percentage of the list price of the related software license and hardware. We determined the standalone selling price of maintenance based on this pricing relationship and observable data from standalone sales of maintenance.

We have identified three separate distinct performance obligations of maintenance:

 

Software upgrades and updates;

 

Technical support; and

 

Hardware support.

These performance obligations are distinct within the contract and, although they are not sold separately, the components are not essential to the functionality of the other components. Each of the performance obligations included in maintenance revenue is a stand ready obligation that is recognized ratably over the passage of the contractual term.

Services

Our services revenue is comprised of software license implementation services, engineering services, training and reimbursable expenses. We have concluded that services are distinct performance obligations, with the exception of engineering services. Engineering services may be provided on a standalone basis, or bundled with a license, when we are providing custom development.

The standalone selling price for services in time and materials contracts is determined by observable prices in standalone services arrangements and recognized as revenue as the services are performed based on an input measure of hours incurred to total estimated hours.

We estimate the standalone selling price for fixed price services based on estimated hours adjusted for historical experience, at time and material rates charged in standalone services arrangements. Revenue for fixed price services is recognized over time as the services are provided based on an input measure of hours incurred to total estimated hours.

Contract modifications

We occasionally enter into amendments to previously executed contracts that constitute contract modifications. We assess each of these contract modifications to determine:

 

If the additional products and services are distinct from the product and services in the original arrangement; and

 

If the amount of consideration expected for the added products and services reflects the standalone selling price of those products and services.

 

A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both criteria is considered a change to the original contract and is accounted for on either a prospective basis as a termination of the existing contract and the creation of a new contract, or a cumulative catch-up basis.

9


Signifi cant Judgments

 

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once we determine the performance obligations, we determine the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. We then allocate the transaction price to each performance obligation in the contract based on a relative standalone selling price method. The corresponding revenue is recognized as the related performance obligations are satisfied as discussed in the revenue categories above.

 

Judgment is required to determine the standalone selling price for each distinct performance obligation. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

 

With the exception of travel and entertainment expenses, our contracts do not generally include a variable component to the transaction price. With certain statements of work, we explicitly state that we are to be reimbursed for reasonable travel and entertainment expenses incurred as part of the delivery of professional services. In the cases when we are entitled to collect all travel and entertainment expenses incurred, an estimate of the fulfillment costs is made at the onset of the contract in order to determine the transaction price. The revenue associated with travel and entertainment expenses is then recognized over time along with the professional services.

Some of our contracts have payment terms that differ from the timing of revenue recognition, which requires us to assess whether the transaction price for those contracts include a significant financing component. We have elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if we expect that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. For those contracts in which the period exceeds the one-year threshold, this assessment, as well as the quantitative estimate of the financing component and its relative significance, requires judgment. We estimate the significant financing component provided to our customers with extended payment terms by determining the present value of the future payments by applying a discount rate that reflects the customer’s creditworthiness.

 

Contract Balances

 

Contract assets consist of unbilled revenue, which is recognized as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones.  Unbilled receivables are expected to be billed and collected within one year.  Contract liabilities consist of deferred revenue and customer deposits that arise when amounts are billed to or collected from customers in advance of revenue recognition.

 

Costs to Obtain and Fulfill a Contract

 

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that commissions and special incentive payments (“Spiffs”) for hardware and software maintenance and support and professional services paid under our sales incentive programs meet the requirements to be capitalized under ASC 340-40. Costs to obtain a contract are amortized as selling and marketing expense over the expected period of benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. The judgments made in determining the amount of costs incurred include whether the commissions are in fact incremental and would not have occurred absent the customer contract and the estimate of the amortization period. The commissions and Spiffs related to professional services are amortized over time, as work is completed. The commissions and Spiffs for hardware and software maintenance are amortized over the life of the customer, which is estimated to be five years. These costs are periodically reviewed for impairment. We determined that no impairment existed as of April 30, 2019. We have elected to apply the practical expedient and recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less.

 

We capitalize incremental costs incurred to fulfill our contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy our performance obligation under the contract, and (iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs include direct labor for support services, software enhancements, reimbursable expenses and professional services for customized software development costs. The revenue associated with the support services, software enhancements and reimbursable expenses is recognized ratably over time; therefore, the costs associated are expensed as incurred. The professional services associated with the customized software are not recognized until completion. As such, the professional services costs are capitalized and recognized upon completion of the services.

10


Leases

We account for our leases in accordance with ASC 842, Leases . A contract is accounted for as a lease when we have the right to control the asset for a period of time while obtaining substantially all of the assets economic benefits. We determine if an arrangement is a lease or contains an embedded lease at inception. For arrangements that meet the definition of a lease, we determine the initial classification and measurement of our right-of-use operating lease asset and corresponding liability at the lease commencement date. We determine the classification and measurement of a modified lease at the date it is modified. The lease term includes only renewal options that it is reasonably assured to exercise. The present value of lease payments is typically determined by using its estimated secured incremental borrowing rate for the associated lease term as interest rates implicit in the leases are not normally readily determinable. Management’s policy is to utilize the practical expedient to not record leases with an original term of twelve months or less on our consolidated balance sheets, and lease payments are recognized in the consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term.

Our existing leases are for facilities, automobiles and equipment. None of our leases are with related parties. In addition to rent, office leases may require us to pay additional amounts for taxes, insurance, maintenance and other expenses, which are generally referred to as non-lease components . As a practical expedient, we account for the non-lease components together with the lease components as a single lease component for all of our leases . Only the fixed costs for leases are accounted for as a single lease component and recognized as part of a right-of-use asset and liability. Rent expense for operating leases is recognized on a straight-line basis over the reasonably assured lease term based on the total lease payments and is included in operating expense in the consolidated statements of operations.

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of unrestricted common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted average number of unrestricted common shares outstanding during the period and the weighted average number of potential common shares from the assumed exercise of stock options and the vesting of shares of restricted and deferred common stock units using the “treasury stock” method when the effect is not anti-dilutive. In periods in which we report a net loss, diluted net loss per share is the same as basic net loss per share.

The number of common shares used in the computation of diluted net income (loss) per share for the periods presented does not include the effect of the following potentially outstanding common shares because the effect would have been anti-dilutive:

 

 

 

For Three Months Ended April 30,

 

 

 

2019

 

 

2018

 

 

 

(Amounts in thousands)

 

Stock options

 

 

2,937

 

 

 

3,195

 

Restricted stock units

 

 

291

 

 

 

387

 

Deferred stock units

 

 

188

 

 

 

163

 

Performance stock units

 

 

115

 

 

 

351

 

 

 

 

3,531

 

 

 

4,096

 

 

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued  Accounting Standards Update (“ASU”) 2018-15, “ Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”  ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. We adopted ASU 2018-15 on February 1, 2019, which did not have a material impact to our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “ Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.”  ASU 2018-13 modifies the disclosure requirements on fair value measurements. We adopted ASU 2018-13 on February 1, 2019, which did not have a material impact to our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07,  “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.”  ASU 2018-07 expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. We adopted ASU 2018-07 on February 1, 2019, which did not have a material impact to our consolidated financial statements.

11


In February 2018, the FASB issued ASU 2018-02,  “Income Statement – Reporting Co mprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1,  An Act to Provide for Reconciliation Pursuant to Titles II an d V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (“Tax Cuts and Jobs Act”) , which requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Reform Act. We adopted ASU 2018-02 effective February 1, 2019 and elected not to reclassify the income tax effects stranded in other comprehensive income to ret ained earnings and, as a result, there was no impact to our consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08,  Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities  which requires companies to amend the amortization period for premiums on debt securities with explicit call features to be the earliest call date rather than through the contractual life of the debt instrument. This amendment aims to more closely align the recognition of interest income with the manner in which market participants price such instruments. We adopted this guidance on February 1, 2019, which did not have a material impact on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases , which is intended to improve financial reporting about leasing transactions. In July 2018, the Financial Accounting Standards Board issued ASU 2018-11 to amend ASU 2016-02 and provide an additional (and optional) transition method to adopt the new lease standard. This transition method allows entities to apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption instead of using the original modified retrospective transition method of adoption which requires the restatement of all prior-period financial statements. Under this new transition method, the comparative periods in the financial statements will continue to be presented in accordance with prior GAAP. On February 1, 2019, we adopted the new lease standard on a prospective basis using the new transition method under ASU 2018-11. Under this guidance, as of February 2019, we recognized right-of-use assets and operating lease liabilities of $1.7 million for all leases with lease terms of more than 12 months. There was no impact to retained earnings as of that date. In addition, we adopted the guidance by electing the following practical expedients: (1) We did not reassess whether any expired or existing contracts contained leases, (2) We did not reassess the lease classification for any expired or existing leases, and (3) We excluded variable payments from the lease contract consideration and recorded those as incurred. The adoption of the standard did not have a material impact on our results of operations or cash flows. Our future commitments under lease obligations and additional disclosures are summarized in Note 8.

Recently Issued Accounting Pronouncement

In June 2016, the FASB issued ASU No. 2016-13,  Financial Instruments—Credit Losses (Topic 326) , which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities and accounts receivable. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities.  ASU 2016-13 is effective in the first quarter of our fiscal 2021. We are currently evaluating if this guidance will have a material effect to our consolidated financial statements.

3.

Fair Value Measurements

The following tables set forth our financial assets that were accounted for at fair value on a recurring basis. There were no fair value measurements of our financial assets using level 3 inputs for the periods presented:

 

 

 

 

 

 

 

Fair Value at April 30, 2019 Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

 

(Amounts in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

3,690

 

 

$

2,723

 

 

$

967

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Notes and bonds

 

 

6,350

 

 

 

6,350

 

 

 

 

U.S. Agency bonds

 

 

995

 

 

 

 

 

 

995

 

Corporate bonds

 

 

2,299

 

 

 

 

 

 

2,299

 

Total

 

$

13,334

 

 

$

9,073

 

 

$

4,261

 

12


 

 

 

 

 

 

 

Fair Value at January 31, 2019 Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

 

(Amounts in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

2,887

 

 

$

2,724

 

 

$

163

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Notes and bonds

 

 

7,072

 

 

 

7,072

 

 

 

 

U.S. Agency bonds

 

 

992

 

 

 

 

 

 

992

 

Corporate bonds

 

 

2,295

 

 

 

 

 

 

2,295

 

Total

 

$

13,246

 

 

$

9,796

 

 

$

3,450

 

 

Cash equivalents include money market funds and U.S. treasury bills.

  

Marketable securities by security type consisted of the following:

 

 

 

As of April 30, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

(Amounts in thousands)

 

U.S. Treasury Notes and bonds

 

$

6,306

 

 

$

44

 

 

$

 

 

$

6,350

 

U.S. Agency bonds

 

 

1,001

 

 

 

 

 

 

(6

)

 

 

995

 

Corporate bonds

 

 

2,306

 

 

 

 

 

 

(7

)

 

 

2,299

 

 

 

$

9,613

 

 

$

44

 

 

$

(13

)

 

$

9,644

 

 

 

 

As of January 31, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

(Amounts in thousands)

 

U.S. Treasury Notes and bonds

 

$

7,055

 

 

$

17

 

 

$

 

 

$

7,072

 

U.S. Agency bonds

 

 

1,001

 

 

 

 

 

 

(9

)

 

 

992

 

Corporate Bonds

 

 

2,308

 

 

 

 

 

 

(13

)

 

 

2,295

 

 

 

$

10,364

 

 

$

17

 

 

$

(22

)

 

$

10,359

 

As of April 30, 2019, marketable securities consisted of investments that mature within one year, with the exception of investments with a fair value of $4.6 million that mature between one and three years.

4.

Consolidated Balance Sheet Detail

Inventory

 

Inventory consists of the following:

 

 

 

As of

 

 

 

April 30, 2019

 

 

January 31, 2019

 

 

 

(Amounts in thousands)

 

Components and assemblies

 

$

163

 

 

$

763

 

Finished products

 

 

595

 

 

 

161

 

Total inventory

 

$

758

 

 

$

924

 

 

13


Property, plant and equipment, net

Property, plant and equipment, net consists of the following:

 

 

 

As of

 

 

 

April 30, 2019

 

 

January 31, 2019

 

 

 

(Amounts in thousands)

 

Buildings

 

$

3,467

 

 

$

3,467

 

Land

 

 

2,780