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 management solutions. Our products and services are designed to empower video providers to create, manage and monetize the increasingly personalized, highly engaging experiences that viewers demand.
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, 2018 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.
The preparation of these financial statements in conformity with U.S. GAAP, requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities.
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.
2.
|
Significant Accounting Policies
|
During the three months ended April 30, 2018, except for the accounting policy for revenue recognition, which was updated as a result of adopting the new revenue recognition standard, there have been no material changes to our significant accounting policies that were described in our fiscal 2018 Form 10-K, as filed with the SEC.
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.
The following table provides a summary of cash, cash equivalents and restricted cash that constitutes the total amounts shown in the consolidated statements of cash flows for the three months ended April 30, 2018 and 2017:
|
|
Three Months Ended
|
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Amounts in thousands)
|
|
Cash and cash equivalents
|
|
$
|
38,856
|
|
|
$
|
26,843
|
|
Restricted cash
|
|
|
—
|
|
|
|
7
|
|
Total cash, cash equivalents, and restricted cash
|
|
$
|
38,856
|
|
|
$
|
26,850
|
|
|
|
|
|
|
|
|
|
|
6
Revenue Recognition
The Company adopted Accounting Standards Codification No. (“ASC”) 606,
“Revenue from Contracts with Customers
,
”
on February 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The adoption of ASC 606 did not have a material impact on the Company’s consolidated financial statements. The reported results for the first quarter of fiscal 2019 reflect the application of ASC 606 guidance while the reported results for the first quarter of fiscal 2018 were prepared under the guidance of ASC 605,
“Revenue Recognition,”
which is also referred to herein as "legacy U.S. GAAP" or the "previous guidance." The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's goods and services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from a customer which are subsequently remitted to government authorities. To achieve this core principle, the Company applies the following five steps:
|
1)
|
Identify the contract(s) with a customer - A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to those goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.
|
|
2)
|
Identify the performance obligations in the contract - Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company must apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation.
|
|
3)
|
Determine the transaction price - The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Determining the transaction price requires significant judgment, which is discussed by revenue category in further detail below.
|
|
4)
|
Allocate the transaction price to the performance obligations in the contract - If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. The Company determines 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, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
|
|
5)
|
Recognize revenue when (or as) the Company satisfies a performance obligation - The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.
|
The Company’s revenue is derived from sales of hardware, software licenses, professional services, and maintenance fees related to the hardware and the Company’s software licenses.
Contracts with multiple performance obligations
The Company’s contracts often contain multiple performance obligation. For contracts with multiple performance obligations, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative stand-alone selling price basis. If the transaction price contains discounts or the Company expects to provide future price concessions, these elements are considered when determining the transaction price prior to allocation. Variable fees within the transaction price will be estimated and recognized in revenue as the Company satisfies its performance obligations to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur
7
when the uncertainty associated with the variable fee is resolved. If the contract grants the client the option to acquire additional products or services, the Company assesses whether or not any discount on the p
roducts and services is in excess of levels normally available to similar clients and, if so, accounts for that discount as an additional performance obligation.
Hardware
The Company has 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, the Company has determined stand-alone selling price for hardware utilizing the relative allocation method based on observable evidence.
Software licenses
The Company has concluded that its 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. The Company’s license arrangements generally contain multiple performance obligations, including hardware, installation services, training, and maintenance. The Company has determined stand-alone 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. The Company determined the standalone selling price of maintenance based on this pricing relationship and observable data from standalone sales of maintenance.
The Company has identified three separate distinct performance obligations of maintenance:
|
•
|
Software upgrades and updates;
|
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, which is typically one year.
Services
The Company’s services revenue is comprised of software license implementation services, engineering services, training and reimbursable expenses. The Company has concluded that services are distinct performance obligations, with the exception of engineering services. Engineering services may be provided on a stand-alone basis, or bundled with a license, when the Company is providing custom development.
The stand-alone selling price for services in time and materials contracts is determined by observable prices in stand-alone services arrangements and recognized as revenue as the services are performed based on an input measure of hours incurred to total estimated hours.
The Company estimates the stand-alone selling price for fixed price services based on estimated hours adjusted for historical experience, at time and material rates charged in stand-alone 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.
8
Contract modifications
The Company occasionally enters into amendments to previously executed contracts that constitute contract modifications. The Company assesses 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 stand-alone 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.
Liquidity
We continue to realize the savings related to our restructuring activities in fiscal 2017 and fiscal 2018. These measures were 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 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 observability of prices and inputs may be reduced for certain instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3.
9
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 April 30, 2018 and January 31, 2018. There were no fair value measurements of our financial assets and liabilities using significant Level 3 inputs for the periods presented:
|
|
|
|
|
|
Fair Value at April 30, 2018 Using
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
Active
|
|
|
Other
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
|
April 30,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
|
2018
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
|
(Amounts in thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
(1)
|
|
$
|
2,785
|
|
|
$
|
2,650
|
|
|
$
|
135
|
|
Available-for-sale marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bonds - conventional
|
|
|
2,237
|
|
|
|
2,237
|
|
|
|
—
|
|
U.S. government agency issues
|
|
|
499
|
|
|
|
—
|
|
|
|
499
|
|
Non-current marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bonds - conventional
|
|
|
4,236
|
|
|
|
4,236
|
|
|
|
—
|
|
U.S. government agency issues
|
|
|
983
|
|
|
|
—
|
|
|
|
983
|
|
Corporate bonds
|
|
|
2,284
|
|
|
|
—
|
|
|
|
2,284
|
|
Total
|
|
$
|
13,024
|
|
|
$
|
9,123
|
|
|
$
|
3,901
|
|
|
|
|
|
|
|
Fair Value at January 31, 2018 Using
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
Active
|
|
|
Other
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
|
January 31,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
|
2018
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
|
(Amounts in thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
(1)
|
|
$
|
4,568
|
|
|
$
|
—
|
|
|
$
|
4,568
|
|
Available-for-sale marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bonds - conventional
|
|
|
1,993
|
|
|
|
1,993
|
|
|
|
—
|
|
U.S. government agency issues
|
|
|
1,998
|
|
|
|
—
|
|
|
|
1,998
|
|
Non-current marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury notes and bonds - conventional
|
|
|
1,724
|
|
|
|
1,724
|
|
|
|
—
|
|
U.S. government agency issues
|
|
|
985
|
|
|
|
—
|
|
|
|
985
|
|
Corporate bonds
|
|
|
1,740
|
|
|
|
—
|
|
|
|
1,740
|
|
Total
|
|
$
|
13,008
|
|
|
$
|
3,717
|
|
|
$
|
9,291
|
|
10
|
(1)
|
Money market funds and U.S. treasury bills are included in cash and cash equivalents on the accompanying consolidated balance sheets and are valued at quoted market prices for identical instruments in active markets.
|
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible property and equipment, goodwill, and other intangible assets, which are re-measured when the derived fair value is below carrying value on our consolidated balance sheets. For these assets and liabilities, we do not periodically adjust carrying value to fair value except in the event of impairment. 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 from impairment of long-lived assets in our consolidated statements of operations and comprehensive loss.
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 April 30, 2018 and January 31, 2018. 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 (expenses) income, net, in our consolidated statements of operations and comprehensive loss. Interest on securities is recorded as earned and is also included in other (expenses) income, net. Any realized gains or losses would be shown in the accompanying consolidated statements of operations and comprehensive loss in other (expenses) income, 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.
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 April 30, 2018 and January 31, 2018:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
|
|
(Amounts in thousands)
|
|
April 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
36,071
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,071
|
|
Cash equivalents
|
|
|
2,776
|
|
|
|
9
|
|
|
|
—
|
|
|
|
2,785
|
|
Cash and cash equivalents
|
|
|
38,847
|
|
|
|
9
|
|
|
|
—
|
|
|
|
38,856
|
|
U.S. treasury notes and bonds - short-term
|
|
|
2,250
|
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
2,237
|
|
U.S. treasury notes and bonds - long-term
|
|
|
4,264
|
|
|
|
—
|
|
|
|
(28
|
)
|
|
|
4,236
|
|
U.S. government agency issues - short-term
|
|
|
500
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
499
|
|
U.S. government agency issues - long-term
|
|
|
1,002
|
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
983
|
|
Corporate bonds - long-term
|
|
|
2,315
|
|
|
|
—
|
|
|
|
(31
|
)
|
|
|
2,284
|
|
Total cash, cash equivalents and marketable securities
|
|
$
|
49,178
|
|
|
$
|
9
|
|
|
$
|
(92
|
)
|
|
$
|
49,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
39,084
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,084
|
|
Cash equivalents
|
|
|
4,568
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,568
|
|
Cash and cash equivalents
|
|
|
43,652
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,652
|
|
U.S. treasury notes and bonds - short-term
|
|
|
2,001
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
1,993
|
|
U.S. treasury notes and bonds - long-term
|
|
|
1,740
|
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
1,724
|
|
U.S. government agency issues - short-term
|
|
|
1,991
|
|
|
|
9
|
|
|
|
(2
|
)
|
|
|
1,998
|
|
U.S. government agency issues - long-term
|
|
|
1,002
|
|
|
|
—
|
|
|
|
(17
|
)
|
|
|
985
|
|
Corporate bonds - long-term
|
|
|
1,760
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
1,740
|
|
Total cash, cash equivalents and marketable securities
|
|
$
|
52,146
|
|
|
$
|
9
|
|
|
$
|
(63
|
)
|
|
$
|
52,092
|
|
11
The gross realized gains and losses on sale of available-for-sale securities as of April 30, 2018 and January 31, 2018 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 April 30, 2018 are as follows (amounts in thousands):
|
|
Estimated
|
|
|
|
Fair Value
|
|
Maturity of one year or less
|
|
$
|
2,736
|
|
Maturity between one and five years
|
|
|
7,503
|
|
Total
|
|
$
|
10,239
|
|
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. There was no restricted cash as of April 30, 2018 and it was not material as of January 31, 2018.
4.
|
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
|
|
|
|
April 30,
|
|
|
January 31,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(Amounts in thousands)
|
|
Components and assemblies
|
|
$
|
542
|
|
|
$
|
426
|
|
Finished products
|
|
|
203
|
|
|
|
240
|
|
Total inventories, net
|
|
$
|
745
|
|
|
$
|
666
|
|
Property and equipment, net
Property and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
As of
|
|
|
|
Useful
|
|
|
April 30,
|
|
|
January 31,
|
|
|
|
Life (Years)
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Land
|
|
|
|
|
|
$
|
2,780
|
|
|
$
|
2,780
|
|
Buildings
|
|
|
20
|
|
|
|
11,852
|
|
|
|
11,839
|
|
Office furniture and equipment
|
|
|
5
|
|
|
|
766
|
|
|
|
774
|
|
Computer equipment, software and demonstration equipment
|
|
|
3
|
|
|
|
13,178
|
|
|
|
12,770
|
|
Service and spare components
|
|
|
5
|
|
|
|
1,158
|
|
|
|
1,158
|
|
Leasehold improvements
|
|
1-7
|
|
|
|
524
|
|
|
|
537
|
|
|
|
|
|
|
|
|
30,258
|
|
|
|
29,858
|
|
Less - Accumulated depreciation and amortization
|
|
|
|
|
|
|
(21,084
|
)
|
|
|
(20,387
|
)
|
Total property and equipment, net
|
|
|
|
|
|
$
|
9,174
|
|
|
$
|
9,471
|
|
12
Depreciation and amortization expense on property and equipment, net was $
0.4
million and $
0.
6
million
for the three
months ended
April 30
, 201
8
and 201
7
, respectively.
Other accrued expenses
Other accrued expenses consist of the following:
|
|
As of
|
|
|
|
April 30,
|
|
|
January 31,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(Amounts in thousands)
|
|
Accrued compensation and commissions
|
|
$
|
952
|
|
|
$
|
1,414
|
|
Accrued bonuses
|
|
|
1,892
|
|
|
|
2,715
|
|
Employee benefits
|
|
|
393
|
|
|
|
601
|
|
Sales tax and VAT payable
|
|
|
199
|
|
|
|
4,001
|
|
Income taxes payable
|
|
|
2,172
|
|
|
|
2,869
|
|
Accrued other
|
|
|
3,408
|
|
|
|
3,779
|
|
Total other accrued expenses
|
|
$
|
9,016
|
|
|
$
|
15,379
|
|
5.
|
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 April 30, 2018 and January 31, 2018, we had goodwill of $25.2 million and $25.6 million, respectively. The following table represents the changes in the carrying amount of goodwill for the three months ended April 30, 2018 (amounts in thousands):
Balance as of January 31, 2017:
|
|
|
|
|
Goodwill, gross
|
|
$
|
62,566
|
|
Accumulated impairment losses
|
|
|
(39,279
|
)
|
Goodwill, net
|
|
|
23,287
|
|
Cumulative translation adjustment
|
|
|
2,292
|
|
Balance as of January 31, 2018:
|
|
|
|
|
Goodwill, gross
|
|
|
64,858
|
|
Accumulated impairment losses
|
|
|
(39,279
|
)
|
Goodwill, net
|
|
|
25,579
|
|
Cumulative translation adjustment
|
|
|
(414
|
)
|
Balance as of April 30, 2018:
|
|
|
|
|
Goodwill, gross
|
|
|
64,444
|
|
Accumulated impairment losses
|
|
|
(39,279
|
)
|
Goodwill, net
|
|
$
|
25,165
|
|
There were no indicators of impairment during the first quarter of fiscal 2018. Therefore, no impairment test was required.
13
Intangible Assets
Intangible assets, net, consisted of the following at April 30, 2018 and January 31, 2018:
|
|
|
|
|
|
As of April 30, 2018
|
|
|
As of January 31, 2018
|
|
|
|
Weighted
average remaining life (Years)
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
|
(Amounts in thousands)
|
|
Finite-life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer contracts
|
|
|
1.7
|
|
|
$
|
30,489
|
|
|
$
|
(29,698
|
)
|
|
$
|
791
|
|
|
$
|
30,818
|
|
|
$
|
(29,836
|
)
|
|
$
|
982
|
|
Non-compete agreements
|
|
|
0.3
|
|
|
|
2,594
|
|
|
|
(2,591
|
)
|
|
|
3
|
|
|
|
2,639
|
|
|
|
(2,635
|
)
|
|
|
4
|
|
Completed technology
|
|
|
1.8
|
|
|
|
11,308
|
|
|
|
(11,096
|
)
|
|
|
212
|
|
|
|
11,479
|
|
|
|
(11,203
|
)
|
|
|
276
|
|
Trademarks, patents and other
|
|
|
2.3
|
|
|
|
7,177
|
|
|
|
(7,142
|
)
|
|
|
35
|
|
|
|
7,189
|
|
|
|
(7,148
|
)
|
|
|
41
|
|
Total finite-life intangible assets
|
|
|
1.8
|
|
|
$
|
51,568
|
|
|
$
|
(50,527
|
)
|
|
$
|
1,041
|
|
|
$
|
52,125
|
|
|
$
|
(50,822
|
)
|
|
$
|
1,303
|
|
Amortization expense for intangible assets was $0.4 million and $0.6 million for the three months ended April 30, 2018 and 2017, respectively.
As of April 30, 2018, 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
|
|
2019 (for the remaining nine months)
|
|
$
|
700
|
|
2020
|
|
|
337
|
|
2021
|
|
|
4
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
2024 and thereafter
|
|
|
—
|
|
Total
|
|
$
|
1,041
|
|
6.
|
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 of patent litigation claims. Management cannot reasonably estimate any potential losses, but these claims could result in material liability for us. There are no current pending legal proceedings, in the opinion of management, that would have a material adverse effect on our financial position, results from operations and cash flows. There is no assurance that future legal proceedings arising from ordinary course of business or otherwise, will not have a material adverse effect on our financial position, results from operations or cash flows.
We warrant that our products, including software products, will substantially perform in accordance with our standard published specifications in effect at the time of delivery. In addition, we provide maintenance support to our customers and therefore allocate a portion of the product purchase price to the initial warranty period and recognize revenue on a straight-line basis over that warranty period related to both the warranty obligation and the maintenance support agreement. When we enter into
14
arrangements that include revenue for extended warranties beyond the standard duration, the revenue is deferred and recognized on a straight
-
line bas
is over the contract period. Related costs are expensed as incurred.
7.
|
Severance and Other Restructuring Costs
|
Restructuring Costs
During the three months ended April 30, 2018, we incurred some immaterial restructuring charges primarily for employee-related benefits for terminated employees.
The following table shows the activity in accrued restructuring reported as a component of other accrued expenses on the consolidated balance sheet as of April 30, 2018 (amounts in thousands):
|
|
Employee-Related
|
|
|
Closure of Leased
|
|
|
Other
|
|
|
|
|
|
|
|
Benefits
|
|
|
Facilities
|
|
|
Restructuring
|
|
|
Total
|
|
Accrual balance as of January 31, 2018
|
|
$
|
61
|
|
|
$
|
135
|
|
|
$
|
29
|
|
|
$
|
225
|
|
Restructuring charges incurred
|
|
|
12
|
|
|
|
(7
|
)
|
|
|
(29
|
)
|
|
|
(24
|
)
|
Cash payments
|
|
|
(73
|
)
|
|
|
(130
|
)
|
|
|
—
|
|
|
|
(203
|
)
|
Other charges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Accrual balance as of April 30, 2018
(1)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
(1)
|
Balance represents the combination of the remaining lease obligation for our former San Francisco facility, which we vacated in fiscal 2017, offset by the remaining sublease payments due to the Company as of April 30, 2018.
|
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 Restructuring Plan was substantially complete as of January 31, 2018. However, we incurred a small charge for employee-related benefits during the first quarter of fiscal 2019 and reversed any remaining estimates to severance and other restructuring charges in our consolidated statements of operations and comprehensive loss in April 2018. Since its implementation, we recognized $7.1 million in restructuring charges related to the Restructuring Plan.
Severance Costs
During the three months ended April 30, 2018, we incurred additional severance charges not related to a restructuring plan of $0.1 million, primarily from the departure of four employees. Severance costs during the three months ended April 30, 2017 were not material.
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.
Effective February 1, 2014, SeaChange gave its non-employee members of the Board of Directors the option to receive DSUs in lieu of RSUs, beginning with the annual grant for fiscal 2015. The number of units subject to the DSUs is determined as of the grant date and shall fully vest one year from the grant date. The shares underlying the DSUs are not vested and issued until the earlier of the director ceasing to be a member of the Board of Directors (provided such time is subsequent to the first day of the succeeding fiscal year) or immediately prior to a change in control.
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
15
instances,
the Board of Directors may elect to modify the terms of an award. As of
April 30, 2018
, there wer
e
2,52
9
,
993
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 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. In fiscal 2018, the Board of Directors changed the structure of prospective LTI performance-based awards, changing from awards based on total shareholder return to awards based on Company-specific financial performance metrics. Since these awards are performance-based awards and do not include market conditions, we record the fair value of these PSUs using the grant date share price as opposed to the Monte Carlo simulation model used for PSUs previously granted in fiscal 2016 and 2017, which included market conditions. We recognize stock compensation expense ratably over the required service period based on the estimate that it is probable that the measurement criteria will be achieved and the targeted number of shares will vest. If there is a change in estimate of the number of shares that are probable of vesting, we will cumulatively adjust stock compensation expense in the period that the change in estimate is made.
We have granted market-based options to certain officers 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 April 30, 2018, $0.1 million remained unamortized on these market-based stock options, which will be expensed over the next 0.8 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. Since its inception, a total of 51,844 shares have been purchased under the ESPP. Stock-based compensation expense related to the ESPP was not significant for the three months ended April 30, 2018 and 2017.
9.
|
Accumulated Other Comprehensive Loss
|
The following shows the changes in the components of accumulated other comprehensive loss for the three months ended April 30, 2018:
|
|
|
|
|
|
Changes in
|
|
|
|
|
|
|
|
Foreign
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
Currency
|
|
|
Available-
|
|
|
|
|
|
|
|
Translation
|
|
|
for-Sale
|
|
|
|
|
|
|
|
Adjustment
|
|
|
Investments
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
Balance at January 31, 2018
|
|
$
|
(5,380
|
)
|
|
$
|
(54
|
)
|
|
$
|
(5,434
|
)
|
Other comprehensive income (loss)
|
|
|
575
|
|
|
|
(29
|
)
|
|
|
546
|
|
Balance at April 30, 2018
|
|
$
|
(4,805
|
)
|
|
$
|
(83
|
)
|
|
$
|
(4,888
|
)
|
16
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 income (loss), which includes foreign currency translation adjustments and changes in unrealized gains and losses on marketable securities available-for-sale. For purposes of comprehensive loss disclosures, we do not record tax expense or benefits for the net changes in the foreign currency translation adjustments.
10.
|
Revenue from Contracts with Customers
|
On February 1, 2018, the Company adopted ASC 606
using the modified retrospective method to achieve a consistent application of revenue recognition, resulting in a single revenue model to be applied by reporting companies under U.S. GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. Therefore, for arrangements that include customer-specified acceptance criteria, revenue is recognized when the Company can objectively determine that control has been transferred to the customer in accordance with the agreed-upon specifications in the contract, which may occur before formal customer acceptance. In addition, the new guidance requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance no longer requires the Company to have vendor specific object evidence (“VSOE”) to determine the fair value of undelivered elements in a multiple-element software transaction, resulting in revenue attributable to the sale of software being recognized earlier.
Our products and services facilitate the aggregation, licensing, management and distribution of video and advertising content to cable television system operators, telecommunication companies, satellite operators and media companies. Offerings include and revenue is generated from the sales of software, hardware, professional services, maintenance and support in order to deploy SeaChange systems and provide ongoing functionality.
These offerings can be sold on a standalone basis or as a component of a contract with multiple performance obligations. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price. The performance obligations include future credits, significant discounts and material rights in addition to the software, hardware, professional services, maintenance and support.
The revenue for perpetual licenses to software applications and hardware is recognized upon delivery or acceptance by the customer. Product maintenance and technical support is recognized ratably over the stated and implied maintenance periods.
The professional services are either fixed price or time and material contracts, and consist of installation and integration, customized development and customized software, training, and on-site managed services. The installation and integration is recognized over time based on an input measure of hours incurred to total estimated hours. The customized development and software is recognized at a point in time upon delivery and acceptance of the final software product. The training and the on-site managed services are recognized over the service period.
The cumulative effect of the changes made to our consolidated balance sheet as of February 1, 2018 for the adoption of the new guidance under the modified retrospective method is as follows (amounts in thousands):
|
|
As of
|
|
|
|
January 31, 2018
|
|
|
|
|
|
|
February 1, 2018
|
|
|
|
Under ASC 605
|
|
|
Adjustment
|
|
|
Under ASC 606
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
(1)
|
|
$
|
3,557
|
|
|
$
|
824
|
|
|
$
|
4,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
$
|
14,433
|
|
|
$
|
(1,495
|
)
|
|
$
|
12,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated loss
|
|
$
|
(148,620
|
)
|
|
$
|
2,319
|
|
|
$
|
(146,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
(1)
|
Contract as
sets
,
short-term are included in prep
ai
d expenses and other current assets in our consolidated balance sheet.
|
The following tables set forth the amount by which each financial statement line item is affected in the current reporting period by the application of ASC 606, as compared to the guidance that was in effect before its adoption. The impact of adoption on the consolidated financial statements as of and for the three months ended April 30, 2018 is as follows:
Consolidated Balance Sheets:
|
|
As of
|
|
|
|
April 30, 2018
|
|
|
|
|
|
|
April 30, 2018
|
|
|
|
Under ASC 605
|
|
|
Adjustment
|
|
|
Under ASC 606
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
(1)
|
|
$
|
2,899
|
|
|
$
|
366
|
|
|
$
|
3,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
$
|
15,628
|
|
|
$
|
(4,346
|
)
|
|
$
|
11,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated loss
|
|
$
|
(156,484
|
)
|
|
$
|
4,712
|
|
|
$
|
(151,772
|
)
|
|
(1)
|
Contract assets, short-term are included in prepaid expenses and other current assets in our consolidated balance sheet.
|
Consolidated Statements of Operations and Comprehensive Loss:
|
|
For the Three Months Ended April 30, 2018
|
|
|
|
Under ASC 605
|
|
|
Adjustment
|
|
|
Under ASC 606
|
|
Revenues
|
|
$
|
12,084
|
|
|
$
|
2,851
|
|
|
$
|
14,935
|
|
Cost of revenues
|
|
|
5,571
|
|
|
|
458
|
|
|
|
6,029
|
|
Operating expenses
|
|
|
14,022
|
|
|
|
—
|
|
|
|
14,022
|
|
Loss from operations
|
|
|
(7,509
|
)
|
|
|
2,393
|
|
|
|
(5,116
|
)
|
Loss before income taxes
|
|
|
(8,358
|
)
|
|
|
2,393
|
|
|
|
(5,965
|
)
|
Income tax (benefit) provision
|
|
|
(494
|
)
|
|
|
—
|
|
|
|
(494
|
)
|
Net loss
|
|
|
(7,864
|
)
|
|
|
2,393
|
|
|
|
(5,471
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.22
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.15
|
)
|
Diluted
|
|
$
|
(0.22
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows:
|
|
For the Three Months Ended April 30, 2018
|
|
|
|
Under ASC 605
|
|
|
Adjustment
|
|
|
Under ASC 606
|
|
Cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,864
|
)
|
|
$
|
2,393
|
|
|
$
|
(5,471
|
)
|
Prepaid expenses and other current assets
|
|
|
590
|
|
|
|
(366
|
)
|
|
|
224
|
|
Deferred revenues
|
|
|
1,568
|
|
|
|
(4,346
|
)
|
|
|
(2,778
|
)
|
Other operating activities
|
|
|
37
|
|
|
|
2,319
|
|
|
|
2,356
|
|
Net cash used in operating activities
|
|
$
|
(3,927
|
)
|
|
$
|
—
|
|
|
$
|
(3,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the significant changes under ASC 606 as compared to legacy U.S. GAAP:
|
•
|
Under legacy U.S. GAAP, the Company allocated revenue to licenses under the residual method when it had VSOE for the remaining undelivered elements, which allocated any future credits or significant discounts entirely to the license. Under ASC 606, the Company allocates all future credits, significant discounts, and material rights to all performance obligations based upon their relative selling price. Additional license revenue from the reallocation of such arrangement consideration recognized when control is transferred to the customer, which is generally upon delivery of the license.
|
|
•
|
Under legacy U.S. GAAP, the Company did not have VSOE for professional services and maintenance in certain geographical areas, which resulted in revenue being deferred in such instances until such time as VSOE existed for all
|
18
|
|
undelivered elements or recognized ratably over the longest service period. Under ASC 606, the requirem
ent for VSOE is eliminated and replaced with the concept of a standalone selling price. Once the transaction price is allocated to each of the performance obligations, the Company recognizes revenue as the performance obligations are delivered, either at a
point in time or over time. Under ASC 606, license revenue is recognized when control is transferred to the customer and professional services revenue is recognized over time based on an input measure of hours incurred to total estimated hours. This resul
ts in the acceleration of professional services revenue when compared to the historical practice of ratable recognition for professional services when there is a lack of VSOE.
|
|
•
|
Under legacy U.S. GAAP, sales commissions and other third-party acquisition costs resulting directly from securing contracts with customers are expensed when incurred. Under ASC 340,
“Other Assets and Deferred Costs,”
because the sales commission paid on the maintenance renewals is not commensurate with the original arrangement, ASC 340 requires that these acquisition costs be expensed over the expected period of benefit, which we estimate as the customer life of five years.
|
|
•
|
Under legacy U.S. GAAP, professional service costs associated with highly customized development efforts related directly to contracts with customers are expensed when incurred. Under ASC 340, these costs are recognized as an asset when incurred and are expensed along with professional service revenue at the time that customized software is delivered and/or accepted.
|
Disaggregated Revenue
The following table shows our revenue disaggregated by revenue stream for the three months ended April 30, 2018 (amounts in thousands):
Revenue by revenue stream:
|
|
|
|
|
Product
|
|
$
|
3,091
|
|
Professional services
|
|
|
4,637
|
|
Maintenance - first year
|
|
|
658
|
|
Maintenance - renewal
|
|
|
6,549
|
|
Total revenues
|
|
$
|
14,935
|
|
|
|
|
|
|
Transaction Price Allocated to Future Performance Obligations
The aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied or are partially satisfied as of April 30, 2018 is $1.5 million. This amount consists of amounts billed for undelivered services that are included in deferred revenue. This total amount is expected to be recognized as revenue within the next 12 months.
Significant 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, the Company determines 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 stand-alone 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.
19
With the exception of travel and entertainment expenses, our contracts do not generally in
clude 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 expe
nses is then recognized over time along with the professional services.
As discussed above, 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 arises when revenue is recognized in advance of billing for certain customer contracts. Contract liabilities consist of deferred revenue and customer deposits which arise when amounts are billed to or collected from customers in advance of revenue recognition.
Costs to Obtain and Fulfill a Contract
The Company recognizes 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, which prior to the adoption of ASC 606, we had expensed as incurred. The amount capitalized for incremental costs to obtain contracts as of April 30, 2018 was $0.4 million, all of which was short-term and has been included in prepaid expenses and other current assets in our consolidated balance sheet. Costs to obtain a contract are amortized as sales 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 is amortized over the life of the customer, which is estimated to be five years. These costs are periodically reviewed for impairment; however, we determined that no impairment existed as of April 30, 2018. 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 the Company 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 the Company’s 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.
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.
20
Significant Customers
The following table summarizes revenue by significant customers where such revenue exceeded 10% of total revenues for the indicated period:
|
|
Three Months Ended
|
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
Customer A
|
|
19%
|
|
|
25%
|
|
Customer B
|
|
10%
|
|
|
N/A
|
|
Geographic Information
The following table summarizes revenues by customers’ geographic locations for the periods presented:
|
|
Three Months Ended April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Revenues by customers' geographic locations:
|
|
(Amounts in thousands, except percentages)
|
|
North America
(1)
|
|
$
|
7,114
|
|
|
|
48
|
%
|
|
$
|
8,326
|
|
|
|
50
|
%
|
Europe and Middle East
|
|
|
6,023
|
|
|
|
40
|
%
|
|
|
7,165
|
|
|
|
43
|
%
|
Latin America
|
|
|
1,496
|
|
|
|
10
|
%
|
|
|
721
|
|
|
|
4
|
%
|
Asia Pacific
|
|
|
302
|
|
|
|
2
|
%
|
|
|
455
|
|
|
|
3
|
%
|
Total
|
|
$
|
14,935
|
|
|
|
|
|
|
$
|
16,667
|
|
|
|
|
|
|
(1)
|
Includes total revenues for the United States for the periods shown as follows (amounts in thousands, except percentage data):
|
|
|
Three Months Ended
|
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
U.S. Revenue
|
|
$
|
5,787
|
|
|
$
|
7,028
|
|
% of total revenues
|
|
|
38.7
|
%
|
|
|
42.2
|
%
|
Each interim period is considered an integral part of the annual period and, accordingly, we measure our income tax expense using an estimated annual effective tax rate. A company is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis, as adjusted for discrete taxable events that occur during the interim period.
We recorded an income tax benefit of $0.5 million and an income tax provision of $0.3 million for the three months ended April 30, 2018 and 2017, respectively. The tax benefit for the three months ended April 30, 2018 includes a $0.1 million tax benefit related to the reversal of tax reserves for uncertain tax positions due to the expiration of the Polish statute of limitations. Our effective tax rate in fiscal 2019 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 April 30, 2018, 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.
The U.S. Tax Cuts and Jobs Act (“Tax Reform Act”) introduced significant changes to U.S. income tax law. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time tax on the mandatory deemed repatriation of cumulative foreign earnings (the “Transition Tax”) as of December 31, 2017.
On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. (“SAB”) 118, which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its
21
accounting.
During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjuste
d as information becomes available, prepared or analyzed.
The Company is still evaluating the provisions of the Tax Reform Act and amounts reflected in the financial statements for the three months ended April 30, 2018 are provisional. The ultimate impact may differ from these provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be completed within the one-year measurement period.
We are subject to additional requirements of the Tax Reform Act during the fiscal year ended January 31, 2019. Those provisions include a tax on global intangible low-taxed income (“GILTI”) and a limitation of certain executive compensation. We have elected to account for GILTI as a period cost, and therefore included GILTI expense in the effective tax rate calculation. Our 2018 effective tax rate includes our estimates of these new provisions.
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
|
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(5,471
|
)
|
|
$
|
(5,371
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net loss per share - basic and diluted
|
|
|
35,608
|
|
|
|
35,309
|
|
|
|
|
|
|
|
|
|
|
Net loss per shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.15
|
)
|
|
$
|
(0.15
|
)
|
Diluted
|
|
$
|
(0.15
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
The number of common shares used in the computation of diluted net loss per share for the three months ended April 30, 2018 and 2017 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
|
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
3,195
|
|
|
|
1,698
|
|
Restricted stock units
|
|
|
387
|
|
|
|
1,126
|
|
Deferred stock units
|
|
|
163
|
|
|
|
106
|
|
Performance stock units
|
|
|
351
|
|
|
|
316
|
|
Total
|
|
|
4,096
|
|
|
|
3,246
|
|
22
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
Comprehensive Income
In February 2018, the FASB issued ASU 2018-02,
“Income Statement – Reporting Comprehensive 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 and 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. ASU 2018-02 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.
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
Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU 2014-09, “
Revenue from Contracts with Customers (Topic 606),”
and has since issued several additional amendments thereto as discussed below (collectively referred to herein as “ASC 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. ASC 606 also includes ASC 340-40,
“Other Assets and Deferred Costs – Contracts with Customers,”
which provides guidance on accounting for certain revenue related costs, including costs associated with obtaining and fulfilling a contract to provide goods and services to customers.
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
23
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.
Effective February 1, 2018, the Company adopted ASC 606 using the modified retrospective adoption model. See Note 10,
“Revenue from Contracts with Customers,”
to this Form 10-Q for additional information regarding how the Company is accounting for revenue under the new guidance.
24