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.
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
|
SeaChange International, Inc. (“we” or the “Company”), 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 expected to generate annualized savings of approximately $6 million. In fiscal 2020, we continue to streamline our operations and closed our service organizations in Ireland and the Netherlands in order to generate annualized savings of approximately $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 of America (“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. Certain prior year amounts have been reclassified to conform to the current year presentation.
The accompanying unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in U.S. GAAP have been omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments of a normal recurring nature which were considered necessary for a fair presentation have been included. The year-end consolidated balance sheet data as of January 31, 2019 was derived from our audited consolidated financial statements and may not include al disclosures required by U.S. GAAP. Certain prior period amounts on the consolidated statements of operations have been reclassified to conform with current period presentation. Such reclassifications had no impact on net income or accumulated deficit. The results of operations for the three months and nine months ended October 31, 2019 are not necessarily indicative of the results to be expected for the entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2019, filed with the SEC on April 12, 2019.
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, the valuation of stock-based awards, and ongoing legal matters. 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.
7
Business Combinations
We account for acquisitions of entities that include inputs and processes and have the ability to create outputs as business combinations. We allocate the purchase price of the acquisition to the tangible assets acquired, liabilities assumed, and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred. During the measurement period, we record adjustments to provisional amounts recorded for assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, which could be up to one year after the transaction date, subsequent adjustments are recorded to the Company’s consolidated statements of operations.
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 the 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 in relation to obligations set forth by our landlords.
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 as of October 31, 2019 and 2018:
|
|
As of October 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Amounts in thousands)
|
|
Cash and cash equivalents
|
|
$
|
5,598
|
|
|
$
|
21,554
|
|
Restricted cash
|
|
|
289
|
|
|
|
543
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
5,887
|
|
|
$
|
22,097
|
|
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. Two customers accounted for 13% each of total revenue in the third quarter of fiscal 2020 and four customers accounted for 13%, 12%, 10%, and 10% each of total revenue in the third quarter of fiscal 2019. No one customer accounted for 10% or more of total revenue in the first nine months of fiscal 2020 and two customers accounted for 16% and 12% each of total revenue in the first nine months of fiscal 2019. Three customers accounted for 14%, 14%, and 12% each of the accounts receivable balance as of October 31, 2019. Two customers accounted for 44% and 15% of the accounts receivable balance as of January 31, 2019.
Marketable Securities
Our investments in 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 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 expense, net in the consolidated statements of operations and comprehensive income (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 consolidated statement of operations and comprehensive income (loss). No such adjustments were necessary during the periods presented.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under U.S. 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
8
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. 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 on August 1st 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 October 31, 2019, we have recorded accumulated goodwill impairment charges of $54.8 million.
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.
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).
9
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. For Framework, which is our end-to-end software delivery platform solution, we have identified a single support service obligation which includes software upgrades and updates, installation services, and technical support.
Hardware
Historically, 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 included in product revenue in our consolidated statement of operations and comprehensive income (loss) and is typically recognized at a point in time when control is transferred to the customer, which is defined as the point in time when the client can use and benefit from the hardware. Hardware sold with our Framework software bundle is considered a distinct performance obligation. 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.
Software Licenses
Historically, 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 included in product revenue in our consolidated statement of operations and comprehensive income (loss) and 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. Framework software bundles include software and support, both of which are considered distinct performance obligations in regard to revenue recognition and related consideration is allocated under the residual method.
Maintenance
Maintenance revenue, which is included in services revenue in our consolidated statements of operations and comprehensive income (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;
|
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 for products sold on a standalone basis.
Services
Historically, our services revenue, excluding maintenance revenue, is comprised of software license implementation services, engineering services, training and reimbursable expenses. We have concluded that services are distinct performance obligations,
10
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.
For Framework deals we have identified a single support service obligation which includes software upgrades and updates, installations services, and technical support. We determine the stand-alone selling price for Framework services based on a cost-plus model as market and other observable inputs are seldom present based on the proprietary nature of the Company’s products and services.
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.
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, 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. In instances where stand-alone selling price is not directly observable, such as when we don’t sell the product or service separately, we determine the stand-alone selling price based on a cost-plus model as market and other observable inputs are seldom present based on the proprietary nature of the Company’s products and services.
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 expected to be billed and
11
collected within one year are classified as current assets or long-term assets if expected to be billed and collected after 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 contract. These costs are periodically reviewed for impairment. We determined that no impairment existed as of October 31, 2019 or 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 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.
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 asset’s 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 are reasonably assured to exercise. The present value of lease payments is typically determined by using the Company’s 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 income (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.
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.
12
The number of common shares used in the computation of diluted net income per share for the period presented includes the effect of the following potentially outstanding common shares (in thousands):
|
|
For the Three Months
Ended October 31, 2019
|
|
Stock options
|
|
|
390
|
|
Restricted stock units
|
|
|
159
|
|
Deferred stock units
|
|
|
324
|
|
Performance stock units
|
|
|
128
|
|
|
|
|
1,001
|
|
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 the Three Months
Ended October 31,
|
|
|
For the Nine Months
Ended October 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Amounts in thousands)
|
|
Stock options
|
|
|
1,011
|
|
|
|
3,204
|
|
|
|
2,820
|
|
|
|
3,259
|
|
Restricted stock units
|
|
|
—
|
|
|
|
419
|
|
|
|
130
|
|
|
|
389
|
|
Deferred stock units
|
|
|
—
|
|
|
|
218
|
|
|
|
201
|
|
|
|
111
|
|
Performance stock units
|
|
|
—
|
|
|
|
575
|
|
|
|
112
|
|
|
|
527
|
|
|
|
|
1,011
|
|
|
|
4,416
|
|
|
|
3,263
|
|
|
|
4,286
|
|
Recently Adopted Accounting Pronouncements
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.
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. We adopted ASU 2018-02 effective February 1, 2019 and elected not to reclassify the income tax effects stranded in other comprehensive income to retained earnings and, as a result, there was no impact to 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 U.S. 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.
13
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 October 31, 2019 Using
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
|
(Amounts in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
1,118
|
|
|
$
|
-
|
|
|
$
|
1,118
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes and bonds
|
|
|
6,610
|
|
|
|
6,610
|
|
|
|
—
|
|
Corporate bonds
|
|
|
1,258
|
|
|
|
—
|
|
|
|
1,258
|
|
Total
|
|
$
|
8,986
|
|
|
$
|
6,610
|
|
|
$
|
2,376
|
|
|
|
|
|
|
|
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 October 31, 2019
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(Amounts in thousands)
|
|
U.S. Treasury Notes and bonds
|
|
$
|
6,512
|
|
|
$
|
98
|
|
|
$
|
—
|
|
|
$
|
6,610
|
|
Corporate bonds
|
|
|
1,255
|
|
|
|
3
|
|
|
|
—
|
|
|
|
1,258
|
|
|
|
$
|
7,767
|
|
|
$
|
101
|
|
|
$
|
-
|
|
|
$
|
7,868
|
|
14
|
|
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 October 31, 2019, marketable securities consisted of investments that mature within one year, with the exception of investments with a fair value of $2.5 million that mature between one and three years.
4.
|
Consolidated Balance Sheet Detail
|
Inventory
Inventory consists of the following:
|
|
As of
|
|
|
|
October 31, 2019
|
|
|
January 31, 2019
|
|
|
|
(Amounts in thousands)
|
|
Components and assemblies
|
|
$
|
161
|
|
|
$
|
763
|
|
Finished products
|
|
|
43
|
|
|
|
161
|
|
Total inventory
|
|
$
|
204
|
|
|
$
|
924
|
|
Property and equipment, net
Property and equipment, net consists of the following:
|
|
As of
|
|
|
|
October 31, 2019
|
|
|
January 31, 2019
|
|
|
|
(Amounts in thousands)
|
|
Buildings
|
|
$
|
3,467
|
|
|
$
|
3,467
|
|
Land
|
|
|
2,780
|
|
|
|
2,780
|
|
Computer equipment, software and demonstration equipment
|
|
|
9,804
|
|
|
|
12,316
|
|
Service and spare components
|
|
|
1,158
|
|
|
|
1,158
|
|
Office furniture and equipment
|
|
|
437
|
|
|
|
738
|
|
Leasehold improvements
|
|
|
153
|
|
|
|
531
|
|
|
|
|
17,799
|
|
|
|
20,990
|
|
Less: Accumulated depreciation and amortization
|
|
|
(11,222
|
)
|
|
|
(13,798
|
)
|
Total property and equipment, net
|
|
$
|
6,577
|
|
|
$
|
7,192
|
|
15
Accrued expenses
Accrued expenses consist of the following:
|
|
As of
|
|
|
|
October 31, 2019
|
|
|
January 31, 2019
|
|
|
|
(Amounts in thousands)
|
|
Accrued employee compensation and benefits
|
|
$
|
3,785
|
|
|
$
|
2,161
|
|
Accrued professional fees
|
|
|
1,214
|
|
|
|
1,521
|
|
Sales tax and VAT payable
|
|
|
746
|
|
|
|
1,502
|
|
Current obligation - right of use operating leases
|
|
|
511
|
|
|
|
—
|
|
Accrued restructuring (Note 9)
|
|
|
1,959
|
|
|
|
653
|
|
Accrued other
|
|
|
936
|
|
|
|
1,925
|
|
Total accrued expenses
|
|
$
|
9,151
|
|
|
$
|
7,762
|
|
On February 6, 2019, we acquired all of the outstanding stock of Xstream A/S (“Xstream”) for $4.6 million in cash and 541,738 shares of common stock for a total transaction value of $5.4 million. Xstream provides a managed service, OTT video solution that serves more than five million active subscribers globally.
The acquisition has been accounted for as a business combination and, in accordance with ASC 805, Business Combinations, we have recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following table summarizes the preliminary purchase price allocation recorded:
Estimated fair value of consideration:
|
|
|
|
|
Cash
|
|
$
|
4,552
|
|
Stock consideration
|
|
|
874
|
|
Total purchase price
|
|
$
|
5,426
|
|
Estimated fair value of assets acquired and liabilities assumed:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
714
|
|
Other current assets
|
|
|
927
|
|
Other long-term assets
|
|
|
152
|
|
Finite-life intangible assets
|
|
|
3,648
|
|
Goodwill
|
|
|
1,221
|
|
Current liabilities
|
|
|
(1,236
|
)
|
Allocated purchase price
|
|
$
|
5,426
|
|
The significant intangible assets identified in the preliminary purchase price allocation discussed above include developed technology and customer relationships, which are amortized over their respective useful lives on a straight-line basis. Amortization of existing technology is included within research and development and amortization of customer relationships is included within sales and marketing expense. To value the developed technology asset, we utilized the income approach, specifically a discounted cash-flow method known as the multi-period excess earnings method. Customer relationships represent the underlying relationships with certain customers to provide ongoing services for products sold. We utilized the income approach, specifically the distribution method, a subset of the excess-earnings method to value the customer relationships.
The following table presents the estimated fair values and useful lives of the identifiable intangible assets acquired:
|
|
Useful Life
|
|
Fair Value
|
|
|
|
|
|
(amounts in
thousands)
|
|
Customer contracts
|
|
3 years
|
|
$
|
2,273
|
|
Existing technology
|
|
3 years
|
|
|
1,375
|
|
|
|
|
|
$
|
3,648
|
|
16
Goodwill was recognized for the excess purchase price over the fair value of the net assets acquired. The goodwill reflects the value of the synergies the Company expects to realize and the assembled workforce. Goodwill from the Xstream acquisition is included within the Company’s one reporting unit and is included in the Company’s enterprise-level annual review for impairment. Goodwill resulting from the Xstream acquisition is not deductible for tax purposes.
The purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based upon the respective estimates of fair value as of the date of the acquisition, which remains preliminary in regards to the intangibles valuation, and using assumptions that the Company’s management believes are reasonable given the information then available. The final allocation of the purchase price may differ materially from the information presented in these consolidated financial statements. Any changes to the preliminary estimates of the fair value of the assets acquired and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.
The revenues and loss before income taxes from Xstream included in our consolidated results for the nine months ended October 31, 2019 were $2.9 million and $1.7 million, respectively. The Xstream results include expenses resulting from purchase accounting that include amortization of intangibles. We have not presented pro forma results of operations for the Xstream acquisition because it is not material to the Company's consolidated results of operations, financial position, or cash flows.
6.
|
Goodwill and Intangible Assets
|
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 if we identify certain triggering events or circumstances that would more likely than not reduce the estimated fair value of the goodwill below its carrying amount. The following table represents the changes in goodwill since January 31, 2019:
|
|
Goodwill
|
|
|
|
(Amounts in
thousands)
|
|
Balance as of January 31, 2019
|
|
$
|
8,753
|
|
Goodwill arising from the Xstream acquisition
|
|
|
1,221
|
|
Cumulative translation adjustment
|
|
|
(179
|
)
|
Balance as of October 31, 2019
|
|
$
|
9,795
|
|
Intangible assets, net, consisted of the following at October 31, 2019:
|
|
As of October 31, 2019
|
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Cumulative
translation
Adjustment
|
|
|
Net
|
|
|
|
(Amounts in thousands)
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired customer contracts
|
|
$
|
2,273
|
|
|
$
|
555
|
|
|
$
|
(48
|
)
|
|
$
|
1,670
|
|
Acquired existing technology
|
|
|
1,375
|
|
|
|
338
|
|
|
|
(25
|
)
|
|
|
1,012
|
|
Total finite-lived intangible assets
|
|
$
|
3,648
|
|
|
$
|
893
|
|
|
$
|
(73
|
)
|
|
$
|
2,682
|
|
As a result of our impairment analysis in the fourth quarter of fiscal 2019, the carrying value of our intangible assets was zero as of January 31, 2019.
We recognized amortization expense of intangible assets in cost of revenue and operating expense categories as follows:
|
|
For the Three Months
Ended October 31,
|
|
|
For the Nine Months
Ended October 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Amounts in thousands)
|
|
|
(Amounts in thousands)
|
|
Cost of revenue
|
|
$
|
—
|
|
|
|
356
|
|
|
$
|
—
|
|
|
$
|
534
|
|
Selling and marketing
|
|
|
185
|
|
|
|
380
|
|
|
|
555
|
|
|
|
525
|
|
Research and development
|
|
|
110
|
|
|
|
58
|
|
|
|
338
|
|
|
|
139
|
|
|
|
$
|
295
|
|
|
$
|
794
|
|
|
$
|
893
|
|
|
$
|
1,198
|
|
17
Future estimated amortization expense of acquired intangibles as of October 31, 2019 is as follows:
For the Fiscal Years Ended January 31,
|
|
Estimated
Amortization
Expense
|
|
|
|
(Amounts in
thousands)
|
|
2020
|
|
$
|
300
|
|
2021
|
|
|
1,191
|
|
2022
|
|
|
1,191
|
|
Total
|
|
$
|
2,682
|
|
7.
|
Commitments and Contingencies
|
Litigation
Certain conditions may exist as of the date the consolidated financial statements are issued which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us, or unasserted claims that may result in such proceedings, we evaluate the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our consolidated financial statements. If our assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed.
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 our historical 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 receive revenue for extended warranties beyond the standard duration, it is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred.
18
Facilities Leases
In December 2019, we entered into an operating sublease agreement that commences on December 2, 2019, relocating our corporate headquarters to Waltham, Massachusetts. The subleased space is approximately 17,000 square feet with an initial sublease term of 63 months, and an option allowing us to extend the term for 36 additional months. The total minimum rent obligation under the initial sublease agreement is approximately $3.1 million.
In October of 2019, we entered into an agreement with our landlord to lease additional storage, office and parking space at our current facility in Poland and increase the term of our existing leases to February 2025. The monthly cost of the additional leased space is approximately 8,000 EUR.
As discussed in Note 9, in October 2019 we commenced with a plan to consolidate our Netherlands and Ireland operations and vacate our Netherlands and Ireland facilities by providing four- and six-month notices, respectively, to our landlords to terminate our lease agreements.
The Company has noncancelable operating leases for facilities, automobiles and equipment expiring at various dates through 2023 and thereafter. As discussed in Note 2, the Company adopted ASC 842 as of February 1, 2019 on a prospective basis using the transition method under ASU 2018-11. In accordance with this method, the Company recognized a right of use asset and an operating lease liability of $1.7 million as of February 1, 2019.
The components of lease expense for the three and nine months ended October 31, 2019 are as follows:
|
|
Three Months
Ended
October 31, 2019
|
|
|
Nine Months
Ended
October 31, 2019
|
|
|
|
(Amounts in
thousands)
|
|
Operating lease cost
|
|
$
|
199
|
|
|
$
|
611
|
|
Short term lease cost
|
|
|
3
|
|
|
17
|
|
Total lease cost
|
|
$
|
202
|
|
|
$
|
628
|
|
Supplemental cash flow information related to the Company’s operating leases was as follows:
|
|
Nine Months Ended
October 31, 2019
|
|
|
|
(Amounts in
thousands)
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
611
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
|
|
|
Operating leases
|
|
$
|
2,952
|
|
Supplemental balance sheet information related to the Company's operating leases was as follows:
|
|
October 31, 2019
|
|
|
|
(Amounts in
thousands)
|
|
Operating lease right-of-use assets
|
|
$
|
2,438
|
|
|
|
|
|
|
Current portion, operating lease liabilities
|
|
|
511
|
|
Operating lease liabilities, long term
|
|
|
2,056
|
|
Total operating lease liabilities
|
|
$
|
2,567
|
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
4.9
|
|
Weighted average incremental borrowing rate
|
|
|
5.1
|
%
|
The current portion, operating lease liabilities is included in the balance of accrued expenses at October 31, 2019. Rent payments for continuing operations were approximately $0.2 million and $0.6 million for the three and nine months ended
19
October 31, 2019. Future minimum lease payments for operating leases, with initial or remaining terms in excess of one year at October 31, 2019, are as follows:
|
|
Payments for
Operating Leases
|
|
For the fiscal years ended January 31,
|
|
(Amounts in
thousands)
|
|
2020
|
|
$
|
192
|
|
2021
|
|
|
573
|
|
2022
|
|
|
545
|
|
2023
|
|
|
526
|
|
2024
|
|
|
516
|
|
Thereafter
|
|
|
497
|
|
Total lease payments
|
|
|
2,849
|
|
Less interest
|
|
|
282
|
|
Total operating lease liabilities
|
|
$
|
2,567
|
|
9.
|
Severance and Restructuring Costs
|
During the three and nine months ended October 31, 2019, we incurred severance and restructuring costs of $2.3 million and $3.2 million, respectively, primarily for employee-related benefits for terminated employees, partially offset by the reversal of operating lease liabilities. In September 2018, we announced that we implemented cost-savings actions during the third quarter of fiscal 2019 (the “2019 Restructuring Program”). The primary element of this restructuring program was staff reductions across all of our functions and geographic areas and the program was substantially completed at the end of the first six months of fiscal 2020. In addition, as we continue to streamline our operations, in October 2019, we closed our service organizations in Ireland and the Netherlands resulting in restructuring charges of $1.9 million.
The following table shows the change in accrued restructuring balances since January 31, 2019 primarily related to our 2019 Restructuring Program, reported as a component of other accrued expenses on the consolidated balance sheets:
|
|
Employee-
Related
Benefits
|
|
|
Closure of
Leased
Facilities
|
|
|
Other
Restructuring
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
Accrued balance as of January 31, 2019
|
|
$
|
653
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
653
|
|
Restructuring charges incurred
|
|
|
2,713
|
|
|
|
107
|
|
|
|
211
|
|
|
|
3,031
|
|
Cash payments
|
|
|
(1,401
|
)
|
|
|
—
|
|
|
|
(211
|
)
|
|
|
(1,612
|
)
|
Other charges
|
|
|
(6
|
)
|
|
|
(107
|
)
|
|
|
—
|
|
|
|
(113
|
)
|
Accrued balance as of October 31, 2019
|
|
$
|
1,959
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,959
|
|
10.
|
Stock Repurchase Program
|
On June 6, 2019, the Board authorized a share repurchase program of up to $5.0 million of then-outstanding shares of the Company over the next year. Under the share repurchase program, the Company is authorized to repurchase, from time to time, outstanding shares of common stock in accordance with applicable laws both on the open market, including under trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended and in privately negotiated transactions.
The following table provides a summary of the Company’s stock repurchase activities for the nine months ended October 31, 2019 (in thousands, except per share amounts):
|
|
For the Nine
Months Ended
|
|
|
|
October 31, 2019
|
|
Shares repurchased
|
|
|
100
|
|
Average cost per share
|
|
$
|
1.42
|
|
Value of shares repurchased
|
|
$
|
142
|
|
20
11.
|
Stock-based Compensation Expense
|
Equity Plans
2011 Compensation and Incentive Plan.
Our 2011 Compensation and Incentive 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”), performance stock units (“PSUs”) and other equity based non-stock option awards as determined by the plan administrator to our officers, employees, consultants and directors. We may satisfy awards upon the exercise of stock options or the vesting of stock units with newly issued shares or treasury shares. The Board of Directors is responsible for the administration of the 2011 Plan and determining the terms of each award, award exercise price, the number of shares for which each award is granted and the rate at which each award vests. In certain instances, the Board of Directors may elect to modify the terms of an award. The number of shares authorized for issuance under the 2011 Plan is 9,300,000. Additionally, outstanding awards under the 2005 Equity Compensation and Incentive Plan that, since adoption of the 2011 Plan, expire, terminate, or are surrendered or canceled without having been fully exercised are available for issuance under the 2011 Plan. As of October 31, 2019, there were 2,667,216 shares available for future grant.
Nonemployee members of the Board of Directors may elect to receive DSUs in lieu of RSUs. 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.
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. Option awards granted under the 2011 Plan generally vest over a period of one to three years and expire ten years from the date of the grant.
We have a Long-Term Incentive (“LTI”) Program, adopted in fiscal 2016, under which the named executive officers and other of our key employees may 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 PSUs subject to vesting based in part on the extent to which employment continues.
2015 Employee Stock Purchase Plan
Under our 2015 Employee Stock Purchase Plan (the “ESPP), six-month offering periods begin on October 1 and April 1 of each year during which eligible employees may elect to purchase shares of our common stock according to the terms of the offering. On each purchase date, eligible employees can 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 authorized for sale under the ESPP is 1,150,000 shares, of which 1,080,726 remain available under the ESPP as of October 31, 2019. Under the ESPP, 12,453 and 14,398 shares were purchased during the first nine months of fiscal 2020 and fiscal 2019, respectively.
Award Activity
In the third quarter of fiscal 2020, we granted 425,000 option awards with a combined fair value totaling $1.2 million.
Market-Based Options
Our former CEO was granted 800,000 market-based options issued in fiscal 2016 and fiscal 2017. These stock options vest in approximately equal increments based upon the closing price of our common stock achieving a certain level and continued service conditions. We measured the grant-date fair value of these options using a Monte Carlo simulation model and recognized the associated expense over the requisite service period. The fair value of these stock options was $2.1 million, which was recognized over three years. In February 2019, these options were cancelled upon the resignation of our CEO, at which time we reversed $0.5 million of stock-based compensation expense related to the final performance period for a portion of the grant.
We have not granted additional market-based options since fiscal 2017.
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Stock-based Compensation
We recognized stock-based compensation expense within the accompanying consolidated statements of operations and comprehensive loss as follows:
|
|
For the Three Months
Ended October 31,
|
|
|
For the Nine Months
Ended October 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Amounts in thousands)
|
|
|
(Amounts in thousands)
|
|
Cost of revenue
|
|
$
|
(21
|
)
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
Research and development
|
|
|
92
|
|
|
|
46
|
|
|
|
242
|
|
|
|
154
|
|
Sales and marketing
|
|
|
101
|
|
|
|
100
|
|
|
|
92
|
|
|
|
334
|
|
General and administrative
|
|
|
185
|
|
|
|
622
|
|
|
|
222
|
|
|
|
2,082
|
|
|
|
$
|
357
|
|
|
$
|
769
|
|
|
$
|
554
|
|
|
$
|
2,571
|
|
Stock-based compensation expense in the amount of $0.1 million for modifications to awards was recorded in the three months ended October 31, 2019. A credit to stock-based compensation in the amount of $0.6 million for modifications to awards was recorded in the nine months ended October 31, 2019. As of October 31, 2019, unrecognized stock-based compensation expense related to unvested stock options was approximately $1.7 million, which is expected to be recognized over a weighted average period of 2.5 years. As of October 31, 2019, unrecognized stock-based compensation expense related to unvested RSUs and DSUs was $0.9 million, which is expected to be recognized over a weighted average amortization period of 1.5 years. As of October 31, 2019, unrecognized stock-based compensation expense related to unvested PSUs was $0.04 million, which is expected to be recognized over a weighted average amortization period of 1.0 year.
12.
|
Revenues from Contracts with Customers
|
Disaggregated Revenue
The following table shows our revenue disaggregated by revenue stream for the three and nine months ended October 31, 2019 and 2018
|
|
For the Three Months
Ended October 31,
|
|
|
For the Nine Months
Ended October 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Amounts in thousands)
|
|
|
(Amounts in thousands)
|
|
Product
|
|
$
|
13,524
|
|
|
$
|
8,268
|
|
|
$
|
26,671
|
|
|
$
|
12,821
|
|
Professional services
|
|
|
1,124
|
|
|
|
2,948
|
|
|
|
5,050
|
|
|
|
11,011
|
|
Maintenance - first year
|
|
|
541
|
|
|
|
514
|
|
|
|
1,820
|
|
|
|
1,632
|
|
Maintenance - renewal
|
|
|
5,355
|
|
|
|
6,881
|
|
|
|
14,300
|
|
|
|
19,983
|
|
Total revenue
|
|
$
|
20,544
|
|
|
$
|
18,611
|
|
|
$
|
47,841
|
|
|
$
|
45,447
|
|
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 October 31, 2019 is $30.8 million. This amount includes amounts billed for undelivered services that are included in deferred revenue.
22
13.
|
Segment Information, Significant Customers and Geographic Information
|
We have determined that we operate in one segment.
Geographic Information
The following summarizes revenue by customers’ geographic locations:
|
|
For the Three Months
Ended October 31,
|
|
|
For the Nine Months
Ended October 31,
|
|
|
|
2019
|
|
|
%
|
|
|
2018
|
|
|
%
|
|
|
2019
|
|
|
%
|
|
|
2018
|
|
|
%
|
|
|
|
(Amounts in thousands, except percentages)
|
|
|
(Amounts in thousands, except percentages)
|
|
Revenue by customer's geographic
locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America (1)
|
|
$
|
12,472
|
|
|
61%
|
|
|
$
|
10,534
|
|
|
57%
|
|
|
$
|
28,128
|
|
|
59%
|
|
|
$
|
23,580
|
|
|
52%
|
|
Europe and Middle East
|
|
|
6,870
|
|
|
33%
|
|
|
|
3,876
|
|
|
21%
|
|
|
|
12,564
|
|
|
26%
|
|
|
|
13,757
|
|
|
30%
|
|
Latin America
|
|
|
907
|
|
|
4%
|
|
|
|
3,863
|
|
|
21%
|
|
|
|
6,086
|
|
|
13%
|
|
|
|
6,934
|
|
|
15%
|
|
Asia Pacific
|
|
|
295
|
|
|
1%
|
|
|
|
338
|
|
|
2%
|
|
|
|
1,063
|
|
|
2%
|
|
|
|
1,176
|
|
|
3%
|
|
Total revenue
|
|
$
|
20,544
|
|
|
|
|
|
|
$
|
18,611
|
|
|
|
|
|
|
$
|
47,841
|
|
|
|
|
|
|
$
|
45,447
|
|
|
|
|
|
|
(1)
|
Includes total revenue for the United States for the periods shown as follows:
|
|
|
For the Three Months
Ended October 31,
|
|
|
For the Nine Months
Ended July 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Amounts in thousands,
except percentages)
|
|
|
(Amounts in thousands,
except percentages)
|
|
US Revenue
|
|
$
|
10,425
|
|
|
$
|
8,124
|
|
|
$
|
23,489
|
|
|
$
|
19,013
|
|
% of total revenue
|
|
|
51
|
%
|
|
|
44
|
%
|
|
|
49
|
%
|
|
|
42
|
%
|
The following summarizes long-lived assets by geographic locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2019
|
|
|
%
|
|
|
As of January 31, 2019
|
|
|
%
|
|
|
|
(Amounts in thousands, except percentages)
|
|
Long-lived assets by geographic locations (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
17,267
|
|
|
76%
|
|
|
$
|
7,148
|
|
|
93%
|
|
Europe and Middle East
|
|
|
5,344
|
|
|
24%
|
|
|
|
446
|
|
|
6%
|
|
Asia Pacific
|
|
|
46
|
|
|
0%
|
|
|
|
48
|
|
|
1%
|
|
Total long-lived assets by geographic location
|
|
$
|
22,657
|
|
|
|
|
|
|
$
|
7,642
|
|
|
|
|
|
|
(1)
|
Excludes long-term marketable securities and goodwill.
|
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 $0.1 million and $0.2 million in the for the three and nine months ended October 31, 2019, respectively, and we recorded income tax benefits of $0.8 million and $2.4 million for the three and nine months ended October 31, 2018, respectively. Our effective tax rate in fiscal 2020 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.
We review all available evidence to evaluate the recovery of deferred tax assets, including the recent history of losses in all tax jurisdictions, as well as its ability to generate income in future periods. As of October 31, 2019, due to the uncertainty related to the ultimate use of certain deferred income tax assets, we have recorded a valuation allowance on certain deferred assets.
23
The U.S. Tax Cuts and Job Act (the “2017 Tax 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.
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; 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.
On March 4, 2019, our Board approved and adopted a Tax Benefits Preservation Plan to potentially limit our ability to use net operating loss carryforwards and certain other tax attributes (“NOLs”) to reduce our potential future federal income tax obligations. In connection with the Tax Benefits Preservation Plan, we declared a dividend of one preferred share purchase right for each share of our common stock issued and outstanding as of March 15, 2019 to our stockholders of record on that date. The Tax Benefits Preservation Plan expires no later than March 4, 2022, and was approved by our stockholders at our 2019 annual meeting of stockholders on July 11, 2019.
On November 4, 2019, we entered into a Purchase and Sale Agreement and Escrow Instructions (the “Agreement”) for the sale of our Corporate headquarters in Acton, Massachusetts for $0.6 million. The sale is expected to close in the fourth quarter of our fiscal year 2020, and the Agreement contains a seller license provision to allow us to remain in our current facility for up to six months from the closing date as we relocate our headquarters. We expect to recognize a loss of approximately $5.3 million upon consummation of the sale. The building’s net cost basis of approximately $5.9 million is classified in Property and equipment, net on our balance sheet at October 31, 2019.
Effective as of December 3, 2019, Mark Bonney retired as a Class I Director and Chairman of the Board of SeaChange. Mr. Bonney had served as a director since August 2017, Executive Chair from April 4, 2019 to October 1, 2019, and independent Chairman of the Board from October 1, 2019 to his resignation. Robert Pons has been appointed Chairman of the Board.
24