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EX-32.2 - EX-32.2 - SEACHANGE INTERNATIONAL INCseac-ex322_9.htm
EX-32.1 - EX-32.1 - SEACHANGE INTERNATIONAL INCseac-ex321_6.htm
EX-31.2 - EX-31.2 - SEACHANGE INTERNATIONAL INCseac-ex312_8.htm
EX-31.1 - EX-31.1 - SEACHANGE INTERNATIONAL INCseac-ex311_7.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended October 31, 2017

OR

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

For the transition period from                      to                     

Commission File Number: 0-21393

 

SEACHANGE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

04-3197974

(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)

50 Nagog Park, Acton, MA 01720

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (978) 897-0100

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

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

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

The number of shares outstanding of the registrant’s Common Stock on December 1, 2017 was 35,503,871.

 

 


 

SEACHANGE INTERNATIONAL, INC.

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Page

Item 1.

Financial Statements (interim periods unaudited)

 

 

 

 

 

Consolidated Balance Sheets at October 31, 2017 and January 31, 2017

3

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended October 31, 2017 and October 31, 2016

4

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended October 31, 2017 and October 31, 2016

5

 

 

 

 

Notes to Consolidated Financial Statements

6-24

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25-42

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

 

 

 

Item 4.

Controls and Procedures

43

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

45

 

 

 

Item 1A.

Risk Factors

45

 

 

 

Item 6.

Exhibits

45

 

 

SIGNATURES

47

 

2


 

PART I – FINANCIAL INFORMATION

ITEM 1.   Financial Statements

SEACHANGE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

 

 

October 31,

 

 

January 31,

 

 

 

2017

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,155

 

 

$

28,302

 

Restricted cash

 

 

8

 

 

 

109

 

Marketable securities

 

 

4,990

 

 

 

5,253

 

Accounts and other receivables, net of allowance for doubtful accounts of $294

   and $876 at October 31, 2017 and January 31, 2017, respectively

 

 

28,437

 

 

 

25,985

 

Unbilled receivables

 

 

3,630

 

 

 

6,553

 

Inventories, net

 

 

850

 

 

 

770

 

Prepaid expenses and other current assets

 

 

2,856

 

 

 

2,393

 

Total current assets

 

 

67,926

 

 

 

69,365

 

Property and equipment, net

 

 

10,131

 

 

 

11,485

 

Marketable securities, long-term

 

 

4,485

 

 

 

4,991

 

Investments in affiliates

 

 

2,000

 

 

 

2,000

 

Intangible assets, net

 

 

1,616

 

 

 

2,603

 

Goodwill, net

 

 

24,506

 

 

 

23,287

 

Other assets

 

 

1,200

 

 

 

2,336

 

Total assets

 

$

111,864

 

 

$

116,067

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,631

 

 

$

4,978

 

Deferred revenues

 

 

12,558

 

 

 

12,517

 

Other accrued expenses

 

 

12,788

 

 

 

9,928

 

Total current liabilities

 

 

26,977

 

 

 

27,423

 

Deferred revenue, long-term

 

 

3,058

 

 

 

2,419

 

Deferred tax liabilities, long-term

 

 

16,253

 

 

 

14,732

 

Taxes payable, long-term

 

 

973

 

 

 

1,427

 

Other liabilities, long-term

 

 

 

 

 

530

 

Total liabilities

 

 

47,261

 

 

 

46,531

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 100,000,000 shares authorized; 35,544,361

   shares issued and 35,503,871 outstanding at October 31, 2017, and 35,339,232

   shares issued and 35,298,742 outstanding at January 31, 2017

 

 

355

 

 

 

353

 

Additional paid-in capital

 

 

238,955

 

 

 

236,677

 

Treasury stock, at cost; 40,490 common shares at October 31, 2017 and January 31,

   2017, respectively

 

 

(5

)

 

 

(5

)

Accumulated loss

 

 

(169,238

)

 

 

(162,118

)

Accumulated other comprehensive loss

 

 

(5,464

)

 

 

(5,371

)

Total stockholders’ equity

 

 

64,603

 

 

 

69,536

 

Total liabilities and stockholders’ equity

 

$

111,864

 

 

$

116,067

 

 

 

 

 

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

3


 

SEACHANGE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

October 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

11,119

 

 

$

3,746

 

 

$

18,907

 

 

$

10,481

 

Services

 

 

12,311

 

 

 

16,215

 

 

 

38,415

 

 

 

49,502

 

Total revenues

 

 

23,430

 

 

 

19,961

 

 

 

57,322

 

 

 

59,983

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

1,198

 

 

 

1,824

 

 

 

3,088

 

 

 

4,506

 

Services

 

 

5,612

 

 

 

7,470

 

 

 

15,810

 

 

 

26,336

 

Amortization of intangible assets

 

 

255

 

 

 

315

 

 

 

764

 

 

 

947

 

Stock-based compensation expense

 

 

1

 

 

 

(26

)

 

 

3

 

 

 

131

 

Total cost of revenues

 

 

7,066

 

 

 

9,583

 

 

 

19,665

 

 

 

31,920

 

Gross profit

 

 

16,364

 

 

 

10,378

 

 

 

37,657

 

 

 

28,063

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

5,634

 

 

 

7,325

 

 

 

17,411

 

 

 

23,751

 

Selling and marketing

 

 

3,916

 

 

 

3,988

 

 

 

9,292

 

 

 

12,487

 

General and administrative

 

 

3,868

 

 

 

3,673

 

 

 

10,595

 

 

 

11,579

 

Amortization of intangible assets

 

 

370

 

 

 

540

 

 

 

1,075

 

 

 

1,572

 

Stock-based compensation expense

 

 

696

 

 

 

791

 

 

 

2,224

 

 

 

1,685

 

Change in fair value of earn-outs

 

 

 

 

 

 

 

 

 

 

 

249

 

Professional fees - other

 

 

 

 

 

24

 

 

 

21

 

 

 

328

 

Severance and other restructuring costs

 

 

960

 

 

 

2,373

 

 

 

3,670

 

 

 

5,991

 

Loss on impairment of long-lived assets

 

 

 

 

 

99

 

 

 

 

 

 

99

 

Total operating expenses

 

 

15,444

 

 

 

18,813

 

 

 

44,288

 

 

 

57,741

 

Income (loss) from operations

 

 

920

 

 

 

(8,435

)

 

 

(6,631

)

 

 

(29,678

)

Other income (expenses), net

 

 

14

 

 

 

(67

)

 

 

969

 

 

 

220

 

Income (loss) before income taxes

 

 

934

 

 

 

(8,502

)

 

 

(5,662

)

 

 

(29,458

)

Income tax provision (benefit)

 

 

1,154

 

 

 

(420

)

 

 

1,458

 

 

 

14,415

 

Net loss

 

$

(220

)

 

$

(8,082

)

 

$

(7,120

)

 

$

(43,873

)

Net loss

 

$

(220

)

 

$

(8,082

)

 

$

(7,120

)

 

$

(43,873

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(79

)

 

 

(619

)

 

 

(76

)

 

 

(316

)

Unrealized loss on marketable securities

 

 

(12

)

 

 

(20

)

 

 

(17

)

 

 

(2

)

Comprehensive loss

 

$

(311

)

 

$

(8,721

)

 

$

(7,213

)

 

$

(44,191

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.00

)

 

$

(0.23

)

 

$

(0.20

)

 

$

(1.26

)

Diluted

 

$

(0.00

)

 

$

(0.23

)

 

$

(0.20

)

 

$

(1.26

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,479

 

 

 

35,186

 

 

 

35,381

 

 

 

34,889

 

Diluted

 

 

35,479

 

 

 

35,186

 

 

 

35,381

 

 

 

34,889

 

 

 

 

 

 

 

 

 

 

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

4


 

SEACHANGE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

 

 

 

Nine Months Ended

 

 

 

October 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,120

)

 

$

(43,873

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

1,758

 

 

 

2,289

 

Provision for inventory obsolescence

 

 

90

 

 

 

318

 

Amortization of intangible assets

 

 

1,839

 

 

 

2,519

 

Fair value of acquisition-related contingent consideration

 

 

 

 

 

249

 

Stock-based compensation expense

 

 

2,227

 

 

 

1,816

 

Deferred income taxes

 

 

102

 

 

 

14,649

 

Other

 

 

(14

)

 

 

113

 

Changes in operating assets and liabilities, excluding impact of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,401

)

 

 

1,987

 

Unbilled receivables

 

 

3,289

 

 

 

2,913

 

Inventories

 

 

(165

)

 

 

338

 

Prepaid expenses and other assets

 

 

62

 

 

 

428

 

Accounts payable

 

 

(3,199

)

 

 

(2,102

)

Accrued expenses

 

 

942

 

 

 

(4,833

)

Deferred revenues

 

 

355

 

 

 

(3,864

)

Other

 

 

327

 

 

 

173

 

Total cash used in operating activities

 

 

(908

)

 

 

(26,880

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(386

)

 

 

(521

)

Purchases of marketable securities

 

 

(7,246

)

 

 

(2,252

)

Proceeds from sale and maturity of marketable securities

 

 

7,993

 

 

 

4,249

 

Acquisition of business, net of cash acquired

 

 

 

 

 

(5,243

)

Other investing activities

 

 

176

 

 

 

28

 

Total cash provided by (used in) investing activities

 

 

537

 

 

 

(3,739

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

53

 

 

 

64

 

Payments of withholding tax on RSU vesting

 

 

(52

)

 

 

(109

)

Other financing activities

 

 

 

 

 

(4

)

Total cash provided by (used in) financing activities

 

 

1

 

 

 

(49

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(878

)

 

 

(555

)

Net decrease in cash, cash equivalents, and restricted cash

 

 

(1,248

)

 

 

(31,223

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

28,411

 

 

 

58,815

 

Cash, cash equivalents and restricted cash, end of period

 

$

27,163

 

 

$

27,592

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

267

 

 

$

120

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Fair value of common stock issued for acquisition of DCC Labs

 

$

 

 

$

2,640

 

Fair value of common stock issued for deferred stock consideration obligation

 

$

 

 

$

3,454

 

Asset group classified as held for sale

 

$

 

 

$

235

 

Transfer of items originally classified as inventories to equipment

 

$

 

 

$

24

 

 

 

 

 

 

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

5


 

SEACHANGE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

Nature of Business and Basis of Presentation

The Company

SeaChange International, Inc. and its consolidated subsidiaries (collectively “SeaChange”, “we”, or the “Company”) is an industry leader in the delivery of multiscreen video, advertising and premium over-the-top (“OTT”) video. Our products and services facilitate the aggregation, licensing, management and distribution of video and advertising content to cable television system operators, telecommunications companies, satellite operators and media companies.

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of SeaChange International, Inc. and its subsidiaries (“SeaChange” or the “Company”) and are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reports as well as rules and regulations of the Securities and Exchange Commission (“SEC”). All intercompany transactions and balances have been eliminated. Certain information and footnote disclosures normally included in financial statements prepared under U.S. GAAP have been condensed or omitted pursuant to such regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the accompanying financial statements include all adjustments, consisting of only normal recurring items, necessary to present a fair presentation of the consolidated financial statements for the periods shown. These consolidated financial statements should be read in conjunction with our most recently audited financial statements and related footnotes included in our Annual Report on Form 10-K (“Form 10-K”) as filed with the SEC. The balance sheet data as of January 31, 2017 that is included in this Quarterly Report on Form 10-Q (“Form 10-Q”) was derived from our audited financial statements. We have reclassified certain amounts previously reported in our financial statements to conform to current presentation.

Effective February 1, 2017, the Company changed how it classifies costs associated with its solution architect employees. In fiscal 2017, all solution architect costs were classified as cost of revenues. However, beginning in fiscal 2018, the Company began reflecting in cost of revenues only those costs associated with revenue-generating projects, based on the hours worked by solutions architect employees. Solutions architect costs that are not associated with revenue-generating projects are recognized as selling and marketing expenses since these employees are involved in pre-sales and other customer-facing activities.

 

We have adjusted prior fiscal year amounts to conform to the current fiscal year presentation. The effect of this change in methodology, which is a decrease to cost of revenues and an increase to selling and marketing expenses, is reflected in our current statements of operations and comprehensive loss for the three and nine months ended October 31, 2016 as follows:

 

 

 

 

 

 

 

Adjustment to

 

 

 

 

 

 

 

As Filed Fiscal 2017

 

 

Conform to

 

 

Adjusted

 

 

 

Three Months Ended

 

 

Current Year

 

 

Three Months Ended

 

 

 

October 31, 2016

 

 

Presentation

 

 

October 31, 2016

 

 

 

(Amounts in thousands)

 

Cost of revenues - service

 

$

8,036

 

 

$

(566

)

 

$

7,470

 

Selling and marketing expenses

 

$

3,422

 

 

$

566

 

 

$

3,988

 

 

 

 

 

 

 

 

Adjustment to

 

 

 

 

 

 

 

As Filed Fiscal 2017

 

 

Conform to

 

 

Adjusted

 

 

 

Nine Months Ended

 

 

Current Year

 

 

Nine Months Ended

 

 

 

October 31, 2016

 

 

Presentation

 

 

October 31, 2016

 

 

 

(Amounts in thousands)

 

Cost of revenues - service

 

$

27,982

 

 

$

(1,646

)

 

$

26,336

 

Selling and marketing expenses

 

$

10,841

 

 

$

1,646

 

 

$

12,487

 

 

6


 

The preparation of these financial statements in conformity with U.S. GAAP, requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and 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. During the three and nine months ended October 31, 2017, there have been no material changes to our significant accounting policies that were described in our fiscal 2017 Form 10-K, as filed with the SEC.

The Company believes that existing funds and cash provided by future operating activities are adequate to satisfy our working capital, potential acquisitions and capital expenditure requirements and other contractual obligations for the foreseeable future, including at least the next 12 months. However, if our expectations are incorrect, we may need to raise additional funds to fund our operations, to take advantage of unanticipated strategic opportunities or to strengthen our financial position. In the future, we may enter into other arrangements for potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt financing. If adequate funds are not available, or are not available on acceptable terms, we may not be able to take advantage of market opportunities, to develop new products or to otherwise respond to competitive pressures.

In the second quarter of fiscal 2017, following a review of our operations, liquidity and funding, and investment in our product roadmap, we determined that the ability to access cash resulting from earnings in prior fiscal years that had previously been deemed permanently restricted for foreign investment would provide greater flexibility to meet the Company’s working capital needs. Accordingly, in the second quarter of fiscal 2017, we changed our permanent reinvestment assertion on $58.6 million of earnings generated by our Irish operations through July 2016.  We recorded a deferred tax liability of $14.7 million related to the foreign income taxes on $58.6 million of undistributed earnings. The balance of the deferred tax liability is $16.3 million as of October 31, 2017.

2.

Significant Accounting Policies

 

Cash, cash equivalents, and restricted cash

 

Cash and cash equivalents include cash on hand and on deposit and highly liquid investments in money market mutual funds, government sponsored enterprise obligations, treasury bills, commercial paper and other money market securities with remaining maturities at date of purchase of 90 days or less. All cash equivalents are carried at cost, which approximates fair value. Restricted cash represents cash that is restricted as to withdrawal or usage and consists primarily of cash held as collateral for performance obligations with our customers.

 

We early adopted the new Financial Accounting Standards Board (“FASB”) guidance on August 1, 2017, which changed the presentation of our consolidated statements of cash flows and related disclosures for all periods presented (see Note 14, “Recent Accounting Standard Updates,” for more information on the adoption of this guidance). Accordingly, the following is a summary of our cash, cash equivalents, and restricted cash total as presented in our consolidated statements of cash flows for the nine months ended October 31, 2017 and 2016:

 

 

 

Nine Months Ended

 

 

 

October 31,

 

 

 

2017

 

 

2016

 

 

 

(Amounts in thousands)

 

Cash and cash equivalents

 

$

27,155

 

 

$

27,484

 

Restricted cash

 

 

8

 

 

 

108

 

Total cash, cash equivalents, and restricted cash

 

$

27,163

 

 

$

27,592

 

 

 

 

 

 

 

 

 

 

Revenue Recognition

Our transactions frequently involve the sales of hardware, software, systems and services in multiple-element arrangements. Revenues from sales of hardware, software and systems that do not require significant modification or customization of the underlying software are recognized when:

 

persuasive evidence of an arrangement exists;

 

delivery has occurred, and title and risk of loss have passed to the customer;

 

fees are fixed or determinable; and

 

collection of the related receivable is considered probable.

Customers are billed for installation, training, project management and at least one year of product maintenance and technical support at the time of the product sale. Revenue from these activities is deferred at the time of the product sale and recognized ratably over the period these services are performed. Revenue from ongoing product maintenance and technical support

7


 

agreements is recognized ratably over the period of the related agreements. Revenue from software development contracts that include significant modification or customization, including software product enhancements, is recognized based on the percentage of completion contract accounting method using labor efforts expended in relation to estimates of total labor efforts to complete the contract. The percentage of completion method requires that adjustments or re-evaluations to estimated project revenues and costs be recognized on a project-to-date cumulative basis, as changes to the estimates are identified. Revisions to project estimates are made as additional information becomes known, including information that becomes available after the date of the consolidated financial statements up through the date such consolidated financial statements are filed with the SEC. If the final estimated profit to complete a long-term contract indicates a loss, a provision is recorded immediately for the total loss anticipated.  Accounting for contract amendments and customer change orders are included in contract accounting when executed. Revenue from shipping and handling costs and other out-of-pocket expenses reimbursed by customers are included in revenues and cost of revenues. Our share of intercompany profits associated with sales and services provided to affiliated companies are eliminated in consolidation in proportion to our equity ownership.

Contract accounting requires judgment relative to assessing risks, estimating revenues and costs and making assumptions including, in the case of our professional services contracts, the total amount of labor required to complete a project and the complexity of the development and other technical work to be completed. Due to the size and nature of many of our contracts, the estimation of total revenues and cost at completion is complicated and subject to many variables. Assumptions must be made regarding the length of time to complete the contract because costs also include estimated third-party vendor and contract labor costs. Penalties related to performance on contracts are considered in estimating sales and profit, and are recorded when there is sufficient information for us to assess anticipated performance. Third-party vendors’ assertions are also assessed and considered in estimating costs and margin.

Revenue from the sale of software-only products remains within the scope of the software revenue recognition rules. Maintenance and support, training, consulting, and installation services no longer fall within the scope of the software revenue recognition rules, except when they are sold with and relate to a software-only product. Revenue recognition for products that no longer fall under the scope of the software revenue recognition rules is like that for other tangible products and Accounting Standard Update No. (“ASU”) 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,” amended ASC 605 and is applicable for multiple-deliverable revenue arrangements. ASU 2009-13 allows companies to allocate revenue in a multiple-deliverable arrangement in a manner that better reflects the transaction’s economics.

Under the software revenue recognition rules, the fee is allocated to the various elements based on vendor-specific objective evidence (“VSOE”) of fair value. Under this method, the total arrangement value is allocated first to undelivered elements based on their fair values, with the remainder being allocated to the delivered elements. Where fair value of undelivered service elements has not been established, the total arrangement value is recognized over the period during which the services are performed. The amounts allocated to undelivered elements, which may include project management, training, installation, maintenance and technical support and certain hardware and software components, are based upon the price charged when these elements are sold separately and unaccompanied by the other elements. The amount allocated to installation, training and project management revenue is based upon standard hourly billing rates and the estimated time necessary to complete the service. These services are not essential to the functionality of systems as these services do not alter the equipment’s capabilities, are available from other vendors and the systems are standard products. For multiple-element arrangements that include software development with significant modification or customization and systems sales where VSOE of the fair value does not exist for the undelivered elements of the arrangement (other than maintenance and technical support), percentage of completion accounting is applied for revenue recognition purposes to the entire arrangement except for maintenance and technical support.

Under the revenue recognition rules for tangible products as amended by ASU 2009-13, the fee from a multiple-deliverable arrangement is allocated to each of the deliverables based upon their relative selling prices as determined by a selling-price hierarchy. A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. A delivered item that does not qualify as a separate unit of accounting is combined with the other undelivered items in the arrangement and revenue is recognized for those combined deliverables as a single unit of accounting. The selling price used for each deliverable is based upon VSOE if available, third-party evidence (“TPE”) if VSOE is not available, and best estimate of selling price (“BESP”) if neither VSOE nor TPE are available. TPE is the price of the Company’s, or any competitor’s, largely interchangeable products or services in stand-alone sales to similarly situated customers. BESP is the price at which we would sell the deliverable if it were sold regularly on a stand-alone basis, considering market conditions and entity-specific factors.

The selling prices used in the relative selling price allocation method for certain of our services are based upon VSOE. The selling prices used in the relative selling price allocation method for third-party products from other vendors are based upon TPE. The selling prices used in the relative selling price allocation method for our hardware products, software, subscriptions, and customized services for which VSOE does not exist are based upon BESP. We do not believe TPE exists for these products and services because they are differentiated from competing products and services in terms of functionality and performance and there are no competing products or services that are largely interchangeable. Management establishes BESP with consideration for market conditions, such as the impact of competition and geographic considerations, and entity-specific factors, such as the cost

8


 

of the product, discounts provided and profit objectives. Management believes that BESP is reflective of reasonable pricing of that deliverable as if priced on a stand-alone basis.

For our cloud and managed service revenues, we generate revenue from two sources: (1) subscription and support services; and (2) professional services and other. Subscription and support revenue includes subscription fees from customers accessing our cloud-based software platform and support fees. Our arrangements with customers do not provide the customer with the right to take possession of the software supporting the cloud-based software platform at any time. Professional services and other revenue include fees from implementation and customization to support customer requirements. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. For the most part, subscription and support agreements are entered into for 12 to 36 months. Generally, most of the professional services components of the arrangements with customers are performed within a year of entering a contract with the customer.

In most instances, revenue from a new customer acquisition is generated under sales agreements with multiple elements, comprised of subscription and support and other professional services. We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control.

In determining when to recognize revenue from a customer arrangement, we are often required to exercise judgment regarding the application of our accounting policies to an arrangement. The primary judgments used in evaluating revenue recognized in each period involve: determining whether collection is probable, assessing whether the fee is fixed or determinable, and determining the fair value of the maintenance and service elements included in multiple-element software arrangements. Such judgments can materially impact the amount of revenue that we record in a given period. While we follow specific and detailed rules and guidelines related to revenue recognition, we make and use significant management judgments and estimates about the revenue recognized in any reporting period, particularly in the areas described above. If management made different estimates or judgments, material differences in the timing of the recognition of revenue could occur.

Impairment of Assets

Indefinite-lived intangible assets, such as goodwill, are not amortized but are evaluated for impairment at the reporting unit level annually, in our third quarter beginning August 1st. Indefinite-lived intangible assets may be tested for impairment on an interim basis in addition to the annual evaluation if an event occurs or circumstances change such as declines in sales, earnings or cash flows, sustained decline in the Company’s stock price, or material adverse changes in the business climate, which would more likely than not reduce the fair value of a reporting unit below its carrying amount.  See Note 6, “Goodwill and Intangible Assets,” to our consolidated financial statements for more information.

 

9


 

We also evaluate property and equipment, intangible assets with finite useful lives and other long-lived assets on a regular basis for the existence of facts or circumstances, both internal and external that may suggest an asset is not recoverable. If such circumstances exist, we evaluate the carrying value of long-lived assets to determine if impairment exists based upon estimated undiscounted future cash flows over the remaining useful life of the primary asset in the asset group and compare that value to the carrying value of the assets. In August 2017, we placed our corporate headquarters and the adjacent land (the “Corporate Headquarters”), located in Acton, Massachusetts, on the market for sale. We assessed whether the Corporate Headquarters would qualify as an asset held for sale and determined that it would not since it did not meet all six of the criteria of an asset held for sale under current accounting guidance. During the assessment, we received information from a third-party real estate broker which led management to believe that there was a significant decrease in the fair value of the Corporate Headquarters. We considered this to be a triggering event and were required to test the Corporate Headquarters for recoverability. We evaluated the undiscounted future cash flows over the remaining useful life of the primary asset of the asset group and determined that an impairment did not exist as of the date of the triggering event. Our cash flow estimates contain management’s best estimates, using appropriate and customary assumptions and projections at the time.

 

In addition, since we considered the significant decrease in fair value of the Corporate Headquarters a triggering event, we were required to complete an additional goodwill impairment test as of the date of the triggering event. We completed the additional goodwill impairment test and determined that the implied fair value of the reporting unit exceeds its carrying value as of the date of the triggering event. Accordingly, no impairment charge was recognized as of October 31, 2017.

 

Liquidity

We continue to realize the savings related to our restructuring activities. During fiscal 2018, we made significant reductions to our headcount as part of our ongoing restructuring effort from which we expect to generate annualized savings of approximately $18 million. These measures are important steps in restoring SeaChange to profitability and positive cash flow. The Company believes that existing funds and cash expected to be provided by future operating activities, augmented by the plans highlighted above, are adequate to satisfy our working capital, potential acquisitions and capital expenditure requirements and other contractual obligations for the foreseeable future, including at least the next 12 months.

3.

Fair Value Measurements

Definition and Hierarchy

The applicable accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a framework for measuring fair value and expands required disclosure about the fair value measurements of assets and liabilities. This guidance requires us to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities measured on a non-recurring basis in periods subsequent to initial measurement, in a fair value hierarchy.

The fair value hierarchy is broken down into three levels based on the reliability of inputs and requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required, as well as the assets and liabilities that we value using those levels of inputs:

 

Level 1 – Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

 

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not very active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Valuation Techniques

Inputs to valuation techniques are observable and unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. When developing fair value estimates for certain financial assets and liabilities, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted market prices, market comparables and discounted cash flow projections. Financial assets include money market funds, U.S. treasury notes or bonds, U.S. government agency bonds and corporate bonds.

In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly. In periods of market inactivity, the

10


 

observability of prices and inputs may be 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.

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The following tables set forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of October 31, 2017 and January 31, 2017. There were no fair value measurements of our financial assets and liabilities using significant Level 3 inputs for the periods presented:

 

 

 

 

 

 

 

Fair Value at October 31, 2017 Using

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

Significant

 

 

 

 

 

 

 

Active

 

 

Other

 

 

 

 

 

 

 

Markets for

 

 

Observable

 

 

 

October 31,

 

 

Identical Assets

 

 

Inputs

 

 

 

2017

 

 

(Level 1)

 

 

(Level 2)

 

 

 

(Amounts in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (a)

 

$

3,550

 

 

$

500

 

 

$

3,050

 

Available-for-sale marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Current marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury notes and bonds - conventional

 

 

1,993

 

 

 

1,993

 

 

 

 

U.S. government agency issues

 

 

2,997

 

 

 

 

 

 

2,997

 

Non-current marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury notes and bonds - conventional

 

 

1,735

 

 

 

1,735

 

 

 

 

U.S. government agency issues

 

 

993

 

 

 

 

 

 

993

 

Corporate bonds

 

 

1,757

 

 

 

 

 

 

1,757

 

Total

 

$

13,025

 

 

$

4,228

 

 

$

8,797

 

 

 

 

 

 

 

 

Fair Value at January 31, 2017 Using

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

Significant

 

 

 

 

 

 

 

Active

 

 

Other

 

 

 

 

 

 

 

Markets for

 

 

Observable

 

 

 

January 31,

 

 

Identical Assets

 

 

Inputs

 

 

 

2017

 

 

(Level 1)

 

 

(Level 2)

 

 

 

(Amounts in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (a)

 

$

2,726

 

 

$

2,726

 

 

$

 

Available-for-sale marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Current marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury notes and bonds - conventional

 

 

4,253

 

 

 

4,253

 

 

 

 

U.S. government agency issues

 

 

1,000

 

 

 

 

 

 

1,000

 

Non-current marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury notes and bonds - conventional

 

 

1,997

 

 

 

1,997

 

 

 

 

U.S. government agency issues

 

 

2,994

 

 

 

 

 

 

2,994

 

Total

 

$

12,970

 

 

$

8,976

 

 

$

3,994

 

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(a)

Money market funds and U.S. treasury bills are included in cash and cash equivalents on the accompanying consolidated balance sheets.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible property and equipment, goodwill, and other intangible assets, which are re-measured when the derived fair value is below carrying value on our consolidated balance sheets. For these assets and liabilities, we do not periodically adjust carrying value to fair value except in the event of impairment. If we determine that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is recorded to loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive loss.

In the third quarter of fiscal 2018, we finalized the “Step 1” analysis of our annual goodwill impairment test for fiscal 2018. Based on this analysis, we determined that fair value of our reporting unit exceeded its carrying value, which was $64.2 million at August 1, 2017. As a result, no impairment charge was required related to the annual test.

In August 2017, we placed the Corporate Headquarters on the market for sale. We assessed whether the Corporate Headquarters would qualify as an asset held for sale and determined that it would not since it did not meet all six of the criteria of an asset held for sale under current accounting guidance. During the assessment, we received information from a third-party real estate broker that led management to believe that there was a significant decrease in the fair value of the Corporate Headquarters. We considered this to be a triggering event and were required to test the Corporate Headquarters for recoverability. We evaluated the undiscounted future cash flows over the remaining useful life of the primary asset of the asset group and determined that an impairment did not exist as of the date of the triggering event.

In addition, since we considered the significant decrease in fair value of the Corporate Headquarters a triggering event, we were required to complete an additional goodwill impairment test as of the date of the triggering event. We completed the additional goodwill impairment test and determined that the implied fair value of the reporting unit exceeds its carrying value as of the date of the triggering event. Accordingly, no impairment charge was recognized as of October 31, 2017.

During the three and nine months ended October 31, 2016, we recorded a $0.1 million loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive loss. This impairment was taken on an asset group classified as an asset held for sale on our consolidated balances sheet as of October 31, 2016, (as disclosed in Note 5, “Consolidated Balances Sheet Detail”).

We also have direct investments in privately-held companies, over which we do not have significant influence of their operating and financial activities and account for under the cost-method of accounting. Management periodically assesses these investments for other-than-temporary impairment, considering available information provided by the investees and any other readily available market data. If we determine that an other-than-temporary impairment has occurred, we write-down the investment to its fair value. Our ability to realize value from these investments depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them, we will not be able to obtain fair value for them.

During the three and nine months ended October 31, 2017, the Company did not recognize any impairment charges related to goodwill, intangible assets, long-lived assets or cost-method investments.

Available-For-Sale Securities

We determine the appropriate classification of debt investment securities at the time of purchase and reevaluate such designation as of each balance sheet date. Our investment portfolio consists of money market funds, U.S. treasury notes and bonds, U.S. government agency notes and bonds and corporate bonds as of October 31, 2017 and January 31, 2017. All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. All cash equivalents are carried at cost, which approximates fair value. Our marketable securities are classified as available-for-sale and are reported at fair value with unrealized gains and losses, net of tax, reported in stockholders’ equity as a component of accumulated other comprehensive loss. The amortization of premiums and accretion of discounts to maturity are computed under the effective interest method and are included in other income (expenses), net, in our consolidated statements of operations and comprehensive loss. Interest on securities is recorded as earned and is also included in other income (expenses), net. Any realized gains or losses would be shown in the accompanying consolidated statements of operations and comprehensive loss in other income (expenses), net. We provide fair value measurement disclosures of available-for-sale securities in accordance with one of the three levels of fair value measurement mentioned above.

12


 

The following is a summary of cash, cash equivalents and available-for-sale securities, including the cost basis, aggregate fair value and gross unrealized gains and losses, for short- and long-term marketable securities portfolio as of October 31, 2017 and January 31, 2017:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

 

 

(Amounts in thousands)

 

October 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

23,605

 

 

$

 

 

$

 

 

$

23,605

 

Cash equivalents

 

 

3,549

 

 

 

1

 

 

 

 

 

 

3,550

 

Cash and cash equivalents

 

 

27,154

 

 

 

1

 

 

 

 

 

 

27,155

 

U.S. treasury notes and bonds - short-term

 

 

2,001

 

 

 

 

 

 

(8

)

 

 

1,993

 

U.S. treasury notes and bonds - long-term

 

 

1,740

 

 

 

 

 

 

(5

)

 

 

1,735

 

U.S. government agency issues - short-term

 

 

2,982

 

 

 

17

 

 

 

(2

)

 

 

2,997

 

U.S. government agency issues - long-term

 

 

1,003

 

 

 

 

 

 

(10

)

 

 

993

 

Corporate bonds - long-term

 

 

1,761

 

 

 

 

 

 

(4

)

 

 

1,757

 

Total cash, cash equivalents and marketable securities

 

$

36,641

 

 

$

18

 

 

$

(29

)

 

$

36,630