Attached files

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EX-32 - EX-32 - CalAmp Corp.camp-ex32_7.htm
EX-31.2 - EX-31.2 - CalAmp Corp.camp-ex312_8.htm
EX-31.1 - EX-31.1 - CalAmp Corp.camp-ex311_6.htm
EX-10.9 - EX-10.9 - CalAmp Corp.camp-ex109_114.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 quarter ended August 31, 2018

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: 0-12182

 

CALAMP CORP.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

95-3647070

(State or other jurisdiction of

     

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

15635 Alton Parkway, Suite 250

 

 

Irvine, California

 

92618

(Address of principal executive offices)

 

(Zip Code)

(949) 600-5600

(Registrant’s telephone number, including area code)

 

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

 

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

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

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

The number of shares outstanding of the registrant’s common stock as of September 21, 2018 was 34,760,955.

 


 

CALAMP CORP.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED AUGUST 31, 2018

TABLE OF CONTENTS

 

 

 

 

 

Page

Number

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Financial statements

 

3

 

 

 

 

 

 

 

Condensed consolidated balance sheets (unaudited) as of August 31, 2018 and February 28, 2018

 

3

 

 

 

 

 

 

 

Condensed consolidated statements of comprehensive income (loss) (unaudited) for the three and six months ended August 31, 2018 and 2017

 

4

 

 

 

 

 

 

 

Condensed consolidated statements of cash flows (unaudited) for the six months ended August 31, 2018 and 2017

 

5

 

 

 

 

 

 

 

Condensed consolidated statement of stockholders’ equity (unaudited) for the six months ended August 31, 2018

 

6

 

 

 

 

 

 

 

Notes to unaudited condensed consolidated financial statements

 

7

 

 

 

 

 

ITEM 2.

 

Management’s discussion and analysis of financial condition and results of operations

 

23

 

 

 

 

 

ITEM 3.

 

Quantitative and qualitative disclosures about market risk

 

30

 

 

 

 

 

ITEM 4.

 

Controls and procedures

 

31

 

 

 

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

ITEM 1.

 

Legal proceedings

 

32

 

 

 

 

 

ITEM 1A.

 

Risk factors

 

32

 

 

 

 

 

ITEM 2.

 

Unregistered sales of securities and use of proceeds

 

32

 

 

 

 

 

ITEM 5.

 

Other information

 

32

 

 

 

 

 

ITEM 6.

 

Exhibits

 

34

 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CALAMP CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

 

 

August 31,

 

 

February 28,

 

Assets

 

2018

 

 

2018

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

273,972

 

 

$

132,603

 

Short-term marketable securities

 

 

31,026

 

 

 

23,400

 

Accounts receivable, net

 

 

70,981

 

 

 

71,580

 

Inventories

 

 

31,194

 

 

 

36,302

 

Prepaid expenses and other current assets

 

 

14,482

 

 

 

12,000

 

Total current assets

 

 

421,655

 

 

 

275,885

 

Property and equipment, net

 

 

22,405

 

 

 

21,262

 

Deferred income tax assets

 

 

21,421

 

 

 

31,581

 

Goodwill

 

 

73,284

 

 

 

72,980

 

Other intangible assets, net

 

 

46,385

 

 

 

52,456

 

Other assets

 

 

25,773

 

 

 

18,829

 

 

 

$

610,923

 

 

$

472,993

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

36,159

 

 

$

35,478

 

Accrued payroll and employee benefits

 

 

7,544

 

 

 

10,606

 

Deferred revenue

 

 

20,683

 

 

 

17,757

 

Other current liabilities

 

 

31,621

 

 

 

31,688

 

Total current liabilities

 

 

96,007

 

 

 

95,529

 

Convertible senior unsecured notes, net

 

 

268,980

 

 

 

154,299

 

Other non-current liabilities

 

 

36,200

 

 

 

24,249

 

Total liabilities

 

 

401,187

 

 

 

274,077

 

Commitments and contingencies (see Note 16)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $.01 par value; 3,000 shares authorized; no shares issued or outstanding

 

 

 

 

 

 

Common stock, $.01 par value; 80,000 shares authorized; 34,758 and 35,718 shares

   issued and outstanding at August 31, 2018 and February 28, 2018, respectively

 

 

348

 

 

 

357

 

Additional paid-in capital

 

 

222,981

 

 

 

218,217

 

Accumulated deficit

 

 

(12,963

)

 

 

(19,459

)

Accumulated other comprehensive loss

 

 

(630

)

 

 

(199

)

Total stockholders' equity

 

 

209,736

 

 

 

198,916

 

 

 

$

610,923

 

 

$

472,993

 

 

See accompanying notes to condensed consolidated financial statements.

3


CALAMP CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

August 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

76,974

 

 

$

74,517

 

 

$

153,890

 

 

$

145,637

 

Application subscriptions and related products and other services

 

 

19,063

 

 

 

15,250

 

 

 

37,035

 

 

 

32,211

 

Total revenues

 

 

96,037

 

 

 

89,767

 

 

 

190,925

 

 

 

177,848

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

46,045

 

 

 

44,641

 

 

 

93,398

 

 

 

87,066

 

Application subscriptions and related products and other services

 

 

10,171

 

 

 

8,288

 

 

 

19,615

 

 

 

16,501

 

Total cost of revenues

 

 

56,216

 

 

 

52,929

 

 

 

113,013

 

 

 

103,567

 

Gross profit

 

 

39,821

 

 

 

36,838

 

 

 

77,912

 

 

 

74,281

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,599

 

 

 

6,725

 

 

 

14,200

 

 

 

12,557

 

Selling and marketing

 

 

12,523

 

 

 

12,515

 

 

 

25,020

 

 

 

25,186

 

General and administrative

 

 

11,991

 

 

 

10,756

 

 

 

25,427

 

 

 

27,166

 

Restructuring (see Note 7)

 

 

566

 

 

 

 

 

 

3,949

 

 

 

 

Intangible asset amortization

 

 

2,893

 

 

 

3,710

 

 

 

5,641

 

 

 

7,568

 

Total operating expenses

 

 

35,572

 

 

 

33,706

 

 

 

74,237

 

 

 

72,477

 

Operating income

 

 

4,249

 

 

 

3,132

 

 

 

3,675

 

 

 

1,804

 

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

 

1,007

 

 

 

396

 

 

 

1,860

 

 

 

729

 

Interest expense

 

 

(3,767

)

 

 

(2,567

)

 

 

(6,432

)

 

 

(5,085

)

Gain on legal settlement (see Note 16)

 

 

 

 

 

15,032

 

 

 

13,333

 

 

 

15,032

 

Loss on extinguishment of debt (see Note 6)

 

 

(2,033

)

 

 

 

 

 

(2,033

)

 

 

 

Other income (expense)

 

 

(277

)

 

 

314

 

 

 

(503

)

 

 

431

 

 

 

 

(5,070

)

 

 

13,175

 

 

 

6,225

 

 

 

11,107

 

Income (loss) before income taxes and equity in net loss of affiliate

 

 

(821

)

 

 

16,307

 

 

 

9,900

 

 

 

12,911

 

Income tax benefit (provision)

 

 

497

 

 

 

(3,699

)

 

 

(1,274

)

 

 

(2,619

)

Income (loss) before equity in net loss of affiliate

 

 

(324

)

 

 

12,608

 

 

 

8,626

 

 

 

10,292

 

Equity in net loss of affiliate

 

 

(530

)

 

 

(376

)

 

 

(969

)

 

 

(713

)

Net income (loss)

 

$

(854

)

 

$

12,232

 

 

$

7,657

 

 

$

9,579

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.02

)

 

$

0.35

 

 

$

0.22

 

 

$

0.27

 

Diluted

 

$

(0.02

)

 

$

0.34

 

 

$

0.21

 

 

$

0.27

 

Shares used in computing earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

34,850

 

 

 

35,204

 

 

 

35,141

 

 

 

35,136

 

Diluted

 

 

34,850

 

 

 

36,021

 

 

 

36,073

 

 

 

35,973

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(854

)

 

$

12,232

 

 

$

7,657

 

 

$

9,579

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(14

)

 

 

(260

)

 

 

3

 

 

 

(179

)

   Unrealized gain on available-for-sale securities, net of tax

 

 

-

 

 

 

10

 

 

 

-

 

 

 

51

 

Total comprehensive income (loss)

 

$

(868

)

 

$

11,982

 

 

$

7,660

 

 

$

9,451

 

 

See accompanying notes to condensed consolidated financial statements.

4


CALAMP CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

August 31,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

7,657

 

 

$

9,579

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

4,341

 

 

 

3,983

 

Intangible assets amortization expense

 

 

5,641

 

 

 

7,568

 

Stock-based compensation expense

 

 

5,147

 

 

 

4,044

 

Tax benefits on vested and exercised equity awards

 

 

525

 

 

 

241

 

Amortization of convertible debt issue costs and discounts

 

 

4,537

 

 

 

3,679

 

Loss on extinguishment of debt

 

 

2,033

 

 

 

 

Impairment loss on equity investment

 

 

326

 

 

 

 

Unrealized foreign currency transaction losses

 

 

187

 

 

 

(385

)

Deferred tax assets, net

 

 

(211

)

 

 

669

 

Equity in net loss of affiliate

 

 

969

 

 

 

713

 

Other

 

 

(72

)

 

 

55

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

505

 

 

 

516

 

Inventories

 

 

4,878

 

 

 

(1,440

)

Prepaid expenses and other assets

 

 

(4,879

)

 

 

(3,034

)

Accounts payable

 

 

743

 

 

 

4,335

 

Accrued liabilities

 

 

139

 

 

 

4,648

 

Deferred revenue

 

 

4,367

 

 

 

838

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

36,833

 

 

 

36,009

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from maturities of marketable securities

 

 

32,792

 

 

 

7,268

 

Purchases of marketable securities

 

 

(40,312

)

 

 

(4,548

)

Capital expenditures

 

 

(5,770

)

 

 

(3,713

)

Advances to equity method investee

 

 

(1,063

)

 

 

(650

)

Other

 

 

(78

)

 

 

(135

)

NET CASH USED IN INVESTING ACTIVITIES

 

 

(14,431

)

 

 

(1,778

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of 2025 Convertible Notes

 

 

230,000

 

 

 

 

Payment of debt issuance costs of 2025 Convertible Notes

 

 

(7,305

)

 

 

 

Purchase of capped call on 2025 Convertible Notes

 

 

(21,160

)

 

 

 

Repurchase of 2020 Convertible Notes

 

 

(53,683

)

 

 

 

Proceeds from unwind of note hedges and warrants on 2020 Convertible Notes

 

 

3,122

 

 

 

 

Repurchases of common stock

 

 

(28,564

)

 

 

 

Taxes paid related to net share settlement of vested equity awards

 

 

(3,347

)

 

 

(2,335

)

Proceeds from exercise of stock options

 

 

101

 

 

 

128

 

NET CASH PROVIDED BY (USED) IN FINANCING ACTIVITIES

 

 

119,164

 

 

 

(2,207

)

 

 

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

(197

)

 

 

906

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

141,369

 

 

 

32,930

 

Cash and cash equivalents at beginning of period

 

 

132,603

 

 

 

93,706

 

Cash and cash equivalents at end of period

 

$

273,972

 

 

$

126,636

 

 

See accompanying notes to condensed consolidated financial statements.

5


 

 

 

CALAMP CORP.

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

 

(In thousands)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balances at February 28, 2018

 

 

35,718

 

 

$

357

 

 

$

218,217

 

 

$

(19,459

)

 

$

(199

)

 

$

198,916

 

Cumulative adjustment upon adoption of ASU 2016-01,   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

434

 

 

 

(434

)

 

 

 

Cumulative adjustment upon adoption of ASC 606, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,595

)

 

 

 

 

 

 

(1,595

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,657

 

 

 

 

 

 

 

7,657

 

Equity component of 2025 Convertible Notes, net of tax

 

 

 

 

 

 

 

 

 

 

51,902

 

 

 

 

 

 

 

 

 

 

 

51,902

 

Purchase of capped call on 2025 Convertible Notes, net of tax

 

 

 

 

 

 

 

 

 

 

(15,870

)

 

 

 

 

 

 

 

 

 

 

(15,870

)

Debt issuance costs of 2025 Convertible Notes allocated to equity, net of tax

 

 

 

 

 

 

 

 

 

 

(1,649

)

 

 

 

 

 

 

 

 

 

 

(1,649

)

Equity component of the repurchased 2020 Convertible Notes

 

 

 

 

 

 

 

 

 

 

(6,088

)

 

 

 

 

 

 

 

 

 

 

(6,088

)

Unwind of note hedges and warrants of 2020 Convertible Notes, net of tax

 

 

 

 

 

 

 

 

 

 

3,122

 

 

 

 

 

 

 

 

 

 

 

3,122

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

5,147

 

 

 

 

 

 

 

 

 

 

 

5,147

 

Shares issued on net share settlement of equity awards

 

 

156

 

 

 

2

 

 

 

(3,348

)

 

 

 

 

 

 

 

 

 

 

(3,346

)

Issuance of shares for restricted stock awards

 

 

84

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

55

 

 

 

1

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

101

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

3

 

Repurchases of common stock

 

 

(1,255

)

 

 

(13

)

 

 

(28,551

)

 

 

 

 

 

 

 

 

 

 

(28,564

)

Balances at August 31, 2018

 

 

34,758

 

 

$

348

 

 

$

222,981

 

 

$

(12,963

)

 

$

(630

)

 

$

209,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 


6


CALAMP CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED AUGUST 31, 2018 AND 2017

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

CalAmp Corp. (referred to herein as “CalAmp”, “the Company”, “we”, “our”, or “us”) is a telematics pioneer leading transformation in a global connected economy. We help reinvent businesses and improve lives around the globe with technology solutions that streamline complex Internet of Things (“IoT”) deployments through wireless connectivity solutions and derived data intelligence. Our software applications, scalable cloud services, and intelligent devices collect and assess business-critical data anywhere in the world from industrial machines, commercial and passenger vehicles, their passengers and contents. We are a global organization that is headquartered in Irvine, California. We operate under two reportable segments: Telematics Systems and Software & Subscription Services.

Certain notes and other information included in the audited financial statements in our Annual Report on Form 10-K for the fiscal year ended February 28, 2018 are condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with our 2018 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission on May 10, 2018.

In the opinion of our management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly our financial position at August 31, 2018 and our results of operations for the three and six months ended August 31, 2018 and 2017. The results of operations for such periods are not necessarily indicative of results to be expected for the full fiscal year.

All intercompany transactions and accounts have been eliminated in consolidation.

Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASC 606”). The new revenue recognition standard provides a five-step analytical framework for transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The two permitted transition methods under the new standard are the full retrospective method or the modified retrospective method. We adopted the new standard effective March 1, 2018 using the modified retrospective method, which we applied to all contracts.

 

Products. In accordance with ASC 606, we recognize revenue from product sales upon transfer of control of promised products to customers in an amount that reflects the transaction price, which is generally the stand-alone selling prices of the promised goods. For product shipments made on the basis of “FOB Destination” terms, revenue is recorded when the shipment reaches the customer. Customers generally do not have a right of return except for defective products returned during the warranty period. We record estimated commitments related to customer incentive programs as reductions of revenues.

 

Professional Services. We also provide various professional services to customers. These include project management, engineering services, installation services and an on-going early warning automated notification service, which are typically distinct from other performance obligations and are recognized as the related services are performed.

 

Software-as-a-Service (“SaaS”) and Platform-as-a-Service (“PaaS”). Our SaaS-based and PaaS-based subscriptions for our fleet management, vehicle finance and certain other verticals provide our customers with the ability to wirelessly communicate with monitoring devices installed in vehicles and other mobile or remote assets via our software applications. Generally, we defer the recognition of revenue for the products that are sold with application subscriptions. In such circumstances, the associated product costs are recorded as deferred costs in the balance sheet. The upfront fees for the devices are not distinct from the subscription service and are combined into the subscription service performance obligation. The upfront fees may provide a material right to the customer that has influence over the customers’ right to renew. Generally, these service arrangements do not provide the customer with the right to take possession of the software supporting the subscription service at any time. Revenues from subscription services are recognized ratably, on a straight-line basis, over the term of the subscription. Subscription renewal fees are recognized ratably over the term of the renewal. The deferred product revenue and deferred product cost amounts are amortized to application subscriptions revenue and cost of revenue, respectively, on a straight-line basis over the estimated average in-service lives of these devices, which are three years in the vehicle finance and four years in the fleet management verticals. Our deferred contract revenue under ASC 606 does not include future subscription fees associated with customers’ unexercised contract renewal rights. The product revenues for certain customer arrangements are presented combined within Application subscription and related products and other services in our statement of comprehensive income (loss) as the products and services are customarily part of one customer contractual arrangement.

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Sales taxes. We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from a customer.

 

Contract Balances. Timing of revenue recognition may differ from the timing on invoicing to customers. Contract liabilities are comprised of billings or payments received from our customers in advance of performance under the contract. We refer to these contract liabilities as “Deferred Revenues” in the accompanying condensed consolidated financial statements. During the three and six months ended August 31, 2018, we recognized $4.6 million and $11.2 million in revenue from the beginning deferred revenue balance of $41.7 million on March 1, 2018, respectively.

 

As of August 31, 2018, we have estimated remaining performance obligations for contractually committed revenues of $46.5 million, of which we expect to recognize approximately 26% through the remainder of fiscal 2019, 33% for fiscal 2020 and 22% for fiscal 2021. We have utilized the practical expedient exception within ASC 606 and exclude contracts that have original durations of less than one year from the aforementioned remaining performance obligation disclosure.

Cash and Cash Equivalents

We consider all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consists of amounts due to us from sales arrangements that are executed in our normal business activities and are recorded at invoiced amounts. We present the aggregate accounts receivable balance net of an allowance for doubtful accounts. We mitigate a portion of our receivables credit risk through credit insurance. Generally, collateral and other security is not obtained for outstanding accounts receivable. Credit losses, if any, are recognized based on management’s evaluation of historical collection experience, customer-specific financial conditions as well as an evaluation of current industry trends and general economic conditions. Past due balances are assessed by management on a monthly basis, and balances are written off when the customer’s financial condition no longer warrants pursuit of collection. Although we expect to collect amounts due, actual collections may differ from estimated amounts. The allowance for doubtful accounts totaled $1.4 million and $1.2 million as of August 31, 2018 and February 28, 2018, respectively.

Fair Value Measurements

We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in our financial statements. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly manner in an arm’s-length transaction between market participants at the measurement date. Fair value is estimated by using the following hierarchy:

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

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, 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 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

Convertible Senior Notes and Capped Call Transactions

We account for our convertible senior notes as separate liability and equity components. We determine the carrying amount of the liability component based on the fair value of a similar debt instrument excluding the embedded conversion option. The carrying amount of the equity component representing the conversion option is calculated by deducting the carrying value of the liability component from the principal amount of the notes as a whole. This difference represents a debt discount that is amortized to interest expense over the term of the notes using the effective interest rate method. The equity component of the notes is included in stockholders’ equity and is not remeasured as long as it continues to meet the conditions for equity classification. We allocate transaction costs related to the issuance of the notes to the liability and equity components using the same proportions as the initial carrying value of the notes. Transaction costs attributable to the liability component are being amortized to interest expense using the effective interest method over the respective term of the notes, and transaction costs attributable to the equity components are netted with the equity component of the note in stockholders’ equity. We account for the cost of the capped calls as a reduction to additional paid-in capital.

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Patent Litigation and Other Contingencies

We accrue for patent litigation and other contingencies whenever we determine that an unfavorable outcome is probable and a liability is reasonably estimable. The amount of the accrual is estimated based on a review of each claim, including the type and facts of the claim and our assessment of the merits of the claim. These accruals are reviewed at least on a quarterly basis and are adjusted to reflect the impact of recent negotiations, settlements, court rulings, advice from legal counsel and other events pertaining to the case. Such accruals, if any, are recorded as general and administrative expense in our consolidated statements of comprehensive income (loss). Although we take considerable measures to mitigate our exposure in these matters, litigation is inherently unpredictable. Nonetheless, we believe that we have valid defenses with respect to pending legal matters against us as well as adequate provisions for probable and estimable losses.

We expense legal expenses as incurred.

Foreign Currency Translation

We translate the assets and liabilities of our non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in accumulated other comprehensive income (loss) during the period. The aggregate foreign currency transaction exchange rate gain (losses) included in determining income (loss) before income taxes were immaterial for both of the three and six months periods ended August 31, 2018 and 2017.

 

Recently Issued Accounting Standards

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (“ASU 2018-15”). The amendments in ASU 2018-15 provide guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this update. The new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. We do not anticipate this pronouncement will have a significant impact on our condensed consolidated financial statements upon adoption.

 

In May 2017, the FASB issued Accounting Standards Update 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting (“ASU 2017-09”). The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718 Compensation – Stock Compensation. We adopted the standard during the fiscal quarter ended May 31, 2018. The adoption of the standard had no impact on our condensed consolidated financial statements for the three and six months ended August 31, 2018.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This guidance eliminates Step 2 from the goodwill impairment test and instead requires that an entity measure the impairment of goodwill assigned to a reporting unit if the carrying value of assets and liabilities assigned to the reporting unit, including goodwill, exceed the reporting unit's fair value. The new guidance must be adopted for annual and interim goodwill tests in fiscal years beginning after December 15, 2019. After the adoption of this standard, which will be applied prospectively, we will follow a one-step model for goodwill impairment. We do not anticipate this pronouncement will have a significant impact on our condensed consolidated financial statements upon adoption.

In February 2016, the FASB issued ASU 2016-02, Leases, which was further clarified by ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases – Targeted Improvement, both issued in July 2018. ASU 2016-02 affects all entities that lease assets and establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the income statement. ASU 2018-10 clarifies or corrects unintended application of guidance related to ASU 2016-02. The amendments affects narrow aspects of ASU 2016-02 related to the implicit rate in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. ASU 2018-11 adds a transition option for all entities and a practical expedient only for lessors. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. Under the transition option, entities can opt to continue to apply the legacy guidance in ASC 840, “Leases”, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard. Entities that elect this transition option will still be required to adopt the new leases standard using the modified retrospective transition method required by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The new standards are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. For leases existing at, or entered into after the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach. We have established an implementation team to identify the various categories of capital and operating leases existing in our business operations. We are also accumulating information for the additional disclosure requirements of the new standard and are evaluating changes to our internal control structure and accounting policy. We have not completed the assessment of the impact of the accounting pronouncement on our condensed consolidated financial statements, but we do expect to record ROU assets and lease liabilities upon adoption.

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In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This standard revises an entity’s accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for a new practicality exception. We adopted the standard during the fiscal quarter ended May 31, 2018. Upon adoption, we reclassified $0.4 million of unrealized gain (net of income taxes) reported in accumulated other comprehensive loss for available for sale equity securities to beginning accumulated deficit.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The new revenue recognition standard (“ASC 606”) provides a five-step analytical framework for transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard became effective for annual reporting periods beginning after December 15, 2017; therefore, we were required to adopt this standard effective March 1, 2018. We adopted the new standard using the modified retrospective method and applied it to all of our open customer contracts. The new standard did not materially affect our results of operations, financial position or cash flows, but resulted in immaterial changes to the timing of recognition of revenues for certain deferred revenues.

Since the modified retrospective method does not result in recasting of the prior year financial statements, ASC 606 requires us to provide additional disclosures for the amount by which each financial statement line item was affected by adoption of the standard, with an explanation of the reasons for significant changes.

The cumulative effect of the changes made to our consolidated balance sheet for the adoption of ASC 606 were as follows (in thousands):

 

 

Balance at

February 28, 2018

 

 

ASC 606 Adjustments

 

 

Balance at

March 1, 2018

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

$

12,000

 

 

 

1,891

 

 

$

13,891

 

Deferred income tax assets

 

31,581

 

 

 

532

 

 

 

32,113

 

Other assets

 

18,829

 

 

 

3,145

 

 

 

21,974

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

$

17,757

 

 

 

2,156

 

 

 

19,913

 

Other non-current liabilities

 

24,249

 

 

 

5,007

 

 

 

29,256

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

$

(19,459

)

 

 

(1,595

)

 

 

(21,054

)

 

In accordance with the requirements of ASC 606, the disclosure of the impact of adoption on our condensed consolidated balance sheet for the second quarter is as follows:

 

 

As of August 31, 2018

 

 

As reported

 

 

ASC 606 Adjustments

 

 

Without ASC 606 Adoption

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

$

14,482

 

 

 

(1,864

)

 

$

12,618

 

Deferred income tax assets

 

21,421

 

 

 

(532

)

 

 

20,889

 

Other assets

 

25,773

 

 

 

(3,420

)

 

 

22,353

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

$

20,683

 

 

 

(1,925

)

 

 

18,758

 

Other non-current liabilities

 

36,200

 

 

 

(5,693

)

 

 

30,507

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

$

(12,963

)

 

 

1,644

 

 

 

(11,319

)

 

The impact of adopting ASC 606 on our condensed consolidated statements of comprehensive income (loss) for the three and six months ended August 31, 2018 was immaterial.

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NOTE 2 – CASH, CASH EQUIVALENTS AND INVESTMENTS

The following tables summarize our financial instrument assets (in thousands):

 

 

 

As of August 31, 2018