UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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:
SEACHANGE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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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.
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).
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.
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Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
The number of shares outstanding of the registrant’s Common Stock on June 6, 2022 was
SEACHANGE INTERNATIONAL, INC.
Table of Contents
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Item 1. |
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2 |
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Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) |
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Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) |
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5 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
22 |
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Item 3. |
28 |
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Item 4. |
28 |
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Item 1. |
29 |
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Item 1A. |
29 |
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Item 2. |
29 |
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Item 3. |
29 |
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Item 4. |
29 |
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Item 5. |
29 |
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Item 6. |
29 |
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31 |
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PART I – FINANCIAL INFORMATION
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ITEM 1. |
Financial Statements |
SEACHANGE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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April 30, |
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January 31, |
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2022 |
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2022 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net of allowance for doubtful accounts of $ and $ |
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Unbilled receivables |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Goodwill |
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Unbilled receivables |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Deferred revenue |
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Total current liabilities |
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Deferred revenue |
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Operating lease liabilities |
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Taxes payable |
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Other liabilities |
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— |
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Total liabilities |
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Commitments and contingencies (Note 5) |
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Stockholders' equity: |
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Common stock, $ 2022; January 31, 2022 |
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Additional paid-in capital |
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Treasury stock, at cost; January 31, 2022 |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See accompanying notes to the unaudited condensed consolidated financial statements.
2
SEACHANGE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)
(In thousands, except per share data)
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For the Three Months Ended April 30, |
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2022 |
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2021 |
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Revenue: |
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Product |
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$ |
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$ |
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Service |
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Total revenue |
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Cost of revenue: |
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Product |
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Service |
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Total cost of revenue |
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Gross profit |
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Operating expenses: |
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Research and development |
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Selling and marketing |
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General and administrative |
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Severance and restructuring costs |
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Transaction costs |
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— |
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Total operating expenses |
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Loss from operations |
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Other expense, net |
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( |
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Loss before income taxes |
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Income tax provision |
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( |
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Net loss |
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$ |
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$ |
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Net loss per share, basic |
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$ |
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$ |
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Net loss per share, diluted |
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$ |
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$ |
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Weighted average common shares outstanding, basic |
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Weighted average common shares outstanding, diluted |
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Comprehensive loss: |
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Net loss |
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$ |
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$ |
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Other comprehensive (loss) income, net of tax: |
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Foreign currency translation adjustment |
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Unrealized gains on marketable securities |
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— |
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Total other comprehensive (loss) income |
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( |
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Comprehensive loss |
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$ |
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$ |
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See accompanying notes to the unaudited condensed consolidated financial statements.
3
SEACHANGE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(In thousands, except number of shares)
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Common Stock |
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Additional |
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Accumulated Other |
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Total |
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Number of Shares |
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Par Value |
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Paid-in Capital |
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Treasury Stock |
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Comprehensive Loss |
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Accumulated Deficit |
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Stockholders' Equity |
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Balances at January 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Issuance of common stock pursuant to vesting of restricted stock units |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
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Balances at April 30, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Common Stock |
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Additional |
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Accumulated Other |
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Total |
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Number of Shares |
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Par Value |
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Paid-in Capital |
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Treasury Stock |
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Comprehensive Loss |
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Accumulated Deficit |
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Stockholders' Equity |
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Balances at January 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Issuance of common stock pursuant to vesting of restricted stock units |
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( |
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— |
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— |
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— |
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— |
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Issuance of common stock pursuant to exercise of stock options |
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— |
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— |
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— |
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Issuance of common stock, net of issuance costs |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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Unrealized gains on marketable securities |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Balances at April 30, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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See accompanying notes to the unaudited condensed consolidated financial statements.
4
SEACHANGE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
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For the Three Months Ended April 30, |
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2022 |
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2021 |
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Cash flows from operating activities: |
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Net loss |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization expense |
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Loss on disposal of fixed assets |
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— |
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Gain on write-off of operating lease right-of-use assets and liabilities related to termination |
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— |
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( |
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Provision for bad debts |
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— |
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Stock-based compensation expense |
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Realized and unrealized foreign currency transaction loss |
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Other |
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— |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Unbilled receivables |
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Prepaid expenses and other current assets and other assets |
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( |
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— |
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Accounts payable |
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( |
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Accrued expenses and other liabilities |
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Deferred revenue |
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Net cash used in operating activities |
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( |
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( |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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( |
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( |
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Proceeds from sales and maturities of marketable securities |
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— |
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Net cash (used in) provided by investing activities |
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( |
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Cash flows from financing activities: |
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Proceeds from stock option exercises |
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— |
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Proceeds from issuance of common stock, net of issuance costs |
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— |
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Net cash provided by financing activities |
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— |
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Effect of exchange rate on cash, cash equivalents and restricted cash |
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( |
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( |
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Net (decrease) increase in cash, cash equivalents and restricted cash |
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( |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period |
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$ |
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$ |
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Supplemental disclosure of cash flow information |
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Income tax payments, net |
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$ |
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$ |
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See accompanying notes to the unaudited condensed consolidated financial statements.
5
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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1. |
Nature of Business and Basis of Presentation |
SeaChange International, Inc. (“SeaChange,” or the “Company”), was incorporated under the laws of the state of Delaware on July 9, 1993. SeaChange is an industry leader in the delivery of multiscreen, advertising and premium over-the-top (“OTT”) video management solutions. The Company’s software products and services are designed to empower video providers to create, manage and monetize the increasingly personalized, highly engaging experiences that viewers demand.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company consolidates the financial statements of its wholly owned subsidiaries and all intercompany transactions and account balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation.
The accompanying unaudited condensed consolidated financial statements included herein have been prepared by the Company in accordance with the instructions to Quarterly Report on Form 10-Q and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations, although the Company believes the disclosures made are adequate to make the information not misleading. In the opinion of the Company’s management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for a fair presentation. The year-end condensed consolidated balance sheet data as of January 31, 2022 was derived from our audited consolidated financial statements and may not include all disclosures required by GAAP. The results of operations for the three months ended April 30, 2022 are not necessarily indicative of the results to be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022, filed with the SEC on April 8, 2022.
Liquidity
The Company had $
The Company believes that existing cash and cash expected to be provided by future operating results will be adequate to satisfy its working capital, capital expenditure requirements and other contractual obligations for at least 12 months from the date of this filing.
If the Company’s expectations are incorrect, it may need to raise additional funds to fund its operations or take advantage of unanticipated strategic opportunities in order to strengthen its financial position. In the future, the Company may enter into other arrangements for potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require it to seek additional equity or debt financing. If adequate funds are not available or are not available on acceptable terms, the Company may not be able to take advantage of market opportunities, to develop new products or to otherwise respond to competitive pressures.
Impact of COVID-19 Pandemic
COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. In the first quarter of fiscal 2021, concerns related to the spread of COVID-19 created global business disruptions as well as disruptions in the Company’s operations and created potential negative impacts on its revenues and other financial results. The extent and the magnitude to which COVID-19 will continue to impact the Company’s financial condition or results of operations is currently uncertain and depends on factors including the impact on SeaChange’s customers, partners, and vendors and on the operation of the global markets in general. Due to the Company’s business model, the effect of COVID-19 on its results of operations may also not be fully reflected for some time.
The Company continues to conduct business with substantial modifications to employee travel, employee work locations, virtualization or cancellation of customer and employee events, and remote sales, implementation, and support activities, among other modifications. These decisions may delay or reduce sales and harm productivity and collaboration. The Company has observed other companies and governments making similar alterations to their normal business operations, and in general, the markets are experiencing a significant level of uncertainty at the current time. Virtualization of the SeaChange team’s sales activities could foreclose future business opportunities, particularly as its customers limit spending, which could negatively impact the willingness of the Company’s customers to enter into or renew contracts. The pandemic has impacted the Company’s
6
ability to complete certain implementations, negatively impacting its ability to recognize revenue, and could also negatively impact the payment of accounts receivable and collections. SeaChange continues to realize its on-going cost optimization efforts in response to the impact of the pandemic. The Company may take further actions that alter its business operations as the situation evolves. As a result, the ultimate impact of the ongoing COVID-19 pandemic and the effects of the operational alterations the Company has made in response on its business, financial condition, liquidity, and financial results cannot be predicted at this time.
Merger Agreement
In December 2021, the Company and Triller Hold Co LLC, a Delaware limited liability company (“Triller”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Triller will be merged with and into SeaChange, and the separate existence of Triller shall cease, with SeaChange continuing as the surviving corporation (the “Merger”). Upon the closing of the Merger, the name of the combined company (the “Post-Merger Company”) will be changed to “TrillerVerz Corp.”
Pursuant and subject to the terms and conditions of the Merger Agreement, in addition to other contemplated transactions, (i) the parties anticipate that Triller will conduct an offering of convertible notes prior to the closing in an amount in excess of $
The stockholders of SeaChange will have the right to elect to receive either (i) their pro rata portion of $
No fractional shares of Buyer Class A Common Stock and Buyer Class B Common Stock will be issued in the Merger, and holders of shares of common stock will receive cash in lieu of any such fractional shares. SeaChange stock options and other equity awards will generally, upon completion of the Merger, be converted into Buyer Class A Common Stock.
The Merger Agreement provides that, upon the closing of the Merger, the board of directors of the Post-Merger Company will be composed of seven members, with all members to be designated by Triller. Upon completion of the Merger, all executive officers of the Post-Merger Company will be appointed by Triller, in each case to serve in such positions until successors are duly elected or appointed.
The respective boards of directors of SeaChange and Triller have approved the Merger Agreement, and have agreed to recommend that SeaChange’s stockholders and Triller’s unitholders, respectively, adopt the Merger Agreement.
7
Consummation of the Merger is subject to customary closing conditions, including approvals by SeaChange’s stockholders and Triller’s unitholders, the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the effectiveness of certain filings with the SEC, the Buyer Class A Common Stock to be issued in the Merger being approved for listing on Nasdaq and SeaChange and Triller having specified levels of working capital.
Neither SeaChange nor Triller is permitted to solicit, initiate or knowingly encourage or induce any alternative transaction proposals from third parties or to engage in discussions or negotiations with third parties regarding any alternative transaction proposals. Notwithstanding this limitation, prior to a party’s stockholders or unitholders, as applicable, approving the transactions, including the Merger, such party may under certain circumstances provide information to and participate in discussions or negotiations with third parties with respect to an unsolicited alternative transaction proposal that its board of directors has determined in good faith, after consultation with its outside financial advisors and outside legal counsel, is or could reasonably be expected to lead to a superior proposal. SeaChange’s board of directors may change its recommendation to its stockholders (subject to Triller’s right to terminate the Merger Agreement following such change in recommendation by the SeaChange board of directors) in response to a superior proposal or an intervening event if the board of directors determines in good faith, after consultation with its outside financial advisors and outside legal counsel, that the failure to take such action would be inconsistent with the exercise of the directors’ fiduciary duties under applicable law.
The Merger Agreement contains certain termination rights for both SeaChange and Triller. Upon termination of the Merger Agreement, under certain specified circumstances, (i) SeaChange may be required to pay a termination fee of $
Immediately prior to the execution of the Merger Agreement, SeaChange entered into an amendment (the “Amendment”) to the Tax Benefits Preservation Plan, dated as of March 4, 2019 (the “Rights Agreement”), by and between the SeaChange and Computershare Inc., as rights agent. Pursuant to the Amendment, in connection with the Merger Agreement, Triller and its affiliates and associates will not be deemed an “Acquiring Person” under the Rights Agreement.
In April 2022, SeaChange and Triller entered into the Second Amendment to Agreement and Plan of Merger (the “Second Amendment”). Pursuant to the Second Amendment, the parties clarified the election process for SeaChange stockholders of record, as of the record date to be established by SeaChange for voting on the Merger, to elect the type of consideration that such stockholders shall receive in connection with the Merger—either Cash/Notes Consideration or Stock Consideration. If a SeaChange stockholder does not make a valid election to receive Cash/Notes Consideration before the election deadline to be established, such SeaChange stockholder will be deemed to have elected the Stock Consideration and will receive such Merger consideration as is determined in accordance with the Merger Agreement.
In addition, pursuant to the Second Amendment, the parties revised the calculation of Stock Consideration that will be received by a SeaChange stockholder deemed to have elected to receive such Stock Consideration. Such stockholder will now receive a number of shares of Buyer Class A Common Stock of the surviving corporation in an amount equal to that which such stockholder would have received if such stockholder had purchased, in an aggregate dollar amount equal to its pro rata portion of the Cash/Notes Consideration, Triller Class B common units at the median effective conversion or issuance price of all financings that Triller consummates prior to the Merger (subject to certain exclusions), based on total gross proceeds to Triller, and that such stockholder then participated pro-rata along with the Triller holders in the Merger.
The Company recorded $
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2. |
Significant Accounting Policies |
Use of Estimates
The preparation of these unaudited condensed consolidated financial statements in conformity with 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 unaudited condensed consolidated financial statements include, but are not limited to, those related to revenue recognition, allowance for doubtful accounts, goodwill and intangible assets, impairment of long-lived assets, management’s going concern assessment, accounting for income taxes, and the valuation of stock-based awards. The Company bases its 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.
8
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. 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 the landlord of the Company’s Poland facility.
The following table provides a summary of (i) cash and cash equivalents and (ii) restricted cash in the condensed consolidated statements of cash flows as of the periods presented:
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As of April 30, |
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2022 |
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2021 |
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||
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(Amounts in thousands) |
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|||||
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Cash and cash equivalents |
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$ |
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$ |
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|
Restricted cash |
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|
|
|
|
|
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Total cash, cash equivalents and restricted cash |
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$ |
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$ |
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As of January 31, |
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2022 |
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2021 |
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(Amounts in thousands) |
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|||||
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Cash and cash equivalents |
|
$ |
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$ |
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Restricted cash |
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Total cash, cash equivalents and restricted cash |
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$ |
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$ |
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|
Restricted cash is included as a component of other assets in the condensed consolidated balance sheets.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
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• |
Level 1—Quoted prices in active markets for identical assets or liabilities. |
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• |
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. |
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• |
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. |
The Company’s cash equivalents are carried at fair value determined according to the fair value hierarchy described above. The carrying values of 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.
Concentration of Credit Risk and of Significant Customers
Financial instruments which potentially expose the Company to concentrations of credit risk include cash, cash equivalents and restricted cash, and accounts receivable. The Company has cash investment policies which, among other things, limit investments to investment-grade securities. The Company restricts its cash equivalents to repurchase agreements with major banks and U.S. government and corporate securities, which are subject to minimal credit and market risk. The Company performs ongoing credit evaluations of its customers.
The Company sells its software products and services worldwide primarily to service providers consisting of operators, telecommunications companies, satellite operators and broadcasters.
9
of April 30, 2022.
Goodwill and Other Intangible Assets
The Company records goodwill when consideration paid in a business acquisition exceeds the value of the net assets acquired. The Company estimates of fair value are based upon assumptions believed to be reasonable at that time but such estimates 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 tested for impairment annually and more frequently if events and circumstances indicate that the asset might be impaired. The Company has determined it is a single reporting unit for the purpose of conducting the goodwill impairment assessment. A goodwill impairment charge is recorded if the amount by which the Company’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Factors that could lead to a future impairment include material uncertainties such as a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline in the Company’s market value as a result of a significant decline in the Company’s stock price. There were
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
The Company assesses 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. Factors considered important which could trigger a review include:
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• |
significant underperformance relative to historical or projected future operating results; |
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• |
significant changes in the manner of use of the acquired assets or the strategy for our overall business; |
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• |
identification of other impaired assets within a reporting unit; |
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• |
significant negative industry or economic trends; |
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• |
a significant decline in our stock price for a sustained period; and |
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• |
a decline in our market capitalization relative to net book value. |
Determining whether a triggering event has occurred involves significant judgment. There were
Revenue Recognition
Overview
The Company recognizes revenue following the guidance under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The Company’s revenue is derived from sales of software licenses and associated third party hardware and support services, as well as professional services and support fees related to the Company’s software licenses.
The Company recognizes revenue from contracts with customers using a five-step model, which is described below:
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• |
identify the customer contract; |
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• |
identify performance obligations that are distinct; |
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• |
determine the transaction price; |
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• |
allocate the transaction price to the distinct performance obligations; and |
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• |
recognize revenue as the performance obligations are satisfied. |
10
Identify the customer contract
A customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability and consideration is probable.
Identify performance obligations that are distinct
A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.
Determine the transaction price
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales and VAT taxes that are collected on behalf of government agencies.
Allocate the transaction price to distinct performance obligations
The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer. The Company’s contracts typically contain multiple performance obligations, for which it accounts for individual performance obligations separately, if they are distinct.
Recognize revenue as the performance obligations are satisfied
The Company enters into contracts that include combinations of license, support and professional services, and third-party products, which are accounted for as separate performance obligations with differing revenue recognition patterns. Revenue is recognized when or as control of the promised goods or services is transferred to customers. The Company’s software licenses are primarily delivered on a perpetual basis, whereby the customer receives rights to use the software for an indefinite time period or a specified term and delivery and revenue recognition occurs at the point in time when the customer has the ability to download or access the software. The Company’s customers may also contract with it for a Software as a Service (“SaaS”) type license whereby the customer only has a right to access the software for a defined term. SaaS licenses are recognized ratably over the subscription period beginning on the date the license is made available to customers.
The Company’s services revenue is comprised of support services and professional services. Support services consist of software upgrades on a when-and-if available basis, telephone support, bug fixes or patches and general hardware maintenance support. Revenue related to support services is recognized ratably over the term of the contract. Professional services are recognized as the services are performed.
Revenues attributable to third-party products typically consist of hardware and related support contracts. Hardware products are typically recognized 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. In situations where the hardware is distinct and it is delivered before services are provided and is functional without services, control is transferred upon delivery or acceptance by the customer. Revenue attributable to third-party support contracts is recognized ratably over the term of the contract.
Significant Judgments
The Company’s 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 the Company determines the performance obligations, it determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on the SSP. The corresponding revenue is recognized as the related performance obligations are satisfied.
Judgment is required to determine the SSP for each distinct performance obligation. The Company determines SSP based on the price at which the performance obligation is sold separately and the methods of estimating SSP under the guidance of ASC 606-10-32-33. If the SSP is not observable through past transactions, the SSP is estimated, taking into account available information such as market conditions, expected margins, and internally approved pricing guidelines related to the performance obligations. The Company enters into contracts with its customers that may include promises to transfer multiple performance obligations in the arrangement, such as software licenses, support, and professional services. The total fee of the contract may consist of one fixed price for all of the performance obligations or each performance obligation may be separately stated in the contract. Regardless of how the performance obligations are priced in the contract, the Company must determine the transaction price for each identified performance obligation. The Company recognizes the portion of the transaction price allocated to the software
11
license on a residual basis. The residual basis is used when the contract arrangement has at least one performance obligation for which the SSP is observable (i.e. hardware and/or support services). The residual method is also utilized to estimate the transaction price for software licenses, as the selling price for software licenses is highly variable and the SSP is not discernable from past transactions or other observable evidence. The Company periodically re-evaluates its use of the residual approach estimate compared to all available observable data before concluding the estimate is representative of SSP. In these contracts, the Company has observable SSP for the associated support services, and hardware, if applicable, that are sold with the software license based on historical observable data of selling support contracts on a standalone basis. The Company also provides SaaS offerings, combining access to hosted software with support services (inclusive of technical support and unspecified upgrades and bug fixes). The hosted software and support services are representative of stand ready obligations with the same pattern of transfer of control. SaaS offerings do not include the right for the customer to take possession of the software during the contract term, and therefore have one distinct performance obligation, which is satisfied over time with revenue recognized ratably over the contract term as the customer consumes the services.
Services revenue is comprised of software license implementation, engineering, training and reimbursable expenses. Services are sold on both a standalone basis and as part of our customer contracts. The Company has concluded these services are typically distinct performance obligations. For implementation, engineering and training services, revenue is recognized on an input method as hours are incurred and services are provided compared to total estimated hours. The Company estimates the SSP for fixed price services based on estimated hours adjusted for historical experience using the time and materials rates charged in standalone service arrangements. When sold on a time and materials basis, SSP for services is determined by observable prices in standalone service arrangements. Certain engineering services sold with support contracts are not distinct in the context of the contract and those services are bundled with other distinct services to form a single stand ready performance obligation which is recognized ratably over the relevant service period.
The Company has utilized the cost-plus margin method to determine the SSP for Framework software support services offerings and hardware sales. When support services are sold on an “a la carte” basis with the Company’s software offerings, the Company typically determines the SSP of these support services based on this pricing relationship and observable data from standalone sales of support contracts. The expected cost-plus margin for hardware is based on the cost of the hardware from third parties, plus a reasonable markup that the Company believes is reflective of a market-based reseller margin. When observable standalone pricing for support service offerings are not readily available, the Company then reverts to the cost-plus margin method to determine the SSP for the support services.
Some contracts have payment terms that differ from the timing of revenue recognition, which requires the Company to assess whether the transaction price for those contracts include a significant financing component. The Company has elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if the Company expects 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. The Company estimates the significant financing component provided to its customers with extended payment terms by determining the present value of the future payments by applying an average standard industry discount rate that reflects the customer’s creditworthiness.
Payment terms with customers typically require payment 30 days from invoice date. Agreements with customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise a concern over delivered products or services, the Company has endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented.
The Company occasionally enters into amendments to previously executed contracts that may constitute contract modifications. The amendments are assessed to determine if (1) the additional products and services are distinct from the product and services in the original arrangement; and (2) the amount of consideration expected for the added products and services reflects the SSP of those products and services. An amendment or 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.
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 collected within one year are classified as current assets or long-term assets if expected to be billed and collected after one year (see Note 8).
12
Costs to Obtain and Fulfill a Contract
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year. The Company has determined that commissions and special incentive payments (“Spiffs”) for hardware and software maintenance and support and professional services paid under its 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. The Company determined that
Leases
The Company accounts for leases in accordance with ASC 842, Leases. A contract is accounted for as a lease when the Company has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines if an arrangement is a lease or contains an embedded lease at inception. For arrangements that meet the definition of a lease, the Company determines the initial classification and measurement of its right-of-use operating lease asset and corresponding liability at the lease commencement date. The Company determines 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 the Company’s condensed consolidated balance sheets, and lease payments are recognized in the condensed consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term.
The Company’s existing leases are for facilities only. None of our leases are with related parties. In addition to rent, office leases may require the Company to pay additional amounts for taxes, insurance, maintenance and other expenses, which are generally referred to as non-lease components. As a practical expedient, the Company accounts for the non-lease components together with the lease components as a single lease component for all 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 Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of unrestricted common shares outstanding during the period. Diluted net loss per share is computed by dividing net 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 the Company reports a net loss, diluted net loss per share is the same as basic net loss per share.
The number of common shares used in the computation of diluted net 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:
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For the Three Months Ended April 30, |
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2022 |
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2021 |
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(Amounts in thousands) |
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Stock options |
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Restricted stock units |
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— |
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Deferred stock units |
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— |
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13
Pending Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“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 fiscal 2024. The Company is currently evaluating if this guidance will have a material effect to its consolidated financial statements.
All other ASUs issued but not yet effective are not expected to have a material effect on the Company’s future financial statements.
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3. |
Condensed Consolidated Balance Sheet Detail |
Property and Equipment, Net
Property and equipment, net consisted of the following:
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As of |
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|
April 30, 2022 |
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|
January 31, 2022 |
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(Amounts in thousands) |
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Computer equipment, software and demonstration equipment |
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$ |
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$ |
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Office furniture and equipment |
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Leasehold improvements |
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Less: Accumulated depreciation and amortization |
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( |
) |
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( |
) |
|
Total property and equipment, net |
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$ |
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|
$ |
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|
Depreciation expense was $
Accrued Expenses
Accrued expenses consisted of the following:
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As of |
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|
April 30, 2022 |
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January 31, 2022 |
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(Amounts in thousands) |
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Accrued employee compensation and benefits |
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$ |
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$ |
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Accrued professional fees |
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Sales tax and VAT payable |
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Current obligation - right of use operating leases |
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Third-party hardware |
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Accrued other |
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