Quarterly report pursuant to Section 13 or 15(d)

Acquisitions and Loss on Impairment

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Acquisitions and Loss on Impairment
9 Months Ended
Oct. 31, 2016
Business Combinations [Abstract]  
Acquisitions and Loss on Impairment
4. Acquisitions and Loss on Impairment

DCC Labs

On May 5, 2016 we acquired a 100% share of DCC Labs in exchange for an aggregate of $2.6 million in newly issued shares of SeaChange common stock and $5.2 million in cash, net of cash acquired, resulting in a total net purchase price of $7.9 million. DCC Labs is a developer of set-top and multiscreen device software. Of the total consideration, $0.5 million in cash and all of the stock is initially held in escrow as security for the indemnification obligations of the former DCC Labs owners to SeaChange under the purchase agreement. The stock consideration was determined by dividing the total value of $2.6 million by the volume weighted average closing price of our common stock for the twenty trading days preceding the closing.

The acquisition of DCC Labs enables us to optimize the operations of our In Home business, which is our developer of deployed software solutions including the SeaChange Nucleus home video gateway. In addition, the acquisition brings market-ready products, including an optimized television software stack for Europe’s Digital Video Broadcasting community and an HTML5 framework for building future-proof user interfaces for CPE devices.

We accounted for the acquisition of DCC Labs as a business combination, which requires us to record the assets acquired and liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of the net assets acquired is recorded as goodwill. We engaged an independent appraiser to assist management in assessing the fair values of the tangible and intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the acquisition date. Assets acquired as a result of the acquisition include receivables, prepaid expenses and property and equipment while liabilities assumed include accounts payable, other accrued expenses, deferred taxes and income taxes payable. The amounts recorded for these assets and liabilities are preliminary in nature and are subject to adjustment as additional information is obtained about the facts and circumstances that existed as of the acquisition date. Adjustments to these amounts are allowed under U.S. GAAP during the measurement period, which is up to one year from the acquisition date. The final determination of the fair values of the acquired assets and liabilities will be completed within the measurement period.

The allocation of purchase price was as follows (amounts in thousands):

 

Estimated Fair value of consideration:

  

Cash, net of cash acquired

   $ 5,243   

Stock consideration

     2,640   
  

 

 

 

Total purchase price

   $ 7,883   
  

 

 

 

Estimated Fair value of assets acquired and liabilities assumed:

  

Current assets

     826   

Other long-term assets

     116   

Finite-life intangible assets

     3,100   

Goodwill

     5,401   

Current liabilities

     (618

Other long-term liabilities

     (942
  

 

 

 

Allocated purchase price

   $ 7,883   
  

 

 

 

Acquired Goodwill

The preliminary purchase price allocation is subject to our final determination of fair value. We recorded the $5.4 million excess of the purchase price over the fair value of the identified tangible and intangible assets as goodwill, primarily due to expected synergies between the combined companies and expanded market opportunities. The goodwill is not deductible for tax purposes.

Intangible Assets

In determining the fair value of the intangible assets, the Company considered, among other factors, the intended use of the assets and the estimates of future performance of DCC Labs, based on analyses of historical financial performance. The fair values of identified intangible assets were calculated using an income-based approach based on estimates and assumptions provided by DCC Labs’ and the Company’s management.

 

The following table sets forth the components of the identified intangible assets associated with the DCC Labs acquisition and their estimated useful lives:

 

     Useful life      Fair Value  
            (Amounts in thousands)  

Tradename

     5 years       $ 200   

Customer contracts

     9 years         1,400   

Non-compete agreements

     2 years         100   

Existing technology

     7 years         1,400   
     

 

 

 
      $ 3,100   
     

 

 

 

Measurement Period Adjustments

During the quarter ended October 31, 2016, we identified measurement period adjustments that impacted the estimated fair value of the DCC Labs assets and liabilities assumed on May 5, 2016 as a result of new information obtained about the facts and circumstances that existed as of the acquisition date. The total measurement period adjustments recorded during the third quarter of fiscal 2017 resulted in a decrease in receivables of $0.3 million and an increase in goodwill of $0.3 million. There was no impact to the consolidated statements of operations and comprehensive loss for the three and nine months ended October 31, 2016. Further adjustments are expected through the end of the measurement period as third-party valuations are finalized.

Impact to Fiscal 2017 Financial Results

DCC Labs’ financial results have been included in our consolidated financial results only for the period from the May 5, 2016 acquisition date through October 31, 2016. As a result, our consolidated financial results for the nine months ended October 31, 2016 do not reflect a full nine months of DCC Labs’ results. From the May 5, 2016 acquisition date through October 31, 2016, DCC Labs generated revenue of $0.7 million and an operating loss of $2.0 million.

Acquisition-related Costs

In connection with the acquisition, we incurred approximately $0.2 million in acquisition-related costs, including legal, accounting and other professional services for fiscal 2017. The acquisition costs were expensed as incurred and included in professional fees – other, in our consolidated statements of operations and comprehensive loss for the period ended October 31, 2016.

TLL, LLC

On February 2, 2015, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of December 22, 2014, we acquired 100% of the member interests in TLL, LLC (“Timeline Labs”), a privately-owned California-based software-as-a-service (“SaaS”) company.

We accounted for the acquisition of Timeline Labs as a business combination and the financial results of Timeline Labs have been included in our consolidated financial statements as of the date of acquisition. Under the acquisition method of accounting, the purchase price was allocated to the acquired net tangible and intangible assets based upon their fair values as of February 2, 2015.

 

The allocation of the purchase price was as follows (amounts in thousands):

 

Fair value of consideration:

  

Cash, net of cash acquired

   $ 14,186   

Closing stock consideration

     3,019   

Deferred stock consideration

     4,959   

Contingent consideration

     475   
  

 

 

 

Total purchase price

   $ 22,639   
  

 

 

 

Fair value of assets acquired and liabilities assumed:

  

Current assets

     95   

Other long-term assets

     108   

Finite-life intangible assets

     6,720   

Goodwill

     15,787   

Current liabilities

     (71
  

 

 

 

Allocated purchase price

   $ 22,639   
  

 

 

 

Fair Value of Consideration Transferred

Upon completion of the acquisition, the Company made cash consideration payments to the former members of Timeline Labs in the amount of $14.2 million (“Closing Cash Consideration”). The Closing Cash Consideration included $1.4 million deposited in escrow to secure certain indemnification obligations of the former members of Timeline Labs under the Merger Agreement. Also upon completion of the acquisition, the Company issued 344,055 shares of common stock to the former members of Timeline Labs and deposited 173,265 shares of common stock into escrow.

On August 3, 2015, we issued 260,537 shares of our common stock with a value of $1.8 million to the former members of Timeline Labs, in satisfaction of the six-month deferred stock consideration obligation pursuant to the Merger Agreement. In satisfaction of the twelve-month deferred stock consideration obligation pursuant to the Merger Agreement, on February 2, 2016 we issued 542,274 shares of our common stock with a value of $3.2 million and in May 2016, pursuant to an adjustment mechanism based on stock price provided for in the Merger Agreement with respect to deferred stock consideration issuances, we issued an additional 70,473 shares of our common stock with a value of $0.2 million.

Contingent Consideration

The former interest holders of Timeline Labs were eligible to receive earn-out compensation, consisting of shares of our common stock, if defined performance criteria were achieved for fiscal 2016 and 2017. We recorded a liability of $3.2 million in February 2015 in our consolidated balance sheets that represented the fair value of the estimated shares at full achievement of the defined performance criteria on the date of acquisition. As of January 31, 2016, the Company determined that the defined performance criteria would not be achieved and the liability was reduced to zero with a $0.4 million reversal of liability credited to loss on impairment of TLL, LLC net assets in our consolidated statements of operations and comprehensive loss for the fiscal year ended January 31, 2016.

Intangible Assets

In determining the fair value of the intangible assets, the Company considered, among other factors, the intended use of the assets, the estimates of future performance of Timeline Lab’s products and analyses of historical financial performance. The fair values of identified intangible assets were calculated using an income-based approach based on estimates and assumptions provided by Timeline Labs’ and the Company’s management.

 

The following table sets forth the components of the identified intangible assets associated with the Timeline Labs acquisition and their estimated useful lives:

 

     Useful life      Fair Value  
            (Amounts in thousands)  

Tradename

     7 years       $ 620   

Customer contracts

     7 years         4,760   

Non-compete agreements

     2 years         170   

Existing technology

     5 years         1,170   
     

 

 

 
      $ 6,720   
     

 

 

 

Acquired Goodwill

We finalized the purchase price allocation in January 2016. We recorded the $15.8 million excess of the purchase price over the fair value of the identified tangible and intangible assets as goodwill, primarily due to expected synergies between the combined companies and expanded market opportunities. The goodwill was deductible for tax purposes.

Acquisition-related Costs

In connection with the acquisition, we incurred approximately $0.2 million in acquisition-related costs, including legal, accounting and other professional services for fiscal 2016. The acquisition costs were expensed as incurred and included in professional fees – other, in our consolidated statements of operations and comprehensive loss for the fiscal year ended January 31, 2016.

Loss on Impairment of Assets

In January 2016, our Board of Directors authorized a restructuring plan to wind down the Timeline Labs operations, as previously reported in a Current Report on Form 8-K filed with the SEC on February 17, 2016. Based on the decision to enter into the restructuring plan and the plan’s impact on the projected future cash flows of the Timeline Labs operations, we determined that the carrying amount of all long-term assets that resulted from the February 2015 acquisition had exceeded their fair value as of January 31, 2016. As a result, these long-term assets were deemed fully impaired and we recorded the $21.9 million net book value of these long-term assets as a component of loss on impairment of TLL, LLC net assets in our consolidated statements of operations and comprehensive loss for the fiscal year ended January 31, 2016. Additionally, we reduced the contingent consideration liability associated with the Timeline Labs acquisition to zero, as we determined that the defined performance criteria would not be achieved, and credited the reversal of the liability of $0.4 million to loss on impairment of TLL, LLC net assets in our consolidated statements of operations and comprehensive loss for the fiscal year ended January 31, 2016.

In addition, we incurred $0.6 million in severance and other restructuring charges during fiscal 2017 related to cost-saving actions taken with respect to the Timeline Labs business.