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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended October 31, 2020

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: 001-38828

 

SEACHANGE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

04-3197974

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

500 Totten Pond Road, Waltham, MA

 

02451

Address of principal executive offices

 

(Zip Code)

(978) 897-0100

 

Registrant’s telephone number, including area code

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 Par Value

SEAC

The Nasdaq Global Select Market

Series A Participating Preferred Stock Purchase Rights

SEAC

The Nasdaq Global Select Market

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 on November 30, 2020 was 37,556,067.

 



SEACHANGE INTERNATIONAL, INC.

Table of Contents

 

 

Page

PART I. FINANCIAL  INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets

2

 

 

 

 

Consolidated Statements of Operations and Comprehensive (Loss) Income

3

 

 

 

 

Consolidated Statements of Stockholders’ Equity

4

 

 

 

 

Consolidated Statements of Cash Flows

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

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

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 5.

Other Information

32

 

 

 

Item 6.

Exhibits

32

 

 

SIGNATURES

34

 

 

 

 

 

 

 

 


PART I – FINANCIAL INFORMATION

ITEM 1.

Financial Statements

SEACHANGE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands, except share data)

 

 

 

October 31,

 

 

January 31,

 

 

 

2020

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash

 

$

5,124

 

 

$

9,297

 

Marketable securities

 

 

1,034

 

 

 

3,835

 

Accounts receivable, net of allowance for doubtful accounts of $903

   and $947 at October 31, 2020 and January 31, 2020, respectively

 

 

5,259

 

 

 

12,127

 

Unbilled receivables

 

 

11,509

 

 

 

14,279

 

Prepaid expenses and other current assets

 

 

4,755

 

 

 

5,112

 

Total current assets

 

 

27,681

 

 

 

44,650

 

Property and equipment, net

 

 

641

 

 

 

554

 

Operating lease right-of-use assets

 

 

5,231

 

 

 

4,860

 

Marketable securities, long-term

 

 

 

 

 

782

 

Intangible assets, net

 

 

1,528

 

 

 

2,300

 

Goodwill

 

 

10,249

 

 

 

9,775

 

Unbilled receivables, long-term

 

 

7,527

 

 

 

9,031

 

Other assets

 

 

756

 

 

 

938

 

Total assets

 

$

53,613

 

 

$

72,890

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,765

 

 

$

4,007

 

Accrued expenses

 

 

4,628

 

 

 

7,986

 

Deferred revenue

 

 

3,180

 

 

 

5,041

 

Promissory note

 

 

1,475

 

 

 

 

Total current liabilities

 

 

12,048

 

 

 

17,034

 

Deferred revenue, long-term

 

 

643

 

 

 

1,140

 

Operating lease liabilities, long-term

 

 

4,299

 

 

 

4,348

 

Taxes payable, long-term

 

 

328

 

 

 

436

 

Promissory note, long-term

 

 

938

 

 

 

 

Deferred tax liabilities, long-term

 

 

246

 

 

 

 

Total liabilities

 

 

18,502

 

 

 

22,958

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 100,000,000 shares authorized at

   October 31, 2020 and January 31, 2020; 37,727,987 shares issued

   and 37,556,067 shares outstanding at October 31, 2020; 37,303,952

   shares issued and 37,163,462 outstanding at January 31, 2020

 

 

377

 

 

 

373

 

Additional paid-in capital

 

 

246,254

 

 

 

245,067

 

Treasury stock, at cost; 171,920 shares at October 31, 2020 and

   140,490 shares at January 31, 2020

 

 

(227

)

 

 

(147

)

Accumulated other comprehensive loss

 

 

(676

)

 

 

(2,137

)

Accumulated deficit

 

 

(210,617

)

 

 

(193,224

)

Total stockholders' equity

 

 

35,111

 

 

 

49,932

 

Total liabilities and stockholders' equity

 

$

53,613

 

 

$

72,890

 

 

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

 

2


SEACHANGE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

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

 

 

 

For the Three Months

Ended October 31,

 

 

For the Nine Months

Ended October 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

1,048

 

 

$

13,524

 

 

$

5,212

 

 

$

26,671

 

Service

 

 

3,918

 

 

 

7,020

 

 

 

11,664

 

 

 

21,170

 

Total revenue

 

 

4,966

 

 

 

20,544

 

 

 

16,876

 

 

 

47,841

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

435

 

 

 

466

 

 

 

2,803

 

 

 

4,414

 

Service

 

 

1,755

 

 

 

4,386

 

 

 

6,974

 

 

 

13,939

 

Total cost of revenue

 

 

2,190

 

 

 

4,852

 

 

 

9,777

 

 

 

18,353

 

Gross profit

 

 

2,776

 

 

 

15,692

 

 

 

7,099

 

 

 

29,488

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,024

 

 

 

4,033

 

 

 

10,550

 

 

 

12,060

 

Selling and marketing

 

 

1,636

 

 

 

3,859

 

 

 

5,490

 

 

 

9,674

 

General and administrative

 

 

2,636

 

 

 

3,265

 

 

 

7,057

 

 

 

11,664

 

Severance and restructuring costs

 

 

53

 

 

 

2,282

 

 

 

1,082

 

 

 

3,152

 

Total operating expenses

 

 

7,349

 

 

 

13,439

 

 

 

24,179

 

 

 

36,550

 

(Loss) income from operations

 

 

(4,573

)

 

 

2,253

 

 

 

(17,080

)

 

 

(7,062

)

Other expense, net

 

 

(499

)

 

 

(161

)

 

 

(334

)

 

 

(2,030

)

(Loss) income before income taxes

 

 

(5,072

)

 

 

2,092

 

 

 

(17,414

)

 

 

(9,092

)

Income tax provision (benefit)

 

 

45

 

 

 

(53

)

 

 

(21

)

 

 

(214

)

Net (loss) income

 

$

(5,117

)

 

$

2,145

 

 

$

(17,393

)

 

$

(8,878

)

Net (loss) income per share, basic

 

$

(0.14

)

 

$

0.06

 

 

$

(0.46

)

 

$

(0.24

)

Net (loss) income per share, diluted

 

$

(0.14

)

 

$

0.06

 

 

$

(0.46

)

 

$

(0.24

)

Weighted average common shares outstanding, basic

 

 

37,556

 

 

 

36,751

 

 

 

37,436

 

 

 

36,606

 

Weighted average common shares outstanding, diluted

 

 

37,556

 

 

 

37,752

 

 

 

37,436

 

 

 

36,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(5,117

)

 

$

2,145

 

 

$

(17,393

)

 

$

(8,878

)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(143

)

 

 

59

 

 

 

1,498

 

 

 

1,399

 

Unrealized (losses) gains on marketable securities

 

 

(33

)

 

 

31

 

 

 

(37

)

 

 

91

 

Total other comprehensive (loss) income

 

 

(176

)

 

 

90

 

 

 

1,461

 

 

 

1,490

 

Comprehensive (loss) income

 

$

(5,293

)

 

$

2,235

 

 

$

(15,932

)

 

$

(7,388

)

 

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

3


SEACHANGE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, amounts in thousands except share data)

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Number of

Shares

 

 

Par Value

 

 

Paid-in

Capital

 

 

Treasury

Stock

 

 

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Stockholders'

Equity

 

Balances at July 31, 2020

 

 

37,727,987

 

 

$

377

 

 

$

245,817

 

 

$

(227

)

 

$

(500

)

 

$

(205,500

)

 

$

39,967

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

437

 

 

 

 

 

 

 

 

 

 

 

 

437

 

Unrealized losses on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33

)

 

 

 

 

 

(33

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(143

)

 

 

 

 

 

(143

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,117

)

 

 

(5,117

)

Balances at October 31, 2020

 

 

37,727,987

 

 

$

377

 

 

$

246,254

 

 

$

(227

)

 

$

(676

)

 

$

(210,617

)

 

$

35,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Number of

Shares

 

 

Par Value

 

 

Paid-in

Capital

 

 

Treasury

Stock

 

 

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Stockholders'

Equity

 

Balances at July 31, 2019

 

 

36,811,061

 

 

$

367

 

 

$

243,514

 

 

$

(147

)

 

$

(1,993

)

 

$

(195,326

)

 

$

46,415

 

Issuance of common stock pursuant to

   vesting of restricted stock units

 

 

138,134

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock pursuant to

   ESPP purchases

 

 

4,634

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

11

 

Issuance of common stock pursuant to

   exercise of stock options

 

 

17,146

 

 

 

1

 

 

 

45

 

 

 

 

 

 

 

 

 

 

 

 

46

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

357

 

 

 

 

 

 

 

 

 

 

 

 

357

 

Unrealized gains on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31

 

 

 

 

 

 

31

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

59

 

 

 

 

 

 

59

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,145

 

 

 

2,145

 

Balances at October 31, 2019

 

 

36,970,975

 

 

$

369

 

 

$

243,926

 

 

$

(147

)

 

$

(1,903

)

 

$

(193,181

)

 

$

49,064

 

4


SEACHANGE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, amounts in thousands except share data)

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

 

Total

 

 

 

Number of

Shares

 

 

Par Value

 

 

Paid-in

Capital

 

 

 

 

Treasury

Stock

 

 

 

 

Comprehensive

Loss

 

 

 

 

Accumulated

Deficit

 

 

Stockholders'

Equity

 

Balances at January 31, 2020

 

 

37,303,952

 

 

$

373

 

 

$

245,067

 

 

 

 

$

(147

)

 

 

 

$

(2,137

)

 

 

 

$

(193,224

)

 

$

49,932

 

Issuance of common stock pursuant to

   vesting of restricted stock units

 

 

379,063

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock pursuant to

   exercise of stock options

 

 

39,270

 

 

 

 

 

 

119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

119

 

Issuance of common stock pursuant to

   ESPP purchases

 

 

5,702

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,054

 

Repurchases of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(80

)

 

 

 

 

 

 

 

 

 

 

 

 

(80

)

Unrealized losses on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

 

 

 

 

 

(37

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,498

 

 

 

 

 

 

 

 

1,498

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,393

)

 

 

(17,393

)

Balances at October 31, 2020

 

 

37,727,987

 

 

$

377

 

 

$

246,254

 

 

 

 

$

(227

)

 

 

 

$

(676

)

 

 

 

$

(210,617

)

 

$

35,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

 

Total

 

 

 

Number of

Shares

 

 

Par Value

 

 

Paid-in

Capital

 

 

 

 

Treasury

Stock

 

 

 

 

Comprehensive

Loss

 

 

 

 

Accumulated

Deficit

 

 

Stockholders'

Equity

 

Balances at January 31, 2019

 

 

35,946,100

 

 

$

359

 

 

$

242,442

 

 

 

 

$

(5

)

 

 

 

$

(3,393

)

 

 

 

$

(184,303

)

 

$

55,100

 

Issuance of common stock pursuant to

   acquisition of Xstream

 

 

541,738

 

 

 

5

 

 

 

869

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

874

 

Issuance of common stock pursuant to

   vesting of restricted stock units

 

 

453,538

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock pursuant to

   ESPP purchases

 

 

12,453

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

Issuance of common stock pursuant to

   exercise of stock options

 

 

17,146

 

 

 

1

 

 

 

45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

554

 

Repurchases of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(142

)

 

 

 

 

 

 

 

 

 

 

 

 

(142

)

Unrealized gains on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

91

 

 

 

 

 

 

 

 

91

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,399

 

 

 

 

 

 

 

 

1,399

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,878

)

 

 

(8,878

)

Balances at October 31, 2019

 

 

36,970,975

 

 

$

369

 

 

$

243,926

 

 

 

 

$

(147

)

 

 

 

$

(1,903

)

 

 

 

$

(193,181

)

 

$

49,064

 

 

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

5


SEACHANGE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

 

 

 

For the Nine Months

Ended October 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(17,393

)

 

$

(8,878

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

1,105

 

 

 

1,622

 

(Recovery of) provision for bad debts

 

 

(216

)

 

 

480

 

Stock-based compensation expense

 

 

1,054

 

 

 

554

 

Deferred income taxes

 

 

246

 

 

 

(203

)

Realized and unrealized foreign currency transaction loss

 

 

1,498

 

 

 

1,399

 

Other

 

 

(26

)

 

 

97

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

7,084

 

 

 

5,456

 

Unbilled receivables

 

 

4,274

 

 

 

(11,215

)

Inventory

 

 

 

 

 

720

 

Prepaid expenses and other current assets and other assets

 

 

539

 

 

 

469

 

Accounts payable

 

 

(1,242

)

 

 

(1,079

)

Accrued expenses and other liabilities

 

 

(3,886

)

 

 

535

 

Deferred revenue

 

 

(2,358

)

 

 

(2,977

)

Net cash used in operating activities

 

 

(9,321

)

 

 

(13,020

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(311

)

 

 

(252

)

Cash paid for acquisitions, net

 

 

 

 

 

(3,838

)

Purchases of marketable securities

 

 

 

 

 

(852

)

Proceeds from sales and maturities of marketable securities

 

 

3,576

 

 

 

3,343

 

Net cash provided by (used in) investing activities

 

 

3,265

 

 

 

(1,599

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

137

 

 

 

66

 

Repurchases of common stock

 

 

(80

)

 

 

(142

)

Proceeds from Paycheck Protection Program

 

 

2,413

 

 

 

 

Net cash provided by (used in) financing activities

 

 

2,470

 

 

 

(76

)

Effect of exchange rate on cash and cash equivalents

 

 

(587

)

 

 

265

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(4,173

)

 

 

(14,430

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

9,297

 

 

 

20,317

 

Cash, cash equivalents and restricted cash at end of period

 

$

5,124

 

 

$

5,887

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Income taxes paid

 

$

196

 

 

$

454

 

Non-cash activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable

 

$

 

 

$

 

Right-of-use assets obtained in exchange for lease obligations

 

$

987

 

 

$

2,952

 

Fair value of common stock issued in acquisition

 

$

 

 

$

874

 

 

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

 

6


SEACHANGE INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

Nature of Business and Basis of Presentation

SeaChange International, Inc. (“we” or the “Company”), a Delaware corporation, was founded on July 9, 1993. We are an industry leader in the delivery of multiscreen, advertising and premium over-the-top video management solutions.  Our software products and services are designed to empower video providers to create, manage and monetize the increasingly personalized, highly engaging experiences that viewers demand.

Liquidity

We continue to realize the savings related to our restructuring activities. In fiscal 2020, we continued to streamline our operations and closed our service organizations in Ireland and the Netherlands. These measures are important steps in restoring us to profitability and positive cash flow. We believe that existing cash and investments and cash expected to be provided by future operating results are adequate to satisfy our working capital, capital expenditure requirements and other contractual obligations for at least the next 12 months.

If our expectations are incorrect, we may need to raise additional funds to fund our operations or take advantage of unanticipated strategic opportunities in order to strengthen our financial position. In the future, we may enter into other arrangements for potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt financing. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of market opportunities, to develop new products or to otherwise respond to competitive pressures.

Impact of COVID-19 Pandemic

In the first quarter of fiscal 2021, concerns related to the spread of COVID-19 began to create global business disruptions as well as disruptions in our operations and to create potential negative impacts on our revenues and other financial results. COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. The extent to which COVID-19 will impact our financial condition or results of operations is currently uncertain and depends on factors including the impact on our customers, partners, and vendors and on the operation of the global markets in general. Due to our business model, the effect of COVID-19 on our results of operations may also not be fully reflected for some time.

We are currently conducting 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. We have 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 our team’s sales activities could foreclose future business opportunities, particularly as our customers limit spending, which could negatively impact the willingness of our customers to enter into or renew contracts with us. The pandemic has impacted our ability to complete certain implementations, negatively impacting our ability to recognize revenue, and could also negatively impact the payment of accounts receivable and collections. We continue to realize our on-going cost optimization efforts in response to the impact of the pandemic. We may take further actions that alter our business operations as the situation evolves. As a result, the ultimate impact of the COVID-19 pandemic and the effects of the operational alterations we have made in response on our business, financial condition, liquidity, and financial results cannot be predicted at this time.

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief and Economic Security Act (the “CARES) Act”).  The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.  We continue to examine the impact that the CARES Act may have on our business, including the extent of our Paycheck Protection Program (the “PPP”) loan forgiveness eligibility.

The Paycheck Protection Program

On May 5, 2020, the Company entered into a promissory note (the “Note”) with Silicon Valley Bank (the “Lender”) evidencing an unsecured loan in an aggregate principal amount of $2,412,890 pursuant to the PPP under the CARES Act administered by the U.S. Small Business Administration (“SBA”). The Note is included in our consolidated balance sheets.

Interest accrues on the Note at a fixed rate of one percent (1%) per annum, with the payment of the first six months of interest and principal deferred and is included in accrued expenses in our consolidated balance sheets. The Note has an initial term of two years, is unsecured and is guaranteed by the SBA. The Company may apply to the Lender for forgiveness of the Note, with the amount which may be forgiven equal to the sum of qualifying expenses, including payroll costs, covered rent obligations, and covered utility payments incurred by the Company during the twenty-four week period beginning on May 7, 2020, calculated in accordance with the terms of the CARES Act.

7


Subject to any forgiveness under the PPP, the Note will mature on May 5, 2022. Beginning on the seven-month anniversary of the date of the Note, the Company is required to make 18 monthly payments of principal and interest. The Note may be prepaid at any time prior to maturity with no prepayment penalties. The Note provides for customary events of default including, among others, those relating to breaches of the Company’s obligations under the Note, including a failure to make payments, any bankruptcy or similar proceedings involving the Company, and certain material effects on the Company’s ability to repay the Note. The Note may be accelerated upon the occurrence of an event of default.

Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard

On October 30, 2020, the Company received a deficiency letter from the Nasdaq Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the 30 consecutive business days prior to such date, the closing bid price for the Company’s common stock was below the minimum $1.00 per share required for continued listing on The Nasdaq Global Select Market pursuant to Nasdaq Listing Rule 5450(a)(1) (the “Minimum Bid Price Requirement”). The Nasdaq deficiency letter had no immediate effect on the listing of the Company’s common stock, and the common stock will continue to trade on The Nasdaq Global Select Market under the symbol “SEAC” at this time.

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days from the receipt of the letter, or until April 27, 2021, to regain compliance with the Minimum Bid Price Requirement. If at any time before April 27, 2021, the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Staff will provide written confirmation that the Company has achieved compliance.

If the Company does not regain compliance with the Minimum Bid Price Requirement by April 27, 2021, the Company may be afforded a second 180 calendar day period to regain compliance. To qualify, the Company would be required to transfer to The Nasdaq Capital Market, to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, except for the Minimum Bid Price Requirement. In addition, the Company would be required to notify Nasdaq of its intent to cure the deficiency during the second compliance period. Following a transfer to The Nasdaq Capital Market, the Company will be afforded the second 180 calendar day period to regain compliance, unless it does not appear to Nasdaq that it is possible for the Company to cure the deficiency. If the Company does not regain compliance with the Minimum Bid Price Requirement by the end of the compliance period (or the second compliance period, if applicable), the Company’s common stock will become subject to delisting. In the event that the Company receives notice that its common stock is being delisted, the Nasdaq listing rules permit the Company to appeal a delisting determination by the Staff to a hearings panel.

The Company is monitoring the closing bid price of its common stock and may, if appropriate, consider available options to regain compliance with the Minimum Bid Price Requirement, including initiating a reverse stock split. However, there can be no assurance that the Company will be able to regain compliance with the Minimum Bid Price Requirement or will otherwise be in compliance with other Nasdaq Listing Rules.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). We consolidate the financial statements of our wholly-owned subsidiaries and all intercompany transactions and account balances have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments of a normal recurring nature which were considered necessary for a fair presentation have been included. The year-end consolidated balance sheet data as of January 31, 2020 was derived from our audited consolidated financial statements and may not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended October 31, 2020 are not necessarily indicative of the results to be expected for the entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020, filed with the SEC on April 20, 2020.

8


2.

Significant Accounting Policies

Use of Estimates

The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities.  Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, those related to revenue recognition, allowance for doubtful accounts, goodwill and intangible assets, right-of-use operating leases, impairment of long-lived assets, accounting for income taxes, the valuation of stock-based awards, and ongoing legal matters.  We base our estimates on historical experience, known trends and other market-specific or relevant factors that are believed to be reasonable under the circumstances.  On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known.  Actual results may differ from those estimates or assumptions.

Business Combinations

We account for acquisitions of entities that include inputs and processes and have the ability to create outputs as business combinations. We allocate the purchase price of the acquisition to the tangible assets acquired, liabilities assumed, and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred. During the measurement period, we record adjustments to provisional amounts recorded for assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, which could be up to one year after the transaction date, subsequent adjustments are recorded to the Company’s consolidated statements of operations.

Cash, Cash Equivalents and Restricted Cash

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

The following table provides a summary of cash, cash equivalents and restricted cash that constitutes the total amounts shown in the consolidated statements of cash flows as of October 31, 2020 and 2019:

 

 

 

As of October 31,

 

 

 

2020

 

 

2019

 

 

 

(Amounts in thousands)

 

Cash and cash equivalents

 

$

4,904

 

 

$

5,598

 

Restricted cash

 

 

220

 

 

 

289

 

Total cash, cash equivalents and restricted cash

 

$

5,124

 

 

$

5,887

 

 

Concentration of Credit Risk and of Significant Customers

Financial instruments which potentially expose us to concentrations of credit risk include cash, cash equivalents and restricted cash, marketable securities and accounts receivable. We have cash investment policies which, among other things, limit investments to investment-grade securities. We restrict our cash equivalents and marketable securities to repurchase agreements with major banks and U.S. government and corporate securities which are subject to minimal credit and market risk. We perform ongoing credit evaluations of our customers.

We sell our software products and services worldwide primarily to service providers consisting of operators, telecommunications companies, satellite operators and broadcasters. One customer accounted for 29% of total revenue for the three months ended October 31, 2020 and two customers accounted for 13% each of total revenue for the three months ended October 31, 2019. One customer accounted for 21% of total revenue for the nine months ended October 31, 2020 and no customer accounted for 10% or more of total revenue for the nine months ended October 31, 2019. Two customers accounted for 39% and 11% of the accounts receivable balance as of October 31, 2020. Two customers accounted for 16% and 10% of the accounts receivable balance as of January 31, 2020.

9


Marketable Securities

Our investments in debt securities are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss in stockholders’ equity. Realized gains and losses and declines in value determined to be other than temporary are based on the specific identification method and are included as a component of other expense, net in the consolidated statements of operations and comprehensive loss.

We evaluate our investments with unrealized losses for other-than-temporary impairment. When assessing investments for other-than-temporary declines in value, we consider such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, our ability and intent to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value and market conditions in general. If any adjustment to fair value reflects a decline in the value of the investment that we consider to be “other than temporary,” we reduce the investment to fair value through a charge to the consolidated statement of operations and comprehensive loss. No such adjustments were necessary during the periods presented.

Fair Value Measurements

Certain assets and liabilities are carried at fair value under U.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 

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

 

Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

Our cash equivalents and marketable securities are carried at fair value determined according to the fair value hierarchy described above. The carrying values of our accounts and other receivables, unbilled receivables, accounts payable, accrued expenses, and the Note approximate their fair values due to the short-term nature of these assets and liabilities.

Goodwill and Acquired Intangible Assets

We record goodwill when consideration paid in a business acquisition exceeds the value of the net assets acquired. Our estimates of fair value are based upon assumptions believed to be reasonable at that time but that are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate and unanticipated events or circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results.  Goodwill is not amortized, but rather is tested for impairment annually on August 1st of each year, or more frequently if facts and circumstances warrant a review, such as the ones mentioned in impairments of long-lived assets below. We have determined that there is a single reporting unit for the purpose of conducting this goodwill impairment assessment. We assess both the existence of potential impairment and the amount of impairment loss by comparing the fair value of the reporting unit with its carrying amount, including goodwill. The Company tested for goodwill impairment as of July 31, 2020 in consideration of the COVID-19 pandemic and determined there was no impairment. Through October 31, 2020, we have recorded accumulated goodwill impairment charges of $54.8 million.

Intangible assets are recorded at their estimated fair values at the date of acquisition. We amortize acquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.

10


Impairment of Long-Lived Assets

Long-lived assets primarily consist of property, plant and equipment and intangible assets with finite lives. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. Recoverability of long-lived assets or groups of assets is assessed based on a comparison of the carrying amount to the estimated future undiscounted cash flows. If estimated future undiscounted net cash flows are less than the carrying amount, the asset is considered impaired and expense is recorded at an amount required to reduce the carrying amount to fair value. Determining the fair value of long-lived assets includes significant judgment by management and different judgments could yield different results.

We assess the useful lives and possible impairment of existing recognized long-lived assets whenever events or changes in circumstances occur that indicate that it is more likely than not that an impairment has occurred. We test long-lived assets for impairment by comparing the carrying amount to the sum of the net undiscounted cash flows expected to be generated by the asset whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of the asset exceeds its net undiscounted cash flows, then an impairment loss is recognized for the amount by which the carrying amount exceeds its fair value. We use a discounted cash flow approach or other methods, if appropriate, to assess fair value. Factors considered important which could trigger a review include:

 

significant underperformance relative to historical or projected future operating results;

 

significant changes in the manner of use of the acquired assets or the strategy for our overall business;

 

identification of other impaired assets within a reporting unit;

 

significant negative industry or economic trends;

 

a significant decline in our stock price for a sustained period; and

 

a decline in our market capitalization relative to net book value.

Determining whether a triggering event has occurred involves significant judgment (see Note 5).

Revenue Recognition

Our revenue is derived from sales of software licenses and associated hardware and support services, including professional services and maintenance fees related to our software licenses.

Our contracts, including contracts for our end-to-end software delivery platform solution (the “Framework”), often contain multiple performance obligations. For contracts with multiple performance obligations, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis when available or expected cost plus margin or residual approach. If the transaction price contains discounts or we expect to provide future price concessions, these elements are considered when determining the transaction price prior to allocation. Variable fees within the transaction price are estimated and recognized as revenue when we satisfy our performance obligations to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. If the contract grants the client the option to acquire additional products or services, we assess whether or not any discount on the products and services is in excess of levels normally available to similar clients and, if so, we account for that discount as an additional performance obligation.

Framework

We have concluded that the Framework has multiple performance obligations. The selling price of the Framework is highly variable as a result of our value-based engagement where pricing for our customers is based on the operating expense savings that we enable using the Framework engagement.

Framework Software Licenses

We have concluded that a Framework software license is a distinct performance obligation as the client can benefit from the software on its own. Software license revenue is included in product revenue in our consolidated statement of operations and comprehensive loss and is typically recognized when control is transferred to the client, which is defined as the point in time when the client can use and benefit from the license. The software license is delivered before related services are provided and is functional without services, updates, and technical support. As a result of the highly variable selling price, revenue recognition and consideration related to the Framework software license is allocated under the residual method.

11


Framework Hardware

We have concluded that Framework hardware, when included in a Framework contract, is a distinct performance obligation as the client can benefit from the product. Framework hardware revenue is included in product revenue in our consolidated statement of operations and comprehensive loss and is 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.

Framework Support Services

We have concluded that Framework support services is a distinct performance obligation. Framework support services is included in services revenue in our consolidated statements of operations and comprehensive loss.  Support services includes software upgrades on a when-and-if available basis, support, bug fixes or patches and general maintenance support.  Framework support services is not sold on a standalone basis. The standalone selling price is determined using a cost-plus approach, and revenue is recognized ratably over the passage of the contractual term.

Legacy Software Licenses

We have concluded that a software license is a distinct performance obligation as the client can benefit from the software on its own. Software license revenue is included in product revenue in our consolidated statement of operations and comprehensive loss and is typically recognized when control is transferred to the client, which is defined as the point in time when the client can use and benefit from the license. The software license is delivered before related services are provided and is functional without services, updates, and technical support.

Legacy Hardware

We have concluded that hardware is a distinct performance obligation as the client can benefit from the product on its own. Hardware revenue is included in product revenue in our consolidated statement of operations and comprehensive loss and is 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.

Legacy Maintenance

Historically, maintenance revenue, which is included in services revenue in our consolidated statements of operations and comprehensive loss, includes revenue from client support and related professional services. Client support includes software upgrades on a when-and-if available basis, telephone support, bug fixes or patches and general hardware maintenance support. Maintenance is priced as a percentage of the list price of the related software license and hardware. Historically, we determined the standalone selling price of maintenance based on this pricing relationship and observable data from standalone sales of maintenance.

We have identified three separate distinct performance obligations of maintenance:

 

Software upgrades and updates;

 

Technical support; and

 

Hardware support.

These performance obligations are distinct within the contract and, although they are not sold separately, the components are not essential to the functionality of the other components. Each of the performance obligations included in maintenance revenue is a stand ready obligation that is recognized ratably over the passage of the contractual term for products sold on a standalone basis.  

Legacy Services

Historically, our services revenue, excluding maintenance revenue, is comprised of software license implementation services, engineering services, training and reimbursable expenses. We have concluded that services are distinct performance obligations, with the exception of engineering services. Engineering services may be provided on a standalone basis or bundled with a license when we are providing custom development.

The standalone selling price for services in time and materials contracts is determined by observable prices in standalone services arrangements and recognized as revenue as the services are performed based on an input measure of hours incurred to total estimated hours.

12


We estimate the standalone selling price for fixed price services based on estimated hours adjusted for historical experience at time and material rates charged in standalone services arrangements. Revenue for fixed price services is recognized over time as the services are provided based on an input measure of hours incurred to total estimated hours.

Contract Modifications

We occasionally enter into amendments to previously executed contracts that constitute contract modifications. We assess each of these contract modifications to determine:

 

If the additional products and services are distinct from the product and services in the original arrangement; and

 

If the amount of consideration expected for the added products and services reflects the standalone selling price of those products and services.

 

A contract modification meeting both criteria is accounted for as a separate contract. A contract modification not meeting both criteria is considered a change to the original contract and is accounted for on either a prospective basis as a termination of the existing contract and the creation of a new contract or a cumulative catch-up basis.

Significant Judgments

 

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once we determine the performance obligations, we determine the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. We then allocate the transaction price to each performance obligation in the contract based on a relative standalone selling price method. The corresponding revenue is recognized as the related performance obligations are satisfied as discussed in the revenue categories above.

 

Judgment is required to determine the standalone selling price for each distinct performance obligation. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price, taking into account available information such as market conditions, and internally approved pricing guidelines related to the performance obligations. In instances where stand-alone selling price is not directly observable, such as when we do not sell the product or service separately, we determine the stand-alone selling price based on a cost-plus model as market and other observable inputs are seldom present based on the proprietary nature of our products and services.

 

Our contracts do not generally include a variable component to the transaction price. With certain statements of work, we explicitly state that we are to be reimbursed for reasonable travel and entertainment expenses incurred as part of the delivery of professional services. In the cases when we are entitled to collect all travel and entertainment expenses incurred, an estimate of the fulfillment costs is made at the onset of the contract in order to determine the transaction price. The revenue associated with travel and entertainment expenses is then recognized over time along with the professional services.

Some of our contracts have payment terms that differ from the timing of revenue recognition, which requires us to assess whether the transaction price for those contracts include a significant financing component. We have elected the practical expedient that permits an entity to not adjust for the effects of a significant financing component if we expect that at the contract inception, the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service, will be one year or less. For those contracts in which the period exceeds the one-year threshold, this assessment, as well as the quantitative estimate of the financing component and its relative significance, requires judgment. We estimate the significant financing component provided to our customers with extended payment terms by determining the present value of the future payments by applying a discount rate that reflects the customer’s creditworthiness.

 

Contract Balances

Contract assets consist of unbilled revenue, which is recognized as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones.  Unbilled receivables expected to be billed and collected within one year are classified as current assets or long-term assets if expected to be billed and collected after one year. Contract liabilities consist of deferred revenue and customer deposits that arise when amounts are billed to or collected from customers in advance of revenue recognition.

Costs to Obtain and Fulfill a Contract

 

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that commissions and special incentive payments (“Spiffs”) for hardware and software maintenance and support and professional services paid under our sales incentive programs meet the requirements to be capitalized under Accounting Standards Codification (“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

13


commissions are in fact incremental and would not have occurred absent the customer contract and the estimate of the amortization period. The commissions and Spiffs related to professional services are amortized over time as work is completed. The commissions and Spiffs for hardware and software maintenance are amortized over the life of the contract. These costs are periodically reviewed for impairment. We determined that no impairment of these assets existed as of October 31, 2020 or January 31, 2020. We have elected to apply the practical expedient and recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. Total deferred capitalized commission costs were $864 thousand as of October 31, 2020 compared to $958 thousand as of January 31, 2020. Current deferred capitalized commission costs are included in prepaid expense and other current assets in our consolidated balance sheets and non-current deferred capitalized commission costs are included in other assets in our consolidated balance sheets. Capitalized commissions expensed during the nine months ended October 31, 2020 and 2019 included in the consolidated statement of operations and comprehensive loss were $275 thousand and $168 thousand, respectively.

 

We capitalize incremental costs incurred to fulfill our contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy our performance obligation under the contract, and (iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs include direct labor for support services, software enhancements, reimbursable expenses and professional services for customized software development costs. The revenue associated with the support services, software enhancements and reimbursable expenses is recognized ratably over time; therefore, the associated costs are expensed as incurred. The professional services associated with the customized software are not recognized until completion. As such, the professional services costs are capitalized and recognized upon completion of the services.

Leases

We account for our leases in accordance with ASC 842, Leases. A contract is accounted for as a lease when we have the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. We determine if an arrangement is a lease or contains an embedded lease at inception. For arrangements that meet the definition of a lease, we determine the initial classification and measurement of our right-of-use operating lease asset and corresponding liability at the lease commencement date. We determine the classification and measurement of a modified lease at the date it is modified. The lease term includes only renewal options that are reasonably assured to exercise. The present value of lease payments is typically determined by using the Company’s estimated secured incremental borrowing rate for the associated lease term as interest rates implicit in the leases are not normally readily determinable. Management’s policy is to utilize the practical expedient to not record leases with an original term of twelve months or less on our consolidated balance sheets. Lease payments are recognized in the consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term.

Our existing leases are for facilities and equipment. None of our leases are with related parties. In addition to rent, office leases may require us to pay additional amounts for taxes, insurance, maintenance and other expenses, which are generally referred to as non-lease components. As a practical expedient, we account for the non-lease components together with the lease components as a single lease component for all of our leases. Only the fixed costs for leases are accounted for as a single lease component and recognized as part of a right-of-use asset and liability.

Net (Loss) Income Per Share

Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of unrestricted common shares outstanding during the period. Diluted net (loss) income per share is computed by dividing net (loss) income by the sum of the weighted average number of unrestricted common shares outstanding during the period and the weighted average number of potential common shares from the assumed exercise of stock options and the vesting of shares of restricted and deferred common stock units using the “treasury stock” method when the effect is not anti-dilutive. In periods in which we report a net loss, diluted net loss per share is the same as basic net loss per share.

14


The number of common shares used in the computation of diluted net (loss) income per share for the periods presented does not include the effect of the following potentially outstanding common shares because the effect would have been anti-dilutive:

 

 

 

For the Three Months

Ended October 31,

 

 

For the Nine Months

Ended October 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Amounts in thousands)

 

 

(Amounts in thousands)

 

Stock options

 

 

2,643

 

 

 

1,011

 

 

 

1,072

 

 

 

2,820

 

Restricted stock units

 

 

341

 

 

 

 

 

 

58

 

 

 

130

 

Deferred stock units

 

 

313

 

 

 

 

 

 

82

 

 

 

201

 

Performance stock units

 

 

 

 

 

 

 

 

 

 

 

112

 

 

 

 

3,297

 

 

 

1,011

 

 

 

1,212

 

 

 

3,263

 

 

Recently Issued Accounting Pronouncement

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326) (“ASU 2016-13”), which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities and accounts receivable. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. ASU 2016-13 is effective in the first quarter of our fiscal 2024. We are currently evaluating if this guidance will have a material effect to our consolidated financial statements.

3.

Fair Value Measurements

The following tables set forth our financial assets that were accounted for at fair value on a recurring basis. There were no fair value measurements of our financial assets using level 3 inputs for the periods presented:

 

 

 

 

 

 

 

Fair Value at October 31, 2020 Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

 

(Amounts in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

44

 

 

$

 

 

$

44

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Notes and bonds

 

 

782

 

 

 

782

 

 

 

 

Corporate bonds

 

 

252

 

 

 

 

 

 

252

 

Total

 

$

1,078

 

 

$

782

 

 

$

296

 

 

 

 

 

 

 

 

Fair Value at January 31, 2020 Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

 

(Amounts in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

1,408

 

 

$

1,408

 

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Notes and bonds

 

 

3,360

 

 

 

3,360

 

 

 

 

Corporate bonds

 

 

1,257

 

 

 

 

 

 

1,257

 

Total

 

$

6,025

 

 

$

4,768

 

 

$

1,257

 

 

Cash equivalents include money market funds and U.S. treasury bills.

  

15


Marketable securities by security type consisted of the following:

 

 

 

As of October 31, 2020

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

(Amounts in thousands)

 

U.S. Treasury Notes and bonds

 

$

767

 

 

$

15

 

 

$

 

 

$

782

 

Corporate bonds

 

 

251

 

 

 

1

 

 

 

 

 

 

252

 

 

 

$

1,018

 

 

$

16

 

 

$

 

 

$

1,034

 

 

 

 

As of January 31, 2020

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

(Amounts in thousands)

 

U.S. Treasury Notes and bonds

 

$

3,310

 

 

$

50

 

 

$

 

 

$

3,360

 

Corporate Bonds

 

 

1,254

 

 

 

3

 

 

 

 

 

 

1,257

 

 

 

$

4,564

 

 

$

53

 

 

$

 

 

$

4,617

 

 

As of October 31, 2020, all marketable securities consisted of investments that mature within one year.

4.

Consolidated Balance Sheet Detail

 

Property and Equipment, Net

Property and equipment, net consists of the following:

 

 

 

As of

 

 

 

October 31, 2020

 

 

January 31, 2020

 

 

 

(Amounts in thousands)

 

Computer equipment, software and demonstration equipment

 

$

9,767

 

 

$

9,695

 

Service and spare components

 

 

 

 

 

1,158

 

Office furniture and equipment

 

 

292

 

 

 

170

 

Leasehold improvements

 

 

272

 

 

 

154

 

 

 

 

10,331

 

 

 

11,177

 

Less:  Accumulated depreciation and amortization

 

 

(9,690

)

 

 

(10,623

)

Total property and equipment, net

 

$

641

 

 

$

554

 

 

Accrued Expenses

Accrued expenses consist of the following:

 

 

 

As of

 

 

 

October 31, 2020

 

 

January 31, 2020

 

 

 

(Amounts in thousands)

 

Accrued employee compensation and benefits

 

$

2,015

 

 

$

3,236

 

Accrued professional fees

 

 

167

 

 

 

928

 

Sales tax and VAT payable

 

 

282

 

 

 

317

 

Accrued restructuring

 

 

-

 

 

 

744

 

Current obligation - right of use operating leases

 

 

1,351

 

 

 

722

 

Accrued third party hardware costs

 

 

 

 

 

1,169

 

Accrued other

 

 

813

 

 

 

870

 

Total accrued expenses

 

$

4,628

 

 

$

7,986

 

 

16


 

5.

Goodwill and Intangible Assets

Goodwill represents the difference between the purchase price and the estimated fair value of identifiable assets acquired and liabilities assumed. We are required to perform impairment tests related to our goodwill annually, which we perform during the third quarter of each fiscal year or if we identify certain events or circumstances that would more likely than not reduce the estimated fair value of the goodwill below its carrying amount. The following table represents the changes in goodwill since January 31, 2020:

 

 

 

Goodwill

 

 

 

(Amounts in

thousands)

 

Balance as of January 31, 2020

 

$

9,775

 

Translation adjustment

 

 

474

 

Balance as of October 31, 2020

 

$

10,249

 

Intangible assets, net, consisted of the following at October 31, 2020:

 

 

 

As of October 31, 2020

 

 

 

Gross

 

 

Accumulated

Amortization

 

 

Cumulative

Translation

Adjustment

 

 

Net

 

 

 

(Amounts in thousands)

 

Finite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired customer contracts

 

$

2,205

 

 

$

1,273

 

 

$

12

 

 

$

944

 

Acquired existing technology

 

 

1,364

 

 

 

789

 

 

 

9

 

 

 

584

 

Total finite-lived intangible assets

 

$

3,569

 

 

$

2,062

 

 

$

21

 

 

$

1,528

 

 

 

 

We recognized amortization expense of intangible assets in operating expense categories on the consolidated statement of operations and comprehensive loss as follows:

 

 

 

For the Three Months

Ended October 31,

 

 

For the Nine Months

Ended October 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Amounts in thousands)

 

 

(Amounts in thousands)

 

Selling and marketing

 

$

190

 

 

$

185

 

 

$

556

 

 

$

555

 

Research and development

 

 

118

 

 

 

110

 

 

 

335

 

 

 

338

 

 

 

$

308

 

 

$

295

 

 

$

891

 

 

$

893

 

 

Future estimated amortization expense of acquired intangibles as of October 31, 2020 is as follows:

 

For the Fiscal Years Ended January 31,

 

Estimated

Amortization

Expense

 

 

 

(Amounts in

thousands)

 

2021

 

$

306

 

2022

 

 

1,222

 

Total

 

$

1,528

 

 

17


6.

Commitments and Contingencies

Litigation

Certain conditions may exist as of the date the consolidated financial statements are issued which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us, or unasserted claims that may result in such proceedings, we evaluate the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our consolidated financial statements. If our assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed.

Indemnification and Warranties

We provide indemnification, to the extent permitted by law, to our officers, directors, employees and agents for liabilities arising from certain events or occurrences while the officer, director, employee or agent is, or was, serving at our request in such capacity. With respect to acquisitions, we provide indemnification to, or assume indemnification obligations for, the current and former directors, officers and employees of the acquired companies in accordance with the acquired companies’ governing documents. As a matter of practice, we have maintained directors’ and officers’ liability insurance including coverage for directors and officers of acquired companies.

We enter into agreements in the ordinary course of business with customers, resellers, distributors, integrators and suppliers. Most of our historical agreements require us to defend and/or indemnify the other party against intellectual property infringement claims brought by a third-party with respect to our products. From time to time, we also indemnify customers and business partners for damages, losses and liabilities they may suffer or incur relating to personal injury, personal property damage, product liability, and environmental claims relating to the use of our products and services or resulting from the acts or omissions of us, our employees, authorized agents or subcontractors. From time to time, we have received requests from customers for indemnification of patent litigation claims. Management cannot reasonably estimate any potential losses, but these claims could result in material liability for us. There are no current pending legal proceedings, in the opinion of management that would have a material adverse effect on our financial position, results from operations and cash flows. There is no assurance that future legal proceedings arising from ordinary course of business or otherwise, will not have a material adverse effect on our financial position, results from operations or cash flows.

We warrant that our products, including software products, will substantially perform in accordance with our standard published specifications in effect at the time of delivery. In addition, we provide maintenance support to our customers and therefore allocate a portion of the product purchase price to the initial warranty period and recognize revenue on a straight-line basis over that warranty period related to both the warranty obligation and the maintenance support agreement. When we receive revenue for extended warranties beyond the standard duration, it is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred.

 

7.

Operating Leases

The Company has noncancelable operating leases for facilities and equipment expiring at various dates through 2025 and thereafter.  

 

The components of lease expense are as follows:

 

 

 

For the Three Months Ended

October 31, 2020

 

 

For the Nine Months Ended

October 31, 2020

 

 

 

(Amounts in thousands)

 

Operating lease cost

 

$

344

 

 

$

972

 

Short term lease (credit) cost, net

 

 

(10

)

 

 

30

 

Total lease cost

 

$

334

 

 

$

1,002

 

 

18


Supplemental cash flow information related to the Company’s operating leases was as follows:

 

 

 

For the Three Months Ended

October 31, 2020

 

 

For the Nine Months Ended

October 31, 2020

 

 

 

(Amounts in thousands)

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

263

 

 

$

829

 

 

Supplemental balance sheet information related to the Company's operating leases was as follows:

 

 

 

October 31, 2020

 

 

January 31, 2020

 

 

 

(Amounts in thousands)

 

Operating lease right-of-use assets

 

$

5,231

 

 

$

4,860

 

 

 

 

 

 

 

 

 

 

Current portion, operating lease liabilities

 

 

1,351

 

 

 

722

 

Operating lease liabilities, long term

 

 

4,299

 

 

 

4,348

 

Total operating lease liabilities

 

$

5,650

 

 

$

5,070

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term (years)

 

 

4.3

 

 

 

 

 

Weighted average incremental borrowing rate

 

 

5.0

%

 

 

 

 

 

The current portion, operating lease liabilities is included in the balance of accrued expenses at October 31, 2020. Rent payments for continuing operations were approximately $0.3 million for the three months ended October 31, 2020 and $0.8 million for the nine months ended October 31, 2020. Future minimum lease payments for operating leases, with initial or remaining terms in excess of one year at October 31, 2020, are as follows:

 

 

 

Payments for

Operating Leases

 

For the fiscal years ended January 31,

 

(Amounts in thousands)

 

2021

 

$

298

 

2022

 

 

1,319

 

2023

 

 

1,445

 

2024

 

 

1,482

 

2025

 

 

1,524

 

Thereafter

 

 

59

 

Total lease payments

 

 

6,127

 

Less interest

 

 

477

 

Total operating lease liabilities

 

$

5,650

 

 

8.

Severance and Restructuring Costs

During the three and nine months ended October 31, 2020, we incurred severance and restructuring costs of $0.1 million and $1 million, respectively, primarily for employee-related termination benefits driven by the COVID-19 pandemic and the transfer of our technical support operations to our Poland location. In fiscal 2020, we continued to streamline our operations and closed our service organizations in Ireland and the Netherlands.

The following table shows the change in accrued restructuring balances since January 31, 2020 primarily related to our fiscal 2020 restructuring efforts, reported as a component of accrued expenses on the consolidated balance sheets:

 

 

 

Employee-

Related

Benefits

 

 

 

(Amounts in thousands)

 

Accrued balance as of January 31, 2020

 

$

744

 

Restructuring charges incurred

 

 

2

 

Cash payments

 

 

(737

)

Other charges

 

 

(9

)

Accrued balance as of October 31, 2020

 

$

 

 

19


 

9.

Stock-Based Compensation Expense

Equity Plans

2011 Compensation and Incentive Plan

Our 2011 Compensation and Incentive Plan (the “2011 Plan”) provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units (“RSUs”), deferred stock units (“DSUs”), performance stock units (“PSUs”) and other equity based non-stock option awards as determined by the plan administrator to our officers, employees, consultants and directors. We may satisfy awards upon the exercise of stock options or the vesting of stock units with newly issued shares or treasury shares. The Board of Directors is responsible for the administration of the 2011 Plan and determining the terms of each award, award exercise price, the number of shares for which each award is granted and the rate at which each award vests. In certain instances, the Board of Directors may elect to modify the terms of an award. The number of shares authorized for issuance under the 2011 Plan is 9,300,000. Additionally, outstanding awards under the 2005 Equity Compensation and Incentive Plan that, since adoption of the 2011 Plan, expire, terminate, or are surrendered or canceled without having been fully exercised are available for issuance under the 2011 Plan. As of October 31, 2020, there were 2,397,728 shares available for future grant.      

Nonemployee members of the Board of Directors may elect to receive DSUs or stock options in lieu of RSUs. The number of units subject to the DSUs is determined as of the grant date and shall fully vest one year from the grant date. The shares underlying the DSUs are not vested and issued until the earlier of the director ceasing to be a member of the Board of Directors (provided such time is subsequent to the first day of the succeeding fiscal year) or immediately prior to a change in control.

Option awards may be granted to employees at an exercise price per share of not less than 100% of the fair market value per common share on the date of the grant. Option awards granted under the 2011 Plan generally vest over a period of one to three years and expire ten years from the date of the grant.

We have a Long-Term Incentive Program, adopted in fiscal 2016, under which the named executive officers and other of our key employees may receive long-term equity-based incentive awards, which are intended to align the interests of our named executive officers and other key employees with the long-term interests of our stockholders and to emphasize and reinforce our focus on team success. Long-term equity-based incentive compensation awards are made in the form of stock options, RSUs and PSUs subject to vesting based in part on the extent to which employment continues. 

2015 Employee Stock Purchase Plan

Under our 2015 Employee Stock Purchase Plan (the “ESPP”), six-month offering periods begin on October 1 and April 1 of each year during which eligible employees may elect to purchase shares of our common stock according to the terms of the offering.  On each purchase date, eligible employees can purchase our stock at a price per share equal to 85% of the closing price of our common stock on the exercise date, but no less than par value.  The maximum number of shares of our common stock authorized for sale under the ESPP is 1,150,000 shares, of which 1,075,024 remain available under the ESPP as of October 31, 2020. Under the ESPP, 5,702 and 12,453 shares were purchased during the first nine months of fiscal 2021 and fiscal 2020, respectively. The Company has suspended the ESPP as of April 1, 2020 and is still evaluating when suspension will be lifted, if at all.

Award Activity

In the first nine months of fiscal 2021, we granted 300,998 option awards, including PSU options, and 607,807 RSU awards, including DSUs and PSUs, with a combined fair value totaling $1.5 million. In the first nine months of fiscal 2021, we canceled 508,700 option awards and 148,839 RSU awards, including PSUs.

20


Stock-Based Compensation

We recognized stock-based compensation expense within the accompanying consolidated statements of operations and comprehensive loss as follows:

 

 

 

For the Three Months

Ended October 31,

 

 

For the Nine Months

Ended October 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Amounts in thousands)

 

 

(Amounts in thousands)

 

Cost of revenue

 

$

 

 

$

(21

)

 

$

(8

)

 

$

(2

)

Research and development

 

 

80

 

 

 

92

 

 

 

215

 

 

 

242

 

Sales and marketing

 

 

25

 

 

 

101

 

 

 

120

 

 

 

92

 

General and administrative

 

 

332

 

 

 

185

 

 

 

727

 

 

 

222

 

 

 

$

437

 

 

$

357

 

 

$

1,054

 

 

$

554

 

 

 

As of October 31, 2020, unrecognized stock-based compensation expense related to unvested stock options was approximately $1.1 million, which is expected to be recognized over a weighted average period of 1.6 years. As of October 31, 2020, unrecognized stock-based compensation expense related to unvested RSUs and DSUs was $1.0 million, which is expected to be recognized over a weighted average amortization period of 1.3 years. Additionally, as of October 31, 2020, unrecognized stock-based compensation expenses related to unvested PSUs was approximately $0.2 million, which is expected to be recognized over a weighted average amortization period of 1.3 years.

10.

Revenues from Contracts with Customers

 

Disaggregated Revenue

 

 

The following table shows our revenue disaggregated by revenue stream for the three and nine months ended October 31, 2020 and 2019:

 

 

 

For the Three Months

Ended October 31,

 

 

For the Nine Months

Ended October 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Amounts in thousands)

 

 

(Amounts in thousands)

 

Product

 

$

1,048

 

 

$

13,524

 

 

$

5,212

 

 

$

26,671

 

Professional services

 

 

488

 

 

 

1,124

 

 

 

1,112

 

 

 

5,050

 

Maintenance

 

 

3,430

 

 

 

5,896

 

 

 

10,552

 

 

 

16,120

 

Total revenue

 

$

4,966

 

 

$

20,544

 

 

$

16,876

 

 

$

47,841

 

 

Transaction Price Allocated to Future Performance Obligations

 

The aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied or are partially satisfied as of October 31, 2020 is $24.6 million. This amount includes amounts billed for undelivered services that are included in deferred revenue.

11.

Segment Information and Geographic Information

We have determined that we operate in one segment.

21


Geographic Information

The following summarizes revenue by customers’ geographic locations:

 

 

 

For the Three Months

Ended October 31,

 

 

For the Nine Months

Ended October 31,

 

 

 

2020

 

 

%

 

 

2019

 

 

%

 

 

2020

 

 

%

 

 

2019

 

 

%

 

 

 

(Amounts in thousands, except percentages)

 

 

(Amounts in thousands, except percentages)

 

Revenue by customers' geographic locations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America (1)

 

$

2,038

 

 

41%

 

 

$

12,472

 

 

62%

 

 

$

7,934

 

 

47%

 

 

$

28,128

 

 

59%

 

Europe and Middle East

 

 

2,007

 

 

40%

 

 

 

6,870

 

 

33%

 

 

 

6,139

 

 

36%

 

 

 

12,564

 

 

26%

 

Latin America

 

 

726

 

 

15%

 

 

 

907

 

 

4%

 

 

 

2,202

 

 

13%

 

 

 

6,086

 

 

13%

 

Asia Pacific

 

 

195

 

 

4%

 

 

 

295

 

 

1%

 

 

 

601

 

 

4%

 

 

 

1,063

 

 

2%

 

Total revenue

 

$

4,966

 

 

 

 

 

 

$

20,544

 

 

 

 

 

 

$

16,876

 

 

 

 

 

 

$

47,841

 

 

 

 

 

 

 

(1)

Includes total revenue for the United States for the periods shown as follows: 

 

 

 

For the Three Months

Ended October 31,

 

 

For the Nine Months

Ended October 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Amounts in thousands,

except percentages)

 

 

(Amounts in thousands,

except percentages)

 

US Revenue

 

$

1,408

 

 

$

10,425

 

 

$

5,413

 

 

$

23,489

 

% of total revenue

 

 

28

%

 

 

51

%

 

 

32

%

 

 

49

%

 

The following summarizes long-lived assets by geographic locations:

 

 

 

As of October 31, 2020

 

 

%

 

 

As of January 31, 2020

 

 

%

 

 

 

(Amounts in thousands, except percentages)

 

Long-lived assets by geographic locations (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

11,442

 

 

73%

 

 

$

13,293

 

 

75%

 

Europe and Middle East

 

 

4,210

 

 

27%

 

 

 

4,359

 

 

25%

 

Asia Pacific

 

 

31

 

 

0%

 

 

 

31

 

 

0%

 

Total long-lived assets by geographic location

 

$

15,683

 

 

 

 

 

 

$

17,683

 

 

 

 

 

 

 

(1)

Excludes long-term marketable securities and goodwill.

12.

Income Taxes

Each interim period is considered an integral part of the annual period and, accordingly, we measure our income tax expense using an estimated annual effective tax rate.  A company is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis, as adjusted for discrete taxable events that occur during the interim period.

We recorded an income tax provision of less than $0.1 million and an income tax benefit of $0.1 million for the three months ended October 31, 2020 and October 31, 2019, respectively. We recorded an income tax benefit of less than $0.1 million and $0.2 million for the nine months ended October 31, 2020 and October 31, 2019, respectively. The tax benefit for the nine months ended October 31, 2020 includes a $0.2 million tax benefit related to the reversal of tax reserves for uncertain tax positions due to the expiration of the Polish statute of limitations. Our effective tax rate in fiscal 2021 and in future periods may fluctuate on a quarterly basis as a result of changes in our jurisdictional forecasts where losses cannot be benefitted due to the existence of valuation allowances on our deferred tax assets, changes in actual results versus our estimates, or changes in tax laws, regulations, accounting principles or interpretations thereof.

 

We review all available evidence to evaluate the recovery of deferred tax assets, including the recent history of losses in all tax jurisdictions, as well as our ability to generate income in future periods. As of October 31, 2020, due to the uncertainty related to the ultimate use of certain deferred income tax assets, we have recorded a valuation allowance on certain deferred assets.

22


We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions and various foreign jurisdictions. We have closed out an audit with the Internal Revenue Service through fiscal 2013; however, the taxing authorities will still have the ability to review the propriety of certain tax attributes created in closed years if such tax attributes are utilized in an open tax year, such as our federal research and development credit carryovers.

On March 4, 2019, our Board of Directors approved and adopted a Tax Benefits Preservation Plan to potentially limit our ability to use net operating loss carryforwards and certain other tax attributes (“NOLs”) to reduce our potential future federal income tax obligations.  In connection with the Tax Benefits Preservation Plan, we declared a dividend of one preferred share purchase right for each share of our common stock issued and outstanding as of March 15, 2019 to our stockholders of record on that date. The Tax Benefits Preservation Plan expires no later than March 4, 2022, and was approved by our stockholders at our 2019 annual meeting of stockholders on July 11, 2019.

In response to the COVID-19 pandemic, the CARES Act was signed into law in March 2020. The CARES Act includes several provisions that provide economic relief for individuals and businesses. Other than the acceleration of our AMT credit refund, the Company does not expect the CARES Act to result in a material impact on our income taxes. 

23


ITEM 2.

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

Forward-Looking Statements

This Form 10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and such statements involve risks and uncertainties. The following information should be read in conjunction with the unaudited consolidated financial information and the notes thereto included in this Form 10-Q. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors referred to in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K (the “Form 10-K”) for our fiscal year ended January 31, 2020 and elsewhere in this Form 10-Q. These factors may cause our actual results to differ materially from any forward-looking statement. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate, and management’s beliefs and assumptions. We undertake no obligation to publicly update or revise the statements in light of future developments. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “seek,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “project,” or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict.

Business Overview  

SeaChange International, Inc. (“SeaChange,” the “Company,” “us,” or “we”), a Delaware corporation founded on July 9, 1993, is an industry leader in the delivery of multiscreen, advertising and premium over the top (“OTT”) video management solutions headquartered in Waltham, Massachusetts. Our software products and services facilitate the aggregation, licensing, management and distribution of video and advertising content for service providers, telecommunications companies, satellite operators and broadcasters. We sell our software products and services worldwide, primarily to service providers including: operators, such as Liberty Global, plc., Altice NV, Cox Communications, Inc. and Rogers Communications, Inc.; telecommunications companies, such as Verizon Communications, Inc., AT&T, Inc. and Frontier Communications Corporation; satellite operators such as Direct TV and Dish Network Corporation; and broadcasters.

Our software products and services are designed to empower video providers to create, manage and monetize the increasingly personalized, highly engaging experiences that viewers demand. Using our products and services, we believe customers can increase revenue by offering services such as video-on-demand (“VOD”) programming on a variety of consumer devices, including televisions, mobile telephones (“smart phones”), personal computers (“PCs”), tablets and OTT streaming players. Our solutions enable service providers to offer other interactive television services that allow subscribers to receive personalized services and interact with their video devices, thereby enhancing their viewing experience. Our products also allow our customers to insert advertising into broadcast and VOD content.

SeaChange serves an exciting global marketplace where multiscreen viewing is increasing, consumer device options are evolving rapidly, and viewing habits are shifting. The primary driver of our business is enabling the delivery of video assets in the changing multiscreen television environment. Through strategic collaborations, we have expanded our capabilities, products and services to address the delivery of content to devices other than television set-top boxes, namely PCs, tablets, smart phones and OTT streaming players. We believe that our strategy of expanding into adjacent product lines will also position us to further support and maintain our existing service provider customer base. Providing our customers with more scalable software platforms enables them to further reduce their infrastructure costs, improve reliability and expand service offerings to their customers. Additionally, we believe we are well positioned to capitalize on new customers entering the multiscreen marketplace and increasingly serve adjacent markets. Our core technologies provide a foundation for software products and services that can be deployed in next generation video delivery systems capable of increased levels of subscriber activity across multiple devices.

We have historically sold and licensed our products and services on a standalone basis. Commencing February 2019, we adopted a value-based selling approach as part of which we offer our customers the ability to license all of our product and services, including specified upgrades, for a fixed period of time for a fixed price which we refer to as Framework deals.

We initiated restructuring efforts in fiscal 2020 to improve operations and optimize our cost structure. In October 2019, we continued to streamline our operations and closed our service organizations in Ireland and the Netherlands resulting in annualized cost savings of approximately $6.0 million. We will also realize cost savings in fiscal 2021 related to the reduction in headcount driven by COVID-19.

On February 28, 2019, we entered into a Cooperation Agreement with TAR Holdings LLC and Karen Singer (together, “TAR Holdings”).  As of the date of the Cooperation Agreement, TAR Holdings beneficially owned approximately 20.6% of our outstanding common stock.  Pursuant to the Cooperation Agreement, we agreed to set the size of the Board of Directors of the Company (the “Board”) at eight members, appoint Robert Pons to the Board as a Class II Director, and appoint Jeffrey Tuder to the Board as a Class III Director.  Mr. Pons and Mr. Tuder were accordingly appointed to our Board upon execution of the Cooperation Agreement on February 28, 2019. On August 8, 2019, we amended the Cooperation Agreement to permit TAR Holdings, together with its affiliates, to own up to 25% of our securities.

24


On March 4, 2019, our Board approved and adopted a Tax Benefits Preservation Plan to deter acquisitions of our common stock that would potentially limit our ability to use net operating loss carryforwards and certain other tax attributes (“NOLs”) to reduce our potential future federal income tax obligations, which was subsequently approved by our stockholders at our 2019 annual meeting of stockholders.  In connection with the Tax Benefits Preservation Plan, we declared a dividend of one preferred share purchase right for each share of our common stock issued and outstanding as of March 15, 2019 to our stockholders of record on that date.  The Tax Benefits Preservation Plan expires no later than March 4, 2022. On August 8, 2019, we amended the Tax Benefits Preservation Plan to permit TAR Holdings, together with its affiliates, to own up to 25% of our securities.

In the first quarter of fiscal 2021, we experienced a ransomware attack on our information technology system. While such attack did not have a material adverse effect on our business operation, it caused a temporary disruption. We worked with data privacy counsel and third-party forensics specialists to investigate the ransomware incident. Based on our investigation, we provided notice of the incident to individuals and regulatory authorities pursuant to applicable statutes and regulations.

 

Results of Operations

The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements.  

Revenue and Gross Profit

The components of our total revenue and gross profit are described in the following table:

 

 

 

For the Three Months

Ended October 31,

 

 

Change

 

 

For the Nine Months

Ended October 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

 

(Amounts in thousands, except for percentage data)

 

 

(Amounts in thousands, except for percentage data)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

1,048

 

 

$

13,524

 

 

$

(12,476

)

 

 

(92.3

%)

 

$

5,212

 

 

$

26,671

 

 

$

(21,459

)

 

 

(80.5

%)

Service

 

 

3,918

 

 

 

7,020

 

 

 

(3,102

)

 

 

(44.2

%)

 

 

11,664

 

 

 

21,170

 

 

 

(9,506

)

 

 

(44.9

%)

Total revenue

 

 

4,966

 

 

 

20,544

 

 

 

(15,578

)

 

 

(75.8

%)

 

 

16,876

 

 

 

47,841

 

 

 

(30,965

)

 

 

(64.7

%)

Cost of product revenue

 

 

435

 

 

 

466

 

 

 

(31

)

 

 

(6.7

%)

 

 

2,803

 

 

 

4,414

 

 

 

(1,611

)

 

 

(36.5

%)

Cost of service revenue

 

 

1,755

 

 

 

4,386

 

 

 

(2,631

)

 

 

(60.0

%)

 

 

6,974

 

 

 

13,939

 

 

 

(6,965

)

 

 

(50.0

%)

Total cost of revenue

 

 

2,190

 

 

 

4,852

 

 

 

(2,662

)

 

 

(54.9

%)

 

 

9,777

 

 

 

18,353

 

 

 

(8,576

)

 

 

(46.7

%)

Gross profit

 

$

2,776

 

 

$

15,692

 

 

$

(12,916

)

 

 

(82.3

%)

 

$

7,099

 

 

$

29,488

 

 

$

(22,389

)

 

 

(75.9

%)

Gross product profit margin

 

 

58.5

%

 

 

96.6

%

 

 

 

 

 

 

(38.1

%)

 

 

46.2

%

 

 

83.5

%

 

 

 

 

 

 

(37.2

%)

Gross service profit margin

 

 

55.2

%

 

 

37.5

%

 

 

 

 

 

 

17.7

%

 

 

40.2

%

 

 

34.2

%

 

 

 

 

 

 

6.1

%

Gross profit margin

 

 

55.9

%

 

 

76.4

%

 

 

 

 

 

 

(20.5

%)

 

 

42.1

%

 

 

61.6

%

 

 

 

 

 

 

(19.6

%)

 

One customer accounted for 29% of total revenue for the three months ended October 31, 2020 and one customer accounted for 21% of total revenue for the nine months ended October 31, 2020. Two customers accounted for 13% each of total revenue for the three months ended October 31, 2019 and no one customer accounted for 10% or more of total revenue for the nine months ended October 31, 2019. See Part I Item I, Note 2, “Significant Accounting Policies,” to this Form 10-Q for more information.

International revenue accounted for 72% and 49% of total revenue in the three months ended October 31, 2020 and 2019, respectively. International revenue accounted for 68% and 51% for the nine months ended October 31, 2020 and 2019, respectively. The increase in international sales as a percentage of total revenue in the three and nine months ended October 31, 2020 as compared to the three and nine months ended October 31, 2019 is primarily due to a decrease in U.S. revenue generated.

Product Revenue

Product revenue decreased by $12.5 million and $21.5 million for the three and nine months ended October 31, 2020, respectively, as compared to the three and nine months ended October 31, 2019. The decrease for the three and nine months ended October 31, 2020 was primarily due to the COVID-19 pandemic as our customers and prospective customers held off on making new technology investments and deployment decisions in favor of supporting their existing operations and infrastructure through the on-going uncertainty, resulting in lower sales.

25


Service Revenue

Service revenue decreased by $3.1 million and $9.5 million for the three and nine months ended October 31, 2020, respectively, as compared to the three and nine months ended October 31, 2019. The decrease for the three and nine months ended October 31, 2020 was primarily due to a decrease in our legacy professional service revenue related to our individual product sales and upgrades and a reduction to maintenance and support revenue provided on post warranty contracts as customers continue to provide their own solutions and legacy products are decommissioned.

Gross Profit and Margin

Cost of revenue consists primarily of the cost of resold third-party products and services, purchased components and subassemblies, labor and overhead relating to the assembly, testing and implementation and ongoing maintenance of complete systems.

Our gross profit margin decreased by 21% and 20% for the three and nine months ended October 31, 2020, respectively, as compared to the three and nine months ended October 31, 2019 primarily due to lower revenue generated as a result of the COVID-19 pandemic. Product profit margin decreased by 38% and 37% for the three and nine months ended October 31, 2020, respectively, as compared to the three and nine months ended October 31, 2019 primarily due to lower revenue generated as a result of the COVID-19 pandemic. Service profit margins increased by 18% and 6% for the three and nine months ended October 31, 2020, respectively, as compared to the three and nine months ended October 31, 2019 primarily due to a reduction in headcount driven by the COVID-19 pandemic while still recognizing legacy revenue.

Operating Expenses

Research and Development

Research and development expenses consist of salaries and related costs, including stock-based compensation, for personnel in software development and engineering functions as well as contract labor costs, depreciation of development and test equipment and an allocation of related facility expenses. The following table provides information regarding the change in research and development expenses during the periods presented:

 

 

 

For the Three Months

Ended October 31,

 

 

Change

 

 

For the Nine Months

Ended October 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

 

(Amounts in thousands, except for percentage data)

 

 

(Amounts in thousands, except for percentage data)

 

Research and development expenses

 

$

3,024

 

 

$

4,033

 

 

$

(1,009

)

 

 

(25.0

%)

 

$

10,550

 

 

$

12,060

 

 

$

(1,510

)

 

 

(12.5

%)

% of total revenue

 

 

60.9

%

 

 

19.6

%

 

 

 

 

 

 

 

 

 

 

62.5

%

 

 

25.2

%

 

 

 

 

 

 

 

 

 

Research and development expenses decreased by $1.0 million and $1.5 million for the three and nine months ended October 31, 2020, respectively, as compared to the three and nine months ended October 31, 2019 primarily due to a decrease in labor costs associated with the lower headcount resulting from the cost-savings efforts implemented as part of our restructuring program in the second half of fiscal 2020 as well as a reduction in headcount implemented in the first half of fiscal 2021 driven by the COVID-19 pandemic.

Selling and Marketing

Selling and marketing expenses consist of salaries and related costs, including stock-based compensation, for personnel engaged in selling and marketing functions, as well as commissions, travel expenses, certain promotional expenses and an allocation of related facility expenses. The following table provides information regarding the change in selling and marketing expenses during the periods presented:

 

 

 

For the Three Months

Ended October 31,

 

 

Change

 

 

For the Nine Months

Ended October 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

 

(Amounts in thousands, except for percentage data)

 

 

(Amounts in thousands, except for percentage data)

 

Selling and marketing expenses

 

$

1,636

 

 

$

3,859

 

 

$

(2,223

)

 

 

(57.6

%)

 

$

5,490

 

 

$

9,674

 

 

$

(4,184

)

 

 

(43.2

%)

% of total revenue

 

 

32.9

%

 

 

18.8

%

 

 

 

 

 

 

 

 

 

 

32.5

%

 

 

20.2

%

 

 

 

 

 

 

 

 

 

Selling and marketing expenses decreased by $2.2 million and $4.2 million for the three and nine months ended October 31, 2020, respectively, as compared to the three and nine months ended October 31, 2019 primarily due to a decrease in labor costs

26


associated with lower headcount from the cost-saving efforts implemented as part of our restructuring program in the second half of fiscal 2020 as well as a reduction in headcount implemented in the first half of fiscal 2021 driven by the COVID-19 pandemic and a decrease in travel and tradeshow related expenses, also driven by the COVID-19 pandemic.

General and Administrative

General and administrative expenses consist of salaries and related costs, including stock-based compensation, for personnel in executive, finance, legal, human resources, information technology and administrative functions, as well as legal and accounting services, insurance premiums and an allocation of related facilities expenses. The following table provides information regarding the change in general and administrative expenses during the periods presented:

 

 

 

For the Three Months

Ended October 31,

 

 

Change

 

 

For the Nine Months

Ended October 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

 

(Amounts in thousands, except for percentage data)

 

 

(Amounts in thousands, except for percentage data)

 

General and administrative expenses

 

$

2,636

 

 

$

3,265

 

 

$

(629

)

 

 

(19.3

%)

 

$

7,057

 

 

$

11,664

 

 

$

(4,607

)

 

 

(39.5

%)

% of total revenue

 

 

53.1

%

 

 

15.9

%

 

 

 

 

 

 

 

 

 

 

41.8

%

 

 

24.4

%

 

 

 

 

 

 

 

 

 

General and administrative expenses decreased by $0.6 million for the three months ended October 31, 2020 as compared to the three months ended October 31, 2019 primarily due to a $0.3 million reduction in salaries and compensation driven by the COVID-19 pandemic, a $0.2 million decrease in outside services, a $0.1 million decrease in bad debt expense, and reduction in other general expenditures. General and administrative expenses decreased by $4.6 million for the nine months ended October 31, 2020 as compared to the nine months ended October 31, 2019 primarily due to a $0.9 million reduction in salaries and compensation driven by the COVID-19 pandemic, a $2.2 million reduction in the use of outside services, a $0.7 million reduction to bad debt expense, and a reduction in other general expenditures.

Severance and Restructuring Costs

Severance costs consist of employee-related severance charges not related to a restructuring plan. Restructuring costs consist of charges related to restructuring including employee-related severance charges, remaining lease obligations and termination costs, and the disposal of equipment.

 

 

 

For the Three Months

Ended October 31,

 

 

Change

 

 

For the Nine Months

Ended October 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

 

(Amounts in thousands, except for percentage data)

 

 

(Amounts in thousands, except for percentage data)

 

Severance and restructuring costs

 

$

53

 

 

$

2,282

 

 

$

(2,229

)

 

 

(97.7

%)

 

$

1,082

 

 

$

3,152

 

 

$

(2,070

)

 

 

(65.7

%)

% of total revenue

 

 

1.1

%

 

 

11.1

%

 

 

 

 

 

 

 

 

 

 

6.4

%

 

 

6.6

%

 

 

 

 

 

 

 

 

 

Severance and restructuring costs decreased by $2.2 million and $2.1 million for the three and nine months ended October 31, 2020, respectively, as compared to the three and nine months ended October 31, 2019 primarily due to the cost-saving efforts implemented as part of our restructuring program in fiscal 2020. Severance and restructuring costs incurred in fiscal 2021 primarily consisted of termination costs related to a reduction in headcount driven by the COVID-19 pandemic.

Other Expense, Net

The table below provides detail regarding our other expense, net:

 

 

 

For the Three Months

Ended October 31,

 

 

Change

 

 

For the Nine Months

Ended October 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

 

(Amounts in thousands, except for percentage data)

 

 

(Amounts in thousands, except for percentage data)

 

Interest income, net

 

$

121

 

 

$

67

 

 

$

54

 

 

 

80.6

%

 

 

353

 

 

 

240

 

 

 

113

 

 

 

47.1

%

Foreign exchange (loss) gain, net

 

 

(687

)

 

 

17

 

 

 

(704

)

 

 

(4141.2

%)

 

 

(778

)

 

 

(2,064

)

 

 

1,286

 

 

 

(62.3

%)

Miscellaneous income (expense), net

 

 

67

 

 

 

(245

)

 

 

312

 

 

 

(127.3

%)

 

 

91

 

 

 

(206

)

 

 

297

 

 

 

(144.2

%)

 

 

$

(499

)

 

$

(161

)

 

$

(338

)

 

 

 

 

 

$

(334

)

 

$

(2,030

)

 

$

1,696

 

 

 

 

 

27


 

The principal components of other expense, net were interest income, net of $0.1 million and foreign exchange loss, net of $0.7 million for the three months ended October 31, 2020 and interest income, net of $0.1 million and miscellaneous expense, net of $0.2 million for the three months ended October 31, 2019. The principal components of other income (expense), net were interest income, net of $0.4 million and foreign exchange loss, net of $0.8 million for the nine months ended October 31, 2020 and interest income, net of $0.2 million, foreign exchange loss, net of $2.1 million, and miscellaneous expense, net of $0.2 for the nine months ended October 31, 2019. Our foreign exchange gain (loss), net is primarily due to the revaluation of intercompany notes.

Income Tax Provision (Benefit)

We recorded an income tax provision of less than $0.1 million and an income tax benefit of $0.1 million for the three months ended October 31, 2020 and October 31, 2019, respectively. We recorded an income tax benefit of less than $0.1 million and $0.2 million for the nine months ended October 31, 2020 and October 31, 2019, respectively. The tax benefit for the nine months ended October 31, 2020 includes a $0.2 million tax benefit related to the reversal of tax reserves for uncertain tax positions due to the expiration of the Polish statute of limitations. Our effective tax rate in fiscal 2021 and in future periods may fluctuate on a quarterly basis as a result of changes in our jurisdictional forecasts where losses cannot be benefitted due to the existence of valuation allowances on our deferred tax assets, changes in actual results versus our estimates, or changes in tax laws, regulations, accounting principles or interpretations thereof.

We review all available evidence to evaluate the recovery of deferred tax assets, including the recent history of losses in all tax jurisdictions, as well as our ability to generate income in future periods. As of October 31, 2020, due to the uncertainty related to the ultimate use of certain deferred income tax assets, we have recorded a valuation allowance on certain deferred assets.

We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign jurisdictions. We have closed out an audit with the Internal Revenue Service through fiscal 2013. We are no longer subject to U.S. federal examinations before fiscal 2015. However, the taxing authorities will still have the ability to review the propriety of certain tax attributes created in closed years if such tax attributes are utilized in an open tax year, such as our federal research and development credit carryovers.

 

Liquidity and Capital Resources

The following table includes key line items of our consolidated statements of cash flows:

 

 

 

For the Nine Months

Ended October 31,

 

 

 

2020

 

 

2019

 

 

 

(Amounts in thousands)

 

Net cash used in operating activities

 

$

(9,321

)

 

$

(13,020

)

Net cash provided by (used in) investing activities

 

 

3,265

 

 

 

(1,599

)

Net cash provided by (used in) financing activities

 

 

2,470

 

 

 

(76

)

Effect of exchange rate changes on cash, cash equivalents

   and restricted cash

 

 

(587

)

 

 

265

 

     Net decrease in cash, cash equivalents and restricted cash

 

$

(4,173

)

 

$

(14,430

)

 

Historically, we have financed our operations and capital expenditures primarily with our cash and investments. Our cash, cash equivalents, and restricted cash and marketable securities totaled $6.2 million at October 31, 2020.

In fiscal 2020, we closed our Ireland and Netherlands service organizations in the continued streamlining of our operations resulting in annualized cost savings of approximately $6.0 million. In the first and second quarters of fiscal 2021, we reduced our headcount across all departments in response to the COVID-19 pandemic, which will result in approximately $7.6 million of annualized cost savings.  Additionally, in the second quarter of fiscal 2021 we transferred our technical support services to our Poland location.

We believe that existing cash and investments and cash expected to be provided by future operating activities, augmented by the plans highlighted above, are adequate to satisfy our working capital, capital expenditure requirements and other contractual obligations for at least the next 12 months.

If our expectations are incorrect, we may need to raise additional funds to fund our operations or take advantage of unanticipated strategic opportunities in order to strengthen our financial position. In the future, we may enter into other arrangements for potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt financing. If adequate funds are not available or are not available on acceptable

28


terms, we may not be able to take advantage of market opportunities, to develop new products or to otherwise respond to competitive pressures.

On June 4, 2019, the Board authorized a share repurchase program, which expired on June 4, 2020, of up to $5.0 million of then outstanding shares of the Company. Under the share repurchase program, the Company was authorized to repurchase outstanding shares of common stock in accordance with applicable laws both on the open market, including under trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, and in privately negotiated transactions. There was no stock repurchase activity in the third quarter of fiscal 2021.

Continued Nasdaq Listing

On October 30, 2020, the Company received a deficiency letter from the Nasdaq Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the 30 consecutive business days prior to such date, the closing bid price for the Company’s common stock was below the minimum $1.00 per share required for continued listing on The Nasdaq Global Select Market pursuant to Nasdaq Listing Rule 5450(a)(1) (the “Minimum Bid Price Requirement”). The Nasdaq deficiency letter had no immediate effect on the listing of the Company’s common stock, and the common stock will continue to trade on The Nasdaq Global Select Market under the symbol “SEAC” at this time.

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days from the receipt of the letter, or until April 27, 2021, to regain compliance with the Minimum Bid Price Requirement. If at any time before April 27, 2021, the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Staff will provide written confirmation that the Company has achieved compliance.

If the Company does not regain compliance with the Minimum Bid Price Requirement by April 27, 2021, the Company may be afforded a second 180 calendar day period to regain compliance. To qualify, the Company would be required to transfer to The Nasdaq Capital Market, to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, except for the Minimum Bid Price Requirement. In addition, the Company would be required to notify Nasdaq of its intent to cure the deficiency during the second compliance period. Following a transfer to The Nasdaq Capital Market, the Company will be afforded the second 180 calendar day period to regain compliance, unless it does not appear to Nasdaq that it is possible for the Company to cure the deficiency. If the Company does not regain compliance with the Minimum Bid Price Requirement by the end of the compliance period (or the second compliance period, if applicable), the Company’s common stock will become subject to delisting. In the event that the Company receives notice that its common stock is being delisted, the Nasdaq listing rules permit the Company to appeal a delisting determination by the Staff to a hearings panel.

The Company is monitoring the closing bid price of its common stock and may, if appropriate, consider available options to regain compliance with the Minimum Bid Price Requirement, including initiating a reverse stock split. However, there can be no assurance that the Company will be able to regain compliance with the Minimum Bid Price Requirement or will otherwise be in compliance with other Nasdaq Listing Rules.

Net cash used in operating activities

Net cash used in operating activities was $9.3 million for the nine months ended October 31, 2020. Net cash used in operating activities was primarily the result of our net loss of $17.4 million, a $1.1 million non-cash expense for stock-based compensation, a $1.1 million non-cash expense for depreciation and amortization, a $1.5 million non-cash foreign currency transaction loss, and changes in working capital, which include a $7.1 million decrease in accounts receivable and a $4.3 million decrease in unbilled receivables, a $0.5 million decrease in prepaid expenses and other current assets and other assets, a $1.3 million decrease in accounts payable, a $3.9 million decrease in accrued expenses and other liabilities, and a $2.4 million decrease in deferred revenue.

Net cash used in operating activities was $13.0 million for the nine months ended October 31, 2019. Net cash used in operating activities was primarily the result of our net loss of $8.9 million, a $1.4 million non-cash foreign currency transaction loss, and changes in working capital, which include a $5.6 million decrease in accounts receivable and a $11.2 million increase in unbilled receivables, a $1.1 million decrease in accounts payable and a $3.0 million decrease in deferred revenue.

Net cash provided by (used in) investing activities

Net cash provided by investing activities was $3.3 million for the nine months ended October 31, 2020 and was primarily due to the proceeds from the sales and maturities of marketable securities partially offset by purchases of property and equipment. Net cash used in investing activities was $1.6 million for the nine months ended October 31, 2019 and was primarily due to cash paid for the acquisition of Xstream A/S in February 2019 and purchases of property and equipment partially offset by the net proceeds from the sales and maturities of marketable securities.

 

29


Net cash provided by (used in) financing activities

Net cash provided by financing activities was $2.5 million for the nine months ended October 31, 2020 due to the $2.4 million in proceeds from the Paycheck Protection Program (“PPP”) and $0.1 million from the issuance of common stock related to option exercises and purchases through the Company’s Employee Stock Purchase Plan partially offset by $0.1 million in payments to the taxing authorities in connection with shares directly withheld from employees. Net cash used in financing activities was $0.1 million for the nine months ended October 31, 2019 due to the repurchases of common stock partially offset by proceeds from the issuance of common stock.

Impact of COVID-19 Pandemic

In the first quarter of fiscal 2021, concerns related to the spread of COVID-19 began to create global business disruptions as well as disruptions in our operations and to create potential negative impacts on our revenues and other financial results. COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. The extent to which COVID-19 will impact our financial condition or results of operations is currently uncertain and depends on factors including the impact on our customers, partners, and vendors and on the operation of the global markets in general. Due to our business model, the effect of COVID-19 on our results of operations may also not be fully reflected for some time.

We are currently conducting 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. We have 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 our team’s sales activities could foreclose future business opportunities, particularly as our customers limit spending, which could negatively impact the willingness of our customers to enter into or renew contracts with us.  The pandemic has impacted our ability to complete certain implementations, negatively impacting our ability to recognize revenue, and could also negatively impact the payment of accounts receivable and collections. We continue to realize our on-going cost optimization efforts in response to the impact of the pandemic. We may take further actions that alter our business operations as the situation evolves. As a result, the ultimate impact of the COVID-19 pandemic and the effects of the operational alterations we have made in response on our business, financial condition, liquidity, and financial results cannot be predicted at this time.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).  The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We continue to examine the impact that the CARES Act may have on our business, including the extent of our PPP loan forgiveness eligibility.

The Paycheck Protection Program

On May 5, 2020, the Company entered into a promissory note (the “Note”) with Silicon Valley Bank (the “Lender”) evidencing an unsecured loan in an aggregate principal amount of $2,412,890 pursuant to the PPP under the CARES Act administered by the U.S. Small Business Administration (“SBA”).

Interest accrues on the Note at a fixed rate of one percent (1%) per annum, with the payment of the first six months of interest and principal deferred. The Note has an initial term of two years, is unsecured and is guaranteed by the SBA. The Company may apply to the Lender for forgiveness of the Note, with the amount which may be forgiven equal to the sum of qualifying expenses, including payroll costs, covered rent obligations, and covered utility payments incurred by the Company during the twenty-four week period beginning on May 7, 2020, calculated in accordance with the terms of the CARES Act.

Subject to any forgiveness under the PPP, the Note will mature on May 5, 2022. Beginning on the seven-month anniversary of the date of the Note, the Company is required to make 18 monthly payments of principal and interest. The Note may be prepaid at any time prior to maturity with no prepayment penalties. The Note provides for customary events of default including, among others, those relating to breaches of the Company’s obligations under the Note, including a failure to make payments, any bankruptcy or similar proceedings involving the Company, and certain material effects on the Company’s ability to repay the Note. The Note may be accelerated upon the occurrence of an event of default.

30


Critical Accounting Policies and Significant Judgments and Estimates

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management.

There have been no material changes to our critical accounting policies and estimates from those disclosed in our financial statements and the related notes and other financial information included in our Form 10-K on file with the Securities and Exchange Commission (the “SEC”).

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company, as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, for this reporting period and are not required to provide the information required under this item.

ITEM 4.

Controls and Procedures

Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and chief financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of October 31, 2020, our chief executive officer and chief financial officer concluded that, as of that date, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting. There were no changes in our internal controls over financial reporting during the three months ended October 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

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PART II. OTHER INFORMATION

ITEM 1.

We enter into agreements in the ordinary course of business with customers, resellers, distributors, integrators and suppliers. Most of our historical agreements require us to defend and/or indemnify the other party against intellectual property infringement claims brought by a third party with respect to our products. From time to time, we also indemnify customers and business partners for damages, losses and liabilities they may suffer or incur relating to personal injury, personal property damage, product liability, and environmental claims relating to the use of our products and services or resulting from the acts or omissions of us, our employees, authorized agents or subcontractors. Management cannot reasonably estimate any potential losses, but these claims could result in material liability for us (see Note 6).

ITEM 1A.

Risk Factors

In addition to other information set forth in this Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Form 10-K for the fiscal year ended January 31, 2020, which could materially affect our business, financial conditions, and results of operations. The risks described in our Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes in our risk factors from those disclosed in the Form 10-K, except as set forth below:

Our failure to meet the continued listing requirements of the Nasdaq Global Market could result in a delisting of our common stock, which could negatively impact the market price and liquidity of our common stock and our ability to access the capital markets.

On October 30, 2020, the Company received a deficiency letter from the Staff of Nasdaq notifying the Company that, for the 30 consecutive business days prior to such date, the closing bid price for the Company’s common stock was below the minimum $1.00 per share required for continued listing on The Nasdaq Global Select Market pursuant to the Minimum Bid Price Requirement. The Nasdaq deficiency letter had no immediate effect on the listing of the Company’s common stock, and the common stock will continue to trade on The Nasdaq Global Select Market under the symbol “SEAC” at this time.

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days from receipt of the letter, or until April 27, 2021, to regain compliance with the Minimum Bid Price Requirement. If at any time before April 27, 2021, the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Staff will provide written confirmation that the Company has achieved compliance.

If the Company does not regain compliance with the Minimum Bid Price Requirement by April 27, 2021, the Company may be afforded a second 180 calendar day period to regain compliance. To qualify, the Company would be required to transfer to The Nasdaq Capital Market, to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, except for the Minimum Bid Price Requirement. In addition, the Company would be required to notify Nasdaq of its intent to cure the deficiency during the second compliance period. Following a transfer to The Nasdaq Capital Market, the Company will be afforded the second 180 calendar day period to regain compliance, unless it does not appear to Nasdaq that it is possible for the Company to cure the deficiency. If the Company does not regain compliance with the Minimum Bid Price Requirement by the end of the compliance period (or the second compliance period, if applicable), the Company’s common stock will become subject to delisting. In the event that the Company receives notice that its common stock is being delisted, the Nasdaq listing rules permit the Company to appeal a delisting determination by the Staff to a hearings panel.

The Company is monitoring the closing bid price of its common stock and may, if appropriate, consider available options to regain compliance with the Minimum Bid Price Requirement, including initiating a reverse stock split. However, there can be no assurance that the Company will be able to regain compliance with the Minimum Bid Price Requirement or will otherwise be in compliance with other Nasdaq Listing Rules.

ITEM 5.

Other Information

None.

ITEM 6.

Exhibits

 

(a)

Exhibits

The following list of exhibits includes exhibits submitted with this Form 10-Q as filed with the SEC and those incorporated by reference to other filings.

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Index to Exhibits

 

No. 

 

Description 

3.1

 

Amended and Restated Certificate of Incorporation of the Company (see Exhibit 3.3 to the Company’s Registration Statement on Form S-1 previously filed on October 4, 1996 with the Commission and incorporated herein by reference).

 

 

 

3.2

 

Certificate of Amendment, filed May 25, 2000 with the Secretary of State in the State of Delaware, to the Amended and Restate Certificate of Incorporation of the Company (filed as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q previously filed on December 15, 2000 with the Commission and incorporated herein by reference).

 

 

 

3.3

 

Certificate of Designations, Preferences and Rights of Series A Participating Preferred Stock of the Company, filed March 5, 2019 with the Secretary of State in the State of Delaware (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K previously filed March 5, 2019 with the Commission and incorporated herein by reference).

 

 

 

3.4

 

Amended and Restated By-laws of the Company (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K previously filed on December 6, 2016 with the Commission and incorporated herein by reference).

 

 

 

31.1*

 

Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1*

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2*

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

Inline XBRL Instance Document. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101 filed herewith).

 

*

Filed herewith

33


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, SeaChange International, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: December 10, 2020

 

SEACHANGE INTERNATIONAL, INC.

 

 

by:

/s/ YOSSI ALONI

 

Yossi Aloni

 

Chief Executive Officer

 

by:

/s/ MICHAEL PRINN

 

Michael Prinn

 

Chief Financial Officer, Senior Vice President and Treasurer

 

34