10.	Revenues from Contracts with Customers

On February 1, 2018, the Company adopted ASC 606 using the modified retrospective method to achieve a consistent application of revenue recognition, resulting in a single revenue model to be applied by reporting companies under U.S. GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. Therefore, for arrangements that include customer-specified acceptance criteria, revenue is recognized when the Company can objectively determine that control has been transferred to the customer in accordance with the agreed-upon specifications in the contract, which may occur before formal customer acceptance. In addition, the new guidance requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance no longer requires the Company to have vendor specific object evidence (“VSOE”) to determine the fair value of undelivered elements in a multiple-element software transaction, resulting in revenue attributable to the sale of software being recognized earlier.

Our products and services facilitate the aggregation, licensing, management and distribution of video and advertising content to cable television system operators, telecommunication companies, satellite operators and media companies. Offerings include and revenue is generated from the sales of software, hardware, professional services, maintenance and support in order to deploy SeaChange systems and provide ongoing functionality.

These offerings can be sold on a standalone basis or as a component of a contract with multiple performance obligations. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price. The performance obligations include future credits, significant discounts and material rights in addition to the software, hardware, professional services, maintenance and support.

The revenue for perpetual licenses to software applications and hardware is recognized upon delivery or acceptance by the customer. Product maintenance and technical support is recognized ratably over the stated and implied maintenance periods.

 

The professional services are either fixed price or time and material contracts, and consist of installation and integration, customized development and customized software, training, and on-site managed services. The installation and integration is recognized over time based on an input measure of hours incurred to total estimated hours. The customized development and software is recognized at a point in time upon delivery and acceptance of the final software product. The training and the on-site managed services are recognized over the service period.

The cumulative effect of the changes made to our consolidated balance sheet as of February 1, 2018 for the adoption of the new guidance under the modified retrospective method is as follows (amounts in thousands):

 

		As of
		January 31, 2018								February 1, 2018
		Under ASC 605				Adjustment				Under ASC 606
Assets
Unbilled receivables		$	3,101			$	137			$	3,238
Prepaid expenses and other current assets (1)		$	3,557			$	824			$	4,381
Liabilities
Deferred revenues		$	14,433			$	(1,358	)		$	13,075
Equity
Accumulated loss		$	(148,620	)		$	2,319			$	(146,301	)

 

(1)	Contract assets, short-term are included in prepaid expenses and other current assets in our consolidated balance sheet.

The following tables set forth the amount by which each financial statement line item is affected in the current reporting period by the application of ASC 606, as compared to the guidance that was in effect before its adoption. The impact of adoption on the consolidated financial statements as of and for the three and nine months ended October 31, 2018 is as follows (amounts in thousands):

Consolidated Balance Sheets:

 

		As of
		October 31, 2018								October 31, 2018
		Under ASC 605				Adjustment				Under ASC 606
Assets
Unbilled receivables		$	8,561			$	(680	)		$	7,881
Prepaid expenses and other current assets (1)		$	5,113			$	366			$	5,479
Liabilities
Deferred revenues		$	13,418			$	6,344			$	7,074
Equity
Accumulated loss		$	170,709			$	6,030			$	(164,679	)

 

(1)	Contract assets, short-term, are included in prepaid expenses and other current assets in our consolidated balance sheet.

 

Consolidated Statements of Operations and Comprehensive Loss:

 

		For the Three Months Ended October 31, 2018
		Under ASC 605				Adjustment				Under ASC 606
Revenues		$	18,352			$	260			$	18,611
Cost of revenues			7,163				160				7,323
Operating expenses			13,695				110				13,803
Loss from operations			(2,506	)			(10	)			(2,516	)
Loss before income taxes			(4,535	)			(10	)			(4,545	)
Income tax (benefit) provision			(775	)			—				(775	)
Net loss			(3,818	)			(9	)			(3,827	)
Net loss per share:
Basic		$	(0.11	)		$	—			$	(0.11	)
Diluted		$	(0.11	)		$	—			$	(0.11	)
		For the Nine Months Ended October 31, 2018
		Under ASC 605				Adjustment				Under ASC 606
Revenues		$	41,216			$	4,231			$	45,447
Cost of revenues			18,509				458				18,967
Operating expenses			42,381				—				42,381
Loss from operations			(19,675	)			3,774				(15,901	)
Loss before income taxes			(24,515	)			3,774				(20,741	)
Income tax (benefit) provision			(2,421	)			—				(2,421	)
Net loss			(22,152	)			3,774				(18,378	)
Net loss per share:
Basic		$	(0.63	)		$	0.11			$	(0.52	)
Diluted		$	(0.63	)		$	0.11			$	(0.52	)

Consolidated Statement of Cash Flows:

 

		For the Nine Months Ended October 31, 2018
		Under ASC 605				Adjustment				Under ASC 606
Cash used in operating activities:
Net loss		$	(22,089	)		$	3,711			$	(18,378	)
Unbilled receivables			(5,638	)			680				(4,957	)
Prepaid expenses and other current assets			(1,740	)			366				(2,107	)
Deferred revenues			(716	)			(6,344	)			(7,060	)
Other operating activities			169				2,319				2,488
Total cash used in operating activities		$	(23,626	)		$	—			$	(23,626	)

The following summarizes the significant changes under ASC 606 as compared to legacy U.S. GAAP:

 

•

Under legacy U.S. GAAP, the Company allocated revenue to licenses under the residual method when it had VSOE for the remaining undelivered elements, which allocated any future credits or significant discounts entirely to the license. Under ASC 606, the Company allocates all future credits, significant discounts, and material rights to all performance obligations based upon their relative selling price. Additional license revenue from the reallocation of such arrangement consideration is recognized when control is transferred to the customer, which is generally upon delivery of the license.

 

•

Under legacy U.S. GAAP, the Company did not have VSOE for professional services and maintenance in certain geographical areas, which resulted in revenue being deferred in such instances until such time as VSOE existed for all undelivered elements or recognized ratably over the longest service period. Under ASC 606, the requirement for VSOE is eliminated and replaced with the concept of a standalone selling price. Once the transaction price is allocated to each of the performance obligations, the Company recognizes revenue as the performance obligations are delivered, either at a point in time or over time. Under ASC 606, license revenue is recognized when control is transferred to the customer and professional services revenue is recognized over time based on an input measure of hours incurred to total estimated hours. This results in the acceleration of professional services revenue when compared to the historical practice of ratable recognition for professional services when there is a lack of VSOE.

 

•

Under legacy U.S. GAAP, sales commissions and other third-party acquisition costs resulting directly from securing contracts with customers are expensed when incurred. Under ASC 340, “Other Assets and Deferred Costs,” because the sales commission paid on the maintenance renewals is not commensurate with the original arrangement, ASC 340 requires that these acquisition costs be expensed over the expected period of benefit, which we estimate as the customer life of five years.

 

•

Under legacy U.S. GAAP, professional service costs associated with highly customized development efforts related directly to contracts with customers are expensed when incurred. Under ASC 340, these costs are recognized as an asset when incurred and are expensed along with professional service revenue at the time that customized software is delivered and/or accepted.

Disaggregated Revenue

The following table shows our revenue disaggregated by revenue stream for the three and nine months ended October 31, 2018 (amounts in thousands):

 

		For the Three Months				For the Nine Months
		Ended October 31, 2018				Ended October 31, 2018
Revenue by revenue stream:
Product		$	8,268			$	12,821
Professional services			2,948				11,011
Maintenance - first year			514				1,632
Maintenance - renewal			6,882				19,983
Total revenues		$	18,612			$	45,447

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, 2018 is $19.7 million. This amount consists of amounts billed for undelivered services that are included in deferred revenue.

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, the Company determines 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 stand-alone 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.

With the exception of travel and entertainment expenses, 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.

As discussed above, 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 arises when revenue is recognized in advance of billing for certain customer contracts. Contract liabilities consist of deferred revenue and customer deposits which arise when amounts are billed to or collected from customers in advance of revenue recognition.

Costs to Obtain and Fulfill a Contract

The Company recognizes 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 ASC 340-40, which prior to the adoption of ASC 606, we had expensed as incurred. The amount capitalized for incremental costs to obtain contracts as of October 31, 2018 was $0.4 million, all of which was short-term and has been included in prepaid expenses and other current assets in our consolidated balance sheet. Costs to obtain a contract are amortized as sales and marketing expense over the expected period of benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. The judgments made in determining the amount of costs incurred include whether the commissions are in fact incremental and would not have occurred absent the customer contract and the estimate of the amortization period. The commissions and Spiffs related to professional services are amortized over time, as work is completed. The commissions and Spiffs for hardware and software maintenance are amortized over the life of the customer, which is estimated to be five years. These costs are periodically reviewed for impairment; however, we determined that no impairment existed as of October 31, 2018. 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 the Company otherwise would have recognized is one year or less.

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 the Company’s 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 costs associated 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.