SEACHANGE INTERNATIONAL INC MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes, prepared in accordance with
United States("U.S.") generally accepted accounting principles ("GAAP"), included in this Form 10-K. When reviewing the discussion, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described under Item 1A., "Risk Factors," of this Form 10-K. These risks and uncertainties could cause actual results to differ materially from those forecasted in forward-looking statements or implied by past results and trends. Forward-looking statements are statements that attempt to project or anticipate future developments in our business; we encourage you to review the discussion of forward-looking statements under "Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995," at the beginning of this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise such statements as a result of future developments. Unless otherwise specified, any reference to a "year" is to a fiscal year ended January 31st.
SeaChange International, Inc.("SeaChange" or the "Company"), was incorporated under the laws of the state of Delawareon July 9, 1993. We are an industry leader in the delivery of multiscreen, advertising and premium over-the-top ("OTT") video management solutions. Our software products and services facilitate the aggregation, licensing, management and distribution of video and advertising content for service providers, telecommunications companies, satellite operators, broadcasters and other content providers. 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., and Frontier Communications Corporation; satellite operators such as 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, smart phones, 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. SeaChangeserves an exciting global marketplace where multiscreen viewing is increasingly required, consumer device options are evolving rapidly, and viewing habits are ever-shifting. The primary driver of our business is enabling the delivery of video content in the changing multiscreen television environment. 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 initiated restructuring efforts to improve operations and optimize our cost structure. In fiscal 2021, we reduced our headcount across all departments in response to the COVID-19 pandemic, which resulted in approximately $7.6 millionof annualized savings. Additionally, in the second quarter of fiscal 2021, we transferred our technical support services to our Polandlocation in an effort to further reduce cost. In the first quarter of fiscal 2022, we restructured our finance department and terminated the lease to our Waltham, Massachusettsheadquarters.
held approximately 20.6% of our outstanding common shares. In accordance with the cooperation
33 -------------------------------------------------------------------------------- Agreement, we agreed to set the size of the Company's Board of Directors (the "Board") at up to eight members, appointed Mr.
Robert Ponsto the Board as a Class II Director with an initial term that expired at the 2019 annual meeting of stockholders, and appointed Mr. Jeffrey Tuderto the Board as a Class III Director with an initial term that expired at the 2020 annual meeting of stockholders. Messrs. Pons and Tuder were subsequently re-elected in the 2019 and 2020 annual meeting of stockholders, respectively. In January 2021, our Chief Executive Officer resigned, and Mr. Ponswas subsequently appointed Executive Chairman and Principal Executive Officer in the interim. Mr. Tuderresigned from the Board in May 2021and was replaced by Mr. David Nicol. In September 2021, Mr. Peter Aquinowas appointed as the Company's President and Chief Executive Officer. Upon the appointment of Mr. Aquino, Mr. Ponsresigned as the Company's Executive Chairman and Principal Executive Officer but remains Chairman of the Board. In March 2019, our Board approved and adopted a tax benefits preservation plan (the "Tax Benefits Preservation Plan") to deter acquisitions of our common stock that would potentially limit our ability to use net operating loss carryforwards 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, 2019to our stockholders of record on that date. The Tax Benefits Preservation Plan was approved by our stockholders at our 2019 annual meeting of stockholders. In February 2021, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission(the "SEC"), which registered an indeterminate number of shares of common stock, preferred stock, Series A Participating Preferred Stock, warrants or rights to purchase common stock or preferred stock, and units using a "shelf" registration or continuous offering process. Under this shelf registration, we may, from time to time, sell any combination of the securities in one or more offerings up to a total aggregate offering price of $200 million. The shelf registration was declared effective on March 16, 2021. In connection with the shelf registration statement, the Company entered into an underwriting agreement with Aegis Capital Corp.on March 30, 2021, to issue and sell 10,323,484 shares of common stock, $0.01par value per share ("common stock"), at a public offering price of $1.85per share (the "Offering"). The Offering closed on April 1, 2021and resulted in approximately $17.5 millionin proceeds, net of underwriting discounts and commissions of 6.5%, or $0.12025 per share of common stock, and offering expenses of approximately $0.2 million. In addition to the Offering, the Company also granted the underwriters a 45-day option (the "Underwriter Option") to purchase up to an additional 1,548,522 shares of common stock at a purchase price of $1.85per share, less underwriting discounts and commissions. The Underwriter Option was not exercised and has expired. In March 2021, we entered into a Sublease Termination Agreement (the "Termination Agreement") which terminated the sublease to our former headquarters in Waltham, Massachusetts, effective March 21, 2021. In connection with the early termination of the sublease, the Company paid the sublandlord termination payments of approximately $0.4 millionfor the fiscal year ended January 31, 2022. The Company also wrote off all related operating lease right-of-use assets and liabilities as of the termination date, resulting in a $0.3 millionnon-cash gain, which partially offset the loss on the termination payments. The net $0.1 millionloss on the lease termination is reported as a component of severance and restructuring expenses on the consolidated statements of operations and comprehensive loss for the fiscal year ended January 31, 2022. Prior to the execution of the Termination Agreement, the sublease had been scheduled to expire in February 2025. As a result of the Termination Agreement, we expect annualized savings of approximately $0.6 millionin facilities costs for each of the next four years.
December 2021, the Company and Triller Hold Co LLC, a Delawarelimited liability company ("Triller"), entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Triller will be merged with and into SeaChange, and the separate existence of Triller shall cease, with SeaChangecontinuing as the surviving corporation (the "Merger"). Upon the closing of the Merger, the name of the combined company (the " Post-Merger Company") will be changed to " TrillerVerz Corp.". Pursuant and subject to the terms and conditions of the Merger Agreement, in addition to other contemplated transactions, (i) the parties anticipate that Triller will conduct an offering of convertible notes prior to the closing in an amount in excess of $100 million(the "Triller Convertible Notes"), and (ii) the charter of the Post-Merger Companywill provide for two classes of common stock, consisting of Class A common stock ("Buyer Class A Common Stock") and Class B common stock ("Buyer Class B Common Stock"), which Buyer Class B Common Stock is anticipated to provide for super-voting rights to provide its holders 76% or more of the total voting rights. 34 -------------------------------------------------------------------------------- The stockholders of SeaChangewill have the right to elect to receive either (i) their pro rata portion of $25 millioncash consideration along with their pro rata portion of an aggregate $75 millionin principal of notes (the "Notes Consideration") to be issued by the Post-Merger Companyto the holders of SeaChangecommon stock (such cash and notes consideration, the "Cash/Notes Consideration") or (ii) a number of shares of Buyer Class A Common Stock (the "Stock Consideration"), in an amount equal to that which such holder would have received if such SeaChangestockholder had purchased the Triller Convertible Notes in an aggregate amount equal to its pro rata portion of the Cash/Notes Consideration and then converted such Triller Convertible Notes at the conversion price at which such Triller Convertible Notes were issued and then participated pro-rata along with the Triller holders in the proposed Merger. Assuming that (i) all holders of SeaChangecommon stock elect the Stock Consideration and (ii) that Triller issues $250 millionof Triller Convertible Notes which convert in connection with the proposed Merger at an agreed discount of 20% to an assumed $5 billionTriller valuation, the stockholders of SeaChangewould own approximately 2.3% of the Post-Merger Companyand the holders of Triller would hold approximately 97.7% of the Post-Merger Company. If all stockholders of SeaChangeelected to receive the Cash/Notes Consideration, such stockholders would have no equity interest in the Post-Merger Company, and the Triller holders would collectively own 100% of the Post-Merger Company. For SeaChangestockholders that elect the Cash/Notes Consideration, each would receive their pro rata portion of such Cash/Notes Consideration which would then also reduce the resulting SeaChangestockholders' ownership percentages by taking into account the payment of the Cash/Notes Consideration and related reduction in the Stock Consideration. The notes (the "Merger Consideration Notes") to be issued to SeaChangestockholders whoelect the Cash/Notes Consideration are payable on the one-year anniversary of issuance, bear interest at a rate of 5% per annum and will be automatically converted into Buyer Class A Common Stock at such time as the market capitalization of the Post-Merger Companyequals or exceeds $6 billionfor ten consecutive trading days. The holders of the Merger Consideration Notes will have the option to convert into Buyer Class A Common Stock if the Post-Merger Companyexercises its optional redemption right, which it may do at any time, in whole or in part, on the same terms set forth above. The holders of the Merger Consideration Notes will have recourse against the Post-Merger Companyand its assets only to the extent of the Post-Merger Company'sinterest in certain of its subsidiaries ( whowill also provide guarantees of the Merger Consideration Notes). The existing subsidiaries of SeaChangeprior to the proposed Merger are also anticipated to provide a first lien security interest on their assets securing the Merger Consideration Notes. The Merger Consideration Notes will have limited covenants Shares of Buyer Class A Common Stock to be issued in the Merger are expected to be listed on the NASDAQ Stock Exchange("Nasdaq") under the ticker symbol "ILLR". No fractional shares of Buyer Class A Common Stock and Buyer Class B Common Stock will be issued in the Merger, and holders of shares of SeaChangecommon stock will receive cash in lieu of any such fractional shares. SeaChangestock options and other equity awards will generally, upon completion of the Merger, be converted into Buyer Class A Common Stock. The Merger Agreement provides that, upon the closing of the Merger, the board of directors of the Post-Merger Companywill be composed of seven members, with all members to be designated by Triller. Upon completion of the Merger, all executive officers of the Post-Merger Companywill be appointed by Triller, in each case to serve in such positions until successors are duly elected or appointed. The respective boards of directors of SeaChangeand Triller have approved the Merger Agreement, and have agreed to recommend that SeaChange'sstockholders and Triller's unitholders, respectively, adopt the Merger Agreement. Neither SeaChangenor Triller is permitted to solicit, initiate or knowingly encourage or induce any alternative transaction proposals from third parties or to engage in discussions or negotiations with third parties regarding any alternative transaction proposals. Notwithstanding this limitation, prior to a party's stockholders or unitholders, as applicable, approving the transactions, including the Merger, such party may under certain circumstances provide information to and participate in discussions or negotiations with third parties with respect to an unsolicited alternative transaction proposal that its board of directors has determined in good faith, after consultation with its outside financial advisors and outside legal counsel, is or could reasonably be expected to lead to a superior proposal. SeaChange'sboard of directors may change its recommendation to its stockholders (subject to Triller's right to terminate the Merger Agreement following such change in recommendation by the SeaChangeboard of directors) in response to a superior proposal or an intervening event if the board of directors determines in good faith, after consultation with its outside financial advisors and outside legal counsel, that the failure to take such action would be inconsistent with the exercise of the directors' fiduciary duties under applicable law. 35 -------------------------------------------------------------------------------- Immediately prior to the execution of the Merger Agreement, SeaChangeentered into an amendment (the "Amendment") to the Tax Benefits Preservation Plan, dated as of March 4, 2019(the "Rights Agreement"), by and between the SeaChangeand Computershare Inc., as rights agent. Pursuant to the Amendment, in connection with the Merger Agreement, Triller and its affiliates and associates will not be deemed an "Acquiring Person" under the Rights Agreement.
We have registered
Summary of operating results
The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements for the fiscal years ended
January 31, 2022and 2021.
Turnover and gross profit
The components of our total revenue and gross profit are described in the following table: For the Fiscal Years Ended January 31, Change 2022 2021 $ % (Amounts in thousands, except for percentage data) Revenue: Product revenue: License and subscription
$ 10,843 $ 5,135 $ 5,708111.2 % Hardware 2,178 1,473 705 47.9 % Total product revenue 13,021 6,608 6,413 97.0 % Service revenue: Maintenance and support 12,249 13,657 (1,408 ) (10.3 %) Professional services and other 2,040 1,734 306 17.6 % Total service revenue 14,289 15,391 (1,102 ) (7.2 %) Total revenue 27,310 21,999 5,311 24.1 % Cost of product revenue 3,876 3,556 320 9.0 % Cost of service revenue 7,083 8,513 (1,430 ) (16.8 %) Total cost of revenue 10,959 12,069 (1,110 ) (9.2 %) Gross profit $ 16,351 $ 9,930 $ 6,42164.7 % Gross product profit margin 70.2 % 46.2 % 24.0 % Gross service profit margin 50.4 % 44.7 % 5.7 % Gross profit margin 59.9 % 45.1 % 14.7 % International revenue accounted for 43% and 69% of total revenue in fiscal 2022 and fiscal 2021, respectively. The decrease in international sales as a percentage of total revenue in fiscal 2022 as compared to fiscal 2021 is primarily attributable to a $5.0 millionincrease in perpetual license sales to U.S.customers as compared to international customers, for which we had a $0.1 milliondecrease in perpetual license sales. Additionally, in fiscal 2022, we had a $1.8 milliondecrease in revenue related to our largest international customer and its affiliates as their maintenance and support and professional services needs were reduced.
Product sales increased by
Services revenue decreased by
Gross profit and margin
Product cost primarily includes the cost of resold third-party products and services, purchased components and subassemblies, labor and overhead, testing and implementation, and ongoing maintenance of complete systems. .
Our gross profit margin increased by approximately 15% in fiscal 2022 as compared to fiscal 2021 primarily due to an increase in higher margin perpetual license revenue while associated costs remained relatively consistent, coupled with a decrease in cost of service revenue as a result of the reduction in headcount and overhead in relation to our cost-saving efforts. Product profit margin increased by 24% in fiscal 2022 as compared to fiscal 2021 also primarily due to higher margin perpetual license revenue while associated costs remained relatively consistent. Service profit margin increased by 6% in fiscal 2022 as compared to fiscal 2021 primarily due to a reduction in headcount and overhead expenses in relation to our cost-saving efforts.
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 Fiscal Years Ended January 31, Change 2022 2021 $ % (Amounts in thousands, except for percentage data) Research and development expenses $ 8,910
$ 13,808 $ (4,898 )(35.5 %) % of total revenue 32.6 % 62.8 % Research and development expenses decreased by $4.9 millionin fiscal 2022 as compared to fiscal 2021 primarily due to a $1.1 milliondecrease in salaries and compensation costs associated with our reduction in headcount, a $3.1 milliondecrease in contract labor, a $0.4 milliondecrease in stock-based compensation expense, a $0.2 milliondecrease in allocated overhead and facility expenses, and reductions in other research and development expenditures in relation to our restructuring and cost-saving efforts.
Sales 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 Fiscal Years Ended January 31, Change 2022 2021 $ % (Amounts in thousands, except for percentage data) Selling and marketing expenses
$ 5,862 $ 6,420 $ (558 )(8.7 %) % of total revenue 21.5 % 29.2 % Selling and marketing expenses decreased by $0.6 millionin fiscal 2022 as compared to fiscal 2021 primarily due to a decrease in allocated overhead and facility expenses, a decrease in tradeshow and travel expenses, and reductions in other selling and marketing expenditures in relation to our restructuring and cost-saving efforts. 37 --------------------------------------------------------------------------------
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 Fiscal Years Ended January 31, Change 2022 2021 $ % (Amounts in thousands, except for percentage data) General and administrative expenses
$ 8,779 $ 9,746 $ (967 )(9.9 %) % of total revenue 32.1 % 44.3 % General and administrative expenses decreased by $1.0 millionin fiscal 2022 as compared to fiscal 2021 primarily due to a $1.2 milliondecrease in salaries and compensation costs associated with our reduction in headcount, a $0.4 milliondecrease in outside professional services, a $0.4 milliondecrease in allocated overhead and facility expenses, and reductions in other general expenditures in relation to our cost-saving efforts partially offset by a $0.8 millionincrease in Board affiliated stock-based compensation and a $0.3 millionincrease in corporate insurance premiums.
Redundancy and restructuring costs
Severance benefits consist of employee-related severance benefits and other severance benefits not related to a restructuring plan. Restructuring includes employee severance and facility closure costs.
For the Fiscal Years Ended January 31, Change 2022 2021 $ % (Amounts in thousands, except for percentage data) Severance and restructuring costs $ 717
$ 1,477 $ (760 )(51.5 %) % of total revenue 2.6 % 6.7 % Severance and restructuring costs decreased by $0.8 millionin fiscal 2022 as compared to fiscal 2021. Severance and restructuring costs in fiscal 2022 consisted primarily of Board and employee-related termination benefits as well as a $0.1 millionloss on lease termination and a $0.1 millionloss on disposal of fixed assets in relation to the Termination Agreement, for which we expect annualized cost savings of $0.6 millionover the next four years. Severance and restructuring costs in fiscal 2021 consisted primarily of employee-related termination benefits associated with our reduction in headcount in fiscal 2021, which resulted in approximately $7.6 millionof annualized cost savings.
Transaction costs to effect the Merger totaled
$1.5 millionin fiscal 2022 and included third-party direct costs such as legal, accounting, and other professional fees. Transaction costs were expensed as incurred and accounted for separately from the Merger consideration.
Gain on extinguishment of debt
May 2020, we entered into a promissory note (the "Note") with Silicon Valley Bank(the "Lender") evidencing an unsecured loan in an aggregate principal amount of $2.4 millionpursuant to the Paycheck Protection Program ("PPP") under the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") administered by the U.S. Small Business Administration("SBA"). Interest on the Note accrued at a fixed interest rate of one percent (1%) per annum. The Note and accrued interest were fully forgiven by the SBA in June 2021and a $2.4 milliongain on extinguishment of debt was recorded on the consolidated statements of operations and comprehensive loss in the second quarter of fiscal 2022. 38 --------------------------------------------------------------------------------
Other expenses, net
The table below provides details of our other expenses, net:
For the Fiscal Years Ended January 31, Change 2022 2021 $ % (Amounts in thousands, except for percentage data) Interest income, net $ 258 $ 454
$ (196 )(43.2 %) Foreign exchange loss, net (896 ) (793 ) (103 ) 13.0 % Miscellaneous income, net 159 159 - 0.0 % $ (479 ) $ (180 ) $ (299 )
Our foreign exchange loss, net, is mainly attributable to the revaluation of intercompany notes.
Provision for income tax
We recorded an income tax benefit of less than
$0.1 millionand an income tax expense of $0.1 millionin fiscal 2022 and 2021, respectively. Our tax expense was largely driven by foreign withholding taxes. Our effective tax rate in fiscal 2022 and in future periods may fluctuate, 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.
Use of Non-
We define non-GAAP loss from operations as GAAP net loss adjusted for stock-based compensation expenses, amortization of intangible assets, severance and restructuring costs, acquisition-related costs, other expense, net, gain on extinguishment of debt, and our income tax (benefit) provision. We discuss non-GAAP loss from operations in our quarterly earnings releases and certain other communications, as we believe non-GAAP loss from operations is an important measure that is not calculated according to GAAP. We use non-GAAP loss from operations in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our Board, determining a component of bonus compensation for executive officers and other key employees based on operating performance and evaluating short-term and long-term operating trends in our operations. We believe that the non-GAAP loss from operations financial measure assists in providing an enhanced understanding of our underlying operational measures to manage the business, to evaluate performance compared to prior periods and the marketplace, and to establish operational goals. We believe that the non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making. Non-GAAP loss from operations is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenses similar to the financial adjustments described above in arriving at non-GAAP loss from operations and investors should not infer from our presentation of this non-GAAP financial measure that these costs are unusual, infrequent or non-recurring. The following table includes the reconciliations of our GAAP net loss, the most directly comparable GAAP financial measure, to our non-GAAP loss from operations for the fiscal years ended
January 31, 2022and 2021: 39 --------------------------------------------------------------------------------
For the Fiscal Years Ended January 31, 2022 2021 (Amounts in thousands) GAAP net loss $ (7,430 ) $ (21,759 ) Other expense, net 479 180 Gain on extinguishment of debt (2,440 ) - Income tax (benefit) provision (15 ) 58 GAAP loss from operations $ (9,406 ) $ (21,521 ) Amortization of intangible assets 1,226 1,210 Stock-based compensation 1,690 1,247 Severance and restructuring costs 717 1,477 Transaction costs 1,489 - Non-GAAP loss from operations $ (4,284 ) $ (17,587 ) Non-GAAP loss from operations, basic per share $ (0.09 ) $ (0.47 ) Non-GAAP loss from operations, diluted per share $ (0.09 ) $ (0.47 ) Weighted average common shares outstanding, basic per share 47,030 37,471
Weighted average number of common shares outstanding, diluted per share
Cash and capital resources
The following table includes key line items of our consolidated statements of cash flows: For the Fiscal Years Ended
January 31, 20222021 (Amounts in thousands) Net cash used in operating activities $(4,747)
Net cash (used in) provided by investing activities (394) 4,027 Net cash provided by financing activities 17,623 2,470 Effect of exchange rate changes on cash, cash equivalents and restricted cash (710) (355) Net increase (decrease) in cash, cash equivalents and restricted cash
$11,772 $(3,213)Historically, we have financed our operations and capital expenditures primarily with our cash and investments. Our cash, cash equivalents and restricted cash totaled $17.9 millionat January 31, 2022. We have initiated restructuring efforts to improve operations and optimize our cost structure. In fiscal 2021, we reduced our headcount across all departments in response to the onset of the COVID-19 pandemic, which resulted in approximately $7.6 millionof annualized savings. Additionally, in the second quarter of fiscal 2021, we transferred our technical support services to our Polandlocation in an effort to further reduce cost. In the first quarter of fiscal 2022, we entered into the Termination Agreement with respect to our former headquarters in Waltham, Massachusetts. In connection with the Termination Agreement, the Company paid the sublandlord a termination payment of approximately $0.4 millionagainst an obligation of approximately $2.8 million. Prior to the execution of the Termination Agreement, the sublease had been scheduled to expire in February 2025. As a result of the Termination Agreement, we expect annualized savings of approximately $0.6 millionin facilities costs for each of the next four years. Additionally, in the first quarter of fiscal 2022, we issued and sold 10,323,484 shares of common stock at a public offering price of $1.85per share. The Offering resulted in approximately $17.5 millionin proceeds, net of underwriting discounts and commissions of 6.5%, or $0.12025 per share of common stock, and offering expenses of approximately $0.2 million. 40 -------------------------------------------------------------------------------- In the second quarter of fiscal 2022, we were granted full forgiveness of the Note we entered into with the Lender in May 2020pursuant to the PPP under the CARES Act administered by the SBA. The aggregate principal amount of $2.4 millionand interest accrued at a fixed rate of one percent (1%) per annum were fully forgiven is included in the consolidated statements of operations and comprehensive loss as a gain on extinguishment of debt. 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 and investing 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 terms, we may not be able to take advantage of market opportunities, to develop new products or to otherwise respond to competitive pressures.
Net cash used in operating activities
Net cash used in operating activities was
$4.7 millionin fiscal 2022 and was primarily the result of our (i) $7.4 millionnet loss, (ii) operating activity non-cash adjustments of $1.2 million, including $1.4 millionof depreciation and amortization expense, a $2.4 millionnon-cash gain on extinguishment of debt related to the fully forgiven Note, $1.7 millionof stock-based compensation expense, and $0.9 millionof realized and unrealized foreign currency transaction losses, and (iii) net cash inflows of $1.5 millionprovided by changes in our operating assets and liabilities, including a $2.8 millionincrease in accounts receivable attributable to up-front perpetual license invoicing, a $2.4 milliondecrease in unbilled receivables attributable to the passage of time on installment invoicing of perpetual licenses previously sold for which we recognized revenue at the time of delivery, a $2.2 milliondecrease in prepaid expenses and other current assets and other assets primarily attributable to a decrease in prepaid taxes, a $1.2 millionincrease in accounts payable attributable to the timing of vendor payments, a $0.2 milliondecrease in accrued expenses and other liabilities attributable to a reduction in expenditures in relation to our cost-saving efforts, and a $1.3 milliondecrease in deferred revenue attributable to a decline in up-front maintenance invoicing for which we recognize revenue over a period of time. Net cash used in operating activities was $9.4 millionin fiscal 2021 and was primarily the result of our (i) $21.8 millionnet loss, (ii) operating activity non-cash adjustments of $3.5 million, including $1.7 millionof depreciation and amortization expense, $1.2 millionof stock-based compensation expense, and $0.8 millionof realized and unrealized foreign currency transaction losses, and (iii) net cash inflows of $8.9 millionprovided by changes in our operating assets and liabilities, including a $6.4 milliondecrease in accounts receivable attributable to a decline in sales driven by the COVID-19 pandemic, an $8.0 milliondecrease in unbilled receivables attributable to the installment invoicing of perpetual licenses previously sold for which we recognized revenue at the time of delivery, a $1.2 milliondecrease in prepaid expenses and other current assets and other assets attributable to a decrease in capitalized commissions due to the decline in sales driven by the COVID-19 pandemic, a $2.2 milliondecrease in accounts payable attributable to the timing of vendor payments, a $3.5 milliondecrease in accrued expenses and other liabilities attributable to incentive compensation payments made in relation to the previous fiscal year, and a $0.9 milliondecrease in deferred revenue attributable to a decline in up-front maintenance invoicing for which we recognize revenue over a period of time.
Net cash (used) from investing activities
Net cash used in investing activities was
$0.4 millionin fiscal 2022 due to $0.6 millionin purchases of property and equipment offset by $0.3 millionin proceeds from the sales and maturities of marketable securities. Net cash provided by investing activities was $4.0 millionin fiscal 2021 due to $4.4 millionin proceeds from the sales and maturities of marketable securities offset by $0.3 millionin purchases of property and equipment.
Net cash provided by financing activities
Net cash provided by financing activities was
$17.6 millionand $2.5 millionin fiscal 2022 and 2021, respectively. Net cash provided by financing activities in fiscal 2022 was attributable to $17.5 millionin proceeds from the issuance of common stock, net of issuance costs and $0.2 millionin proceeds from stock option exercises. Net cash 41 -------------------------------------------------------------------------------- provided by financing activities in fiscal 2021 was attributable to $2.4 millionin proceeds from the PPP Note and $0.1 millionin proceeds from stock option exercises and our employee stock purchase plan partially offset by $0.1 millionin repurchases of common stock.
Impact of the COVID-19 pandemic
COVID-19 was declared a pandemic by the
World Health Organizationon March 11, 2020. In the first quarter of fiscal 2021, concerns related to the spread of COVID-19 created global business disruptions as well as disruptions in our operations and created potential negative impacts on our revenues and other financial results. 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 continue to conduct business with substantial modifications to employee travel, employee work locations, virtualization or cancellation of customer and employee events, and remote sales, implementation, and support activities, among other modifications. These decisions may delay or reduce sales and harm productivity and collaboration. 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 on-going 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.
Tax Benefit Preservation Plan
March 4, 2019, we entered into the Tax Benefits Preservation Plan in the form of a stockholder rights agreement ("Rights Agreement") and issued a dividend of one preferred share purchase right (a "Right") for each share of common stock payable on March 15, 2019to the stockholders of record of such shares on that date. Each Right entitles the registered holder, under certain circumstances, to purchase from us one one-hundredth of a share of Series A Participating Preferred Stock, par value $0.01per share (the "Preferred Shares"), of the Company, at a price of $8.00per one one-hundredth of a Preferred Share represented by a Right (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in the Rights Agreement. The Rights are not exercisable until the Distribution Date (as defined in the Rights Agreement). Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. At any time prior to ten (10) business days after the time any person becomes an Acquiring Person (as defined in the Rights Agreement), the Board may redeem the Rights in whole, but not in part, at a price of $0.0001per Right (the "Redemption Price"). The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
Rights expired at close of business on
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with
U.S.GAAP, which requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could differ from these estimates under different assumptions and conditions. 42 -------------------------------------------------------------------------------- The significant accounting policies and methods used in the preparation of our consolidated financial statements are described in Note 2, "Significant Accounting Policies," to our consolidated financial statements set forth in Part II, Item 8, of this Form 10-K. We believe our critical accounting policies for revenue recognition and goodwill and other intangible assets use the most significant estimates, judgments, and assumptions in the preparation of our consolidated financial statements.
Our revenue is derived from software license sales and related third-party hardware and support services, as well as professional services and support fees related to our software licenses.
The Company recognizes revenue from contracts with customers using a five-step model, which is described below:
• identify the customer contract; • identify performance obligations that are distinct; • determine the transaction price;
• allocate the transaction price to the various performance obligations; and
• recognize revenue as performance obligations are met.
Identify the customer contract
A customer contract is generally identified when there is approval and commitment on the part of the Company and its customer, the rights have been identified, the terms of payment are identified, the contract has commercial substance and the recoverability and consideration are probable.
Identify performance obligations that are distinct
A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.
Determine the price of the transaction
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for the transfer of goods or services to a customer, excluding sales taxes and VAT which are levied on behalf of government agencies.
Attribute the transaction price to separate performance obligations
The transaction price is allocated to each performance obligation based on the relative standalone selling prices ("SSP") of the goods or services being provided to the customer. Our contracts typically contain multiple performance obligations, for which we account for individual performance obligations separately, if they are distinct.
Recognize revenue as performance obligations are met
We enter into contracts that include combinations of license, support, professional services, and third-party products, which are accounted for as separate performance obligations with differing revenue recognition patterns. Revenue is recognized when or as control of the promised goods or services is transferred to customers. Our software licenses are primarily delivered on a perpetual basis, whereby the customer receives rights to use the software for an indefinite time period or a specified term and delivery and revenue recognition occurs at the point in time when the customer has the ability to download or access the software. Our customers may also contract with us for a Software as a Service ("SaaS") type license, whereby the customer only has a right to access the software for a defined term. 43 --------------------------------------------------------------------------------
SaaS licenses are accounted for in proportion to the subscription period from the date the license is made available to customers.
Our services revenue is comprised of support services and professional services. Support services consist of software upgrades on a when-and-if available basis, telephone support, bug fixes or patches and general hardware maintenance support. Revenue related to support services is recognized ratably over the term of the contract. Professional services are recognized as the services are performed. Revenues attributable to third-party products typically consist of hardware and related support contracts. Hardware products are typically recognized when control is transferred to the customer, which is defined as the point in time when the client can use and benefit from the hardware. In situations where the hardware is distinct and it is delivered before services are provided and is functional without services, control is transferred upon delivery or acceptance by the customer. Revenue attributable to third-party support contracts is recognized ratably over the term of the contract.
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 the SSP. The corresponding revenue is recognized as the related performance obligations are satisfied. Judgment is required to determine the SSP for each distinct performance obligation. We determine SSP based on the price at which the performance obligation is sold separately and the methods of estimating SSP under the guidance of Accounting Standards Codification ("ASC") 606-10-32-33. If the SSP is not observable through past transactions, we estimate the SSP, taking into account available information such as market conditions, expected margins, and internally approved pricing guidelines related to the performance obligations. We sell software either in a bundle (historically called Framework) or as part of "a la carte" contracts with multiple performance obligations with separate pricing for the software, services, and hardware. When we sell a bundled license, our software products and services, including updates, are sold for one fixed price and we recognize the portion of the transaction price allocated to the software license on a residual basis, as the bundle has at least one performance obligation for which the SSP is observable: hardware and/or support services. We note that both hardware and support services have observable standalone pricing. When our software is sold on an "a la carte" basis, revenue is allocated to the software performance obligation using the residual method, as we have observable SSP for the associated support services that are sold with the software license based on historical observable data of selling support contracts on a standalone basis. We may also license our software as a SaaS type license, whereby our customer only has a right to access the software over a specified time period and the service includes technical support and unspecified upgrades and bug fixes. We recognize the full value of the SaaS contract ratably over the contractual term of the SaaS license, as we cannot bifurcate the separate elements on a standalone basis and the elements have never been sold separately in a SaaS arrangement. Our services revenue is comprised of software license implementation, engineering, training and reimbursable expenses. Services are sold on both a standalone basis and as part of our customer contracts with multiple performance obligations. For implementation, engineering and training services, revenue is recognized on an input method as hours are incurred and services are provided compared to total estimated hours. We estimate the SSP for fixed price services based on estimated hours adjusted for historical experience using the time and material rates charged in standalone service arrangements. When sold on a time and materials basis, SSP for services is determined by observable prices in standalone service arrangements. Certain engineering services sold with support contracts are not distinct in the context of the contract and those services are bundled with other distinct services to form a single stand ready performance obligation, which is recognized ratably over the relevant service period. We have utilized the cost-plus margin method to determine the SSP for our Framework software support services offerings and hardware sales. When support services are sold on an "a la carte" basis with our software offerings, we typically determine the SSP of these support services based on this pricing relationship and observable data from standalone sales of support contracts. The expected cost-plus margin for hardware is based on the cost of the hardware from third parties, plus a reasonable markup that we believe is reflective of a market-based reseller 44 -------------------------------------------------------------------------------- margin. When observable standalone pricing for support service offerings are not readily available, we then revert to the cost-plus margin method to determine the SSP for the support 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 an average standard industry discount rate that reflects the customer's creditworthiness. Payment terms with customers typically require payment 30 days from invoice date. Our agreements with customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise a concern over delivered products or services, we have endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented. We occasionally enter into amendments to previously executed contracts that may constitute contract modifications. The amendments are assessed to determine if (1) the additional products and services are distinct from the product and services in the original arrangement; and (2) the amount of consideration expected for the added products and services reflects the SSP of those products and services. A contract modification meeting both criteria is accounted for as a separate contract. An amendment or 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.
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 such estimates are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events or circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results.
Goodwillis tested for impairment annually and more frequently if events and circumstances indicate that the asset might be impaired. We have determined that there is a single reporting unit for the purpose of conducting the goodwill impairment assessment. A goodwill impairment is recorded if the amount by which our carrying value exceeds our fair value, not to exceed the carrying amount of goodwill. Factors that could lead to a future impairment include material uncertainties such as a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline in our market value as a result of a significant decline in our stock price. The Company performed a goodwill impairment test as of August 1, 2021using a quantitative approach. The Company considered macroeconomics, industry-specific and Company specific factors, and estimates and assumptions in its analysis. The Company estimated the fair value of its reporting unit using the income (otherwise known as the discounted cash flows model) and market approaches and determined there was no impairment as the fair value exceeded the carrying value 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.
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