2018 ANNUAL REPORT AND PROXY
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For 25 years, SeaChange has pioneered
solutions to help video providers across the
globe manage and monetize their content.
As the video industry rapidly evolves to meet
the “anytime, anywhere” demands of today’s
viewers, SeaChange’s comprehensive content,
business, experience, and advertising
management solutions provide a mature,
network-agnostic, cloud-enabled platform of
scalable core capabilities that video providers
of all types need to create the personalized
experiences that drive viewer engagement.
Letter from the CEO
Dear Fellow Shareholders,
I am pleased and proud to report that fiscal 2018 was a very successful year for SeaChange
International. During the past year we completed a restructuring and transformation of the
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a major achievement for our entire team, and I am grateful to our employees around the world who
worked diligently to accomplish this goal, as we reposition the company to address the continued
rapid and dramatic evolution of our industr
y.
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Taken together, these actions have provided a strong foundation for future revenue growth and
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Our industry and markets are changing, and we are leveraging those shifts to our advantage:
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their choice, anytime and anywhere.
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content directly to consumers on any device, as they seek to increase customer engagement and
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lower operating cost, must also deliver a seamless viewing experience across all devices.
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•
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to continue to roll out over the next several years.
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•
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•
and has already won a handful of new customers.
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customers who need to quickly and easily deploy a full video management, delivery and
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to content owners.
To achieve our strategy, we have created a product roadmap that will drive industry evolution and shape
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(cid:73)
industry expertise to develop meaningful, innovative product offerings that provide customers with a
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has shown exceptional skills in guiding SeaChange to the next level of product innovation, working with
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•
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Similarly, we have also engaged technology partners who augment our product offerings with
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direction during this transformational year.
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(cid:71)(cid:76)(cid:74)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:69)(cid:92)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:3)(cid:86)(cid:68)(cid:87)(cid:76)(cid:86)(cid:73)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:85)(cid:76)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:88)(cid:80)(cid:72)(cid:85)(cid:86)(cid:17)(cid:3)(cid:58)(cid:76)(cid:87)(cid:75)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:79)(cid:92)(cid:3)(cid:86)(cid:70)(cid:68)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:15)(cid:3)(cid:85)(cid:72)(cid:79)(cid:76)(cid:68)(cid:69)(cid:79)(cid:72)
(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3)(cid:89)(cid:76)(cid:71)(cid:72)(cid:82)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:71)(cid:89)(cid:72)(cid:85)(cid:87)(cid:76)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:79)(cid:68)(cid:87)(cid:73)(cid:82)(cid:85)(cid:80)(cid:86)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:81)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:79)(cid:79)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:3)(cid:82)(cid:81)
(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:71)(cid:76)(cid:74)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:80)(cid:72)(cid:71)(cid:76)(cid:68)(cid:3)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:92)(cid:3)(cid:87)(cid:85)(cid:72)(cid:81)(cid:71)(cid:86)(cid:17)(cid:3)(cid:58)(cid:72)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:72)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:3)(cid:92)(cid:82)(cid:88)(cid:85)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:3)(cid:80)(cid:82)(cid:89)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:88)(cid:76)(cid:79)(cid:71)(cid:3)(cid:88)(cid:83)(cid:82)(cid:81)
(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:75)(cid:76)(cid:72)(cid:89)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:86)(cid:87)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:868)(cid:85)(cid:80)(cid:79)(cid:92)(cid:3)(cid:72)(cid:86)(cid:87)(cid:68)(cid:69)(cid:79)(cid:76)(cid:86)(cid:75)(cid:3)(cid:54)(cid:72)(cid:68)(cid:38)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)(cid:74)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:79)(cid:72)(cid:68)(cid:71)(cid:72)(cid:85)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:76)(cid:74)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)
(cid:80)(cid:72)(cid:71)(cid:76)(cid:68)(cid:3)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:92)(cid:15)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:868)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:17)
Sincerely,
(cid:40)(cid:71)(cid:3)(cid:55)(cid:72)(cid:85)(cid:76)(cid:81)(cid:82)
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72) (cid:50)(cid:73)(cid:868)(cid:70)(cid:72)(cid:85)
SEACHANGE INTERNATIONAL, INC.
50 Nagog Park
Acton, Massachusetts 01720
NOTICE OF 2018 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 12, 2018
The Annual Meeting of Stockholders of SeaChange International, Inc. (SeaChange or the Company) will
be held at SeaChanges offices, located at 50 Nagog Park, Acton, Massachusetts 01720, on Thursday, July 12, 2018
at 10:00 a.m., local time, to consider and act upon each of the following matters:
1.
2.
3.
4.
To elect the nominees named in the proxy statement to the Board of Directors to serve for three-year terms as
Class I Directors.
To conduct an advisory vote on the compensation of the Companys named executive officers.
To ratify the appointment of the Companys independent registered public accounting firm.
To transact such other business as may properly come before the meeting and any adjournments thereof.
Stockholders entitled to notice of and to vote at the meeting shall be determined as of the close of business on
May 23, 2018, the record date fixed by the Board of Directors for such purpose.
IF YOU PLAN TO ATTEND:
Please call David McEvoy at 978-889-3004 if you plan to attend. Please bring valid picture identification, such
as a drivers license or passport. Stockholders holding stock in brokerage accounts (street name holders) will also
need to bring a copy of a brokerage statement reflecting stock ownership as of the record date. Cameras, cell phones,
recording devices and other electronic devices will not be permitted at the meeting.
By Order of the Board of Directors,
David McEvoy
Senior Vice President, General Counsel and Secretary
Acton, Massachusetts
May 25, 2018
Whether or not you expect to attend the meeting, please complete, date and sign the enclosed proxy and
mail it promptly in the enclosed envelope to ensure representation of your shares. No postage need be affixed
if the proxy is mailed in the United States. If you are the registered holder of the shares, you may rather
choose to vote via the Internet or by telephone. If your shares are held in a bank or brokerage account, you
may be eligible to vote electronically or by telephone. Please refer to the enclosed form for instructions.
2018 ANNUAL MEETING OF STOCKHOLDERS
PROXY STATEMENT
TABLE OF CONTENTS
Information Regarding Voting and Proxies
OWNERSHIP OF SECURITIES
Securities Ownership Of Certain Beneficial Owners And Management
PROPOSAL NO. I ELECTION OF DIRECTORS
Class I Directors (Terms Expire at 2018 Annual Meeting)
Class II Directors (Terms Expire at 2019 Annual Meeting)
Class III Directors (Terms Expire at 2020 Annual Meeting)
CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS
Determination of Director Independence
Stockholder Proposals
Availability of Corporate Governance Documents
Board Meetings
Board Leadership Structure
Board Oversight of Risk
Board Committees
Audit Committee
Compensation Committee
Corporate Governance and Nominating Committee
Qualifications of Director Candidates
Procedures for Stockholders to Recommend Director Candidates
Process for Stockholders to Communicate with Directors
Compensation of Directors
Report of the Audit Committee
INFORMATION CONCERNING EXECUTIVE OFFICERS
COMPENSATION DISCUSSION AND ANALYSIS
Executive Summary
Compensation Objectives
Setting Executive Compensation
Fiscal 2018 Executive Compensation Components
Fiscal 2019 Executive Compensation Components
Tax and Accounting Implications
Summary Compensation Table
Grants of Plan-Based Awards
Outstanding Equity Awards at Fiscal Year-End
Option Exercises and Stock Vested
Pension Benefits
Nonqualified Deferred Compensation
Potential Payments upon Termination or Change in Control
Compensation Committee Report
Compensation Committee Interlocks and Insider Participation
CEO Pay Ratio
PROPOSAL NO. II ADVISORY VOTE ON COMPENSATION OF NAMED EXECUTIVE OFFICERS
PROPOSAL NO. III RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Independent Registered Public Accounting Firm for Fiscal 2019
Principal Accountant Fees and Services
OTHER MATTERS
Expenses and Solicitation
Section 16(a) Beneficial Ownership Reporting Compliance
Certain Relationships and Related Transactions
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SEACHANGE INTERNATIONAL, INC.
50 Nagog Park
Acton, Massachusetts 01720
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
July 12, 2018
May 25, 2018
Proxies in the form enclosed with this proxy statement are solicited by the Board of Directors (the Board) of
SeaChange International, Inc. (SeaChange or the Company) for use at the Annual Meeting of Stockholders (the
Annual Meeting) to be held on Thursday, July 12, 2018, at 10:00 a.m., local time, at SeaChanges offices, located
at 50 Nagog Park, Acton, Massachusetts 01720.
Only stockholders of record as of the close of business on May 23, 2018 (the Record Date) will be entitled
to vote at the Annual Meeting and any adjournments thereof.
SeaChange is pleased to take advantage of the U.S. Securities and Exchange Commission (the SEC) rules
that allow companies to furnish their proxy materials over the Internet. We believe that this process allows
SeaChange to provide its stockholders with the information they need in a timelier manner, while reducing the
environmental impact and lowering the costs of printing and distributing its proxy materials.
As a result, SeaChange is mailing to most of its stockholders of record entitled to vote at the Annual Meeting
on or about May 31, 2018, a Notice Regarding the Availability of Proxy Materials (sometimes referred to as the
Notice) instead of a paper copy of this proxy statement and SeaChanges 2018 Annual Report. The Notice
contains instructions on how to access those documents over the Internet. The balance of SeaChanges stockholders
entitled to vote at the annual meeting will be mailed on or about May 31, 2018 a printed copy of the proxy materials.
Information Regarding Voting and Proxies
Stockholders may vote in one of the following two ways:
1.
if you receive a copy of the proxy materials by mail, by completing, signing and dating the enclosed proxy
card and returning it in the enclosed postage paid envelope by return mail; or
2.
by completing a proxy on the Internet at the address listed on the proxy card or Notice.
Any proxy may be revoked by a stockholder at any time before its exercise by either delivering written
revocation or a later dated proxy to the Secretary of SeaChange, entering a new vote by Internet or telephone, or
attending the Annual Meeting of Stockholders and voting in person. Only your latest dated proxy will count.
All properly completed proxy forms returned in time to be cast at the Annual Meeting will be voted.
Stockholders are being asked to vote with respect to the election of Class I Directors, an advisory vote on the
compensation of the Companys named executive officers and the ratification of the selection of SeaChanges
independent registered public accounting firm. Where a choice has been specified on the proxy card with respect to
each proposal, the shares represented by the proxy will be voted in accordance with your specifications. If no
specification is indicated on the proxy card, the shares represented by the proxy will be voted FOR the nominees
named herein for election to the Board of Directors to serve as Class I Directors, FOR approval of the compensation
of the Companys named executive officers, and FOR the ratification of the selection of SeaChanges independent
registered public accounting firm.
A majority-in-interest of the outstanding shares represented at the Annual Meeting in person or by proxy shall
constitute a quorum for the transaction of business. Votes withheld from any nominee, abstentions and broker non-
votes are counted as present or represented for purposes of determining the presence or absence of a quorum for the
meeting. A non-vote occurs when a nominee holding shares for a beneficial owner votes on one proposal, but does
1
not vote on another proposal because the nominee does not have discretionary voting power and has not received
instructions from the beneficial owner. On all matters being submitted to stockholders at this Annual Meeting, an
affirmative vote of at least a majority of the shares present, in person or represented by proxy, and voting on that
matter is required for approval or ratification. An automated system administered by Broadridge Financial Solutions,
Inc. tabulates the votes. The vote on each matter submitted to stockholders is tabulated separately. Abstentions, as
well as broker non-votes are not considered to have been voted for such matters and have the practical effect of
having no impact on the outcome of the vote.
The Board of Directors knows of no other matter to be presented at the Annual Meeting. If any other matter
should be presented at the Annual Meeting upon which a vote properly may be taken, shares represented by all
proxies received by the Board of Directors will be voted with respect thereto in accordance with the judgment of the
persons named as proxies and in accordance with the SECs proxy rules. See Stockholder Proposals herein at page
9. The persons named as proxies, Peter Faubert and David McEvoy, were selected by the Board of Directors and are
executive officers of SeaChange.
2
OWNERSHIP OF SECURITIES
Securities Ownership Of Certain Beneficial Owners And Management
The following table sets forth information regarding the beneficial ownership of SeaChange common stock as
of May 23, 2018 by:
each person or entity who is known by SeaChange to beneficially own more than five percent (5%) of the
common stock of SeaChange;
each of the directors of SeaChange and each of the executive officers of SeaChange named in the
Summary Compensation Table on page 26; and
all of the directors and executive officers of SeaChange as a group.
Except for the named executive officers and directors, none of these persons or entities has a relationship with
SeaChange, except as disclosed below under Certain Relationships and Related Transactions. Unless otherwise
indicated, the address of each person or entity named in the table is c/o SeaChange International, Inc., 50 Nagog
Park, Acton, Massachusetts 01720, and each person or entity has sole voting power and investment power (or shares
such power with his or her spouse), with respect to all shares of capital stock listed as owned by such person or
entity.
The number and percentage of shares beneficially owned is determined in accordance with the rules of the
SEC, and is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial
ownership includes any shares as to which a person has sole or shared voting power or investment power and also
any shares of common stock underlying restricted stock units (RSUs), performance stock units (PSUs), deferred
stock units (DSUs), options or warrants that are exercisable by that person within sixty (60) days of May 23, 2018.
However, these shares underlying options or warrants are not treated as outstanding for the purpose of computing
the percentage ownership of any other person or entity. Percentage of beneficial ownership is based on 35,623,219
shares of SeaChanges common stock outstanding as of May 23, 2018.
Name
Edward Terino
Jonathan Rider
Peter Faubert
David McEvoy
Mark Bonney
Mary Palermo Cotton
William F. Markey, III
Andrew Sriubas
Royce E. Wilson
Ariel Investments, LLC (2)
200 E. Randolph Street
Suite 2900
Chicago, IL 60601
NNeuberger Berman Investment Advisors LLC (3)
1290 Avenue of the Americas
NNew York, NY 10104
Dimensional Fund Advisors, LP (4)
Building One
6300 Bee Cave Road
Austin, TX 78746
All Executive Officers and Directors as a group (9 persons) (5)
3
Amount and
Nature of
Beneficial
Ownership (1)
(#)
Percent of
Common
Stock
Outstanding
283,651
94,871
68,467
89,382
38,023
217,426
87,871
52,072
100,610
*
*
*
*
*
*
*
*
*
2,930,417
8.2%
2,175,576
6.1%
1,802,724
1,032,373
5.1%
2.9%
Less than 1%
*
(1) Includes shares of Common Stock which have not been issued but are subject to options which either are
presently exercisable or will become exercisable within sixty (60) days of May 23, 2018, as follows:
Mr. Terino: 64,537 shares; Mr. Rider: 87,414 shares; Mr. Faubert: 64,157 shares; and Mr. McEvoy: 28,559
shares. Includes RSUs and DSUs that will have vested within sixty (60) days of May 23, 2018, as follows:
Mr. Terino: 13,793 RSUs; Mr. Bonney: 38,023 DSUs Ms. Cotton: 35,842 DSUs; Mr. Markey: 35,842 DSUs;
Mr. Sriubas: 38,023 DSUs and Mr. Wilson: 35,842 DSUs.
(2) According to a Schedule 13G/A filed on February 13, 2018, Ariel Investments, LLC may be deemed to have
sole voting power with respect to 2,510,052 of the above-mentioned shares and sole dispositive power with
respect to 2,930,417 of the above-mentioned shares.
(3) According to a Schedule 13G/A filed on February 15, 2018, Neuberger Berman Investment Advisors LLC may
be deemed to have shared dispositive power with respect to all 2,175,576 of the above-mentioned shares and
shared voting power over 1,718,477 of the above-mentioned shares with its clients.
(4) According to an amended Schedule 13G/A filed on February 9, 2018, Dimensional Fund Advisors LP may be
deemed to have sole dispositive power with respect to all 1,802,724 of the above-mentioned shares and sole
voting power over 1,697,939 of the above-mentioned shares. Dimensional Fund Advisors LP serves as
investment advisor to four investment companies and serves as investment manager to certain other
commingled group trusts and investment accounts, which own the above-mentioned shares. Dimensional Fund
Advisors LP disclaims beneficial ownership of such shares.
(5) This group is comprised of those individuals named in the Summary Compensation Table on page 26 and those
persons who were directors of SeaChange as of May 23, 2018. Includes an aggregate of 442,032 shares of
Common Stock which the directors and executive officers, as a group, have the right to acquire by exercise of
stock options or will acquire upon vesting of RSUs or DSUs within sixty (60) days of May 23, 2018.
4
PROPOSAL NO. I
ELECTION OF DIRECTORS
SeaChanges Board of Directors currently consists of six members, five of whom are independent, non-
employee directors. The Board of Directors is divided into three classes. Each class is elected for a term of three
years, with the terms of office of the directors in the respective classes expiring in successive years.
The present term of the current Class I Directors, Mr. Bonney and Ms. Cotton, expires at the Annual Meeting.
The Board of Directors, based on the recommendation of the Corporate Governance and Nominating Committee,
has nominated Mr. Bonney and Ms. Cotton for re-election as Class I Directors. The Board of Directors knows of no
reason why either of these nominees should be unable or unwilling to serve, but if that should be the case, proxies
may be voted for the election of some other person selected by the Board. Mr. Bonney and Ms. Cotton have each
consented to being named in this proxy statement as a nominee to be a Class I Director and to serving in that
capacity, if elected.
The Board of Directors unanimously recommends a vote FOR the Nominees listed below.
The following table sets forth, for the Class I nominees to be elected at the Annual Meeting and each of the
other current directors, the year the nominee or director was first appointed or elected a director, the principal
occupation of the nominee or director during at least the past five years, any other public company boards on which
the nominee or director serves or has served in the past five years, the nominees or directors qualifications to serve
on the Board and the age of the nominee or director. In addition, included in the information presented below is a
summary of each nominees or directors specific experience, qualifications, attributes and skills that led the Board
to the conclusion that he or she should serve as a director.
Class I Directors (Terms Expire at 2018 Annual Meeting)
Directors Name
and Year First
Became Director
Mark Bonney
(2017)
Position and Principal Occupation and Business Experience During the Past Five Years
Director
Mark Bonney, 64, has served as a Director of SeaChange since August 2017. Mr. Bonney most
recently served as President and Chief Executive Officer of MRV Communications, Inc.
(NASDAQ: MRVC) from December 2014 until its sale in August 2017 and as a director of
MRV Communications, Inc. from April 2013 to August 2017. Mr. Bonney has served as a
Director of Zix Corporation (NASDAQ: ZIXI) since January 2013 and serves as a member of its
Audit Committee and its Nominating & Corporate Governance Committee. Mr. Bonney also
serves as a Director of Community eConsult Network, Inc., a not-for-profit corporation engaged
in medical consultative services, and is Chairman Emeritus of Community Health Centers, Inc.
Mr. Bonney has held senior financial and management roles at Black & Decker, Zygo
Corporation, Axsys Technologies, Inc., American Bank Note Holographics, Inc. and Direct
Brands leading up to Chief Financial Officer, President and Chief Executive Officer. In addition
to his current directorships he has served as a director of Axsys, American Bank Note
Holographics, Threecore, Inc., ASearch LLC and Sigma Designs. Mr. Bonney also founded and
served as former Chairman of the Angel Investor Forum. Mr. Bonney holds a BS in Business
Administration from Central Connecticut State University and an MBA in Finance from the
University of Hartford. Mr. Bonney brings more than 35 years of senior financial and
operational experience with middle-market high tech companies in the U.S. and abroad which is
highly valued by our Board.
5
Mary Palermo
Cotton
(2004)
Director
Mary Palermo Cotton, 60, has served as a Director of SeaChange since September 2004. Since
April 2017, Ms. Cotton has served as Senior Advisor, VT iDirect a leading provider of satellite-
based communications technology. In this role she advises the company on key strategic
initiatives. For the previous 10 years Ms. Cotton held the position of Chief Executive Officer and
Director of VT iDirect. Previously, Ms. Cotton was a Senior Vice President of SAP, an enterprise
software provider, as a result of SAPs June 2006 acquisition of Frictionless Commerce. Prior to
the acquisition, Ms. Cotton had been the Chief Executive Officer of Frictionless Commerce, a
company providing supplier relationship management software since February 2005. From
February 2003 to July 2004, Ms. Cotton was a Senior Advisor to Aspen Technology, a software
service provider, and previously served as Aspens Chief Operating Officer from January 2001 to
January 2003. Ms. Cotton additionally served on the Board of Directors of Precise Software
Solutions from June 2000 to June 2003 when Precise Software Solutions was acquired by
VERITAS Software. Ms. Cotton contributes extensive executive experience in the global
software industry as well as extensive financial reporting expertise to our Board deliberations.
6
Class II Directors (Terms Expire at 2019 Annual Meeting)
Directors Name
and Year First
Became Director
Andrew
Sriubas
(2017)
Royce E.
Wilson
(2015)
Position and Principal Occupation and Business Experience During the Past Five Years
Director
Andrew Sriubas, 49, has served as a Director of SeaChange since August 2017. In addition,
Mr. Sriubas serves as Chief Commercial Officer of Outfront Media since August 2017, and
dd
ppreviously served as Executive Vice President of Strategic Planning & Development since July
2014. Mr. Sriubas began his career with Citibank in media and tech investment banking and held
2014. Mr. Sriubas began his career with Citibank in media and tech investment banking and held
d
managing director roles at other firms including Donaldson Lufkin Jenrette, UBS, and JP
Morgan, before joining Sonifi as Chief Strategist and Head of Corporate Development.
Mr. Sriubas is a member of the Advisory Committee of Palisades Growth Capital, and also serves
ffof
as an advisor to Secure Mobile Contact System Co. and Tout Inc. Mr. Sriubas is also a director
the Jack Kemp Foundation. Mr. Sriubas holds a BS in Finance from the Carroll School
ffof
Management at Boston College. Mr. Sriubas has been an advisor to the SeaChange board since
May 2016, and is a member of the Companys Advisory Board that works with the management
team on strategic and technology matters. Mr. Sriubas contributes his experience as a former
rr
telecom, media and technology banker; his experience developing new technologies to advance
innovative business models as he has for the digital theatre industry, hospitality industry and now
in his capacity re
drawing the out of home/location media landscape.
g
Director
Royce E. Wilson, 61, has served as a Director of SeaChange since February 2015. Mr. Wilson is
a founding partner of New Form Digital, a developer of original cinematic stories on digital
platforms, since January 2014; President and Chief Executive Officer of Dreamcatcher
Broadcasting, which owns 3 television stations, since July 2013; and President of Dreamcatcher
Media, an angel investment and consulting company, since January 2011. Mr. Wilson was
Executive Chairman of Timeline Labs (acquired by SeaChange in February 2015) from June
2011 to January 2015, having also served as its President and Chief Executive Officer from 2011
through 2013. Mr. Wilson was President of Tribune Broadcasting Company and Chief Revenue
Officer of The Tribune Company, which owned 23 television stations, from February 2008 to
April 2010; President of FOX Television Network from 2004-2008; President of NBC
Enterprises and Syndication from 2000-2004; and President of CBS Enterprises from 1996-2000.
Prior to that Mr. Wilson also held executive positions at Maxam Entertainment, Sony Pictures
TV, and Paramount Pictures. Mr. Wilson also serves as a director of MVPindex, a social media
index for sports and entertainment since January 2016 and of Newzulu Limited, a global crowd-
sourced technology and media company, since August 2016. In addition, Mr. Wilson serves as a
Trustee to Southern Methodist University since July 2008, and as a Director to the San Diego Zoo
since February 2014. Mr. Wilson contributes extensive management experience in traditional and
emerging media markets, developing key strategic partnerships and using new approaches to
create innovative solutions.
7
Class III Directors (Terms Expire at 2020 Annual Meeting)
Nominees Name
and Year First
Became Director
William Francis
Markey, III
(2016)
Edward Terino
(2010)
Position and Principal Occupation and Business Experience During the Past Five Years
Chairman of the Board of Directors
William Francis Markey, III, 52, has served as a member of our Board of Directors since March
2016. Since October 2002, Mr. Markey has been the Founder and President of the Relevant C
Business Group (RCBG), a private consulting firm that assists companies with strategy and
d
execution, often around emerging technologies, in the areas of telecom, media and technology.
Prior to that Mr. Markey was a co-founder of Ucentric Systems, a software company that
t
pprovided connected home software solutions to television operators, that was acquired by
Motorola, and also held various management positions at 3Com, Motorola, Pacific Tele
sis and
d
Preview Media. Mr. Markey holds a BA from Georgetown University, an MS from Columbia
University and an MA from Johns Hopkins University. Mr. Markey is a member of various
advisory boards and is a trustee of Lake Forest Academy in Illinois. Mr. Markey has extensive
experience in corporate development, business strategy, and mergers and acquisitions in
technology and media.
Chief Executive Officer and Director
Edward Terino, 64, became Chief Executive Officer on April 6, 2016, after being appointed
Chief Operating Officer and Executive Vice President on June 3, 2015. Mr. Terino has served as
a member of our Board of Directors since July 2010, where he was formerly Chairman of the
Audit Committee and a member of the Compensation Committee. Mr. Terino has served as
President of GET Advisory Service LLC, a strategic and financial management consulting firm
focused on the technology and maritime industries since March 2009. From March 2010 to July
2015, Mr. Terino served as a director of Baltic Trading Ltd., a NYSE listed international dry
bulk shipping company (NYSE:BALT), where he was the Chairman of the Audit Committee
and a member of the Compensation Committee. From October 2012 to November 2013, Mr.
Terino served as a director of Extreme Networks, Inc., a NASDAQ listed network switching and
services company (NASDAQ:EXTR), where he was a member of the Audit Committee. From
April 2007 through February 2012, Mr. Terino served as a director of S1 Corporation, a
NASDAQ listed internet banking and payments software company (NASDAQ:SONE), where he
was Chairman of the Audit Committee and a member of the Compensation Committee. In
February 2012, S1 Corporation was acquired by ACI Worldwide, Inc. From November 2009 to
November 2010, Mr. Terino served as a director of Phoenix Technologies Ltd., a NASDAQ
listed BIOS software company (NASDAQ:PTEC), where he was the Chairman of the Audit
Committee and a member of the Compensation Committee. In November 2010, Phoenix
Technologies Ltd. was acquired by Marlin Equity Partners. From October 1999 to March 2006,
Mr. Terino served as a director of EBT International Inc., a NASDAQ listed web content
management software company (NASDAQ:EBTI), where he was Chairman of the Audit
Committee and a member of the Compensation Committee. From July 2005 through December
2008, Mr. Terino was Chief Executive Officer and Chief Financial Officer of Arlington Tankers
Ltd., a NYSE listed international seaborne transporter of crude oil and petroleum products
(NYSE:ATB). In December 2008 Arlington Tankers Ltd. merged with General Maritime
Corporation. From September 2001 to June 2005, Mr. Terino was Senior Vice President, Chief
Financial Officer, and Treasurer of Art Technology Group, Inc. Art Technology Group, Inc. was
acquired by Oracle Corporation in 2011. Prior to 2001, Mr. Terino held senior financial and
operational management positions over a 15-year period with several publicly traded technology
and educational publishing companies. Mr. Terino began his career at Deloitte & Touche and
spent 9 years in their consulting services organization. Mr. Terino earned a BS degree in
Management from Northeastern University and he earned a MBA from Suffolk University.
8
CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS
Determination of Director Independence
The Board of Directors has determined that Ms. Cotton and Messrs. Bonney, Markey, Sriubas, and Wilson are
independent directors, meeting all applicable independence requirements of the SEC, including Rule 10A-3(b)(1)
pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), and the Marketplace Rules of
The NASDAQ Stock Market (NASDAQ). In making this determination, the Board of Directors affirmatively
determined that none of such directors has a relationship that, in the opinion of the Board of Directors, would
interfere with the exercise of independent judgment in carrying out the responsibilities of a director, including that
neither the identification in 2015 of Mr. Wilson as a director nominee by the former equityholders of TLL, LLC, the
terms of the Agreement and Plan of Merger dated December 22, 2014 for the acquisition of TLL, LLC nor
Mr. Wilsons prior management positions with TLL, LLC precluded a determination that Mr. Wilson qualified as
independent.
Stockholder Proposals
Proposals of stockholders intended to be presented at the 2019 Annual Meeting of Stockholders must be
received no later than the close of business on January 25, 2019 at SeaChanges principal executive offices in order
to be included in the SeaChange proxy statement for that meeting. Any such stockholder proposals should be
submitted to SeaChange International, Inc., 50 Nagog Park, Acton, Massachusetts, 01720, Attention: Secretary.
Under the By-Laws of SeaChange, stockholders who wish to make a proposal at the 2019 Annual Meeting other
than one that will be included in SeaChanges proxy materials must notify SeaChange no earlier than
December 26, 2018, and no later than January 25, 2019. If a stockholder who wishes to present a proposal fails to
notify SeaChange by January 25, 2019, the stockholder will not be entitled to present the proposal at the meeting. If,
however, notwithstanding the requirements of the By-Laws of SeaChange, the proposal is brought before the
meeting, then under the SECs proxy rules the proxies solicited by management with respect to the 2019 Annual
Meeting will confer discretionary voting authority with respect to the stockholders proposal on the persons selected
by management to vote the proxies. If a stockholder makes a timely notification, the proxies may still exercise
discretionary voting authority under circumstances consistent with the SECs proxy rules.
In order to curtail controversy as to the date on which a proposal will be marked as received by SeaChange, it
is suggested that stockholders submit their proposals by Certified Mail Return Receipt Requested.
Availability of Corporate Governance Documents
SeaChanges Code of Ethics and Business Conduct (Ethics Policy) for all directors and all employees of
SeaChange, including executive officers, and the charters for the Audit, Compensation, and Corporate Governance
and Nominating Committees of the Board of Directors are available on SeaChanges website at www.schange.com
the Investor Relations link. SeaChange will ensure that
under
amendments, if any, to these documents are disclosed and posted on this website within four (4) business days of
any such amendment.
the Corporate Governance section of
Board Meetings
The Board of Directors of SeaChange met sixteen (16) times and acted by written consent three (3) times
during the fiscal year ended January 31, 2018. During the fiscal year ended January 31, 2018, each then director
attended at least seventy-five percent (75%) of the total number of meetings of the Board of Directors and meetings
of all the committees of the Board on which they serve. SeaChange has a policy that its Board of Directors attends
SeaChanges Annual Meeting of Stockholders. Last year, all of the directors attended the Annual Meeting of
Stockholders that was held on July 13, 2017.
Board Leadership Structure
The Board of Directors has appointed an independent director to serve as Chairman of the Board of Directors.
The Board has adopted this structure to strike an effective balance between management and independent leadership
9
participation in the Board process. The function of the Chairman is to set the agenda for Board meetings and to
facilitate and improve communication between the independent directors and SeaChange by serving as the interface
between SeaChanges Chief Executive Officer, senior management and the independent directors. The Chairman
works with the chair of the Compensation Committee, if a separate person, to establish goals for the Chief Executive
Officer each fiscal year and conducts the annual Chief Executive Officer evaluation. Mr. Markey currently serves as
the Chairman and Chairman of the Corporate Governance and Nominating Committee.
Board Oversight of Risk
The Board oversees the business and strategic risks of SeaChange, including risks related to cybersecurity. The
Audit Committee oversees financial reporting, internal controls and compliance risks confronting SeaChange. The
Compensation Committee oversees risks associated with SeaChanges compensation policies and practices,
including performance-based compensation and change in control plans. The Corporate Governance and
Nominating Committee oversees risks relating to corporate governance and the process governing the nomination of
members of the Board. SeaChange provides a detailed description of the risk factors impacting its business in its
Annual Report on Form 10-K and if necessary, its Quarterly Reports on Form 10-Q filed with the SEC.
Board Committees
The Board has a standing Audit Committee, Compensation Committee, and Corporate Governance and
Nominating Committee. The members of each committee are appointed by the Board based on the recommendation
of the Corporate Governance and Nominating Committee. The members are set forth below in this proxy statement.
Actions taken by any committee of the Board are reported to the Board, usually at the next Board meeting following
a committee meeting. Each of these standing committees is governed by a committee-specific charter that is
reviewed periodically by the applicable committee pursuant to the rules set forth in each charter. The Board annually
conducts a self-evaluation of each of its committees. All members of all committees are independent directors.
Audit Committee
The Audit Committee members are Mr. Bonney (Chairman, effective May 1, 2018), Ms. Cotton (Chairman
during fiscal 2018 and until May 1, 2018), Mr. Markey and Mr. Sriubas, each of whom meet the independence
requirements of the SEC and NASDAQ, as described above. In addition, SeaChanges Board has determined that
each member of the Audit Committee is financially literate and that Mr. Bonney satisfies the requirement of the
Marketplace Rules applicable to NASDAQ-listed companies that at least one member of the Audit Committee
possess financial sophistication and that Mr. Bonney is an audit committee financial expert as defined in the rules
and regulations promulgated under the Exchange Act. The Audit Committees oversight responsibilities include
matters relating to SeaChanges financial disclosure and reporting process, including the system of internal controls,
the performance of SeaChanges internal audit function, compliance with legal and regulatory requirements, and the
appointment and activities of SeaChanges independent auditors. The Audit Committee met thirteen (13) times and
acted by written consent two (2) times during fiscal 2018. The responsibilities of the Audit Committee and its
activities during fiscal 2018 are more fully described under the heading Report of the Audit Committee contained
in this proxy statement.
Compensation Committee
The Compensation Committee members are Mr. Bonney (Chairman), Ms. Cotton and Mr. Sriubas, each of
whom meet the independence requirements of the SEC and NASDAQ, as described above. Among other things, the
including stock options, RSUs and other equity
Compensation Committee determines the compensation,
compensation, of SeaChanges management and key employees, administers and makes recommendations
concerning SeaChanges equity compensation plans, and ensures that appropriate succession planning takes place
for all levels of management, department heads and senior management. The Compensation Committee met nine
(9) times and acted by unanimous written consent five (5) times during fiscal 2018. The responsibilities of the
Compensation Committee and its activities during fiscal 2018 are more fully described in this proxy under the
heading, COMPENSATION DISCUSSION AND ANALYSIS.
10
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee members are Mr. Markey (Chairman), Ms. Cotton and
Mr. Wilson, each of whom meet the independence requirements of the SEC and NASDAQ, as described above. The
Corporate Governance and Nominating Committee is responsible for oversight of corporate governance at
SeaChange, recommending to the Board of Directors persons to be nominated for election or appointment as
directors of SeaChange and monitoring compliance with SeaChanges Code of Ethics and Business Conduct. The
Corporate Governance and Nominating Committee identifies Board candidates through numerous sources, including
recommendations from existing Board members, executive officers, and stockholders of SeaChange. Additionally,
the Corporate Governance and Nominating Committee may identify candidates through engagements with executive
search firms. The Corporate Governance and Nominating Committee met six (6) times and did not act by unanimous
written consent during fiscal 2018.
Qualifications of Director Candidates
In evaluating the suitability of individuals for Board membership, the Corporate Governance and Nominating
Committee takes into account many factors,
including whether the individual meets the requirements for
independence, his or her professional expertise and educational background, and the potential to contribute to the
diversity of viewpoints, backgrounds or experiences of the Board as a whole including diversity of experience,
gender, race, ethnicity and age. The Corporate Governance and Nominating Committee evaluates each individual in
the context of the entire Board, with the objective of recommending nominees who can best further the success of
SeaChanges business and represent stockholder interests. The Corporate Governance and Nominating Committee
assigns specific weights to particular criteria for prospective nominees. SeaChange believes that the backgrounds
and qualifications of directors, considered as a group, should provide a significant composite mix of experience,
knowledge and abilities that will allow the Board of Directors to fulfill its responsibilities. As part of the
consideration in fiscal 2018 by the Corporate Governance and Nominating Committee of candidates for election to
the Board, these criteria were reviewed. No changes to these criteria were recommended as a result of such review.
Procedures for Stockholders to Recommend Director Candidates
Stockholders wishing to suggest candidates to the Corporate Governance and Nominating Committee for
consideration as potential director nominees may do so by submitting the candidates name, experience, and other
relevant information to the SeaChange Corporate Governance and Nominating Committee, 50 Nagog Park, Acton,
Massachusetts 01720. SeaChange stockholders wishing to nominate directors may do so by submitting a written
notice to the Secretary of SeaChange at the same address in accordance with the nomination procedures set forth in
SeaChanges By-Laws. The procedures are summarized in this proxy statement under the heading Stockholder
Proposals. The Secretary will provide the notice to the Corporate Governance and Nominating Committee. The
Corporate Governance and Nominating Committee does not distinguish between nominees recommended by
stockholders and other nominees. All nominees must meet, at a minimum,
the qualifications described in
Qualifications of Director Candidates above.
Process for Stockholders to Communicate with Directors
Stockholders may write to the Board or a particular Board member by addressing such communication to the
Chairman of the Board, if directed to the Board as whole, or to an individual director, if directed to that particular
Board member, care of SeaChanges Secretary, at SeaChanges offices at 50 Nagog Park, Acton, Massachusetts
01720. Unless such communication is addressed to an individual director, SeaChange will forward any such
communication to each of the directors. Communication sent in any other manner, including but not limited to
email, text messages or social media will be forwarded to the entire Board of Directors. The Chairman of the Board
together with the Chief Executive Officer will determine the appropriate response to such communication.
Compensation of Directors
Directors who are employees of SeaChange receive no compensation for their services as directors, except for
reimbursement of expenses incurred in connection with attending meetings.
11
Non-employee directors received the following cash compensation in fiscal 2018:
A cash retainer of $45,000;
The Chairman of the Board received additional cash compensation of $25,000;
Each member of the Audit Committee received additional cash compensation of $7,500, other than the
Chairman, who received additional cash compensation of $15,000;
Each member of the Compensation Committee received additional cash compensation of $6,000, other
than the Chairman, who received additional cash compensation of $12,000; and
Each member of the Corporate Governance and Nominating Committee received additional cash
compensation of $5,000, other than the Chairman, who received additional cash compensation of $10,000.
Each member of the Strategy Committee received additional cash compensation of $5,000, other than the
Chairman, who received additional cash compensation of $10,000.
The Strategy Committee was
dissolved in August 2017.
In addition, each non-employee director is entitled to receive an annual grant of RSUs valued at $100,000,
granted on the date of our Annual Meeting and which vests in full one year from the grant date, subject to
acceleration in the event of a Change in Control. Our non-employee directors have the option to receive DSUs in
lieu of RSUs, and the shares underlying the DSU are not issued until the earlier of the director ceasing to be a
member of the Board or immediately prior to consummation of a Change in Control.
Newly appointed non-employee directors receive an initial grant of RSUs valued at $100,000, granted on the
date of the directors appointment or election to the Board of Directors, which vest annually in three (3) equal
tranches over a three (3) year period, subject to acceleration in the event of a Change in Control. Newly appointed
non-employee directors also receive (i) 100% of the annual grant of RSUs valued at $100,000 if their
appointment/election is within six (6) months of the Companys last Annual Meeting or (ii) 50% of the annual grant
of RSUs valued at $50,000 if their appointment/election is within six (6) months of the Companys next Annual
Meeting. New non-employee directors have the option to receive their initial grant in the form of DSUs rather than
RSUs (as described above with respect to the annual awards).
Director Compensation Fiscal 2018
Fees Earned or Paid in Cas
h
($)
32,250
68,000
78,000
29,250
50,000
70,875
36,750
Stock Awards (1)
($)
200,000
100,000
100,000
200,000
100,000
100,000
Total
($)
232,250
168,000
178,000
229,250
150,000
170,875
36,750
Name
Mark Bonney (2)
Mary Palermo Cotton
William F. Markey, III
Andrew Sriubas (3)
Royce E. Wilson
Steven Craddock (5)
Thomas Olson (6)
12
(1) The grant date fair value for each of these awards, aggregated in the above table, is as follows:
Name
Mark Bonney (2)
Mary Palermo Cotton
William F. Markey, III
Andrew Sriubas (3)
Royce E. Wilson
Steven Craddock (5)
Stock
Awards
(#DSUs,
except as
noted)
38,023 (4)
38,023
35,842
35,842
38,023
38,023
35,842
35,842
Total
Grant Date Fai
r
Value ($)
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
Date of Grant
8/24/2017
8/24/2017
7/12/2017
7/12/2017
8/24/2017
8/24/2017
7/12/2017
7/12/2017
(2) Mr. Bonney joined the Board of Directors on August 17, 2017, as previously reported on a Form 8-K filed with
the SEC on August 18, 2017.
The grant of RSUs and DSUs to Mr. Bonney on August 17, 2017 included
RSUs valued at $100,000 upon initial election to the Board as a non-employee director and the grant of DSUs
valued at $100,000 for the annual grant of such DSUs to non-employee directors.
(3) Mr. Sriubas joined the Board of Directors on August 17, 2017, as previously reported on a Form 8-K filed with
the SEC on August 18, 2017. The grant of DSUs to Mr. Sriubas on August 17, 2017 included DSUs valued at
$100,000 upon initial election to the Board as a non-employee director and the grant of DSUs valued at
$100,000 for the annual grant of such DSUs to non-employee directors.
(4) Mr. Bonney elected RSUs instead of DSUs for his initial grant.
(5) Mr. Craddock resigned from the Board of Directors on August 17, 2017.
(6) Mr. Olson resigned from the Board of Directors on July 18, 2017.
The table below shows the aggregate number of unvested stock awards and options for each non-employee
director as of January 31, 2018. Stock awards consist of DSUs (except as otherwise noted below) for which the
minimum one-year service period has not been satisfied.
Name
Mark Bonney (1)
Mary Palermo Cotton
William F. Markey, III
Andrew Sriubas (3)
Royce. E. Wilson
Aggregate Stock
Awards Outstandin
g
(#)
Aggregate Stock
Options Outstandin
g
(#)
76,046(2)
35,842
48,517
76,046
40,523
(1) Mr. Bonney joined the Board of Directors on August 17, 2017, as previously reported on a Form 8-K filed
with the SEC on August 18, 2017.
(2) Mr. Bonney elected RSUs instead of DSUs for his initial grant of 38,023 shares,
(3) Mr. Sriubas joined the Board of Directors on August 17, 2017, as previously reported on a Form 8-K filed
with the SEC on August 18, 2017.
Report of the Audit Committee
The Audit Committee currently consists of Mr. Bonney (Chairman), Ms. Cotton, Mr. Markey and Mr. Sriubas.
13
The Audit Committees primary duties and responsibilities are to:
Appoint, compensate and retain SeaChanges independent registered public accounting firm, and oversee
the work performed by the independent registered public accounting firm;
Assist the Board of Directors in fulfilling its responsibilities by reviewing the financial reports provided
by SeaChange to the SEC and SeaChanges stockholders;
Monitor the integrity of SeaChanges financial reporting process and systems of internal controls
regarding finance, accounting, and legal compliance;
Recommend, establish and monitor procedures designed to improve the quality and reliability of the
disclosure of SeaChanges financial condition and results of operations; and
Provide an avenue of communication among the independent registered public accounting firm,
management and the Board of Directors.
The Board of Directors has adopted a written charter setting out the functions the Audit Committee is to
perform. A copy of this may be found on SeaChanges website at www.schange.com under the Corporate
Governance section of the Investor Relations link.
Management has primary responsibility for SeaChanges consolidated financial statements and the overall
reporting process, including SeaChanges system of internal controls.
The independent registered public accounting firm audits the annual consolidated financial statements
prepared by management, expresses an opinion as to whether those consolidated financial statements fairly present,
in all material respects, the financial position, results of operations and cash flows of SeaChange in conformity with
accounting principles generally accepted in the United States of America, expresses an opinion on the effectiveness
of internal control over financial reporting and discusses with the Audit Committee any issues the independent
registered public accounting firm believes should be raised with SeaChange.
For fiscal 2018, the Audit Committee reviewed the audited consolidated financial statements of SeaChange
and met with both management and Grant Thornton LLP, SeaChanges independent registered public accounting
firm, to discuss those consolidated financial statements.
The Audit Committee has received from and discussed with Grant Thornton LLP the written disclosure and
the letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding
Grant Thornton LLPs communications with the Audit Committee concerning independence, and has discussed with
Grant Thornton LLP their independence. The Audit Committee also discussed with Grant Thornton LLP the matters
required to be discussed by Auditing Standard No. 1301, Communications with Audit Committees issued by the
Public Company Accounting Oversight Board.
Based on these reviews and discussions, the Audit Committee recommended to the Board of Directors that the
audited consolidated financial statements of SeaChange be included in its Annual Report on Form 10-K for the
fiscal year ended January 31, 2018. The Audit Committee also decided to retain Grant Thornton LLP as
SeaChanges independent registered public accounting firm for the 2019 fiscal year.
RESPECTFULLY SUBMITTED BY THE AUDIT
COMMITTEE OF THE BOARD OF DIRECTORS
Mark Bonney, Chairman
Mary Palermo Cotton
William F. Markey, III
Andrew Sriubas
The information contained in this Audit Committee Report shall not be deemed to be soliciting material. No
portion of this Audit Committee Report shall be deemed to be incorporated by reference into any filing under the
Securities Act of 1933, as amended (the Securities Act), or the Exchange Act, through any general statement
14
incorporating by reference in its entirety the Proxy Statement in which this report appears, except to the extent that
SeaChange specifically incorporates this report or any portion of it by reference. In addition, this report shall not be
deemed to be filed under either the Securities Act or the Exchange Act.
15
INFORMATION CONCERNING EXECUTIVE OFFICERS
In addition to Edward Terino, SeaChanges Chief Executive Officer and Director, whose biographical
information is set forth above at page 8, SeaChanges executive officers are:
Executive
Officers Name
Jonathan Rider
Position and Principal Occupation and Business Experience During the Past Five Years
Chief Operating Officer & Senior Vice President
Mr. Rider, age 54, was appointed Chief Operating Officer and Senior Vice President on
January 31, 2017, and he previously served as SeaChanges Chief Information Officer since
April 19, 2016. Mr. Riders has over thirty years of senior management experience in the
high technology sector including service as Chief Information Officer of Dynatrace from
August 2014 to February 2016; Senior Vice President, Technology and Engineering fof
Arcadia Solutions from September 2013 to August 2014; Principal and Chief Information
Officer of JetStream Consulting from June 2006 to January 2014; Vice President, Business
Systems of PTC from March 2011 to June 2012; Vice President and Chief Information
Officer of Gilbane Building Company from November 2006 to May 2010. Previously Mr.
Rider served as a U.S. Army Officer and helicopter instructor. Mr. Rider holds a United
d
States patent in the area of data mining and is a Six Sigma Green and Black Belt. Mr. Rider
r
has a B.S. in Aeronautics, Engineering/Aviation and a M.B.A. in E-Business from the
University of Phoenix.
Peter Faubert
Chief Financial Officer, Senior Vice President and Treasurer
Mr. Faubert, age 48, joined the Company on July 7, 2016 as Chief Financial Officer, Senior
Vice President and Treasurer. He brings over fifteen years of extensive finance leadership
for public and private software companies that focused on video service providers, mobility
and enterprise computing. Prior to joining the Company, Mr. Faubert served as Chief
Financial officer of This Technology, Inc. from December 2013 to August 2015, Chief
Financial Officer and Treasurer of Vision Government Solutions, Inc. from October 2012 to
December 2013, Chief Financial Officer of JNJ Mobile (MocoSpace) from February 2009 to
July 2012 and Chief Financial Officer and Treasurer at Turbine, Inc. from August 2005 to
January 2009. Prior to that Mr. Faubert held various senior finance positions with Viisage
Technology Inc., Burntsand Inc. and Ariba Inc. Mr. Faubert is also a Certified Public
Accountant.
David McEvoy
General Counsel, Senior Vice President and Secretary
Mr. McEvoy, age 60, joined the Company on July 2, 2012 as Vice President and General
Counsel. He became Senior Vice President and General Counsel on February 1, 2013, and
d
became the Secretary on May 17, 2013. Prior to joining SeaChange, Mr. McEvoy was the
Senior Vice President and General Counsel of Peoplefluent Inc. from June 2011 to July
2012. Mr. McEvoy served as the Senior Vice President and General Counsel of Art
) from September 2005 to March 2010, which was acquired
d
Technology Group, Inc. (ATG
by Oracle Corporation on January 5, 2011. Prior to joining ATG, Mr. McEvoy was the
Group General Counsel Operations of Gores Technology Group, a private equity
firm. Mr. McEvoy has held various General Counsel and other executive level
legal
positions with several companies including Aprisma Inc., Anker Systems Ltd., VeriFone
Inc., Mattel Interactive, Broderbund and The Learning Company.
Executive officers of SeaChange are appointed by, and serve at the discretion of, the Board of Directors, and
serve until their successors have been duly elected and qualified. There are no family relationships among any of the
executive officers or directors of SeaChange. Each executive officer is a full-time employee of SeaChange.
16
COMPENSATION DISCUSSION AND ANALYSIS
Executive Summary
We have implemented an executive compensation program that rewards performance. Our executive
compensation program is designed to attract, retain and motivate the key individuals who are most capable of
contributing to our success and building long-term value for our stockholders. The elements of our executives total
compensation are base salary,
incentive compensation and other employee benefits. We have designed a
compensation program that makes a substantial portion of executive pay variable, subject to increase when
performance targets are achieved, and subject to reduction when performance targets are not achieved.
Fiscal 2018 Business Results
In fiscal 2018, we addressed what we see as the continuing rise of Internet Protocol television (IPTV) and
over-the-top (OTT) services by such companies as Netflix, Hulu, Amazon, mlbam, Kaltura, Ooyala and
Brightcove and by media companies such as HBO, CBS and BBC. This rise of IPTV and OTT video services
globally increased the demand for multiscreen capabilities on a range of consumer devices operating on the cloud-
based platforms. We have been increasing our strategic investments in research and development related to our
cloud-based offerings, as well as in sales and marketing as we focus on our go-to-market efforts in those areas. We
continue to invest in developing next-generation capabilities in our four main product offerings: video back office,
advertising, content management and user experience. Our suite of products allows us to provide customers with
end-to-end video delivery capabilities across multiple platforms, thus reducing cost and increasing speed and ease of
use for end users.
In conjunction with our acquisition of DCC Labs in fiscal 2017 and an additional company-wide costs savings
program established in the second half of fiscal 2017, we commenced a restructuring program (Restructuring
Program), which has allowed us to achieve approximately $38 million in annualized cost savings since its
commencement. The Restructuring Program was completed in fiscal 2018 and has helped us improve operations and
optimize our cost structure since its inception.
We saw improvement in most of our key operating metrics and overall financial results in fiscal 2018,
compared to fiscal 2017. This included a fourteen-percentage point increase in gross margins, a $39.1 million
decrease in U.S. GAAP operating expenses and positive cash flow from operations. Cash, cash equivalents,
marketable securities and restricted cash of $52.1 million at January 31, 2018 was up from the $38.7 million at
January 31, 2017. We had a U.S. GAAP operating loss of $5.4 million, or $0.15 per basic share, in fiscal 2018,
compared to a U.S. GAAP operating loss of $54.1 million, or $1.55 per basic share, in fiscal 2017. The decrease in
U.S. GAAP operating loss is due to the decrease in expenses resulting from implementation of the Restructuring
Program in the second half of fiscal 2017 and to the absence in fiscal 2018 of the $23.8 million loss on impairment
of long-lived assets recorded in fiscal 2018. Included in the full fiscal 2018 U.S. GAAP results are $9.3 million in
non-GAAP charges, which consisted of severance and other restructuring costs, stock-based compensation,
amortization of intangible assets from prior acquisitions and other non-recurring professional fees, while the full
fiscal 2017 results by comparison included $33.3 million of similar non-GAAP charges and the loss on impairment
of long-lived assets mentioned above.
Pay for Performance
In recent years, payouts under our executive compensation incentive plan have largely been limited to payouts
made for the achievement of individual performance objectives rather than the portion of payouts allocable to the
achievement of pre-established financial objectives of the Company, as these objectives have not been met. For
example, in fiscal 2017, payouts under our fiscal 2017 performance-based compensation plan were only made for
the achievement of certain individual performance objectives, and no payouts were made with respect to satisfying
the pre-established financial objectives.
the fiscal 2018 Short-Term Incentive
compensation plan (fiscal 2018 STI) were made for the achievement of both the pre-determined Company
financial objectives and individual performance objectives. We believe that the variability in these payouts indicates
that our annual compensation plans effectively reward our executive officers for superior performance, while
appropriately adjusting compensation downward for less-than-superior performance.
However, payouts under
17
Compensation Objectives
We structure our executive compensation to reflect
individual responsibilities and contributions, while
providing incentives to achieve overall business and financial objectives. The Compensation Committee (the
Committee) has the responsibility for establishing, implementing and monitoring adherence to this philosophy.
The Committee has designed an executive compensation plan that rewards the achievement of specific
financial and non-financial goals through a combination of cash and stock-based compensation. This bifurcation
between financial and non-financial objectives and between cash and stock-based compensation creates alignment
with stockholder interests and provides a structure in which executives are rewarded for achieving results that the
Committee believes will enhance stockholder value.
The Committee believes that stockholder interests are best served by compensating our executives at industry
competitive rates, enabling us to attract and retain the best available talent, recognizing superior performance while
providing incentives to achieve overall business and financial objectives. By doing so, we believe that our ability to
achieve financial and non-financial goals is enhanced.
Setting Executive Compensation
When setting the annual compensation plan for our executive officers, the Committee begins with an analysis
of each compensation component for our Chief Executive Officer. This analysis includes the dollar amount of each
component of compensation payable to the Chief Executive Officer related to the relevant period, together with the
related metrics for performance-based compensation. The overall purpose of this analysis is to bring together, in one
place, all of the elements of fixed and contingent compensation, so that the Committee may analyze both the
individual elements of compensation (including the compensation mix) as well as the aggregate amount of actual
and projected compensation.
The Committee then presents this analysis to the Chief Executive Officer, who provides input to the
Committee on the reasonableness, feasibility and effectiveness of the compensation components,
including
performance metrics, proposed by the Committee. The Chief Executive Officer then creates similar compensation
component breakdowns for the other executive officers, presenting compensation recommendations of both base and
performance-based compensation related to the relevant period, together with the associated performance metrics.
These recommendations are then reviewed and, once agreed upon, approved by the Committee. The Committee can
and has exercised its discretion in modifying any recommended compensation to executives, and exercises this
discretion in active consultation with the Chief Executive Officer.
18
In setting executive compensation for fiscal 2018, the Committee reviewed an updated list of peer companies
recommended by Frederic W. Cook & Co., Inc. (Cook), a compensation consulting firm who the Committee
concluded based on the Companys knowledge and information provided by Cook had no conflict of interest with
the Company. The updated list of peer companies reflects the removal of certain companies from the prior peer
company list with a much larger market capitalization than the Company. The updated list of our peer companies is
as follows:
American Software, Inc.
BSQUARE Corporation
Digital Turbine, Inc.
Guidance Software, Inc.
Limelight Networks, Inc.
Marin Software Inc.
Remark Media, Inc.
Synacor, Inc.
YuMe, Inc.
Brightcove, Inc.
Concurrent Computer Corporation
eGain Corporation
Jive Software, Inc.
Marchex, Inc.
RealNetworks, Inc.
SITO Mobile, Ltd.
Tremor Video, Inc.
The Committee determined that this list of peer companies provided appropriate referenceable data points,
based on our revenues, market capitalization, and industry focus relative to each of these companies. The Committee
made reference to the compensation paid by these peer companies in establishing fiscal 2018 executive
compensation but did not benchmark compensation to these companies.
With respect to all of the fiscal 2018 compensation programs for the Companys named executive officers, the
Committee endeavors to establish a compensation program that is internally consistent and equitable to enable our
achievement of overall corporate objectives. Within this framework, the level of the Chief Executive Officer
s
compensation will differ from that of the other executives because of the difference in his role and responsibilities
and the compensation practices at peer companies.
rr
In 2017, we submitted our executive compensation to an advisory vote of our stockholders and it received the
support of 93% of the total votes cast on this matter at our annual meeting. We pay careful attention to any feedback
we receive from our stockholders about our executive compensation, including the Say-on-Pay vote. While we
had already approved our fiscal 2018 compensation plan by the time we held our Say-on-Pay vote in July 2017,
we considered the stockholder advisory vote in formulating our fiscal 2019 compensation plan. This consideration
included reaching out to certain large stockholders to discuss and seek input on our compensation plans.
Fiscal 2018 Executive Compensation Components
For the fiscal year ended January 31, 2018, the principal components of compensation for our named executive
officers were:
base salary;
short-term performance-based incentive compensation;
long-term incentive equity awards;
discretionary equity awards;
change in control and termination benefits; and
general employee welfare benefits.
19
As discussed below, the Committee believed that this mix of compensation would allow us to pay our
executive officers competitive levels of compensation that best reflect individual responsibilities and contributions,
while providing incentives to achieve overall business and financial objectives.
Base Salary
We provide our named executive officers and other employees with base salary to compensate them for
services rendered during the fiscal year. Base salary ranges for named executive officers are determined individually
for each executive.
During its review of base salaries for named executive officers, the Committee primarily considers:
individual performance of the executive;
our overall past operating and financial performance and future expectations;
internal review of the executives compensation, both individually and relative to other executive officers;
and
market data regarding peer companies.
The Committee does not give a specific weighting among these various factors but rather considers the factors
collectively in setting base salary. Salary levels are typically considered on an annual basis as part of the
performance review process, as well as upon a promotion or other change in job responsibility. We try to provide an
allocation between base and performance-based incentive compensation that reflects market conditions and
appropriately ensures alignment of individual performance with our objectives.
In setting the executive compensation plan for fiscal 2018, the Committee did not make an adjustment to the
base salary of the Chief Executive Officer, Mr. Terino, who continued to receive a base salary of $450,000. The
Committee also did not make an adjustment to the base salaries of the Chief Operating Officer, Mr. Rider, the Chief
Financial Officer, Mr. Faubert, or the General Counsel, Mr. McEvoy, who each continued to receive a base salary of
$325,000, $300,000 and $296,000 respectively.
Performance-Based Incentive Compensation
After considering the overall cash-equity mix of the aggregate compensation paid to our named executive
officers, the Committee structured awards pursuant to the fiscal 2018 performance-based compensation plan to be a
mixture of cash, stock options, RSUs and PSUs. The Committee believes that including both cash and stock options,
RSUs and PSUs as an element of the performance-based compensation is important as it further aligns the interests
of our executive officers with those of our stockholders, increases executive ownership of our stock, discourages
excessive levels of risk taking, and enhances executive retention in a challenging business environment and
competitive labor market, while at the same time providing competitive current compensation and accounting for the
liquidity limitations created by the Companys stock ownership guidelines.
Starting in fiscal 2018, the Committee now provides all equity awards to the named executive officers under
the performance-based Long-Term Incentive compensation plan (fiscal 2018 LTI) and all cash awards to the
named executive officers under the fiscal 2018 STI. The fiscal 2018 STI and fiscal 2018 LTI are described further
below.
Fiscal 2018 Performance-Based Short-Term Incentive Compensation Plan
The Committee believes that performance-based incentive compensation motivates the achievement of critical
annual performance objectives aimed at enhancing stockholder value. The fiscal 2018 STI established for each of
Messrs. Terino, Rider, Faubert and McEvoy, the Companys executive officers during fiscal 2018, provided for a
cash award payable upon the satisfaction of specified targets.
20
Performance-based compensation for each of the named executive officers, except for Mr. McEvoy, pursuant
to our fiscal 2018 STI was structured as follows:
40% of target bonus payable based upon the achievement of certain U.S. GAAP revenue goals for fiscal
2018;
40% of target bonus payable based upon the achievement of certain non-GAAP operating income1 goals
for fiscal 2018; and
20% or target bonus payable based upon the achievement of certain individual performance-based
objectives.
Performance-based compensation for Mr. McEvoy pursuant to our fiscal 2018 STI was structured as follows:
40% of target bonus payable based upon the achievement of certain U.S. GAAP revenue goals for fiscal
2018;
20% of target bonus payable based upon the achievement of certain non-GAAP operating income goals
for fiscal 2018; and
40% or target bonus payable based upon the achievement of certain individual performance-based
objectives.
In determining the targets and payouts at target performance levels for each of the objectives for awards under
the fiscal 2018 executive compensation plan, the Committee considered the probability of achieving that target and
the corresponding level of individual and group effort that would be required to achieve that target. Within that
framework, the Committee set a fiscal 2018 U.S. GAAP revenue target of $85 million, with a threshold of $80
million, and a fiscal 2018 non-GAAP operating income loss target of a $1.125 million, with a threshold of a $3.575
million loss. The Committee retained discretion to adjust these targets during the year. The Committee did not
establish limits for itself with respect to exercise of this discretion and believes that this discretion is important in
order to retain the ability to compensate executive officers in a manner that reflects overall corporate and individual
performance relative to the market conditions.
In establishing financial targets and potential payout targets for the named executive officers, the Committee
provided for additional incentive payouts in the event that the revenue or non-GAAP operating income targets were
exceeded, with a specified maximum upward adjustment of twenty-five percent (25%) above target based upon non-
GAAP operating income and a maximum upward adjustment of twenty-five (25%) based upon revenue. The
Committee also provided for a decreasing amount of cash payouts in the event that the revenue or non-GAAP
operating income target, as applicable, were not met, while establishing a threshold with respect to each objective
below which no corresponding payout would be made. These provisions were established to provide incentive to our
executive officers to exceed the financial targets, as well as to provide some form of payout for performance that
approaches but may not meet the established targets. The Committee implemented this structure to ensure that our
compensation programs support our overall compensation objectives.
1 We define non-GAAP income (loss) from operations as U.S. GAAP operating loss plus stock-based compensation
expenses, amortization of intangible assets, change in fair value of earn-outs, non-operating expense professional
fees, severance and other restructuring costs, recovery on provision for loss contract and loss on impairment of long-
lived assets.
21
Each of the named executive officers participating in our fiscal 2018 performance based incentive
The objectives for Messrs. Terino, Rider,
compensation plan also had individual performance-based objectives.
Faubert and McEvoy are as follows:
Mr. Terino: the completion of corporate restructuring actions to reduce operating costs and achieve
profitability in the second half of fiscal 2018, the enhancement and implementation of the Companys
sales and marketing strategy, and the formation of an Advisory Board of industry leaders to assist the
management team in developing a strategic plan and receiving approval of the plan by the Board of
Directors before January 31, 2018.
Mr. Rider:
the completion of corporate restructuring actions, the completion of technical support,
professional services, product line management and marketing renovation programs. Mr. Rider also was
to complete various IT infrastructure projects, create a deal desk to review quotations, and complete a
restructuring of the Companys maintenance renewal process.
Mr. Faubert: the completion of corporate restructuring actions, the implementation of various actions to
reduce operating expenses and increase cash, the divesture of the Companys investment in Layer3 TV,
Inc. (Layer 3), the completion of improvements to the Companys internal control environment, the
implementation of Accounting Standard Codification Topic No. (ASC) 606 regarding new revenue
recognition guidance, the creation of quarterly business reviews and a deal desk to review quotations, and
the automation of the budget process for fiscal 2019.
Mr. McEvoy: the completion of corporate restructuring actions, the implementation of various actions to
reduce operating expenses and increase cash, the divesture of the Companys investment in Layer 3, the
strengthening of the legal department through hiring an additional lawyer, and the provision of support to
the Board of Directors for shareholder activist activities.
Payouts were made under the fiscal 2018 STI based on the achievement of both the financial and individual
performance objectives. Under the fiscal 2018 STI, Mr. Terino received a cash bonus of $341,982; Mr. Rider
received a cash bonus of $205,504; Mr. Faubert received a cash bonus of $145,080; and Mr. McEvoy received a
cash bonus of $122,011.
Long-Term Incentive Equity Awards
Fiscal 2018 Long-Term Incentive Program
In fiscal 2018, the Committee continued the Long-Term Incentive compensation plan (fiscal 2018 LTI)
under which the named executive officers received long-term equity-based incentive awards, which are intended to
align the interests of our named executive officers with the long-term interests of our stockholders and to emphasize
and reinforce our focus on team success. The long-term equity-based incentive compensation awards for fiscal 2018
were made in the form of stock options, RSUs and a new form of PSUs for shares of our common stock subject to
vesting based in part on the extent to which employment continues for three (3) years.
Because the executives are able to profit from stock options only if our stock price increases relative to the
stock options exercise price and because the value of restricted stock units is based on the price of our common
stock when the RSUs vest, we believe stock options and RSUs provide meaningful incentives to executives to
achieve increases in the value of our stock over time and as a result are effective tools for meeting our compensation
goal of increasing long-term stockholder value.
For fiscal 2018, the Committee restructured the vesting criteria of the PSUs to emphasize the achievement of
specified U.S. GAAP revenue and non-GAAP operating income goals.
Instead of vesting based on the Companys
TSR percentile rank compared to the S&P SmallCap 600 Index over a three (3) year period, as was done in fiscal
2016 and 2017, the PSUs awarded pursuant to the fiscal 2018 LTI are eligible to vest in three (3) equal annual
tranches subject to the executives achievement of both U.S. GAAP revenue and non-GAAP operating income goals
that will be set annually for each year.
All LTI awards are approved by the Committee. In determining the size of a stock option grant, RSU award or
PSU award, the Committee takes into account individual performance (generally consisting of financial performance
22
for the year as well as a subjective, qualitative review of each named executive officers contribution to the success
of the business), internal pay equity considerations and the value of previously granted equity awards.
The following LTI awards were approved by the Committee on January 31, 2018:
PSUs. An award of PSUs for the amount based on the target number of shares of SeaChanges common
stock set forth opposite the applicable executives name below:
Executive
Edward Terino
Jonathan Rider
Peter Faubert
David McEvoy
y
Target Award # of PSU
s
50,000
25,000
25,000
25,000
The PSUs will vest ratably on an annual basis over three (3) years, if at all, on January 31, 2019, January 31,
2020 and January 31, 2021 (each a Vesting Date), respectively, based on SeaChanges achievement of target U.S.
GAAP revenue and non-GAAP operating income goals that are set for each of the annual vesting periods.
RSUs. An award of RSUs for the number of shares of SeaChanges common stock set forth opposite the
applicable executives name below, to be vested ratably on an annual basis over the three years following
January 31, 2018:
Executive
Edward Terino
Jonathan Rider
Peter Faubert
David McEvoy
RSUs Awarde
d
50,000
25,000
25,000
25,000
Stock Options. An award of options to purchase the number of shares of SeaChanges common stock set
forth opposite the applicable executives name below at an exercise price equal SeaChanges closing stock
price on January 31, 2018, to be vested ratably on an annual basis over the three years following
January 31, 2018:
Executive
Edward Terino
Jonathan Rider
Peter Faubert
David McEvoy
Options Awarde
d
200,000
100,000
100,000
100,000
Additional Fiscal 2018 LTI Terms
If a Change in Control of the Company occurs prior to prospective Vesting Date(s) of the fiscal 2018 LTI
stock option, RSU and PSU awards, then fifty percent (50%) of the stock option, RSU and target PSU awards to vest
in those prospective periods shall vest immediately prior to such Change in Control, subject to the executive being
an employee of that Company as of such date.
Clawback Policy; Stock Ownership Guidelines; Hedging and Pledging Restrictions
Compensation paid to our named executive officers is subject
to a policy regarding compensation
reimbursement, or a clawback policy, as described in our Code of Ethics and Business Conduct, a copy of which
is available on our website of www.schange.com under the Corporate Governance section of the Investor
Relations link. The policy provides that in the event that our financial results are significantly restated, the Board of
23
Directors will review any compensation, other than base salary, paid or awarded to any executive officer found to be
personally responsible for the fraud or intentional misconduct that caused the need for the restatement. The Board
will, to the extent permitted by law, require the executive officer to repay any such compensation if:
the amount of such compensation was calculated based upon the achievement of certain financial results
that were subsequently the subject of the restatement;
the executive officer engaged in fraud or intentional misconduct that caused the need for the restatement;
and
such compensation would have been lower than the amount actually awarded had the financial results
been properly reported.
Compensation paid to our named executive officers in the form of equity is also subject to our stock retention
and ownership guidelines that apply to our directors and senior officers, as described in our Corporate Governance
Guidelines, a copy of which is available on our website at www.schange.com under the Corporate Governance
section of the Investor Relations link. These guidelines provide that by the later of six (6) years following
appointment to office or four (4) years following election to the board, as applicable:
each non-employee director is expected to retain ownership of vested shares of SeaChange stock in a
minimum amount equal to lesser of 40,000 shares or $250,000 worth of shares;
the Chief Executive Officer is expected to retain ownership of vested shares of SeaChange stock in a
minimum amount equal to 250,000 shares;
the Chief Financial Officer is expected to retain ownership of vested shares of SeaChange stock in a
minimum amount equal to 75,000 shares; and
each Senior Vice President that is an executive officer is expected to retain ownership of vested shares of
SeaChange stock in a minimum amount equal to 50,000 shares.
Prior to meeting the stock ownership targets, each non-employee director and senior executive officer is
encouraged, but is not required, to retain a meaningful portion of all shares of stock acquired by the non-employee
director or officer (whether through equity awards by SeaChange, purchases on the open market or otherwise) in
order to progress toward the stock ownership targets, other than shares of stock sold to pay taxes and/or applicable
exercise price with respect to an equity award. Upon meeting the stock ownership targets, each non-employee
director and senior executive officer is required thereafter to retain not less than twenty-five percent (25%) of all
shares of stock acquired by the non-employee director or officer (whether through equity awards by SeaChange,
purchases on the open market or otherwise), other than shares of stock sold to pay taxes and/or the applicable
exercise price with respect to an equity award. In addition, upon any termination of service for a non-employee
director and upon voluntary termination of service for a senior executive officer, such director or officer must wait at
least ninety (90) days before selling any shares. In the case of hardship or other compelling personal requirements,
the stock ownership targets may be waived to permit the sale of shares by the affected person.
In addition, our Insider Trading and Tipping Policy prohibits our insiders, which includes our employees and
directors, from engaging in hedging transactions and requires the prior written consent of our compliance officer to
pledge securities of SeaChange owned by the insider. We have not received any requests pursuant to our Insider
Trading and Tipping Policy to permit pledges of SeaChange stock.
We have made, and from time to time continue to make, grants of stock options and RSUs to eligible
employees based upon our overall financial performance and their individual contributions. Stock options and RSUs
are designed to align the interests of our executives and other employees with those of our stockholders by
encouraging them to enhance the value of SeaChange. In addition, the vesting of stock options and RSUs over a
period of time is designed to defer the receipt of compensation by the recipient, creating an incentive for the
individual to remain an employee. We do not have a program, plan or practice to select equity grant dates in
connection with the release of favorable or negative news.
24
Change in Control and Termination Benefits
Each named executive officer is party to a Change in Control Severance Agreement with SeaChange (the
Change in Control Agreements).
The Change in Control Agreements provide for benefits upon termination of employment following a change
in control or sale of SeaChange (commonly referred to as double trigger) and do not contain any tax gross-up
provisions. SeaChange entered into these agreements to reflect current best pay practices, while continuing to
provide an incentive for each executive to remain with SeaChange leading up to and following a Change in Control.
Under the Change in Control Agreements, if an executives equity award, other than a performance-based
equity award (such as PSUs or market-based stock options), is continued, assumed or substituted following a
Change in Control and the executives employment is terminated within two years after the Change in Control by
the employer without cause or by the executive for good reason (a Covered Termination), then such equity award
would be accelerated in full. Performance-based equity awards would continue to be governed by their existing
terms. In addition, if a Covered Termination occurs, the executive would be entitled to receive a cash amount as
severance equal to the sum of (a) one times his base salary, plus (b) 150% of the executives target annual bonus for
the fiscal year in which the Covered Termination occurs, plus (c) $62,000, being an amount corresponding to
medical and other benefits during the post-employment period.
The specific terms of these arrangements, as well as an estimate of the compensation that would have been
payable had they been triggered as of fiscal 2018 year-end, are described in detail on page 31 under the heading
entitled Potential Payments Upon Termination or Change in Control.
General Employee Welfare Benefits
We also have various broad-based employee benefit plans. Executive officers participate in these plans on the
same terms as eligible, non-executive employees, subject to any legal limits on the amounts that may be contributed
or paid to executive officers under these plans. We offer a 401(k) retirement plan, which permits employees to
invest in a choice of mutual funds on a pre-tax basis. We also maintain medical, disability and life insurance plans
and other benefit plans for our employees.
Fiscal 2019 Executive Compensation Components
The principal components of fiscal 2019 executive compensation are as follows, the same as existed for fiscal
2018 executive compensation:
base salary;
short-term performance-based incentive compensation;
long-term incentive equity awards;
discretionary equity awards;
change in control and termination benefits; and
general employee welfare benefits.
Within this framework,
the Committee established the specific compensation programs for our named
executive officers.
In setting executive compensation for fiscal 2019, the Committee reviewed the updated list of peer companies
recommended by Cook in fiscal 2018 and determined not to make any changes.
The Committee determined that this list of peer companies provided appropriate referenceable data points,
based on our revenues, market capitalization, and industry focus relative to each of these companies. The Committee
made reference to the compensation paid by these peer companies in establishing fiscal 2019 executive
compensation but did not benchmark compensation to these companies.
25
Effective June 1, 2018, Mr. Terinos base salary was increased from $450,000 to $465,000; Mr. Riders base
salary was increased from $325,000 to $335,000; Mr. Fauberts base salary was increased from $300,000 to
$310,000 and Mr. McEvoys base salary was increased from $296,000 to $305,000.
Similar to fiscal 2018, in fiscal 2019 no equity awards will be made to the named executive officers under the
fiscal 2019 Short-Term Incentive bonus plan (fiscal 2019 STI). Instead, any incentive equity awards to the named
executive officers during fiscal 2019 are intended to be made under the fiscal 2019 Long-Term Incentive
compensation plan (fiscal 2019 LTI) subject to vesting based in part on the extent to which employment continues
for three (3) years. Under the fiscal 2019 STI, Mr. Terino will be eligible for a target cash bonus of 90% of his base
salary; Mr. Rider will be eligible for a target cash bonus of 80% of his base salary; Mr. Faubert will be eligible for a
target cash bonus of 60% of his base salary; and Mr. McEvoy will be eligible for a target cash bonus of 50% of his
base salary.
This fiscal 2019 STI is earned based on the Companys achievement of overall company financial objectives
for fiscal 2019 related to total revenue and non-GAAP operating income and based on individualized performance-
based objectives. These objectives will be further discussed in our proxy statement relating to our 2019 Annual
Meeting of stockholders.
In fiscal 2019, the named executive officers will be eligible to receive awards under the fiscal 2019 LTI with
amounts to be determined.
Tax and Accounting Implications
The financial reporting and income tax consequences to SeaChange of individual compensation elements are
important considerations for the Committee when it is analyzing the overall level of compensation and the mix of
compensation among individual elements. Overall, the Committee seeks to balance its objective of ensuring an
effective compensation package for named executive officers with the need to maximize the immediate deductibility
of compensation while ensuring an appropriate and transparent impact on reported net income and other closely
followed financial measures.
Section 162(m) of the Internal Revenue Code (the Code) limits the amount that SeaChange may deduct from
the Companys federal income taxes for compensation paid to our named executive officer to $1 million per
executive per year. Prior law provided exemptions to this deduction for compensation limit for compensation paid
to our Chief Financial Officer and for certain performance-based compensation. Effective for our new tax years
beginning after January 31, 2018, the law has changed such that the deduction limit will be extended to our Chief
Financial Officer and the exemption for performance-based compensation will be eliminated.
As a result,
compensation paid to our named executive officers in excess of the above limit will not be deductible unless the
compensation qualifies for transition relief applicable to certain arrangements in effect on November 2, 2017.
Because of the lack of guidance on transition relief, we cannot provide any assurance that any compensation
arrangements intended to qualify for transition relief will actually receive such treatment. While our Compensation
Committee considers the tax deductibility when making compensation decisions, the Committee believes that it
should retain flexibility to exceed the limits of Section 162(m) when in furtherance of our corporate objectives and
in the best interests of the Company and its shareholders.
Summary Compensation Table
The following table sets forth summary information regarding the compensation of SeaChanges named
executive officers in fiscal 2018, 2017, and 2016.
As described above in Compensation Discussion and Analysis, final determinations regarding awards of fiscal
2018 STI compensation are made after fiscal year-end, when performance against the previously established metrics
may be assessed by the Committee. With respect to equity awards under SeaChanges performance-based LTI
compensation plans, the grant date for purposes of ASC 718 is the service inception date, or the beginning of the
period during which performance is measured. In accordance with ASC 718, the amounts reflected below under the
headings Stock Awards for a given fiscal year, represent the probable outcome as of the service inception date of
26
the performance conditions under the fiscal 2018 Long-Term Incentive compensation plan (fiscal 2018 LTI),
which in each case is the award amount at the targets approved by the Compensation Committee. In the table below
performance-based compensation paid in cash after fiscal year-end but earned in the prior fiscal year is reflected
under the heading Non-Equity Incentive Plan Compensation or Bonus, as applicable, in the fiscal year in which
that compensation was earned, regardless of when paid.
Salary
($)
Fiscal
Year
2018 447,115
2017 438,705
Bonus
($)
Stock
Awards (1)
($)
250,191 (6)
350,399
Option
Awards (2)
($)
285,180 (7)
1,655,865
Non-Equity
Incentive Plan
Compensation (3
)
($)
341,982
70,200
All Other
Compensation (4
)
($)
Total
($)
1,324,468
2,515,169
2016 253,952
1,038,600
814,680
147,443
35,888
2,290,563
2018 319,375
2017 188,308 25,000
125,094 (6)
243,589
142,590 (7)
687,578
205,504
58,032
792,563
1,202,507
2018 298,077
2017 171,731
125,094 (6)
153,872
142,590 (7)
432,775
145,080
18,726
2018 292,353
2017 287,500 52,796
125,094 (6)
60,659
142,590 (7)
40,518
122,011
27,796
710,841
777,104
682,048
469,269
Name
Edward Terino (5)
Chief Executive
EE
Officer, Director,
and former Chief
Operating Officer &
Executive Vice
President
Jonathan Rider (8)
Chief Operating
Officer & Senior
Vice President
Peter Faubert (9)
Chief Financial
Officer, Senior Vice
President &
Treasurer
David McEvoy
General Counsel,
Senior Vice
President &
Secretary
2016 270,413
608,980
82,500
62,906
1,024,799
(1) This expense represents the grant date fair value of the applicable target RSU and PSU awards as computed in accordance
with ASC 718 disregarding any estimates of forfeitures relating to service-based vesting conditions. Performance-based
RSUs and PSUs are valued at the grant date based upon the probable outcome of the performance metrics. Therefore, the
amounts under the Stock Awards column do not reflect the amount of compensation actually received by the named
executive officer during the fiscal year.
(2) This expense represents the grant date fair value of the applicable option awards, as computed in accordance with ASC 718
disregarding any estimates of forfeitures relating to service-based vesting conditions.
(3) The Non-Equity Incentive Plan Compensation column reflects for fiscal 2016, 2017 and 2018 cash awards under
performance-based compensation plans from the satisfaction of pre-established performance criteria and prior to any
exercise of discretion permitted to be exercised pursuant
to the applicable performance-based compensation plan.
Mr. Fauberts cash bonus under the fiscal 2017 Short-Term Incentive bonus plan (fiscal 2017 STI) was pro-rated based on
his days of employment with the Company in fiscal 2017.
(4) The All Other Compensation column includes Company contributions to a named executive officers 401(k) Plan account,
perquisites and other personal benefits received by a named executive officer to the extent such benefits exceeded $10,000
in the aggregate relating to the fiscal year.
(5) Mr. Terino was appointed Chief Executive Officer on April 6, 2016, as previously reported on a Form 8-K filed with the
SEC on April 7, 2016, and serves as a director of the Company. Prior to his appointment as Chief Executive Officer,
Mr. Terino was appointed Chief Operating Officer and Executive Vice President on June 3, 2015, as previously reported on
a Form 8-K filed with the SEC on June 4, 2015. Compensation reported for Mr. Terino in this table includes the
27
compensation paid to him for his service prior to June 3, 2015 as a non-employee director of the Company. Mr. Terinos
fiscal 2017 salary reflects a partial year as Chief Operating Officer and a partial year as Chief Executive Officer.
Mr. Terinos fiscal 2016 salary reflects a partial year of service to the Company in his capacity as Chief Operating Officer.
(6) Stock Awards in this table for fiscal 2018 consist of: For Mr. Terino, fiscal 2018 LTI award of RSUs valued at $166,500 and
PSUs valued at target at $83,691; for Mr. Rider, fiscal 2018 LTI award of RSUs valued at $83,250 and PSUs valued at
target at $41,844; for Mr. Faubert, his fiscal 2018 LTI award of RSUs valued at $83,250 and PSUs valued at target at
$41,844; and for Mr. McEvoy, his fiscal 2018 LTI award of RSUs valued at $83,250 and PSUs valued at target at $41,844.
(7) Option Awards in this table for fiscal 2018 consist of: for Mr. Terino, a fiscal 2018 LTI award of stock options valued at
$285,180; for Mr. Rider, a fiscal 2018 LTI award of stock options valued at $142,590; for Mr. Faubert, a fiscal 2018 LTI
award of stock options valued at $142,590; and for Mr. McEvoy a fiscal 2018 LTI award of stock options valued at
$142,590.
(8) Mr. Rider was appointed Chief Operating Officer and Senior Vice President on January 31, 2017, as previously reported on
Form 8-K filed with the SEC on February 3, 2017. Mr. Riders fiscal 2017 salary reflects his salary as Chief Information
Officer, his position with the Company until the last day of fiscal 2017.
(9) Mr. Faubert was appointed Chief Financial Officer, Senior Vice President and Treasurer on July 6, 2016, as previously
reported on Form 8-K filed with the SEC on July 7, 2016. Mr. Fauberts fiscal 2017 salary reflects a partial year of service
to the Company.
Grants of Plan-Based Awards
The following table sets forth information concerning plan-based awards to the named executive officers
during the fiscal year ended January 31, 2018.
y
Estimated Future Payouts under
Non-Equity Incentive Plan Awards
Maximu
m
($)
486,000
Target
($)
405,000
Threshold
($)
Grant
Date
4/25/2017 (3) 210,600
1/31/2018
Jonathan Rider
Peter Faubert
David McEvoy
4/25/2017 (3) 101,400
1/31/2018
4/25/2017 (3)
1/31/2018
4/25/2017 (3)
1/31/2018
93,600
94,720
195,000
180,000
148,000
234,000
216,000
170,200
All Other
Stock
Awards:
Number
of Shares
of Stock
or Units (2
)
(#)
All Other
Option
Awards:
Number of
Securities
Underlying
Options (2)
(#)
Grant
Date Fair
Value of
Stock
and
Option
Awards
($)
Exercise
or Base
Price of
Option
Awards
($/Sh)
Estimated Future Payouts under
Equity Incentive Plan Awards (1)
y
Threshold
(#)
Target
(#)
Maximum
(#)
50,000
25,000
25,000
25,000
50,000
25,000
25,000
25,000
50,000
25,000
25,000
25,000
200,000
100,000
100,000
100,000
3.33 535,371
3.33 267,684
3.33 267,684
3.33 267,684
(1) The grants under the Estimated Future Payouts under Equity Incentive Plan Awards column represent the threshold,
target and maximum number of RSUs awarded under the LTIs, subject to performance-based criteria other than time-based
vesting.
(2) The grants under the All Other Stock Awards: Number of Shares of Stock or Units column and under the All Other
Option Awards: Number of Securities Underlying Options column represent the number of RSUs and options,
respectively, awarded under the LTIs subject to time-based vesting.
(3) These awards were made pursuant to the fiscal 2018 STI adopted on April 25, 2017.
28
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth summary information regarding the outstanding equity awards at January 31,
2018 granted to each of SeaChanges named executive officers:
Options Awards (1)
Stock Awards (2)
Name
Edward Terino
Jonathan Rider
Peter Faubert
David McEvoy
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
32,300
32,237
18,750
14,046
25,000
10,868
25,000
14,157
5,000
17,978
5,581
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)
7.25 6/3/2025 303,049 1,009,153
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
Option
Exercise
Price
($)
Option
Expiration
Date
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
200,000
600,000
16,156
64,473
200,000
6.05 1/26/2026
5.56 4/6/2026
2.42 1/31/2027
3.33 1/31/2028
3.83 4/19/2026 114,378
380,879
56,250
75,000
7,022
3.77 5/2/2026
2.42 1/31/2027
2.42 1/31/2027
3.33 1/31/2028
21,736
100,000
75,000
3.30 7/6/2026 103,568
344,881
28,312
100,000
2.42 1/31/2027
3.33 1/31/2028
8.15 7/2/2022 117,545
391,425
8,989
11,162
100,000
6.05 1/26/2026
2.42 1/31/2027
3.33 1/31/2028
(1) All options in the table above were granted under the Companys Second Amended and Restated 2011
Compensation and Incentive Plan. Mr. Terinos 200,000 options granted on June 3, 2015 vest in approximately
equal tranches based on our stock reaching $10.00, $12.00 and $14.00 for twenty consecutive trading dates, and
his 600,000 options granted on April 6, 2016 vest in approximately equal tranches based on our stock reaching
$7.00, $9.00 and $11.00 for twenty consecutive trading dates. The LTI award stock options listed in the column,
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options will
vest annually in equal tranches over three years from the grant date.
29
(2) These columns show the number of shares of Common Stock represented by unvested RSUs and PSUs at
January 31, 2018. Each of these RSUs and PSUs was granted as part of an award. The remaining vesting dates
for these unvested RSUs and PSUs as of January 31, 2018 were as follows:
Name
Edward Terino
Jonathan Rider
Peter Faubert
David McEvoy
Number of
Restricted
Stock Units
That Have
Not Vested
27,586
45,839
7,640
30,496
91,488
50,000
50,000
3,323
19,930
10,282
30,843
25,000
25,000
13,393
40,175
25,000
25,000
4,251
25,510
16,666
5,280
15,838
25,000
25,000
Date of Grant
6/3/2015
1/26/2016
1/26/2016
1/31/2017
1/31/2017
1/31/2018
1/31/2018
5/2/2016
5/2/2016
1/31/2017
1/31/2017
1/31/2018
1/31/2018
1/31/2017
1/31/2017
1/31/2018
1/31/2018
1/26/2016
1/26/2016
1/28/2016
1/31/2017
1/31/2017
1/31/2018
1/31/2018
Vesting Dates
6/3/2018, 6/3/2019
1/31/2019
1/31/2019
1/31/2019, 1/31/2020
1/31/2020
1/31/2019, 1/31/2020, 1/31/2021
1/31/2019, 1/31/2020, 1/31/2021
1/31/2019
1/31/2019
1/31/2019, 1/31/2020
1/31/2020
1/31/2019, 1/31/2020, 1/31/2021
1/31/2019, 1/31/2020, 1/31/2021
1/31/2019, 1/31/2020
1/31/2020
1/31/2019, 1/31/2020, 1/31/2021
1/31/2019, 1/31/2020, 1/31/2021
1/31/2019
1/31/2019
1/28/2019
1/31/2019, 1/31/2020
1/31/2020
1/31/2019, 1/31/2020, 1/31/2021
1/31/2019, 1/31/2020, 1/31/2021
Option Exercises and Stock Vested
The following table summarizes the option exercises and vesting of stock awards for each of SeaChanges
named executive officers for fiscal 2018:
Name
Edward Terino
Jonathan Rider
Peter Faubert
David McEvoy
Option Awards
Stock Awards
Number of Shares
Acquired on Exercis
e
(#)
Value Realized
on
Exercise
($)
Number of Shares
Acquired on Vestin
g
(#)
36,681
8,461
6,695
23,558
Value Realized
on
Vesting (1)
($)
109,044
28,175
22,294
78,948
(1) The value realized upon vesting of the RSUs shown in the table above was calculated as the product of the
closing price of a share of our common stock on the vesting date multiplied by the number of shares vested.
30
Pension Benefits
Prior to November 30, 2017, we had a statutory pension benefit obligation covering current SeaChange
employees in the Philippines. On November 30, 2017, as part of the Restructuring Plan, we decided to close our
facility in the Philippines. Therefore, a complete reduction in workforce of the remaining employees working at the
facility occurred in the fourth quarter of fiscal 2018. As a result, there was no pension benefit obligation balance as
of January 31, 2018 as no pay-outs to terminated employees were required under the Restructuring Plan or by
Philippine law.
Nonqualified Deferred Compensation
SeaChange does not offer nonqualified defined contribution or other nonqualified deferred compensation plans
to its employees.
Potential Payments Upon Termination or Change in Control
Each named executive officer is party to a Change in Control Severance Agreement with SeaChange (the
Change in Control Agreements). The Change in Control Agreements provide for benefits upon termination of
employment following a change in control or sale of SeaChange (commonly referred to as double trigger) and do
not contain any tax gross-up provisions. SeaChange entered into these agreements to reflect current best pay
practices, while continuing to provide an incentive for each executive to remain with SeaChange leading up to and
following a Change in Control.
Under the Change in Control Agreements, a change in control means any of the following:
(i)
the members of the Board at the beginning of any consecutive 12-calendar-month period (the Incumbent
Directors) cease for any reason other than due to death to constitute at least a majority of the members of
the Board; provided that any director whose election, or nomination for election by the Companys
stockholders, was approved by a vote of at least a majority of the members of the Board then still in office
who were members of the Board at the beginning of such 12-calendar-month period, shall be deemed to
be an Incumbent Director;
(ii) any consolidation or merger of the Company where the stockholders of the Company, immediately prior
to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own
(as such term is defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, shares of
Stock representing in the aggregate fifty percent (50%) or more of the combined voting power of the
securities of the corporation issuing cash or securities in the consolidation or merger (or of its ultimate
parent corporation, if any);
(iii) there shall occur (A) any sale, lease, exchange or other transfer (in one transaction or a series of
transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets
of the Company, other than a sale or disposition by the Company of all or substantially all of the
Companys assets to an entity, at least fifty percent (50%) of the combined voting power of the voting
securities of which are owned by Persons in substantially the same proportion as their ownership of the
Company immediately prior to such sale or (B) the approval by stockholders of the Company of any plan
or proposal for the liquidation or dissolution of the Company; or
(iv) any corporation or other legal person, pursuant to a tender offer, exchange offer, purchase of stock
(whether in a market
transaction or otherwise) or other transaction or event acquires securities
representing forty percent (40%) or more of the combined voting power of the voting securities of the
Company, or there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form
or report), each as promulgated pursuant to the U.S. Securities Exchange Act, disclosing that any person
(as such term is used in Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act) has become
the beneficial owner (as such term is used in Rule 13d-3 under the Securities Exchange Act) of
securities representing forty percent (40%) or more of the combined voting power of the voting securities
of the Company.
Under the Change in Control Agreements, if an executives equity award, other than a performance-based
equity award (such as PSUs or market-based stock options), is continued, assumed or substituted following a change
in control and the executives employment is terminated within two years after the change in control by the
31
employer without cause or by the executive for good reason (a Covered Termination), then such equity award
would be accelerated in full. PSUs would continue to be governed by their existing terms. In addition, if a Covered
Termination occurs, the executive would be entitled to receive a cash amount as severance equal to the sum of
(a) one times his base salary, plus (b) 150% of the executives target annual bonus for the fiscal year in which the
Covered Termination occurs, plus (c) $62,000, being an amount corresponding to medical and other benefits during
the post-employment period.
As a condition to the receipt by the executive officer of any payment or benefit under the Change in Control
Agreements, the executive officer must first execute a valid, binding and irrevocable general release in favor of
SeaChange and in a form reasonably acceptable to SeaChange.
The following table shows, for the named executive officers with SeaChange as of the close of business on
January 31, 2018, the payments to which Messrs. Terino, Rider, Faubert and McEvoy would have been entitled
pursuant to their Change in Control Agreement in the event of a Covered Termination after with a change in control
occurring on such date.
Potential Payments Upon Termination or Change in Control
Name
Edward Terino
(Covered Termination)
Jonathan Rider
(Covered Termination)
Peter Faubert
(Covered Termination)
David McEvoy
(Covered Termination)
Non-Equity
Incentive Plan
Compensation (2
)
Equity Incentive
Plan
Compensation (2
)
($)
607,500
($)
Salary (1)
($)
450,000
325,000
292,500
300,000
270,000
296,000
222,000
Benefits
($)
62,000
Equity Awards (3
)
($)
980,002
62,000
425,595
62,000
329,932
62,000
358,582
(1) The amounts reflect one times annual base salary.
(2) The amounts shown in the Non-Equity Incentive Plan Compensation and Equity Incentive Plan Compensation
columns reflect payment of 150% of the executives target amount under the fiscal 2018 STI 2018 in
connection with a Covered Termination.
(3) The Covered Termination amounts reflect the value of all unvested stock options, RSUs and PSUs that would
vest as a result of the termination. The amounts are based on (i) in the case of accelerated options, the excess of
the SeaChange January 31, 2018 closing common stock price over the applicable exercise price, (ii) in the case
of accelerated RSUs, the SeaChange closing common stock price as of January 31, 2018 multiplied by the
number of unvested RSUs as of January 31, 2018, (iii) in the case of accelerated 2016 and 2017 PSUs, the share
payout in the table assumes that the Covered Termination occurs during the PSU Performance Period and the
SeaChange Relative TSR Percentile Rank is at the 50th percentile at the time of the Covered Termination, and
(iv) in the case of accelerated 2018 PSUs, fifty percent (50%) of the target award for prospective periods.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis
required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the
Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included
in this proxy statement.
32
THE COMPENSATION COMMITTEE
Mark Bonney, Chairman
Mary Palermo Cotton
Andrew Sriubas
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Mr. Bonney (Chairman), Ms. Cotton and Mr. Sriubas. No person
who served as a member of the Compensation Committee was, during the past fiscal year, an officer or employee of
SeaChange or any of its subsidiaries, was formerly an officer of SeaChange or any of its subsidiaries, or had any
relationship requiring disclosure herein. No executive officer of SeaChange served as a member of the compensation
committee of another entity (or other committee of the Board of Directors performing equivalent functions or, in the
absence of any such committee, the entire Board of Directors), one of whose executive officers served as a director
of SeaChange.
CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item
402(u) of Regulation S-K, we are providing the following information about the relationship of the annual total
compensation of our employees and the annual total compensation of our CEO, Mr. Terino. The CEO pay ratio is
a reasonable estimate calculated in a manner consistent with these requirements. For our fiscal year 2018 our median
employee annual total compensation was $91,806.
Our CEOs annual total compensation was $1,324,468.
Accordingly, the ratio of the CEOs annual total compensation to the median employees annual total compensation
was 14.4 to 1.
To identify the median of the annual total compensation of all our employees, as well as to determine the
annual total compensation of our median employee and our CEO, we used the following methodology, material
assumptions, adjustments and estimates:
- We determined that, as of December 31, 2017 (the chosen date for identifying our median employee), our
employee population consisted of 281 employees worldwide.
- We used a consistently applied compensation measure to identify our median employee by comparing the
total cash compensation (base salary, wages, commissions and cash bonuses) actually paid in 2017 as
reflected in our payroll records. To make them comparable, base salaries for newly hired employees who
had worked less than a year were annualized.
- We used all of our worldwide employees, excluding Mr. Terino, in our analysis, and used the currency
exchange rate in effect on December 31, 2017 to convert all currencies to U.S. dollars for the comparison.
We did not make any cost of living adjustments in identifying the median employee.
-
After we identified our median employee, we combined all of the elements of such employees
compensation for the Companys fiscal year ending January 31, 2018 in accordance with the requirements
of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation of $91,806.
- With respect to the annual total compensation of our CEO, we used the amount reported in the Total
column of our fiscal 2018 Summary Compensation Table included in this Proxy Statement and
incorporated by reference under Part III, Item 11 of our Annual Report.
33
PROPOSAL NO. II
ADVISORY VOTE ON COMPENSATION OF NAMED EXECUTIVE OFFICERS
The Company is providing stockholders with the opportunity at the 2018 Annual Meeting to vote on the
following advisory resolution, commonly known as Say-on-Pay:
RESOLVED,
the
compensation of the Companys named executive officers as disclosed in the Companys proxy statement under the
heading Compensation Discussion and Analysis.
in a non-binding, advisory vote,
the Company approve,
the stockholders of
that
The Board has implemented an executive compensation program that rewards performance and is designed to
attract, retain and motivate the key individuals who are most capable of contributing to SeaChanges success and
building long-term value for its stockholders. This compensation program makes a substantial portion of executive
pay variable, subject to increase when performance targets are achieved, and subject to reduction when performance
targets are not achieved. SeaChange believes that
its annual
compensation plans effectively reward its executive officers for superior performance, while appropriately adjusting
compensation downward for less-than-superior performance. The Compensation Committee retains discretion as to
final payouts under the incentive compensation plans to ensure the goals of the overall program are met. SeaChange
believes that the compensation program is centered on a pay-for-performance philosophy and is strongly aligned
with the long-term interests of stockholders.
the variability in these payouts indicates that
In recent years, payouts under our executive compensation incentive plan have largely been limited to payouts
made for the achievement of individual performance objectives rather than the portion of payouts allocable to the
achievement of pre-established financial objectives of the Company, as these objectives have not been met. For
example, in fiscal 2017, payouts under our fiscal 2017 performance-based compensation plan were only made for
the achievement of certain individual performance objectives, and no payouts were made with respect to satisfying
the pre-established financial objectives. However, in fiscal 2018 payouts under our fiscal 2018 performance-based
compensation plan were made for the achievement of both the pre-determined Company financial objectives and
individual performance objectives. We believe that the variability in these payouts indicates that our annual
compensation plans effectively reward our executive officers for superior performance, while appropriately
adjusting compensation downward for less-than-superior performance.
We pay careful attention to any feedback we receive from our stockholders about our executive compensation,
including the annual Say-on-Pay vote. While we had already approved our fiscal 2018 compensation plan by the
time we held our Say-on-Pay vote in July 2017, we considered the stockholder advisory vote in the
implementation of our fiscal 2018 compensation plan and in formulating our fiscal 2019 compensation plan. This
consideration included reaching out to certain large stockholders to discuss and seek input on our compensation
plans.
The Board urges stockholders to read the Compensation Discussion and Analysis beginning on page 17 of this
proxy statement, which describes in more detail how the Companys executive compensation policies and
procedures operate and are designed to achieve our compensation objectives, and which includes the Summary
Compensation Table and other related compensation tables and narrative, appearing on pages 26 through 32 of this
proxy statement, which provide detailed information on the compensation of our named executive officers. The
Compensation Committee and the Board believe that the policies and procedures articulated in the Compensation
Discussion and Analysis are effective and that the compensation of our named executive officers reported in this
proxy statement reflects and supports these compensation policies and procedures.
While the vote is advisory, the Board and the Compensation Committee will consider the outcome of the vote
when considering future executive compensation arrangements. It is currently expected that stockholders will be
given an opportunity to cast an advisory vote on this topic annually, with the next opportunity occurring in
connection with the Companys Annual Meeting in 2019.
The Board of Directors unanimously recommends a vote FOR the approval of the Companys executive
compensation.
34
PROPOSAL NO. III
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Grant Thornton LLP currently serves as SeaChanges independent registered public accounting firm. The
Board of Directors is seeking ratification of the Audit Committees selection of Grant Thornton LLP to continue to
serve as the registered public accounting firm for the fiscal year ending January 31, 2019.
Independent Registered Public Accounting Firm for Fiscal 2019
The Audit Committee of the Board of Directors has selected the firm of Grant Thornton LLP, independent
accountants, to serve as the registered public accounting firm for the fiscal year ending January 31, 2019.
A representative of Grant Thornton LLP is expected to be present at the Annual Meeting, will have the
opportunity to make a statement if they desire to do so and is expected to be available to respond to appropriate
questions.
The Board of Directors has put the ratification of the selection of Grant Thornton LLP before the stockholders
because the Board believes that seeking stockholder ratification of the selection of the independent registered public
accounting firm is good corporate practice. If the appointment of Grant Thornton LLP is not ratified, the Audit
Committee will first review the basis for the stockholder vote and SeaChanges relationship with Grant Thornton
LLP and will then take such action as it deems necessary.
The Board of Directors unanimously recommends a vote FOR ratification of the appointment of
SeaChanges independent registered public accounting firm.
Principal Accountant Fees and Services
Fees for Services Provided by Grant Thornton LLP
The following table sets forth the aggregate fees for services provided by Grant Thornton LLP, SeaChanges
independent registered public accounting firm for the fiscal years ended January 31, 2018 and 2017.
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total:
2018
2017
$ 1,230,448 $ 1,227,967
$ 1,230,448 $ 1,227,967
Audit Fees. These are aggregate fees billed for professional services rendered by Grant Thornton LLP for the
fiscal year ended January 31, 2018, and for the fiscal year ended January 31, 2017 for (a) the annual audit of
SeaChanges financial statements for each such fiscal year including statutory audits of foreign subsidiaries and the
accompanying attestation report regarding SeaChanges internal control over financial reporting contained in
SeaChanges Annual Reports on Form 10-K, (b) reviews of the quarterly financial
information included in
SeaChanges Quarterly Reports on Form 10-Q for each such fiscal year and (c) reviews of SEC filings.
The Audit Committee of the Board of Directors has determined that the provision of the services as set out
above is compatible with maintaining Grant Thornton LLPs independence.
Audit Committee Pre-Approval Policy
The Audit Committees policy is to pre-approve all audit, audit-related, tax and other non-audit services that
may be provided by Grant Thornton LLP, the independent registered public accounting firm. The policy identifies
the principles that must be considered by the Audit Committee in approving these services to ensure that Grant
Thornton LLPs independence is not impaired; describes the audit and audit-related, tax and other services that may
be provided; and sets forth pre-approval requirements for all permitted services. To date, Audit Committee pre-
approval has been sought for the provision of all services by Grant Thornton LLP.
35
OTHER MATTERS
Expenses and Solicitation
All costs of solicitation of proxies will be borne by SeaChange. In addition to solicitations by mail, certain of
SeaChanges directors, officers and regular employees, without additional remuneration, may solicit proxies by
telephone, facsimile, e-mail and personal interviews. The Company has engaged The Proxy Advisory Group, LLC,
to assist in the solicitation of proxies and provide related advice and informational support, for a service fee, plus
customary disbursements, which are not expected to exceed $15,000 in total. Brokers, custodians and fiduciaries
will be requested to forward the Notice and proxy soliciting material to the owners of stock held in their names, and
SeaChange will reimburse them for their reasonable out-of-pocket costs.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires SeaChanges directors, executive officers and holders of more
than 10% of SeaChanges common stock (collectively, Reporting Persons) to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock of SeaChange. Such persons are required by
regulations of the SEC to furnish SeaChange with copies of all such filings. Based on its review of the copies of
such filings received by it with respect to the fiscal year ended January 31, 2018, and written representations from
certain Reporting Persons, SeaChange believes that all Reporting Persons complied with all Section 16(a) filing
requirements in the fiscal year ended January 31, 2018.
Certain Relationships and Related Transactions
SeaChange has adopted a written policy pursuant to the Second Amended and Restated Charter of the Audit
Committee and the Charter of the Corporate Governance and Nominating Committee that all transactions between
SeaChange and its officers, directors, principal stockholders and affiliates will be approved by a majority of the
Board of Directors, including a majority of the independent and disinterested outside directors on the Board of
Directors, and will be on terms no less favorable to SeaChange than could be obtained from unaffiliated third
parties.
36
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2018
or
(cid:4)(cid:4) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-21393
SEACHANGE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
04-3197974
(IRS Employer
Identification No.)
50 Nagog Park, Acton, MA 01720
(Address of principal executive offices, including zip code)
(978)-897-0100
(Registrants telephone number, including area code)
Securities Registered Pursuant to Section 12(b) Of The Act:
Common Stock, $0.01 par value
Securities Registered Pursuant to Section 12(g) Of The Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:4) No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No ⌧
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 (cid:4)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ⌧ No (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or in any amendment to this Form 10-K. ⌧
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
Non-accelerated filer
(cid:4)
(cid:4)
Accelerated filer
Smaller reporting company
Emerging growth company
⌧
(cid:4)
(cid:4)
If an emerging growth company, indicate by a check mark if the registrant has elected 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. (cid:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:4) No ⌧
As of July 31, 2017, the aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price for the
registrants Common Stock on the NASDAQ Global Select Market on such date was $98,541,508. The number of shares of the registrants Common
Stock outstanding as of the close of business on April 12, 2018 was 35,614,396.
Portions of the definitive Proxy Statement filed no later than 120 days after the Companys fiscal year end pursuant to Regulation 14A are
incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE:
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Annual Report on Form 10-K (Form 10-K) of SeaChange International, Inc. ("SeaChange," the
"Company," "us," or "we"), including, but not limited to the statements contained in Item 1., "Business," and Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations, along with statements contained in other reports that we
have filed with the Securities and Exchange Commission (SEC), external documents and oral presentations, which are not historical
facts, are considered to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These statements which may be expressed in a variety of
ways, including the use of forward looking terminology such as "believe," "expect," "seek," "intend," "may," "will," "should," "could,"
"potential," "continue," "estimate," "plan," or "anticipate," or the negatives thereof, other variations thereon or compatible
terminology, relate to, among other things, our transition to being a company that primarily provides software solutions, the effect of
certain legal claims against us, projected changes in our revenues, earnings and expenses (including taxes), exchange rate sensitivity,
interest rate sensitivity, liquidity, product introductions, industry changes, general market conditions, our continued limited number of
customers, geographic location of sales and a reduction in workforce and the impact thereof. We do not undertake any obligation to
publicly update any forward-looking statements.
These forward-looking statements, and any forward-looking statements contained in other public disclosures of the Company which
make reference to the cautionary factors contained in this Form 10-K, are based on assumptions that involve risks and uncertainties
and are subject to change based on the considerations described below. We discuss many of these risks and uncertainties in greater
detail in Item 1A., Risk Factors,
performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied
by such forward-looking statements.
of this Form 10-K. These and other risks and uncertainties may cause our actual results,
The following discussion should be read in conjunction with Part II, Item 7., "Management Discussion and Analysis of Financial
Condition and Results of Operations," and our financial statements and footnotes contained in this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
BUSINESS.........................................................................................................................................................................
.
RISK FACTORS ...............................................................................................................................................................
UNRESOLVED STAFF COMMENTS ............................................................................................................................
.
PROPERTIES ....................................................................................................................................................................
.
LEGAL PROCEEDINGS..................................................................................................................................................
.
MINE SAFETY DISCLOSURES .....................................................................................................................................
.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES..................................................................................................................
.
SELECTED FINANCIAL DATA.....................................................................................................................................
.
Item 6.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
OPERATIONS
.
..............................................................................................................................................................
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................................
.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................................................................................
.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
AA
.
DISCLOSURE ..............................................................................................................................................................
CONTROLS AND PROCEDURES..................................................................................................................................
.
OTHER INFORMATION .................................................................................................................................................
.
PART III
Item 10.
Item 11.
Item 12.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ..........................................................
.
EXECUTIVE COMPENSATION.....................................................................................................................................
.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
Item 13.
Item 14.
STOCKHOLDER MATTERS
......................................................................................................................................
.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE...............
.
PRINCIPAL ACCOUNTING FEES AND SERVICES ...................................................................................................
.
PART IV
Page
4
10
24
24
24
25
26
28
29
53
54
94
95
96
97
97
97
97
97
Item 15.
Item 16.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.................................................................................................
98
.
FORM 10-K SUMMARY ................................................................................................................................................. 101
SIGNATURES................................................................................................................................................................... 102
.
ITEM 1.
BUSINESS
GENERAL
PART I
SeaChange International, Inc., 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 Acton, Massachusetts. Our products and
services facilitate the aggregation, licensing, management and distribution of video and advertising content for cable television system
operators, telecommunications companies, satellite operators and media companies. We sell our software products and services
worldwide, primarily to television service providers including: cable television system operators, such as Liberty Global, plc. (LGI),
Comcast Corporation (Comcast), 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 media companies such as Filmbank Media.
Our 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 revenues by
offering services such as video-on-demand (VOD) programming on a variety of consumer devices, including televisions (TVs),
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 serving adjacent markets, such
as mobile and OTT. Our core technologies provide a foundation for products and services that can be deployed in next generation
video delivery systems capable of increased levels of subscriber activity across multiple devices.
On May 5, 2016, we acquired a 100% share of DCC Labs in exchange for an aggregate of $2.7 million in newly issued shares of
SeaChange common stock and $5.2 million in cash, net of cash acquired, resulting in a total net purchase price of $7.9 million. DCC
Labs is a developer of set-top and multiscreen device software. The acquisition of DCC Labs in fiscal 2017 enabled us to optimize the
operations of our In-Home business, which developed home video gateway software including SeaChanges Nucleus and NitroX
products. In addition, the acquisition brought market-ready products, including an optimized television software stack for Europes
Digital Video Broadcasting community, and an HTML5 framework for building additional user experience client applications across a
variety of CPE devices, including Android TV STBs, tablets, mobile and computer devices. During fiscal 2018, the In-Home business
became the center of engineering and expanded to include product development for backoffice, advertising and legacy products. The
Poland operation became the prime engineering location and as of the end of fiscal 2018, was the largest location by number of
engineers. In addition, the engineering efforts were combined and the teams were re-organized into a single global team in fiscal 2018,
which spans a reduced number of locations globally compared to fiscal 2017. As part of the engineering transition, organizational
improvements were implemented in order to focus on software quality, reliability and pre-integration, in order to de-risk deployments
and improve go-to-market time for new solutions and existing upgrades. The global engineering team introduced DevOps practices
with a customer-centric view of technology improvements across all products within the SeaChange solution. Along with operational
improvements, engineering introduced changes to process and workflow which enabled more accurate effort estimations and velocity
tracking. With the introduction of common agile project methodology across all teams and products, the efficiency of software
engineering increased, which allowed more engineering resources to focus on innovation and development of industry leading features
and enhancements to existing products as well as new product releases that expand the SeaChange technology franchise. At the same
time, improved efficiency and better allocation of software developers enabled a more lean and targeted approach to supporting
existing deployments and delivering upon support commitments for legacy products using a cost-optimized workforce.
In conjunction with the DCC Labs acquisition and an additional company-wide cost savings program established in the second half of
fiscal 2017, SeaChange commenced a restructuring program (Restructuring Program), which has allowed us to achieve
approximately $38 million in annualized cost savings since its commencement. The Restructuring Program resulted in aggregate
charges of $9.2 million as of January 31, 2018 in severance and other restructuring costs. These charges include costs for workforce
reductions, facility closings and other costs to complete the restructuring, such as legal and consulting fees. As of January 31, 2018,
the Restructuring Program has been completed and has helped us improve operations and optimize our cost structure since its
4
inception. Any remaining costs related to the Restructuring Program will be expensed as incurred to severance and other restructuring
costs in our consolidated statements of operations and comprehensive income (loss) in future quarters.
PRODUCTS AND SERVICES
Our business is focused on the following product areas: video platform (including content management), advertising and user
experience. Our revenue sources consist of product revenue from these areas, as well as related services.
Video Platform
ff
Adrenalin is a comprehensive software platform that enables service
SeaChange Adrenalin Multiscreen Video Backoffice Platform.
providers to manage, monetize and deliver a seamless viewing experience to subscribers across TVs, PCs, tablets, smart phones and
other IP-enabled devices. Adrenalin is a modular software solution allowing customers to gradually adopt new functionality and
features to expand multiscreen television distribution capabilities. We offer our Adrenalin platform under two deployment options:
through onsite software licenses and on a cloud-based offering through software-as-a-service (SaaS). With an onsite software
license model, revenue is derived from perpetual software licenses, maintenance and support fees and professional services. In a SaaS
offering, we license our product offerings and customers pay us on a monthly recurring basis based on the total number of subscribers
deployed by the customer.
a
SeaChange AssetFlow Content Management Solution. In todays multiscreen viewing environment, programming or advertisements
are reproduced with numerous variants to serve the unique requirements of multiple network types, consumer devices and
d
geographies. Metadata, such as poster, description and pricing, associated with the programming, is also managed by the platform. At
the point of content ingest, our AssetFlow software is used to receive, manage and publish video content for viewing on televisions,
television program asset
tablets, PCs and other consumer devices.
tracking, metadata management, and overall content workflow processing.
AssetFlow simplifies the increasingly complex tasks of movie and
End-to-End Integrated Platforms.
our offerings in the integrated platform service/solution market.
ff
Leveraging the experience gained through our SeaChange Rave offering, we continue to expand
Advertising
SeaChange Infusion Advanced Advertising Platform. As more video content is served to multiple consumer devices, the ability to
generate additional revenue by inserting advertising across multiple platforms becomes crucial to service providers seeking to offset
content rights costs and reduce subscriber fees for viewing the content. Infusion enables service providers to maximize advertising
revenue across multiscreen, broadcast, on-demand and OTT viewing and reach their audiences while viewers watch content across
multiple devices.
User Experience
Nucleus. Nucleus ports to third-party set-top boxes, or other customer on-premises equipment hardware and system on a chip, and acts
as a hub for all video distribution to any IP- connected device in the home, such as tablets, smart phones and game consoles.
SeaChange capitalizes on open software and networking technologies to offer Nucleus, a fully customizable foundation for rich
multiscreen services running on the chipset and hardware. Nucleus enables the service providers to select the chipset, hardware and
set-top box vendor of their choice. Nucleus extends providers video services to a wide range of video consumer devices through its
support for Digital Living Network Alliance networking protocols. This enhances the overall offering by providing the framework for
Nucleus leverages the industry Reference Design Kit, a technology standard that
the introduction of new applications. Further, Nucleus leverages the industry Reference Design Kit, a technology standard that
enables the video service provider community to use open technologies to more rapidly introduce and support service innovations.
XX
SeaChange NitroX. NitroX empowers service providers and content owners to optimize
multiscreen and OTT services. Its features and functionality allow service providers to fully leverage the extensive content
management, delivery and monetization capabilities of Seachange
user experience that is pre-integrated with SeaChanges widely deployed Adrenalin or third-party multiscreen video platform and
Nucleus.
s platforms. NitroX products provide a ready-to-deploy multiscreen
live and on-demand video consumption on
a
Services
SeaChange offers comprehensive professional services, maintenance and support for all its products. We have developed extensive
capabilities in systems integration, implementation and customer engineering. We also offer managed services with advantages,
5
including remote monitoring and proactive system maintenance, to help our customers quickly and confidently establish new on-
demand and multiscreen capabilities.
STRATEGY
Our goal is to strengthen our position as a leading global provider of multiscreen video delivery solutions by enabling service
providers and content owners to increase revenue opportunities by delivering transformative multiscreen video services to their end
users. Key elements of our strategy include:
•
•
•
•
•
•
We intend to continue providing our current and future customer base with industry-leading solutions through our focus
on product innovation and substantial investment in research and development for our latest feature-rich software products
and services;
We intend to provide pre-packaged integrated solutions, known as end-to-end solutions, with the goal of better enabling
new and existing customers to drive the adoption of subscription-based, SaaS models through service offerings hosted
and/or managed by us;
We intend to continue pursuing strategic collaborations that we believe will strengthen our industry leadership position,
expand our geographic presence, open new markets or allow us to expand to new products or services, or enhance our
existing ones;
We may enter strategic relationships to help our customers address deficiencies in their market space;
We intend to continue to focus on both selling our products to support a single screen and to upgrade our services to
support multiple devices as service providers expand their reach. We intend to continue to be able to scale to enablea
platforms as part of the initial sale; and
We intend to expand our customer base in Asia Pacific and Latin America as well as market segments such as mobile,
satellite, telecommunications and media companies.
RESEARCH AND DEVELOPMENT
We have focused and streamlined our research and development efforts in recent years. Our research and development costs were
$23.2 million in fiscal 2018, $30.1 million in fiscal 2017 and $33.7 million in fiscal 2016. We believe that our success will depend on
our ability to develop and timely introduce new integrated solutions and enhancements to our existing products that meet changing
customer requirements in our current and future customer base as well as new markets. We have made substantial investments in
developing and bringing to market our next generation products. Our current research and development activities are focused on
developing multiscreen television platforms, content management solutions, additional user experience applications, advertising
solutions and integrating the solutions we currently offer. Our direct sales and marketing groups closely monitor changes in customer
needs, changes in the marketplace and emerging industry standards to help us focus our research and development efforts to address
our customers needs, such as increasing average revenue per subscriber, lowering operating and capital costs and reducing customer
churn. Our significant research and development efforts are performed at our Acton, Massachusetts headquarters, in Warsaw, Poland
and in Eindhoven, Netherlands.
t
During fiscal 2018, we continued the focus of our research and development efforts on the next generation software platforms, which
are vital to our customers success. We achieved this by further increasing our investment in our software products for multiscreen
video platforms. As of January 31, 2018, we had a research and development staff of 104 full-time employees and 67 contract
employees.
SELLING AND MARKETING
Our sales cycle tends to be long, in some instances 12-24 months, and purchase orders can be more than one million dollars. It is
sometimes difficult to predict in what quarter or fiscal year our sales will occur. Considering the complexity of our video products, we
primarily utilize a direct sales process. We sell and market our products worldwide through a combination of a direct sales
organization and sales representatives and partners. Working closely with customers to understand and define their needs enables us to
obtain better information regarding market requirements, enhance our expertise in our customers industries, and more effectively and
precisely convey to customers how our solutions address their specific needs.
6
We use several marketing programs to support the sale and distribution of our products. We also market certain of our products to
systems integrators and value-added resellers. We attend and exhibit our products at a limited number of prominent industry trade
shows and conferences and we present our technology at seminars and smaller conferences to promote their awareness. In fiscal 2018
and 2017, to increase software sales in North America and EMEA, we increased our sales efforts in those regions. We also increased
our sales efforts in other geographic areas such as Asia Pacific and Latin America. As of January 31, 2018, we had a selling and
marketing staff of 41 employees.
MANUFACTURING AND QUALITY CONTROL
Our manufacturing operation consists primarily of component and subassembly procurement, systems integration and final assembly,
testing and quality control of the complete systems. As of January 31, 2018 we had a manufacturing staff of 4 employees, reflecting
our transition to being a company that primarily provides software solutions.
OUR CUSTOMERS
We currently sell our products primarily to video service providers, such as cable system operators and telecommunications
companies, as well as content providers. Our customer base is highly concentrated among a limited number of large service provider
customers. A significant portion of our revenues in any given fiscal period have been derived from substantial orders placed by these
large organizations. For the fiscal year ended January 31, 2018, LGI was the only customer that accounted for more than 10% of our
total revenues.
We expect that we will continue to be dependent upon a limited number of customers for a significant portion of our revenues in the
near future, even as we intend to penetrate new markets and customers. As a result of this customer concentration, our business,
financial condition and results of operations could be materially adversely affected by the failure of anticipated orders to materialize
and by deferrals or cancellations of orders because of changes in customer requirements or new product announcements or
introductions. In addition, the concentration of customers may cause variations in revenue, expenses and operating results on a
quarterly basis due to seasonality of orders, the timing and relative size of orders received and accepted during a fiscal quarter, or the
timing and size of orders for which revenue recognition criteria have been satisfied during a fiscal quarter.
We do not believe that our backlog at any time is meaningful as an indicator of our future level of revenue for any specific future
period. Because of the requirements of some customers, orders may require substantive acceptance criteria prior to revenue being
recognized, resulting in the related revenues not being recognized in the ensuing quarter. Therefore, there is no direct correlation
between the backlog at the end of any quarter and our total revenue for the following quarter or other periods. If our sales growth
increases or we experience business model changes, our backlog may become a meaningful indicator of revenue in the future.
COMPETITION
The markets in which we compete are characterized by intense competition, with many suppliers providing different types of products
to different segments of the markets. In new markets for our products, we compete based on price, functionality and delivery
capabilities. In markets in which we have an established presence, we compete principally based on the breadth of our products
features and benefits, including the flexibility, scalability, professional quality, ease of use, reliability and cost effectiveness of our
products, and our reputation and the depth of our expertise, customer service and support. While we believe that we currently compete
favorably overall with respect to these factors and that our ability to provide integrated solutions to manage and distribute digital video
differentiates us from our competitors, in the future we may not be able to continue to compete successfully with respect
factors.
to these
ff
In the market for multiscreen video, we compete with various larger companies offering video platforms and applications such as
Cisco Systems, Inc., Arris Group Inc., TiVo Corporation and Ericsson Inc., as well as in-house solutions built by the service provider.
Increasingly, we are also seeing competition from integrated end-to-end solutions such as Comcasts X-1 platform and many OTT
providers. We expect the competition in each of the markets in which we operate to intensify in the future with existing and new
competitors with significant market presence and financial resources.
Many of our current and prospective competitors have significantly greater financial, technical, manufacturing, sales, marketing and
other resources than we do. As a result, these competitors may be able to devote greater resources to the development, promotion, sale
and support of their products. Moreover, these companies may introduce additional products that are competitive with ours or enter
strategic relationships to offer complete solutions. Therefore, our products may not be able to compete effectively with these products
from these companies in the future.
7
PROPRIETARY RIGHTS
Our success and our ability to compete are dependent, in part, upon the proprietary rights of our intellectual property. We have
currently been granted 24 patents worldwide. In addition, we rely on a combination of contractual rights, trademark laws, trade secrets
and copyright laws to establish and protect our proprietary rights in our products. It is possible that in the future, not all these patent
applications will be issued or that, if issued, the validity of these patents would not be upheld. It is also possible that the steps taken by
us to protect our intellectual property will be inadequate to prevent misappropriation of our technology or that our competitors will
independently develop technologies that are substantially equivalent or superior to our technology. In addition, the laws of some
foreign countries in which our products are or may be distributed do not protect our proprietary rights to the same extent as do the
laws of the United States. Currently, we are not party to intellectual property litigation, but we may be a party to litigation in the future
to enforce our intellectual property rights or because of an allegation that we infringe others intellectual property.
ff
EMPLOYEES
The table below represents the number of full-time employees that we employ in different geographic areas across the world for the
periods shown. We also use part-time and many other temporary employees in the ordinary course of our business. We believe that
our relations with our employees are good. None of our employees are represented by a collective bargaining agreement. Employees
in certain foreign jurisdictions are represented by local works council as may be customary or required in those jurisdictions.
Countryy
United States
Philippines
NNetherlands
Poland
Other international
Total employees by country
January 31,
2018
2017
2016
150
49
57
30
286
199
132
83
31
51
496
307
171
116
66
660
During fiscal 2017, we implemented costs-savings efforts related to the TLL, LLC (Timeline Labs) business and the DCC Labs
acquisition. We implemented an additional company-wide cost savings program beginning in the third quarter of fiscal 2017, which
included a worldwide reduction in workforce, to help improve operations and optimize our cost structure with the goal of restoring
SeaChange to profitability and positive cash flow. In total, these actions affected more than 180 employees in fiscal 2018 and
approximately 170 employees in fiscal 2017. Reductions in workforce relating to this latest cost-savings efforts are completed.
ACQUISITIONS AND LOSS ON IMPAIRMENT OF TLL, LLC
DCC Labs
On May 5, 2016, we acquired a 100% share of DCC Labs in exchange for an aggregate of $2.7 million in newly issued shares of
SeaChange common stock and $5.2 million in cash, net of cash acquired, resulting in a total net purchase price of $7.9 million. The
acquisition of DCC Labs enables us to optimize the operations of our In-Home business, which develops home video gateway
software including SeaChanges Nucleus and NitroX products. In addition, the acquisition brings market-ready products, including an
optimized television software stack for Europes Digital Video Broadcasting community and an HTML5 framework for building
additional user experience client applications across a variety of CPE devices, including Android TV STBs, tablets, mobile and
computer devices.
We accounted for the acquisition of DCC Labs as a business combination, which requires us to record the assets acquired and
liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of the net assets acquired was
recorded as goodwill. We engaged an independent appraiser to assist management in assessing the fair values of the tangible and
intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the acquisition date. Assets
acquired in the acquisition include receivables, prepaid expenses and property and equipment while liabilities assumed include
accounts payable, other accrued expenses, deferred taxes and income taxes payable. The amounts recorded for these assets and
liabilities are final based on information obtained about the facts and circumstances that existed as of the acquisition date.
Loss on Impairment of TLL, LLC
In January 2016, our Board of Directors authorized a restructuring plan to wind down the Timeline Labs operations, as previously
reported in a Current Report on Form 8-K filed with the SEC on February 17, 2016. Based on the decision to enter into the
restructuring plan and the plans impact on the projected future cash flows of the Timeline Labs operations, we determined that the
8
carrying amount of all long-term assets that resulted from the February 2015 acquisition had exceeded their fair value as of January
31, 2016. As a result, these long-term assets were deemed fully impaired and we recorded the $21.9 million net book value of these
long-term assets as a component of loss on impairment of long-lived assets in our consolidated statements of operations and
comprehensive income (loss) for the fiscal year ended January 31, 2016. Additionally, we reduced the contingent consideration
liability associated with the Timeline Labs acquisition to zero, as we determined that the defined performance criteria would not be
achieved, and credited the reversal of the liability of $0.4 million to loss on impairment of long-lived assets in our consolidated
statements of operations and comprehensive income (loss) for the fiscal year ended January 31, 2016. In addition, we incurred $0.7
million in severance and other restructuring charges during fiscal 2017 related to cost-saving actions taken with respect to the
Timeline Labs business.
a
EXECUTIVE OFFICERS
The following is a list of our executive officers, their ages as of April 12, 2018 and their positions held with us:
Name
Edward Terino
Jonathan Rider
Peter Faubert
g
Age
Title
64 Chief Executive Officer and Director
54 Chief Operating Officer, Senior Vice President
47 Chief Financial Officer, Senior Vice President, Finance and Administration and
David McEvoy
60 Senior Vice President and General Counsel and Secretary
Treasurer
Mr. Terino became SeaChanges Chief Executive Officer (CEO) effective April 6, 2016 having previously served as Chief
Operating Officer (COO) since June 2015. He has served on the Companys board of directors since 2010. Mr. Terinos
professional experience spans 30 years in senior management and operational roles for public companies including service as Senior
Vice President (SVP) and Chief Financial Officer (CFO) of Art Technology Group, Inc. from September 2001 to June 2005, CEO
and CFO of Arlington Tankers Ltd. from July 2005 to December 2008, and Vice President (VP) of Finance and Operations at
Houghton Mifflin Harcourt from 1985 to 1996. He has served on the board of directors for software and technology companies
including Extreme Networks, Inc. from October 2012 to November 2013, S1 Corporation from April 2007 to February 2012, Phoenix
Technologies Ltd. from November 2009 to November 2010, and EBT International, Inc. from October 1999 to March 2006. He also
served on the board of directors of Baltic Shipping Ltd. from March 2010 to July 2015.
Mr. Rider joined the Company on April 19, 2016 as Chief Information Officer (CIO). He became COO and Senior Vice President
on January 31, 2017. He brings over 30 years of senior management experience in the high technology sector. Prior to joining
SeaChange, Mr. Rider was CIO of Dynatrace from August 2014 to February 2016; Senior Vice President, Technology and
Engineering of Arcadia Solutions from September 2013 to August 2014; and Principal and CIO of JetStream Consulting LLC from
June 2006 to January 2014. Mr. Rider held various senior positions with PTC, Gilbane Building Company, Monster Worldwide,
Netscout Systems and Helidesigns. Mr. Rider served as a U.S. Army Officer and helicopter instructor. He has a bachelor of science
degree in aeronautics, engineering/aviation and a masters degree in e-business from the University of Phoenix.
Mr. Faubert joined the Company on July 7, 2016 as CFO, SVP and Treasurer. He brings over 15 years of extensive finance leadership
for public and private software companies that focused on video service providers, mobility and enterprise computing. Prior to joining
the Company, Mr. Faubert served as CFO of This Technology, Inc. since December 2013. Prior to that, Mr. Faubert served as CFO
and Treasurer of Vision Government Solutions, Inc. from October 2012 to December 2013. He has also served as CFO of JNJ Mobile
(MocoSpace) from February 2009 to July 2012 and CFO and Treasurer at Turbine, Inc. from August 2005 to January 2009. Prior to
that Mr. Faubert held various senior finance positions with Viisage Technology Inc., Burntsand Inc. and Ariba Inc. Mr. Faubert is also
a Certified Public Accountant.
Mr. McEvoy joinedd the Company on July 1, 2012 as VP and General Counsel. He became SVP and General Counsel on February 1,
2013. Prior to joining SeaChange, Mr. McEvoy was the SVP and General Counsel of Peoplefluent Inc. Mr. McEvoy was the SVP and
General Counsel of Art Technology Group, Inc. (ATG) from September 2005 to March 2010. ATG was acquired by Oracle on
January 5, 2011. Prior to joining ATG, Mr. McEvoy was the Group General Counsel of Gores Technology Group, a private equity
firm. Mr. McEvoy has held various General Counsel and other executive level legal positions with several companies including
Aprisma Inc., Anker Systems Ltd., VeriFone Inc., Mattel Interactive, Broderbund and The Learning Company.
9
GEOGRAPHIC INFORMATION
Geographic information is included in Part II, Item 7 of this Form 10-K under the heading Management
s Discussion and Analysis of
Financial Condition and Results of Operations-Results of Operations and in Note 11, Segment Information, Significant Customers
and Geographic Information, to the consolidated financial statements located in Part II, Item 8, of this Form 10-K.
AVAILABLE INFORMATION
SeaChange is subject to the informational requirements pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the Exchange Act). SeaChange files periodic reports, proxy statements and other information with the SEC. Such reports,
proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E.,
Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site
(http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file
electronically.
Financial and other information about SeaChange, including our Code of Ethics and Business Conduct and charters for our Audit
Committee, Compensation Committee and Corporate Governance and Nominating Committee, is available on the Investor Relations
section of our website at www.schange.com. We make available free of charge on our website our Form 10-K, Quarterly Reports on
Form 10-Q (Form 10-Q), Current Reports on Form 8-K (Form 8-K) and amendments to those reports as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the SEC. The information contained on our web site is not
incorporated by reference into this document and should not be considered a part of this Form 10-K. Our website address is included
in this document as an inactive textual reference only.
ITEM 1A. RISK FACTORS
We wish to caution each reader of this Form 10-K to consider the following factors and other factors discussed herein and in other
past reports, including but not limited to prior year Form 10-K and Form 10-Q reports filed with the SEC. Our business and results of
operations could be materially affected by any of the following risks. The factors discussed herein are not exhaustive. Therefore, the
factors contained herein should be read together with other reports that we file with the SEC from time to time, which may
supplement, modify, supersede, or update the factors listed in this document.
ff
Our business is dependent on customers continued spending on video solutions and services. A reduction in spending by
customers would adversely affect our business.
Our performance is dependent on customers continued spending for video solutions and services. Spending for these systems and
services is cyclical and can be curtailed or deferred on short notice. A variety of factors affect the amount of spending, and, therefore,
our sales and profits, including:
•
•
•
•
•
•
•
•
general economic conditions;
customer specific financial or stock market conditions;
availability and cost of capital;
governmental regulation;
demand for services;
competition from other providers of video solutions and services;
acceptance by our customers; and
real or perceived trends or uncertainties in these factors.
Any reduction in spending by our customers would adversely affect our business. We continue to have limited visibility into the
capital spending plans of our current and prospective customers. Fluctuations in our revenue can lead to even greater fluctuations in
our operating results. Our planned expense levels depend in part on our expectations of future revenue. Our planned expenses include
significant investments, particularly within our research and development organization, which we believe are necessary to continue to
provide innovative solutions to meet our current and prospective customers needs. As a result, it is difficult to forecast revenue and
operating results. If our revenue and operating results are below the expectations of our investors and market analysts, it could cause a
decline in the price of our common stock.
10
Our efforts to introduce SaaS-based multiscreen service offerings may either not succeed or impair the sale of our on-site lic
offerings, the occurrence of either of which may adversely affect our financial condition and operating results.
tt
ensed
We have been, and will continue to, devote considerable resources and allocate capital expenditures to growing our SaaS service
offering revenue over the next several years. There can be no assurance that we will meet our revenue targets for this service and if we
fail to achieve our revenue goals, our growth and operating results will be materially adversely affected. Additionally, new or existing
customers may choose to purchase our SaaS services rather than our on-premise solutions. If our customers purchases trend away
from perpetual licenses toward our SaaS, or to the extent customers defer orders due to evaluation of SaaS, our product revenues, and
our timing of revenue generally, may be adversely affected, which could adversely affect our results of operations and financial
condition.
If we are unable to successfully introduce new products or enhancements to existing products on a timely basis, our financial
condition and operating results may be adversely affected by a decrease in sales of our products.
Because our business plan is based on technological development of new products and enhancements to our existing products, our
future success is dependent on our successful introduction of these new products and enhancements on a timely basis. In the future, we
may experience difficulties that could delay or prevent the successful development, introduction and marketing of these and other new
products and enhancements, or find that our new products and enhancements do not adequately meet the requirements of the
marketplace or achieve market acceptance. Announcements of currently planned or other new product offerings may cause customers
to defer purchasing our existing products. Moreover, despite testing by us and by current and potential customers, errors or failures
may be found in our products, and, even if discovered, may not be successfully corrected in a timely manner. These errors or failures
could cause delays in product introductions and acceptance, or require design modifications that could adversely affect our
competitive position. Our inability to complete the development of new products or enhancements on a timely basis or the failure of
these new products or enhancements to achieve market acceptance could have a material adverse effect on our business, financial
condition and results of operations in future periods.
Our future success is dependent on the manner in which the multiscreen video and OTT markets develop, and if these markets
develop in a manner that does not facilitate inclusion of our products and services, our business may not continue to grow.
A large portion of our anticipated revenue growth is expected to come from sales and services related to our multiscreen video and
OTT products. These markets continue to develop as commercial markets, both within and outside North America. In addition to the
potential size of these markets and the timing of their development being uncertain, so too is the technological manner in which they
will develop. The success of these markets will require that video service providers continue to upgrade their cable networks to service
and successfully market multiscreen video, OTT and similar services to their cable television subscribers in a manner that permits
inclusion of our products and services. If cable system operators and telecommunications companies fail to make the capital
expenditures necessary to upgrade their networks or determine that broad deployment of multiscreen video and OTT services is not
viable as a business proposition or if our products cannot support a substantial number of subscribers while maintaining a high level of
performance, our revenues will not grow as we have planned.
We may be unsuccessful in our efforts to become a company that primarily provides software solutions.
Our efforts to become a company that primarily provides software solutions may result in a reduction in both the range of products
and services we offer and in the range of our current and potential future customers. Each of these factors may increase the level of
execution risk in our strategy, in that there may be increased variability in our revenues. If we are unsuccessful in this transition, our
business, financial condition and results of operation may be adversely affected, and the market price of our common stock may
decrease.
If we are unable to successfully compete in our marketplace, our financial condition and operating results may be adversely
affected.
We currently compete against companies offering video software solutions and have increasingly seen competition from integrated
end-to-end solutions such as Comcasts X-1 platform and a large number of OTT players. To the extent the products developed are
competitive with and not complementary to our products, they may be more cost-effective than our solutions, which could result in
cable television system operators and telecommunications companies discontinuing their purchases of our on-demand products. Due
to the rapidly evolving markets in which we compete, additional competitors with significant market presence and financial resources,
such as in-house solutions and online video platforms, may enter those markets, thereby further intensifying competition. Increased
competition could result in price reductions, cancellations of purchase orders, losses of business with current customers to
competitors, and loss of market share which would adversely affect our business, financial condition and results of operations. Many
11
of our current and potential competitors have greater financial, selling and marketing, technical and other resources than we do. They
may be in better position to withstand any significant reduction in capital spending by customers in our markets and may not be as
susceptible to downturns in a particular market. Moreover, our competitors may also foresee the course of market developments more
accurately than we do. Although we believe that we have certain technological and other advantages over our competitors, realizing
and maintaining these advantages will require a continued high level of investment by us in research and product development,
marketing and customer service and support. In the future, we may not have sufficient resources to continue to make these investments
or to make the technological advances necessary to compete successfully with our existing competitors or with new competitors. If we
are unable to compete effectively, our business, prospects, financial condition and operating results would be materially adversely
affected because of the difference in our operating results from the assumptions on which our business model is based.
ff
If we fail to respond to rapidly changing technologies related to multiscreen video, our business, financial condition and results of
operations would be materially adversely affect
of our products and services relative to those
tt
of our competitors would decrease.
tt
ed because the compet
itive advantage
ll
The markets for our products are characterized by rapidly changing technology, evolving industry standards and frequent new product
introductions and enhancements. Future technological advances in the television and video industries may result in
the availability of
new products or services that could compete with the solutions provided by us or reduce the cost of existing products or services, any
of which could enable our existing or potential customers to fulfill their video needs better and more cost efficiently than with our
products. Our future success will depend on our ability to enhance our existing video products, including the development of new
applications for our technology, and to develop and introduce new products to meet and adapt to changing
emerging technologies such as the OTT market. In the future, we may not be successful in enhancing our video products or
developing and marketing new products which satisfy customer needs or achieve market acceptance. In addition, there may be
services, products or technologies developed by others that render our products or technologies uncompetitive, unmarketable or
obsolete, or announcements of currently planned or other new product offerings either by us or our competitors that cause customers
to defer or fail to purchase our existing solutions.
customer requirements and
d
a
We have taken and continue to take measures to address the variability in the market for our products and services, which could
have long-term negative effects on our business or impact our ability to adequately address a rapid increase in customer demand.
We have taken and continue to take measures to address the variability in the market for our products and services, including due to
the impact of worldwide economic cycles, to increase average revenue per unit of our sales and to reduce our operating expenses,
rationalize capital expenditure and minimize customer turnover. These measures include shifting more of our operations to lower cost
regions by outsourcing and off-shoring, implementing cost reduction programs and reducing and rationalizing planned capital
expenditures and expense budgets. We cannot ensure that the measures we have taken will not impair our ability to effectively
develop and market products and services, to remain competitive in the industries in which we compete, to operate effectively, to
operate profitably during slowdowns or to effectively meet a rapid increase in customer demand. These measures may have long-term
negative effects on our business by reducing our pool of technical talent, decreasing or slowing improvements in our products and
services, making it more difficult to hire and retain talented individuals and to quickly respond to customers or competitors in an
upward cycle.
Because our customer base is highly concentrated among a limited number of large customers, the loss of or reduced demand by,
the return of product by one or more of these customers or the failure of revenue acceptance criteria to have been satisfied in a
given fiscal quarter, could have a material adverse effect on our business, financial condition and results of operations.
Our customer base is highly concentrated among a limited number of large customers, and, therefore, a limited number of customers
account for a significant percentage of our revenues in any fiscal period. We generally do not have written agreements that require
customers to purchase fixed minimum quantities of our products. Our sales to specific customers tend to vary significantly from year
to year and from quarter to quarter depending upon these customers budgets for capital expenditures and our new product
introductions. We believe that a significant amount of our revenues will continue to be derived from a limited number of large
customers in the future. The loss of, reduced demand for products or related services by, return of a product previously purchased by
any of our major customers or the failure of revenue acceptance criteria to have been satisfied in a given fiscal quarter, could
materially and adversely affect, either in a particular quarter or on a more long-term basis, our business, financial condition and results
of operations.
Consolidations in the markets we serve could result in delays or reductions in purchases of products, which would have a material
adverse effect on our business.
The markets we serve have historically experienced, and continue to experience, the consolidation of many industry participant
s. For
example, AT&T acquired Direct TV, Charter Communications acquired Time Warner Cable, Altice NV acquired HOT, Suddenlink
d
12
Communications and Cablevision Systems Corp., and Verizon Communications Inc. announced that it is selling assets to Frontier
Communications Corporation. When consolidations occur, it is possible that the acquirer will not continue using the same suppliers,
possibly resulting in an immediate or future elimination of sales opportunities for us or our competitors. Even if sales are not reduced,
consolidation can also result in pressure from customers for lower prices or better terms, reflecting the increase in the total volume of
products purchased or the elimination of a price differential between the acquiring customer and the company acquired.
Consolidations also could result in delays in purchasing decisions by the affected companies prior to completion of the transaction and
by the merged businesses. The purchasing decisions of the merged companies could have a material adverse effect on our business.
Cancellation or deferral of purchases of our products or final customer acceptance, or the return of previously purchased products
could cause a substantial variation in our operating results, resulting in a decrease in the market price of our common stock and
making period-to-period comparisons of our operating results less meaningful.
We derive a substantial portion of our revenues from purchase orders that exceed one million dollars in value. Therefore, any
significant cancellation or deferral of purchases of our products or receiving final customer acceptance could result in a substantial
variation in our operating results in any particular quarter due to the resulting decrease in revenue and gross margin. In addition, to the
extent significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected because our
operating costs and expenses are based, in part, on our expectations of future revenues, and we may be unable to adjust spending in a
timely manner to compensate for any revenue shortfall. Because of these factors, in some future quarter our operating results may be
below guidance that we may issue or the expectations of public market analysts and investors, either of which may adversely affect the
market price of our common stock. In addition, these factors may make period-to-period comparisons of our operating results less
meaningful.
Due to the lengthy sales cycle involved in the sale of our products, our quarterly results may vary and should not be relied on as an
indication of future performance.
Our software products and related services are relatively complex and their purchase generally involves a significant commitment of
capital, with attendant delays frequently associated with large capital expenditures and implementation procedures within an
organization. Moreover, the purchase of these products typically requires coordination and agreement among a potential customers
corporate headquarters and its regional and local operations. For these and other reasons, the sales cycle associated with the purchase
of our software products and services is typically lengthy and subject to a number of significant risks, including customers budgetary
constraints and internal acceptance reviews, over which we have little or no control. Based upon all of the foregoing, we believe that
our quarterly revenues and operating results are likely to vary significantly in the future, that period-to-period comparisons of our
results of operations are not necessarily meaningful and that these comparisons should not be relied upon as indications of future
performance.
ff
If there were a decline in demand or average selling prices for our products and services, our revenues and operating results would
be materially affected.
A decline in demand or average selling prices for our products or services in the foreseeable future, whether as a result of new product
introductions by others, price competition, technological change, inability to enhance the products in a timely fashion, or otherwise,
could have a material adverse effect on our business, financial condition and results of operations. Increasingly, we are seeing
competition from integrated end-to-end solutions such as Comcasts X-1 platform and a large number of OTT players, each of which
may reduce the demand for or average selling prices of our products and services and adversely affect our business, financial
condition and results of operations.
We must manage product transitions successfully to remain competitive.
The introduction of a new product or product line is a complex task, involving significant expenditures in research and development,
training, promotion and sales channel development. However, we cannot assure that we will be able to execute product transitions in
an efficient manner or that product transitions will be executed without harming our operating results. Failure to develop products with
required features and performance levels or any delay in bringing a new product to market could significantly reduce our revenues and
harm our competitive position.
We may fail to achieve our financial forecasts due to inaccurate sales forecasts or other factors.
Our revenues are difficult to forecast, and as a result, our quarterly operating results can fluctuate substantially. We use a pipeline
system, a common industry practice, to forecast sales and trends in our business. Our sales personnel monitor the status of all
proposals and estimate when a customer will make a purchase decision and the dollar amount of the sale. These estimates are
aggregated periodically to generate a sales pipeline. Our pipeline estimates can prove to be unreliable both in a particular quarter and
over a longer period of time, in part because the conversion rate or closure rate of the pipeline into contracts can be very difficult
13
to estimate. A reduction in the conversion rate, or in the pipeline itself, could cause us to plan or budget incorrectly and adversely
affect our business or results of operations. In particular, a slowdown in capital spending or economic conditions generally can
unexpectedly reduce the conversion rate in particular periods as purchasing decisions are delayed, reduced in amounts or cancelled.
The conversion rate can also be affected by the tendency of some of our customers to wait until the end of a fiscal period in the hope
of obtaining more favorable terms, which can also impede our ability to negotiate, execute and deliver upon these contracts in a timely
manner.
dd
Because a significant portion of our cost structure is largely fixed in the short-term, revenue shortfalls tend to have a
disproportionately negative impact on our profitability. The number of large new software licenses transactions increases the risk of
fluctuations in our quarterly results because a delay in even a small number of these transactions could cause our quarterly revenues
and profitability to fall significantly short of our predictions.
Restructuring programs could have a material negative impact on our business.
To increase strategic focus and operational efficiency we have implemented restructuring programs. In fiscal 2017, we undertook
significant cost-saving actions related to DCC Labs and in the second half of fiscal 2017 with a reduction in workforce. We may incur
additional restructuring costs or not realize the expected benefits of these new initiatives. Further, we could experience delays,
business disruptions, decreased productivity, unanticipated employee turnover and increased litigation-related costs in connection with
past and future restructuring and other efficiency improvement activities, and there can be no assurance that our estimates of the
savings achievable by restructuring will be realized. As a result, our restructuring and our related cost reduction activities could have
an adverse impact on our financial condition or results of operations.
If we are unable to manage our efforts to focus our business and grow in targeted areas, our business may be harmed through a
diminished ability to monitor and control effectively our operations, and a decrease in the quality of work and innovation of our
employees.
Our ability to successfully focus our business and grow in targeted areas requires effective planning and management. We are also
continuing to transition towards greater reliance on our software products and services for a significant portion of our total revenue. In
light of the growing complexities in managing our expanding portfolio of products and services, our anticipated future operations may
continue to strain our operational and administrative resources. To manage future growth effectively, we must continue to improve our
operational controls and internal controls over financial reporting, integrate new personnel and the businesses we have acquired, or
will acquire, and manage our expanding international operations. A failure to manage our growth may harm our business through a
decreased ability to monitor and control effectively our operations, and a decrease in the quality of work and innovation of our
employees upon which our business is dependent.
Because our business is susceptible to risks associated with international operations, we may not be able to maintain or increase
international sales of our products and services.
Approximately 65% of our total revenue is generated from sales outside the United States. Our international operations are expected to
continue to account for a significant portion of our business in the foreseeable future. However, in the future we may be unable to
maintain or increase international sales of our products and services. Our international operations are subject to a variety of risks,
including:
ff
•
•
•
•
•
•
•
•
•
difficulties in establishing and managing international distribution channels;
difficulty in staffing and managing foreign operations;
inability to collect accounts receivable;
difficulties in selling, servicing and supporting overseas products and services and in translating products and services into
foreign languages;
the uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property;
fluctuations in currency exchange rates;
multiple and possibly overlapping tax structures;
negative tax consequences such as withholding taxes and employer payroll taxes;
differences in labor laws and regulations affecting our ability to hire and retain employees;
14
•
•
•
•
•
•
business and operational disruptions or delays caused by political, social and economic instability and unrest, including
risks related to terrorist activity;
a
changes in economic policies by foreign governments, including the imposition and potential continued expansion of
economic sanctions by the United States and the European Union on the Russian Federation;
the burden of complying with a wide variety of foreign laws, treaties and technical standards;
cultural differences in the conduct of business;
natural disasters and pandemics; and
growth and stability of the economy or political changes in international markets.
The impact of one or more of these international risks could have a material and adverse effect on our business, financial condition,
operating results and cash flow.
We are subject to the Foreign Corrupt Practices Act (FCPA
), and our failure to comply
our reputation, business, and financial condition.
could result in penalties that could harm
We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign
officials to obtain or keep business. The FCPA also requires companies to maintain adequate record-keeping and internal accounting
practices to accurately reflect the transactions of the Company. Under the FCPA, U.S. companies may be held liable for actions taken
by their strategic or local partners or representatives. The FCPA and similar laws in other countries can impose civil and criminal
penalties for violations.
a
If we do not properly implement practices and controls with respect to compliance with the FCPA and similar laws, or if we fail to
enforce those practices and controls properly, we may be subject to regulatory sanctions, including administrative costs related to
governmental and internal investigations, civil and criminal penalties, injunctions and restrictions on our business activities, all of
which could harm our reputation, business and financial condition.
We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.
Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in
foreign currency exchange rates. These exposures may change over time as business practices evolve, and they could have a material
adverse impact on our financial results and cash flows. An increase in the value of the U.S. dollar could increase the real cost to our
customers of our products in those markets outside the United States where we often sell in dollars, and a weakened dollar could
increase local currency operating costs. In preparing our consolidated financial statements, certain financial information is required to
be translated from foreign currencies to the U.S. dollar using either the spot rate or the weighted-average exchange rate. If the U.S.
dollar weakens or strengthens relative to applicablea
income could significantly fluctuate. We are not able to predict the degree of exchange rate fluctuations; nor can we estimate the effect
any future fluctuations may have upon our future operations.
local currencies, there is a risk our reported sales, operating expenses and net
Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights from third-party challenges.
Our success and ability to compete depends upon our ability to protect our proprietary technology that is incorporated into our
products. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our
intellectual property rights. Although we have issued patents, we cannot assure that any additional patents will be issued or that the
issued patents will not be invalidated. We also enter confidentiality or license agreements with our employees, consultants and
corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Despite
these precautions, it may be possible for a third-party to copy or otherwise misappropriate and use our products or technology without
authorization, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.
We may need to resort to litigation in the future to enforce our intellectual property rights, to protect our trade secrets or to determine
the validity and scope of the proprietary rights of others. If competitors are able to use our technology, our ability to compete
effectively could be harmed.
We have been and in the future, could become subject to litigation regarding intellectual property rights, which could seriously
harm our business and require us to incur significant legal costs to defend our intellectual property rights.
The industry in which we operate is characterized by vigorous protection and pursuit of intellectual property rights or positions, which
on occasion, have resulted in significant and often protracted litigation. We have from time to time received, and may in the future
receive, communications from third-parties asserting infringements on patent or other intellectual property rights covering our
15
products or processes. We may be a party to litigation in the future to enforce our intellectual property rights or because of an
allegation that we infringe others intellectual property. Any parties asserting that our products infringe upon their proprietary rights
would force us to defend ourselves and possibly our customers or manufacturers against the alleged infringement, as many of our
commercial 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. We have received certain claims for indemnification from customers but have
not been made party to any litigation involving intellectual property infringement claims as a result. These claims and any resulting
lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. This possibility of
multiple damages serves to increase the incentive for plaintiffs to bring such litigation. In addition, these lawsuits, regardless of their
success, would likely be time-consuming and expensive to resolve and would divert management time and attention away from our
operations. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be
adequate to indemnify us for all liability that may be imposed. In addition, any potential intellectual property litigation also could
force us to stop selling, incorporating or using the products that use the infringed intellectual property or obtain from the owner of the
infringed intellectual property right a license to sell or use the relevant technology, although this license may not be available on
reasonable terms, or at all, or redesign those products that use the infringed intellectual property. If we are forced to take any of the
foregoing actions, our business may be seriously harmed.
If content providers limit the scope of content licensed for use in the digital VOD and OTT market, our business, financial
condition and results of operations could be negatively affected because the potential market for our products would be more
limited than we currently believe and have communicated to the financial markets.
rr
ii
The success of the multiscreen video market is contingent on content providers permitting their content to be licensed for use in this
market. Content providers may, due to concerns regarding either or both marketing and illegal duplication of the content, limit the
extent to which they provide content to their subscribers. A limitation of content for the VOD and OTT market would indirectly limit
the market for our products that are used in connection with that market.
If we are not able to obtain necessary licenses, services or distribution rights for third-party technology at acceptable prices, or at
all, our products could become obsolete or we may not be able to deliver certain product offerings.
We have incorporated third-party licensed technology into our current products and our product lines. From time to time, we may be
required to license additional technology or obtain services from third-parties to develop new products or product enhancements or to
provide specific solutions. Third-party providers may not be available or continue to be available to us on commercially reasonable
terms. The inability to maintain or re-license any third-party products required in our current products or to obtain any new third-party
licenses and services necessary to develop new products and product enhancements or provide specific solutions could require us to
obtain substitute technology of lower quality or performance standards or at greater cost. Such inabilities could delay or prevent us
from making these products or services, which could seriously harm the competitiveness of our solutions.
We may also incorporate open source software into our products. Although we monitor our use of open source closely, the terms of
many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a
manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. We could also be
subject to similar conditions or restrictions should there be any changes in the licensing terms of the open source software
incorporated into our products. In either event, we could be required to seek licenses from third-parties to continue offering our
products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on
a timely or successful basis, any of which could adversely affect our business, operating results and financial condition.
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We may not fully realize the benefits of our completed ac
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those
benefits. Future acquisitions may be difficult to integrate, disrupt our business, dilute stockholder value or divert management
attention.
quisitions or it may take longer than we anticipate for us to achieve
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As part of our business strategy, we have acquired and may in the future seek to acquire or invest in new businesses, products or
technologies that we believe could complement or expand our business, augment our market coverage, enhance our technical
capabilities or otherwise offer growth opportunities. Acquisitions could create risks for us, including:
•
•
•
•
difficulties in assimilation of acquired personnel, operations, technologies or products that may affect our ability to
develop new products and services and compete in our rapidly changing marketplace due to a resulting decrease in the
quality of work and innovation of our employees upon which our business is dependent;
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delays in realizing, or failure to realize, the anticipated benefits of an acquisition. Even if we can integrate these
businesses and operations successfully, we may not realize the full benefits we expect to achieve, within the anticipated
timeframe, or at all. If a company we purchase does not perform as we expected, our investment could become impaired
or we could discontinue the operations and our financial results could be negatively impacted, such as the Timeline Labs
acquisition on February 2, 2015, for which we subsequently impaired substantially all acquired assets and certain
liabilities as of January 2016;
adverse effects on the business relationships with pre-existing suppliers and customers of both companies. This may be
important to our business because we sell our products to a limited number of large customers, we purchase certain
components used in manufacturing our products from sole suppliers and we use a limited number of third-party
manufacturers to manufacture our product; and
uncertainty among current and prospective employees regarding their future roles with our company, which might
adversely affect our ability to retain, recruit and motivate key personnel.
Acquisitions or divestitures may adversely affect our financial condition.
We could acquire additional products, technologies or businesses, or enter joint venture arrangements, to complement or expand our
business. Negotiation of potential acquisitions, divestitures or joint ventures and our integration or transfer of acquired or divested
products, technologies or businesses, could divert managements time and resources.
As part of our strategy for growth, we may continue to explore acquisitions, divestitures, or strategic collaborations, which may not be
completed or may not be ultimately beneficial to us.
Acquisitions or divestitures may pose risks to our operations, including:
•
•
•
•
•
•
problems and increased costs in connection with the integration or divestiture of the personnel, operations, technologies,
or products of the acquired or divested businesses;
unanticipated costs;
potential disruption of our business and the diversion of managements attention from our core business during the
acquisition process;
inability to make planned divestitures of businesses on favorable terms in a timely manner or at all;
acquired assets becoming impaired because of technical advancements or worse-than-expected performance by the
acquired company, which was the basis for the impairment charge of $21.5 million taken in January 2016 related to the
assets acquired in the February 2015 Timeline Labs acquisition; and
entering markets in which we have no, or limited, prior experience.
Additionally, in connection with any acquisitions or investments we could:
•
•
•
•
•
issue stock that would dilute our existing stockholders ownership percentages;
incur debt and assume liabilities;
a
record contingent liabilities estimated for potential earnouts based on achieving financial targets;
obtain financing on unfavorable terms;
incur amortization expenses related to acquired intangible assets or incur large and immediate write-offs;
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•
•
incur large expenditures related to office closures of the acquired companies, including costs relating to the termination of
employees and facility and leasehold improvement charges resulting from our having to vacate the acquired companies
premises; and
reduce the cash that would otherwise be available to fund operations or for other purposes.
Wefacetheriskthatcapitalneededforourbusinesswillnotbeavailablewhenweneeditorthatitwouldresultinsubstantial
dilutiontoourstockholders.
To the extent that our existing cash and cash equivalents are insufficient to fund our future activities, we may need to raise additional
funds through public or private equity or debt financings. If unfavorable capital market conditions exist and we were to seek additional
funding, we may not be able to raise sufficient capital on favorable terms and on a timely basis, if at all. Failure to obtain capital when
required by our business circumstances would have a material adverse effect on our business, financial condition and results of
operations. In addition, our stockholders may incur substantial dilution from any financing that we undertake given our current stock
price.
We may not have access in the future to sufficient funding to finance desired growth and operations.
If we cannot secure future funds or financing on acceptable terms, we may be unable to support our future operations or growth
strategy. We use cash for strategic collaborations and other investments, both of which are elements of our growth strategy, and the
timing and size of our collaboration or investment efforts cannot be readily predicted. If we experience deficits in our cash flows from
operating activities in the future or we are unable to obtain new financing, there could be limitations on the availability of funds
resulting in limitations in our financial flexibility, thereby inhibiting our future operations or growth strategy and that may result in our
need to seek capital through additional debt financing arrangements, debt offerings, or equity offerings, which either may not be
available to us or may not be available to us on favorable terms, including resulting in significant dilution of our stockholders.
The performance of the companies in which we have made and may in the future make equity investments could have a material
adverse effect on our financial condition and results of operations.
We have made non-controlling equity investments in complementary companies in the past and we may make additional investments
in the future. These investments may require additional capital and may not generate the expected rate of return that we believed
possible at the time of making the investment. This may adversely affect our financial condition or results of operations. Also,
investments in development-stage companies may generate other than temporary declines in fair value of our investment that would
result in impairment charges.
If our indefinite-lived or other intangible assets become impaired, we may be required to record a significant charge to earnings.
Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on projections
of future operating performance. We operate in highly competitive environments and projections of future operating results and cash
flows may vary materially from actual results. We may be required to record a significant noncash charge to earnings in our financial
statements during the period in which any impairment of our indefinite-lived assets or other intangible assets is determined, such as
the $23.5 million impairment charge we recorded in fiscal 2017 to our consolidated statements of operations and comprehensive
income (loss) as a result of our annual testing of our goodwill.
We may experience risks in our investments due to changes in the market, which could adversely affect the value or liquidity of our
investments.
We maintain a portfolio of marketable securities in a variety of instruments, which may include commercial paper, certificates of
deposit, money market funds, government debt securities and corporate bonds. These investments are subject to general credit,
liquidity, market, and interest rate risks. As a result, we may experience a reduction in value or loss of liquidity of our investments.
These market risks associated with our investment portfolio may have a negative adverse effect on our results of operations, liquidity
and financial condition.
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The success of our business model could be influenced by changes in the regulatory environment, such as changes that either
would limit capital expenditures by television, cable or telecommunications operators or reverse the trend towards deregulation in
the industries in which we compete.
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The telecommunications and television industries are subject to extensive regulation which may limit the growth of our business, both
in the United States and other countries. The growth of our business internationally is dependent in part on deregulation of the
telecommunications industry abroad, like that which has occurred in the United States, and the timing and magnitude of this growth,
which is uncertain. Video service providers are subject to extensive government regulation by the Federal Communications
Commission and other federal, state and international regulatory agencies. These regulations could have the effect of limiting capital
expenditures by video service providers and thus could have a material adverse effect on our business, financial condition and results
of operations. The enactment by federal, state or international governments of new laws or regulations, changes in the interpretation of
existing regulations or a reversal of the trend toward deregulation in these industries could adversely affect our customers, and thereby
materially adversely affect our business, financial condition and results of operations.
We may not be able to hire and retain highly skilled employees, which could affect our ability to compete effectively because our
business is technology-based.
Our success depends to a significant degree upon the continued contributions of our key personnel, many of whom would be difficult
to replace. We believe that our future success will also depend in large part upon our ability to attract and retain highly skilled
managerial, engineering, customer service, selling and marketing, finance, administrative and manufacturing personnel, as our
business is technology-based. Because competition for these personnel is intense, we may not be able to attract and retain qualified
personnel in the future. The loss of the services of any of the key personnel, the integration of new personnel, the inability to attract or
retain qualified personnel in the future or delays in hiring required personnel, particularly software engineers and sales personnel,
could have a material adverse effect on our business, financial condition and results of operations because our business is technology-
based.
Wefacesignificantriskstoourbusinesswhenweengageintheoutsourcingofengineeringwork,includingoutsourcingof
softwareworkoverseas,which,ifnotproperlymanaged,couldresultinthelossofvaluableintellectualpropertyand
increasedcostsduetoinefficientandpoorworkproduct,whichcouldharmourbusiness,includingourfinancialresults,
reputation,andbrand.
We may, from time-to-time, outsource engineering work related to the design and development of our products, typically to save
money and gain access to additional engineering resources. We have worked, and expect to work in the future, with companies located
in jurisdictions outside of the United States, including, but not limited to Poland and the Netherlands. We have limited experience in
the outsourcing of engineering and other work to third-parties located internationally that operate under different laws and regulations
than those in the United States. If we are unable to properly manage and oversee the outsourcing of this engineering and other work
related to our products, we could suffer the loss of valuable intellectual property, or the loss of the ability to claim such intellectual
property, including patents and trade names. Additionally, instead of saving money, we could in fact incur significant additional costs
because of inefficient engineering services and poor work product. As a result, our business would be harmed, including our financial
results, reputation, and brand.
Wemayhaveadditionaltaxliabilities.
We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in
determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and
calculations where the ultimate tax determination is uncertain. We are regularly under audit by various tax jurisdictions. Although we
believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different
from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on
tax provision, net income, or cash flows in the period or periods for which that determination is made. In addition, we are subject to
sales, use and similar taxes in many countries, jurisdictions and provinces, including those states in the United States where we
maintain a physical presence or have a substantial nexus. These taxing regimes are complex. For example, in the United States, each
state and local taxing authority has its own interpretation of what constitutes a sufficient physical presence or nexus to require the
collection and remittance of these taxes. Similarly, each state and local taxing authority has its own rules regarding the applicability of
sales tax by customer or product type.
our income
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Our foreign subsidiaries generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in our
operations outside the United States. Pursuant to Accounting Standard Codification Topic No. (ASC) 740-30, Income Taxes-Other
Considerations or Special Areas, undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would
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become subject to deferred income taxes under U.S. tax law. Prior to the second quarter of fiscal 2017, we asserted that the
undistributed earnings of all our foreign subsidiaries were permanently reinvested.
In the second quarter of fiscal 2017, following a review of our operations, liquidity and funding, and investment in our product
roadmap, we determined that the ability to access certain amounts of foreign earnings would provide greater flexibility to meet the
Companys working capital needs. Accordingly, in the second quarter of fiscal 2017, we recognized a deferred tax liability of $14.7
million on $58.6 million of undistributed earnings generated by our Irish operations through July 2016. In the fourth quarter of fiscal
2018, we completed a restructuring of our foreign operations, wherein we centralized our European operations for greater efficiency
and cost savings in the Netherlands. As part of that process the residence of SEAC Ireland was moved to the Netherlands. In
connection with the restructuring and change in tax status, we also obtained a step-up in tax basis of certain of our foreign subsidiaries.
u
As a result, we re-measured the deferred tax liability in connection with the outside basis differences of our foreign subsidiaries and
recorded a $14.7 million deferred tax benefit in connection to the reduction of the previously recorded deferred tax liability.
We may need to adjust estimates resulting from the U.S. Tax Cuts and Jobs Act of 2017.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (Tax Reform Act) was signed into law. The Tax Reform Act has resulted in
significant changes to the U.S. corporate income tax system that affected our fiscal year ended January 31, 2018. These changes
include, but are not limited to, a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic
deductions and credits and limitations on the deductibility of interest expense and executive compensation. The Tax Reform Act also
transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention
measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as
global intangible low-taxed income (GILTI). These changes were effective January 1, 2018.
The Tax Reform Act also includes a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries previously
untaxed foreign earnings (Transition Tax). The Transition Tax may be paid over an eight-year period and will not accrue interest.
r
We have made a preliminary estimate of the Transition Tax and the re-measurement of our deferred tax assets and liabilities as of
January 31, 2018. See Part II. Item 8, Note 12. Income Taxes,
estimate is subject to change as we finalize our analysis and as interpretations of the provisions of the Tax Reform Act continue to
develop. The final determination of the Transition Tax and the re-measurement of our deferred tax assets and liabilities will be
completed as additional information becomes available, but no later than one year from the enactment of the Tax Reform Act. U.S.
Treasury regulations, administrative interpretations or court decisions interpreting the Tax Reform Act may require further
adjustments and changes in our estimates, which could have a material adverse effect on our business, results of operations or
financial conditions.
of this Form 10-K for additional information. The preliminary
Ifoursecuritymeasuresarebreachedandunauthorizedaccessisobtainedtoacustomersdataorourdataonoursystems,
ourservicemaybeperceivedasnotbeingsecure,customersmaycurtailorstopusingourserviceandwemayincursignificant
legalandfinancialexposureandliabilities.
Our service involves the transmission of customers proprietary information and security breaches could expose us to a risk of loss of
this information or a network disruption, which may result in litigation and possible liability. These security measures may be
breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or
otherwise and result in unauthorized publication of our confidential business or proprietary information, cause
operations, result in the unauthorized release of customer or employee data, result in a violation of privacy or other laws, expose us to
a risk of litigation or damage our reputation, which could harm our business and operating results. Additionally, third-parties may
attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other
information to gain access to our customers data or our data or IT systems. Because the techniques used to obtain unauthorized
access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable
to anticipate these techniques or to implement adequate preventative measures. In addition, our customers may authorize third-party
technology providers to access their customer data. Because we do not control our customers and third-party technology providers, or
the processing of such data by third-party technology providers, we cannot ensure the integrity or security of such transmissions or
processing. Malicious third-parties may also conduct attacks designed to temporarily deny customers access to our services. Any
security breach could result in a loss of confidence in the security of our service, damage our reputation, negatively impact our future
appropriate security measures to minimize
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sales, disrupt our business and lead to legal liability. While we believe that we have taken
these risks to our data and information systems, there can be no assurance that our efforts will prevent breakdowns or breaches in our
systems that could adversely affect our business.
an interruption in our
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Recently reported hacking attacks on government and commercial computer systems raise the risks that such an attack may
compromise, in a material respect, one or more of our computer systems and permit hackers access to our proprietary information and
data. If such an attack does, in fact, allow access to or theft of our proprietary information or data, our business, operating results and
reputation could be materially and adversely affected.
Interruptionsordelaysinservicefromourthird-partydatacenterhostingfacilitiescouldimpairthedeliveryofourservice
andharmourbusiness.
For our customers buying our SaaS product offering, we use third-party data center hosting facilities located in the United States and
the United Kingdom. Any damage to, or failure of, our systems generally could result in interruptions in our service. Interruptions in
our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and
adversely affect our attrition rates and our ability to attract new customers. Our business will also be harmed if our customers and
potential customers believe our service is unreliable. We do not control the operation of any of these facilities, and they are vulnerable
to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also
be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite precautions taken at these facilities,
the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other
unanticipated problems at these facilities could result in lengthy interruptions in our service. Even with the disaster recovery
arrangements, our service could be interrupted.
A disruption to our information technology systems could significantly impact our operations and impact our revenue and
profitability.
Our data processing and financial reporting systems are cloud-based and hosted by a third-party. An interruption to the third-party
systems or in the infrastructure that allows us to connect to the third-party systems for an extended period may impact our ability to
operate the business and process transactions which could result in a decline in sales and affect our ability to achieve or maintain
profitability. It may also result in our inability to comply with SEC regulations in a timely manner.
UncertaintiesofregulationoftheInternetanddatatravelingovertheInternetcouldhaveamaterialandadverseimpacton
ourfinancialconditionandresultsofoperations.
Currently, few laws or regulations apply directly to access to or commerce on the Internet. With more business being conducted over
the Internet, there have been calls for more stringent copyright protection, tax, consumer protection, cybersecurity, data localization
and content restriction laws, both in the United States and abroad. We could be materially, adversely affected by regulation of the
Internet and Internet commerce in any country where we operate. Such regulations could include matters such as net neutrality.
Further, governments may regulate or restrict the sales, licensing, distribution, and export or import of certain technologies to certain
countries. The adoption of regulation of Internet and Internet commerce could decrease demand for our products and, at the same
time, increase the cost of selling our products and services, which could have a material and adverse effect on our financial condition
and results of operations. In addition, the enactment of new federal, state, or foreign data privacy laws and regulations could cause
customers not to be able to take advantage of all the features or capabilities of our products and services, which in turn could reduce
demand for certain of our products and services.
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Ourstockpricemaybevolatileandaninvestmentinourstockmaydecline.
Historically, the market for technology stocks has been extremely volatile. Our common stock has experienced, and may continue to
experience, substantial price volatility. The occurrence of any one or more of the factors noted above could cause the market price of
our common stock to fluctuate. The stock market in general, and The NASDAQ Global Select Market (NASDAQ) and technology
companies have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. These broad market and industry factors may materially adversely affect the market price of our
common stock, regardless of our actual operating performance. In these circumstances, investors may be unable to sell their shares of
our common stock at or above their purchase price over the short-term, or at all. In the past, following periods of volatility in the
market price of a companys securities, securities class action litigation has often been instituted against such companies.
ActionsthatmaybetakenbysignificantstockholdersmaydivertthetimeandattentionofourBoardofDirectorsand
managementfromourbusinessoperations.
Campaigns by significant investors to effect changes at publicly-traded companies continue to be prevalent. There can be no assurance
that one or more current or future stockholders will not pursue actions to effect changes in our management and strategic direction,
including through the solicitation of proxies from our stockholders. If a proxy contest were to be pursued by a stockholder, it could
result in substantial expense to us, consume significant attention of our management and Board of Directors, and disrupt our business.
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Securitiesanalystsmaynotpublishfavorableresearchorreportsaboutourbusinessormaypublishnoinformation,which
couldcauseourstockpriceortradingvolumetodecline.
The trading market for our common stock is influenced by the research and reports that industry or financial analysts publish about us
and our business. We do not control these analysts. If any of the analysts who cover us issue an adverse opinion regarding our stock
price, our business or stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to
regularly publish reports covering us, we could lose visibility in the market, which in turn could cause our stock price or trade volume
to decline.
Weutilizenon-GAAPreportinginourquarterlyearningspressreleases.
We publish non-GAAP financial measures in our quarterly earnings press releases, along with a reconciliation of non-GAAP financial
measures to those measures determined in accordance with U.S. GAAP. The reconciling items have adjusted U.S. GAAP net income
(loss) and U.S. GAAP earnings (loss) per share for certain non-cash, non-operating or non-recurring items and are described in detail
in each such quarterly earnings press release. We believe that this presentation may be more meaningful to investors in analyzing the
results of operations and income generation as this is how our business is managed. The market price of our stock may fluctuate based
on future non-GAAP results if investors base their investment decisions upon such non-GAAP financial measures. If we decide to
curtail use of non-GAAP financial measures in our quarterly earnings press releases, the market price of our stock could be affected if
investors analyze our performance in a different manner.
Changes in financial accounting standards may cause adverse unexpected revenue fluctuations and affect our reported results of
operations.
We prepare our consolidated financial statements in accordance with U.S. GAAP. These principles are subject to interpretations by the
SEC and various bodies formed to interpret and create appropriate accounting principles. A change in
significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective.
The adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and
controls.
these principles can have a
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For example, in May 2014, the Financial Accounting Standards Board (FASB) issued new accounting guidance for revenue
recognition which we have elected to adopt on February 1, 2018 using the modified retrospective method of adoption. The Company
has substantially completed the implementation of this guidance and has identified the necessary changes to its policies, processes,
systems, and controls. Based upon the work performed to date, the Company expects to record a cumulative-effect adjustment as of
February 1, 2018 to increase retained earnings by an estimated range of approximately $1.7 million to $4.0 million. Such adjustment
includes an increase in retained earnings of approximately $1 million to $3 million due to higher revenue that would have been
recognized under the new guidance if it had been adopted for the fiscal year ended January 31, 2018 and an increase in retained
earnings of $0.7 million to $1.0 million due to reduced commission expense that would have been recognized under ASC 606 if the
standard had been adopted for the fiscal year ended January 31, 2018. The resulting tax effect of this cumulative-effect adjustment is
not expected to be significant to retained earnings. We expect to fully disclose the impacts of the new standard in connection with our
Form 10-Q for the first quarter of fiscal 2019.
Any weakness identified in our system of internal controls by us and our independent registered public accounting firm pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse effect on our business.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on their systems of internal control over
financial reporting. In addition, our independent registered public accounting firm must express an opinion on the Companys internal
controls over financial reporting based on their audit. As disclosed in this Form 10-K, we have remediated the material weaknesses in
the design of certain of our internal controls reported in our Form 10-K for the fiscal year ended January 31, 2017, previously filed
with the SEC on April 17, 2017. In future periods, we may identify additional deficiencies in our system of internal controls over
financial reporting that may require remediation. The existence and identification of any such material weaknesses may have an
adverse effect on our business.
We use estimates in accounting for our contracts. Changes in our estimates could adversely affect our future financial results.
Contract accounting requires judgment relative to assessing risks, estimating revenues and costs and making assumptions including, in
the case of our professional services contracts, the total amount of labor required to complete a project and the complexity of the
development and other technical work to be completed. Due to the size and nature of many of our contracts, the estimation of total
revenues and cost at completion is complicated and subject to many variables. Assumptions must be made regarding the length of time
to complete the contract because costs also include estimated third-party vendor and contract labor costs. Penalties related to
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performance on contracts are considered in estimating sales and profit, and are recorded when there is sufficient information for us to
assess anticipated performance. Third-party vendors assertions are also assessed and considered in estimating costs and margin.
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Because of the significance of the judgments and estimation processes described above, it is likely that materially different sales and
profit amounts could be recorded if we used different assumptions or if the underlying circumstances were to change, such as occurred
in fiscal 2016 when we recorded a $9.2 million provision for loss contract as a result of delays of customer acceptance relating to a
fixed-price customer contract on a multi-year arrangement which included multiple vendors. Between fiscal 2017 and fiscal 2018, we
recorded a $4.7 million reduction in that provision after amending our contract with the fixed-price customer, thus eliminating the
second phase of the project and calculating a better estimate of the remaining costs to complete the project. Changes in underlying
assumptions, circumstances or estimates may adversely affect future period financial performance.
Our ability to deliver products and services that satisfy customer requirements is heavily dependent on the performance of our
third-party vendors.
We rely on other companies to provide products and to perform some of the services that we provide to our customers. If one or more
of our third-party vendors experience delivery delays or other performance problems, we may be unable to meet commitments to our
customers. In addition, if one or more of the products which we depend on becomes unavailable or is available only at very high
prices, we may be unable to deliver one or more of our products in a timely fashion or at budgeted costs. In some instances, we depend
upon a single source of supply. Any service disruption from one of these third-party vendors, either due to circumstances beyond the
suppliers control or because of performance problems or financial difficulties, could have a material adverse effect on our ability to
meet commitments to our customers or increase our operating costs.
We enter fixed-price contracts, which could subject us to losses if we have cost overruns.
While firm fixed-price contracts enable us to benefit from performance improvements, cost reductions and efficiencies, they also
subject us to the risk of reduced margins or incurring losses if we are unable to achieve estimated costs and revenues. If our estimated
costs exceed our estimated price, we will recognize a loss, which can significantly affect our reported results. The long-term nature of
many of our contracts makes the process of estimating costs and revenues on fixed-price contracts inherently risky. Fixed-price
development contracts are generally subject to more uncertainty than fixed-price production contracts. Many of these development
programs have highly complex designs. If we fail to meet the terms specified in those contracts, our margin could be reduced. In
addition, technical or quality issues that arise during development could lead to schedule delays and higher costs to complete, which
could result in a material charge or otherwise adversely affect our financial condition.
Because we purchase certain components used in assembling some of our products from sole suppliers, our business, financial
condition and results of operations could be materially adversely affected by a failure of these suppliers to provide these
components.
We rely on a limited number of third-parties who provide certain components used in our products. We may experience quality
control problems, where products did not meet specifications or were damaged in shipping, and delays in the receipt of these
components. These risks could be heightened during a substantial economic slowdown or if a sole supplier were adversely affected by
a natural disaster because our suppliers are more likely to experience adverse changes in their financial condition and operations
during such a period. While we believe that there are alternative suppliers available for these components, we believe that the
procurement of these components from alternative suppliers could take a significant amount of time. In addition, these alternative
components may not be functionally equivalent or may not be available on a timely basis or on similar terms. The inability to obtain
sufficient key components as required, or to develop alternative sources if and as required in the future, could result in delays or
reductions in product shipments which, in turn, could have a material adverse effect on our business, financial condition and results of
operations. While to date there has been suitable component capacity readily availablea
at acceptable quality levels, in the future there
may not be suppliers that can meet our future volume or quality requirements at a price that is favorable to us. Any financial,
operational, production or quality assurance difficulties experienced by these suppliers that result in a reduction or interruption in
supply to us could have a material adverse effect on our business, financial condition and results of operations.
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Terrorist acts, conflicts, wars and geopolitical uncertainties may seriously harm our business and revenue, costs and expenses and
financial condition and stock price.
Terrorist acts, conflicts, wars (wherever located around the world) or geopolitical uncertainties may cause damage or disruption to our
business, our employees, facilities, partners, suppliers, distributors, resellers or customers, or adversely affect our ability to manage
logistics, operate our transportation and communication systems or conduct certain other critical business operations. The potential for
future attacks, the national and international responses to attacks or perceived threats to national security, and other actual or potential
conflicts or wars, have created many economic and political uncertainties. In addition, as a multinational company with headquarters
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and significant operations located in the United States, actions against or by the United States may impact our business or employees.
Although it is impossible to predict the occurrences or consequences of any such events, if they occur, they could result in a decrease
in demand for our products, make it difficult or impossible to provide services or deliver products to our customers or to receive
components from our suppliers, create delays and inefficiencies in our supply chain and result in the need to impose employee travel
restrictions. We are predominately uninsured for losses and interruptions caused by terrorist acts, conflicts and wars.
As a Delaware corporation, we are subject to certain Delaware anti-takeover provisions.
As a Delaware corporation, we are subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation
Law, which may, unless certain criteria are met, prohibit large stockholders, those owning 15% or more of the voting rights of our
common stock, from merging or combining with us for a practical period of time. Any provision of our certificate of incorporation or
bylaws or Delaware law that has the effect of delaying or deterring a change in control of SeaChange could limit the opportunity of
our stockholders to receive a premium for their shares of SeaChange common stock and could affect the price that some investors are
willing to pay for our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Location
Owned Facilities
Acton, Massachusetts (1)
Leased Facilities
Eindhoven, The Netherlands
Warsaw, Poland
Manila, Philippines (2)
p
Principal Use
Square
Feet
Corporate Headquarters, Engineering,
124,128
Customer Services, Sales and Marketing
Engineering, Sales and Customer Services
Engineering and Customer Services
Vacant
20,553
14,242
14,175
(1)
(2)
In August 2017, we placed our corporate headquarters and the adjacent land (the Corporate Headquarters), located in Acton
Massachusetts, on the market for sale. We assessed whether the Corporate Headquarters would qualify as an asset held for sale and
determined that it did not since it didnt meet all six of the criteria of an asset held for sale under current accounting guidance.
The cease-use date of our facility in the Philippines was November 30, 2017. The facility is currently vacant. However, as of January
31, 2018, we were still under contract with the lessor until September 30, 2019. In February 2018, we negotiated with the lessor to
terminate the lease on March 31, 2018 in exchange for a termination fee equal to six months rent which obligation was accrued in
January 2018 to severance and other restructuring costs in our consolidated statement of operations and comprehensive income (loss).
In addition, we lease or sublease offices in Santa Monica and San Francisco, California, Ireland and Turkey. We believe that existing
facilities are adequate to meet our foreseeable requirements.
In fiscal 2018, we incurred restructuring charges of $0.7 million to exit our facility in the Philippines as part of our cost reduction
initiative implemented in the second half of fiscal 2017.
In fiscal 2017, we incurred restructuring charges of $0.4 million to exit our facilities in California and Oregon as part of our cost
savings actions related to the impairment of the Timeline Labs business and to the acquisition of DCC Labs. Currently, we are
subleasing the facilities in Santa Monica and San Francisco, California until the end of their respective lease terms in fiscal 2019.
ITEM 3.
LEGAL PROCEEDINGS
We enter agreements in the ordinary course of business with customers, resellers, distributors, integrators and suppliers. Most of these
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,
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.
and environmental claims
a
24
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
25
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrants Common Equity
Our common stock is traded on NASDAQ under the symbol SEAC.
The following table sets forth the quarterly high and low closing sales prices per share reported on NASDAQ for our last two fiscal
years ended January 31, 2018 and 2017:
Three Month Period Ended:
Second Quarter
Third Quarter
Fourth Quarter
On April 12, 2018, there were 129 holders of record.
Fiscal Year 2018
High
Low
Fiscal Year 2017
High
Low
$ 2.57
2.93
2.89
3.99
$ 2.25
2.36
2.51
2.53
$ 6.25
3.77
3.32
2.80
$ 3.73
3.19
2.62
2.30
We have never declared or paid any cash dividends on our common stock, since inception, and do not expect to pay cash dividends on
our common stock in the foreseeable future. We currently intend to retain all our future earnings for use in operations and to finance
the expansion of our business.
Issuer Purchases of Equity Securities
Stock Performance Graph
The following graph compares the change in the cumulative total stockholder return on SeaChanges common stock during the period
from the close of trading on January 31, 2013 through January 31, 2018, with the cumulative total return on the Center for Research in
Securities Prices (CRSP) Index for NASDAQ (U.S. Companies) and a Standard Industrial Classification (SIC) Code Index based
on SeaChanges SIC Code. The comparison assumes $100 was invested on January 31, 2013 in SeaChanges common stock at the
$11.15 closing price on January 31, 2013 and in each of the foregoing indices and assumes reinvestment of dividends, if any.
26
The following graph is not soliciting material, is not deemed filed with the SEC and is not to be incorporated by reference in any
filing of SeaChange under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of
any general incorporation language in any such filing. The stock price performance shown on the following graph is not necessarily
indicative of future price performance. Information used on the graph was obtained from a third-party provider, a source believed to
be reliable, but SeaChange is not responsible for any errors or omissions in such information.
$300.0
$250.0
$200.0
$150.0
$100.0
$50.0
Jan-31-2013
Jan-31-2014
Jan-30-2015
Jan-29-2016
Jan-31-2017
Jan-31-2018
SeaChange International, Inc. (SEAC)
NASDAQ Composite Index Total Return
S&P Composite 1500 Software & Services
(Industry Group) - Index Value
$100.0
$100.0
$100.0
$118.1
$133.6
$127.3
$69.7
$152.7
$134.6
$61.4
$153.8
$158.7
$23.9
$189.5
$185.5
$32.9
$252.9
$263.1
Notes:
(1)
(2)
(3)
The lines represent monthly index levels derived from compounded daily returns that include all dividends.
If the monthly interval, based on the fiscal year end, is not a trading day, the preceding trading day is used.
The index level for all series was set to 100 on January 31, 2013.
27
ITEM 6.
SELECTED FINANCIAL DATA
Our selected financial data below should be read in conjunction with our audited, consolidated financial statements and related notes
contained in Part II, Item 8., Financial Statements and Supplementary Data,
selected financial data have been adjusted to reflect the businesses divested as discontinued operations.
of this Form 10-K. For all periods presented, these
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Product revenue
Service revenue
Total revenues
Total operating costs and expenses
Other income (expenses), net
Gain (loss) on investment in affiliates
Income (loss) from continuing operations before income
taxes and equity income in earnings of affiliates
Income tax (benefit) provision
Equity income in earnings of affiliates, net of tax
Income (loss) from continuing operations
Income (loss) from discontinued operations, net
NNet income (loss)
Income (loss) per share:
Basic
Diluted
Income (loss) per share from continuing operations:
Basic
Diluted
Income (loss) per share from discontinued operations:
Basic
Diluted
$
$
$
$
$
$
$
$
2018
28,791
51,476
80,267
(85,677)
4,081
2,555
1,226
(12,272)
13,498
13,498
0.38
0.38
0.38
0.38
$
For the Fiscal Years Ended January 31,
2015
2016
2017
(Amounts in thousands, except per share data)
31,507
$
83,928
115,435
(141,888)
(2,161)
18,205
65,590
83,795
(137,941)
(1,972)
(500)
21,896
85,096
106,992
(155,191)
(523)
(31)
$
$
2014
54,749
91,570
146,319
(147,948)
(224)
(363)
(56,618)
14,631
(71,249)
(71,249) $
(48,753)
(1,029)
27
(47,697)
(47,697) $
(28,614)
(1,106)
19
(27,489)
5
(27,484) $
(2.04) $
(2.04) $
(1.42) $
(1.42) $
(0.84) $
(0.84) $
(2.04) $
(2.04) $
(1.42) $
(1.42) $
(0.84) $
(0.84) $
$
$
$
$
$
$
$
$
$
$
$
0.00
0.00
$
$
(2,216)
55
44
(2,227)
(803)
(3,030)
(0.09)
(0.09)
(0.07)
(0.07)
(0.02)
(0.02)
CONSOLIDATED BALANCE SHEET DATA
2018
2017
As of January 31,
2016
(Amounts in thousands)
$
$
41,942
116,067
14,936
19,108
46,531
69,536
59,887
177,669
17,410
3,699
46,651
131,018
2015
2014
101,014
212,351
19,088
6,266
41,300
171,051
$
125,875
254,113
25,628
6,670
49,672
204,441
Working capital
Total assets
Deferred revenue
Long-term liabilities
Total liabilities
Total stockholders equity
$
$
48,105
119,330
14,433
4,202
33,610
85,720
28
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (MD&A)
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes 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 risk 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 the statements considering future developments. Unless otherwise specified, any reference
to a year is to a fiscal year ended January 31st.
ff
Business Overview
We are an industry leader in the delivery of multiscreen, advertising and premium over-the-top (OTT) video management solutions
headquartered in Acton, Massachusetts. Our products and services facilitate the aggregation, licensing, management and distribution
of video and advertising content for cable television system operators, telecommunications companies, satellite operators and media
companies. We currently operate under one reporting segment.
We address what we see as the continuing rise of Internet Protocol television (IPTV) and OTT services by such companies as
Netflix, Hulu, Amazon, mlbam, Kaltura, Ooyala and Brightcove and by media companies such as HBO, CBS and BBC. This rise of
IPTV and OTT video services globally has increased the demand for multiscreen capabilities on a range of consumer devices
operating on cloud-based platforms. We have been increasing our strategic investments in research and development related to our
cloud-based offerings, as well as in sales and marketing as we focus on our go-to-market efforts in these areas.
We continue to invest in developing next generation capabilities in our four main product offerings: video back office, advertising,
content management and user experience. Our suite of products allows us to provide customers with end-to-end video delivery
capabilities across multiple platforms, thus reducing cost and increasing speed and ease of use for end users. We believe that by
delivering innovative solutions to both our existing customer base and to content owners that are looking to provide end-to-end
solutions, we can meet their growing needs and help them get to market faster, which will help them drive new revenue growth. We
have virtualized our solutions and products to make integrating with existing networks simple and this ease-of-use is a core
competency of our platform. We have optimized our software solutions to serve a wide range of consumer devices.
We expect to increase software sales in North America and Europe, the Middle East and Africa (EMEA) through targeted sales
efforts in those regions. In addition, we believe that we have the opportunity for revenue growth by expanding our selling efforts in
Asia Pacific and Latin America. We also believe that our existing service operator customers will continue upgrading to new features
that can increase average revenue per subscriber, reduce operating and capital expenses, and lower customer churn.
We continue to experience fluctuations in our revenues from period to period due to the following factors:
•
•
•
•
•
•
•
•
Changes to estimated times to complete long-term projects;
The time required to deliver and install the product and for the customer to accept the product and services;
Timing of customers in selecting programs to launch our services to their end users;
The ability of our customers to process the purchase order within their organizations in a timely manner;
The transition from perpetual license to subscription, cloud-based revenue and the associated deviation from our
traditional professional services model;
Budgetary approvals by our customers for capital purchases;
Uncertainty caused by potential consolidation in the industry; and
Changes in foreign exchange rates.
These, together with other factors, could result in reductions in sales of our products, longer sales cycles, difficulties in collection of
accounts receivable, a longer period of time before we may recognize revenue attributable to a sale, changes in cost estimates on long-
term contracts which could result in a loss provision, gross margin deterioration, slower adoption of new technologies, the transition to
SaaS, and increased price competition.
29
Our foreign subsidiaries generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in our
operations outside the United States. Pursuant to Accounting Standard Codification Topic No. (ASC) 740-30, Income Taxes-Other
Considerations or Special Areas, undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would
become subject to deferred income taxes under U.S. tax law. Prior to the second quarter of fiscal 2017, we asserted that the
undistributed earnings of all our foreign subsidiaries were permanently reinvested.
In the second quarter of fiscal 2017, following a review of our operations, liquidity and funding, and investment in our product
roadmap, we determined that the ability to access certain amounts of foreign earnings would provide greater flexibility to meet the
Companys working capital needs. Accordingly, in the second quarter of fiscal 2017, we recognized a deferred tax liability of $14.7
million on $58.6 million of undistributed earnings generated by our Irish operations through July 2016. In the fourth quarter of fiscal
2018, we completed a restructuring of our foreign operations, wherein we centralized our European operations for greater efficiency
and cost savings in the Netherlands. As part of that process the residence of SEAC Ireland was moved to the Netherlands.
connection with the restructuring and change in tax status, we also obtained a step-up in tax basis of certain of our foreign subsidiaries.
As a result, we remeasured the deferred tax liability in connection with the outside basis differences of our foreign subsidiaries and
recorded a $14.7 million deferred tax benefit in connection to the reduction of the previously recorded deferred tax liability. This
a
change was not related to the Tax Cuts and Jobs Act of 2017 (the Tax Reform Act) enacted on December 22, 2017.
In
u
On May 5, 2016, we acquired a 100% share of DCC Labs in exchange for an aggregate of $2.7 million in newly issued shares of
SeaChange common stock and $5.2 million in cash, net of cash acquired, resulting in a total net purchase price of $7.9 million. The
stock consideration was determined by dividing the total value of $2.7 million by the volume weighted average closing price of our
common stock for the twenty trading days preceding the closing. DCC Labs is a developer of set-top and multiscreen device software.
Of the total consideration, $0.5 million in cash and all the stock (681,278 shares) were initially held in escrow as security for the
indemnification obligations of the former DCC Labs owners to SeaChange under the purchase agreement, with one-third of the stock
in escrow to be released to the former DCC Labs owners annually on the anniversary date of the acquisition beginning on May 5, 2017
and ending May 5, 2019, and one-half of the cash in escrow to be released to the former DCC Labs owners on May 5, 2017 and May
5, 2018. On May 5, 2017, $0.3 million in cash and 227,090 shares of our common stock initially deposited with an Escrow Agent
were disbursed to the sellers.
The acquisition of DCC Labs in fiscal 2017 enabled us to optimize the operations of our In-Home business, which developed home
video gateway software including SeaChanges Nucleus and NitroX products. In addition, the acquisition brought market-ready
products, including an optimized television software stack for Europes Digital Video Broadcasting community, and an HTML5
framework for building additional user experience client applications across a variety of CPE devices, including Android TV STBs,
tablets, mobile and computer devices. During fiscal 2018, the In-Home business became the center of engineering and expanded to
include product development for backoffice, advertising and legacy products. The Poland operation became the prime engineering
location and as of the end of fiscal 2018, was the largest location by number of engineers. In addition, the engineering efforts were
combined and the teams were re-organized into a single global team in fiscal 2018, which spans a reduced number of locations
globally compared to fiscal 2017. As part of the engineering transition, organizational improvements were implemented in order to
focus on software quality, reliability and pre-integration, in order to de-risk deployments and improve go-to-market time for new
solutions and existing upgrades. The global engineering team introduced DevOps practices with a customer-centric view of
technology improvements across all products within the SeaChange solution. Along with operational improvements, engineering
introduced changes to process and workflow which enabled more accurate effort estimations and velocity tracking. With the
introduction of common agile project methodology across all teams and products, the efficiency of software engineering increased,
which allowed more engineering resources to focus on innovation and development of industry leading features and enhancements to
existing products as well as new product releases that expand the SeaChange technology franchise. At the same time, improved
efficiency and better allocation of software developers enabled a more lean and targeted approach to supporting existing deployments
and delivering upon support commitments for legacy products using a cost-optimized workforce.
ff
In conjunction with the DCC Labs acquisition and an additional company-wide cost savings program established in the second half of
fiscal 2017, SeaChange commenced a restructuring program (Restructuring Program), which has allowed us to achieve
approximately $38 million in annualized cost savings since its commencement. The Restructuring Program resulted in aggregate
charges of $9.2 million as of January 31, 2018 in severance and other restructuring costs. These charges include costs for workforce
reductions, facility closings and other costs to complete the restructuring, such as legal and consulting fees. As of January 31, 2018,
the Restructuring Program has been completed and has helped us improve operations and optimize our cost structure since its
inception. Any remaining costs related to the Restructuring Program will be expensed as incurred to severance and other restructuring
costs in our consolidated statements of operations and comprehensive income (loss) in future quarters.
30
Results of Operations
The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated
financial statements.
Revenues
The components of our total revenues are described in the following table:
Revenues:
Products
Services
Total revenues
Cost of product revenues
Cost of service revenues
(Recovery on) provision for loss contract
Total cost of revenues
Gross profit
Gross product profit margin
Gross service profit margin
Gross pr
ofit margin
g
Fiscal 2018 As Compared to Fiscal 2017
For the Fiscal Years Ended January 31,
FY18 vs. FY17
FY17 vs. FY16
2018
2017
2016
$ Change % Change
$ Change % Change
(Amounts in thousands, except for percentage data)
$ 28,791
51,476
80,267
4,048
22,868
(593)
26,323
$ 53,944
$ 18,205
65,590
83,795
6,779
36,829
(4,118)
39,490
$ 44,305
$ 21,896
85,096
106,992
6,752
44,239
9,162
60,153
$ 46,839
$ 10,586
(14,114)
(3,528)
(2,731)
(13,961)
3,525
(13,167)
$ 9,639
85.9%
56.7%
67.2%
62.8%
50.1%
52.9%
69.2%
37.2%
43.8%
58.1% $ (3,691)
(19,506)
(21.5%)
(23,197)
(4.2%)
27
(40.3%)
(7,410)
(37.9%)
100.0% (13,280)
(33.3%)
(20,663)
21.8% $ (2,534)
23.2%
6.6%
14.3%
(16.9%)
(22.9%)
(21.7%)
0.4%
(16.7%)
N/A
(34.4%)
(5.4%)
(6.4%)
12.9%
9.1%
Product Revenue. The increase in product revenue for fiscal 2018 of $10.6 million, as compared to fiscal 2017, was primarily due to a
$12.3 million increase in video platform, user experience and advertising revenues. This increase is primarily due to the purchase of
software licenses by our largest customer in the third and fourth quarters of fiscal 2018 as they continue to build out their back-office
solution. This increase was partially offset by a $1.8 million decrease in hardware and third-party product revenues in fiscal 2018
compared to fiscal 2017.
Service Revenue. Service revenue decreased $14.1 million in fiscal 2018, as compared to fiscal 2017. The decline was primarily due
to a decrease of $10.9 million recognized for professional services provided on our video platform during fiscal 2018. Additionally,
there was a $3.2 million decrease in maintenance and support revenue provided on post-warranty contracts as customers continue to
provide their own solutions.
In fiscal 2018 and fiscal 2017, one customer accounted for more than 10% of our total revenue. See Part II. Item 8, Note 11, Segment
Information, Significant Customers and Geographic Information, to this Form 10-K for more information.
International revenue accounted for 65% and 64% of total revenues in fiscal 2018 and fiscal 2017, respectively. The increase in the
international revenue as a percentage of total revenue for fiscal 2018, as compared to fiscal 2017 is primarily due to a decrease in
revenue outside the United States at a lower rate than the decrease in domestic revenue. Specifically, in the third and fourth quarter of
fiscal 2018, we sold a total of approximately $14 million of software licenses to our largest customer in Europe.
Gross Profit and Margin. Cost of revenues consists primarily of the cost of resold third-party products and services, purchased
components and subassemblies, labor and overhead relating to the assembly and testing of complete systems and costs related to
customized software development contracts.
Our gross profit margin increased 14 percentage points in fiscal 2018, as compared to fiscal 2017. Product gross margin increased 23
percentage points in fiscal 2018 compared to fiscal 2017. This increase is primarily due to an increase in software license revenues,
which carry higher gross margins, and a decrease in costs, specifically employee-related costs resulting from the cost-savings
initiatives implemented beginning in the third quarter of fiscal 2017. Service profit margins increased seven percentage points in
fiscal 2018, as compared to fiscal 2017. This is primarily due to lower employee-related costs described above.
31
(Recovery on) provision for loss contract
ff
Contract accounting requires judgment relative to assessing risks, estimating the revenue and costs and making assumptions for the
length of time to complete the contract. Since the financial reporting of these contracts depends on estimates, which are assessed
continually during the term of the contract, recognized revenues and costs are subject to revisions as the contract progresses towards
completion. Any changes to these assumptions and estimates could result in gains or losses in the future. During fiscal 2016, delays of
customer acceptance relating to fixed-price customer contracts on a multi-year arrangement that included multiple vendors occurred.
As a result, we recorded approximately $9.2 million as a provision for loss contract in our consolidated statements of operations and
comprehensive income (loss). We agreed with the customer on the replacement of certain third-party vendors and a change in the
timeline of this project, which was estimated to be completed in June 2017. As the system integrator on the project, we are subject to
any costs overruns or increases with these vendors resulting in delays of acceptance by our customer. Any further delays of acceptance
by the customer will result in incremental expenditures and increase the loss.
Due to the elimination of the second phase of this project, as well as other changes in the scope of the project since the end of the third
quarter of fiscal 2017, we recorded a recovery on loss contract in fiscal 2018 and 2017 of $0.6 million and $4.1 million, respectively,
in our consolidated statement of operations and comprehensive income (loss). As of January 31, 2018, this project is complete.
Fiscal 2017 As Compared to Fiscal 2016
Product Revenue. The decrease in product revenue for fiscal 2017 of $3.7 million, as compared to fiscal 2016, was primarily due to a
$6.3 million decrease in hardware and advertising revenue offset by a $2.6 million increase in our video platform, user experience and
third-party product revenues.
Service Revenue. Service revenue decreased $19.5 million in fiscal 2017, as compared to fiscal 2016. The decline was primarily due
to less revenue recognized for professional services provided on our video platform during the period. Additionally, there was a
decrease in maintenance and support revenue provided on post-warranty contracts as customers continue to provide their own
solutions.
In fiscal 2017, one customer accounted for more than 10% of our total revenue. Two customers accounted for more than 10% of our
total revenue in fiscal 2016. See Part II. Item 8, Note 11, Segment Information, Significant Customers and Geographic Information,
to this Form 10-K for more information.
International revenue accounted for 64% and 56% of total revenues in fiscal 2017 and fiscal 2016, respectively. The increase in the
international revenue as a percentage of total revenue for fiscal 2017, as compared to the same prior period is primarily due to the
decrease in domestic revenue at a higher rate than the decrease in international revenue. Domestic maintenance and support revenue
provided on post-warranty contracts continues to decrease year over year as customers continue to provide their own maintenance
solutions.
Gross Profit and Margin. Our gross profit margin increased nine percentage points in fiscal 2017, as compared to fiscal 2016.
However, excluding the (recovery on) provision for loss contract recorded in the third quarter of fiscal 2016 and adjusted in the fourth
quarter of fiscal 2017, our gross profit margin decreased four percentage points in fiscal 2017, as compared to fiscal 2016. Product
gross margin decreased six percentage points in fiscal 2017, as compared to fiscal 2016 due to lower software and license revenue.
Service profit margins increased 13 percentage points in fiscal 2017, as compared to fiscal 2016. However, excluding the (recovery
on) provision for loss contract, service profit margin decreased four percentage points in fiscal 2017, as compared to fiscal 2016. This
is due to the lower service revenue to absorb our fixed costs of the professional services organization.
Operating Expenses
Research and Development
The following table provides information regarding the change in research and development expenses during the periods presented:
Research and development expenses
$ 23,162
$ 30,093
$ 33,696
$ (6,931)
(23.0%) $ (3,603)
(10.7%)
% of total revenue
28.9%
35.9%
31.5%
For the Fiscal Years Ended January 31,
FY18 vs. FY17
FY17 vs. FY16
2018
2017
2016
$ Change % Change
$ Change % Change
(Amounts in thousands, except for percentage data)
Fiscal 2018 As Compared to Fiscal 2017. Research and development expenses consist primarily of employee costs, which include
salaries, benefits and related payroll taxes, contract labor costs, depreciation of development and test equipment and an allocation of
32
related facility expenses. Research and development costs decreased $6.9 million in fiscal 2018 as compared to fiscal 2017, primarily
due to the restructuring of the research and development group after our acquisition of DCC Labs in May 2016 and to cost-savings
efforts implemented in the second half of fiscal 2017.
Fiscal 2017 As Compared to Fiscal 2016. Research and development costs decreased $3.6 million in fiscal 2017 as compared to fiscal
2016, primarily due to lower labor costs associated with the decreased headcount from the Timeline Labs restructuring in February
2016, to the restructuring of the research and development group after our acquisition of DCC Labs in May 2016 and to cost-savings
efforts implemented in the second half of fiscal 2017. These restructuring efforts would have resulted in a larger decrease in our
research and development costs period over period than would have been achieved if we did not capitalize $3.0 million of costs related
to the development of our internal-use software in fiscal 2016. This software was placed in service at the beginning of fiscal 2017 and
no further costs were capitalized.
Selling and Marketing
The following table provides information regarding the change in selling and marketing expenses during the periods presented:
For the Fiscal Years Ended January 31,
FY18 vs. FY17
FY17 vs. FY16
2018
2017
2016
$ Change % Change
$ Change % Change
Selling and marketing expenses
$ 12,614
(Amounts in thousands, except for percentage data)
(21.9%) $
$ (3,544)
$ 15,197
$ 16,158
961
6.3%
% of total revenue
15.7%
19.3%
14.2%
Fiscal 2018 As Compared to Fiscal 2017. Selling and marketing expenses consist primarily of payroll costs, which include salaries
and related payroll taxes, benefits and commissions, travel expenses and certain promotional expenses. Selling and marketing
expenses decreased $3.5 million in fiscal 2018 primarily due to lower employee-related costs. These lower costs were a result of the
cost-savings initiatives implemented during the second half of fiscal 2017. This decrease was partially offset by the transfer of 12
employees from research and development to our selling and marketing group. The year over year decrease was also offset by an
increase in internal commissions in fiscal 2018 as compared to fiscal 2017 due to increased bookings during fiscal 2018.
Fiscal 2017 As Compared to Fiscal 2016. Selling and marketing expenses increased $1.0 million in fiscal 2017 primarily due to an
increase in marketing payroll costs resulting from the addition of DCC Labs in May 2016 and to the hiring of a new senior vice
president of marketing in February 2016.
General and Administrative
The following table provides information regarding the change in general and administrative expenses during the periods presented:
For the Fiscal Years Ended January 31,
FY18 vs. FY17
FY17 vs. FY16
2018
2017
2016
$ Change % Change
$ Change % Change
General and administrative expenses
$ 14,671
(Amounts in thousands, except for percentage data)
(9.3%) $
$ (1,502)
$ 15,470
$ 16,173
703
4.5%
% of total revenue
18.3%
19.3%
14.5%
Fiscal 2018 As Compared to Fiscal 2017. General and administrative expenses consist primarily of employee costs, which include
salaries and related payroll taxes and benefit-related costs, legal and accounting services and an allocation of related facilities
expenses. General and administrative expenses decreased $1.5 million in fiscal 2018 as compared to fiscal 2017 primarily due to a
decrease in labor costs resulting from the reduction of our headcount as part of our cost-savings initiatives implemented in the second
half of fiscal 2017. The change does not reflect the full benefit that we anticipated to realize from our restructuring efforts because we
had a $0.9 million increase in professional fees in fiscal 2018 from higher accounting and internal controls consulting services.
Fiscal 2017 As Compared to Fiscal 2016. General and administrative expenses increased $0.7 million in fiscal 2017 as compared to
fiscal 2016. The change did not reflect the full benefit that we anticipated to realize from our restructuring efforts because we had a
$0.4 million increase in professional fees in fiscal 2017, including audit, tax and legal fees and an increase in bad debt expense.
33
Amortization of Intangible Assets
The following table provides information regarding the change in amortization of intangible assets during the periods presented:
Amortization of intangible assets
$ 2,423
$ 3,302
$ 4,780
$
(879)
(26.6%) $ (1,478)
(30.9%)
% of total revenue
3.0%
3.9%
4.5%
For the Fiscal Years Ended January 31,
y
FY18 vs. FY17
FY17 vs. FY16
2018
2017
2016
$ Change % Change
$ Change % Change
(Amounts in thousands, except for percentage data)
Amortization expense is primarily related to the costs of acquired intangible assets. Amortization expense on certain intangible assets
is based on the future economic value of the related intangible assets which is generally higher in the earlier years of the assets lives.
The decrease in amortization expense in fiscal 2018, as compared to fiscal 2017, is primarily due to fully amortized intangible assets
from prior acquisitions and to the change in foreign exchange rates. The decreases were partially offset by a full year of amortization
of intangible assets recorded in fiscal 2018 related to our acquisition of DCC Labs in May 2016.
Amortization expense decreased $1.5 million in fiscal 2017, as compared to fiscal 2016 primarily due to the impairment of intangible
assets, related to our acquisition of TLL, LLC, recorded in fiscal 2016 as well as fully amortized intangible assets from prior
acquisitions. These decreases were partially offset by the addition of amortization of intangible assets related to our acquisition of
DCC Labs in May 2016.
Stock-based Compensation Expense
The following table provides information regarding the change in stock-based compensation expense during the periods presented:
For the Fiscal Years Ended January 31,
2017
y
2016
2018
FY18 vs. FY17
$ Change % Change
FY17 vs. FY16
$ Change % Change
Stock-based compensation expenses
$ 2,696
(Amounts in thousands, except for percentage data)
2.9% $
$ 3,552
75
$
$ 2,621
(931)
(26.2%)
% of total revenue
3.4%
3.1%
3.3%
Fiscal 2018 As Compared to Fiscal 2017. Stock-based compensation expense is related to the issuance of stock awards to our
employees, executives and members of our Board of Directors. Stock-based compensation expense increased $0.1 million in fiscal
2018, as compared to fiscal 2017. The increase is primarily due to an $0.8 million reversal of previously recognized stock-based
compensation expense in fiscal 2017 for our former CEOs market-based stock options, as well as a $0.2 million increase due to
modifications of certain stock awards for terminated employees recorded in fiscal 2017. Offsetting these increases is a $0.7 million
decrease in stock option expense primarily due to fully-amortized tranches of market-based options awarded to our current CEO and a
$0.3 million decrease in expense related to non-performance based restricted-stock units due to lower grant day stock prices.
Fiscal 2017 As Compared to Fiscal 2016. Stock-based compensation expense decreased $0.9 million in fiscal 2017, as compared to
fiscal 2016 primarily due to stock modifications in connection with separation agreements with certain terminated employees, as well
as a decrease in stock compensation recorded on non-performance-based equity after the departure of our former CEO in the first
quarter of fiscal 2017. Also, because of the departure of our former CEO, we reversed $0.8 million of previously recognized stock-
based compensation expense on his market-based stock options. Finally, certain employees elected to receive a discounted cash
payment, in lieu of restricted stock units, for their fiscal 2016 incentive compensation, resulting in a $0.4 million decrease in stock-
based compensation expense in fiscal 2017. Partially offsetting these decreases is an increase in stock options granted during fiscal
2017 and expense recognized on performance stock units which were granted at the end of fiscal 2016.
Professional Fees - Other
The following table provides information regarding the change in professional fees expenses associated with acquisitions, divestitures,
litigation and strategic alternatives during the periods presented:
For the Fiscal Years Ended January 31,
2017
2018
2016
FY18 vs. FY17
$ Change % Change
FY17 vs. FY16
$ Change % Change
Professional fees - other
% of total revenue
$
$
21
0.0%
(Amounts in thousands, except for percentage data)
347
(93.9%) $
0.4%
637
0.6%
(326)
$
$
(290)
(45.5%)
34
Professional fees decreased in fiscal 2018 compared to fiscal 2017 due to a decrease in costs related to strategic alternatives,
specifically costs from our purchase of DCC Labs in May 2016. Professional fees in fiscal 2017 decreased $0.3 million, as compared
to fiscal 2016 due to costs related to strategic alternatives incurred in fiscal 2016 partially offset by costs in fiscal 2017 for the
acquisition of DCC Labs.
Severance and Other Restructuring Expenses
The following table provides information regarding the change in severance and other restructuring expenses during the periods
presented:
For the Fiscal Years Ended January 31,
2017
2018
2016
FY18 vs. FY17
$ Change % Change
FY17 vs. FY16
$ Change % Change
Severance and other restructuring expenses
$ 4,740
$ 7,151
$ 1,061
$ (2,411)
(33.7%) $ 6,090
>100%
% of total revenue
5.9%
8.5%
1.0%
(Amounts in thousands, except for percentage data)
Fiscal 2018 As Compared to Fiscal 2017. Severance and other restructuring costs decreased $2.4 million in fiscal 2018, as compared
to fiscal 2017. Charges in fiscal 2018 include $4.1 million related to a cost reduction initiative that began in the second half of fiscal
2017 and has been completed as of January 31, 2018, $0.1 million of charges related to the reduction in force in our engineering and
services organization as a result of our acquisition of DCC Labs in May 2016 and to severance charges not related to a restructuring
plan of $0.5 million. Charges in fiscal 2017 included $3.1 million related to the cost reduction initiative mentioned above, $0.7 million
related to the restructuring activities of our Timeline Labs operations, $1.9 million related to the reduction in force in our In-Home
engineering and services organization in conjunction with our acquisition of DCC Labs in May 2016 and to severance charges not
related to a restructuring plan of $1.5 million, including severance related to our former CEO and CFO.
Fiscal 2017 As Compared to Fiscal 2016. Severance and other restructuring costs increased $6.1 million in fiscal 2017, as compared
to fiscal 2016 due to cost savings initiatives implemented during the second half of fiscal 2017, which resulted in charges of $3.1
million. Restructuring charges related to our Timeline Labs operation and DCC Labs acquisition resulted in charges totaling $2.6
million recorded during fiscal 2017. In addition, severance charges of $1.5 million not related to a restructuring plan included $1.0
million of severance to our former CEO and $0.2 million of severance to our former CFO along with severance paid to 13 other
former employees. Severance and other restructuring costs in fiscal 2016 included severance for a former General Manager of our
EMEA operations and 17 other former employees.
Change in Fair Value of Earn-outs
The following table provides information regarding the change in fair value of earn-outs during the periods presented:
For the Fiscal Years Ended January 31,
2017
2016
2018
FY18 vs. FY17
$ Change % Change
FY17 vs. FY16
$ Change % Change
Change in fair value of earn-outs
% of total revenue
$
$
0.0%
249
0.3%
$
0.0%
(Amounts in thousands, except for percentage data)
(100.0%) $
(249)
$
249
N/A
The $0.2 million in earn-outs costs for fiscal 2017 is due to a charge recorded that represents the fair value (at the issuance date) of
additional shares issued to the former holders of Timeline Labs pursuant to the terms of the Timeline Labs purchase agreement based
on our stock price at the time of deferred stock consideration issuances.
Loss on Impairment of Long-lived Assets
The following table provides information regarding the change in loss on impairment of long-lived assets during the periods
presented:
For the Fiscal Years Ended January 31,
2017
2016
2018
FY18 vs. FY17
$ Change % Change
FY17 vs. FY16
$ Change % Change
Loss on impairment of long-lived assets
$
% of total revenue
$ 23,772
0.0%
28.4%
$ 21,464
$ (23,772)
(100.0%) $ 2,308
10.8%
20.1%
(Amounts in thousands, except for percentage data)
35
In fiscal 2017, we recorded a loss on impairment of long-lived assets of $23.8 million which included a charge related to the
impairment of our goodwill resulting from our annual goodwill impairment test which concluded in the fourth quarter of fiscal 2017.
We finalized Step 1 of this impairment test in the third quarter and determined that the fair value of our reporting unit was less than
its carrying value and needed to perform Step 2 which we performed in the fourth quarter of fiscal 2017. We compared the implied
fair value of our goodwill to its carrying value as required by Step 2 and determined that the implied fair value of our goodwill was
less than its carrying value and that it was not recoverable, resulting in an impairment charge of $23.5 million being recorded in our
consolidated statements of operations and comprehensive income (loss) in the quarter ended January 31, 2017. In addition, we
recorded an impairment charge on our Greenville, New Hampshire building in the fourth quarter of fiscal 2017 to write off its
remaining book value. We had been actively trying to sell this building since fiscal 2012, writing down its carrying value several
times. However, due to the location of the property and the overall market conditions in the area, we were not able to find a buyer.
Therefore, we recorded a $0.3 million impairment charge in our consolidated statements of operations and comprehensive income
(loss) in the quarter ended January 31, 2017 to write down the carrying value to zero.
In January 2016, our Board of Directors authorized a restructuring plan, as previously reported in a Form 8-K filed with the SEC on
February 17, 2016. Based on the decision to enter into the restructuring plan and the plans impact on the projected future cash flows
of the Timeline Labs operations, we determined that the carrying amount of all long-term assets that resulted from the February 2015
acquisition had exceeded the fair value as of January 31, 2016. As a result, these long-term assets were deemed fully impaired and we
recorded the $21.9 million net book value of these long-term assets as a component of loss on impairment of TLL, LLC net assets in
our consolidated statements of operations and comprehensive income (loss) for the fiscal year ended January 31, 2016. Additionally,
we reduced the contingent consideration liability associated with the Timeline Labs acquisition to zero, as we determined that the
defined performance criteria would not be achieved, and recorded the reversal of the liability of $0.4 million to loss on impairment of
TLL, LLC net assets in our consolidated statements of operations and comprehensive income (loss) for the fiscal year ended January
31, 2016. In February 2016, we implemented cost-saving actions related to the restructuring plan. See Part II. Item 8, Note 4,
Acquisitions and Loss on Impairment of TLL, LLC,
to this Form 10-K for more information.
Other Income (Expenses), Net
The table below provides detail regarding our other income (expenses), net:
For the Fiscal Years Ended January 31,
2017
2018
2016
FY18 vs. FY17
$ Change % Change
FY17 vs. FY16
$ Change % Change
Gain (loss) on investment in affiliates
Interest income, net
Foreign exchange gain (loss)
Miscellaneous income (expense)
$
$
2,555
147
3,828
106
6,636
Gain (loss) on investment in affiliates
(Amounts in thousands, except for percentage data)
$
$
(500) $
129
(2,093)
(8)
(31) $ 3,055 >(100%)
18
165
(723)
35
5,921 >(100%)
114 >(100%)
14.0%
(469)
(36)
(1,370)
$ (2,472) $
(554) $ 9,108
$ (1,918)
>100%
(21.8%)
>100%
(43) >(100%)
In connection with the acquisition in January 2018 by T-Mobile of Layer3 TV, Inc. (Layer 3), a next generation cable provider in
which we previously had made an equity investment, we received $4.6 million upon closing of the transaction, with an additional
payment of up to $2.1 million being held in escrow, subject to satisfaction of the escrow provisions. As a result of the sale of our
investment in Layer 3, we realized a gain of $2.6 million in gain (loss) on investment in affiliates in our consolidated statements of
operations and comprehensive income (loss) for fiscal 2018.
In the fourth quarter of fiscal 2017, we determined that the fair value of a certain cost-method investment was less than its carrying
value. Accordingly, we recorded a $0.5 million impairment charge in January 2017 which is included in gain (loss) on investment in
affiliates in our consolidated statements of operations and comprehensive income (loss).
Foreign exchange gain (loss)
In January 2018, a note receivable between our Netherlands and British Virgin Islands (BVI) entities was settled. The loan was
established in Euros, our Netherland subsidiarys functional currency, and therefore generated a realized foreign exchange gain of $2.0
million. In January 2018, we also re-measured the deferred tax liability related to the outside basis differences of our foreign
subsidiaries and recorded a $14.7 million deferred tax benefit in connection with the reduction of the previously recorded deferred tax
liability. Due to the weakening of the U.S. dollar against the Euro in fiscal 2018, we recorded a foreign exchange gain of $2.4 million
when this deferred tax benefit was recorded in January 2018. We also established an intercompany loan between our U.S. and
Netherlands entities in fiscal 2010, which was settled in the fourth quarter of fiscal 2017. The loan was established in Euros and
36
generated a realized foreign exchange loss of $1.8 million upon settlement of the loan. The realized foreign exchange gains recorded
in fiscal 2018 and the realized foreign exchange loss recorded in fiscal 2017, were recorded in other income (expenses), net, on the
consolidated statements of operations and comprehensive income (loss). In addition, there was a $0.3 million increase in foreign
exchange loss in fiscal 2018, as compared to fiscal 2017, due to the weakening of the U.S. dollar compared to other foreign currencies,
primarily the Euro, during the period.
Income Tax (Benefit) Provision
For the Fiscal Years Ended January 31,
2017
2016
2018
FY18 vs. FY17
$ Change % Change
FY17 vs. FY16
$ Change % Change
Income tax (benefit) provision
% of total revenue
$ (12,272)
$ 14,631
$ (1,029)
$ (26,903) >(100%) $ 15,660
>(100%)
(Amounts in thousands, except for percentage data)
(15.3%)
17.5%
(1.0%)
Fiscal 2018 As Compared to Fiscal 2017
We recorded an income tax benefit of $12.3 million in fiscal 2018 and a tax provision of $14.6 million in fiscal 2017. In the fourth
quarter of fiscal 2018, we completed a restructuring of our foreign operations, wherein we centralized our European operations for
greater efficiency and cost savings in the Netherlands. As part of that process the residence of SEAC Ireland was moved to the
Netherlands. In connection with the restructuring and change in tax status, we also obtained a step-up in tax basis of certain of our
foreign subsidiaries. As a result, we re-measured the deferred tax liability related to the outside basis differences of our foreign
subsidiaries and recorded a $14.7 million deferred tax benefit in connection to the reduction of the previously recorded deferred tax
liability. Our effective tax rate in fiscal 2018 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.
The Company reviews all available evidence to evaluate the recovery of deferred tax assets, including the recent history of losses in all
tax jurisdictions, as well as its ability to generate income in future periods. As of January 31, 2018, due to the uncertainty related to the
ultimate use of certain deferred income tax assets, the Company has recorded a valuation allowance on certain of its 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 (IRS) 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.
On December 22, 2017, the Tax Reform Act was signed into law. The Tax Reform Act has resulted in significant changes to the U.S.
corporate income tax system that affected our fiscal year ended January 31, 2018. These changes include, but are not limited to, a
federal statutory rate reduction from 35% to 21% for years after 2017, additional limitations on executive compensation, acceleration
of business asset expensing and a repeal of the corporate alternative minimum tax (AMT) and allowing for a refund of prior year
AMT paid. These changes were effective January 1, 2018.
The Tax Reform Act also includes a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries previously
untaxed foreign earnings (Transition Tax). The Transition Tax may be paid over an eight-year period and will not accrue interest.
On December 22, 2017, the SEC issued guidance under SAB 118, which allows us to record provisional amounts during a
measurement period not to extend beyond one year of the enactment date. The measurement period is deemed to have ended earlier
when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the
effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for
the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable
estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Reform Act.
The Company is still evaluating the provisions of the Tax Reform Act and amounts reflected in the financial statements for the year
ended January 31, 2018 are provisional. The ultimate impact may differ from these provisional amounts, due to, among other things,
additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be
issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be completed in fiscal
2019.
37
The Tax Reform Act reduces the U.S. statutory tax rate from 35% to 21% for years after 2017. Accordingly, we have re-measured our
U.S. deferred tax assets and liabilities as of January 31, 2018 to reflect the reduced rate that will apply in future periods when these
deferred tax assets will reverse, resulting in a provisional reduction of our net deferred tax assets, by $17.1 million, which is offset by
a corresponding reduction to our valuation allowance in the fourth quarter of fiscal 2018. As a result, there was no impact to the
Companys consolidated statements of operations and comprehensive income (loss) due to the reduction in the U.S. corporate tax rate.
The Transition Tax is a tax on previously untaxed accumulated and current earnings and profits of our foreign subsidiaries. To
determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 earnings and
profit of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We estimated a Transition
Tax impact of approximately $3.9 million, which is offset by tax losses, resulting in no material impact to our consolidated financial
statements. Our estimate represents a reasonable estimate of the Transition Tax; however, we are continuing to gather additional
information to more precisely compute the amount of the Transition Tax.
Other significant provisions that are not yet effective but may impact income taxes in future years include: an exemption from U.S. tax
on dividends of future foreign earnings, limitations on the deductibility of certain executive compensation, deductions related to
foreign derived intangible income, and a minimum tax on certain foreign earnings in excess of 10 percent of the foreign subsidiaries
tangible assets (i.e., global intangible low-taxed income or GILTI). We are still evaluating whether to make a policy election to treat
the GILTI tax as a period expense or to provide U.S. deferred taxes on foreign temporary differences that are expected to generate
GILTI income when they reverse in future years.
Fiscal 2017 As Compared to Fiscal 2016
We recorded an income tax provision of $14.6 million in fiscal 2017 which was due to deferred income tax expense of $14.7 million
related to the change in assertion regarding the undistributed foreign earnings of certain of our foreign subsidiaries.
Our foreign subsidiaries generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in our
operations outside of the U.S. Pursuant to Accounting Standard Codification Topic No. 740-30, Income Taxes
Considerations or Special Areas, undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would
become subject to deferred income taxes under U.S. tax law. Prior to the second quarter of fiscal 2017, we asserted that the
undistributed earnings of all our foreign subsidiaries were permanently reinvested.
Other
In the second quarter of fiscal 2017, following a review of our operations, liquidity and funding, and investment in our product
roadmap, we determined that the ability to access certain amounts of foreign earnings would provide greater flexibility to meet the
Companys working capital needs. Accordingly, in the second quarter of fiscal 2017, we withdrew the permanent reinvestment
assertion on $58.6 million of earnings generated by our Irish operations through July 2016. We recorded a deferred tax liability of
$14.7 million related to the foreign income taxes on $58.6 million of undistributed earnings.
a
We have not provided for U.S. federal or foreign income taxes on $6.0 million of our non-U.S. subsidiaries undistributed earnings as
of January 31, 2017. The $6.0 million of undistributed foreign earnings have been reinvested in our foreign operations, as we have
determined that these earnings are necessary to support our planned ongoing investments in our foreign operations, and as a result,
these earnings remain indefinitely reinvested in those operations. In making this decision, we considered cash needs for investing in
our existing businesses, potential acquisitions and capital transactions.
The Company reviews all available evidence to evaluate the recovery of deferred tax assets, including the recent history of losses in all
tax jurisdictions, as well as its ability to generate income in future periods. As of January 31, 2017, due to the uncertainty related to the
ultimate use of certain deferred income tax assets, the Company has recorded a valuation allowance on substantially all of its deferred
assets.
Non-GAAP Measures
We define non-GAAP income (loss) from operations as U.S. GAAP operating loss plus stock-based compensation expenses,
amortization of intangible assets, (recovery on) provision for loss contract, change in fair value of earn-outs, non-operating
professional fees, severance and other restructuring costs and loss on impairment of long-lived assets. We discuss non-GAAP income
(loss) from operations in our quarterly earnings releases and certain other communications as we believe non-GAAP operating income
(loss) from operations is an important measure that is not calculated according to U.S. GAAP. We use non-GAAP income (loss) from
operations in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and
forecasts reported to our Board of Directors, determining a component of bonus compensation for executive officers and other key
38
employees based on operating performance and evaluating short-term and long-term operating trends in our operations. We believe
that the non-GAAP income (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 these 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.
ff
Non-GAAP income (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 U.S. GAAP. These non-GAAP financial measures may not be
computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenses like the
financial adjustments described above in arriving at non-GAAP income (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.
39
The following table includes the reconciliations of our U.S. GAAP loss from operations, the most directly comparable U.S. GAAP
financial measure, to our non-GAAP income (loss) from operations for fiscal 2018, 2017 and 2016 (amounts in thousands, except per
share and percentage data):
For the Fiscal Year Ended January 31, 2018
GAAP
As Reported
Adjustments
For the Fiscal Year Ended January 31, 2017
GAAP
Non-GAAP As Reported
Adjustments
Non-GAAP
For the Fiscal Year Ended January 31, 2016
GAAP
As Reported
Adjustments
Non-GAAP
Revenues:
Products
Services
Total
revenues
Cost of revenues:
Products
Services
(Recovery on)
provision for loss
contract
Amortization of
intangible assets
Stock-based
compensation
Total cost of
revenues
Gross profit
Gross profit
percentage
Operating expenses:
Research and
development
Selling and
marketing
General and
administrative
Amortization of
intangible assets
Stock-based
compensation
expense
Change in fair
value of earn-outs
Professional fees -
other
Severance and
other restructuring
costs
Loss on
impairment of
long-lived assets
Total
operating
expenses
(Loss) income
from operations
(Loss) income
from operations
percentage
Weighted average
common shares
outstanding:
Basic
Diluted
Non-GAAP operating
(loss) income per
share:
$
28,791
51,476
$
$
28,791
51,476
$
18,205
65,590
$
$
18,205
65,590
$
21,896
85,096
$
$
21,896
85,096
80,267
3,942
22,001
(593)
970
3
26,323
53,944
593
(970)
(3)
(380)
380
80,267
83,795
3,942
22,001
6,453
35,740
83,795
106,992
6,453
35,740
6,013
44,159
25,943
54,324
(4,118)
4,118
1,283
132
39,490
44,305
(1,283)
(132)
2,703
(2,703)
739
80
42,193
41,602
60,153
46,839
(739)
(80)
(9,981)
9,981
9,162
(9,162)
106,992
6,013
44,159
50,172
56,820
67.2%
0.5%
67.7%
52.9%
(3.2%)
49.7%
43.8%
9.3%
53.1%
23,162
12,614
14,671
1,453
(1,453)
2,693
(2,693)
21
(21)
4,740
(4,740)
23,162
30,093
12,614
16,158
14,671
16,173
30,093
33,696
16,158
15,197
16,173
15,470
33,696
15,197
15,470
2,019
(2,019)
2,489
(2,489)
249
347
(249)
(347)
7,151
(7,151)
23,772
(23,772)
4,041
(4,041)
3,472
(3,472)
637
(637)
1,061
(1,061)
21,464
(21,464)
59,354
(8,907)
50,447
98,451
(36,027)
62,424
95,038
(30,675)
64,363
$
(5,410)
$
9,287
$
3,877
$
(54,146)
$
33,324
$ (20,822)
$
(48,199)
$
40,656
$
(7,543)
(6.8%)
11.6%
4.8%
(64.6%)
39.8%
(24.8%)
(45.0%)
38.0%
(7.0%)
35,412
35,412
35,412
35,685
35,412
35,685
34,970
34,970
34,970
35,057
34,970
34,970
33,506
33,506
33,506
33,663
33,506
33,506
Basic
Diluted
$
$
(0.15)
(0.15)
$
$
0.26
0.26
$
$
0.11
0.11
$
$
(1.55)
(1.55)
$
$
0.95
0.95
$
$
(0.60)
(0.60)
$
$
(1.44)
(1.44)
$
$
1.21
1.21
$
$
(0.23)
(0.23)
40
The changes in the table above during fiscal 2018, compared to fiscal 2017 and during fiscal 2017 compared to fiscal 2016, were a
result of the factors described in connection with revenues and operating expenses under Item 7. Management
s Discussion and
Analysis of Financial Conditions and Results of Operations Results of Operations, of this Form 10-K.
In managing and reviewing our business performance, we exclude several items required by U.S. GAAP. Management believes that
excluding these items is useful in understanding the trends and managing our operations. We provide these supplemental non-GAAP
measures to assist the investment community to see SeaChange through the eyes of management, and therefore enhance the
understanding of our operating performance. Non-GAAP financial measures should be viewed in addition to, not as an alternative to,
our reported results prepared in accordance with U.S. GAAP. Our non-GAAP financial measures reflect adjustments based on the
following items:
ff
(Recovery on) Provision for Loss Contract. We entered a fixed-price customer contract on a multi-year arrangement, which included
multiple vendors. As the system integrator on the project, we are subject to any cost overruns or increases with these vendors resulting
in delays of acceptance by our customer. Delays of customer acceptance on this project result in incremental expenditures and require
us to recognize a loss on this project in the period the determination is made. As a result, we recorded an estimated charge of $9.2
million in fiscal 2016. Subsequently, because of changes in the scope of the project and negotiations with the fixed-price customer, we
recorded adjustments since fiscal 2016 totaling $4.7 million to reduce this estimated loss. We believe that the exclusion of this line
item amount allows a comparison of operating results that would otherwise impair comparability between periods.
Amortization of Intangible Assets. We incur amortization expense of intangible assets related to various acquisitions that have been
made in recent years. These intangible assets are valued at the time of acquisition, are then amortized over a period of several years
after the acquisition and generally cannot be changed or influenced by management after the acquisition. We believe that exclusion of
these expenses allows comparisons of operating results that are consistent over time for the Companys newly-acquired and long-held
businesses.
Stock-based Compensation Expense. We incur expenses related to stock-based compensation included in our U.S. GAAP
presentation of cost of revenues, selling and marketing expense, general and administrative expense and research and development
expense. Although stock-based compensation is an expense we incur and is viewed as a form of compensation, the expense varies in
amount from period to period, and is affected by market forces that are difficult to predict and are not within the control of
management, such as the market price and volatility of our shares, risk-free interest rates and the expected term and forfeiture rates of
the awards.
Change in Fair Value of Earn-outs. The change in the fair value of the earn-outs payable to the former shareholders of the businesses
we acquire is considered by management to be non-recurring and therefore, impairs comparability among periods.
ff
Professional Fees - Other. We have excluded the effect of legal and other professional costs associated with our acquisitions,
divestitures, litigation and strategic alternatives because the amounts are considered significant non-recurring expenses.
Severance and Other Restructuring Costs. We incur charges due to the restructuring of our business, including severance charges and
facility reductions resulting from our restructuring and streamlining efforts and any changes due to revised estimates, which we
generally would not have otherwise incurred in the periods presented as part of our continuing operations.
Loss on Impairment of Long-lived Assets. We incur losses on impairment of long-lived assets when it is determined that an
impairment exists based upon estimated undiscounted future cash flows over the remaining useful life of the assets and compare that
value to the carrying value of the assets. These charges are
considered non-recurring.
rr
41
Liquidity and Capital Resources
The following table includes key line items of our consolidated statements of cash flows:
Total cash provided by (used in) operating activities
Total cash provided by (used in) investing activities
Total cash (used in) provided by financing activities
Effect of exchange rate changes on cash, cash equivalents
$
y
For the Fiscal Years Ended January 31,
2016
2017
2018
(Amounts in thousands)
(18,662) $
(13,046)
192
(28,338) $
(3,872)
(123)
12,947
6,011
(87)
$
FY18 vs FY17
$ Change
FY17 vs FY16
$ Change
$
41,285
9,883
36
(9,676)
9,174
(315)
and restricted cash
(3,621)
1,929
312
(5,550)
1,617
Net increase (decrease) in cash, cash equivalents and
restricted cash
$
15,250
$
(30,404) $
(31,204) $
45,654
$
800
Historically, we have financed our operations and capital expenditures primarily with cash on-hand. Cash, cash equivalents, restricted
cash and marketable securities increased from $38.7 million at January 31, 2017 to $52.1 million at January 31, 2018.
During fiscal 2018, we made significant reductions to our headcount as part of our ongoing restructuring effort from which we expect
to generate annualized savings of approximately $18 million. These measures are important steps in restoring SeaChange to
profitability and positive cash flow. The Company believes that existing funds and cash expected to be provided by future operating
activities, augmented by the plans highlighted above, are adequate to satisfy our working capital, potential acquisitions and capital
expenditure requirements and other contractual obligations for the foreseeable future, including at least the next 12 months.
a
t
However, if our expectations are incorrect, we may need to raise additional funds to fund our operations, to take advantage of
unanticipated strategic opportunities or to strengthen our financial position. In the future, we may enter 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.
Operating Activities
Below are key line items affecting cash from operating activities:
NNet income (loss)
Adjustments to reconcile net income (loss) to cash provided
$
by (used in) operating activities
NNet income (loss) including adjustments
Decrease (increase) in accounts receivable and unbilled
For the Fiscal Years Ended January 31,
2016
2017
2018
(Amounts in thousands)
(47,697) $
(71,249) $
13,498
$
FY18 vs FY17
$ Change
FY17 vs FY16
$ Change
84,747
$
(23,552)
(9,411)
4,087
44,924
(26,325)
41,550
(6,147)
(54,335)
30,412
3,374
(20,178)
receivables
9,100
4,736
(6,080)
4,364
10,816
(Increase) decrease in prepaid expenses and other current
assets
(Decrease) increase in accounts payable
Increase (decrease) in accrued expenses
Decrease in deferred revenues
All other - net
Net cash provided by (used in) operating activities
$
(588)
(2,499)
3,505
(1,078)
420
12,947
$
1,378
(1,674)
(4,872)
(2,417)
836
(28,338) $
(1,097)
874
(2,712)
(1,431)
(2,069)
(18,662) $
(1,966)
(825)
8,377
1,339
(416)
41,285
$
2,475
(2,548)
(2,160)
(986)
2,905
(9,676)
For fiscal 2018, cash provided by operating activities was $12.9 million. This cash provided by operating activities was primarily the
result of our net income, including adjustments, of $4.1 million and to the changes in working capital, which include a decrease in
receivables of $9.1 million due to collections from customers during the fiscal year and to an increase in accrued expenses of $3.5
million, specifically income taxes payable from foreign locations and accrued bonus based on improved operating results of the
Company in fiscal 2018. Offsetting these sources of cash was a $1.1 million decrease in deferred revenue and a $2.5 million decrease
in accounts payable due to the timing of payments to vendors.
42
For fiscal 2017, we used net cash in operating activities of $28.3 million. This cash used in operating activities was primarily the result
of our net loss including adjustments of $26.3 million offset by changes in working capital, which include a decrease in receivables of
$4.7 million due to the timing of customer payments, offset by a decrease in accrued expenses of $4.9 million related to the payment
of severance and bonuses, a $2.4 million decrease in deferred revenue and a $1.7 million decrease in accounts payable due to the
timing of payments to vendors.
a
Investing Activities
Cash flows from investing activities are as follows:
Purchases of property and equipment
Investment in capitalized software
Purchases of marketable securities
Proceeds from sale and maturity of marketable securities
Proceeds from sale of investments in affiliates
Acquisition of business, net of cash acquired
Other investing activities
$
Net cash provided by (used in) investing activities
$
For the Fiscal Years Ended January 31,
2016
2017
2018
(Amounts in thousands)
(1,397) $
(2,440)
(9,033)
11,043
464
(11,686)
3
(13,046) $
(683) $
(2,008)
4,005
(5,243)
57
(3,872) $
(526) $
(7,246)
8,992
4,555
236
6,011
$
FY18 vs FY17
$ Change
FY17 vs FY16
$ Change
157
(5,238)
4,987
4,555
5,243
179
9,883
$
$
714
2,440
7,025
(7,038)
(464)
6,443
54
9,174
In fiscal 2018, $6.0 million in cash was provided by investing activities. Specifically, we received proceeds of $4.6 million from the
sale of our investment in affiliate in the fourth quarter of fiscal 2018. In addition, cash provided by investing activities includes $0.2
million in proceeds from the sale of property and equipment in fiscal 2018 and the proceeds from the sale or maturity of marketablea
securities, net of purchases, during the fiscal year of $1.7 million. This was offset by cash used of $0.5 million for the purchase of
capital assets during the fiscal year.
ff
In connection with the acquisition in January 2018 by T-Mobile of Layer 3, a next generation cable provider in which we previously
had made an equity investment, we received $4.6 million upon closing of the transaction.
In fiscal 2017, we used $3.9 million in cash related to investing activities. Specifically, we used cash of $5.2 million for the
acquisition of DCC Labs and $0.7 million for the purchase of capital assets offset by $2.0 million of proceeds from the sale or
maturity of marketable securities, net of purchases.
Financing Activities
Cash flows from financing activities are as follows:
For the Fiscal Years Ended January 31,
FY18 vs FY17
FY17 vs FY16
2018
2017
2016
$ Change
$ Change
Proceeds from issuance of common stock
Other financing activities
Net cash (used in) provided by financing activities
$
$
$
54
(141)
(87) $
60
(183)
(123) $
(Amounts in thousands)
$
$
193
(1)
192
$
(6) $
42
36
$
(133)
(182)
(315)
For fiscal 2018 and fiscal 2017, cash (used in) provided by financing activities reflects proceeds received from the issuance of
common stock for the employee stock purchase plan, offset by employee taxes paid when we withhold shares of common stock for
tax-withholding purposes.
Effect of exchange rate changes decreased cash and cash equivalents by $3.6 million for fiscal 2018, primarily due to the
strengthening of the Euro against the U.S. dollar in fiscal 2018.
43
Contractual Obligations
The following table reflects our current and contingent contractual obligations to make potential future payments as of January 31,
2018:
Purchase obligations (1)
Non-cancelable lease obligations (2)
Non-cancelable lease obligations (2)
Total
$
$
2,844
3,501
6,345
$
$
Total
Less than
one year
One to
three years
(Amounts in thousands)
$
$
1,589
1,589
$
$
Three to
five years
Over five
years
$
598
598
$
2,844
1,314
4,158
(1)
(2)
Represents obligations under agreements with non-cancelable terms to purchase goods or services. The agreements are enforceable and
legally binding, and specify terms, including quantities to be purchased and the timing of the purchase.
Represents the minimum lease cash payments for operating lease obligations. Excludes aggregate related sublease rental receipts of
$0.1 million on operating lease obligations.
We have excluded from the table above uncertain tax liabilities as defined by authoritative guidance due to the uncertainty of the
amount and period of payment. As of January 31, 2018, we have gross unrecognized tax benefits of $4.9 million.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
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, revenues, 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.
The significant accounting policies and methods used in the preparation of our consolidated financial statements are described in
Note 2., Summary of Significant Accounting Policies, to our consolidated financial statements set forth in Part II, Item 8, of this
Form 10-K. We believe the following critical accounting policies reflect the significant estimates, judgments and assumptions
ff
the preparation of our consolidated financial statements.
used in
Principles of Consolidation
The consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation.
Our investments in affiliates include investments accounted for under the cost method of accounting as the investments represent less
than a 20% ownership interest of the common shares of the affiliate are carried at cost.
We periodically review indicators of the fair value of our investments in affiliates to assess whether available facts or circumstances,
both internally and externally, may suggest an other-than-temporary decline in the value of the investment. The carrying value of an
investment in an affiliate accounted for under the cost method of accounting may be affected by the affiliates ability to obtain
adequate funding and execute its business plans, general market conditions, its current cash position, earnings and cash flow forecasts,
recent operational performance, and any other readily available data. We record an impairment charge when we believe an investment
has experienced a decline in value that is other-than-temporary.
Revenue Recognition
Our transactions frequently involve the sales of hardware, software, systems and services in multiple-element arrangements. Revenues
from sales of hardware, software and systems that do not require significant modification or customization of the underlying software
are recognized when:
•
persuasive evidence of an arrangement exists;
44
•
•
•
delivery has occurred, and title and risk of loss have passed to the customer;
fees are fixed or determinable; and
collection of the related receivable is considered probable.
Customers are billed for installation, training, project management and at least one year of product maintenance and technical support
at the time of the product sale. Revenue from these activities is deferred at the time of the product sale and recognized ratably over the
period these services are performed. Revenue from ongoing product maintenance and technical support agreements is recognized
ratably over the period of the related agreements. Revenue from software development contracts that include significant modification
or customization, including software product enhancements, is recognized based on the percentage of completion contract accounting
method using labor efforts expended in relation to estimates of total labor efforts to complete the contract. The percentage of
completion method requires that adjustments or re-evaluations to estimated project revenues and costs be recognized on a project-to-
date cumulative basis, as changes to the estimates are identified. Revisions to project estimates are made as additional information
becomes known, including information that becomes available after
date such consolidated financial statements are filed with the SEC. If the final estimated profit to complete a long-term contract
indicates a loss, a provision is recorded immediately for the total loss anticipated. Accounting for contract amendments and customer
change orders are included in contract accounting when executed. Revenue from shipping and handling costs and other out-of-pocket
expenses reimbursed by customers are included in revenues and cost of revenues. Our share of intercompany profits associated with
sales and services provided to affiliated companies are eliminated in consolidation in proportion to our equity ownership.
the date of the consolidated financial statements up through the
ff
ff
Contract accounting requires judgment relative to assessing risks, estimating revenues and costs and making assumptions including, in
the case of our professional services contracts, the total amount of labor required to complete a project and the complexity of the
development and other technical work to be completed. Due to the size and nature of many of our contracts, the estimation of total
revenues and cost at completion is complicated and subject to many variables. Assumptions must be made regarding the length of time
to complete the contract because costs also include estimated third-party vendor and contract labor costs. Penalties related to
performance on contracts are considered in estimating sales and profit, and are recorded when there is sufficient information for us to
assess anticipated performance. Third-party vendors assertions are also assessed and considered in estimating costs and margin.
Revenue from the sale of software-only products remains within the scope of the software revenue recognition rules. Maintenance and
support, training, consulting, and installation services no longer fall within the scope of the software revenue recognition rules, except
when they are sold with and relate to a software-only product. Revenue recognition for products that no longer fall under the scope of
the software revenue recognition rules is like that for other tangible products and Accounting Standard Update No. (ASU) 2009-13,
amended ASC 605 and is applicable for multiple-
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,
deliverable revenue arrangements. ASU 2009-13 allows companies to allocate revenue in a multiple-deliverable arrangement in a
manner that better reflects the transactions economics.
Under the software revenue recognition rules, the fee is allocated to the various elements based on vendor-specific objective evidence
(VSOE) of fair value. Under this method, the total arrangement value is allocated first to undelivered elements based on their fair
values, with the remainder being allocated to the delivered elements. Where fair value of undelivered service elements has not been
established, the total arrangement value is recognized over the period during which the services are performed. The amounts allocated
to undelivered elements, which may include project management, training, installation, maintenance and technical support and certain
hardware and software components, are based upon the price charged when these elements are sold separately and unaccompanied by
the other elements. The amount allocated to installation, training and project management revenue is based upon standard hourly
billing rates and the estimated time necessary to complete the service. These services are not essential to the functionality of systems
as these services do not alter the equipments capabilities, are available from other vendors and the systems are standard products. For
multiple-element arrangements that include software development with significant modification or customization and systems sales
where VSOE of the fair value does not exist for the undelivered elements of the arrangement (other than maintenance and technical
support), percentage of completion accounting is applied for revenue recognition purposes to the entire arrangement except for
maintenance and technical support.
45
Under the revenue recognition rules for tangible products as amended by ASU 2009-13, the fee from a multiple-deliverable
arrangement is allocated to each of the deliverables based upon their relative selling prices as determined by a selling-price hierarchy.
A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-
alone basis. A delivered item that does not qualify as a separate unit of accounting is combined with the other undelivered items in the
arrangement and revenue is recognized for those combined deliverables as a single unit of accounting. The selling price used for each
deliverable is based upon VSOE if available, third-party evidence (TPE) if VSOE is not available, and best estimate of selling price
(BESP) if neither VSOE nor TPE are available. TPE is the price of the Companys, or any competitors, largely interchangeable
products or services in stand-alone sales to similarly situated customers. BESP is the price at which we would sell the deliverable if it
were sold regularly on a stand-alone basis, considering market conditions and entity-specific factors.
The selling prices used in the relative selling price allocation method for certain of our services are based upon VSOE. The selling
prices used in the relative selling price allocation method for third-party products from other vendors are based upon TPE. The selling
prices used in the relative selling price allocation method for our hardware products, software, subscriptions, and customized services
for which VSOE does not exist are based upon BESP. We do not believe TPE exists for these products and services because they are
differentiated from competing products and services in terms of functionality and performance and there are no competing products or
services that are largely interchangeable. Management establishes BESP with consideration for market conditions, such as the impact
of competition and geographic considerations, and entity-specific factors, such as the cost of the product, discounts provided and
profit objectives. Management believes that BESP is reflective of reasonable pricing of that deliverable as if priced on a stand-alone
basis.
For our cloud and managed service revenues, we generate revenue from two sources: (1) subscription and support services; and (2)
professional services and other. Subscription and support revenue includes subscription fees from customers accessing our cloud-
based software platform and support fees. Our arrangements with customers do not provide the customer with the right to take
possession of the software supporting the cloud-based software platform at any time. Professional services and other revenue include
fees from implementation and customization to support customer requirements. Amounts that have been invoiced are recorded in
accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. For the
most part, subscription and support agreements are entered into for 12 to 36 months. Generally, most of the professional services
components of the arrangements with customers are performed within a year of entering a contract with the customer.
In most instances, revenue from a new customer acquisition is generated under sales agreements with multiple elements, comprised of
subscription and support and other professional services. We evaluate each element in a multiple-element arrangement to determine
whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has
standalone value and delivery of the undelivered element is probable and within our control.
In determining when to recognize revenue from a customer arrangement, we are often required to exercise judgment regarding the
application of our accounting policies to an arrangement. The primary judgments used in evaluating revenue recognized in each period
involve: determining whether collection is probable, assessing whether the fee is fixed or determinable, and determining the fair value of
the maintenance and service elements included in multiple-element software arrangements. Such judgments can materially impact the
amount of revenue that we record in a given period. While we follow specific and detailed rules and guidelines related to revenue
recognition, we make and use significant management judgments and estimates about the revenue recognized in any reporting period,
particularly in the areas described above. If management made different estimates or judgments, material differences in the timing of the
recognition of revenue could occur.
Allowance for Doubtful Accounts
We recognize revenue for products and services only in those situations where collection from the customer is probable. We perform
ongoing credit evaluations of customers financial condition but generally do not require collateral. For some international customers,
we may require an irrevocable letter of credit to be issued by the customer before the purchase order is accepted. We monitor
payments from customers and assess any collection issues. We maintain allowances for specific doubtful accounts and other risk
categories of accounts based on estimates of losses resulting from the inability of our customers to make required payments and record
these allowances as a charge to general and administrative expenses in our consolidated statements of operations and comprehensive
income (loss). We base our allowances for doubtful accounts on historical collections and write-off experience, current trends, credit
assessments, and other analysis of specific customer situations. While such credit losses have historically been within our expectations
and the allowances established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the
past. If the financial condition of our customers were to change, additional allowances may be required or established allowances may
be considered unnecessary. Judgment is required in making these determinations and our failure to accurately estimate the losses for
doubtful accounts and ensure that payments are received on a timely basis could have a material adverse effect on our business,
financial condition and results of operations.
46
Fair Value Measurements
We measure certain financial assets and liabilities at fair value based on valuation techniques using the best information available,
which may include quoted market prices, market comparables and discounted cash flow projections. Financial instruments include
money market funds, corporate debt investments, asset-backed securities, government-sponsored enterprises and state municipal
obligations.
In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value. If
quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for
similar assets and liabilities or inputs that are observable either directly or indirectly.
a
Inventories and Reserves
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. Inventories
consist primarily of components and subassemblies and finished products held for sale. All our hardware components are purchased
from outside vendors. The value of inventories is reviewed quarterly to determine that the carrying value is stated at the lower of cost
or net realizable value. We record charges to reduce inventory to its net realizable value when impairment is identified through the
quarterly review process. The obsolescence evaluation is based upon assumptions and estimates about future demand and possible
alternative uses and involves significant judgments.
Accounting for Business Combinations
We apply the acquisition method of accounting for business combinations, including our acquisition of DCC Labs on May 5, 2016.
Under this method of accounting, we are required to record the assets acquired, liabilities assumed, contractual contingencies, and
contingent consideration at their fair value on the acquisition date. Determining these fair values and completing the purchase price
allocation process requires management to make significant estimates and assumptions, especially at acquisition date with respect to
intangible assets, estimated contingent consideration payments and pre-acquisition contingencies. Any excess of the purchase price
over the fair value of the net assets acquired is recognized as goodwill. Although we believe the assumptions and estimates we have
made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the
management of the acquired company and are inherently uncertain. Examples of critical estimates in accounting for acquisitions
include but are not limited to:
•
•
•
the estimated fair value of acquisition-related contingent consideration, which is calculated using a probability-weighted
discounted cash flow model based upon the forecasted achievement of post-acquisition bookings targets;
the future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts and
acquired developed technologies and patents; and
the relevant discount rates.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual
results. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record
adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Additionally, any change in the
fair value of the acquisition-related contingent consideration once determined, including changes from events after the acquisition
date, such as changes in our estimate of the bookings that are expected to be achieved, will be recognized in earnings in the period of
the estimated fair value change. A change in fair value of the acquisition-related contingent consideration could have a material effect
on the consolidated statements of operations and comprehensive income (loss) and statement of financial position in the period of the
change in estimate.
Long-Lived Assets
We review property and equipment, investments and other long-lived assets on a regular basis for impairment when indication of
potential impairment exists. If such circumstances exist, we evaluate the carrying value of long-lived assets to determine if impairment
exists based upon estimated undiscounted future cash flows over the remaining useful life of the assets and compare that value to the
carrying value of the assets. Our cash flow estimates contain managements best estimates, using appropriate and customary
assumptions and projections at the time.
In August 2017, we placed our corporate headquarters and the adjacent land (the Corporate Headquarters), located in Acton,
Massachusetts, on the market for sale. We assessed whether the Corporate Headquarters would qualify as an asset held for sale and
determined that it would not since it did not meet all six of the criteria of an asset held for sale under current accounting guidance.
During the assessment, we received information from a third-party real estate broker which led management to believe that there was
a significant decrease in the fair value of the Corporate Headquarters. We considered this to be a triggering event and were required to
test the Corporate Headquarters for recoverability. We evaluated the undiscounted future cash flows over the remaining useful life of
47
the primary asset of the asset group and determined that an impairment did not exist as of the date of the triggering event. Our cash
flow estimates contain managements best estimates, using appropriate and customary assumptions and projections at the time.
Acquired Intangible Assets and Goodwill
Acquired Intangible Assets
We use significant judgment in determining the fair value of acquired intangible assets, whether the assets are amortizable or non-
amortizable and the period and method by which the intangible asset will be amortized. Intangible assets include customer contracts,
completed technology, non-compete agreements, trademarks, backlogs and patents. We engage third-party valuation specialists to
assist us with the initial measurement of the fair value of acquired intangible assets. Acquired intangible assets, other than goodwill,
are amortized on a straight-line basis over their estimated useful lives during the period the economic benefits of the intangible asset
are consumed or otherwise used up. We review definite-lived intangible assets for impairment when indication of a potential
impairment exists.
a
Goodwill
2017-04 eliminated Step 2 of the goodwill impairment test
In connection with acquisitions of businesses, we recognize the excess of the purchase price over the fair value of the net tangible and
identifiable intangible assets acquired as goodwill. Goodwill is not amortized, but is evaluated for impairment at least annually, in our
third quarter beginning August 1st, or more frequently if indicators are present or changes in circumstances suggest that an impairment
SU 2017-04 Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for
exists. As of August 1, 2017, we early adopted ASU 2017-04,
Goodwill Impairment.
ASU 2017-04
to determine the fair value at the impairment testing date of its assets and liabilities. The standard does not change the guidance on
completing Step 1 of the goodwill impairment test. In accordance with the new standard, we compare the fair value of our reporting
unit with the carrying amount, including goodwill. We recognize an impairment charge for the amount by which the carrying amount
exceeds a reporting units fair value, as applicable. The process of evaluating goodwill for impairment requires several judgments and
assumptions to be made to determine the fair value, including the method used to determine fair value, discount rates, expected levels
of cash flows, revenues and earnings, and the selection of comparable companies used to develop market-based assumptions. We may
employ the three generally accepted approaches for valuing businesses: the market approach,
based (cost) approach to arrive at the fair value. The choice of which approach and methods to use in a situation depends on the facts
and circumstances.
in which an entity had to perform procedures
the income approach, and the asset-
a
rr
In evaluating goodwill for impairment, we chose to use the market approach and the income approach to determine the fair value. The
market approach provides value indications through a comparison with guideline public companies or guideline transactions. The
valuation multiple is an expression of what investors believe to be a reasonable valuation relative to a measure of financial information
such as revenues, earnings or cash flows. The income approach provides value indications through an analysis of its projected
earnings, discounted to present value. We employed a weighted-average cost of capital rate
other factors such as equity risk premiums and the ratio of total debt to equity capital. In performing the annual impairment test, we
took steps to ensure appropriate and reasonable cash flow projections and assumptions were used.
based on the risk-free interest rate and
a
Our projections for the next two and a half years included increased operating expenses in line with the expected revenue growth
based on current market and economic conditions and our historical knowledge. Historical growth rates served as only one input to the
projected future growth used in the goodwill impairment analysis. These historical growth rates were adjusted based on other inputs
regarding anticipated customer contracts. The forecasts have incorporated any changes to the revenue and operating expenses through
the end of fiscal 2018. We estimated the operating expenses based on a rate consistent with the current experience and estimated
revenue growth over the next two and a half years. Future adverse changes in market conditions or poor operating results could result
in losses, thereby possibly requiring an impairment charge in the future.
In the third quarter of fiscal 2018, we finalized the Step 1 analysis of our annual goodwill impairment test for fiscal 2018. Based on
this analysis, we determined that fair value of our reporting unit exceeded its carrying value, which was $64.2 million at August 1,
2017. As a result, no impairment charge was required related to the annual test.
rr
In addition, since we considered the significant decrease in fair value of the Corporate Headquarters a triggering event, we were
required to complete an additional goodwill impairment test as of the date of the triggering event. We completed the additional
goodwill impairment test and determined that the implied fair value of the reporting unit exceeds its carrying value as of the date of
the triggering event. Accordingly, no impairment charge was recognized in fiscal 2018.
During our fiscal 2017 annual impairment test, we determined based on Step 1 that the fair value of our reporting unit was less than
its carrying value, which was $102.5 million at August 1, 2016. Our forecast indicated that the estimated fair value of net assets was
less than the carrying value which is a potential indicator of impairment. The comparison of estimated fair value to the carrying value
48
rr
of our reporting unit ranged from a shortfall of approximately $23.0 million to $14.5 million. Since the estimated fair value of our
reporting unit was less than its carrying value, we determined that it was necessary to perform
Step 2 of the impairment test. In
Step 2 of the impairment test we compared the implied fair value of our goodwill to its carrying value. After adjusting the carrying
value of all assets, liabilities and equity to fair value at August 1, 2016, the estimated implied fair value of goodwill was calculated to
be $22.3 million. Since the implied fair value of goodwill of $22.3 million is less than the carrying value of $45.8 million as of August
1, 2016, we recorded an impairment charge of $23.5 million to loss on impairment of long-lived assets in our consolidated statements
of operations and comprehensive income (loss) in the fourth quarter of fiscal 2017.
Internal Use Software
Certain costs incurred in the application development phase of software development for internal use are capitalized and amortized
over the products estimated useful life, which is three years. The Company expenses all costs incurred that relate to planning and post
implementation phases of development. Capitalized costs related to internally developed software under development are treated as
construction in progress until the technology is available for
intended use, at which time the amortization commences. The carrying
value of our capitalized internally developed software costs was $0.7 million as of January 31, 2018. Maintenance and training costs
are expensed as incurred. In November 2017, we closed our Philippines facility as part of our cost-savings initiatives which began in
the second half of fiscal 2017. As a result, we wrote off $0.1 million of internally developed software costs to severance and other
restructuring costs in our consolidated statements of operations and comprehensive income (loss).
a
Software Development Costs
We also purchase software for resale and capitalize those costs associated with projects that meet technological feasibility.
Amortization expense of capitalized software is recorded over the period of economic consumption or the life of the agreement,
whichever results in the higher expense, starting with the first shipment of the product to a customer. Amortization expense of
capitalized software was $0.9 million, $1.0 million and $0.1 million in fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
Accounting for Income Taxes
Income tax comprises current and deferred tax. Income tax is recognized in the consolidated statements of operations and
comprehensive income (loss) except to the extent that it relates to items recognized directly within equity or in other comprehensive
income (loss). Income taxes payable, which is included in other accrued expenses in our consolidated balance sheets, is the expected
tax payable on the taxable income for the year, using tax rates enacted or substantially-enacted at the reporting date, and any
adjustment to tax payable in respect of previous years.
r
Deferred tax assets and liabilities are recognized, using the balance sheet method, for the expected tax consequences of temporary
differences between the carrying amounts of assets and liabilities and the amounts used for taxation purposes. Deferred tax is not
recognized for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets and liabilities in
a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to
investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the
tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or
substantially-enacted by the reporting date.
ff
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is
probable that future taxable profits will be available against which they can be utilized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income in the countries where the deferred
tax assets originated and during the
a
periods when the deferred tax assets become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment.
We operate in multiple jurisdictions with complex tax policy and regulatory environments. In certain of these jurisdictions, we may
take tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable
taxing authority. These interpretational differences with the respective governmental taxing authorities can be impacted by the local
economic and fiscal environment. We evaluate our tax positions and establish liabilities in accordance with the applicable accounting
guidance on uncertainty in income taxes. We review these tax uncertainties in light of changing facts and circumstances, such as the
progress of tax audits, and adjust them accordingly.
Our policy is to classify interest and penalties related to unrecognized tax benefits, if and when required, as a component of income
tax (benefit) provision, in our consolidated statements of operations and comprehensive income (loss).
49
Because there are several estimates and assumptions inherent in calculating the various components of our tax provision, certain
changes or future events such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings
repatriation plans could have an impact on those estimates and our effective tax rate.
On December 22, 2017, the Tax Reform Act was signed into law. We are required to recognize in the period of enactment, the effect
of the tax law changes, such as re-measuring our U.S. deferred tax assets and liabilities, reassessing the net realizability of deferred tax
assets and liabilities, and determining the applicability of the one-time mandatory transition tax on accumulated foreign earnings.
Additionally, on December 22, 2017, the SEC staff issued SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs
Act. SAB 118 has provided guidance which allows us to record provisional amounts during a measurement period not to extend
beyond one year of the enactment date. As a result of the change in law, including a reduction in the corporate tax rate, the Company
recorded a provisional reduction to its deferred tax assets of $17.1 million and a corresponding reduction to its valuation allowance in
the fourth quarter of fiscal 2018 which represents the Companys best estimate of the impact of the Tax Reform Act in accordance
with the Companys understanding of the Tax Reform Act and available guidance as of the date of this filing. As a result, there was no
impact to the Companys consolidated statements of operations and comprehensive income (loss) income statement due to the
reduction in the U.S. corporate tax rate. We will continue to analyze the Tax Reform Act and related accounting guidance and
interpretations in order to finalize any impacts within the measurement period. See Note 12, Income Taxes,
more information.
to this Form 10-K for
Stock-based Compensation
We account for all employee and non-employee director stock-based compensation awards using the authoritative guidance regarding
share-based payments. We continue to use the Black-Scholes pricing model as we feel it is the most appropriate method for
determining the estimated fair value of the non-market-based awards. We also use the Monte Carlo pricing model for our market-
based option awards and performance stock units (PSUs). Determining the appropriate fair value model and calculating the fair
value of share-based payment awards requires the input of highly subjective assumptions, including the expected life of the share-
based payment awards and stock price volatility. Management estimates the volatility based on the historical volatility of our stock.
The assumptions used in calculating the fair value of share-based payment awards represent managements best estimates, but these
estimates involve inherent uncertainties and the application of managements judgment. As a result, if circumstances change and we
use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are
required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual
rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we
have recorded in the current period. The estimated fair value of our market-based awards, less expected forfeitures, is amortized over
the awards vesting period on a graded vesting basis, whereas the fair value of non-market-based awards and employee stock purchase
plan (ESPP) stock units, less estimated forfeitures, are amortized on a straight-line basis.
forfeiture
t
Foreign Currency Translation
For subsidiaries where the U.S. dollar is designated as the functional currency of the entity, we translate that entitys monetary assets
and liabilities denominated in local currencies into U.S. dollars (the functional and reporting currency) at current exchange rates, as of
each balance sheet date. Non-monetary assets (e.g., inventories, property and equipment and intangible assets) and related income
statement accounts (e.g., cost of sales, depreciation, amortization of intangible assets) are translated at historical exchange rates
between the functional currency (the U.S. dollar) and the local currency. Revenue and other expense items are translated using average
exchange rates during the fiscal period. Translation adjustments resulting from translation of the subsidiaries accounts are included in
accumulated other comprehensive loss, a separate component of stockholders equity. Gains and losses resulting from foreign
currency transactions, and any unrealized gains and losses on short-term intercompany transactions are included in other income
(expenses), net on our consolidated statements of operations and comprehensive income (loss).
For subsidiaries where the local currency is designated as the functional currency, we translate the subsidiaries assets and liabilities into
U.S. dollars (the reporting currency) at current exchange rates as of each balance sheet date. Revenue and expense items are translated
using average exchange rates during the period. Cumulative translation adjustments are presented as a separate component of
stockholders equity. Exchange gains and losses on foreign currency transactions and unrealized gains and losses on short-term
intercompany transactions are included in other income (expenses), net on our consolidated statements of operations and comprehensive
income (loss).
The aggregate foreign exchange transaction gain (loss) included as other income (expenses), net, on our consolidated statements of
operations and comprehensive income (loss) was $3.8 million, ($2.1) million and ($0.7) million for the fiscal years ended January 31,
2018, 2017 and 2016, respectively.
50
Recent Accounting Standard Upd
ates
dd
SS
We consider the applicability and impact of all ASUs on our consolidated financial statements. Updates not listed below were assessed
and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of
operations. Recently issued ASUs which we feel may be applicable to us are as follows:
a
Recently Issued Accounting Standard Updates Not Yet Adopted
Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, Income Statement
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. On December 22, 2017, the U.S. federal
government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on
the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act) , which requires deferred tax liabilities and assets to be adjusted for the
effect of a cha
earnings for stranded tax effects resulting from the Tax Reform Act. ASU 2018-02 is effective for us in the first quarter of fiscal 2020.
Early adoption is permitted. We are currently evaluating what impact the adoption of this update will have on our consolidated
financial statements.
ssification from accumulated other comprehensive income to retained
Reporting Comprehensive Income (Topic 220):
ASU 2018-02 allows a recla
nge in tax laws.
A
Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides
enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial
statements of companies using International Financial Reporting Standards and U.S. GAAP. The core principle requires entities to
recognize revenue in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration an
entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB voted to approve a one-year deferral,
making the standard effective for public entities for annual and interim periods beginning after December 15, 2017.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net). The purpose of ASU 2016-08 is to clarify the guidance on principal versus
agent considerations. It includes indicators that help to determine whether an entity controls the specified good or service before it is
transferred to the customer and to assist in determining when the entity satisfied the performance obligation and as such, whether to
recognize a gross or a net amount of consideration in their consolidated statement of operations.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing. ASU 2016-10 clarifies that entities are not required to assess whether promised goods or services are
performance obligations if they are immaterial in the context of the contract. ASU 2016-10 also addresses how to determine whether
promised goods or services are separately identifiable and permits entities to make a policy election to treat shipping and handling
costs as fulfillment activities. In addition, it clarifies key provisions in Topic 606 related to licensing.
In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815). ASU
2016-11 rescinds previous SEC comments that were codified in Topic 605, Topic 932 and Topic 815. Upon adoption of Topic 606,
certain SEC comments including guidance on accounting for shipping and handling fees and costs and consideration given by a
vendor to a customer should not be relied upon.
In May 2016, the FASB also issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope
Improvements and Practical Expedients. ASU 2016-12 provides clarity around collectability, presentation of sales taxes, non-cash
consideration, contract modifications at transition and completed contracts at transition. ASU 2016-12 also includes a technical
correction within Topic 606 related to required disclosures if the guidance is applied retrospectively upon adoption.
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers. ASU 2016-20 allows entities not to make quantitative disclosures about remaining performance obligations in
certain cases and requires entities that use any of the optional exemptions to expand their qualitative disclosures. ASU 2016-20 also
clarifies other areas of the new revenue standard, including disclosure requirements for prior period performance obligations,
impairment guidance for contract costs and the interaction of impairment guidance in ASC 340-40 with other guidance elsewhere in
the Codification.
The Company has elected the modified retrospective adoption model, effective February 1, 2018. The Companys quarterly results
beginning with the quarter ending April 30, 2018 and comparative prior periods will be compliant with ASC 606 and its Form 10-K
for the year ended January 31, 2019 will be the Companys first Annual Report that will be issued in compliance with ASC 606.
51
The Company has substantially completed the implementation of ASC 606 and has identified the necessary changes to its policies,
processes, systems, and controls. Based upon the work performed to date, the Company expects to record a cumulative-effect
adjustment as of February 1, 2018 to increase retained earnings by an estimated range of approximately $1.7 million to $4.0 million.
Such adjustment includes an increase in retained earnings by approximately $1 million to $3 million due to higher revenue that would
have been recognized under ASC 606 if the standard had been adopted for the fiscal year ended January 31, 2018 and an increase in
retained earnings of $0.7 million to $1.0 million due to reduced commission expense that would have been recognized under ASC
if the standard had been adopted for the fiscal year ended January 31, 2018. The resulting tax effect of this cumulative-effect
adjustment is not expected to be significant to retained earnings. We expect to fully disclose the impacts of the new standard in
connection with our Form 10-Q filing for the first quarter of fiscal 2019.
d
606
The Company anticipates the following impacts upon adoption of the standard:
•
•
•
•
•
Currently, the Company recognizes revenue from perpetual licenses with extended payment terms over the term of the
agreement as payments are received, provided all other criteria for revenue recognition have been met, and any
corresponding maintenance over the term of the agreement. The adoption of ASC 606 will result in revenue for
performance obligations being recognized as they are satisfied. Therefore, revenue from perpetual license performance
obligations with extended payment terms will be recognized when control is transferred to the customer. Any
unrecognized license revenue from the arrangement, included in deferred revenue at January 31, 2018, will not be
recognized in revenue in future periods but as a cumulative adjustment to retained earnings. Further, revenue from the
maintenance performance obligations is expected to be recognized on a straight-line basis over the contractual term. Due
to the revenue from perpetual licenses with extended payment terms being recognized prior to amounts being billed to the
customer, the Company expects to recognize a net contract asset on the balance sheet.
Currently, the Company allocates revenue to licenses under the residual method when it has Vendor Specific Objective
Evidence (VSOE) for the remaining undelivered elements, which allocates any future credits or significant discounts
entirely to the license. The adoption of ASC 606 will result in future credits, significant discounts, and material rights
under ASC 606, being allocated to all performance obligations based upon their relative selling price. Under ASC 606,
additional license revenue from the reallocation of such arrangement considerations will be recognized when control is
transferred to the customer, which is generally upon delivery of the license.
Currently, the Company does not have VSOE for professional services and maintenance in certain geographical areas,
which results in revenue being deferred in such instances until such time as VSOE exists for all undelivered elements or
recognized ratably over the longest performance period. The adoption of ASC 606 eliminates the requirement for VSOE
and replaces it with the concept of a standalone selling price. Once the transaction price is allocated to each of the
performance obligations, the Company can recognize revenue as the performance obligations are delivered, either at a
point in time or over time. Under ASC 606, license revenue will be recognized when control is transferred to the customer
and professional services revenue will be recognized over time based on labor hours expended. This will result in the
acceleration of professional services revenue when compared to the current practice of ratable recognition for professional
services when there is a lack of VSOE.
Sales commissions and other third-party acquisition costs resulting directly from securing contracts with customers are
currently expensed when incurred. ASC 606 will require these costs to be recognized as an asset when incurred and to be
expensed over the associated contract term. However, because the sales commission paid on the maintenance renewals is
not commensurate with the original deal, ASC 606 requires that these acquisition costs be expensed over the customer
life, which we have estimated to be five years. The Company expects this change to impact all arrangements that included
implicit or explicit maintenance contracts.
ASC 606 provides additional accounting guidance for contract modifications whereby changes must be accounted for
either as a retrospective change (creating either a catch up or deferral of past revenues), prospectively with a reallocation
of revenues amongst identified performance obligations, or prospectively as separate contracts which will not require any
reallocation. This may result in a difference in the timing of the recognition of revenue as compared to how contract
modifications are recognized currently.
There will be a corresponding effect on tax liabilities in relation to all of the above impacts.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).
asset and a lease liability for operating leases with terms over twelve months, initially measured at the present value of the lease
payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the
lease is allocated over the lease term, on a generally straight-line basis. It also requires lessees to classify leases as either finance or
operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee.
This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line
ASU 2016-02 requires a lessee to recognize a right-of-use
52
basis over the term of the lease. ASU 2016-02 is effective for us in the first quarter of fiscal 2020. Early adoption is permitted. We are
currently evaluating what impact the adoption of this update will have on our consolidated financial statements.
Recently Issued Accounting Standard Updates Adopted During the Period
Income Taxes
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 118. ASU 2018-05 amends ASC 740, Income Taxes
to provide guidance on accounting for the tax effects
of the Tax Reform Act pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC
740 within a one-year measurement period from the Tax Reform Act enactment date. This update was effective upon issuance.
Therefore, we have applied the guidance in this update within our consolidated financial statements for the fiscal year ended January
31, 2018. See Note 12, Income Taxes,
of this Form 10-K for more information on the adoption of this guidance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate Risk
We face exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest
rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial
results. Our foreign currency exchange exposure is primarily associated with product sales arrangements or settlement of
intercompany payables and receivables among subsidiaries and their respective parent company, and/or investment/equity contingency
considerations denominated in the local currency where the functional currency of the foreign subsidiary is the U.S. dollar.
Our principal currency exposures relate primarily to the U.S. dollar and the Euro. All foreign currency gains and losses are included in
other income (expenses), net, in the accompanying consolidated statements of operations and comprehensive income (loss). For fiscal
2018 we recorded $3.8 million in gains primarily due to the settlement of a note receivable between our Netherlands and British
Virgin Islands entities. The loan was established in Euros, our Netherland subsidiarys functional currency, and therefore generated a
realized foreign exchange gain of $2.0 million. In addition, we also re-measured the deferred tax liability related to the outside basis
difference of our foreign subsidiaries and recorded a $14.7 million deferred tax benefit in connection to the reduction of the previously
recorded deferred tax liability. Due to the weakening of the U.S. dollar against
exchange gain of $2.4 million when this deferred tax liability was reversed in January 2018.
the Euro in fiscal 2018, we recorded a foreign
a
ff
A substantial portion of our earnings are generated by our foreign subsidiaries whose functional currency are other than the U.S.
dollar. Therefore, our earnings could be materially impacted by movements in foreign currency exchange rates upon the translation of
the subsidiarys earnings into the U.S. dollar. If the U.S. dollar had strengthened by 10% compared to the Euro, our total revenues
would have decreased by $3.3 million and loss from operations would have decreased $1.9 million.
Interest Rate Risk
Exposure to market risk for changes in interest rates relates primarily to our investment portfolio of marketable debt securities of
various issuers, types and maturities. We do not use derivative instruments in our investment portfolio, and our investment portfolio
only includes highly liquid instruments. Our cash and marketable securities include cash equivalents, which we consider to be
investments purchased with original maturities of 90 days or less. There is risk that losses could be incurred if we were to sell any
securities prior to stated maturity. Given the short maturities and investment grade quality of the portfolio holdings at January 31,
2018, a hypothetical 10% adverse movement in interest rates should not have a material adverse impact on the fair value of our
investment portfolio.
53
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm..........................................................................................................
Consolidated Balance Sheets as of January 31, 2018 and 2017 ....................................................................................................
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended January 31, 2018, 2017 and 2016 ....
Consolidated Statements of Cash Flows for the years ended January 31, 2018, 2017 and 2016 ................................................
Consolidated Statements of Stockholders Equity for the years ended January 31, 2018, 2017 and 2016...................................
Notes to Consolidated Financial Statements..................................................................................................................................
Schedule IIValuation and Qualifying Accounts and Reserves ..................................................................................................
Page
55
57
58
59
60
61
101
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
SeaChange International, Inc.
Opinions on the financial statements and internal control over financial reporting
We have audited the accompanying consolidated balance sheets of SeaChange International, Inc. (a Delaware corporation) and
subsidiaries (the Company) as of January 31, 2018 and 2017, and the related consolidated statements of operations and
comprehensive income (loss), stockholders equity, and cash flows for each of the three years in the period ended January 31, 2018,
and the related notes and schedule (collectively referred to as the financial statements). We also have audited the Companys
internal control over financial reporting as of January 31, 2018, based on criteria established in the 2013 Internal Controlll
Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of January 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended
January 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2018, based on
criteria established in the 2013
Integrated Framework
Internal Controlll
issued by COSO.
a
Basis for opinions
The Companys management is responsible for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report
of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys financial
statements and an opinion on the Companys internal control over financial reporting based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud,
and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and limitations of internal control over financial reporting
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
55
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
We have served as the Companys auditor since 2007.
Boston, Massachusetts
April 16, 2018
56
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Marketable securities
Accounts and other receivables, net of allowance for doubtful accounts of $16 and $876 at
January 31, 2018 and January 31, 2017, respectively
Unbilled receivables
Inventories, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Marketable securities, long-term
Investments in affiliates
Intangible assets, net
Goodwill, net
Other assets
Total assets
Liabilities and Stockholders Equity
Current liabilities:
Accounts payable
Deferred revenues
Other accrued expenses
Total current liabilities
Deferred revenues, long-term
Taxes payable, long-term
Deferred tax liabilities, long-term
Other liabilities, long-term
Total liabilities
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $0.01 par value; 100,000,000 shares authorized; 35,634,984 shares issued and
35,594,494 outstanding at January 31, 2018, and 35,339,232 shares issued and 35,298,742
outstanding at January 31, 2017
Additional paid-in capital
Treasury stock, at cost; 40,490 common shares at January 31, 2018 and January 31, 2017,
respectively
Accumulated loss
Accumulated other comprehensive loss
Total stockholders equity
Total liabilities and stockholders equity
January 31,
2018
January 31,
2017
$
$
$
$
43,652
9
3,991
22,537
3,101
666
3,557
77,513
9,471
4,449
1,303
25,579
1,015
119,330
2,431
11,598
15,379
29,408
2,835
1,152
215
33,610
356
239,423
(5)
(148,620)
(5,434)
85,720
119,330
$
$
$
$
28,302
109
5,253
25,985
6,553
770
2,393
69,365
11,485
4,991
2,000
2,603
23,287
2,336
116,067
4,978
12,517
9,928
27,423
2,419
1,427
14,732
530
46,531
353
236,677
(5)
(162,118)
(5,371)
69,536
116,067
The accompanying notes are an integral part of these consolidated financial statements.
57
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands, except per share data)
For the Fiscal Years Ended January 31,
2017
2016
2018
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
(Recovery on) provision for loss contract
Amortization of intangible assets
Stock-based compensation expense
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Amortization of intangible assets
Stock-based compensation expense
Change in fair value of earn-outs
Professional fees - other
Severance and other restructuring costs
Loss on impairment of long-lived assets
Total operating expenses
Loss from operations
Other income (expenses), net
Gain (loss) on investment in affiliates
Income (loss) from operations before income taxes and equity income in earnings of affiliates
Income tax (benefit) provision
Equity income in earnings of affiliates, net of tax
NNet income (loss)
NNet income (loss)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment
Unrealized loss on marketable securities(1)
Comprehensive income (loss)
NNet loss per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
(1)
Tax amounts for all periods were not significant
$ 28,791
51,476
80,267
$ 18,205
65,590
83,795
$ 21,896
85,096
106,992
3,942
22,001
(593)
970
3
26,323
53,944
23,162
12,614
14,671
1,453
2,693
21
4,740
59,354
(5,410)
4,081
2,555
1,226
(12,272)
$ 13,498
$ 13,498
(3)
(60)
$ 13,435
$
$
0.38
0.38
35,412
35,685
6,453
35,740
(4,118)
1,283
132
39,490
44,305
30,093
16,158
16,173
2,019
2,489
249
347
7,151
23,772
98,451
(54,146)
(1,972)
(500)
(56,618)
14,631
$ (71,249)
$ (71,249)
1,267
(25)
$ (70,007)
$
$
(2.04)
(2.04)
34,970
34,970
6,013
44,159
9,162
739
80
60,153
46,839
33,696
15,197
15,470
4,041
3,472
637
1,061
21,464
95,038
(48,199)
(523)
(31)
(48,753)
(1,029)
27
$ (47,697)
$ (47,697)
(847)
(12)
$ (48,556)
$
$
(1.42)
(1.42)
33,506
33,506
The accompanying notes are an integral part of these consolidated financial statements.
58
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
For the Fiscal Years Ended January 31,
2017
2016
2018
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
$
13,498
$ (71,249)
$
(47,697)
Depreciation and amortization of property and equipment
(Recovery on) provision for loss contract
Amortization of intangible assets
Provision for bad debts
Stock-based compensation expense
Deferred income taxes
(Gain) loss on investment in affiliates
Loss on impairment of long-lived assets
Other
Changes in operating assets and liabilities, excluding impact of acquisitions:
Accounts receivable
Unbilled receivables
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Deferred revenues
Other operating activities
Total cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of property and equipment
Investment in capitalized software
Purchases of marketable securities
Proceeds from sale and maturity of marketable securities
Proceeds from sale of investment in affiliates
Acquisition of businesses and payment of contingent consideration, net of cash acquired
Other investing activities
Total cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock
Payments of withholding tax on RSU vesting
Total cash (used in) provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
NNet increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
Supplemental disclosure of cash flow information:
Income taxes paid
Interest paid
Supplemental disclosure of non-cash investing and financing activities:
Fair value of common stock issued for acquisition of DCC Labs
Fair value of common stock issued for acquisition of TLL, LLC
Fair value of common stock issued for deferred stock consideration obligation
Transfer of items originally classified as inventories to equipment
g
y
2,273
(593)
2,423
79
2,696
(14,132)
(2,555)
398
5,132
3,968
34
(588)
(2,499)
3,505
(1,078)
386
12,947
(526)
(7,246)
8,992
4,555
236
6,011
54
(141)
(87)
(3,621)
15,250
28,411
43,661
368
$
$
$
$
$
$
$
2,953
(4,118)
3,302
597
2,621
14,676
500
23,772
621
42
4,694
806
1,378
(1,674)
(4,872)
(2,417)
30
(28,338)
(683)
(2,008)
4,005
(5,243)
57
(3,872)
60
(183)
(123)
1,929
(30,404)
58,815
28,411
178
6
2,640
3,452
24
$
$
$
$
$
$
$
3,380
9,162
4,780
58
3,552
(985)
31
21,464
108
(1,721)
(4,359)
(937)
(1,097)
874
(2,712)
(1,431)
(1,132)
(18,662)
(1,397)
(2,440)
(9,033)
11,043
464
(11,686)
3
(13,046)
193
(1)
192
312
(31,204)
90,019
58,815
640
6
3,019
1,754
532
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
59
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share amounts)
Common Stock
Par
Value
Additional
Paid-
In Capital
327 $ 219,651 $
Accumulated
Deficit
(43,172) $
Accumulated Other
Comprehensive Income (Loss)
Unrealized
Cumulative
Gain/Loss on
Translation
Investments
Adjustment
43
$
(5,797)
j
Treasury Stock
Number of
Shares
(39,784) $
Amount
Total
Stockholders'
y
Equity
171,051
(1) $
Balance at January 31, 2015
Issuance of common stock pursuant to
exercise of stock options
Issuance of common stock pursuant to
vesting of restricted stock units
Issuance of common stock pursuant to the
TLL, LLC acquisition
Purchase of treasury shares
Stock-based compensation expense
Change in fair value on marketable
securities
Translation adjustment
NNet loss
Balance at January 31, 2016
Issuance of common stock pursuant to
vesting of restricted stock units
Issuance of common stock pursuant to the
TLL, LLC acquisition
Issuance of common stock pursuant to TLL
purchase adjustment mechanism
Issuance of commons stock pursuant to the
acquisition of DCC Labs
Issuance of common stock pursuant to ESPP
purchases
Purchase of treasury shares
Stock-based compensation expense
Fiscal 2016 compensation paid in restricted
stock units
Change in fair value on marketable
securities
Translation adjustment
NNet loss
Balance at January 31, 2017
Issuance of common stock pursuant to
vesting of restricted stock units
Issuance of common stock pursuant to ESPP
purchases
Stock-based compensation expense
Change in fair value on marketable
securities
Translation adjustment
NNet income
Balance at January 31, 2018
y
Number of
Shares
32,733,636 $
28,740
278,544
777,857
33,818,777
208,474
542,274
70,473
681,278
17,956
35,339,232
271,285
24,467
35,634,984 $
3
8
338
2
5
1
7
353
3
193
(3)
4,771
3,552
(122)
228,164
(47,697)
(90,869)
(847)
(6,644)
(12)
31
(39,906)
3,198
248
2,633
61
2,621
(248)
236,677
(3)
53
2,696
(71,249)
(162,118)
1,267
(5,377)
(1)
(2)
(3)
(5)
193
4,779
(1)
3,552
(12)
(847)
(47,697)
131,018
2
3,203
249
2,640
61
(3)
2,621
(248)
(25)
1,267
(71,249)
69,536
53
2,696
(60)
(3)
13,498
85,720
(584)
(40,490)
(25)
6
(60)
(54)
356 $ 239,423 $ (148,620) $
13,498
(3)
(5,380)
$
(40,490) $
(5) $
The accompanying notes are an integral part of these consolidated financial statements.
60
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Business
We are an industry leader in the delivery of multiscreen, advertising and premium over-the-top (OTT) video management
solutions. Our products and services are designed to empower video providers to create, manage and monetize the increasingly
personalized, highly engaging experiences that viewers demand.
2.
Summary of Significant Accounting Policies
Significant accounting policies followed in the preparation of the accompanying consolidated financial statements are as
follows:
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 (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. We have reclassified certain prior period
data to conform to our current fiscal year presentation.
Effective February 1, 2017, the Company changed how it classifies costs associated with its solution architect employees. In
fiscal 2017, all solution architect costs were classified as cost of revenues. However, beginning in fiscal 2018, the Company
began reflecting in cost of revenues only those costs associated with revenue-generating projects, based on the hours worked by
solution architect employees. Solution architect costs that are not associated with revenue-generating projects are recognized as
selling and marketing expenses since these employees are involved in pre-sale and other customer-facing activities.
We have adjusted prior fiscal year amounts to conform to the current fiscal year presentation. The effect of this change in
methodology, which is a decrease to cost of revenue and an increase to selling and marketing expenses, is reflected in our
current statements of operations and comprehensive income (loss) for fiscal 2017. There were no such costs in fiscal 2016:
ff
Cost of revenues - service
Selling and marketing expenses
g
g
As Filed Fiscal 2017
January 31, 2017
Adjustment to
Conform to
Current Year
Presentation
(Amounts in thousands)
As Filed Fiscal 2018
January 31, 2017
$
$
37,865
14,033
$
$
(2,125) $
$
2,125
35,740
16,158
Use of Estimates
The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and
liabilities. On an ongoing basis, management evaluates these estimates and judgments, including those related to the timing and
amounts of revenue recognition, valuation of inventory, collectability of accounts receivable, valuation of investments and
income taxes, assumptions used to determine stock-based compensation, valuation of goodwill and intangible assets and related
amortization. Management bases these estimates on historical and anticipated results and trends and on various other
assumptions that management believes are reasonable under the circumstances, including assumptions as to future events. These
estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from
managements estimates.
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 date of purchase of 90 days or less. All cash equivalents are carried at cost, which approximates fair
61
value. Restricted cash represents cash that is restricted as to withdrawal or usage and consists primarily of cash held as collateral
for performance obligations with our customers.
We early adopted the new Financial Accounting Standards Board (FASB) guidance on August 1, 2017, which changed the
presentation of our consolidated statements of cash flows and related disclosures for all periods presented. Accordingly, the
following is a summary of our cash, cash equivalents, and restricted cash total as presented in our consolidated statements of
cash flows for the fiscal years ended January 31, 2018, 2017 and 2016:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash
Marketable Securities
For the Fiscal Year Ended
January 31,
2017
(Amounts in thousands)
$ 28,302
109
$ 28,411
2018
$ 43,652
9
$ 43,661
2016
$ 58,733
82
$ 58,815
We account for investments in accordance with authoritative guidance that defines investment classifications. We determine the
appropriate classification of debt securities at the time of purchase and reevaluate such designation as of each balance sheet date.
Our investment portfolio consists primarily of money market funds, U.S. treasury notes and bonds, U.S. government agency
notes and bonds and corporate bonds at January 31, 2018 and 2017, but can consist of asset-backed securities and government-
sponsored enterprises. Our marketable securities are classified as available-for-sale and are reported at fair value with unrealized
gains and losses, net of tax, reported in stockholders equity as a component of accumulated other comprehensive loss. The
amortization of premiums and accretion of discounts to maturity are
included in other income (expenses), net in our consolidated statements of operations and comprehensive income (loss). Interest
on securities is recorded as earned and is also included in other income (expenses), net. Any realized gains or losses would be
shown in the accompanying consolidated statements of operations and comprehensive income (loss) in other income (expenses),
net.
computed under the effective interest method and are
t
We evaluate our investments on a regular basis to determine whether an other-than-temporary decline in fair value has occurred.
This evaluation consists of a review of several factors, including, but not limited to: the length of time and extent that an
investment has been in an unrealized loss position; the existence of an event that would impair the issuer's future earnings
potential; and our intent and ability to hold an investment for a period of time sufficient to allow for any anticipated recovery in
fair value. Declines in value below cost for investments where it is considered probable that all contractual terms of the
investment will be satisfied, are due primarily to changes in interest rates, and where the company has the intent and ability to
hold the investment for a period sufficient to allow a market recovery, are not assumed to be other-than-temporary. Any other-
than-temporary declines in fair value are recorded in earnings and a new cost basis for the investment is established.
a
Liquidity
We continue to realize the savings related to our restructuring activities. During fiscal 2018, we made significant reductions to
our headcount as part of our ongoing restructuring effort from which we expect to generate annualized savings of approximately
$18 million. These measures are important steps in restoring SeaChange to profitability and positive cash flow. The Company
believes that existing funds and cash expected to be provided by future operating activities are adequate to satisfy our working
capital, potential strategic collaborations and capital expenditure requirements and other contractual obligations for the
foreseeable future, including at least the next 12 months.
Fair Value Measurements
Definition and Hierarchy
y
f
The applicable accounting guidance defines fair value as the exchange price that would be received for an asset or paid to
transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. The guidance establishes a framework for measuring fair value and expands required
disclosure about the fair value measurements of assets and liabilities. This guidance requires us to classify and disclose assets
and liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities measured
on a non-recurring basis in periods after initial measurement, in a fair value hierarchy.
62
The fair value hierarchy is broken down into three levels based on the reliability of inputs and requires an entity to maximize the
use of observable inputs, where available. The following summarizes the three levels of inputs required:
•
•
•
Level 1 Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not very active; or other inputs that are observable or can be corroborated by observable market data
for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities.
Valuation Techniques
Inputs to valuation techniques are observable and unobservable. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect our market assumptions. When developing fair value estimates for
certain financial assets and liabilities, we maximize the use of observable inputs and minimize the use of unobservable inputs.
When available, we use quoted market prices, market comparables and discounted cash flow projections. Financial assets
include money market funds, U.S. treasury notes or bonds, U.S. government agency bonds and corporate bonds.
ff
a
In general, and where applicable, we use quot
If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted
prices for similar assets and liabilities or inputs that are observable either directly or indirectly. In periods of market inactivity,
the observability of prices and inputs may be reduced for certain instruments. This condition could cause an instrument to be
reclassified from Level 1 to Level 2 or from Level 2 to Level 3.
ed prices in active markets for identical assets or liabilities to determine fair value.
Concentration of Credit Risk
Financial instruments which potentially expose us to concentrations of credit risk include cash equivalents, investments in
treasury bills, certificates of deposits and commercial paper, trade accounts receivable, accounts payable and accrued liabilities.
We have cash investment policies which, among other things, limit investments to investment-grade securities. We restrict our
cash equivalents and investments in 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. As of January 31, 2018, one customer represented more than 10% of consolidated accounts receivable while as of
January 31, 2017, two customers did. For fiscal 2018 and fiscal 2017, one customer accounted for more than 10% of our total
revenue while two customers accounted for more than 10% of our total revenue in fiscal 2016.
Accounts Receivable and Allowances for Doubtful Accounts
For trade accounts receivable, we evaluate customers financial condition, require advance payments from certain of our
customers and maintain reserves for potential credit losses. We perform ongoing credit evaluations of customers financial
condition but generally do not require collateral. For some international customers, we may require an irrevocable letter of credit
to be issued by the customer before the purchase order is accepted. We monitor payments from customers and assess any
collection issues. We maintain an allowance for specific doubtful accounts for estimated losses resulting from the inability of
our customers to make required payments and record these allowances as a charge to general and administrative expenses in our
consolidated statements of operations and comprehensive income (loss). We base our allowances for doubtful accounts on
historical collections and write-off experience, current trends, credit assessments, and other analysis of specific customer
situations. At January 31, 2018, allowance for doubtful accounts was not a material amount, while our allowance for doubtful
accounts was $0.9 million at January 31, 2017 to provide for potential credit losses. We charge off trade accounts receivables
against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Recoveries of trade receivables previously charged off are recorded when received.
Inventory Valuation
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method.
Inventories consist primarily of components and subassemblies and finished products held for sale. The values of inventories are
reviewed quarterly to determine that the carrying value is stated at the lower of cost or net realizable value. We record charges
to reduce inventory to its net realizable value when impairment is identified through a quarterly review process. The
obsolescence evaluation is based upon assumptions and estimates about future demand, or possible alternative uses and involves
significant judgments.
63
Property and Equipment
Property and equipment consists of land and buildings, office and computer equipment, leasehold improvements, demonstration
equipment, deployed assets and spare components and assemblies used to service our installed base. Property and equipment are
recorded at cost, net of accumulated depreciation and amortization, and are depreciated over their estimated useful lives.
Determining the useful lives of property and equipment requires us to make significant judgments that can materially impact our
operating results. If our estimates require adjustment, it could have a material impact on our reported results.
Demonstration equipment consists of systems manufactured by us for use in marketing and selling activities. Leasehold
improvements are amortized over the shorter of their estimated useful lives or the term of the respective leases using the
straight-line method. Deployed assets consist of movie systems owned and manufactured by us that are installed in a hotel
environment. Deployed assets are depreciated over the life of the related service agreements. Capitalized service and spare
components are depreciated over the estimated useful lives using the straight-line method. Maintenance and repair costs are
expensed as incurred.
Generally, property and equipment include assets in service. Fully depreciated assets remaining in service along with related
accumulated depreciation are not removed from the balance sheet until the corresponding asset is removed from service either
through a retirement or sale. Upon retirement or sale of an asset or asset group, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is recognized in other income
(expenses), net in our consolidated statements of operations and comprehensive income (loss).
Investments in Affiliates
Our investments in affiliates include investments accounted for under the cost method of accounting as the investments
represent less than a 20% ownership interest of the common shares of the affiliate.
We periodically review indicators of the fair value of our investments in affiliates to assess whether available facts or
circumstances, both internally and externally, may suggest an other-than-temporary decline in the value of the investment. If we
determine that an other-than-temporary impairment has occurred, we will write-down the investment to its fair value. The
carrying value of an investment in an affiliate accounted for under the cost method of accounting may be affected by the
affiliates ability to obtain adequate funding and execute its business plans, general market conditions, its current cash position,
earnings and cash flow forecasts, recent operational performance, and any other readily available data. We record an impairment
charge when we believe an investment has experienced a decline in value that is other-than-temporary. In January 2017, we
recorded a $0.5 million impairment charge to gain (loss) on investment in affiliates in our consolidated statements of operations
and comprehensive income (loss) for one of our cost-method investments as we determined that the fair value of the investment
was below its carrying value and that the carrying value was not expected to be recoverable within
a reasonable amount of time
(see Note 3, Fair Value Measur
ements to this Form 10-K for more information).
rr
In connection with the acquisition in January 2018 by T-Mobile of Layer3 TV, Inc. (Layer 3), a next generation cable
provider in which we previously had made an equity investment, we received $4.6 million upon closing of the transaction, with
an additional payment of up to $2.1 million being held in escrow, subject to satisfaction of the escrow provisions. As a result of
the sale of our investment in Layer 3, we realized a gain of $2.6 million in gain (loss) on investment in affiliates in our
consolidated statements of operations and comprehensive income (loss) for fiscal 2018.
Intangible Assets and Goodwill
Intangible assets consist of customer contracts, non-compete agreements, completed technology, trademarks, backlogs and
patents. The intangible assets are amortized to cost of sales and operating expenses, as appropriate, on a straight-line or
accelerated basis, using the economic consumption life basis, to reflect the period that the assets will be consumed, which are:
g
Intangible assets with finite useful lives:
Customer contracts
NNon-compete agreements
Completed technology
Trademarks, patents and other
1 - 8 years
2 - 3 years
4 - 6 years
5 - 7 years
Certain costs incurred in the application development phase of software development for internal use are capitalized and
amortized over the products estimated useful life, which is three years. The Company expenses all costs incurred that relate to
planning and post implementation phases of development. Capitalized costs related to internally developed software under
64
development are treated as construction in progress until the technology is available for intended use, at which time the
amortization commences. The carrying value of our capitalized internally developed software costs was $0.7 million as of
January 31, 2018. Maintenance and training costs are expensed as incurred.
Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible
assets acquired.
Impairment of Assets
Indefinite-lived intangible assets, such as goodwill, are not amortized but are evaluated for impairment at the reporting unit level
annually, in our third quarter beginning August 1st. Indefinite-lived intangible assets may be tested for impairment on an interim
basis in addition to the annual evaluation if an event occurs or circumstances change such as declines in sales, earnings or cash
flows, decline in the Companys stock price, or material adverse changes in the business climate, which would more likely than
not reduce the fair value of a reporting unit below its carrying amount.
The process of evaluating indefinite-lived intangible assets for impairment requires several judgments and assumptions to be
made to determine the fair value, including the method used to determine fair value, discount rates, expected levels of cash
flows, revenues and earnings, and the selection of comparable companies used to develop market-based assumptions. We may
employ the three generally accepted approaches for valuing businesses: the market approach,
based (cost) approach to arrive at the fair value. The choice of which approach and methods to use in a particular situation
depends on the facts and circumstances.
the income approach and the asset-
a
We also evaluate property and equipment, intangible assets with finite useful lives and other long-lived assets on a regular basis
for the existence of facts or circumstances, both internal and external that may suggest an asset is not recoverable. If such
circumstances exist, we evaluate the carrying value of long-lived assets to determine if impairment exists based upon estimated
undiscounted future cash flows over the remaining useful life of the primary asset in the asset group and compare that value to
the carrying value of the assets. Our cash flow estimates contain managements best estimates, using appropriate and customary
assumptions and projections at the time.
In August 2017, we placed our corporate headquarters and the adjacent land (the Corporate Headquarters), located in Acton,
Massachusetts, on the market for sale. We assessed whether the Corporate Headquarters would qualify as an asset held for sale
and determined that it would not since it did not meet all six of the criteria of an asset held for sale under current accounting
guidance. During the assessment, we received information from a third-party real estate broker which led management to
believe that there was a significant decrease in the fair value of the Corporate Headquarters. We considered this to be a
triggering event and were required to test the Corporate Headquarters for recoverability. We evaluated the undiscounted future
cash flows over the remaining useful life of the primary asset of the asset group and determined that an impairment did not exist
as of the date of the triggering event.
In the third quarter of fiscal 2017, we finalized our Step 1 analysis of our annual goodwill impairment test. Our forecast
indicated that the estimated fair value of net assets may be less than its carrying value which is a potential indicator of
impairment. As such, we were required to perform Step 2 of the impairment test during which we compared the implied fair
value of our goodwill to its carrying value.
fourth quarter of fiscal 2017. Since the implied fair value of goodwill was determined to be lower than its carrying value, we
recorded an impairment charge of $23.5 million to loss on impairment of long-lived assets in our consolidated statements of
operations and comprehensive income (loss) (see Note 6, Goodwill and Intangible Assets to this Form 10-K for more
information).
We completed the goodwill impairment testing of our reporting unit during the
rr
In January 2017, after a potential buyer declined to purchase our facility in Greenville, New Hampshire, we determined that the
sale of this facility was not imminent due to the location of the building and the overall market conditions in the area.
Consequently, we decided to fully impair the facility since we felt the carrying amount was greater than the fair value. As a
result, we recorded a $0.3 million loss on impairment of long-lived assets in our consolidated statements of operations and
comprehensive income (loss).
rr
In the fourth quarter of fiscal 2017, a certain cost-method investment was determined to be impaired and written off.
Accordingly, we recorded a $0.5 million impairment charge in January 2017 which is included in loss on investment in affiliates
in our consolidated statements of operations and comprehensive income (loss). The cost-method investment is a privately-held
entity without quoted market prices and therefore, falls within Level 3 of the fair value hierarchy due to the use of significant
unobservable inputs to determine its fair value. In determining the fair value of this cost-method investment, we considered
65
many factors including, but not limited to, operating performance of the investee, the amount of cash that the investee has on
hand and the overall market conditions in which the investee operates.
As of January 31, 2016, the Company reviewed the projected future cash flows of the Timeline Labs operations and determined
that the carrying amount was greater than the fair value. As a result, all long-term assets related to Timeline Labs were fully
impaired and reflected as a $21.9 million loss on impairment of long-lived assets in our consolidated statements of operations
and comprehensive income (loss) for the fiscal year ended January 31, 2016 which included: i) $15.8 million relating to the
Timeline Labs acquired goodwill, ii) $5.2 million of acquired intangible assets, and iii) $0.9 million of capitalized internal use
software. Additionally, we reduced the contingent consideration liability associated with the Timeline Labs acquisition to zero,
as we determined the defined performance criteria would not be achieved. Therefore, we recorded the reversal of the liability
of
$0.4 million to the loss on impairment of long-lived assets. The amount of goodwill impaired represented all the goodwill that
resulted from this acquisition due to the short duration of time between the acquisition and the event causing us to impair the
assets.
a
Income Taxes
Income taxes comprise current and deferred income tax. Income taxes are recognized in the consolidated statements of
operations and comprehensive income (loss) except to the extent that it relates to items recognized directly within equity or in
other comprehensive income (loss). Income taxes payable, which is included in other accrued expenses in our consolidated
balance sheets, is the expected taxes payable on the taxable income for the year, using tax rates enacted or substantially-enacted
at the reporting date, and any adjustment to tax payable in respect of previous years.
r
Deferred tax assets and liabilities are recognized, using the balance sheet method, for the expected tax consequences of
temporary differences between the carrying amounts of assets and liabilities and the amounts used for taxation purposes.
Deferred tax is not recognized for the following temporary differences: the initial recognition of goodwill, the initial recognition
of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit,
and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on
the laws that have been enacted or substantially-enacted by the reporting date.
rr
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is
probable that future taxable profits will be available against which they can be utilized. The ultimate realization of deferred tax
tax assets originated and
assets is dependent upon the generation of future taxable income in the countries where the deferred
during the periods when the deferred tax assets become deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
a
We operate in multiple jurisdictions with complex tax policy and regulatory environments. In certain of these jurisdictions, we
may take tax positions that management believes are supportable, but are potentially subject to successful challenge by the
applicable taxing authority. These interpretational differences with the respective governmental taxing authorities can be
impacted by the local economic and fiscal environment. We evaluate our tax positions and establish liabilities in accordance
with the applicable accounting guidance on uncertainty in income taxes. We review these tax uncertainties in light of changing
facts and circumstances, such as the progress of tax audits, and adjust them accordingly.
Our policy is to classify interest and penalties related to unrecognized tax benefits, if and when required, as a component of
income tax (benefit) provision, in our consolidated statements of operations and comprehensive income (loss).
Because there are several estimates and assumptions inherent in calculating the various components of our tax provision, certain
changes or future events such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings
repatriation plans could have an impact on those estimates and our effective tax rate.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (Tax Reform Act) was signed into law. We are required to recognize
in the period of enactment, the effect of the tax law changes, such as remeasuring our U.S. deferred tax assets and liabilities,
reassessing the net realizability of deferred tax assets and liabilities, and determining the applicability of the one-time mandatory
transition tax on accumulated foreign earnings. Additionally, on December 22, 2017, the SEC staff issued Staff Accounting
Bulletin No. (SAB) 118, Income Tax Accounting Implications of
guidance which allows us to record provisional amounts during a measurement period not to extend beyond one year of the
enactment date. As a result of the change in law including a reduction in the corporate tax rate, the Company recorded a
provisional reduction to its deferred tax assets of $17.1 million and a corresponding reduction to its valuation allowance in the
fourth quarter of fiscal 2018, which represents the Companys best estimate of the impact of the Tax Reform Act in accordance
the Tax Cuts and Jobs Act. SAB 118 has provided
a
66
with the Companys understanding of the Tax Reform Act and available guidance as of the date of this filing. As a result, there
was no impact to the Companys consolidated statements of operations and comprehensive income (loss) due to the reduction in
the U.S. corporate tax rate. We will continue to analyze the Tax Reform Act and related accounting guidance and
interpretations in order to finalize any impacts within the measurement period. See Note 12, Income Taxes,
for more information.
to this Form 10-K
Restructuring
Restructuring charges that we record consist of employee-related severance charges, remaining lease obligations and
termination costs, and the disposal of related equipment. Restructuring charges represent our best estimate of the associated
liability at the date the charges are recognized. Adjustments for changes in assumptions are recorded as a component of
operating expenses in the period they become known. Differences between actual and expected charges and changes in
assumptions could have a material effect on our restructuring accrual as well as our consolidated results of operations. See Note
7, Severance and Other Restructuring Costs, to this Form 10-K for more information on the current restructuring plan.
Foreign Currency Translation
For subsidiaries where the U.S. dollar is designated as the functional currency of the entity, we translate that entitys monetary
assets and liabilities denominated in local currencies into U.S. dollars (the functional and reporting currency) at current
exchange rates, as of each balance sheet date. Non-monetary assets (e.g., inventories, property and equipment and intangible
assets) and related income statement accounts (e.g., cost of sales, depreciation, amortization of intangible assets) are translated
at historical exchange rates between the functional currency (the U.S. dollar) and the local currency. Revenue and other expense
items are translated using average exchange rates during the fiscal period. Translation adjustments resulting from translation of
the subsidiaries accounts are included in accumulated other comprehensive loss, a separate component of stockholders equity.
Gains and losses on foreign currency transactions, and any unrealized gains and losses on short-term intercompany transactions
are included in other income (expenses), net.
into
For subsidiaries where the local currency is designated as the functional currency, we translate their assets and liabilities
U.S. dollars (the reporting currency) at current exchange rates as of each balance sheet date. Revenue and expense items are
translated using average exchange rates during the period. Cumulative translation adjustments are presented as a separate
component of stockholders equity. Exchange gains and losses on foreign currency transactions and unrealized gains and losses
on short-term inter-company transactions are included in other income (expenses), net.
a
The aggregate foreign exchange transaction gains (losses) included in other income (expenses), net, on the consolidated
statements of operations and comprehensive income (loss), were $3.8 million, ($2.1) million and approximately ($0.7) million
for fiscal 2018, 2017 and 2016, respectively.
Comprehensive Income (Loss)
We present accumulated other comprehensive loss in our consolidated balance sheets and comprehensive income (loss) in the
consolidated statement of operations and comprehensive income (loss). At the end of fiscal 2018, 2017 and 2016, our
comprehensive income (loss) of $13.4 million, ($70.0) million and ($48.6) million consists of net income (loss), cumulative
translation adjustments and unrealized gains and losses on marketable securities.
Revenue Recognition
Our transactions frequently involve the sales of hardware, software, systems and services in multiple-element arrangements.
Revenues from sales of hardware, software and systems that do not require significant modification or customization of the
underlying software are recognized when:
•
•
•
•
persuasive evidence of an arrangement exists;
delivery has occurred, and title and risk of loss have passed to the customer;
fees are fixed or determinable; and
collection of the related receivable is considered probable.
Customers are billed for installation, training, project management and at least one year of product maintenance and technical
support at the time of the product sale. Revenue from these activities is deferred at the time of the product sale and recognized
67
ratably over the period these services are performed. Revenue from ongoing product maintenance and technical support
agreements is recognized ratably over the period of the related agreements. Revenue from software development contracts that
include significant modification or customization, including software product enhancements, is recognized based on the
percentage of completion contract accounting method using labor efforts expended in relation to estimates of total
labor efforts
to complete the contract. The percentage of completion method requires that adjustments or re-evaluations to estimated project
revenues and costs be recognized on a project-to-date cumulative basis, as changes to the estimates are identified. Revisions to
project estimates are made as additional information becomes known, including information that becomes available after the
date of the consolidated financial statements up through the date such consolidated financial statements are filed with the SEC.
If the final estimated profit to complete a long-term contract indicates a loss, a provision is recorded immediately for the total
loss anticipated. Accounting for contract amendments and customer change orders are included in contract accounting when
executed. Revenue from shipping and handling costs and other out-of-pocket expenses reimbursed by customers are included in
revenues and cost of revenues. Our share of intercompany profits associated with sales and services provided to affiliated
companies are eliminated in consolidation in proportion to our equity ownership.
ff
ff
Contract accounting requires judgment relative to assessing risks, estimating revenues and costs and making assumptions
including, in the case of our professional services contracts, the total amount of labor required to complete a project and the
complexity of the development and other technical work to be completed. Due to the size and nature of many of our contracts,
the estimation of total revenues and cost at completion is complicated and subject to many variables. Assumptions must be made
regarding the length of time to complete the contract because costs also include estimated third-party vendor and contract labor
costs. Penalties related to performance on contracts are considered in estimating sales and profit, and are recorded when there is
sufficient information for us to assess anticipated performance. Third-party vendors assertions are also assessed and considered
in estimating costs and margin.
Revenue from the sale of software-only products remains within the scope of the software revenue recognition rules.
Maintenance and support, training, consulting, and installation services no longer fall within the scope of the software revenue
recognition rules, except when they are sold with and relate to a software-only product. Revenue recognition for products that
no longer fall under the scope of the software revenue recognition rules is like that for other tangible products and Accounting
Standard Update No. (ASU) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,
amended Accounting Standard Codification Topic No. (ASC) 605 and is applicable for multiple-deliverable revenue
arrangements. ASU 2009-13 allows companies to allocate revenue in a multiple-deliverable arrangement in a manner that better
reflects the transactions economics.
Under the software revenue recognition rules, the fee is allocated to the various elements based on vendor-specific objective
evidence (VSOE) of fair value. Under this method, the total arrangement value is allocated first to undelivered elements based
on their fair values, with the remainder being allocated to the delivered elements. Where fair value of undelivered service
elements has not been established, the total arrangement value is recognized over the period during which the services are
performed. The amounts allocated to undelivered elements, which may include project management, training, installation,
maintenance and technical support and certain hardware and software components, are based upon the price charged when these
elements are sold separately and unaccompanied by the other elements. The amount allocated to installation, training and project
management revenue is based upon standard hourly billing rates and the estimated time necessary to complete the service. These
services are not essential to the functionality of systems as these services do not alter the equipments capabilities, are available
from other vendors and the systems are standard products. For multiple-element arrangements that include software
development with significant modification or customization and systems sales where VSOE of the fair value does not exist for
the undelivered elements of the arrangement (other than maintenance and technical support), percentage of completion
accounting is applied for revenue recognition purposes to the entire arrangement except for maintenance and technical support.
Under the revenue recognition rules for tangible products as amended by ASU 2009-13, the fee from a multiple-deliverable
arrangement is allocated to each of the deliverables based upon their relative selling prices as determined by a selling-price
hierarchy. A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the
customer on a stand-alone basis. A delivered item that does not qualify as a separate unit of accounting is combined with the
other undelivered items in the arrangement and revenue is recognized for those combined deliverables as a single unit of
accounting. The selling price used for each deliverable is based upon VSOE if available, third-party evidence (TPE) if VSOE
is not available, and best estimate of selling price (BESP) if neither VSOE nor TPE are available. TPE is the price of the
Companys, or any competitors, largely interchangeable products or services in stand-alone sales to similarly situated
customers. BESP is the price at which we would sell the deliverable if it were sold regularly on a stand-alone basis, considering
market conditions and entity-specific factors.
The selling prices used in the relative selling price allocation method for certain of our services are based upon VSOE. The
selling prices used in the relative selling price allocation method for third-party products from other vendors are based upon
68
TPE. The selling prices used in the relative selling price allocation method for our hardware products, software, subscriptions,
and customized services for which VSOE does not exist are based upon BESP. We do not believe TPE exists for these products
and services because they are differentiated from competing products and services in terms of functionality and performance
and there are no competing products or services that are largely interchangeable. Management establishes BESP with
consideration for market conditions, such as the impact of competition and geographic considerations, and entity-specific
factors, such as the cost of the product, discounts provided and profit objectives. Management believes that BESP is reflective of
reasonable pricing of that deliverable as if priced on a stand-alone basis.
For our cloud and managed service revenues, we generate revenue from two sources: (1) subscription and support services; and
(2) professional services and other. Subscription and support revenue includes subscription fees from customers accessing our
cloud-based software platform and support fees. Our arrangements with customers do not provide the customer with the right to
take possession of the software supporting the cloud-based software platform at any time. Professional services and other
revenue include fees from implementation and customization to support customer requirements. Amounts that have been
invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition
criteria have been met. For the most part, subscription and support agreements are entered into for 12 to 36 months. Generally,
most of the professional services components of the arrangements with customers are performed within a year of entering a
contract with the customer.
In most instances, revenue from a new customer acquisition is generated under sales agreements with multiple elements,
comprised of subscription and support and other professional services. We evaluate each element in a multiple-element
arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of
accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our
control.
In determining when to recognize revenue from a customer arrangement, we are often required to exercise judgment regarding the
application of our accounting policies to an arrangement. The primary judgments used in evaluating revenue recognized in each
period involve: determining whether collection is probable, assessing whether the fee is fixed or determinable, and determining the
fair value of the maintenance and service elements included in multiple-element software arrangements. Such judgments can
materially impact the amount of revenue that we record in a given period. While we follow specific and detailed rules and
guidelines related to revenue recognition, we make and use significant management judgments and estimates about the revenue
recognized in any reporting period, particularly in the areas described above. If management made different estimates or judgments,
material differences in the timing of the recognition of revenue could occur.
Stock-based Compensation
We account for all employee and non-employee director stock-based compensation awards using the authoritative guidance
regarding share-based payments. We continue to use the Black-Scholes pricing model as we feel it is the most appropriate
method for determining the estimated fair value of the non-market-based awards. We also use the Monte Carlo pricing model
for our market-based option awards and performance stock units (PSUs). Determining the appropriate fair value model and
calculating the fair value of share-based payment awards requires the input of highly subjective assumptions, including the
expected life of the share-based payment awards and stock price volatility. Management estimates the volatility based on the
historical volatility of our stock. The assumptions used in calculating the fair value of share-based payment awards represent
managements best estimates, but these estimates involve inherent uncertainties and the application of managements judgment.
As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be
materially different in the future. In addition, we are required to
for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based
compensation expense could be significantly different from what we have recorded in the current period. The estimated fair
value of our market-based awards, less expected forfeitures, is amortized over the awards vesting period on a graded vesting
basis, whereas the fair value of non-market-based awards and employee stock purchase plan (ESPP) stock units, less
estimated forfeitures, are amortized on a straight-line basis.
estimate the expected forfeiture rate and only recognize expense
x
ff
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs were not material for fiscal 2018 and were $0.1 million
for fiscal 2017 and 2016, respectively.
69
Earnings Per Share
Earnings per share are presented in accordance with authoritative guidance which requires the presentation of basic earnings per
share and diluted earnings per share. Basic earnings per share is computed by dividing earnings available to common
shareholders by the weighted-average shares of common stock outstanding during the period. For the purposes of calculating
diluted earnings per share, the denominator includes both the weighted average number of shares of common stock outstanding
during the period and the weighted average number of potential shares of common stock, such as stock options and restricted stock,
calculated using the treasury stock method. For calculating diluted
loss per share, we do not include these shares in the denominator
because these shares would have an anti-dilutive effect on periods in which we incur a net loss. Certain shares of our common stock
have exercise prices in excess of the average market price. These shares are anti-dilutive and are omitted from the calculation of
earnings per share. For more information on this see Note 14., Net Income (Loss) Per Share,
to this Form 10-K.
t
Recent Accounting Standard Updatess
We consider the applicability and impact of all ASUs on our consolidated financial statements. Updates not listed below were
assessed and determined to be either not applicable or
position or results of operations. Recently issued ASUs which we feel may be applicable to us are as follows:
are expected to have minimal impact on our consolidated financial
a
a
Recently Issued Accounting Standard Updates Not Yet Adopted
Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, Income Statement
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. On December 22, 2017, the U.S.
federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent
A
Tax Cuts and Jobs Act) , which requires deferred tax liabilities and assets to be
Resolution on the Budget for Fiscal Year 2018 (
jadjusted for the effect of a change i
tion from accumulated other comprehensive
ASU 2018-02 allows a reclassifica
income to retained earnings for stranded tax effects resulting from the Tax Reform Act. ASU 2018-02 is effective for us in the
first quarter of fiscal 2020. Early adoption is permitted. We are currently evaluating what impact the adoption of this update will
have on our consolidated financial statements.
Reporting Comprehensive Income (Topic 220):
n tax laws.
d
Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides
enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial
statements of companies using International Financial Reporting Standards and U.S. GAAP. The core principle requires entities
to recognize revenue in a manner that depicts the transfer of goods or services to customers in amounts that reflect the
consideration an entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB voted to
approve a one year deferral, making the standard effective for public entities for annual and interim periods beginning after
December 15, 2017.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net). The purpose of ASU 2016-08 is to clarify the guidance on principal
versus agent considerations. It includes indicators that help to determine whether an entity controls the specified good or service
before it is transferred to the customer and to assist in determining when the entity satisfied the performance obligation and as
such, whether to recognize a gross or a net amount of consideration in their consolidated statement of operations.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing. ASU 2016-10 clarifies that entities are not required to assess whether promised goods or services
are performance obligations if they are immaterial in the context of the contract. ASU 2016-10 also addresses how to determine
whether promised goods or services are separately identifiable and permits entities to make a policy election to treat shipping
and handling costs as fulfillment activities. In addition, it clarifies key provisions in Topic 606 related to licensing.
In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic
815). ASU 2016-11 rescinds previous SEC comments that were codified in Topic 605, Topic 932 and Topic 815. Upon
adoption of Topic 606, certain SEC comments including guidance on accounting for shipping and handling fees and costs and
consideration given by a vendor to a customer should not be relied upon.
In May 2016, the FASB also issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope
Improvements and Practical Expedients. ASU 2016-12 provides clarity around collectability, presentation of sales taxes, non-
70
cash consideration, contract modifications at transition and completed contracts at transition. ASU 2016-12 also includes a
technical correction within Topic 606 related to required disclosures if the guidance is applied retrospectively upon adoption.
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customers. ASU 2016-20 allows entities not to make quantitative disclosures about remaining performance
obligations in certain cases and requires entities that use any of the optional exemptions to expand their qualitative disclosures.
ASU 2016-20 also clarifies other areas of the new revenue standard, including disclosure requirements for prior period
performance obligations, impairment guidance for contract costs and the interaction of impairment guidance in ASC 340-40
with other guidance elsewhere in the Codification.
The Company has elected the modified retrospective adoption model, effective February 1, 2018. The Companys quarterly
results beginning with the quarter ending April 30, 2018 and comparative prior periods will be compliant with ASC 606 and its
Form 10-K for the year ended January 31, 2019 will be the Companys first Annual Report that will be issued in compliance
with ASC 606.
The Company has substantially completed the implementation of ASC 606 and has identified the necessary changes to its
policies, processes, systems, and controls. Based upon the work performed to date, the Company expects to record a cumulative-
effect adjustment as of February 1, 2018 to increase retained earnings by an estimated range of approximately $1.7 million to
$4.0 million. Such adjustment includes an increase in retained earnings by approximately $1 million to $3 million due to higher
revenue that would have been recognized under ASC 606 if the standard had been adopted for the fiscal year ended January 31,
2018 and an increase in retained earnings of $0.7 million to $1.0 million due to reduced commission expense that would have
been recognized under ASC 606 if the standard had been adopted for the fiscal year ended January 31, 2018. The resulting tax
effect of this cumulative-effect adjustment is not expected to be significant to retained earnings. We expect to fully disclose the
impacts of the new standard in connection with our Form 10-Q filing for the first quarter of fiscal 2019.
ff
The Company expects the following impacts upon adoption of the standard:
•
•
•
•
Currently, the Company recognizes revenue from perpetual licenses with extended payment terms over the term of the
agreement as payments are received, provided all other criteria for revenue recognition have been met, and any
corresponding maintenance over the term of the agreement. The adoption of ASC 606 will result in revenue for
performance obligations being recognized as they are satisfied. Therefore, revenue from perpetual license performance
obligations with extended payment terms will be recognized when control is transferred to the customer. Any
unrecognized license revenue from the arrangement, included in deferred revenue at January 31, 2018, will not be
recognized in revenue in future periods but as a cumulative adjustment to retained earnings. Further, revenue from the
maintenance performance obligations is expected to be recognized on a straight-line basis over the contractual term. Due
to the revenue from perpetual licenses with extended payment terms being recognized prior to amounts being billed to the
customer, the Company expects to recognize a net contract asset on the balance sheet.
Currently, the Company allocates revenue to licenses under the residual method when it has Vendor Specific Objective
Evidence (VSOE) for the remaining undelivered elements, which allocates any future credits or significant discounts
entirely to the license. The adoption of ASC 606 will result in future credits, significant discounts, and material rights
under ASC 606, being allocated to all performance obligations based upon their relative selling price. Under ASC 606,
additional license revenue from the reallocation of such arrangement considerations will be recognized when control is
transferred to the customer, which is generally upon delivery of the license.
Currently, the Company does not have VSOE for professional services and maintenance in certain geographical areas,
which results in revenue being deferred in such instances until such time as VSOE exists for all undelivered elements or
recognized ratably over the longest performance period. The adoption of ASC 606 eliminates the requirement for VSOE
and replaces it with the concept of a standalone selling price. Once the transaction price is allocated to each of the
performance obligations, the Company can recognize revenue as the performance obligations are delivered, either at a
point in time or over time. Under ASC 606, license revenue will be recognized when control is transferred to the customer
and professional services revenue will be recognized over time based on labor hours expended. This will result in the
acceleration of professional services revenue when compared to the current practice of ratable recognition for professional
services when there is a lack of VSOE.
Sales commissions and other third-party acquisition costs resulting directly from securing contracts with customers are
currently expensed when incurred. ASC 606 will require these costs to be recognized as an asset when incurred and to be
expensed over the associated contract term. However, because the sales commission paid on the maintenance renewals is
not commensurate with the original deal, ASC 606 requires that these acquisition costs be expensed over the customer
life. The Company expects this change to impact all arrangements that included implicit or explicit maintenance contracts.
71
•
ASC 606 provides additional accounting guidance for contract modifications whereby changes must be accounted for
either as a retrospective change (creating either a catch up or deferral of past revenues), prospectively with a reallocation
of revenues amongst identified performance obligations, or prospectively as separate contracts which will not require any
reallocation. This may result in a difference in the timing of the recognition of revenue as compared to how contract
modifications are recognized currently.
There will be a corresponding effect on tax liabilities in relation to all of the above impacts.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).
ASU 2016-02 requires a lessee to recognize a right-
of-use asset and a lease liability for operating leases with terms over twelve months, initially measured at the present value of
the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, on a generally straight-line basis. It also requires lessees to classify leases as
either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the
leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective
interest method or on a straight-line basis over the term of the lease. ASU 2016-02 is effective for us in the first quarter of fiscal
2020. Early adoption is permitted. We are currently evaluating what impact the adoption of this update will have on our
consolidated financial statements.
Recently Issued Accounting Standard Updates Adopted During the Period
Income Taxes
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118. ASU 2018-05 amends ASC 740, Income Taxes
to provide guidance on accounting for the
tax effects of the Tax Reform Act pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the
accounting under ASC 740 within a one-year measurement period from the Tax Reform Act enactment date. This update was
effective upon issuance. Therefore, we have applied the guidance in this update within our consolidated financial statements for
the fiscal year ended January 31, 2018. See Note 12, Income Taxes,
of this Form 10-K for more information on the adoption
of this guidance.
72
3.
Fair Value Measurements
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The following tables set forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of
January 31, 2018 and January 31, 2017. There were no fair value measurements of our financial assets and liabilities using
significant level 3 inputs for the periods presented:
Financial assets:
Cash equivalents (a)
Available-for-sale marketable securities:
Current marketable securities:
U.S. treasury notes and bonds - conventional
U.S. government agency issues
Non-current marketable securities:
U.S. treasury notes and bonds - conventional
U.S. government agency issues
Corporate bonds
Total
Financial assets:
Cash equivalents (a)
Available-for-sale marketable securities:
Current marketable securities:
U.S. treasury notes and bonds - conventional
U.S. government agency issues
Non-current marketable securities:
U.S. treasury notes and bonds - conventional
U.S. government agency issues
Total
Fair Value at January 31, 2018 Using
Quoted
Prices in
Active
Markets for
Identical Assets
(Level 1)
(Amounts in thousands)
Significant
Other
Observable
Inputs
(Level 2)
January 31,
2018
$
4,568
$
$
4,568
1,993
1,998
1,724
985
1,740
$ 13,008
$
1,993
1,724
3,717
1,998
985
1,740
9,291
$
Fair Value at January 31, 2017 Using
Quoted
Prices in
Active
Markets for
Identical Assets
(Level 1)
(Amounts in thousands)
Significant
Other
Observable
Inputs
(Level 2)
January 31,
2017
$
2,726
$
2,726
$
4,253
1,000
1,997
2,994
$ 12,970
$
4,253
1,997
8,976
1,000
2,994
3,994
$
a) Money market funds and U.S. treasury bills are included in cash and cash equivalents on the accompanying consolidated
balance sheets.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible property and
equipment, goodwill, and other intangible assets, which are re-measured when the derived fair value is below carrying value on
our consolidated balance sheets. For these assets and liabilities, we do not periodically adjust carrying value to fair value
except
in the event of impairment. If we determine that impairment has occurred, the carrying value of the asset is reduced to fair value
and the difference is recorded to loss from impairment of long-lived assets in our consolidated statements of operations and
comprehensive income (loss).
a
rr
73
Available-for-Sale Securities
t
We determine the appropriate classification of debt investment securities at the time of purchase and reevaluate such designation
as of each balance sheet date. Our investment portfolio consists of money market funds, U.S. treasury notes and bonds, U.S.
government agency notes and bonds as of January 31, 2018 and 2017, and corporate bonds as of January 31, 2018. All highly
liquid investments with an original maturity of three months or less when purchased are cash equivalents. All cash equivalents
are carried at cost, which approximates fair value. Our marketable securities are classified as available-for-sale and are reported
at fair value with unrealized gains and losses, net of tax, reported in stockholders equity as a component of accumulated other
comprehensive loss. The amortization of premiums and accretions of discounts to maturity are computed under the effective
interest method and is included in other income (expenses), net, in our consolidated statements of operations and comprehensive
income (loss). Interest on securities is recorded as earned and is also included in other income (expenses), net. Any realized
gains or losses would be shown in the accompanying consolidated statements of operations and comprehensive income (loss) in
other income (expenses), net. We provide fair value measurement disclosures of available-for-sale securities in accordance with
one of three levels of fair value measurement mentioned above.
The following is a summary of cash, cash equivalents and available-for-sale securities, including the cost basis, aggregate fair
value and unrealized gains and losses, for short-and long-term marketable securities portfolio as of January 31, 2018 and 2017:
January 31, 2018:
Cash equivalents
Cash and cash equivalents
U.S. treasury notes and bonds - short-term
U.S. treasury notes and bonds - long-term
U.S. government agency issues - short-term
U.S. government agency issues - long-term
Corporate bonds - long-term
Total cash, cash equivalents and marketable securities
January 31, 2017:
Cash equivalents
Cash and cash equivalents
U.S. treasury notes and bonds - short-term
U.S. treasury notes and bonds - long-term
U.S. government agency issues - short-term
U.S. government agency issues - long-term
Total cash, cash equivalents and marketable securities
Amortized
Cost
$ 39,084
4,568
43,652
2,001
1,740
1,991
1,002
1,760
$ 52,146
$ 25,576
2,726
28,302
4,248
2,003
991
2,996
$ 38,540
Gross
Gross
Unrealized
Unrealized
Losses
Gains
(Amounts in thousands)
Estimated
Fair
Value
$
$
$
$
$
9
9
$
$
5
9
14
$
$ 39,084
4,568
43,652
1,993
(8)
1,724
(16)
1,998
(2)
985
(17)
(20)
1,740
$ 52,092
(63)
$ 25,576
2,726
28,302
4,253
1,997
(6)
1,000
(2)
2,994
$ 38,546
(8)
The gross realized gains and losses on sale of available-for-sale securities for fiscal 2018, 2017 and 2016 were immaterial. For
purposes of determining gross realized gains and losses, the cost of securities sold is based on specific identification.
Contractual maturities of available-for-sale debt securities at January 31, 2018 are as follows (amounts in thousands):
t
Maturity of one year or less
Maturity between one and five years
Total
Estimated
Fair Value
3,991
$
4,449
8,440
$
We concluded that there were no other-than-temporary declines of available-for-sale securities as of January 31, 2018, 2017 and
2016. The unrealized holding losses, net of tax, on available-for-sale securities, which
are not material for the periods presented,
have been included in stockholders equity as a component of accumulated other comprehensive loss.
a
74
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents consist primarily of 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 date of
purchase of 90 days or less.
t
The fair value of cash, cash equivalents, restricted cash and marketable securities at January 31, 2018 and 2017 was $52.1
million and $38.7 million, respectively.
Restricted Cash
At times, we may be required to maintain cash held as collateral for performance obligations with our customers which we
classify as restricted cash on our consolidated balance sheets. Restricted cash was not material as of January 31, 2018 and was
$0.1 million as of January 31, 2017.
4.
Acquisitions and Loss on Impairment of TLL, LLC
DCC Labs
On May 5, 2016, we acquired a 100% share of DCC Labs in exchange for an aggregate of $2.7 million in newly issued shares of
SeaChange common stock and $5.2 million in cash, net of cash acquired, resulting in a total net purchase price of $7.9 million.
The stock consideration was determined by dividing the total value of $2.7 million by the volume weighted average closing
price of our common stock for the twenty trading days preceding the closing. DCC Labs is a developer of set-top and
multiscreen device software. Of the total consideration, $0.5 million in cash and all the stock (681,278 shares) were initially
held in escrow as security for the indemnification obligations of the former DCC Labs owners to SeaChange under the purchase
agreement, with one-third of the stock in escrow to be released to the former DCC Labs owners annually on the anniversary date
of the acquisition beginning on May 5, 2017 and ending May 5, 2019, and one-half of the cash in escrow to be released to the
former DCC Labs owners on May 5, 2017 and May 5, 2018. On May 5, 2017, $0.3 million in cash and 227,090 shares of our
common stock initially deposited with an Escrow Agent were disbursed to the sellers.
ff
The acquisition of DCC Labs in fiscal 2017 enabled us to optimize the operations of our In-Home business, which developed
home video gateway software including SeaChanges Nucleus and NitroX products. In addition, the acquisition brought market-
ready products, including an optimized television software stack for Europes Digital Video Broadcasting community, and an
HTML5 framework for building additional user experience client applications across a variety of CPE devices, including
Android TV STBs, tablets, mobile and computer devices. During fiscal 2018, the In-home business became the center of
engineering and expanded to include product development for backoffice, advertising and legacy products. The Poland
operation became the prime engineering location and as of the end of fiscal 2018, was the largest location by number of
engineers. In addition, the engineering efforts were combined and the teams were re-organized into a single global team in fiscal
2018, which spans a reduced number of locations globally compared to fiscal 2017. As part of the engineering transition,
organizational improvements were implemented in order to focus on software quality, reliability and pre-integration, in order to
de-risk deployments and improve go-to-market time for new solutions and existing upgrades. The global engineering team
introduced DevOps practices with a customer-centric view of technology improvements across all products within the
SeaChange solution. Along with operational improvements, engineering introduced changes to process and workflow which
enabled more accurate effort estimations and velocity tracking. With the introduction of common agile project methodology
across all teams and products, the efficiency of software engineering increased, which allowed more engineering resources to
focus on innovation and development of industry leading features and enhancements to existing products as well as new product
releases that expand the SeaChange technology franchise. At the same time, improved efficiency and better allocation of
software developers enabled a more lean and targeted approach to supporting existing deployments and delivering upon support
commitments for legacy products using a cost-optimized workforce.
We accounted for the acquisition of DCC Labs as a business combination, which requires us to record the assets acquired and
liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of the net assets acquired was
recorded as goodwill. We engaged an independent appraiser to assist management in assessing the fair values of the tangible and
intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the acquisition date. Assets
acquired in the acquisition include receivables, prepaid expenses and property and equipment while liabilities assumed include
accounts payable, other accrued expenses, deferred taxes and income taxes payable. The amounts recorded for these assets and
liabilities are final based on information obtained about the facts and circumstances that existed as of the acquisition date.
The allocation of purchase price was as follows (amounts in thousands):
75
Estimated Fair value of consideration:
Cash, net of cash acquired
Stock consideration
Total purchase price
Estimated Fair value of assets acquired and liabilities assumed:
Current assets
Other long-term assets
Finite-life intangible assets
Goodwill
Current liabilities
Other long-term liabilities
Allocated purchase price
$ 5,243
2,640
$ 7,883
826
116
810
7,255
(618)
(506)
$ 7,883
Acquired Goodwill
We recorded the $7.3 million excess of the purchase price over the fair value of the identified tangible and intangible assets as
goodwill, primarily due to expected synergies between the combined companies and expanded market opportunities. The
goodwill is not deductible for tax purposes.
Intangible Assets
In determining the fair value of the intangible assets, the Company considered, among other factors, the intended use of the
assets and the estimates of future performance of DCC Labs, based on analyses of historical financial performance. The fair
values of identified intangible assets were calculated using an income-based approach based on estimates and assumptions
provided by DCC Labs and the Companys management.
The following table sets forth the components of the identified intangible assets associated with the DCC Labs acquisition and
their estimated useful lives:
Tradename
Customer contracts
NNon-compete agreements
Existing technology
Useful life
4 years $
2 years
2 years
3 years
Fair Value
(Amounts in thousands)
60
230
30
490
810
$
Impact to Fiscal 2017 Financial Results
DCC Labs financial results have only been included in our fiscal 2017 consolidated financial results for the period from May 5,
2016 through January 31, 2017. As a result, our consolidated financial results for fiscal 2017 do not include DCC Labs results
for the period from February 1, 2016 to May 4, 2016. For that period, DCC Labs revenue was not significant and its operating
loss was approximately $1.2 million.
Acquisition-related Costs
In connection with the acquisition, we incurred approximately $0.2 million in acquisition-related costs, including legal,
accounting and other professional services for fiscal 2017. The acquisition costs were expensed as incurred and included in
professional fees other, in our consolidated statements of operations and comprehensive income (loss) for the fiscal year ended
January 31, 2017.
Loss on Impairment of TLL, LLC
In January 2016, our Board of Directors authorized a restructuring plan, as previously reported in a Form 8-K filed with the SEC
on February 17, 2016. Based on the decision to enter the restructuring plan and the plans impact on the projected future cash
76
flows of the Timeline Labs operations, we determined that the carrying amount of all long-term assets that resulted from the
February 2015 acquisition had exceeded the fair value as of January 31, 2016. As a result, these long-term assets were deemed
fully impaired and we recorded the $21.9 million net book value of these long-term assets as a component of loss on impairment
of long-lived assets in our consolidated statements of operations and comprehensive income (loss) for the fiscal year ended
January 31, 2016. Additionally, we reduced the contingent consideration liability associated with the Timeline Labs acquisition
to zero, as we determined that the defined performance criteria would not be achieved, and credited the reversal of the liability
a
of $0.4 million to loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive
income (loss) for the fiscal year ended January 31, 2016. In addition, we incurred $0.7 million in severance and restructuring
charges in February 2016 related to the cost-saving actions taken with respect to the Timeline Labs business.
5.
Consolidated Balance Sheet Detail
Inventories, net
Inventories consist primarily of hardware and related component parts and are stated at the lower of cost (on a first-in, first-out
basis) or net realizable value. Inventories consist of the following:
January 31,
2018
2017
Components and assemblies
Finished products
Total inventories, net
Property and equipment, net
Property and equipment, net consists of the following:
(Amounts in thousands)
500
$
270
770
426
240
666
$
$
$
Land
Buildings
Office furniture and equipment
Computer equipment, software and demonstration equipment
Service and spare components
Leasehold improvements
Less - Accumulated depreciation and amortization
Total property and equipment, net
Estimated
Useful
Life
(Years)
20
5
3
5
1-7
January 31,
2018
2017
(Amounts in thousands)
$ 2,780
11,839
774
12,770
1,158
537
29,858
(20,387)
$ 9,471
$
2,780
11,726
1,091
18,194
1,158
1,064
36,013
(24,528)
$ 11,485
Depreciation and amortization expense of property and equipment was $2.3 million, $3.0 million and $3.4 million for the years
ended January 31, 2018, 2017 and 2016, respectively.
During fiscal 2018, we wrote off the book value of fixed assets that were at our closed facilities in Milpitas, California, Ft.
Washington, Pennsylvania and Manilla, Philippines. These facilities were closed as a direct result of cost savings initiatives
implemented during the second half of fiscal 2017. The gain (loss) on disposal associated with these closures was not material.
During the third quarter of fiscal 2017, we began actively marketing our facility in Greenville, New Hampshire for sale and
identified a potential buyer. Accordingly, we determined at the time that the sale of the asset group was probable by the end of
the fourth quarter of fiscal 2017. We determined that the asset group met all the criteria of held for sale accounting and
classified the asset group as held for sale on our consolidated balance sheets beginning in the third quarter of fiscal 2017.
Subsequently, in January 2017, after a potential buyer declined to purchase this facility, we determined that the sale of the
facility was not imminent due to the location of the building and the overall market conditions in the area. Consequently, we
decided to fully impair the facility since we felt that carrying amount was greater than the fair value. As a result, we recorded a
$0.3 million loss on impairment of long-lived assets in our consolidated statements of operations and comprehensive income
(loss) for the fiscal year ended January 31, 2017. In April 2017, we sold the facility for $0.1 million.
rr
77
Investments in affiliates
In connection with the acquisition in January 2018 by T-Mobile of Layer 3, a next generation cable provider in which we
previously had made an equity investment, we received $4.6 million upon closing of the transaction, with an additional
payment of up to $2.1 million being held in escrow, subject to satisfaction of the escrow provisions. As a result of the sale of
our investment in Layer 3, we realized a gain of $2.6 million in gain (loss) on investment in affiliates in our consolidated
statements of operations and comprehensive income (loss) for fiscal 2018.
Other accrued expenses
Other accrued expenses consist of the following:
Accrued compensation and commissions
Accrued bonuses
Accrued restructuring
Employee benefits
Sales tax and VAT payable
Income taxes payable
Accrued other
Total other accrued expenses
6.
Goodwill and Intangible Assets
Goodwill, net
January 31,
2018
2017
(Amounts in thousands)
$ 1,799
$ 1,414
1,871
2,715
1,023
225
885
601
731
4,001
188
2,869
3,431
3,554
$ 9,928
$15,379
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 when we identify certain triggering events or circumstances that would more likely than not
reduce the estimated fair value of the goodwill of the Company below its carrying amount. At January 31, 2018 and 2017, we
had goodwill of $25.6 million and $23.3 million, respectively. The change in the carrying amount of goodwill for fiscal year
2018 is due to the impact of foreign currency translation adjustments related to goodwill balances that are recorded in currencies
other than the U.S. dollar. The following table represents the changes in goodwill for the fiscal years ended January 31, 2018
and 2017 (amounts in thousands):
Balance as of January 31, 2016:
Goodwill, gross
Accumulated impairment losses
Goodwill, net
Acquisition of DCC Labs
Goodwill impairment charge
Cumulative translation adjustment
Balance as of January 31, 2017:
Goodwill, gross
Accumulated impairment losses
Goodwill, net
Cumulative translation adjustment
Balance as of January 31, 2018
Goodwill, gross
Accumulated impairment losses
Goodwill, net
$ 55,962
(15,787)
40,175
7,255
(23,492)
(651)
62,566
(39,279)
23,287
2,292
64,858
(39,279)
$ 25,579
In the third quarter of fiscal 2018, we finalized the Step 1 analysis of our annual goodwill impairment test for fiscal 2018.
Based on this analysis, we determined that fair value of our reporting unit exceeded its carrying value, which was $64.2 million
78
at August 1, 2017. As a result, no impairment charge was required related to the annual test. See Critical Accounting Policies
and Significant Judgement and Estimates
Goodwill in Part II, Item 7 of this Form 10-K for more information.
dd
ff
During the third quarter of fiscal 2018, we determined that there was a significant decrease in fair value of the Corporate
Headquarters (see Note 2, Summary of Significant Accounting Policies Impairment of Assets, for more information). We
considered this significant decrease in fair value a triggering event. As a result, we were required to complete an additional
goodwill impairment test as of the date of the triggering event. We completed the additional goodwill impairment test and
determined that the implied fair value of the reporting unit exceeds its carrying value as of the date of the triggering event.
Accordingly, no impairment charge was recognized.
While no impairment resulted from our annual test, impairment charges may occur in the future as a result of
projected growth and other factors. No triggering events have occurred during the fourth quarter of fiscal 2018 that would
indicate a potential impairment of goodwill exists.
changes in
ff
We determined based on Step 1 of our fiscal 2017 annual impairment test, that the fair value of our reporting unit was less
than its carrying value, which was $102.5 million at August 1, 2016. Since the estimated fair value of our reporting unit was
less than its carrying value, we determined that it was necessary to perform Step 2 of the impairment test. In Step 2 of the
impairment test we compared the implied fair value of our goodwill to its carrying value. After adjusting the carrying value of
all assets, liabilities and equity to fair value at August 1, 2016, the estimated implied fair value of goodwill was calculated to be
$22.3 million. Since the implied fair value of goodwill of $22.3 million is less than the carrying value of $45.8 million as of
August 1, 2016, we recorded an impairment charge of $23.5 million to loss on impairment of long-lived assets in our
consolidated statements of operations and comprehensive income (loss).
rr
Intangible assets, net
Intangible assets, net, consisted of the following at January 31, 2018 and 2017:
Weighted average
remaining life
(Years)
y
January 31, 2018
y
January 31, 2017
Gross
Accumulated
Amortization
Net
Gross
Accumulated
Amortization
Net
(Amounts in thousands)
Finite-lived intangible assets:
Customer contracts
Non-compete agreements
Non-compete agreements
Completed technology
Trademarks, patents and other
Total finite-lived intangible assets
1.7
0.5
1.8
2.5
1.7
$30,818 $ (29,836) $ 982 $30,056 $ (28,019) $2,037
18
4
499
49
$52,125 $ (50,822) $1,303 $50,051 $ (47,448) $2,603
2,374
276 10,496
7,125
41
(2,635)
(11,203)
(7,148)
(2,356)
(9,997)
(7,076)
2,639
11,479
7,189
Amortization expense for intangible assets was $2.4 million, $3.3 million and $4.8 million for fiscal 2018, 2017 and 2016,
respectively.
The total amortization expense for each of the next five fiscal years is as follows (amounts in thousands):
For the Fiscal Years Ended January 31,
2019
2020
2021
2022
2023
2024 and thereafter
Total
Estimated
Amortization
Expense
$
$
914
385
4
1,303
Actual amortization may differ from estimated amounts in the table above due
rates, additional intangible asset acquisitions, potential impairment, accelerated amortization, or other events.
to fluctuations in foreign currency exchange
a
79
7.
Severance and Other Restructuring Costs
Restructuring Costs
During fiscal 2018, we incurred restructuring charges totaling $4.2 million primarily from employee-related benefits for
terminated employees and costs to close facilities.
The following table shows the change in balances of our accrued restructuring reported as a component of other accrued
expenses on the consolidated balance sheet as of January 31, 2018 (amounts in thousands):
Accrual balance as of January 31, 2017
Restructuring charges incurred
Cash payments
Other charges
Accrual balance as of January 31, 2018
Employee-
Related
Benefits
785
$
2,973
(3,733)
36
61
$
Closure
of
Leased
Facilities
130
$
796
(783)
(8)
135
$
Other
Restructuring
108
$
387
(466)
29
$
Total
$ 1,023
4,156
(4,982)
28
225
$
During the third quarter of fiscal 2017, we implemented a restructuring program (Restructuring Plan) with the purpose of
reducing costs and assisting in restoring SeaChange to profitability and positive cash flow. This program included measures
intended to allow the Company to more efficiently operate in a leaner, more direct cost structure. These measures included
reductions in workforce, consolidation of facilities, transfers of certain business processes to lower cost regions and reduction in
third-party service costs. The total estimated restructuring costs associated with the Restructuring Plan are anticipated to be
approximately $7.5 million and will be recorded in severance and other restructuring costs in our consolidated statements of
operations and comprehensive income (loss) as they are incurred. We recorded $4.1 million of restructuring expense in
connection with this plan during fiscal 2018, which was primarily made up of employee-related costs and facility closings. Since
its implementation, we have recognized $7.2 million in restructuring charges related to the Restructuring Plan. We do not expect
to incur any more significant restructuring charges related to this plan.
During the second quarter of fiscal 2017, we restructured our operations in connection with the acquisition of DCC Labs. This
restructuring resulted in a workforce reduction within our engineering and services organization and in the closing of our facility
in Portland, Oregon and a substantial reduction to our facility in Milpitas, California. We recorded $0.1 million of restructuring
expense in connection with this action during fiscal 2018, which was primarily made up of facility and other costs not related to
employees. We incurred charges totaling $2.0 million in severance and other restructuring costs from the second quarter of
fiscal 2017 through the end of fiscal 2018 related to the acquisition. We do not expect to incur any further material restructuring
charges related to this acquisition.
Severance Costs
During fiscal 2018, we incurred additional severance charges not related to a restructuring plan of $0.5 million, primarily from
the departure of 14 former employees including a Senior Vice President and a Vice President. During fiscal 2017, we incurred
severance charges of $1.5 million, primarily from the departure of our former Chief Executive Officer (CEO) and Chief
Financial Officer (CFO) during the first half of fiscal 2017 as well as the termination of 13 other former employees.
8.
Commitments and Contingencies
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 agreements in the ordinary course of business with customers, resellers, distributors, integrators and suppliers. Most of
these 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
80
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 thereforeff
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.
Operating Leases
We lease certain of our operating facilities, automobiles and office equipment under non-cancelable operating leases, which
expire at various dates through fiscal 2024. Leases for our facilities typically contain standard commercial lease provisions,
including renewal options and rent escalation clauses. Rental expense under operating leases was $1.6 million, $2.4 million and
$2.7 million for fiscal 2018, 2017 and 2016, respectively. Future commitments under minimum lease payments as of January
31, 2018 are as follows (amounts in thousands):
y
For the Fiscal Years Ended January 31,
2019
2020
2021
2022
2023
2024 and thereafter
Minimum operating lease payments
Operating
Leases
1,314
910
678
432
167
3,501
$
$
9.
Stockholders Equity
Stock Authorization
The Board of Directors is authorized to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock, in one
or more series. Each such series of preferred stock shall have the number of shares, designations, preferences, voting powers,
qualifications and special or relative rights or privileges to be determined by the Board of Directors, including dividend rights,
voting rights, redemption rights and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights.
No preferred stock has been issued as of January 31, 2018.
Stock Option Plans
2011 Compensation and Incentive Plan.
In July 2011, our stockholders approved the adoption of our 2011 Compensation and Incentive Plan (the 2011 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) and other equity based non-stock option awards as determined by the plan
administrator to officers, employees, consultants, and directors of the Company.
On July 13, 2017, our stockholders approved an amendment to the 2011 Plan which increased the number of shares under the
2011 Plan by 4,000,000 shares and correspondingly increased the number of incentive stock options that can be authorized for
issuance under the 2011 Plan.
Effective February 1, 2014, SeaChange gave its non-employee members of the Board of Directors the option to receive DSUs in
lieu of RSUs, beginning with the annual grant for fiscal 2015. The number of units subject to the DSUs is determined as of the
81
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. Commencing with fiscal 2016, we changed the policy
regarding the timing of the equity grant from the first day of the applicable fiscal year to the date of our annual meeting of
stockholders.
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. As of January 31, 2018, there were 2,527,281
shares available for future grant under the 2011 Plan.
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. Stock units may be granted to any officer, employee, director, or consultant at a purchase
price per share as determined by the Board of Directors. Option awards granted under the 2011 Plan generally vest over a period
of one to four years and expire ten years from the date of the grant.
In fiscal 2016, the Board of Directors developed a new Long-Term Incentive (LTI) Program under which the named executive
officers and other key employees of the Company will 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 performance stock units (PSUs) subject to vesting based in part on the extent to which
employment continues for three years. In fiscal 2018, the Board of Directors changed the structure of prospective LTI
performance-based awards, changing from awards based on total shareholder return to awards based on Company-specific
financial performance metrics.
2015 Employee Stock Purchase Plan
In July 2015, we adopted the 2015 Employee Stock Purchase Plan (the ESPP). The purpose of the ESPP is to provide eligible
employees, including executive officers of SeaChange, with the opportunity to purchase shares of our common stock at a
discount through accumulated payroll deductions of up to 15%, but not less than one percent of their eligible compensation,
subject to any plan limitations. Offering periods typically commence on October 1st and April 1st and end on March 31st and
September 30th with the last trading day being the exercise date for the offering period. The first offering period under the ESPP
commenced on October 1, 2015. On each purchase date, eligible employees will 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 which will be authorized for sale under the ESPP is 1,150,000 shares. Under the ESPP, 24,467 and 17,956
shares were purchased during fiscal 2018 and fiscal 2017, respectively. Stock-based compensation expense related to the ESPP
was immaterial for fiscal 2018 and fiscal 2017.
Stock-based Compensation
We use the provisions of the authoritative guidance which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors based on estimated fair values. The fair value of our stock
options and PSUs, less expected forfeitures, is amortized over the awards vesting period on a graded vesting basis, whereas the
RSUs and DSUs, less expected forfeitures, are amortized on a straight-line basis over the requisite service period of those
awards. We have applied the provisions of authoritative guidance allowing the use of a simplified method, in developing an
estimate of the expected term of plain vanilla share options.
82
The effect of recording stock-based compensation was as follows:
Stock-based compensation expense by type of award:
Stock options
Restricted stock units
Deferred stock units
Performance-based restricted stock units
Employee stock purchase plan
Total stock-based compensation
For the Fiscal Years Ended January 31,
2017
2018
(Amounts in thousands)
y
2016
$ 1,025
664
487
511
9
$ 2,696
$
873
624
709
398
17
$ 2,621
$
$
1,257
1,203
607
475
10
3,552
Since stock-based awards are expected to be made each year and vest over several years, the effects of applying authoritative
guidance for recording stock-based compensation for the year ended January 31, 2018 are not indicative of future amounts.
Determining Fair Value
Stock Options
We record the fair value of most stock options using the Black-Scholes valuation model. Key input assumptions used to estimate
the fair value of stock options include the exercise price, the expected option term, the risk-free interest rate over the options
expected term, the expected annual dividend yield and the expected stock price volatility. The expected option term was
determined using the simplified method for plain vanilla options. The expected stock price volatility was established using a
blended volatility, which is an average of the historical volatility of our common stock over a period of time equal to the
expected term of the stock option, and the average volatility of our common stock over the most recent one-year and two-year
periods. The risk-free interest rate is based upon the U.S. treasury bond yield at the grant date, using a remaining term equal to
the expected life. The expected dividend yield is 0%, as we have not paid cash dividends on our common stock since our
inception.
The fair value of stock options granted was estimated at the date of grant using the following assumptions:
Expected term (in years)
Expected volatility (range)
Weighted average volatility
Risk-free interest rate
Weighted average interest rate
Expected dividend yield
Market-Based Options
For the Fiscal Years Ended January 31,
2017
6-7
40-45%
42%
1.0-2.0%
1.1%
0%
2016
6-7
40-45%
42%
1.5-2.0%
1.6%
0%
2018
6-7
39-46%
41%
1.9-2.5%
2.4%
0%
We have granted market-based options to certain officers with their appointment. These stock options have an exercise price
equal to our closing stock price on the date of grant and will vest in approximately equal increments based upon the closing
price of SeaChanges common stock. We record the fair value of these stock options using the Monte Carlo simulation model,
since the stock option vesting is variable depending on the closing price of our traded common stock. The model simulated the
daily trading price of the market-based stock options expected terms to determine if the vesting conditions would be triggered
during the term. Effective April 6, 2016, Ed Terino, who previously served as our Chief Operating Officer (COO), was
appointed Chief Executive Officer (CEO) of SeaChange and was granted 600,000 market-based options, bringing the total of
his market-based options, when added to the 200,000 market-based options he received upon hire as COO in June 2015, to
800,000 market-based options. The fair value of these 800,000 stock options was estimated to be $2.1 million. As of January
31, 2018, $0.3 million remained unamortized on the market-based stock options, which will be expensed over the next 1.1 years,
the remaining weighted average amortization period.
83
The following table summarizes the Companys stock option activity:
2018
For the Fiscal Years Ended January 31,
2017
y
2016
Outstanding at beginning of period
Granted
Exercised
Forfeited/expired/cancelled
Outstanding at end of period
Options exercisable at end of period
Weighted
average
exercise
price
Shares
2,141,567
1,400,000
4.70
$
$
3.16
$
5.65
3.94
3.98
(301,462) $
$
3,240,105
$
399,232
Weighted
average
exercise
price
Shares
1,192,677
1,581,614
6.80
$
$
4.02
$
6.98
4.70
6.28
(632,724) $
$
2,141,567
$
203,982
Weighted average remaining contractual term (in years)
8.00
8.01
Shares
$
1,626,421
612,678
$
(28,740) $
(1,017,682) $
$
1,192,677
$
80,000
Weighted
average
exercise
price
7.77
6.44
6.74
8.13
6.80
6.83
8.10
The weighted-average fair valuation at grant date of stock options granted during the years ended January 31, 2018, 2017 and
2016, was $1.34, $3.09, and $2.75, respectively. As of January 31, 2018, the unrecognized stock-based compensation related to
the unvested stock options was approximately $1.1 million, net of estimated forfeitures. Total unrecognized compensation cost
will be adjusted for any future changes in estimated changes in forfeitures. This cost will be recognized over an estimated
weighted average amortization period of 2.3 years.
Intrinsic value is defined as the difference between the market price on the date of exercise and the grant date price. The
aggregate intrinsic value for options outstanding was $0.7 million as of January 31, 2018 and $0.1 million for 2016. There was
no intrinsic value as of January 31, 2017 as the market price on the date of exercise was higher than the grant date price for
options outstanding. The aggregate intrinsic value of vested shares and share options expected to vest as of January 31, 2018,
2017 and 2016 was $0.7 million, $0 and $0.1 million, respectively.
Cash received from employees as a result of employee stock option exercises during fiscal 2016 was $0.2 million. There were
no stock options exercised in fiscal 2018 and 2017.
The following table summarizes information about stock options outstanding and exercisable as of January 31, 2018:
Options Outstanding
Options Exercisable
Weighted
average
remaining
contractual
terms
(years)
Weighted
average
exercise
price
Number
exercisable
Weighted
average
exercise
price
8.36
4.20
8.27
10.00
8.27
8.26
1.25
8.21
7.97
1.77
1.42
8.00
$
$
$
$
$
$
$
$
$
$
$
$
2.42
2.61
2.98
3.33
3.41
3.50
3.77
3.83
5.98
6.05
8.15
3.94
133,517
18,750
40,000
2.42
$
2.64
$
$
3.13
$
3.41
$
3.50
$
3.77
$
$
3.83
$
6.05
$
8.15
$
3.98
$
12,500
25,000
14,046
18,750
131,669
5,000
399,232
Range of exercise prices
$2.42 to $2.42
$2.60 to $2.64
$2.67 to $3.30
$3.33 to $3.33
$3.41 to $3.41
$3.50 to $3.50
$3.77 to $3.77
$3.83 to $3.83
$5.56 to $7.25
$6.05 to $6.05
$8.15 to $8.15
Number
outstanding
413,797
300,000
260,000
1,050,000
50,000
100,000
21,067
75,000
800,000
165,241
5,000
3,240,105
84
Stock Units (RSUs, DSUs and PSUs)
We record stock-based compensation expense associated with stock units using the market value of our stock on the date of
grant, less forfeitures, and amortize the fair value over the awards vesting period on a straight-line basis for awards with only a
service condition and graded vesting basis for awards that include both a performance and service condition.
The following table summarizes the stock unit activity:
2018
For the Fiscal Years Ended January 31,
2017
2016
Weighted
average
grant date
Weighted
average
grant date
Weighted
average
grant date
Unvested at beginning of period
Awarded
Vested
Forfeited/expired/cancelled
Unvested at end of period
Shares
1,453,058 $
796,304 $
(271,285) $
(53,187) $
1,924,890 $
fair value
5.54
3.07
2.85
5.71
4.89
Shares
1,053,045 $
837,927 $
(208,474) $
(229,440) $
1,453,058 $
fair value
7.34
3.07
3.46
6.68
5.54
fair value
Shares
8.91
$
435,306
6.46
$
904,344
6.89
(277,373) $
8.42
(9,232) $
7.34
$
1,053,045
As of January 31, 2018, the unrecognized stock-based compensation related to the unvested RSUs and DSUs was $2.9 million.
This cost will be recognized over an estimated weighted average amortization period of 1.5 years.
In fiscal 2018, 2017 and 2016, under the LTI Program, the Company granted an aggregate of 232,500, 307,963 and 301,192
PSUs, respectively, to employees. In fiscal 2018, the target number of PSUs granted represents the right to receive a
corresponding number of shares of our common stock based on the Company achieving certain overall financial objectives for
fiscal 2019, 2020 and 2021 relating to total revenue and non-GAAP operating income in fiscal 2019 and to be determined in
fiscal 2020 and 2021. These financial objectives will be quantified by the Board each fiscal year. The target number of PSUs
granted to an employee in fiscal 2017 and 2016 represents the right to receive a corresponding number of shares of our common
stock, subject to adjustment depending on SeaChanges total shareholder return (TSR) for the period between, February 1,
2017 and January 31, 2020 (for the fiscal 2017 grant) and between February 1, 2016 and January 31, 2019 (for the fiscal 2016
grant) measured against the TSR of the common stock of the companies comprising the S&P SmallCap 600 Index (collectively
referred to as the SeaChange Relative TSR Percentile Rank). The number of shares of our common stock that these employees
are entitled to receive at January 31, 2019 and 2020 range from 0% to 150% of the target PSU award. If the SeaChange
Relative TSR Percentile Rank relative to the companies in the S&P SmallCap 600 Index is less than the 25th percentile, the
target grants are forfeited.
85
We record the fair value of these PSUs using the Monte Carlo simulation model since the vesting is variable depending on the
actual future financial results of the Company and SeaChange Relative TSR Percentile Ranking. We recognize stock
compensation expense related to the PSUs ratably over the required service period based on the estimate that it is probable that
the measurement criteria will be achieved and the targeted number of shares will vest. If there is a change in the estimate of the
number of shares that are probable of vesting, we will cumulatively adjust compensation expense in the period that the change
in estimate is made. The fair value of the granted PSUs was estimated to be $3.7 million and will be expensed over the next 3
years.
10. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following:
Balance at January 31, 2016
Other comprehensive loss
Balance at January 31, 2017
Other comprehensive loss
Balance at
January 31, 2018
y
Foreign
Currency
y
Translation
Adjustment
Changes in
Fair Value of
Available-
for-Sale
Investments
Accumulated
Other
Comprehensive
Loss
(Amounts in thousands)
$
$
(6,644) $
1,267
(5,377)
(3)
(5,380) $
31 $
(25)
6
(60)
(54) $
(6,613)
1,242
(5,371)
(63)
(5,434)
Unrealized holding losses on securities available for sale are not material for the periods presented.
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which includes foreign
currency translation adjustments and changes in unrealized gains and losses on marketable securities. For purposes of
comprehensive income (loss) disclosures, we do not record tax expense or benefits for the net changes in the foreign currency
translation adjustments.
11.
Segment Information, Significant Customers and Geographic Information
Segment Information
Our operations are organized into one reportable segment. Operating segments are defined as components of an enterprise
evaluated regularly by the Companys senior management in deciding how to allocate resources and assess performance. Our
reportable segment was determined based upon the nature of the products offered to customers, the market characteristics of
each operating segment and the Companys management structure.
Significant Customers
The following table summarizes revenues by significant customers where such revenue exceeded 10% of total revenues for the
indicated period:
Customer A
Customer B
For Fiscal Years Ended January 31,
2016
2017
2018
28%
30%
37%
10%
N/A
N/A
86
%
55%
39%
4%
2%
Geographic Information
The following summarizes revenues by customers geographic locations:
2018
Amount
For the Fiscal Years Ended January 31,
2017
y
2016
%
(Amounts in thousands, except percentages)
Amount
%
Amount
Revenues by customers' geographic locations:
North America (1)
Europe and Middle East
Latin America
Asia Pacific
Total revenues
$32,409
39,177
7,379
1,302
$80,267
40% $37,570
38,169
49%
5,764
9%
2,292
2%
$83,795
45% $ 58,113
42,201
45%
4,707
7%
1,971
3%
$106,992
(1)
Includes total revenue for the United States for the periods shown as follows:
U.S. Revenue
% of total revenue
The following summarizes long-lived assets by geographic locations:
Long-lived assets by geographic locations (1):
Europe and Middle East
Asia Pacific
Total long-lived assets by geographic location
(1)
Excludes marketable securities, long-term and goodwill.
2018
For the Fiscal Years Ended January 31,
2017
(Amounts in thousands, except
percentages)
$30,094
$46,978
$27,876
2016
34.7%
35.9%
43.9%
January 31,
2018
2017
Amount
%
Amount
%
(Amounts in thousands, except percentages)
$ 9,792
1,949
48
$11,789
83% $14,729
2,878
17%
817
0%
$18,424
80%
16%
4%
12.
Income Taxes
The components of income (loss) from operations before income taxes are as follows:
2018
For the Fiscal Years Ended January 31,
2017
(Amounts in thousands)
$(40,452)
(16,166)
$(56,618)
$(16,158)
17,384
$ 1,226
$(38,709)
(10,044)
$(48,753)
2016
Domestic
Foreign
Income (loss) from operations before income taxes
87
The components of the income tax (benefit) provision from operations are as follows:
For the Fiscal Years Ended January 31,
2017
(Amounts in thousands)
y
2016
2018
Current:
Federal
State
Foreign
Total
Deferred:
Foreign
Total
Income tax (benefit) provision
$
(595)
(18)
2,473
1,860
$ $
50
(49)
1
50
(94)
(44)
(14,132)
(14,132)
$(12,272)
14,675
14,675
$14,631
(1,030)
(1,030)
$(1,029)
The income tax (benefit) provision for continuing operations computed using the federal statutory income tax rate differs from
our effective tax rate primarily due to the following:
Statutory U.S. federal tax rate
State taxes, net of federal tax benefit
Income not benefitted
Non-deductible stock compensation expense
Other non-deductible items (1)
Innovative technology and development incentive
Foreign tax rate differential
Outside basis difference in foreign subsidiaries
Goodwill impairment
Tax Reform Act (2)
Current fiscal year impact of FIN 48
Income tax (benefit) provision
$
2016
2018
For the Fiscal Years Ended January 31,
2017
(Amounts in thousands)
$(19,816)
32
10,679
266
252
3,770
14,675
5,044
(271)
$ 14,631
415
(4)
481
158
(46)
(2,014)
(14,675)
3,882
(469)
$(12,272)
$(17,066)
33
15,712
3
(31)
(189)
816
(307)
$ (1,029)
(1) Within the other line in the table above, other non-deductible items were ($0.1) million, $0.1 million and ($0.2) million for the fiscal
a
years ended January 31, 2018, 2017 and 2016, respectively. These items have been aggregated with various adjustments related to
differences in prior year U.S. and foreign tax provisions and the actual returns filed.
(2) Due to the impact of the one-time transition tax on the deemed repatriation of accumulated foreign earnings required by the Tax
Reform Act discussed below.
On December 22, 2017, the United States enacted the Tax Reform Act. The Tax Reform Act has resulted in significant changes
in the U.S. corporate income tax system that affected our fiscal year ended January 31, 2018, including, but not limited to, the
following:
•
•
Reduction of the corporate federal income tax rate from 35% to 21% effective January 1, 2018;
r
Repeal of the corporate alternative minimum tax (
rr
AMT);
• A one-time transition tax on the deemed repatriation of accumulated previously untaxed foreign earnings (Transition
Tax);
• A move to a territorial tax system;
• Additional limitations on executive compensation; and
88
• Acceleration of business asset expensing.
On December 22, 2017, the SEC issued guidance under SAB 118, which allows us to record provisional amounts during a
measurement period not to extend beyond one year of the enactment date. The measurement period is deemed to have ended
when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the
effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional
amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined;
and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment
of the Tax Reform Act.
The Company is still evaluating the provisions of the Tax Reform Act and amounts reflected in the financial statements for the
year ended January 31, 2018 are provisional. The ultimate impact may differ from these provisional amounts, due to, among
other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory
guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected
to be completed within the one-year measurement period.
The Tax Reform Act reduces the U.S. statutory tax rate from 35% to 21% for years after 2017. Accordingly, we have re-
measured our U.S. deferred tax assets and liabilities as of January 31, 2018 to reflect the reduced rate that will apply in future
periods when these deferred tax assets will reverse, resulting in a provisional reduction of our net deferred tax assets, by $17.1
million, which is offset by a corresponding reduction to our valuation allowance in the fourth quarter of fiscal 2018. As a result,
there was no impact to the Companys consolidated statements of operations and comprehensive income (loss) due to the
reduction in the U.S. corporate tax rate.
The Transition Tax is a tax on previously untaxed accumulated and current earnings and profits of our foreign subsidiaries. To
determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 earnings
and profits of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We estimated a
Transition Tax impact of approximately $3.9 million, which is offset by tax losses, resulting in no material impact to our
consolidated financial statements. Our estimate represents a reasonable estimate of the Transition Tax; however, we are
continuing to gather additional information to more precisely compute the amount of the Transition Tax and the impact to our
federal and state deferred tax assets.
Other significant provisions that are not yet effective but may impact income taxes in future years include: an exemption from
U.S. tax on dividends of future foreign earnings, limitations on the deductibility of certain executive compensation, deductions
related to foreign derived intangible income, and a minimum tax on certain foreign earnings in excess of 10 percent of the
foreign subsidiaries tangible assets (i.e., global intangible low-taxed income or GILTI). We are still evaluating whether to
make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on foreign temporary
differences that are expected to generate GILTI income when they reverse in future years.
89
The components of deferred income taxes are as follows:
Deferred tax assets:
Accruals and reserves
Deferred revenue
Stock-based compensation expense
U.S. federal, state and foreign tax credits
Intangible assets
Loss carryforwards
Deferred tax assets
Less: Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
APB 23 deferred tax liability
Other
Property and equipment
Total net deferred tax liabilities
January 31,
y
2018
2017
(Amounts in thousands)
$
963
476
1,134
8,070
(201)
27,642
38,084
(38,305)
(221)
$ 1,815
79
3,730
7,459
6,834
38,356
58,273
(58,134)
139
47
(71)
(197)
14,675
75
121
$(14,732)
$
At January 31, 2018, we had federal, state and foreign net operating loss carry forwards of $111.1 million, $148.7 million and
$2.4 million respectively, which can be used to offset future tax liabilities and expire at various dates beginning in fiscal 2019.
Utilization of these net operating loss carry forwards may be limited pursuant to provisions of the respective local jurisdiction.
In addition, at January 31, 2018, we had federal and state research and development credit carry forwards of $3.8 million and
$1.8 million respectively, and state investment tax credit carry forwards of $0.2 million. We have foreign tax credit carry
forwards of $2.6 million, which are available to reduce future federal regular income taxes. These credits expire at various dates
beginning in fiscal 2019, except for $0.2 million in credits that have an unlimited carryforward period.
As a result of the Tax Reform Act, the corporate AMT has been repealed for tax years beginning after December 31, 2017.
Taxpayers with AMT credit carryforwards that are not used by fiscal 2019 may claim a partial refund beginning in fiscal 2019
and any remaining amount is refundable by fiscal 2022. For the fiscal year ended January 31, 2018, we have set up a tax
receivable of $0.6 million and removed the credit from our deferred tax assets to reflect the future refund of our AMT credits.
ff
We review the adequacy of the valuation allowance for deferred tax assets on a quarterly basis. We have evaluated the positive
and negative evidence bearing upon the realizability of our deferred tax assets and have established a valuation allowance of
$38.3 million for such assets, which are comprised principally of net operating loss carry forwards, research and development
credits, deferred revenue, inventory and stock-based compensation. If we generate pre-tax income in the future, some portion or
all of the valuation allowance could be reversed and a corresponding increase in net income would be reported in future periods.
The valuation allowance decreased $19.8 million from $58.1 million at January 31, 2017.
Our foreign subsidiaries generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested
in our operations outside the United States. Pursuant to ASC 740-30, undistributed earnings of foreign subsidiaries that are no
longer permanently reinvested would become subject to deferred income taxes under U.S. tax law. Prior to the second quarter of
fiscal 2017, we asserted that the undistributed earnings of all our foreign subsidiaries were permanently reinvested.
In the second quarter of fiscal 2017, following a review of our operations, liquidity and funding, and investment in our product
roadmap, we determined that the ability to access certain amounts of foreign earnings would provide greater flexibility to meet
the Companys working capital needs. Accordingly, in the second quarter of fiscal 2017, we recognized a deferred tax liability
of $14.7 million on $58.6 million of undistributed earnings generated by our Irish operations through July 2016. In the fourth
quarter of fiscal 2018, we completed a restructuring of our foreign operations, wherein we centralized our European operations
for greater efficiency and cost savings in the Netherlands. As part of that process, the residence of SEAC Ireland was moved to
the Netherlands. In connection with the restructuring and change in tax status, we also obtained a step-up in tax basis of certain
of our foreign subsidiaries. As a result, we re-measured the deferred tax liability related to the outside basis differences of our
foreign subsidiaries and recorded a $14.7 million deferred tax benefit in connection to the reduction of the previously recorded
deferred tax liability.
a
90
As of January 31, 2018, we maintain our assertion that all of our foreign earnings, except those related to our Irish operations
are to be permanently reinvested outside the United States.
A reconciliation of the total amounts of gross unrecognized tax benefits, is as follows:
For the Fiscal Years Ended January 31,
2018
2017
(Amounts in thousands)
Balance of gross unrecognized tax benefits, beginning of
pperiod
Gross amounts of increases in unrecognized tax benefits as
a result of tax positions taken in the current period
Decrease for change in U.S. federal tax rate
Decrease due to expiration of statute of limitation
Decrease for tax positions related to prior years
Effect of currency translation
Balance of gross unrecognized tax benefits, end of period $
$
5,093
$
5,151
(389)
152
4,856
321
(269)
(96)
(14)
5,093
$
As of January 31, 2018, the amount of unrecognized tax benefits, if recognized, would reduce income tax expense by $0.6
million. We recognized interest and penalties related to unrecognized tax benefits in income tax (benefit) provision on our
consolidated statements of operations and comprehensive income (loss). As of January 31, 2018 and 2017, total gross interest
accrued was $0.1 million, respectively.
13. Employee Benefit Plans
We sponsor a 401(k) retirement savings plan (the Plan) that covers substantially all domestic employees of SeaChange. The
Plan allows employees to contribute gross salary through payroll deductions up to the legally mandated limit. Participation in
the Plan is available to full-time employees who meet eligibility requirements. We also contribute to various retirement plans for
our employees outside the United States according to the local plans specific to each foreign location. Amounts contributed will
vary. During fiscal 2018, 2017 and 2016, we contributed $1.1 million, $1.4 million and $1.5 million, respectively.
Prior to November 30, 2017, we had a statutory pension benefit obligation covering current employees in the Philippines. On
November 30, 2017, as part of the Restructuring Plan, we decided to close our facility in the Philippines. Therefore, a complete
reduction in workforce of the remaining employees working at that facility occurred in the fourth quarter of fiscal 2018. As a
result, there was no pension benefit obligation balance as of January 31, 2018 as no pay-outs to terminated employees were
required under the Restructuring Plan or by Philippines law. The components of the change in this pension benefit obligation as
of January 31, 2018 and 2017 are as follows:
Projected benefit obligation, beginning of fiscal year
Service cost
Interest cost
Actuarial gain
Foreign currency exchange rate changes
Termination of the Plan
Projected benefit obligation, end of fiscal year
Funded status at end of fiscal year (1)
y
$
$
$
January 31,
2018
2017
(Amounts in thousands)
530
(530)
$
$
$
1,063
238
54
(801)
(24)
530
530
(1)
These unfunded amounts are included in other liabilities, long-term on our consolidated balance sheets for the periods presented.
The following sets forth the components of our net periodic benefit cost under the pension plan:
91
Service cost
Interest cost
Actuarial gain
NNet periodic benefit cost
2018
January 31,
2017
(Amounts in thousands)
2016
$
$
$
$
238
54
(801)
(509)
$
$
288
51
(435)
(96)
Key weighted average assumptions used in the accounting for the pension plan to determine the benefit obligation and net
benefit cost were as follows:
Discount rate
Compensation increase rate
14. Net Income (Loss) Per Share
January 31,
2018
2017
N/A
N/A
5.72%
5.00%
Net income (loss) per share is presented in accordance with authoritative guidance which requires the presentation of basic
and diluted earnings per share. Basic net income (loss) per share is computed by dividing earnings available to common
shareholders by the weighted average shares of common stock outstanding during the period. For the purposes of calculating
diluted net income (loss) per share, the denominator includes both the weighted average number of shares of common stock
outstanding during the period and the weighted average number of shares of potential dilutive shares of common stock, such as
stock awards, calculated using the treasury stock method. Basic and diluted net income (loss) per share was the same for fiscal
2017 and 2016 as the impact of potential dilutive shares outstanding was anti-dilutive.
The following table sets forth our computation of basic and diluted net income (loss) per common share (amounts in thousands,
except per share data):
For the Fiscal Years Ended January 31,
2017
$(71,249)
2016
$(47,697)
2018
$13,498
35,412
34,970
33,506
60
63
84
66
273
35,685
34,970
33,506
$
$
0.38
0.38
$
$
(2.04)
(2.04)
$
$
(1.42)
(1.42)
NNet income (loss)
Weighted average shares used in computing net income (loss) per
share - basic
Effect of dilutive shares:
Stock options
Restricted stock units
Deferred stock units
Performance stock units
Dilutive potential common shares
Weighted average shares used in computing net income (loss) per
share - diluted
NNet income (loss) per share:
Basic
Diluted
92
The number of common shares used in the computation of diluted net income (loss) per share for the periods presented does not
include the effect of the following potentially outstanding common shares because the effect would have been anti-dilutive
(amounts in thousands):
For the Fiscal Year Ended January
31,
2017
1,415
448
70
318
2,251
2018
1,522
159
13
297
1,991
2016
1,493
145
31
5
1,674
Stock options
Restricted stock units
Deferred stock units
Performance stock units
Total
93
15. Quarterly Results of OperationsUnaudited
The following table sets forth certain unaudited quarterly results of operations for fiscal 2018 and fiscal 2017. In the opinion of
management, this information has been prepared on the same basis as the audited consolidated financial statements and all
necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to
present fairly the quarterly information when read in conjunction with the audited consolidated financial statements and notes
thereto included elsewhere in this Form 10-K. The quarterly operating results are not necessarily indicative of future results of
operations.
Fiscal Year Ended January 31, 2018
Q4
Q1
(Amounts in thousands, except per share data)
Q2
Q3
Revenue
Gross profit
Operating expenses
NNet (loss) income (1)
(Loss) income per share (2):
Diluted
Revenue
Gross profit
Operating expenses (3)
NNet loss (1)
Loss per share (2):
Diluted
$16,667
9,877
15,345
(5,371)
$ 17,225
11,416
13,499
(1,529)
$23,430
16,364
15,444
(220)
$ 22,945
16,287
15,066
20,618
$ (0.15)
$ (0.15)
$
$
(0.05)
(0.05)
$ (0.00)
$ (0.00)
$
$
0.58
0.58
Fiscal Year Ended January 31, 2017
Q1
Q4
(Amounts in thousands, except per share data)
Q2
Q3
$21,570
9,662
19,237
(8,907)
$ 18,452
8,023
19,691
(26,884)
$19,961
10,378
18,813
(8,082)
$ 23,812
16,242
40,710
(27,376)
$ (0.26)
$ (0.26)
$
$
(0.77)
(0.77)
$ (0.23)
$ (0.23)
$
$
(0.78)
(0.78)
(1)
(2)
(3)
Net income in the fourth quarter of fiscal 2018 includes a tax benefit of $14.7 million resulting from the re-measurement of the deferred
tax liability in connection with the outside basis of our foreign subsidiaries and a $2.6 million gain on the sale of our investment in
Layer 3. Net loss in the second quarter of fiscal 2017 includes a tax provision of $14.6 million related to foreign income taxes on $58.6
million of undistributed earnings. Also, the fourth quarter of fiscal 2017 includes a $23.7 million loss on impairment of long-lived
assets as we found during Step 2 of our annual goodwill impairment test that the carrying value of our goodwill was greater than the
implied fair value. As a result, we recorded an impairment charge of $23.5 million. In addition, we fully impaired the fair market value
of our facility in Greenville, New Hampshire by recording an impairment charge of $0.2 million as we feel that the sale of this facility
is not imminent due to the facilitys location and the market conditions in the area. Finally, we also recorded an impairment charge of
$0.5 million to write down an investment in affiliate whose fair value was determined to be lower than its carrying value.
The sum of per share data may not agree to annual amounts due to rounding.
Effective February 1, 2017, the Company changed how it classifies costs associated with its solution architect employees. In fiscal
2017, all solution architect costs were classified as cost of revenues. However, beginning in fiscal 2018, the Company began reflecting
in cost of revenues only those costs associated with revenue-generating projects, based on the hours worked by solution architect
employees. Solution architect costs that are not associated with revenue-generating projects are recognized as selling and marketing
expenses since these employees are involved in pre-sale and other customer-facing activities. We have adjusted prior fiscal year
amounts to conform to the current fiscal year presentation. The effect of this change in methodology, which is a decrease to cost of
revenue and an increase to selling and marketing expenses, is reflected in our current statements of operations and comprehensive
income (loss) for fiscal 2017. See Note 2, Summary of Significant Accounting Policies Basis of Presentation and Principles of
Consolidation, for more information.
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
94
ITEM 9A. CONTROLS AND PROCEDURES
(A) Evaluation of Disclosure Controls and Procedures
We evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this Form 10-K. Edward
Terino, our Chief Executive Officer, and Peter R. Faubert, our Chief Financial Officer, participated in this evaluation. Based upon that
evaluation, Messrs. Terino and Faubert concluded that our disclosure controls and procedures were effective as of January 31, 2018.
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the
period covered by this annual report, or the evaluation date. Disclosure controls and procedures are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms. Our 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. Our management, after evaluating the effectiveness of our disclosure controls and procedures as of the evaluation date,
concluded that as of the evaluation date, our disclosure controls and procedures were effective at the reasonable assurance level.
t
(B) Report of Management on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal
control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally accepted in the United States of
America.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and
directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of January 31, 2018. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in the 2013 Internal Controlll
concluded that as of January 31, 2018, our internal control over financial reporting was effective.
Based on this assessment and those criteria, our management
Integrated Framework.
The effectiveness of our internal control over financial reporting as of January 31, 2018 has been audited by Grant Thornton LLP, our
independent registered public accounting firm, as stated in their report which is included in Part II, Item 8 of this Form 10-K.
(C) Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended January 31, 2018, management finalized the process of designing and implementing remediation plans
intended to address the control deficiencies which resulted in the material weaknesses previously disclosed in Item 9A (B), Report of
Management on Internal Control Over Financial Reporting, to our Form 10-K previously filed on April 17, 2017. The following
actions were completed during the fiscal year ended January 31, 2018:
•
•
•
We made improvements to certain internal controls over financial reporting which we believe increased the effectiveness
of our control environment, monitoring processes, and control activities, including their alignment with risks of
misstatement and clarity of precision levels applied.
We have enhanced the design and implemented new internal controls over financial reporting to expand our review of
professional services revenue to include revenue recognized on projects below $25,000.
We have enhanced the design and implemented new internal controls over financial reporting to include a review of all
journal entries at an international subsidiary for completeness and accuracy.
95
•
We have implemented a new internal control over financial reporting whereby the Corporate Controller reviews the
impact of currency translation adjustments on intercompany notes payable on a monthly basis.
Other than as described above, there was no change in our internal control over financial reporting during the fourth fiscal quarter
ended January 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
96
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our directors is hereby incorporated by reference from the information contained under the heading Election
of Directors in our definitive proxy statement related to our Annual Meeting of Stockholders to be held on or about July 11, 2018
which will be filed with the Commission within 120 days after the close of the fiscal year (the Definitive Proxy Statement).
Certain information regarding our executive officers is set forth in Part I, Item 1, Business,
Executive Officers. The other information required by this item concerning directors and
incorporated by reference to the information contained under the headings
Audit Committee, Information Concerning Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance
in the Definitive Proxy Statement.
of this Form 10-K under the heading
executive officers of SeaChange is hereby
Availability of Corporate Governance Documents,
ff
ff
ITEM 11.
EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the information contained under the headings Compensation of
Directors and Compensation Discussion and Analysis in the Definitive Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information required by this item is incorporated by reference to the information contained under the headings Securities Ownership
of Certain Beneficial Owners and Management and Compensation Discussion and Analysis in the Definitive Proxy Statement.
Equity Compensation Plan Information
The following table provides information about the common stock that may be issued upon the exercise of options, warrants and rights
under all of our existing equity compensation plans as of January 31, 2018, including our Amended and Restated 2011 Compensation
and Incentive Plan (the 2011 Plan).
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
Weighted-
average
exercise price of
outstanding
options, warrants
and rights
Number of
securities
remaining
available
for future
issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
Plan Category
Equity compensation plans approved by security
holders (1)
(a)
(b)
(c)
5,164,995 (2)$
3.94
2,527,281 (3)
(1)
(2)
(3)
Consists of the 2011 Plan and the 2015 Employee Stock Purchase Plan (the ESPP).
Includes 1,924,890 shares of restricted stock units, deferred stock units and performance stock units that are not included in the
calculation of the weighted-average exercise price.
As of January 31, 2018, there were 2,527,281 shares remaining available for issuance under the 2011 Plan and 1,107,577 shares available
under the ESPP.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this item is incorporated by reference to the information contained under the heading Determination of
Director Independence and Certain Relationships and Related Transactions in the Definitive Proxy Statement.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item is incorporated by reference to the information contained under the heading Ratification of
Appointment of Independent Registered Public Accounting Firm in the Definitive Proxy Statement.
97
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Index to the Consolidated Financial Statements
PART IV
The following Consolidated Financial Statements of the Registrant are included in Part II, Item 8., Financial Statements and
Supplementary Data, of this Form 10-K:
Report of Independent Registered Public Accounting Firm...........................................................................................................
Consolidated Balance Sheets as of January 31, 2018 and 2017 .....................................................................................................
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended January 31, 2018, 2017 and
2016.................................................................................................................................................................................................
Consolidated Statements of Cash Flows for the years ended January 31, 2018, 2017 and 2016 ...................................................
Consolidated Statements of Stockholders Equity for the years ended January 31, 2018, 2017 and 2016 ....................................
Notes to Consolidated Financial Statements...................................................................................................................................
(a)(2) Index to Financial Statement Schedule
The following Financial Statement Schedule of the Registrant is filed as part of this report:
Schedule IIValuation and Qualifying Accounts..........................................................................................................................
Page
55
57
58
59
60
61
Page
101
Schedules not listed above have been omitted because the information requested to be set forth therein is not applicable or is shown in
the accompanying consolidated financial statements or notes thereto.
(a)(3) Index to Exhibits
See Item 15 (b) below.
(b) Exhibits
The following list of exhibits includes exhibits submitted with this Form 10-K as filed with the SEC and those incorporated by
reference to other filings.
98
Exhibit No. Description
3.1
3.2
3.3
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8*
10.9
10.10
10.11
10.12
10.13
Amended and Restated Certificate of Incorporation of the Company (see Exhibit 3.3 to the Companys Registration
Statement on Form S-1 previously filed on November 4, 1996 with the Commission and incorporated herein by
reference).
Certificate of Amendment, filed May 25, 2000 with the Secretary of State in the State of Delaware, to the Amended and
Restated Certificate of Incorporation of the Company (filed as Exhibit 4.1 to the Companys Quarterly Report on Form
10-Q previously filed on December 15, 2000 with the Commission and incorporated herein by reference).
Amended and Restated By-laws of the Company (filed as Exhibit 3.1 to the Companys Current Report on Form 8-K
previously filed on December 6, 2016 with the Commission and incorporated herein by reference).
Specimen certificate representing the Common Stock (filed as Exhibit 4.1 to the Companys Registration Statement on
Form S-1 previously filed on November 4, 1996 with the Commission and incorporated herein by reference).
Second Amended and Restated 2011 Compensation and Incentive Plan (filed as Appendix A to the Companys Proxy
Statement on Schedule 14A previously filed on May 26, 2017 with the Commission and incorporated herein by
reference).
Form of Restricted Stock Unit Agreement pursuant to the Companys 2011 Compensation and Incentive Plan (filed as
Exhibit 10.1 to the Companys Current Report on Form 8-K previously filed on July 20, 2011 with the Commission and
incorporated here
in by reference).
y
Form of Incentive Stock Option Agreement pursuant to the Companys 2011 Compensation and Incentive Plan (filed as
Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q previously filed December 5, 2014 with the Commission
and incorporated herein by reference).
Form of Deferred Stock Unit Award Grant Notice pursuant to the Companys 2011 Compensation and Incentive Plan
(filed as Exhibit 10.6 to the Companys Quarterly Report on Form 10-Q previously filed December 5, 2014 with the
Commission and incorporated herein by reference).
Form of Non-Qualified Stock Option Agreement for Employees pursuant to the Companys 2011 Compensation and
Incentive Plan (filed as Exhibit 10.7 to the Companys Quarterly Report on Form 10-Q previously filed December 5,
2014 with the Commission and incorporated herein by reference).
Form of Restricted Stock Unit Agreement for Non-Employee Directors pursuant to the Companys 2011 Compensation
and Incentive Plan (filed as Exhibit 10.3 to the Companys Annual Report on Form 10-K previously filed on April 4,
2014 with the Commission and incorporated herein by reference).
Form of Performance Stock Unit Agreement pursuant to the Companys 2011 Compensation and Incentive Plan (filed
as Exhibit 10.1 to the Companys Current Report on Form 8-K filed on January 28, 2016 with the Commission and
incorporated herein by reference).
y
Form of Performance Stock Unit Agreement pursuant to the Companys 2011 Compensation and Incentive Plan.
Amended and Restated 2005 Equity Compensation and Incentive Plan (filed as Appendix A to the Companys Proxy
Statement on Schedule 14A previously filed on May 25, 2007 with the Commission and incorporated herein by
reference).
Form of Restricted Stock Unit Agreement pursuant to the Companys 2005 Equity Compensation and Incentive Plan
(filed as Exhibit 10.1 to the Companys Current Report on Form 8-K previously filed December 14, 2005 with the
Commission and incorporated herein by reference).
Form of Incentive Stock Option Agreement pursuant to the Companys 2005 Equity Compensation and Incentive Plan
(filed as Exhibit 10.3 to the Companys Annual Report on Form 10-K previously filed April 17, 2006 with the
Commission and incorporated herein by reference).
Form of Non-Qualified Stock Option Agreement pursuant to the Companys 2005 Equity Compensation and Incentive
Plan (filed as Exhibit 10.4 to the Companys Annual Report on Form 10-K previously filed April 17, 2006 with the
Commission and incorporated herein by reference).
Form of Indemnification Agreement (filed as Exhibit 10.15 to the Companys Annual Report on Form 10-K previously
filed April 10, 2013 with the Commission and incorporated herein by reference).
10.14
SeaChange International, Inc. 2015 Employee Stock Purchase Plan (filed as Appendix A to the Companys Proxy
99
Exhibit No. Description
Statement on Schedule 14A previously filed on May 22, 2015 with the Commission and incorporated herein by
reference).
Amended and Restated Change-in-Control Severance Agreement, dated as of January 26, 2016, by and between the
Company and Edward Terino (filed as Exhibit 10.3 to the Companys Current Report on Form 8-K previously filed on
January 28, 2016 with the Commission and incorporated herein by reference).
Change-in-Control Severance Agreement, dated as of July 6, 2016, by and between the Company and Peter Faubert
(filed as Exhibit 10.3 to the Companys Current Report on Form 8-K previously filed on July 7, 2016 with the
Commission and incorporated by reference).
y
Change-in-Control Severance Agreement, dated as of January 31, 2017, by and between the Company and Jon Rider
(filed as Exhibit 10.1 to the Companys Current Report on Form 8-K previously filed on February 3, 2017 with the
Commission and incorporated herein by reference).
Amended and Restated Change-in-Control Severance Agreement, dated as of January 26, 2016, by and between the
Company and David McEvoy (filed as Exhibit 10.5 to the Companys Current Report on Form 8-K previously filed on
January 28, 2016 with the Commission and incorporated herein by reference).
Cooperation Agreement, dated as of August 17, 2017, by and among the Company and the persons set forth on the
signature pages thereto (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K previously filed on August
18, 2017 with the Commission and incorporated herein by reference).
List of Subsidiaries of the Registrant.
Consent of Grant Thornton LLP.
Power of Attorney (included on signature page).
Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
10.15
10.16
10.17
10.18
10.19
21.1*
23.1*
24.1
31.1*
31.2*
32.1*
32.2*
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
y
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
* Provided herewith
Exhibits which are incorporated herein by reference can be inspected and copied at the public reference facilities maintained by the
SEC, 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549. Copies of such material can also be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
(c) Financial Statement Schedules
We hereby file as part of this Form 10-K the consolidated financial statements schedule listed in Item 15 (a) (2) above, which is
attached hereto.
100
SEACHANGE INTERNATIONAL, INC.
Schedule II Valuation and Qualifying Accounts
For the Fiscal Years Ended January 31, 2018, 2017 and 2016
Additions
Description
Accounts Receivable Allowance:
Year ended January 31, 2018
Year ended January 31, 2017
Year ended January 31, 2016
Deferred Tax Assets Valuation Allowance:
Year ended January 31, 2018
Year ended January 31, 2017
Year ended January 31, 2016
ITEM 16.
FORM 10-K SUMMARY
None.
Balance at
beginning of
period
Charged to
costs and
expenses
Charged to
other
accounts
(Amounts in thousands)
Deductions
and write-
offs
Balance at
end of
period
$
$
$
$
$
$
876
415
400
58,134
47,368
30,369
$
$
$
$
$
$
79
597
59
$
$
$
(19,829) $
$
10,766
$
16,999
10
$
(61) $
$
$
$
$
(949) $
(75) $
(44) $
16
876
415
$
$
$
38,305
58,134
47,368
101
Pursuant to the requirements of Section 13 or 15 (d) 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.
SIGNATURES
Dated: April 16, 2018
SEACHANGE INTERNATIONAL, INC.
By:
/s/ EDWARD TERINO
Edward Terino
Chief Executive Officer and Director
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Edward Terino and Peter R. Faubert, jointly and severally, his attorney-in-fact, each with the power of substitution, for him in any and
all capacities, to sign any amendments to this Form 10-K and to file same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
Date
April 16, 2018
April 16, 2018
April 16, 2018
April 16, 2018
April 16, 2018
April 16, 2018
April 16, 2018
Signature
Title(s)
/s/ EDWARD TERINO
Edward Terino
/s/ PETER R. FAUBERT
Peter R. Faubert
/s/ MARK BONNEY
Mark Bonney
/s/ MARY PALERMO COTTON
Mary Palermo Cotton
/s/ WILLIAM MARKEY
William Markey
/s/ ANDREW SRIUBAS
Andrew Sriubas
/s/ ED WILSON
Ed Wilson
Chief Executive Officer, Director
(Principal Executive Officer)
Chief Financial Officer, Senior Vice
President and Treasurer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
102
SEACHANGE INTERNATIONAL, INC.
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1
y
Subsidiary Name
ZQ Interactive, Ltd.
SEAC Canada Limited
S.E.A.C. Germany GmbH
SeaChange India Private, Ltd.
S.E.A.C. Ireland Limited
SeaChange Ireland Operations Limited
SeaChange Japan KK
Cambio Maritimo Mexico, S. de R.L de C.V.
SeaChange B.V.
SeaChange NLG B.V.
SeaChange Software Solutions B.V.
SeaChange Interactive Solutions B.V.
SeaChange Philippines Corporation
SeaChange LLC
SeaChange Asia Pacific Pte. Ltd.
SeaChange Telekomünikasyon Hizmetleri Anonim Sirketi
SeaChange International U.K. Ltd.
SeaChange Holdings, Inc.
SeaChange Polska Sp zoo
Subsidiary Jurisdiction
British Virgin Islands
Canada
Germany
India
Ireland
Ireland
Japan
Mexico
Netherlands
Netherlands
Netherlands
Netherlands
Philippines
Russia
Singapore
Turkey
United Kingdom
United States
Poland
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated April 16, 2018, with respect to the consolidated financial statements and internal control over
financial reporting included in the Annual Report of SeaChange International, Inc. on Form 10-K for the year ended January 31, 2018.
We consent to the incorporation by reference of said report in the Registration Statements of SeaChange International, Inc. on Forms
S-3 (File No. 333-56410 and File No. 333-201866) and on Forms S-8 (File Nos. 333-136322, 333-17379, 333-100160, 333-65854,
333-113761, 333-128987, 333-147970, 333-153424, 333-175707, 333-201867, 333-210716 and 333-220912).
Exhibit 23.1
/s/ GRANT THORNTON LLP
Boston, Massachusetts
April 16, 2018
Exhibit 31.1
I, Edward Terino, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of SeaChange International, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a 15(f) and 15d 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
its consolidated subsidiaries, is
our supervision, to ensure that material information relating to the registrant, including
made known to us by others within those entities, particularly during the period in which this report is being prepared;
ff
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting;
and
5.
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
Date: April 16, 2018
By:
/s/ EDWARD TERINO
Edward Terino
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Peter R. Faubert, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of SeaChange International, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a 15(f) and 15d 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
its consolidated subsidiaries, is
our supervision, to ensure that material information relating to the registrant, including
made known to us by others within those entities, particularly during the period in which this report is being prepared;
ff
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting;
and
5.
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
Date: April 16, 2018
By:
/s/ PETER R. FAUBERT
Peter R. Faubert
Chief Financial Officer,
Senior Vice President and Treasurer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the annual report of SeaChange International, Inc. (the Company) on Form 10-K for the year ended
January 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Edward Terino, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
(1)
(2)
The Companys Annual Report on Form 10-K fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
/s/ EDWARD TERINO
Edward Terino
Chief Executive Officer and Director
Dated: April 16, 2018
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the annual report of SeaChange International, Inc. (the Company) on Form 10-K for the year ended
January 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Peter R. Faubert, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
(1)
(2)
The Companys Annual Report on Form 10-K fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
/s/ PETER R. FAUBERT
Peter R. Faubert
Chief Financial Officer, Senior Vice President
and Treasurer
Dated: April 16, 2018
Corporate Information
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
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HEADQUARTERS
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DEVELOPEMENT, SALES AND SUPPORT FACILITIES
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(cid:95) DUNDALK, IRELAND
STOCKHOLDERS INFORMATION
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INVESTOR RELATIONS
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STOCK TRADING INFORMATION(cid:4)
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TRANSFER AGENT AND REGISTRAR
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INDEPENDENT ACCOUNTANTS
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OUTSIDE COUNSEL
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ANNUAL MEETING OF STOCKHOLDERS
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SEACHANGE INTERNATIONAL INC.
CORPORATE HEADQUARTERS
50 Nagog Park, Acton, MA 01720
T +1.978.897.0100(cid:4)
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©2018 SeaChange International, Inc. All rights
reserved. SeaChange is a registered trademark of
SeaChagne International, Inc. All other trademarks
are the property of their respective owners.
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