UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2016September 30, 2017
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number: 001-37706
_____________
CONCURRENT COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 04-2735766 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
4375 River Green Parkway, Suite 100, Duluth, GA 30096
(Address of principal executive offices) (Zip Code)
Telephone: (678) 258-4000
(Registrant’s telephone number, including area code)
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.
Yesþ No¨
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesþ No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer ¨ | Smaller reporting company þ | |
Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yesþ¨ No¨þ
Number of shares of the Registrant's Common Stock, par value $0.01 per share, outstanding as of February 6,November 7, 2017 was 9,835,686.9,893,228.
Concurrent Computer Corporation
Form 10-Q
For the Three Months Ended December 31, 2016September 30, 2017
Table of Contents
1 |
PartPart I -Financial Information
Item 1. Condensed Consolidated Financial Statements
Item 1. | Condensed Consolidated Financial Statements |
Concurrent Computer Corporation
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
December 31, 2016 | June 30, 2016 | |||||||||||||||
(Unaudited) | September 30, 2017 | June 30, 2017 | ||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 18,804 | $ | 20,268 | $ | 31,624 | $ | 35,893 | ||||||||
Accounts receivable, net of allowance for doubtful accounts of $54 and $55 at December 31, 2016 and June 30, 2016, respectively | 7,896 | 15,104 | ||||||||||||||
Short-term investments | 6,284 | 6,870 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $10 at both September 30, 2017 and June 30, 2017 | 6,940 | 6,930 | ||||||||||||||
Receivable from sale of Real-Time business held in escrow | 2,000 | 2,000 | ||||||||||||||
Inventories | 2,001 | 3,495 | 1,627 | 1,865 | ||||||||||||
Prepaid expenses and other current assets | 1,220 | 1,061 | 1,752 | 1,366 | ||||||||||||
Total current assets | 29,921 | 39,928 | 50,227 | 54,924 | ||||||||||||
Property and equipment, net | 2,763 | 3,061 | 1,623 | 1,726 | ||||||||||||
Deferred income taxes, net | 820 | 924 | 16 | 15 | ||||||||||||
Other long-term assets, net | 1,281 | 1,323 | 1,266 | 1,142 | ||||||||||||
Total assets | $ | 34,785 | $ | 45,236 | $ | 53,132 | $ | 57,807 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable and accrued expenses | $ | 5,908 | $ | 9,191 | $ | 5,808 | $ | 8,164 | ||||||||
Deferred revenue | 6,605 | 8,126 | 1,138 | 1,454 | ||||||||||||
Total current liabilities | 12,513 | 17,317 | 6,946 | 9,618 | ||||||||||||
Long-term liabilities: | ||||||||||||||||
Deferred revenue | 708 | 1,168 | 53 | 66 | ||||||||||||
Pension liability | 3,558 | 3,720 | 3,729 | 3,582 | ||||||||||||
Other long-term liabilities | 2,001 | 2,033 | 941 | 1,072 | ||||||||||||
Total liabilities | 18,780 | 24,238 | 11,669 | 14,338 | ||||||||||||
Commitments and contingencies (Note 17) | ||||||||||||||||
Stockholders' equity: | ||||||||||||||||
Shares of series preferred stock, par value $0.01; 1,250,000 authorized; none issued | - | - | ||||||||||||||
Shares of series preferred stock, par value $.01; 1,250,000 authorized; none issued | - | - | ||||||||||||||
Shares of class A preferred stock, par value $100; 20,000 authorized; none issued | - | - | - | - | ||||||||||||
Shares of common stock, par value $0.01; 14,000,000 authorized; 9,296,704 and 9,218,093 issued and outstanding at December 31, 2016 and June 30, 2016, respectively | 93 | 92 | ||||||||||||||
Shares of common stock, par value $.01; 14,000,000 authorized; 9,442,467 and 9,410,878 issued and outstanding at September 30, 2017 and June 30, 2017, respectively | 94 | 94 | ||||||||||||||
Capital in excess of par value | 211,521 | 210,971 | 212,239 | 212,018 | ||||||||||||
Accumulated deficit | (194,625 | ) | (189,265 | ) | (167,689 | ) | (165,498 | ) | ||||||||
Treasury stock, at cost; 37,788 shares | (255 | ) | (255 | ) | (255 | ) | (255 | ) | ||||||||
Accumulated other comprehensive income (loss) | (729 | ) | (545 | ) | (2,926 | ) | (2,890 | ) | ||||||||
Total stockholders' equity | 16,005 | 20,998 | 41,463 | 43,469 | ||||||||||||
Total liabilities and stockholders' equity | $ | 34,785 | $ | 45,236 | $ | 53,132 | $ | 57,807 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
2 |
Concurrent Computer Corporation
Condensed Consolidated STATEMENTS OF OPERATIONS(Unaudited (Unaudited)
(Amounts in thousands, except share and per share data)
Three Months Ended December 31, | Six Months Ended December 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Product | $ | 10,246 | $ | 9,974 | $ | 18,105 | $ | 18,468 | $ | 5,297 | $ | 2,440 | ||||||||||||
Service | 5,301 | 4,925 | 10,558 | 9,782 | 2,573 | 2,679 | ||||||||||||||||||
Total revenues | 15,547 | 14,899 | 28,663 | 28,250 | 7,870 | 5,119 | ||||||||||||||||||
Cost of sales: | ||||||||||||||||||||||||
Product | 4,079 | 3,541 | 7,869 | 6,994 | 2,217 | 1,354 | ||||||||||||||||||
Service | 2,019 | 1,982 | 4,162 | 4,023 | 1,003 | 1,299 | ||||||||||||||||||
Total cost of sales | 6,098 | 5,523 | 12,031 | 11,017 | 3,220 | 2,653 | ||||||||||||||||||
Gross margin | 9,449 | 9,376 | 16,632 | 17,233 | 4,650 | 2,466 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Sales and marketing | 4,368 | 3,797 | 8,843 | 7,191 | 2,158 | 3,028 | ||||||||||||||||||
Research and development | 2,816 | 3,762 | 6,123 | 7,599 | 1,678 | 2,250 | ||||||||||||||||||
General and administrative | 2,313 | 2,175 | 4,657 | 3,953 | 1,929 | 2,168 | ||||||||||||||||||
Gain on sale of product line, net | - | - | - | (4,116 | ) | |||||||||||||||||||
Total operating expenses | 9,497 | 9,734 | 19,623 | 14,627 | 5,765 | 7,446 | ||||||||||||||||||
Operating income (loss) | (48 | ) | (358 | ) | (2,991 | ) | 2,606 | |||||||||||||||||
Operating loss | (1,115 | ) | (4,980 | ) | ||||||||||||||||||||
Interest income | 13 | 6 | 40 | 9 | 70 | 14 | ||||||||||||||||||
Interest expense | (1 | ) | - | (4 | ) | - | ||||||||||||||||||
Other income, net | 51 | 24 | 170 | 147 | ||||||||||||||||||||
Income (loss) before income taxes | 15 | (328 | ) | (2,785 | ) | 2,762 | ||||||||||||||||||
Other income (expense), net | (87 | ) | 81 | |||||||||||||||||||||
Loss from continuing operations before income taxes | (1,132 | ) | (4,885 | ) | ||||||||||||||||||||
Provision (benefit) for income taxes | 103 | (45 | ) | 231 | (162 | ) | ||||||||||||||||||
Benefit from income taxes | (122 | ) | (31 | ) | ||||||||||||||||||||
Loss from continuing operations | (1,010 | ) | (4,854 | ) | ||||||||||||||||||||
Income from discontinued operations, net of income taxes | - | 1,926 | ||||||||||||||||||||||
Net loss | $ | (1,010 | ) | $ | (2,928 | ) | ||||||||||||||||||
Basic and diluted earnings (loss) per share: | ||||||||||||||||||||||||
Continuing operations | $ | (0.11 | ) | $ | (0.53 | ) | ||||||||||||||||||
Discontinued operations | - | 0.21 | ||||||||||||||||||||||
Net income (loss) | $ | (88 | ) | $ | (283 | ) | $ | (3,016 | ) | $ | 2,924 | $ | (0.11 | ) | $ | (0.32 | ) | |||||||
Net income (loss) per share | ||||||||||||||||||||||||
Basic | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.33 | ) | $ | 0.32 | |||||||||||||
Diluted | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.33 | ) | $ | 0.32 | |||||||||||||
Weighted average shares outstanding - basic | 9,244,590 | 9,161,407 | 9,216,967 | 9,137,149 | ||||||||||||||||||||
Weighted average shares outstanding - diluted | 9,244,590 | 9,161,407 | 9,216,967 | 9,201,099 | ||||||||||||||||||||
Weighted average shares outstanding - basic and diluted | 9,392,197 | 9,189,343 | ||||||||||||||||||||||
Cash dividends declared per common share | $ | 0.12 | $ | 0.12 | $ | 0.24 | $ | 0.24 | $ | 0.12 | $ | 0.12 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
3 |
Concurrent Computer Corporation
Condensed Consolidated STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(Unaudited)
(Amounts in thousands)
Three Months Ended December 31, | Six Months Ended December 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||
�� | ||||||||||||||||||||||||
Net income (loss) | $ | (88 | ) | $ | (283 | ) | $ | (3,016 | ) | $ | 2,924 | |||||||||||||
Net loss | $ | (1,010 | ) | $ | (2,928 | ) | ||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Foreign currency translation adjustment | (216 | ) | (29 | ) | (291 | ) | (123 | ) | 24 | (75 | ) | |||||||||||||
Pension and post-retirement benefits, net of tax | 110 | 48 | 107 | 45 | (60 | ) | (3 | ) | ||||||||||||||||
Other comprehensive income (loss) | (106 | ) | 19 | (184 | ) | (78 | ) | |||||||||||||||||
Other comprehensive loss | (36 | ) | (78 | ) | ||||||||||||||||||||
Comprehensive income (loss) | $ | (194 | ) | $ | (264 | ) | $ | (3,200 | ) | $ | 2,846 | $ | (1,046 | ) | $ | (3,006 | ) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
4 |
CONCURRENT COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(Unaudited)
For the sixthree month period ended December 31, 2016September 30, 2017
(Amounts in thousands, except share data)
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Capital In | Other | Common Stock | Capital In | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Par | Excess Of | Accumulated | Comprehensive | Treasury Stock | Par | Excess Of | Accumulated | Comprehensive | Treasury Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Value | Par Value | Deficit | Income (Loss) | Shares | Cost | Total | Shares | Value | Par Value | Deficit | Income (Loss) | Shares | Cost | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2016 | 9,218,093 | $ | 92 | $ | 210,971 | $ | (189,265 | ) | $ | (545 | ) | (37,788 | ) | $ | (255 | ) | $ | 20,998 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2017 | 9,410,878 | $ | 94 | $ | 212,018 | $ | (165,498 | ) | $ | (2,890 | ) | (37,788 | ) | $ | (255 | ) | $ | 43,469 | ||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | (2,369 | ) | (2,369 | ) | (1,187 | ) | (1,187 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends forfeited with restricted stock forfeitures | 25 | 25 | 6 | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 551 | 551 | 221 | 221 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lapse of restriction on restricted stock | 78,611 | 1 | (1 | ) | - | 31,589 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of taxes: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (3,016 | ) | (3,016 | ) | (1,010 | ) | (1,010 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | (291 | ) | (291 | ) | 24 | 24 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pension plan | 107 | 107 | (60 | ) | (60 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income (loss) | (3,200 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2016 | 9,296,704 | $ | 93 | $ | 211,521 | $ | (194,625 | ) | $ | (729 | ) | (37,788 | ) | $ | (255 | ) | $ | 16,005 | ||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive loss | (1,046 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2017 | 9,442,467 | $ | 94 | $ | 212,239 | $ | (167,689 | ) | $ | (2,926 | ) | (37,788 | ) | $ | (255 | ) | $ | 41,463 |
The accompanying notes are an integral part of the condensed consolidated financial statements
5 |
Concurrent Computer Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
(Amounts in thousands)
Six Months Ended December 31, | Three Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Cash flows provided by (used in) operating activities: | ||||||||||||||||
Net income (loss) | $ | (3,016 | ) | $ | 2,924 | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
Net loss | $ | (1,010 | ) | $ | (2,928 | ) | ||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Depreciation and amortization | 920 | 861 | 329 | 458 | ||||||||||||
Share-based compensation | 551 | 382 | 221 | 242 | ||||||||||||
Deferred income taxes, net | - | (422 | ) | |||||||||||||
Provision for excess and obsolete inventories | 151 | 87 | ||||||||||||||
Provision for bad debts | - | 30 | ||||||||||||||
Foreign currency exchange gains | (118 | ) | (135 | ) | ||||||||||||
Gain on sale of product line, net | - | (4,116 | ) | |||||||||||||
Provision for (recovery of) excess and obsolete inventories | (23 | ) | 110 | |||||||||||||
Other, net | (22 | ) | - | |||||||||||||
Foreign currency exchange gains (losses) | 110 | (104 | ) | |||||||||||||
Decrease (increase) in assets: | ||||||||||||||||
Accounts receivable | 7,094 | (1,838 | ) | (5 | ) | 4,676 | ||||||||||
Inventories | 1,259 | 245 | 254 | 768 | ||||||||||||
Prepaid expenses and other current assets | (179 | ) | (749 | ) | (385 | ) | (354 | ) | ||||||||
Other long-term assets | (176 | ) | (78 | ) | (115 | ) | (105 | ) | ||||||||
Increase (decrease) in liabilities: | ||||||||||||||||
Accounts payable and accrued expenses | (3,192 | ) | 44 | (2,456 | ) | (1,973 | ) | |||||||||
Deferred revenue | (1,828 | ) | (930 | ) | (333 | ) | (415 | ) | ||||||||
Pension and other long-term liabilities | 98 | 100 | (70 | ) | 55 | |||||||||||
Net cash provided by (used in) operating activities | 1,564 | (3,595 | ) | (3,505 | ) | 430 | ||||||||||
Cash flows provided by (used in) investing activities: | ||||||||||||||||
Additions to property and equipment | (537 | ) | (1,011 | ) | (222 | ) | (347 | ) | ||||||||
Purchase of domain name | - | (35 | ) | |||||||||||||
Proceeds from sale of product line | - | 2,750 | ||||||||||||||
Proceeds from sale or maturity of short-term investments | 4,783 | - | ||||||||||||||
Purchases of short-term investments | (4,175 | ) | - | |||||||||||||
Net cash provided by (used in) investing activities | (537 | ) | 1,704 | 386 | (347 | ) | ||||||||||
Cash flows used in financing activities: | ||||||||||||||||
Dividends paid | (2,281 | ) | (2,264 | ) | (1,148 | ) | (1,142 | ) | ||||||||
Net cash used in financing activities | (2,281 | ) | (2,264 | ) | (1,148 | ) | (1,142 | ) | ||||||||
Effect of exchange rates on cash and cash equivalents | (210 | ) | (8 | ) | (2 | ) | 60 | |||||||||
Decrease in cash and cash equivalents | (1,464 | ) | (4,163 | ) | (4,269 | ) | (999 | ) | ||||||||
Cash and cash equivalents - beginning of period | 20,268 | 25,451 | ||||||||||||||
Cash and cash equivalents - end of period | $ | 18,804 | $ | 21,288 | ||||||||||||
Cash and cash equivalents - beginning of year | 35,893 | 20,268 | ||||||||||||||
Cash and cash equivalents - end of year | $ | 31,624 | $ | 19,269 | ||||||||||||
Cash paid during the period for: | ||||||||||||||||
Interest | $ | 1 | $ | 1 | $ | - | $ | 1 | ||||||||
Income taxes (net of refunds) | $ | 518 | $ | 300 | $ | 615 | $ | 500 |
The accompanying notes are an integral part of the condensed consolidated financial statements
6 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
1. | Overview of Business and Basis of Presentation |
References herein to “Concurrent,” the “Company,” “we,” “our,” or “us” refer to Concurrent Computer Corporation and its subsidiaries unless the context specifically indicates otherwise.
Concurrent is a global software and solutions company that develops advanced applications focused on storing, protecting, transforming, and delivering high value media assets. We provide software, hardwareserve industries and professional services forcustomers that demand uncompromising performance, reliability and flexibility to gain a competitive edge, drive meaningful growth and confidently deliver best-in-class solutions that enrich the content delivery market, storage solutions market andlives of millions of people around the high-performance, real-time market. Effective July 1, 2016, we changed the way our chief operating decision maker views our operating results by providing more discrete segment financial information.world every day. As a result of the sale of our reportable operating segments now consist ofReal-Time solutions business (“Real-Time business”) in May 2017, as discussed below, we have one reporting segment for financial reporting purposes, Content Delivery and Real-Time.Delivery.
Our content delivery solutions consist of software, hardware and services for intelligently streaming video content to a variety of consumer devices and storing and managing content in the network. Our streaming video and storage products and services are deployed by service providers to support consumer-facing video servicesapplications including live broadcast video, video-on-demand and time-shifted video applicationsservices such as cloud-based digital video recording. In fiscal year 2016, we introduced Aquari™, Storage, our new unified scale-out storage solutions product to our content delivery customers.that is ideally suited for a wide range of enterprise IT and video applications that require advanced performance, very large storage capacities, and a high degree of reliability.
Our real-time solutions consistIn May 2017, we sold our Real-Time business consisting of real-time Linux® operating system versions, development and performance optimization tools, simulation software and other system software combined, in many cases, with computer platforms and services. These real-time products arewere sold to a wide variety of companies seeking high performance, real-time computer solutions in the defense, aerospace, financial and automotive markets around the world.
Results of our real-time business are retrospectively reflected as discontinued operations in our consolidated financial statements for all periods presented. Prior year information has been adjusted to conform with the current year presentation. Unless otherwise stated, the information disclosed in the footnotes accompanying the consolidated financial statements refer to continuing operations. See Note 12 – Discontinued Operations for more information regarding results from discontinued operations.
The accompanying unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles of the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments of a normal recurring nature which were considered necessary for fair presentation have been included. The year-end condensed consolidated balance sheet data as of June 30, 20162017 was derived from our audited consolidated financial statements but dodoes not include all disclosures required by U.S. GAAP. The results of operations for the three and six months ended December 31, 2016September 30, 2017 are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 20162017 filed with the SEC on August 30, 2016.September 20, 2017.
On October 13, 2017, we entered into an agreement to sell the assets of the Company used in our content delivery business and assign certain liabilities associated therewith. See Note 18 – Subsequent Events for more details.
There have been no changes to our Significant Accounting Policies as disclosed in Note 2 of the consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2016. The results reported2017.
7 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expectedthousands, except for the entire year.share and per share data)
Smaller Reporting Company
We meet the SEC’s definition of a “Smaller Reporting Company,” and therefore qualify for the SEC’s reduced disclosure requirements for smaller reporting companies.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
2. | Recent Accounting Guidance |
Recently Adopted Accounting Guidance
In AprilJuly 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-05,2015-11,Intangibles – GoodwillInventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). This amendment requires that an entity measure its inventory at the “lower of cost and Other – Internal-Use Software (Subtopic 350-40)(“net realizable value.” Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Current literature requires measurement of inventory at “lower of cost or market.” Market could be replacement cost, net realizable value, or net realizable value less an approximate normal profit margin. ASU 2015-05”). The pronouncement was issued to provide guidance concerning accounting for fees in a cloud computing arrangement. The pronouncement2015-11 was effective for us on July 1, 2016,2017, and we adopted the guidance prospectively. The adoption of ASU 2015-052015-11 did not have a significantmaterial impact on our consolidated financial statements.statements or disclosures.
In March 2016, the FASB issued ASU No. 2016-09,Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 provides for simplification of certain aspects of employee share-based payment accounting including income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 was effective was effective for us on July 1, 2017, and we adopted the guidance prospectively. The adoption of ASU 2016-09 did not have a material impact on our consolidated financial statements or disclosures.
Recent Accounting Guidance Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), a new standard related to revenue recognition as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards, the FASB issued a new standard related to revenue recognition.Standards. Under ASU 2014-09, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB issued ASU No. 2015-14,Revenue from Contracts with Customers (Topic 606):Deferral of the EffectiveDate and deferred the original effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 will be effective for us beginning July 1, 2018. Early adoption is not permitted. Additionally, in March 2016, the FASB issued ASU No. 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”); in April 2016, the FASB issued ASU No. 2016-10,Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); and in May 2016, the FASB issued ASU No. 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), all of which provide additional clarification on certain topics addressed in ASU 2014-09. ASU 2016-08, ASU 2016-10 and ASU 2016-12 follow the same implementation guidelines as ASU 2014-09 and ASU 2015-14. We anticipate that ASU 2014-09 and its related standards may have a material impact, and we are currently evaluating the impact these standards will have on our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15,Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. ASU 2014-15 requires management to perform interim period and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We do not expect ASU 2014-15 to have a material impact on our consolidated financial statements or disclosures.
In July 2015, the FASB issued ASU No. 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). This amendment requires that an entity measure its inventory at the “lower of cost and net realizable value.” Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Current literature requires measurement of inventory at “lower of cost or market.” Market could be replacement cost, net realizable value, or net realizable value less an approximate normal profit margin. ASU 2015-11 applies to all entities and is effective for annual periods beginning after December 15, 2016, and interim periods thereafter, with early adoption permitted. We do not expect ASU 2015-11 to have a material impact on our consolidated financial statements or disclosures.
8 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires a lessee to recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.
In MarchAugust 2016, the FASB issued ASU No. 2016-09,Compensation – Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 provides for simplification of certain aspects of employee share-based payment accounting including income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted, including adoption in an interim period. We do not expect ASU 2016-09 to have a material impact on our consolidated financial statements or disclosures.
In August 2016, the FASB issued ASU 2016-15,Clarification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The amendments in this update should be applied retrospectively to all periods presented, unless deemed impracticable, in which case, prospective application is permitted. We do not expect ASU 2016-15 to have a material impact on our consolidated financial statements or disclosures.
In January 2017, the FASB issued ASU No. 2017-01 -Business Combinations (Topic 805) (“ASU 2017-01”), which clarifies the definition of a business. For accounting and financial reporting purposes, businesses are generally comprised of three elements; inputs, processes, and outputs. Integrated sets of assets and activities capable of providing these three elements may not always be considered a business, and the lack of one of the three elements does not always disqualify the set from being a business. The issuance of ASU 2017-01 provides a clarifying screen to determine when a set of assets and activities is not a business. Primarily, the screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. The amendments contained in ASU 2017-01 are effective for annual periods beginning after December 15, 2017 and may be early adopted for certain transactions that have occurred before the effective date, but only when the underlying transaction has not been reported in the financial statements that have been issued or made available for issuance. We do not expect ASU 2017-01 to have a material impact on our consolidated financial statements or disclosures.
In March 2017, the FASB issued ASU 2017-07,Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost(“ASU 2017-07”) which requires the service cost component of the net periodic benefit cost to be presented in the same income statement line items as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization. Other components will be presented separately from the line items that include the service cost and outside of any subtotal of operating income, if one is presented. ASU 2017-07 is effective annual periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The guidance on the presentation of the components of net periodic benefit cost requires retrospective application. The guidance limiting the capitalization of net periodic benefit cost requires prospective application. We do not expect ASU 2017-07 to have a material impact on our consolidated financial statements or disclosures.
In May 2017, the FASB issued ASU 2017-09,Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), to provide clarity and reduce both diversity in practice and cost complexity when applying the guidance in Topic 718 to a change to the terms and conditions of a stock-based payment award. ASU 2017-09 also provides guidance about the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, and for interim periods therein. Early adoption is permitted. We do not expect the adoption of ASU 2017-09 to have a material impact on our consolidated financial statements or disclosures.
9 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
3. | Basic and Diluted Net Income (Loss) per Share |
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during each year. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares including dilutive common share equivalents. Under the treasury stock method, incremental shares representing the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued are included in the computation. CommonDue to the loss from continuing operations for both periods presented, common share equivalents of 267,481218,719 and 187,332342,361 for the three months ended December 31,September 30, 2017 and 2016, and 2015, respectively, and 265,845 and 123,733 for the six months ended December 31, 2016 and 2015, respectively, were excluded from the calculation as their effect was anti-dilutive.
The following table presents a reconciliation of the numerators and denominators of basic and diluted net income per share for the periods indicated:
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Basic and diluted EPS calculation: | ||||||||||||||||
Net income (loss) | $ | (88 | ) | $ | (283 | ) | $ | (3,016 | ) | $ | 2,924 | |||||
Basic weighted average number of shares outstanding | 9,244,590 | 9,161,407 | 9,216,967 | 9,137,149 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Employee stock options | - | - | - | - | ||||||||||||
Restricted shares | - | - | - | 63,950 | ||||||||||||
Diluted weighted average number of shares outstanding | 9,244,590 | 9,161,407 | 9,216,967 | 9,201,099 | ||||||||||||
Basic EPS | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.33 | ) | $ | 0.32 | |||||
Diluted EPS | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.33 | ) | $ | 0.32 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Loss from continuing operations | $ | (1,010 | ) | $ | (4,854 | ) | ||
Income from discontinued operations, net of income taxes | - | 1,926 | ||||||
Net income (loss) | $ | (1,010 | ) | $ | (2,928 | ) | ||
Basic and diluted EPS: | ||||||||
Basic and diluted weighted average shares outstanding | 9,392,197 | 9,189,343 | ||||||
Basic and diluted earnings (loss) per share: | ||||||||
Continuing operations | $ | (0.11 | ) | $ | (0.53 | ) | ||
Discontinued operations | - | 0.21 | ||||||
Net income (loss) | $ | (0.11 | ) | $ | (0.32 | ) |
4. | Fair Value Measurements |
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, we consider the most advantageous market in which it would transact and assumptions that market participants would use when pricing the asset or liability.
The Accounting Standards Codification requires certain disclosures around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
· | Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities; |
· | Level 2 | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and |
· | Level 3 | Assets or liabilities for which fair value is based on valuation models with significant unobservable pricing inputs and which result in the use of management estimates. |
We have money market funds that are highly liquid and have a maturity of three months or less, and as such, are considered cash equivalents and fall within Level 1 of the fair value hierarchy. We have no financial assets that are measured on a recurring basis that fall within Level 2 or Level 3 of the fair value hierarchy.
Our financial assets that are measured at fair value on a recurring basis as of December 31, 2016 are as follows:
Total Fair Value | Quoted Prices in Active Markets (Level 1) | Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | |||||||||||||
Cash | $ | 8,732 | $ | 8,732 | $ | - | $ | - | ||||||||
Money market funds | 10,072 | 10,072 | - | - | ||||||||||||
Cash and cash equivalents | $ | 18,804 | $ | 18,804 | $ | - | $ | - |
Our financial assets that are measured at fair value on a recurring basis as of June 30, 2016 are as follows:
Total Fair Value | Quoted Prices in Active Markets (Level 1) | Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | |||||||||||||
Cash | $ | 10,213 | $ | 10,213 | $ | - | $ | - | ||||||||
Money market funds | 10,055 | 10,055 | - | - | ||||||||||||
Cash and cash equivalents | $ | 20,268 | $ | 20,268 | $ | - | $ | - |
10 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
ComponentsOur investment portfolio consists of Provision (Benefit) for Income Taxesmoney market funds, U.S. Treasury bills, repurchase agreements and commercial paper. Our investment portfolio has an average maturity of three months or less and no investments within the portfolio have an original maturity of one year or more. All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. All cash equivalents are carried at cost less any unamortized premium or discount, which approximates fair value. All investments with original maturities of more than three months are classified as short-term investments. 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 income or loss. Interest on securities is recorded in interest income. Any realized gains or losses would be shown in the accompanying consolidated statements of operations in other income or expense. We provide fair value measurements disclosures of our available-for-sale securities in accordance with one of the three levels of fair value measurement. We have no financial assets that are measured on a recurring basis that fall within Level 3 of the fair value hierarchy.
The domestic and foreign componentsOur financial assets measured at fair value on a recurring basis as of income (loss) before the provision (benefit) for income taxesSeptember 30, 2017 are as follows:
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
United States | $ | (17 | ) | $ | (431 | ) | $ | (3,331 | ) | $ | 2,323 | |||||
Foreign | 32 | 103 | 546 | 439 | ||||||||||||
Income (loss) before income taxes | $ | 15 | $ | (328 | ) | $ | (2,785 | ) | $ | 2,762 |
Total Fair Value | Quoted Prices in Active Markets (Level 1) | Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | |||||||||||||
Cash | $ | 5,700 | $ | 5,700 | $ | - | $ | - | ||||||||
Money market funds | 17,124 | 17,124 | - | - | ||||||||||||
Repurchase agreement(1) | 7,500 | - | 7,500 | - | ||||||||||||
Commercial paper | 700 | - | 700 | - | ||||||||||||
U.S. Treasury bills | 600 | - | 600 | - | ||||||||||||
Cash and cash equivalents | 31,624 | 22,824 | 8,800 | - | ||||||||||||
Commercial paper | 5,684 | - | 5,684 | - | ||||||||||||
U.S. Treasury bills | 600 | - | 600 | - | ||||||||||||
Short-term investments | 6,284 | - | 6,284 | - | ||||||||||||
$ | 37,908 | $ | 22,824 | $ | 15,084 | $ | - |
(1) | Collateralized at 102% of principal by U.S. Treasury securities, federal agency and/or agency mortgage-backed securities |
We recorded income tax expense for our domestic and foreign subsidiariesOur financial assets measured at fair value on a recurring basis as of $103 and an income tax benefit of $45 during the three months ended December 31, 2016 and 2015, respectively, and an income tax expense of $231 and an income tax benefit of $162 during the six months ended December 31, 2016 and 2015, respectively. The components of the provision (benefit) for income taxesJune 30, 2017 are as follows:
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
United States | $ | 8 | $ | (159 | ) | $ | 16 | $ | (410 | ) | ||||||
Foreign | 95 | 114 | 215 | 248 | ||||||||||||
Provision (benefit) for income taxes | $ | 103 | $ | (45 | ) | $ | 231 | $ | (162 | ) |
For the three and six months ended December 31, 2016, the domestic tax expense is higher than the prior year due to the full valuation allowance that is now being applied to any tax benefit generated from operating losses. The domestic expense is primarily attributable to interest and penalties on uncertain tax positions and minimum state taxes in a number of jurisdictions for the three and six months ended December 31, 2016. The foreign tax expense is lower than the prior year primarily due to a reduction in the statutory tax rate in Japan for the three and six months ended December 31, 2016, compared to the same periods from the prior year.
Net Operating Losses
As of June 30, 2016, we had U.S. federal net operating loss carryforwards (“NOLs”) of approximately $89,937 for income tax purposes, of which none expire in fiscal year 2017, and the remainder expire at various dates through fiscal year 2035. We recently completed an evaluation of the potential effect of Section 382 of the Internal Revenue Code (the “Code”) on our ability to utilize these net operating losses. The study concluded that we have not had an ownership change for the period from July 22, 1993 to June 30, 2016. If we experience an ownership change as defined in Section 382 of the Code, our ability to use these NOLs will be substantially limited, which could therefore significantly impair the value of that asset. On March 1, 2016, we adopted a Tax Asset Preservation Plan (“TAPP”) in order to protect the value of our NOLs. At our 2016 Annual Meeting held on October 26, 2016, our shareholders adopted a formal amendment to our certificate of incorporation with terms substantially similar to the TAPP. The TAPP terminated in accordance with its terms on November 3, 2016 concurrent with the effectiveness of the amendment to our certificate of incorporation.
As of June 30, 2016, we had state NOLs of $51,346 and foreign NOLs of $28,208. The state NOLs expire between fiscal year 2017 and fiscal year 2035. The foreign NOLs expire according to the rules of each country. Currently, none of the jurisdictions in which the Company has foreign NOLs are subject to expiration due to indefinite carryforward periods.
Total Fair Value | Quoted Prices in Active Markets (Level 1) | Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | |||||||||||||
Cash | $ | 5,646 | $ | 5,646 | $ | - | $ | - | ||||||||
Money market funds | 26,051 | 26,051 | - | - | ||||||||||||
Commercial paper | 4,196 | - | 4,196 | - | ||||||||||||
Cash and cash equivalents | 35,893 | 31,697 | 4,196 | - | ||||||||||||
Commercial paper | 6,870 | - | 6,870 | - | ||||||||||||
Short-term investments | 6,870 | - | 6,870 | - | ||||||||||||
$ | 42,763 | $ | 31,697 | $ | 11,066 | $ | - |
11 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
The following is a summary of available-for-sale securities as of September 30, 2017:
Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||
Commercial paper | $ | 5,684 | $ | - | $ | - | $ | 5,684 | ||||||||
U.S. Treasury bills | 600 | - | - | 600 | ||||||||||||
Total marketable securities | $ | 6,284 | $ | - | $ | - | $ | 6,284 |
5. | Income Taxes |
Valuation AllowanceComponents of Provision (Benefit) for Income Taxes
RealizationThe domestic and foreign components of our deferred tax assets is dependent primarily onincome (loss) before the generation of future taxable income. In reviewing the needprovision (benefit) for a valuation allowance, we consider our historical and future projected operations along with other positive and negative evidence in assessing if sufficient future taxable income will be generated to use the existing deferred tax assets. The following summarizes our conclusions on the need for a valuation allowance in each jurisdictiontaxes are as of December 31, 2016:follows:
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
United States | $ | (960 | ) | $ | (5,150 | ) | ||
Foreign | (172 | ) | 265 | |||||
Income (loss) before income taxes | $ | (1,132 | ) | $ | (4,885 | ) |
U.S. – As
We recorded an income tax benefit of June$122 and $31 during the three months ended September 30, 2017 and 2016, we believedrespectively. The components of the weight of negative evidence was greaterprovision (benefit) for income taxes are as follows:
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
United States | $ | 5 | $ | 10 | ||||
Foreign | (127 | ) | (41 | ) | ||||
Provision (benefit) for income taxes | $ | (122 | ) | $ | (31 | ) |
For the three months ended September 30, 2017, the domestic tax expense is lower than the existing positive evidence and concluded that it was more-likely-than-not that we would be unableprior year due to realize our U.S. net deferred tax assets. As a result, a full valuation allowance was established on our U.S. net deferred tax assets which continue to remain in place as of December 31, 2016. For future periods in which we remain in a full valuation allowance position, we would expect our U.S. tax provision expense to be limited to the alternative minimum tax (if applicable) for federal tax purposes, which approximates 2% of earnings before income taxes,lower state taxes in various jurisdictions, and interest and penalties on our uncertain tax positions.positions for the three months ended September 30, 2017, as compared to the same period from the prior year. The international tax benefit is higher as compared to the prior year, primarily due to lower pre-tax income in both Japan and the U.K. for the three months ended September 30, 2017, as compared to the same period from the prior year.
U.K. - During our fiscal year 2014, a change in U.K. tax law relative to treatment of research and development expenses allowed us to release $214 of valuation allowances against deferred tax assets that we believe are now realizable as a result of the current period tax law change. We believe that in light of this law change, we will now generate sufficient taxable income to fully utilize our net deferred tax assets in the U.K.
Japan - Our subsidiary in Japan has a long history of profitable operations, and we continue to project profitability in Japan for the foreseeable future. Therefore, we continue to believe that we will fully realize the net deferred tax assets in Japan, and no valuation allowance is needed.
Other Foreign Jurisdictions - We also evaluated the need for a continued full valuation allowance against our foreign deferred tax assets in other jurisdictions. We concluded that a full valuation allowance against our deferred tax assets for other foreign jurisdictions was warranted due to, among other reasons, (i) the realized cumulative accounting losses, (ii) our long history of taxable losses and (iii) our uncertainty with respect to generating future taxable income in the near term given our recently completed projections and other inherent uncertainties in our business.
We are beginning to show greater profitability in our German operations. While we continue to have cumulative losses over a 12-quarter period, it is possible that we could become cumulatively profitable over a 12-quarter period in the next 12 to 24 months should profitable operations continue. We will continue to monitor results in Germany to determine if a change in our valuation allowance conclusion is needed.
Each quarter, we assess the total weight of positive and negative evidence and evaluate whether release of all or any portion of the valuation allowance is appropriate. Should we come to the conclusion that a release of our valuation allowances is required, or that additional valuation allowance is required, there could be a significant increase or decrease in net income and earnings per share in the period of release, or the additional valuation allowance, due to the impact on the tax rate.
Unrecognized Tax BenefitsNet Operating Losses
As of June 30, 2017, we had U.S. federal net operating loss carryforwards (“NOLs”) of approximately $71,953 for income tax purposes, of which none expire in fiscal year 2018, and the remainder expire at various dates through fiscal year 2036. We recently completed an evaluation of the potential effect of Section 382 of the Internal Revenue Code (the “IRC”) on our ability to utilize these net operating losses. The Company has evaluated its unrecognized tax benefits and determinedstudy concluded that there haswe have not been a materialhad an ownership change in the amount of such benefits for the three or six months ended December 31, 2016.period from July 22, 1993 to June 30, 2017. If we experience an ownership change as defined in Section 382 of the IRC, our ability to use these NOLs will be substantially limited, which could therefore significantly impair the value of that asset. See section below entitled “Tax Asset Preservation Plan” for details regarding steps we have taken to protect the value of our NOLs.
12 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
We also have state NOLs that expire according to the rules of each state and expiration will occur between fiscal year 2018 and fiscal year 2036 and foreign NOLs that expire according to the rules of each country. Currently, none of the jurisdictions in which we have foreign NOLs are subject to expiration due to indefinite carryforward periods.
Deferred Tax Assets and Related Valuation Allowances
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining whether or not a valuation allowance for tax assets is needed, we evaluate all available evidence, both positive and negative, including: trends in operating income or losses; currently available information about future years; future reversals of existing taxable temporary differences; future taxable income exclusive of reversing temporary differences and carryforwards; taxable income in prior carryback years if carryback is permitted under the tax law; and tax planning strategies that would accelerate taxable amounts to utilize expiring carryforwards, change the character of taxable and deductible amounts from ordinary income or loss to capital gain or loss, or switch from tax-exempt to taxable investments. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As of September 30, 2017, we maintain a full valuation allowance on our net deferred tax assets in all jurisdictions except Japan and the U.K. In Japan and the U.K., we believe that it is more likely than not that we will realize our entire deferred tax inventory, and no valuation allowance is needed.
In all other jurisdictions, we do not have sufficient evidence of future income to conclude that it is more likely than not that we will realize our entire deferred tax inventory. Therefore, we have placed a full valuation allowance on the deferred tax inventory. These jurisdictions include the U.S., Germany, Spain, Hong Kong, and Australia. We re-evaluate our conclusions quarterly regarding the valuation allowance and we will make appropriate adjustments as necessary in the period in which significant changes occur.
Unrecognized Tax Benefits
We have evaluated our unrecognized tax benefits and determined that there has not been a material change in the amount of such benefits for the three months ended September 30, 2017.
Research and Development Tax Credits
During the year ended June 30, 2017, we applied for both a U.S. federal and state of Georgia research and development tax credit in the amounts of (1) $719 and $675 for our fiscal year ending June 30, 2016, respectively, and (2) $575 and $540 for our fiscal year ending June 30, 2017, respectively. For U.S. federal tax purposes, the credit cannot be utilized immediately but will carryforward for a period of 20 years. As we do not expect to be able to realize the benefit of the U.S. federal tax credit carryforward before its expiration, we maintain a full valuation allowance on this item. For the state of Georgia tax credit, we have recorded the credit within both other current assets and other long-term assets with an offset in both accrued expenses and other long-term liabilities in our condendsed consolidated balance sheets as of September 30, 2017 and June 30, 2017. As future payroll tax withholdings of our Georgia-based employees become due, we are able to offset the withholding amount dollar-for-dollar against the credit. As a result, as the credit is claimed, we will (1) reduce other current assets and offset the payroll tax liability and (2) reduce accrued expenses and recognize a reduction of operating expenses.
During the three months ended September 30, 2017, we recognized $146 of the state of Georgia credit and reduced operating expenses accordingly. As of September 30, 2017, amounts due from the state of Georgia of $689 and $526 are reflected within other current assets (representing the estimated portion we expect to collect within the next twelve months) and other long-term assets, respectively, and unrecoginzed income from these credits of $510 and $386 are reflected in accrued expenses (representing the estimated portion we expect to realize within the next twelve months) and other long-term liabilities, respectively.
13 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
Tax Asset Preservation Plan
At our 2016 Annual Meeting of Stockholders held on October 26, 2016, our stockholders adopted a formal amendment to our certificate of incorporation (the “Protective Amendment”) to deter any person acquiring 4.9% or more of the outstanding Common Stock without the approval of our Board in order to protect the value of our NOLs. The Protective Amendment was extended by our stockholders at our 2017 Annual Meeting of Stockholders held on October 25, 2017 and will expire on the earliest of (i) the Board of Directors’ determination that the Protective Amendment is no longer necessary for the preservation of the Company’s NOLs because of the amendment or repeal of Section 382 or any successor statute, (ii) the close of business on the first day of any taxable year of Concurrent to which the Board of Directors determines that none of our NOLs may be carried forward (iii) such date as the Board of Directors otherwise determines that the Protective Amendment is no longer necessary for the preservation of the Company’s NOLs and (iv) the date of our Annual Meeting of Stockholders to be held during calendar year 2018.
As indicated in our Form 8-K filed on October 27, 2017, the Company executed and delivered that certain Consent and Limited Waiver to the Standstill Agreement, filed therewith as Exhibit 10.1 (the “Consent and Limited Waiver”), to JDS1, LLC and Julian Singer (together with their affiliates and associates, the “Investor Group”). The Consent and Limited Waiver provides that so long as (i) the Investor Group collectively beneficially own no more than 24.9% of the outstanding shares of common stock of the Company and (ii) any acquisition of common stock of the Company by the Investor Group would not reasonably be expected to actually limit the Company’s ability to utilize the Company’s net operating loss carryforwards under applicable United States, state, or foreign tax laws, the Company shall not deem the Investor Group to have effected a Prohibited Transfer as that term is defined in the Company’s Restated Certificate of Incorporation.
6. | Share-Based Compensation |
As of December 31, 2016,September 30, 2017, we had share-based compensation plans which are described in Note 10 of the consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2016.2017. We recognize stock compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. As of December 31, 2016,September 30, 2017, we had 65,1383,000 stock options outstanding and 636,824489,424 restricted shares outstanding. During the sixthree months ended December 31, 2016,September 30, 2017, no stock options were granted or exercised; however, 19,28127,881 stock options were cancelled. We recorded share-based compensation related to the issuance of restricted stock to employees and board members as follows:
Three Months Ended December 31, | Six Months Ended December 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||
Share-based compensation expense included in the consolidated statement of operations: | ||||||||||||||||||||||||
Cost of sales | $ | 6 | $ | 7 | $ | 14 | $ | 8 | $ | 6 | $ | 2 | ||||||||||||
Sales and marketing | 98 | 43 | 170 | 73 | 44 | 62 | ||||||||||||||||||
Research and development | 21 | 48 | 29 | 78 | 17 | (1 | ) | |||||||||||||||||
General and administrative | 184 | 117 | 338 | 223 | 154 | 154 | ||||||||||||||||||
Total | $ | 309 | $ | 215 | $ | 551 | $ | 382 | $ | 221 | $ | 217 |
14 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
A summary of the activity of our time-based, service condition restricted shares during the sixthree months ended December 31, 2016,September 30, 2017, is presented below:
Restricted Stock Awards | Shares | Weighted- Average Grant Date Fair Value | Shares | Weighted- Average Grant Date Fair Value | ||||||||||||
Non-vested at July 1, 2016 | 464,117 | $ | 5.39 | |||||||||||||
Non-vested at July 1, 2017 | 440,613 | $ | 5.45 | |||||||||||||
Granted | 221,000 | 5.56 | 50,400 | 5.66 | ||||||||||||
Vested | (78,611 | ) | 5.35 | (31,589 | ) | 5.61 | ||||||||||
Forfeited | (19,682 | ) | 5.72 | (20,000 | ) | 6.05 | ||||||||||
Non-vested at December 31, 2016 | 586,824 | $ | 5.45 | |||||||||||||
Non-vested at September 30, 2017 | 439,424 | $ | 5.43 |
In conjunction with the resignation of onethree of our independent directors (See(see Note 17 – Commitments and Contingencies – Board Representation and Standstill Agreement)Resignation of Directors), we accelerated the vesting of 5,400 shares of restricted stock.stock held by each of the resigning directors. This acceleration of vesting resulted in incremental stock compensation expense of $27$37 during the sixthree months ended December 31, 2016.September 30, 2017.
During the sixthree months ended December 31, 2016, we issuedSeptember 30, 2017, 50,000 performance-based restricted shares (“PSAs”) to senior and executive management.management previously issued during fiscal year 2017 at a weighted-average grant date fair value of $5.49 remain outstanding. The PSAs issued in fiscal year 20162017 will be released only if certain company financial performance criteria are achieved over a cumulative three-year performance period. The weighted-average grant date fair value per share for these PSAs was established on the date the cumulative three-year performance criteria was approved by our BoardBoard. As of Directors (“Board”).
DuringSeptember 30, 2017, management determined that the six months ended December 31, 2016, 5,387 previously granted performance-based restricted shares were forfeited due tolikelihood of achieving the specific three-year performance criteria was not probable and, as a failure to meet performance goalsresult, no share-based compensation expense associated with our fiscal year 2016 financial results. A summary of the activity of our performance-based restricted shares duringthese PSAs was recorded for the three months ended December 31, 2016, is presented below:September 30, 2017.
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
Performance Stock Awards | Shares | Weighted- Average Grant Date Fair Value | ||||||
Non-vested at July 1, 2016 | 5,387 | $ | 5.14 | |||||
Granted | 50,000 | 5.49 | ||||||
Vested | - | - | ||||||
Forfeited | (5,387 | ) | 5.14 | |||||
Non-vested at December 31, 2016 | 50,000 | $ | 5.49 |
7. | Pensions and Other Postretirement Benefits |
Defined Contribution Plans
We maintain a retirement savings plan available to U.S. employees that qualifies as a defined contribution plan under Section 401(k) of the Internal Revenue Code. We match 50% of the first 5% of the participants’ compensation invested by the employee in the 401(k) plan. We made matching contributions of $88$79 and $82 during each of the three months ended December 31,September 30, 2017 and 2016, and 2015, respectively, and $221 and $212 during the six months ended December 31, 2016 and 2015, respectively.
We also maintain a defined contribution plan (the “Stakeholder Plan”) for our U.K. based employees. The Stakeholder Plan provides for discretionary matching contributions of between 4% and 7% of the employee’s salary. We contributed $7$5 and $12$13 to the Stakeholder Plan for the three months ended December 31,September 30, 2017 and 2016, respectively.
15 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and 2015, respectively, and $20 and $26 to the Stakeholder Plan for the six months ended December 31, 2016 and 2015, respectively.per share data)
Defined Benefit Plans
The following table provides the components of net periodic pension cost of our German defined benefit pension plans recognized in earnings for the three and six months ended December 31, 2016September 30, 2017 and 2015:2016:
Three Months Ended December 31, | Six Months Ended December 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||
Net Periodic Benefit Cost | ||||||||||||||||||||||||
Service cost | $ | - | $ | - | ||||||||||||||||||||
Interest cost | $ | 12 | $ | 24 | $ | 25 | $ | 48 | 18 | 13 | ||||||||||||||
Expected return on plan assets | (3 | ) | (5 | ) | (7 | ) | (11 | ) | (2 | ) | (4 | ) | ||||||||||||
Recognized actuarial loss | 18 | 12 | 38 | 25 | 16 | 20 | ||||||||||||||||||
Amortization of unrecognized net transition obligation (asset) | - | - | ||||||||||||||||||||||
Net periodic benefit cost | $ | 27 | $ | 31 | $ | 56 | $ | 62 | $ | 32 | $ | 29 |
We contributed $3 and $4 to our German defined benefit pension plans for each of the three months ended December 31, 2016ending September 30, 2017 and 2015, respectively, and $7 and $8 to for the six months ended December 31, 2016 and 2015, respectively.2016. We expect to make additional, similar, quarterly contributions during the remaining quarters of our fiscal year 2017.2018.
8. | Inventories |
Inventories consist of the following:
September 30, 2017 | June 30, 2017 | |||||||
Raw materials | $ | 636 | $ | 832 | ||||
Work-in-process | 5 | - | ||||||
Finished goods | 986 | 1,033 | ||||||
$ | 1,627 | $ | 1,865 |
9. | Property and Equipment, net |
Property and equipment consists of the following:
September 30, 2017 | June 30, 2017 | |||||||
Leasehold improvements | $ | 1,117 | $ | 1,117 | ||||
Machinery and equipment | 10,686 | 10,515 | ||||||
11,803 | 11,632 | |||||||
Less: Accumulated depreciation | (10,180 | ) | (9,906 | ) | ||||
$ | 1,623 | $ | 1,726 |
Depreciation expense for property and equipment was $326 and $372 for the three months ended September 30, 2017 and 2016, respectively.
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
Inventories consist of the following:
December 31, 2016 | June 30, 2016 | |||||||
Raw materials | $ | 1,087 | $ | 1,233 | ||||
Work-in-process | 78 | 133 | ||||||
Finished goods | 836 | 2,129 | ||||||
$ | 2,001 | $ | 3,495 |
Property and equipment consists of the following:
December 31, 2016 | June 30, 2016 | |||||||
Leasehold improvements | $ | 2,710 | $ | 2,750 | ||||
Machinery and equipment | 14,461 | 15,000 | ||||||
17,171 | 17,750 | |||||||
Less: Accumulated depreciation | (14,408 | ) | (14,689 | ) | ||||
$ | 2,763 | $ | 3,061 |
Depreciation expense for property and equipment was $459 and $427 for the three months ended December 31, 2016 and 2015, respectively, and $914 and $822 for the six months ended December 31, 2016 and 2015, respectively.
10. | Intangible Assets, net |
Intangible assets, net of $137$133 and $143$134 at December 31, 2016September 30, 2017 and June 30, 2016,2017, respectively, consist of patents and an internet domain name (www.concurrent.com). The domain name is considered an indefinite lived intangible asset and is not amortizable. Intangible assets are included in other long-term assets, net in our consolidated balance sheets.
Amortization expense related to finite-lived intangible assets was $3 for each of the three months ended December 31,September 30, 2017 and 2016, and 2015, respectively, and $6 and $39 for the six months ended December 31, 2016 and 2015, respectively.
11. | Accounts Payable and Accrued Expenses |
Accounts payable and accrued expenses consist of the following:
December 31, 2016 | June 30, 2016 | |||||||
Accounts payable, trade | $ | 2,316 | $ | 4,767 | ||||
Accrued payroll, vacation and other employee expenses | 2,175 | 2,757 | ||||||
Accrued income taxes | 127 | 389 | ||||||
Dividend payable | 100 | 95 | ||||||
Other accrued expenses | 1,190 | 1,183 | ||||||
$ | 5,908 | $ | 9,191 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
September 30, 2017 | June 30, 2017 | |||||||
Accounts payable, trade | $ | 2,356 | $ | 2,452 | ||||
Accrued payroll, vacation and other employee expenses | 1,679 | 2,372 | ||||||
Accrued Real-Time sale transaction expenses | 300 | 1,767 | ||||||
Unrecognized income from research and development tax credits | 510 | 566 | ||||||
Accrued income taxes | - | 415 | ||||||
Dividend payable | 142 | 60 | ||||||
Other accrued expenses | 821 | 532 | ||||||
$ | 5,808 | $ | 8,164 |
12. |
On September 9, 2015,May 15, 2017, we soldcompleted the customer contractssale and intellectual propertytransfer of certain assets and certain liabilities primarily related to our multi-screen video analytics product line for $3,500Real-Time business segment pursuant to an Asset Purchase Agreement (“(the “RT APA”) dated August 31, 2015as of May 15, 2017 with Verimatrix,Real Time, Inc. (“Verimatrix”(the “Purchaser”), an investment company owned by Battery Ventures, a privately-held video revenue security companyprivate-equity firm based in San Diego, California.Boston, Massachusetts, for $35,000 less agreed upon adjustments for working capital. Pursuant to the terms of the RT APA, we sold and transferred certain respective equity interests in one of our subsidiaries, which constituted the European operations of the Real-Time business, upon receipt of French regulatory approval on May 30, 2017. The RT APA includedincludes customary terms and conditions, including provisions following closing that require the Companyus to indemnify Verimatrixthe Purchaser for certain losses that it incurs as a result of a breach by the Companyus of itsour representations and warranties in the RT APA and certain other matters. Proceeds
Gross proceeds from the sale were payablepaid to the Companyus as follows: (1) a $2,750$30,200 cash payment on May 15, 2017 (subject to an adjustment for estimated working capital as defined in the Company in cash (received on September 10, 2015)RT APA), (2) a $375 deferred$2,800 cash payment (received in fullmade concurrently with the transfer of the European operations of the Real Time business to the Purchaser received on JuneMay 30, 2016)2017 and (3) $375$2,000 placed in escrow (releasedas security for certain purchase price adjustments and received in fullfor our indemnification obligations to the Purchaser under the RT APA which amount will be released to us on June 30, 2016). No amounts were held back pusuantor before May 15, 2018 (less any portion of the escrow used to make indemnification provisions inor purchase price adjustment payments to the APA.Purchaser).
The customer contractsIn conjunction with the RT APA, we and intellectual property sold had a net book value of $188 (which was included in intangible assets, net in our consolidated balance sheet). As a result of the sale, we also included $1,016 (net liability, consisting primarily of unearned deferred revenue) of related assets and liabilities not sold or transferred in the transaction in the calculation of the recorded gain. Additionally, through September 30, 2015, we incurred $212 in legal, accounting and other expenses that would not have been incurred otherwise. As a result, we recorded a net gain of $4,116 in our consolidated statement of operationsPurchaser entered into Transition Services Agreements (the “TSAs”) for the U.S/Europe and Japan. Under the TSAs, we have agreed to provide and receive various services to and from the Purchaser on an arms-length fee-for-service basis for a term of six months ended December 31, 2015.
On July 1, 2015, we had adopted ASU No. 2014-08,Presentationas of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). As a result, we evaluated the sale of our multi-screen video analytics product line in light of this new standard. We concluded that the sale of our multi-screen video analytics product line in September 2015 was not a “material shift” (as defined in ASU 2014-08) for us and therefore, was not considered a discontinued operation. The operating profit related to the multi-screen video analytics product line for the six months ended December 31, 2015 (through the date of sale) was $179.
Reportable Operating Segments
The “management approach” has been usedthe TSAs, subject to present the following segment information. This approach is based upon the way the management organizes segments within the Company for making operating decisions and assessing performance. Financial information is reported on the basis that it is used internally by the chief operating decision maker (“CODM”) for evaluating segment performance and deciding howa renewal term of up to allocate resources to segments. The Company’s chief executive officer has been identified as the CODM.
Effective July 1, 2016, we changed the way our CODM views our operating results by providing more discrete segment financial information. As a result, our reportable operating segments now consist of Content Delivery and Real-Time.
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
These operating segments were determined based on the nature of the products and services offered and the nature and industry of customers serviced. The measures that are used to assess the reportable segment’s operating performance are sales and operating income. Operating income for reportable segments is defined as gross margin less selling and marketing, research and development expenses, and certain general and administrative expenses. Any transactions between operating segments are eliminated in consolidation.
Additionally, corporate and unallocated costs include certain corporate sales and marketing and corporate general and administrative expenses (executive, finance, legal, risk management and human resources). These expenses are not included in the measure of segment operating income but are included in the reconciliation to income (loss) before income taxes.
Segment assets may be either directly attributable or allocatedeighteen months. Net amounts charged to the operating segment depending on their nature. However, segment assets are not regularly reviewed byPurchaser under the CODM for evaluating performance or allocating resources and therefore, are not presented.
The table below represents information about the Company’s reportable operating segmentsTSAs for the three and six months ended December 31, 2016September 30, 2017 are $5 and 2015:are recorded within operating expenses.
Three Months Ended December 31, | ||||||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||||||
Content Delivery | Real-Time | Total | Content Delivery | Real-Time | Total | |||||||||||||||||||
Product | $ | 4,916 | $ | 5,330 | $ | 10,246 | $ | 6,174 | $ | 3,800 | $ | 9,974 | ||||||||||||
Services | 2,321 | 2,980 | 5,301 | 2,433 | 2,492 | 4,925 | ||||||||||||||||||
Revenue from external customers | $ | 7,237 | $ | 8,310 | $ | 15,547 | $ | 8,607 | $ | 6,292 | $ | 14,899 | ||||||||||||
Gross margin | $ | 4,309 | $ | 5,140 | $ | 9,449 | $ | 5,616 | $ | 3,760 | $ | 9,376 | ||||||||||||
Sales and marketing | (2,339 | ) | (1,631 | ) | (3,970 | ) | (2,174 | ) | (1,426 | ) | (3,600 | ) | ||||||||||||
Research and development | (1,832 | ) | (984 | ) | (2,816 | ) | (2,798 | ) | (964 | ) | (3,762 | ) | ||||||||||||
General and administrative | (75 | ) | (150 | ) | (225 | ) | (60 | ) | (176 | ) | (236 | ) | ||||||||||||
Operating income for reportable segments | $ | 63 | $ | 2,375 | 2,438 | $ | 584 | $ | 1,194 | 1,778 | ||||||||||||||
Corporate and unallocated costs: | ||||||||||||||||||||||||
Sales and marketing | (398 | ) | (197 | ) | ||||||||||||||||||||
General and administrative | (2,088 | ) | (1,939 | ) | ||||||||||||||||||||
(2,486 | ) | (2,136 | ) | |||||||||||||||||||||
Operating loss | (48 | ) | (358 | ) | ||||||||||||||||||||
Interest income | 13 | 6 | ||||||||||||||||||||||
Interest expense | (1 | ) | - | |||||||||||||||||||||
Other income, net | 51 | 24 | ||||||||||||||||||||||
Income (loss) before income taxes | $ | 15 | $ | (328 | ) |
17 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
Six Months Ended December 31, | ||||||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||||||
Content Delivery | Real-Time | Total | Content Delivery | Real-Time | Total | |||||||||||||||||||
Product | $ | 7,356 | $ | 10,749 | $ | 18,105 | $ | 10,123 | $ | 8,345 | $ | 18,468 | ||||||||||||
Services | 5,000 | 5,558 | 10,558 | 4,930 | 4,852 | 9,782 | ||||||||||||||||||
Revenue from external customers | $ | 12,356 | $ | 16,307 | $ | 28,663 | $ | 15,053 | $ | 13,197 | $ | 28,250 | ||||||||||||
Gross margin | $ | 6,834 | $ | 9,798 | $ | 16,632 | $ | 9,342 | $ | 7,891 | $ | 17,233 | ||||||||||||
Sales and marketing | (4,955 | ) | (3,091 | ) | (8,046 | ) | (4,084 | ) | (2,755 | ) | (6,839 | ) | ||||||||||||
Research and development | (4,057 | ) | (2,066 | ) | (6,123 | ) | (5,669 | ) | (1,930 | ) | (7,599 | ) | ||||||||||||
General and administrative | (148 | ) | (283 | ) | (431 | ) | (117 | ) | (294 | ) | (411 | ) | ||||||||||||
Operating income (loss) for reportable segments | $ | (2,326 | ) | $ | 4,358 | 2,032 | $ | (528 | ) | $ | 2,912 | 2,384 | ||||||||||||
Corporate and unallocated costs: | ||||||||||||||||||||||||
Sales and marketing | (797 | ) | (352 | ) | ||||||||||||||||||||
General and administrative | (4,226 | ) | (3,542 | ) | ||||||||||||||||||||
Gain on sale of product line, net | - | 4,116 | ||||||||||||||||||||||
(5,023 | ) | 222 | ||||||||||||||||||||||
Operating income (loss) | (2,991 | ) | 2,606 | |||||||||||||||||||||
Interest income | 40 | 9 | ||||||||||||||||||||||
Interest expense | (4 | ) | - | |||||||||||||||||||||
Other income, net | 170 | 147 | ||||||||||||||||||||||
Income (loss) before income taxes | $ | (2,785 | ) | $ | 2,762 |
Results associated with the Real-Time business are classified as income from discontinued operations, net of income taxes, in our condensed consolidated statements of operations. Operating expenses recorded in discontinued operations include costs incurred directly in support of the Real-Time business. Prior year results have been adjusted to conform with the current year presentation. For the three months ended September 30, 2016, income from discontinued operations is comprised of the following:
Three Months Ended September 30, 2016 | ||||
Revenue | $ | 7,997 | ||
Cost of sales | 3,280 | |||
Gross margin | 4,717 | |||
Operating expenses: | ||||
Sales and marketing | 1,447 | |||
Research and development | 1,057 | |||
General and administrative | 176 | |||
Total operating expenses | 2,680 | |||
Operating income | 2,037 | |||
Other income, net | 48 | |||
Income from discontinued operations before income taxes | 2,085 | |||
Provision for income taxes | 159 | |||
Income from discontinued operations | $ | 1,926 |
In accordance with ASC Topic 205-20,Geographic InformationDiscontinued Operations, additional disclosures relating to cash flow are required for discontinued operations. Cash flow information relating to the Real-Time business for the three months ended September 30, 2016 is as follows:
Three Months Ended September 30, 2016 | ||||
Operating cash flow data: | ||||
Depreciation and amortization | $ | 83 | ||
Share-based compensation | 25 | |||
Foreign currency exchange gains | (28 | ) | ||
Investing cash flow data: | ||||
Capital expenditures | (20 | ) |
13. | Segment Information |
As a result of the sale of our Real-Time business in May 2017 (see Note 12 – Discontinued Operations), we operate in one reportable segment, Content Delivery. We evaluate segment results using revenues and gross margin as the performance measures. Such information is shown on the face of the accompanying condensed consolidated statements of operations. We attribute revenues to individual countries and geographic areas based upon location of our customers. A summary of our revenue by geographic area is as follows:
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
United States | $ | 9,262 | $ | 8,125 | $ | 16,043 | $ | 16,730 | ||||||||
Canada | 290 | 2,455 | 1,191 | 3,571 | ||||||||||||
Total North America | 9,552 | 10,580 | 17,234 | 20,301 | ||||||||||||
Japan | 3,158 | 2,038 | 5,793 | 4,135 | ||||||||||||
Other Asia-Pacific | 1,152 | 389 | 2,498 | 691 | ||||||||||||
Total Asia-Pacific | 4,310 | 2,427 | 8,291 | 4,826 | ||||||||||||
Europe | 1,316 | 1,889 | 2,769 | 3,114 | ||||||||||||
South America | 369 | 3 | 369 | 9 | ||||||||||||
Total revenue | $ | 15,547 | $ | 14,899 | $ | 28,663 | $ | 28,250 |
18 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
We attribute long-lived assets based upon location of the assets. As presented below, long-lived assets exclude intangible assets, net.
A summary of our revenue and long-lived assets by geographic area is as follows:
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Revenue: | ||||||||
United States | $ | 5,682 | $ | 2,735 | ||||
Canada | 516 | 870 | ||||||
Total North America | 6,198 | 3,605 | ||||||
Japan | 1,131 | 921 | ||||||
Other Asia-Pacific | 1 | 62 | ||||||
Total Asia-Pacific | 1,132 | 983 | ||||||
Europe | 377 | 531 | ||||||
South America | 163 | - | ||||||
Total revenue | $ | 7,870 | $ | 5,119 |
September 30, 2017 | June 30, 2017 | |||||||
Long-lived assets: | ||||||||
United States | $ | 2,340 | $ | 2,391 | ||||
Europe | 53 | 53 | ||||||
Japan | 378 | 303 | ||||||
Other Asia-Pacific | 1 | 2 | ||||||
Total long-lived assets | $ | 2,772 | $ | 2,749 |
14. | Concentration of Risk |
The following table summarizes revenues by significant customer where such revenue accounted for 10% or more of total revenues for any one of the indicated periods:
Three Months Ended | Six Months Ended | Three Months Ended September 30, | ||||||||||||||||||||||
December 31, | December 31, | 2017 | 2016 | |||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||
Customer A(1) | 21 | % | 16 | % | 14 | % | 20 | % | ||||||||||||||||
Customer A | 57 | % | 16 | % | ||||||||||||||||||||
Customer B | <10 | % | 14 | % | <10 | % | <10 | % | 14 | % | 18 | % | ||||||||||||
Customer C | <10 | % | 10 | % | <10 | % | <10 | % | <10 | % | 21 | % | ||||||||||||
Customer D | <10 | % | 11 | % |
19 |
Concurrent Computer Corporation
(1)DataNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for all periods reflects the merger of two customers consummated in the year ended June 30, 2016. consummated in the year ended June 30, 2016.share and per share data)
We assess credit risk through ongoing credit evaluations of customers’ financial condition, and collateral is generally not required. The following summarizes accounts receivable by significant customers for whom accounts receivable were 10% or more of total accounts receivables for any one of the indicated periods:
December 31, | June 30, | |||||||
2016 | 2016 | |||||||
Customer D | 11 | % | <10 | % | ||||
Customer A(1) | <10 | % | 37 | % |
(1)Data for all periods reflects the merger of two customers consummated in the year ended June 30, 2016. consummated in the year ended June 30, 2016.
September 30, 2017 | June 30, 2017 | |||||||
Customer A | 64 | % | 35 | % | ||||
Customer C | <10 | % | 23 | % | ||||
Customer E | <10 | % | 21 | % |
The following summarizes purchases from significant vendors where such purchases accounted for 10% or more of total purchases for any one of the indicated periods:
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Vendor A | 16 | % | <10 | % | 15 | % | 11 | % | ||||||||
Vendor B | 12 | % | <10 | % | <10 | % | <10 | % | ||||||||
Vendor C | <10 | % | <10 | % | 14 | % | <10 | % | ||||||||
Vendor D | <10 | % | 22 | % | 13 | % | 18 | % | ||||||||
Vendor E | <10 | % | 20 | % | <10 | % | 19 | % |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Vendor A | 61 | % | 33 | % | ||||
Vendor B | 22 | % | <10 | % | ||||
Vendor C | <10 | % | 41 | % |
15. | Dividends |
During the sixthree months ended December 31, 2016,September 30, 2017, our Board approved quarterly cash dividends as follows:
Dividends Declared | ||||||||||||
Record Date | Payment Date | Type | Per Share | Total | ||||||||
September 13, 2016 | September 27, 2016 | Quarterly | $ | 0.12 | $ | 1,182 | ||||||
December 14, 2016 | December 28, 2016 | Quarterly | $ | 0.12 | $ | 1,187 | ||||||
$ | 2,369 |
Dividends Declared | ||||||||||||
Record Date | Payment Date | Type | Per Share | Total | ||||||||
September 12, 2017 | September 26, 2017 | Quarterly | $ | 0.12 | $ | 1,187 | ||||||
Total | $ | 1,187 |
As of December 31, 2016,September 30, 2017, we recorded $336$318 of dividends payable to holders of restricted common stock who held restricted shares at the time of the dividend record dates and still hold those restricted shares as of December 31, 2016.September 30, 2017. Such dividends will be paid when the restrictions on a holder’s restricted common shares lapse. This dividend payable is divided between current payable and non-current payable in the amounts of $100$142 and $236,$176, respectively, based upon the expected vesting date of the underlying shares. These holders of restricted common stock will receive the dividend payments as long as they remain eligible at the vesting date of the shares. For the sixthree months ended December 31, 2016, $25September 30, 2017, $6 of dividends payable were forfeited and returned to capital for restricted shares that were forfeited prior to meeting vesting requirements. Because the participants are not entitled to these dividends unless they complete the requisite service period for the shares to vest, they are not “participating dividends” as defined under ASC Topic 260-10,Earnings per Share.
The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of taxes, for the six months ended December 31, 2016:
Pension and Postretirement Benefit Plans | Currency Translation Adjustments | Total | ||||||||||
Balance at June 30, 2016 | $ | (1,637 | ) | $ | 1,092 | $ | (545 | ) | ||||
Other comprehensive income (loss) before reclassifications | 69 | (291 | ) | (222 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income (loss) | 38 | - | 38 | |||||||||
Net current period other comprehensive income (loss) | 107 | (291 | ) | (184 | ) | |||||||
Balance at December 31, 2016 | $ | (1,530 | ) | $ | 801 | $ | (729 | ) |
20 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
16. | Accumulated Other Comprehensive Income (Loss) |
The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of taxes, for the three months ended September 30, 2017:
Pension and Postretirement Benefit Plans | Currency Translation Adjustments | Total | ||||||||||
Balance at June 30, 2017 | $ | (1,345 | ) | $ | (1,545 | ) | $ | (2,890 | ) | |||
Other comprehensive income before reclassifications | (76 | ) | 24 | (52 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income (loss) | 16 | - | 16 | |||||||||
Net current period other comprehensive income (loss) | (60 | ) | 24 | (36 | ) | |||||||
Balance at September 30, 2017 | $ | (1,405 | ) | $ | (1,521 | ) | $ | (2,926 | ) |
17. | Commitments and Contingencies |
From time to time, we are involved in litigation incidental to the conduct of our business. We believe that such pending litigation will not have a material adverse effect on our results of operations or financial condition.
We enter into agreements in the ordinary course of business with customers that often require us to defend and/or indemnify the customer against intellectual property infringement claims brought by a third-party with respect to our products. For example, we were notified that certain of our customers have settled with or been sued by the following companies, in the noted jurisdictions, regarding the listed patents:
Asserting Party | Jurisdiction | Patents at Issue | ||
Broadband iTV, Inc. | U.S. District Court of Hawaii | U.S. Patent No. 7,361,336 | ||
Sprint Communications Company, L.P. | U.S. District Court Eastern District of Pennsylvania | U.S. Patent Nos. 6,754,907 and 6,757,907 | ||
FutureVision.com LLC | U.S. District Court Eastern District of Texas | U.S. Patent No. 5,877,755 |
We continue to review our potential obligations under our indemnification agreements with these customers and the indemnity obligations to these customers from other vendors that also provided systems and services to these customers. From time to time, we also indemnify customers and business partners for damages, losses and liabilities they may suffer or incur relating to personal injury, personal property damage, product liability, and environmental claims relating to the use of our products and services or resulting from our acts or omissions, our employees, authorized agents or subcontractors. We have not accrued any material liabilities related to such indemnifications in our financial statements and do not expect any other material costs as a result of such obligations. The maximum potential amount of future payments that we could be required to make is unlimited, and we are unable to estimate any possible loss or range of possible loss.
21 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
Severance Arrangements
Pursuant to the terms of the employment agreements with our executive officers and certain other employees, employment may be terminated by either the respective executive officer or us at any time. In the event the employee voluntarily resigns (except as described below) or is terminated for cause, compensation under the employment agreement will end. In the event an agreement is terminated by us without cause or in certain circumstances constructively by us, the terminated employee will receive severance compensation for a period from 6 to 12 months, depending on the officer, in an annualized amount equal to the respective employee's base salary then in effect. InFor our CEO and CFO, in the event our CEO resignsthe executive officer is constructively terminated within three months of a change in control or the CEO’sofficer’s agreement is terminated by us within one year of a change of control other than for due cause, disability or non-renewal by our CEO,the executive officer (1) our CEO will be entitled to severance compensation multiplied by two, as well as incremental medical costs and (2) our CFO will be entitled to severance compensation multiplied by one, as well as incremental medical costs. Additionally, if terminated, our CEO and CFO may be entitled to bonuses during the severance period. At December 31, 2016,September 30, 2017, the maximum contingent liability under these agreements is $2,194.$1,503. Our employment agreements with certain of our employees contain certain offset provisions, as defined in their respective agreements.
Resignation of Directors
As indicated in our Form 8-K filed on July 14, 2017, three of our independent directors resigned from our Board and Board committees. In connection with these resignations, we agreed to accelerate the vesting of 5,400 shares of restricted stock held by each of the resigning directors (including an aggregate of $7 of accrued dividends released upon the acceleration of the vesting of the restricted stock), and to make a one-time payment to each of the resigning directors of $52, which includes unpaid meeting fees through the date of resignation. Additionally, as reported in our Form 8-K filed on July 31, 2017, we added one new independent director. As a result of the above actions, the Board approved a reduction in the size of the Board from seven (7) to five (5) members.
18. | Subsequent Events |
Entry into Agreement to Sell Content Delivery Business
As reported in our Form 8-K filed on October 16, 2017, we entered into an Asset Purchase Agreement (the “CDN APA”) with Vecima Networks Inc. (“Vecima” and the “CDN Purchaser”) on October 13, 2017. The CDN APA contemplates the sale and transfer of all of the Company’s assets and certain liabilities primarily related to our content delivery business to the CDN Purchaser for a purchase price of $29,000 (subject to an adjustment for net working capital). The transactions contemplated by the CDN APA will result in the sale of substantially all of our remaining operating assets. The CDN APA includes customary terms and conditions, including an adjustment to the purchase price based on a normalized level of net working capital and provisions that require us to indemnify the CDN Purchaser for certain losses that it incurs as a result of a breach by us of our representations and warranties in the CDN APA and certain other matters.
Proceeds from the sale will be payable to us as follows: (1) a $27,550 payment in cash on the closing date (subject to an adjustment for estimated net working capital) and (2) $1,450 placed in escrow on the closing date as security for our indemnification obligations to the CDN Purchaser under the CDN APA, which amount will be released to us on or before the date that is twelve months from the closing date (less any portion of the escrow used to make indemnification or purchase price adjustment payments to the CDN Purchaser).
The CDN APA contains customary representations and warranties of each of the parties. The CDN APA contains indemnification rights in favor of us following closing for (i) breaches of any of the representations or warranties by the CDN Purchaser including, but not limited to, breaches related to organization, authorization, and governmental authorization, (ii) breaches of the covenants or agreements of the CDN Purchaser in the CDN APA, and (iii) liabilities which the CDN Purchaser agrees to assume in the CDN APA. In addition, the CDN APA contains indemnification rights in favor of the CDN Purchaser following closing for (i) breaches of certain fundamental representations and warranties by us, including breaches related to organization, authorization, capitalization, title to purchased assets, finders’ fees, and sufficiency of purchased assets, (ii) breaches of any of the representations and warranties by us, (iii) breaches of the covenants or agreements of us in the CDN APA, and (iv) liabilities which the parties agreed the CDN Purchaser would not assume pursuant to the CDN APA.
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
Board Representation and Standstill AgreementThe completion of the transactions contemplated by the CDN APA are subject to customary closing conditions, including the approval of the transactions by our stockholders.
As previously disclosedThe CDN APA contains specified termination rights for the parties. We have the right to terminate the CDN APA if we enter into a definitive agreement in respect of a Superior Proposal (as defined in the CDN APA), provided that we comply with certain notice and other requirements set forth in the CDN APA. In such event, we may be required to pay Vecima a termination fee equal to $1,450. We may also be required to pay a termination fee if the CDN APA is terminated under certain circumstances when, prior to the termination of the CDN APA, an Acquisition Proposal (as defined in the CDN APA) shall have been communicated to us and announced publicly and within six (6) months after such termination we enter into a definitive agreement with respect to any Acquisition Proposal with another Person.
Under the terms of a non-compete agreement to be executed simultaneously with the closing of the transactions contemplated by the CDN APA, we will agree for a period of three years following the closing of the transaction not to (i) directly or indirectly, alone or in association with any other person, own, manage, operate, control, participate in, invest in, perform services for, or otherwise carry on or engage in any business focused on the development, marketing, and supporting of software applications and solutions for video content delivery and storage technologies (a “Content Delivery Business”) anywhere in the world, (ii) without the written consent of the CDN Purchaser, have any direct or indirect interest in any person that engages in any Content Delivery Business or competes with the Content Delivery Business of the Seller, as conducted as of the date of the closing of the transactions under the CDN APA, or (iii) directly or indirectly, solicit or recruit any employees being transferred as set forth in the CDN APA or to encourage any such employee to terminate his or her employment with the CDN Purchaser.
Simultaneously with the execution of the CDN APA, certain of our Form 8-K filed on August 29, 2016, the Companystockholders entered into a Board Representation and StandstillVoting Agreement with Vecima (the “Standstill“Voting Agreement”) with an investor and its affiliated party. Pursuant. As of November 3, 2017, the signatories to the Voting Agreement held approximately 21% of our issued and outstanding common stock. The Voting Agreement requires the signatories to thereto, so long as the Voting Agreement has not terminated in accordance with its terms, to vote in favor of our consummation of the Standstilltransactions contemplated by the CDN APA and against any action or proposal in favor of an alternative acquisition proposal. The Voting Agreement in consideration for certain restrictions applicable toand the investor, our Board,obligations of the stockholders’ thereunder will terminate upon, among other things, (1) agreed to appoint a nomineethe termination of the investorCDN APA, the withdrawal by the Board of its recommendation that stockholders vote to serve onapprove the Company’s Board untilCDN APA, or the 2016 Annual Meeting of Stockholdersentry by Concurrent, without the prior written consent of the Company (the nominee was subsequently electedsignatories to the Voting Agreement, of an amendment to the CDN APA or a waiver of any term thereof which results in a material decrease in, or material change in the composition of, the purchase price payable under the CDN APA. The stockholders executing the Voting Agreement include all of the directors and officers of Concurrent that are stockholders, but solely in their capacity as stockholders. The Voting Agreement (i) does not limit or affect any actions or omissions taken by any stockholder in its capacity as a director or officer of Concurrent and (ii) may not be construed to prohibit, limit, or restrict any stockholder from exercising its fiduciary duties as an officer or director of Concurrent or its remaining stockholders. JDS1, LLC, our largest stockholder, is also a signatory to the Company at the 2016 Annual Meeting held on October 26, 2016) and (2) agreed to pay up to $235 for fees and expenses incurred by the investor and its affiliated party in connection with the StandstillVoting Agreement.
Additionally, pursuantSimultaneously with the approval by our Board of our execution of the CDN APA, the Board formed a subcommittee of the Board (the “Investment Committee”) to evaluate options to maximize the value of our remaining assets, which, following the closing of the transactions contemplated under the CDN APA, will consist primarily of (i) cash and cash equivalents and (ii) Concurrent’s remaining NOLs under federal, state, and foreign tax laws. The Board has authorized the Investment Committee to retain such counsel, experts, consultants or other professionals as the Investment Committee shall deem appropriate from time to time to aid in the Investment Committee in the performance of its duties.
23 |
Concurrent Computer Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) - continued
(Amounts in thousands, except for share and per share data)
In accordance with ASC 360-10,Property, Plant and Equipment,the signing of the CDN APA did not meet the “held-for-sale” criteria in the standard at September 30, 2017 and therefore, the assets and liabilities of the content delivery business are not reported as “held-for-sale” in our condensed consolidated balance sheet as of September 30, 2017.
For additional information relating to the Standstill Agreement, effective as of August 29, 2016, oneproposed sale of our directors tendered his resignation from the Boardcontent delivery business, see that certain Schedule 14A and all Board committees thereof. In connection with this resignation,Definitive Proxy Statement filed by the Company agreedon November 6, 2017. The Company’s stockholders are invited to accelerate the vesting of 5,400 shares of restricted stockattend a special meeting, which will be held by this director andat 4375 River Green Parkway, Suite 100, Duluth, Georgia 30096, on Wednesday, December 13, 2017 at 9:00 a.m. local time, to make a one-time payment to him of $48 (including $2 of accrued dividends released upon the accelerationconsider approval of the vesting of the restricted stock).CDN APA.
WeOther than the entry into an agreement to sell our content delivery business described above, we have evaluated subsequent events through the date these financial statements were issued and determined that there were no other material subsequent events that require recognition or additional disclosure in our consolidated financial statements.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and the related notes thereto which appear elsewhere herein. Except for the historical financial information, many of the matters discussed in this Item 2 may be considered “forward-looking” statements that reflect our plans, estimates and beliefs. Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section below entitled “Cautionary Note Regarding Forward-Looking Statements,” elsewhere herein and in other filings made with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended June 30, 2016.2017.
References herein to “Concurrent,” the “Company,” “we,” “our” or “us” refer to Concurrent Computer Corporation and its subsidiaries unless the context specifically indicates otherwise.
Discussions concerning revenues in the context of geographic areas are based upon the location of our customers.
References to our Form 10-K made throughout this document refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 20162017 as filed with the SEC on August 30, 2016.September 20, 2017.
Overview
We provideare a global software hardware and professional services forsolutions company that develops advanced applications focused on storing, protecting, transforming, and delivering visual media. We enable the content delivery market, storage solutions marketworld’s leading innovators in visual media to entertain, inform, and the high-performance, real-time market. Effective July 1, 2016, we changed the way our chief operating decision maker views our operating resultscommunicate, by providing more discretethe tools to help them unlock their creativity and share it with the world. We accomplish this by developing open software solutions that make the world’s visual media available online, when and where it is needed around the globe. Our business is comprised of one operating segment for financial information. As a result, our reportable operating segments now consist ofreporting purposes, Content Delivery and Real-Time. Our Content Delivery segment includes both our content delivery solutions and Aquari storage solutions product lines.Delivery.
Our content delivery solutions consist of software, hardware and services for intelligently storing, processing and streaming video content to a variety of consumer devices and storing and managing content in the network.devices. Our streaming, video processing and storage products and services are deployed by service providers to support consumer-facing video servicesapplications including live broadcast video, video-on-demand and time-shifted video applicationstelevision services such as cloud-based digital video recording. In fiscal year 2016, we introduced Aquari Storage, our unifiedsoftware-defined scale-out storage solutions product to our contentsolution that is ideally suited for a wide-range of applications in the media delivery value chain that require advanced performance, very large storage capacity, and other third-party customers. a high degree of configuration flexibility.
In September 2015,May 2017, we sold our multi-screen video analytics product lineReal-Time solutions business (“Real-Time business”) to Battery Ventures for collecting and analyzing data related to content delivery applications (see Note 12 – Salegross proceeds of Product Line to the accompanying condensed consolidated financial statements).
Our real-time solutions consist of$35 million. The Real-Time business provided real-time Linux operating system versions,variants, development and performance optimization tools, simulation software and other system software combined, in many cases, with computer platforms and services. These real-timePrior to the sale, Concurrent sold the Real-Time business products are sold to a wide variety of companies seeking high-performance,high performance, real-time computer solutions in the defense, aerospace, financial and automotive markets around the world. Results of our Real-Time business are retrospectively reflected as a discontinued operation in our consolidated financial statements for all periods presented (see Note 12 to the consolidated financial statements).
Other than consolidated amounts reflecting operating results and balances for both the continuing and discontinued operations, all remaining amounts presented in the accompanying consolidated financial statements reflect the financial results and financial position of our continuing content delivery solutions business.
On October 13, 2017, we entered into an Asset Purchase Agreement (the “CDN APA”) with Vecima Networks Inc. for the sale and transfer of all of our assets and certain liabilities primarily related to our content delivery business for a purchase price of $29.0 million (subject to an adjustment for net working capital). The transactions contemplated by this agreement will result in the sale of substantially all of our remaining operating assets. The completion of the transactions are subject to customary closing conditions, including the approval of the transactions by our stockholders. For additional information relating to the proposed sale of our content delivery business, see that certain Schedule 14A and Definitive Proxy Statement filed by the Company on November 6, 2017. The Company’s stockholders are invited to attend a special meeting, which will be held at 4375 River Green Parkway, Suite 100, Duluth, Georgia 30096, on Wednesday, December 13, 2017 at 9:00 a.m. local time, to consider approval of the CDN APA.
Results of Operations for the Three months ended December 31, 2016September 30, 2017 Compared to the Three months ended December 31, 2015September 30, 2016
Revenue
The following table sets forth our revenuesummarized consolidated financial information for the three months ended December 31,September 30, 2017 and 2016 and 2015 for each of our operating segments as well as comparative data showing increases and decreases between periods (dollars in thousands):
Three Months Ended December 31, | $ | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
Content delivery revenue: | ||||||||||||||||
Product | $ | 4,916 | $ | 6,174 | $ | (1,258 | ) | (20.4 | )% | |||||||
Service | 2,321 | 2,433 | (112 | ) | (4.6 | )% | ||||||||||
Total Content delivery revenue | $ | 7,237 | $ | 8,607 | $ | (1,370 | ) | (15.9 | )% | |||||||
Real-time revenue: | ||||||||||||||||
Product | $ | 5,330 | $ | 3,800 | 1,530 | 40.3 | % | |||||||||
Service | 2,980 | 2,492 | 488 | 19.6 | % | |||||||||||
Total Real-time revenue | $ | 8,310 | $ | 6,292 | $ | 2,018 | 32.1 | % |
An analysis of revenue by operating segment is described below.
Three Months Ended September 30, | $ | % | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
Product revenue | $ | 5,297 | $ | 2,440 | $ | 2,857 | 117.1 | % | ||||||||
Service revenue | 2,573 | 2,679 | (106 | ) | (4.0 | )% | ||||||||||
Total revenue | 7,870 | 5,119 | 2,751 | 53.7 | % | |||||||||||
Product cost of sales | 2,217 | 1,354 | 863 | 63.7 | % | |||||||||||
Service cost of sales | 1,003 | 1,299 | (296 | ) | (22.8 | )% | ||||||||||
Total cost of sales | 3,220 | 2,653 | 567 | 21.4 | % | |||||||||||
Product gross margin | 3,080 | 1,086 | 1,994 | 183.6 | % | |||||||||||
Service gross margin | 1,570 | 1,380 | 190 | 13.8 | % | |||||||||||
Total gross margin | 4,650 | 2,466 | 2,184 | 88.6 | % | |||||||||||
Operating expenses: | ||||||||||||||||
Sales and marketing | 2,158 | 3,028 | (870 | ) | (28.7 | )% | ||||||||||
Research and development | 1,678 | 2,250 | (572 | ) | (25.4 | )% | ||||||||||
General and administrative | 1,929 | 2,168 | (239 | ) | (11.0 | )% | ||||||||||
Total operating expenses | 5,765 | 7,446 | (1,681 | ) | (22.6 | )% | ||||||||||
Operating loss | (1,115 | ) | (4,980 | ) | 3,865 | (77.6 | )% | |||||||||
Interest income, net | 70 | 14 | 56 | 400.0 | % | |||||||||||
Other income, net | (87 | ) | 81 | (168 | ) | (207.4 | )% | |||||||||
Loss from continuing operations before income taxes | (1,132 | ) | (4,885 | ) | 3,753 | (76.8 | )% | |||||||||
Provision (benefit) for income taxes | (122 | ) | (31 | ) | (91 | ) | 293.5 | % | ||||||||
Loss from continuing operations | (1,010 | ) | (4,854 | ) | 3,844 | (79.2 | )% | |||||||||
Income from continuing operations, net of income taxes | - | 1,926 | (1,926 | ) | (100.0 | )% | ||||||||||
Net loss | $ | (1,010 | ) | $ | (2,928 | ) | $ | 1,918 | (65.5 | )% |
Content DeliveryProduct Revenue
Content delivery product. Product revenue decreasedincreased by $1.3$2.9 million, or 20.4%117.1%, for the three months ended December 31, 2016September 30, 2017 compared to the prior year period. Additionally, the three months ended December 31, 2016 includes $0.8both periods include $0.2 million of product revenue from our Aquari storage product solution compared to $0.2 million in the same period last year.solution. The period-over-period decreaseincrease in content delivery product revenue resulted from the following:
· | North American |
· | European |
· | Asia-Pacific |
· | South American |
26 |
Fluctuation in content delivery product revenue is often due to the fact that we have a small number of customers making periodic large purchases that account for a significant percentage of revenue. Our content delivery product revenue is also subject to customers’ capital spending cycles, including product upgrade and expansion patterns, and may be impacted in the future by consolidation of the industry in which our customers operate.
Content delivery servicesService Revenue.Services revenue decreased by $0.1 million, or 4.6%4.0%, for the three months ended December 31, 2016 compared to the prior year. The decrease period-over-period is primarily due to a decrease in content delivery installations partially offset by an increase in out-of-warranty repairs.
Real-Time
Real-time product revenue increased $1.5 million, or 40.3%, for the three months ended December 31, 2016September 30, 2017 compared to the prior year period. The period-over-period increase in real-time product revenue resulted primarily from the following:
Revenue from defense contractors and the government tend to vary by quarter and year, and are dependent upon government initiatives and funding availability.
Real-time service revenue increased by $0.5 million, or 19.6%, for the three months ended December 31, 2016 compared to the prior year period. The increasedecrease is primarily due to a decrease in the volume of out-of-warranty revenue partially offset by an increase in annual maintenanceinstallation revenue infrom our Asia-Pacific region.content delivery solutions products.
Product Gross Margin
The following tables set forth our gross margins and gross margin percentage of revenues for the three months ended December 31, 2016 and 2015 for each of our operating segments as well as comparative data showing increases and decreases between periods (dollars in thousands):
Three Months Ended December 31, | % | |||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
Content delivery gross margin: | ||||||||||||||||
Gross margin dollars | $ | 4,309 | $ | 5,616 | $ | (1,307 | ) | (23.3 | )% | |||||||
Gross margin percentage | 59.5 | % | 65.2 | % | (5.7 | )% | ||||||||||
Real-time gross margin: | ||||||||||||||||
Gross margin dollars | $ | 5,140 | $ | 3,760 | $ | 1,380 | 36.7 | % | ||||||||
Gross margin percentage | 61.9 | % | 59.8 | % | 2.1 | % | ||||||||||
Total gross margin: | ||||||||||||||||
Gross margin dollars | $ | 9,449 | $ | 9,376 | $ | 73 | 0.8 | % | ||||||||
Gross margin percentage | 60.8 | % | 62.9 | % | (2.1 | )% |
ConsolidatedMargin. Product gross margin was $9.5$3.1 million for the three months ended December 31, 2016,September 30, 2017, an increase of $0.1$2.0 million, or 0.8%183.6%, from $9.4$1.1 million for the three months ended December 31, 2015. Consolidated gross margin percentage declined to 60.8% for the three months ended December 31, 2016 from 62.9% for the three months ended December 31, 2015. An analysis by operating segment is described below.
Content Delivery
Segment gross margin dollars were $4.3 million for the three months ended December 31, 2016, a decrease of $1.3 million, or 23.3%, from $5.6 million for the three months ended December 31, 2015. The decrease in gross margin dollars is due to the decrease in content delivery product revenue. The decline in gross margin percentage is primarily due to (1) lower gross margins on certain content delivery sales to some of our larger customers and (2) lower than average gross margins on the sales of our Aquari storage product solution.
Additionally, the decrease in gross margin dollars on content delivery services revenue had a minimal impact on the overall change in segment gross margin dollars. However, the increase in the service gross margin percentage of service revenue was primarily due a favorable service mix due to an increase in out-of-warranty repairs.
Real-Time
Segment gross margin dollars were $5.1 million for the three months ended December 31, 2016, an increase of $1.4 million, or 36.7%, from $3.8 million for the three months ended December 31, 2015.prior year period. The increase in gross margin dollars is a primarily due to the increase in both real-time product and service revenue. The increase inProduct gross margin as a percentage is primarily due an improvement in service margins dueof product revenue increased to the predominantly fixed-cost nature of our service operations.
Segment Operating Expenses
Segment operating expenses include selling and marketing, research and development expenses, and certain general and administrative expenses. The following tables set forth our segment operating expenses58.1% for the three months ended December 31, 2016 and 2015September 30, 2017 from 44.5% for each ofthe prior year period primarily due to a favorable product mix in the current year period which included increased product gross margins for our operating segments as well as comparative data showing increases and decreases between periods (dollars in thousands):
Three Months Ended December 31, | $ | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
Sales and marketing: | ||||||||||||||||
Content delivery | $ | 2,339 | $ | 2,174 | $ | 165 | 7.6 | % | ||||||||
Real-time | 1,631 | 1,426 | 205 | 14.4 | % | |||||||||||
Research and development: | ||||||||||||||||
Content delivery | $ | 1,832 | $ | 2,798 | $ | (966 | ) | (34.5 | )% | |||||||
Real-time | 984 | 964 | 20 | 2.1 | % | |||||||||||
General and administrative: | ||||||||||||||||
Content delivery | $ | 75 | $ | 60 | $ | 15 | 25.0 | % | ||||||||
Real-time | 150 | 176 | (26 | ) | (14.8 | )% |
Sales and Marketing - An analysis of sales and marketing expenses by operating segment is described below.Aquari storage solutions product compared to the prior year period.
Content DeliveryService Gross Margin
Segment sales and marketing expenses were $2.3. Service gross margin was $1.6 million for the three months ended December 31, 2016,September 30, 2017, an increase of $0.1$0.2 million, or 7.6%13.8%, from $1.4 million for the prior year period. Gross margin on service revenue increased to 61.0% of service revenue for the three months ended September 30, 2017 from 51.5% of service revenue the prior year period. Service margin as a percentage of service revenue improved primarily due to a reduction in personnel costs in both our U.S and European service and support teams.
Sales and Marketing.Sales and marketing expenses were $2.2 million for the three months ended December 31, 2015. This period-over-period increase primarily resulted from a $0.1 million increase in sales personnel and related costs.
Real-Time
Segment sales and marketing expenses were $1.6 million for the three months ended December 31, 2016, an increase of $0.2 million, or 14.4%, from $1.4 million for the three months ended December 31, 2015. This period-over-period increase primarily resulted from an increase in commissions due to increased sales.
Research and Development - An analysis of research and development expenses by operating segment is described below.
Content Delivery
Segment research and development expenses were $1.8 million for the three months ended December 31, 2016,September 30, 2017, a decrease of $1.0$0.9 million, or 34.5%28.7%, from $2.8$3.0 million for the three months ended December 31, 2015. Thefiscal year 2016. This period-over-period decrease primarily resulted from (1) a $0.8$0.6 million decrease due to changes in sales leadership and other positions eliminated during the second half of our prior fiscal year, (2) a $0.2 million decrease in trade shows and other marketing-related activities and (3) a $0.1 million decrease in sales travel-related expenses.
Research and Development.Research and development expenses were $1.7 million for the three months ended September 30, 2017, a decrease of $0.6 million, or 25.4%, from $2.3 million for fiscal year 2016. The period-over-period decrease primarily resulted from a reduction of headcount in the U.S. within our development teams and (2) a $0.1 million decrease in recruiting fees.
Real-Timeteams.
Segment research and development expenses were $1.0 million for each of the three months ended December 31, 2016 and 2015, respectively.
Segment Operating Income
Segment operating income is defined as gross margin less selling and marketing, research and development expenses, and certain general and administrative expenses. The following tables set forth our segment operating income for the three months ended December 31, 2016 and 2015 for each of our operating segments as well as comparative data showing increases and decreases between periods (dollars in thousands):
Three Months Ended December 31, | $ | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
Segment operating income: | ||||||||||||||||
Content delivery | $ | 63 | $ | 584 | $ | (521 | ) | (89.2 | )% | |||||||
Real-time | 2,375 | 1,194 | 1,181 | 98.9 | % |
An analysis of operating income by operating segment is described below.
Content Delivery
The period-over-period decrease primarily resulted from lower product revenues and gross margin dollars, partially offset by the reduction in research and development costs, as described above.
Real-Time
The period-over-period increase primarily resulted from higher product and services revenues and related gross margin dollars partially offset by slightly higher sales and marketing costs, as described above.
Corporate and Unallocated Costs
Corporate and unallocated costs include certain corporate sales and marketing and corporate general and administrative expenses (executive, finance, legal, risk management and human resources). These expenses are not included in the measure of segment operating income but are included in the reconciliation to income (loss) before income taxes. The following tables set forth our corporate and unallocated costs for the three months ended December 31, 2016 and 2015 as well as comparative data showing increases and decreases between periods (dollars in thousands):
Three Months Ended December 31, | $ | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
Sales and marketing | 398 | 197 | 201 | 102.0 | % | |||||||||||
General and administrative | 2,088 | 1,939 | 149 | 7.7 | % |
Sales and Marketing.Sales and marketing expenses increased approximately $0.2 million, or 102.0%, to $0.4 million for the three months ended December 31, 2016 from $0.2 million for the three months ended December 31, 2015. This increase was primarily due to (1) a $0.1 million increase in severance costs and (2) a $0.1 million increase in outside marketing costs.
General and Administrative.General and administrative expenses increased approximately $0.2 million, or 7.7%, to $2.1 million for the three months ended December 31, 2016 fromwere $1.9 million for the three months ended December 31, 2015.September 30, 2017, a decrease of $0.2 million, or 11.0%, from $2.2 million for the prior year period. This increasedecrease was primarily due to (1) a $0.4$0.3 million increase in legal and other professional fees primarily associated with settlementour entry into a Board Representation and Standstill Agreement with an investor and affiliate of that investor incurred in the first quarter of fiscal year 2016, (2) a $0.1 million decrease in personnel costs due to changes in executive management that took place in the fourth quarter of the prior fiscal year after the sale of our shareholder litigationReal-Time business segment and exploration of strategic alternatives,(3) a $0.2 million decrease in corporate conference expenses partially offset by (2)(4) a $0.3 million bonus paid to our chief executive officerincrease in connectionlegal fees associated with the executionpending sale of an amendmentour content delivery business and (5) a $0.1 increase in director fees due to his employment agreementthe resignation of three of our independent directors in October 2015.
Otherthe current fiscal year period.
Other Income (Expense), net. During each of the three months ended December 31, 2016 and 2015,September 30, 2017, we recognized less than$0.1 million of net realized foreign currency translation losses compared to $0.1 million in net realized currency translation gains.gains in the prior year period. These gains and losses result from the impact of the changes in value of the British pound, euro and Japanese yen, relative to the U.S. dollar, on foreign currency transactions related to short-term intercompany accounts which are settled in the normal course of business by our European and Japanese subsidiaries for which the British pound, euro and Japanese yen are the functional currencies. Additionally, we recognized an increase of less than $0.1 million in interest income earned period-over-period as we have been able to invest our cash, cash equivalents and short-term investments (including cash received from the sale of our Real-Time business) at higher rates of return than previously earned.
Provision (Benefit) for Income Taxes.We recorded a consolidated income tax expensebenefit of $0.1 million for the three months ended December 31, 2016September 30, 2017 compared to a less than $0.1 million consolidated income tax benefit for the three months ended December 31, 2015. For the three months ended December 31, 2016, the domestic tax expense is higher thanin the prior year due to the full valuation allowance that is now being applied to any tax benefit generated from operating losses in the U.S.period. The domestic expense is lower as compared to the prior year primarily attributabledue to lower state taxes and interest and penalties on uncertain tax positions and minimum state taxes in a number of jurisdictions for the three months ended December 31, 2016.September 30, 2017. The foreigninternational tax expensebenefit is lower than the prior yearhigher primarily due to a reductionlarger pre-tax loss in both Japan and the U.K. in the statutory tax rate in Japancurrent year period as compared to the prior year period.
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Loss from Continuing Operations.Our loss from continuing operations for the three months ended December 31, 2016, compared to the same period from the prior year.
In jurisdictions other than the U.K. and Japan, we either generate net operating losses or occasionally utilize some of the net operating loss carryforward amounts. However, because of the cumulative accounting losses in those jurisdictions, we maintain a full valuation allowance on those losses. This results in no net income tax provision impact in those jurisdictions as of December 31, 2016.
Net Loss.Our consolidated net loss for the three months ended December 31, 2016September 30, 2017 was $0.1$1.1 million, or a $0.01$0.11 loss per basic and diluted share, compared to a consolidated net loss for the three months ended December 31, 2015September 30, 2016 of $0.3$4.9 million, or $0.03$0.53 loss per basic and diluted share.
ResultsIncome from Discontinued Operations, Net of Operations forIncome Taxes. We sold our Real-Time business in May 2017. As a result, the Six$1.9 million of income from discontinued operations, net of income taxes includes the financial results of our Real-Time business during the three months ended December 31, 2016 Compared to the Six months ended December 31, 2015
Revenue
The following table sets forth our revenue for the six months ended December 31, 2016 and 2015 for each of our operating segments as well as comparative data showing increases and decreases between periods (dollars in thousands):
Six Months Ended December 31, | $ | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
Content delivery revenue: | ||||||||||||||||
Product | $ | 7,356 | $ | 10,123 | $ | (2,767 | ) | (27.3 | )% | |||||||
Service | 5,000 | 4,930 | 70 | 1.4 | % | |||||||||||
Total Content delivery revenue | $ | 12,356 | $ | 15,053 | $ | (2,697 | ) | (17.9 | )% | |||||||
Real-time revenue: | ||||||||||||||||
Product | $ | 10,749 | $ | 8,345 | 2,404 | 28.8 | % | |||||||||
Service | 5,558 | 4,852 | 706 | 14.6 | % | |||||||||||
Total Real-time revenue | $ | 16,307 | $ | 13,197 | $ | 3,110 | 23.6 | % |
An analysis of revenue by operating segment is described below.
Content Delivery
Content delivery product revenue decreased $2.8 million, or 27.3%, for the six months ended December 31, 2016 compared to the prior year period. Additionally, the six months ended December 31, 2016 includes $0.9 million of revenue from our Aquari storage product solution compared to $0.3 million in the prior year period. The period-over-period decrease in content delivery product revenue resulted from the following:
Fluctuation in content delivery product revenue is often due to the fact that we have a small number of customers making periodic large purchases that account for a significant percentage of revenue. Our content delivery product revenue is also subject to customers’ capital spending cycles, including product upgrade and expansion patterns, and may be impacted in the future by consolidation of the industry in which our customers operate.
Content delivery services revenue increased by $0.1 million, or 1.4%, for the six months ended December 31, 2016 compared to the prior year period despite the loss of $0.5 million in content delivery service revenue as a result of the sale of our multi-screen video analytics product line in September 2015. The increase period-over-period is primarily due to (1) an increase in content delivery installations and out-of-warranty repairs and (2) an increase in storage solutions installations.
Real-Time
Real-time product revenue increased $2.4 million, or 28.8%, for the six months ended December 31, 2016 compared to the prior year period. The period-over-period increase in real-time product revenue resulted primarily from the following:
Revenue from defense contractors and the government tend to vary by quarter and year, and are dependent upon government initiatives and funding availability.
Real-time service revenue increased by $0.7 million, or 14.6%, for the six months ended December 31, 2016 compared to the prior year period. The increase is primarily due to incremental time and material service projects in Japan and an increase in annual maintenance revenue in another Asia-Pacific location.
Gross Margin
The following tables set forth our gross margins and gross margin percentage of revenues for the six months ended December 31, 2016 and 2015 for each of our operating segments as well as comparative data showing increases and decreases between periods (dollars in thousands):
Six Months Ended December 31, | % | |||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
Content delivery gross margin: | ||||||||||||||||
Gross margin dollars | $ | 6,834 | $ | 9,342 | $ | (2,508 | ) | (26.8 | )% | |||||||
Gross margin percentage | 55.3 | % | 62.1 | % | (6.8 | )% | ||||||||||
Real-time gross margin: | ||||||||||||||||
Gross margin dollars | $ | 9,798 | $ | 7,891 | $ | 1,907 | 24.2 | % | ||||||||
Gross margin percentage | 60.1 | % | 59.8 | % | 0.3 | % | ||||||||||
Total gross margin: | ||||||||||||||||
Gross margin dollars | $ | 16,632 | $ | 17,233 | $ | (601 | ) | (3.5 | )% | |||||||
Gross margin percentage | 58.0 | % | 61.0 | % | (3.0 | )% |
Consolidated gross margin was $16.6 million for the six months ended December 31, 2016, a decrease of $0.6 million, or 3.5% from $17.2 million for the six months ended December 31, 2015. Consolidated gross margin percentage declined to 58.0% for the six months ended December 31, 2016 from 61.0% for the six months ended December 31, 2015. An analysis by operating segment is described below.
Content Delivery
Segment gross margin dollars were $6.8 million for the six months ended December 31, 2016, a decrease of $2.5 million, or 26.8%, from $9.3 million for the six months ended December 31, 2015. The decrease in gross margin dollars is due to the decrease in content delivery product revenue. The decline in gross margin percentage of product revenue is primarily due to (1) lower gross margins on certain content delivery sales to some of our larger customers and (2) lower than average gross margins on the sales of our Aquari storage product solution.
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Additionally, the increase in gross margin dollars on content delivery services revenue had a minimal impact on the overall change in segment gross margin dollars. The service gross margin percentage of service revenue remained flat despite the loss of high margin service revenue from our multi-screen video analytics product line, which was sold in September 2015.
Real-Time
Segment gross margin dollars were $9.8 million for the six months ended December 31, 2016, an increase of $1.9 million, or 24.2%, from $7.9 million for the six months ended December 31, 2015. The increase in gross margin dollars is a primarily due to the increase in real-time product revenue. The slight increase in gross margin percentage is primarily due a favorable product mix period-over-period.
An increase in gross margin dollars on real-time services revenue had an impact on the overall change in segment gross margin dollars. Service gross margin percentage of service revenue increased to 67.8% for the six months ended December 31, 2016 from 65.4% for the six months ended December 31, 2015 primarily due to the predominantly fixed-cost nature of our service operations.
Segment Operating Expenses
Segment operating expenses include selling and marketing, research and development expenses, and certain general and administrative expenses. The following tables set forth our segment operating expenses for the six months ended December 31, 2016 and 2015 for each of our operating segments as well as comparative data showing increases and decreases between periods (dollars in thousands):
Six Months Ended December 31, | $ | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
Sales and marketing: | ||||||||||||||||
Content delivery | $ | 4,955 | $ | 4,084 | $ | 871 | 21.3 | % | ||||||||
Real-time | 3,091 | 2,755 | 336 | 12.2 | % | |||||||||||
Research and development: | ||||||||||||||||
Content delivery | $ | 4,057 | $ | 5,669 | $ | (1,612 | ) | (28.4 | )% | |||||||
Real-time | 2,066 | 1,930 | 136 | 7.0 | % | |||||||||||
General and administrative: | ||||||||||||||||
Content delivery | $ | 148 | $ | 117 | $ | 31 | 26.5 | % | ||||||||
Real-time | 283 | 294 | (11 | ) | (3.7 | )% |
Sales and Marketing - An analysis of sales and marketing expenses by operating segment is described below.
Content Delivery
Segment sales and marketing expenses were $5.0 million for the six months ended December 31, 2016, an increase of $0.9 million, or 21.3%, from $4.1 million for the six months ended December 31, 2015. This period-over-period increase primarily resulted from (1) a $0.4 million increase in sales personnel and related costs to help expand penetration of our existing products in our target markets and new markets for our Aquari storage solutions product, (2) a $0.3 million increase in travel and trade show expenses to promote visibility of our products and (3) a $0.1 million increase in depreciation expense related to equipment on loan to customers to demonstrate our systems in a live environment.
Real-Time
Segment sales and marketing expenses were $3.1 million for the six months ended December 31, 2016, an increase of $0.3 million, or 12.2%, from $2.8 million for the six months ended December 31, 2015. This period-over-period increase primarily resulted from (1) a $0.2 increase in sales personnel and related costs, including commissions and (2) a $0.1 million from unfavorable foreign exchange rate changes.
Research and Development - An analysis of research and development expenses by operating segment is described below.
Content Delivery
Segment research and development expenses were $4.1 million for the six months ended December 31, 2016, a decrease of $1.6 million, or 28.4%, from $5.7 million for the six months ended December 31, 2015. The period-over-period decrease primarily resulted from (1) a $1.3 million decrease from a reduction of headcount in the U.S. within our development teams, (2) a $0.2 million decrease in subcontractor and outsourced development costs, (3) a $0.2 million decrease in overall research and development expenses as a result of the sale of our multi-screen video analytics product line in September 2015, primarily related to personnel costs, partially offset by (4) a $0.2 million increase in severance related to the reduced headcount noted above.
Real-Time
Segment research and development expenses were $2.1 million for the six months ended December 31, 2016, an increase of $0.2 million, or 7.0%, from $1.9 million for the six months ended December 31, 2015. The period-over-period increase primarily resulted from an increase in personnel and related costs.
Segment Operating Income
Segment operating income is defined as gross margin less selling and marketing, research and development expenses, and certain general and administrative expenses. The following tables set forth our segment operating income for the six months ended December 31, 2016 and 2015 for each of our operating segments as well as comparative data showing increases and decreases between periods (dollars in thousands):
Six Months Ended December 31, | $ | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
Segment operating income (loss): | ||||||||||||||||
Content delivery | $ | (2,326 | ) | $ | (528 | ) | $ | (1,798 | ) | 340.5 | % | |||||
Real-time | 4,358 | 2,912 | 1,446 | 49.7 | % |
An analysis of operating income by operating segment is described below.
Content Delivery
The period-over-period decrease primarily resulted from lower product revenues and gross margin dollars, as described above.
Real-Time
The period-over-period increase primarily resulted from higher product and services revenues and related gross margin dollars partially offset by slightly higher sales and marketing and research and development costs, as described above.
Corporate and Unallocated Costs
Corporate and unallocated costs include certain corporate sales and marketing and corporate general and administrative expenses (executive, finance, legal, risk management and human resources). These expenses are not included in the measure of segment operating income but are included in the reconciliation to income (loss) before income taxes. The following tables set forth our corporate and unallocated costs for the six months ended December 31, 2016 and 2015 as well as comparative data showing increases and decreases between periods (dollars in thousands):
Six Months Ended December 31, | $ | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
Sales and marketing | 797 | 352 | 445 | 126.4 | % | |||||||||||
General and administrative | 4,226 | 3,542 | 684 | 19.3 | % | |||||||||||
Gain on sale of product line, net | - | (4,116 | ) | 4,116 | (100.0 | )% |
Sales and Marketing.Sales and marketing expenses increased approximately $0.4 million, or 126.4%, to $0.8 million for the six months ended December 31, 2016 from $0.4 million for the six months ended December 31, 2015. This increase was primarily due to (1) a $0.2 million increase in personnel costs related to the addition of a sales executive in Europe starting in the third quarter of the prior fiscal year, including commissions, (2) a $0.1 million increase in severance costs and (3) a $0.2 million increase in outsourced marketing activities.
General and Administrative.General and administrative expenses increased approximately $0.7 million, or 19.3%, to $4.2 million for the six months ended December 31, 2016 from $3.5 million for the six months ended December 31, 2015. This increase was primarily due to (1) a $0.7 million increase in legal and other professional fees primarily associated with our entry into a Board Representation and Standstill Agreement with an investor and affiliate of that investor, settlement of our shareholder litigation and exploration of strategic alternatives, (2) a $0.2 million increase in personnel-related costs, including an increase in share-based compensation costs, partially offset by (3) a $0.3 million bonus paid to our chief executive officer in connection with the execution of an amendment to his employment agreement in October 2015.
Gain on Sale of Product Line, net. During the six months ended December 31, 2015, we sold the customer contracts and intellectual property related to our multi-screen video analytics product line for $3.5 million. The recorded net gain of $4.1 million included (1) customer contracts and intellectual property with a net book value of $0.2 million, (2) related assets and liabilities not sold or transferred in the transaction of $1.0 million (net liability, consisting primarily of unearned deferred revenue) and (3) legal, accounting and other expenses of $0.2 million that would not have been incurred otherwise.
Other
Other Income, net. During each of the six months ended December 31, 2016 and 2015, we recognized $0.1 million in net realized currency translation gains. These gains and losses result from the impact of the changes in value of the British pound, euro and Japanese yen, relative to the U.S. dollar, on foreign currency transactions related to short-term intercompany accounts which are settled in the normal course of business by our European and Japanese subsidiaries for which the British pound, euro and Japanese yen are the functional currencies.
Provision (Benefit) for Income Taxes.We recorded consolidated income tax expense of $0.2 million for the six months ended December 31, 2016 compared to a $0.2 million consolidated income tax benefit for the six months ended December 31, 2015. For the six months ended December 31, 2016, the domestic tax expense is higher than the prior year due to the full valuation allowance that is now being applied to any tax benefit generated from operating losses in the U.S. The domestic expense is primarily attributable to interest and penalties on uncertain tax positions and minimum state taxes in a number of jurisdictions for the six months ended December 31, 2016. The foreign tax expense is lower than the prior year primarily due to a reduction in the statutory tax rate in Japan for the six months ended December 31, 2016, compared to the same period from the prior year.
In jurisdictions other than the U.K. and Japan, we either generate net operating losses or occasionally utilize some of the net operating loss carryforward amounts. However, because of the cumulative accounting losses in those jurisdictions, we maintain a full valuation allowance on those losses. This results in no net income tax provision impact in those jurisdictions as of December 31, 2016.
Net Income (Loss).Our consolidated net loss for the six months ended December 31, 2016 was $3.0 million, or a $0.33 loss per basic and diluted share, compared to consolidated net income for the six months ended December 31, 2015 of $2.9 million, or $0.32 income per basic and diluted share.
Liquidity and Capital Resources
Our liquidity is dependent upon many factors, including sales volume, product and service costs, operating results and the efficiency of asset use and turnover. Our future liquidity will be affected by, among other things:
· | our reliance on a small customer base, typically represented by a small number of large, concentrated orders (the largest three customers accounted for |
· | our content delivery product revenue is subject to customers’ capital spending cycles and may be impacted in the future by consolidation of the industry in which our customers operate; |
· | the rate of growth or decline or change in market, if any, of content delivery market expansions and the pace that video service companies implement, upgrade or replace content delivery technology; |
· | our investment strategy into the storage solutions market; |
· |
our ability to renew maintenance and support service agreements with customers and retain existing customers; |
· | our future access to capital; |
· | our ability to manage expenses consistent with the rate of growth or decline in our markets; |
· | our exploration and evaluation of strategic alternatives; |
· | ongoing cost control actions and expenses, including capital expenditures; |
· | the margins on our product and service sales; |
· | timing of product shipments, which typically occur during the last month of the quarter; |
· | the impact of delays of product acceptance from our customers; |
· | the percentage of sales derived from outside the U.S. where there are generally longer accounts receivable collection cycles; |
· | the number of countries in which we operate, which may require maintenance of minimum cash levels in each country and, in certain cases, may restrict the repatriation of cash, by requiring us to maintain levels of capital; |
· | the use of cash to pay quarterly and special dividends. |
Uses and Sources of Cash
We generated $1.6used $3.5 million and used $3.6generated $0.4 million of cash from operating activities during the sixthree months ended December 31,September 30, 2017 and 2016, and 2015, respectively. Operating cash flows during the sixthree months ending September 30, 2017 were primarily attributable the timing of payments made against our accounts payable to settle the previous quarter’s transaction costs related to the sale of our Real-Time business, inventory purchases and accrued compensation. Operating cash flows during the three months ended December 31,September 30, 2016 were primarily attributable to the collection of accounts duringreceivable for sales shipped late in the period,prior quarter, offset by the current period net loss and the timing of payments made against our accounts payable to settle the previous quarter’s inventory purchasespurchase and other obligations. Operating cash outflows during the six months ended December 31, 2015 were primarily attributable to the increase in accounts receivable created by certain larger sales that occurred late in the prior year’s second quarter.
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We invested $0.5$0.2 million and $1.0$0.3 million in property and equipment during the sixthree months ended December 31,September 30, 2017 and 2016, and 2015, respectively. Capital additions during each of these periods were primarily related to: (1) development and test equipment for our development group,groups and (2) demonstration systems used by our sales and marketing group and (3) facilities improvements.group. We expect our capital additionsexpenditures for fiscal year 2018 to increasebe similar to fiscal year 2017.
We had maturities of $4.8 million of previously invested short-term investments and reinvested $4.2 million in short-term investments during the remainderthree months ended September 30, 2017. We moved cash to these short-term investments in the third quarter of our current fiscal year primarily to support2017 so that we may earn a higher return than we had previously earned with our continuing investment in our Aquari storage solutions product line.
During the sixcash and cash equivalent balances. Our short-term investments consist of highly liquid commercial paper and U.S. Treasury bills and have original maturities of more than 3 months ended December 31, 2015, we sold the customer contracts and intellectual property related to our multi-screen video analytics product line for $3.5 million. Cash proceeds from the transaction consisted of $2.8 million paid immediately after closing. The balance of the sales price was collected in full in June 2016.but no more than 12 months.
We paid twoone quarterly cash dividends ofdividend, each for $0.12 per share, during each of the sixthree months ended December 31, 2016September 30, 2017 and 2015.2016. During both the sixthree months ended December 31,September 30, 2017 and 2016, and 2015, we also paid less than $0.1 million of additional dividends in each period that had been held as dividends payable from previous declarations to restricted stockholders for whom restrictions lapsed during each period. In the three months ended September 30, 2017, the additional amount paid includes payments of dividends to three of our independent directors who resigned during the period. We intend to pay a regular quarterly cash dividend on our common shares during the second quarter of fiscal year 2018 but will suspend future dividend payments while we consider potential acquisition targets and alternative uses of our common stock subjectremaining assets subsequent to among other things,the consummation of the sale of our results of operations, cash balances, future cash requirements, financial condition, statutory requirements of Delaware law, and other factors that the Board may deem relevant.content delivery business. We believe that a portion of our dividends may be treated as a return of capital to stockholders, rather than dividend income, as we believe dividend payments may exceed our cumulative earnings and profits.
Although we do not have any outstanding debt or borrowing facilities in place at December 31, 2016,September 30, 2017, we periodically review the need for credit arrangements. However, basedBased upon our existing cash balances, historical cash usage, and anticipated operating cash flow in the near term, we believe that existing cash balances will be sufficient to meet our anticipated working capital, capital expenditure requirements and any dividend payments for at least the next twelve months.
At December 31, 2016, weWe had working capital (current assets less current liabilities) of $17.4$43.3 million including cashand $45.3 million and cash, cash equivalents and short-term investments of $18.8 million. At$37.9 million and $42.8 million at September 30, 2017 and June 30, 2016, we had working capital of $22.6 million, including cash and cash equivalents of $20.3 million.2017, respectively. At December 31, 2016,September 30, 2017, we had no material commitments for capital expenditures.
As of December 31, 2016,September 30, 2017, approximately $1.9$0.6 million, or 10.1%1.8%, of our cash is in foreign accounts and there is no expectation that any foreign cash would need to be transferred from these foreign accounts to cover U.S. operations in the next 12 months.Based upon our existing cash balances and short-term investments, historical cash usage, and anticipated operating cash flow in the current fiscal year, we believe that existing U.S. cash balances will be sufficient to meet our anticipated working capital, dividend payments and capital expenditure requirements for at least the next 12 months.
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Off-Balance Sheet Arrangements
We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products and certain other matters. In evaluating estimated losses on these indemnifications, we consider factors such as the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of loss. These obligations did not have a material impact on our financial statements during the periods presented. See Note 17 – Commitments and Contingencies to the condensed consolidated financial statements for the additional disclosures regarding indemnification.
Critical Accounting Policies and Estimates
The SEC defines “critical accounting estimates” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.Our critical accounting policies and estimates are disclosed under the section“Application of Critical Accounting Policies”in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016.2017. Our critical accounting estimates have not changed in any material respect during the three months ended December 31, 2016.September 30, 2017.
Recent Accounting Guidance
See Note 2 – Recent Accounting Guidance to our accompanying condensed consolidated financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and the expected effects on our consolidated results of operations and financial condition.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements made or incorporated by reference in this quarterly reportQuarterly Report on Form 10-Q may constitute “forward-looking statements” within the meaning of the federal securities laws. When used or incorporated by reference in this report, the words “believes,” “expects,” “estimates,” “anticipates,” and similar expressions, are intended to identify forward-looking statements. Statements regarding future events and developments, our future performance, market share, new market growth, payment of dividends, ability to utilize our net deferred tax assets and availability of earnings and profits with respect to dividend income, as well as our expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. Examples of our forward-looking statements in this report include, but are not limited to, our ability to obtain stockholder approval and consummate the sale of our content delivery business with Vecima Networks Inc., as well as any purchase price adjustment or indemnification claim related to such sale and the timing of release of amounts subject to escrow thereunder and the carrying value of certain assets and liabilities after the closing of the transactions contemplated by the CDN APA, the impact of our content delivery strategy on our business,business; the impact of our new AquariAquari™ storage solution strategy on our business,business; the impact of any strategic initiatives we may undertake; the impact of the current reestablishment of and potential for future release of our tax valuation allowances on future income tax provisions and income taxes paid,paid; expected level of capital additions,additions; our expected cash position,position; the impact of interest rate changes and fluctuation in currency exchange rates,rates; our sufficiency of cash,cash; and the impact of litigation and the payment of dividends. These statements are based on beliefs and assumptions of our management, which are based on currently available information. All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected. The risks and uncertainties which could affect our financial condition or results of operations include, without limitation: the potential consolidation of the markets that we serve; U.S. Government sequestration; European austerity measures; the impact of the U.K. exiting the European Union; delays or cancellations of customer orders; non-renewal of maintenance and support service agreements with customers; changes in product demand; economic conditions; various inventory risks due to changes in market conditions; margins of the content delivery business to capture new business; our ability to reinvest the net proceeds from the sale of our Real-Time business in a manner that we believe will generate an adequate return to our remaining business; fluctuations and timing of large content delivery orders; risks associated with our operations in the People’s Republic of China; uncertainties relating to the development and ownership of intellectual property; uncertainties relating to our ability and the ability of other companies to enforce their intellectual property rights; the pricing and availability of equipment, materials and inventories; the concentration of our customers; failure to effectively manage change; delays in testing and introductions of new products; the impact of reductions in force on our operations; rapid technology changes; system errors or failures; reliance on a limited number of suppliers and failure of components provided by those suppliers; uncertainties associated with international business activities, including foreign regulations, trade controls, taxes, tariffs and currency fluctuations; the impact of competition on the pricing of content delivery products; failure to effectively service the installed base; the entry of new, well-capitalized competitors into our markets; the success of new content delivery products, including acceptance of our new storage solutions; the success of our relationships with technology and channel partners; capital spending patterns by a limited customer base; the current challenging macroeconomic environment; continuing unevenness of the global economic recovery; global terrorism; privacy concerns over data collection; our ability to utilize net operating losses to offset cash taxes in the event of an ownership change as defined by the Internal Revenue Service; earthquakes, tsunamis, floods and other natural disasters in areas in which our customers and suppliers operate; the process of evaluation of strategic alternatives; and the availability of debt or equity financing to support our liquidity needs.
Other important risk factors that could cause actual results to differ from any forward-looking statements made in this report are discussed in Part I, Item 1A. of our Annual Report on Form 10-K for the fiscal year ended June 30, 2016.2017.
Our forward-looking statements are based on current expectations and speak only as of the date of such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Pursuant to Item 305(e) of Regulation S-K (Section 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company” as defined by Rule 229.10(f)(1).
We are exposed to market risk from changes in interest rates and foreign currency exchange rates. We are exposed to the impact of interest rate changes on our short-term cash investments. We conduct business in the U.S. and around the world. Our most significant foreign currency transaction exposure relates to the U.K., certain European countries that use the euro as a common currency, and Japan. We do not hedge against fluctuations in exchange rates.
Item 4. Controls and Procedures
Item 4. | Controls and Procedures |
Evaluation of Controls and Procedures
We conducted an evaluation as of December 31, 2016,September 30, 2017, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that 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 SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures 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 accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management concluded that our disclosuresdisclosure controls and procedures were effective as of December 31, 2016.September 30, 2017.
Changes in Internal Control
There were no changes to our internal controls over financial reporting during the quarter ended December 31, 2016September 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 1. | Legal Proceedings |
We are not presently involved in any material litigation. However, we are, from time to time, party to various routine legal proceedings arising out of our business. See Note 17 – Commitments and Contingencies to our condensed consolidated financial statements for additional information about legal proceedings.
Additional risk factors are discussed in Part I, Item 1A. of our Annual Report on Form 10-K for the fiscal year ended June 30, 2016. There2017. Except as discussed below under “Risks Related to the CDN APA,” there have been no material changes to our risk factors as previously disclosed.
Risks Related to the CDN APA
The transactions contemplated by the CDN APA may not be completed or may be delayed if the conditions to closing are not satisfied or waived.
The transactions contemplated by the CDN APA (the “CDN Asset Sale”) may not be completed or may be delayed because the conditions to closing set forth in the CDN APA, including approval of the transaction by our stockholders and the absence of a material adverse effect before the closing, may not be satisfied or waived. If the CDN Asset Sale is not completed, we may have difficulty recouping the costs incurred in connection with negotiating the CDN Asset Sale, our relationships with our customers, suppliers and employees may be damaged and our business may be harmed.
If we fail to complete the CDN Asset Sale, our business may be harmed.
As a result of our announcement of the CDN Asset Sale, third parties may be unwilling to enter into material agreements with respect to our content delivery business. New or existing customers and business partners may prefer to enter into agreements with our competitors who have not expressed an intention to sell their business because customers and business partners may perceive that such new relationships are likely to be more stable. Employees working in our content delivery business may become concerned about the future of the business and lose focus or seek other employment. If we fail to complete the CDN Asset Sale, the failure to maintain existing business relationships or enter into new ones could adversely affect our business, results of operations and financial condition. If we fail to complete the CDN Asset Sale, we will also retain and continue to operate our content delivery business. The resultant potential for loss or disaffection of employees or customers of our content delivery business could have a material, negative impact on the value of our content delivery business.
In addition, if the CDN Asset Sale is not consummated, our directors, executive officers and other employees will have expended extensive time and effort and will have experienced significant distractions from their work during the pendency of the transaction and we will have incurred significant third-party transaction costs, in each case, without any commensurate benefit, which may have a material and adverse effect on our stock price and results of operations.
Failure to complete the CDN Asset Sale may cause the market price for our common stock to decline.
If our stockholders fail to approve the CDN Asset Sale, or if the CDN Asset Sale is not completed for any other reason, the market price of our common stock may decline due to various potential consequences, including:
· | we may not be able to sell our content delivery business to another party on terms as favorable to us as the terms of the CDN APA; |
· | the failure to complete the CDN Asset Sale may create substantial doubt as to our ability to effectively implement our current business strategies; and |
· | our costs related to the CDN Asset Sale, such as legal and accounting fees, must be paid even if the CDN Asset Sale is not completed. |
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If the CDN Asset Sale is not completed, we may explore other potential transactions, but the alternatives may be less favorable to us and there can be no assurance that we will be able to complete an alternative transaction.
If the CDN Asset Sale is not completed, we may explore other potential transactions, including a sale of our content delivery business to another party on such terms as the board of directors may approve. The terms of an alternative transaction may be less favorable to us than the terms of the CDN Asset Sale and there can be no assurance that we will be able to reach agreement with or complete an alternative transaction with another party.
The amount of net proceeds that we will receive from the CDN Asset Sale is subject to uncertainties.
Pursuant to the CDN APA, the purchase price payable by Vecima is subject to adjustment based on a net working capital target of $2.64 million. In addition, $1.45 million of the purchase price payable by Vecima at closing will be placed into escrow and subject to loss, in whole or in part after the closing, if Vecima successfully asserts claims for indemnification pursuant to the indemnification provisions of the CDN APA. Furthermore, we may have unforeseen liabilities and expenses that must be satisfied from the after-tax net proceeds of the CDN Asset Sale, leaving less to fund our remaining operations.
Stockholders are not guaranteed any of the proceeds from the CDN Asset Sale.
Our board of directors has instructed the Investment Committee to evaluate options to maximize the value of our remaining assets, including identifying potential opportunities to invest in or acquire one or more operating businesses that provide opportunities for appreciation in value. As of the date hereof, the Investment Committee has not identified any specific acquisition or investment target. If the Investment Committee is unable to identify a suitable acquisition target that is appropriately valued, we may consider alternatives for returning capital to stockholders while we wind up our affairs. If we wind up our affairs and liquidate under applicable law, our net operating loss carryforwards will be forfeit.
Management could spend or invest the net proceeds from the CDN Asset Sale in ways with which our stockholders may not agree.
Our management could spend or invest the proceeds from the CDN Asset Sale in ways with which our stockholders may not agree. Management and the board of directors may authorize such spending or investment without seeking stockholder approval. The investment of these proceeds may not yield a favorable return.
There can be no assurances that we will be successful in investing the proceeds of the CDN Asset Sale.
The process to identify potential investment opportunities and acquisition targets, to investigate and evaluate the future returns therefrom and business prospects thereof and to negotiate definitive agreements with respect to such transactions on mutually acceptable terms can be time consuming and costly. We are likely to encounter intense competition from other companies with similar business objectives to ours, including private equity and venture capital funds, leveraged buyout funds, investment firms with significantly greater financial and other resources and operating businesses competing for acquisitions. Many of these companies are well established and have extensive experience in identifying and effecting business combinations.
In addition, we will incur operating expenses, resulting from payroll, rent and other overhead and professional fees, while we are evaluating opportunities to invest the proceeds of the CDN Asset Sale.
We may consider potential acquisition candidates in different industries, and stockholders have no basis at this time to ascertain the merits or risks of any business that we may ultimately operate.
Our business strategy contemplates the potential acquisition of one or more operating businesses or other investments that we believe will provide better returns on equity than our content delivery business that we are selling, and we are not limited to acquisitions and/or investments to any particular acquisition targets or any particular industry or type of business. Accordingly, there is no current basis for stockholders to evaluate the possible merits or risks of the target business with which we may ultimately effect a business combination or other investment. Although we will seek to evaluate the risks inherent in a particular investment or acquisition opportunity, we cannot assure stockholders that all of the significant risks present in that opportunity will be properly assessed. Even if we properly assess those risks, some of them may be outside of our control or ability to affect. We will not seek stockholder approval for any business combination or other investment that we may pursue, so stockholders will most likely not be provided with an opportunity to evaluate the specific merits or risks of such a transaction before we become committed to the transaction.
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Resources will be expended in researching potential acquisitions and investments that might not be consummated.
The investigation of target businesses and the negotiation, drafting and execution of relevant agreements, disclosure documents, and other instruments will require substantial management time and attention in addition to costs for accountants, attorneys and others. If a decision is made not to complete a specific business combination or other investment the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific opportunity, we may fail to consummate the transaction for any number of reasons, including those beyond our control.
Subsequent to an acquisition, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and our share price, which could cause stockholders to lose some or all of their investments.
Even if we conduct extensive due diligence on a target business with which we combine, we cannot assure stockholders that this diligence will identify all material issues that may be present inside a particular target business, that it would be possible to uncover all material issues through a customary reasonable amount of due diligence, or that factors outside of the target business and outside of our control will not later arise. As a result of these factors, we may be forced to later write-down or write-off assets, restructure our operations, or incur impairment or other charges that could result in our reporting losses. Even if our due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities. In addition, charges of this nature may cause us to violate net worth or other covenants to which we may be subject as a result of assuming pre-existing debt held by a target business or by virtue of our obtaining post-Divestiture debt financing. Accordingly, stockholders could suffer a significant reduction in the value of their shares.
We may issue additional shares of common stock or other securities to complete business combinations or under employee incentive plans. Any such issuances would dilute the interest of our stockholders and likely present other risks.
Our amended and restated certificate of incorporation authorizes our board of directors to issue shares of our common stock or preferred stock from time to time in their business judgment up to the amount of our then authorized capitalization. We may issue a substantial number of additional shares of our common stock, and may issue shares of our preferred stock, in order to complete business combinations or under employee incentive plans. These issuances:
· | may significantly dilute stockholders’ equity interests; |
· | may subordinate the rights of holders of shares of our common stock if shares of preferred stock are issued with rights senior to those afforded our common stock; |
· | could cause a change in control if a substantial number of shares of our common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards and could result in the resignation or removal of our present officers and directors; and |
· | may adversely affect prevailing market prices for our common stock. |
We may issue notes or other debt securities, or otherwise incur substantial debt, to complete a business combination, which may adversely affect our leverage and financial condition and thus negatively impact the value of our stockholders' investment in us.
Although we have no commitments as of the date of this proxy statement to issue any notes or other debt securities, or to otherwise incur indebtedness, we may choose to incur substantial debt to finance our growth plans. The incurrence of debt could have a variety of negative effects, including:
· | default and foreclosure on our assets if our operating revenues after an initial business combination are insufficient to repay our debt obligations; |
· | acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach covenants that require the maintenance of financial ratios or reserves without a waiver or renegotiation of that covenant; |
· | our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand; |
· | our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding; |
· | our inability to pay dividends on our common stock; |
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· | using a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for dividends on our common stock if declared, expenses, capital expenditures, acquisitions and other general corporate purposes; |
· | limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate; |
· | increased vulnerability to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; and |
· | limitations on our ability to borrow additional amounts for expenses, capital expenditures, acquisitions, debt service requirements, execution of our strategy and other purposes and other disadvantages compared to our competitors who have less debt. |
We may have a limited ability to assess the management of a prospective target business and, as a result, may effect a business combination with a target business whose management may not have the skills, qualifications or abilities to manage a public company.
When evaluating the desirability of effecting a business combination with a prospective target business, our ability to assess the target business's management may be limited due to a lack of time, resources or information. Our assessment of the capabilities of the target's management, therefore, may prove to be incorrect and such management may lack the skills, qualifications or abilities we suspected. Should the target's management not possess the skills, qualifications or abilities necessary to manage a public company, the operations and profitability of the post-combination business may be negatively impacted.
We may attempt to complete business combinations with private companies about which little information is available, which may result in a business combination with a company that is not as profitable as we suspected, if at all.
In pursuing our acquisition strategy, we may seek to effectuate business combinations with privately held companies. By definition, very little public information exists about private companies, and we could be required to make our decision on whether to pursue a potential initial business combination on the basis of limited information, which may result in a business combination with a company that is not as profitable as we expect, if at all.
After the closing of the CDN Asset Sale, we may stop paying dividends to our stockholders.
On October 26, 2017, the board of directors determined that it intends to (i) make the regularly scheduled quarterly dividend payment of $0.12 per share of common stock in December 2017 and (ii) suspend future dividend payments while the Investment Committee considers potential acquisition targets and alternative uses of our remaining assets, including the proceeds of the CDN Asset Sale.
We may make acquisitions where we do not own all or a majority of the target enterprise.
We may make acquisitions where do not own all or a majority of the target enterprise. We may engage in such acquisitions or make such investments where we desire the target management to continue to have a significant equity incentive to grow and ensure the profitability of the target business. We may also make such acquisitions or investments where we do not have sufficient financial resources to acquire all of the equity in the target company or where the target has price requirements that we are unwilling to meet at the time of the acquisition or investment. Our minority or less than 100% ownership subjects us to risks that we do not control the target company and its results of operations, business condition or prospects may be materially adversely impacted by the decisions of the other equity owners or the difficulty of negotiating among equity owners.
By completing the CDN Asset Sale, we will no longer be engaged in the content delivery and storage business.
Our content delivery business accounted for substantially all of our revenue from continuing operations for the fiscal year ended June 30, 2017. By selling substantially all of our assets relating to our content delivery business to Vecima, we will be exiting the content delivery and storage business. Following the CDN Asset Sale, we will no longer have an operating business but we expect to continue to incur operating expenses and anticipate our expenses and losses will increase in the foreseeable future as we continue our efforts to identify and evaluate potential acquisition targets.
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We may fail to satisfy the continued listing standards of The NASDAQ Global Market.
Even though we currently satisfy the continued listing standards for The NASDAQ Global Market, following the completion of the CDN Asset Sale, we may fail to satisfy the continued listing standards of The NASDAQ Global Market. In the event that we are unable to satisfy the continued listing standards of The NASDAQ Global Market, our common stock may be delisted from that market. Any delisting of our common stock from The NASDAQ Global Market could adversely affect our ability to attract new investors, decrease the liquidity of our outstanding shares of common stock, reduce our flexibility to raise additional capital, reduce the price at which our common stock trades and increase the transaction costs inherent in trading such shares with overall negative effects for our stockholders. In addition, delisting of our common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock, and might deter certain institutions and persons from investing in our securities at all. For these reasons and others, delisting could adversely affect the price of our common stock and our business, financial condition and results of operations.
We will be unable to compete with our content delivery business for a period of three years after the date of the closing of the CDN Asset Sale.
In connection with the closing of the CDN Asset Sale, we have agreed to enter into the Non-Compete Agreement, which provides that until the third anniversary of the closing of the CDN Asset Sale, we will not:
· | engage in any activity that competes with our content delivery business; |
· | use or disclose any confidential, non-public information to be transferred to Vecima at the closing or otherwise related to our content delivery business; or |
· | own, manage, operate, assist, invest in or acquire any person or entity that competes with our content delivery business (except for ownership of 5% of less of the outstanding securities of a publicly traded entity). |
The CDN APA will expose us to contingent liabilities that could have a material adverse effect on our financial condition.
We have agreed to indemnify Vecima for breaches of any representation, warranty, or covenant made by us in the CDN APA, for losses arising out of or in connection with excluded assets or excluded liabilities, and for certain other matters. Indemnification claims by Vecima would reduce the amount of the escrow that we receive and could have a material adverse effect on our financial condition. Other than in the event of fraud or willful misconduct, we will not be obligated to indemnify Vecima for any breach of the representations, warranties or covenants made by us under the CDN APA until the aggregate amount of claims for indemnification exceed $100,000. In the event that claims for indemnification for breach of most of the representations and warranties made by us under the CDN APA exceed this threshold, we will be obligated to indemnify Vecima for any damages or loss resulting from such breach up to five percent (5%) of the final purchase price to be paid by Vecima pursuant to the CDN APA.
The CDN APA limits our ability to pursue alternatives to the CDN Asset Sale.
The CDN APA contains provisions that make it more difficult for us to sell our content delivery business to any party other than Vecima. These provisions include the prohibition on our ability to solicit acquisition proposals, the requirement that we pay a termination fee of $1.45 million if the CDN APA is terminated in specified circumstances, and Vecima’s right to be advised of acquisition proposals and to submit revised proposals for consideration. These provisions could discourage a third party that might have an interest in acquiring all of or a significant part of Concurrent or our content delivery business from considering or proposing an alternative transaction, even if that party were prepared to pay consideration with a higher value than the consideration to be paid by Vecima.
Vecima’s right, as set forth in the CDN APA, to be advised of and to submit a revised offer in response to any unsolicited third-party acquisition proposal continues until the termination of the CDN APA, which could make it more difficult for Concurrent to complete an alternative business combination transaction with another party.
The utilization of our net operating loss carryforwards may be challenged.
If we earn taxable income in future periods, the Internal Revenue Service may challenge the utilization of our net operating loss carryforwards. The Internal Revenue Service will have a number of theories on which it and the U.S. Justice Department could base a challenge to our utilization of our net operating loss carryforwards and the resolution of such challenges is uncertain.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. Defaults Upon Senior Securities
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. Mine Safety Disclosures
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
None.
Item 6. | Exhibits |
Exhibit | Description of Document | |
2.1 | Asset Purchase Agreement dated as of October 13, 2017, by and between Concurrent Computer Corporation and Vecima Networks Inc. (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on October 16, 2017). | |
3.1 | Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-2 (No. 33-62440)). | |
3.2 | Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant (incorporated by reference to the Registrant’s Proxy on Form DEFR14A filed on June 2, 2008). | |
3.3 | Certificate of Amendment to its Restated Certificate of Incorporation of the Registrant (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on June 30, 2011). | |
3.4 | Amended and Restated Bylaws of the Registrant (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on September 9, 2011). | |
3.5 | Certificate of Correction to Restated Certificate of Incorporation of the Registrant (incorporated by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002). | |
Amended Certificate of Designations of Series A Participating Cumulative Preferred Stock (incorporated by reference to the Form 8-A/A, dated August 9, 2002). | ||
Amendment to Amended Certificate of Designations of Series A Participating Cumulative Preferred Stock (incorporated by reference to the Form 8-A/A, dated August 9, 2002). | ||
Certificate of Designations of Series B | ||
Certificate of Amendment to the Restated Certificate of Incorporation of Registrant (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on November 7, 2016). | ||
Certificate of Elimination of Series B Participating Preferred Stock of Registrant (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on November 7, 2016). | ||
10.1 | ||
11.1* | Statement Regarding Computation of Per Share Earnings. | |
31.1** | Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2** | Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1** | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2** | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS** | XBRL Instance Document. | |
101.SCH** | XBRL Schema Document. | |
101.CAL** | XBRL Calculation Linkbase Document. | |
101.DEF** | XBRL Definition Linkbase Document. | |
101.LAB** | XBRL Labels Linkbase Document. |
101. PRE** | XBRL Presentation Linkbase Document. |
* | Required earnings per share data is provided in the Notes to the condensed consolidated financial statements in this report. |
** | Included herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | CONCURRENT COMPUTER CORPORATION | ||
By: | /s/ | Warren Sutherland | |
Warren Sutherland | |||
Chief Financial Officer | |||
(Principal Financial and Accounting Officer) |
Exhibit Index
40 |
101.INS** | XBRL Instance Document. | |
101.SCH** | XBRL Schema Document. | |
101.CAL** | XBRL Calculation Linkbase Document. | |
101.DEF** | XBRL Definition Linkbase Document. | |
101.LAB** | XBRL Labels Linkbase Document. |
101. PRE** | XBRL Presentation Linkbase Document. |
* | Required earnings per share data is provided in the Notes to the condensed consolidated financial statements in this report. |
** | Included herewith. |