| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are as follows:
Basis of Presentation and Principles of
Consolidation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States (“U.S. GAAP”). We
consolidate the financial statements of our wholly-owned
subsidiaries and all intercompany transactions and account balances
have been eliminated in consolidation.
We also hold minority investments in the capital stock of certain
private companies having product offerings or customer
relationships that have strategic importance. We evaluate our
equity and debt investments and other contractual relationships
with affiliate companies in order to determine whether the
guidelines regarding the consolidation of variable interest
entities (“VIEs”) should be applied in the financial
statements. We use qualitative analysis to determine whether or not
we are the primary beneficiary of a VIE. We consider the rights and
obligations conveyed by the implicit and explicit variable interest
in each VIE and the relationship of these with the variable
interests held by other parties to determine whether its variable
interests will absorb a majority of a VIEs expected losses, receive
a majority of its expected residual returns, or both. If we
determine that our variable interests will absorb a majority of the
VIEs expected losses, receive a majority of their expected residual
returns, or both, we consolidate the VIE as the primary
beneficiary, and if not, it is not consolidated. We have concluded
that we are not the primary beneficiary for any VIEs during fiscal
2016.
Use of Estimates
The preparation of these financial statements in conformity with
U.S. GAAP requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities. On
an ongoing basis, management evaluates these estimates and
judgments, including those related to the timing and amounts of
revenue recognition, valuation of inventory, collectability of
accounts receivable, valuation of investments and income taxes,
assumptions used to determine stock-based compensation, valuation
of goodwill and intangible assets and related amortization.
Management bases these estimates on historical and anticipated
results and trends and on various other assumptions that management
believes are reasonable under the circumstances, including
assumptions as to future events. These estimates form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. By
their nature, estimates are subject to an inherent degree of
uncertainty. Actual results may differ from management’s
estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit and
highly liquid, temporary cash investments with an original maturity
of three months or less. All cash equivalents are carried at cost,
which approximates fair value.
Marketable Securities
We account for investments in accordance with authoritative
guidance that defines investment classifications. We determine the
appropriate classification of debt securities at the time of
purchase and reevaluate such designation as of each balance sheet
date. Our investment portfolio consists primarily of money market
funds, U.S. treasury notes or bonds and U.S. government agency
bonds at January 31, 2016 and 2015, but can consist of
corporate debt investments, asset-backed securities and
government-sponsored enterprises. Our marketable securities are
classified as available-for-sale and are reported at fair value
with unrealized gains and losses, net of tax, reported in
stockholders’ equity as a component of accumulated other
comprehensive loss. The amortization of premiums and accretion of
discounts to maturity are computed under the effective interest
method and are included in other expenses, net in our consolidated
statements of operations and comprehensive loss. Interest on
securities is recorded as earned and is also included in other
expenses, net. Any realized gains or losses would be shown in the
accompanying consolidated statements of operations and
comprehensive loss in other expenses, net.
We evaluate our investments on a regular basis to determine whether
an other-than-temporary decline in fair value has occurred. This
evaluation consists of a review of several factors, including, but
not limited to: the length of time and extent that an investment
has been in an unrealized loss position; the existence of an event
that would impair the issuer’s future earnings potential; and
our intent and ability to hold an investment for a period of time
sufficient to allow for any anticipated recovery in fair value.
Declines in value below cost for investments where it is considered
probable that all contractual terms of the investment will be
satisfied, are due primarily to changes in interest rates, and
where the company has the intent and ability to hold the investment
for a period of time sufficient to allow a market recovery, are not
assumed to be other-than-temporary. Any other-than-temporary
declines in fair value are recorded in earnings and a new cost
basis for the investment is established.
Fair Value Measurements
Definition and Hierarchy
The applicable accounting guidance defines fair value as the
exchange price that would be received for an asset or paid to
transfer a liability in the principal or most advantageous market
for the asset or liability in an orderly transaction between market
participants on the measurement date. The guidance establishes a
framework for measuring fair value and expands required disclosure
about the fair value measurements of assets and liabilities. This
guidance requires us to classify and disclose assets and
liabilities measured at fair value on a recurring basis, as well as
fair value measurements of assets and liabilities measured on a
non-recurring basis in periods subsequent to initial measurement,
in a fair value hierarchy.
The fair value hierarchy is broken down into three levels based on
the reliability of inputs and requires an entity to maximize the
use of observable inputs, where available. The following summarizes
the three levels of inputs required, as well as the assets and
liabilities that we value using those levels of inputs:
• Level 1 – Observable inputs
that reflect quoted prices for identical assets or liabilities in
active markets.
• Level 2 – Observable inputs
other than Level 1 prices, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not very active;
or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities.
• Level 3 – Unobservable inputs
that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. The
fair value measurements of the contingent consideration obligations
related to our business acquisitions are valued using Level 3
inputs.
Valuation Techniques
Inputs to valuation techniques are observable and unobservable.
Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect our market assumptions.
When developing fair value estimates for certain financial assets
and liabilities, we maximize the use of observable inputs and
minimize the use of unobservable inputs. When available, we use
quoted market prices, market comparables and discounted cash flow
projections. Financial assets include money market funds, U.S.
treasury notes or bonds and U.S. government agency bonds.
In general, and where applicable, we use quoted prices in active
markets for identical assets or liabilities to determine fair
value. If quoted prices in active markets for identical assets or
liabilities are not available to determine fair value, then we use
quoted prices for similar assets and liabilities or inputs that are
observable either directly or indirectly. In periods of market
inactivity, the observability of prices and inputs may be reduced
for certain instruments. This condition could cause an instrument
to be reclassified from Level 1 to Level 2 or from Level 2 to Level
3.
Concentration of Credit Risk
Financial instruments which potentially expose us to concentrations
of credit risk include cash equivalents, investments in treasury
bills, certificates of deposits and commercial paper, trade
accounts receivable, accounts payable and accrued liabilities. We
have cash investment policies which, among other things, limit
investments to investment-grade securities. We restrict our cash
equivalents and investments in marketable securities to repurchase
agreements with major banks and U.S. government and corporate
securities which are subject to minimal credit and market risk. We
perform ongoing credit evaluations of our customers. As of
January 31, 2016, one customer represented more than 10% of
consolidated accounts receivable compared to two customers as of
January 31, 2015. For fiscal 2016 and 2015, two customers each
accounted for more than 10% of our total revenue. In fiscal 2014
three customers did.
Accounts Receivable and Allowances for Doubtful
Accounts
For trade accounts receivable, we evaluate customers’
financial condition, require advance payments from certain of our
customers and maintain reserves for potential credit losses. We
perform ongoing credit evaluations of customers’ financial
condition but generally do not require collateral. For some
international customers, we may require an irrevocable letter of
credit to be issued by the customer before the purchase order is
accepted. We monitor payments from customers and assess any
collection issues. We maintain an allowance for specific doubtful
accounts for estimated losses resulting from the inability of our
customers to make required payments and record these allowances as
a charge to general and administrative expenses in our consolidated
statements of operations and comprehensive loss. We base our
allowances for doubtful accounts on historical collections and
write-off experience, current trends, credit assessments, and other
analysis of specific customer situations. At January 31, 2016
and 2015, we had an allowance for doubtful accounts of $0.4
million, respectively, to provide for potential credit losses. We
charge off trade accounts receivables against the allowance after
all means of collection have been exhausted and the potential for
recovery is considered remote. Recoveries of trade receivables
previously charged off are recorded when received.
Inventory Valuation
Inventories are stated at the lower of cost or net realizable
value. Cost is determined using the first-in, first-out method.
Inventories consist primarily of components and subassemblies and
finished products held for sale. The values of inventories are
reviewed quarterly to determine that the carrying value is stated
at the lower of cost or net realizable value. We record charges to
reduce inventory to its net realizable value when impairment is
identified through a quarterly review process. The obsolescence
evaluation is based upon assumptions and estimates about future
demand, or possible alternative uses and involves significant
judgments.
Property and Equipment
Property and equipment consists of land and buildings, office and
computer equipment, leasehold improvements, demonstration
equipment, deployed assets and spare components and assemblies used
to service our installed base. Property and equipment are recorded
at cost, net of accumulated depreciation and amortization, and are
depreciated over their estimated useful lives. Determining the
useful lives of property and equipment requires us to make
significant judgments that can materially impact our operating
results. If our estimates require adjustment, it could have a
material impact on our reported results.
Demonstration equipment consists of systems manufactured by us for
use in marketing and selling activities. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the
term of the respective leases using the straight-line method.
Deployed assets consist of movie systems owned and manufactured by
us that are installed in a hotel environment. Deployed assets are
depreciated over the life of the related service agreements.
Capitalized service and spare components are depreciated over the
estimated useful lives using the straight-line method. Maintenance
and repair costs are expensed as incurred.
Generally, property and equipment include assets in service. Fully
depreciated assets remaining in service along with related
accumulated depreciation are not removed from the balance sheet
until the corresponding asset is removed from service either
through a retirement or sale. Upon retirement or sale of an asset
or asset group, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the determination of net
income or loss.
Investments in Affiliates
Our investments in affiliates include investments accounted for
under the cost method and the equity method of accounting. The
investments that represent less than a 20% ownership interest of
the common shares of the affiliate are carried at cost. Under the
equity method of accounting, which generally applies to investments
that represent 20% to 50% ownership of the common shares of the
affiliate, our proportionate ownership share of the earnings or
losses of the affiliate are included in equity income in earnings
of affiliates in our consolidated statements of operations and
comprehensive loss.
We periodically review indicators of the fair value of our
investments in affiliates in order to assess whether available
facts or circumstances, both internally and externally, may suggest
an other-than-temporary decline in the value of the investment. If
we determine that an other-than-temporary impairment has occurred,
we will write-down the investment to its fair value. The carrying
value of an investment in an affiliate may be affected by the
affiliate’s ability to obtain adequate funding and execute
its business plans, general market conditions, its current cash
position, earnings and cash flow forecasts, recent operational
performance, and any other readily available data. The inability of
an affiliate to obtain future funding or successfully execute its
business plan could adversely affect our equity earnings of the
affiliate in the periods affected by those events. Future adverse
changes in market conditions or poor operating results of the
affiliates could result in equity losses or an inability to recover
the carrying value of the investments in affiliates that may not be
reflected in an investment’s current carrying value, thereby
possibly requiring an impairment charge in the future. We record an
impairment charge when we believe an investment has experienced a
decline in value that is other-than-temporary.
Intangible Assets and Goodwill
Intangible assets consist of customer contracts, completed
technology, non-compete agreements, trade names, patents and
intellectual property. The intangible assets are amortized to cost
of sales and operating expenses, as appropriate, on a straight-line
or accelerated basis, using the economic consumption life basis, in
order to reflect the period that the assets will be consumed, which
are:
Intangible assets with finite useful lives:
Customer contracts 1 - 8 years
Non-compete agreements 2 - 3 years
Completed technology 4 - 6 years
Trade names, intellectual property and other 5 - 7 years
Certain costs incurred in the application development phase of
software development for internal use are capitalized and amortized
over the product’s estimated useful life, which is three
years. The Company expenses all costs incurred that relate to
planning and post implementation phases of development. Capitalized
costs related to internally developed software under development
are treated as construction in progress until the technology is
available for intended use, at which time the amortization
commences. Capitalized internally developed software costs were
$2.4 million in fiscal 2016. Maintenance and training costs are
expensed as incurred.
Goodwill is recorded when the consideration for an acquisition
exceeds the fair value of net tangible and identifiable intangible
assets acquired.
Impairment of Assets
Indefinite-lived intangible assets, such as goodwill, are not
amortized but are evaluated for impairment at the reporting unit
level annually, in our third quarter beginning
August 1 st
The process of evaluating indefinite-lived intangible assets for
impairment requires several judgments and assumptions to be made to
determine the fair value, including the method used to determine
fair value, discount rates, expected levels of cash flows, revenues
and earnings, and the selection of comparable companies used to
develop market-based assumptions. We may employ the three generally
accepted approaches for valuing businesses: the market approach,
the income approach and the asset-based (cost) approach to arrive
at the fair value. The choice of which approach and methods to use
in a particular situation depends on the facts and circumstances.
If actual results are not consistent with these estimates or
assumptions, the Company may be exposed to an additional impairment
charge that could be material.
We also evaluate property and equipment, intangible assets with
finite useful lives and other long-lived assets on a regular basis
for the existence of facts or circumstances, both internal and
external that may suggest an asset is not recoverable. If such
circumstances exist, we evaluate the carrying value of long-lived
assets to determine if impairment exists based upon estimated
undiscounted future cash flows over the remaining useful life of
the assets and compare that value to the carrying value of the
assets. Our cash flow estimates contain management’s best
estimates, using appropriate and customary assumptions and
projections at the time.
As of January 31, 2016, the Company reviewed the projected future
cash flows of the Timeline Labs operations and determined that the
carrying amount was greater than the fair value. As a result, all
long-term assets related to Timeline Labs were fully impaired and
reflected as a $21.9 million loss on impairment of TLL, LLC net
assets in our consolidated statements of operations and
comprehensive loss for the period ending January 31, 2016 which
included: i) $15.8 million relating to the Timeline Labs
acquired goodwill, ii) $5.2 million of acquired intangible assets,
and iii) $0.9 million of capitalized internal use software.
Additionally, we reduced the contingent consideration liability
associated with the Timeline Labs acquisition to zero, as we
determined the defined performance criteria would not be achieved.
Therefore, we recorded the reversal of the liability of $0.4
million to the loss on impairment of assets. The amount of goodwill
impaired represented all of the goodwill that resulted from this
acquisition due to the short duration of time between the
acquisition and the event causing us to impair the assets.
Income Taxes
Income tax comprises current and deferred tax. Income tax is
recognized in the consolidated statements of operations and
comprehensive loss except to the extent that it relates to items
recognized directly within equity or in other comprehensive loss.
Income taxes payable, which is included in other accrued expenses
in our consolidated balance sheets, is the expected tax payable on
the taxable income for the year, using tax rates enacted or
substantially-enacted at the reporting date, and any adjustment to
tax payable in respect of previous years.
Deferred tax assets and liabilities are recognized, using the
balance sheet method, for the expected tax consequences of
temporary differences between the carrying amounts of assets and
liabilities and the amounts used for taxation purposes. Deferred
tax is not recognized for the following temporary differences: the
initial recognition of goodwill, the initial recognition of assets
and liabilities in a transaction that is not a business combination
and that affects neither accounting nor taxable profit, and
differences relating to investments in subsidiaries to the extent
that they probably will not reverse in the foreseeable future.
Deferred tax is measured at the tax rates that are expected to be
applied to temporary differences when they reverse, based on the
laws that have been enacted or substantially-enacted by the
reporting date.
A deferred tax asset is recognized for unused tax losses, tax
credits and deductible temporary differences, to the extent that it
is probable that future taxable profits will be available against
which they can be utilized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable
income in the countries where the deferred tax assets originated
and during the periods when the deferred tax assets become
deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment.
We operate in multiple jurisdictions with complex tax policy and
regulatory environments. In certain of these jurisdictions, we may
take tax positions that management believes are supportable, but
are potentially subject to successful challenge by the applicable
taxing authority. These interpretational differences with the
respective governmental taxing authorities can be impacted by the
local economic and fiscal environment. We evaluate our tax
positions and establish liabilities in accordance with the
applicable accounting guidance on uncertainty in income taxes. We
review these tax uncertainties in light of changing facts and
circumstances, such as the progress of tax audits, and adjust them
accordingly. We have a number of audits in process in various
jurisdictions. Although the resolution of these tax positions is
uncertain, based on currently available information, we believe
that the ultimate outcomes will not have a material adverse effect
on our financial position, results of operations or cash flows.
Because there are a number of estimates and assumptions inherent in
calculating the various components of our tax provision, certain
changes or future events such as changes in tax legislation,
geographic mix of earnings, completion of tax audits or earnings
repatriation plans could have an impact on those estimates and our
effective tax rate.
Restructuring
Restructuring charges that we record consist of employee-related
severance charges, termination costs and the disposal of related
equipment. Restructuring charges represent our best estimate of the
associated liability at the date the charges are recognized.
Adjustments for changes in assumptions are recorded as a component
of operating expenses in the period they become known. Differences
between actual and expected charges and changes in assumptions
could have a material effect on our restructuring accrual as well
as our consolidated results of operations. See Note 7,
“Severance and Other Restructuring Costs,”
Foreign Currency Translation
For subsidiaries where the U.S. dollar is designated as the
functional currency of the entity, we translate that entity’s
monetary assets and liabilities denominated in local currencies
into U.S. dollars (the functional and reporting currency) at
current exchange rates, as of each balance sheet date. Non-monetary
assets (e.g., inventories, property and equipment and intangible
assets) and related income statement accounts (e.g., cost of sales,
depreciation, amortization of intangible assets) are translated at
historical exchange rates between the functional currency (the U.S.
dollar) and the local currency. Revenue and other expense items are
translated using average exchange rates during the fiscal period.
Translation adjustments resulting from translation of the
subsidiaries’ accounts are included in accumulated other
comprehensive loss, a separate component of stockholders’
equity. Gains and losses on foreign currency transactions, and any
unrealized gains and losses on short-term intercompany transactions
are included in other expenses, net.
For subsidiaries where the local currency is designated as the
functional currency, we translate our assets and liabilities into
U.S. dollars (the reporting currency) at current exchange rates as
of each balance sheet date. Revenue and expense items are
translated using average exchange rates during the period.
Cumulative translation adjustments are presented as a separate
component of stockholders’ equity. Exchange gains and losses
on foreign currency transactions and unrealized gains and losses on
short-term inter-company transactions are included in other
expenses, net.
The aggregate foreign exchange transaction losses included in other
expenses, net, on the consolidated statements of operations and
comprehensive loss, were $0.7 million, $2.3 million and
approximately $0.4 million for fiscal 2016, 2015 and 2014,
respectively.
Comprehensive Loss
We present accumulated other comprehensive loss in our consolidated
balance sheets and comprehensive loss in the consolidated statement
of operations and comprehensive loss. At the end of fiscal 2016,
2015 and 2014, our comprehensive loss of $48.6 million, $31.1
million and $3.3 million consists primarily of net loss, cumulative
translation adjustments and unrealized gains and losses on
marketable securities.
Revenue Recognition
Our transactions frequently involve the sales of hardware,
software, systems and services in multiple-element arrangements.
Revenues from sales of hardware, software and systems that do not
require significant modification or customization of the underlying
software are recognized when:
• persuasive evidence of an arrangement
exists;
• delivery has occurred, and title and
risk of loss have passed to the customer;
• fees are fixed or determinable;
and
• collection of the related receivable
is considered probable.
Customers are billed for installation, training, project management
and at least one year of product maintenance and technical support
at the time of the product sale. Revenue from these activities is
deferred at the time of the product sale and recognized ratably
over the period these services are performed. Revenue from ongoing
product maintenance and technical support agreements is recognized
ratably over the period of the related agreements. Revenue from
software development contracts that include significant
modification or customization, including software product
enhancements, is recognized based on the percentage of completion
contract accounting method using labor efforts expended in relation
to estimates of total labor efforts to complete the contract. The
percentage of completion method requires that adjustments or
re-evaluations to estimated project revenues and costs be
recognized on a project-to-date cumulative basis, as changes to the
estimates are identified. Revisions to project estimates are made
as additional information becomes known, including information that
becomes available subsequent to the date of the consolidated
financial statements up through the date such consolidated
financial statements are filed with the SEC. If the final estimated
profit to complete a long-term contract indicates a loss, a
provision is recorded immediately for the total loss anticipated.
Accounting for contract amendments and customer change orders are
included in contract accounting when executed. Revenue from
shipping and handling costs and other out-of-pocket expenses
reimbursed by customers are included in revenues and cost of
revenues. Our share of intercompany profits associated with sales
and services provided to affiliated companies are eliminated in
consolidation in proportion to our equity ownership.
Contract accounting requires judgment relative to assessing risks,
estimating revenues and costs and making assumptions including, in
the case of our professional services contracts, the total amount
of labor required to complete a project and the complexity of the
development and other technical work to be completed. Due to the
size and nature of many of our contracts, the estimation of total
revenues and cost at completion is complicated and subject to many
variables. Assumptions have to be made regarding the length of time
to complete the contract because costs also include estimated
third-party vendor and contract labor costs. Penalties related to
performance on contracts are considered in estimating sales and
profit, and are recorded when there is sufficient information for
us to assess anticipated performance. Third-party vendors’
assertions are also assessed and considered in estimating costs and
margin. During fiscal 2016, we recorded a $9.2 million provision
for loss contract as a result of costs associated with delays of
customer acceptance relating to a fixed-price customer contract on
a multi-year arrangement which included multiple vendors. We have
agreed with the customer on the replacement of certain third-party
vendors and a change in the timeline for the completion of the
project. As the system integrator on the project, we are subject to
any costs overruns or increases with these vendors resulting in
delays or acceptance by our customer. Any further delays of
acceptance by the customer will result in incremental expenditures
and increase the loss.
Revenue from the sale of software-only products remains within the
scope of the software revenue recognition rules. Maintenance and
support, training, consulting, and installation services no longer
fall within the scope of the software revenue recognition rules,
except when they are sold with and relate to a software-only
product. Revenue recognition for products that no longer fall under
the scope of the software revenue recognition rules is similar to
that for other tangible products and Accounting Standard Update No.
(“ASU”) 2009-13, “Revenue Recognition (Topic
605): Multiple-Deliverable Revenue Arrangements,”
Under the software revenue recognition rules, the fee is allocated
to the various elements based on vendor-specific objective evidence
(“VSOE”) of fair value. Under this method, the total
arrangement value is allocated first to undelivered elements based
on their fair values, with the remainder being allocated to the
delivered elements. Where fair value of undelivered service
elements has not been established, the total arrangement value is
recognized over the period during which the services are performed.
The amounts allocated to undelivered elements, which may include
project management, training, installation, maintenance and
technical support and certain hardware and software components, are
based upon the price charged when these elements are sold
separately and unaccompanied by the other elements. The amount
allocated to installation, training and project management revenue
is based upon standard hourly billing rates and the estimated time
necessary to complete the service. These services are not essential
to the functionality of systems as these services do not alter the
equipment’s capabilities, are available from other vendors
and the systems are standard products. For multiple-element
arrangements that include software development with significant
modification or customization and systems sales where VSOE of the
fair value does not exist for the undelivered elements of the
arrangement (other than maintenance and technical support),
percentage of completion accounting is applied for revenue
recognition purposes to the entire arrangement with the exception
of maintenance and technical support.
Under the revenue recognition rules for tangible products as
amended by ASU 2009-13, the fee from a multiple-deliverable
arrangement is allocated to each of the deliverables based upon
their relative selling prices as determined by a selling-price
hierarchy. A deliverable in an arrangement qualifies as a separate
unit of accounting if the delivered item has value to the customer
on a stand-alone basis. A delivered item that does not qualify as a
separate unit of accounting is combined with the other undelivered
items in the arrangement and revenue is recognized for those
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