| 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 have reclassified certain
prior period data to conform to our current fiscal year
presentation.
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 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 most of a VIEs expected losses, receive most
of its expected residual returns, or both. If we determine that our
variable interests will absorb most of the VIEs expected losses,
receive most 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.
The Company believes that existing funds and cash provided by
future operating activities are adequate to satisfy our working
capital, potential acquisitions and capital expenditure
requirements and other contractual obligations for the foreseeable
future, including at least the next 12 months. However, if our
expectations are incorrect, we may need to raise additional funds
to fund our operations, to take advantage of unanticipated
strategic opportunities or to strengthen our financial position. In
the future, we may enter into other arrangements for potential
investments in, or acquisitions of, complementary businesses,
services or technologies, which could require us to seek additional
equity or debt financing. Additional funds may not be available on
terms that are favorable.
In addition, we actively review potential acquisitions that would
complement our existing product offerings, enhance our technical
capabilities or expand our marketing and sales presence. Any future
transaction of this nature could require potentially significant
amounts of capital or could require us to issue our stock and
dilute existing stockholders. If adequate funds are not available,
or are not available on acceptable terms, we may not be able to
take advantage of market opportunities, to develop new products or
to otherwise respond to competitive pressures.
In the second quarter of fiscal 2017, following a review of our
operations, liquidity and funding, and investment in our product
roadmap, we determined that the ability to access cash resulting
from earnings in prior fiscal years that had previously been deemed
permanently restricted for foreign investment would provide greater
flexibility to meet the Company’s working capital needs.
Accordingly, in the second quarter of fiscal 2017, we withdrew the
permanent reinvestment assertion on $58.6 million of earnings
generated by our Irish operations through July 2016. We recorded a
deferred tax liability of $14.7 million related to the foreign
income taxes on $58.6 million of undistributed earnings.
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 investments in money market mutual funds, government
sponsored enterprise obligations, treasury bills, commercial paper
and other money market securities with remaining maturities at date
of purchase of 90 days or less. All cash equivalents are carried at
cost, which approximates fair 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, 2017 and 2016, but can consist of
corporate debt investments, asset-backed securities and
government-sponsored enterprises. Our marketable securities are
classified as available-for-sale
We evaluate our investments on a regular basis to determine whether
an other-than-temporary decline in fair value has occurred. This
evaluation consists of a review of several factors, including, but
not limited to: the length of time and extent that an investment
has been in an unrealized loss position; the existence of an event
that would impair the issuer’s future earnings potential; and
our intent and ability to hold an investment for a period of time
sufficient to allow for any anticipated recovery in fair value.
Declines in value below cost for investments where it is considered
probable that all contractual terms of the investment will be
satisfied, are due primarily to changes in interest rates, and
where the company has the intent and ability to hold the investment
for a period sufficient to allow a market recovery, are not assumed
to be other-than-temporary. Any other-than-temporary declines in
fair value are recorded in earnings and a new cost basis for the
investment is established.
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
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, 2017, two customers represented more than 10% of
consolidated accounts receivable while as of January 31, 2016,
one customer did. For fiscal 2017, one customer accounted for more
than 10% of our total revenue compared to two customers accounting
for more than 10% of our total revenue in fiscal 2016 and 2015.
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
Inventory Valuation
Inventories are stated at the lower of cost or net realizable
value. Cost is determined using the first-in, first-out
Property and Equipment
Property and equipment consists of land and buildings, office and
computer equipment, leasehold improvements, demonstration
equipment, deployed assets and spare components and assemblies used
to service our installed base. Property and equipment are recorded
at cost, net of accumulated depreciation and amortization, and are
depreciated over their estimated useful lives. Determining the
useful lives of property and equipment requires us to make
significant judgments that can materially impact our operating
results. If our estimates require adjustment, it could have a
material impact on our reported results.
Demonstration equipment consists of systems manufactured by us for
use in marketing and selling activities. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the
term of the respective leases using the straight-line method.
Deployed assets consist of movie systems owned and manufactured by
us that are installed in a hotel environment. Deployed assets are
depreciated over the life of the related service agreements.
Capitalized service and spare components are depreciated over the
estimated useful lives using the straight-line method. Maintenance
and repair costs are expensed as incurred.
Generally, property and equipment include assets in service. Fully
depreciated assets remaining in service along with related
accumulated depreciation are not removed from the balance sheet
until the corresponding asset is removed from service either
through a retirement or sale. Upon retirement or sale of an asset
or asset group, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts and the
resulting gain or loss, if any, is recognized in other expenses,
net in our consolidated statements of operations and comprehensive
loss.
Investments in Affiliates
Our investments in affiliates include investments accounted for
under the cost method of accounting as the investments represent
less than a 20% ownership interest of the common shares of the
affiliate.
We periodically review indicators of the fair value of our
investments in affiliates to assess whether available facts or
circumstances, both internally and externally, may suggest an
other-than-temporary decline in the value of the investment. If we
determine that an other-than-temporary impairment has occurred, we
will write-down the investment to its fair value. The carrying
value of an investment in an affiliate accounted for under the cost
method of accounting may be affected by the 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. We record an impairment charge when we
believe an investment has experienced a decline in value that is
other-than-temporary. In January 2017, we recorded a
$0.5 million impairment charge to loss on impairment of
long-lived assets in our consolidated statements of operations and
comprehensive loss for one of our cost-method investments as we
determined that the fair value of the investment was below its
carrying value and that the carrying value was not expected to be
recoverable within a reasonable amount of time (see Note
3, “Fair
Value Measurements” 10-K
Intangible Assets and Goodwill
Intangible assets consist of customer contracts, completed
technology, non-compete
Intangible assets with finite useful lives:
Customer contracts 1 - 8 years
Non-compete 2 - 3 years
Completed technology 4 - 6 years
Trademarks, patents 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
$2.7 million as of January 31, 2017. 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.
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.
In the third quarter of fiscal 2017, we finalized our “Step
1” analysis of our annual goodwill impairment test. Our
forecast indicated that the estimated fair value of net assets may
be less than its carrying value which is a potential indicator of
impairment. As such, we were required to perform “Step
2” of the impairment test during which we compared the
implied fair value of our goodwill to its carrying value. We
completed the goodwill impairment testing of our reporting unit
during the fourth quarter of fiscal 2017. Since the implied fair
value of goodwill was determined to be lower than its carrying
value, we recorded an impairment charge of $23.5 million to
loss on impairment of long-lived assets in our consolidated
statements of operations and comprehensive loss (see Note
6, “Goodwill and
Intangible Assets” 10-K
In January 2017, after a potential buyer declined to purchase our
facility in Greenville, New Hampshire, we determined that the sale
of this facility was not imminent due to the location of the
building and the overall market conditions in the area.
Consequently, we decided to fully impair the facility since we felt
the carrying amount was greater than the fair value. As a result,
we recorded a $0.3 million loss on impairment of long-lived
assets in our consolidated statements of operations and
comprehensive loss.
In the fourth quarter of fiscal 2017, a certain cost-method
investment was determined to be impaired and written off.
Accordingly, we recorded a $0.5 million impairment charge in
January 2017 which is included in loss on investment in affiliates
in our consolidated statements of operations and comprehensive
loss. The cost-method investment is a privately-held entity without
quoted market prices and therefore, falls within Level 3 of
the fair value hierarchy due to the use of significant unobservable
inputs to determine its fair value. In determining the fair value
of this cost-method investment, we considered many factors
including, but not limited to, operating performance of the
investee, the amount of cash that the investee has on hand and the
overall market conditions in which the investee operates.
As of January 31, 2016, the Company reviewed the projected
future cash flows of the Timeline Labs operations and determined
that the carrying amount was greater than the fair value. As a
result, all long-term assets related to Timeline Labs were fully
impaired and reflected as a $21.9 million loss on impairment
of long-lived assets in our consolidated statements of operations
and comprehensive loss for the fiscal year ended January 31,
2016 which included: i) $15.8 million relating to the Timeline
Labs acquired goodwill, ii) $5.2 million of acquired
intangible assets, and iii) $0.9 million of capitalized
internal use software. Additionally, we reduced the contingent
consideration liability associated with the Timeline Labs
acquisition to zero, as we determined the defined performance
criteria would not be achieved. Therefore, we recorded the reversal
of the liability of $0.4 million to the loss on impairment of
long-lived assets. The amount of goodwill impaired represented all
the goodwill that resulted from this acquisition due to the short
duration of time between the acquisition and the event causing us
to impair the assets.
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.
Because there are several estimates and assumptions inherent in
calculating the various components of our tax provision, certain
changes or future events such as changes in tax legislation,
geographic mix of earnings, completion of tax audits or earnings
repatriation plans could have an impact on those estimates and our
effective tax rate.
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,” 10-K
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
For subsidiaries where the local currency is designated as the
functional currency, we translate their 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 $2.1 million, $0.7 million and
approximately $2.3 million for fiscal 2017, 2016 and 2015,
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 2017,
2016 and 2015, our comprehensive loss of $70.0 million,
$48.6 million and $31.1 million consists 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 project-to-date out-of-pocket
Contract accounting requires judgment relative to assessing risks,
estimating revenues and costs and making assumptions including, in
the case of our professional services contracts, the total amount
of labor required to complete a project and the complexity of the
development and other technical work to be completed. Due to the
size and nature of many of our contracts, the estimation of total
revenues and cost at completion is complicated and subject to many
variables. Assumptions must be made regarding the length of time to
complete the contract because costs also include estimated
third-party vendor and contract labor costs. Penalties related to
performance on contracts are considered in estimating sales and
profit, and are recorded when there is sufficient information for
us to assess anticipated performance. Third-party vendors’
assertions are also assessed and considered in estimating costs and
margin.
Revenue from the sale of software-only products remains within the
scope of the software revenue recognition rules. Maintenance and
support, training, consulting, and installation services no longer
fall within the scope of the software revenue recognition rules,
except when they are sold with and relate to a software-only
product. Revenue recognition for products that no longer fall under
the scope of the software revenue recognition rules is like that
for other tangible products and Accounting Standard Update No.
(“ASU”) 2009-13, “Revenue Recognition
(Topic 605): Multiple-Deliverable Revenue
Arrangements,” 2009-13
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 except for
maintenance and technical support.
Under the revenue recognition rules for tangible products as
amended by ASU 2009-13,
The selling prices used in the relative selling price allocation
method for certain of our services are based upon VSOE. The selling
prices used in the relative selling price allocation method for
third-party products from other vendors are based upon TPE. The
selling prices used in the relative selling price allocation method
for our hardware products, software, subscriptions, and customized
services for which VSOE does not exist are based upon BESP. We do
not believe TPE exists for these products and services because they
are differentiated from competing products and services in terms of
functionality and performance and there are no competing products
or services that are largely interchangeable. Management
establishes BESP with consideration for market conditions, such as
the impact of competition and geographic considerations, and
entity-specific factors, such as the cost of the product, discounts
provided and profit objectives. Management believes that BESP is
reflective of reasonable pricing of that deliverable as if priced
on a stand-alone basis.
For our cloud and managed service revenues, we generate revenue
from two sources: (1) subscription and support services; and
(2) professional services and other. Subscription and support
revenue includes subscription fees from customers accessing our
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