altr-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

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: 001-38263

 

ALTAIR ENGINEERING INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

38-2591828

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

1820 East Big Beaver Road, Troy, Michigan

 

48083

(Address of principal executive offices)

 

(Zip Code)

(248) 614-2400

(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. Yes  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). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

 

 

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). Yes  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

On April 19, 2018 there were 27,495,652 shares of the registrant’s Class A common stock outstanding and 36,507,676 shares of the registrant’s Class B common stock outstanding.

 

 

 

 

 


ALTAIR ENGINEERING INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2018

INDEX

 

 

 

 

 

 

 

 

Page

 

 

 

 

 

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements – Unaudited

 

3

 

 

 

 

 

 

 

 

 

 

 

a)

 

Consolidated balance sheets

 

3

 

 

 

 

 

 

 

 

 

 

 

b)

 

Consolidated statements of operations

 

4

 

 

 

 

 

 

 

 

 

 

 

c)

 

Consolidated statements of comprehensive income (loss)

 

5

 

 

 

 

 

 

 

 

 

 

 

d)

 

Consolidated statement of changes in stockholders’ equity

 

6

 

 

 

 

 

 

 

 

 

 

 

e)

 

Consolidated statements of cash flows

 

7

 

 

 

 

 

 

 

 

 

 

 

f)

 

Notes to consolidated financial statements

 

8

 

 

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

33

 

 

 

 

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

34

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

34

 

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

 

 

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

35

 

 

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

35

 

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

35

 

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

36

 

 

 

 

 

 

 

 

SIGNATURES

 

 

 

 

 

37

 

 

 

 


 

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

 

Altair Engineering Inc. and subsidiaries

Consolidated balance sheets

 

 

 

March 31, 2018

 

 

December 31, 2017

 

(In thousands)

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

63,196

 

 

$

39,213

 

Accounts receivable, net

 

 

83,350

 

 

 

86,635

 

Inventory, net

 

 

1,051

 

 

 

1,980

 

Income tax receivable

 

 

6,898

 

 

 

6,054

 

Prepaid expenses and other current assets

 

 

13,148

 

 

 

10,006

 

Total current assets

 

 

167,643

 

 

 

143,888

 

Property and equipment, net

 

 

30,501

 

 

 

31,446

 

Goodwill

 

 

63,771

 

 

 

62,706

 

Other intangible assets, net

 

 

22,813

 

 

 

24,461

 

Deferred tax assets

 

 

8,824

 

 

 

8,351

 

Other long-term assets

 

 

17,270

 

 

 

17,019

 

TOTAL ASSETS

 

$

310,822

 

 

$

287,871

 

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

294

 

 

$

232

 

Accounts payable

 

 

5,650

 

 

 

4,880

 

Accrued compensation and benefits

 

 

25,360

 

 

 

26,560

 

Obligations for acquisition of businesses

 

 

13,226

 

 

 

13,925

 

Other accrued expenses and current liabilities

 

 

21,486

 

 

 

21,744

 

Deferred revenue

 

 

152,663

 

 

 

130,122

 

Total current liabilities

 

 

218,679

 

 

 

197,463

 

Long-term debt, net of current portion

 

 

526

 

 

 

178

 

Deferred revenue, non-current

 

 

9,961

 

 

 

9,640

 

Other long-term liabilities

 

 

14,179

 

 

 

17,647

 

TOTAL LIABILITIES

 

 

243,345

 

 

 

224,928

 

Commitments and contingencies

 

 

 

 

 

 

 

 

MEZZANINE EQUITY

 

 

2,352

 

 

 

2,352

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Preferred stock ($0.0001 par value), authorized 45,000 shares, none issued and outstanding

 

 

 

 

 

 

Common stock ($0.0001 par value)

 

 

 

 

 

 

 

 

Class A common stock, authorized 513,797 shares, issued and outstanding 27,357

   and 26,725 shares as of March 31, 2018 and December 31, 2017, respectively

 

 

3

 

 

 

2

 

Class B common stock, authorized 41,203 shares, issued and outstanding 36,508 shares as of

   March 31, 2018 and December 31, 2017

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

232,576

 

 

 

232,156

 

Accumulated deficit

 

 

(162,579

)

 

 

(166,499

)

Accumulated other comprehensive loss

 

 

(4,879

)

 

 

(5,072

)

TOTAL STOCKHOLDERS’ EQUITY

 

 

65,125

 

 

 

60,591

 

TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY

 

$

310,822

 

 

$

287,871

 

 

See accompanying notes to consolidated financial statements.

 

 

 

3


 

 

Altair Engineering Inc. and subsidiaries

Consolidated statements of operations

(Unaudited)

 

 

 

Three months ended March 31,

 

(in thousands, except per share data)

 

2018

 

 

2017

 

Revenue

 

 

 

 

 

 

 

 

Software

 

$

68,143

 

 

$

54,097

 

Software related services

 

 

9,473

 

 

 

8,971

 

Total software

 

 

77,616

 

 

 

63,068

 

Client engineering services

 

 

12,080

 

 

 

12,229

 

Other

 

 

2,035

 

 

 

1,585

 

Total revenue

 

 

91,731

 

 

 

76,882

 

Cost of revenue

 

 

 

 

 

 

 

 

Software

 

 

10,922

 

 

 

8,904

 

Software related services

 

 

6,709

 

 

 

6,659

 

Total software

 

 

17,631

 

 

 

15,563

 

Client engineering services

 

 

10,200

 

 

 

10,141

 

Other

 

 

1,211

 

 

 

1,050

 

Total cost of revenue

 

 

29,042

 

 

 

26,754

 

Gross profit

 

 

62,689

 

 

 

50,128

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

22,703

 

 

 

18,770

 

Sales and marketing

 

 

18,977

 

 

 

16,910

 

General and administrative

 

 

16,990

 

 

 

16,089

 

Amortization of intangible assets

 

 

1,940

 

 

 

943

 

Other operating income

 

 

(2,191

)

 

 

(594

)

Total operating expenses

 

 

58,419

 

 

 

52,118

 

Operating income (loss)

 

 

4,270

 

 

 

(1,990

)

Interest expense

 

 

16

 

 

 

611

 

Other (income) expense, net

 

 

(900

)

 

 

359

 

Income (loss) before income taxes

 

 

5,154

 

 

 

(2,960

)

Income tax expense (benefit)

 

 

1,234

 

 

 

(772

)

Net income (loss)

 

$

3,920

 

 

$

(2,188

)

Income (loss) per share:

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to common stockholders, basic

 

$

0.06

 

 

$

(0.04

)

Net income (loss) per share attributable to common stockholders, diluted

 

$

0.05

 

 

$

(0.04

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Weighted average number of shares used in computing net income (loss) per share, basic

 

 

63,638

 

 

 

50,132

 

Weighted average number of shares used in computing net income (loss) per share, diluted

 

 

72,390

 

 

 

50,132

 

 

See accompanying notes to consolidated financial statements.

 

 

4


 

Altair Engineering Inc. and subsidiaries

Consolidated statements of comprehensive income (loss)

(Unaudited)

 

 

 

Three months ended March 31,

 

(in thousands)

 

2018

 

 

2017

 

Net income (loss)

 

$

3,920

 

 

$

(2,188

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation (net of tax effect of $0 and $0, respectively)

 

 

205

 

 

 

357

 

Retirement related benefit plans (net of tax effect of $10 and $0, respectively)

 

 

(12

)

 

 

(11

)

Total other comprehensive income (loss)

 

 

193

 

 

 

346

 

Comprehensive income (loss)

 

$

4,113

 

 

$

(1,842

)

 

See accompanying notes to consolidated financial statements.

 

 

 

5


 

Altair Engineering Inc. and subsidiaries

Consolidated statement of changes in stockholders’ equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common stock

 

 

Additional

 

 

 

 

 

 

other

 

 

Total

 

 

 

Class A

 

 

Class B

 

 

paid-in

 

 

Accumulated

 

 

comprehensive

 

 

stockholders’

 

(in thousands)

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

loss

 

 

equity

 

Balance at January 1, 2018

 

 

26,725

 

 

$

2

 

 

 

36,508

 

 

$

4

 

 

$

232,156

 

 

$

(166,499

)

 

$

(5,072

)

 

$

60,591

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,920

 

 

 

 

 

 

3,920

 

Adjustment for acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(96

)

 

 

 

 

 

 

 

 

(96

)

Exercise of stock options

 

 

632

 

 

 

1

 

 

 

 

 

 

 

 

 

300

 

 

 

 

 

 

 

 

 

301

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

216

 

 

 

 

 

 

 

 

 

216

 

Foreign currency translation, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

205

 

 

 

205

 

Retirement related benefit plans, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

(12

)

Balance at March 31, 2018

 

 

27,357

 

 

$

3

 

 

 

36,508

 

 

$

4

 

 

$

232,576

 

 

$

(162,579

)

 

$

(4,879

)

 

$

65,125

 

 

 

See accompanying notes to consolidated financial statements.

 

 

6


 

Altair Engineering Inc. and subsidiaries

Consolidated statements of cash flows

(Unaudited)

 

 

 

Three months ended March 31,

 

(In thousands)

 

2018

 

 

2017

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,920

 

 

$

(2,188

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,543

 

 

 

2,461

 

Provision for bad debt

 

 

65

 

 

 

91

 

Stock-based compensation expense

 

 

216

 

 

 

2,869

 

Deferred income taxes

 

 

(432

)

 

 

182

 

Other, net

 

 

(7

)

 

 

18

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,492

 

 

 

8,153

 

Prepaid expenses and other current assets

 

 

(715

)

 

 

(4,058

)

Other long-term assets

 

 

119

 

 

 

(1,523

)

Accounts payable

 

 

510

 

 

 

(186

)

Accrued compensation and benefits

 

 

(1,560

)

 

 

(2,478

)

Other accrued expenses and current liabilities

 

 

(3,967

)

 

 

(632

)

Deferred revenue

 

 

20,505

 

 

 

16,493

 

Net cash provided by operating activities

 

 

26,689

 

 

 

19,202

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,684

)

 

 

(969

)

Payments for acquisition of businesses

 

 

(1,199

)

 

 

(1,099

)

Payments for acquisition of developed technology

 

 

(353

)

 

 

(120

)

Other investing activities, net

 

 

23

 

 

 

(44

)

Net cash used in investing activities

 

 

(3,213

)

 

 

(2,232

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

302

 

 

 

115

 

Payments of initial public offering costs

 

 

(186

)

 

 

(81

)

Payments for redemption of common stock

 

 

(60

)

 

 

(305

)

Principal payments on long-term debt

 

 

(51

)

 

 

(2,688

)

Payments on revolving commitment

 

 

 

 

 

(32,061

)

Borrowings under revolving commitment

 

 

 

 

 

17,271

 

Other financing activities

 

 

 

 

 

(16

)

Net cash provided by (used in) financing activities

 

 

5

 

 

 

(17,765

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

495

 

 

 

490

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

23,976

 

 

 

(305

)

Cash, cash equivalents and restricted cash at beginning of year

 

 

39,578

 

 

 

17,139

 

Cash, cash equivalents and restricted cash at end of period

 

$

63,554

 

 

$

16,834

 

Supplemental disclosure of cash flow:

 

 

 

 

 

 

 

 

Interest paid

 

$

10

 

 

$

634

 

Income taxes paid

 

$

2,143

 

 

$

1,641

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Initial public offering costs in other long-term assets

 

$

 

 

$

1,625

 

Property and equipment in accounts payable and other accrued expenses and

   current liabilities

 

$

736

 

 

$

64

 

Capital leases

 

$

565

 

 

$

 

 

See accompanying notes to consolidated financial statements.

 

 

7


 

Altair Engineering Inc. and subsidiaries

Notes to consolidated financial statements (unaudited)

 

1.

Organization and description of business

Altair Engineering Inc. (“Altair” or the “Company”) is incorporated in the state of Delaware. The Company is a provider of enterprise-class engineering software enabling innovation across the entire product lifecycle from concept design to in-service operation. Altair transforms design and decision making by applying simulation, machine learning, and optimization throughout product lifecycles. The Company is headquartered in Troy, Michigan.

 

 

2.

Accounting policies

Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information.   Accordingly, the accompanying statements do not include all the information and notes required by GAAP for complete financial statements.  The accompanying consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements (and notes thereto) for the year ended December 31, 2017, included in the most recent Annual Report on Form 10-K filed with the SEC.  In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included, and all adjustments are of a normal and recurring nature. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting periods.  Considerable judgment is often involved in making these determinations; use of different assumptions could result in significantly different results.  Management believes its assumptions and estimates are reasonable and appropriate.  However, actual results may differ from those estimates.  In addition, the results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for any future period.  

There have been no material changes to Altair’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  

The Company has concluded that all material transactions that have occurred that require disclosure or adjustments to the consolidated financial statements have been reported herein.  See Note 16 – Subsequent events for additional information.

Cash, cash equivalents and restricted cash

The Company considers all highly liquid investments with original or remaining maturities of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents are recorded at cost, which approximates fair value.

Restricted cash is included in other long-term assets on the consolidated balance sheets. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheet that sum to the total of the amounts reported in the consolidated statement of cash flows (in thousands):

 

 

 

March 31, 2018

 

December 31, 2017

 

Cash and cash equivalents

 

$

63,196

 

$

39,213

 

Restricted cash included in other long-term assets

 

 

358

 

 

365

 

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

 

$

63,554

 

$

39,578

 

 

Restricted cash represents amounts required for a contractual agreement with an insurer for the payment of potential health insurance claims, and term deposits for bank guarantees.

 


8


 

Receivable for R&D credit

The French government provides a research and development (“R&D”) tax credit known as Credit Impôt Recherche, or CIR, in order to encourage Companies to invest in R&D activities.  The tax credit is deductible from French income tax and any excess is carried forward three years.  After three years, any unused credit may be reimbursed to the Company by the French government.  As of March 31, 2018, the Company had approximately $10.2 million receivable from the French government related to CIR, of which $2.4 million is recorded in income tax receivable and the remaining $7.8 million is recorded in other long-term assets. CIR is subject to customary audit by French tax authorities.

Assets held for sale

Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell. Depreciation expense is not recognized on assets held for sale. On March 30, 2018, the Company signed a letter of intent to sell the building that is used as the headquarters for the Company’s toggled subsidiary. A purchase agreement is presently under negotiation. As of March 31, 2018, the building and related assets of $2.1 million were recorded in prepaid expenses and other current assets.

Mezzanine equity

In 2017, the Company issued 200,000 shares of Class A common stock to a third party as partial consideration for the purchase of developed technology. These shares have a put right that can be exercised by the holder five years from date of purchase at $12.50 per share that requires the shares to be recorded at fair value and classified as mezzanine equity in the consolidated balance sheet. The put right option is terminated if the shareholders sell their shares. Classification of the of instrument shall remain as mezzanine equity until one of the following three events take place: (1) shares are sold on the open market; (2) a redemption feature lapses; or (3) there is a modification of the terms of the instrument.

Income (loss) per share

Basic income (loss) per share attributable to common stockholders is computed using the weighted average number of shares of common stock outstanding for the period, excluding stock options. Diluted income (loss) per share attributable to common stockholders is based upon the weighted average number of shares of common stock outstanding for the period and potentially dilutive common shares, including the effect of stock options under the treasury stock method. The following table sets forth the computation of the numerators and denominators used in the basic and diluted income (loss) per share amounts (in thousands, except per share data):

 

 

 

Three months ended March 31,

 

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,920

 

 

$

(2,188

)

Denominator:

 

 

 

 

 

 

 

 

Denominator for basic income (loss) per share—weighted average shares

 

 

63,638

 

 

 

50,132

 

Effect of dilutive securities, stock options

 

 

8,752

 

 

 

 

Denominator for dilutive income (loss) per share

 

 

72,390

 

 

 

50,132

 

Net income (loss) per share attributable to common stockholders, basic

 

$

0.06

 

 

$

(0.04

)

Net income (loss) per share attributable to common stockholders, diluted

 

$

0.05

 

 

$

(0.04

)

 

The computation of diluted income (loss) per share does not include shares that are anti-dilutive under the treasury stock method because their exercise prices are higher than the average fair value of the Company’s stock during the period or due to a net loss in the period. For the three months ended March 31, 2018, there were no anti-dilutive shares excluded from the computation of income (loss) per share. For the three months ended March 31, 2017, there were 9.4 million anti-dilutive shares excluded from the computation of income (loss) per share.

 


9


 

 

3.

Recent accounting guidance

Accounting standards adopted

The Company adopted Accounting Standards Update, “ASU” 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, on January 1, 2018. ASU 2017-09 amends the guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The Company adopted ASU 2017-09 on a prospective basis, and the adoption did not have a material effect on the Company’s consolidated financial statements.

Accounting standards not yet adopted

Revenue Recognition—In May 2014, the Financial Accounting Standards Board, or “FASB”, issued ASU 2014-09, Revenue from Contracts with Customers. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most existing revenue recognition guidance under GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date that defers the effective date of ASU 2014-09 for all entities by one year for public business entities. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. For all other entities, including emerging growth companies, this ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted.

Under existing GAAP, the Company does not have vendor-specific objective evidence (“VSOE”) of fair value for post-contract customer support (“PCS”) sold along with software products licenses; therefore, revenues for the software products licenses (including perpetual licenses), PCS and professional services, if applicable, are considered to be one accounting unit and, once all services have commenced, are recognized ratably over the remaining period of the arrangement (the longer of the contractual service term or PCS term). Under ASU 2014-09, the concept of assessing VSOE has been eliminated and the Company must estimate a fair value associated with each performance obligation within an arrangement. As a result, the Company expects the timing of revenue recognition to be accelerated because it anticipates that license revenue will be recognized at a point in time, rather than over time, which is its current practice. Generally, the license revenue component of an arrangement represents a significant portion of the overall fair value of a software arrangement. As a result, the Company expects the adoption of ASU 2014-09 to have a significant impact on the consolidated financial statements. The Company has elected to adopt this standard effective on January 1, 2019 using the modified retrospective approach. The Company is currently evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

 

Financial Instruments—In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This standard affects the accounting for equity instruments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 is effective in the first quarter of 2019. The Company is currently evaluating the impact of the adoption of ASU 2016-01 on its consolidated financial statements and related disclosures.

Leases—In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard amends various aspects of existing accounting guidance for leases, including the recognition of a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This standard also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. For all other entities, including emerging growth companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The new standard must be adopted using a modified retrospective approach, and provides for certain practical expedients. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements and related disclosures.

Cash Classification—In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to improve financial reporting in regard to how certain transactions are classified in the statement of cash flows. ASU 2016-15 provides guidance for targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is

10


 

effective for interim and annual periods beginning after December 15, 2017, for public business entities. For all other entities, including emerging growth companies, ASU 2016-15 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-15 on its consolidated financial statements and related disclosures.

Goodwill Impairment—In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies accounting for goodwill impairments by eliminating step two from the goodwill impairment test.  This guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, for public business entities that are Securities and Exchange Commission (SEC) filers, and December 15, 2020, for public business entities that are not SEC filers. For all other entities, including emerging growth companies, ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. The new standard must be applied on a prospective basis. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

Retirement Benefits – 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. This ASU requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. The new guidance is effective for public business entities for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. For all other entities, including emerging growth companies, ASU 2017-07 is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted as of the beginning of an annual period. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

Derivatives and HedgingIn August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends the guidance with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. In addition, this ASU amends the current guidance to simplify the application of the hedge accounting guidance. For public business entities, the amendments are effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. For all other entities, including emerging growth companies, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.

Comprehensive Income – In January 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which gives entities the option to reclassify to retained earnings the tax effects resulting from the Tax Cuts and Jobs Act, or the Tax Act, related to items in AOCI that the FASB refers to as having been stranded in AOCI. The new guidance may be applied retrospectively to each period in which the effect of the Tax Act is recognized in the period of adoption. The Company must adopt this guidance for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the Tax Act was enacted. The guidance, when adopted, will require new disclosures regarding a company’s accounting policy for releasing the tax effects in AOCI and permit the company the option to reclassify to retained earnings the tax effects resulting from the Tax Act that are stranded in AOCI. The Company is currently evaluating how to apply the new guidance and has not determined whether it will elect to reclassify stranded amounts. The adoption of ASU 2018-02 is not expected to have a material effect on the Company’s consolidated financial statements and related disclosures.

 

 


11


 

4.

Fair value measurements

The accounting guidance for fair value, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The framework for measuring fair value consists of a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

Level 1 – Quoted prices in active markets for identical assets and liabilities at the measurement date;

Level 2 – Observable inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. Interest on the Company’s long-term debt is at a variable rate, and as such the debt obligation outstanding approximates fair value.

5.

Inventory

Inventory is stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. The valuation of inventory requires management to estimate excess inventory as well as inventory that is not of saleable quality. The determination of obsolete or excess inventory requires management to estimate market conditions and future demand for the Company’s products.

Inventory consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

 

 

$

 

Finished goods

 

 

1,051

 

 

 

1,980

 

Total inventory – net

 

$

1,051

 

 

$

1,980

 

 

 

6.

Property and equipment, net

Property and equipment consists of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Land

 

$

7,994

 

 

$

7,994

 

Building and improvements

 

 

12,825

 

 

 

15,185

 

Computer equipment and software

 

 

33,645

 

 

 

32,103

 

Office furniture and equipment

 

 

7,850

 

 

 

6,751

 

Leasehold improvements

 

 

6,300

 

 

 

6,467

 

Total property and equipment

 

 

68,614

 

 

 

68,500

 

Less: accumulated depreciation and amortization

 

 

38,113

 

 

 

37,054

 

Property and equipment, net

 

$

30,501

 

 

$

31,446

 

 

Depreciation expense was $1.6 million and $1.5 million for the three months ended March 31, 2018 and 2017, respectively.

 

12


 

 

7.

Goodwill and other intangible assets

Goodwill

The changes in the carrying amount of goodwill, which is attributable to the Software reporting segment, are as follows (in thousands):

 

Balance at December 31, 2017

 

$

62,706

 

Purchase price adjustment

 

 

114

 

Effects of foreign currency translation

 

 

951

 

Balance at March 31, 2018

 

$

63,771

 

 

Other intangible assets

A summary of other intangible assets is shown below (in thousands):

 

 

 

March 31, 2018

 

 

 

Weighted average

amortization period

 

Gross carrying

amount

 

 

Accumulated amortization

 

 

Net carrying amount

 

Definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

4 years

 

$

26,357

 

 

$

11,849

 

 

$

14,508

 

Customer relationships

 

7 years

 

 

11,930

 

 

 

6,532

 

 

 

5,398

 

Other intangibles

 

10 years

 

 

149

 

 

 

61

 

 

 

88

 

Total definite-lived intangible assets

 

 

 

 

38,436

 

 

 

18,442

 

 

 

19,994

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

 

 

 

2,819

 

 

 

 

 

 

 

2,819

 

Total other intangible assets

 

 

 

$

41,255

 

 

$

18,442

 

 

$

22,813

 

 

 

 

December 31, 2017

 

 

 

Weighted average

amortization period

 

Gross carrying

amount

 

 

Accumulated

amortization

 

 

Net carrying

amount

 

Definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

4 years

 

$

25,947

 

 

$

9,909

 

 

$

16,038

 

Customer relationships

 

7 years

 

 

11,794

 

 

 

6,195

 

 

 

5,599

 

Other intangibles

 

10 years

 

 

143

 

 

 

57

 

 

 

86

 

Total definite-lived intangible assets

 

 

 

 

37,884

 

 

 

16,161

 

 

 

21,723

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

 

 

 

2,738

 

 

 

 

 

 

 

2,738

 

Total other intangible assets

 

 

 

$

40,622

 

 

$

16,161

 

 

$

24,461

 

 

Amortization expense related to intangible assets was $1.9 million and $0.9 million for the three months ended March 31, 2018 and 2017, respectively.

 

 

13


 

8.

Other liabilities

The following table provides the details of other accrued expenses and current liabilities (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Accrued VAT

 

 

4,709