NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
(1)
|
Nature of Business and Basis of Presentation
|
Qumu Corporation (the "Company") provides the software applications businesses use to create, manage, secure, deliver and measure the success of their videos. The Company's innovative solutions release the power in video to engage and empower employees, partners and clients, allowing organizations around the world to realize the greatest possible value from video they create and publish. Whatever the audience size, viewer device or network configuration, the Company's solutions are how business does video.
The Company views its operations and manages its business as
one
segment and one reporting unit. Factors used to identify the Company's single operating segment and reporting unit include the financial information available for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance. The Company manages the marketing of its products and services through regional sales representatives and independent distributors in the United States and international markets.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in a complete set of financial statements have been condensed or omitted. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations and cash flows of the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended
December 31, 2016
.
The Company has experienced recurring operating losses and negative cash flows from operating activities and during the quarter ended March 31, 2017 was unable to project future compliance with certain covenants in its credit agreement under certain financial scenarios. The ability of the Company to continue as a going concern is dependent upon the Company maintaining compliance with its covenants. If an event of default occurs due to the Company not maintaining compliance with its covenants, the lender may accelerate the repayment of outstanding principal, which could negatively impact the Company’s ability to fund its working capital requirements, capital expenditures and general corporate expenses. On March 31, 2017, the Company amended its credit agreement. The Company is projecting future compliance with the amended covenants with an operating plan that, when combined with its expense reduction program, further aligns resources with revenue.
|
|
(2)
|
Intangible Assets and Goodwill
|
Intangible Assets
The Company’s amortizable intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Customer Relationships
|
|
Developed Technology
|
|
Trademarks / Trade-Names
|
|
Covenants Not to Compete
|
|
Total
|
Original cost
|
$
|
4,854
|
|
|
$
|
8,091
|
|
|
$
|
2,181
|
|
|
$
|
33
|
|
|
$
|
15,159
|
|
Accumulated amortization
|
(1,881
|
)
|
|
(5,272
|
)
|
|
(731
|
)
|
|
(33
|
)
|
|
(7,917
|
)
|
Net identifiable intangible assets
|
$
|
2,973
|
|
|
$
|
2,819
|
|
|
$
|
1,450
|
|
|
$
|
—
|
|
|
$
|
7,242
|
|
Weighted-average useful lives (years)
|
10
|
|
|
6
|
|
|
15
|
|
|
2
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Customer Relationships
|
|
Developed Technology
|
|
Trademarks / Trade-Names
|
|
Covenants Not to Compete
|
|
Total
|
Original cost
|
$
|
4,759
|
|
|
$
|
7,917
|
|
|
$
|
2,178
|
|
|
$
|
31
|
|
|
$
|
14,885
|
|
Accumulated amortization
|
(1,577
|
)
|
|
(4,509
|
)
|
|
(658
|
)
|
|
(31
|
)
|
|
(6,775
|
)
|
Net identifiable intangible assets
|
$
|
3,182
|
|
|
$
|
3,408
|
|
|
$
|
1,520
|
|
|
$
|
—
|
|
|
$
|
8,110
|
|
Weighted-average useful lives (years)
|
10
|
|
|
6
|
|
|
15
|
|
|
2
|
|
|
9
|
|
Changes to the carrying amount of net amortizable intangible assets for the
six months ended June 30, 2017
consisted of the following (in thousands):
|
|
|
|
|
|
Six Months Ended
June 30, 2017
|
Balance, beginning of period
|
$
|
8,110
|
|
Amortization expense
|
(1,040
|
)
|
Currency translation
|
172
|
|
Balance, end of period
|
$
|
7,242
|
|
Amortization expense of intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amortization expense associated with the developed technology included in cost of revenues
|
$
|
298
|
|
|
$
|
323
|
|
|
$
|
591
|
|
|
$
|
645
|
|
Amortization expense associated with other acquired intangible assets included in operating expenses
|
226
|
|
|
227
|
|
|
449
|
|
|
453
|
|
Total amortization expense
|
$
|
524
|
|
|
$
|
550
|
|
|
$
|
1,040
|
|
|
$
|
1,098
|
|
Goodwill
On October 3, 2014, the Company completed the acquisition of Kulu Valley, Ltd., subsequently renamed Qumu Ltd, and recognized
$8.8 million
of goodwill and
$6.7 million
of intangible assets. The goodwill balance of
$7.1 million
at
June 30, 2017
reflects the impact of foreign currency exchange rate fluctuations since the acquisition date. The gross carrying amount of goodwill related to the 2011 acquisition of Qumu, Inc. of
$22.2 million
was fully impaired in 2012.
During the
six months ended June 30, 2017
, the Company’s stock price traded at levels which caused the Company’s enterprise value, excluding any control premium, to approximate its book value, resulting in increased risk of a potential impairment of goodwill. As of
June 30, 2017
, the Company’s market capitalization, without a control premium, exceeded its book value by approximately
98%
and the Company determined there were no other triggering events necessitating a goodwill impairment analysis. Declines in the Company’s market capitalization or a downturn in its future financial performance and/or future outlook could require the Company to record goodwill and other impairment charges. While a goodwill impairment charge is a non-cash charge, it would have a negative impact on the Company's results of operations.
|
|
(3)
|
Commitments and Contingencies
|
Leases and Other Financing Obligations
Balances for assets acquired under capital lease obligations and included in property and equipment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Computer and network equipment
|
$
|
511
|
|
|
$
|
511
|
|
Furniture
|
287
|
|
|
287
|
|
Assets acquired under capital lease obligations
|
798
|
|
|
798
|
|
Accumulated depreciation
|
(494
|
)
|
|
(372
|
)
|
Assets acquired under capital lease obligations, net
|
$
|
304
|
|
|
$
|
426
|
|
The current and long-term portions of capital leases and other financing obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Capital leases and other financing obligations, current
|
$
|
394
|
|
|
$
|
508
|
|
Capital leases and other financing obligations, noncurrent
|
31
|
|
|
170
|
|
Total capital leases and other financing obligations
|
$
|
425
|
|
|
$
|
678
|
|
The Company leases certain of its facilities and some of its equipment under non-cancelable operating lease arrangements. The rental payments under these leases are charged to expense on a straight-line basis over the non-cancelable term of the lease. Future minimum payments under capital lease obligations, other financing obligations, and non-cancelable operating leases, excluding property taxes and other operating expenses, as of
June 30, 2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases and other financing obligations
|
|
Operating leases
|
|
Total
|
Remainder of 2017
|
$
|
268
|
|
|
$
|
606
|
|
|
$
|
874
|
|
2018
|
172
|
|
|
992
|
|
|
1,164
|
|
2019
|
3
|
|
|
530
|
|
|
533
|
|
2020
|
—
|
|
|
298
|
|
|
298
|
|
2021
|
—
|
|
|
300
|
|
|
300
|
|
Thereafter
|
—
|
|
|
331
|
|
|
331
|
|
Total minimum lease payments
|
443
|
|
|
$
|
3,057
|
|
|
$
|
3,500
|
|
Less amount representing interest
|
(18
|
)
|
|
|
|
|
Present value of net minimum lease payments
|
$
|
425
|
|
|
|
|
|
Term Loan
On March 31, 2017, the Company and its wholly-owned subsidiary, Qumu, Inc., entered into an Amendment No. 1 to its credit agreement dated October 21, 2016 with HCP-FVD, LLC as lender and Hale Capital Partners, LP as administrative agent. Through the Amendment No. 1, the parties agreed to reduce the minimum core bookings covenant from
$10 million
to
$8 million
for any computation period ending prior to June 30, 2018 (returning to
$10 million
for any computation period ending on or after June 30, 2018) and to increase the covenant relating to minimum amount of eligible accounts receivable and cash from
100%
to
118%
of outstanding obligations. The parties also amended the credit agreement to require prepayment of
100%
of the net cash proceeds of any “Asset Disposition” as defined in the credit agreement and to increase the prepayment fee to
10%
of the principal amount prepaid if prepayment occurs at any time prior to October 21, 2019. In connection with the amendment, the Company paid the administrative agent an amendment fee of
$125,000
, the unamortized portion of which is included in debt issuance costs as of June 30, 2017.
The
$8.0 million
term loan is scheduled to mature on October 21, 2019 and requires payment of interest monthly at the prime rate plus
6.0%
. As of
June 30, 2017
, interest was payable at
10.25%
and the effective interest rate, which includes the impact of accreting the original issue discount and debt issuance costs to interest expense over the term of the loan, was
18.8%
.
The term loan is reported in the Company's consolidated balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Term loan, at face value
|
$
|
8,000
|
|
|
$
|
8,000
|
|
Unamortized original issue discount
|
(805
|
)
|
|
(967
|
)
|
Unamortized debt issuance costs
|
(467
|
)
|
|
(416
|
)
|
Term loan
|
$
|
6,728
|
|
|
$
|
6,617
|
|
The term loan had an estimated fair value of
$7.3 million
as of
June 30, 2017
. The fair value of the term loan is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rate. As the contractual terms of the loan provide all the necessary inputs for this calculation, the term loan is classified as Level 2 within the fair value hierarchy. The estimated fair value is not necessarily indicative of the amount that would be realized in a current market exchange.
The credit agreement contains affirmative and negative covenants and requirements relating to the Company and its operations, with which the Company was in compliance as of
June 30, 2017
.
Contingencies
The Company is exposed to a number of asserted and unasserted claims encountered in the normal course of business. Legal costs related to loss contingencies are expensed as incurred. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.
The Company’s standard arrangements include provisions indemnifying customers against liabilities if the Company's products infringe a third-party’s intellectual property rights. The Company has not incurred any costs in its continuing operations as a result of such indemnifications and has not accrued any liabilities related to such contingent obligations in the accompanying condensed consolidated financial statements.
|
|
(4)
|
Fair Value Measurements
|
A hierarchy for inputs used in measuring fair value is in place that distinguishes market data between observable independent market inputs and unobservable market assumptions by the reporting entity. The hierarchy is intended to maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available. Three levels within the hierarchy may be used to measure fair value:
|
|
•
|
Level 1: Inputs are unadjusted quoted prices in active markets for identical assets and liabilities.
|
|
|
•
|
Level 2: Inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset or liability, either directly or indirectly.
|
|
|
•
|
Level 3: Inputs are generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect an entity’s own estimates of assumptions that market participants would use in pricing the asset or liability.
|
The Company’s assets and liabilities measured at fair value on a recurring basis and the fair value hierarchy utilized to determine such fair values is as follows at
June 30, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Total Fair
Value at
June 30, 2017
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative warrant liability
|
$
|
960
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Total Fair
Value at
December 31, 2016
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative warrant liability
|
$
|
893
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
893
|
|
In conjunction with the October 21, 2016 debt financing, the Company issued a warrant for the purchase of up to
314,286
shares of the Company's common stock, the entire portion of which remained unexercised and outstanding at
June 30, 2017
and December 31, 2016. The warrant, which expires on October 21, 2026, has an exercise price of
$2.80
per share and is transferrable. The warrant contains a cash settlement feature contingent upon the occurrence of certain events defined in the warrant agreement. Because of this cash settlement feature, the warrant is subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the warrant on the date of issuance was recorded in the Company’s consolidated balance sheets as a liability.
The warrant liability was recorded in the Company's consolidated balance sheets at its fair value on the date of issuance and is revalued on each subsequent balance sheet date until such instrument is exercised or expires, with any changes in the fair value between reporting periods recorded as other income or expense. During the three and
six months ended June 30, 2017
, the Company recorded non-cash income of
$11,000
and non-cash loss of
$67,000
, respectively, from the change in fair value of the warrant liability. The decrease in fair value during the
three months ended June 30, 2017
was primarily driven by decreased volatility in the Company’s stock price and the increase in fair value during the
six months ended June 30, 2017
was primarily driven by an increase in the Company’s stock price.
The Company estimates the fair value of this liability using an option pricing model that is based on the individual characteristics of the warrant on the valuation date, which includes assumptions for expected volatility, expected life and risk-free interest rate, as well as the present value of the minimum cash payment component of the instrument. Changes in the assumptions used could have a material impact on the resulting fair value. The primary input affecting the value of the warrant liability is the Company’s stock price. Generally, increases (decreases) in the fair value of the underlying stock would result in a corresponding increase (decrease) in the fair value of the warrant liability.
The Company classified the warrant liability as Level 3 due to the lack of relevant observable market data over fair value inputs such as the probability-weighting of the various scenarios in the arrangement. The following table represents a roll forward of the fair value of the Level 3 instrument (significant unobservable inputs):
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
893
|
|
Change in fair value
|
|
67
|
|
Balance at June 30, 2017
|
|
$
|
960
|
|
|
|
(5)
|
Stock-Based Compensation
|
The Company granted the following stock-based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock options
|
10,000
|
|
|
30,000
|
|
|
135,000
|
|
|
30,000
|
|
Restricted stock awards and restricted stock units
|
150,000
|
|
|
120,000
|
|
|
212,500
|
|
|
120,000
|
|
Performance stock units
|
—
|
|
|
—
|
|
|
166,149
|
|
|
—
|
|
The stock options, restricted stock awards and performance stock units granted during the three and
six months ended June 30, 2017
were granted under the Company's Second Amended and Restated 2007 Stock Incentive Plan (the "2007 Plan"), a shareholder approved plan. The
166,149
performance stock units were issued in connection with the Company's 2017 short-term incentive plan ("2017 Incentive Plan"). In settlement of the performance stock units, the Company will issue a number of shares equal to the number of performance stock units issued multiplied by the total percentage achievement of the performance goals for the 2017 Incentive Plan. The percentage achievement for the performance stock units may not exceed 100%.
On May 12, 2016, the Company’s shareholders approved an amendment to the 2007 Plan to increase the number of shares authorized under the plan by
500,000
to a total of
2,730,320
shares.
The Company recognized the following expense related to its share-based payment arrangements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock-based compensation cost, before income tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
118
|
|
|
$
|
156
|
|
|
$
|
244
|
|
|
$
|
304
|
|
Restricted stock awards and restricted stock units
|
|
210
|
|
|
233
|
|
|
419
|
|
|
436
|
|
Performance stock units
|
|
42
|
|
|
—
|
|
|
120
|
|
|
—
|
|
Total stock-based compensation
|
|
$
|
370
|
|
|
$
|
389
|
|
|
$
|
783
|
|
|
$
|
740
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock-based compensation cost included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
18
|
|
|
$
|
25
|
|
|
$
|
32
|
|
|
$
|
18
|
|
Operating expenses
|
|
352
|
|
|
364
|
|
|
751
|
|
|
722
|
|
Total stock-based compensation
|
|
$
|
370
|
|
|
$
|
389
|
|
|
$
|
783
|
|
|
$
|
740
|
|
As of
June 30, 2017
and
December 31, 2016
, the Company’s liability for gross unrecognized tax benefits totaled
$1.1 million
and
$1.0 million
, respectively (excluding interest and penalties). Total accrued interest and penalties relating to unrecognized tax benefits amounted to
$1,000
and
$3,000
on a gross basis at
June 30, 2017
and
December 31, 2016
, respectively. The change in the liability for gross unrecognized tax benefits reflects an increase in reserves established for federal and state research and development credits. The Company does not currently expect significant changes in the amount of unrecognized tax benefits during the next twelve months.
|
|
(7)
|
Computation of Net Loss Per Share of Common Stock
|
The following table identifies the components of net loss per basic and diluted share (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net loss per share – basic
|
|
|
|
|
|
|
|
Net loss
|
$
|
(2,611
|
)
|
|
$
|
(4,291
|
)
|
|
$
|
(6,173
|
)
|
|
$
|
(8,423
|
)
|
Weighted average shares outstanding – basic
|
9,356
|
|
|
9,236
|
|
|
9,301
|
|
|
9,227
|
|
Net loss per share – basic
|
$
|
(0.28
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.91
|
)
|
|
|
|
|
|
|
|
|
Net loss per share – diluted
|
|
|
|
|
|
|
|
Loss attributable to common shareholders:
|
|
|
|
|
|
|
|
Net loss
|
$
|
(2,611
|
)
|
|
$
|
(4,291
|
)
|
|
$
|
(6,173
|
)
|
|
$
|
(8,423
|
)
|
Numerator effect of dilutive securities
|
|
|
|
|
|
|
|
Warrant
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss from attributable to common shareholders
|
$
|
(2,622
|
)
|
|
$
|
(4,291
|
)
|
|
$
|
(6,173
|
)
|
|
$
|
(8,423
|
)
|
Weighted averages shares outstanding – diluted:
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
9,356
|
|
|
9,236
|
|
|
9,301
|
|
|
9,227
|
|
Denominator effect of dilutive securities
|
|
|
|
|
|
|
|
Stock options and restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Warrant
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted potential common shares
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average shares outstanding – diluted
|
9,357
|
|
|
9,236
|
|
|
9,301
|
|
|
9,227
|
|
Net loss per share – diluted
|
$
|
(0.28
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.91
|
)
|
Stock options, warrant and restricted stock units to acquire common shares excluded from the computation of diluted weighted-average common shares as their effect is anti-dilutive were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock options
|
1,562
|
|
|
1,381
|
|
|
1,545
|
|
|
1,472
|
|
Warrant
|
—
|
|
|
—
|
|
|
314
|
|
|
—
|
|
Restricted stock units
|
135
|
|
|
84
|
|
|
128
|
|
|
62
|
|
Total anti-dilutive
|
1,697
|
|
|
1,465
|
|
|
1,987
|
|
|
1,534
|
|
|
|
(8)
|
Investment in Software Company
|
As of
June 30, 2017
and
December 31, 2016
, the Company held an investment totaling
$3.1 million
in convertible preferred stock of BriefCam, Ltd. (“BriefCam”), a privately-held Israeli company that develops video synopsis technology to augment security and surveillance systems to facilitate review of surveillance video. The investment is included in other non-current assets. Because Qumu's ownership interest is less than
20%
and it has no other rights or privileges that enable it to exercise significant influence over the operating and financial policies of BriefCam, Qumu accounts for this equity investment using the cost method. Equity securities accounted for under the cost method are reviewed quarterly for changes in circumstances or the occurrence of events that suggest the Company’s investment may not be fully recoverable. If an unrealized loss for the investment is considered to be other-than-temporary, the loss will be recognized in the consolidated statements of operations in the period the determination is made. Qumu monitors BriefCam's results of operations, business plan and capital raising activities and is not aware of any events or circumstances that would indicate a decline in the fair value below the carrying value of its investment. Qumu has determined that estimating the fair value of BriefCam on a periodic basis is impracticable due to the infrequency of transactions in BriefCam's equity and the cost of obtaining an independent valuation appears excessive considering the materiality of the investment.
|
|
(9)
|
Recently Issued Accounting Standards
|
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The purpose of the amendment is to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the
implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact of adopting this standard, which could be material to its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which simplifies the income tax consequences, accounting for forfeitures and classification on the statements of consolidated cash flows. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company adopted ASU 2016-09 effective January 1, 2017 and elected to account for forfeitures of share-based payment awards as they occur. The adoption did not have a material impact to the consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which will supersede the existing lease guidance and will require all leases with a term greater than 12 months to be recognized in the statements of financial position and eliminate current real estate-specific lease guidance, while maintaining substantially similar classification criteria for distinguishing between finance leases and operating leases. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting this standard, which will require right-of-use assets and lease liabilities be recorded in the consolidated balance sheet for operating leases.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall
, which requires entities to measure equity instruments at fair value and recognize any changes in fair value in net income (loss). Entities may estimate the fair value of certain equity securities that do not have readily determinable fair value or may choose a practical expedient. If the practical expedient is elected, these investments would be recorded at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance also updates certain presentation and disclosure requirements. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the impact of adopting this standard, which could be material to its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. The new standard is effective for the Company on January 1, 2018 but may be early adopted effective January 1, 2017.
The new revenue standard may be applied using either of the following transition methods: a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). The Company will adopt the standard in the first quarter of 2018 and preliminarily expects to use the modified retrospective method. However, the Company is continuing to evaluate the impact of the standard, and its adoption method is subject to change.
Currently, the Company is in the process of reviewing its historical contracts to quantify the impact that the adoption of the standard will have on specific performance obligations. The Company is also continuing to evaluate the impact of the standard on its recognition of costs related to obtaining customer contracts (namely, sales commissions). While the Company continues to assess all potential impacts of this new standard, it currently believes the most significant impacts relate to the accounting for the timing of revenue recognition of subscription, or term-based, software license arrangements. Specifically, under the new standard:
|
|
•
|
Software revenue associated with non-cancellable subscription or, term-based, software license arrangements will generally be recognized upon delivery of the license. Historically, these arrangements have been material, and the Company currently recognizes this revenue ratably over the term of the software license; and
|
|
|
•
|
The Company expects that the accounting for software revenue derived from perpetual-based licensing arrangements and associated services revenues will not be materially impacted.
|
The adoption of the standard will require the implementation of new accounting processes, which will change the Company's internal controls over revenue recognition, contract acquisition costs and financial reporting. The Company is designing and implementing these controls in anticipation adopting the new standard January 1, 2018.