SEACHANGE INTERNATIONAL, INC. Forward-Looking Statements
This Form 10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and such statements involve risks and uncertainties. The following information should be read in conjunction with the unaudited consolidated financial information and the notes thereto included in this Form 10-Q. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors referred to in Part I, Item 1A. "Risk Factors" in our Form 10-K for our fiscal year endedJanuary 31, 2020 and elsewhere in this Form 10-Q. These factors may cause our actual results to differ materially from any forward-looking statement. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate, and management's beliefs and assumptions. We undertake no obligation to publicly update or revise the statements in light of future developments. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as "expect," "seek," "anticipate," "intend," "plan," "believe," "could," "estimate," "may," "target," "project," or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Business OverviewSeaChange International, Inc. , aDelaware corporation ("SeaChange ," the "Company," "us," or "we") founded onJuly 9, 1993 , is an industry leader in the delivery of multiscreen, advertising and premium over the top ("OTT") video management solutions headquartered inWaltham, Massachusetts . Our software products and services facilitate the aggregation, licensing, management and distribution of video and advertising content for service providers, telecommunications companies, satellite operators and broadcasters. We sell our software products and services worldwide, primarily to service providers including: operators, such as Liberty Global, plc., Altice NV,Cox Communications, Inc. and Rogers Communications, Inc.; telecommunications companies, such as Verizon Communications, Inc., AT&T, Inc. and Frontier Communications Corporation; satellite operators such asDirect TV and Dish Network Corporation; and broadcasters. Our software products and services are designed to empower video providers to create, manage and monetize the increasingly personalized, highly engaging experiences that viewers demand. Using our products and services, we believe customers can increase revenue by offering services such as video-on-demand ("VOD") programming on a variety of consumer devices, including televisions ("TVs"), mobile telephones ("smart phones"), personal computers ("PCs"), tablets and OTT streaming players. Our solutions enable service providers to offer other interactive television services that allow subscribers to receive personalized services and interact with their video devices, thereby enhancing their viewing experience. Our products also allow our customers to insert advertising into broadcast and VOD content.SeaChange serves an exciting global marketplace where multiscreen viewing is increasing, consumer device options are evolving rapidly, and viewing habits are shifting. The primary driver of our business is enabling the delivery of video assets in the changing multiscreen television environment. Through strategic collaborations, we have expanded our capabilities, products and services to address the delivery of content to devices other than television set-top boxes, namely PCs, tablets, smart phones and OTT streaming players. We believe that our strategy of expanding into adjacent product lines will also position us to further support and maintain our existing service provider customer base. Providing our customers with more scalable software platforms enables them to further reduce their infrastructure costs, improve reliability and expand service offerings to their customers. Additionally, we believe we are well positioned to capitalize on new customers entering the multiscreen marketplace and increasingly serve adjacent markets. Our core technologies provide a foundation for software products and services that can be deployed in next generation video delivery systems capable of increased levels of subscriber activity across multiple devices. We have historically sold and licensed our products and services on a standalone basis. CommencingFebruary 2019 , we adopted a value-based selling approach as part of which we offer our customers the ability to license all of our product and services, including specified upgrades, for a fixed period of time for a fixed price which we refer to as Framework deals. We initiated restructuring efforts in fiscal 2020 to improve operations and optimize our cost structure. InOctober 2019 , we continued to streamline our operations and closed our service organizations inIreland andthe Netherlands resulting in annualized cost savings of approximately$6.0 million . We will also realize cost savings in fiscal 2021 related to the reduction in headcount driven by COVID-19. OnFebruary 28, 2019 , we entered into a Cooperation Agreement withTAR Holdings LLC andKaren Singer (collectively, "TAR Holdings "). As of the date of the Cooperation Agreement,TAR Holdings beneficially owned approximately 20.6% of our outstanding common stock. Pursuant to the Cooperation Agreement, we agreed to set the size of the Board of Directors of the Company (the "Board") at eight members, appointRobert Pons to the Board as a Class II Director, and appointJeffrey Tuder to the Board as a Class III Director.Mr. Pons andMr. Tuder were accordingly appointed to our Board upon execution of the Cooperation Agreement onFebruary 28, 2019 . OnAugust 8, 2019 , we amended the Cooperation Agreement to permitTAR Holdings , together with its affiliates, to own up to 25% of our securities. 21 -------------------------------------------------------------------------------- OnMarch 4, 2019 , our Board approved and adopted a Tax Benefits Preservation Plan to deter acquisitions of our common stock that would potentially limit our ability to use net operating loss carryforwards and certain other tax attributes ("NOLs") to reduce our potential future federal income tax obligations, which was subsequently approved by our stockholders at our 2019 annual meeting of stockholders. In connection with the Tax Benefits Preservation Plan, we declared a dividend of one preferred share purchase right for each share of our common stock issued and outstanding as ofMarch 15, 2019 to our stockholders of record on that date. The Tax Benefits Preservation Plan expires no later thanMarch 4, 2022 . OnAugust 8, 2019 , we amended the Tax Benefits Preservation Plan to permitTAR Holdings , together with its affiliates, to own up to 25% of our securities. Results of Operations
The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements.
Revenue and Gross Profit
The components of our total revenue and gross profit are described in the
following table:
For the Three Months Ended April 30, Change
2020 2019 $ %
(Amounts in thousands, except for percentage data)
Revenue:
Product $ 3,098 $ 1,179 $ 1,919 162.8 %
Service 3,817 7,306 (3,489 ) (47.8 %)
Total revenue 6,915 8,485 (1,570 ) (18.5 %)
Cost of product revenue 1,580 909 671 73.8 %
Cost of service revenue 2,826 4,668 (1,842 ) (39.5 %)
Total cost of revenue 4,406 5,577 (1,171 ) (21.0 %)
Gross profit $ 2,509 $ 2,908 $ (399 ) (13.7 %)
Gross product profit margin 49.0 % 22.9 % 26.1 %
Gross service profit margin 26.0 % 36.1 % (10.1 %)
Gross profit margin 36.3 % 34.3 % 2.0 %
Two customers accounted for 13% and 15% of total revenue in the first quarter of
fiscal 2021 and one customer accounted for 17% of total revenue in the first
quarter of fiscal 2020. See Part I Item I, Note 2, "Significant Accounting
Policies," to this Form 10-Q for more information.
International revenue accounted for 66% and 60% of total revenue in the three
months ended April 30, 2020 and 2019, respectively. The increase in
international sales as a percentage of total revenue in the three months ended
April 30, 2020 as compared to the same period in fiscal 2020 is primarily due to
a decrease in U.S. revenue generated.
Product Revenue
Product revenue increased by$1.9 million for the three months endedApril 30, 2020 as compared to the three endedApril 30, 2019 . The increase for the three months endedApril 30, 2020 was primarily due to revenue generated from a shift in sales to our end-to-end Framework offering, which did not begin until the end of our first quarter in fiscal 2020.
Service Revenue
Service revenue decreased by$3.5 million for the three months endedApril 30, 2020 as compared to the three months endedApril 30, 2019 . The decrease for the three months endedApril 30, 2020 was primarily due to a decrease in our legacy professional service revenue related to our individual product sales and upgrades and a reduction to maintenance and support revenue provided on post warranty contracts as customers continue to provide their own solutions and legacy products are decommissioned.
Gross Profit and Margin
Cost of revenue consists primarily of the cost of resold third-party products
and services, purchased components and subassemblies, labor and overhead
relating to the assembly, testing and implementation and ongoing maintenance of
complete systems.
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-------------------------------------------------------------------------------- Our gross profit margin increased by 2% for the three months endedApril 30, 2020 compared to the three months endedApril 30, 2019 primarily due to a shift to our end-to-end Framework model during the period. Product profit margin increased by 26% for the three months endedApril 30, 2020 compared to the three months endedApril 30, 2019 primarily due to a shift to our end-to-end Framework model and a decrease in lower margin hardware sales. Service profit margins decreased by 10% for the three months endedApril 30, 2020 compared to the three months endedApril 30, 2019 primarily due to lower service revenue to absorb our fixed costs from professional services and maintenance and support revenue during the three months endedApril 30, 2020 as customers continue to provide their own solutions and legacy products are decommissioned as well as a reduction in headcount. Operating Expenses Research and Development Research and development expenses consist of salaries and related costs, including stock-based compensation, for personnel in software development and engineering functions as well as contract labor costs, depreciation of development and test equipment and an allocation of related facility expenses. The following table provides information regarding the change in research and development expenses during the periods presented: For the Three Months Ended April 30, Change 2020 2019 $ % (Amounts in thousands, except for percentage data) Research and development expenses $ 4,166 $ 4,252$ (86 ) (2.0 %) % of total revenue 60.2 % 50.1 % Research and development expenses decreased by$0.1 million for the three months endedApril 30, 2020 as compared to the same period in fiscal 2020 primarily due to a decrease in labor costs associated with the lower headcount resulting from the cost-savings efforts implemented as part of our restructuring program in fiscal 2020 as well as a reduction in headcount in the first quarter of fiscal 2021 driven by the COVID-19 pandemic.
Selling and Marketing
Selling and marketing expenses consist of salaries and related costs, including
stock-based compensation, for personnel engaged in selling and marketing
functions, as well as commissions, travel expenses, certain promotional expenses
and an allocation of related facility expenses. The following table provides
information regarding the change in selling and marketing expenses during the
periods presented:
For the Three Months Ended April 30, Change
2020 2019 $ %
(Amounts in thousands, except for percentage data)
Selling and marketing expenses $ 2,126 $ 2,852 $ (726 ) (25.5 %)
% of total revenue 30.7 % 33.6 %
Selling and marketing expenses decreased by $0.7 million for the three months
ended April 30, 2020 as compared to the same period in fiscal 2020 primarily due
to a decrease in labor costs associated with lower headcount from the
cost-saving efforts implemented as part of our restructuring program in fiscal
2020 as well as a decrease in travel related expenses due to the COVID-19
pandemic.
General and Administrative
General and administrative expenses consist of salaries and related costs,
including stock-based compensation, for personnel in executive, finance, legal,
human resources, information technology and administrative functions, as well as
legal and accounting services, insurance premiums and an allocation of related
facilities expenses. The following table provides information regarding the
change in general and administrative expenses during the periods presented:
For the Three Months Ended April 30, Change
2020 2019 $ %
(Amounts in thousands, except for percentage data)
General and administrative expenses $ 2,054 $ 4,249 $ (2,195 ) (51.7 %)
% of total revenue 29.7 % 50.1 %
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-------------------------------------------------------------------------------- General and administrative expenses decreased by$2.2 million for the three months endedApril 30, 2020 as compared to the same period in fiscal 2020 primarily due to a$0.2 million decrease in labor costs associated with lower headcount from the cost-saving efforts implemented as part of our restructuring program in fiscal 2020 as well as a$1.6 million reduction in the use of outside services and a$0.4 million reduction in bad debt expense.
Severance and Restructuring Costs
Severance costs consist of employee-related severance charges not related to a restructuring plan. Restructuring costs consist of charges related to restructuring including employee-related severance charges, remaining lease obligations and termination costs, and the disposal of equipment.
For the Three Months Ended April 30, Change
2020 2019 $ %
(Amounts in thousands, except for percentage data)
Severance and restructuring costs $ 486 $ 211 $ 275 130.3 %
% of total revenue 7.0 % 2.5 %
Severance and other restructuring costs increased by
Other Expense, Net
The table below provides detail regarding our other expense, net:
For the Three Months Ended April 30, Change
2020 2019 $ %
(Amounts in thousands, except for percentage data)
Interest income, net 119 83 36 43.4 %
Foreign exchange loss, net (331 ) (1,895 ) 1,564 (82.5 %)
Miscellaneous (expense) income, net 4 21 (17 ) (81.0 %)
$ (208 ) $ (1,791 ) $ 1,583
The principal components of other expense, net were interest income, net of $0.1
million and foreign exchange loss, net of $0.3 million for the three months
ended April 30, 2020 and foreign exchange loss, net of $1.9 million for the
three months ended April 30, 2019 . Our foreign exchange loss, net is primarily
due to the revaluation of intercompany notes.
Income Tax (Benefit) Provision
We recorded an income tax benefit of$21 thousand and an income tax provision of$0.4 million for the three months endedApril 30, 2020 andApril 30, 2019 , respectively. Our effective tax rate in fiscal 2021 and in future periods may fluctuate on a quarterly basis, as a result of changes in our jurisdictional forecasts where losses cannot be benefitted due to the existence of valuation allowances on our deferred tax assets, variance in actual results from our estimates, or changes in tax laws, regulations, accounting principles or interpretations thereof. We review all available evidence to evaluate the recovery of deferred tax assets, including the recent history of losses in all tax jurisdictions, as well as its ability to generate income in future periods. As ofApril 30, 2020 , due to the uncertainty related to the ultimate use of certain deferred income tax assets, we have recorded a valuation allowance on certain deferred assets. We file income tax returns in theU.S. federal jurisdiction, various state jurisdictions, and various foreign jurisdictions. We have closed out an audit with the Internal Revenue Service ("IRS") through fiscal 2013. We are no longer subject toU.S. federal examinations before fiscal 2015. However, the taxing authorities will still have the ability to review the propriety of certain tax attributes created in closed years if such tax attributes are utilized in an open tax year, such as our federal research and development credit carryovers. 24
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Liquidity and Capital Resources
The following table includes key line items of our consolidated statements of
cash flows:
For the Three Months Ended April 30,
2020 2019
(Amounts in thousands)
Net cash used in operating activities $ (4,263 ) $ (2,685 )
Net cash provided by (used in) investing
activities 1,063 (3,173 )
Net cash provided by financing activities 137 9
Effect of exchange rate changes on cash, cash
equivalents
and restricted cash 153 229
Net decrease in cash, cash equivalents and
restricted cash $ (2,910 ) $ (5,620 )
Historically, we have financed our operations and capital expenditures primarily
with our cash and investments. Our cash, cash equivalents, and restricted cash
and marketable securities totaled $9.8 million at April 30, 2020 .
In fiscal 2020, we closed our Ireland and Netherlands service organizations in
the continued streamlining of our operations resulting in annualized cost
savings of approximately $6.0 million . In the first quarter of fiscal 2021, we
reduced our headcount across all departments in response to the COVID-19
pandemic, which will result in approximately $4.0 million of annualized cost
savings.
We believe that existing cash and investments and cash expected to be provided
by future operating activities, augmented by the plans highlighted above, are
adequate to satisfy our working capital, capital expenditure requirements and
other contractual obligations for at least the next 12 months.
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. 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.
On June 4, 2019 , the Board authorized a share repurchase program, which expired
on June 4, 2020 , of up to $5.0 million of then outstanding shares of the
Company. Under the share repurchase program, the Company is authorized to
repurchase outstanding shares of common stock in accordance with applicable laws
both on the open market, including under trading plans established pursuant to
Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, and in
privately negotiated transactions. There was no stock repurchase activity in the
first quarter of fiscal 2021.
Net cash used in operating activities
Net cash used in operating activities was$4.3 million for the three months endedApril 30, 2020 . Net cash used in operating activities was primarily the result of our net loss of$6.5 million and changes in working capital, which includes a$3.1 million decrease in accounts receivable and a$0.6 million decrease in unbilled, partially offset by a$0.6 million increase in prepaid expenses and other current assets and other assets and a$1.7 million decrease in accrued expenses and other liabilities. Net cash used in operating activities was$2.7 million for the three months endedApril 30, 2019 . Net cash used in operating activities was primarily the result of our net loss of$10.8 million and changes in working capital, which includes a$9.9 million decrease in accounts receivable partially offset by a$1.6 million decrease in accounts payable and a$.8 million decrease in deferred revenue.
Net cash provided by (used in) investing activities
Net cash provided by investing activities was$1.1 million for the three months endedApril 30, 2020 and was primarily due to the sales and maturities of marketable securities. Net cash used in investing activities was$3.2 million for the three months endedApril 30, 2019 and was primarily due to cash paid for the acquisition of Xstream A/S partially offset by the proceeds from the sale of marketable securities.
Net cash provided by financing activities
Net cash provided by financing activities was$0.1 million for the three months endedApril 30, 2020 due to the proceeds from the issuance of common stock related to option exercises and purchases through the Employee Stock Purchase Plan ("ESPP"). Net cash provided by financing activities was$9 thousand for the three months endedApril 30, 2019 due to the proceeds from the issuance of common stock. 25
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Impact of COVID-19 Pandemic
In the first quarter of fiscal 2021, concerns related to the spread of COVID-19 began to create global business disruptions as well as disruptions in our operations and to create potential negative impacts on our revenues and other financial results. COVID-19 was declared a pandemic by theWorld Health Organization onMarch 11, 2020 . The extent to which COVID-19 will impact our financial condition or results of operations is currently uncertain and depends on factors including the impact on our customers, partners, and vendors and on the operation of the global markets in general. Due to our business model, the effect of COVID-19 on our results of operations may also not be fully reflected for some time. We are currently conducting business with substantial modifications to employee travel, employee work locations, virtualization or cancellation of customer and employee events, and remote sales, implementation, and support activities, among other modifications. These decisions may delay or reduce sales and harm productivity and collaboration. We have observed other companies and governments making similar alterations to their normal business operations, and in general, the markets are experiencing a significant level of uncertainty at the current time. Virtualization of our team's sales activities could foreclose future business opportunities, particularly as our customers limit spending, which could negatively impact the willingness of our customers to enter into or renew contracts with us. The pandemic has impacted our ability to complete certain implementations, negatively impacting our ability to recognize revenue, and could also negatively impact the payment of accounts receivable and collections. We may take further actions that alter our business operations as the situation evolves. As a result, the ultimate impact of the COVID-19 pandemic and the effects of the operational alterations we have made in response on our business, financial condition, liquidity, and financial results cannot be predicted at this time. OnMarch 27, 2020 ,President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the "CARES) Act"). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We continue to examine the impact that the CARES Act may have on our business, including our ability to utilize our NOLs.
The Paycheck Protection Program
OnMay 5, 2020 , the Company entered into a promissory note (the "Note") withSilicon Valley Bank (the "Lender") evidencing an unsecured loan in an aggregate principal amount of$2,412,890 pursuant to the Paycheck Protection Program (the "PPP") under the CARES Act administered by theU.S. Small Business Administration ("SBA"). Interest accrues on the Note at a fixed rate of one percent (1%) per annum, with the payment of the first six months of interest and principal deferred. The Note has an initial term of two years, is unsecured and is guaranteed by the SBA. The Company may apply to the Lender for forgiveness of the Note, with the amount which may be forgiven equal to the sum of qualifying expenses, including payroll costs, covered rent obligations, and covered utility payments incurred by the Company during the eight-week period beginning onMay 7, 2020 , calculated in accordance with the terms of the CARES Act. Subject to any forgiveness under the PPP, the Note will mature onMay 5, 2022 . Beginning on the seven-month anniversary of the date of the Note, the Company is required to make 18 monthly payments of principal and interest. The Note may be prepaid at any time prior to maturity with no prepayment penalties. The Note provides for customary events of default including, among others, those relating to breaches of the Company's obligations under the Note, including a failure to make payments, any bankruptcy or similar proceedings involving the Company, and certain material effects on the Company's ability to repay the Note. The Note may be accelerated upon the occurrence of an event of default.
Critical Accounting Policies and Significant Judgments and Estimates
We prepare our consolidated financial statements in accordance withU.S. GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. There have been no material changes to our critical accounting policies and estimates from those disclosed in our financial statements and the related notes and other financial information included in our Annual Report on Form 10-K on file with theSecurities and Exchange Commission .
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSecurities and Exchange Commission . 26
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Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
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