0001558370-18-004508.txt : 20180509 0001558370-18-004508.hdr.sgml : 20180509 20180509170402 ACCESSION NUMBER: 0001558370-18-004508 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 61 CONFORMED PERIOD OF REPORT: 20180331 FILED AS OF DATE: 20180509 DATE AS OF CHANGE: 20180509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VASCO DATA SECURITY INTERNATIONAL INC CENTRAL INDEX KEY: 0001044777 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 364169320 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24389 FILM NUMBER: 18819270 BUSINESS ADDRESS: STREET 1: 1901 SOUTH MYERS ROAD STREET 2: SUITE 210 CITY: OAKBROOK TERRACE STATE: IL ZIP: 60181 BUSINESS PHONE: 6309328844 MAIL ADDRESS: STREET 1: 1919 S HIGHLAND AVE STREET 2: STE 118 C CITY: LOMBARD STATE: IL ZIP: 60148 10-Q 1 vdsi-20180331x10q.htm 10-Q vdsi_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10‑Q


(Mark One)

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 000‑24389


VASCO Data Security International, Inc.

(Exact Name of Registrant as Specified in Its Charter)


 

 

DELAWARE

36‑4169320

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

121 West Wacker Drive, Suite 2050

Chicago, Illinois 60601

(Address of Principal Executive Offices)(Zip Code)

(312) 766‑4001

(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 definition 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

Emerging growth company

 

 

Smaller reporting 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

There were 40,312,000 shares of Common Stock, $.001 par value per share, outstanding at April 22, 2018.

 

 

 

 


 

VASCO Data Security International, Inc.

Form 10‑Q

For The Quarterly Period Ended March 31, 2018

Table of Contents

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2018 (Unaudited) and December 31, 2017

3

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2018 and 2017

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the three  months ended March 31, 2018 and 2017

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

Item 2. 

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

25

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

37

 

 

 

Item 4. 

Controls and Procedures

37

 

 

PART II. OTHER INFORMATION 

 

 

 

 

Item 1. 

Legal Proceedings

38

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

Item 5. 

Other Information

39

 

 

 

Item 6. 

Exhibits

39

 

 

SIGNATURES 

41

This report contains trademarks of VASCO Data Security International, Inc. and its subsidiaries, which include VASCO, the VASCO “V” design, DIGIPASS, VACMAN, IDENTIKEY, Cronto, and eSignLive.

 

2


 

VASCO Data Security International, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2018

    

2017

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets

 

 

  

 

 

  

Cash and equivalents

 

$

126,484

 

$

78,661

Short term investments

 

 

39,953

 

 

79,733

Accounts receivable, net of allowances of $809 in 2018 and $520 in 2017

 

 

34,445

 

 

48,126

Inventories, net

 

 

11,504

 

 

12,040

Prepaid expenses

 

 

6,478

 

 

3,876

Contract assets

 

 

4,874

 

 

 —

Other current assets

 

 

4,547

 

 

5,501

Total current assets

 

 

228,285

 

 

227,937

Property and equipment:

 

 

  

 

 

  

Furniture and fixtures

 

 

7,451

 

 

5,655

Office equipment

 

 

10,012

 

 

13,084

Total Property and equipment:

 

 

17,463

 

 

18,739

Accumulated depreciation

 

 

(11,163)

 

 

(13,963)

Property and equipment, net

 

 

6,300

 

 

4,776

Goodwill

 

 

57,025

 

 

56,332

Intangible assets, net of accumulated amortization

 

 

35,733

 

 

37,888

Deferred income taxes

 

 

4,975

 

 

5,460

Contract assets - non-current

 

 

7,488

 

 

 —

Other assets

 

 

7,062

 

 

5,229

Total assets

 

$

346,868

 

$

337,622

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

Current liabilities

 

 

  

 

 

  

Accounts payable

 

$

4,822

 

$

8,144

Deferred revenue

 

 

30,433

 

 

33,295

Accrued wages and payroll taxes

 

 

10,669

 

 

11,643

Short-term income taxes payable

 

 

1,435

 

 

3,673

Other accrued expenses

 

 

9,598

 

 

7,746

Deferred compensation

 

 

395

 

 

1,652

Total current liabilities

 

 

57,352

 

 

66,153

Long-term deferred revenue

 

 

6,773

 

 

7,019

Other long-term liabilities

 

 

7,500

 

 

5,919

Long-term income taxes payable

 

 

12,848

 

 

12,848

Deferred income taxes

 

 

8,169

 

 

7,753

Total liabilities

 

 

92,642

 

 

99,692

Stockholders' equity

 

 

  

 

 

  

Common stock: $.001 par value per share, 75,000 shares authorized; 40,312 and 40,086 issued and outstanding at March 31, 2018 and December 31, 2017, respectively

 

 

40

 

 

40

Additional paid-in capital

 

 

91,106

 

 

90,307

Accumulated income

 

 

170,319

 

 

156,151

Accumulated other comprehensive loss

 

 

(7,239)

 

 

(8,568)

Total stockholders' equity

 

 

254,226

 

 

237,930

Total liabilities and stockholders' equity

 

$

346,868

 

$

337,622

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

VASCO Data Security International, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

    

2018

    

2017

 

Revenue

 

 

  

 

 

  

 

Product and license

 

$

33,494

 

$

31,561

 

Services and other

 

 

11,938

 

 

10,404

 

Total revenue

 

 

45,432

 

 

41,965

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

  

 

 

  

 

Product and license

 

 

8,185

 

 

9,540

 

Services and other

 

 

2,550

 

 

2,513

 

Total cost of goods sold

 

 

10,735

 

 

12,053

 

 

 

 

 

 

 

 

 

Gross profit

 

 

34,697

 

 

29,912

 

 

 

 

 

 

 

 

 

Operating costs

 

 

  

 

 

  

 

Sales and marketing

 

 

14,277

 

 

13,702

 

Research and development

 

 

5,797

 

 

5,856

 

General and administrative

 

 

10,774

 

 

7,853

 

Amortization of purchased intangible assets

 

 

2,201

 

 

2,199

 

Total operating costs

 

 

33,049

 

 

29,610

 

 

 

 

 

 

 

 

 

Operating income

 

 

1,648

 

 

302

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

393

 

 

290

 

Other income, net

 

 

380

 

 

214

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

2,421

 

 

806

 

Provision for income taxes

 

 

629

 

 

233

 

 

 

 

 

 

 

 

 

Net income

 

$

1,792

 

$

573

 

 

 

 

 

 

 

 

 

Net income per share

 

 

  

 

 

  

 

Basic

 

$

0.04

 

$

0.01

 

Diluted

 

$

0.04

 

$

0.01

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

  

 

 

  

 

Basic

 

 

39,910

 

 

39,760

 

Diluted

 

 

40,059

 

 

39,770

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

VASCO Data Security International, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

    

2018

    

2017

 

Net income

 

$

1,792

 

$

573

 

Other comprehensive income

 

 

 

 

 

 

 

Cumulative translation adjustment, net

 

 

1,318

 

 

644

 

Pension adjustment, net

 

 

12

 

 

 5

 

Comprehensive income

 

$

3,122

 

$

1,222

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

VASCO Data Security International, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2018

    

2017

 

Cash flows from operating activities:

 

 

  

 

 

  

 

Net income

 

$

1,792

 

$

573

 

Adjustments to reconcile net income to net cash provided:

 

 

  

 

 

  

 

Depreciation and amortization

 

 

2,747

 

 

2,633

 

Deferred tax benefit

 

 

(9)

 

 

(395)

 

Stock-based compensation

 

 

800

 

 

544

 

Changes in assets and liabilities

 

 

  

 

 

  

 

Accounts receivable, net

 

 

14,185

 

 

1,715

 

Inventories, net

 

 

535

 

 

(1,403)

 

Contract assets

 

 

(4,195)

 

 

 —

 

Accounts payable

 

 

(3,360)

 

 

(1,507)

 

Income taxes payable

 

 

(3,012)

 

 

(2,914)

 

Accrued expenses

 

 

(821)

 

 

1,265

 

Deferred compensation

 

 

(1,258)

 

 

243

 

Deferred revenue

 

 

3,424

 

 

1,691

 

Other

 

 

(1,102)

 

 

(738)

 

Net cash provided by operating activities

 

 

9,726

 

 

1,707

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

  

 

 

  

 

Purchase of short term investments

 

 

 —

 

 

(69,626)

 

Maturities of short term investments

 

 

40,000

 

 

75,000

 

Additions to property and equipment

 

 

(2,296)

 

 

(247)

 

Net cash provided by investing activities

 

 

37,704

 

 

5,127

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

  

 

 

  

 

Tax payments for restricted stock issuances

 

 

(179)

 

 

(154)

 

Net cash used in financing activities

 

 

(179)

 

 

(154)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

572

 

 

253

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 

47,823

 

 

6,933

 

Cash and equivalents, beginning of period

 

 

78,661

 

 

49,345

 

Cash and equivalents, end of period

 

$

126,484

 

$

56,278

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


 

VASCO Data Security International, Inc.

Notes to Condensed Consolidated Financial Statements

(All amounts are in thousands, except per share data)

(unaudited)

Unless otherwise noted, references in this Quarterly Report on Form 10‑Q to “VASCO,” “company,” “we,” “our,” and “us,” refer to VASCO Data Security International, Inc. and its subsidiaries.

Note 1 - Summary of Significant Accounting Policies

Nature of Operations

VASCO Data Security International, Inc. (“VASCO”) and its wholly owned subsidiaries design, develop, market and support hardware and software security systems that manage and secure access to information assets. VASCO has operations in Austria, Australia, Belgium, Brazil, Canada, China, France, Japan, The Netherlands, Singapore, Switzerland, the United Arab Emirates, the United Kingdom, and the United States (“U.S.”).

In accordance with ASC 280, Segment Reporting, our operations are reported as a single operating segment.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of VASCO and its subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the company’s Annual Report on Form 10‑K for the year ended December 31, 2017.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. All significant intercompany accounts and transactions have been eliminated. The operating results for the interim periods presented are not necessarily indicative of the results expected for a full year.

Reclassifications

 

Certain amounts from prior year have been reclassified to conform to current year presentation.

 

Principles of Consolidation

The consolidated financial statements include the accounts of VASCO and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency Translation and Transactions

The financial position and results of the operations of the majority of the company’s foreign subsidiaries are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S.

7


 

Dollars using current exchange rates as of the balance sheet date. Revenue and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates are charged or credited to other comprehensive income. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations in other income (expense), net.

The financial position and results of operations of our operations in Canada, Singapore and Switzerland are measured in U.S. Dollars. For these subsidiaries, gains and losses that result from foreign currency transactions are included in the consolidated statements of operations in other income (expense), net.

For the three month period ended March 31, 2018, foreign currency transactions resulted in a net gain of $210 compared to a net loss of $24 for the same period in 2017.

Revenue Recognition

On January 1, 2018, we adopted Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers” (FASB Accounting Standards Codification (ASC) Topic 606, or “Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under FASB ASC Topic 605 “Revenue Recognition”  and FASB ASC Topic 985-605 “Software-Revenue Recognition” (“Topic 605”). We recorded a net reduction to opening Accumulated Income of $12,371, net of tax, as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to the accounting impacts of our customer contracts that include a term license to our software, as well as the impact of accounting for costs incurred to obtain our contracts.  The net impact to revenues as a result of applying Topic 606 was an increase of $3,145 for the three months ended March 31, 2018.  See Note 2 for further details.

We determine revenue recognition through the following steps:

 

·

Identification of the contract, or contracts, with a customer;

·

Identification of the performance obligations in the contract;

·

Determination of the transaction price;

·

Allocation of the transaction price to the performance obligations in the contract; and

·

Recognition of revenue when, or as, we satisfy a performance obligation.

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services, which excludes any sales incentives and amounts collected on behalf of third parties.    Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are in included in cost of revenues.

 

Nature of Goods and Services

 

We derive our revenues primarily from Product and License Revenue, which includes hardware products and software licenses, and Services and Other, which is inclusive of software-as-a-service (which we refer to as “subscription”), maintenance and support, and professional services. 

 

Product Revenue: Revenue from the sale of security hardware is recorded upon shipment, which is the point at which control of the goods are transferred and the completion of performance obligation, unless there are specific terms

8


 

that would suggest control is transferred at a later date (e.g. delivery). No significant obligations or contingencies typically exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Customer payments normally correspond with delivery.

 

License Revenue: Revenue from the sale of software licensing is recorded upon the latter of when the customer receives the ability to access the software or when they are legally allowed to use the software.  No significant obligations or contingencies exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Contracts with customers for distinct licenses of intellectual property include perpetual licenses, which grant the customer unlimited access to the software, and term licenses which limit the customer’s access to the software. The typical term license length is 3 years.  Customer payments normally correspond with delivery for perpetual licenses.  For term licenses, payments are either on installment or in advance.  In limited circumstances, we integrate third party software solutions into our software products.  We have determined that, consistent with our conclusion under prior revenue recognition rules, we act as the principal with respect to the satisfaction of the related performance obligation and record the corresponding revenue on a gross basis from these transactions.  The fees paid to the third parties are recognized as a component of cost of sales when the revenue is recognized.

 

Subscription Revenue: We generate subscription revenues from our cloud services offerings. Subscription revenues mostly include fees from customers for access to the eSignLive suite of solutions. Our standard customer arrangements do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of the contract. Customer payments are normally in advance for annual service.

 

Maintenance and Support and Other: Maintenance and support agreements generally call for us to provide software updates and technical support, respectively, to customers. Revenue on maintenance and technical support is deferred and recognized ratably over the term of the maintenance and support agreement.  Customer payments are normally in advance for annual service.

 

Professional Services: We provide professional services to our customers. Revenue from such services is recognized during the period in which the services are performed.  Payments vary, but normally occur on a time and materials basis.

Significant Judgments

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Certain arrangements may involve a significant level of configuration. Judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the other performance obligations and recognized over time.

Judgment is required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount that needs to be allocated based on the relative SSP of the various products and services.  In instances where SSP is not directly observable, and when we sell at a highly variable price range, such as for software licenses and for subscriptions, we determine the SSP for those performance obligations using the residual method.  

 

Cash and Cash Equivalents

Cash and cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are high-quality short term money market instruments and commercial paper, with original maturities of three months or less. Cash is held by a number of U.S. and non-U.S. commercial banks and money market investment funds.

9


 

Short Term Investments

Short term investments are stated at cost plus accrued interest, which approximates fair value. Short term investments consist of bank certificates of deposit and high quality commercial paper with original maturities of more than three and less than twelve months.

Accounts Receivable and Allowance for Doubtful Accounts

The creditworthiness of customers (including distributors and resellers) is reviewed prior to shipment. A reasonable assurance of collection is a requirement for revenue recognition. Verification of credit and/or the establishment of credit limits are part of the customer contract administration process. Credit limit adjustments for existing customers may result from the periodic review of outstanding accounts receivable. The company records trade accounts receivable at invoice values, which are generally equal to fair value.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments for goods and services. We analyze accounts receivable balances, customer credit-worthiness, current economic trends and changes in our customer payment timing when evaluating the adequacy of the allowance for doubtful accounts. The allowance is based on a specific review of all significant past-due accounts. If the financial condition of our customers deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories, net

Inventories, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable value. Cost is determined using the first-in-first-out (FIFO) method. We write down inventory when it appears that the carrying cost of the inventory may not be recovered through subsequent sale of the inventory. We analyze the quantity of inventory on hand, the quantity sold in the past year, the anticipated sales volume in the form of sales to new customers as well as sales to previous customers, the expected sales price and the cost of making the sale when evaluating the valuation of our inventory. If the sales volume or sales price of a specific model declines significantly, additional write downs may be required.

Property and Equipment

Property and equipment is stated at cost. Depreciation for the first quarter of 2018 was $0.5 million, compared to $0.4 million for the first quarter of 2017. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets ranging from three to seven years. Additions and improvements are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses resulting from sales, disposals, or retirements are recorded as incurred, at which time related costs and accumulated depreciation are removed from the accounts.

Long Term Investments

Included in Other Assets are minority equity investments in companies we believe may be beneficial in executing our strategy. At March 31, 2018 and December 31, 2017, investments were $4,813 and $4,361, respectively. In accordance with ASC 325, the investments are recorded at fair value using the alternative measurement method allowed for in ASU 2016-01, and are evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Cost of Goods Sold

Included in product and license cost of goods sold are direct product costs. Cost of goods sold related to service revenues are primarily costs related to subscription solutions, including personnel and equipment costs, and personnel costs of employees providing professional services and maintenance and support.

10


 

Research and Development Costs

Costs for research and development, principally the design and development of hardware, and the design and development of software prior to the determination of technological feasibility, are expensed as incurred on a project-by-project basis.

Software Development Costs

We capitalize software development costs in accordance with ASC 985‑20, Costs of Software to be Sold, Leased, or Marketed. Research costs and software development costs, prior to the establishment of technological feasibility, determined based upon the creation of a working model, are expensed as incurred. Our software capitalization policy defines technological feasibility as a functioning beta test prototype with confirmed manufacturability (a working model), within a reasonably predictable range of costs. Additional criteria include receptive customers, or potential customers, as evidenced by interest expressed in a beta test prototype, at some suggested selling price. Our policy is to amortize capitalized costs by the greater of (a) the ratio that current gross revenue for a product bears to the total of current and anticipated future gross revenue for that product or (b) the straight-line method over the remaining estimated economic life of the product, generally two to five years, including the period being reported on. No material software development costs were capitalized during the three months ended March 31, 2018.

Income Taxes

As a global company, we calculate and provide for income taxes in each tax jurisdiction in which we operate. The provision for income taxes includes the amounts payable or refundable for the current year, the effect of deferred taxes and impacts from uncertain tax positions. Our provision for income taxes is significantly affected by shifts in the geographic mix of our pre-tax earnings across tax jurisdictions, changes in tax laws and regulations, and tax planning opportunities available in each tax jurisdiction.

 

Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of our assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those differences are expected to be recovered or settled. Valuation allowances are established for deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the effect of a change in tax rates on deferred tax assets and liabilities and in income in the period that includes the enactment date.

 

We recognize tax benefits for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our income tax returns that do not meet these recognition and measurement standards. Assumptions, judgments, and the use of estimates are required in determining whether the “more likely than not” standard has been meet when developing the provision for income taxes.

 

See Note 6 – Income Taxes discussing 2017 U.S. tax reform and Staff Accounting Bulletin No. 118 ("SAB 118") issued by the SEC.

.

Fair Value of Financial Instruments

At March 31, 2018, and December 31, 2017, our financial instruments were cash and equivalents, short term investments, accounts receivable, accounts payable and accrued liabilities. The estimated fair value of our financial instruments has been determined by using available market information and appropriate valuation methodologies, as defined in ASC 820, Fair Value Measurements. The fair values of the financial instruments were not materially different from their carrying amounts at March 31, 2018 and December 31, 2017.

11


 

Accounting for Leases

All of our leases are operating leases. Rent expense on facility leases is charged evenly over the life of the lease, regardless of the timing of actual payments.

Goodwill and Other Intangibles

Intangible assets arising from business combinations such as acquired technology, customer relationships, and other intangible assets, are originally recorded at fair value. Intangible assets other than patents with definite lives are amortized over the useful life, generally three to seven years for proprietary technology and five to twelve years for customer relationships. Patents are amortized over the life of the patent, generally 20 years in the U.S.

Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a business combination. We assess the impairment of goodwill and intangible assets with indefinite lives each November 30 or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performance of the reporting unit against the planned results used in the last quantitative goodwill impairment test. Additionally, the reporting unit’s fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity- and reporting unit specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of the reporting unit exceeds the carrying value involves significant judgments and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed. Under the first step, the estimated fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in acquisition accounting. The residual amount after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit under the two-step assessment is determined using a combination of both income and market-based variation approaches. The inputs and assumptions to valuation methods used to estimate the fair value of reporting units involves significant judgments.

We operate in one reporting unit and have had no impairment recorded for the three months ended March 31, 2018.

 

Stock-Based Compensation

We have stock-based employee compensation plans, described in Note 7. ASC 718‑10, Stock Compensation requires us to estimate the fair value of restricted stock granted to employees, directors and others and to record compensation expense equal to the estimated fair value. Compensation expense is recorded on a straight-line basis over the vesting period for time-based awards and on a graded basis for performance-based awards. Forfeitures are recorded as incurred.

Retirement Benefits

We record annual expenses relating to its pension defined benefit plans based on calculations which include various actuarial assumptions, including discount rates, assumed asset rates of return, compensation increases, and turnover rates. We review our actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. The effects of gains, losses, and prior service costs and credits are amortized over the average service life. The funded status, or projected benefit obligation less plan assets, for each plan, is reflected in our consolidated balance sheets using a December 31 measurement date.

12


 

Warranty

Warranties are provided on the sale of certain of our products and an accrual for estimated future claims is recorded at the time revenue is recognized. We estimate the cost based on past claims experience, sales history and other considerations. We regularly assess the adequacy of our estimates and adjust the amounts as necessary. Our standard practice is to provide a warranty on our hardware products for either a one or two year period after the date of purchase. Customers may purchase extended warranties covering periods from one to four years after the standard warranty period. We defer the revenue associated with the extended warranty and recognize it into income on a straight-line basis over the extended warranty period. We have historically experienced minimal actual claims over the warranty period.

Recently Issued Accounting Pronouncements

Effective January 1, 2018, we adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01, which revises the classification and measurement of investments in equity securities. ASU 2016-01 requires that equity investments, except those accounted for under the equity method of accounting, be measured at fair value and changes in fair value are recognized in net income. ASU 2016-01 also provides a new measurement alternative for equity investments that do not have a readily determinable fair value (cost method investments). These investments are measured at cost, less any impairment, adjusted for observable price changes. Effective January 1, 2018, we elected to record our equity investments that do not have a readily determinable fair value using the alternative measurement method. Accordingly upon adoption, we recorded a cumulative effect adjustment to increase opening accumulated income at January 1, 2018 by $457, net of tax, as required for our equity investments with no readily determinable fair value to reflect these investments at approximate fair value.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which supersedes ASC Topic 840, Leases, and creates a new topic, ASC Topic 842, Leases. This update requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is to become effective for the Company on January 1, 2019. Currently, ASU No. 2016-02 requires companies to adopt the requirements of the new standard by applying a modified retrospective approach to the beginning of the earliest period presented in the financial statements. However, the FASB issued an exposure draft in January 2018, which would allow companies the option to instead apply the provisions of the new standard at the effective date without adjusting the comparative periods presented. While the Company is currently assessing the impact ASU No. 2016-02 will have on its consolidated financial statements, the Company expects the primary impact upon adoption will be the recognition, on a discounted basis, of its minimum commitments under noncancellable operating leases on its consolidated balance sheets resulting in the recording of right of use assets and lease obligations.

 

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows: Restricted Cash" (Topic 230). This ASU requires that a statement of cash flows explain the change during the period in the total of cash, and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal 2018. Adoption is required on a retrospective transition basis. The Company does not have any restricted cash or restricted cash equivalents.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (ASC 230)  – Classification of Certain Cash Receipts and Cash Payments.  This guidance clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. We adopted this ASU on January 1, 2018 on a retrospective basis; however, the impact was not material to our consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. The new guidance is intended to simplify the accounting for intercompany asset transfers. The core principle requires an entity to immediately recognize the tax consequences of intercompany asset transfers. We adopted this

13


 

standard on January 1, 2018 on a prospective basis. The impact was not material to our consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations – Clarifying the Definition of a Business. This standard changes the definition of a business by requiring that at least one substantive process exist in the acquired entity. It also states that if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the set of transferred assets and activities is not a business. We adopted the standard on January 1, 2018 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment. This standard eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (i.e. Step 2 of the current guidance), instead measuring the impairment charge as the excess of the reporting unit's carrying amount over its fair value (i.e. Step 1 of the current guidance). The guidance is effective for us beginning in the first quarter of 2020, and should be applied prospectively. Early adoption is permitted for impairment testing dates after January 1, 2017. We are currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.

 

In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (ASC 715) - Improving the Presentation of Net Periodic Pension Costs and Net Periodic Postretirement Benefit Cost. The new guidance will improve the presentation of pension cost by providing additional guidance on the presentation of net benefit cost in the income statement and on the components eligible for capitalization in assets. The core principle of the ASU is to provide more transparency in the presentation of these costs by requiring the service cost component to be reported in the same line item 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 separately from the service cost component and outside a subtotal of income from operations. The amendments require that the Consolidated Statements of Income impacts be applied retrospectively, while Balance Sheet changes should be applied prospectively.

The ASU is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2017. The Company adopted the newly issued ASU as of January 1, 2018. The adoption of the standard did not have a material impact our consolidated financial statements and related disclosures.

 

We adopted Accounting Standard Update, or ASU, 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in the first quarter of 2018. The ASU allows for the reclassification of stranded tax effects on items resulting from the Tax Cuts and Jobs Act, or the 2017 Tax Act, from accumulated other comprehensive income, or AOCI, to retained earnings. Tax effects unrelated to the 2017 Tax Act are released from AOCI using either the specific identification approach or the portfolio approach based on the nature of the underlying item. We elected not to reclassify the income tax effects of the 2017 Tax Act.

 

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) (“Tax Cuts and Jobs Act”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. We have accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118, on a provisional basis. Our accounting for certain income tax effects is incomplete, but we have determined reasonable estimates for those effects and have recorded provisional amounts in our condensed consolidated financial statements as of March 31, 2018 and December 31, 2017.

   

 

14


 

 

 

Note 2 – Revenue

 

The Company adopted Topic 606 Revenue from Contracts with Customers with a date of the initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.

 

The Company applied Topic 606 using the modified retrospective method – i.e. by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of Accumulated Income at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605. The details of the significant changes and quantitative impact of the changes are set out below.

 

Term Licenses

 

For revenues generated from arrangements that included term licenses to our software, the Company previously recognized revenue ratably over the term of the contract when VSOE did not exist for all undelivered elements.  Under Topic 606, these licenses are considered licenses of functional intellectual property, which requires recognition at the point in time all of the revenue recognition criteria per Topic 606 are met, which for the Company is generally when the customer is provided access to the software and the license term has commenced.  We have established a stand-alone selling price (SSP) for all other performance obligations in the contract. Accordingly, the Company now recognizes revenue from these licenses, based on the residual approach due to highly variable pricing, at the beginning of the license period and recognizes the transaction price allocated to the other performance obligations in the contract (typically maintenance and support) over the period in which those performance obligations are satisfied. This is consistent with the method of recognizing revenue for perpetual licenses of intellectual property.  Fees paid to third party software providers in term license arrangements are now recognized under Topic 606 when the term license revenues are recognized.

 

Sales Commissions

 

The Company incurs incremental costs related to commissions, which can be directly tied to obtaining a contract.  For commissions earned by sales personnel, the Company previously recognized these amounts when they were earned by the employees. As a result of adopting Topic 606, the Company now capitalizes commissions associated with new customers and amortizes the costs over a period in which the Company is expected to benefit, which can be up to seven years.  The amortization is reflected in Sales and Marketing in the statement of operations.  For certain contracts, any commission that is subject to a service period, such as employment, is expensed as incurred within Sales and Marketing in the statement of operations. 

 

Disaggregation of Revenues

 

The following tables present our revenues disaggregated by major products and services, geographical region and timing of revenue recognition.

 

Revenue by major products and services

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 

 

    

2018

    

2017*

 

 

 

 

 

 

 

Hardware products

 

$

17,491

 

$

21,744

Software licenses

 

 

16,003

 

 

9,816

Subscription

 

 

2,970

 

 

2,115

Professional services

 

 

964

 

 

961

Maintenance, support and other

 

 

8,004

 

 

7,329

 

 

 

 

 

 

 

Total Revenue

 

$

45,432

 

$

41,965

* Prior period amounts are presented under ASC 605 and 985-605

 

15


 

Revenue by location of customer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

EMEA

    

Americas

    

APAC

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue:

 

 

  

 

 

  

 

 

  

 

 

  

 

2018

 

$

18,387

 

$

15,921

 

$

11,124

 

$

45,432

 

2017*

 

$

18,370

 

$

12,124

 

$

11,471

 

$

41,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of Total:

 

 

  

 

 

  

 

 

  

 

 

  

 

2018

 

 

40

%  

 

35

%  

 

25

%  

 

100

%

2017*

 

 

44

%  

 

29

%  

 

27

%  

 

100

%

* Prior period amounts are presented under ASC 605 and 985-605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timing of revenue recognition

 

 

 

 

 

 

For the three months ended March 31, 

 

    

2018

 

 

 

 

Products and Licenses transferred at a point in time

 

$

33,494

Services transferred over time

 

 

11,938

 

 

 

 

Total Revenue

 

$

45,432

 

Impacts on Financial Statements

 

The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements for the three months ended March 31, 2018.

 

16


 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

As Reported

 

Adjustments

 

Balances without the adoption of Topic 606

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance

 

$

34,445

 

$

(276)

 

$

34,169

Contract asset

 

 

4,874

 

 

(4,874)

 

 

 -

Other current assets

 

 

4,547

 

 

302

 

 

4,849

Total current assets

 

 

228,285

 

 

(4,848)

 

 

223,437

Deferred income taxes

 

 

4,975

 

 

507

 

 

5,482

Contract asset - non-current

 

 

7,488

 

 

(7,488)

 

 

 —

Other assets

 

 

7,062

 

 

(30)

 

 

7,032

Total assets

 

$

346,868

 

$

(11,859)

 

$

335,009

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

30,433

 

$

5,468

 

$

35,901

Short-term income taxes payable

 

 

1,435

 

 

(1,942)

 

 

(507)

Total current liabilities

 

 

57,352

 

 

3,526

 

 

60,878

Deferred revenue - non-current

 

 

6,773

 

 

89

 

 

6,862

Deferred income taxes

 

 

8,169

 

 

(424)

 

 

7,745

Total liabilities

 

 

92,642

 

 

3,191

 

 

95,833

Stockholders' equity

 

 

 

 

 

 

 

 

 

Accumulated income

 

 

170,319

 

 

(15,050)

 

 

155,269

Total stockholders' equity

 

 

254,226

 

 

(15,050)

 

 

239,176

Total liabilities and stockholders' equity

 

$

346,868

 

$

(11,859)

 

$

335,009

 

17


 

Statement of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three-months ended March 31, 2018

 

 

As Reported

 

Adjustments

 

Balances without the adoption of Topic 606

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Product and license

 

$

33,494

 

$

(2,447)

 

$

31,047

Services and other

 

 

11,938

 

 

(698)

 

 

11,240

Total revenue

 

 

45,432

 

 

(3,145)

 

 

42,287

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

 

 

 

 

 

 

 

Product and license

 

 

8,185

 

 

393

 

 

8,578

Services and other

 

 

2,550

 

 

 —

 

 

2,550

Total Cost of goods sold

 

 

10,735

 

 

393

 

 

11,128

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

34,697

 

 

(3,538)

 

 

31,159

 

 

 

 

 

 

 

 

 

 

Operating Costs

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

14,277

 

 

382

 

 

14,659

Total operating costs

 

 

33,049

 

 

382

 

 

33,431

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

1,648

 

 

(3,920)

 

 

(2,272)

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

 

2,421

 

 

(3,920)

 

 

(1,499)

 

 

 

 

 

 

 

 

 

 

Provision for income tax

 

 

629

 

 

(1,019)

 

 

(390)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,792

 

$

(2,901)

 

$

(1,109)

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

$

0.04

 

 

 

 

$

(0.03)

Diluted EPS

 

$

0.04

 

 

 

 

$

(0.03)

 

The adoption of Topic 606 did not impact total operating, investing or financing cash flows in the statement of cash flows.

 

Contract balances

 

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1,

 

March 31,

 

 

 

 

 

 

2018

 

2018

Receivables, inclusive of trade and unbilled

 

 

 

 

 

$

48,217

 

$

34,445

Contract Assets (current and non-current)

 

 

 

 

 

$

8,167

 

$

12,362

Contract Liabilities (Deferred Revenue current and non-current)

 

 

 

 

 

$

33,752

 

$

37,207

 

Contract assets relate primarily to multi-year term license arrangements and the remaining contractual billings.  These contract assets are transferred to receivables when the right to billing occurs, which is normally over 3-5 years.  The contract liabilities primarily relate to the advance consideration received from customers for subscription and maintenance services.  Revenue is recognized for these services over time. 

 

18


 

As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. We do not typically include extended payment terms in our contracts with customers.

 

During the three months ended March 31, 2018, the Company’s contract asset balances increased $4,200 primarily due to new term contracts exceeding billings during the period, partially offset by transfers to accounts receivable.  Deferred Revenue increased in the same period due to advanced payments from annual renewals, offset by a decrease of approximately $11,000 associated with revenue recognized.

 

Transaction price allocated to the remaining performance obligations

 

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

2019

 

2020

 

Beyond 2020

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future revenue related to current unsatisfied performance obligations

 

$

7,242

 

$

5,977

 

$

3,064

 

$

2,654

 

$

18,937

 

The Company applies practical expedients and does not disclose information about remaining performance obligations a) that have original expected durations of one year or less, or b) where revenue is recognized as invoiced.

 

Costs of obtaining a contract

 

The Company incurs incremental costs related to commissions, which can be directly tied to obtaining a contract. Under Topic 606, the Company capitalizes commissions associated with certain new contracts and amortizes the costs over a period of benefit based on the transfer of goods or services that we have determined to be up to seven years.  The Amortization is reflected in Sales and Marketing in the Statement of Operations. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors, including customer attrition.  Commissions are payable upon receipt of payment by the customer and requires the employee to be a current employee.  For contracts with multiple year payment terms, as the commissions that are payable after year 1 are payable based on continue employment, they are expensed when incurred.   Commissions and amortization expense is included in Sales and Marketing expenses on the consolidated statements of operations.

 

Applying the practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period for the assets that the Company otherwise would have recognized is one year or less.  These costs are included in Sales and Marketing expense in the consolidated statement of operations.

 

The following tables provides information related to the capitalized costs and amortization recognized in the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

in thousands

 

 

 

 

 

 

March 31,  2018

Capitalized costs to obtain contracts, current

 

 

 

 

 

$

296

Capitalized costs to obtain contracts, non-current

 

 

 

 

 

$

1,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

in thousands

 

 

 

 

 

 

March 31,  2018

Amortization of capitalized costs to obtain contracts

 

 

 

 

 

$

65

Impairments of capitalized costs to obtain contracts

 

 

 

 

 

$

 -

 

 

19


 

Note 3 – Inventories, net

Inventories, net, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable value. Cost is determined using the FIFO method.

Inventories, net are comprised of the following:

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2018

    

2017

Component parts

 

$

4,932

 

$

4,691

Work-in-process and finished goods

 

 

6,572

 

 

7,349

Total

 

$

11,504

 

$

12,040

 

 

Note 4 – Goodwill

Goodwill activity for the three months ended March 31, 2018 consisted of the following:

 

 

 

 

Net balance at December 31, 2017

    

$

56,332

Additions

 

 

 —

Net foreign currency translation

 

 

693

Net balance at March 31, 2018

 

$

57,025

 

Certain portions of goodwill are denominated in local currencies and are subject to currency fluctuations. No impairment of goodwill was recorded in the three months ended March 31, 2018 or March 31, 2017.

Note 5 – Intangible Assets

Intangible asset activity for the three months ended March 31, 2018 is detailed in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired

 

Customer

 

    

 

 

Total Intangible

 

    

Technology

    

Relationships

    

Other

    

Assets

Net balance at December 31, 2017

 

$

6,946

 

$

22,544

 

$

8,398

 

$

37,888

Additions-Other

 

 

 —

 

 

 —

 

 

36

 

 

36

Disposals-Other

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net foreign currency translation

 

 

 5

 

 

 1

 

 

 4

 

 

10

Amortization expense

 

 

(1,109)

 

 

(604)

 

 

(488)

 

 

(2,201)

Net balance at March 31, 2018

 

$

5,842

 

$

21,941

 

$

7,950

 

$

35,733

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018 balance at cost

 

$

37,349

 

$

27,864

 

$

13,427

 

$

78,640

Accumulated amortization

 

 

(31,507)

 

 

(5,923)

 

 

(5,477)

 

 

(42,907)

Net balance at March 31, 2018

 

$

5,842

 

$

21,941

 

$

7,950

 

$