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Washington, D.C. 20549
(Amendment No. 1)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2012
o 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 000-26209
Ditech Networks, Inc.
(Exact name of registrant as specified in its charter)
3099 North First Street
San Jose, California 95134
(Address of principal executive offices) (Zip Code)
(Registrants 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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. YES x NO o
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). YES o NO x
As of August 31, 2012, 26,894,963 shares of the Registrants common stock were outstanding.
Ditech Networks, Inc. (the Company) filed its Quarterly Report on Form 10-Q for the period ended July 31, 2012, on September 13, 2012 (the Original Filing). The Company is filing this Amendment No. 1 on Form 10-Q/A (a) to refile the financial statements contained in Part I, Item 1 of the Original Filing to correct a typographical error by removing the parentheses around the figure in the cash flow statement for Accrued and other liabilities for the three months ended July 31, 2011, and (b) to furnish its Interactive Data Files (XBRL Exhibits) as Exhibit 101. The Company elected to take advantage of the 30-day grace period for filing its first XBRL documents with detail-tagged footnote and schedule submissions as permitted by Rule 405 of Regulation S-T.
No other changes have been made to the Original Filing other than those described above. This Amendment No. 1 on Form 10-Q/A does not reflect subsequent events occurring after the filing date of the Original Filing or, except as described above, modify or update any disclosures made in the Original Filing.
Ditech Networks, Inc.
(in thousands, except per share data)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Ditech Networks, Inc.
(in thousands, except per share data)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Ditech Networks, Inc.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
DITECH NETWORKS, INC.
1. DESCRIPTION OF BUSINESS
Ditech Networks, Inc. (the Company) designs, develops and markets telecommunications equipment and services for use in wireline, wireless, satellite and internet protocol (IP) telecommunications networks. The Companys products enhance and monitor voice quality and provide security in the delivery of voice services. In addition, the Company has entered the voice services market of telecommunications by developing and marketing voice products that can be used by phone customers to have voice messages transcribed into textual messages, and which also allows for interaction with web-based applications. The Company has established a direct sales force that sells its products in the U.S. and internationally. In addition, the Company is expanding its use of value added resellers and distributors in an effort to broaden its sales channels. This expanded use of value added resellers and distributors has occurred primarily in the Companys international markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The accompanying condensed consolidated financial statements as of July 31, 2012, and for the three month periods ended July 31, 2012 and 2011, together with the related notes, are unaudited but include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for the fair presentation, in all material respects, of the financial position and the operating results and cash flows for the interim date and periods presented. The April 30, 2012, condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Results for the interim period ended July 31, 2012, are not necessarily indicative of results for the entire fiscal year or future periods. These condensed consolidated financial statements should be read in conjunction with the financial statements and related notes thereto for the year ended April 30, 2012, included in the Companys Annual Report on Form 10-K, filed with the Securities and Exchange Commission on July 27, 2012, file number 000-26209.
In October 2009, the Financial Accounting Standards Board (FASB) amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the products essential functionality from the scope of industry-specific software revenue recognition guidance. Also in October 2009, the FASB amended the accounting standards for multiple-deliverable arrangements to (i) provide updated guidance on how the elements in a multiple-deliverable arrangement should be separated, and how the consideration should be allocated; (ii) require an entity to allocate revenue amongst the elements in an arrangement using estimated selling prices (ESP) if a vendor does not have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) of the selling price; and (iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.
VSOE for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for an element falls within a reasonably narrow pricing range, generally evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range of the median rates. In addition, the Company considers major service groups, geographies, customer classifications, and other variables in determining VSOE.
TPE is determined based on competitor prices for similar deliverables when sold separately. The Company is typically not able to determine TPE for the Companys products or services. Generally, the Companys go-to-market strategy differs from that of the Companys peers and the Companys offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products selling prices are on a stand-alone basis.
When the Company is unable to establish the selling price of its elements using VSOE or TPE, the Company uses ESP in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company determines ESP for a product or service by considering multiple factors including, but not limited to, pricing policies, internal costs, gross margin objectives, competitive landscapes, geographies, customer classes and distribution channels.
The Company adopted this accounting guidance at the beginning of its first quarter of the fiscal year ended April 30, 2012, for applicable arrangements originating or materially modified after April 30, 2011. The Company currently only enters into multiple element arrangements within the Voice Quality Enhancement segment as mentioned in Note 9 of these Notes to Condensed Consolidated Financial Statements. The adoption of these accounting standards has not had a material impact on revenue recognized since adoption.
The Companys revenue in multiple element arrangements in the Voice Quality Enhancement segment are derived primarily from two sources: (i) product revenue which consists of hardware and software, and (ii) related support and service revenue. The Companys products are telecommunications hardware with embedded software components such that the software functions together with the hardware to provide the essential functionality of the product. Therefore, the Companys hardware deliverables are considered to be non-software elements and are excluded from the scope of industry-specific software revenue recognition guidance.
Although the Company cannot reasonably estimate the effect of the adoption on future financial periods as the impact may vary depending on the nature and volume of future sale contracts, this guidance does not generally change the units of accounting for the Companys revenue transactions. The Companys hardware (including essential software) products and services qualify as separate units of accounting because they have value to the customer on a stand-alone basis and the Companys revenue arrangements generally do not include a general right of return relative to delivered products. The Companys hardware (including essential software) is valued using ESP as mentioned above based on internal pricing policies. The Companys services (which include annual service maintenance and installation services) are valued using VSOE as mentioned above based upon the contractually stated annual renewal rate.
The Company generally recognizes product revenue, including shipping charges, when: persuasive evidence of a definitive agreement exists; shipment to the customer has occurred; title and all risks and rewards of ownership have passed to the customer; acceptance terms, if any have been fulfilled; no significant contractual obligations remain outstanding; the fee is fixed or determinable; and collection is reasonably assured.
Service revenue includes revenue from maintenance service contracts and revenue from the Companys voice services. Revenue associated with service contracts is deferred and recognized ratably over the term of the contract. Revenue from the Companys voice services is recognized on a monthly basis as services are provided.
In the event that a shipment transaction does not meet all of the criteria for revenue recognition it is recorded as deferred revenue in the condensed consolidated balance sheet. To the extent that the Company has received cash for some or all of a given deferred revenue transaction, the Company reports it in the condensed consolidated balance sheets as deferred revenue. However, to the extent that the Company has not collected cash related to the deferred revenue transaction, the Company reflects the deferred revenue as a reduction in the corresponding account receivable balance.
The Company records transaction-based taxes including, but not limited to, sales, use, value added, and excise taxes, on a net basis in its condensed consolidated statements of operations.
Computation of Loss per Share
Basic loss per share is calculated based on the weighted average number of shares of common stock outstanding during the period. Diluted loss per share for the three month periods ended July 31, 2012 and 2011, is calculated excluding the effects of all common stock equivalents, as their effect would be anti-dilutive. For the three month periods ended July 31, 2012 and 2011, common stock equivalents, primarily options and restricted stock units, totaling 4,490,000 and 4,782,000 shares, respectively, were excluded from the calculation of diluted loss per share, as their impact would be anti-dilutive. The diluted loss per share for the first quarter of fiscal 2012 and 2011 also excludes the impact of 100,000 shares potentially issuable under the warrant issued as part of the Grid Communication Services, Inc. (Grid), acquisition. See Note 4 of these Notes to the Condensed Consolidated Financial Statements for a further discussion of the Grid transaction.
A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net loss per share follows (in thousands, except per share amounts):
For the three month periods ended July 31, 2012 and 2011, there was no difference between reported net loss and comprehensive loss.
Accounting for Stock-Based Compensation
Stock-based compensation expense recognized during the period is based on the fair value of the actual awards vested or expected to vest. Compensation expense for all stock-based payment awards expected to vest is recognized on a straight-line basis. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The fair value of stock option awards is estimated on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock option awards. The value of the portion of the option that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys condensed consolidated statements of operations.
The fair value of restricted stock awards (RSAs) and restricted stock units (RSUs) is the product of the number of shares granted and the grant date fair value of the Companys stock. RSAs and RSUs are converted into shares of the Companys common stock upon vesting on a one-for-one basis. Typically, vesting of RSAs and RSUs is subject to the employees continuing service to the Company. RSAs and RSUs generally vest over three or four year periods and are expensed ratably on a straight-line basis over their respective vesting period net of estimated forfeitures.
In the periods presented, the Company has issued non-vested stock options and RSUs with performance goals to certain senior members of management. The number of non-vested stock options or non-vested RSUs underlying each award may be determined based on a range of attainment within defined performance goals. The Company is required to estimate the attainment that will be achieved related to the defined performance goals and number of non-vested stock options or non-vested RSUs that will ultimately be awarded in order to recognize compensation expense over the vesting period. If the Companys initial estimates of performance goal attainment change, the related expense may fluctuate from quarter to quarter based on those estimates and if the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed. In the three months ended July 31, 2012, the Company reversed approximately $0.1 million of previously recognized expense on unvested RSUs related to certain performance grants, due to performance milestones not being met. In the three months ended July 31, 2011, the Company reversed approximately $0.1 million of previously recognized expense on unvested options and RSUs related to certain performance grants, due to the previous chief executive officers departure from the Companys board of directors.
There was no tax benefit from the exercise of stock options related to deductions in excess of compensation cost recognized in the three months ended July 31, 2012 and 2011. The Company reflects the tax savings resulting from tax deductions in excess of expense reflected in its financial statements as a financing cash flow.
Investment securities that have maturities of more than three months at the date of purchase but current maturities of less than one year are considered short-term investments. Long-term investment securities include any investments with remaining maturities of one year or more and auction rate securities that failed to settle beginning in fiscal 2008, for which conditions leading to their failure at auction create uncertainty as to whether they will settle in the near-term.
Short and long-term investments consist primarily of certificates of deposit and asset backed preferred equity securities. The Companys investment securities are maintained at a major financial institution, are classified as available-for-sale, and are recorded on the condensed consolidated balance sheets at fair value, with unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders equity, net of tax. If the Company sells its investments prior to their maturity, it may record a realized gain or loss in the period the sale took place. The cost of securities sold is based on the specific identification method. In the three months ended July 31, 2012 and 2011, the Company realized no gains or losses on its investments.
The Company evaluates its investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and the extent to which the fair value has been below its cost-basis, the financial condition of the issuer and the Companys ability to hold the investment for a period of time, which may be sufficient for anticipated recovery of the market value. To the extent that the historical cost of the available for sale security exceeds the estimated fair market value, and the decline in value is deemed to be other-than-temporary, an impairment charge is recorded in the condensed consolidated statements of operations.
Impairment of Long-lived Assets
The Company evaluates the recoverability of its long-lived assets, including its purchased intangibles and intangible assets related to its exclusive distribution agreement, on an annual basis in the fourth quarter, or more frequently if indicators of potential impairment arise. The Company evaluates the recoverability of its amortizable purchased intangible assets based on an estimate of undiscounted future cash flows resulting from the use of the related asset group and its eventual disposition. The asset group represents the lowest level for which cash flows are largely independent of cash flows of other assets and liabilities. Measurement of an impairment loss for long-lived assets that the Company expects to hold and use is based on the difference between the fair value and carrying value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
3. BALANCE SHEET ACCOUNTS
Inventories comprised (in thousands):
Stock-based compensation included in inventories was not material at July 31, 2012, and April 30, 2012, respectively.
The following table summarizes the Companys investments as of July 31, 2012 (in thousands):
The following table summarizes the Companys investments as of April 30, 2012 (in thousands):
As of April 30, 2012, all of our short-term investments were held in certificates of deposit and long-term investments were held in asset backed preferred equity securities. The long-term investments are tied to auction rate securities that failed to settle at auction beginning in fiscal 2008, for which there appears to be no near-term market. As of July 31, 2012, and April 30, 2012, the Company continued to hold asset backed preferred equity securities with a par value of $10.0 million and a fair value of $0.1 million.
For the three months ended July 31, 2012 and 2011, no gains or losses were realized on the sale of short-term and long-term investments. There were no unrealized holding gains or losses included in accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets as of July 31, 2012, and April 30, 2012.
The accounting guidance on fair value accounting clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance on fair value accounting establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets at fair value, including its short-term and long-term investments.
When available, the Company uses quoted market prices to determine fair value of certain of its cash and cash equivalents including money market funds. Such items are classified in Level 1 of the fair value hierarchy. At July 31, 2012, and April 30, 2012, the Companys Level 2 securities include certificates of deposit which are each individually below the Federal Deposit Insurance Corporation (FDIC)
threshold of $250,000 per account owner and per depository institution. Level 2 pricing is provided by third party sources of market information obtained through the Companys investment advisors. The Company does not adjust for or apply any additional assumptions or estimates to the pricing information it receives from advisors. The Companys investment advisors obtain pricing data from independent sources, such as Standard and Poors and Bloomberg, and rely on comparable pricing of other securities because the Level 2 securities it holds are not actively traded and have fewer observable transactions. The Company considers this the most reliable information available for the valuation of the securities. At July 31,2012, and April 30, 2012, there were no active markets for the Companys asset backed preferred equity securities resulting from converted auction rate securities, or comparable securities due to current market conditions. Therefore, until such a market becomes active, the Company is determining their fair value based on expected discounted cash flows. Such items are classified in Level 3 of the fair value hierarchy.
The Company had no transfers between Level 1 and Level 2 during the three months ended July 31, 2012 and 2011.
There were no liabilities measured at fair value as of July 31, 2012, and April 30, 2012.
The following table presents for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring basis as of July 31, 2012 (in thousands):
The following table presents for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring basis as of April 30, 2012 (in thousands):
The following table presents the changes in the Level 3 fair value category for the three months ended July 31, 2012 (in thousands):
The following table presents the changes in the Level 3 fair value category for the year ended April 30, 2012 (in thousands):
Other assets comprised (in thousands):
See Note 5 of Notes to the Consolidated Financial Statements, below for details related to the exclusive distributor intangible assets.
Accrued and other liabilities comprised (in thousands):
Warranty accrual. The Company provides for future warranty costs upon shipment of its products. The specific terms and conditions of those warranties may vary depending on the product sold, the customer and the country in which it does business. However, the Companys hardware warranties generally start from the shipment date and continue for a period of one to five years while the software warranty is generally ninety days to one year.
Because the Companys products are manufactured to a standardized specification and products are internally tested to these specifications prior to shipment, the Company historically has experienced minimal warranty costs. Factors that affect the Companys warranty liability include the number of installed units, historical experience and managements judgment regarding anticipated rates of warranty claims and cost per claim. The Company assesses the adequacy of its recorded warranty liabilities every quarter and makes adjustments to the liability, if necessary.
Changes in the warranty accrual, which is included as a component of Accrued and other liabilities on the Condensed Consolidated Balance Sheet, were as follows (in thousands):
Reduction in force.
In the quarter ended July 31, 2011, the Company initiated a reduction in force that was completed by October 31, 2011, in an ongoing attempt to reduce operating expenses. The affected employees were notified in July 2011. As a result, the Company reduced its headcount by approximately 8%, and recorded charges of approximately $122,000 for severance and related charges, $5,000 of which had not been paid as of July 31, 2012, and April 30, 2012, and is included in accrued and other liabilities. This amount represents costs for outplacement services available to the affected employees through September 2012. No such charge was recorded in the quarter ended July 31, 2012.
At July 31, 2011, accrued and other liabilities included a balance of $42,000 pertaining to a facility abandonment charge resulting from the reduction in force in November 2009. The related sublease expired fully on July 31, 2011.
Reduction in force costs for the quarters ended July 31, 2012 and 2011, were as follows (in thousands):
In the three months ended July 31, 2011, the Companys Voice Quality Enhancement segment incurred $112,000 of the reduction in force costs, and $10,000 was incurred by the Voice Applications segment.
4. PURCHASED INTANGIBLES
The carrying value of purchased intangible assets acquired in business combinations is as follows (in thousands):
In February 2010, the Company completed a small acquisition of 100% of the outstanding shares of Grid, a company with infrastructure to deliver services with simple credit card billing through the web. The purchase price, net of $0.1 million of cash received from Grid totaled $0.5 million. This purchase price, which included $35,000 of value attributable to a warrant issued for 100,000 shares of the Companys common stock at an exercise price of $3.50 per share, based on a Black-Scholes valuation, was allocated to identified intangibles through established valuation techniques in the high-technology communications equipment industry. The warrant expires in February 2013. As a result, the Company recorded an incremental $0.2 million in core technology intangible assets and $0.3 million related to the URL, the latter of which the Company sold in July of 2011 for approximately $0.2 million, net of expenses.
In the three months ended July 31, 2012 and 2011, the Company recorded $21,000 of amortization of acquisition-related intangible assets.
Estimated future amortization expense for the core technology purchased intangible asset as of July 31, 2012, is $40,000 for the remaining nine months of fiscal 2013.
5. EXCLUSIVE DISTRIBUTION AGREEMENT
On September 10, 2009, the Company and Simulscribe, entered into a Reseller Agreement pursuant to which Simulscribe will provide, and the Company became the exclusive reseller of, Simulscribes voice to text (VTT) services to wholesale customers. Pursuant to the agreement, the Company also assumed all of Simulscribes wholesale customers. The Company paid $3.5 million and issued a two-year promissory note for an additional $3.5 million for the assumption of the wholesale customer relationships and the exclusivity rights. This note was paid in full in April 2011. Additionally, the Company will pay a fee for the services provided by Simulscribe, and will pay up to an additional $10 million if the revenues generated from the Simulscribe services meet certain performance milestones within the first three years of the
agreement (the Additional Payments), subject to acceleration in certain events, such as the Companys failure to use commercially reasonable efforts to market the services or a change of control of the Company at a time that revenues from these services are on track to result in the payment ultimately being made.
The Additional Payments are convertible into the Companys common stock at Simulscribes option, and may be converted into the Companys common stock at a conversion price of $5.00 per share; provided that if a specified revenue target is met then up to $5.0 million of the Additional Payments can be converted at $4.00 per share. The value of the additional payments has not been recorded as of the date of the transaction pursuant to the accounting guidance related to the issuance of equity-based instruments to non-employees for the purchase of goods or services, as it is not probable of incurrence. In the event that payouts under the Additional Payments provisions of the agreement become probable of occurrence based on an assessment of customer revenue streams and the remaining duration of agreement and/or the conditions of the payout are met, the Company will record the fair value of the Additional Payments at that time.
As a result of this agreement, the Company recorded the total consideration at a fair value of $6.7 million and recorded assets associated with the exclusive distribution rights and transfer of customers. The value assigned to the intangible assets, which are recorded in other assets on the face of the Condensed Consolidated Balance Sheet, was determined by valuing the discounted potential cash flows associated with each asset over the four year term of the agreement. The asset associated with the transferred customer relationships will be amortized, on a tax deductible basis, to sales and marketing expense ratably over the four year term of the agreement and the asset associated with the distribution rights will be amortized, on a tax deductible basis, to cost of revenue on a unit of revenue basis, similar to a royalty payment, at the rate of 25% of revenue recognized based on the base level of revenue anticipated in the Agreement attributable to the $7.0 million of consideration issued to date. The Company recorded amortization expense associated with the distribution rights of approximately $0.4 million and $0.2 million for the three months ended July 31, 2012, and July 31, 2011, respectively; and amortization expense associated with the customer relationships of approximately $0.2 million in each of the three month periods ended July 31, 2012 and 2011, respectively.
Subsequent to executing the Agreement, the Company hired one of the principle officers of Simulscribe to assume the position of Chief Strategy Officer at the Company. His primary focus was on expansion of the wholesale market for voice transcription service. This individual continues to hold a large ownership interest in Simulscribe. As such, although he may have input into key decisions related to interaction between the Company and Simulscribe, the final decisions rest with the executive management team, of which he is not a member, and/or the Board of Directors. This individual was also a major shareholder in Grid,which the Company acquired in February 2010. In the third quarter of fiscal 2011, the Chief Strategy Officer resigned; however, he continues to provide certain services to the Company as a consultant.
In the fourth quarter of fiscal 2010, the Company and Simulscribe, entered into an Amendment No. 1 to Reseller Agreement (the Amendment), amending the Reseller Agreement previously entered into between the Company and Simulscribe on September 10, 2009. Primarily, the Amendment permits the Company to provide services to all voice to text customers, both retail and wholesale. Among other things, the Amendment also contains additional changes to the Reseller Agreement to conform to the new structure, and provides that both the retail and wholesale services will count as Additional Payments for purposes of determining what amount, if any, of the $10.0 million contingent consideration will be paid to Simulscribe. In consideration for the Amendment, the Company agreed to pay an additional $0.3 million in seven equal quarterly installments. The Company recognized this consideration as an addition to the customer relationship intangible asset, which amount is being amortized over the remainder of the 4 year life assigned to the original customer relationship intangible asset in September 2009. Four of the seven quarterly installments totaling $0.2 million were paid in cash. In April 2011, the promissory note for $3.5 million was paid in full 5 months early. In exchange for early payment of the note, Simulscribe waived the final three installment payments totaling $0.1 million, due under the Amendment. As of April 30, 2011, this obligation had been paid in full.
The carrying value of the related intangible assets acquired, which are included in other assets, was as follows (in thousands):
Estimated future amortization expense for the customer relationship related intangible asset as of July 31, 2012, is as follows (in thousands):
Since the distribution rights are being amortized based on the level of revenue recognized, the amortization expense cannot be estimated for future periods.
6. STOCKHOLDERS EQUITY
Employee Equity Plans
The Company utilizes a combination of Employee Stock Purchase, Stock Option and Restricted Stock plans as a means to provide equity ownership in the Company for its employees. In the three months ended July 31, 2012, no shares of common stock were issued under the Employee Stock Purchase Plan (ESPP) and 176,280 shares remain available for issuance under that plan as of July 31, 2012. Effective November 30, 2011, the Board of Directors suspended activity under the ESPP.
Activity under the stock option and restricted stock plans was as follows (in thousands, except exercise price amounts):
(1) Shares available for grant include shares from the 2005 New Recruit Stock Plan and the 2006 Equity Incentive Plan that may be issued as either stock options, restricted stock awards or restricted stock units. Shares issued under the 2006 Equity Incentive Plan as stock bonus awards, stock purchase awards, stock unit awards, or other stock awards in which the issue price is less than the fair market value on the date of grant of the award count as the issuance of 1.3 shares for each share of common stock issued pursuant to these awards for purposes of the share reserve.
The weighted average remaining contractual term for outstanding options as of July 31, 2012, is 5.82 years.
The following is a summary of options vested and expected to vest, and exercisable at July 31, 2012, comprised (in thousands, except term and exercise price):
All granted restricted stock awards were fully vested as of July 31, 2012.
Restricted stock units (RSUs) are converted into shares of the Companys common stock upon vesting on a one-for-one basis. Typically, vesting of RSUs is subject to the employees continuing service to the Company. RSUs generally vest over a period of 3 or 4 years and are expensed ratably on a straight-line basis over their respective vesting period net of estimated forfeitures. The fair value of RSUs granted pursuant to the Companys 2005 New Recruit Stock Option Plan and the 2006 Equity Incentive Plan is the product of the number of shares granted and the grant date fair value of our common stock.
A summary of activity of RSUs for the three months ended July 31, 2012, is presented below:
For the three months ended July 31, 2012 and 2011, the total fair value of restricted shares that vested was $121,000 and $7,500, respectively.
As of July 31, 2012, there was approximately $1.0 million of total unrecognized compensation cost related to stock options and RSUs that is expected to be recognized over a weighted-average period of 2.07 years for stock options and 2.20 years for RSUs.
The key assumptions used in the fair value model and the resulting estimates of weighted-average fair value per share used to record stock-based compensation during the three months ended July 31, 2012 and 2011, for options and restricted stock granted and for employee stock purchases under the ESPP, are as follows:
(1) The Company has no history or expectation of paying dividends on its common stock.
(2) The Company estimates the volatility of its common stock at the date of grant based on the historic volatility of its common stock for a term consistent with the expected life of the awards affected at the time of grant.
(3) The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in affect at the time of grant.
(4) The expected life of stock options granted under the stock option plans is based on historical exercise patterns, which the Company believes are representative of future behavior. The expected life of grants under the ESPP represents the amount of time remaining in the 12-month offering window.
(5) Assumptions for the ESPP use a weighted average of all enrollments during the fiscal year. Effective November 30, 2011, the Board of Directors suspended activity under the Purchase Plan.
7. INCOME TAXES
The guidance on Accounting for Uncertainty in Income Taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The liability for uncertain tax positions, if recognized, will decrease the Companys tax expense. The Company does not anticipate that the amount of liability for uncertain tax positions existing at July 31, 2012, will change significantly within the next 12 months. Interest and penalties related to the liability for uncertain tax positions are included in the provision for income taxes.
The Company files income tax returns in the U.S. and various state and foreign jurisdictions. Most U.S. and foreign jurisdictions have 3 to 10 years of open tax years. However, all the Companys tax years since fiscal 1998 will be open to examination by the U.S. federal and certain state tax authorities due to the Companys overall net operating loss and/or tax credit carryforward position.
The Company has experienced continuous operating losses for the past several years, and therefore has incurred minimal tax expense or benefit in the periods presented. The Companys effective tax rate was less than 1% at both July 31, 2012 and 2011, and reflects the effects of a full valuation allowance against the federal and state net operating loss and tax credit carryforwards due to uncertainty as to the recoverability of those items due to the Companys continuing operating losses. The minimal tax benefit and provision for the quarters ended July 31, 2012 and 2011, respectively, is attributable to certain state and foreign jurisdictions in which the Company operates.
8. COMMITMENTS AND CONTINGENCIES
The Company is not a party to any material legal proceedings. From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial resources and diversion of managements attention.
The Companys lease commitments comprise a facility lease, office equipment leases and a colocation facility. The Company leases its principal office facilities of approximately 20,100 square feet, in San Jose, California under a non-cancelable operating lease expiring on April 30, 2017. The lease contains a one time early expiration option after 31 months of occupancy. To exercise this option, the Company must comply with various provisions, and pay an expiration fee which is comprised of the unamortized portion of any commissions, legal fees, free rent and leasehold improvements. The Company is responsible for taxes, insurance and maintenance expenses related to the leased facilities. We also had purchase commitments of approximately $0.7 million as of July 31, 2012, compared to approximately $1.0 million as of April 30, 2012.
At July 31, 2012, future minimum payments under the Companys current operating leases are as follows (in thousands):
Guarantees and Indemnifications
As is customary in the Companys industry and as required by law in the U.S. and certain other jurisdictions, certain of the Companys contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of the Companys products. From time to time, the Company indemnifies customers against combinations of losses, expenses, or liabilities arising from various trigger events related to the sale and the use of the Companys products
and services. In addition, from time to time the Company also provides protection to customers against claims related to undiscovered liabilities, additional product liability or environmental obligations. In the Companys experience, claims made under such indemnifications are rare.
As permitted or required under Delaware law and to the maximum extent allowable under that law, the Company has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving at the Companys request, in such capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner that a person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited; however, the Company has a director and officer insurance policy that limits the Companys exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Companys insurance policy coverage, the Company believes the estimated fair value of these indemnification obligations is minimal.
9. REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION
The Company is a global telecommunications equipment supplier for voice networks. The Company develops, produces and sells voice quality enhancement solutions as well as voice applications solutions to telecommunication service providers worldwide. The Companys voice quality enhancement solutions enable service providers to deliver consistently clear, end-to-end communications to their subscribers. The Companys revenues are organized along two main product categories: products; and services, which are comprised of the Companys new voice applications offerings as well as services in support of its voice quality enhancement solutions. The Company currently operates in two business segments: the voice quality enhancement segment, which includes service revenues related to delivery of these solutions; and the voice applications segment. The segments are determined in accordance with how management views and evaluates the Companys business and based on the criteria as outlined in the authoritative guidance. A description of the types of products and services provided by each reportable segment is as follows:
Voice Quality Enhancement Segment
The Company designs, develops, and markets stand-alone and system-based voice quality products for circuit-switched and Voice over internet Protocol (VoIP) mobile networks throughout the world. The Companys products feature high-capacity, high-availability hardware systems coupled with a sophisticated array of voice optimization and measurement software to enhance the quality of voice communications. In addition to the hardware systems that comprise this segment, the Company also includes services such as maintenance, training and installation which support the hardware system sales.
Voice Applications Segment
Voice services includes a range of applications and services with the common goal of utilizing the human voice to interface with various aspects of day to day life which have been historically limited to keyboard interface. The products include voice-to-text transcription services, voice-based interface with the web and web-based applications.
Segment Revenue and Contribution Margin
Segment contribution margin includes all product line segment revenues less the related cost of sales, marketing and engineering expenses directly identifiable to each segment. Management allocates corporate manufacturing costs and some infrastructure costs such as facilities and information technology costs in determining segment contribution margin. Contribution margin is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Certain operating expenses are not allocated to segments because they are separately managed at the corporate level. These unallocated costs include sales costs, marketing costs other than direct marketing, general and administrative costs, such as legal and accounting, stock-based compensation expenses, acquisition-related integration costs, amortization and impairment of purchased intangible assets, restructuring costs, interest and other income (expense), net.
The results of the reportable segments are derived directly from the Companys management reporting system. The results are based on the Companys method of internal reporting and are not necessarily in conformity with accounting principles generally accepted in the United States. The Company measures the performance of each segment based on several metrics, including contribution margin.
Asset data, with the exception of inventory, is not reviewed by management at the segment level. All of the products and services within the respective segments are generally considered similar in nature, and therefore a separate disclosure of similar classes of products and services below the segment level is not presented.
Financial information for each reportable segment is as follows as of July 31, 2012, and April 30, 2012, and for the three months ended July 31, 2012 and 2011 (in thousands):
The reconciliation of segment information to the Companys condensed consolidated totals is as follows (in thousands):
Geographic revenue information comprises (in thousands):
Sales for the three months ended July 31, 2012, included three customers that represented greater than 10% of total revenue (30%, 15% and 10%). Sales for the three months ended July 31, 2011, included two customers that represented greater than 10% of total revenue (38% and 17%). As of July 31, 2012, the Company had two customers that represented greater than 10% of gross accounts receivable (43% and 10%). The Companys gross accounts receivable were concentrated in one customer at April 30, 2012, (representing 46% of receivables).
The Company maintained substantially all of its property and equipment in the United States at July 31, 2012, and April 30, 2012.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(1) Incorporated by reference to Exhibit 3.2 to Ditechs Current Report on Form 8-K (File No. 000-26209), filed May 22, 2006.
(2) Incorporated by reference from Exhibit 3.2 to Ditechs Current Report on Form 8-K (File No. 000-26209), filed September 21, 2011.
(3) Incorporated by reference from the Exhibit 3.2 to Ditechs Annual Report on Form 10-K (File No.000-26209), filed July 8, 2010.
(4) Incorporated by reference from the exhibit with corresponding description from Ditechs Registration Statement (No. 333-75063), declared effective on June 9, 1999.
(5) Incorporated by reference from the description set forth in Item 5.02, and Exhibit 10.1, of Ditechs Current Report on Form 8-K (File No. 000-26209), filed June 21, 2012.
(6) Previously filed with Ditechs Quarterly Report on Form 10-Q (File No.000-26209) on September 13, 2012, which this Form 10-Q/A amends, with respect to such Form 10-Q, and filed with this Form 10-Q/A with respect to the content of this Form 10-Q/A.
* XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.