Our sales model for multi-screen video analytics software products includes the option for customers to purchase a perpetual license, a term license, or software as a service. Customers also have the option to purchase maintenance or managed services with their license.  Revenue from these sales generally is recognized over the term of the various customer arrangements.  Professional services attributable to implementation of our multi-screen video analytics software products or managed services are essential to the customers’ use of these products and services.  We defer commencement of revenue recognition for the entire arrangement until we have delivered the essential professional services or have made a determination that the remaining professional services are no longer essential to the customer.  We recognize revenue for managed services and software-as-a-service arrangements once we commence providing the managed or software services and recognize the service revenue ratably over the term of the various customer contracts.  In circumstances whereby we sell a term or perpetual license and maintenance or managed services, we commence revenue recognition after both the software and service are made available to the customer and recognize the revenue from the entire arrangement ratably over the longer of the term license or service period, because we do not have vendor specific objective evidence (“VSOE”) for either our term licenses or our maintenance and managed services for multi-screen video analytics software solutions.

We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting.  An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control.  Our various systems have standalone value because we have either routinely sold them on a standalone basis or we believe that our customers could resell the delivered system on a standalone basis.  Professional services have standalone value because we have routinely sold them on a standalone basis, there are similar third-party vendors that routinely provide similar professional services, and certain customers perform the installation themselves.  Our maintenance has standalone value because we have routinely sold maintenance separately.

In October 2009, the FASB amended the accounting standards for multiple-element revenue arrangements under ASU 2009-13 to:

●

provide updated guidance on whether multiple deliverables exist, how the elements in an arrangement should be separated, and how the consideration should be allocated;

●

require an entity to allocate revenue in an arrangement using estimated selling price (“ESP”) of each element if a vendor does not have VSOE or third-party evidence (“TPE”); and

●

eliminate the use of the residual method and require a vendor to allocate revenue using the relative selling price method.

As a result of the adoption of ASU 2009-13, we allocate revenue to each element in an arrangement based on the following selling price hierarchy: the selling price for a deliverable is based on its VSOE, if available, TPE, if VSOE is not available, or ESP, if neither VSOE nor TPE is available.  We have typically been able to establish VSOE of fair value for our maintenance and services.  We determine VSOE of fair value for professional services and maintenance by examining the population of selling price for the same or similar services when sold separately and on a standalone basis, and determining that the pricing population for each VSOE classification is within a very narrow range of the median selling price.  For each element, we evaluate at least annually whether or not we have maintained VSOE of fair value based on our review of the actual selling price of each element over the previous 12-month period.

Our product deliverables are typically comprised of complete systems with numerous hardware and software components that operate together to provide essential functionality, and we are typically unable to establish VSOE or TPE of fair value for our products.  Due to the custom nature of our products, we must determine ESP at the individual component level whereby our estimated selling price for the total system is determined based on the sum of the individual components.  ESP for components of our real-time products is typically based upon list price, which is representative of our actual selling price.  ESP for components of our content delivery products are based upon our most frequent selling price (“mode”) of standalone and bundled sales, based upon a 12-month historical analysis.  If a mode selling price is not available, then ESP will be the median selling price of all such component sales based upon a 12-month historical analysis, unless facts and circumstances indicate that another selling price, other than the mode or median selling price, is more representative of our estimated selling price.  Our methodology for determining estimated selling price requires judgment, and any changes to pricing practices, the costs incurred to integrate products, the nature of our relationships with our customers, and market trends could cause variability in our estimated selling prices or cause us to re-evaluate our methodology for determining estimated selling price.  We update our analysis of mode and median selling price at least annually, unless facts and circumstances indicate that more frequent analysis is required.

 

In addition, we also sell software under multiple-element arrangements that do not include hardware.  Under these software arrangements, we allocate revenue to the various elements based on VSOE of fair value.  Our VSOE of fair value is determined based on the price charged when the same element is sold separately.  If VSOE of fair value does not exist for all elements in a multiple-element arrangement, but does exist for undelivered elements, we recognize revenue using the residual method.  Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement is recognized as revenue.  Where fair value of undelivered elements has not been established, the total arrangement is recognized over the period during which the services are performed.

Allowance for Doubtful Accounts

The allowance for doubtful accounts receivable is based on an analysis of our historical charge-off ratio, our aging of accounts receivable and our assessment of the collectability of our receivables.  If there is a deterioration of one of our customer’s credit worthiness or actual account defaults are higher than our historical trends, our reserve estimates could be adversely impacted.

Inventory Valuation

We provide for inventory obsolescence based upon assumptions about future demand, market conditions and anticipated timing of the release of next generation products.  If actual market conditions or future demand are less favorable than those projected, or if next generation products are released earlier than anticipated, additional inventory write-downs may be required.  We also review, on a quarterly basis, the value of inventory on hand for which a newer and more advanced technology or product is currently, or will soon be, available.  When we believe that we will not be able to sell the products in inventory at or above cost, we mark the inventory down to market value.

We also provide for obsolescence of our spares inventories.  As these service parts age over the related product post-installation service life covered by a warranty, we reduce the net carrying value of our spare parts inventory to account for the excess that builds over the service life.  For certain spare parts, our assessment also includes recent usage under the associated warranties.  The post‑installation warranty service life of our systems is generally three to five years and, at the end of the service life, the carrying value for these parts is reduced to zero.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate.  The provision for income taxes is determined using the asset and liability approach for accounting for income taxes.  A current liability is recognized for the estimated taxes payable for the current year.  Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which the timing differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of changes in tax rates or tax laws are recognized in the provision for income taxes in the period that includes the enactment date.

Valuation allowances are established when necessary to reduce deferred tax assets to the amount more-likely-than-not to be realized.  To the extent we establish or change the valuation allowance in a period, the tax effect will generally flow through the consolidated statement of operations.  In the case of an acquired or merged entity, we will record any valuation allowance on a deferred tax asset established through purchase accounting procedures as an adjustment to goodwill at the acquisition date.  Any subsequent change to a valuation allowance established during purchase accounting that occurs within the measurement period of the acquisition (a period not to exceed 12 months) will also be recorded as an adjustment to goodwill, provided that such a change relates to new information about the facts and circumstances that existed on the acquisition date.  All other changes to a valuation allowance established during purchase accounting will flow through the consolidated statement of operations.

 

The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws.  We are subject to income taxes in the U.S. and numerous foreign jurisdictions.  Significant judgment is required in determining our worldwide provision for income taxes and recording the related tax assets and liabilities.  In the ordinary course of our business, there are transactions and calculations for which the ultimate tax determination is uncertain.  In spite of our belief that we have appropriate support for all the positions taken on our tax returns, we acknowledge that certain positions may be successfully challenged by the taxing authorities.  Therefore, an accrual for uncertainty in income taxes is provided for, when necessary.  In the event that we have accruals for uncertainty in income taxes, these accruals are reviewed quarterly and reversed upon being sustained under audit, the expiration of the statute of limitations, new information, or other determination by the taxing authorities.  The provision for income taxes includes the impact of changes in uncertainty in income taxes.  Although we believe our recorded tax assets and liabilities are reasonable, tax laws and regulations are subject to interpretation and inherent uncertainty; therefore our assessments can involve both a series of complex judgments about future events and rely on estimates and assumptions.  Although we believe these estimates and assumptions are reasonable, the final determination could be materially different than that which is reflected in our provision for income taxes and recorded tax assets and liabilities.

In the calculation of our quarterly provision for income taxes, we use an annual effective rate based on expected annual income and statutory tax rates, which may require judgments and estimates.  The tax (or benefit) applicable to significant unused or infrequently occurring items, discontinued operations or extraordinary items are separately recognized in the income tax provision in the quarter in which they occur.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of our deferred tax assets will not be realized.  In determining whether or not a valuation allowance for deferred tax assets is needed, we evaluate all available evidence, both positive and negative, including: trends in operating income or losses; currently available information about future years; future reversals of existing taxable temporary differences; future taxable income exclusive of reversing temporary differences and carryforwards; taxable income in prior carryback years if carryback is permitted under the tax law; and tax planning strategies that would accelerate taxable amounts to utilize expiring carryforwards, change the character of taxable and deductible amounts from ordinary income or loss to capital gain or loss, or switch from tax-exempt to taxable investments.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

As of June 30, 2015, we maintain a full valuation allowance on our net deferred tax assets in all jurisdictions except Japan, the U.K., and the U.S.  We believe that it is more likely than not that the deferred tax assets will not be realized in the jurisdictions in which we maintain a full valuation allowance.  In Japan and the U.K., we believe that it is more likely than not that we will realize our entire deferred tax inventory, and no valuation allowance is needed.  We evaluated the recent trend of positive operating results in the U.S. and concluded during the fourth quarter of fiscal year 2014 that it is now more likely than not that we will realize a portion of our U.S. deferred tax asset due to the historical trend of positive operating income and expectations of future income.  Based upon our estimate of future U.S. earnings, $13.7 million of our valuation allowance was realized during the fourth quarter of fiscal year 2014.  Based on a similar evaluation as of June 30, 2015, we concluded that there has not been a significant change in our estimate of future earnings based on our fiscal year 2015 results and future projections.  As a result, we have not made any adjustment to our valuation allowance in the U.S. for the fiscal year ended June 30, 2015. See Note 8 to the consolidated financial statements for more information.

Indemnifications and Warranties

We recognize the fair value of guarantee and indemnification arrangements issued or modified by us, if these arrangements are within the scope of the interpretation.  In addition, we must continue to monitor the conditions that are subject to the indemnifications, as required under previously existing accounting principles generally accepted in the U.S. (“U.S. GAAP”), in order to identify if a loss has occurred.  If we determine that it is probable that a loss has occurred, then any such estimable loss would be recognized under those indemnifications.  Under our standard software license, services and maintenance agreement, we often agree to indemnify, defend and hold harmless our licensees from and against certain losses, damages and costs arising from claims alleging the licensees’ use of our software infringes the intellectual property rights of a third-party.  Historically, we have not been required to pay material amounts in connection with claims asserted under these provisions and, accordingly, we have not recorded a liability relating to such provisions.

 

Under our software licenses, services and maintenance agreements, we also represent and warrant to licensees that our software products will operate substantially in accordance with our published specifications regarding the product, and that the services we perform will be undertaken by qualified personnel in a professional manner conforming to generally accepted industry standards and practices.  Historically, only minimal costs have been incurred relating to the satisfaction of product warranty claims.

Other potential obligations could arise from promises to indemnify, defend and hold harmless each of our executive officers, non-employee directors and certain key employees from and against losses, damages and costs incurred by each such individual in administrative, legal or investigative proceedings arising from alleged wrongdoing by the individual while acting in good faith within the scope of his or her job duties on our behalf.  Historically, minimal costs have been incurred relating to such indemnifications and, as such, no amount has been accrued for these types of potential obligations.

Stock-Based Compensation

We account for stock-based compensation in accordance with ASC Topic 718-10, Stock Compensation, which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and requires application of a fair-value-based measurement method in accounting for share-based payment transactions with employees.  Assumptions used to estimate compensation expense from issuance of share-based compensation are based, to some extent, on historical experience and expectation of future conditions.  To the extent we issue additional share-based compensation, or assumptions regarding previously issued share-based compensation change, our future share-based compensation expense may be positively or negatively impacted.

Defined Benefit Pension Plan

We maintain defined benefit pension plans (the “Pension Plans”) for a number of former employees of our German subsidiary (“participants”).  In 1998, the Pension Plans were closed to new employees and no existing employees are eligible to participate, as all eligible participants are no longer employed by Concurrent.  The Pension Plan provides benefits to be paid to all participants at retirement based primarily on years of service with Concurrent and compensation rates in effect near retirement.  Our policy is to fund benefits attributed to participants’ services to date.  The determination of our Pension Plan benefit obligation and expense is dependent on our selection of certain assumptions used by actuaries in calculating such amounts.  Those assumptions include, among others, the weighted average discount rate, the weighted average expected rate of return on plan assets and the weighted average rate of compensation increase.  To the extent that these assumptions change, our future benefit obligation and net periodic pension expense may be positively or negatively impacted.

 

Selected Operating Data as a Percentage of Total Revenue

The following table sets forth our consolidated historical operating information, as a percentage of total revenues (unless otherwise noted) for the periods indicated:

 

Results of Operations

We recognize revenue for product sales in accordance with the appropriate accounting guidance as described in our critical accounting policies.  We recognize revenue from customer service plans ratably over the term of each plan, which are typically between one and three years.  Our business is comprised of two operating segments for financial reporting purposes, products and services, which we provide for each of these markets.

Custom engineering services are often completed within 90 days from receipt of an order.  Revenues from these services are recognized upon completion and delivery of the product to the customer.  In certain instances, our customers require significant customization of both the software and hardware products.  In these situations, the services are considered essential to the functionality of the software and, therefore, the revenue from the arrangement, with the exception of maintenance, is recognized in conformity with accounting standards governing long term construction-type contracts and performance of construction-type and certain production-type contracts.  If we are able to determine reasonable estimates of the cost of the arrangement, we record the value of the entire arrangement (excluding maintenance) as the project progresses based on actual costs incurred compared to the total costs expected to be incurred through completion.  If we are unable to reasonably estimate the costs to complete the arrangement, all revenue is deferred until the contract is completed.

Cost of sales consists of the cost of the computer systems sold, including amortization of software development costs, depreciation, labor, material, overhead and third-party product costs.  Cost of sales also includes the salaries, benefits and other costs of the maintenance, service and help desk personnel associated with product installation and support activities.

 

Sales and marketing expenses consist primarily of the salaries, benefits, overhead, and travel expenses of employees responsible for acquiring new business and maintaining existing customer relationships, as well as marketing expenses related to trade publications, advertisements, trade shows and depreciation costs of demo equipment.

Research and development expenses are comprised of salaries, benefits, overhead, and travel expenses of employees involved in hardware and software product enhancement and development, cost of outside contractors engaged to perform quality assurance, hardware and software product enhancement and development.  Development costs are expensed as incurred.

General and administrative expenses consist primarily of salaries, benefits, overhead, and travel expenses of management and administrative personnel, human resources, information systems, insurance, investor relations, accounting and fees for legal, board of director expenses, and other professional services.

Fiscal Year 2015 in Comparison to Fiscal Year 2014

The following table sets forth summarized consolidated financial information for each of the fiscal years ended June 30, 2015 and 2014, as well as comparative data showing increases and decreases between periods (dollars in thousands).

(1)

NM denotes percentage is not meaningful

 

Product Revenue.  Total product revenue for fiscal year 2015 was $43.9 million, a decrease of $4.0 million, or 8.3%, from $47.9 million for fiscal year 2014.  The decrease in product revenue resulted from a $2.7 million, or 9.9%, decrease in content delivery product revenue for fiscal year 2015 compared to the prior year.  The year‑over‑year decline in content delivery product revenue resulted from the following:

 

●

North American content delivery product revenue decreased by $2.7 million, or 14.7%, due to a North American cable service provider purchasing a large volume of content delivery systems in fiscal year 2014 that accounted for a substantial amount of our prior fiscal year content delivery product revenue.  Current year North American video system sales were more evenly spread among numerous customers; however, we experienced lower overall purchasing volume from our domestic content delivery customers in the current year, especially two of our larger North American customers, as we continue to see consolidation in the cable and telecommunications industries.

●

European content delivery product revenue decreased by $1.1 million, or 21.4%, primarily due to two video customers who purchased systems in fiscal year 2014, one of which was purchased in late fiscal year 2014 but had only minor purchases in the current fiscal year.

●

These decreases were partially offset by an increase in Asia-Pacific content delivery product revenue of $1.1 million, or 27.8%, due to continued expansion of existing customers’ video systems and storage capacities.  Netted against this increase is a $0.8 million decrease due the effect of foreign currency rate changes as the Japan yen weakened against the U.S dollar in fiscal year 2015.

Fluctuation in content delivery product revenue is often due to the fact that we have a small number of customers making periodic large purchases that account for a significant percentage of revenue.  Our content delivery product revenue is also subject to customers’ capital spending cycles and may be impacted in the future by consolidation of the industry in which our customers operate.

The decrease in product revenue also resulted from a $1.3 million, or 6.1%, decrease in real-time product revenue for fiscal year 2015 compared to the prior year.  The year-over-year decline in real-time product revenue resulted from the following:

●

European real-time product revenue decreased $0.6 million, or 24.9%, due to a lower sales volume of our iHawk systems to European defense contractors.  Included in this decrease is a $0.2 million decrease due to the effect of foreign currency rate changes as the euro weakened against the U.S dollar.

●

Asia-Pacific real-time product revenue decreased $1.1 million, or 13.7%, due to lower sales volume of our iHawk systems to Asia-Pacific customers outside of Japan.  Included in this decrease is a $0.7 million decrease due the effect of foreign currency rate changes as the Japan yen weakened against the U.S dollar in fiscal year 2015.

●

These decreases were partially offset by an increase in North American real-time product revenue of $0.5 million, or 5.3%, due to the sale of a custom integrated system to an aerospace customer.  However, iHawk systems sales to U.S. defense contractors were lower in the current fiscal year compared to the prior year.

Revenue from defense contractors and the government tend to vary by quarter and year, and are dependent upon government initiatives and funding availability.

Service Revenue.  Total service revenue for fiscal year 2015 was $20.5 million, a decrease of $2.8 million, or 11.8%, from $23.3 million for fiscal year 2014.  This decrease was due to a $2.9 million, or 20.3%, decrease in content delivery service revenue.  Approximately $1.2 million of the decrease in content delivery service revenue resulted from a multi-screen video analytics software managed service contract that we completed during our fiscal year 2014 that was not renewed.  Additionally, in the prior year, we recognized $0.7 million of multi-screen video analytics software reporting services revenue that did not recur in the current year.  The remaining decrease in our content delivery service revenue was attributable to a decrease in our content delivery maintenance revenue.  During fiscal year 2014, a customer that accounted for 5.4% of our total service revenue indicated that it was winding down its purchase of maintenance services from us.  Our loss of maintenance revenue from this customer accounted for a $1.2 million decrease in maintenance service revenue for fiscal year 2015, compared to the same period in the prior year.

 

Product Gross Margin.  Product gross margin was $25.1 million for fiscal year 2015, a decrease of $2.4 million, or 8.6%, from $27.5 million for fiscal year 2014.  Product gross margin as a percentage of product revenue decreased slightly to 57.2% for fiscal year 2015 from 57.4% for fiscal year 2014.  Product gross margin decreased in terms of dollars during fiscal year 2015, compared to the same period in the prior year, due to the lower volume of our product sales to content delivery customers and the impact of foreign currency rate changes particularly in Japan.

Service Gross Margin.  Service gross margin was $11.3 million for fiscal year 2015, a decrease of $1.6 million, or 12.8%, from $12.9 million for fiscal year 2014.  Gross margin on service revenue decreased slightly to 54.9% of service revenue for fiscal year 2015 from 55.5% of service revenue for fiscal year 2014.  The decrease in service margin as a percentage of service revenue was primarily due to the year-over-year decrease in service revenue by a greater amount than the year-over-year decrease in service costs.  Additionally, the $1.1 million decrease in service cost of sales primarily resulted from (1) a $0.5 million decrease in costs to support multi-screen video analytics software managed services contracts that have ended (along with the end of the related service contract revenue) at the end of the prior fiscal year and (2) a $0.2 million decrease in amortization of purchased technology related to our multi-screen video analytics software solutions, as the amortization period for this intangible ended in the second quarter of the prior fiscal year, (3) a $0.2 million decrease in customer service personnel costs, due to lower headcount primarily in the U.S. and (4) a $0.2 million decrease due to the effect of foreign currency rate changes, primarily in Japan and Germany, partially offset by (5) a $0.3 million increase in the provision for excess and obsolescence related to our spare parts inventories.

Sales and Marketing. Sales and marketing expenses increased approximately $0.2 million, or 1.3%, to $14.5 million for fiscal year 2015 from $14.3 million for fiscal year 2014.  This year-over-year increase primarily resulted from (1) a $0.7 million increase in personnel costs during fiscal year 2015, as we have increased our sales and sales support presence in both Europe and the U.S. to pursue new business and support existing customers, offset by (2) a $0.3 million decrease in bonus incentive compensation as our current year bonus performance criteria were not met and (3) a $0.4 million decrease due to the effect of foreign currency rate changes, primarily in Japan and Germany.

Research and Development.  Research and development expenses increased approximately $0.6 million, or 4.4%, to $13.6 million for fiscal year 2015, from $13.0 million for fiscal year 2014.  This increase was primarily due to (1) a $0.7 million increase in personnel costs during fiscal year 2015 resulting from an increase in development personnel to support product and strategic growth initiatives, (2) an increase of $0.3 million in recruiting fees related to the increase in personnel, (3) a $0.2 million increase in development costs as fewer development projects for sale were ordered by our customers (typically this results in a transfer of costs from research and development to cost of sales), offset by (4) a decrease of $0.5 million in bonus incentive compensation as our current year bonus performance criteria were not met.

General and Administrative.  General and administrative expenses increased approximately $0.3 million, or 3.2%, to $8.0 million for fiscal year 2015 from $7.7 million for fiscal year 2014.  This increase was primarily due to $1.0 million of Chief Executive Officer (“CEO”) transition costs (as discussed in the next paragraph) during fiscal year 2015, offset by a decrease of $0.8 million and $0.1 million in bonus incentive compensation and performance based restricted stock expense, respectively, as our current year bonus and restricted stock performance criteria were not met.

In regards to the $1.0 million in CEO transition costs, on November 18, 2014, our Board of Directors appointed Mr. Derek Elder as our President and Chief Executive Officer, effective immediately upon the departure of Mr. Dan Mondor.  Mr. Elder received a $0.1 million sign-on bonus as part of his employment.  Effective November 21, 2014, Mr. Mondor, our former President and Chief Executive Officer departed the Company.  Mr. Mondor will receive severance compensation approximating $0.7 million, which has been accrued and expensed in fiscal year 2015, in accordance with the provisions in his amended and restated employment agreement regarding termination without due cause, as described in our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 4, 2010.  Furthermore, we incurred approximately $0.2 million of recruiting costs as part of our executive search during fiscal year 2015.

 

Gain on Sale of Intangible Assets, net.  During fiscal year 2015, we sold two blocks of IPv4 addresses to two buyers for cash.  These blocks of non-strategic IPv4 addresses, which were both recorded at $0 book value, had not been a material part of our ongoing operations.  The aggregate $0.7 million gain on the sale of these IPv4 addresses is net of broker fees incurred to consummate the transaction.

Other Expense, net.  During fiscal year 2015, we incurred approximately $0.6 million of realized currency translation losses compared to $0.2 million of realized currency translation losses in fiscal year 2014.  These losses resulted from the impact of the continued decrease in value of both the euro and Japanese yen, relative to the U.S. dollar, on foreign currency transactions related to short-term intercompany accounts which are settled in the normal course of business by our European and Japanese subsidiaries for which the euro and yen are the respective functional currencies.

Provision for Income Taxes.  We recorded a $0.7 million income tax provision for fiscal year 2015 and a $13.4 million income tax benefit for fiscal year 2014.  Our tax provision recorded during fiscal year 2015 was primarily attributable to income tax provisions on profitable operations in Japan.  Additionally, our U.S. tax provision in the current year is primarily non-cash, as we are able to utilize our U.S. net operating losses to offset most cash taxes that would otherwise be owed.  In the fourth quarter of fiscal year 2014, we concluded that it was more likely than not that we will realize a portion of our U.S. deferred tax asset as a result of our trend of positive operating results in the U.S.  As a result, we realized a $13.7 million non-cash tax benefit related to the release of a portion of our valuation allowance that represented the amount of our U.S. deferred tax asset that we expect to realize in future years.  This release was based upon our estimate of U.S. future taxable earnings.  See Note 8 to the consolidated financial statements for more information.

Our tax provision recorded in the prior year was primarily attributable to the income tax provision recorded by our subsidiary in Japan as a result of pretax income earned in the period.  However, most of this was offset on a consolidated basis by the release of all valuation allowances against our deferred tax assets in the U.K., during the first half of our fiscal year 2014.  A change in U.K. tax law relative to treatment of research and development tax credits allowed us to release valuation allowances against approximately $0.2 million of deferred tax assets that we believe are now realizable as a result of the current period tax law change.

In jurisdictions other than the U.S., U.K. and Japan, we either generate net operating losses or occasionally utilize some of the net operating loss carryforward amounts.  However, because of the cumulative accounting losses in those jurisdictions, we maintain a full valuation allowance on those losses.  This results in no net income tax provision impact in those jurisdictions, as of June 30, 2015.

Net Income (Loss).  Our net loss for fiscal year 2015 was $0.3 million, or $0.04 of loss per basic and diluted share, compared to net income for fiscal year 2014 of $18.5 million, or $2.08 per basic and $2.04 per diluted share.

 

Fiscal Year 2014 in Comparison to Fiscal Year 2013

The following table sets forth summarized consolidated financial information for each of the fiscal years ended June 30, 2014 and 2013, as well as comparative data showing increases and decreases between periods (dollars in thousands).

(1)

NM denotes percentage is not meaningful

 

Product Revenue.  Total product revenue for fiscal year 2014 was $47.9 million, an increase of $9.5 million, or 24.7%, from approximately $38.4 million in fiscal year 2013.  The increase in product revenue resulted from a $6.3 million, or 30.2%, increase in content delivery product revenue in fiscal year 2014, compared to the prior year.  We experienced year-over-year content delivery product revenue growth in all of our traditional geographic regions in fiscal year 2014 as follows:

●

European content delivery revenue increased $3.3 million, or 192.4%, due to the timing of purchases from two multiple system operators in fiscal year 2014. One of the two customers was an existing customer that expanded its video system and storage capacity, and the second was a relatively new European video customer deploying video systems and storage for the first time.

●

North American content delivery revenue increased $2.0 million, or 12.2%, in fiscal year 2014 primarily due to our year-over-year increase in the sales volume of our multi-screen video analytics software reporting products.

●

Asia-Pacific content delivery revenue increased $1.0 million, or 36.4%, in fiscal year 2014 due to existing customers’ expanding their existing video systems and storage capacity.

 

Fluctuation in content delivery product revenue is often due to the fact that we have a small number of customers making periodic large purchases that account for a significant percentage of revenue.  Our content delivery product revenue is also subject to customers’ capital spending cycles and may be impacted in the future by consolidation of the industry in which our customers operate.

The increase in product revenue also resulted from the $3.2 million, or 18.1%, increase in real-time product revenue for fiscal year 2014, compared to the prior year.  We experienced year-over-year real-time product revenue growth in all of our traditional geographic regions in fiscal year 2014 as follows:

●

European real-time product revenue increased $1.6 million, or 162.9%, due to higher sales volume of our iHawk systems and SIMulation Workbench to European defense contractors and automotive customers.

●

Asia-Pacific real-time product revenue increased $1.1 million, or 16.3%, in fiscal year 2014 due to higher sales volume of our iHawk systems to Japanese defense contractors.

●

North American real-time product revenue increased $0.5 million, or 4.1%, in fiscal year 2014 due to higher sales volume of our iHawk systems to commercial technology companies and the U.S. Government.

Revenue from defense contractors and the government tend to vary by quarter and year, and are dependent upon government initiatives and funding availability.

Service Revenue.  Total service revenue for fiscal year 2014 was $23.3 million, a decrease of approximately $1.7 million, or 7.0%, from $25.0 million in fiscal year 2013.  Content delivery service revenue decreased by $1.9 million, or 12.0%, in fiscal year 2014, compared to the prior fiscal year.  This decrease was partly due to the completion of a multi-screen video analytics software managed service contract that we completed during mid-year of fiscal year 2014 and that was not renewed, resulting in a $0.7 million decrease in content delivery services revenue.  Also, during fiscal year 2014, our content delivery maintenance revenue decreased by $1.0 million, compared to fiscal year 2013.  During fiscal year 2014, a customer that accounted for approximately 5.4% and 6.4% of our service revenues during the current and prior fiscal years, respectively, indicated that it was winding down its purchase of maintenance services from us.  Our loss of maintenance revenue from this customer accounted for $0.4 million of the decrease in maintenance service revenue in fiscal year 2014, compared to fiscal year 2013.  In the event that we are not able to replace this revenue with new customer revenue and other service revenues going forward, our service revenue will be impacted in the future.  The remaining decrease in maintenance revenue was primarily attributable to a large customer transitioning to a lower level of maintenance for which we charge a lower rate.

Offsetting the decrease in content delivery service revenue, real-time service revenue for fiscal year 2014 increased by $0.2 million, or 2.1%, compared to the prior fiscal year.  This increase resulted from new maintenance contracts on new product sales increasing at a higher rate than our declining maintenance revenue from real-time legacy systems that customers are removing from service after many years of operation.

Product Gross Margin.  Product gross margin was $27.5 million in fiscal year 2014, an increase of approximately $5.5 million, or 24.7%, from $22.0 million in fiscal year 2013.  Product gross margin was 57.4% of product revenue for both fiscal years 2014 and 2013.  Product margins increased in terms of dollars due to the increase in revenue in fiscal year 2014, as compared to fiscal year 2013.  Product margins remained consistent during fiscal year 2014, compared to the prior fiscal year, despite a change in the geographic mix of customers.  We typically experience lower product margins in our European market and we generated 15.9% of our product revenue from customers in Europe during fiscal year 2014, compared with 7.0% of our product revenue in the prior fiscal year.  However, our mix of product sales in North America was more heavily weighted to higher margin custom products in fiscal year 2014, relative to fiscal year 2013, offsetting our lower product margins in Europe.

Service Gross Margin.  Service gross margin was $12.9 million in fiscal year 2014, a decrease of approximately $1.9 million, or 12.7%, from $14.8 million in fiscal year 2013.  Gross margin on service revenue decreased to 55.5% of service revenue for fiscal year 2014 from 59.1% of service revenue for fiscal year 2013.  The decrease in service margin as a percentage of service revenue was primarily due to the $0.1 million, or 1.2% increase in service cost of sales in fiscal year 2014, compared to the prior fiscal year, while generating $1.9 million less service revenue.  The increase in service cost of sales resulted from additional personnel costs in fiscal year 2014 to support (1) our focus on generating additional professional services revenue and (2) the change in our customer geography and mix requiring additional support.

 

Sales and Marketing.  Sales and marketing expenses remained flat at $14.4 million for both fiscal years 2014 and 2013.  During fiscal year 2014, we incurred an additional $0.2 million of commission expense from higher year-over-year revenue.  We also incurred an additional $0.2 million in sales personnel costs in fiscal year 2014, compared to the prior fiscal year, due to the increase in our sales and sales support presence in Europe.  The offsetting decrease was due to a $0.3 million reduction in overseas expenses resulting from the declining value of foreign currencies on our overseas sales expenses and a $0.1 million decrease in corporate overseas travel expenses, partly due to having a greater local presence in Europe.

Research and Development.  Research and development expenses increased $1.4 million, or 12.2%, to $13.0 million in fiscal year 2014, from approximately $11.6 million in fiscal year 2013.  This increase was due to a $1.1 million increase in personnel costs in fiscal year 2014 resulting from an increase in development personnel to support product and strategic growth initiatives.  Additionally, our research and development expenses increased due to approximately a $0.2 million increase in incentive compensation, as additional development personnel became eligible for incentive compensation that is tied to achievement of certain performance objectives.

General and Administrative.  General and administrative expenses decreased approximately $0.5 million, or 5.9%, to $7.7 million in fiscal year 2014 from $8.2 million in fiscal year 2013.  This decrease was primarily due to a $0.3 million decrease in severance expense from a prior fiscal year reduction in force.  This decrease was also due to a $0.2 million reduction in legal and accounting fees in fiscal year 2014, compared to the same period in the prior year.

Gain on Sale of Intangible Assets, net.  In the fourth quarter of fiscal year 2013, we entered into an agreement to sell certain non-strategic patents and patent applications (collectively known as “intellectual property”) that Concurrent originally acquired in the purchase of Everstream, Inc. (“Everstream”).  We did not expect to use the technology associated with this intellectual property as part of our ongoing or planned operations.  This intellectual property was originally valued at $0 upon our acquisition of Everstream, as there was no identifiable use for these patents at the time of purchase.  On June 28, 2013, we closed on this agreement with the purchaser and the purchaser transferred $2.8 million of cash to us as payment in full for this intellectual property.  As part of the execution of this agreement, we incurred approximately $0.4 million of transaction costs that we have netted against the $2.8 million of gross proceeds in fiscal year 2013, as these expenses were incurred as a result of the sale, and would not have been incurred otherwise.

Other Expense, net.   In fiscal year 2014, we incurred approximately $0.2 million of realized currency translation losses.  In fiscal year 2013, we incurred approximately $0.3 million of realized currency translation losses.  These losses resulted from the impact of the decreasing value of the euro and Japanese yen in both periods, relative to the U.S. dollar, on foreign currency transactions related to short-term intercompany accounts which are settled in the normal course of business by our European and Japanese subsidiaries for which the euro and yen are the respective functional currencies.

Provision for Income Taxes.  We recorded a $13.4 million income tax benefit in fiscal year 2014, compared to a $0.4 million income tax provision in fiscal year 2013.  We have been monitoring our recent trend of positive operating results in the U.S. and concluded during the fourth quarter of fiscal year 2014 that it is now more likely than not that we will realize a portion of our U.S. deferred tax asset.  As a result, we realized a $13.7 million tax benefit related to the release of a portion of our valuation allowance that represents the amount of our U.S. deferred tax asset that we expect to realize in future years.  This release is based upon our estimate of U.S. future taxable earnings.  We will continue to evaluate our assumptions each quarter regarding the need for a valuation allowance and will make appropriate adjustments as necessary.  See Note 8 to the consolidated financial statements for more information.  In the recent past, our U.S. tax provision expense has been limited to the alternative minimum tax amount for federal tax purposes, which approximates 2% of earnings before income taxes, and state taxes in various jurisdictions.  However, as a result of our non-cash valuation allowance release during fiscal year ended June 30, 2014, we expect our U.S. tax provision expense in future periods to be at a higher effective tax rate, which will reduce our net income (or loss) and earnings (or loss) per share, by a greater amount than it has in the past.  The higher effective tax rates and tax provisions will result in non-cash income tax expense in the future, as we will be able to utilize net operating losses to offset future cash taxes into the foreseeable future.

 

During the first half of fiscal year 2014, a change in U.K. tax law relative to treatment of research and development expenses allowed us to release $0.2 million of valuation allowances against deferred tax assets that we believe are now realizable as a result of the current period tax law change.  We believe that in light of this law change, we will now generate sufficient taxable income to fully utilize our net deferred tax assets in the U.K.

We have net operating loss carryforwards available to offset taxable income in the U.S. and in many of the foreign locations in which we operate, but do not have net operating loss carryforwards available to offset taxable income in Japan.  Our deferred tax benefit recorded during fiscal year 2014 was partially offset by $0.5 million of current tax provisions recorded primarily in the U.S. and Japan during fiscal year 2014.  Tax provisions recorded in the U.S. and Japan during both fiscal year ends was attributable to alternative minimum tax recorded in the U.S. and income tax provision recorded by our subsidiary in Japan as a result of its pretax income recorded during the period.

Net Income (Loss).  Net income for fiscal year 2014 was $18.5 million, or $2.08 per basic and $2.04 per diluted share, compared to a net income for fiscal year 2013 of $4.2 million, or $0.49 per basic and $0.48 per diluted share.

Liquidity and Capital Resources

Our liquidity is dependent upon many factors, including sales volume, product and service costs, operating results and the efficiency of asset use and turnover.  Our future liquidity will be affected by, among other things:

●

our reliance on a small customer base, typically represented by a small number of large, concentrated orders (the largest three customers accounted for 26%, 32% and 31% of fiscal year 2015, 2014 and 2013 total revenue, respectively);

 

●

our content delivery product revenue is subject to customers’ capital spending cycles and may be impacted in the future by consolidation of the industry in which our customers operate;

 

●

the rate of growth or decline or change in market, if any, of content delivery market expansions and the pace that video service companies implement, upgrade or replace content delivery technology;

 

●

the impact of the global economic conditions on our business and our customers, including European Union austerity measures;

 

●

our ability to renew maintenance and support service agreements with customers and retain existing customers;

 

●

the impact of U.S. Government sequestration on our business and our customers;

 

●

the rate of growth or decline, if any, of deployment of our real-time products;

 

●

the actual versus anticipated decline in revenue from maintenance and product sales of real-time proprietary systems and from multi-screen video analytics software managed and maintenance services;

 

●

our future access to capital;

 

●

our ability to manage expenses consistent with the rate of growth or decline in our markets;

 

●

ongoing cost control actions and expenses, including capital expenditures;

 

●

the margins on our product and service sales;

 

●

timing of product shipments, which typically occur during the last month of the quarter;

 

●

the impact of delays of product acceptance from our customers;

 

●

the percentage of sales derived from outside the U.S. where there are generally longer accounts receivable collection cycles;

 

●

the number of countries in which we operate, which may require maintenance of minimum cash levels in each country and, in certain cases, may restrict the repatriation of cash, by requiring us to maintain levels of capital;

 

●

the rate of growth or decline, if any, of sales to the government and government related entities; and

 

●

the use of cash to pay quarterly and special dividends.

 

Uses and Sources of Cash

We generated $3.5 million, $6.2 million and $4.7 million of cash from operating activities during fiscal years 2015, 2014 and 2013, respectively.  Operating cash flows during the fiscal year 2015 were primarily attributable to non-cash charges recorded during the year.  Operating cash flows in both fiscal years 2014 and 2013 were primarily generated by operating profits during the year.

We invested $1.9 million, $1.3 million and $1.2 million in property and equipment during fiscal years 2015, 2014 and 2013, respectively.  Capital additions during each of these periods were primarily related to: (1) development and test equipment for our development group, (2) demonstration systems used by our sales and marketing group and (3) facilities improvements.

During fiscal year 2015, we sold two blocks of IPv4 addresses to two buyers for cash.  These blocks of non-strategic IPv4 addresses, which were both recorded at $0 book value, had not been a material part of our ongoing operations.  The aggregate $0.7 million proceeds on the sale of these IPv4 addresses are net of broker fees incurred to consummate the transaction.

During fiscal year 2013, we sold certain non-strategic patents and patent applications for $2.8 million in cash.  We originally acquired this intellectual property in the purchase of Everstream but did not expect to use the technology associated with this intellectual property as part of our ongoing or planned operations.  As a result, this intellectual property was originally valued at $0 upon our acquisition of Everstream.  The proceeds on the sale of the intellectual property are net of $0.4 million of commissions and legal fees that were incurred as a result of the sale, and would not have been incurred otherwise.

We paid four quarterly cash dividends, each for $0.12 per share, during each of fiscal years 2015 and 2014.  During fiscal year 2015, we also paid an additional $0.1 million of dividends that had been held as dividends payable from previous declarations to restricted stockholders for whom restrictions lapsed in fiscal year 2015.  During fiscal year 2013, we paid four $0.06 per share cash dividends, one $0.12 per share cash dividend and a $0.50 per share special dividend.  We intend to pay a regular quarterly cash dividend on our common shares subject to, among other things, our results of operations, cash balances, future cash requirements, financial condition, statutory requirements of Delaware law, and other factors that the Board of Directors may deem relevant.  We believe that a portion of our dividends may be treated as a return of capital to stockholders, rather than dividend income, as we believe dividend payments may exceed our cumulative earnings and profits.

We paid $0.1 million for the repurchase and retirement of shares to settle minimum tax withholdings for employees whose restricted stock awards released during fiscal year 2014.  The tax settlement method was limited to a short period of time and we do not anticipate any additional repurchases of stock for this purpose.

Our credit line with our bank expired on December 31, 2013.  We are currently evaluating whether or not to enter into a new credit arrangement, but based upon our existing cash balances, historical cash usage, and anticipated operating cash flow in the near term, we believe that existing cash balances will be sufficient to meet our anticipated working capital, capital expenditure requirements and any dividend payments for at least the next twelve months.  We are no longer subject to the covenants associated with the credit line.

We had working capital (current assets less current liabilities) of $26.5 million, $29.9 million and $27.7 million and cash and cash equivalents of $25.5 million, $28.1 million and $27.9 million at June 30, 2015, 2014 and 2013, respectively.  At June 30, 2015, we had no material commitments for capital expenditures.

As of June 30, 2015, approximately $2.2 million, or 8.5% of our cash is in foreign accounts and there is no expectation that any foreign cash would need to be transferred from these foreign accounts to cover operations in the next 12 months.  Based upon our existing cash balances and short-term investments, historical cash usage, and anticipated operating cash flow in the current fiscal year, we believe that existing cash balances will be sufficient to meet our anticipated working capital, dividend payments and capital expenditure requirements for at least the next 12 months.

 

Off-Balance Sheet Arrangements

We enter into agreements in the ordinary course of business with customers, resellers, distributors, integrators and suppliers that often require us to defend and/or indemnify the other party against intellectual property infringement claims brought by a third-party with respect to our products.  We evaluate estimated losses for such indemnifications under ASC Topic 460-10-25, Guarantees.  We consider factors such as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss.  To date, we have not encountered material costs as a result of such obligations and have not accrued any material liabilities related to such indemnifications in our financial statements.  See Note 16 to the consolidated financial statements for additional disclosures regarding indemnification.

Contractual Obligations

The following table summarizes our significant contractual obligations as of June 30, 2015:

(1)	Excludes charges for common area maintenance, operating expenses, insurance and taxes associated with the leased properties.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013‑05”), which provides guidance on a parent company’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity.  ASU 2013-05 requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided.  ASU 2013-05 was effective for us beginning July 1, 2014 and did not have a material impact on our consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”).  This amendment requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward or a similar tax loss or a tax credit carryforward, unless certain conditions exist.  ASU 2013-11 is effective prospectively for annual reporting periods (and the interim periods within) beginning after December 15, 2013.  Early adoption and retrospective application are permitted.  ASU 2013-11 was effective for us beginning July 1, 2014 and did not have any impact on our financial statements, as there were no net operating loss carryforwards attributable to any of our uncertainty in income taxes.

Recent Accounting Guidance Not Yet Adopted

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”).  ASU 2014-08 requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations.  ASU 2014-08 also expands the disclosure requirements for discontinued operations and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations.  ASU 2014-08 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014.  ASU 2014-08 will be effective for us beginning July 1, 2015.  The adoption of ASU 2014-08 could impact whether future disposals of operations would qualify as discontinued operations.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014‑09”), as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards, the FASB issued a new standard related to revenue recognition.  Under ASU 2014‑09, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services.  In addition, the standard requires disclosure of the nature, amount, timing  and uncertainty of revenue and cash flows arising from contracts with customers.  In July 2015, the FASB agreed to defer the original effective date of ASU 2014-09 by one year, and as a result, ASU 2014-09 will be effective for us beginning July 1, 2018.  Early adoption is not permitted.  We anticipate that ASU 2014-09 may have a material impact, and we are currently evaluating the impact this standard will have on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which provides guidance on determining when and how to disclose going concern uncertainties in the financial statements.  ASU 2014‑15 requires management to perform interim period and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued.  An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.”  ASU 2014‑15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.  We do not expect ASU 2014‑15 to have a material impact on our consolidated financial statements or disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”).  This amendment requires that an entity measure its inventory at the “lower of cost and net realizable value.”  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  Current literature requires measurement of inventory at “lower of cost or market.”  Market could be replacement cost, net realizable value or net realizable value less an approximate normal profit margin.  ASU 2015-11 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.  We do not expect ASU 2015-11 to have a material impact on our consolidated financial statements or disclosures.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements made or incorporated by reference in this annual report may constitute “forward-looking statements” within the meaning of the federal securities laws.  When used or incorporated by reference in this report, the words “believes,” “expects,” “estimates,” “anticipates,” and similar expressions, are intended to identify forward-looking statements.  Statements regarding future events and developments, our future performance, market share, new market growth, payment of dividends, ability to utilize our net deferred tax assets and availability of earnings and profits with respect to dividend income, as well as our expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws.  Examples of our forward-looking statements in this report include, but are not limited to, the impact of our content delivery strategy on our business, the impact of our tax valuation allowance release on future income tax provisions and income taxes paid, expected level of capital additions, our expected cash position, the impact of interest rate changes and fluctuation in currency exchange rates, our sufficiency of cash, the impact of litigation and the payment of dividends.  These statements are based on beliefs and assumptions of our management, which are based on currently available information.  All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected.  The risks and uncertainties which could affect our financial condition or results of operations include, without limitation: the potential consolidation of the markets that we serve; U.S. Government sequestration; European austerity measures; delays or cancellations of customer orders; non-renewal of maintenance and support service agreements with customers; changes in product demand; economic conditions; various inventory risks due to changes in market conditions; margins of the content delivery business to capture new business; fluctuations and timing of large content delivery orders; doing business in the People’s Republic of China; uncertainties relating to the development and ownership of intellectual property; uncertainties relating to our ability and the ability of other companies to enforce their intellectual property rights; the pricing and availability of equipment, materials and inventories; the concentration of our customers; failure to effectively manage change; delays in testing and introductions of new products;  the impact of reductions in force on our operations; rapid technology changes; system errors or failures; reliance on a limited number of suppliers and failure of components provided by those suppliers; uncertainties associated with international business activities, including foreign regulations, trade controls, taxes  and currency fluctuations; the impact of competition on the pricing of content delivery products; failure to effectively service the installed base; the entry of new, well-capitalized competitors into our markets; the success of new content delivery; the success of our relationships with technology and channel partners; capital spending patterns by a limited customer base; the current challenging macroeconomic environment; continuing unevenness of the global economic recovery; privacy concerns over data collection; our ability to utilize net operating losses to offset cash taxes in the event of an ownership change as defined by the Internal Revenue Service; earthquakes, tsunamis, floods and other natural disasters in areas in which our customers and suppliers operate; and the availability of debt or equity financing to support our liquidity needs.

 

Our forward-looking statements are based on current expectations and speak only as of the date of such statements.  We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise.

Item 8.

Consolidated Financial Statements and Supplementary Data.

The following consolidated financial statements and supplementary data are included herein.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A.

Controls and Procedures.

Evaluation of Controls and Procedures

We conducted an evaluation as of June 30, 2015, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Pursuant to the rules and regulations of the SEC, internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

●

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Concurrent;

●

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Concurrent are being made only in accordance with authorizations of management and directors of Concurrent; and

●

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Concurrent’s assets that could have a material effect on the financial statements.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in “Internal Control—Integrated Framework” (originally issued in 1992 and updated in 2013) by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Our management concluded that our internal control over financial reporting was effective as of June 30, 2015.

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our independent registered public accounting firm in accordance with recent amendments to Section 404 of the Sarbanes-Oxley Act of 2002 pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit us to provide only management’s report in this Annual Report on Form 10-K.

Remediation of Previously Reported Material Weakness

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  In connection with our evaluation of the immaterial errors identified in the second quarter of fiscal year 2015 as discussed in Note 2 to the consolidated financial statements regarding the historical cash flow presentation of the purchase of customer support spare parts as a component of investing cash flows, we implemented more robust controls to analyze all balance sheet accounts at a detailed level to ensure that the proper cash flow presentation is in accordance with generally accepted accounting principles.  Management re-evaluated the effectiveness of the remediation of our previously reported material weakness as of December 31, 2014.   Based on the measures taken and implemented, management has tested the newly implemented control activities and found them to be effective and concluded that the material weakness has been remediated as of June 30, 2015.

Changes in Internal Control

Except for the changes in internal controls described above, there were no changes to our internal controls over financial reporting during the quarter ended June 30, 2015 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Item 9B.

Other Information.

None.

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

Information regarding the Registrant’s executive officers is located in Item 4A of this Form 10-K.

The Registrant hereby incorporates by reference in this Form 10-K certain information contained under the caption “Election of Directors” in the Registrant's Proxy Statement to be used in connection with its Annual Meeting of Stockholders to be held on October 27, 2015 (“Registrant's 2015 Proxy Statement”).

The Registrant hereby incorporates by reference in this Form 10-K certain information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant's 2015 Proxy Statement.

The Registrant hereby incorporates by reference in this Form 10-K certain information contained under the caption “Election of Directors – Corporate Governance and Committees of the Board of Directors” in the Registrant’s 2015 Proxy Statement.

Item 11.

Executive Compensation.

The Registrant hereby incorporates by reference in this Form 10-K certain information contained under the caption “Compensation Discussion and Analysis” (Other than the Compensation Committee Report) and “Compensation of Directors” in the Registrant's 2015 Proxy Statement.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The Registrant hereby incorporates by reference in this Form 10-K certain information contained under the captions “Common Stock Ownership of Management and Certain Beneficial Owners” and “Equity Compensation Plan Information” in the Registrant's 2015 Proxy Statement.

The Registrant knows of no contractual arrangements, including any pledge by any person of securities of the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

The Registrant herein incorporates by reference in this Form 10-K certain information under the caption “Certain Relationships and Related Party Transactions” in the Registrant’s 2015 Proxy Statement.

Item 14.

Principal Accountant Fees and Services.

The registrant hereby incorporates by reference in this Form 10-K certain information under the caption “Principal Accountant Fees and Services” in the Registrant’s 2015 Proxy Statement.

 

PART IV

Item 15.

Exhibits and Financial Statement Schedules.

(a) (1) Financial Statements Filed As Part of This Report:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of June 30, 2015 and 2014

Consolidated Statements of Operations for each of the three years in the period ended June 30, 2015

Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period ended June 30, 2015

Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 30, 2015

Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2015

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules

Schedule II Valuation and Qualifying Accounts

All other financial statements and schedules not listed have been omitted since the required information is included in the Consolidated Financial Statements or the Notes thereto, is not applicable, material or required.

(3) Exhibits

 

 

 

CONCURRENT COMPUTER CORPORATION

ANNUAL REPORT ON FORM 10-K

Item 8

Consolidated Financial Statements and Supplementary Data

Year Ended June 30, 2015

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Concurrent Computer Corporation:

 

We have audited the accompanying consolidated balance sheets of Concurrent Computer Corporation and subsidiaries (the “Company”) as of June 30, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2015.  Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2).  These financial statements and financial statement schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Concurrent Computer Corporation and subsidiaries as of June 30, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2015, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia

August 26, 2015

 

CONCURRENT COMPUTER CORPORATION

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

 

The accompanying notes are an integral part of the consolidated financial statements.

 

CONCURRENT COMPUTER CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data)

The accompanying notes are an integral part of the consolidated financial statements.

 

CONCURRENT COMPUTER CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

The accompanying notes are an integral part of the consolidated financial statements.

 

CONCURRENT COMPUTER CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For each of the three years in the period ended June 30, 2015

(Amounts in thousands, except share data)