Item 4.02. Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.
(a)
On
Background
The Subject Financial Statements contain the following accounting errors:
•Revenue Recognition - Allocation of Standalone Selling Price - The Company recognizes revenue under ASC 606. Under ASC 606, the Company recognizes revenue when its customers obtain control of goods or services in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company primarily sells its software through on-premise term-based license agreements, perpetual license agreements and software as a service ("SaaS") subscriptions, which allow its customers to use its SaaS services without taking possession of the software. The Company's agreements with customers for software licenses may include maintenance contracts and may also include professional services contracts.
The Company has determined that its sales contracts for term-based license agreements contain multiple distinct performance obligations (i.e., obligation to deliver the software license and the obligation to provide support and maintenance over the term of the agreement). In accounting for those arrangements, the Company allocates the transaction price to each performance obligation based on a relative standalone selling price ("SSP"). The Company determines the transaction price with reference to the SSP of the various performance obligations inherent within a contract. The Company is correcting its accounting estimate for SSP as it relates to term-based license arrangements, specifically the estimate used to allocate the transaction price between the license and the support and maintenance obligations in term-based license agreements. The change in the allocation estimate results in more transaction price being allocated to the support and maintenance portion of multi-year term-based license agreements, which changes our periodic recognition of revenue under these agreements.
The effect of the error on the Subject Financial Statements is currently anticipated to be as follows:
-overstatement of revenue of approximately
The error does not have an impact on the Company's net cash or liquidity. The Company is reviewing the impact of this error on income taxes, the statements of cash flows and earnings (loss) per share, including amounts reported for discontinued operations, and any such impact will be reflected in our restated financials for the affected periods.
•Incremental Costs to Obtain a Contract with a Customer - Amortization Pattern - The Company capitalizes incremental costs associated with obtaining customer contracts, specifically certain commission payments, and incurs commission expense on an ongoing basis. The Company is correcting the pattern of amortization of these deferred costs to allocate the combined commission asset to the individual performance obligations and amortize each respective portion based on the pattern of performance for the underlying performance obligation. Prior to the change, commission expense was expensed ratably over five years. The change in the pattern of amortization of deferred contract acquisition costs accelerates the recognition of commission expense.
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The effect of the error on the Subject Financial Statements is currently anticipated to be as follows:
-understatement of sales and marketing expenses of approximately
The error does not have an impact on the Company's net cash or liquidity. The Company is reviewing the impact of this error on income taxes, the statements of cash flows and earnings (loss) per share, including amounts reported for discontinued operations, and any such impact will be reflected in our restated financials for the affected periods.
•Equity-based Compensation - In 2022, the Board (or a designee thereof) granted certain long-term incentive awards to executives, employees, officers and consultants of the Company (or a subsidiary thereof), which are subject to vesting criteria. Generally, the Company concluded that the awards were performance-based awards and that the vesting criteria is not probable and therefore, no expense had been incurred on these grants. However, the award to the Company's Executive Chairman and Chairman of the Board (the "Chairman Award") contains different vesting criteria, and upon further review, the Company concluded that the Chairman Award is a time-based award (rather than a performance-based award), for which the Company should have recognized compensation expense throughout 2022.
The effect of the error on the Subject Financial Statements for each of the
interim periods ended
-understatement of general and administrative expenses by
The error does not have an impact on the Company's net cash or liquidity. The Company is reviewing the impact of this error on income taxes, the statements of cash flows and earnings (loss) per share, and any such impact will be reflected in our restated financials for the affected periods.
•Diluted Earnings (Loss) per Share - In 2021, the Company's diluted loss per
share of common stock calculation included the effect of the issuance of
10,982,805 shares of its common stock underlying the Company's outstanding
convertible senior notes. The convertible senior notes are convertible at any
time prior to their maturity at the option of the holders thereof. These
potentially dilutive shares should have instead been excluded from diluted
(loss) income per share, as their effect was anti-dilutive and reduced net loss
per share. Therefore, the weighted-average number of shares of common stock
outstanding used to calculate both basic and diluted net loss per share for the
year ended
Except as set forth above, the aggregate effect of the foregoing errors on the Subject Financial Statements is currently unknown. The Company cannot provide assurance that the foregoing amounts and financial statement line items affected will not change materially as the Company finalizes its restatement process. Further, the Company cannot provide assurance that other errors will not be discovered as the Company finalizes its restatement process.
Financial Statements to be Restated
The Company will promptly amend (a) its Annual Report on Form 10-K for the year
ended
The Company's management is also evaluating the impact of these errors on the Company's internal controls and procedures, including its internal control over financial reporting.
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At the present time, the Company is uncertain when the restatement process will
be completed and when the Company will be able to file its Form 10-Q for the
quarter ended
The Board discussed the matters disclosed in this paragraph (a) of this Item 4.02 with BDO.
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