Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. KEYW HOLDING CORP (1487101) 10-K published on Mar 12, 2019 at 11:58 am
Reporting Period: Dec 30, 2018
In May 2018, the General Data Protection Regulation 2016 (GDPR) came into force in the European Union, which is supplemented by the Data Protection Act 2018 (DPA) in the U.K. The GDPR imposes more stringent data protection obligations on companies that control or process personal data. Because KeyW employs persons on US Government contracts in the European Union, it is required to comply with the measures imposed by the GDPR regarding the protection and handling of personal data. Administrative fines imposed against companies that have breached the data protection regulations can be fines of up to 20 million euros or 4% of worldwide turnover. We have been preparing for this legislation and have implemented a number of risk-mitigating strategies; however, it is not possible to eliminate all risk associated with the new legislation. Possible risks include violations of the DPA and/or GDPR arising from human error or external threats to our IT systems or process omissions.
Revenues from certain contracts is recognized using the percentage-of-completion method or on the basis of partial performance towards completion. These methodologies require estimates of total costs at completion, fees earned on the contract, or both. This estimation process, particularly due to the technical nature of the services performed and the long-term nature of certain contracts, is complex and involves significant judgment. Adjustments to original estimates are often required as work progresses, experience is gained and additional information becomes known, even though the scope of the work required under the contract may not change. Any adjustment as a result of a change in estimate is recognized as events become known. Changes in the underlying assumptions, circumstances or estimates could result in adjustments that may adversely affect our future financial results.
On March 11, 2019, the Company entered into amendments to the Employment Agreements with John Sutton, Philip Luci, and Kirk Herdman to provide that any outstanding equity awards to the executive, including Long-Term Incentive Shares (as defined in the Employment Agreements), shall vest immediately upon a Change of Control (as defined pursuant to the Employment Agreements). The foregoing summary of the amendments to the Employment Agreements does not purport to be complete and is qualified in its entirety by reference to the amendments to the Employment Agreements, copies of which are attached as Exhibits 10.29, 10.30 and 10.31 to this Annual Report on Form 10-K, respectively, and are incorporated herein by reference.
In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842) which superseded existing lease guidance under ASC 840 and made several changes such as requiring an entity to recognize a right-of-use asset and corresponding lease obligation on the balance sheet. The ASU also requires enhanced disclosures of key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842): Targeted Improvements, to clarify certain guidance in ASU 2016-02 and allows companies to elect an optional transition method to apply the new lease standard through a cumulative-effect adjustment in the period of adoption. The Company adopted the standard on January 1, 2019 using the optional transition method. The Company has made substantial progress in executing the implementation plan including revising various controls and processes to address the lease standard. The Company has elected to adopt certain practical expediencies provided under ASC 842, including the option to not apply lease recognition for short-term leases, reassessment of whether expired or existing contracts contain leases, reassessment of lease classification for expired or existing leases, reassessing initial direct costs and combining lease and non-lease components in revenue arrangements. The Company expects adoption of the standard will result in the recognition of approximately $28 million and $38 million of right-of-use assets and lease liabilities, respectively, on the Consolidated Balance Sheets for its operating leases. The Company does not expect ASU 2016-02 to have a material impact on the annual Consolidated Statements of Operations and Consolidated Statements of Cash Flows. ASU 2016-02 also requires expanded disclosure regarding the amounts, timing and uncertainties of cash flows related to a company’s lease portfolio. Management is evaluating these disclosure requirements and are incorporating the collection of relevant data into its processes in preparation for disclosure in fiscal year 2019.
During 2018, the Company issued 229,646 performance-based units to existing employees under the long-term incentive plan. These performance-based units will vest three years from the grant date based on continuous service and the stock will be issued at the end of the three-year period based upon the achievement of performance criteria over a three year period, with the number of shares ultimately awarded, if any, ranging up to 150% of the specified target units. If performance is below the threshold level of performance criteria, no shares will be issued. The expense for these units will be recognized over the requisite service period of three years. The grant-date fair value of these performance-based units is $2.1 million. For purposes of measuring compensation expense for these performance-based units, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria.