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ASC 606 Adoption Impact and Revenue from Contracts with Customers | 6 Months Ended
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Jun. 30, 2018
Revenue from Contract with Customer [Abstract] |
ASC 606 Adoption Impact and Revenue from Contracts with Customers | ASC 606 Adoption Impact and Revenue from Contracts with Customers ASC 606 Adoption Impact On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method, applying to all contracts. The Company recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of accumulated deficit at the beginning of 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the period presented, or “ASC 605.” In connection with the adoption of ASC 606, the Company also adopted ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers (“ASC 340-40”), which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to ASC 606 and ASC 340-40 as the “new standard.” Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, commissions and deferred commissions as discussed below. The Company recorded a net reduction to opening accumulated deficit of $24.1 million as of January 1, 2018 due to the cumulative impact of adopting the new standard. The primary impact of adopting the new standard related to the deferral of $23.1 million in incremental commission costs of obtaining subscription contracts. Under ASC 605, the Company expensed all commission costs as incurred. Under the new standard, the Company defers all incremental commission costs to obtain the contract, and amortizes these costs over a period of benefit determined to be five years. The remaining $1.0 million impact of adopting the new standard related to revenue being recognized earlier than it would have been under ASC 605. Practical Expedients and Exemptions The Company applies a practical expedient that permits the Company to apply ASC 340-40 to a single portfolio of contracts, as they are similar in their characteristics, and the financial statement effects of applying ASC 340-40 to that portfolio would not differ materially from applying it to the individual contracts within that portfolio. Additionally, the Company has elected the optional exemption which allows for the exclusion of the amounts for remaining performance obligations that are part of contracts with an original expected duration of one year or less. Impact on Condensed Consolidated Financial Statements Select condensed consolidated balance sheet line items, which reflects the adoption impact of the new standard, are as follows:
|  | June 30, 2018
(in thousands) |  | As Reported |  | Balances without adoption of ASC 606 |  | Effect of Change Higher (Lower)
Assets: |  |  |  |  |  |
Accounts receivable, net |  | $ | 20,167 |  |  | $ | 20,064 |  |  | $ | 103 |
Prepaid expenses and other current assets |  | 8,437 |  |  | 8,075 |  |  | 362 |
Deferred contract acquisition costs |  | 26,476 |  |  | — |  |  | 26,476 |
Liabilities: |  |  |  |  |  |
Deferred revenue - current |  | 14,750 |  |  | 16,002 |  |  | (1,252 | )
Shareholders’ Equity: |  |  |  |  |  |
Accumulated deficit |  | (153,925 | ) |  | (182,118 | ) |  | 28,193 |
Select condensed consolidated statement of operations line items, which reflects the adoption of the new standard, are as follows:
|  | Three Months Ended June 30, 2018
(in thousands, except per share amounts) |  | As Reported |  | Balances without adoption of ASC 606 |  | Effect of Change Higher (Lower)
Revenue |  | $ | 61,120 |  |  | $ | 60,772 |  |  | $ | 348 |
Cost of revenue |  | 24,814 |  |  | 24,668 |  |  | 146 |
Gross profit |  | 36,306 |  |  | 36,104 |  |  | 202 |
Sales and marketing |  | 17,912 |  |  | 19,588 |  |  | (1,676 | )
Income (loss) from operations |  | 194 |  |  | (1,684 | ) |  | 1,878 |
Net loss |  | (2,042 | ) |  | (3,920 | ) |  | 1,878 |
Basic and diluted net loss per share |  | $ | (0.04 | ) |  | $ | (0.07 | ) |  | $ | 0.03 |
|  | Six months ended June 30, 2018
(in thousands, except per share amounts) |  | As Reported |  | Balances without adoption of ASC 606 |  | Effect of Change Higher (Lower)
Revenue |  | $ | 120,025 |  |  | $ | 118,924 |  |  | $ | 1,101 |
Cost of revenue |  | 49,516 |  |  | 49,125 |  |  | 391 |
Gross profit |  | 70,509 |  |  | 69,799 |  |  | 710 |
Sales and marketing |  | 35,390 |  |  | 38,728 |  |  | (3,338 | )
Income (loss) from operations |  | 44 |  |  | (4,004 | ) |  | 4,048 |
Net loss |  | (2,649 | ) |  | (6,697 | ) |  | 4,048 |
Basic and diluted net loss per share |  | $ | (0.05 | ) |  | $ | (0.12 | ) |  | $ | 0.07 |
Select condensed consolidated cash flow line items, which reflects the adoption of the new standard, are as follows:
|  | Six months ended June 30, 2018
(in thousands) |  | As Reported |  | Balances without adoption of ASC 606 |  | Effect of Change Higher (Lower)
Accounts receivable |  | $ | (1,114 | ) |  | $ | (1,011 | ) |  | $ | (103 | )
Prepaid expenses and other current assets |  | (3,140 | ) |  | (2,778 | ) |  | (362 | )
Deferred contract acquisition costs |  | (3,338 | ) |  | — |  |  | (3,338 | )
Deferred revenue |  | 1,170 |  |  | 2,422 |  |  | (1,252 | )
Net cash provided by operating activities |  | 13,708 |  |  | 13,708 |  |  | — |
Changes in Accounting Policies Revenue Recognition Revenue is recognized when control of the promised services are transferred to customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those services. The Company generates all of its revenue from contracts with customers. In contracts with multiple performance obligations, it identifies each performance obligation and evaluates whether the performance obligations are distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined. The Company allocates the transaction price to each distinct performance obligation proportionately based on the estimated standalone selling price for each performance obligation. The Company then looks to how services are transferred to the customer in order to determine the timing of revenue recognition. Most services provided under the Company’s agreements result in the transfer of control over time. The Company’s revenue consists of subscription services and related usage as well as professional services. The Company charges clients subscription fees, usually billed on a monthly basis, for access to the Company’s Virtual Contact Center, or VCC, solution. The monthly subscription fees are primarily based on the number of agent seats, as well as the specific VCC functionalities and applications deployed by the client. Agent seats are defined as the maximum number of named agents allowed to concurrently access the VCC cloud platform. Clients typically have more named agents than agent seats. Multiple named agents may use an agent seat, though not simultaneously. Substantially all of the Company’s clients purchase both subscriptions and related telephony usage. A small percentage of the Company’s clients subscribe to its platform but purchase telephony usage directly from a wholesale telecommunications service provider. The Company does not sell telephony usage on a stand-alone basis to any client. The related usage fees are based on the volume of minutes used for inbound and outbound client interactions. The Company also offers bundled plans, generally for smaller deployments, whereby the client is charged a single monthly fixed fee per agent seat that includes both subscription and unlimited usage in the contiguous 48 states and, in some cases, Canada. Professional services revenue is derived primarily from VCC implementations, including application configuration, system integration, optimization, education and training services. Clients are not permitted to take possession of the Company’s software. The Company offers monthly, annual and multiple-year contracts to its clients, generally with 30 days’ notice required for changes in the number of agent seats and sometimes with a minimum number of agent seats required. Larger clients typically choose annual contracts, which generally include an implementation and ramp period of several months. Fixed subscription fees (including bundled plans) are generally billed monthly in advance, while related usage fees are billed in arrears. Support activities include technical assistance for the Company’s solution and upgrades and enhancements to the VCC cloud platform on a when-and-if-available basis, which are not billed separately. The Company generally requires advance deposits from its clients based on estimated usage when such usage is not billed as part of a bundled plan. Any unused portion of the deposit is refundable to the client upon termination of the arrangement, provided all amounts due have been paid. All fees, except usage deposits, are non-refundable. Professional services are primarily billed on a fixed-fee basis and are performed by the Company directly or, alternatively, clients may also choose to perform these services themselves or engage their own third-party service providers. The estimation of variable consideration for each performance obligation requires the Company to make some subjective judgments resulting in estimated variable consideration that is included in the transaction fee. This is done to the extent that it is probable, in the Company’s judgment, that a significant reversal in the amount of cumulative revenue recognized under the contract will not occur. The Company estimates the variable consideration in order to allocate the overall transaction fee on a relative stand-alone selling price basis to its multiple performance obligations. This requires the estimate of unit quantities, especially during the initial ramp period of the contract, during which the Company bills under an ‘actual usage’ model for subscription-related services. The Company recognizes revenue on fixed fee professional services performance obligations based on the proportion of labor hours expended compared to the total hours expected to complete the related performance obligation. The determination of the total labor hours expected to complete the performance obligations involves some judgment, influencing the initial stand-alone selling price estimate as well as the timing of professional services revenue recognition, although this uncertainty is typically resolved in a short time frame. When a contract with a customer is signed, the Company assesses whether collection of the fees under the arrangement is probable. The Company assesses collection based on a number of factors, including past transaction history and the creditworthiness of the client. The Company maintains a revenue reserve for potential credits to be issued in accordance with service level agreements or for other revenue adjustments. The revenue recognition standards include guidance relating to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added and excise taxes. The Company records Universal Service Fund, or USF, contributions and other regulatory costs on a gross basis in its condensed consolidated statements of operations and comprehensive loss and records surcharges and sales, use and excise taxes billed to its clients on a net basis. The cost of gross USF contributions payable to the Universal Service Administrative Company, or USAC, and suppliers is presented as a cost of revenue in the condensed consolidated statements of operations and comprehensive loss. Surcharges and sales, use and excise taxes incurred in excess of amounts billed to the Company’s clients are presented in general and administrative expense in the condensed consolidated statements of operations and comprehensive loss. Disaggregation of Revenue The Company disaggregates its revenue by geographic region. See Note 11 for more information. Contract Balances The following table provides information about accounts receivable, net, deferred contract acquisition costs, contract assets and contract liabilities from contracts with customers (in thousands):
|  | June 30, 2018 |  | January 1, 2018
Accounts receivable, net |  | $ | 20,167 |  |  | $ | 19,151 |
Deferred contract acquisition costs: |  |  |  |
Current |  | $ | 8,083 |  |  | $ | 7,059 |
Non-current |  | 18,393 |  |  | 16,079 |
Total deferred contract acquisition costs |  | $ | 26,476 |  |  | $ | 23,138 |
Contract assets and contract liabilities: |  |  |  |
Contract assets (included in prepaid expenses and other current assets) |  | $ | 991 |  |  | $ | 736 |
Contract liabilities (deferred revenue) |  | 14,750 |  |  | 13,568 |
Net contract assets (liabilities) |  | $ | (13,759 | ) |  | $ | (12,832 | )
The Company receives payments from customers based upon billing cycles. Invoice payment terms are usually 30 days or less. Accounts receivable are recorded when the right to consideration becomes unconditional. Deferred contract acquisition costs are recorded when incurred and are amortized over a customer benefit period of five years. The Company’s contract assets consist of unbilled amounts typically resulting from professional services revenue recognition when it exceeds the total amounts billed to the customer. The Company’s contract liabilities consist of advance payments and billings in excess of revenue recognized. In the three and six months ended June 30, 2018, the Company recognized revenue of $1.6 million and $8.1 million, respectively, related to its contract liabilities at January 1, 2018. Deferred Contract Acquisition Costs In connection with the adoption of ASC 340-40, the Company capitalizes certain contract acquisition costs consisting primarily of commissions paid when contracts are signed and related incremental fringe benefits. As of January 1, 2018, the date of ASC 340-40 adoption, the Company had $23.1 million capitalized in deferred contract acquisition costs related to contracts where the benefit period had not yet expired. In the three and six months ended June 30, 2018, amortization from amounts capitalized was $2.0 million and $3.9 million, respectively, and amounts expensed as incurred was $0.5 million and $1.0 million, respectively. As of June 30, 2018, the Company had no impairment loss in relation to costs capitalized. Remaining Performance Obligations As of June 30, 2018, the aggregate amount of the total transaction price allocated in contracts with original duration of greater than one year to the remaining performance obligations was $64.0 million. The Company expects to recognize revenue on approximately three-quarters of the remaining performance obligation over the next 24 months, with the balance recognized thereafter. The Company has elected the optional exemption which allows for the exclusion of the amounts for remaining performance obligations that are part of contracts with an original expected duration of one year or less. Such remaining performance obligations represent the unsatisfied or partially unsatisfied performance obligations pursuant to ASC 606.

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- Definition The entire disclosure of revenue from contract with customer to transfer good or service and to transfer nonfinancial asset. Includes, but is not limited to, disaggregation of revenue, credit loss recognized from contract with customer, judgment and change in judgment related to contract with customer, and asset recognized from cost incurred to obtain or fulfill contract with customer. Excludes insurance and lease contracts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -URI http://asc.fasb.org/topic&trid=49130388 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 + Details
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