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Revenue Recognition | 9 Months Ended
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Mar. 29, 2019
Revenue from Contract with Customer [Abstract] |
Revenue Recognition | Revenue Recognition Effective June 30, 2018, we adopted ASC 606, using the modified retrospective method applied to those contracts that were not completed as of June 29, 2018. Results for the reporting periods after June 29, 2018 are presented under ASC 606, while prior‑period amounts are not adjusted and continue to be reported in accordance with our historical accounting under ASC 605. We recognize revenue by applying the following five-step approach: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation. Revenue from product sales is generated predominately from the sales of products manufactured by third-party manufacturers to whom we have outsourced our manufacturing processes. Printed circuit assemblies, mechanical housings, and packaged modules are manufactured by contract manufacturing partners, with periodic business reviews of material levels and obsolescence. Product assembly, product testing, complete system integration, and system testing may either be performed within our own facilities or at the locations of our third-party manufacturers. Revenue from services includes certain installation, extended warranty, customer support, consulting, training, and education. Maintenance and support services are generally offered to our customers over a specified period of time and from sales and subsequent renewals of maintenance and support contracts. The services noted are recognized based on an over-time recognition model using the cost input method. Revenues related to certain contracts for customized network solutions are recognized over time using the cost input method. In using this input method, we generally apply the cost-to-cost method of accounting where sales and profits are recorded based on the ratio of costs incurred to estimated total costs at completion. Recognition of profit on these contracts requires estimates of the total contract value, the total cost at completion, and the measurement of progress towards completion. Significant judgment is required when estimating total contract costs and progress to completion on the arrangements, as well as whether a loss is expected to be incurred on the contract. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in income in the period in which the circumstances that gave rise to the revision become known by the Company. We perform ongoing profitability analysis of our service contracts accounted for under this method in order to determine whether the latest estimates of revenues, costs, and profits require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately. We establish billing terms at the time project deliverables and milestones are agreed. Revenues recognized in excess of the amounts invoiced to clients are classified as unbilled receivables on the unaudited Condensed Consolidated Balance Sheet. Contracts and customer purchase orders are used to determine the existence of an arrangement. In addition, shipping documents and customer acceptances, when applicable, are used to verify delivery and transfer of control. We typically satisfy our performance obligations upon shipment or delivery of product depending on the contractual terms. Payment terms to customers generally range from net 30 to 120 days from invoice, which are considered to be standard payment terms. We assess our ability to collect from our customers based primarily on the creditworthiness and past payment history of the customer. While our customers do not have the right of return, we reserve for estimated product returns as an offset to revenue based primarily on historical trends. Actual product returns may be different than what was estimated. These factors and unanticipated changes in economic and industry condition could make actual results differ from our return estimates. We present transactional taxes such as sales and use tax collected from customers and remitted to government authorities on a net basis. ASC 606 Adoption We recorded a net reduction to the opening balance of our accumulated deficit of $5.6 million as of June 30, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to our bill-and-hold and services revenue. Our revenue was $54.0 million and $179.6 million for the three and nine months ended March 29, 2019, respectively, under ASC 606, compared to $54.1 million and $167.0 million, respectively, under ASC 605. The details of the significant changes and quantitative impact of our adoption of ASC 606 are set out below:
• | Bill-and-Hold Sales: Certain customer arrangements consist of bill-and-hold characteristics under which transfer of control has been met (including the passing of title and significant risk and reward of ownership to the customers). Therefore, the customers can direct the use of the bill-and-hold inventory while we retain physical possession of the product until it is installed at a customer site at a point in time in the future. The change under ASC 606 requires consideration of the indicators of when control has been transferred and sets forth additional criteria to be met in a bill-and-hold arrangement potentially resulting in revenue being recognized earlier than under ASC 605. Upon adoption of ASC 606, we recorded a cumulative effect adjustment to June 30, 2018 opening accumulated deficit consisting of bill-and-hold backlog of $10.5 million that will not be recognized as revenue, less related cost of product sales and income taxes, resulting in a net decrease to accumulated deficit of $1.7 million.
• | Professional Services Revenue: We historically recognized certain professional services revenue upon completion under ASC 605 which changed to over time revenue recognition under ASC 606. We use the input method based on costs incurred, where revenue is calculated based on the percentage of total costs incurred in relation to total estimated costs at completion of the contract. The input method is reasonable because the costs incurred best reflect our efforts toward satisfying the performance obligation over time. The use of the input method requires us to make reasonably dependable estimates. Upon adoption of ASC 606, we recorded a cumulative effect adjustment to June 30, 2018 opening accumulated deficit of $4.7 million that will not be recognized as revenue, less related cost of services and income taxes resulting in a net decrease to accumulated deficit of $1.6 million.
• | Transfer of Control: Certain of our contracts include penalties, acceptance provisions, or other price variability that precluded revenue recognition under ASC 605 because of the requirement for amounts to be fixed or determinable. ASC 606 requires us to estimate and account for variable consideration as a reduction of the transaction price. Upon adoption of ASC 606, we recorded a cumulative effect adjustment to June 30, 2018 opening accumulated deficit of $0.6 million that will not be recognized as revenue, less related cost of revenues and income taxes, resulting in a net decrease to accumulated deficit of $0.4 million.
In addition, revenue allocation under ASC 606 requires an allocation of revenue between deliverables, or performance obligations, within an arrangement. Under ASC 605, the allocation of revenue was restricted to the amount which was not contingent on future deliverables; however, ASC 606 removes this restriction. Upon adoption of ASC 606, we recorded a cumulative effect adjustment to decrease June 30, 2018 opening accumulated deficit by $0.5 million. Under ASC 605, we deferred revenue for stand-alone software licenses where vendor-specific objective evidence (VSOE) of fair value had not been established for undelivered items, and revenue was recognized straight line over the term of the maintenance agreement. Under ASC 606, software revenue is allocated to delivered and undelivered elements based on relative fair value resulting in more software arrangement revenue being recognized earlier. Upon adoption of ASC 606, we recorded a cumulative effect adjustment to decrease June 30, 2018 opening accumulated deficit by $0.7 million. Previously, we expensed the majority of our commission expense as incurred. Under the new standard, we capitalize and amortize incremental commission costs to obtain the contract over a benefit period. We elected a practical expedient to exclude contracts with a benefit period of a year or less from this deferral requirement. Upon adoption of ASC 606, we recorded a cumulative effect adjustment to decrease June 30, 2018 opening accumulated deficit by $0.7 million. Termination Rights The contract term is determined on the basis of the period over which the parties to the contract have present enforceable rights and obligations. Certain customer contracts include a termination for convenience clause that allows the customer to terminate services without penalty, upon advance notification. We concluded that the duration of support contracts does not extend beyond the non-cancellable portion of the contract. Variable Consideration The consideration associated with customer contracts is generally fixed. Variable consideration includes discounts, rebates, refunds, credits, incentives, penalties, or other similar items. The amount of consideration that can vary is not a substantial portion of total consideration. Variable consideration estimates will be re-assessed at each reporting period until a final outcome is determined. The changes to the original transaction price due to a change in estimated variable consideration will be applied on a retrospective basis, with the adjustment recorded in the period in which the change occurs. Changes to variable consideration will be tracked and material changes disclosed. Stand-alone Selling Price Stand-alone selling price is the price at which an entity would sell a good or service on a stand-alone (or separate) basis at contract inception. Under the model, the observable price of a good or service sold separately provides the best evidence of stand-alone selling price. However, in certain situations, stand-alone selling prices will not be readily observable and the entity must estimate the stand-alone selling price. When allocating on a relative stand-alone selling price basis, any discount provided in the contract is allocated proportionately to all of the performance obligations in the contract. The majority of products and services that we offer have readily observable selling prices. For products and services that do not, we estimate stand-alone selling price using the market assessment approach based on expected selling price and adjust those prices as necessary to reflect our costs and margins. As part of our stand-alone selling price policy, we review product pricing on a periodic basis to identify any significant changes and revise our expected selling price assumptions as appropriate. Shipping and Handling Shipping and handling costs are included as a component of costs of product sales in our unaudited Condensed Consolidated Statements of Operations because they are also included in revenue that we bill our customers. Costs to Obtain a Contract We have assessed the treatment of costs to obtain or fulfill a contract with a customer. Sales commissions have historically been expensed as incurred. Under ASC 606, we capitalize sales commissions related to multi-year service contracts and amortize the asset over the period of benefit, which is the estimated service period. Sales commissions paid on contract renewals, including service contract renewals, is commensurate with the sales commissions paid on the initial contracts. We elected ASC 606’s practical expedient to expense sales commissions as incurred when the amortization period of the related asset is one year or less. These costs are recorded as sales and marketing expense and included on the unaudited Condensed Consolidated Balance Sheet as accrued expenses until paid. Our amortization expense was not material for the three and nine months ended March 29, 2019. Contract Balances, Performance Obligations, and Backlog The following table provides information about receivables and liabilities from contracts with customers (in thousands):
| March 29, 2019 |  | At Adoption on June 30, 2018
Contract Assets |  |  |
Accounts receivable, net | $ | 45,622 |  |  | $ | 45,571 |
Unbilled receivables | $ | 28,474 |  |  | $ | 22,794 |
Capitalized commissions | $ | 589 |  |  | $ | 656 |
Contract Liabilities |  |  |
Advance payments and unearned revenue | $ | 18,507 |  |  | $ | 12,700 |
Unearned revenue, long-term | $ | 8,071 |  |  | $ | 7,295 |
Significant changes in the contract balances may arise as a result of recognition over time for services, transfer of control for equipment, and periodic payments (both in arrears and in advance). From time to time, we may experience unforeseen events that could result in a change to the scope or price associated with an arrangement. We would update the transaction price and measure of progress for the performance obligation and recognize the change as a cumulative catch-up to revenue. Because of the nature and type of contracts we engage in, the timeframe to completion and satisfaction of current and future performance obligations can shift; however, this will have no impact on our future obligation to bill and collect. As of March 29, 2019, we had $26.6 million in advance payments and unearned revenue and long-term unearned revenue, of which approximately 25% is expected to be recognized as revenue in the next three months of fiscal year 2019 and the remainder thereafter. During the three and nine months ended March 29, 2019, we recognized approximately $1.7 million and $7.1 million, respectively, in maintenance service revenue which was included in unearned revenue at June 29, 2018. Our remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially satisfied, consisting of deferred revenue and backlog. Our backlog represents orders received from customers for future product shipments and services. Our backlog is subject to future events that could cause the amount or timing of the related revenue to change, and, in certain cases, may be canceled. Orders in backlog may be fulfilled several quarters following receipt or may relate to multi-year support service obligations. Impacts on Financial Statements The following tables summarize the impacts of adopting ASC 606 on the unaudited Condensed Consolidated Statements of Operations for the three and nine months ended March 29, 2019 and our Consolidated Balance Sheet as of June 29, 2018 (in thousands):
| Three Months Ended March 29, 2019
| As Reported |  | Adjustments |  | Balances without Adoption of ASC 606
Income Statement |  |  |  |  |
Revenues: |  |  |  |  |
Revenue from product sales | $ | 34,615 |  |  | $ | 304 |  |  | $ | 34,919 |
Revenue from services | 19,422 |  |  | (227 | ) |  | 19,195 |
Total revenues | $ | 54,037 |  |  | $ | 77 |  |  | $ | 54,114 |
Cost of revenues: |  |  |  |  |
Cost of product sales | $ | 23,712 |  |  | $ | 334 |  |  | $ | 24,046 |
Cost of services | 14,070 |  |  | (354 | ) |  | 13,716 |
Total cost of revenues | $ | 37,782 |  |  | $ | (20 | ) |  | $ | 37,762 |
Selling and administrative expenses | $ | 13,408 |  |  | $ | (39 | ) |  | $ | 13,369 |
Net income | $ | 4,339 |  |  | $ | 366 |  |  | $ | 4,705 |
| Nine Months Ended March 29, 2019
| As Reported |  | Adjustments |  | Balances without Adoption of ASC 606
Income Statement |  |  |  |  |
Revenues: |  |  |  |  |
Revenue from product sales | $ | 115,696 |  |  | $ | (10,215 | ) |  | $ | 105,481 |
Revenue from services | 63,933 |  |  | (2,370 | ) |  | 61,563 |
Total revenues | $ | 179,629 |  |  | $ | (12,585 | ) |  | $ | 167,044 |
Cost of revenues: |  |  |  |  |
Cost of product sales | $ | 76,670 |  |  | $ | (5,394 | ) |  | $ | 71,276 |
Cost of services | 46,289 |  |  | (1,884 | ) |  | 44,405 |
Total cost of revenues | $ | 122,959 |  |  | $ | (7,278 | ) |  | $ | 115,681 |
Selling and administrative expenses | $ | 41,405 |  |  | $ | (74 | ) |  | $ | 41,331 |
Net income | $ | 5,899 |  |  | $ | (4,954 | ) |  | $ | 945 |
See Note 9, “Segment and Geographic Information” to the Notes to unaudited Condensed Consolidated Financial Statements for discussion on the impact of additional information, including disaggregated revenue disclosures.
| Balances as of June 29, 2018 |  | Adjustments due to ASC 606 |  | As Adjusted Balances as of June 30, 2018
Balance Sheet |  |  |  |  |
Assets |  |  |  |  |
Accounts receivable, net | $ | 43,068 |  |  | $ | 2,503 |  |  | $ | 45,571 |
Unbilled receivables | $ | 14,167 |  |  | $ | 8,627 |  |  | $ | 22,794 |
Inventories | $ | 21,290 |  |  | $ | (11,516 | ) |  | $ | 9,774 |
Other current assets | $ | 6,006 |  |  | $ | 476 |  |  | $ | 6,482 |
Deferred income taxes | $ | 5,600 |  |  | $ | (545 | ) |  | $ | 5,055 |
Other assets | $ | 9,816 |  |  | $ | 180 |  |  | $ | 9,996 |
Liabilities |  |  |  |  |
Advance payments and unearned revenue | $ | 19,300 |  |  | $ | (6,600 | ) |  | $ | 12,700 |
Unearned revenue - long term | $ | 6,593 |  |  | $ | 702 |  |  | $ | 7,295 |
Equity |  |  |  |  |
Accumulated deficit | $ | (746,359 | ) |  | $ | 5,623 |  |  | $ | (740,736 | )
The effects of the adoption of the new revenue recognition guidance on our March 29, 2019 unaudited Condensed Consolidated Balance Sheet were as follows:
| As of March 29, 2019
| As Reported |  | Adjustments due to ASC 606 |  | Balances without adoption of ASC 606
Balance Sheet |  |  |  |  |
Assets |  |  |  |  |
Accounts receivable, net | $ | 45,622 |  |  | $ | (7,473 | ) |  | $ | 38,149 |
Unbilled receivables | $ | 28,474 |  |  | $ | (15,943 | ) |  | $ | 12,531 |
Inventories | $ | 10,309 |  |  | $ | 18,530 |  |  | $ | 28,839 |
Other current assets | $ | 4,664 |  |  | $ | (340 | ) |  | $ | 4,324 |
Deferred income taxes | $ | 12,185 |  |  | $ | 545 |  |  | $ | 12,730 |
Other assets | $ | 12,098 |  |  | $ | (299 | ) |  | $ | 11,799 |
Liabilities |  |  |  |  |
Accrued expenses | $ | 22,234 |  |  | $ | (369 | ) |  | $ | 21,865 |
Advance payments and unearned revenue | $ | 18,507 |  |  | $ | 7,023 |  |  | $ | 25,530 |
Unearned revenue - long term | $ | 8,071 |  |  | $ | (1,021 | ) |  | $ | 7,050 |
Reserve for uncertain tax positions | $ | 3,654 |  |  | $ | (37 | ) |  | $ | 3,617 |
Equity |  |  |  |  |
Accumulated deficit | $ | (734,837 | ) |  | $ | (10,576 | ) |  | $ | (745,413 | )

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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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