| Revenue Recognition | 2. Revenue Recognition Nature of Net Revenue Most of our net revenue is currently
derived from sales of hardware products. We also derive a small portion of our net revenue from professional engineering services
and extended warranty services. Extended warranty services generally extend the warranty period on our hardware products for an
additional one to three years, depending upon the product. In addition to the products
and services described directly above, during the past year we have introduced a number of ready-to-use applications as well
as software-as-a-service (“SaaS”) offerings for our IoT and IT Management product lines, including Lantronix
Gateway Central, MACH10 ® TM Net Revenue by Product Line
and Geographic Region We organize our products and solutions
into three product lines: IoT, IT Management and Other. Our IoT products typically connect to one or more existing machines or
are built into new industrial devices to provide network connectivity. Our IT Management product line includes console management,
power management, and keyboard-video-mouse (commonly referred to as KVM) products that provide remote access to IT and networking
infrastructure deployed in test labs, data centers, branch offices and server rooms. We categorize products that are non-focus
or end-of-life as Other. We conduct our business globally
and manage our sales teams by three geographic regions: the Americas; Europe, Middle East, and Africa (“EMEA”); and
Asia Pacific Japan. The following tables present our
net revenue by product line and by geographic region. Net revenues by geographic region are based on the “bill-to”
location of our customers:
Three
Months Ended September 30,
2018 2017
(In thousands)
IoT $ 8,967 $ 8,458
IT Management 3,101 1,789
Other 211 359
$ 12,279 $ 10,606
Three
Months Ended September 30,
2018 2017
(In thousands)
Americas $ 6,914 $ 5,697
EMEA 3,520 3,164
Asia Pacific Japan 1,845 1,745
$ 12,279 $ 10,606 Revenue Recognition Policy
and Significant Judgments Revenue is recognized upon the
transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive
in exchange for those products or services. In accordance with ASC 606, we apply the following five-step approach in determining
the amount and timing of revenue to be recognized: (i) identifying the contract with a customer, (ii) identifying the
performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price
to the performance obligations in the contract and (v) recognizing revenue when the performance obligation is satisfied. On occasion, we enter into contracts
that can include various combinations of products and services, which are generally capable of being distinct and accounted for
as separate performance obligations. Revenue is recognized net of (i) any taxes collected from customers, which are subsequently
remitted to governmental authorities and (ii) shipping and handling costs collected from customers. Product Shipments Most of our product revenue is
recognized as a distinct single performance obligation when products are tendered to a carrier for delivery, which represents
the point in time that our customer obtains control of the promised products. A smaller portion of our product revenue is recognized
when our customer receives delivery of the promised products. A significant portion of
our products are sold to distributors under agreements which contain (i) limited rights to return unsold products and (ii) price
adjustment provisions, both of which are accounted for as variable consideration when estimating the amount of revenue to recognize.
We base our estimates for returns and price adjustments primarily on historical experience; however, we also consider contractual
allowances, approved pricing adjustments and other known or anticipated returns and price adjustments in a given period. Such
estimates are generally made at the time of shipment to the customer and updated at the end of each reporting period as additional
information becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue
will not occur. Our estimates of accrued variable consideration are included in other current liabilities in the accompanying
condensed consolidated balance sheet at September 30, 2018. Services and Multiple Performance
Obligations Revenues from our extended
warranty and services are generally recognized ratably over the applicable service period. Revenues from professional
engineering services are generally recognized as services are performed. We expect revenues from future sales of our SaaS
products to be recognized ratably over the applicable service period. From time to time, we may enter
into contracts with customers that include promises to transfer multiple deliverables that may include sales of products, professional
engineering services and other product qualification or certification services. Determining whether the deliverables in such arrangements
are considered distinct performance obligations that should be accounted for separately versus together often requires judgment.
We consider performance obligations to be distinct when the customer can benefit from the promised good or service on its own
or by combining it with other resources readily available and when the promised good or service is separately identifiable from
other promised goods or services in the contract. In such arrangements, we allocate revenue on a relative standalone selling price
basis by maximizing the use of observable inputs to determine the standalone selling price for each performance obligation. Contract Balances In
certain instances, the timing of revenue recognition may differ from the timing of invoicing to our customers. We record a
contract asset receivable when revenue is recognized prior to invoicing, and a contract or deferred revenue liability when
revenue is recognized subsequent to invoicing. With respect to product shipments, we expect to fulfill contract obligations
within one year and so we have elected not to separately disclose the amount nor the timing of recognition of these
remaining performance obligations. For contract balances related to contracts that include
services and multiple performance obligations, refer to the deferred revenue discussion below. There were no unbilled
contract asset receivable balances as of the transition date, July 1, 2018. Payment terms and conditions vary
by customer, but generally include a requirement of payment within 30 to 60 days from the invoice date. We do not consider this
a significant period of time and have elected not to determine whether contracts with customers contain significant financing
components. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing
our products and services, not to provide financing to them. Deferred Revenue Deferred revenue is currently
comprised primarily of unearned revenue related to our extended warranty services. These services are generally invoiced at the
beginning of the contract period and revenue is recognized ratably over the service period. Current and non-current deferred revenue
balances represent revenue allocated to the remaining unsatisfied performance obligations at the end of a reporting period and
are respectively included in other current liabilities and other non-current liabilities in the accompanying condensed consolidated
balance sheets. The following table presents the
changes in our deferred revenue balance for the three months ended September 30, 2018 (in thousands):
Balance, July 1, 2018 $ 480
New performance obligations 37
Recognition of revenue as a result of satisfying
performance obligations (90 )
Balance, September 30, 2018 $ 427
Less: non-current portion
of deferred revenue (166 )
Current portion, September
30, 2018 $ 261 We expect to recognize substantially
all of the non-current portion of deferred revenue over the next two to three years. Costs to Obtain or Fulfill
a Contract with a Customer In accordance with applicable
accounting guidance, we recognize an asset for the incremental costs of obtaining or fulfilling a contract with a customer if
we expect the benefit of those costs to be longer than one year. We apply a practical expedient to expense costs as incurred for
costs to obtain a contract when the amortization period would have been one year or less. These costs primarily relate to commissions
earned and paid to our internal sales team and to certain external sale representatives, and are recorded in selling, general
and administrative expenses in the accompanying condensed consolidated statements of operations. As of September 30, 2018, we
do not have any assets recorded pertaining to incremental costs to obtain or fulfill a contract with a customer. Adoption of New Revenue
Standard and Change in Accounting Policy On July 1, 2018, we adopted ASC
606 using the modified retrospective method and applied it to contracts that were not completed as of that date. Upon adoption,
we recorded a non-cash cumulative effect adjustment of $582,000 to our accumulated deficit as of July 1, 2018. The prior year
comparative financial information has not been restated and continues to be presented under the accounting standards in effect
for the respective periods. The primary impact to Lantronix of adopting ASC 606 relates to a shift in the timing of when revenue
is recognized for sales made to distributors under agreements which contain limited rights to return unsold products and price
adjustment provisions. Under the revenue standards that we followed prior to adopting ASC 606, we concluded that the prices to
these distributors were not fixed and determinable at the time we deliver products to them and accordingly, revenues from sales
to these distributors, and the related inventory costs, were not recognized until the distributors resold the products. By
contrast, upon adopting ASC 606, we now recognize revenue, including estimates for variable consideration, when we transfer control
of the products to the distributor rather than deferring recognition until the distributor resells the products. The following table summarizes
the significant changes to our accompanying unaudited condensed consolidated balance sheet in connection with adopting ASC 606:
Balance at ASC 606 Adoption Balance at
June
30, 2018 Adjustments July
1, 2018
(In thousands)
Assets:
Accounts receivable, net $ 4,244 $ 1,177 $ 5,421
Inventories, net 8,439 (462 ) 7,977
Prepaid expenses and other current assets 370 93 463
Liabilities and Shareholders' Equity
Other current liabilities $ 2,877 $ 226 $ 3,103
Accumulated deficit (189,555 ) 582 (188,973 ) The following tables summarize
the significant impacts of adopting ASC 606 on our financial statements as of September 30, 2018 and for the three months ended
September 30, 2018: Condensed Consolidated Balance
Sheet
September
30, 2018
As
Reported Impact
of Adoption Balances
Without Adoption of ASC 606
(In thousands)
Assets:
Accounts receivable, net $ 5,917 $ (2,818 ) $ 3,099
Inventories, net 8,032 1,281 9,313
Prepaid expenses and other current assets 794 (191 ) 603
Liabilities and Shareholders' Equity
Other current liabilities $ 3,765 (241 ) 3,524
Accumulated deficit (189,056 ) (1,488 ) $ (190,544 ) Accounts receivable, net and inventories, net, as reported
at September 30, 2018, differ from the balances that would have been recorded without the adoption of ASC 606 since we
no longer record deferred revenue and inventory balances for products held at certain distributor customers awaiting
sell-through. Additionally, under ASC 606 we record contract assets and contract liabilities as estimates for variable
consideration, which are recorded to prepaid expenses and other current assets and other current liabilities, respectively.
The accumulated deficit balance, as reported, differs from the balance without the adoption of ASC 606 as a result of the
adjustments discussed above. Condensed Consolidated Statement
of Operations
Three
months ended September 30, 2018
As
Reported Impact
of Adoption Amounts
Without Adoption of ASC 606
(In thousands, except per share
amounts)
Net revenue $ 12,279 $ (1,628 ) $ 10,651
Cost of revenue 5,538 (721 ) 4,817
Selling, general and administrative 4,472 (2 ) 4,470
Net loss (83 ) (906 ) (989 )
Net loss per share - basic and diluted $ (0.00 ) $ (0.05 ) $ (0.05 ) Net revenue, as reported, for
the three months ended September 30, 2018 differs from the recalculated net revenue without the adoption of ASC 606 due to the
difference in timing of when we recognize revenue for sales to certain distributor customers, as further described above. More
specifically, as of the prior quarter ended June 30, 2018, inventories held by our distributor customers were at historically
low levels. During the quarter ended September 30, 2018, our distributor customers increased their purchases and brought their
inventories up to levels that were more consistent with what they have held historically. This had the impact of lower sell-through
net revenues as recalculated without the effect of adopting ASC 606. Likewise, the differences in cost of revenue, net loss and
net loss per share in the table directly above are primarily attributable to the difference in net revenue. |
