| 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 an insignificant portion of our net revenue from professional engineering services, extended warranty
services, and software licenses. 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 out-of-band management, 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 (“APJ”). 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 Nine Months Ended
March 31, March 31,
2019 2018 2019 2018
(In thousands)
IoT $ 8,935 $ 9,235 $ 26,972 $ 25,654
IT Management 3,210 1,964 9,199 6,971
Other 199 402 566 918
$ 12,344 $ 11,601 $ 36,737 $ 33,543
Three Months Ended Nine Months Ended
March 31, March 31,
2019 2018 2019 2018
(In thousands)
Americas $ 6,866 $ 5,832 $ 19,962 $ 17,821
EMEA 3,757 4,055 11,357 10,391
APJ 1,721 1,714 5,418 5,331
$ 12,344 $ 11,601 $ 36,737 $ 33,543 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 unaudited condensed consolidated balance sheet at March 31, 2019. Services and Multiple Performance Obligations Revenues from our extended warranty and services are generally
recognized ratably over the applicable service period. We expect revenues from future sales of our SaaS products to be recognized
ratably over the applicable service period as well. Revenues from professional engineering services are generally recognized as
services are performed. 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 July 1, 2018, the transition date for ASC 606. 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 included in other current
liabilities and other non-current liabilities, respectively, in the accompanying unaudited condensed consolidated balance sheets. The following table presents the changes in our deferred revenue
balance for the nine months ended March 31, 2019 (in thousands):
Balance, July 1, 2018 $ 480
New performance obligations 357
Recognition of revenue as a result of satisfying performance obligations (280 )
Balance, March 31, 2019 $ 557
Less: non-current portion of deferred revenue (158 )
Current portion, March 31, 2019 $ 399 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 sales representatives, and are recorded in selling, general and administrative expenses in the
accompanying unaudited condensed consolidated statements of operations. As of March 31, 2019, 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 March 31, 2019 and for the three and nine months ended March 31, 2019: Condensed Consolidated Balance Sheet
March 31, 2019
Impact of Balances Without Adoption of
As Reported Adoption ASC 606
(In thousands)
Assets:
Accounts receivable, net $ 8,351 $ (4,337 ) $ 4,014
Inventories, net 9,809 1,579 11,388
Prepaid expenses and other current assets 817 (196 ) 621
Liabilities and Shareholders' Equity:
Other current liabilities $ 3,956 (294 ) $ 3,662
Accumulated deficit (187,922 ) (2,660 ) (190,582 ) Accounts receivable, net and inventories, net, as reported at
March 31, 2019, 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 March 31, 2019
Impact of Amounts Without Adoption of
As Reported Adoption ASC 606
(In thousands, except per share amounts)
Net revenue $ 12,344 $ (428 ) $ 11,916
Cost of revenue 5,254 (92 ) 5,162
Net income 857 (336 ) 521
Net income per share - basic $ 0.04 $ (0.02 ) $ 0.02
Net income per share - diluted $ 0.04 $ (0.02 ) $ 0.02
Nine Months Ended March 31, 2019
Impact of Amounts Without Adoption of
As Reported Adoption ASC 606
(In thousands, except per share amounts)
Net revenue $ 36,737 $ (3,094 ) $ 33,643
Cost of revenue 16,245 (1,014 ) 15,231
Net income (loss) 1,051 (2,078 ) (1,027 )
Net income (loss) per share - basic $ 0.05 $ (0.10 ) $ (0.05 )
Net income (loss) per share - diluted $ 0.05 $ (0.10 ) $ (0.05 ) Net revenue, as reported, for the three and nine months ended
March 31, 2019 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 June 30,
2018, inventories held by our distributor customers were at historically low levels. During the three and nine months ended March
31, 2019, our distributor customers increased their purchases and related inventory levels, which 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 income (loss)
and net income (loss) per share in the tables directly above are primarily attributable to the difference in net revenue. |
