The accompanying consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated. The Company reviews subsidiaries and affiliates, as well as other entities, to determine if they should be considered variable interest entities (“VIE”), and whether it should change the consolidation determinations based on changes in their characteristics. The Company considers an entity a VIE if its equity investors own an interest therein that lacks the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or if the entity is structured with voting interests. To determine whether or not the entity is consolidated with the Company’s results, the Company also evaluates which interests are variable interests in the VIE and which party is the primary beneficiary of the VIE.

 

The Company maintains an allowance for doubtful accounts for estimated losses based on historical experience and expected collectability of outstanding accounts receivable. The Company performs ongoing credit evaluations of its customers’ financial condition, and for the majority of its customers require no collateral. For customers that do not meet the Company’s credit standards, the Company often requires a form of collateral, such as cash deposits or letters of credit, prior to the completion of a transaction. These credit evaluations require significant judgment and are based on multiple sources of information. The Company analyzes such factors as its historical bad debt experience, industry and geographic concentrations of credit risk, current economic trends and changes in customer payment terms. The Company will customer balances in full to the reserve when it has determined that the balance is not recoverable. Changes in the allowance for doubtful accounts are recorded in general and administrative expenses.

The Company’s manufacturing inventory is recorded at the lower of cost or net realizable value, with cost being determined on a (“FIFO”) basis. Costs include material, direct labor, and an allocation of overhead in the case of work in process. Manufacturing inventories included inventory at certain distributors and customers of $3.4 million and $10.9 million as of March 31, 2019 and 2018, respectively, for which revenue recognition criteria had not been met as discussed in Note 2: . Adjustments to reduce the cost of manufacturing inventory to its net realizable value, if required, are made for estimated excess, obsolete or impaired balances. Factors influencing these adjustments include declines in demand, rapid technological changes, product life cycle and development plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from the Company’s estimates.

Customers have the option to choose between different levels of hardware and software support, i.e. bronze, silver, or gold. Our support plans include various stand-ready obligations (such as technical assistance replacement parts maintenance, and remote monitoring) that are delivered whenever called upon by our customers. Support plans provide additional services and assurance outside the scope of our primary product warranties. Revenue from support plans are recognized using a time-based measure of output over the contractual term of the service contract.

We license certain intellectual property to third party manufacturers which gives the manufacturers rights to intellectual property including the right to either manufacture or include the intellectual property in their products for resale. Licensees pay us a royalty for sales of their products that incorporate our intellectual property. On a periodic and timely basis, the licensees provide us with reports containing units sold to end users subject to the royalties. The reports substantiate that the performance obligation has been satisfied therefore revenue is recognized based on the reports or when amounts can be reasonably estimated.

 

 

Revenue for Americas geographic region outside of the United States is not significant.

 

Topic 606 provides new guidance on capitalizing certain fulfillment costs and costs to obtain a contract. The Company’s primary cost to obtain contracts is sales commissions earned by sales representatives. These costs are incremental and expected to be recovered indirectly through the margin inherent within the contract. A large portion of the Company’s contracts are completed within a performance period, and for contracts with a specified term of one year or less, the Company has elected to apply a practical expedient available in Topic 606, which allows the Company to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company would otherwise have recognized is one year or less.

Only sales commissions attributed to service contracts qualify for capitalization after application of the practical expedient. The duration of these contracts ranges from years with an insignificant number of contracts exceeding 1 year. Total costs subject to capitalization were immaterial to the Company’s consolidated financial statements for the year ended March 31, 2019.

obligations

 

The Company enters into contracts with customers that contain multiple deliverables such as hardware, software and services, and these arrangements require assessment of each deliverable to determine its estimated selling price. Additionally, the Company used judgment in order to determine the appropriate timing of revenue recognition and to assess whether any software and components function together to deliver a tangible product’s essential functionality in order to ensure the arrangement is properly accounted for as software or hardware revenue. The majority of the Company’s products are hardware products which contain software essential to the overall functionality of the product. Hardware products are generally sold with customer support agreements.

Consideration in such multiple element arrangements is allocated to each element based on the fair value hierarchy, where the selling price for an element is based on vendor-specific objective evidence (“VSOE”), if available; third-party evidence (“TPE”) if VSOE is not available; or the best estimate of selling price (“BESP”), if neither VSOE nor TPE is available. The Company establishes VSOE based upon the selling price of elements when sold on a standalone basis and TPE is determined based upon competitor’s selling price for largely interchangeable products. For BESP, the Company considers its discounting and internal pricing practices, external market conditions and competitive positioning for similar offerings.

 

For software products, the Company generally recognized revenue upon delivery of the software. Revenue from post-contract customer support agreements, which entitle software customers to both telephone support and any unspecified upgrades and enhancements during the term of the agreement, is classified as product revenue, as the value of these support arrangements are the upgrades and enhancements to the software licenses themselves and there is no support. The Company recognized revenue from its post-contract customer support ratably over the term of the agreement. The Company licenses certain software to customers under licensing agreements that allow those customers to embed the Company’s software into specific products offered by the customer. The Company also licenses its software to licensees who pay a fee based on the amount of sales of their products that incorporate the Company’s software. On a periodic basis, the licensees provide the Company with reports listing their sales to end users for which they owe the Company license fees. As the reports substantiate delivery has occurred, the Company recognized revenue based on the information in these reports or when amounts could be reasonably estimated.

The Company licenses certain intellectual property to third party manufacturers under arrangements that are represented by master contracts. The master contracts give the third-party manufacturers rights to the intellectual property which include allowing them to either manufacture or include the intellectual property in products for resale. As consideration, the licensees pay the Company a royalty for sales of their products that incorporate the Company’s intellectual property. On a periodic and timely basis, the licensees provide the Company with reports listing units sold to end users subject to the royalties. As the reports substantiate delivery has occurred, the Company recognized revenue based on the information either in these reports or when amounts can be reasonably estimated.

 

The Company translates the assets and liabilities of its dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation adjustments included in accumulated other comprehensive loss. The Company’s subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property, and nonmonetary assets and liabilities at historical rates. Gains and losses from these remeasurements are included in other (income) expense in the accompanying consolidated statements of operations.

The Company assesses whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized in the financial statements from such a position is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances and changes in tax law. The Company recognizes penalties and interest expense as a component of income tax expense in the consolidated statements of operations.

 

The Company classifies stock-based awards granted in exchange for services as either equity awards or liability awards. The classification of an award as either an equity award or a liability award is generally based upon cash settlement options. Equity awards are measured based on the fair value of the award at the grant date. Liability awards are to fair value each reporting period. Each reporting period, the Company recognizes the change in fair value of awards issued to as expense. The Company recognizes stock-based compensation on a straight-line basis over the award’s requisite service period, which is generally the vesting period of the award, less actual forfeitures. No compensation expense is recognized for awards for which participants do not render the requisite services. For equity and liability awards earned based on performance or upon occurrence of a contingent event, when and if the awards will be earned is estimated. If an award is not considered probable of being earned, no amount of stock-based compensation is recognized. If the award is deemed probable of being earned, related compensation expense is recorded over the estimated service period. To the extent the estimate of awards considered probable of being earned changes, the amount of stock-based compensation recognized will also change.

 and 2017 n

 

Executive

of $0.8 million and 2018 and , respectively.

In August 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No.  (“ASU ASU requires that management assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. ASU is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company adopted ASU beginning April 1, 2016, or fiscal 2017. The Company evaluated its forecasted earnings, cash flows and liquidity to evaluate any situations, including payment of its convertible notes upon maturity, that would trigger additional assessment and reporting under this standard. Based upon such evaluation, the adoption did not impact the Company’s consolidated financial statements or related disclosures.

In April 2015, the FASB issued ASU No.  (“ASU ASU requires that customers apply the same criteria as vendors to determine whether a cloud computing arrangement (“CCA”) contains a software license or is solely a service contract. Under ASU fees paid by a customer in a CCA will be within the scope of software guidance if both of the following criteria are met: 1) the customer has the contractual right to take possession of the software at any time without significant penalty and 2) it is feasible for the customer to run the software on its own hardware (or to contract with another party to host the software). ASU may be applied prospectively to all agreements entered into or materially modified after the adoption date or retrospectively. The Company adopted ASU prospectively beginning April 1, 2016, or fiscal 2017, and adoption did not impact its consolidated financial statements or related disclosures.

In July 2015, the FASB issued ASU (Topic 330) (“ASU ASU requires that an entity measure all inventory at the lower of cost and net realizable value, except for inventory that is measured using (LIFO) or the retail inventory method. The Company adopted ASU prospectively beginning April 1, 2017, or fiscal 2018, and adoption did not impact its consolidated financial statements or related disclosures.

 

In March 2016, the FASB issued ASU  (“ASU ASU amended several aspects of the accounting for stock-based payment transactions, including simplifying the accounting for income tax consequences of stock-based payments, changing how classification is impacted by statutory withholding requirements, clarifying how statutory withholdings should be classified on the statement of cash flows, and permitting companies to make an accounting policy election to estimate forfeitures or recognize them as they occur. The Company adopted ASU beginning April 1, 2017, or fiscal 2018, using multiple transition approaches as prescribed by the guidance. The Company’s tax windfall benefits are reported in the statement of operations instead of equity to the extent that the Company does not have an offsetting valuation allowance and such benefits are recorded within its deferred taxes. The Company has elected to account for forfeitures as they occur. Additionally, the new guidance has changed how management calculates EPS under the treasury stock method. The adoption of ASU did not impact the Company’s consolidated financial statements or related disclosures.

In August 2016, the FASB issued ASU  (“ASU ASU provides guidance on the following eight specific cash flow issues: 1) debt prepayment or debt extinguishment costs, 2) settlement of debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, 3) contingent consideration payments made after a business combination, 4) proceeds from the settlement of insurance claims, 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, 6) distributions received from equity method investees, 7) beneficial interests in securitization transactions and 8) separately identifiable cash flows and application of the predominance principle. The Company adopted ASU beginning April 1, 2018, or fiscal 2019, using a retrospective method for all periods presented in accordance with the guidance. The adoption of ASU did not impact the Company’s consolidated financial statements or related disclosures.

In November 2016, the FASB issued ASU No. ) (“ASU Previously, transfers between cash and cash equivalents and restricted cash were included within operating and investing activities on the Company’s consolidated statements of cash flows. ASU requires amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statements of cash flows. The Company adopted ASU 2016-18 beginning April 1, 2018, of fiscal 2019, on a retrospective basis. Upon adoption, its restricted cash balances of $6.1 million, $6.3 million, and $23.0 million at March 31, 2019, March 31, 2018, and March 31, 2017, respectively, are included in cash, cash equivalents, and restricted cash on the Company’s consolidated statements of cash flows. The following change to the Company’s condensed consolidated statements of cash flows for the years ended March 31, 2018 and March 31, 2017 respectively are: Investing Activities $16.6 million and $20.2 million. Cash, Cash Equivalents and Restricted Cash as of March 31, 2016, March 31, 2017, and March 31, 2018 of $36.7 million, $35.9 million, and $17.2 million, respectively.

In January 2017, the FASB issued ASU (“ASU ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether a transaction should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, this ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted ASU beginning April 1, 2018, or fiscal 2019, using a prospective method. The adoption of ASU did not impact the Company’s consolidated financial statements or related disclosures.

In July 2017, the FASB issued ASU (“ASU ASU allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company early adopted ASU as of April 1, 2018 and its adoption impacted the accounting for warrants issued in connection with the Company’s Senior Secured Term Loan discussed in Note 5.

 

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU (“ASU 2016-02”). ASU establishes the guidance in ASC 842, (“ASC 842”) which upon adoption, supersedes prior lease guidance in ASC 840, The guidance in ASC 842 was subsequently amended by ASU ASU ASU ASU and ASU (together with ASU the “New Lease Standard”).

The New Lease Standard also provides certain optional accounting policy elections related to an entity’s ongoing lease accounting, which can be elected by class of underlying asset. For real estate, vehicles, computers, and office equipment, the Company elected the short-term lease exception whereby the Company will not recognize a lease liability or asset on its balance sheet for leases that meet the definition of a short-term lease under the New Lease Standard, generally those leases with a term of 12 months or less. The Company also made an accounting policy election to combine and lease components for its leases involving real estate, vehicles, computers and office equipment. Consequently, each separate lease and component associated with that lease will be accounted for as a single combined lease component.

The adoption of the New Lease Standard resulted in the recognition of lease liabilities of $13.5 million and assets of $12.7 million, which include the impact of existing deferred rents and tenant improvement allowances on the consolidated balance sheet as of April 1, 2019. The adoption of ASU is not expected to have a material impact on the Company’s consolidated statements of operations or cash flows.

In June 2016, the FASB issued ASU No. will change how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU will replace the current “incurred loss” model with an “expected loss” model. Under the “incurred loss” model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that it is probable that a loss has occurred (i.e., that it has been “incurred”). Under the “expected loss” model, a loss (or allowance) is recognized upon initial recognition of the asset that reflects all future events that leads to a loss being realized, regardless of whether it is probable that the future event will occur. The “incurred loss” model considers past events and current conditions, while the “expected loss” model includes expectations for the future which have yet to occur. ASU , was issued in November 2018 and excludes operating leases from the new guidance. The standard will require entities to record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the potential impact that ASU may have on the timing of recognition and measurement of future provisions for expected losses on its accounts receivable.

In January 2017, the FASB issued ASU No. (“ASU ASU will eliminate the requirement to calculate the implied fair value of goodwill (i.e. Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e. measure the charge based on the current Step 1). Any impairment charge will be limited to the amount of goodwill allocated to an impacted reporting unit. ASU will not change the current guidance for completing Step 1 of the goodwill impairment test, and an entity will still be able to perform the current optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. Upon adoption, the ASU will be applied prospectively. For public companies, ASU 2017-04 will be effective for interim and annual periods beginning after December 15, 2019. The Company does not expect ASU 2017-04 to have a material impact on its consolidated financial statements or related disclosures.

In February 2018, the FASB issued ASU (“ASU ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. ASU 2018-02 will require the Company to make certain disclosures about stranded tax effects. For public companies, ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2018-02 will have on its consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU No. (“ASU to simplify the accounting for share-based payments to by aligning it with the accounting for stock-based payments to employees, with certain exceptions. For public business entities, ASU 2018-07 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that fiscal year. The Company does not expect ASU 2018-07 to have a material impact on its consolidated financial statements or related disclosures.

In August 2018, the FASB issued ASU No. (“ASU ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. For all entities, ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Certain amendments must be applied prospectively while others are to be applied on a retrospective basis to all periods presented. As disclosure guidance, the adoption of ASU will not have an effect on the consolidated financial statements.

In August 2018, the FASB issued ASU  (“ASU ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain software (and hosting arrangements that include an software license). For public entities, ASU is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal that fiscal year. ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact ASU will have on its consolidated financial statements and related disclosures.