REVENUE RECOGNITION

Revenue Recognition under ASC 606

The Company recognizes service revenue, mainly from subscription services to its cloud-based voice, call center, video and collaboration solutions using the five-step model as prescribed by ASC 606:

• Identification of the contract, or contracts, with a customer;

• Identification of the performance obligations in the contract;

• Determination of the transaction price;

• Allocation of the transaction price to the performance obligations in the contract; and

• Recognition of revenue when or as, the Company satisfies a performance obligation.

The Company identifies performance obligations in contracts with customers, which may include subscription services and related usage, product revenue and professional services. The transaction price is determined based on the amount the Company expects to be entitled to receive in exchange for transferring the promised services or products to the customer. The transaction price in the contract is allocated to each distinct performance obligation in an amount that represents the relative amount of consideration expected to be received in exchange for satisfying each performance obligation. Revenue is recognized when performance obligations are satisfied. Revenues are recorded based on the transaction price excluding amounts collected on behalf of third parties such as sales and telecommunication taxes, which are collected on behalf of and remitted to governmental authorities. The Company usually bills its customers on a monthly basis. Contracts typically range from annual to multi-year agreements with payment terms of net 30 days or less. The Company occasionally allows a 30-day period to cancel a subscription and return products shipped for a full refund.

Judgments and Estimates

The estimation of variable consideration for each performance obligation requires the Company to make subjective judgments. The Company has service-level agreements with customers warranting defined levels of uptime reliability and performance. Customers may get credits or refunds if the Company fails to meet such levels. If the services do not meet certain criteria, fees are subject to adjustment or refund representing a form of variable consideration. The Company may impose minimum revenue commitments (MRC) on its customers at the inception of the contract. Thus, in estimating variable consideration for each of these performance obligations, the Company assesses both the probability of MRC occurring and the collectability of the MRC, of which both represent a form of variable consideration.

The Company enters into contracts with customers that regularly include promises to transfer multiple services and products, such as subscriptions, products, and professional services. For arrangements with multiple services, the Company evaluates whether the individual services qualify as distinct performance obligations. In its assessment of whether a service is a distinct performance obligation, the Company determines whether the customer can benefit from the service on its own or with other readily available resources, and whether the service is separately identifiable from other services in the contract. This evaluation requires the Company to assess the nature of each individual service offering and how the services are provided in the context of the contract, including whether the services are significantly integrated, highly interrelated, or significantly modify each other, which may require judgment based on the facts and circumstances of the contract.

When agreements involve multiple distinct performance obligations, the Company allocates arrangement consideration to all performance obligations at the inception of an arrangement based on the relative standalone selling prices (SSP) of each performance obligation. Usage fees deemed to be variable consideration meet the allocation exception for variable consideration. Where the Company has standalone sales data for its performance obligations which are indicative of the price at which the Company sells a promised good or service separately to a customer, such data is used to establish SSP. In instances where standalone sales data is not available for a particular performance obligation, the Company estimates SSP by the use of observable market and cost-based inputs. The Company continues to review the factors used to establish list price and will adjust standalone selling price methodologies as necessary on a prospective basis.

Service Revenue

Service revenue from subscriptions to the Company's cloud-based technology platform is recognized over time on a ratable basis over the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription services being rendered are recorded as a deferred revenue. Usage fees, either bundled or not bundled, are recognized when the Company has a right to invoice. Professional services for configuration, system integration, optimization, customer training or education are primarily billed on a fixed-fee basis and are performed by the Company directly or, alternatively, customers may also choose to perform these services themselves or engage their own third-party service providers. Professional services revenue is recognized over time as the services are rendered.

When a contract with a customer is signed, the Company assesses whether collection of the fees under the arrangement is probable. The Company estimates the amount to reserve for uncollectible amounts based on the aging of the contract balance, current and historical customer trends, and communications with its customers. These reserves are recorded as operating expenses against the contract asset (Accounts Receivable). In the normal course of business, the Company records revenue reductions for customer credits.

Product Revenue

The Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is generally upon shipment. Sales returns are recorded as a reduction to revenue estimated based on historical experience.

Contract Assets

Contract assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations are completed. The revenue is recognized when the customer receives services or equipment for a reduced consideration at the onset of an arrangement, for example when the initial month's services or equipment are discounted. Contract assets are included in other current or non-current assets in the consolidated balance sheets, depending on if their reduction will be recognized during the succeeding twelve-month period or beyond.

Deferred Revenue

Deferred revenues represent billings or payments received in advance of revenue recognition and is recognized upon transfer of control. Balances consist primarily of annual plan subscription services and professional and training services not yet provided as of the balance sheet date. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as current deferred revenues in the consolidated balance sheets, with the remainder recorded as other non-current liabilities in the consolidated balance sheets.

Costs to Obtain a Customer Contract

Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized as other current or non-current assets and amortized on a straight-line basis over the anticipated benefit period, which is five years. The benefit period was estimated by taking into consideration the length of customer contracts, technology lifecycle, and other factors. This amortization expense is recorded in sales and marketing expense within the Company's consolidated statement of operations.

Practical Expedients

The new guidance under ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers, sets forth the requirement of deferring incremental costs of obtaining a contract, typically sales commissions, that were expensed as incurred under the previous guidance. The Company applies a practical expedient that permits it to apply Subtopic 340-40 to a portfolio of contracts, instead of on a contract-by-contract basis, as they are similar in their characteristics, and the financial statement effects of applying Subtopic 340-40 to that portfolio would not differ materially from applying it to the individual contracts within that portfolio.

Impact of Adopting ASC 606

The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to retained earnings in the consolidated balance sheet as of April 1, 2018 (in thousands).



	Balance at March 31, 2018			Adjustments Due to ASC 606		Balance at April 1, 2018
Current assets:
Deferred sales commission costs	$	—		$	11,234	$	11,234
Other current assets	$	10,040		$	1,725	$	11,765
Non-current assets:
Deferred sales commission costs	$	—		$	26,942	$	26,942
Stockholders' Equity
Accumulated deficit	$	(201,464	)	$	39,901	$	(161,563	)

The following tables summarize the impact of the ASC 606 adoption on the Company's consolidated financial statements for the quarter ended December 31, 2018.

Selected Consolidated Balance Sheet Line Items (in thousands):



	December 31, 2018
	ASC 605			Adjustments		(As Reported) ASC 606
Current assets:
Deferred sales commission costs	$	—		$	14,443	$	14,443
Other current assets	$	10,023		$	3,143	$	13,166
Non-current assets:
Deferred sales commission costs	$	—		$	30,893	$	30,893
Stockholders' Equity
Accumulated deficit	$	(270,649	)	$	48,479	$	(222,170	)

Selected Consolidated Statement of Operations Line Items (in thousands, except per share amounts):



	Three Months Ended December 31, 2018
	ASC 605			Adjustments			(As Reported) ASC 606
Service revenue	$	86,245		$	(334	)	$	85,911
Product revenue	3,335			666			4,001
Total revenue	$	89,580		$	332		$	89,912
Operating expenses:
Sales and marketing	$	63,276		$	(2,559	)	$	60,717
Loss from operations	$	(27,129	)	$	2,891		$	(24,238	)
Net loss	$	(26,662	)	$	2,891		$	(23,771	)
Net loss per share:
Basic and Diluted	$	(0.28	)	$	0.03		$	(0.25	)

	Nine Months Ended December 31, 2018
	ASC 605			Adjustments			(As Reported) ASC 606
Service revenue	$	246,030		$	(652	)	$	245,378
Product revenue	12,522			919			13,441
Total revenue	$	258,552		$	267		$	258,819
Operating expenses:
Sales and marketing	$	177,186		$	(7,234	)	$	169,952
Loss from operations	$	(69,709	)	$	7,501		$	(62,208	)
Net loss	$	(68,109	)	$	7,501		$	(60,608	)
Net loss per share:
Basic and Diluted	$	(0.72	)	$	0.08		$	(0.64	)

Selected Consolidated Statements of Cash Flows Line Items (in thousands):



	Nine Months Ended December 31, 2018
	ASC 605			Adjustments			(As Reported) ASC 606
Net loss	$	(68,109	)	$	7,501		$	(60,608	)
Deferred sales commission costs	$	—		$	(7,234	)	$	(7,234	)
Other current and non-current assets	$	(2,298	)	$	(267	)	$	(2,565	)
Net cash provided by operating activities	$	(6,673	)	$	—		$	(6,673	)

Disaggregation of Revenue

The Company disaggregates its revenue by geographic region. See Note 9 for more information.

Contract Balances

The following table provides information about receivables, contract assets and deferred revenues from contracts with customers (in thousands):



	December 31, 2018
Accounts receivable, net	$	19,068
Other current assets	$	3,143
Deferred revenue - current	$	3,523
Deferred revenue - non-current	$	8

Changes in the contract assets and the deferred revenue balances during the nine months ended December 31, 2018 are as follows (in thousands):



	April 1, 2018		December 31, 2018		$ Change
Other current assets	$	1,725	$	3,143	$	1,418
Deferred revenue	$	2,578	$	3,531	$	953

The change in contract assets was primarily driven by the recognition of revenue that has not yet been billed. The increase in deferred revenues was due to billings in advance of performance obligations being satisfied. Revenues of $2.3 million and $5.5 million recognized during the three and nine months ended December 31, 2018, respectively, were included in the deferred revenues balance at the beginning of the period, which was offset by additional deferrals during the period.

Remaining Performance Obligations

The Company's subscription terms typically range from one to four years. Contract revenue as of December 31, 2018, that has not yet been recognized was approximately $160 million. This excludes contracts with an original expected length of one year or less. The Company expects to recognize revenue on the vast majority of the remaining performance obligation over the next 24 months.