5.Revenue from Contracts with Customers

Revenue Accounting Policy

The FASB has issued ASC 606, which supersedes the revenue recognition requirements in ASC 605, and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.

We adopted ASC 606 as of July 1, 2018 using the modified retrospective transition method. The cumulative effect of initially applying the new standard was recorded as an adjustment to the opening balance of retained earnings within our Consolidated Balance Sheet. The adjustment to retained earnings was the result of changing the timing of our revenue for several performance obligations and the number of performance obligations in our contracts with multiple performance obligations, as well as ceasing the deferral of revenue on satisfied performance obligations for the portion of the sales price of the contract that is not payable until additional performance obligations are satisfied. The revenues associated with our Measurement Solutions and Value Added Services that were impacted beginning July 1, 2018 which were included in the modified transition method adjustment aggregated $3.8 million. The net impact on retained earnings associated with these revenues was an increase of $2,049,000. For all adjustments and changes as a result of adopting ASC 606 for the current period, please refer to the section “Impacts on Financial Statements” below. In accordance with the modified retrospective transition method, the historical information within the financial statements has not been restated and continues to be reported under the accounting standard in effect for those periods. As a result, we have disclosed the accounting policies in effect prior to July 1, 2018, as well as the policies applied starting July 1, 2018.

Periods prior to July 1, 2018

Revenue is recognized in accordance with ASC 605. Revenue related to products and services is recognized upon shipment when title and risk of loss has passed to the customer or upon completion of the service, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of the related receivable is reasonably assured and customer acceptance criteria, if any, have been successfully demonstrated.

We also have multiple element arrangements in our Measurement Solutions product line which may include elements such as: equipment, installation, labor support and/or training. Each element has value on a stand-alone basis and the delivered elements do not include general rights of return. Accordingly, each element is considered a separate unit of accounting. When available, we allocate arrangement consideration to each element in a multiple element arrangement based upon vendor specific objective evidence (“VSOE”) of fair value of the respective elements. When VSOE cannot be established, we attempt to establish the selling price of each element based on relevant third-party evidence. Our products contain a significant level of proprietary technology, customization or differentiation; therefore, comparable pricing of products with similar functionality cannot be obtained. In these cases, we utilize our best estimate of selling price (“BESP”). We determine the BESP for a product or service by considering multiple factors including, but not limited to, pricing practices, internal costs, geographies and gross margin.

For multiple element arrangements, we defer from revenue recognition the greater of the relative fair value of any undelivered elements of the contract or the portion of the sales price of the contract that is not payable until the undelivered elements are completed. As part of this evaluation, we limit the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services, including a consideration of payment terms that delay payment until those future deliveries are completed.

Some multiple element arrangements contain installment payment terms with a final payment (“final buy-off”) due upon the completion of all elements in the arrangement or when the customer’s final acceptance is received. We recognize revenue for each completed element of a contract when it is both earned and realizable. A provision for final customer acceptance generally does not preclude revenue recognition for the delivered equipment element because we rigorously test equipment prior to shipment to ensure it will function in our customer’s environment. The final acceptance amount is assigned to specific element(s) identified in the contract, or if not specified in the contract, to the last element or elements to be delivered that represent an amount at least equal to the final payment amount.

Our Measurement Solutions are designed and configured to meet each customer’s specific requirements. Timing for the delivery of each element in the arrangement is primarily determined by the customer’s requirements and the number of elements ordered. Delivery of all of the multiple elements in an order will typically occur over a three to 15-month period after the order is received. We do not have price protection agreements or requirements to buy back inventory. Our history demonstrates that sales returns have been insignificant.

Periods commencing July 1, 2018

Revenue is recognized when or as our customer obtains control of promised goods or services in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To achieve this principle, we analyze our contracts under the following five steps:

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Identify the contract with the customer

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Identify the performance obligation(s) in the contract

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Determine the transaction price

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Allocate the transaction price to performance obligation(s) in the contract

•

Recognize revenue when or as we satisfy a performance obligation

We have contracts with multiple performance obligations in our Measurement Solutions product line such as: equipment, installation, labor support and/or training. Each performance obligation is distinct and we do not provide general rights of return for transferred goods and services. Accordingly, each performance obligation is considered a separate unit of accounting. Our Measurement Solutions are designed and configured to meet each customer’s specific requirements. Timing for the delivery of each performance obligation in the arrangement is primarily determined by the customer’s requirements. Delivery of all of performance obligations in an order will typically occur over a three to 15-month period after the order is received. For the equipment performance obligation, we typically recognize revenue when we ship or when the equipment is received by our customer, depending on the specific terms of the contract with our customer. We have elected to treat shipping and handling costs as an activity necessary to fulfill the performance obligation to transfer product to the customer and not as a separate performance obligation. For the installation, labor support and training performance obligations, we generally recognize revenue over time as we perform because of the continuous transfer of control to the customer. Because control transfers over time, based on labor hours, revenue is recognized based on the extent of progress towards completion of the performance obligation. We do not have price protection agreements or requirements to buy back inventory. Our history demonstrates that sales returns have been insignificant.

Disaggregated Revenue

We manage our business under three operating segments: Americas, Europe and Asia. All of our operating segments rely on our core technologies and sell the same products primarily in the global automotive industry. The segments also possess similar economic characteristics, resulting in similar long-term expected financial performance. In addition, we sell to substantially the same customers in all of our operating segments. Accordingly, our operating segments are aggregated into one reportable segment.

The following tables summarizes our revenue disaggregated by geography, based on our shipping location (in thousands):

Geographic Region:	Three Months Ended September 30, 2018
Americas Sales	$	8,379
Europe Sales		8,782
Asia Sales		4,281
Total Net Sales	$	21,442

We have three major product lines: Measurement Solutions, 3D Scanning Solutions and Value Added Services. Sales by our product lines are as follows (in thousands):

Product Lines	Three Months Ended September 30, 2018
Measurement Solutions	$	19,908
3D Scanning Solutions		730
Value Added Service		804
Total Net Sales	$	21,442

Our revenues can be disaggregated between two categories (1) Goods transferred at a point in time, which typically includes the equipment performance obligation of our Measurement Solutions and contracts that include a single performance obligation and (2) Services transferred over time, which include installation, labor support and training performance obligations.

The following table summarizes these two categories for the 3 months ended September 30, 2018 (in thousands):

Timing of Revenue Recognition	Three Months Ended September 30, 2018
Goods transferred at a point of time	$	15,200
Services transferred over time		6,242
Total Net Sales	$	21,442

Remaining Performance Obligations/Backlog

Backlog represents orders or bookings we have received but have not yet been filled, that is our unsatisfied performance obligations as of the reporting date. Although most of the backlog is subject to cancellation by our customers, we expect to fill substantially all of the orders. Our history demonstrates that cancellations have not been significant.

The estimated recognition of our Backlog by year is as follows (in thousands):

Years Ending June 30,	Amount
2019 (excluding the three months ended September 30, 2018)	$	35,878
2020		2,716
2021		335
2022		195
2023		11
after 2023		-
Total Backlog	$	39,135

Contract Balances

The timing of revenue recognition, billings and cash collections results in ‘Billed receivables’, ‘Unbilled receivables’ and ‘Deferred revenue’ on our Consolidated Balance Sheets. Our collections are typically 45 to 90 days after invoicing, depending on region and individual contracts with our customers, which does not always align with the timing of revenue recognition. In addition, we defer certain costs incurred to obtain a contract, primarily related to sales commissions.

Billed receivables, net – Billed receivables, net includes amounts billed and currently due from our customers. The amounts due are stated at their net estimated realizable value. Billed receivables are stated net of an allowance for doubtful accounts. Billed receivables outstanding longer than the contractual payment terms are considered past due. We determine our allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, our customers’ current ability to pay their outstanding balance due to us, the condition of the general economy, and the industry as a whole. We write-off billed receivables when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Unbilled receivables – Our unbilled receivables include unbilled amounts typically resulting from our Measurement Solutions as we recognize revenue when or as performance obligations are satisfied; however, the revenue amount exceeds the amount billed to the customer, and the right to payment is not solely due to the passage of time. Amounts may not exceed their net realizable value.

Deferred revenues – We record deferred revenues when billings are issued in advance of our satisfaction of specific performance obligations.

Our Unbilled receivables and Deferred revenues are reported in a net position on a contract-by-contract basis at the end of each reporting period.

Impairment losses recognized on our Billed and Unbilled receivables were $25,000 in the three months ended September 30, 2018.

Deferred commissions – Our incremental direct costs of obtaining a contract, which consist primarily of sales commissions, are deferred and amortized based on the timing of revenue recognition over the period of contract performance. As of September 30, 2018, capitalized commissions of $184,000 were included in ‘Other current assets’ on our Consolidated Balance Sheet. Commission expense recognized during the three-month period ended September 30, 2018 was $253,000 and is included in selling, general and administrative expense in our Consolidated Statement of Operations.

Current balances of our contract balances are as follows (in thousands):

Balance Sheet Account	September 30, 2018			July 1, 2018			Increase / (Decrease)
Unbilled receivables	$	4,906		$	1,864		$	3,042
Deferred revenue		(7,142	)		(6,715	)		(427	)
Net Unbilled receivables / (Deferred revenue)	$	(2,236	)	$	(4,851	)	$	2,615

The change in our net Unbilled receivables / (Deferred revenue) from July 1, 2018 to September 30, 2018 was primarily due to revenue recognized during the three months ended September 30, 2018, partially offset by the timing of invoicing related to our Measurement Solutions and 3D Scanning Solutions. During the three months ended September 30, 2018, we recognized revenue of $3,331,000 that was included in ‘Deferred revenue’ at July 1, 2018.

Financial Statement Impact of Adopting ASC 606

The following table summarizes the cumulative effect of the changes to our unaudited Consolidated Balance Sheet as of September 30, 2018 from the adoption of ASC 606 (in thousands):

	As reported						Balances
	September 30,			ASC 606			without adoption
(In Thousands, Except Per Share Amount)	2018			Adjustments			of ASC 606
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	7,416		$	-		$	7,416
Short-term investments		548			-			548
Receivables:
Billed receivables, net		28,509			-			28,509
Unbilled receivables, net		4,906			(4,906	)		-
Other receivables		300			-			300
Inventories, net		11,664			1,578			13,242
Other current assets		1,858			(119	)		1,739
Total current assets		55,201			(3,447	)		51,754

Property and Equipment, Net		6,827			-			6,827
Goodwill		7,970			-			7,970
Intangible Assets, Net		3,611			-			3,611
Long-Term Investments		725			-			725
Long-Term Deferred Income Tax Asset		956			-			956

Total Assets	$	75,290		$	(3,447	)	$	71,843

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit and short-term notes payable	$	122		$	-		$	122
Accounts payable		7,764			-			7,764
Accrued liabilities and expenses		4,361			-			4,361
Accrued compensation		2,377			-			2,377
Current portion of taxes payable		498			-			498
Income taxes payable		1,156			-			1,156
Reserves for restructuring and other charges		675			-			675
Deferred revenue		7,142			808			7,950
Total current liabilities		24,095			808			24,903

Long-Term Taxes Payable		324			-			324
Long-Term Deferred Income Tax Liability		1,728			(277	)		1,451
Other Long-Term Liabilities		604			-			604
Total Liabilities	$	26,751		$	531		$	27,282

Shareholders' Equity
Preferred stock		-			-			-
Common stock		96			-			96
Accumulated other comprehensive loss		(2,495	)		(1	)		(2,496	)
Additional paid-in capital		48,507			-			48,507
Retained earnings (deficit)		2,431			(3,977	)		(1,546	)
Total Shareholders' Equity	$	48,539		$	(3,978	)	$	44,561

Total Liabilities and Shareholders' Equity	$	75,290		$	(3,447	)	$	71,843

The following table summarizes the effect of adopting ASC 606 on our unaudited Consolidated Statement of Operations for the three months ended September 30, 2018 (in thousands):

	As reported			ASC 606			Balances without
	September 30, 2018			Adjustments			adoption of ASC 606
Net Sales	$	21,442		$	(2,304	)	$	19,138
Cost of Sales		13,150			(1,148	)		12,002
Gross Profit		8,292			(1,156	)		7,136

Operating Expenses
Selling, general and administrative		4,635			184			4,819
Engineering, research and development		2,198			-			2,198
Severance, impairment and other charges		-			-			-
Total operating expenses		6,833			184			7,017

Operating Income (Loss)		1,459			(1,340	)		119

Other Income and (Expenses)
Interest expense, net		(27	)		-			(27	)
Foreign currency loss, net		(202	)		-			(202	)
Other income (expenses), net		-			-			-
Total other income and (expenses)		(229	)		-			(229	)

Income (Loss) Before Income Taxes		1,230			(1,340	)		(110	)

Income Tax Expense		(338	)		277			(61	)

Net Income (Loss)	$	892		$	(1,063	)	$	(171	)