
	REVENUE RECOGNITION

Adoption of ASC Topic 606, "Revenue from Contracts with Customers"

On August 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of August 1, 2018. Results for reporting periods beginning after August 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 605.

The Company recognizes revenue from its contracts with customers primarily from the sale of supply chain management services and marketing solutions offerings. Revenue is recognized when control of the promised goods or services is transferred to a customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. For ModusLink's supply chain management services arrangements and IWCO's marketing solutions offerings, the goods and services are considered to be transferred over time as they are performed. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

ModusLink's revenue primarily comes from the sale of supply chain management services to its clients. Under the new standard, the majority of these arrangements consist of two distinct performance obligations (i.e. a warehousing and inventory management service and a separate kitting, packaging and assembly service), each of which is recognized over time as services are performed using an input method based on the level of efforts expended. A significant portion of ModusLink's revenue from these arrangements continues to be recognized over time as the services are performed based on an input method of efforts expended which corresponds with the transfer of value to the customer. For the limited population of contracts where the Company previously recognized revenues upon completion of all services and historically recognized revenue at a point in time (generally upon product shipment), the new standard accelerates the recognition of revenue as the Company's performance enhances assets that the customer controls and therefore revenue is recognized over time based on an input method of efforts expended which corresponds with the transfer of value to the customer.

Revenue from the sale of perpetual licenses sold in ModusLink's e-Business operations is now recognized at a point in time upon execution of the relevant license agreement and when delivery has taken place.

Revenue recognized related to the majority of IWCO's marketing solutions offerings, which typically consist of a single integrated performance obligation, is now recognized over time as the Company performs because the products have no alternative use to the Company.

Revenue Recognition

In accordance with Topic 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities.

Disaggregation of Revenue

The following table presents the Company's revenues disaggregated by major good or service line, timing of revenue recognition, and sales channel. The table also includes a reconciliation of the disaggregated revenue with the reportable segments.



	Twelve Months Ended July 31, 2019
	Supply Chain		Direct Marketing		Consolidated Total
	(In thousands)
Major Goods/Service Lines
Supply chain management services	$	331,022	$	—	$	331,022
Marketing solutions offerings	—		486,902		486,902
Other	1,906		—		1,906
	$	332,928	$	486,902	$	819,830
Timing of Revenue Recognition
Goods transferred over time	$	—	$	486,902	$	486,902
Services transferred over time	332,928		—		332,928
	$	332,928	$	486,902	$	819,830
Total Revenue
Revenue from contracts with customers	$	332,928	$	486,902	$	819,830
	$	332,928	$	486,902	$	819,830

Over the fiscal year ended July 31, 2019, the Company had no revenue recognized at a point in time.

Prior period amounts have not been adjusted under the modified retrospective method.

Supply chain management services.

ModusLink's revenue primarily comes from the sale of supply chain management services to its clients. Amounts billed to customers under these arrangements include revenue attributable to the services performed as well as for materials procured on the customer's behalf as part of its service to them. The majority of these arrangements consist of two distinct performance obligations (i.e. warehousing/inventory management service and a separate kitting/packaging/assembly service), revenue related to each of which is recognized over time as services are performed using an input method based on the level of efforts expended.

Marketing solutions offerings.

IWCO's revenue is generated through the provision of data-driven marketing solutions, primarily through providing direct mail products to customers. Revenue related to the majority of IWCO's marketing solutions contracts, which typically consist of a single integrated performance obligation, is recognized over time as the Company performs because the products have no alternative use to the Company.

Other.

Other revenue consists of cloud-based software subscriptions, software maintenance and support service contracts, and fees for professional services. Revenue related to these arrangements is recognized on a straight-line basis over the term of the agreement or over the term of the agreement in proportion to the costs incurred in satisfying the obligations under the contract.

Significant Judgments

The Company's contracts with customers may include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For arrangements with multiple performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company generally determines standalone selling prices based on the prices charged to customers and uses a range of amounts to estimate standalone selling prices when we sell each of the products and services separately and need to determine whether there is a discount that needs to be allocated based on the relative standalone selling prices of the various products and services. The Company typically has more than one range of standalone selling prices for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the type of customer and geographic region in determining the range of standalone selling prices.

The Company may provide credits or incentives to customers, which are accounted for as variable consideration when estimating the transaction price of the contract and amounts of revenue to recognize. The amount of variable consideration to include in the transaction price is estimated at contract inception using either the estimated value method or the most likely amount method based on the nature of the variable consideration. These estimates are updated at the end of each reporting period as additional information becomes available and revenue is recognized only to the extent that it is probable that a significant reversal of any amounts of variable consideration included in the transaction price will not occur.

Practical Expedients and Exemptions

The Company has elected to make the following accounting policy elections through the adoption of the following practical expedients:

Right to Invoice

Where applicable, the Company will recognize revenue from a contract with a customer in an amount that corresponds directly with the value to the customer of the Company's performance completed to date and the amount to which the entity has a right to invoice.

Sales and Other Similar Taxes

The Company will exclude sales taxes and similar taxes from the measurement of transaction price and will ensure that it complies with the disclosure requirements of ASC 235-10-50-1 through 50-6.

Significant Financing Component

The Company will not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Cost to Obtain a Contract

The Company will recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is one year or less and there are no renewal periods on which the Company does not pay commissions that are not commensurate with those originally paid.

Promised Goods or Services that are Immaterial in the Context of a Contract

The Company has elected to assess promised goods or services as performance obligations that are deemed to be immaterial in the context of a contract. As such, the Company will not aggregate and assess immaterial items at the entity level. That is, when determining whether a good or service is immaterial in the context of a contract, the assessment will be made based on the application of ASC 606 at the contract level.

Contract Balances

Timing of revenue recognition may differ from timing of invoicing to customers. The Company records contract assets and liabilities related to its contracts with customers as follows:


•	Accounts receivable when revenue is recognized prior to receipt of cash payments and if the right to such amounts is unconditional and solely based on the passage of time.

•

Contract asset when the Company recognizes revenue based on efforts expended but the right to such amount is conditional upon satisfaction of another performance obligation. Contract assets are primarily comprised of fees related to marketing solutions offerings and supply chain management services. The Company notes that its contract assets are all short-term in nature and are included in prepaid expenses and other current assets in the Company's consolidated balance sheets.

•

Deferred revenue when cash payments are received or due in advance of performance. Deferred revenue is primarily comprised of fees related to supply chain management services, cloud-based software subscriptions and software maintenance and support service contracts, which are generally billed in advance. Deferred revenue also includes other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. The deferred revenue balance is classified as a component of other current liabilities and other long-term liabilities on the Company's consolidated balance sheets.

The opening balance of contract assets was $24.0 million as of August 1, 2018. As of July 31, 2019, the contract asset balance was $21.5 million, which is recorded as a component of prepaid expenses and other current assets. Contract assets are classified as accounts receivable, trade, upon billing to the customer where such amounts become unconditional.

The opening balance of current deferred revenue and long-term deferred revenue was $3.7 million and $0.2 million, respectively, as of August 1, 2018. As of July 31, 2019, current deferred revenue and long-term deferred revenue was $2.9 million and $0.1 million, respectively.

Changes in deferred revenue during the twelve months ended July 31, 2019, were as follows (in thousands):



Twelve Months Ended July 31, 2019
Balance at beginning of period	$	3,858
Deferral of revenue	4,624
Recognition of deferred amounts upon satisfaction of performance obligation	(5,453		)
Balance at end of period	$	3,029

We expect to recognize approximately $2.9 million of the unearned amount over the twelve months ended July 31, 2020 and the remaining $0.1 million beyond July 31, 2020.

Assets Recognized from the Costs to Obtain a Contract with a Customer

Prior to the adoption of Topic 606, the Company expensed incremental costs to obtain a contract, which represented commissions, as the liability was incurred. In accordance with Topic 606, the Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the period over which such costs would be amortized is greater than one year. The Company has determined that certain commissions programs meet the requirements to be capitalized. However, as of August 1, 2018, the total commission expense that had been incurred under the commissions programs identified was not material and therefore, the Company determined that no amounts were required to be capitalized at the date of adoption. For the twelve months ended July 31, 2019, the total commission expense that had been incurred under the commissions programs identified was not material and the Company determined that no amounts were required to be capitalized at July 31, 2019.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

The cumulative effect of the changes made to the Company's consolidated August 1, 2018 balance sheet for the adoption of Topic 606 were as follows (in thousands):



Balance Sheet
	July 31, 2018			Adjustments Due to ASU 2014-09			August 1, 2018
Assets
Inventories, net	$	47,786		$	(21,233	)	$	26,553
Prepaid expenses and other current assets	13,415			24,041			37,456
Total current assets	264,281			2,808			267,089
Total assets	$	827,050		$	2,808		$	829,858
Liabilities
Other current liabilities	$	42,029		$	(3,330	)	$	38,699
Total current liabilities	276,356			(3,330		)	273,026
Total liabilities	684,230			(3,330		)	680,900
Stockholders' equity
Accumulated deficit	(7,363,569		)	6,138			(7,357,431		)
Total stockholders' equity	107,628			6,138			113,766
Total liabilities, contingently redeemable preferred stock and stockholders' equity	$	827,050		$	2,808		$	829,858

The Company reduced opening accumulated deficit by $6.1 million as of August 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact attributable to the acceleration of revenue related to ModusLink's supply chain management services arrangements and IWCO's marketing solutions offerings where the Company previously recognized revenues upon completion of all services and historically recognized revenue at a point in time (generally upon product shipment or when the products were complete). The adoption of ASC 606 primarily resulted in an acceleration of revenue as of August 1, 2018, which in turn generated additional deferred tax liabilities that ultimately reduced the Company's net deferred tax asset position. As the Company fully reserves its net deferred tax assets in the jurisdictions impacted by the adoption of Topic 606, this impact was offset by a corresponding reduction to the valuation allowance.

In accordance with the requirements of the new standard, the disclosure of the impact of the adoption on the Company's consolidated balance sheet and statement of operations was as follows (in thousands, except per share amounts):



Balance Sheet:	July 31, 2019
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/(Lower)
Assets
Inventories, net	$	23,674		$	45,853		$	(22,179	)
Prepaid expenses and other current assets	31,445			9,973			21,472
Total current assets	213,324			214,031			(707		)
Total assets	$	731,563		$	732,270		$	(707	)
Liabilities
Other current liabilities	$	39,046		$	46,641		$	(7,595	)
Total current liabilities	256,850			264,445			(7,595		)
Total liabilities	643,685			651,280			(7,595		)
Stockholders' equity
Accumulated deficit	(7,426,287		)	(7,433,175		)	6,888
Total stockholders' equity	52,692			45,804			6,888
Total liabilities, contingently redeemable preferred stock and stockholders' equity	$	731,563		$	732,270		$	(707	)



Statement of Operations:	Twelve months ended July 31, 2019
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/(Lower)
Net revenue	$	819,830		$	818,134		$	1,696
Cost of revenue	670,100			669,154			946
Gross profit	149,730			148,980			750
Loss before income taxes	(62,099		)	(62,849		)	750
Net loss	(66,727		)	(67,477		)	750
Net loss attributable to common stockholders	$	(68,856	)	$	(69,606	)	$	750
Basic and diluted net loss per share attributable to common stockholders:	$	(1.13	)	$	(1.14	)	$	0.01

The impact to revenues for the twelve month period ended July 31, 2019 was an increase of $1.7 million as a result of applying Topic 606 primarily related to the acceleration of revenue related to IWCO's marketing solutions arrangements for certain contracts with customers that under Topic 606 are being recognized over time based on an input method of efforts expended which depicts the transfer of value to the customer.